Silicon Image, Inc. Q3 2008 Earnings Call Transcript

Oct.25.08 | About: Silicon Image, (SIMG)

Silicon Image, Inc. (NASDAQ:SIMG)

Q3 2008 Earnings Call Transcript

October 23, 2008, 05:00 pm ET

Executives

Mike Bishop – IR

Steve Tirado – President and CEO

Hal Covert – CFO

Analysts

Sukhi Nagesh – Deutsche Bank

Adam Benjamin – Jefferies & Company

David Howard [ph] – Goldman Sachs

Sandeep Chandrasekhar [ph] – RBC Capital Markets

Operator

Good day, everyone, and welcome to the Silicon Image's third quarter 2008 financial results conference call. Please note that today's call and question-and-answer session are being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Mike Bishop. Please go ahead, sir.

Mike Bishop

Good afternoon and welcome to Silicon Image’s third quarter 2008 financial results conference call. I am Mike Bishop from Silicon Image’s Investor Relations. Joining me today are Steve Tirado, the company’s President and CEO, and Hal Covert, the Chief Financial Officer.

The agenda for today’s call includes a discussion of third quarter results and the company’s strategy from our CEO, followed by the CFO with a more in-depth discussion of financial results in the third quarter and guidance for Q4 2008. We will then open the call for Q&A.

Before I turn the call over to Steve, let me remind the listeners that we will be making forward-looking statements based on our current expectations during the call regarding many aspects of our business and the markets in which we operate, including but not limited to forward-looking statements about our future products and their anticipated benefits, the timing of new product introductions, average selling prices, design wins, market demand for our products, financial results and performance.

Actual results may differ materially from our forward-looking statements. Moreover, our forward-looking statements and the company’s future results are subject to certain risks and uncertainties, which we describe in today’s press release as well as in our filings with the SEC, including but not limited to our most recent periodic reports on Forms 10-K and 10-Q. These documents describe certain relevant risk factors that could affect our future results.

I also want to mention that we have provided a financial metrics table and a reconciliation of non-GAAP financial information to GAAP information in our third quarter financial results press release, which is available on the Investor Relations section of our website at siliconimage.com.

I will now turn the call over to Steve.

Steve Tirado

Thank you, Mike. And good afternoon everyone. Before I begin my commentary, I would like to let our listeners know that my financial comments will be made on a non-GAAP basis.

Our financial results for the third quarter of 2008 demonstrated solid revenue growth over Q2 2008 at $77.8 million. This growth was complemented by stronger operating margin, which improved to 15.4% of revenue and higher overall gross margins which hit 59.6%. Additionally, expenses were well managed and below Q2 levels as we continue to focus on improving bottom line operating profitability and demonstrate that our operating model has leverage as we grow the business. Based on our current view of the business and despite the current economic environment, we expect to achieve the low end of our annual guidance range for the year.

I’ll now turn to the quarter highlights. Our consumer electronics because came in according to expectations and was characterized by significant design wins for our new port processor called Superman. Superman supports our new InstaPort feature, which dramatically lowers port switching between HDMI devices attached to your digital television.

Superman is a four-port processor chip that also supports our new MHL, or Mobile High-Definition Link technology, targeted at the mobile phone market. These new design wins starting with our announcement from Samsung that they will be supporting InstaPort across several of their TV lines in future period is also going to be implemented by several other large OEMs across several of their product lines. In sum, we now have visibility into significant design wins for 2009 whose volumes will now depend on overall economic conditions for 2009.

Our PC business, which has been a strong contributor to revenue in the first half of ’08, will steadily decline over the next several quarters, as Intel’s new integrated Southbridge, supporting DVI, HDMI and display port, replaces our discrete products across several notebook and desktop platforms. This transition was expected and planned for, and will in the short-term be replaced by growth in our consumer electronics, mobile and storage product sales. Over the longer term, we expect to introduce next generation digital connectivity for premium content distribution and consumption in the home domain with our PEN solutions for the PC market.

