Trident Microsystems Inc. F1Q09 (Qtr End 9/30/08) Earnings Call Transcript

Trident Microsystems Inc. (TRID)

F1Q09 (Qtr End 9/30/08) Earnings Call

November 3, 2008 5:00 pm ET

Executives

Maria Riley - The Blueshirt Group

Sylvia Summers - CEO and President

Pete Mangan - SVP and CFO

Analysts

Sukhi Nagesh - Deutsche Bank

David Wu - Global Crown Capital

Blaine Curtis - Jefferies

Presentation

Operator

Thank you for joining Trident Microsystems First Quarter Fiscal Year 2009 Financial Results Conference Call. My name is [Amirfia] and I will be your operator today. During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, you will be invited to participate in a question-and-answer session. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to hand the call over to the host for today’s call, Ms. Maria Riley. Please proceed.

Maria Riley

Good afternoon. My name is Maria Riley from the Blueshirt Group. Welcome to Trident Microsystems first quarter fiscal year 2009 financial results conference call. This call is being broadcast live over the web using the link found in today’s press release. A replay of this webcast will be available starting tomorrow and for the next 90 days by accessing the Investor Relations section of Trident's website, www.tridentmicro.com.

On today's call are Sylvia Summers, Trident's CEO and President, and Pete Mangan, Trident's Senior Vice President and CFO. After the market closed today, Trident issued a press release discussing the results for its first quarter of fiscal 2009, which ended September 30, 2008. The press release is accessible online at the company’s website or you may call the Blueshirt Group at 415-217-7722 and we will fax or e-mail you a copy.

Before we begin, please note that during this call Trident management will discuss some factors that are likely to influence the company's business going forward. These forward-looking statements include guidance on anticipated revenue and other financial information for the second quarter of fiscal 2009 and statements about prospects for the company's business and the development status and planned availability of new products. It should be clearly understood that actual results may differ substantially from the forward-looking statements made today and have in fact done so in the past.

These projections or forward-looking statements, are subject to certain risks and depend upon a number of factors, including but not limited to the timing of product introduction, the failure to obtain design wins among major OEMs for Trident's products, competitive pressures including pricing and competitors, new product introductions, changes in trends in the television and entertainment industry, the emergence of alternative digital consumer technology, actions that may be taken or required as a result of our historical stock option investigation and formal inquiries being made by the SEC and the Department of Justice, and risks of litigation related to these issues, potential claims and proceedings related to such matters, including shareholder or employee litigation, and action by the SEC or other regulatory agencies, as well as negative tax or other implications for Trident resulting from or relating to these factors.

It is very important that you factor in the appropriate risk factor and arrive at your own judgment about any forward-looking statement management might make. For further information regarding the risk factors inherent in Trident's business, please refer to the company's registration statement and most recent Forms 10-Q and 10-K filed with the Securities and Exchange Commission accessible at web www.sec.gov. We encourage you to read these documents. Also please note that non-GAAP financial results presented do not include any infrequent or unusual items. Please refer to the non-GAAP information section of the earnings press release for further detail.

Today's call will proceed as follows. Sylvia Summers will begin the call with her opening remarks. Pete Mangan will then review the financial results for the quarter and Sylvia will follow with further discussion of Trident's business. Finally Pete will provide some detail regarding the recent workforce reduction and guidance for the second quarter and we will then open this call for questions.

Following the publication of Trident's outlook and its quarterly earnings press release, Trident will continue its practice of having outside corporate representative and designated management meet privately during the quarter with investors, the media, investment trade analysts as well as others. At these meetings Trident may reference the outlook published in such earnings release, the outlook will not be updated during the quarter, and up until the time of the next quarterly earnings release until Trident publishes a notice stating otherwise. Again Trident will not update its guidance until the next quarterly earnings release. So, please ask your questions today during the general Q&A period.

Now I would like to introduce Sylvia Summers, Trident's Chief Executive Officer and President. Sylvia?

Sylvia Summers

Thank you, Maria and thank you all for joining our call today. We are living in tumultuous times; therefore I would like to lay the foundation for today's call by confirming Trident’s vision and objectives. We intend to become the preferred provider of the DVB-T multimedia solutions to the world leading DVB-T suppliers. Our goal is to recapture our Tier One customer base and resume revenue growth.

