Himax Technologies Inc

NASDAQ:HIMX

Earnings Call Analysis

Q2 Revenue Surges with Strong Automotive Sales, But Caution Ahead

Himax Technologies reported Q2 2024 revenue of $239.6 million, a 15.5% increase sequentially, driven by cost improvements and increased automotive IC sales. Gross margin rose to 32%, from 29.3% in Q1. The company's automotive business, which contributed over 47% of total revenue, led this growth. However, the Q3 outlook is conservative with a forecasted revenue decline of 12%-17% and a gross margin of 30%. The company cited macroeconomic uncertainty and inventory management among customers as key factors. Despite these challenges, Himax remains optimistic about future growth, particularly in automotive ICs and new product launches such as OLED touch controllers and AI sensor technology.

Strong Q2 Performance Exceeds Expectations

Himax Technologies reported a robust performance in the second quarter of 2024, with revenue reaching $239.6 million, a sequential increase of 15.5%. This figure surpassed the company's prior guidance, which estimated an increase of 8% to 13%. Gross margin improved to 32%, also meeting guidance expectations. The notable growth in revenue was largely attributed to increased demand across various product lines, particularly automotive integrated circuits (IC) and Tcon (timing controller) products.

Growth in Automotive Demand Fuels Results

The automotive sector remained a key driver for Himax's revenue, contributing over 47% of total sales in Q2. The company saw substantial increases in automotive display driver IC sales, which grew more than 50% year-over-year. Notably, sales of small and medium-sized display drivers reached $158.8 million, an increase of 10.1% sequentially, driven by stronger-than-expected sales in TDDI products across automotive, smartphone, and tablet sectors.

Challenges on the Horizon for Q3

Looking ahead, the company anticipates challenges in Q3, forecasting a sequential revenue decline of 12% to 17%, with gross margins expected around 30%. The projected profit attributable to shareholders is predicted to be between $0.015 and $0.045 per diluted American Depositary Share (ADS). This conservative outlook reflects the current macroeconomic uncertainties and adjustment of inventory levels by clients, particularly in the automotive market.

Strategic Investments and Innovations

Himax made strategic investments to strengthen its product offerings, including acquiring a 5.3% stake in FOCI through a $16 million private placement. This partnership aims to leverage Himax's expertise in Wafer Level Optics to create innovative optical solutions for high-speed computing and cloud AI markets. The anticipated growth from these innovations positions Himax to capitalize on emerging trends in the automotive and high-performance sectors.

Expanding Product Lines amidst Market Adjustments

The company is diversifying its product range in response to shifting consumer electronics demand. While it expects a decline in sales for certain segments, such as large display drivers and tablets due to destocking by customers, it remains optimistic about the potential in automotive OLED technology. The integration of local dimming and touch controls into a single chip is one example of Himax's commitment to innovation to enhance its product portfolio.

Focus on Cost Management and Operational Efficiency

Himax is rigorously managing expenses, reporting a 11.1% year-over-year reduction in operating expenses. This focus on stringent budget controls is aimed at sustaining profitability during challenging economic conditions. The company believes strong expense management will help maintain competitiveness within the market despite a forecasted reduction in revenue.

Long-term Outlook and Market Position

Despite the short-term challenges, Himax believes its core automotive IC business will remain resilient, holding a 40% global market share in traditional automotive display ICs. The growing demand for advanced automotive displays is seen as a substantial growth opportunity. Furthermore, the anticipated return to growth in Q4 suggests a bounce-back, potentially forecasting a decent double-digit growth compared to Q3.

Earnings Call Transcript 2024-Q2

[Operator]

Hello, ladies and gentlemen. Welcome to the Himax Technologies Second Quarter 2024 Earnings Conference Call.



[Operator Instructions] As a reminder, this conference call is being recorded.



I would now like to turn the conference over to Mr. Eric Li, Chief IR/PR Officer, at Himax. Eric, please proceed.

[Tzung-I Li, executive]

Welcome, everyone, to the [Audio Gap]. My name is Eric Li, Chief IR/PR Officer at Himax. Joining me today are Jordan Wu, President and Chief Executive Officer; Jessica Pan, Chief Financial Officer.



After the company's prepared comments, we have allocated time for questions in a Q&A session. If you have not yet received a copy of today's results release, place e-mail, [e-mail] or [e-mail]. Access to the press release on financial portals or download a copy from Himax's website at www.himax.com.tw.



