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Zoran Corporation (NASDAQ:ZRAN)

Q4 2008 Earnings Call Transcript

January 26, 2009 5:00 pm ET

Executives

Bonnie McBride – IR

Levy Gerzberg – President and CEO

Karl Schneider – SVP of Finance and CFO

Analysts

James Schneider – Goldman Sachs

Heidi Poon – Thomas Weisel Partners

John Vinh – Collins Stewart

Blayne Curtis – Jefferies

Daniel Amir – Lazard Capital Markets

Suji De Silva – Kaufman Brothers

Yair Reiner – Oppenheimer

Mahesh Sanganeria – RBC Capital Markets

Vijay Rakesh – ThinkEquity

Rajvi Gill [ph] – Needham & Company

Operator

Good day, ladies and gentlemen, and welcome to Zoran’s Fourth Quarter and Year End Conference Call. My name is Jerry, and I'll be your operator for today. At this time, all participants are in a listen only mode. We will conduct a question and answer session towards the end of the conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to, Ms. Bonnie McBride. You may proceed.

Bonnie McBride

Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Zoran's fourth quarter and year end 2008 results.

By now, you should have each received a copy of today's earnings release. Joining us today from Zoran's management team are Dr. Levy Gerzberg, President and CEO; Mr. Karl Schneider, Zoran's Vice President of Finance and Chief Financial Officer; and Dr. Isaac Shenberg, Senior Vice President of Business Development.

Before we begin, I would like to remind you that during the course of this conference call, we may make forward-looking statements regarding the markets for the company's products, revenue projections, the outlook for our manufacturing capacities, and new product development, and certain trends affecting gross margins and operating expenses for future periods.

I wish to caution you that such statements are just predictions, and actual results or events may differ materially. We refer you to the documents the company files from time to time with the SEC. These documents contain important factors that could cause the company's actual results to differ materially from those contained in our forward-looking statements.

I will now turn the call over to you, Levy. Please go ahead.

Levy Gerzberg

Thank you, Bonnie, and good afternoon, everyone.

Our fourth quarter and year-end results reflect the increasingly challenged global economic climate. It is during these difficult times that we must focus on cost controls and maintaining a strong balance sheet in order to weather the downturn. As we enter 2009, we're pleased that our balance sheet boasts $396 million in cash, cash equivalents and investments, substantially reduced accounts receivables, and continued decline in inventory levels.

During the fourth quarter, with revenues down to levels we have not seen since the first quarter of 2005, we generated nearly $26 million in cash from operations, and continue to focus on increasing efficiencies and containing cost throughout the organization. In addition, despite the worldwide recession, we were able to deliver on our expectations to grow our revenues in the DTV and mobile phone processor lines substantially. DTV grew 59% over last year and mobile phone processors increased nearly five fold during the same period.

Now for an update on our core markets. In DTV, our overall results were in line with our expectations, given fourth quarter’s seasonality and the impact of a weakened economy. In LCD TVs, reduced consumer spending and the subsequent slowdown in demand is resulting in increased pressure to reduce costs and prices among TV suppliers. This trend benefits the OEM segment where Zoran’s customers are supplying mainstream cost conscious products.

We are seeing stability within the retail channel at Wal-Mart and Costco with brands like Amazon, Sylvania, Magnavox and Polaroid, as well as Best Buy’s house brands Insignia and Dynex. Additionally, our Taiwanese ODMs are securing more Japanese branded products that will be in the retail chain during the current quarter based on our SupraHD family.

During the quarter, we announced that we were shipping our latest HDTV processor family, the SupraHD 775 and 785, to manufacturers supplying the high volume cost sensitive ATSC digital TV market in North America. The processors are unprecedented in terms of integration, along with many new features, including advanced audio processing and color management capabilities. This is significant because not only are they the most integrated solution currently available, but they effectively meet the demands of today's consumers, who want improved quality at an affordable price.

In Europe, demand appears to be weakening. However, our new SupraHD DVB-T SoC target this market specifically, and we're currently engaged with multiple European TV manufacturers. So far, the feedback has been excellent. Additionally, we are expecting to launch a new product family later in the year to address the European and Japanese markets, which we believe will be the most advanced solution in terms of integration, picture quality, and feature set available in the market. Our solutions will enable us to address all the requirements for European TV chassis, from the entry level mainstream models to the high end tier 1 branded products. Zoran is the only TV SoC provider that is able to successfully supply solutions for the US, European, and Japanese markets, putting us in an excellent position for growth, when the worldwide economy begins its recovery.

In the ATSC converter setup box market, revenue declined somewhat as a result of a buildup of customers' inventory during the third quarter. However, we believe demand will resume over the next few quarters as inventory is depleted. In China digital cable, we are actively supporting new designs with our new advanced setup box SoCs that will enter production later in the current quarter, and we expect to continue to gain share in this market throughout 2009.

In DVD, sales were impacted by weak consumer spending, as well as market share losses in the low end low margin segment. However, we remain focused on value-added segments such as HDMI 1080p and portables. Customers such as MTC, Philips, Samsung and Toshiba are all introducing new models using our HDMI solution in the first quarter, including new high quality DVD up-converter models. We continue to believe this segment will benefit Zoran.

