Himax Technologies, Inc. (HIMX) Q4 2018 Earnings Conference Call Transcript

Himax Technologies, Inc. (HIMX 1.84%)
Q4 2018 Earnings Conference Call
Feb. 19, 2019, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to Himax's Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be provided at that time. Should anyone require operator assistance during today's call, please press *0 on your touchtone telephone. Now, I'd like to hand the call over to John Mattio with Lanmia International. Please go ahead.

John Mattio -- Lanmia International -- Investor Relations Representative

Thank you, operator. Welcome, everyone, to Himax's Fourth Quarter and Full Year 2018 Earnings Call. Joining us from the company are Mr. Jordan Wu, President and Chief Executive Officer, and Ms. Jackie Chang, Chief Financial Officer. After the company's prepared comments, we have allocated time for a question and answer session. If you have not yet received a copy of today's results release, please email [email protected], or access the press release on financial portals, or download a copy from Himax's website at himax.com.tw.

Before we begin the formal remarks, I would like to remind everyone that some of the statements in this 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. Factors that could cause actual events or results to differ materially from those described in this call include, but are not limited to, general business and economic conditions, the state of the semiconductor industry, market acceptance and competitiveness of the driver and non-driver products developed by Himax, and demand for end user application.

Also, the uncertainty of continued success and technological innovations, as well as other operational and market challenges and other risks described from time to time in the company's SEC filings, including those risks identified in the section entitled "Risk Factors" in its Form 20-F for the year ended December 31st, 2017, filed with the SEC in March 2018. Except for the company's full year of 2017 financials, which were provided in the company's 20-F and filed with the SEC on March 28th, 2018, 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 yet been subjected to the same review and scrutiny, including internal auditing procedures and external audits by an independent auditor, to which the company subjects its 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. Now, I would like to turn the call over to Ms. Jackie Cheng, Chief Financial Officer of Himax Technologies. Jackie, the floor is yours.

Jackie Chang -- Chief Financial Officer

Thank you, John, and thank you, everybody, for joining us. Our outline for today's call is first to review Himax's consolidated financial performance for the quarter and full year 2018, and to provide you with our outlook for the first quarter of 2019. Jordan will then give an update on the status of our business, after which we will take questions. We will review our financials on both IFRS and non-IFRS basis. The non-IFRS financials exclude share-based compensation and acquisition-related charges.

Our fourth-quarter 2018 revenues and gross margin met our guidance issued on November 8th, while EPS exceeded the guidance. For the fourth quarter, we recorded net revenues of $191 million, an increase of 1.4% sequentially and an increase of 5.5% year over year. The revenue increase in the quarter was attributed to the production outputs of newly added foundries for both large display driver ICs and TDDI chips. Our WLO shipment volume to an anchor customer also increased sequentially.

Gross margin was 24.3%, up 90 basis points sequentially, due to a more favorable product mix. IFRS earnings per diluted ADS were $0.049, better than the guidance range of $0.015-0.036. The better-than expected earnings were due to a revaluation gain of $0.017 per diluted ADS from an AI start-up investment made in November 2017. Now, IFRS earnings per diluted ADS were $0.05, outperforming the guidance range of $0.017-0.038. The better-than-expected earnings were, again, due to the revaluation gain mentioned above.

Revenue from large display drivers was $74.2 million, up 12% sequentially, and up 27.1% year-over-year, driven by Chinese panel customers' continued ramping of new LCD fabs, where we has solid design-in penetration. Large panel driver ICs accounted for 38.9% of our total revenues for the fourth quarter, compared to 35.2% in the third quarter of 2018 and 32.3% a year ago.

Revenue for small and medium-sized display drivers came in at $79.8 million, down 6% sequentially and down 1.8% year over year. The driver ICs for the segment accounted for 41.8% of total sales for the fourth quarter, as compared to 45.1% in the third quarter of 2018 and 44.9% a year ago. Sales into smartphones were up 20.1% sequentially thanks to higher sales from TDDI, but offset by decreased shipment in traditional driver IC for smartphones. Display drivers for tablet and other consumer products also declined over 30% sequentially. With a major addition of capacity, we are optimistic about the TDDI business growth in 2019. Jordan will elaborate on this a bit later.

Our driver IC revenue for automotive applications stayed strong for the fourth quarter, reaching $32.9 million, down 3% sequentially but up 33% year over year, accounting for 21% of driver IC revenue. Revenues from our non-driver businesses were $37 million, down 0.5% sequentially and down 10.8% from last year. Non-driver products accounted for 19.3% of total revenues, as compared to 19.7% in the third quarter of 2018 and 22.8% a year ago. The fourth quarter saw continued growth of WLO shipments sequentially, but CIS and timing controller experienced some decline in revenue. The year-over-year decrease was due mainly to lower WLO and timing controller shipments.

Our IFRS gross margin for the fourth quarter was 24.3%, up 90 basis points sequentially and down 30 basis points from the same period last year, both a result of product mix. Our IFRS operating expenses were $41 million in the fourth quarter, down 5.3% from the preceding quarter and up 1.8% from a year ago. The year-over-year increase was primarily a result of increased R&D expenses. The sequential expense decrease was mainly caused by the difference of the $3.9 million of RSU charge, offset by R&D and salary expenses increase of $1.6 million.

As an annual practice, we grant annual RSUs to its staff at the end of September each year, which, given all other things equal, leads to higher third-quarter IFRS operating expenses compared to the other quarters of the year. The fourth-quarter RSU expense was $0.02 million while it was $3.9 million in the third quarter. Excluding the RSU expense, operating expenses increased 4% from the previous quarter and up 2% year over year. The quarter-over-quarter increase was mainly the result of higher R&D expenses during the fourth quarter.

