Himax Technologies 3Q 2025 Earnings Call - Surpassing Guidance Amid Automotive Strength and Emerging AI and CPO Ventures

Jordan Wu, President and Chief Executive Officer, Himax Technologies: Hello, ladies and gentlemen. Welcome to Himax Technologies third quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Karen Tiao, Head of Investor Relations, Public Relations, and Himax. Ms. Tiao, please go ahead.

Karen Tiao, Head of Investor Relations, Public Relations, Himax Technologies: Welcome, everyone, to Himax third quarter 2025 earnings call. My name is Karen Tiao, Head of IR, PR, and Himax. Joining me today are Jordan Wu, President and Chief Executive Officer, and Jessica Pan, Chief Financial Officer. After the company’s prepared comments, we have allocated time for questions in the Q&A section. If you have not yet received a copy of today’s result release, please email [email protected] or [email protected]. Access the press release on financial portals or download a copy from Himax’s website at www.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.

A list of risk factors can be found in the company’s SEC filing, Form 20-F, for the year ended December 31, 2024, in the section entitled Risk Factors as may be amended. Except for the company’s full year 2024 financials, which were provided in the company’s 20-F and filed with the SEC on April 2, 2025. 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 been subjected to the same review and scrutiny, including internal auditing procedures and external audits by the independent auditors, to which we subject our 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 as a result of new information, future events, or otherwise.

On today’s call, I will first review the Himax Technologies financial performance for the third quarter 2025, followed by our fourth quarter outlook. Jordan will then give an update on the status of our business, after which we will take questions. You can submit your questions online through the webcast or by phone. We will review our financials on an IFRS basis. During the quarter, U.S. tariff measures continue to disrupt global trade dynamics, adding to the macroeconomic and demand uncertainty. By this time, we are pleased to report that our third quarter revenues and profits both significantly exceeded the guidance range announced on August 7, 2025, while gross margin came in within guidance. Third quarter revenue registered $199.2 million, representing a sequential decline of 7.3%, which significantly outperformed our guidance range of 12.0%-7.0% decline, primarily driven by better-than-expected sales for automotive IC and T-CON product lines.

Gross margin was 13.2%, in line with our guidance of around 13%. Q3 profits per diluted ADS was $0.006, substantially exceeding the guidance range of the loss of $0.02-$0.04. Attributable to strong and guided revenue. Revenues from large display driver came in at $19.0 million, representing a decline of 23.6% from the previous quarter. All three product lines within the large panel driver IC segment declined, primarily due to the absence of the traditional system of shipping momentum and a volatile macroeconomic environment, as well as customers pulling forward purchases in prior quarters. Sales of large panel driver IC accounted for 9.5% of total revenues for the quarter, compared to 11.6% last quarter and 13.8% a year ago. Revenue from the small and medium-sized display driver segment totaled $141.0 million, reflecting a slight decline of 2.4%.

Q3 automotive driver sales, including both the traditional DDIC and TDDI, increased single-digit quarter-over-quarter, outperforming our guidance of a slight sequential decline, indicating resilient underlying demand despite global softness in automotive sales. The sequential growth was mainly driven by replenishments in both TDDI and DDIC products, with customers adhering to a make-to-order model and keeping inventory lean in view of an uncertain demand outlook. Our automotive business, comprising DDIC, TDDI, T-CON, and OLED IC sales, remained the largest revenue contributor in the third quarter, representing over 15% of the total revenues. Meanwhile, revenue for both smartphones and tablet IC segments declined quarter-over-quarter as customers pulled forward purchases in prior quarters. The small and medium-sized display driver IC segment accounted for 17.8% of total sales for the quarter, compared to 67.3% in the previous quarter and 69.9% a year ago. Q3 non-driver sales reached $39.2 million.

A 13.7% decrease from the previous quarter, but outperforming our guidance range, primarily attributable to increased achievement of T-CON for automotive applications. Himax continued to hold an undisputed leadership position with a dominant market share in automotive T-CON. T-CON business accounted for around 12% of total sales, with notable contributions from automotive T-CON. Non-driver products accounted for 19.7% of total sales, as compared to 21.1% in the previous quarter and 16.3% a year ago. Third quarter operating expenses were $16.7 million, an increase of 34.2% from the previous quarter, and roughly flat compared to the same period last year. The sequential increase was mainly attributed to the annual bonus compensation, which we award employees at the end of September each year, typically resulting in much higher Q3 employee compensation expense compared to other quarters of the year.

