2 Things Investors Can Expect From Himax Technologies in 2017

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Himax Technologies (NASDAQ: HIMX) has been a pretty big disappointment this year for investors. The semiconductor company's stock is down 19% since January, and investors may be wondering what's in store for the company in 2017.

To get a glimpse into what investors can expect, let's take a look at one key area that much of Himax's fate depends on -- augmented reality -- and what the company's management has to say about its outlook.

Planning for future augmented reality production

On the first-quarter 2016earnings call, Himax CEO Jordan Wu said its augmented reality (AR) technologies are "just the beginning of a long-term growth story" for the company, and there are plenty of reasons why he should be optimistic.

The company's been working on AR-related tech for about 15 years, already works with 30 AR customers, and made some gains in the space this year.. Himax's non-driver segment, which includes sales of AR and virtual reality (VR) tech, jumped by 33.6% in Q2 and 52.1% in Q3, year-over-year. Revenues from that segment now account for about 22% of its total revenue, up from about 18.5% a year ago.

Research firm IDC expects the combined AR and VR market to grow by more than 180% between now and 2020, to $162 billion. All of this pent-up potential could begin to materialize for Himax in the coming year, as the company expands its AR capabilities.

Himax plans on finishing a new production line for its liquid crystals on silicon (LCOS) and wafer-level optics (WLO) AR technologies by late 2017 or early 2018. Wu says this will "enable higher-end product design and offer far better product quality for mass production of our next-generation LCOS and WLO product lines."

But even with the company's current AR-related tech and its new production lines coming online next year, investors should remember that Himax's management has warned not to expect major revenue growth in this segment in 2017. While the company is gearing up for an augmented reality push, the revenues probably won't materialize until later.

Less AR revenue for most of 2017

LCOS and WLO sales grew in the first nine months of 2016 because of strong shipments to AR customers, but shipments in Q4 2016 and early 2017 are expected to slow down.

"We ... expect our LCOS and WLO sales to decline in the fourth quarter, as well as over the next few quarters in 2017," Wu said during the third-quarter earnings call. This is expected to be a short-term problem stemming from one major customer reducing shipments, but that the customer is still focusing on a next-generation AR device, which Himax will be a part of.

"We are not particularly worried about the short-term headwind as the said major customer is more committed than ever in the long-term development of the AR product concept, which is viewed as a new computing platform and that Himax remains a critical partner to the customer in these AR efforts," Wu said.

While some areas of the AR segment will slow, management sees a few bright spots in 2017.

Sales of its touch and display driver integrated (TDDI) solutionis expected to be a major growth driver for the company's small panel business at the beginning of 2017, andhelp boost long-term gross margins as well.Additionally, sales of the company's small panel integrated circuits (ICs) are expected to grow, along with sales of AMOLED panels in China. Management said this will be one of the "critical growth engines" for the company's small panel driver IC business. Wu mentioned that much of this growth will begin toward the end of 2017.

Final thoughts

I've been skeptical of Himax's ability to realize its full potential, but there are clearly some reasons to be optimistic. The question is whether investors should wait for proof that Himax can turn some of its AR potential into profit, and then buy the stock, or jump in now and ride out some volatility and an unknown future. I'd be inclined to wait a little while longer, considering Himax won't have its new AR tech production lines up until late 2017, and its key AR customer isn't expected to ramp up orders until later in the year.

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