In order to successfully emerge as an industrial leader, we must maintain a clear focus on developing leading-edge IP, leveraging our technology core strengths, expanding our roadmap, improving our engineering efficiency and rationalizing our cost structure. Later in this conference call, I will update you on our progress towards achieving this vision and share key highlights of our performance this past quarter, but first let's talk about the big picture.

The recent downward trend in the DTV industry has only been exacerbated by the events of the past month in the macroeconomic environment. Announcements from the past two weeks by each of Sony and Samsung, who continue battling for the number one position in a global DTV market made clear that they are experiencing substantial customer demand erosion in this market. Their pain is our pain.

We aimed are focus on reducing their cost as a result of these market pressures. They have recently slowed down product development efforts, and some have also reduced their ODM involvement in order to respond to the significant decline in consumer confidence and thus demand. This impacts Trident both in the short and midterm. We have experienced an increase in order cancellations. A few Tier One OEMs have cancelled selected 2009 programs deciding instead to reuse exiting platforms to minimize their overall cost. These cancellations have caused us to suffer setback in pursuing our strategy to win SOC socket, and have affected our near-term growth prospect.

In order to address these challenges, improve our efficiency, and manage to a rapidly evolving market, we recently executed a reduction in force, eliminating approximately 100 positions, representing about 15% of our global workforce. This reduction in force, while reducing the overall number of positions in the company, was design to realign dimensions of our principal geographic sites.

Our corporate headquarters in the United States will also serve as our center for science technology development. Shanghai will become our primary engineering headquarters. Taipei will continue as our "fabless" manufacturing and operations headquarters. Our newly opened office in Korea, along with our Japan office, will focus on intensing our Tier One customer relationships.

While we streamline our operational structure to improve efficiencies and cost savings, we remain committed to our customers and to being a leading provider to the multimedia and digital TV market by creating an optimized customer experience from the design phase to the shipping phase. As our OEM customers reinvent the strategies to address the new economic dynamics, it is incumbent upon us to anticipate the need of this evolving market by providing novel solutions and improved support capabilities that add differentiation and value.

We intend to index and extended our premier picture quality product roadmap and providing our customers with the best solutions and enduring design services available. We have a strong balance sheet. Drawing upon this wisely to make key investments will help contribute to our success and emerge stronger in our recovery.

Before I address our progress in the first quarter, our product updates, our customer relationships and the future milestones by which you may measure our success, Pete will walk you through our financial results for the quarter.

Now let me turn the discussion to Pete.

Pete Mangan

Thank you, Sylvia. Good afternoon, everyone. We reported net revenue of $34.8 million for the first quarter of fiscal 2009, representing a quarterly sequential decline of 12% compared to $39.5 million recorded in the June quarter 2008 and a year-over-year decrease of 61% from the $88.2 million recorded in the system quarter of the prior year.

Revenue from our top two customers represented 65% of total revenues in the first quarter. The ranking of our top customers shifted a bit from the prior quarter. Sony, our largest customer, decreased revenues by 6% from the prior quarter and represented 52% of total revenues. Revenue from Sharp is now our number two customer in the quarter increased 62% from the previous quarter and represented 13% of total revenues for the first quarter of fiscal year 2009. Revenue from Philips, our number two customer in the prior quarter decreased lower discrete IC sales and accounted for less than 10% of revenues.

Regionally, Japan contributed 69% of revenues followed by Asia-Pac with 16%, Europe with 14% and Korea 1%. Overall flat panel blended ASPs for Q1 remain flat with the prior quarter at slightly over $12 as our product mix continue to shift towards SOCs. Our new SOC products grew as expected 6% in the quarter and contributed 28% of revenues compared with 23% in the previous quarter.