Increased PayPal expenses, salary expenses, as well as the appreciation of the NT dollar against the US dollar in Q3 were also factors behind the sequential increase. Our annual bonus compensation grant for 2025 was $7.7 million. Slightly higher than the guidance of $7.5 million. As the bonus amount determined based on the expected full-year profits, was revised up for the following months to improve the Q3 financial performance. Of the $7.7 million, $7.5 million was immediately vested in expenses in the third quarter. Including the portion of the award grant in prior years, the total bonus expenses for Q3 2025 amount to $8.1 million. Significantly lower than $13.9 million recorded in Q3 2024. For reference, the annual bonus granted for 2024 and 2023 was $12.5 million and $10.4 million, respectively. Of which $11.2 million and $9.7 million were vested and expenses immediately.

Amid ongoing macroeconomic challenges, we continue to exercise strict budgets and expenses controls. Third quarter operating loss was $0.6 million, representing a negative operating margin of 0.3%, compared to 8.4% in the previous quarter and 2.6% for the same period last year. The sequential decline was primarily attributable to higher employee bonuses, which, as stated earlier, was $8.1 million compared to $0.8 million last quarter, coupled with the lower revenues and gross margin. The year-over-year decrease was mainly due to the reduced sales. Q3 asset tax profit was $1.1 million, or $0.6 per diluted ADS, compared to $16.5 million or $9.5 per diluted ADS last quarter, and down from $13.0 million or $7.4 in the same period last year. Turning to the balance sheet, we had $278.2 million of cash, cash equivalent, and other financial assets as of September 13th, 2025. This compares to $206.5 million.

At the same time last year. And $332.8 million a quarter ago. The sequential decline in cash balance mainly reflected the $64.5 million dividend and the $13.1 million employee bonus payout. Q3 operating cash inflow was $6.7 million. Compared to an inflow of $16.5 million in the prior quarter. The sequential decrease mainly reflected the higher accounts payable payments in Q3 for inventory procured in prior quarters to support customers’ demand, along with employee bonuses payments mentioned above. The employee bonus paid out this year included $7.3 million for the immediately vested portion of this year’s award and $5.8 million for the vested award granted over the past three years. We had $30.0 million of long-term unprocured loans at the end of Q3, of which $6.0 million was the current portion. Our quarter-end inventories were $137.4 million.

A slight increase from $134.6 million last quarter and lower than $192.5 million a year ago. After several quarters of inventory decline from its peak during the industry-wide supply shortage, Q3 inventory slightly increased but remained at a healthy level. As macroeconomic uncertainty limits visibility across the ecosystem, we will continue to manage our inventory conservatively. Accounts receivable at the end of September 2025 was $200.7 million, decreased from $219.0 million last quarter and down from $224.6 million a year ago. DSO was 87 days at the quarter end, as compared to 92 days last quarter and a year ago. Third quarter capital expenditure was $6.3 million, versus $4.6 million last quarter and $2.6 million a year ago. Third quarter CapEx was mainly for R&D-related equipment for our IC design business and the construction in progress for the new preschool near our Tainan headquarters, beautiful employee children.

As of September 13th, 2025, Himax had $174.5 million ADS outstanding, little changed from the last quarter. On a fully diluted basis, the total number of ADS outstanding for the third quarter was $174.4 million. Now, turning to our fourth quarter 2025 guidance. We expect Q4 revenues to be flat sequentially. Gross margin expected to be flat to slightly up, depending on product mix. Q4 profit attributable to shareholders is estimated to be in the range of $0.02-$0.04 per fully diluted ADS. I will now turn the call over to Jordan to discuss our Q4 2025 outlook. Jordan, the floor is yours. Welcome. Thank you, Karen. The U.S.-China tariff negotiations recently reached a preliminary framework, sending a positive signal to the market. Yet, most panel customers continue to adopt a make-to-order model and maintain low inventory levels.

In the automotive display IC business, Himax is the most important market, accounting for over 50% of total revenues. Demand visibility remains low as customers continue to act conservatively and sustain lean inventory levels. Despite the limited short-term visibility in the automotive market, we remain optimistic about our automotive business outlook for the next few years, backed by our leading new technology offerings and comprehensive customer coverage. Meanwhile, we continue to focus on the expansion into emerging areas beyond display ICs, including ultra-low-power AI, CPO, and smart glasses. All level applications characterized by high growth potential, high added value, and high technological barriers that are well positioned to become new growth drivers for Himax soon. Before I elaborate on those new business areas, let me touch base on the automotive IC business.

