Prepared remarks
Hello, ladies and gentlemen. Welcome to Himax Technologies, Inc. Second Quarter 2026 Earnings Conference Call. Operator instructions. And as a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Karen Tiao, Head of IR/PR at Himax. Ms. Tiao, please go ahead.
Welcome, everyone. My name is Karen Tiao, Head of IR/PR at 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 results release, please e-mail hx_ir@himax.com.tw or himx@mcgroup.us or download a copy from Himax's website. 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 the actual events or results to differ materially from those described in the conference call. A list of risk factors can be found in the company's latest SEC filings, Form 20-F in the section titled Risk Factors as may be amended. Except for the company's full year of 2025 financials, which were provided in the company's 20-F and filed with the SEC on March 27, 2026, 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 and may vary materially from the audited consolidated financial information for the same period. On today's call, I will first review Himax's consolidated financial performance for the second quarter 2026, followed by our third quarter outlook. Jordan will then give an update on the status of our business and 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. The rapid rise in AI demand is placing unprecedented strain on memory chip supply and affecting many non-AI applications, creating a more challenging cost and capacity environment across the industry. Against this backdrop, we are pleased to report that our second quarter revenues, gross margin and profit all exceeded the guidance we provided on May 7, 2026. Second quarter revenues registered $227.4 million, representing a sequential increase of 14.2% and up 5.9% compared to the same period last year. Q2 revenues exceeded our guidance range of a 10% to 13% increase, primarily driven by better-than-expected automotive IC sales. Gross margin was 33.1%, substantially exceeding the guidance of around 32%, up from 30.4% in the previous quarter and 31.2% a year ago. This is primarily due to a more favorable product mix with increased sales from higher-margin automotive IC products. Q2 profit per diluted ADS was $0.114, significantly exceeding the guidance range of $0.086 to $0.103, up from $0.046 in the previous quarter and $0.095 a year ago. Revenue from large display driver came in at $19.2 million, representing a decline of 21.0% from the previous quarter, attributable to panel makers pulling forward their inventory purchases for high-end TV ICs in prior quarters. In contrast, sales for both the monitor and notebook IC products increased quarter-over-quarter due to higher legacy product shipments to key customers. Sales of large panel driver IC accounted for 8.4% of total revenues for the quarter compared to 12.2% last quarter and 11.6% a year ago. Revenue from small- and medium-sized display driver IC segment totaled $162.3 million, reflecting an increase of 19.6% sequentially. Q2 automotive driver sales, including both traditional DDIC and TDDI, increased by double digits quarter-over-quarter, primarily driven by broad-based customer replenishment of TDDI and DDIC following seasonally lower shipment during the Lunar New Year in Q1. The ramp-up of new TDDI and DDIC projects for a leading panel customer also contributed to the sequential increase. Customers continue to operate under a make-to-order model while maintaining lean inventory levels. Our automotive business comprising DDIC, TDDI, Tcon and OLED IC sales remained the largest revenue contributor in the second quarter, representing well over 50% of total revenues. Second quarter tablet IC sales covering both LCD and OLED products also increased sequentially, attributable to customers' early pull-in demand against the backdrop of the rising memory price sentiment in the market, together with the continued shipment for our customers' premium OLED model. In contrast, smartphone IC sales decreased sequentially following the initial ramp-up of an OLED IC for a leading smartphone brand's midstream model in Q1. The small and medium-sized driver IC segment accounted for 71.4% of total sales for the quarter compared to 68.2% in the previous quarter and 67.3% a year ago. Q2 non-driver sales reached $45.9 million, a 17.7% increase from the previous quarter, attributable to robust automotive Tcon shipment supported by replenishment across a broad customer base. Tcon business accounted for over 10% of the total sales with more than half contributed by automotive Tcon. As the market leader in automotive Tcon, particularly in solutions featuring local dimming functionality, we expect strong growth momentum to continue into next year. Non-driver products accounted for 20.2% of total revenues as compared to 19.6% in the previous quarter and 21.1% a year ago. Second quarter operating expenses were $15.7 million, an increase of 0.8% from previous quarter and 3.6% compared to the same period last year. The year-over-year increase was mainly attributable to higher tape-out expenses. We remain disciplined in managing costs while continuing to invest strategically in select non-driver IC business with