Our storage business grew significantly this quarter due to traction with SteelVine on many more motherboards from ASUSTeK and other PC motherboard manufacturers. Overall, we achieved over $9 million in revenue and a 46% growth over Q2 ’08. We expect this business to continue to gain momentum in 2009.

And finally, our licensing business was significantly stronger in Q3 at $12.8 million or a 55% sequential growth over Q2 ’08, hence supporting our annual goal of maintaining 15% of revenue for sales in this category.

On the whole, Q3 was a solid quarter for Silicon Image, with improvements in revenue growth, profitability, and design win traction for 2009 especially in the CE, mobile and storage segments. The quarter was also characterized by three technology/product announcements. First, we announced the Silicon Image 9206, a new ultra low power, dual mode, HDMI, MHL interface solution targeting the mobile phone market. We expect to see increased traction for this and other products aimed at driving HD quality audio and video to the television for mobile handsets. Mobile products are a focus area for development and will become an important part of our overall product mix, supplanting PC as a major segment for Silicon Image next year.

Second, we announced the partnership with AMD to promote our HDMI solutions on their mobile, thin-client, gaming and point-of-sale platform. This represents a new growth area for us as HDMI is penetrating new product segments where interoperability and quality attract customers to our product line. We have several other partnerships like this in the market where our chips are being promoted as part of a total solution in a new product segment.

And third, we won the CableLabs 2008 Best New Product Idea for our PEN technology demonstration. MSOs were particularly struck with one of the key features of PEN, the Echocast technology, which showed the ability to send HD streams with high quality programming guides in a pixel perfect manner. This was accomplished using a commodity home network connected to multiple televisions with outstanding interactive program guide performance.

All of this was accomplished within a secure personal domain, important to Hollywood Studios that want to protect premium content distribution in the home. We expect to announce our first PEN product at the end of this year along with a broad licensing program as we begin to select the trials in 2009.

I want to now turn to some important principles guiding our 2009 planning process. We are entering 2009 with a difficult general economic environment just like many other companies. Operationally we are and will continue to be focused on five things; digital connectivity innovation and leadership, design wins, product gross margin stability, operating margins and cash generation. Strategically, the progress we have made in 2008 has positioned us to offer greater differentiation in our product.

With our industry-leading technologies from InstaPort to our MHL, Mobile High-Definition Link interconnect technology, our PEN or Personal Entertainment Network initiative, as well as the Serial Port Memory Technology standard addressed in our last conference call. It has been our company’s goal to make 2009 a strong design win year, and we believe we have largely achieved this objective, driven by our Superman port processors in digital television, our mobile products, our storage products, and our new Serial Port Memory standardization and licensing programs.

We also expect to keep our licensing business at about 15% of overall revenues on a go-forward basis. Despite the large percentage of integrate HDMI functionality we see in the market today, we are finding that our discrete product strategy continued to have good market success as long as the feature set is compelling and innovative, as we‘ve done with InstaPort and MHL. And the price ranges between 150 and 250 in the DTV space. We’ve also been able to achieve this with targeted gross margins of 50% to 55%, meaning that our business model is working to our targeted objective.

Our overall product ASPs are now averaging approximately $2 at target margins of 50% to 55% and reflect a product mix we expect to see in 2009. Our integration of technology in the input processor line is finding design wins in the home theater market on AV receivers, where premium platforms want the highest quality digital analog video, complemented by full featured audio capability and lots of connectivity. While these products did not penetrate much of the DTV market, they will do well on AV receivers. Conversely, our port processors like Superman will grow volume and revenue in the DTV space in 2009 due to their highly differentiated feature set and pricing.

Finally, our PEN products to be released at the end of this year bring a high level of integration associated with home networking, video decoding, content protection, remote user interface extension, HD streaming optimization, and device discovery. This architecture is highly optimized for the consumer electronics market and is expected to go into early trials during 2009.