Before we begin the formal remarks, I'd like to remind everyone that some of the statements in the conference call, including statements regarding expected future financial results and industry growth are forward-looking statements that involve a number of risks and uncertainties that could cause actual events or results to differ materially from those described in this conference call. A list of risk factors can be found in the company's SEC filings from 20-F for the year ended December 31, 2023, in the session entitled Risk Factors as may be amended. Except for the company's full year 2023 financials, which were provided in the company's 20-F and filed with the SEC on April 2, 2024. The financial information included in this conference call is unaudited and consolidated and prepared in accordance with IFRS accounting. Such financial information is generated internally and has not been subjected to the same review and scrutiny, including internal auditing procedures and external audits by an independent auditor to which we subject our annual consolidated financial statements and may vary materially from the audited consolidated financial information for the same period. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.



On today's call, I will first review the Himax consolidated financial performance for the second quarter 2024, followed by our third quarter outlook. Jordan will then give an update on the status of our business, after which we will take questions. You can submit your questions online through the webcast or by phone. We will review our financials on an IFRS basis.



We are delighted to announce that Q2 revenue surpassed guidance while gross margin and profits were in line with the guidance range issued on May 9, 2024, despite the prevailing economic headwinds, the better than predicted financial results primarily stemmed from resumed order momentum across most of our product lines. Second quarter revenues registered $239.6 million, an increase of 15.5% sequentially, exceeding our guidance range of an 8% to 13% increase. Gross margin came in at 32%, in line with our guidance range of 31.5% to 33.5%, up from 29.3% of the previous quarter and 21.7% same period last year. The sequential growth was driven by cost improvements and favorable product mix, along with increased sales in the automotive IC and the Tcon product lines, both of which have higher than corporate average gross margins. The substantial improvement in gross margin from the same period last year was primarily due to onetime early termination expense paid to foundry partners, which elevated minimum fulfillment requirement constraints and high wafer costs set during the severe industrial capacity shortage. Consequently, our new wafer starts are no longer bound by these restrictive terms. Additionally, we can now leverage diverse foundry source for optimal operational efficiency and a significant improved cost structure, thereby maintaining our product competitiveness. Q2 profit per diluted ADS was $0.159 at the top end of the guidance range of $0.13 to $0.17.



Revenue from large display drivers came in at $39 million, reflecting a sequential increase of 24.7%. The increase was predominantly driven by customers restocking in TV and monitor IC after several quarters of muted demand as well as increased order in preparation for shopping festival. Both TV and monitor IC sales posted sequential double-digit increases quarter-over-quarter. In contrast, Q2 notebook IC sales declined slightly following strong reach of restocking in the previous quarter. Sales of large panel driver IC accounted for 16.3% of total revenues of the quarter compared to 15.1% last quarter and 19.3% a year ago.



Small and medium-sized display driver segment revenue reached $158.8 million, marking a sequential increase of 10.1% and surpassing our guidance due to stronger than anticipated sales in the TDDI products for automotive, smartphone and tablet. In Q2, automotive driver sales encompassing both traditional DDIC and TDDI increased by a decent high-teens sequentially and more than 50% year-over-year. Despite expectations of weakening electric vehicle demand, both automotive DDIC and TDDI sales experienced sequential growth in Q2 thanks to our robust design-win pipeline in TDDI and the customers continuous restocking momentum in DDIC since end of Q1.



Our automotive business, comprising driver, Tcon and OLED sales remained the largest revenue contributor in the second quarter, representing over 47% of total sales Meanwhile, Q2 tablet IC sales slightly increased sequentially, surpassing guidance of decline, fueled by leading customers to new model ramp up. Conversely, smartphone driver sales declined as expected during a subdued festival season capitalized by sluggish demand. The small and medium-sized driver IC segment accounted for 66.3% of total sales for the quarter compared to 69.5% in the previous quarter and 63.9% a year ago.



Second quarter non-driver sales reached $41.8 million, up 30.6% from the previous quarter due to a resurgence in orders for our Tcon product for TV, monitor, automotive as well as OLED tablet. Our automotive local dimming Tcon, where we dominate the market, has been swiftly adopted by major panel makers, Tier 1 suppliers and the car manufacturers worldwide, boasting wear over 100 design-win projects with only a small number of design awards having commenced mass production. This momentum is further fueled by the rapid expansion of project work across continents, positioning us for strong growth mirroring the success we have achieved in automotive TDDI. Tcon business represented over 10% of our total sales in the second quarter. Non-driver products accounted for 17.4% of total revenues as compared to 15.4% in the previous quarter and 16.8% a year ago.



Second quarter operating expenses were $47.3 million, a decrease of 6.7% from the previous quarter and a decline of 11.1% from a year ago. The sequential decrease was primarily driven by decreases in tape-out expenses. The year-over-year decrease was primarily due to reduced tape-out expenses and a decline in the annual bonuses for the amortized tranches of the previous years’ bonuses. And in ongoing macroeconomic challenges, we are strictly enforcing budget and expense controls to manage these conditions.