compelling long-term growth potential. Second quarter operating income was $24.6 million, representing an operating margin of 10.8% compared to 5.1% in the previous quarter and 8.4% for the same period last year. Both the quarter-over-quarter and year-over-year changes were primarily driven by higher revenues and gross margin. Second quarter after-tax profit was $19.9 million or $0.114 per diluted ADS compared to $8.0 million or $0.046 per diluted ADS last quarter and up from $15.5 million or $0.095 in the same period last year. Turning to the balance sheet. We had $298.7 million of cash, cash equivalents and other financial assets as of June 30, 2026. This compared to $332.8 million at the same time last year and $287.6 million a quarter ago. The sequential increase was mainly driven by operating cash flow of $17.5 million in the second quarter. Before moving on, I would like to highlight one point regarding this quarter's cash flow. As is our usual practice, income tax payments are made in the second quarter. Under a new Taiwan government policy, we are entitled to defer approximately $11.0 million of this payment for 1 year without interest. Excluding this deferral, second quarter operating cash flow would have been approximately $6.5 million. Looking ahead to Q3, we anticipate a decline in cash, cash equivalents and other financial assets, primarily due to the payment of the $44 million for the annual dividend to shareholders made on July 10. In addition, subject to the final Board decision, we will distribute around $11.7 million, the immediately vested portion of this year's employee bonus awards at the end of Q3. Our quarter end inventory as of June 30, 2026, was $151.5 million, about the same as the $151.7 million last quarter, but higher than the $134.6 million in the same period last year. After maintaining lean inventory levels for several years, we proactively adjusted our inventory strategy about a year ago, selectively building inventory in anticipation of the tightening supply across the industry. Accounts receivable at the end of June was $220.3 million, up from $190.9 million last quarter and $290.0 million a year ago. DSO was 93 days at the quarter end as compared to 86 days last quarter and 92 days a year ago. Second quarter capital expenditure, primarily for R&D-related equipment for our IC design business was $4.3 million versus $2.9 million last quarter and $4.6 million a year ago. As of June 30, 2026, Himax had 174.4 million ADS outstanding, unchanged from last quarter. On a fully diluted basis, the total number of ADS outstanding for the second quarter was 174.4 million. During the quarter, on July 1, we announced the proposed divestiture of investment in one of our equity method investees. Based on the information provided by the said investee company, we expect to recognize a pretax gain of approximately $23 million to $24 million upon closing. The transaction is expected to close in the fourth quarter of this year, subject to customary closing conditions and regulatory approval. We will provide more updates as appropriate as the transaction progresses. Now turning to our third quarter 2026 guidance. We expect Q3 revenue to increase 7% to 11% sequentially. Gross margin is expected to be around 34%, depending on the product mix. Q3 profit attributable to shareholders is estimated to be in the range of $0.08 to $0.10 per fully diluted ADS. As we have done historically, we will grant employees annual bonus, including RSUs and cash awards on or around September 13 this year. The third quarter guidance for profit per diluted ADS has taken into account the expected 2026 annual bonus, which, subject to Board approval, is now estimated to be around $13 million, out of which $11.7 million will be vested and expensed immediately on the grant date. As a reminder, the total annual bonus amount and the immediately vested portion are our current best estimates only and the actual amount could vary materially depending on, among other things, our Q4 profit expectation and the final Board decision for the total bonus amount and its vesting scheme. It is also worth noting that the $13 million expected annual bonus does not yet include the above-mentioned gain on investment from divestiture of the equity method investee as the transaction is pending regulatory approval and has not yet closed. As is the case for previous years, we expect the annual bonus grant in 2026 to lead to higher third quarter operating expenses compared to the other quarters of the year. In comparison, the annual bonus for 2025 and 2024 were $7.7 million and $12.5 million, respectively, of which $7.5 million and $11.2 million vested immediately. In providing our Q3 financial guidance, the Q3 expense related to the employee bonus is estimated to be $11.8 million, representing $0.068 per diluted ADS before tax, comprising of the $11.7 million of the immediately vested portion of this year's bonus stated above and $0.1 million of the amortized portion of the unvested bonuses from previous years. By comparison, employee bonus expenses in each of the last 3 quarters was around $0.2 million. I will now turn the call over to Jordan to discuss our Q3 outlook. Jordan, the floor is yours.