We believe that future periods, given a more stable economy, can produce a growth profile, characterized by higher revenue, higher operating margins at target product gross margins largely due to the innovations we introduced this year.

With that, I’ll turn the call over to Hal for a financial update and forward guidance before we take your questions. Hal?

Hal Covert

Thanks, Steve. Good afternoon. I would like to cover three topics; highlights of our financial results for Q3 ’08, our financial goals for Q4 ’08, and our 2009 planning process. Unless otherwise indicated, gross margin, expense, and earnings related items are reported on a non-GAAP basis, which excludes stock-based compensation expense, amortization of intangible assets, and restructuring charges. Our GAAP financial results and reconciliation of our non-GAAP measures referenced in today’s call are available on our website www.siliconimage.com.

Revenue for Q3 ’08 was $77.8 million compared to $70.1 million for Q2 ’08 and $86.3 million for Q3 ’07. The increase in revenue sequentially reflects normal seasonality patterns as well as the lumpy nature of deal flow for our IP business, while the decrease in revenue year-over-year is a result of our product transition, as previously discussed.

Product revenue for Q3 ’08 was $65 million, for Q2 ’08 $61.8 million, and Q3 ’07 $74.8 million. License revenue for the quarter was $12.8 million versus $8.3 million in Q2 ’08 and $11.5 million in Q3 ’07. CE product revenue accounted for 71% of our total product revenue in Q3 ’08. HDMI version 1.3 products included in our CE product revenue represented approximately 61% of that revenue. Additionally, PC product revenue accounted for 15% of the total product revenue for Q3, while storage product revenue was 14%.

Average selling prices for product sales during the quarter were in line with our internal expectations and at the low end of our historical pattern of $2 to $3 per unit. Overall gross margin for Q3 ’08 was 59.6% versus 59.1% for Q2 ’08 and 57.0% for Q3 ’07. Our overall gross margin percent was favorable sequentially, year-over-year and when compared to our target range of 55% to 57% in our long-term financial model, primarily due to revenue mix and operational efficiencies. Product gross margin for Q3 ’08 was 52.0% compared to 54.4% in Q2 ’08 and 51.3% in Q3 ’07 while our license gross margin was 98.3% in Q3 ’08, 94.0% in Q2 ’08, and 94.4% in Q3 ’07.

Operating expenses for Q3 ’08 were $34.4 million compared to $35.5 million in Q2 ’08 and $32.4 million in Q3 ’07. The decrease in operating expenses sequentially is the result of the restructuring program implemented during Q3 and that continuously improving the efficiency and leverage of our operating model. On a year-over-year basis, the increase in operating expenses is for the most part related to R&D. Headcount as of September 30, ’08 was 635 compared to 643 as of June 30, ’08 and 617 as of September 30, ’07. The increase in headcount on a year-over-year basis is for the most part related to R&D.

Operating profit for Q3 ’08 was $12.0 million or 15.4% of revenue versus $5.9 million or 8.4% of revenue for Q2 ’08 and $16. 8 million or 19.5% of revenue for Q3 ’07. As just discussed, the reasons for the increase in operating profit sequentially are due to higher revenue and gross margin with lower operating expenses, while the decrease year-over-year reflects lower revenue and gross margin with higher operating expenses partially offset by a higher gross margin as a percent of revenue.

For Q3 ’08, other income was $1.8 million compared to $1.4 million for Q2 ’08 and $2.3 million for Q3 ’07. The $1.8 million for Q3 ’08 primarily consisted of $1 million for interest income and a $0.6 million gain related to our accelerated stock repurchase program. The decrease in interest income both sequentially and on a year-over-year basis reflects the use of $68 million of cash in the first six months of 2008 for our stock repurchase programs and the lower interest rate environment in 2008.

