Silicon Image, Inc. Q4 2008 Earnings Call Transcript

| About: Silicon Image, (SIMG)

Silicon Image, Inc. (NASDAQ:SIMG)

Q4 2008 Earnings Call

February 5, 2009 5:00 pm ET


Steve Tirado – President & CEO

Hal Covert – CFO

Mariah Argetta - IR


James Schneider – Goldman Sachs

Adam Benjamin – Jefferies & Company

Ruben Roy – Pacific Crest Securities

Unspecified Analyst – Needham & Co.

[Tye Lamb – Integral Capital Partners]


Good day, everyone, and welcome to the Silicon Image's fourth quarter and full year 2008 financial results conference call. (Operator Instructions) I would like to turn the conference over to Ms. Mariah Argetta; please go ahead.

Mariah Argetta

Good afternoon and welcome to Silicon Image’s fourth quarter and fiscal year 2008 financial results conference call. I am Mariah Argetta 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 fourth quarter results and the company’s strategy from our CEO, followed by the CFO with a more in-depth discussion of financial results for the fourth quarter and full year 2008 followed by financial performance estimates for the first quarter of 2009. 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 described 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

I will now turn the call over to Steve.

Steve Tirado

Thank you Mariah 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. I’ll give a brief summary of Q4, as well as our outlook for Q1 2009. I’ll then summarize several of Silicon Image’s key accomplishments for 2008 which I believe provide the company with excellent growth opportunities over the next several years.

Our financial results for the fourth quarter 2008 came in at the upper end of our revised guidance range at $59.4 million in revenue with gross margins coming in at 58.9%. We were down significantly in CE and storage and roughly flat in PC revenues versus Q3 2008.

Order visibility is poor and our outlook for Q109 revenue is expected at roughly 25% 5o 30% below Q408 or $40 to $45 million. As a consequence of the muted demand environment we’ve implemented appropriate operating expense reductions at the end of 2008 and can generate cash and profitability at the $200 million revenue level.

This assumes we maintain our margin range of 56% to 57% which we believe is achievable given our expected product mix and our mix of licensing to product revenue which should be higher then 15% for the year. Despite the challenging economic environment Silicon Image had one of its most productive years since 2003 in releasing industry leading products and standards initiatives which position us well for the eventual global economic recovery.

I’m not going to cover some overall highlights for 2008 and conclude with implications for 2009 and beyond before handing the call over to Hal for his financial summary.

Over the last 12 months we introduced three new technology initiatives with the goal of creating three new international standards. The first is our mobile high definition link which is targeted at mobile devices especially mobile phones where a micro USB type connector supporting as few as five pins can support high definition quality digital video and audio, USB charging and other capabilities.

The second major technology area is from our LiquidHD technology which is a comprehensive protocol suite designed to usher in a new generation of devices designed to enable virtual movie distribution in the home and mobile environment.

And finally SPMT our serial port memory technology standards initiative targeted at the mobile phone market where low pin count, high performance, and low power allow new more powerful applications possible in a constrained implementation environment.

Now each of these initiatives has received industry support as follows. In the case of MHL, the mobile high definition link, we begun shipping products into the digital television and mobile product space to several large OEMs, some of whom will likely go to production with MHL support powered on in late 2009 to early 2010.

However since our product strategy was to support both HDMI and MHL in the same part we were able to win many sockets going to production in 2009 especially where customers wanted the option to utilize the benefits of MHL in the future. Stay tuned here for announcements related to the formation of a working group to promote an international standard for mobile devices. It is our view that the market potential for MHL devices exceeds 1.5 billion devices today and has both product and license potential starting in 2009.

LiquidHD has received public support from Fox studios for the robustness of the build in content protection called Liquid Play for premium content distribution in a networked home or mobile environment. This is extremely important to our ability to garner broader industry support from the rest of CE ecosystem and is a unique attribute of LiquidHD.

We expect to gain other studio support during this year. Comcast, Liberty Global, and PRN Thomson have each endorsed our approach for one or more unique capabilities to the protocol suite. In the case of Comcast and Liberty Global our ability to create a pixel accurate programming guide across any commodity IP network in addition to all the other necessary capabilities to enable premium content distribution was pivotal.