Our non-GAAP gross margins for the quarter were 40.6%, a decrease of 510 basis points from the prior quarter. The main driver for this reduction was additional inventory reserves of $1.4 million, or 410 basis points as demand and the future outlook from our top customer was reduced. These inventory reserves were split into a reduction in net inventory value and contingent liabilities for committed material yet to be received from our foundries and subcontractors. The adjustment between non-GAAP and GAAP gross margins amounted to $2.1 million, which was 0.8 million higher than the prior quarter. The increase was a result of a write-down on prepaid royalties and intangible asset impairment as our business outlook was reduced. For further information, please refer to the GAAP to non-GAAP reconciliation table provided in the press release today.

Non-GAAP operating expenses were $18.7 million, a $1.4 million or 8% increase from the prior quarter. R&D expenses came in slightly below guidance at $11.7 million, and increased $1 million from the prior quarter, a result of higher labor-based expenses and NRE. SG&A expenses were within guidance at $7 million and slightly higher than the prior quarter, as rep commission rates consistent with prior years were reset at the beginning of our fiscal year, and professional fees increased due to our fiscal year-end audit.

Total adjustments between GAAP and non-GAAP comparisons totaled $14.7 million for the quarter versus $13.9 million in the prior quarter. The $14.7 million primarily included a net $8.1 million loss on sale of almost all of our UMC stock holdings in September, $2.7 million in stock-based compensation expense, $2.2 million for our stock option investigation related professional fees and $1.2 million related to the amortization of intangible assets. With the exception of our UMC stock loss, these items were inline with the guidance.

For the second quarter of fiscal year 2009, total GAAP adjustments are projected to be in the range of $7 million to $8 million including $1 million in restructuring charges associated with the previously announced workforce reduction. Stock-based compensation expenses is estimate to represent approximately 45% of the total.

Net loss on a non-GAAP base, which excludes the adjustments noted above, was approximately $3.3 million or a loss of $0.05 per diluted share in the first quarter of fiscal 2009. This compares to net income of $7 million or $0.11 per diluted share from the prior quarter and $24.1 million or $0.37 per diluted share for the like period of fiscal year 2008. Please note the Q1 net results included a $2 million, $0.03 per share favorable FX remeasurement gain on foreign income tax is payable.

Now, turning to the balance sheet; cash and cash equivalents including short-term investments decreased from the prior quarter by $10 million to a total of $230 million. This represents approximately $3.76 in cash per fully diluted share. The decrease in cash was driven primarily by the loss of sale on UMC stock incurred in the quarter. We sold all our 50.2 million shares held at the beginning of the quarter for net proceeds of $16.6 million.

Relating to working capital, accounts receivable $1.7 million for the quarter decreased 63% from Q4 as the majority of our customers at quarter end were on a cash in advance basis. The ending AR balance is equivalent to four days sale outstanding. Total inventory of 9.8 million grew by 13% in the quarter and ended at 43 days. Payables and accrued expenses also increased 13% to a combined $38.3 million, which represented 84 days payable at the end of September.

In summary for the first quarter, our non-GAAP operating loss came in slightly better than predicted and our overall balance sheet remained very healthy. This concludes our financial review for the quarter.

I will now turn the call back to Sylvia for further comments on the business.

Sylvia Summers

Thank you, Pete. Let me remind you that our vision is to be the preferred provider of DVT multimedia solutions to the world's leading TV suppliers. What progress did we make towards achieving this goal in the first quarter? Let me share with you some of the key highlights. At the IFA the trade show in Europe, [Grandic] electronics demonstrated their Berlin 32 inches and 37 inches models and its latest Vision7. These have been market approved and were to come to production using Trident's Pro FX, DVB-T, SOC solution.

Also at IIFA, a major Japanese Tier One TV supplier demonstrated our SVP WX 2 in its new cutting-edge ultra thin flat panel TV series. This product is now selling in Europe with our technology, but given the current macroeconomic dynamics, we remain conservative in our estimates for sale for this product. Additionally, we won another customer design using our Pro QX in Europe. We have had success with our SOC products in Europe, Japan and China. Our Pro QX, FX and AX have or are all being designed in. A top European manufacturer has selected our decoder companionship, which includes a start to 64 for one of their models, and is currently engaged in the designing process.