As we noted last quarter, we are making strides in our geographic expansion efforts. However, the market is expected to remain challenged in the near term. We are focusing our sales and marketing efforts to more broadly diversify our geographic coverage to BRIC markets and are actively working on new applications and features with our customers to ensure that we will benefit from a return to a more stable economy.

We are making progress on our forthcoming integrated single chip solution for the Blu-Ray market, and demonstrated our latest system at CS earlier this month. Our SoC integrates both the front and, the back-end function, which we believe will enable us to take a leading position in the segment of the market. In printer imaging, revenues were stable, and actually increased slightly during the fourth quarter due to an increase in software revenues, which tend to fluctuate from quarter to quarter.

We continue to see a tough competitive environment for our imaging hardware product, as well as increasing pressure as a result of the economic downturn. While there has been some scaling back of expectations for growth in the color laser segment, we remain confident that our investment in this area will position us to take a leadership position in the future. We expect to see launches of new models based on our Quatro solutions designed for this market in the coming quarters as we're working with several major OEMs on laser development programs.

Software revenues were driven by continued demand for our IPS software, which is now shipping in more than 300 printers and MFPs. Last quarter Sharp introduced new Frontier A4 product family as well as its refreshed midrange A3, both of which included Zoran embedded IPS for XPS. Ricoh refreshed its color A3 MFP line that user our IPS PCL interpreter. In addition, Microsoft reinforced its commitment to the XPS print pass by announcing broader application support for XPS in Windows 7 in its recent developer conference which could drive further end-user adoption.

In digital cameras, revenues were down substantially, far more than normal seasonality would dictate as a direct result of the world recession. The weaknesses was across the board geographically. However, we saw pronounced optimism among Taiwanese ODMs. The gloomy economic outlook is causing Japanese companies that source their branded products through Taiwan to mitigate further exposure by significantly reducing orders from these suppliers.

In addition, there was an accumulation of inventory in the channel at the end of the third quarter, which reduced fourth-quarter demand. The inventory is selling through though at a slower pace than it normally would, given the consumer demand. However, we continue to work directly with certain Japanese accounts. And one of our tier 1 customers in particular has recently committed to expand its product line based on our Coach solution during 2009. In addition, our Coach 12 processor sampled during the quarter and we are already seeing solid design win activity with Japanese and other customers. Of significance during the quarter was the introduction of Pure Digital’s latest Flip MinoHD video recorder using our Coach technology. The Flip is the number one selling camcorder in the US.

Pricing in the market was in line with our expectations with declining ASPs across all market segments. We expect this to continue as competition increases and the economic climate worsens. Clearly the market is still adjusting to the economic situation and the long-term implications of this recession are yet to be determined. I mentioned the Coach 12 processor earlier, and want to elaborate a bit on this product family, as it underscores our commitment to maintain and grow [ph] share even during these unprecedented decline in the market. We're delivering three versions of the IC designed to address all levels of the market: entry, mid and high end. The Coach 12 family offers exceptional still and video cameras capabilities while supporting HD and full HD capture and playback. This family was developed to deliver a cost-effective solution that will enable our customers to deliver cost competitive cameras that will be well received in the market.

In the multimedia mobile phone market, LG (inaudible) based on our Approach 5C processor exhibited moderate sales in Europe, where it has been sold exclusively. Additional Approach based LG phones will enter the retail market in China and the US later this quarter. We are preparing to introduce our Approach 7 multimedia processor at the World Mobile Congress in Barcelona in February. The Approach 7 solution offers exceptional still and video capture leveraged from our Coach digital camera technology. In addition, it offers HD video playback as well as 3-D graphics acceleration, all aimed at enhancing the mobile phone user experience. Our goal is to see new customers initiate design activity with this product during the second quarter.

In summary, we are, like the rest of you, concerned about the global financial crisis and the economic slowdown. We have not heard nor seen any evidence such as that there will be any recovery in the near term, and this expectation is reflected in the guidance we are providing for the first quarter. However, our strong balance sheet will enable us to weather this downturn. In addition, we are working aggressively to maintain our competitive edge through innovation, cost containment and multiple new product introductions throughout 2009. These efforts will be key to emerging from these difficult times, well positioned to outperform the competition and grow share in our core markets, once the economy recovers.

I'll now turn the call over to Karl for a review of the financials. Karl?

Karl Schneider

Thank you, Levy, and good afternoon, everyone.

For the fourth quarter ended December 31, 2008, Zoran recorded revenues of $74.7 million compared to the $126.1 million reported last quarter, and $129.4 million for the fourth quarter of 2007. Net loss under Generally Accepted Accounting Principles or GAAP for the period was $20.2 million or $0.40 per share on 51 million common shares. These results include non-cash charges of $109,000 related to the amortization of acquired intangible assets, $3.1 million of stock-based compensation expense, and an adjustment of the tax provision to a non-GAAP rate of $6.5 million. This compares with a net loss of $154.2 million or $3.01 per share for the previous quarter, and net income of $58.7 million or $1.11 per share for the fourth quarter of last year, which also included similar non-cash charges.