In fact LiquidHD was honored with the product innovation of the year at the 2008 Cable Lab show held in Colorado, largely for this capability. In the case of PRN Thomson, the leading vendor for in store retail advertising systems, LiquidHD represents a game changing technology for upgrading and individually targeting ad content to digital televisions in the store environment.

We are working closely with these companies to prove the power of the LiquidHD architecture with the Silicon Image 6100 chip and the LiquidHD software developer kit which will begin to ship in Q209.

And finally we announced the formation of a working group to support making the serial port memory technology and international memory interface standard for the mobile phone market. Companies supporting this effort including Arm, [Hinex], LG Electronics, Samsung Electronics, Sony Erickson Mobile Communications, and ST Micro.

All of these initiatives are being supported by Silicon Image products, licensing, services, testing, tools, and consultation. These are significant technology product and organizational achievements and I want to thank our employees for their dedication in bringing them to market.

Beyond the achievement of these milestones intended to provide the basis for new product and market segment growth over the next several years we also enhanced our current product lines and standards initiatives. At [inaudible] 2009 the HDMI founders announced a set of groundbreaking features to be included in the next version of the HDMI standard.

The new feature set includes number one, networking. The consolidation of high definition video, high definition audio, and now high-speed data with the addition of Ethernet in the HDMI cable. Number two, audio return channel. The elimination of the speed of cable by allowing a TV to send audio streams upstream to an AV receiver for processing and playback over the HDMI cable.

Performance, 4K by 2K and 3D are high performance features to be met by increasing the upper limit of the HDMI link. HD in your car, a new connector specification for the auto industry as the world’s largest automakers move to digital HD video and audio for 21st century cars will utilize HDMI.

And finally a smaller connector, a new smaller 19 pin connector. The installed base of HDMI devices now exceeds 640 million devices according to [inaudible] latest market estimates and the number of companies supporting the standard exceeded 750 companies at the end of 2008.

I’m also pleased to say that Emmy’s were awarded to Silicon Image and the HDMI founder companies for their contribution to the development and implementation of the HDMI technology standard by the National Academy of Television Arts and Sciences.

In six short the HDMI standard has risen to be one of the most important standards for the CE industry. We expect to offer products supporting the new standard this year. Finally Silicon Image introduced a new category of DTV semiconductor this year. We call these new DTV product port processors and they have let to a strong number of design wins across the major CE OEMs for 2009. Our port processors were the vehicle for implementing our industry leading and patented Instaport technology. Instaport takes the switching time between source devices connected to a television from several seconds down to sub second switching time between devices.

Nowadays most TV manufacturers in the 40” and above category want to support four to five HDMI ports. This has made the switching time between attached devices much more noticeable. We have also integrated MHL support into these products to provide an option to support it in the future.

All in all this was a very productive year for Silicon Image in enhancing its entire product and technology portfolio and of course all of these initiatives and product programs will be complemented by IP licensing programs and simple HD testing, tools, and consultation services.

As I look into 2009 and 2010 it is clear that home networked, broad band connected CE environment will become the mainstream home around the world. As premium movie content goes from physical to virtual distribution every consumer device will become connected, high definition and mobile.

Our investments over the last several years have allowed us to offer today what we believe can be the distribution infrastructure for tomorrow’s wired, and wireless entertainment experience.

With that I’m going to turn the call over to Hal for a financial update before we take your questions.

Hal Covert

Thanks Steve, good afternoon. I’d like to cover two topics, highlights of our financial results for Q408 and the full year of 2008, and our financial performance estimates for Q109 and some key financial parameters for the full year of 2009.

Unless otherwise indicated revenue, 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 a reconciliation of non-GAAP measures referenced in today’s call are available on our website,

Revenue for Q408 was $59.4 million compared to $77.8 million for Q308 and $78.6 million for Q407. The sequential drop in revenue reflects the unfavorable global economic environment that began to significantly impact us starting with Q408 and to a lesser extent normal seasonality patterns.

