Himax Technologies : Third Quarter 2017 Results Press Release

• Q3 revenue of $197.1M, up 29.9% QoQ, came in at high end of the guidance range
• Product sales: small and medium-sized driver ICs, 44.2% of revenue, up 24.5% QoQ; large panel driver ICs, 27.9% of revenue, up 5.4% QoQ; non-driver IC products, 27.9% of revenue, up 85.9% QoQ led by the new WLO product shipment to a leading customer
• Q3 gross margin was 25.5%, exceeding the guidance by 70 bps due to a more favorable product mix
• Q3 GAAP net income was $3.7M, or 2.1 cents per diluted ADS, in line with the guidance range of 1.3 to 2.5 cents; Non-GAAP net income was $9.0M, or 5.2 cents per diluted ADS, exceeding the guidance range of 3.0 to 4.2 cents
• Started major ramp and shipment of the new WLO product, expects shipment to the same leading customer to accelerate significantly in Q4 2017 and beyond, working on multiple new projects with the same customer
• Jointly announced with Qualcomm for collaboration in the development and commercialization of the state-of-the art and the only true 3D sensing total solution for the Android Smartphone ecosystem right now, expects solution and production capacity to be ready for mass production by Q1 2018
• Continue close collaboration with multiple top tier Android smartphone makers, aggressively aiming to launch flagship models with 3D sensing total solution during the first half of 2018
• To fulfill strong demands from the existing leading WLO customer and 3D sensing total solution Andriod smartphone OEMs, Himax will launch Phase II capex for additional WLO and active alignment capacity in 2018, Phase II scale will substantially exceed the Phase I capex of $80M

results for the third quarter ended September 30, 2017. The Company's 2017 third quarter revenues and GAAP earnings per diluted ADS came in at high end of its guidance while gross margin and non-GAAP earnings per diluted ADS both exceeded the guidance.

"Despite the decline in the first half in our business, we delivered solid results in the third quarter, achieving both top and bottom line growth across all three major product categories. One of the highlights of our third quarter business is the joint announcement with Qualcomm to unveil our 3D sensing total solution. The announcement detailed the two companies' collaboration in the development and commercialization of high resolution, low power active 3D depth sensing solutions for the Android smartphone ecosystem. The Qualcomm/Himax SLiM™ (Structured Light Imaging Module) solution is state-of-the-art and the only true 3D sensing total solution available for the Andriod market right now," said Mr. Jordan Wu, President and Chief Executive Officer of Himax. "Our SLiM™ total solution brings together Qualcomm's industry leading 3D algorithm with Himax's advanced diffraction optical element (DOE) design and mass-production-proven wafer level optics for the projector and cutting-edge NIR sensors with superior quantum efficiency for the receiver. To complete our turn-key solution for the Android market, we have put together an A team by partnering with a few top players in their respective industry, covering laser, NIR camera lens, IR filter, semiconductor foundry and module assembly. This strong alliance will ensure that our SLiM™ 3D sensing total solution will be an accountable and competitive total solution for customers' volume ramping. The SLiM™ total solution represents a very high barrier of entry for any potential competition and a much higher ASP and profit margin for us. We are targeting to have the SLiM™ 3D sensing total solution and production capacity 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. The initial capacity is part of our Phase I investment of $80 million. We will ramp as needed to meet our customers' launch timetable," Mr. Wu further said.

Himax believes 3D sensing is among the most significant new features for the next generation smartphone. It is a game-changing opportunity for the Company and will be the Himax's biggest growth engine for the next few years. "We are excited that Apple has pioneered the 3D sensing technology on iPhone X and is paving the way for smartphone to become a major AR platform. In the Android market, we are seeing leading players also aggressively looking to adopt 3D sensing. We are in close collaboration with multiple top tier Android smartphone OEMs, aggressively aiming to launch flagship smartphone models with 3D sensing total solution during the first half of 2018. By the time we started shipping our 3D total solutions, they will be major contributor to both our revenues and profit, consequently creating a more favorable product mix for us," said Mr. Wu.

Other notable milestones during the third quarter include the ramp of WLO production capacity and revenue, and construction of a new building. Mr. Wu said, "We reported in the last earnings call that this year's capex has included the urgent addition of new WLO capacity to meet the rush demand of a leading customer. This new WLO capacity has started mass production and we already began shipment to the customer during the third quarter. We expect shipment to the same customer to accelerate significantly into the fourth quarter and beyond. In parallel, we are working on several new development projects with the same customer for their future generation products. We are very excited about this partnership and the significant growth opportunities these projects represent." Mr. Wu further said, "The construction of a new building is another major capex project of this year. It will be completed and ready for move-in at around the new-year period of 2018. Its timely completion is particularly critical as it will house

the additional WLO capacity and new active alignment equipment for SLiM™ total solution to fulfill strong demands of Android Smartphone OEMs."