Second quarter operating income was $29.3 million or 12.2% of sales compared to minus 0.9% of sales for the same period last year and 4.8% of sales last quarter. Both the sequential and year-over-year increases were primarily due to higher sales and an improved gross margin. Second quarter after-tax profit was $29.6 million or $0.169 per diluted ADS compared to $12.5 million or $0.071 per diluted ADS last quarter and $0.9 million or $0.05 in the same period last year. The after-tax profit for the first half was $42.1 million or $0.241 per diluted ADS, a significant increase from $15.8 million or $0.091 for the same period last year.



Turning to the balance sheet. We had $253.8 million of cash, cash equivalents and other financial assets at the end of June 2024 compared to $277.4 million a quarter ago and $219.5 million at the same time last year. The sequential decrease in cash balance was primarily due to customers' refunds for their deposits made during the industry-wide capacity shortage, along with a strategic investment of approximately $16 million in FOCI through private placement. The cash balance reduction was partially offset by an operating cash inflow of $26.9 million during the quarter. Compared to the operating cash inflow of $56.7 million in Q1, the sequential decrease was mainly attributable to reduced sales over the preceding 2 quarters, leading to lower receivables. Additionally, the increase in accounts payable in Q2 was a result of higher Q1 wafer orders, as we anticipated larger shipment volumes in Q2. Other significant operating cash outflow in Q2 included annual income tax payments. Looking ahead to Q3, we anticipate a decline in cash, cash equivalents and other financial assets, primarily due to a payment of $50.7 million for annual dividend to shareholders. We also expect to distribute a total of approximately $30.7 million for employee bonus awards at the end of this quarter, which included around $11.3 million for the immediately vested portion of this year's award with the extra amount subject to the final board decision and $19.4 million for vested worth granted over the past 3 years.



Our quarter end inventory of June 30, 2024, were $203.7 million, similar to $201.9 million last quarter, indicating a well-managed and balanced inventory level. Accounts receivable at the end of June 2024 was $242.4 million, up from $212.3 million last quarter and $239 million a year ago. DSO was 99 days at the quarter end as compared to 93 days last quarter and 90 days a year ago. Second quarter capital expenditures were $4.6 million versus $2.7 million last quarter and $2.9 million a year ago. The second quarter CapEx was mainly for R&D-related equipment and in-house tester for our IC design business.



As of June 30, 2024, Himax had 174.7 million ADS outstanding, unchanged from last quarter. On a fully diluted basis, the total number of ADS outstanding for the second quarter was $175.1 million.



Now turning to our third quarter 2024 guidance. We expect third quarter revenue to decrease 12% to 17% sequentially. Gross margin is expected to be around 30%, depending on product mix. The third quarter profit attributable to shareholders is estimated to be in the range of $15 to $0.045 per fully diluted ADS.



As we've done historically, we will grant employees annual bonus, including RSUs and cash awards on or around September 30 this year. The third quarter guidance for profit per diluted ADS has taken into account the expected 2024 annual bonus, which, subject to board approval, is now assumed to be around $12.5 million, out of which $11.3 million will be vested and expensed immediately on the grant date. As a reminder, the total annual bonus amount and the immediately vested portion are our current best estimates only and the actual amounts could vary materially depending on, among other things, our Q4 profit and the final Board decision for the total bonus amount and its vesting scheme.



As is the case for previous year, we expect the annual bonus grant in 2024 to lead to higher third quarter operating expenses compared to other quarters of the year. In comparison, the annual bonus for 2023 and 2022 were $10.4 million and $39.6 million, respectively, of which $9.7 million and $18.5 million vested immediately.



In providing our Q3 financial guidance, the Q3 expense related to employee bonus is estimated to be $14.2 million compared of $11.3 million, the immediately vested portion of this year's bonus, as stated above, and $2.9 million, the amortized portion of the previous year's unvested bonuses. For the sake of completeness, employee bonus expense in each of the last 3 quarters was also around $2.9 million.



I will now turn the call over to Jordan to discuss our Q3 outlook. Jordan, floor is yours.

[Jordan Wu, executive]

Thank you, Eric.



Given the prevailing macroeconomic uncertainty, end customers remain conservative, causing panel makers to take a cautious stance and strictly control production to maintain lower inventory levels. This is adversely impacting IC demand, leading to our conservative third quarter forecast.



During the second quarter in the automotive market, carmakers initially anticipated a sales boost due to promotional activities and government subsidies, especially in China. Consequently, we saw a major uptick in the second quarter IC sales, along with the aggressive discount campaigns of car makers. However, this intense campaign did not generate the anticipated sales growth and may have even triggered consumers to hesitate in purchasing new cars, leading to disappointing car sales in China for the second quarter and resulting in excessive inventories throughout the supply chain. As a result, our panel customers have begun to scale back their IC procurement in Q3 to manage inventory levels. In comparison, the automotive makers in Europe and the U.S. have remained relatively stable since last year without experiencing the dramatic fluctuations seen in China. As the leader of the automotive display ICs, we serve a diverse range of brands worldwide with sales evenly distributed across all major markets. However, since China is the world's largest automotive market, commanding over 30% of the global sales, fluctuations in China do have a substantial impact on our business.