Thank you, Karen. The ongoing surge in AI demand continues to impact non-AI applications. It has rippled across the broader semiconductor supply chain, resulting in capacity constraints at foundry, packaging and testing facilities on the mature process nodes where many of our products are manufactured. Consequently, we are experiencing higher manufacturing and procurement costs, extended lead times and increased difficulty in securing sufficient capacity across a broad range of our product lines. We expect the supply environment to remain challenging in the near term. To enhance our production flexibility and secure the capacity needed to meet our customer needs and support upcoming production ramps, we continue to leverage our established supply chain in Taiwan, while further strengthening our presence across China, Singapore, Korea, Japan and Malaysia. In parallel, as we mentioned last quarter, we have been working closely with customers on pricing adjustments to share these increased costs. Some adjustments took effect in the second quarter with additional pricing adjustments possibly implemented over time as the market conditions warrant. Notwithstanding this industry-wide supply constraints, we remain optimistic about the long-term growth prospects of our automotive display IC business. We continue to view automotive as one of the industry's most attractive secular growth markets, driven by rapid advancements in smart vehicle interiors. This trend is characterized by, among other things, a growing number of displays per vehicle now averaging more than 3 and continuing to rise, along with larger, higher resolution displays and more diverse vehicle cabin configurations, including curved integrated multi-display and pillar-to-pillar designs. Himax is well positioned to capitalize on these industry trends through our comprehensive automotive display portfolio, spanning both LCD and OLED technologies, a broad and diversified global customer base and a robust design win pipeline. We further differentiate ourselves by continuously introducing next-generation automotive display technologies, including LTDI solutions for ultra large displays, advanced Tcon solutions for head-up displays, OLED driver and touch controller ICs and microLED display technologies. Our portfolio also includes Knob-on-Display solutions and capacitive physical buttons where customer interest continues to grow, driven in part by regulatory and vehicle safety initiatives in key automotive markets, including China and Europe, where greater emphasis is being placed on intuitive physical controls to enhance driving safety and reduce driver distraction. The industry's ongoing pursuit of richer human machine interfaces, immersive infotainment and enhanced in-cabin user experiences is driving adoption of a broader range of our display technologies. This not only increases Himax's dollar content per vehicle, but also creates multiple long-term growth opportunities. In addition, our well-established global supply chain provides us with greater flexibility to navigate the current supply environment while securing the capacity needed to support both existing projects and upcoming production ramps. We are also seeing an important trend in the automotive industry with automakers introducing new vehicle models at an accelerated pace and intensifying competition. As a result, product life cycles are becoming shorter, creating greater pressure to improve engineering efficiency, reduce development costs and shorten time to market for new car models. These challenges are driving broader adoption of platform standardization across multiple vehicle models, favoring suppliers with comprehensive and validated technology portfolios and proven track records. Himax is one such supplier boasting the industry's most compelling automotive display IC offerings, market-leading positions across automotive DDIC, TDDI and Tcon and continued leadership in next-generation technologies such as LTDI and OLED technologies. By adopting Himax solutions as part of their standardized platforms, customers can quickly deploy validated display IC products across multiple new vehicle developments, reducing engineering efforts, lowering system costs and shortening development cycle of each project. In addition to automotive, we are also making solid progress across several strategic growth areas, including smart glasses, ultralow power AI and CPO. These emerging businesses diversify our revenue base into markets with attractive long-term growth prospects and margin profiles while strengthening our overall competitive position. We believe they are poised to become increasingly meaningful contributors to our future growth. First, on smart glasses, an area we remain particularly optimistic about. Himax is one of the few companies offering both ultra-low power AI sensing and micro-display technologies, both critical building blocks for next-generation