Due to the strong 3D sensing demands from the existing leading WLO customer and new Android smartphone OEMs, Himax is getting customers' inputs to finalize the Phase II capex for additional capacity in 2018. "The scale of Phase II investment would likely substantially exceed the Phase I capex of $80M. Unlike the Phase I investment where majority of the capex is going to land and building, the Phase II investment will be exclusively for the enlargement of our WLO and active alignment capacity. The Phase II capacity will still be located in the new building. We are confident that our investment will deliver high return. We are positive on our overall business in 2018 and beyond," said Mr. Wu.

The third quarter revenues of $197.1 million represented an increase of 29.9% sequentially and a decrease of 9.6% year-over-year.

Revenue from large panel display drivers was $54.9 million, up 5.4% sequentially and down 23.7% year-over-year. Large panel driver ICs accounted for 27.9% of the Company's total revenues for the third quarter, compared to 34.4% in the second quarter of 2017 and 33.0% a year ago. As opposed to the original guidance of 10% sequential growth, the Company's large panel driver business grew just mid-single-digit as one of its Chinese customers deferred some shipment to Q4. The sector's rebound from the first half was driven primarily by stronger sales in TV market. The year-over-year decline was caused by phase-out of certain customers' old models. The Company is pleased with its current engineering collaboration and design-in activities with large panel customers across China, Taiwan and Korea. Such activities will lead to further rebound in future sales momentum.

Revenue for small and medium-sized drivers came in at $87.2 million, up 24.5% sequentially but down 12.2% year- over-year. The product segment accounted for 44.2% of total sales for the third quarter, as compared to 46.1% in the second quarter of 2017 and 45.5% a year ago. Sales into smartphones rebounded strongly, up more than 30% sequentially, but still declining 36.0% year-over-year. The strong smartphone driver IC sales were driven by customers' replenishment of inventories after a lackluster first half. Shipment of 18:9 displays driver ICs to panel makers for tier-1 end customers also contributed to the strong rebound. The year-over year decline in the third quarter was mainly the result of a shrinking addressable market for pure TFT-LCD driver ICs for smartphones, a significant portion of which is being replaced by TDDI and AMOLED technologies as the Company highlighted in previous earnings calls. The good news is that its TDDI solutions have started some shipment in the third quarter and are expected to start ramping in Q4.

Sales into automotive application went up single digit sequentially and more than 20% year-over-year. The quarterly revenue now reached more than $20 million, a historical high, and accounting for over 15% of the total driver IC revenue. Driver IC sales for tablets were also up strongly, increasing over 25% sequentially but declining 6.8% year- over-year due to weak overall market demand in the product segment.

Revenues from the non-driver businesses were $55.0 million, up 85.9% sequentially and up 17.5% versus last year. Non-driver products accounted for 27.9% of total revenues, also a record high, as compared to 19.5% in the second quarter of 2017 and 21.5% a year ago. The sequential and year-over-year increase was due primarily to WLO product shipment to a leading customer as well as certain one-off customer reimbursements related to Himax's AR goggles business. The revenue increase was offset by the discontinuation of LCOS and WLO shipments to one of Himax's major AR device customers who decided to end the product's production as it reported before. Excluding the above- mentioned one-off customer reimbursements, which totaled $13.3 million, the sequential increase would have been lower but still at a high level of 40.9%.

GAAP gross margin for the third quarter was 25.5%, up 170 bps from 23.8% in the second quarter of 2017 and down 10 bps from 25.6% for the same period last year. The sequential margin improvement was a result of a more favorable product mix, which was due mainly to the WLO shipments starting July, 2017 and the one-off customer reimbursements.

GAAP operating expenses were $47.0 million in the third quarter, up 26.6% from the preceding quarter and up 16.2% from a year ago. The significant sequential expense increase, on top of rising R&D expenses, was caused by

$6.1 million of RSU expense. The RSU expense was assumed to be $3.0 million in the Company's guidance. The $3.1 million higher RSU represents lower EPS of 1.5 cents. As an annual practice, the Company rewards employees with an annual bonus at the end of September 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 RSUs grant $6.5 million, out of which

$6.1 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, Himax's third quarter operating expenses were $40.9 million, up 10.2% from the previous quarter and up 31.1% from the same quarter 2016. The significant year-over-year increase was primarily the result of rising R&D expenses in the areas of 3D sensing, WLO, TDDI, and high-end TV as well as the annual merit increases. In addition, NT dollar appreciation against the US caused the Company's salary expense to increase around $0.9 million as it pays the bulk of its employee salaries in NT dollars.

GAAP operating margin for the third quarter was 1.7%, down from 7.0% for the same period last year and up from - 0.6% in the previous quarter. The sequential improvement was due to gross profit increase which was mainly driven by WLO shipments and the one-off customer reimbursements. The year-over-year decline was a result of higher operating expenses and lower sales.

Third quarter non-GAAP operating income was $10.2 million, or 5.2% of sales, down from 11.5% for the same period last year and up from -0.3% a quarter ago.

GAAP net income for the third quarter was $3.7 million, or 2.1 cents per diluted ADS, compared to GAAP net loss of

$0.6 million, or 0.4 cents per diluted ADS, in the previous quarter and GAAP net income of $13.6 million, or 7.9 cents per diluted ADS, a year ago.