As a reminder, the previous quarter’s net loss included non-cash charges of $167.6 million for impairment of intangible assets. On a non-GAAP basis, which excludes a amortization of purchased intangibles stock-based compensation expense, and the adjustment of the tax provision to a non-GAAP rate, our net loss for the quarter was $10.5 million or $0.21 per share, compared to net income of $13.9 million or $0.27 per diluted share for the previous quarter. For the fourth quarter of the prior year, we recorded a non-GAAP net income of $18.1 million or $0.34 per diluted share.

For the full year 2008, Zoran's revenues were $438.5 million compared $507.4 million in 2007. Our GAAP net loss for the full year 2008 was $215.7 million or $4.20 per share on 51.4 million common shares. These results include non-cash charges of $167.6 million related to the impairment of intangible assets, $23.1 million related to the amortization of acquired intangible assets, $13.1 million of stock-based compensation expense, and the difference in the GAAP and non-GAAP tax expense of $2 million. This compares with GAAP net income of $66.2 million or $1.29 per diluted share for 2007.

On a non-GAAP basis, which excludes the previously mentioned non-cash charges, our net income for 2008 was $8.4 million or $0.16 per diluted share which compares to non-GAAP net income of $70.9 million or $1.37 per diluted share for 2007.

Hardware product revenues decreased to $59.8 million from $112.1 million reported last quarter and from $113.9 million in the same period of the prior year. Software royalties, licensing and other revenues increased slightly to $14.9 million compared to $14 million last quarter, and decreased when compared to the $15.5 million recorded in the fourth quarter of 2007. Revenues by product market for the fourth quarter of 2008 were 36% digital camera, 23% DTV, 23% printer imaging, 10% DVD, 7% mobile phone processors, and 1% other. Sales by geographic region during the fourth quarter were 32% China, 23% Taiwan, 22% Japan, 10% Korea, and 13% US and the rest of the world.

Overall gross margin for the fourth quarter was 51.2% which compares with 47.3% last quarter, and was 52.1% for the fourth quarter of 2007. The improvement in gross margin is the result of fluctuations in our product mix. The allocation of our stock-based compensation expense in our GAAP income statement for the fourth quarter is $88,000 to manufacturing overheads, included in cost of product sales, $1.2 million in R&D, and $1.8 million in SG&A.

Excluding the stock-based compensation expenses, research and development expenses increased $1.3 million in the fourth quarter of 2008 to $29.1 million compared to the $27.8 million in the prior quarter. Compared with the same quarter of last year, R&D spending increased $400,000 from $28.7 million. On a sequential basis, R&D spending tends to fluctuate from quarter to quarter based on the timing of major engineering related expenses, such as tape outs, which include MOSFETs and engineered wafers.

Excluding the impact of stock-based compensation charges, selling, general and administrative expenses decreased to $19.2 million in the fourth quarter from $21.5 million reported last quarter. Compared to the same quarter last year, SG&A expenses increased $6.3 million from $25.5 million. The decreases in SG&A were primarily the result of lower legal costs associated with our now settled stock option backdating derivative lawsuit.

Other income and expense for the fourth quarter of 2008 was $2.9 million compared to $3 million in the prior quarter. These amounts consist primarily of interest income for the periods, and are reflective of declining interest rates.

Moving over to the balance sheet, cash, cash equivalents, and total investments increased by $34 million to $396 million compared to $362 million reported last quarter. Cash generated from operations during the quarter was $25.7 million. Accounts receivables at the end of the quarter were $22.8 million, a decrease of $31.4 million from $54.2 million last quarter, with DSOs decreasing to 28 days compared to 39 days for the previous quarter.

Inventory balances at the end of the quarter decreased $11.9 million to $37.4 million compared to $49.3 million for the previous quarter. Inventory turns for the fourth quarter were approximately 3.7 versus 5.2 in the previous quarter.

I'll now address the company's outlook for the first quarter of 2009. During the Q&A session that follows, you are encouraged to ask any questions that may not be covered during the course of our comments, as we do not anticipate having to provide any additional financial guidance after this call. Before we provide any forward-looking guidance, we want to remind you that any forward-looking statements related to revenue projections, gross margin expectations, and all other comments on the expected financial results for Zoran are just predictions. Actual results may differ materially.

For the first quarter of 2009, we currently anticipate that revenues will range between $50 million and $55 million with overall gross margins ranging between 46% and 48%. Excluding amortization of acquired intangibles and stock-based compensation, operating expenses are expected to increase as a result of increased R&D tape out activity and range between $51 million and $52 million. Acquisition related costs are expected to be approximately $109,000. Stock-based compensation expense is expected to be between $2.9 million and $3.4 million.

The company expects to record a GAAP net loss for the quarter in the range of $0.54 to $0.58 per share. Excluding amortization of acquired intangibles and stock-based compensation, non-GAAP net loss for the quarter is expected to range between $0.48 and $0.53 per share on approximately 51.5 million shares. Based on the current revenue expectations, we are expecting to burn between $25 million and $30 million in cash during the first quarter. As a reminder, we increased our cash balances in the fourth quarter by $34 million, and currently have $396 million in cash and investments, including auction rate securities classified as long-term.

With that, we'll now open up the call for questions. Operator, please go ahead.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of James Schneider with Goldman Sachs. You may proceed.