On the product front, I am encouraged with the recent progress that we have made, and believe that we are strong contender for the 2010 business with leading OEMs. Our DVB-T middleware has been field-tested and is in production. We have made real progress among the Tier Twos and Tier Threes players in all regions of the world. These wins are critical to demonstrate that some of our new technologies are working in the field. This helps us set the stage for future success with the Tier One players.

We also took steps to strengthen our executive management team by hiring Saeid Moshkelani our Senior Vice President of Engineering. Saeid has over 20 years of experience designing, developing and managing large semiconductor engineering teams. Prior to joining Trident, Saeid held senior positions at LSI Logic and C-Cube Microsystems amongst other companies. We are excited to have him join the team and help drive our progress going forward.

Additionally, to help strengthen our management team, we appointed Wen Li to Chief Marketing Officer. Wen joined Trident about two years ago after leading founding several companies in the consumer electronic space and has been instrumental in contributing to our long-term product and market direction.

In his new role, Wen will continue to drive the strategic direction of the company as the industry moves toward a connectivity platform and assume responsibility for Trident's digital TV marketing organization, including product definition and planning.

Over the past quarter, our execution has improved dramatically as measured by the progress we have made on the transition of our product line. In the first quarter, 28% of our revenue was from SOC solutions. Additionally, the improvement in our execution can be measured by the availability of our new chip HiDTV Pro FX. It was delivered on schedule and is now being demonstrated at a number of top OEMs.

Despite this progress, we believe that the current macroeconomic conditions will cause this transition to occur more slowly than we originally anticipated. Lastly, we opened a Trident office in Korea and staffed this with a Korean country manager with senior experience in the semiconductor industry, and we have begun staffing the office with regional sales and support personnel.

We expect this investment will strategically assist us in meeting our objective of increasing our Tier One presence to further penetrate this key DTV market. Now let me give you an update on our product portfolio. Our Full High Definition Pro FX platform, which is targeted at the European market, includes our latest generation video controller H.264 multi-format decoder, audio recorder and FMnet connectivity on one chip.

Key functionality demonstrations to target customers began in October and we will continue through this quarter. We expect this product to be ready for designing during the third quarter of fiscal 2009. We are currently designing a worldwide platform to address the European and US market requirements, the Pro FX2 model integrates a decoder technology including H.264 to channel decoder block, audio and enhance video technology and multiple connectivity options. It is scheduled to tape out in March 2009 and will be our first 65-nanometer product. As we increase enduring productivity, we also intend to develop a large cover version of the Pro FX2 for multiple market such as the US and Japan and for audience.

I will now share with you an overview of our top customer relationships, which I expect will give you meaningful insight into our outlook for the second quarter of 2009 and the remainder of this fiscal year. Throughout the quarter, Sony, our top Japanese customer lost market share in the US. Additionally this top customer has changed its production strategy for the first half of 2009 and decided to move production in-house from its ODM to its facility Tijuana, which has impacted our forecast significantly. This combined with the impact of the economy downturn has reduced our forecast of sale from this customer for the December quarter and potentially for a substantial portion of calendar year 2009.

Another of our Japanese customers, Sharp grew by over 60% in the September quarter albeit from a small base. The Sharp platform is based on one of Trident's leading SOCs, which built-in MEMC motioned each other and is targeted at a growing European market. This product is a testament to our SOC capability and video technology. We continue to be engaged with Philips by selling them our legacy SVP products, and we are exploring design opportunities to integrate our SOC products including Pro FX into their future product line.

As I mentioned previously, in order to accomplish our vision and recapture our Tier One customer base, bringing new models to production successfully is critical for us, as it will demonstrate the strength of our IP, the effectiveness of our technical support resources, and the competitive relevance of our products to the market. We realize that our success is ultimately dependent upon our ability to executive effectively and provide our Tier One customers with unbeatable technology that delivers premium value. Although developing innovative technology is the cornerstone to our recovery, it is only one piece.

As I mentioned earlier, I want to outline for you the future milestones that we are striving to accomplish over the next few quarters so that you may measure our progress. These include; launched Pro FX during the third fiscal quarter of 2009. We are currently conducting early customer demonstrations of Pro FX at Tier One and Two customers; bring to market our first 65 nanometer product.