Moving forward, we will navigate the current challenging business environment through close collaborations with panel makers and Tier 1 suppliers, meticulously managing our wafer starts and closely monitoring customer demand. The automotive IC business is Himax's largest revenue contributor, accounting for over 47% of our total sales in Q2, significantly higher than our peers.



Despite the recent challenges, we remain optimistic about our automotive IC business and are committed to the long-term innovation and development of our automotive products. The automotive display market remains on solid footing, with a positive growth trajectory driven by versatile innovations and technology advancements. Advanced and fancier displays are increasingly becoming a major selling point for car makers, driving the automotive display market towards the mega trend of expanding quantities, sizes and sophistication. As a leading player in the automotive IC market, Himax is well positioned to be the key beneficiary of the trend. We commenced a 40% global market share in traditional automotive DDIC, and hold an even larger share in both the automotive TDDI and local dimming Tcon markets. In addition to offering the most comprehensive range of automotive IC products for LCD panels, we are actively expanding into the automotive OLED panel market, forming strategic partnerships with major leading panel makers in Korea, China and Japan to develop comprehensive solutions encompassing DDIC, Tcon and touch controller ICs. This proactive approach positions us to navigate industry shifts and capitalize on the anticipated widespread adoption of OLED displays in the high-end vehicles, further solidifying our market leadership.



During the quarter, we announced 2 substantial strategic investments. First, in an effort to strengthen the long-term partnership with FOCI, we, as a strategic investor, acquired a 5.3% equity stake through private placement. The partnership integrates Himax's Wafer Level Optics, WLO, expertise and FOCI's optical fiber know-how to create innovative, world-leading Linear-drive Pluggable Optics, or LPO, and Co-Packaged Optics, or CPO, solutions for advanced Multi-Chip Modules required for the fast-growing cloud AI and high-speed computing markets. This collaboration not only highlights the application versatility of the WLO technology at Himax's market leadership, but also underscores the significant potential of our WLO in advancing LPO/CPO technology, which is vital for the advancement of cloud AI and high-speed computing.



Separately, we invested in the U.S.-based Obsidian Sensors, whose revolutionary high-resolution thermal imaging sensors meet the growing demand of thermal imaging across various industries, including automotive, security, surveillance, drones and military. This investment broadens our portfolio of imaging sensors, which when meshed with our ultralow power WiseEye AI, enable enhanced sensor fusion possibilities for endpoint AI applications. The Obsidian investment positions us at the forefront of machine vision AI applications, delivering high effectiveness, particularly in harsh environments and completely dark scenarios.



As we look ahead, our focus remains on enhancing profitability, strengthening operational resilience and improving adaptability to the evolving market. We continue to optimize our cost structure and reinforce our supplier diversification strategies for foundries as well as our backend packaging and testing. At the same time, we remain committed to stringent expense control set to further reduce operating expenses compared to last year. For reference, we achieved a 4% year-over-year reduction in operating expenses in 2023.



With that, I will now begin with an update on the large panel driver IC business. In Q3, we anticipate a double-digit sequential revenue decrease for large display driver ICs, primarily due to subdued monitor and TV IC sales, set to decline double-digit and single-digit, respectively, following substantial order replenishment in preparation for shopping festivals in the previous quarter. Procurements from our leading panel customers have become more conservative due to sluggish market conditions driven by worse-than-expected shopping and festival sales. However, notebook IC sales are poised for a decent increase, bolstered by robust order replenishment from our leading panel customers.



Looking ahead in the notebook sector, we have made a strategic effort to position ourselves to capitalize on the anticipated rise in demand for 2 new market areas, namely LCD displays equipped with touch features and OLED displays, both expected to enjoy decent penetration in premium notebook and the upcoming AI PC markets. Leveraging our industry leadership in TDDI solutions for tablet market, we are working closely with the LCD panel customers in the development of in-cell TDDI and new-generation Tcon solutions for LCD displays. Concurrently, we have made significant strides in OLED technology for notebooks in strategic partnerships with leading panel makers in Korea and China, developing state-of-the-art touch controllers, DDICs and Tcon solutions. Some of the projects above, including in-cell TDDI for mainstream LCD notebooks and Tcon and DDIC for OLED notebooks are slated for mass production in the second half of this year with the leading panel makers. We are optimistic that the notebook segment will act as a strong growth catalyst for Himax as we move into 2025.