IFRS operating margin for the fourth quarter was 2.8%, up from 2.4% in the same period last year and up from 0.4% in the prior quarter. The IFRS operating income increased 575.8% sequentially and increased 24.8% year over year. The sequential increase was primarily a result of higher gross margin and lower RSU expense. The year-over-year increase was a result of higher sales offset by higher operating expenses. Fourth-quarter non-IFRS operating income was $5.7 million, or 3% of sales, up from 2.6% for the same period last year and up from 2.9% a quarter ago.

IFRS profit for the fourth quarter was $8.5 million, or $0.049 per diluted ADS, compared to $0.9 million, or $0.005 per diluted ADS, in the previous quarter, and $23.5 million, or $0.136 per diluted ADS, a year ago. The sequential increase was a result of higher sales, lower RSU expense, and the revaluation gain on investment that I have mentioned earlier. The year-over-year decrease was, however, mainly the result of an investment gain of $20.7 million booked in the fourth quarter 2017 as we disposed of a direct investment in Q3 '17 which accounted for $0.12 per diluted ADS. Excluding the investment gains, IFRS profit for Q4 2018 was $5.6 million, or $0.032 per diluted ADS, versus $2.8 million, or $0.016 per diluted ADS for Q4 2017.

Fourth quarter non-IFRS profit was $8.7 million, or $0.05 per diluted ADS, compared to $4.5 million, or $0.026 per diluted ADS last quarter and $23.8 million, or $0.138 per diluted ADS the same period last year. The sequential and year-over-year variance were from the same reasons stated above. Excluding the investment gains, non-IFRS profit for Q4 2018 was $5.8 million or $0.033 per diluted ADS versus $3.1 million or $0.018 per diluted ADS for Q4 2017.

Now, let's have a quick overview of the 2018 full-year financial performance. Revenues totaled $723.6 million in 2018, representing a 5.6% increase over 2017. Revenue from large panel display drivers totaled $260.5 million, an increase of 15.9% year over year, representing 36% of our total revenues, as compared to 32.8% in 2017. Small and medium-sized driver sales totaled $325.7 million, an increase of 6.8% year over year, representing 45% of our total revenues, as compared to 44.5% in 2017.

Non-driver product sales totaled $137.4 million, a decrease of 11.6% year over year, representing 19% of our total sales, as compared to 22.7% a year ago. The year-over-year decrease was due mainly to certain one-off customer reimbursements totaling $13.3 million booked in Q3 2017 in relation to the AR goggle business. Excluding $13.3 million, the year-over-year decrease was 3.3%.

Gross margin in 2018 was 23.3%, down from 24.4% in 2017. The year-over-year decrease was due primarily to the one-off customer reimbursement in 2017 mentioned above. IFRS operating expenses were $165.5 million, up $6.9 million or 4.3% compared to last year. The increase was primarily the result of increased R&D, salary, and depreciation expenses offset by reduced RSU charge. 2018 IFRS operating income of $3.4 million represented a 59.5% decrease versus 2017, mainly for higher operating expenses.

IFRS profit for the year was $8.6 million, or $0.05 per diluted ADS, versus $27.7 million or $0.161 per diluted ADS, a decline of 69% from last year. Excluding the investment gains that I have mentioned earlier, our IFRS EPS for the year was $0.038 versus $0.041 cents from last year. Non-IFRS profit for 2018 was $12.9 million, or $0.075 per diluted ADS, down 61.9% year over year. Again, the year-over-year decline was due mainly to the investment gains mentioned above. Excluding the investment gains, Non-IFRS EPS for the year was $0.063 versus $0.077 from last year.

Turning to our balance sheet, we had $117.7 million of cash, cash equivalents, and other financial assets as of the end of December 2018, compared to $148.9 million at the same time last year and $102.9 million a quarter ago. On top of the cash position, restricted cash was $164.3 million at the end of the quarter, same to the preceding quarter and up from $147 million a year ago. The restricted cash is mainly used to guarantee the company's short-term borrowings for the same amount.

Our year-end inventories were $162.6 million, up from $145.8 million a quarter ago and up from $135.2 million at the same time last year. Accounts receivable at the end of December 2018 were $189.3 million as compared to $188.8 million a year ago and $187.6 million last quarter. Day sales outstanding was 95 days, as compared to 101 days a year ago and 96 days at end of the last quarter.

Net cash inflow from operating activities for the fourth quarter was $2.3 million as compared to the inflow of $8.3 million for the same period last year and an inflow of $2.2 million last quarter. Cash inflow from operations in 2018 was $4.0 million as compared to $29.4 million in 2017. 2018's operating cash flow was lower mainly because, in response to capacity shortage of foundry and certain packaging material, we had to keep the inventory level higher than usual. The trend may continue into this year.

Fourth-quarter capital expenditures were $5.2 million versus $15.5 million a year ago and $8.2 million last quarter. The fourth quarter CapEx consisted mainly of ongoing payments for the new building's construction, WLO capacity expansion, and installation of active alignment capacity to support our 3D sensing business. Total capital expenditure for the year was $49.7 million versus $39.3 million a year ago, of which $7.6 million was for the investment of design tools and R&D-related equipment related to our traditional IC design business.

Other capital expenditures -- mainly investment in land, a new office building and capacity expansion for 3D sensing business -- was $42 million in 2018 versus $33 million in 2017. In 2019, we anticipate continued payments for the above CapEx items to be totaling around $39 million, including land payment of $27.7 million for the land, which will conclude the current phase of capital expenditure. As of December 31, 2018, Himax had 172.1 million ADS outstanding, unchanged from last quarter. On a fully diluted basis, the total ADS outstanding are 172.6 million.