As I covered earlier, we are currently expecting tape out in the spring of 2009. Deliver Pro FX samples to major Japanese TV manufacturers for integration into the next generation products beginning in the first quarter of fiscal year 2010. These new solutions will be targeting the mid-range platforms, with requirement that align well with Trident's core competencies.

Hire and integrate our executive teams into our executive team and new VP of Sales and a VP of Operations. These key new hires are critical for us to expand our customer presence, increase our efficiency and bolster our organization to provide our Tier One customers with the support they deserve. We plan to announce our new VP of Operations within a week.

Our financial results and outlook continue to be challenged and constrained by the evolving market for our products and our customers shifting market strategies, combined with an increasingly difficult macroeconomic environment. We have outlined today the initial steps we are taking to help us to achieve our vision. To give you more color on our restructuring announcement from last week, as well as our forward guidance, I would like to turn the call over to Pete.

Pete Mangan

Thank you, Sylvia. Before I provide the guidance for the second quarter, I would like to give some additional information regarding the workforce reduction we implemented last week. As announced, we eliminated approximately 100 positions at the company, which represented a 15% reduction of our global total. Approximately 70% of these positions involved involuntary notifications. The balance of positions reflected voluntary resignations over the past few months that will not be replaced.

The total headcount of the company, after this reduction, stands at approximately 565 people with 75% in R&D, 18% in SG&A, and 7% in operations. The headcount reduction involved all functions as SG&A was reduced 20%, R&D 14% and operations 11%. It also included most of our locations, where the US and Asia-Pac were both reduced by 15%, but within Asia, Beijing was impacted 50%, Taiwan 25% and Shanghai and Shenzhen 11%.

Overall, the projected dollar savings from the reduction in force and other cost savings initiatives is projected at 10% per quarter, which will start to contribute this quarter. Today, we will provide guidance for the second quarter. I would like to remind everyone that the outlook provided today is based upon our current expectations and includes forward-looking statements. Actual results may differ materially. As such total revenues for the second quarter of fiscal year 2009 are expected to be in the range of approximately $20 million to $23 million. We expect overall revenues for our Japan Headquartered customers to decline the quarter by approximately 50%, which is a primary cause for the anticipated revenue reduction.

During the second quarter we expect that our SOC revenues will also decline by 50% as our new product traction is affected by our shifting Japanese business and contribute approximately 20% of our total. Non-GAAP gross margins are projected to remain flat in the range of 40% to 42% in Q2. Non-GAAP R&D expenses for the second quarter of fiscal year 2009 are projected flat in the $11 million to $12 million range.

Non-GAAP SG&A expenses are projected to decline around 15% to 20% and fall in the $5 million to $6 million range for the second quarter based upon labor-based savings, lower rep commissions and lower professional fees in the quarter. In Q2, the provision for income taxes is projected to be approximately $1 million. We are projecting an overall non-GAAP operating loss for the second quarter in the $7 million to $8 million range.

Given the current macroeconomic situation, we do not expect to reach the full year guidance that we provided to you last quarter, and at this time believe it is only prudent to suspend providing full year guidance. It is our current intent to provide guidance on a quarterly basis.

That being said, as we internally plan for our recovery, we continue to maintain our long-term non-GAAP financial model objective, which targets gross margins in the neighborhood of 35%, operating expenses of approximately 23%, and operating income and net income of approximately 12% and 10% respectively. Based upon our most recent forecast, we still believe that achievement of this model could take a few years.

That ends our prepared statements and we are now ready to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from the line of Sukhi Nagesh with Deutsche Bank. Please proceed.

Sukhi Nagesh - Deutsche Bank

Hello Pete, in terms of your annual guidance that you are providing, you had provided $115 million to $135 million for the fiscal year and a gross margin of 37% to 39%. How we do assume that the gross margin at least will be lower now to 35% just given what you said today?

Pete Mangan

No Sukhi that is our long term model. It is still 35%, and the only additional guidance was for Q2, the 40% to 42%.

Sukhi Nagesh - Deutsche Bank

Okay. Just in terms of what really is happening at Sony. Can you give a little bit more color in terms of what to expect this year in terms of revenue growth profile there?