For Q3 ’08, our effective tax rate was approximately 0% including discrete items. The majority of the discrete income tax benefit that was included in our income tax rate calculation, which was the primary reason for our effective tax rate of 0%, was for an adjustment in the estimated geographic income and expense distribution related to our international tax structure. For the full year of 2008, our effective tax rate is now projected to be 0% as compared to our earlier estimate of 30% to 35%. The reasons for the anticipated reduction in our effective tax rate for 2008 relate to our projected level of pretax income and discrete items that benefit our effective tax rate for the year.

Non-GAAP net income for Q3 ’08 was $17.7 million or $0.23 per diluted share, for Q2 ’08 $5.0 million or $0.07 per diluted share, and for Q3 ’07 $8.3 million or $0.10 per diluted share. Our non-GAAP net income for Q3 ’08 consisted of approximately $9.7 million or $0.13 per diluted share from operations and $8.0 million or $0.10 per diluted share attributable to income tax benefits, which included a year-to-date adjustment due to the projected reduction in our effective tax rate for 2008.

Our GAAP net income for Q3 ’08 was $6.1 million or $0.08 per diluted share compared to a loss of $0.5 million or $0.01 per diluted share in Q2 ’08. For Q3 ’07, our GAAP net income was $4.1 million or $0.05 per diluted share. Stock-based compensation, which is not included in our non-GAAP net income was $4.1 million in Q3 ’08 compared to $6.3 million in Q2 ’08 and $5.3 million in Q3 ’07.

Amortization of intangible assets, which is not included in our non-GAAP net income was $1.6 million in Q3 ’08 compared to $1.6 million in Q2 ’08 and $0.5 in Q3 ’07. We also incurred a restructuring charge, which was not included in our non-GAAP net income in Q3 ’08 of $1.9 million, primarily due to the reduction in staff that we announced during our earnings conference call in July. Non-GAAP diluted shares outstanding for Q3 ’08 were 75.3 million, for Q2 ’08 74.8 million, and Q3 ’07 85.9 million.

Moving to the balance sheet, cash and investments as of September 30, 2008 were $200.5 million compared to $185.4 million as of June 30, ’08 and $249.7 million as of December 31, ’07. The decrease in cash and investments compared to December 31, ’07 reflects the use of cash for our stock repurchase programs of approximately $68 million in the first six months of 2008, offset by $19 million of cash generated by the company during the first three quarters of 2008.

Capital expenditures for Q3 ‘08 were $1.0 million compared to $2.1 million for Q2 ’08 and $1.4 million for Q3 ’07. Net accounts receivable as of September 30, ’08 were $23.6 million, which represents 27 days of sales outstanding. This compares to 37 days of sales outstanding on June 30, ’08 and 22 days of sales outstanding on December 31, ’07. DSO for Q3 ’08 was below our historical pattern of 35 to 45 days, primarily due to solid accounts receivable collections and a good shipping linearity pattern during the quarter.

Net inventory as of September 30, ’08 was $16.5 million, which represents approximately 7.6 turns on an annualized basis. This compares to approximately 6.4 turns on June 30, ’08 and 6.3 turns on December 31, ’07. Inventory levels are in line with our internal plan and were sequentially lower on a quarterly basis at the end of Q3 ’08.

Now I would like to discuss the company’s common stock repurchase programs. For the first six months of 2008, the company repurchased approximately 11.5 million shares of our common stock at a total cost of approximately $68 million or an average repurchase price of approximately $5.91 per share. Of the $68 million, $62 million was allocated against our February 2007 stock repurchase program that was completed in June 2008 and $6 million was allocated against our current $100 million stock repurchase program. We did repurchase any of our common stock during Q3 ’08. This completes my summary of our Q3 ’08 financial results.