Himax has been deeply engaged in the automotive display market for nearly two decades, offering a comprehensive range of display IC technologies, spanning from LCD to OLED. Amid intense industry competition, Himax holds a solid leadership position with number one global market share across all segments of automotive display ICs and an overwhelming lead over competitors. As smart interiors advanced, demand for automotive displays continues to grow, shifting towards larger high-resolution and more innovative displays, including the adoption of OLED displays for high-end vehicles. Himax is well positioned to benefit from this trend. Looking ahead, we expect further growth in automotive PDDI and P-CON technologies, driven by continued adoption from global panel makers, Tier 1 suppliers, and automakers. Both PDDI and P-CON are advanced display solutions for vehicles that have already been successfully designed into hundreds of projects worldwide.

Meanwhile, in the traditional DDIC segment, shipments remain relatively stable due to long product life cycles and the nature of many applications, such as dashboards, heads-up displays, and rear and side view mirrors that do not require touch functionality, thereby continuing to generate long-term and stable DDIC revenues for Himax. In addition, Himax has been deeply engaged in automotive OLED technology development for many years. With a continuously expanding product portfolio and an increasing number of leading global automakers accelerating adoption of OLED technology in new vehicle models, we expect OLED display adoption in the automotive sector to grow rapidly, starting in 2027. Despite lingering economic uncertainty, Himax continues to actively expand its business beyond display ICs, focusing on ultralow power AI, CPO, and smart glasses. Through years of dedicated investment and R&D, Himax has established a solid technological foundation and a strong patent portfolio in.

These areas, wired with partners to drive products towards mass production and real-world applications. As these emerging businesses gradually materialize, they are poised to become key growth stage engines for Himax, reduce our reliance on the display IC market, and further enhance both profitability and long-term competitiveness. First, on the WiseEye AI domain, WiseEye enables battery-powered endpoint devices with real-time analysis, precise recognition, and environmental awareness at ultra-low power consumption of merely a few milliwatts. Leveraging these core strengths, WiseEye has been successfully adopted by multiple leading global notebook brands, with ongoing collaborations with customers to integrate more AI features into next-generation laptops. WiseEye has also been widely deployed across various domains, such as smart door locks, power bank authentication, and smart home appliances, partnering with top-tier global customers to co-develop a range of innovative applications.

Our Wi-Fi module business features a simple design and ease of integration, making it highly suitable for diverse AIoT applications. It has already been adopted in applications such as smart parking systems, access control, power bank authentication, smart offices, and smart home, with the number of design projects fast expanding. Further, the recent major application addition is in smart glasses, the new product category categorized by extremely demanding low power. Wi-Fi enables real-time AI functionality and industry-leading ultra-low power consumption, while supporting always-on sensing for surroundings and event-based eye tracking to deliver a natural and intuitive human-machine interaction. It has been adopted by numerous major tech giants, traditional OEMs, brands, and startups to integrate into their new smart glasses projects. Looking ahead, the Wi-Fi business is entering a phase of rapid growth, becoming one of our key growth engines.

In the field of co-packaged optics, or CPO, Himax leverages its proprietary WLO advanced narrow-imprinted technology. Together with our partner, Forsley, we have achieved significant breakthroughs in silicon photonics technology, with the first-generation solution being validated by customers and partners as we work towards mass production readiness in 2026. In parallel, joint development efforts with leading customers and partners are underway, focusing on future-generation high-speed optical transmission technologies to meet the explosive bandwidth demands of HPC and AI applications. While addressing the critical challenge of overheating in high-speed transmission, Himax expects CPO to become a major revenue and profit contributor in the years ahead. Last but not least, let me touch base on the status of our smart glasses businesses. Driven by generative AI and large language models, the smart glasses market is experiencing a resurgence and is seen as the next high-growth, high-volume market opportunity.

Smart glasses has been one of Himax’s long-term strategic focus areas, where we are among the few in the industry that possess three critical enabling technologies for smart glasses, namely ultra-low-power intelligent image sensing, micro-display, and nano-optics. Giving Himax a unique opportunity to take advantage of the potentially explosive growth of smart glasses. In intelligent sensing, Himax’s WiseEye AI delivers always-on ultra-low-power contextual awareness, with average power consumption of just a few milliwatts. It significantly enhances the interactivity and perception of smart glasses, while preserving battery life of the smart glasses device. In micro-display, Himax’s latest brand new FrontLED micro-display, specifically tailored for AR glasses, has attracted strong market attention since its debut. It achieves an optimal combination of form factor, weight, power consumption, and cost, while delivering high brightness and high color saturation in full-color display performance. All key attributes for AR glasses.