On a year over year basis the decrease in revenue reflects the unfavorable global economic environment and to a lesser extent the product transition that we experienced in 2008. Revenue for 2008 was $274.4 million versus $313.8 million in 2007. The decrease in revenue is due to the product transition that we experienced in 2008 and the unfavorable global economic environment.

Product revenue for Q408 was $49.2 million, for Q308 $65 million, and Q407 $67.9 million. License revenue for the quarter was $10.2 million versus $12.8 million in Q308 and $10.7 million in Q407. CE product revenue accounted for 70% of our total product revenue in Q408. HDMI version 1.3 products included in our CE product revenue represented approximately 45% of that revenue.

Additionally PC product revenue accounted for 19% of total revenue in Q4 while storage product revenue was 11%. Average selling prices for product sales of $1.82 during the quarter were in line with our expectations. For 2008 product revenue was $233.2 million while license revenue was $41.2 million compared to product revenue of $265.7 million in 2007 and license revenue of $48.1 million.

CE product revenue accounted for 72% of our total product revenue in 2008 versus 78% in 2007. HDMI version 1.3 products included in our 2008 CE product revenue represented approximately 49% of that revenue compared to 40% in 2007. Additionally PC product revenue accounted for 17% of total product revenue in 2008 while storage product revenue was 11%.

In 2007 PC product revenue accounted for 13% of product revenue while storage product revenue was 9%. Average selling prices for product sales during 2008 were $2.02 versus $2.42 in 2007. Even though our average selling prices dropped in 2008 we increased our product gross margin as a result of product design cost reduction activities, lower wafer pricing and improved operating efficiencies.

Our overall gross margin for Q408 was 58.9% versus 59.6% for Q308 and 59% for Q407. Product gross margin for Q408 was 50.6% compared to 52% in Q308 and 53.5% in Q407 while our license gross margin was 98.8% in Q408, 98.3% in Q308 and 94.2% in Q407.

For 2008 our overall gross margin was 59.1% compared to 56.6% in 2007. Product gross margin for 2008 was 52.4% compared to 50.7% in 2007 while license gross margin in 2008 was 97.1% versus 89% in 2007. Favorable mix for both product and license revenue as well as lower cost of revenue as previously discussed are the reasons for the improvement in gross margin as a percent of revenue in 2008.

Operating expenses for Q408 were $32.4 million compared to $34.4 million in Q308 and $36 million in Q407. The decrease in operating expenses in the third and fourth quarters of 2008 is the result of restructuring programs implemented during those quarters. For 2008 operating expenses were $138.5 million versus $130.5 million in 2007. The increase in operating expenses in 2008 was primarily due to legal expense related to the Analogic’s litigation and R&D expenses in the first half of 2008.

Headcount as of December 31, 2008 was 610 compared to 635 as of September 30, 2008 and 635 as of December 31, 2007. Operating profit for Q408 was $2.7 million or 4.5% of revenue versus $12 million or 15.4% of revenue for Q308 and $10.4 million or 13.2% of revenue for Q407. The decrease in operating profit both sequentially and year over year is due to lower revenue.

For 2008 operating profit was $23.6 million or 8.6% of revenue compared to $47.1 million or 15% of revenue in 2007. The reduction in operating profit is primarily due to lower revenue and to a lesser extent higher operating expenses.

For Q408 other income was $1.1 million compared to $1.8 million for Q308 and $2.8 million for Q407. Q308 other income included a gain of $0.6 million related to our stock repurchase program. The decrease in [inaudible] income 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 2008 other income was $6.2 million versus $11.4 million in 2007. For Q408 and the full year of 2008 our non-GAAP and GAAP income tax reflected a credit of $11.9 million primarily due to changes in estimated geographic income and expense distribution related to our international tax structure as well as changes in estimates for R&D credits based on the completion of a multiyear study.

For 2007 our GAAP tax rate was 52% which equated to $20.6 million income tax expense. Non-GAAP net income for Q408 was $15.7 million or $0.21 per diluted share. For Q308 $17.7 million or $0.23 per diluted share and for Q407 $9.5 million or $0.11 per diluted share.