The first quarter is traditionally the bottom of the year in terms of sales because it has fewer working days due to the Lunar New Year holidays. Customers' inventory correction on smartphone drivers, reflecting their conservative views for the smartphone market, will also negatively impact our first-quarter sales. We expect first-quarter revenue to decrease around 14-19% sequentially. Gross margin is expected to be around 23%, depending on the final product mix. IFRS loss attributable to shareholders are expected to be in the range of around $0.01-0.03 per diluted ADS based on 172.6 million outstanding ADSs. Now, IFRS loss attributable to shareholders are expected to be in the range of $0.008-0.028 cents per diluted ADS based on 172.6 million outstanding ADSs. I will now turn the call over to Jordan.

Jordan Wu -- President and Chief Executive Officer

Thank you, Jackie. In the fourth quarter 2018, we delivered solid growth in the areas of TDDI, WLO, and large display driver IC despite weak sentiment in the overall consumer electronics markets. Looking into 2019, on the backdrop of an uncertain global economy, the TV panel market is overshadowed by concerns of oversupply, and the global smartphone sales are projected to suffer some decline. We are, however, still targeting some top-line growth, with upside momentum coming from TV and automotive markets as well as significantly more TDDI shipments for smartphone application, where we only made a small amount of shipment last year when we suffered from foundry capacity shortage.

We will continue to advance our technologies across key strategic areas. These include, among others, next-generation display driver technology for 8K TV and AMOLED, 3D sensing for both mobile phone and non-mobile phone applications, and ultra-low power smart sensing, where we are seeing rising momentum in new applications, such as smart home. We are fully aware we are operating in an uncertain macro environment. We are also putting cost control at the top of our agenda list, targeting to continuing R&D activities across all our strategic areas without raising R&D expenses from the last year. The total OpEx is budgeted to be at around the same level as that of last year, excluding the anticipated increase in depreciation arising primarily from the construction of the new fab described above.

Now, let me give you further insights behind our Q1 guidance and trends that we are seeing develop in our businesses. Our large display driver IC business enjoyed strong growth in the second half of 2018 as 4K TV penetration continued to rise globally and China continued to ramp brand-new, advanced-generation LCD fabs. Looking into 2019, while the market is facing the challenge of potential oversupply, we are seeing continued strength in our business, backed by strong design wins with certain LCD makers who are leading the market in capacity and brand customer engagements.

Equally important, after a lot of engineering efforts, we are now better prepared than last year in terms getting the necessary capacity support from our strategic vendors. Notably, most of our panel customers have completed qualifications of our new foundry with their key customers, and we have also successfully secured additional COF package capacity to meet our customers' TV and monitor demands. Nevertheless, for the first quarter, our large display driver business is likely to decrease by high single digits sequentially due to seasonality and customers' inventory correction.

A number of TV makers showcased their 8K TV technology at the recent CES. I'm pleased to report that one of our industry-leading customers will be launching a new 8K TV model with Himax technologies inside in March. With its cost still high and true 8K content still scarce, 8K TV is unlikely to generate much sale in 2019, but 8K TV is a strategic area for Himax because of its much higher display driver and timing controller contents and high technical barrier of entry. We are encouraged by the recent establishment of the 8K Association to help develop 8K TV ecosystem and accelerate its adoption. Besides TV, we are working with panel customers to deploy 8K technology to new areas, such as high-end gaming PC and professional-purpose monitors.

Now turning to the small and medium-sized display driver IC business, with the ramping of the newly added foundry, our capacity constraint for TDDI shipment has largely been alleviated. In Q4 2018, we were able to fulfill more customer orders with improved supply, thereby greatly increased the TDDI revenue from the previous quarter. Another notable milestone for TDDI during Q4 was that we secured a marquee design win from a major Korean smartphone maker, and are already making mass-production shipment in the first quarter, although starting with a relatively modest volume.

While we are positive on the trend of higher TDDI penetration in smartphone in 2019 and our much improved TDDI supply, our TDDI business will nevertheless be challenged by the anticipated lackluster sales of global smartphone market and the expected decline of TDDI's average sales price as competition intensifies. To gain market share in 2019, we are working to secure more design wins by offering new-generation TDDI solutions. The new solutions can enable narrow bezel panel design without the usage of COF packaging, which not only is costly, but also suffers from serious supply constraint. Several leading panel makers are now sampling panels with our new TDDI solution.

As expected, our traditional discrete driver IC sales into smartphone declined by over 25% sequentially in the fourth quarter, as the market is being quickly replaced by TDDI and AMOLED. This segment accounted for less than 6% of our total sales in the fourth quarter and will further shrink in 2019. Combining TDDI and discrete smartphone driver, our Q1 sales into the smartphone market is expected to decrease close to 30% sequentially due to seasonality and weak global smartphone market. However, we expect a strong second-half rebound in 2019.

On AMOLED product line, we have been collaborating closely with leading panel makers across China for product development. We believe AMOLED driver ICs will be one of the long-term growth engines for our small panel driver IC business.

During the fourth quarter, our automotive business delivered a solid 33% year-over-year growth. The demands for more sophisticated and higher performing displays are still rising with automakers. We are pleased to see our state-of-the-art technology for super large, end-to-end automotive displays showcased at CES. In addition, we launched the world's first TDDI design for automotive displays, and the technology is scheduled to start shipping within 2019.

Our technological prowess will continue to separate it from the rest as, for the next-generation display for automotive, we are the leader in all key technologies, including TDDI, AMOLED and local dimming timing controller. Our first-quarter revenue in this segment is, however, set to decrease close to 10% sequentially, impacted by panel customers' inventory adjustments in response to the weak car sales momentum caused by the U.S.-China trade tension.

