Himax Technologies (HIMX, Financial) reported disappointing set of numbers for the third quarter and projected a weak outlook for the upcoming months. Although year over year performance was not very impressive but sequentially the numbers were better than those in the second quarter. The stock has declined considerably in the past one year and a gloomy outlook makes it hard for investors to predict its future course of movement.
Reasons behind the weak outlook
One of the main reasons cited for a weak outlook for the fourth quarter is on account of shortage in foundry capacity. But the management anticipated this shortage and was preparing for it with the addition of new supply partners to secure more capacity.
In addition, seasonal adjustment in inventory from its customers could also slow down the pace of growth in the fourth quarter. Yet, In spite of the inventory adjustments; Himax is confident of its future prospects, since it has an edge over its peers in the 4K TV market. It is one of the few companies that provide a total solution covering point-to-point high-speed interface between timing controller and driver IC for the 4k TV.
In fact the total solution approach is also used in notebooks, tablets and laptops. As a result of its ground breaking technology the company could go a long way in the future. The management expects its large panel driver IC business to be relatively stable with year over year growth.
Growth drivers
For its small and medium size panels, which are used in smart phones and tablets there are some challenges in the near term, which is expected to fade away eventually. Because e of a change in the government policy in China the smartphone market is slowing down leading to a reduced subsidy from cell phone operators. However, as retail, ecommerce, and direct sales point channels replace operators at the sales channel for smartphones, the Chinese market is expected to regain its momentum in 2015.
But the same cannot be said about tablets, which continues to experience a weak demand. This is mainly on account of slowing Chinese export to the third world countries along with a tight credit policy imposed by the Chinese government, which has forced smaller companies to quit the market. And to top this, with smartphones getting bigger and bigger there is a change in consumers' buying behavior.
Apart from this, there is strong momentum for its non-driver business, which was evident in the third quarter as well, and contributed 21.5% of its total revenue. Although seasonality will affect some of its products but the management is especially confident about its CMOS image sensors and touch panel controllers to deliver strong growth in the fourth quarter.
Himax will launch its 13 megapixel sensor in the fourth quarter even as it expects its 8 megapixel image sensors to be a leading growth driver, which has become very common in most of the smart phones. The company has also developed image sensors for automotive and surveillance applications, which are lucrative and fast-growing markets. Himax has recently bagged an order for its image sensors from a Korean automotive customer, and as it begins to ship these products it will double its business in this segment.
In addition, its touch panel controller reported phenomenal growth in the third quarter, and for the forth quarter it has several major design-wins across both international and Chinese markets. This a growing segment and the technology is extensively used by leading TFT-LCD makers. Himax has partnered with many of them, and will consequently bag large number of orders leading to a strong to line.
Conclusion
Going forward the company expects its fourth quarter earnings to be in the range of $0.075 to $0.092 per diluted ADS. In the third quarter its numbers were not very encouraging but its future prospects seems to be good. The company is continuously developing its products and has a strong command in some segments like providing total solution in the 4K market. Therefore in the light of all the factors investors must watch this stock from the side lines and look for a better entry point.