Sylvia Summers

Well, Sony is impacting us in two ways today. We mentioned in the release. Number one, they are indeed losing market share right now. You may recall that we had their US ODM business, which was doing very well. Recently they have been losing market share against Samsung. So, we are seeing a significant decrease of their bookings in the short-term.

In the mid-term they have also made a decision to bring back all the US business inside the company, meaning not to use ODMs and this is impacting us actually drastically for 2009. As Pete mentioned we are not giving guidance any more for the year, but that give you color for what is happening at Sony today.

Sukhi Nagesh - Deutsche Bank

In other words Sony could disappear similar to what Samsung happened.

Sylvia Summers

Well, at Sony we have won their ultra thin panel, which is a global product. They launched it right after I signed Europe. They expect to launch it in the US and Japan right after Thanksgiving or during Thanksgiving. So, we have not lost everything, but certainly this is a big blow for us, the fact that they are changing their mind about ODMs.

Sukhi Nagesh - Deutsche Bank

Okay. Then one last question for you, Pete, in terms of your cash burn per quarter, how should we look at it going forward?

Pete Mangan

Yes, the burn for Q2, we are expecting to use between $15 million and $20 million in cash and Sukhi that would be split between the operating loss and working capital requirements.

Sukhi Nagesh - Deutsche Bank

For the rest of the year?

Pete Mangan

No, for the second quarter. We are not providing guidance beyond that.

Sukhi Nagesh - Deutsche Bank

Okay. Thank you.

Operator

The next question comes from the line of Mahesh Sanganeria from RBC Capital.

Unidentified Analyst

Hello. This is [Casey] calling in place of Mahesh. Can you help us understand, why is it that Sony, the divorce a loss Sony’s business just because of their business in-house?

Sylvia Summers

It is a matter of their own internal decision and also timing. What happened is that we were working with (inaudible) as we did for 2008 model to propose to Sony at the last minute they decided to go back internally. However, in order for them to be ready for the 2009 model launch, they did not actually have the time to do the design internally so they went back to the model 2008 platform they were using. The platform is ATI.

Unidentified Analyst

Okay. So, does that mean that pretty the much most of the AX business that was going to Sony has stopped?

Sylvia Summers

It has stopped at least for the first half of 2009 and here we are talking calendar year. There is a lot of activity going on right now, even with CODi, but it is way too early to judge what will happen on that.

Unidentified Analyst

Okay. Can you help us understand at the moment, which of your SOC products are actually in shipment and which do you hope to ship in the next one to two quarters?

Pete Mangan

Yes, [Casey], this is Pete. The main driver for revenue this last quarter was the Pro FX, and they has been for the last two quarters. Going forward, it is a combination of that and a WX.

Unidentified Analyst

The WX is a variant that ships to Sharp?

Pete Mangan

We gave you a little color on the product level, but we would prefer not to comment down to the customer level.

Sylvia Summers

We have several customers, who will go, for example one European customer is just released for production the Pro QX. The Pro QX is also designed in several Chinese customers.

Unidentified Analyst

What is your Korea strategy? Is there any hope you folks have for the current fiscal year to gain back business from Samsung and you got any hopes to get something from LG?

Sylvia Summers

So, I would rather not talk about hopes here in an earning release, but let me tell you that we are working actively with both Samsung and LG. So, I just came back from Samsung, Friday. So, we are actively engaged to talk about next year's business. As for LG, we are going to go demonstrate our Pro FX in December.

Unidentified Analyst

Okay. Thanks folks.

Sylvia Summers

You are welcome.

Operator

The next question comes from the line of John Vinh with Collins Stewart. Please proceed.

Unidentified Analyst

Yes, hi, this is [Raghu Madabushi] for John Vinh. Most of my questions have been answered, but could you talk about what the breakdown between Tier One and the rest of the customers are going forward, or what do you think the breakdown might be?

Pete Mangan

The information we gave was, if you took the September quarter, 65% of our revenue from our top two customers and Philips had just fallen underneath, a 10% you get a feel for the Tier One, the guidance for the quarter, talked about the decline being predominantly being the Japan customer base, so that should give you a feel for the December quarter.

Unidentified Analyst

Okay. Thank you.