Our tablet and consumer electronics businesses declined more than 30% sequentially in Q4 2018, driven by weak overall market sentiment. They accounted for less than 10% of our total sales in the fourth quarter. We expect business in both segments to further shrink in the first quarter by around high single digits sequentially. For first-quarter small and medium-sized driver IC business, we expect revenue to decrease by high-teens sequentially.

The non-driver IC business segment has been our most exciting growth area and a differentiator for Himax in the past few years. Now, let me share some of the progress we made in the last quarter, as well as our view for future growth opportunities. First off, 3D sensing business update.

We have participated in most of the smartphone OEMs' ongoing 3D sensing projects covering all three types of technologies, namely structured light, active stereo camera, or ASC, and time-of-flight. Depending on the customers' needs, we provide 3D sensing total solution, or just the projector module, or optics inside the module.

We have highlighted in the last earnings call that the 3D sensing adoption for Android smartphone market remains low. The adoption is hindered primarily by the prevailing high hardware cost of 3D sensing and the long development lead time required to integrate it into the smartphone. Instead of 3D sensing, most of the Android phone makers have chosen the lower-cost finger print technology, which can achieve similar phone unlock and online payment functions with somewhat compromised user experience. Reacting to their lukewarm response, we are working on the next-generation 3D sensing with our platform partners and aim to leapfrog the market by providing high-performance, easy-to-adopt and yet cost-friendly total solutions, targeting the majority of Android smartphone players.

We have a solid product roadmap and plan, including new architecture, new algorithm to make it happen. The development progress is on track, and the new solution is aiming for smartphone customers' 2020 models. We believe that 3D sensing will be widely used by more Android smartphone makers when more killer applications become available and the ecosystem is able to substantially lower the cost of adoption while offering easy-to-use, fully integrated total solutions, for which Himax is now playing a key part. In the meantime, we are working closely with a number of leading smartphone markers on multiple projects by providing projector module or critical optical components targeting their 2019 or 2020 models.

I have mentioned previously that 3D sensing can have a wide range of applications beyond smartphone. It has started to explore business opportunities in various industries by leveraging our SLiM 3D sensing total solution. Such industries are typically less sensitive to cost and always require a total solution. We are collaborating with Kneron, an industry leader in Edge-based artificial intelligence in which we have made an equity investment, to develop an AI-enabled 3D sensing solution targeting security and surveillance markets. We are also working with partners/customers on new applications covering home appliances and industrial manufacturing. We will update our progress in due course.

As anticipated, the shipment volumes to our WLO anchor customer for the fourth quarter recorded a double-digit sequential growth as a result of the customer's large-scale adoption in more models. The overall 2018 shipment increased considerably year over year. However, lower first-quarter volume compared to the previous quarter is expected as per the customer's demand forecast.

The much-reduced shipment will negatively impact our Q1 gross margin, as lower utilization will lead to higher equipment depreciation and factory overhead on a per-unit basis. Nevertheless, the Q1 revenue will still record a significant increase from the same time last year. In addition, we are encouraged by the progress of the ongoing new projects with the said customer for their next-generation products, centering around its exceptional design know-how and mass production expertise in WLO technology.

On CMOS image sensor business updates, we continue to make great progress with its machine-vision sensor product lines. Combining Himax's industry-leading super-low power CIS and ASIC designs with Emza's unique AI-based, ultra-low power computer vision algorithm, we are uniquely positioned to provide ultra-low power, smart imaging sensing total solutions. We are pleased with the status of engagement with leading players in areas such as connected home, smart building, and security, all of which new frontiers for Himax.

For traditional human vision segments, we are seeing strong demands in laptop and increasing shipment for multimedia applications such as car recorders, surveillance, drones, home appliances, and consumer electronics, among others.

I will now give you an update on the LCOS business, where our main focus areas are AR google devices and heads-up display, or HUD, for automotive. In 2018, many AR google devices were launched, targeting primarily niche industrial or business applications, while top-name multinationals continued to invest heavily to develop the ecosystem -- applications, software, operating system, system electronics, and optics. While AR goggles will still take a few more years to fully realize its market potential, we believe LCOS remains the mainstream technology in this space.

Our technology leadership and proven manufacturing expertise are evidenced by the growing list of AR goggle device customers and ongoing engineering projects. In addition, we continue to make great progress in developing high-end holographic head-up displays for high-end automotive. One of its customers has demonstrated their state-of-the-art HUD product with Himax LCOS inside at the 2019 CES with extremely positive market reception.

LCOS for both google device and HUD represents much higher ASP and gross margin for us and represents a long-term growth driver for us. In the meantime, we are working with various OEMs to bring LCOS microdisplays to mini projectors with revenue contribution to start from 2019. For non-driver IC business, we expect revenues to decrease over 30% sequentially in the first quarter, driven primarily by lower WLO shipment.

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

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press *1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from queue, you may press #. As well, we ask that you please limit yourself to one question and one follow-up to allow all participants in queue. Once again, that is *1 to ask a question. Our first question comes from Jaeson Schmidt with Lake Street Capital. Your line is open.

Jaeson Schmidt -- Lake Street Capital -- Analyst

Hey, guys. Thanks for taking my questions. Jordan, just wondering if you could comment on what's behind your confidence in the smartphone rebound in the second half. Is this just based on normal seasonal patterns? Is this based on design wins you have in the pipeline? Any additional color would be helpful.

Jordan Wu -- President and Chief Executive Officer

I think it's primarily on the design pipeline we have with the customers, and also, the projects being discussed with the customers, which hopefully, many of them will soon become real design wins. And certainly, in the second half -- later in the year, particularly -- I think our new technologies for higher-end 4HD-plus is primarily how we call our sixth design, in which we are leading the charge in the industry, which basically enables further reduction on display bezel without the need to use COF package material, which, as you know, is both very expensive and also is having a lot of supply shortage concerns.