With over a decade of mass production experience with leading tech names and a proven record of reliable delivery, Himax’s new Air Force product, now in sampling stage, has attracted the attention of numerous AR glasses players worldwide. In the field of nano-optics, Himax offers proprietary WLO technology for advanced nano-optical foundry service to selected customers to develop waveguide solutions, which, when bundled with micro-display, forms the display system required of AR glasses. Looking ahead, we expect revenues from AR and AR glasses-related applications to grow substantially over the next few years. With that, I will now begin with an update on the last panel driver IC business. In Q4, last display driver IC sales are expected to increase single-digit sequentially, driven by new notebook PDDI projects entering mass production, along with customers restocking on more IC products following several subdued quarters.

Despite a challenging market environment, we continue to advance our technology roadmap for next-generation displays to achieve faster data transmission, lower latency, improved power efficiency, and high-speed interface for next-generation premium and gaming displays. In the notebook sector, we continue to focus on the growing adoption of OLED displays and advanced touch features in premium models, driven by the rise of AI PCs and demand for more interactive productivity engine experiences. Himax is well positioned to capitalize on opportunities with a comprehensive range of ICs for both LCD and OLED notebooks, including DDIC, P-CON, touch controllers, and PDDI. Multiple projects for OLED displays, as well as gaming monitors and notebooks, are currently underway in collaboration with leading panel makers in Korea and China. Turning to the small and medium-sized display driver IC business. In Q4, small and medium-sized display driver IC business is expected to slightly decline from last quarter.

However, Q4 automotive driver IC sales, including PDDI and traditional DDIC, are set to increase single-digit for the quarter, largely driven by the continued adoption of PDDI technology among major customers across all continents. Despite the challenging macro environment, our automotive driver IC sales for the full year 2025 are projected to grow single-digit year over year. With total volume projected to outgrow the global automotive shipments, Himax remains the leader in this market, with a market share well above 50%, far outpacing those of competitors. Traditional automotive DDIC demand remains solid despite partial replacement by PDDI. The transition continues to be gradual as many automotive displays, such as dashboards, SUVs, and rear and side view mirrors, do not require touch functionality and typically have long product life cycles.

Himax holds a solid 40% market share in traditional DDIC and remains the go-to supplier for both legacy and next-generation automotive display applications. Himax also continues to lead in automotive display IC innovation by pioneering solutions across a wide range of panel types, while addressing diverse design needs and cost considerations. For example, in ultra-large touch displays, we led the industry by introducing LTDI solutions, which began mass production in Q3 2023. LTDI has been gaining traction, driven by increasing popularity of larger in-vehicle displays that demand higher performance, improved signal integrity, and simplified system design. Additional LTDI projects with multiple leading global brands are on track to enter mass production as we move into 2026. For smaller displays with form factor and budget constraints, we provide single-chip designs that combine PDDI and local dimming P-CON. This enables advanced local dimming in small-sized displays, reduces overall system cost.

It improves power efficiency, making it an attractive choice for customers. For high-end displays, during the recent SID Vehicle Displays and Interfaces Symposium, one of the industry’s leading events for automotive display and HMI technologies, Himax showcased the industry’s first OLED touch IC that supports both tactile knobs and capacitive touch keys, enabling flexible design options and delivering a safer, more intuitive control experience for OLED automotive displays. Himax continues to advance in the active display technologies that enhance driver safety and cabin ergonomics. Looking ahead, OLED panel adoption in automotive displays is expected to accelerate starting in 2027. This presents an attractive opportunity to further solidify our leadership in the automotive display market, where we already have a dominant market share position across DDIC, PDDI, and local dimming P-CON for LCD displays. We provide ASIC OLED driver and P-CON solutions that entered mass production a few years back.

We also provide standard ICs ready for broader deployment. In parallel, we are collaborating with major panel makers on new custom ASIC developments to address diverse customer requirements. Additionally, our advanced OLED on-cell touch control technology delivers an industry-leading signal-to-noise ratio, ensuring reliable performance even under challenging conditions such as draft or wet vehicle operation. These OLED on-cell touch ICs entered mass production in 2024 and are being increasingly adopted by major global automotive brands for their upcoming car models. As the industry transitions for high-end vehicles, Himax is uniquely positioned to capture the accelerating adoption of OLED in future automotive displays, replicating our success in LCD by leveraging nearly two decades of automotive display expertise and strategic partnerships established with leading panel makers across China, Korea, and Japan.