Next I would like to provide some highlights related to our financial goals for Q4 ’08. Revenue $68 million to $69 million. Gross margin 57% to 58%. GAAP operating expenses $40 million to $41 million, which includes stock-based compensation expense and amortization of intangible assets of approximately $4 million and $2 million respectively. These expenses are not included in non-GAAP expenses. Non-GAAP operating expenses $34 million to $35 million. Interest income $0.9 million to $1.0 million. Effective tax rate approximately 0%. I would also like to note that we estimate our effective tax rate for 2009 will be approximately 25% to 30%. Diluted shares outstanding approximately 76 million. And finally, cash utilization of approximately $10 million to $15 million for accounts receivable related to DSO return to a more normalized level during Q4 and a $7 million scheduled payment for the prior purchase of an intangible asset.

In closing, I would like to point out that we are in the process of building our 2009 annual operating plan. Some key factors related to this planning period are, negative and uncertain global economic environment, Silicon Image is on the front end of a 12 to 24-month new product rollout cycle during which we plan to introduce new products on a quarterly basis. New products are planned to align with our long-term overall gross margin target of 55% to 57%. Our business model is not capital intensive. And we ended Q3 ’08 with $200 million in cash and no debt.

During our earnings conference call anticipated to take place in February 2009, we plan to make appropriate comments about our 2009 operating plan as it relates to our financial goals.

This concludes my remarks. Operator, we will now take questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question will come from Sukhi Nagesh with Deutsche Bank.

Sukhi Nagesh – Deutsche Bank

Yes, hi, thanks guys. I just jumped on late. Could you talk about why your December quarter revenue guidance is much lower than what you guys had guided for the entire year?

Hal Covert

Yes, Sukhi. So I think – right now, if you remember, our overall guidance for the year was $284 million to $289 million. And we did start to see some softness in our order uptake and sell-through in this month. And so taking that into consideration, we did decide to pull down our overall guidance in Q4 to be $68 million to $69 million level that we just talked about. I would also like to point out though, if you run through our guidance that we are actually going to exceed our expectations in the guidance that we’ve provided for EPS. So even though we are experiencing some rockiness or toughness on the top line, we still expect to exceed or meet the guidance on the bottom line.

Sukhi Nagesh – Deutsche Bank

Your guidance is a pretty tight range. Are we going to assume that the turns requirement, given your guidance range, is pretty minimal or nonexistent?

Hal Covert

Well, the only thing I would point out is that we did give you the guidance of $68 million to $69 million. And given that we just reevaluated that, we feel that we have enough visibility to achieve that level. And at this point, we don’t expect anything different. Again, it’s a pretty tough economic environment out there right now and we have to see what happens. But we don’t expect any changes.

Sukhi Nagesh – Deutsche Bank

What’s yours turns in the third quarter?

Hal Covert

The turns in the third quarter were fairly close to normal. We normally end the quarter with about 70% of our revenue visibility in hand or we can see it. And again, the caution that we have now is we did see a slowdown and in sell-through and some other key indicators during the month of October. And again, that’s why we arrived at the guidance we did for revenue.

Sukhi Nagesh – Deutsche Bank

Okay. My final question here is regarding your OpEx, if you would see a continued deterioration in the economic environment here, how should we think about your OpEx for a quarterly basis at least in 2009? What I’m trying to get at is kind of the bookends for your OpEx in a quarterly basis. Thanks.

Hal Covert

Okay. So I don’t want to get too far ahead of our 2009 plan, but I think, as Steve indicated and I pointed out, we are focused first of all on design wins, because that’s going to be the best indicator of our success levels, design wins and then the volume that our customers can ship. We want to maintain our gross margin within our targeted range of 55% to 57%, and then we’ll move down to look at operating profit. And we do have a targeted range set up. And I think our goal is to make certain, in particular, that we are profitable in every quarter going forward. We generate positive cash. But I don’t want to get too far ahead of ourselves in this arena because we’re going to try to update you guys when we have the call in February of 2009 for the full year of 2009. And I think we’ll learn a lot as we look and see what happens over the Christmas season, and the kind of sell-through that we see – and I think that’s going to be one of the big factors that’s going to drive overall performance in 2009. But again, the real key here is to hold our gross margins and push for design wins.