Operator

The next question comes from the line of David Wu with Global Crown Capital. Please proceed.

David Wu - Global Crown Capital

Yes, good afternoon. I was wondering whether you could shed a little light on shop. The Sony situation sounds like very similar to Samsung, where tremendous pressure and they decided to go in-house. In between they are using an outside chip guy for a while. What is happening to Sharp? Would the same thing happen in that particular case as well?

Sylvia Summers

So, we do not think that Sharp is going to go the same way. Sharp right now has no ODM strategy, but Sharp is really looking at a lot of different competitors. So, right now it is an open field for competition for the 2010 models.

David Wu - Global Crown Capital

I see. So, at this point your guidance about the Japanese business of 50%, I was trying to see what it is or entirely due to Sony or is it due to both Sony and Sharp?

Pete Mangan

Yes, David. We are not guiding down to a customer level in those. Clearly, Sony was the substantial part of the quarter and will be a big part of the reduction.

David Wu - Global Crown Capital

Alright, thank you.

Operator

The next question comes from the line of Adam Benjamin with Jefferies. Please proceed.

Blaine Curtis - Jefferies

Good afternoon. This is Blaine Curtis for Adam. Sylvia, I just want to make sure I understand the Sony impact. You are currently selling your WX2 next to the ATI decoder and then with stronger business with your SOC. Would you say they are moving back to an older platform using ATI. Is that for the imaging passing as well or are you still selling the WX2?

Sylvia Summers

No. It is for the whole thing.

Blaine Curtis - Jefferies

Okay. So, you are totally out of that platform?

Sylvia Summers

Totally out of the US market with the exception of the thin panel, which is going to be global.

Blaine Curtis - Jefferies

It is okay.

Sylvia Summers

At least for the first half of the calendar year.

Blaine Curtis - Jefferies

When is the next opportunity that you can get back in? When you were talking '10 I do not know it is fiscal or calendar?

Sylvia Summers

Calendar year '10 is obviously the one now we are focusing on today very heavily. There maybe an opportunity for the second half of '09, and that piece I think will depend upon market conditions. The decision by Sony to go ODM this year was to be able to deliver to a booming market especially a booming US market. If that does not recover, it is not clear to me, which decision they will make. Will they stay in or will they try to get back up with ODM, we do not know yet. We are sure. We are working with ODM as we speaking so that if Sony decides to go ODM, we will be there.

Blaine Curtis - Jefferies

Okay. The next question for Pete; you talked about gross margin being at 35% level. It is actually you are guiding up slightly for this quarter. I am assuming that because of the lower mix SOC, as you look out here, given that Sony is moving away and the SOC is not going to ramp. Why do you still expect margins continue to decline so dramatically?

Pete Mangan

Just at the overall market at SOCs will be a far more competitive environment and so the long-term model would be in the mid 30%. I think the comments for the guidance for the quarter is just that the current mix, the two big things offsetting in the quarter at the 40 to 42 is the inventory reserves that we put on the books in the September quarter being an event for September, not December, offsetting by fixed cost not being leveraged over a small revenue base.

Blaine Curtis - Jefferies

Okay. With Sony dropping off further down to below $10 million a quarter, do you need to look at further OPEX cuts as your first chance to get back in is until 2010?

Sylvia Summers

We are not considering this at this time, and the reason being the following is that in this marketplace we need to be at critical mass. So, we are constantly looking at optimizing our organization and the shift even more of injuring to Shanghai is only one of these move. Those SOCs are very complex products, and they require everyday more technologies to bring in. So, we need to get the critical mass. In addition to that, in our strategy to become Tier One provider, we actually need local presence. So, the combination of those two, I do not expect that they will do additional reduction, but that is all we have at this point.

Blaine Curtis - Jefferies

Okay. Thank you, Sylvia.

Operator

(Operator Instructions).

Sylvia Summers

Okay. Well, if there is no question, I want to thank you operator. Pete and I would like to thank all of you for joining us today. We hope to see you at the upcoming AeA Conference in San Diego tomorrow November 4th and 5th. Thank you for your interest and support of Trident. We look forward to reporting on our progress with you next quarter.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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