A proven record in mass production and product quality that adheres to the world’s most stringent global standards for quality, reliability, and safety. Moving to smartphone and tablet IC sales for LCD panel. We expect revenues for both segments to decline for the quarter, as customers pull forward purchases in prior quarters. However, in the smartphone OLED market, we are making solid progress in collaborations with customers in Korea and China, with much production set to ramp in Q4 this year and volume to increase further in the following quarters. Meanwhile, for OLED tablets, several new projects with top-tier brands are expected to enter mass production heading into 2026. In parallel, we are developing new technologies that enable value-added features such as active stylus, ultra-thin bezel designs, and a higher frame rate to further differentiate our products and reinforce our competitive edge. I would like to now.

Turn to our driver IC business update, where we expect Q4 revenue to increase single-digit sequentially. First, for an update on our P-CON business. We anticipate Q4 P-CON sales to be flat sequentially. However, Q4 automotive P-CON sales are well positioned to grow single-digit sequentially, fueled by a strong pipeline of more than 200 design winning projects that are gradually entering mass production. Many of these projects feature local dimming functionality, an area where Himax maintains a dominant market position. Our full year 2025 automotive P-CON sales are set to grow by approximately 50% year over year, laying a solid foundation for substantial growth as we move into 2026. In contrast, P-CON for monitor, notebook, and TV products are expected to decline sequentially, primarily a result of customers pulling forward inventory purchases early this year. We continue to lead in automotive P-CON innovation.

Our new generation local dimming P-CONs offer advanced features such as edge sharpness and high dynamic range, ideal for customers looking to upgrade their displays for better panel performance. Meanwhile, head-up displays are rapidly emerging, evolving beyond simple text and symbols to deliver high brightness, high contrast, AI-intense visuals within automotive displays, fueling demand for advanced P-CON solutions. To address this trend, we launched an integrated P-CON that features the industry’s first full area selectable local dewarping function, combined with Himax’s market-leading local dimming and on-screen display technologies. The newly introduced multifunctional P-CON offers industry-first full area selectable local dewarping capability, a major advancement over existing solutions that typically offer only full screen or limited split-screen dewarping.

Built on Himax’s dominant local dimming technology, the new dewarping P-CON solution continues to deliver exceptional contrast performance and effectively eliminates the undesired pulse-type effect commonly seen in LCDs caused by backlight leakage typical of conventional TFT LCD panels. Our industry-leading OSD function is also integrated within the new P-CON, allowing critical safety information to remain visible on the display even when the main system is shut down, thereby enhancing overall driver safety. The new P-CON solution supports a broad range of LCD architectures, including windshield LCD, augmented reality LCD, and panoramic LCD systems, while accommodating diverse design and cost requirements. Several customer projects are already underway, reflecting strong market recognition of our advanced LCD P-CON technology.

Switching gears to the WiseEye ultra-low-power AI sensing solution, a cutting-edge endpoint AI integration featuring industry-leading ultra-low-power AI processor, always-on simple dimming sensor, and CNN-based AI algorithm at its core. As AI continues to advance at an unprecedented pace, WiseEye is uniquely positioned with context-aware on-device AI inferencing that delivers industry-leading power efficiency of just a few millivolts. With a compact form factor, while fortified by industrial-grade security. This combination enables advanced AI capabilities in endpoint devices that were once constrained by power and size limitations. Driving expanding adoption across a wide range of applications, including notebooks, tablets, surveillance systems, asset control devices, and smart home solutions, and more recently, AI and AR glasses. This growing momentum highlights WiseEye’s role as a trusted on-device AI sensing enabler, powering smarter and more powerful and more power-efficient solutions across everyday devices and AIoT applications.

In notebooks, WiseEye’s human presence detection has been expanding adoption across leading global brands, driven by its ultra low power consumption of nearly a few millivolts. Instant responsiveness and privacy-centric design perfectly aligned with the industry’s transition toward always aware AI-driven PCs. Small notebook models are scheduled to enter mass production starting in 2026. Meanwhile, additional feature upgrades are being developed with our notebook customers to tackle more complex real-world scenarios and deliver a greater user experience, all while maintaining exceptional power efficiency. One such feature is gesture recognition that mimics keyboard input, allowing pace scrolling or volume adjustment without keyboard. With large language model AI driving a shift from predefined command input to natural language human-machine interaction. Another advanced feature currently under development is the voice-activated keyboard spotting function, in which WiseEye serves as an ultra low power front end that performs.

Wake word detection, activating the CPU only when a specific trigger phrase is detected, enabling continuous audio monitoring while consuming very little power. In the surveillance domain, WiseEye AI enhances security systems by combining accurate human-object distinction. With event-driven activation, significantly reducing false triggers. In addition to the China market, further shipments to leading smart door lock vendors are already underway. We are now partnering with world-leading door lock manufacturers to introduce novel on-device AI features such as PalmVein biometric access, pulse-regarding IP protection. Recently, we introduced a state-of-the-art bi-modal solution, combining PalmVein and facial authentication to meet customer demand for greater flexibility and reliability in small door lock. The dual authentication approach enhances both security and user experience, marking a significant advancement in biometric technology, while still consuming extremely low power, making it ideal for door lock application, which is extremely demanding for power consumption.