Turning to the small and medium-sized display driver IC business. We anticipate third quarter revenue to decline low-teens sequentially. Impacted by our customers' destocking measures, especially for the Chinese market, as I just mentioned, automotive revenue in Q3 is expected to decrease high-teens sequentially, following high-teens growth of both DDIC and TDDI in Q2. That being said, through the first 9 months of the year, our automotive driver IC sales are still set to grow mid-teens year-over-year, driven by continued expansion of TDDI adoption across all major end customers. We have secured over 450 TDDI design-win projects with only approximately 30% currently in mass production, indicating significant growth potential going forward.



Meanwhile, a trend is emerging where more customers are opting for Himax's TDDI or LTDI along with our local dimming Tcon, as their standard development platform for creating new automotive displays of various sizes. This growing adoption of more of our automotive IC offerings also signifies an increase in content value for Himax on a per-panel basis. Himax is widely recognized as the leader in the automated display market, offering the industry's broadest range of products from traditional DDIC and TDDI to advanced technologies such as local dimming Tcon, LTDI and OLED. We are committed to continuously enhancing our product portfolio to meet customers with diverse and evolving needs. Our newly introduced TDDI incorporating local dimming Tcon in one chip exemplifies its commitment to providing customers with more options, as the new solution is ideal for smaller panels that usually require only 1 to 2 ICs for cost considerations while still equipped with advanced touch and local dimming features.



Turning to smartphone IC sales. We expect a decent double-digit increase sequentially thanks to new product launches by key customers during the quarter. In contrast to the positive outlook in smartphone business, Q3 tablet sales are projected to decline sequentially as end customers prolong their replacement cycles in response to challenging economic conditions.



Next for an update on our OLED business. For the automotive OLED market, we have formed strategic alliances with leading panel manufacturers in Korea, China and Japan, leveraging our leadership in automotive LCD technology and other design expertise. These partnerships further strengthen our presence in the market. We offer a comprehensive suite of all the solutions for automotive, including DDIC, Tcon, and on-cell touch controllers, ensuring our complete coverage of customer requirements. Notably, our meticulously engineered OLED on-cell touch controllers set a new standard, both in an industry-leading touch signal-to-noise ratio of over 45 dB, greatly enhancing sensitivity. This allows automotive displays to maintain proper functionality under challenging conditions, such as glove wearing and wet finger operations. We are pleased to share that our OLED on-cell touch controller for automotive has entered mass production this quarter. With additional projects set for mass production soon, we anticipate sales of our OLED on-cell touch controller to further bolster our revenues starting 2025.



Beyond the automotive sector, we have made notable advances in the tablet and notebook sectors with top OLED panel manufacturers in Korea and China. Our comprehensive OLED product offerings, encompassing DDIC, Tcon and touch controllers, have led to several new projects now on track to enter mass production later in the year.



Regarding smartphone OLED, the current market drawdown of our customers has prompted us to revise our production timeline to next year. Despite these challenges, we are actively collaborating with customers in Korea and China and have several verification and partnership projects currently in progress.



I would like to now turn to our non-driver IC business update. First, for the update on our Tcon business. We anticipate a double-digit sequential decline in Q3 Tcon sales as customers pull forward their inventory purchases during the prior quarter, particularly for monitor application. However, our automotive Tcon business is expected to achieve a decent double-digit growth in Q3 despite the current headwinds in the automotive market fueled by the shipment of new projects from previously secured design-wins. Since only a small portion of the secured design-wins are currently in mass production, we anticipate significant growth potential for our automotive Tcon business in the coming years.



While ongoing weak macroeconomic conditions continue to subdue demand in consumer electronics, some of our newly developed Tcon ICs for OLED tablets and ePaper displays are starting to show promising results. In the tablet segment, we are expanding our product lineup and strengthening our position in the high-value-added OLED market, building on our early success in the OLED market. For the rapidly growing ePaper market, we recently made a joint announcement with E Ink, the global leader in ePaper market, to unveil T2000, a state-of-the-art, next-generation color ePaper Tcon. ePaper stands out for its energy efficiency, consuming power only during screen updates. Leveraging Himax's decades of expertise in image display processing and Tcon design, the T2000 Tcon accelerates screen updates for better viewing experience while greatly reducing power consumption of the ePaper display. Additionally, the T2000 features an exclusive handwriting processing accelerator, enabling seamless nearly lag-free handwriting while boosting prompt display responsiveness on ePaper displays without requiring an SoC. It also enables richer and more vibrant colors, enhancing the displays visual appeal across a broad spectrum of E Ink's color ePaper platforms. The collaboration opens new possibilities for color ePaper applications in eReaders, ePaper, digital signages and more