smart glasses. On the AI sensing front, WiseEye enables ultra-low power always-on outward and inward sensing, supporting an expanding range of AI use cases, including contextual awareness, real-time visual assistance and personalized user experiences. Recently, a leading global brand just launched a smart glasses product powered by our WiseEye technology, and we continue to see strong design-in momentum across customers worldwide. In particular, we are seeing growing engagement with leading global brands, technology platform providers, ODMs as well as hyperscalers who traditionally do not offer hardware products, but are now entering the smart glasses market with some projects poised to enter mass production as we move into 2027. On the display side, our Front-lit LCoS micro-display delivers an optimal balance of size, weight, resolution, image quality, power consumption and cost. It can also be configured to operate in the high brightness, ultra-low power green-only mode and seamlessly switch to full color operation as needed. This flexibility differentiates our solution from alternative display technologies, helping customers optimize power efficiency while maintaining visual performance and meeting their system design and cost targets. Together, these capabilities make our Front-lit LCoS a compelling display platform for next-generation AI glasses equipped with see-through displays. Currently, we are working closely with multiple waveguide partners across Asia, Europe and North America to deliver integrated AR display solutions that simplify system integration and shorten customers' development cycles. This is driving broader customer engagement and positioning us to convert more opportunities into design wins, backed by well over a decade of LCoS expertise and a proven track record of successful production shipments. We are well positioned to support the next generation of AR glasses. Now I would like to provide a brief update on our progress in CPO. Customer development timelines remain aggressive with demand showing no signs of slowing. Together with our strategic partner, FOCI, we continue to deepen customer engagement by offering a flexible portfolio of solutions, including customized designs tailored specifically for our customers' needs as well as a standardized technology platform developed in collaboration with a leading foundry partner. Our solutions support both co-packaged and pluggable packaging architectures to address diverse customer needs. Our primary focus for the second half of this year remains on achieving mass production readiness, including key customer qualification milestones while continuing to improve manufacturing yields and establish stable mass production capabilities. We have already made encouraging progress towards these objectives. Both our Gen 1 product supporting 1.6T and 3.2T transmission bandwidths and Gen 2 product designed for 6.4T bandwidth have begun engineering production ramps as scheduled in the third quarter. These products are expected to drive sequential shipment growth quarter-over-quarter, laying the foundation for a more meaningful volume shipment beginning in 2027. The official mass production timing remains subject to customer deployment schedules. Nevertheless, we expect our shipments in 2027 to be significantly higher than in 2026, starting to make meaningful contributions to our financials. At the same time, we are also codeveloping next-generation optical solutions with customers, featuring higher fiber count architectures, enhanced optical precision and increasingly sophisticated designs such as CWDM or Coarse Wavelength Division Multiplexing to address the explosive bandwidth demands of HPC and AI data center applications. With that, I will now begin with an update on the large panel driver IC business. In Q3, large display driver IC sales are expected to decline by single digit from last quarter. Monitor IC sales are expected to decline quarter-over-quarter as customers already pulled forward inventory purchases in prior quarters. In contrast, TV IC sales are poised for sequential increases driven by higher legacy product shipments to key customers. Looking ahead in the notebook market, we are seeing encouraging design momentum, particularly in OLED notebooks with several industry trends creating favorable tailwinds. Rising memory prices are accelerating the shift from entry-level to premium notebook models, while the scheduled ramp-up of new Gen 8.6 OLED fabs in China later this year and into 2027 is expected to further drive OLED penetration in the notebook market. Himax is well positioned to capitalize on these favorable industry trends with our comprehensive notebook display OLED IC portfolio, spanning DDIC, Tcon, power management IC and touch controllers. This one-stop offering lets us serve customers with a complete solution while increasing our value content per device. Turning to the small and medium-sized