So, we are trying to narrow the gap of narrow bezel design in between ICs without COF package, so that is for the higher-end 4HD-plus technology that we are focusing on at the moment. And, on the lower-end HD-plus, the effort there is to primarily reduce cost so the next-generation design will have fewer so-called gap designs -- which, again, we are leading the charge in the industry. So, we are already engaging customers, we are starting to develop projects with customers, and we anticipate those new designs will start to make contributions from the second half of the year. So, for all these various reasons, I think we are committed for a strong rebound in the second half, not to mention the fact that we have been hopefully successful in trying to convince the customer that the foundry capacity shortage of last year, which was very bad, is already totally behind us. So, I think we are ready to go with the customer.

Jaeson Schmidt -- Lake Street Capital -- Analyst

Okay, that's helpful. And, along the capacity constraints line, just curious if you could quantify what sort of capacity on the TDDI side you expect to have in Q1, and then how that will ramp throughout the year.

Jordan Wu -- President and Chief Executive Officer

In terms of... Firstly, on our target for the year, we are targeting to reach, on a monthly basis, over 10 million per month in the second half, which is going to represent about 25% of global TDDI market at a time. So, as far as the capacity is concerned, certainly, our prepared capacity is well above that number, meaning more than 10 million per month. So, we are ready to take more if we can, so that is exactly what we are trying very hard on, which is to try to be aggressive and to get out there and win more design projects with the customer right now. But, our target, I think, is reasonably achievable -- more than 10 million a month, and again, our capacity is way above that.

Jaeson Schmidt -- Lake Street Capital -- Analyst

Okay, thank you.

Jordan Wu -- President and Chief Executive Officer

Thank you, Jason.

Operator

Thank you. Our next question comes from the line of Tim Savageaux with Northland Capital Markets. Your line is now open.

Tim Savageaux -- Northland Capital Markets -- Managing Director

Thank you. Good morning. A couple questions. You mentioned that despite the sequential decline, you expect year-over-year growth in wafer-level optics, I imagine through a greater number of devices at your large customer. I wonder if you could talk about your expectations in growth trends for WLO for the year, both as a result of increased number of devices at your large customer as well as any potential traction on the Android side at the WLO level as the year progresses.

Jordan Wu -- President and Chief Executive Officer

Actually, we didn't specifically say we expect WLO to grow this year, the reason being -- what we did say is that our overall revenue -- overall sales for this year, for a number of reasons, we expect to see some growth despite the macroeconomy uncertainty. That, we did say, but we didn't specifically say WLO is going to register growth this year. That is primarily because admittedly, our WLO business in terms of shipments -- although we have good design pipelines and collaboration projects with much more customers, but in terms of actual shipments, we are highly dependent on one single customer, our anchor customer, which provides very big quality, and we have been a very solid vendor to them.

But, certainly, our first quarter compared to first quarter last year -- because of more model adoption, the volume did see some increase, but I think we are not providing full-year visibility because honestly, we do not have it. We are just building according to their demands, so that's just related to our WLO outlook. Now, we do have Android customers in the pipeline, but the Android customers for 3D sensing -- the volume, if they do happen -- they are small for this year compared to the anchor customer's expected volume, so I think the main driver of revenue for WLO within this year is going to be the anchor customer -- again, for which we don't pretend to have good visibility for the whole year.

Having said that, we are working with multiple projects with that anchor customer and other Android customers, so hopefully, starting from next year, we will have a more diversified, balanced sales portfolio as well as project portfolio and even customer portfolio. So, that is the aim for next year and beyond, but for this year, it's highly dependent on that one anchor customer.

Tim Savageaux -- Northland Capital Markets -- Managing Director

Understood, and thanks. If I could follow up, despite the sequential decline forecast in large driver, it looks like you're growing at a pretty good pace on a year-over-year basis. To your point, you've mentioned overall expectations for revenue growth, which -- you say large driver is the biggest part of that, and it looks like you're growing more than -- based on what you're guiding -- 20% in Q1. I know you had a stronger second half of '18, but what sort of growth expectations -- or, would you expect that type of year-over-year growth continue in large driver?

Jordan Wu -- President and Chief Executive Officer

Tim, I appreciate the question. In addition to large driver, perhaps I can give a quick overview on large driver and small and medium-sized driver, and a little bit on non-driver as well, so you get a fuller picture of how we're thinking for the full year. Again, we fully appreciate the macroeconomic uncertainty, so that is going to impact the market demand, and we also appreciate the fact that people are generally not so bullish on smartphone market, which, for Himax, is the single biggest end market. So, these two factors are certainly negative. We have to bear that in mind in our projection. And also, by providing some color for the projection, we are not providing solid guidance for the whole year numerically.

Now, for large display driver, our target is hopefully double-digit growth year over year. Chinese panel makers -- their ongoing capacity expansion certainly is going to help, and also, I mentioned in my prepared remarks our -- we suffered last year a lot by capacity shortage, firstly on the foundry side, and thereafter on the COF packaging material side, and for both, I think we are leading the industry in terms of resolving those issues, so we feel we are very well prepared, and we are actually ready to -- with that preparation relative to our peers, we are ready to pitch aggressively to customers, try to win more design wins because of our strong capacity support for the second half.

And also, I think China for large panel has been our largest market, and within China, there are actually upper-tier customers and lower-tier customers, and our focus has a lot more upper-tier customers, who typically enjoy better top-name customer engagements or relationships, they enjoy better technology, and they enjoy better market share in the high end, and they enjoy a more diversified product portfolio, so I think we will benefit by supporting all those efforts to the upper-end customers.