Switching gears to the WiseEye Power AI Sensing solution, a cutting-edge endpoint AI integration featuring industry-leading ultra-low-power AI processors, always-on CMOS image sensors and advanced CNN-based AI algorithm. In the fast-changing AI landscape, WiseEye AI technology stands out for its expertise in on-device tiny tinyML microcontroller solutions, characterized by remarkably low power consumption, operating at just single-digit milliwatts, making it possible to add AI functionalities to battery-powered endpoint devices. Our WiseEye technology is creating new opportunities for companies such as DESMAN, China's leading high-end smart door lock vendor who introduced the world's first smart door locks with 24/7 sentry monitoring and real-time event recording with the fancy AI features achieved while still maintaining over 6 months of power or battery operation. Our collaboration with DESMAN has sparked increased interest from other door lock vendors across various continents to develop innovative, value-added AI features such as parcel recognition, smart anti-pinch protection and biometric access. Notably, some of our customers are currently evaluating our newly introduced WiseEye Palmvein solution, which offers effortless, keyless and highly secure biometric access for entry control.



WiseEye PalmVein is part of our WiseEye AI module business, integrating Himax WiseEye2 AI processor, AoS CMOS image sensor and our proprietary palm vein authentication algorithm. We see growing traction and extensive engineering activities for this contactless biometric authentication solution that can authenticate an individual's identity in under 100 milliseconds while consumer just a few milliwatts of power. This represents a significant breakthrough in security technology by enabling biometric authentication in battery-powered devices with outstanding accuracy and robust liveness check capabilities, palm vein authentication significantly reduces the risk of duplication or spoofing compared to conventional fingerprint or face recognition, making it an ideal choice for indoor security, login authentication and other access control applications. WiseEye PalmVein upholds robust security standards while offering best-in-class power efficiency, making it the only solution suitable for battery-powered devices.



We are collaborating with vendors across various sectors globally, including door lock, access control, notebook and automotive. While just launched at the beginning of the year, WiseEye PalmVein has already been successfully adopted by a U.S. customer for smart security and is set to commence mass production starting the end of this year. We believe WiseEye PalmVein will profoundly impact the security industry and unlock new opportunities for battery-powered devices across various use cases.



To broaden WiseEye AI's market reach and shorten customer development cycles, we also provide seamlessly integrated plug-and-play WiseEye modules and no-code/low-code AI development platforms, featuring diverse context-aware AI algorithms that customers can reprogram or fine-tune with minimal effort for real-world use cases.



Our recent announcement with NVIDIA TAO exemplifies this approach whereby our WiseEye module customers targeting AI deployment on resource constraint endpoint devices can easily optimize and quantity deep learning models with pre-trained enterprise-ready AI models and tools offered by NVIDIA. This facilitates rapid democratization of endpoint AI applications using cost-effective production-ready AI modules for various use cases.



Additionally, in response to growing AI-driven demand towards machine-vision across various environments, we recently made a strategic investment in Obsidian sensors, a San Diego-based company renowned for its revolutionary high-resolution, low-cost thermal sensors, offering unmatched versatility by detecting heat differences even in complete darkness, measuring temperature and identifying distant objects. This investment expands our image sensor portfolio beyond optical sensors to include thermal sensors, a valuable complement to our product suite, which is now widened to cover harsh sensing conditions such as heavy fog or complete darkness.



Moreover, this strategic investment promises synergy of the 2 companies with our WiseEye AI aggregated data from both optical and thermal imaging sensors for a truly holistic view of the environment beyond human vision. In addition, we are engaged in ongoing engineering collaborations that leverage Himax's IC design resources and know-how. We believe by integrating the strength of Himax and Obsidian, we can seize new opportunities in the expanding sensor and AI markets across industrial, defense, security, consumer electronics and automotive sectors.



As an illustration, the U.S. National Highway Traffic Safety Administration issued a new rule in April 2024, mandated that Automatic Emergency Braking, or AEB, including Pedestrian AEB, or PAEB, be implemented starting in 2029. This regulation aims to significantly reduce rear-end and pedestrian crashes. Similar rules are increasingly being mandated by regulatory authorities worldwide. The novel ADAS and AEB systems integrated with Obsidian's thermal sensors provide clear vision in low-light and adverse weather conditions such as fog, smoke, rain and snow. This ensures better driving safety and security, underscoring the trend and significant potential demand for thermal imaging sensors.



Last on WLO. During the second quarter, we made a strategic investment in FOCL, a Taiwan-based global leader for silicon photonics connector through $16 million private placement, resulting in a 5.3% equity stake. This collaboration highlights the immense potential of our WLO technology for LPO/CPO, which are crucial for further advancing high-speed AI and HPC technologies. Our partnership integrates FOCI's proprietary LPO/CPO connector technology with Himax's nano-scale weather Wafer Level Optics know-how to create an industry-leading optical transmission solution catered for the most advanced multi-chip modules, which demand enhanced bandwidth, improved data rate, minimized signal loss, reduced latency and lower energy consumption, all for accommodating future-generation needs of Generative AI and HPC. Currently, in close collaboration with world leading AI semiconductor players and foundry partner, we are working closely with FOCI on LPO/CPO development for products that meet customers' near-term production goals.