display driver IC business. In Q3, small- and medium-sized display IC business is expected to increase by high single digits from last quarter. Q3 automotive driver IC sales, including TDDI and traditional DDIC are set to increase by a solid double-digit quarter-over-quarter. This increase reflects broader customer demand for DDIC and TDDI products, together with the mass production of multiple LTDI projects across car brands worldwide. Strong sequential growth underscores the accelerated adoption of larger and more sophisticated automotive displays with Chinese automakers leading the charge. We continue to see healthy underlying customer demand, supported by multiple new projects entering mass production in the coming quarters. We expect our full year 2026 automotive driver IC sales to grow by double digits from last year with strong growth momentum extending into next year as adoption of smart car interiors continue to drive increases in the number, size and sophistication of displays in both electric and conventional vehicles. As I noted earlier, the industry shift towards platform standardization is creating meaningful opportunities for Himax. This is evidenced by the growing number of customers adopting our industry-pioneering LTDI and local dimming Tcon solutions as the standard platform for their ultra large automotive displays. Following years of customer engagement, several of these projects are now entering mass production across multiple car brands. These ultra-large display panels typically require four or more LTDI chips and in some cases, more than ten, together with at least one local dimming Tcon per panel. As customers increasingly adopt our solution across multiple ultra-large display platforms, this not only strengthens customer stickiness and makes it more difficult for competitors to compete with us, but also increases our content value on a per panel and per vehicle basis. Looking ahead, the accelerating adoption of OLED displays in automotive presents a compelling long-term growth opportunity and is poised to become a key pillar of our automotive business. For several years, we have been collaborating closely with leading OLED panel makers in Korea and China and our comprehensive portfolio of DDICs, Tcons, touch controller ICs and customized ASIC solutions gives customers the flexibility to select the solutions that best meet their specific requirements. This broad product coverage and our early customer engagements have already translated into numerous development programs, providing a solid foundation for future growth as premium automotive displays transition from LCD to OLED. With OLED adoption underway, we continue to introduce innovative IC solutions to address evolving customer needs. For example, our latest TED or Tcon Embedded Driver IC solution, which integrates DDIC and Tcon into a single chip, offers a cost-effective, flexible and highly integrated solution ideal for smaller, lower resolution automotive displays. Our TED technology is now being adopted across a diverse range of applications, including automotive, robotics and IT applications with several projects involving customized ASIC solutions codeveloped with leading global end customers. Moving to smartphone IC sales. We expect Q3 smartphone revenue to increase quarter-over-quarter, driven by continued shipments for leading smartphone brands' mainstream models and inventory buildup for their upcoming premium models. For tablet ICs, Q3 sales are expected to decrease sequentially as capacity constraints limit our ability to support additional shipments. I would like to now turn to our non-driver IC business update, where we expect Q3 revenue to increase by low teens sequentially. First, for an update on our Tcon business. We anticipate Q3 Tcon sales to increase by double digits quarter-over-quarter. Our automotive Tcon business is expected to deliver decent double-digit growth in Q3, extending the strong momentum from Q2 and far outpacing our corporate average. This growth is driven by continued legacy product shipments across a broad diversified customer base, along with several new projects entering mass production. Despite ongoing industry-wide capacity constraints, we are confident in the strong growth trajectory of our automotive Tcon business. With hundreds of design wins already secured and new design wins continuing to expand, we are well positioned for another robust growth year in automotive Tcon as we move into 2027. During the quarter, we are pleased to announce that our T2000 Tcon has been adopted into E Ink's next-generation color ePaper platform. Himax's proprietary parallel processing architecture is at the core of this ASIC product, enabling simultaneous display refresh and data transmission, significantly enhancing dynamic display performance while preserving the ultra-low power advantage of ePaper technology. This breakthrough enables smoother display of