Steve Tirado

And I think, Sukhi, the big thing that we see is that we have largely achieved a lot of the objectives we had earlier in the year, introducing new products and then getting the design sockets. I mean, now the issue is going to be how the economy going to go. But we are feeling very good about the traction we have with the new products.

Hal Covert

And just one last point, I mean this is an important area for us. We did generate $15 million worth of cash in Q3. We ended the quarter with $200 million in cash and no debt. And I think we’re well positioned between design wins and our balance sheet to head into what’s going to be a tough economic year we think for everybody.

Sukhi Nagesh – Deutsche Bank

Steve, I just have one last product-related question if I could. You’ve talked about – I don’t know if you’ve already mentioned that. But you talked about high expectations for the MHL product family. Can you provide some kind of color, revenue ramp, margins, kind of primary applications that you're targeting? What should we expect over the next couple of quarters? Thanks.

Steve Tirado

I think on the product side what’s important to note is, we had a great deal of success with the Superman port processor, which is going to go into pretty high volumes next year based on our current outlook. And that supports the Mobile High-Definition Link technology as well as the new InstaPort capability. The mobile market for us is going to be a big growth driver in 2009 based on our visibility into the platforms that we’re going to get on. We are seeing really good penetration on cameras, on camcorders, and you will see actually some cell phone penetration as well. I’m not going to get into specific numbers at this point because, as Hal was saying, we want to see how the Christmas goes and how we come out of 2008 before we give more specific guidance on 2009 performance. But from my perspective, I feel like we’re probably well positioned as we’ve ever been because we are on the cusp of a lot of new products going into production.

Hal Covert

Yes. And Sukhi, I want to reemphasize a point that Steve made earlier on because I think it’s really important. We mentioned that our average ASP is now approaching the $2 level, and that’s going to be probably a level as we go into 2009. But we think we’ve actually hit a sweet spot for selling discrete chips that differentiates our customers’ products in the marketplace. And mobile is a big factor in that arena, and that’s part of the reason our average ASPs are going down. But again, those ASPs drive our target gross margin. So we’re pretty happy with the position that we’re in right now at this point.

Sukhi Nagesh – Deutsche Bank

Okay, thank you.

Operator

And from Jefferies & Company, we’ll hear from Adam Benjamin.

Adam Benjamin – Jefferies & Company

Thanks guys. Clearly, you are hesitant to talk about the 2009 plan, given the backdrop. But I’m hearing different things. I mean, Hal is talking about a 12 to 24-month turnaround in terms of launching those products and getting them into volume. And Steve, you seem quite bullish about the designs that you secured, which generally wrap up right around this timeframe for the tier ones for next year. So I’m just trying to see if you guys could give us a sense, Steve, given where those design wins had been secured that you know about and given what you think the potential forecasts are, the potential sell-through this year really shouldn’t have a bearing on what those forecasts should be and the volume potential. So I’m just trying to get a sense, as you stand today, do you think you should be looking at growth next year?

Hal Covert

So – Adam, just before I turn it over to Steve, let me clarify one point. What I said was that over the next 12 to 24 months, we expect to be rolling new products out as a result of the design wins, as Steve mentioned earlier on. So Steve, I turn it over to you then.

Steve Tirado

Yes, Adam, we are not going to give any numbers at this point in time. Again, I think it is critical for us to see how 2008 goes, how the consumer response of the products that are out there, and what kind of inventory levels our customers have. Because these guys will have to sell off whatever doesn’t get sold through. And so that could potentially delay some ramps in 2009. Having said that, I know that we are on lots of new product lines for 2009. People aren’t going to do nothing. They are going to do absolutely do something. And so I think a lot of our performance is going to depend on how the general economy goes. But from a socket win perspective, I think we’re in really good shape.

