Himax Technologies: Mixed Year Ahead (NASDAQ:HIMX)

Himax Technologies, Inc. (NASDAQ:HIMX), which designs, develops, and markets semiconductors for flat panel displays, continues to face tough macro-economic and geopolitical headwinds as it ends 2022 and heads into 2023, with a number of factors contributing to lack of visibility over the next year.

Among the major ones are inventory management in light of slowing demand in a number of categories, volatility associated with unpredictable lockdowns in China, inflation, interest rates, and whether or not the recession will get worse in 2023.

On the other hand, there is more visibility in Automotive, AMOLED, Tcon and WiseEye AI image sensing, which combined, are expected to be the main growth drivers of the company going forward, accounting for over 50 percent of sales.

Outside of those four categories though, there is a lot less clarity as to how things will proceed in the quarters ahead, which makes it uncertain as to what the performance of HIMX will be in the near term.

A key thing to consider is, even though it does have some visibility with its growth drivers, and they’re expected to increase as a percentage of revenue, they’re still working from a lower baseline because of recent weakness in their performances.

In this article we’ll look at some of its recent numbers, the potential impact of inventory management on its near-term performance, and how the next year or so will work out for the company.

Some of the numbers

Revenue in the third quarter was $213.6 million, down 49 percent year-over-year, but beating by $14.81 million. Revenue for the fourth quarter of 2022 is projected to increase from 4 percent to 8 percent from the third quarter.

Revenue from large display drivers was $41.3 million, down 39.8 percent sequentially, and revenue from small and medium-sized display drivers was $141.4 million, down 29.9 percent from the prior quarter, primarily from its customers reducing inventory levels.

Much of the weak performance of HIMX is coming from customers getting much stricter with inventory controls in light of uncertainty for demand now and in the quarters ahead.

Gross margin in the reporting period was 36.3 percent, down from 43.6 percent sequentially. The major reason for the decline in gross margin was charges from agreements it made with backend suppliers and foundries in order to secure capacity. Cutting back on inventory by its customers was the other major contributor to price erosion in the quarter.

Net income was $29.8 million, or $0.17 per share, beating guidance of $0.116 to $0.156.

Operating expenses in the third quarter of 2022 jumped to $72.9 million, up 38.5 percent sequentially. The bulk of the increase was from annual bonuses distributed by the company to its employees.

Cash, cash equivalents and other financial assets at the end of the quarter was $227.9 million, down from $461.6 million year-over-year, primarily from its dividend payout of $217.9 million in July 2022.

Inventory at the end of the reporting period was $410 million, compared to $337 million in inventory held at the end of the third quarter of 2021. The increase was attributed to a rapid decline in demand and inventory control of its customers.

With low visibility in a number of categories it competes in, the company is going to keep operating expenses for 2023 flat as compared with 2022. It plans on investing more in its expected high-growth categories while cutting expenditures in its declining categories.

The biggest takeaway from the earnings numbers is the company is definitely in a period of slowing growth, and even though some of the categories it competes in should do well over the long term, in the near term, even though they seem to outperform, that performance is coming from a much lower baseline to work from.

For example, even with its revenue beat it was still down 49 percent year-over-year.

Growth drivers

According to management, the key growth drivers in the near and long term are Automotive, AMOLED, Tcon and WiseEye AI image sensing. Together they account for over 50 percent of sales at this time, and are expected to increase as a percentage of sales in the years ahead.

Not only is that important to know, but it’s also important because these four categories are also the most visible in the quarters ahead. The remaining categories are much less visible and the reason why there’s no way of knowing to what level each could offset one another over the next twelve months, making it difficult to get a sense of how the company will perform with the headwinds that will remain in play.

This is especially true with the Federal Reserve battling inflation by increasing interest rates, which has a disproportion negative impact on high-growth tech companies. And since the Fed is going to continue to raise rates at least for a couple more months and possibly longer, this will continue to be a significant headwind for HIMX.