dynamic content on large-format e-paper displays, helping accelerate the transition from traditional static signage to dynamic applications such as retail advertising, public information displays and smart commercial environments. Switching gears to the WiseEye product line, a cutting-edge ultra-low power AI sensing total solution, targeting battery-powered endpoint devices. WiseEye differentiates itself with an industry-leading ultra-low power architecture, consuming only a few milliwatts while delivering on-device AI inferencing, 24/7 always-on image and voice sensing and an exceptionally compact form factor. This unique combination enables endpoint AI devices that were previously impractical due to power and size constraints, driving broad adoption across applications, including notebooks, surveillance systems, access control, PalmVein authentication, smart office and smart glasses, with design activities continuing to expand across leading customers worldwide. On the WiseEye module front, design activities continue to expand, driven by its plug-and-play architecture, ultra-low power consumption and on-device AI capabilities. During the quarter, we are pleased to announce that our WiseEye biometric PowerVein modules achieved the certification of TÜV Rheinland, one of the world's leading and most credible independent testing, inspection and certification organizations. The assessment validated our recognition accuracy, response speed and liveness detection. This verification, together with our early achievement of GDPR compliance, one of the world's strictest data privacy standards, reinforces the privacy, security and performance of our biometric authentication solutions, giving customers greater confidence to accelerate development across security sensitive applications. We are seeing expanding design-in activities for our PalmVein modules across smart access, workforce management, smart door locks and more — and more recently, computer monitors and smart office solutions. Built on the same core hardware platform as the WiseEye technology, our WiseGuard module is specifically designed for security applications, delivering ultra-low power operation, a wide field of view, long-range detection and exceptional low light performance. WiseGuard accurately detects and continuously tracks multiple individuals, including their presence, location and movement, substantially reducing the false triggers commonly associated with traditional PIR-based solutions. Its proactive 24/7 sensing capability enables security systems to detect and continuously track activity from the outset, capturing the full sequence of events rather than only the moment motion is detected, providing a significant advantage over traditional reactive solutions. WiseGuard delivers up to 5 years of battery life while maintaining high-precision detection over long distances even in environments with illumination as low as 1 lux. Since its debut just 6 months ago, WiseGuard has seen encouraging customer engagement across a wide range of applications, including surveillance cameras, access control, IoT and wildlife monitoring. We are also pleased to share that WiseGuard has already been adopted by a U.S. customer for surveillance applications with mass production scheduled to begin towards the end of this year. As mentioned earlier, WiseGuard is gaining broad market recognition for smart glasses as a compact ultra-low power always-on AI perception front end. WiseEye supports outward-facing environmental sensing first through scene understanding by analyzing the users' contextual surroundings and environment, followed by object classification to recognize and identify specific objects typically associated with the identified scene. We also support inward-facing capabilities, including eyeball tracking for intuitive gaze-based interaction and iris authentication for secure identity verification. Together, these capabilities enable AI glasses to continuously capture visual snapshots of the real world and enable intelligent, responsive, low-latency human machine interaction while consuming only a few milliwatts of power. With the leading global brand launching WiseEye-powered smart glasses this fall, we are seeing growing engagement from platform providers, OEMs and consumer electronics companies worldwide. Some of these projects are expected to enter mass production in the coming quarters. That concludes my report for this quarter. Thank you for your interest in Himax. We appreciate you joining today's call and are now ready to take questions.
Questions and answers
Operator instructions. Our first question will be coming from Donnie Teng, Nomura.
My first question is regarding the CPO revenue outlook into 2027. As you mentioned the revenue could be more meaningful for next year. Can you classify how you define 'meaningful' for 2027? And maybe you can also provide us with the overall business outlook in 2027 as well.