LPO/CPO technology is crucial for furthering Generative AI and HPC and will continue to evolve rapidly to meet the explosive demand in these areas. We are committed to advancing the technology with FOCI, ensuring our solutions stay at the cutting-edge and align with the multi-year roadmaps of our AI chip and foundry partners/customers. We believe this will generate new, long-lasting revenue streams for Himax. We will provide further updates as they become available.



As FOCI is a company listed on the Taipei Exchange, the stock price and resulting "fair value" reflected on our books change each day. These fluctuations have been and will continue to be recognized by way of changes in owners' equity as a balance sheet item not affecting our profit and loss. As a illustration, based on the close of FOCI's stock price as of the end of June 2024, we made a "gain" of $9.6 million of our $16 million FOCI investment. However, the said "gain" was not recorded as an investment profit in our Q2 financial statements and instead was booked as an increase in owners' equity. Likewise, upon disposal, the resulting investment gain or loss will also be recognized as a change of equity through retained earnings, less in our profit loss at the time of the disposal either. The accounting method we chose reflects our long-term commitment to the FOCI investment.



With over a decade of experience WLO, Himax has developed diverse designs across a broad spectrum, including 3D sensing, AR/VR devices, biomedical inspection and optical communication, just to name a few. These technologies have been widely adopted by some of the world's most prominent tech companies with cumulative shipments reaching more than 600 million units. We anticipate WLO playing an even more decisive growth in the next-generation optical technology landscape thanks to its versatile, high-precision, lightweight and small form factor characteristics that are not feasible with alternative technologies. In addition to the progress made in LPO/CPO, we are seeing an increase in engineering projects with globally recognized leaders who are leveraging our WLO expertise for the upcoming AR/VR devices, underscoring the widespread recognition of our technology. For non-driver IC business, we expect revenue to decline high-teens sequentially in the third quarter.



That concludes my report for this quarter. Thank you for your interest in Himax. We appreciate you joining today's call and are now ready to take questions.

[Operator]

Thanks very much, Jordan. And ladies and gentlemen, we are now in Q&A session.



[Operator Instructions]



The first one to ask questions, Donnie Teng, Nomura.

[Donnie Teng, analyst]

My first question is regarding to the automotive business. So I think we have started seeing some positive signs back in April. And I remember, we were pretty positive back in June and even entering into July. The guidance looks like to be a little bit disappointing, and you just mentioned about customers digesting inventories quickly. Just wondering when exactly you are seeing this kind of weakness from customers? And also because in mid of July, there has been news in China that Chinese government asking EV companies to check the localization rate in terms of the component in IC procurement. So I wonder if there is any issue there, whether we will be like retired by the Chinese EV makers or it's not the case?

[Jordan Wu, executive]

Thank you, Donnie. You are right in that we were more positive last quarter where we had our conference call than the present moment, and I think the reason behind it, I've already explained in rather detail in my prepared remarks, i.e., the fluctuation in Chinese market is the main factor causing the difference in our view. And as it turns out, our customers were obviously optimistic for their second half outlook and during the Q2, and they were apparently source to too many -- too much IC inventory. And now they are going through the destocking process. And also, we also mentioned in our prepared remarks that the U.S. and European markets are relatively stable compared to China. Now if you look at the Q3 prospect and also if we look further into Q4, so the over procure in Q2 and starting in Q3 kind of explains our strategy position in our outlook. Now the real question is how is this going to go going forward, and I think certainly, for the longer term, like next year, we remain still pretty positive about the outlook, which I will probably cover in a few minutes. Now more importantly, what is the near term in Q4. And I'll tell you the truth, our internal forecast, which were the result of collective forecast coming from various customers globally, including panel makers in Tier 1. Q4 as of today, the projection remains pretty positive with actually a decent double-digit growth compared to Q3. However, we are toning down our Q4 automotive prospect right now. Given the very recent -- I'm talking about last week also -- the global turmoil in financial markets, which might impact the consumer confidence in the major big ticket spending, such as buying new cars. So -- but we are uncertain and we are, given the period of time because the major financial turmoil across the global manager market really occurred only last week, so there's no time for us to get feedback from our customers, and I suspect there's no time for our customers to get good feedback either from the market. So we are taking it, we did see attitude. But in fact, as of today, our outlook for Q4 based on our forecast book is still pretty positive. And when the sentiment turn, I would say probably beginning of this quarter only very recently, but we did see a steady, kind of a slight pullback of customers for forecast almost week by week, slightly but steadily and that is certainly another very positive side.