James Schneider – Goldman Sachs

Hi, good afternoon. First question I guess would be on the cash situation. Karl, you know you don't burn cash as you just talked about, and clearly there is very limited visibility in terms of demand, but can you give us some kind of idea about the bounds of the cash burn for 2009 as well as you can see it? And kind of related to that, is there a point at which you would cut OpEx pretty meaningfully in order to achieve a more positive cash position, or at least to burn less?

Karl Schneider

Well, as you said, Jim, the visibility into 2009 right now is a little bit shortsighted. And based on what our current expectations are, we would expect that Q1 would be the low point of the year from a revenue perspective, and as such it should be the low point from a cash burn. If we see anything close to some seasonality going into Q2, Q3 timeframe, we think that we can get back up into the revenue range in the $85 m million to $90 million. At that point, I think we are pretty much cash neutral. If things worsen, of course, the company is considering all the alternatives that we might need to take to limit the cash drain throughout the year.

James Schneider – Goldman Sachs

Then I guess just a follow up on that one, I mean is there – I mean clearly you would rather be at some meaningful level of profitability, it might take some time to get there given the weak demand environment, so would you consider a restructuring action proactively before things worsen further?

Karl Schneider

Well, yes, we have already taken steps to contain our costs and make progress towards reducing spending. So we have ideas of things that we would have to do. At this point, we believe that to make significant progress towards cutting costs means we have to decide on what market we're not going to service when this economic downturn start to recover. So we have ideas where we will go, but at this point in time, we think that there will most likely be a recovery starting sometime in the second half of the year, and therefore while we're not increasing our investments substantially, we are continuing to drive forward in the programs that we have got. We have cut costs across the board, in things where we can without actually restructuring and cutting a huge number of people, but as the economy moves forward, we’ll have to re-evaluate.

James Schneider – Goldman Sachs

And then the last one from me, could you give us some kind of directional sense in Q1 about what product segments you would expect to decline the most in the quarter?

Karl Schneider

Well, I think, you know it's – we're being – we're not being conservative. I mean we're looking across the board at product segments declining. When you go from 75, roughly $75 million, which we just put up in the fourth quarter down to $50 million to $55 million range, everything is going to be touched. At this point in time, I would think that which we have got a good position in TV. Cameras are challenged in respect of that, but we have got a lot of new design wins, and we’ll just have to see how the quarter plays out.

James Schneider – Goldman Sachs

Okay, fair enough. Thanks very much.

Operator

And your next question comes from the line of Heidi Poon with Thomas Weisel Partners. You may proceed.

Heidi Poon – Thomas Weisel Partners

Thanks. It’s Heidi Poon from TWP. Karl, Levy, I just want to talk a little bit about maybe longer term, are we going to just have to, instead of just waiting out stabilization of the economy, is there any new product cycle that you guys are targeting? It seems like last year, the foray into mobile seems like the traction is a little bit slower than anticipated even with the economic impact. So if you could give us a sense of what would make Zoran product line more exciting in the timeframe of 2010 as we potentially head out of the downturn, that would be great?

Karl Schneider

Well in 2010, as Levy mentioned in the course of this prepared comments on this call, we have got a lot of good products coming out. In TV, we have got the new Approach 7 coming for the handset. We have got new designs is on in our existing handset customers, and we've got – we're hoping to bring on a new major handset customer before this year is over if everything goes well. And so if we just look at it, even in cameras, the Coach 12 is a very, very robust product. As we mentioned in the prepared remarks, it services the low end, the mid range and the high end, and contains full HD video capture and playback. So we think we've got the right products. That's why we're making the investments we are making. Our strategy was to maintain our position in the market and improve our position and gain share, and that's the steps we are taking.

Levy Gerzberg

And Heidi, in addition to, as we mentioned earlier, we see Europe is a real opportunity for us, is a new market for us. We believe we have good market for Europe and Japan, and also some new segments in the set-top box market. And we are say it based on what we see in the market and the competitiveness of our products and readiness of major manufacturers to work with us. And some, as Karl said, some existing new design wins in the pipe. So in all vectors, we believe that we will see something new in the market and something new from Zoran. And if we will not see it, we will really assess those vectors that do not behave as we expect they will next year.

Heidi Poon – Thomas Weisel Partners

Got it. So given the anticipated mix with sort of the compression of the challenges we see in digital camera, is there any change in your long-term outlook for the gross margin, maybe even in the intermediate term?

Karl Schneider

No, I mean in the long term, certainly we think the targets that we put out there in the past are valid targets. I think as we try to weather this economic downturn, in the near term, the reason we guided margins down in the 46% to 48% range for Q1 is that we are probably going see a higher mix of lower margin products in the near term, and also some pull back – we were expecting some pull-back even in the software side of the world on enterprise printing royalty stream we get. And just as a reminder, last quarter, fourth quarter was the last quarter that we will receive royalties from MediaTek on that lawsuit settlement a few years ago.

Heidi Poon – Thomas Weisel Partners

So you expect that maybe in the first half at least you might stabilize at around the 46% to 48% range?

Karl Schneider

48 range, yes.

Heidi Poon – Thomas Weisel Partners

Got you. And then lastly, you kind of sprinkled your comments about inventory through your prepared remarks, could you give a little bit more color about whether you anticipate any inventory replenishment in the February, March timeframe. That seems to be where some of the other IC suppliers are looking toward potential replenishment cycle?