Our non-GAAP net income for Q408 consisted of approximately $3.8 million or $0.05 per diluted share from operations and $11.9 million or $0.16 per diluted share attributable to income tax benefits. Our non-GAAP net income for Q308 consisted of approximately $13.6 million or $0.18 per diluted share from operations and $4.1 million or $0.05 per diluted share attributable to income tax benefits which included a year to date adjustment due to the reduction on our effective tax rate for 2008.

Non-GAAP net income for 2008 was $41.7 million or $0.54 per diluted share versus $32.7 million or $0.37 per diluted share in 2007. The following is a reconciliation of the $0.17 increase in earnings per share in 2008, negative $0.38 from operations more then offset by $0.49 from lower tax expense and $0.06 from lower share count.

Our GAAP net income for Q408 was $5 million or $0.07 per diluted share compared to $6.1 million or $0.08 per diluted share in Q308 and $7.6 million or $0.09 per diluted share in Q407. Our GAAP net income for Q408 consisted of a loss of approximately $6.8 million from operations or $0.09 per diluted share more then offset by a tax credit of $11.9 million or $0.16 per diluted share.

For 2008 our GAAP net income was $10.1 million or $0.13 per diluted share compared to $19 million or $0.22 per diluted share in 2007. The following is a reconciliation of the $0.09 decrease in earnings per share in 2008, negative $0.53 from operations somewhat offset by $0.42 from lower tax expense and $0.02 from lower share count.

Stock based compensation which is not included in our non-GAAP net income was $5.1 million in Q408 compared to $4.1 million in Q308 and $4.9 million in Q407. For 2008 stock based compensation was $19.5 million essentially the same as in 2007.

Amortization of intangible assets which is not included in our non-GAAP net income was $1.6 million in Q4 and Q308 compared to $1.9 million in Q407. For 2008 amortization of intangible assets was $6.3 million compared to $3.5 million in 2007.

We also incurred a restructuring charge which is not included in our non-GAAP net income in Q408 of approximately $4 million primarily due to a reduction in headcount implemented in December. In Q308 we incurred a restructuring charge of approximately $1.9 million for a headcount reduction implemented in July. We did not have a restructuring charge in 2007.

Diluted shares outstanding for Q408 were 74.9 million, for Q308 75.3 million and Q407 85.2 million. For 2008 diluted shares outstanding were 76.7 million compared to 87.4 million in 2007.

Moving to the balance sheet cash and investments as of December 31, 2008 were $185 million compared to $200.5 million on September 30, 2008 and $249.7 on December 31, 2007. The decrease in cash and investments sequentially for the most part reflects final payment with the exception of ongoing support for the Sunplus intellectual property purchased in February, 2007.

Year over year the decrease in cash and investments is due to the use of cash for our stock repurchase programs of approximately $68 million in the first six months of 2008. Capital expenditures for Q408 were $0.2 million compared to $0.5 million for Q308 and $3.3 million for Q407.

For 2008 capital expenditures were $5.6 million versus $15.2 million in 2007. Net accounts receivable as of December 31, 2008 were $5.9 million which represents nine days of sales outstanding. This compares to 27 days of sales outstanding on September 30, 2008 and 22 days of sales outstanding on December 31, 2007. DSO as of December 31, 2008 was below our historical level due to a drop off in bookings and consequently shipments and billings during the quarter.

Net inventory as of December 31, 2008 was $12.8 million which represents approximately 7.6 turns on an annualized basis. This compares to approximately 7.6 turns on September 30, 2008 and 6.3 turns on December 31, 2007. Both our channel inventory and in house inventory were at long time historical lows as of December 31, 2008.

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 $63 million was allocated against our February, 2007 stock repurchase program that was completed in June, 2008 and $5 million was allocated against our current $100 million stock repurchase program. We did not repurchase any of our common stock during Q408.

This completes my summary of our Q08 and full year 2008 financial results. Next I would like to discuss our financial outlook. During the last six weeks we continue to experience a very slow bookings environment. We do not expect this situation to improve in a meaningful way until the second half of 2009 at the earliest.