Adam Benjamin – Jefferies & Company

Okay. And then in terms of just the product mix as you look out, I mean, how varied is it to what you saw in ’08 to what you think you can see in ’09 in terms of these new products and what kind of contribution they could have as a percentage of the mix?

Steve Tirado

You know, I have –

Adam Benjamin – Jefferies & Company

Have you been just banded [ph] at the low end of your expectations versus the high end?

Hal Covert

Yes. So, if you look at our mix, if you go to DTV, home theater and mobile, and then PC and storage, we believe right now, as Steve indicated early on, that PC is going to drop for the reasons that Steve indicated. Storage will pick up and grow. DTV will grow because of the design wins that we captured. Home theater will probably be down a little bit. And then mobile is going to be a strong driver for us. And if you take the balance across all those product lines, as we indicated, our ASP is going to go down to around the $2 range, but the gross margin will be in our target range of 55% to 57% overall including license. So we think we have the right mix now. We have a lot of emphasize in 2009 on design wins in the DTV arena and mobile. And we’re getting traction there.

Adam Benjamin – Jefferies & Company

Okay. But if you take one step further, Hal, if you look at the Superman and the mobile product, you care to take a stab at what percent of the mix that could be next year? I mean, is it 10%, is it 20%, is it 30%? How are you looking at that right now?

Hal Covert

I think at this point what we’ll say is that we expect mobile to be a prime driver for us because of MHL and so many other key characteristics of the equal system that mobile is now playing in. But, after we get to our 2009 planning phase, we’ll try to give you more color around that. We got to wait a little bit here to get through the Christmas season.

Adam Benjamin – Jefferies & Company

Okay. That’s all I have guys. Thanks.

Operator

And your next question will come from Jim Schneider with Goldman Sachs.

David Howard – Goldman Sachs

Hi guys. This is David Howard [ph] in for Jim Schneider. I just wanted to know, given your visibility into design wins and input processors, can you quantify just how many customers you believe will ship input processors to in 2009?

Steve Tirado

Sure. We are in actually several AV receivers. I don’t know if you were able to – you heard the earlier part of the call, the input processor was not a big success in digital television. It has been successful on the AV receiver. We are going to be probably in about seven to eight different platforms. But bear in mind, the AV receiver market is small. It’s not a large volume market. Where we hit the homerun was with the Superman port processor. That is going to be a very high volume product for us. And we are literally going to start rolling out new platforms in this quarter.

David Howard – Goldman Sachs

Okay, great. Thank you. And also one other thing, can you comment on the competitive landscape right now? And specifically whether or not do you see any competitors potentially exiting the market, given the current economic circumstances?

Steve Tirado

I can’t comment on people exiting. I just recently looked at competitors. We actually have 26 non-overlapping competitors in the market today. Actually quite a few companies that are providing either discrete products, license products, or integrated products with similar technology. We think the key differentiator for us this year was that we came out with some features that other people didn’t have, the InstaPort capability, the Mobile High-Definition Link capability. And there are some integrations we did in our products at a very attractive price points that really helped us. I would expect that during the year we may see a few companies fall out, but I really couldn’t tell you who.

David Howard – Goldman Sachs

Okay, I understand. And then just one last thing. I was just wondering whether you could quantify the level of pricing pressures that you saw in the quarter, and maybe give us a number for a unit increase in the quarter as well? I'm not sure whether I missed that.

Hal Covert

Yes. I would say that the pricing situation is pretty consistent with past patterns of somewhere between 15% to 20% reduction on a quarterly basis – recognizing our annual basis, I’m sorry – recognizing that we’re at a lower price point right now. So, no real changes in the historical patterns.

David Howard – Goldman Sachs

Okay, that’s great. That’s all I had. Thanks a lot guys.

Operator

(Operator instructions) And from RBC Capital Markets, you will hear from Mahesh Sanganeria.