Karl Schneider

Yes. I think that is a mixed bag Heidi. I think we are seeing some inventory replenishment in certain markets, in certain sub segments of markets. In other ones like digital camera, there seems to be a good amount of inventory in the channel, but it's pockets.

Heidi Poon – Thomas Weisel Partners

Got it, thank you.

Operator

And your next question comes from the line of John Vinh with Collins Stewart. You may proceed.

John Vinh – Collins Stewart

Hi, good afternoon. First question on the DVD, obviously that remains to be challenged market. One, just a follow up on the previous question in terms of replacement, is that a segment that you are starting to see replenishment orders come back in the current quarter? And secondly, is the decline that you have seen over the last several quarters, the current run rate reflective of any market share loss that you’ve incurred there?

Karl Schneider

Well I think we talked about it in the prepared remarks about some of the DVD was from market share loss. As you know historically, we were focused more on the US and European markets, some of the geographical markets where there has been more demand recently than the two markets we had serviced. We were not highly focused there. We had made adjustments to try to go after those geographies, and we're hoping to make some inroads in the future. Levy, you have any…

Levy Gerzberg

Yes, the replenishment that we see will happen – it doesn't happen now, probably it will start happening in the middle of the year. We do have some new design wins, which is encouraging, in existing segments and new geographies. So there has been a decline in the market, and as we mentioned, we did have a market share loss, especially in the very low end, but we have new products and some of the existing customers getting ready for introductions later in the year.

Karl Schneider

Again, the DVD market was hit pretty hard by the economy, and so we are expecting that as time goes, we will see some of that come back. Again, we're making a bet that there is going to be a Blu-Ray market in the future, and we’ve got a new chip for that market that will be a very cost-effective and probably one of the more integrated chips out there. So we are all hoping that this economic downturn moves toward a recovery in the second half and we can benefit from that recovery.

John Vinh – Collins Stewart

On the, just on the Blu-Ray side, can you talk a little bit more about the timing of the integrated chip? Will it be in time to target this upcoming holiday season? And second is, do you have a sense of, in terms of integration and cost savings, what sort of kind of end market BOM do you think your chip is capable of targeting?

Levy Gerzberg

Yes, we are aiming at the upcoming holiday season. It'll be targeted towards the second part of the year as we will start to show the solution. The BOM is expected to go down, the bill of material, in order to really enable eventually Blu-Ray machines to be out there for, I am talking about high quality machines, for below $200, and even sub $150 if you have the right component costs and excellent quality and the best playability, not only of the Blu-Ray but also the legacy red-label [ph] disk which many of the current Blu-Ray players have problems playing.

John Vinh – Collins Stewart

Great. Okay so you think you're chip is capable of putting out kind of sub $150 Blu-Ray ASP, you think?

Karl Schneider

Moving lower.

Levy Gerzberg

A little lower than that.

John Vinh – Collins Stewart

Okay. And then last question from me, just on DTV is, you know obviously Sony recently just talked about accelerating its plans to outsource, have you seen any movement in the last quarter by any of the tier 1 customers that would suggest that they would finally move toward that more aggressively and allow you to penetrate on of the three S-customers [ph], can you just give us an update in terms of your ability to penetrate on of those customers in 2009 at this point? Thank you.

Levy Gerzberg

Yes, now, we see across the board a trend, a long-term trend of going out to outsourcing using ODMs. This is why we have maintained – developed and maintained the number one position in the digital camera market. We see similar trend in the DTV, and we believe that the same thing will happen in Blu-Ray and other areas. So we believe that some of the manufacturers that talk to you, the brand names will have no choice but to do this, at least for a big part of their product offerings. So we are getting ready for this. This is one reason why we have seen a very nice growth last year in DTV. We enabled some of the manufacturers to use ODMs and we believe that this trend will continue, actually will be accelerated during this year and beyond.

John Vinh – Collins Stewart

Okay, thank you.

Levy Gerzberg

You're welcome.

Operator

And your next question comes from the line of Adam Benjamin with Jefferies. You may proceed.

Blayne Curtis – Jefferies

Good afternoon and thanks. This is Blayne Curtis for Adam. Levy or Karl, I know you are getting impacted by the same economic slowdown as everyone else, just trying to get my hands on some of these revenue levels, particularly you see dramatic declines in DVD, as well as imaging products down about 50% year over year. Can you just talk about those declines, if you could quantify roughly how much share you think you lost first, what is economic factors?

Karl Schneider

Well, on the DVDs, we were probably, if you go back a year or two, we were sitting in the 30% probably market share range, and I would say now we're probably down in the 20%, 23% range. 18% to 23%, somewhere in that range. So that is the decline, but again the market share loss is the result of the economical downturn in the US and Europe versus the continued growth that happened last year in markets like China and some of the BRIC countries. On imaging, we saw the market – we saw our revenues come down, primarily because the nature and competitiveness of the inkjet printer market, which was a very captive market. And as that market became more and more brutal and cost-effective, a lot of those guys continued to do stuff in house.

Blayne Curtis – Jefferies

Okay, got it. And when you talk about the camera market as being challenged looking forward, what –maybe you can give a little more color as to what you're expecting?