So, the concern for the whole year for large display is capacity oversupply, and I think it is the industry consensus that somehow, somebody at some point has got to reduce their capacity, but I think our focus customers -- peers -- are the less likely ones to do that compared to lower-tier customers, and also, I think Korean customers who are in large display panel business are suffering from higher costs compared to Chinese. So, our market share for Q4 is already more than 20% globally, and we expect market share certainly not to decline. Our aim is to further grow that market share. So, I think that's the color for large display.

And, for small display, the biggest driver obviously is going to be TDDI, which I mentioned already in Jaeson's question, so we expect TDDI to more than double from last year. However, for smartphone overall, the growth certainly will be much smaller than that because we do expect the traditional display driver IC for smartphone to further decline, so overall, we think a year-over-year increase of more than 25% can be expected for smartphone.

For automotive, the growth will not be as significant. It's more likely to be single-digit because after a few years of quite strong growth for the automotive display market, the market has started to become mature, and the growth rate is likely to be single-digit this year and even further down next year. And also, the fact is that the Himax market share is already very high, over 30% globally. So, with that high market share and maturing market, I think after quite a few years of phenomenal growth for Himax in the automotive display driver business, we are going to remain the market leader with the coveted market share position, but the growth for the year is likely to be only single-digit.

Other sectors in small and medium-sized display driver would not look so exciting or promising. I'm talking about type LEDs, which is likely to be down, hopefully single digits, electronic paper -- EPD -- also likely to be down, perhaps single digits, and other consumer electronics I think will be probably even worse. So, all these smaller factors in small and medium-sized display drivers are likely to suffer some decline this year. So, overall, we believe, putting all this together, probably single-digit growth, although it's still a very early stage to say, but for small and medium-sized drivers, probably single-digit growth for the whole year.

On non-driver, three biggest segments for now, WLO, which I have already mentioned, so we are not making comments or indications because of lack of visibility, and then, CMOS image sensor -- strong growth expected because of better product portfolio into multimedia products and end market, more products offering more customer engagement. There are a lot of small applications, small engagements, but they are -- it's quite a diverse portfolio, but we are seeing strong growth momentum this year and more next year, so CIS will definitely be double-digit growth for this year.

And lastly is our timing control business for TV, which I think you can pretty much follow my comments on large display driver because they typically go side by side. So, I think that kind of covers all major product areas -- our indication for growth prospects for the whole year. I hope that more than answers your question, Tim.

Tim Savageaux -- Northland Capital Markets -- Managing Director

It sure does. Thank you very much.

Jordan Wu -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Jerry Su with Credit Suisse. Your line is now open.

Jerry Su -- Credit Suisse -- Director

Thanks for taking my question. Jordan, I would like to ask you about OLED progress because you made in the prepared remarks about the OLED driver IC -- especially for smartphone -- had been working with customers. I remember several years ago, you had been shipping some OLED driver ICs, so I would like to know your latest progress and approximate timing for this to see some revenue contribution.

Jordan Wu -- President and Chief Executive Officer

I think the main revenue contribution is going to be next year, little within this year. This year, we do have -- across major OLED customers in China, we do have collaboration projects, we do have engagements, but it really depends a lot on also the customers' progress, and in some cases, the specs of the target market are still being changed. So, for smartphone market, which certainly is the major target market, we have a lot of activities, but unfortunately, in terms of actual sales contribution, I think it is more safe to say in the market it should be next year's story rather than this year.

Now, we do have OLED projects into automotive as well, certainly in terms of production timing even later than smartphone, but we do have engagement, again with Chinese leading customers on that as well. Over there, you basically talk about even higher-end displays compared to TFT or CT, and even with the benefit of -- we are talking about plastic OLED, so, freeform designs, which will be very important for the market. So, I think OLED -- there are a lot of activities, both in smartphone and automotive, but in terms of regular contribution, it will not be until next year.

Jerry Su -- Credit Suisse -- Director

Okay, thank you. And then, probably a follow-up question for Jackie, I think in the prepared remarks, you mentioned OpEx targeting for flattish excluding depreciation, but I think if you -- can you let us know what is the amount of the depreciation increase in the OpEx line, or more easily, can you just give us a rough idea about what's OpEx spending for this year? And also, if you could comment on the effective tax rate for this year. Thank you.

Jackie Chang -- Chief Financial Officer

Sure. The total OpEx for 2019 is budgeted to be around $175 million on an IFRS basis, of which we see $8 million more depreciation -- incremental depreciation versus last year, and of the $8 million incremental depreciation, $2 million really comes from the capitalized lease, so basically, we're capitalizing our lease. So, I think that represents about 5.6% year-over-year increase. As far as the effective tax rate, right now, we are projecting about 3% because if you put everything together, I think that right now, because of the low visibility and the uncertainty of the macroeconomics, we try to remain conservative. Therefore, our driver IC division may not be as profitable this year, so the effective tax rate will be lower because we'll be paying less taxes -- at least, that's in the current assumption right now.

Jerry Su -- Credit Suisse -- Director

Okay, about 3%, as you said.

Jackie Chang -- Chief Financial Officer

Yes, 3%.

Jerry Su -- Credit Suisse -- Director

Okay, got it. Thank you.

Operator

Thank you. Our next question comes from Donnie Teng with Nomura. Your line is now open.

Donnie Teng -- Nomura -- Analyst

Good evening, CEO and CFO. My first question is related to TDDI. So, it looks like the TDDI shipment will sequentially decline into the first quarter from fourth quarter last year, and you mentioned about you are changing the new design, so probably, that's the main reason. But, I'm not sure whether there is still some capacity constraint, particularly in the back end, so that is another reason you cannot get enough capacity because it looks like Novatek's market share is still meaningful and pretty high in the first half. And also, wondering when will we see the TDDI shipment to pick up this year. Will it be second quarter or more like back-end-loaded in the second half? Thank you.

