Himax Technologies (HIMX -0.27%) had a mostly banner year in 2017, delivering delectable gains thanks to two big partnerships. First, Apple (AAPL -1.80%) decided to use Himax solutions for enabling Face ID in the iPhone X. Then, Qualcomm chose it as a partner for developing 3D sensing solutions for smartphones and automobiles.
But Himax's dream run came to a screeching halt in December after short-seller Citron Research accused the company's management of fraud. The unsubstantiated tweet sparked a sell-off even as the company denied allegations of fraud and said Citron's accusation had no credibility.
Himax stock hasn't recovered yet, but the company has an opportunity to boost investor confidence when it releases its fourth-quarter results on Feb. 13. Will it be able to deliver? Let's see:
The headline numbers
Wall Street analysts on average expect $0.14 per share in earnings from Himax on revenue of $185 million. By comparison, the company reported $0.03 per share in earnings in the year-ago quarter on $203 million in revenue. The consensus estimates are in line with the company's guidance issued in November, so it shouldn't have much difficulty meeting them.
Moreover, investors shouldn't get hung up on the estimated 9% drop in Himax's revenue. The company is facing a tough year-over-year comparison because of the phaseout of one of its customer programs. And Himax is calling for a sharp rise in earnings thanks to an improving product mix that's leading to margin expansion.
An increase in sales of touch and display driver-integration products, as well as a bump in shipments of 3D sensing chips manufactured using Himax's wafer-level optics technology, is positively impacting its gross margin profile. The improvement in the company's product mix helped it boost its Q3 gross margin by 170 basis points sequentially to 25.6%, 70 basis points above the original guidance.
In Q4, Himax expects its gross margin to witness a sequential drop of 1% because of seasonality. But it will still be way better than the 19.1% gross margin reported by the company in the prior-year period, leading to a massive pop in earnings year over year. More important, the chipmaker's improved margin profile should give a nice boost to profitability as its top-line growth is expected to start picking up this year.
The outlook should be strong
Himax bears might worry that the company will issue tepid guidance because of Apple's mediocre outlook for the quarter including March. But one shouldn't forget that Himax wasn't an Apple supplier a year ago, so the chipmaker will gain even if Cupertino slashes its production during the current quarter because of seasonal patterns.
There is a lot of speculation around iPhone X production. Certain outlets report that Cupertino could slash production by as much as 50% over the next two quarters because of weak demand, before eventually discontinuing it in the second half of the year. But such a move from Apple seems highly unlikely given the popularity of the iPhone X and its impact on Apple's sales.
The iPhone X pulled up Apple's average selling prices during the holiday quarter. This boosted iPhone revenue by 13% year over year in spite of a 1% drop in iPhone shipments during a quarter. What's more, Apple's guidance for the quarter including March calls for a 17% year-over-year growth in revenue.
So I'm not putting much weight in the speculation that Apple could stop the production of its best-selling iPhone model. And there are reports that key Apple suppliers expect just a 10% drop in component orders this quarter, similar to what was done last year.
More important, Apple isn't the only catalyst for Himax. As already mentioned, the chipmaker has a partnership with Qualcomm for making 3D sensing chips for smartphones and automotive applications.
The good news is that their jointly developed 3D sensing solution will start contributing to Himax's revenue and profit from the first half of 2018. Himax said in the previous conference call that its SLiM 3D sensing solution for Android devices "will be ready for mass production and shipment by the end of the first quarter of 2018, with an initial capacity of 2 million units per month."
Himax will gradually expand its capacity based on demand, and this should pave the way for long-term growth because use of 3D sensing modules in smartphones is expected to increase at a massive compound annual growth rate of 209% through 2020. Analysts expect Himax's revenue to grow almost 30% in fiscal 2018 after an estimated 14% decline last year.
All in all, Himax looks ready to kick-start its turnaround with a strong Q4 report and a sunny guidance.