Himax Technologies : Third Quarter 2016 Results Press Release

• Net revenue for the quarter increased 8.5% sequentially to $218.1 million, in line with the Company's reiterated guidance.
• Compared to the previous quarter, small and medium-sized panel driver sales increased 9.6% and large-sized panel driver sales increased 6.6%, driven by the Company's leading market share in China. Non-driver sales increased 9.0%, led by growth of AR/VR related business.
• Gross margin for the quarter came in at 25.6%, down 50 bps sequentially and up 380 bps year-over-year.
• Q3 2016 GAAP net income was $13.6 million, or 7.9 cents per diluted ADS, meeting guidance of 6.0 to 8.0 cents. Q3 2016 Non-GAAP net income was $21.3 million, or 12.4 cents per diluted ADS, exceeding guidance of 10.0 to 12.0 cents.
• Company remains positive on its long term business outlook.
• Company reports to proceed in line with its schedule of the expansion plan for next generation LCOS and WLO product lines.

1. Non-GAAP Net income attributable to common shareholders and EPS excludes $7.6 million share-based compensation expenses, net of tax and

   $0.1 million non-cash acquisition related charge, net of tax.

2. Non-GAAP Net income attributable to common shareholders and EPS excludes $3.9 million of share-based compensation expenses, net of tax and $0.1 million non-cash acquisition related charges, net of tax.

1. Non-GAAP Net income attributable to common shareholders and EPS excludes $7.6 million of share-based compensation expenses, net of tax and $0.1 million non-cash acquisition related charge, net of tax.

2. Non-GAAP Net income attributable to common shareholders and EPS excludes $0.2 million of share-based compensation expenses, net of tax and $0.2 million non-cash acquisition related charge, net of tax.

"The momentum we established during the first half of the year continued into the third quarter of 2016, as evidenced by our top and bottom line growth during the first three quarters of the year as our driver and non-driver business segments both performed strongly," said Mr. Jordan Wu, President and Chief Executive Officer of Himax. "We continue to see increased market share in our core driver IC business, in both large panel driver ICs as well as small and medium- sized driver ICs, which is a direct result of our ongoing technology advancements and strong customer relationships. Our total solution capabilities and our continued focus on major new technology trends including higher display resolution, AMOLED and in-cell TDDI will continue to solidify our dominant position in the market."

Mr. Wu continued: "We also remain positive on the long-term growth prospect of our higher-margin non-driver business; however, we are anticipating near-term headwinds. Notably, our LCOS and WLO product lines are expected to experience sales declines starting the fourth quarter 2016 and the next few quarters of 2017, primarily due to our major AR customer's shift in focus to the development of future generation devices. That being said, we still remain uniquely positioned in this market as the provider of choice for critical enablers to AR devices. To support anticipated growth in

this segment, we have proceeded with the expansion plans for our next generation LCOS and WLO production lines, which will enable higher end product design and offer far better product quality for mass production and is expected to be completed by the end of 2017 or early 2018. We remain committed to our long-term strategy to diversify our product and customer base with innovative technologies, which ultimately, should increase shareholder value."

The third quarter revenue of $218.1 million represented an 8.5% sequential increase and a 31.7% increase year-over- year. Revenue from large panel display drivers was $72.0 million, up 6.6% sequentially, and up 42.6% from a year ago. Large panel driver ICs accounted for 33.0% of the Company's total revenues for the third quarter, compared to 33.6% in the last quarter and 30.5% a year ago. As opposed to original guidance of double-digit sequential growth, the Company's large panel driver business grew just mid-single-digit due to a certain customer's short-noticed shipment adjustment of its monitor products. Without the last minute change, the Company could have achieved double-digit sequential growth that it guided. Despite the lower than expected sales mentioned above, the Company's large panel products grew more than 40% year-over-year thanks to strong demand from Chinese and Taiwanese panel customers during the quarter. In China, the Company's driver IC business for large panel grew more than 70% year-over-year during the quarter. In comparison, worldwide large-size TFT-LCD panel shipments declined around 6% in the same period. It is especially worth highlighting that Himax's engineering collaboration and design-in activities with large panel customers across China, Taiwan and Korea all remain robust and the Company expects these trends to continue into the next year.

Revenue for small and medium-sized drivers came in at $99.3 million, up 9.6% sequentially and up 17.8% from the same period last year. Driver ICs for small and medium-sized applications accounted for 45.5% of total sales for the third

quarter, as compared to 45.0% in the previous quarter and 50.9% a year ago. Sales into smartphones came in better than guided to achieve low-single-digit growth sequentially and up more than 20% year-over-year, as the Company fulfilled some of the surging rush orders of late from Chinese end customers through securing additional capacity from its supply partners. The strong rebound of the Company's smartphone driver IC business this year came from its long- standing leading market share in China where the Company's end brand customers are performing strongly. Automotive and tablet applications were also contributors to the segment and continued solid momentum, growing double digit during the third quarter both sequentially and year-over-year.

Revenues from non-driver businesses were $46.8 million, up 9.0% sequentially and up 52.1% from the same period last year. Non-driver products accounted for 21.5% of total revenues, as compared to 21.4% in the previous quarter and 18.6% a year ago. The sequential growth was led by the LCOS and WLO shipments for AR applications. Other product lines such as timing controller, touch panel controller and ASIC also grew sequentially. The performance of LCOS and WLO increased several folds year-over-year thanks to shipments to the Company's major AR customer. The year-over- year growth was partially offset by the decline of programmable gamma OP, power management IC, and CMOS image sensors. Himax expects, however, the LCOS and WLO shipments to slow down starting fourth quarter 2016. The Company remains positive on the long-term prospect of these two product lines, judging by the numerous customers the Company has engaged, many of which the world's biggest tech names, and the busy engineering activities going on with such customers.

GAAP gross margin for the third quarter was 25.6%, down 50 basis points from 26.1% in the previous quarter and up 380 basis points from the same period last year. The Company has been able to maintain a relatively strong margin this year mainly thanks to a more favorable product mix in small and medium-sized driver ICs, increased LCOS and WLO shipments for AR applications and certain engineering fees from AR/VR new project engagements. Gross margin improvement remains one of the Company's business focuses.

GAAP operating expenses were $40.4 million in the third quarter of 2016, up 32.2% from the preceding quarter and up 4.9% from a year ago. The significant sequential increase was caused by the $9.2 million 2016 RSU grant the Company has traditionally expensed in the third quarter, which was considered in its guidance. As an annual practice, the Company rewards employees with an annual bonus at the end of September each year which always leads to a substantial increase in the third quarter GAAP operating expenses compared to the other quarters of the year. This year, the annual bonus compensation including Restricted Share Units, or RSUs, and cash payouts totaled $12.0 million, out of which $9.2 million was vested immediately and expensed in the third quarter. The remainder will be vested equally at the first, second and third anniversaries of the grant date. Excluding the RSU charge, the Company's third quarter operating expenses were $31.2 million, up 2.0% from the previous quarter and down 8.2% from the same quarter 2015.

GAAP operating margin for the third quarter of 2016 was 7.0%, up from -1.5% for the same period last year and down from 10.9% a quarter ago. The GAAP operating income decreased 30.2% sequentially, but increased 721.5% year-over-