Levy Gerzberg

Well, in the camera market, as we mentioned a little earlier, we did see some market share loss in the very low end, and we are coming out with new products to address this. We are addressing the low end, the mid range and the high-end cameras, and we believe we're going to re-gain market share, especially since we see some weakness in the ODM market, in the camera market, and at the same time, we see design wins from the (inaudible) in Japan. So some of these market share loss that the ODMs are experiencing, we are benefiting from it because of the direct design wins that we have in Japan. So all in all, the market is expected to continue to decrease during the year, but we see that our market share towards the end of the year will start growing, and we see some feedback from customers and the channel expectations for growth in 2010. There is a trend for high resolution cameras, very high quality, high definition digital video in the digital cameras for which we believe we have an excellent solution from a cost performance point of view and new features.

Blayne Curtis – Jefferies

And then just finally on the gross margin, just trying to get how you are getting that guidance, and you mentioned that you expect licensing to come off, I mean you never really seen less than 30 million in imaging software, so just if you expect the decline in licensing to be similar to the overall revenue decline?

Karl Schneider

Well, yes. I mean we expect that the economic downturn will have its impact on the enterprise printer imaging business as well as it had on the consumer. I mean as companies look to cut, they are probably going to cut their investments and upgrade in their internal infrastructures. So right now, we're predicting that it will have an impact on that royalty stream from that business.

Blayne Curtis – Jefferies

Okay, thanks guys.

Operator

And your next question comes from the line of Daniel Amir with Lazard Capital Markets. You may proceed.

Daniel Amir – Lazard Capital Markets

Thanks a lot for taking my questions. On the mobile phone front, this is a segment that you know you have been struggling against to grow the business. It seems like you have had a decent 2008, but you're still largely focused on one customer at the moment. Is this strategically kind of an area that are continuing to invest in, and if so, do you feel that this business can actually still grow in 2009 if you get additional customers?

Levy Gerzberg

Right now, Daniel, you're right, our focus has been mostly one customer, but with multiple design wins for the current product that we have, that we call the Approach 5, and a new product that we're going to introduce in Barcelona in a few weeks, which is Approach 7. So, there is a growing interest in this solution. The answer is yes, regarding the investment, we continue to invest in this market, in the niche, that we believe we can really dominate by leveraging our camera technology in that niche. So we will be in the best camera enabled cell phones on the market, and we are taking it step-by-step. We have many opportunities within one customer and more coming. So we're looking for growth this year, yes, but it is very hard to predict it at this point anything in this consumer market. But we expect to see some growth this year.

Daniel Amir – Lazard Capital Markets

Okay. And on the end market demand, you're commenting I guess that Europe I guess is weakening. Can you just give a general commentary on kind of demand based on geography, maybe Asia, North America and Europe, in your opinion?

Levy Gerzberg

Yes. I think we have to distinguish between the market itself and our position in the market. Europe for us is essentially a new market. So even if the market is declining, we hope to benefit from growth there. We see increase in some BRIC countries as we mentioned, especially for products like DVD, possibly low-end cameras, and low-cost televisions. Likewise in China, the set-top box market in China, we view this as a possibility for growth for us. We have a good product for this market; we have the relationships, the infrastructure to address it. So this is what we see. In the US, it is very hard to the projects what will happen at this point, and this is why we are taking a more conservative approach at this time.

Daniel Amir – Lazard Capital Markets

And my final question on the Japanese market, can you comment a bit about your – I guess you have a tier 1 design win that you are commenting that you might start shipping your Coach processor later this year?

Levy Gerzberg

Correct. Actually, we have been shipping with the tier 1 customer already in 2008 and we expect to ship more in 2009. Yes, late in the second half of the year, towards the end of the year.

Daniel Amir – Lazard Capital Markets

So is this a new customer or the same customer that you are shipping to?

Levy Gerzberg

It's a combination, and also new kind of cameras with the same customer, and hopefully we will have more than the same customer. But for us, for this particular product segment that we are addressing, it's a new customer.

Daniel Amir – Lazard Capital Markets

Okay. Thanks.

Levy Gerzberg

You're welcome.

Operator

And your next question comes from the line of Suji De Silva with Kaufman Brothers. You may proceed.

Suji De Silva – Kaufman Brothers

Hi, Levy. Hi, Karl. A quick question, I want to understand the pricing versus the unit dynamic, the product revenues are off may be 60% from mid 2008, what's been – if you look into the, if you take the guidance for it, what’s been the unit versus pricing dynamic, and how do you expect pricing to trend here?

Karl Schneider

Well, in the market that we serve, ASPs are on continual decline slopes and so I don't think there is anything outside of normal, but we see anywhere from 15% to 20% here in ASP erosion, and that is no different. Matter of fact, in some cases, given the economic downturn, and given some of the markets where we are chasing, we expect price pressures to continue into 2009. In reality, our units in 2009 probably are slowing versus where we are, because that consumer is not taking the unit. So that is the situation that is out there today. And again we're looking forward to the recovery in the units starting to go back up.

Suji De Silva – Kaufman Brothers

I guess, Karl, I based my question near term, the pricing, is the pricing pressure declining, are they accelerating into 1Q, or are they staying stable?

