Revenues from non-driver businesses were $31.9 million, down 23.2% sequentially but up 8.5% versus last year. Non-driver products accounted for 19.6% of total revenues, as compared to 22.8% in the last quarter and 18.9% a year ago. The sequential decline was mainly due to lower than expected WLO shipment, offset by higher NRE income. The year-over-year increase was driven mainly by the WLO product shipment to a leading customer and, to a lesser extent, rising sales of timing controllers, CMOS image sensors and NRE income. Himax expects WLO shipment to increase in the second quarter and rebound strongly in the second half.

IFRS gross margin for the first quarter was 22.5%, down 210 basis points from the last quarter and down 60 basis points from the same period last year. The sequential margin decline was due mainly to the reduced order from its WLO anchor customer, resulting in higher depreciation and overhead charges on a per unit basis.

IFRS operating expenses were $39.8 million in the first quarter, down 1.1% from the preceding quarter but up 16.1% from a year ago. The significant year-over-year increase was primarily the result of rising R&D expenses in the areas of 3D sensing, WLO, TDDI, and high-end TV as well as annual merit increase. In addition, NT dollar appreciation against the US dollar caused the company’s salary expense to increase around $1.2 million as Himax pays the bulk of its employee salaries in NT dollars.

IFRS operating margin for the first quarter was -2.0%, down from 1.0% for the same period last year and 2.4% in the previous quarter. The sequential decline was a result of lower sales and lower gross margin. The year-over-year decrease was caused by lower gross margin and higher expenses.

First quarter non-IFRS operating loss was $2.9 million or -1.8% of sales, down from 1.3% for the same period last year and down from 2.6% a quarter ago. The sequential decline was a result of lower sales and lower gross margin and the year-over-year decrease was caused by lower gross margin and higher expenses.

IFRS loss for the first quarter was $2.8 million, or 1.6 cents per diluted ADS, compared to profit of $23.5 million, or 13.6 cents per diluted ADS, in the previous quarter and profit of $1.2 million, or 0.7 cents per diluted ADS, a year ago. The sequential decline was a result of lower sales and lower gross margin. An investment gain of $20.7 million in the last quarter for disposal of a direct investment in September 2017 also caused the first quarter profit to decline. The year-over-year decrease was caused by higher expenses.

First quarter non-IFRS loss was $2.6 million, or 1.5 cents per diluted ADS, compared to non-IFRS profit of $23.8 million, or 13.8 cents per diluted ADS last quarter and non-IFRS profit of $1.6 million, or 1.0 cent in the same period last year.

Balance Sheet and Cash Flow

Himax had $151.9 million of cash, cash equivalents and other financial assets as of the end of March 2018, compared to $199.5 million at the same time last year and $148.9 million a quarter ago. On top of the above cash position, restricted cash was $147.0 million at the end of the quarter, unchanged from $147.0 million in the preceding quarter and up from $107.4 million a year ago. The restricted cash is mainly used to guarantee the Company’s short-term borrowings for the same amount. Himax continues to maintain a very strong balance sheet and remain a debt-free company.

Himax’s inventories as of March 31, 2018 were $148.0 million, down from $148.3 million a year ago and up from $135.2 million a quarter ago. Accounts receivable at the end of March 2018 were $166.6 million as compared to $169.1 million a year ago and $188.8 million last quarter. DSO was 92 days at the end of March 2018, as compared to 98 days a year ago and 101 days at end of the last quarter.

Net cash inflow from operating activities for the first quarter was $2.3 million as compared to an inflow of $5.5 million for the same period last year and an inflow of $8.3 million for the last quarter. The decrease in operating cash flow is mainly due to lower net profit.

Capital expenditures were $18.6 million in the first quarter of 2018 versus $2.0 million a year ago and $15.5 million in the last quarter. The first quarter’s capital expenditure consisted mainly of ongoing payments for the new building’s construction, WLO capacity expansion and installation of active alignment equipment to support Himax’s 3D sensing business. Other CAPEX, primarily for the investment of design tools and R&D related equipment for its traditional IC design business, is around $1 million during the quarter.

Share Buyback Update

As of March 31, 2018, Himax had 172.1 million ADS outstanding, unchanged from last quarter. On a fully diluted basis, the total ADS outstanding are 172.5 million.

201 8 Investor Outreach and Conferences

Ms. Jackie Chang, CFO, Ms. Ophelia Lin, internal IR Deputy Director, Mr. Ken Liu, internal IR, and Mr. Greg Falesnik, Himax’s US-based IR, will maintain corporate access for shareholders and attend future investor conferences. If you are interested in speaking with the management, please contact Himax’s US or Taiwan-based investor relations contact at the numbers below.

Business Updates

Himax expects a solid rebound in the second quarter overall and sequential growth across all three major product categories.

Display D river IC M arket
Large display driver IC business recorded low-single-digit growth in the first quarter against seasonality due mainly to Himax’s Chinese panel customers’ capacity expansion and the market’s increasing 4K TV demands. As many of the Company’s panel customers continue to ramp new fabs and run the existing capacity at high utilization, Himax would likely see continued growth in the second quarter, on the back of the first quarter’s performance. Himax remains the market leader in the large panel driver IC business in China and will be a major beneficiary from China’s ongoing capacity expansion. In the last earnings call, Himax highlighted that the whole industry is going through a capacity shortage of 8” foundry where the vast majority of large panel driver ICs are fabricated. Himax was not able to fulfill some orders due to tight foundry capacity during the first quarter. While the capacity shortage continued into the second quarter when Himax still cannot fulfill all the orders, the Company has successfully added a 12” fab into the pool of its foundry capacity to ease the shortage issue. Himax expects to make small volume shipment for TV related driver IC products from this fab starting the second quarter. However, the ultimate ramping schedule will depend on how fast Himax’s panel customers can go through their customer qualification, something all the Company’s major customers are working very hard on. With the 2020 Tokyo Olympics approaching, TV makers are rushing to develop super high end products with 8K resolution. Himax has recently secured another 8K TV design win for a major panel maker and expects more to come in the next few quarters. The Company expects a low-single-digit sequential revenue growth for large display driver ICs, a double-digit growth year-over-year.

Despite the first quarter decline in smartphone display driver IC sales due to soft market demand and seasonality, Himax sees smartphone makers starting to replenish inventory in the second quarter in preparation for the launch of new phones, which will benefit its second quarter business. Overall, Himax is expecting a strong sequential growth for its smartphone business and its HD+ and FHD+ TDDI shipment are set to ramp up in Q2 as the Company indicated. TDDI represents a new source of revenue for Himax with higher ASP and better margin than the traditional driver IC, hence the Company expects the acceleration of TDDI shipment will lead to improvement of its small and medium panel driver IC product mix and contribute to overall sales growth in 2018. Moreover, its new generation FHD+ TDDI with chip on film (COF) package have secured design wins from leading Chinese smartphone brands with mass production expected in the latter half of this year. TDDI with COF package for LCD displays can enable super-slim bezel design for premium smartphone models at a much lower cost than having similar form factor using OLED displays. Similar to the situation in the large display driver IC, the TDDI market is also facing a foundry capacity shortage issue. While trying to get as much capacity as it can from the existing foundries, Himax is working very hard to source and qualify additional foundry capacity for its TDDI ICs.