Thank you, Donnie. Perhaps let me start with your second question, the outlook for next year. As you know, we don't usually provide guidance beyond one quarter, but we are well positioned to see robust sales growth for next year with continuously improved gross margin. As you know, our gross margin this year has improved from last year, and we believe the trend is likely to continue next year. Before I elaborate further, there is one important clarification. As you mentioned in your question, Donnie, for the time being and before CPO starts mass production officially, it's a good idea that we separate our CPO for our outlook discussion because while CPO is arguably a once-in-a-lifetime opportunity for Himax at the pre-mass production stage, its outlook will be too uncertain to quantify for the purpose of these comments. So what I'm about to say below does not include contributions from CPO. I will leave comments on CPO for the question you already raised. So starting back to our view on 2027. I think a very important trend for next year is that the nondriver areas will likely outgrow driver ICs with revenue contribution approaching 30% from around 20% at present. This is driven mainly by automotive Tcon, which will enjoy another year of very strong growth, thanks to our robust design pipeline, and the WiseEye product line where new applications such as smart glasses, WiseEye module and PalmVein authentication are all well positioned to contribute to growth momentum. As to our mainstream automotive business, now over half of our sales, it will continue to grow as well on top of a year of double-digit growth this year. In saying so, we are assuming a flattish year for global vehicle shipment, which I think is a fair assumption, implying our confidence to outperform the overall market again as we have done this year and over the last few years. Our positive outlook is driven by two factors: one, the continuous growth of number of displays per vehicle, which has already exceeded 3 this year compared to roughly 1.5 a decade ago; and two, the fast rise in IC content per display per automotive display. In other words, both the number of displays and content value per display will continue the favorable trend that we have experienced over the last few years. I'll take HUD as an example. We mentioned HUD in our prepared remarks. HUD used to be a tiny niche market that did not use LCD for image projection. Starting just a few years ago, HUD has become one of the strongest growth segments within our design win pipeline. Now we have many design wins for HUD waiting for line-up for mass production starting this year and over the next few years. Every new HUD in the car represents an increase in the number of LCD displays per vehicle as almost all new HUDs now use LCD for image projection and require our solution. Himax has been leading the charge in supporting the industry's new SUV designs, which require not only traditional DDIC, but also very sophisticated Tcons for so-called dewarping and the elimination of the 'postcard' effect. For those who are not familiar, dewarping is a feature in our HUD Tcon that mathematically corrects distortion caused by the curved surface of the windshield. The 'postcard' effect is a visual artifact where the rectangular borders of the projection become visible to the driver, which is undesirable. Our Tcon can eliminate that artifact. Such advanced features add significantly to our IC content value and have become a strong moat that helps fend off competitors. LTDI, which we pioneered a few years back targeting ultra-large automotive displays requiring touch functionality, is another example. We are now the exclusive supplier of the solution in the market right now, which requires at least five chips per panel and in higher-end designs more than ten. Our LTDI solution is ramping nicely this year across several leading auto brands with a solid and expanding design win pipeline. Another important example is the higher value associated with OLED displays for automotive. We offer DDIC, Tcon, TED and discrete touch controllers, each with higher ASPs compared with LCD solutions because of the more complicated features required by OLED displays. OLED is projected to replace LCD over time for high-end auto displays; we are working closely with several leading OLED panel makers in Korea and China with major ramping expected starting from probably the second half of next year and certainly well into 2028. So in short, while we don't give official guidance for next year, we are quite positive about the prospect of our automotive business for next year. Having said that, the industry supply will remain tight with many major foundries indicating further price hikes next year, particularly foundries in Taiwan and to a great extent major foundries in China as well. So it's something we will need to continue to manage as we have done this year. I hope that addresses your second question for next year's outlook. Regarding your first question about CPO's sales indication for next year, again, I will not be able to quantify that. Qualitatively, CPO will see very significant growth next year, but we will be comparing with a low base this year. The extent of CPO's contribution to our overall financials next year will depend on when the end customer kicks off mass production and the ramping curve. For now, it is too early to say. Even in the most conservative scenario, CPO will make a meaningful contribution to our financials, especially to the bottom line starting in 2027, with volume growth quarter-over-quarter beginning this quarter, next quarter and throughout next year. The volume indication from end customers is extremely high. Our main goal this year in close collaboration with our partner FOCI is to complete validation of our products by key customers and partners in terms of both quality and manufacturability. Revenue contribution during this year will still be limited, however we are seeing significant growth this quarter and expect further significant growth next quarter out of engineering runs. While we don't comment on exact mass production timing because the ecosystem is far too complicated to speculate exact timing, we should see meaningful top and bottom line contributions from the CPO product starting in 2027, and even before mass production, early shipments for engineering runs will have a positive impact on our financials starting in 2027. When you asked me to quantify what is 'meaningful,' I would say meaningful means it will not be a low single-digit percentage impact, certainly not a marginal or negligible addition to our financials. Once it happens, we can categorize and elaborate further. Right now, it is fair to say our confidence level toward success of mass production continues to rise compared to even a quarter ago. Lastly, in collaboration with a few top customers we are focusing on Gen 2 products, which are high-end products supporting 6.4T bandwidth or higher, positioned for the market with the biggest volume potential. We will continue to innovate optics designs to meet ever rising needs for higher transmission bandwidth with a next target being 12.8T. It will be a long road ahead and CPO is a once-in-a-lifetime opportunity for Himax. I hope that addresses your question, Donnie.