Jordan Wu -- President and Chief Executive Officer

Certainly, very much second half, back-end-loaded, but certainly, you should expect further pickup second quarter from first quarter. First quarter will definitely be the bottom. And, I think first quarter is low because of serious capacity constraint. Last year, fourth quarter in particular, we really had to exclude a lot of customers in order to just focus to satisfy the demands of one major Chinese end customer. That is an unavoidable and difficult decision to make because we simply didn't have the capacity to satisfy everybody. So, we stuck with the major customer that we had, we focused on end of last year...

Everybody was pretty much in panic mode because capacity was so, so short across the board. So, I think the end result was that they ended up taking what they really needed from us in Q4 last year, and therefore, we are seeing some inventory correction from that major customer. And now, we are slowly diversifying into other customers, but this diversification process -- because admittedly, we did have a high degree of dependency on one single customer, so the fluctuation, I think, compared to our leading competitor, as you mentioned, I think is certainly not in our favor, but hopefully, when we have a more balanced customer portfolio and product portfolio -- starting from now, actually -- this issue will improve.

Now, I just mentioned about our new generation of design. We are not saying our sales will have to count on those designs. I think with those designs, we hope to win more design win sockets, but I think with this current generation of designs, we will continue to make shipments. Again, last year, the concern was primarily capacity. It took a bit of time to really convince the customer that the concern is already gone, and there will be a design engagement stage that leads to shipments. So, there will be some lead time required for us to diversify our customers, but I think the fact that we were able to support high-end products for 4HD-plus with our industry-leading customer -- I think that demonstrated our capability, and we just have to start from there and try to win more projects with more customers.

And, for TDDI, I also want to talk about potentially other applications -- actually, not "potentially." They are happening right now. TDDI is going to be more beyond just smartphone. You talk about automotive, high-end tablet, or larger display with active stylus, and even two-in-one notebooks. Such product industries are already adopting TDDI, and I think we are in the frontier in terms of exploring those opportunities and engaging with those customers.

So, with automotive, to give you a rough idea, we expect shipment starting from second half this year, starting small, but next year will be a lot more programs starting mass production. That is for automotive TDDI. For high-end tablet, again, under development and verification by panel makers, we expect revenue contribution from the third quarter or second half of this year.

And, active-stylus TDDI -- actually, this is where we are leading the industry. Together with our key partner, we made an announcement and demo at CES. We got a very good response. So, the sample will be ready in the second quarter for OEM second-generation design, so hopefully, again, mass production by the end of this year. Two-in-one notebook solutions will be ready by the end of this year, mass production expected next year. So, although any one of these single segments in terms of volume has nothing to compare with mobile phone, but I think for the long term, they represent good growth areas for us.

Donnie Teng -- Nomura -- Analyst

Got it. So, one follow-up question on the capacity constraint. So, this year, can we say that the foundry capacity is no longer a constraint, but probably more like in the back end? Is that a fair comment?

Jordan Wu -- President and Chief Executive Officer

For very high-end TDDI, you're talking about COF packaging. With COF, certainly, capacity is a constraint. I know that for sure. Quite a number of even leading smartphone customers are hesitant to go deep into such design simply because of capacity concerns. And, we also know of probably two or three leading smartphone customers -- they have to go straight through to their ecosystem and secure COF capacity directly by themselves. So, it's very expensive and it's got a lot of capacity constraint, so in our projection for this year, although we do have such technology and we do have some shipment records for COF, again, we are suffering from the same capacity constraint. So, in this year's projection, we are not really counting on that.

So, if that's what you mean by "back end," COF packaging, yes, it's got a few capacity constraints, but in terms of testing, indeed, it requires higher testing, and testing is always a long-term issue, but it's always been resolved. It's an issue that has always been resolved, and it may represent a little bit of shortage, but it's not a big-scale shortage such as what we saw in terms of foundry capacity or what we are seeing right now in terms of COF. We are talking about very different stories. So, those testing capacity constraints -- I think it's only marginal, and they can be resolved.

Donnie Teng -- Nomura -- Analyst

Got it. My second question is pretty simple. I think we have some long-term growth drivers, like OLED, display driver IC, and 3D sensing, and COF. So, if you look at the coming one to two years, what product line should we expect to see more meaningful sales contribution at the earliest, and I'm wondering if you can rank these three product lines. When will we have better visibility on these products?

Jordan Wu -- President and Chief Executive Officer

I think in terms of shorter-term visibility, certainly, the best potential comes from 3D sensing, where we provide critical optical components or particular modules to both enjoy the smartphone market's covering, TOF, and substrate line, and all these solutions. So, there, we are talking about a very small number of leading customers who have the in-house technology depth to provide their own product solutions. So, we -- along with some of our peers -- will be called in to provide certain critical components of technology to go with their whole solution. So, that, if you like, is certainly the major driving contributor last year, this year, next year. That is the most short-term.

So, I think in terms of 3D sensing, we talked about in my prepared remarks -- admittedly, the first generation -- arguably, the technology development was a reasonable success, but I think we probably didn't do well enough in terms of cost and easiness for customers' integration, so that is what we're working on at the moment, together with our global partners. So, the target is end of this year to early next year, sampling for our new total solution, and mass production is likely to be second half 2020.

And also, we do have existing technology, existing solutions which we are using to explore opportunities, primarily on non-smartphone sectors. Again, they are less cost-sensitive, but they do require a total solution, so only a small handful of our vendors around the world can supply that. But, the difficulty here is the fact that you need to meet their requirements -- both technical and commercial requirements -- and you need to put together a true total solution for them in order to start generating revenue. By saying that, we are talking about not just our total solution, also, our total solution needs to work with -- for example -- their central controlling, their SOC plate for more AP, and so on and so forth.