So even if the four key drivers listed above perform according to expectations, the probable decline in its other businesses could easily be more than a counterweight to them.

Management acknowledges that even though the four growth drivers should continue to grow in 2023, which will also increase gross margin because they generate higher margins than the corporate average, it is still too early to know how the company will perform next year.

One area that will provide more visibility will be when the destocking cycle is over, which the company, as of the time of the earnings report, saw being completed within two to three quarters.

If that’s how it plays out, it would mean the overall performance of the company should improve across most of its categories, depending on demand in each one of them; I’m referring here to the weaker businesses as well.

Again, the point with HIMX is it’s impossible to project how it’s going to perform in the near term because of lack of visibility in many of the businesses it competes in. Once inventory destocking is completed, it provides an important piece to the visibility factor that will help investors and management get a clearer picture concerning future demand that can’t be known until current inventory levels are cleared.

For investors, the most important segment in its growth drivers to watch is Automotive, which accounts for 35 percent of company revenue. The other three business account for the remainder of the 50 percent-plus overall business it represents with the combined four growth drivers.

In other words, even though there are some big percentages thrown out concerning growth in some of these businesses, it should be understood they’re working from a low base to begin with.

For example, its Tcon business represented approximately 7 percent of total sales in the third quarter, even though it was down double-digits sequentially. But the company guided for Tcon sales in automotive to soar by over 80 percent in the fourth quarter as measured against the fourth quarter of 2021. This sounds impressive, but it doesn’t represent a significant impact on the company’s performance.

The four drivers are going to continue to grow, but outside of Automotive their short-term impact is going to be minimal, even with large percentage gains. For that reason, expectations over the next year should be moderated until the picture gets much clearer, which isn’t likely to happen until the second half of 2023 at the earliest.

Further out, these four businesses should be strong contributors to the top and bottom lines of the company, and for long-term investors the future could be a bright one.

Share price and entry point

The share price of HIMX over the last year has dropped from a 52-week high or $16.50 on December 27, 2021, to its 52-week low of $4.81 on September 30, 2022. Since then it has rebounded nicely to trade at $6.84 as I write.

It’s obvious that the best time to have taken a position in HIMX was when it was near its bottom. At the same time, even now, after the big correction in the stock, it’s still trading at an attractive price, although the lack of clarity in the quarters ahead makes it difficult to have confidence in the share price holding above the current price level – it could go either way.

Looking at the chart of HIMX, it has hit a triple top of approximately $7.50 since November 15, 2022, and if it’s able to break through that in a sustainable way, it could result in a prolonged move above that price level. And if it doesn’t break through and continues to reverse direction, it should result in a much better entry point then where the stock is trading now.

For those investors believing in the long-term future of HIMX, using a dollar-cost averaging strategy, along with disciplined position sizing, should do very well over the long term, as that would provide an attractive cost basis that should generate solid returns over the next several years, once the industry completes its destocking cycle and economic conditions improve.

Conclusion

There is no doubt 2023 will be a challenging one for HIMX. The battle will be between the growth trajectory of the four major revenue growth drivers of the company, and the level the remaining businesses offset that growth.

I think the near-term prospects of the company will primarily be impacted by the end of the destocking cycle, which will give management and investors a much clearer picture of what current demand really is, resulting in a more accurate assessment of the performance of the company in 2023 and beyond.

Until that happens, we’re simply in the dark concerning how the company will do over the next year, even with more visibility in Automotive, AMOLED, Tcon and WiseEye AI.

Add to that the uncertainties surrounding tensions between China and the U.S. in the semiconductor industry, and it’s apparent to me that HIMX could go either way in 2023.

For that reason, getting in at a good entry point is vital for investors to position themselves in order to improve risk/reward. Over time I believe HIMX is going to do very well, but for now, there is simply no way of knowing how long that’ll take and how low its share price will fall until we know what the real demand is after the destocking cycle and how the economy will do in the next twelve months.