Several of the projects are slated for mass production starting in 2026. Notably, Himax’s solution complies with Europe’s GDPR, one of the world’s strictest data privacy laws. Our recent exhibition at the SECTEC Sweden 2025 illustrates Himax’s proactive expansion into Europe’s security and access control market, one of the most privacy-regulated and innovation-driven markets globally. Himax demonstrated its technological readiness and credibility to European system integrators, OEMs, and customers seeking secure, contactless, and power-efficient authentication solutions. Next, for an update on our WiseEye module business, which integrates Himax’s ultralow power image sensor AI processor and pre-trained no-code/low-code AI algorithm. It’s designed to make AI simple and accessible, helping developers accelerate innovation and scale their products from prototype to commercial deployment.

Thanks to its broad applicability, the WiseEye module has been adopted across a wide range of domains, including leading brands, upcoming smart home appliances, and various security applications. Notably, our PalmVein module has attracted strong interest across multiple industries, rapidly securing design wins in smart access, workforce management, smart door locks, and more. Many of our WiseEye module projects are scheduled to enter mass production in 2026. In the AI sensing domain for AR and AI glasses, WiseEye AI processors continue to build strong momentum, being adopted and integrated into next-generation smart glasses by a growing number of customers, while deepening collaborations with major tech companies, brands, and startups worldwide. Smart glasses makers are leveraging WiseEye to deliver instant responsiveness for a wide range of AI applications while maintaining extended battery life. The increasing number of design inventories reflects broad recognition of WiseEye’s unique ability to bring intelligent.

Context-aware vision sensing to next-generation wearable and AR devices. Specifically to empower both outward and inward vision sensing. Our vision sensing supports surrounding perception, object recognition, and spatial awareness. While inward sensing tracks eye movement, gaze direction, and pupil dynamics to enable natural and intuitive user interactions. Together, its capabilities redefine how users engage with both digital and physical environments, paving the way for more immersive, power-efficient, and personalized AI experiences. Moving on to our latest advancement in the ultra smart display technology. Following years of dedicated R&D and collaboration with leading industry players, our proprietary DuoEdge FrontLED micro-display has achieved a breakthrough, delivering an optimal combination of form factor, weight, power efficiency, performance, and cost. While offering ultra high luminance and vibrant RGB display that meets the industry’s stringent specifications for next-generation see-through AR glasses. This breakthrough.

Is showcased in our industry-leading FrontLED micro-display, which combines illumination optics and micro-display panel into an ultra-compact form factor of just 0.09 cc and 0.2 grams, delivering up to 350,000 nits of brightness and wide lumen output with a maximum power consumption of just 250 milliwatts. This exceptional luminance performance ensures outstanding user visibility even under bright sunlight, while the ultra-compact design enables sleek and lightweight AR glasses suitable for everyday use. Samples of our FrontLED micro-display were released early this quarter and are now being actively evaluated by several leading global tech companies and specialized smart glasses makers. With joint development efforts progressing steadily, we will announce further progress in due course. That concludes my report for this quarter. Thank you for your input into Himax. We appreciate your joining today’s call and are now ready to take questions. Yes.

Thank you, Jordan. Ladies and gentlemen, we are now in question and answer session. If you would like to ask the question, please press star key number one on your telephone keypad, and you will enter the queue. After you are announced, please ask your question. If you find that your question has been answered before it’s your turn to speak, you may press star key number two to cancel the question. Thank you. In addition to submitting questions via phone, you may also submit questions through the webcast, where the chat box is available on the right-hand side of the screen. Thank you. Now, please press star one on your keypad if you would like to ask the question. Thank you. We are now in question and answer session. If you would like to ask the question, you may press star key and number one on your telephone keypad.

Thank you. Now we’ll have the first question, Doni from Nomura. Go ahead, please. Thank you, Jordan, for taking my question. My first question is regarding your fourth quarter guidance. It looks like the revenue and gross margin can sequentially improve from third quarter, but just curious why we have a little bit conservative EPS guidance for the fourth quarter. The second question is that for the CPO progress, I noticed that I think in the past couple of quarters, you indicated some breakthrough on the CPO business, and it looks like we have another progress recently. Just wondering if you can elaborate more on when exactly we can deliver meaningful revenue from the CPO business into 2026. Thank you. Thank you, Doni, for your first question about our seemingly better top line and gross margin guidance compared to bottom line. Thank you for pointing that out.