So, our target markets for now in the short term is primarily security and surveillance because in terms of use case scenario, they are quite similar to face unlock required for smartphone, meaning the hardware aspect revision required is the smallest in those segments because in surveillance and security, in most cases, you are also trying to do face recognition with an IR, IP, and so on and so forth, which is quite similar to smartphone.

And, we are also engaging manufacturing factory kind of customers, but I cannot elaborate more details. Hopefully somewhere this year, we'll make more information available to the market, but I have to respect confidentiality for now. But, what I'm trying to say is that these AIoT applications are more fragmented, but they do represent a tremendous market potential for us. We are, if you like, still going through the learning process in the sense that over here, we do have a total solution, and there will be a next-generation total solution developed for smartphone that will also be applied over here, but how we are going through right now is truly to learn from freer design activities -- hardware, software, and system integration, all these together.

So, it's a necessary knowhow accumulation process to me, but again, for such applications, we are in the forefront of the industry's development. So, I think we see 3D sensing as a new and tremendous market for the long term, so we are in a very rare position where we have three critical technologies under the same roof, being optics, CRS, and algorithm, and even ASIC design. So, very few people in the world can do that, so I think we are seeing 3D sensing as a very long-term thing for Himax. So, I think that is the first major area for non-driver.

I think what you didn't mention -- and, we did mention in our prepared remarks -- I will try to take a few minutes to explore another major AIoT opportunity for us, which is ultra-low-power sensing. Similar to 3D sensing, the reason why we are into this big-time is because firstly, it's a new market, an untapped new market with tremendous long-term potential, and secondly, we have some very unique technology in the marketplace. Certainly, our technology and our position is already highly recognized in the industry, evidenced by the fact that we are already approached typically by their respective industry leaders for collaboration.

So, because of this unique position that we enjoy, we are also seeing ultra-low-power sensing for AIoT as a very long-term growth engine for Himax. You'll remember we acquired the Israeli software company called Emza. Emza specializes in providing AI-based algorithms for ultra-low-power image sensing -- intelligent, ultra-low-power image sensing. So, together with our CMOS image sensor and our ASIC design, we are probably the only one in the world which can put together such solution with such amazing ultra-low-power specification. Right now, it's primarily for pupil detection, limited pupil recognition, and pupil counting.

I'll probably try to give you -- our focus area for the short term is primarily the surveillance and security market, where, very often, you need a battery-charged solution which requires super-low power, and that is where we come in. I'll give you a rough example of security and surveillance markets, or smart doorway or smart door lock, or office entry control -- such markets. Eventually -- it's already happening right now -- this will be upgraded to 3D face recognition for access control because of higher requirement of certainty. Imagine it's your door, it's your home. You want to have something electronic and intelligent for you to replace your traditional key. Actually, the industry is now being upgraded from 2D face recognition to 3D.

Now, the problem is when you're 3D sensing, you can't have 3D sensing always on because it's simply too power-consuming. In addition to 3D sensing, you also don't want to have your central SOC always on. So, what you need is a supplemental ultra-low-power smart image detection device sitting on the side to basically screen and recognize there is a human being approaching, and that's when you decide to wake up the central SOC and 3D sensing, which are, again, power-consuming.

So, we are seeing a lot of inquiries coming from our customers, who are approaching us for such development programs, so I'm pretty sure we'll have more news to report, better progress to report in due course for ultra-low-power sensing as well. So, in terms of revenue contribution, I would say this will also start from next year. Primarily, we have a lot of engagement and design activities together with our customers.

And lastly, on LCOS, we emphasize that... We are talking about two major markets -- AR goggle devices and HUD for super-high-end automotive HUD application. Both will still take a few years to materialize, so how we're doing their cost for now is really try to minimize our cost because we do have the technology ready, we do have a lot of displays already developed. Whenever customers want us to develop a new display -- which is still happening, by the way, from some top-tier nets -- they are still paying us an RE for new panels with their specification requirements. So, whether it's new panels or existing panels, but customers simply want us to support them in their development effort, we charge an RE. So, we try to minimize our costs. We try to use it as our existing technology and product portfolio, and we try to charge an RE for whatever big-effort or small-effort services that we provide to customers, hoping to get to see the recommoditization of both these sectors, being both AR goggle devices and HUD.

By the way, with HUD, we are really seeing -- a lot of people are saying they've never seen this before. They hadn't mentioned this can be [inaudible]. But again, it's automotive. It's going to take a few years to materialize. So, that kind of covers our non-driver effort, so, again, these are unique. We are already in the leading position, highly recognized by the industry, and the market may be small for now, but we feel there are new markets, and they are long-term growth areas.

Donnie Teng -- Nomura -- Analyst

Got it. Thank you so much.

Jordan Wu -- President and Chief Executive Officer

Thank you, Donnie.

Operator

Thank you. And, with that, I will now turn the conference back over to Mr. Wu for any closing remarks.

Jordan Wu -- President and Chief Executive Officer

As a final note, Jackie, our CFO, will maintain investor marketing activities, and we will continue to attend investor conferences, and we will announce the details as they come about. Thank you, and have a nice day.

Operator

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.

Duration: 80 minutes

Call participants:

John Mattio -- Lanmia International -- Investor Relations Representative

Jordan Wu -- President and Chief Executive Officer

Jackie Chang -- Chief Financial Officer

Jaeson Schmidt -- Lake Street Capital -- Analyst

Tim Savageaux -- Northland Capital Markets -- Managing Director

Jerry Su -- Credit Suisse -- Director

Donnie Teng -- Nomura -- Analyst

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