Karl Schneider

Well, the unit is certainly declining. The price pressure hasn't changed as far as a percentage of pressure.

Suji De Silva – Kaufman Brothers

That’s what I was getting at. And then on the guidance here in 1Q, can you just give us some idea of how you gained comfort in terms of visibility into that guidance versus say where you were when you guided for it; can you just give us a sense of how you are guiding 1Q?

Karl Schneider

Well, again, we typically, we do a forecast, a bottoms up forecast on what we expect for the quarter, and our guidance is based on that. And right now, I would say that what we have seen through most of the first quarter is that things are tracking in line with what we typically see for that kind of guidance.

Suji De Silva – Kaufman Brothers

Any metrics on turns versus backlog coverage…

Karl Schneider

No, we don't typically put that out.

Suji De Silva – Kaufman Brothers

Okay. Last question on the cash balance, can you update us remind us where you are on a buyback, if you have one authorized, or what are your thoughts on using your cash for buybacks versus kind of conserving it at this point?

Karl Schneider

Well, the buyback is authorized. It was $100 million buyback. There is $90 million left based on the numbers we put out today. Probably obviously we did not buy shares in the fourth quarter. Right now our view is cash is king and until we understand the magnitude of this downturn, we're going to do our best to conserve it.

Suji De Silva – Kaufman Brothers

Fair enough. Thanks, guys.

Operator

And your next question comes from the line of Yair Reiner with Oppenheimer. You may proceed.

Yair Reiner – Oppenheimer

Yes, thank you. First, on your cash balance, do you have a sense of where your interest rate is going to go on that?

Karl Schneider

Well, I think the interest rate right now is – our interest rate is actually okay, but I think we locked it in with some of the investment choices we made, but I think it will tend to trend down somewhat.

Yair Reiner – Oppenheimer

We should expect a radical change quarter over quarter?

Karl Schneider

No.

Yair Reiner – Oppenheimer

Great. And also just kind of a housekeeping question, can you remind us of how much licensing revenue will be rolling off from MediaTek?

Karl Schneider

In the fourth quarter, MediaTek’s licensing or royalties revenue was a little over $500,000. It was the last quarter of any of that.

Yair Reiner – Oppenheimer

Okay. Final question for me, if you can give us a sense of what is happening on the competitive front, I imagine a lot of the people you go against, don't necessarily have the kind of balance sheet that you do, and how do you see the prospects of industry consolidation, and how do you think you want to play that?

Levy Gerzberg

Well, we do believe that there will be some consolidation this year. We see all kinds of companies or large divisions in large companies looking for ways to consolidate. We're moving with our own plan, and of course when we see interesting opportunities, we are looking at them. It is clear that some companies will have to consolidate. They do not have the exact infrastructure that's needed in order to survive and grow in the consumer electronics market. We believe we have it and we hope to benefit from the opportunities as they come.

Yair Reiner – Oppenheimer

Thank you.

Levy Gerzberg

You're welcome.

Operator

And your next question comes from the line of Mahesh Sanganeria with RBC Capital Markets. You may proceed.

Mahesh Sanganeria – RBC Capital Markets

Thank you. Karl, on the licensing revenue, if we take $500,000 out from MediaTek, you were expecting that December number to be lower, but came in better. What should we look at for March number, is it going down to 13 kind of level or a 10 kind of level, could you give us some magnitude?

Karl Schneider

That's the ten-thousand-dollar question, Mahesh, is what the impact of economic downturn is going to have on some of this. Right now, we are expecting the number to be down. We am not willing to step out and take a guess at it, because in that particular market, our customers are reluctant to give us a picture of what how things are going. So we are expecting it to come down. If it doesn't come down as much, then of course the margin will be impacted by it.

Mahesh Sanganeria – RBC Capital Markets

Okay. And then on the segment, you kind of talked about the inventory, that camera has an inventory, so you probably won’t see the seasonal pick up if there was one. Then camera, it will come a little later, can you talk about how do you look at DTV, how is the inventories, and will you think that you will see a seasonal pick up in DTV?

Karl Schneider

Well in Q1, we are talking about seasonality in Q1, Mahesh, because seasonality…

Mahesh Sanganeria – RBC Capital Markets

Q2.

Karl Schneider

Well, Q2 is a different story. I mean I think there is inventories, there was probably a little more inventory in the channel for digital cameras than maybe there was for the TVs that we service. So we think that that inventory is being more tough, we think that most likely if we see an uptick in our revenues overall in Q2, we will see an uptick in digital camera and TV as well. So whereas in certain sub segments and certain customers we have in TV, we actually see some demand being pulled through in Q1 because they depleted their inventories. We expect that to continue as long as the economy allows it.

Mahesh Sanganeria – RBC Capital Markets

Okay, thanks a lot, Karl.

Karl Schneider

Sure.

Operator

And your next question comes from the line of Vijay Rakesh with ThinkEquity. You may proceed.

Vijay Rakesh – ThinkEquity

Hi, Karl and Levy. Just looking back at 2003, 2004, you guys are running at $60 million to $80 million in revenues with half the OpEx. I guess now your gross margins and balance sheet are much stronger but OpEx is much higher. Even if you get to $80 million, $90 million, let's say by Q3 as things pickup, what would you do on the OpEx side because obviously four years back they were much lower?