One of the key reasons is income tax adjustment. As a standard practice, we estimate our quarterly income tax based on our assessment of full-year total income. In Q3, as you know, we actually underestimated the Q3 profit in our guidance, right? Therefore, we have a major beat in our guidance. We underestimated Q3 profit and therefore also the income tax expense. We underestimated at the time we provided our guidance last quarter. Therefore, we have to kind of call it, call FX, that income tax that we under-accrued in Q3 into Q4. That turned out to be rather significant given that, compared to our current level of income. We have to affect that income tax expense in the fourth quarter. Another major reason is higher R&D expenses during Q4. In addition to a few.

Relatively expensive new tech files scheduled for Q4, which is just a timing issue, right? It’s not, I mean, we don’t necessarily plan it that way, but it just happened that way. We have a few more expensive tech files scheduled for Q4. In addition to that, we have recently been awarded a major R&D grant by the Taiwan government’s so-called, I don’t know what it’s called, IC Innovation Program, Jichuang Jihua IC Innovation Program. The government actually announced that publicly, so I’m allowed to talk about it. The schedule of the grant is such that we are kind of asked to accelerate the R&D spending related to that project, which, by the way, is about our WiseEye product line. We are kind of requested to speed up the spending. We are also getting the speed up in our grant.

As you know, our spending has to be much higher than the grant, and that is how the game is made, right? We have to kind of speed up the R&D spending related to that project in Q4 as well. These are the reasons. You are right. If I take a longer-term view, there is no particular reason why our expense in Q4 is higher than those of the other three quarters of the year, but it just happened, a few factors together. Again, thank you for pointing that out. In regard to the CPO progress, your second question, we are together with our partner, Forsy, right? Our focus right now is getting the first-generation product validation completed and at the same time finalizing the development for the second-generation product, which, by the way, is in a very advanced stage.

I.e., the second-generation product, which is targeting CPO or GPU product line, customer GPU product line. To recap, this year, 2024, 2025, sorry, 2025 has been a year for engineering validation with small quantity sample shipments. In all likelihood, we will be fully ready for volume production in 2026. Now, as for the timing of the customer’s mass production and also the revenue contribution for us in 2026, next year, it is much harder for us to comment. Again, the main goal of 2026 is to complete the validation of our product and manufacturing process, right, by key customers/partners. We believe, conservatively, there could be revenue contribution, but we do not really estimate the revenue contribution to be significant compared to our overall revenue. Rather, we believe it will still be limited because the switch to CPO involves a pretty complex ecosystem.

Which requires long lead time, right? Our technology may be ready and our immediate customer may be ready, but then the repercussion of the switch throughout the whole ecosystem, all the way down to the data center operators, can be quite complex. That is why we are not. We do not necessarily hold a very aggressive view on that timing. However, we believe we can potentially see rather meaningful top line and bottom line contributions starting in 2027 when we expect shipments for engineering runs. That is actually, by the way, based on our assessment, it is still before MP. That is only engineering runs. That engineering run contribution, we believe, can already contribute rather meaningfully to our top line and bottom line. After that, after 2027, we shall enter official MP when the growth will likely be explosive.

Again, I want to emphasize all this, everything I said above about timetable and contribution and all that. Just our own best estimate for now. Ultimately, when and how the ramp will take place is a call to be made by the customers. Actually, related to this, I’ve seen online a question about potential market penetration of the CPO technology. I will address that question online as well. Naturally, based on the timetable, our best guesstimate is 2028. It will be full-blown mass production. Again, the growth will be explosive. Naturally, as the technology becomes proven and more mature, CPO adoption, we believe, will rise for AI data center application. We believe with all the obvious benefits, like substantially raising transmission bandwidth and reducing power consumption, all that, right, of data transmission, we all know the drill.

All at a relatively low cost compared to the overall cost of a complex AI system. The CPO technology has the potential of very, very high market penetration of data center eventually. We are not just saying this as our own opinion. We actually got opinions from across the board, our direct customer or end customer. Everybody seems to be holding that view. Everybody’s holding the breath and watching our step-by-step from validation to engineering run to mass production. It is a very exciting time for us. We are certainly under a lot of pressure, but we are quite confident we should be able to achieve what I just mentioned. Again, the ultimate timetable will be a call to be made by the customer. Thank you. If you would like to ask the question, please press star key and number one on your keypad.