Now on your concern of China localization, yes indeed, they've made the announcements and set targets to further localize their IC supply for for China's automotive sectors. But as far as we are concerned in our IC, which is automotive IC, which is display ICs, we -- I wouldn't say that that would not be a stress because any competition is a threat, but I think our leading edge is now so significant that I can't see any impact of Chinese competition in the near term or in the foreseeable future. And compared to consumer electronics as well are very aware of our automotive ICs are much harder to replace and you have to go through a much lengthier ecosystem and very long, the various requirements, higher standards of safety and other requirements. So Chinese localization certainly does not play any role in our more conservative outlook for Q3 or going forward into Q4. In fact, next year, if anything, we believe our market share, especially for those new technologies such as TDDI, local dimming Tcon or -- it's actually starting next year, we are likely to see some ramping. Early ramping. I think, if anything, we believe quite confidently our market share of automotive disparities will further rise from the sales level. And there's no reason for us to believe next year's automotive market will continue to be very bearish. I mean I think it's too early for us to form a very sold view for next year, but there's no indication or signs that people's cost spending on cars will necessarily decrease given the fact that the economy is going through some troubles, but I think governments, authorities, the feds of different countries, what I likely to take measures to encourage consumption and boost their GDPs and car spending happens to be a major item if the government wanted to boost their GDP. So I think, again, I'm not providing a solid outlook for next year, but I just want to say there's no reason for us to believe next year will be a bad year for the automotive market. I hope that addresses your question.

[Donnie Teng, analyst]

And my second question is regarding to the CPO. So could you maybe elaborate more on what's the timeline of the CPO product? When should we expect to see some more volume coming and how confident you are to ramp up this business in the mid-to-long term?

[Howard Yu, executive]

In that timeline, I'm followed by NDA for my partner, the customer. So I'm afraid I cannot give you very, very specific date or timetable. But I can tell you what we are working on right now, the design, is targeted for mass production. It is certainly not an R&D concept, an R&D project. It's not -- actually, we are way past that stage. I mean, certainly, we did that before, years before, but we're way past that stage, and we are now pushed towards mass production ASAP. What I can tell you is, in fact, we expect to see some small but very early result result hopefully by the end of this year, but that's minimal. But next year, if everything goes as planned, there will be steady ramping.



And the confidence level mid-to-long term, I would say, very confident. I think -- we all know about this hunger for more processing power because of generative AI, right. And we are very aware of the issues there. The challenge is to further increase your bandwidth, your processing power, your processing speed and -- but there are all kinds of issues, including power consumption, heat dissipation and all that right. And I would say CPO is a relatively low cost and relatively easy -- I'm not saying it's easy, but it's relatively easy to fix all these issues and also cost-wise as well because right now, if you analyze the most advanced HPC ICs or GPU ICs they have very big processing power, but the bottleneck right now is actually the transmission with the outside. The transmission of the IC that I think can process a lot of data, high bandwith, bandwidth very fast, the bandwidth is expanding -- is expected to expand exponentially over the next few years. Now with advanced packaging it's going to -- the expansion is going to be faster. However, the real bottleneck right now is their transmission capability, their transmission bandwidth, which is limited because now they are relying on metal wire to do the transmission, and we all know, it's no secret, to really improve that you just need to replace your metal wire with fiber optics, and that's exactly what we're trying to achieve, right. That we're trying to help to resolve. And so if you can successfully replace your metal wire with fiber optics, right away you boost your bandwidth by a huge speed and thereby also as a major side benefit you also reduce your power consumption because the thermal walls will become much less and you increase your data accuracy, et cetera, right? So I would say everybody in the ecosystem is very keen to making sure that this happens ASAP and what happens because, as I mentioned, right, it's a relatively cheap and easy fix to their solutions. So I don't see any reason why this should not be adopted across the board to cover as many of the ICs possible. Now I'm only talking about ICs, which demands very high bandwidth, right, which demand, very high bandwidth. And our goal, our role, is to building on the foundation of today to continue to help expand the transmission bandwidth, right? And we have a role together with partners, our customers, to really pretty dramatically expand the transmission bandwidth very substantially. I'm talking about many -- multiple times over the next few years. And some of these projects are already in experimental stage, in the earliest experimental stage or more mature experimental stage. But what I'm trying to say is that the first generation upon mass production will greatly expand the transmission bandwidth of those ICs already with further solutions expected to be available in rather short time span with multiple times improvement in transmission bandwidth. So I think this is really an exciting opportunity for us, for WLO. I mean, it was a surprise when we realized a long time ago that WLO can actually be utilized to tackle this issue. But as we delve further and further, we realized this is actually a very, very perfect solution, a very perfect fix for the data transmission bandwidth issue that is now faced by this AI technology advancement.

[Operator]

[Operator Instructions]

[Jordan Wu, executive]

As a final note, Eric Li, our Chief IR Officer, will maintain investor marketing activities and continue to attend investor conferences. We will announce the details as they come out. Thank you, and have a nice day.