Sandeep Chandrasekhar – RBC Capital Markets

Hi, this is Sandeep Chandrasekhar [ph] calling in for Mahesh. My first question was regarding the Superman port processor. Can you give us an idea about ASP for this product line?

Steve Tirado

Yes, those things will sell kind of in the $1 to $2 range.

Sandeep Chandrasekhar – RBC Capital Markets

Okay. So they are pretty much similar to your other HDMI transmitters and receivers. I mean, they are probably even lower price than that?

Steve Tirado

Yes, they are probably a little bit lower. I mean, as I said earlier, kind of overall product average is around $2. There are some products we sell that are significantly more, but that’s now wanting to be the sweet spot. And what we are finding is that if we can put enough in the way of compelling innovations in there that – in that price range, we’re going to get really good traction. A lot of the integrated guys just can’t keep up with the new functionality at the pace we’re bringing it out. And you’re going to see us even get more aggressive going into 2009 with new features. So we’re feeling like we’ve got the business model working in the right way. It’s unfortunate the general economy is not better. But again from a design win standpoint and from a pricing and feature set, we think we are in the right zone.

Sandeep Chandrasekhar – RBC Capital Markets

Okay. One other question I wanted to get a sense of, to what extent your PC revenues are going to get impacted by Intel’s next generation product, I mean, which is more integrated with integrated HMDI?

Steve Tirado

Yes. So, my remark earlier in the call was that it will affect a gradual decline in PC discrete chip business for us. We knew this was coming. We’ve anticipated it. We’ve expected it. So, fortunately for us, we’re in a strong position with design wins for DTV, mobile and storage, which will much more than compensate for what we think we’ll experience in future periods. The other thing I would say is that the PEN technologies that we’ve developed offer us an opportunity to come back at the PC market with the new category of products. So we’ll probably do that over the next few quarters.

Hal Covert

Yes. So just to add on, our PC revenues probably going to be pretty close to about 15% of our total product revenue for 2008. And I think as we roll through 2009, as Steve said, that will probably trail into the single digits towards the end of 2009.

Sandeep Chandrasekhar – RBC Capital Markets

Okay, great. Another thing I just wanted to check was, regarding your licensing revenues, I mean it has seen a big move up after four down quarters. Is it just being lumpy, or do you think you are moving into a new kind of revenue run rate for your licensing revenues? I mean, is it just like a one-time trend, or do you think you have more customers now for licensing?

Hal Covert

No, I think as I indicated during my script that licensing has a lumpy nature to it. It was up this quarter. It will probably down as a percent next quarter. But overall, our target is to be at around 15% and we’re on track to achieve that going forward.

Steve Tirado

Yes, the 15% is a pretty solid number in terms of what we’ll do on an annual, as a percentage of total revenue. I’ve said in previous calls that I really like to see if we can drive that up. And so, things like the Serial Port Memory and the MHL, these all offer new licensing opportunities for us going forward. So we’re going to still try to drive that number as high as we possibly can. But I think 15% probably is a good reference point looking at the business.

Hal Covert

Yes. Closing one or two large deals in the quarter really swings it around.

Steve Tirado

Yes, yes.

Hal Covert

Again, we were down in Q2, as you pointed out. We’re up in Q3 and we’ll probably down in Q4. But again looking at it on an overall basis, around 15%.

Sandeep Chandrasekhar – RBC Capital Markets

Okay. Thanks. That’s all I had.

Operator

And ladies and gentlemen, that is all the time we had for questions today. At this time, I would like to turn the conference back over to Mr. Steve Tirado for any additional or closing remarks.

Steve Tirado

I just want to thank everybody for their participation today. And we’re going to be presentation at the American Electronics Association Show coming up in early November. I think it’s the 3rd and 4th. And we hope to see many of you there. Thank you.

Operator

Ladies and gentlemen, that does conclude today’s presentation. We do thank everyone for your participation and have a wonderful day.

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