You may also submit your questions through the webcast system. Thank you. There is one other question about our outlook, particularly for automotive market products in 2026. I guess the question is because we do hold a very significant market share in the automotive display market, so display IC market, automotive display IC market. I guess our view is probably meaningful for investors. We believe the auto market seems to be showing signs of bottoming out, judging by the customers’ low inventory levels and strong rush orders over the last few quarters. That is also actually the main reason for exceeding our guidance last quarter. Having said that, the automotive market is quite sensitive to the overall economic condition and tariffs, and therefore, we do not really anticipate a very strong recovery next year. In our view, and based on our internal business projection.

We are budgeting for a mild recovery only next year. Our current strategy is to maintain the technology leadership, and we start to further deepen customer engagement. A very important focus for us next year is to continue to diversify our supply chain. This is in response to the customer’s request, some customer’s request or need for our geographical diversification of our supply chain and our production. We have very strong confidence over our overall dominant market share right now, backed by leading technology offerings and strong design win pipelines numbering hundreds of programs across a very diverse customer base. We feel we are probably reaching the bottom, but next year, if there’s a rebound, we do not anticipate a very, very strong rebound. We believe it is a mild recovery. That is our current view. Another question is, what is driving your confidence in AR/AI revenue growth?

Is this a design win with a single last customer or multiple smaller ones? Presumably, you are talking about smart glasses. In our prepared remarks, we have three things for smart glasses: WiseEye for always-on application, both looking outward and inward for smart glasses. That covers both AR glasses and AI glasses. The second thing is our ARCOS micro-display, which is only applicable to AR/CSU glasses, right? The third one is our WLO neuroimprint technology, where we are holding a quote-unquote "optical foundry service" business model, targeting only a very selected small number of customers. The third one involves a rather complex design and manufacturing process development. It is going to be a few years away, although we are talking about some of the most significant customers, some of the biggest names in the industry.

We still feel obligated to mention that as a business potential in our prepared remarks. In terms of revenue contribution, the third thing, meaning WLO as a foundry service for WorkGuide, targeting very big-name customers, I think it is still a few years away. WiseEye AI is an ongoing progress, very active ongoing progress. Customers become small across not just US major names, but also Chinese, even Koreans, and Japanese are coming to us. They are also major customers who are offering a platform of AR glass or smart glasses solution. We have been working very closely with them for our WiseEye solution. Our solution, our technology, has been taken as part of their standard offering. As that platform solution gets into more quality production, which is anticipated to take place starting next year, I think we will see.

Revenue contribution from our WiseEye product line. For ARCOS micro-display, which is for AR/CSU glasses only, right? Not AR glasses. You need to have glasses with display to meet our ARCOS solution. Again, in our prepared remarks, we believe we are offering a combination of factors with a real product, which is very promising. We believe it is something that is fully addressing the very difficult requirements of AR glasses for now. However, that product, we are only in sampling stage. From sampling stage to ultimate mass production, it is going to take some time. I do not really anticipate meaningful sales contribution from ARCOS next year, either, hopefully the year after. Because, again, we are only in sampling stage. Customers need to take our ARCOS solution to match WorkGuide, and then we start as a display solution that develops the full set of smart glasses products.

That is still going to take some time. Although our solution has been anticipated by a lot of customers, big names and small names across the board, again, this is very new, and we are in sampling stage. It is going to be still quite an effort for us to take that to mass production together with our customers. Could you give us an update on the second-generation CPO progress? You expect higher revenue number with second-gen? I cannot comment on specifics, but the key difference of first-gen and second-gen is the number of channels, right? Basically, we are more than doubling up from first-gen to second-gen. Naturally, the technical challenge is tremendous, and that also involves a pretty fundamental revision of our optical design to achieve that goal. Customers have made it very specific that they are key customers.

Very hopeful for the success of our second-gen because with the success of our second-gen, it will be a very good product idea for GPU, which, as you know, is something requiring high bandwidth transmission. Upon the success and mass production of second-gen, we believe certainly the revenue contribution will be significant. However, as I mentioned in my earlier Q&A, I speak to our timetable for next year, the year after, and 2028. Again, we do not want to overpromise and let people feel that it is going to be immediate revenue contribution. Second-gen is a big deal. It is a huge deal for us, for our partner, and our customer. Anything else? Okay. Thank you for all your questions. I think that will be the end of the Q&A session. I will pass the call back to Mr. Jordan Wu. Thank you. Thank you all, Peter.

As a final note, Karen Tiao, our Head of IRPR, will maintain investor marketing activities and continue to attend investor conferences. We will announce the details as they come about. Thank you and have a nice day. Thank you, Jordan. Ladies and gentlemen, this concludes third quarter 2025 earnings conference. You may now disconnect.