Next one, Tiffany Yeh, Morgan Stanley.
So I would like to follow up on the CPO front. I think there are many peers or emerging players that will want to tap into this wafer-level optics or wafer-level optics (WLO) market. May I ask how you will address this competition and what are Himax's key advantages over the peers?
Okay. Thank you, Tiffany. It's a good question. As far as we know, we are probably the only one providing optics using wafer-level optics or wafer-based solutions, whereas other competitors use traditional molding glass type of technology. We believe our technology offers many advantages. However, no one has proven themselves with a big volume mass production yet, so we must prove it by actually doing it successfully. Our technologies together with FOCI are more mature compared to peers as far as we can tell. For now, our mindset is not to worry too much about competition. We consider ourselves our own toughest competitor and are focused on getting our products validated this year solidly and, when customers request volume, to ramp volume successfully with good yield and good outcomes to meet their demands. It's also our policy not to comment extensively about our competition publicly. The market is so large that I cannot imagine Himax and FOCI being the only players a few years down the road. The market is big enough for quite a few players to prosper. For now, the most important thing is to bring successful mass production and prove the technology and the team.
All right. Very clear. I have a question regarding the overall CPO industry. As you have been working with FOCI on mass production preparations for many years and are in talks with other players in the supply chain, what do you think are the biggest bottlenecks for CPO mass production right now? And how much time would it take for these bottlenecks to be resolved?
We are very upstream, so you probably asked the wrong person to comment on the entire ecosystem's bottlenecks. I can emphasize that the ecosystem is complicated and our focus is to make sure we are not the bottleneck ourselves, both technology-wise and capacity-wise once mass production starts. Regarding bottlenecks in the entire ecosystem, the engineering runs that will have meaningful volume by the end of this year are intended to validate not only our solution but the whole ecosystem. Our FAU and optics within FAU must be validated first. With a validated FAU, the ecosystem can validate packaging and assembly of the whole module and then the integration into servers, which may require algorithmic or transmission methodology adjustments compared to traditional metal-based transmission. By the end of this year, I expect many validation efforts across the ecosystem, but it is far too complicated for me to identify a single biggest bottleneck. All I can say is we don't want to be the bottleneck. Another question from the online box: How do you expect your smart glasses revenue to trend in 2027? Do you expect smart glasses revenue to be launched next year? Regarding WiseEye, LCoS is a future play for design wins, not mass production next year. WiseEye, however, is very much a story for next year for smart glasses. We mentioned a major customer that launched a product with WiseEye; we asked that customer about volume potential and they said they are just getting started with promotion, so it's too early for meaningful feedback. We are seeing a number of major design-in projects in the pipeline, some involving hyperscalers new to hardware products entering smart glasses as a conduit for their AI models. We are seeing very strong design momentum and each major customer uses WiseEye differently. The common concept is continuous scene understanding followed by object classification enabling AI interaction. Give us two or more quarters and we should be able to quantify better. For now, the momentum is strong, but it's too early to give quantitative guidance.
Thank you, Jordan. And there are no questions at the moment. We thank you for all your questions. And I'll pass the call back to Mr. Jordan Wu. Please proceed. Thank you.
Thank you. As a final note, Karen Tiao, our Head of IR/PR, will maintain investor marketing activities and continue to attend investor conferences. We'll announce the details as they come. Thank you, and have a nice day.
Thank you, Jordan. And ladies and gentlemen, this concludes the Second Quarter 2026 Earnings Conference. You may now disconnect. Thank you again. Goodbye.