Revenue for small and medium-sized drivers came in at $99.7 million, up 0.4% sequentially and up 21.8% from the same period last year. Driver ICs for small and medium-sized applications accounted for 49.0% of total sales for the fourth quarter, as compared to 45.5% in the third quarter and 46.0% a year ago. As opposed to original guidance of low single digit sequential growth, the Company’s small and medium-sized panel driver business grew just 0.4% because of lower-than-expected smartphone driver IC sales. Sales into smartphones, while increased close to 25.0% year-over-year, declined high-single-digits sequentially due to the slowdown in China’s smartphone market starting around December. The strong growth of smartphone driver IC business compared to the same year ago period came from the Company’s long-standing leading market share in China where the Company’s end brand customers were performing strongly. Revenues from automotive applications also contributed to the segment and continued solid momentum, growing close to 10.0% during the fourth quarter, both sequentially and year-over-year.

Revenues from non-driver businesses were $36.0 million, down 22.9% sequentially and up 6.0% from the same period last year. Non-driver products accounted for 17.7% of total revenues, as compared to 21.5% in the third quarter and 19.1% a year ago. The sequential decline was primarily due to lower LCOS and WLO shipments for AR applications. As the Company highlighted in the last earnings call, a major AR customer asked that Himax reduces shipment for their current generation device to a minimum. To a lesser extent, lower sales of touch panel controllers and ASIC chips also contributed to the sequential decline. This decline was partially offset by the increased sales of timing controllers and CMOS image sensors. It is worth noting that despite the near term headwinds, Himax remains positive on the long-term prospect of WLO and LCOS product lines, judging by the expanding customer list that covers some of the world’s biggest tech names, and the busy engineering activities going on with such customers right now.

GAAP gross margin for the fourth quarter was 19.1%, down 650 basis points from 25.6% in the third quarter, and down 380 basis points from the same period last year, below the Company’s guidance of “slightly down” from 25.6% reported in the third quarter of 2016. The lower gross margin is the result of an additional one-time, non-cash inventory write-down totaling $12.0 million. Excluding the additional inventory write-down, gross margin would have been 25.0% and met the Company guidance. The $12.0 million inventory write-down is on top of the $2.7 million original inventory write-off estimate for the fourth quarter. In comparison, the inventory write-off amounts were $2.5 million, $3.0 million and $2.5 million for the first, second and third quarter of 2016, respectively. The vast majority of the additional write-down was related to certain aged inventories of traditional human vision CMOS image sensors (“CIS”) with smaller amounts also covering driver IC and other products. Earlier in 2016, the Company decided to focus its CIS business on smart sensor, machine vision segments, as opposed to the traditional human vision segments. As part of this new strategic direction, the Company made a decision recently to expedite the sales of some aged inventories of human vision sensors. The Company believes it is appropriate that it write-downs the inventory at this time, as it anticipates the need to offer discounted prices to accelerate the sales of some products and, for some other products where the potential revenues do not justify the efforts, stop the sales all together. Himax’s new CIS strategy is backed by new products such as the Always-on-Sensor (“AoS”) and the structured light 3D depth scanning total solution, which offer unique and market leading features. The new strategy is also backed by close collaboration and intensive development activities with certain heavyweight partners and customers. Following this one-time write-down, the Company believes its inventory will be healthy across CIS, driver IC and all other product areas.

GAAP operating expenses were $32.1 million in the fourth quarter of 2016, down 20.7% from the preceding quarter and down 0.2% from a year ago. The sequential decrease was primarily the result of the difference in RSU charges. In accordance with the Company’s protocol, Himax grants annual RSUs to its staff at the end of September each year, which, given all other items equal, leads to higher third quarter GAAP operating expenses compared to the other quarters of the year. The fourth quarter RSU expense was only $0.2 million while it was $9.2 million in the third quarter. Excluding the RSU expense, operating expenses increased 2.2% from the third quarter and decreased 0.1% year-over-year.

GAAP operating margin for the fourth quarter of 2016 was 3.4%, down from 4.8% for the same period last year and down from 7.0% in the third quarter. The GAAP operating income decreased 55.1% sequentially and 20.3% year-over-year. The sequential decrease was primarily a result of the aforementioned additional inventory write-down and lower sales, offset by the lower RSU expense.

Fourth quarter non-GAAP operating income, which excludes share-based compensation and acquisition-related charges, was $7.4 million, or 3.6% of sales, down from 5.1% for the same period last year and down from 11.5% a quarter ago. The non-GAAP operating income decreased 70.7% sequentially and 19.3% from the same quarter in 2015. Excluding the aforementioned inventory write-down, non-GAAP operating margin would have been 9.5% for the quarter, as compared to 11.5% in the previous quarter.

GAAP net income for the fourth quarter was $4.4 million, or 2.6 cents per diluted ADS, compared to $13.6 million, or 7.9 cents per diluted ADS, in the previous quarter and GAAP net income of $6.1 million, or 3.6 cents per diluted ADS, a year ago, below the Company’s guided range of 8.5 to 11.0 cents. GAAP net income decreased 27.6% year-over-year and 67.4% from the previous quarter. Excluding the additional aforementioned inventory write-down, GAAP EPS would have been 8.6 cents and met the Company’s original guidance.

Fourth quarter non-GAAP net income was $4.8 million, or 2.8 cents per diluted ADS, compared to $21.3 million last quarter and $6.5 million the same period last year, below the guided range of 8.7 to 11.2 cents. Excluding the additional aforementioned inventory write-down, non-GAAP EPS would have been 8.8 cents and met the Company’s original guidance.

Full Year 2016 Financial Results

FY 2016 Results Compared to FY 2015 Results (USD in millions ) (unaudited)

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