Karl Schneider

Sure Vijay. But in that timeframe, when we are running at those levels, we didn't have all the business lines that we have today. So we made a big investment to gain market share in areas like TV and set-top box and we were there. We're gaining share quickly in those markets. The camera market which back in that timeframe was still on a very high growth curve, with a very high margins, has come down, and we are doing everything we can to maintain our market share, and continue the investment that we need to stay competitive in it. But the company is -- we are not standing still. We are also looking at what else it is going to take for this company to continue to grow once this economy picks up. So it is a fine line. If the economy doesn't turnaround in the near term, Vijay, then we will of course consider other measures to bring our OpEx down. But that means that we have to decide which markets we are not going to go and change.

Vijay Rakesh – ThinkEquity

Okay. And for 2009, if you look across your product lines, TV, DVD, camera, on the mobile processor, which do you expect to grow in 2009 for a year or so?

Karl Schneider

Well, in 2009, we think we have a good opportunity to grow TV and set-top box business. We are not expecting any substantial growth in the digital camera at this point. Levy, any other…

Levy Gerzberg

Yes, there is a chance for some growth in the mobile phone multimedia processor in the second half of the year as well.

Vijay Rakesh – ThinkEquity

Got it, okay.

Levy Gerzberg

And you know there are some segments that we are going to address like Blu-Ray, we are not selling anything today. We would start selling towards the end of the year. That will be growth for us. And set-top box, definitely, we have seen opportunity for growth in Europe and China and in other territories; we have the product for that.

Vijay Rakesh – ThinkEquity

So fair to say, do you think TV, including set-top box growth year-on-year, cameras, probably flattish, and DVD, including Blu-Ray, will it be flat year on year, or do you think that goes down year-on-year? Sales goes down?

Karl Schneider

Again Vijay it's a little early to tell (inaudible) Blu-Ray does and how the market economy goes.

Vijay Rakesh – ThinkEquity

Okay. Got it. Okay, great. Thanks a lot, guys.

Levy Gerzberg

You are welcome.

Operator

And your next question comes from the line of Rajvi Gill [ph] with Needham & Company. You may proceed.

Rajvi Gill – Needham & Company

Yes, guys. Thanks for taking my call. Just a quick question on some metrics about diversifying your revenue across geographies, what are – how should we be thinking about that as the business first to fall of in some product segments?

Levy Gerzberg

Across geographies? I'm sorry, I am…

Karl Schneider

Can you repeat your question, Rajvi?

Rajvi Gill – Needham & Company

Yes, you had mentioned diversifying your revenue stream focusing more on kind of the BRIC countries, are there any like metrics that you have in place that we can look at with respect to product segments that we should be looking at?

Levy Gerzberg

Well, we cannot share specific metric numbers, but one area is related to DVD, and set-top boxes is second one. As I mentioned earlier, we do see an opportunity for TV in Japan and certainly in Europe. So BRIC, mostly DVD and some set top boxes; Europe, set-top boxes, TV. We have some Japanese suppliers, and this is basically where we see the growth. We also see some small growth in DVD in Korea, China and Japan based on some new activities that we have in the pipe.

Rajvi Gill – Needham & Company

Okay. And just one quick question going back to the OpEx level, you know you have OpEx picking up sequentially but with revenue coming down about 50% quarter over quarter at the midpoint, how should we be looking at the OpEx run rate going forward, if the outlook doesn’t improve?

Karl Schneider

Well, if the outlook doesn't improve, then of course we're going to do what we need to do to contain that line and reduce it. I think what I was trying to allude to in the prepared remarks was that in the first quarter, we have a higher level of engineering tape outs than we had in the fourth quarter. Now the fourth quarter OpEx level was lower than the guidance we had given for the fourth quarter so, and some of that was because the tape outs that were – a tape out that wasn’t planned – or was planned in that quarter didn't make it in that quarter, and that of course spilled over into the first quarter. And that's one of the reasons the first quarter is a little higher. So there is other things, reasons in the first quarter that it is a little higher. Of course, you got payroll taxes kicking in again in the US, which by the end of the year; the company doesn't have to pay. But in general, we have curtailed and contained cost and will continue to do so, and if the outlook doesn't improve, we will do so further.

Rajvi Gill – Needham & Company

Okay, fair enough. And then in terms of maintaining a certain cash threshold, do you have any like metrics in place that you don't want to go below or certain cash balance before you start to cut, is there any range or a net cash per share basis that you are looking at?

Karl Schneider

No, I don't think there is anything that we're going to get specific on. I think it all has to do with where the economy goes, how much worse does it get. Does it get worse, does it improve in the second half, and we will make decisions based on those kinds of data, not a specific level of cash.

Rajvi Gill – Needham & Company

Okay, thank you guys.

Levy Gerzberg

You're welcome.

Operator

This concludes the question-and-answer portion of the conference. I would now like to turn the call over to Levy Gerzberg for closing remarks. You may proceed.

Levy Gerzberg

So, thank you all for joining us today. We would like to remind you that we will be presenting at multiple conferences in the coming months, all of which are posted on our website. So we hope to see you there. Thank you very much and goodbye.

Operator

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

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