Although visibility remains problematic we want to provide some insight into our financial performance estimates and how management is operating the company. The following is a summary of our financial estimates for Q109, revenue $40 to $45 million, gross margin 56% to 57%, GAAP operating expenses $38 to $39 million which includes stock based compensation expense and amortization of intangible assets of approximately $5 million and $2 million respectively. These expenses are not included in non-GAAP expenses.

Non-GAAP expenses $31 to $32 million, interest income $0.9 to $1 million, effective tax rate approximately 25%, diluted share outstanding 77 million, finally use of approximately $10 million in cash to fund a working capital requirement primarily related to accounts receivable returning to our target level for day sales outstanding of 30 days.

Now turning to the full year of 2009, during the second half of 2008 we took steps to lower our break-even point and given the uncertain economic environment, at this time our annual break-even revenue is approximately $200 million with our target gross margin of 56% to 57% in current operating expense infrastructure. With these financial parameters we anticipate being cash positive from operations.

Given the financial factors just described going forward in 2009 our focus will continue to be on the rollout of our new products.

We will now take your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of James Schneider – Goldman Sachs

James Schneider – Goldman Sachs

On the cash flow situation you talked about the $200 million break-even level for 2009 and expectations for being cash flow positive, given the Q1 guidance that would imply a pretty healthy snap back towards the end of the year or at least in Q2 do you think revenues will be up as far as you can see in Q2, and then in terms of your R&D spending clearly you want to make sure you don’t starve the organization so you can fund future growth, how are you thinking about the choices you’re making right there.

Hal Covert

We do have low visibility so I think in the second quarter revenue is not going to be dramatically higher then the first quarter and we are looking for some uptick in the back half of the year because our feeling is with the rollout of our new products and the traction that we have as soon as some of the channel inventory clears our and customers’ inventory clears out, there is going to be an opportunity for some improvement and we’ll just have to watch and see what happens.

In relation to R&D as I indicated we did take steps to lower our overall break-even point in the back half of 2008 and we feel with the activity that we have going on now for new products and other things that we’re trying to accomplish from a marketplace standpoint that we’re at an important level and a critical level and unless we see a dramatic deterioration in the situation from where we are at today we don’t plan on any more deep changes in the expenses.

James Schneider – Goldman Sachs

From an inventory perspective you talked about clearing out of retail and customer inventory what inning do you think we are in that process, third inning, eighth inning, as far as you can see right now.

Hal Covert

I think, we look at it from two aspects, first if you look at our in house inventory and our channel inventory as I mentioned its at very historical low levels. And going forward we think our customers have a very closely watched inventory in terms of their order input and so forth.

Steve Tirado

My observations are similar to Hal’s I’ve never seen the channel nor or own inventory be so lean and in fact we’ve been very cautious about doing build plans because what we think is going to happen as our new products go into production is we’re going to get very short lead times on requests for parts so we’re just carefully monitoring things. Our end customers are down anywhere from 20% to as high as 40% in terms of their end user demand and each of them is very carefully managing getting through their inventory.

However the pace of new technology doesn’t stop, there will still be a large number of TVs sold. We believe we’re going to gain market share for whatever volume there is coming out of 2009 largely on the back of the success of the port processor program we launched in 2008 and also there’s a revision of HDMI standard coming that’s giving us another product opportunity in addition to the other things that I mentioned earlier.

That’s my view on the situation, it’s a very lean inventory from the standpoint of our inventory and our channel inventory and with respect to the customer, I know that they are down and trying to work through their inventory before they order more.

James Schneider – Goldman Sachs

Can you give a sense of what kind of quantification of total revenue you can expect from the port processor products this year, just a rough range.

Steve Tirado

Our digital television, our CE business is roughly 70% of our total revenue and DTV is typically maybe about 40% of that. That’s a rough idea.

James Schneider – Goldman Sachs

So those port processors, DTV would be, the vast majority of that would be port processors this year.

Steve Tirado

No, so of the 70% I’m saying about 40% of that, let’s then half, maybe 25 to 30% of that is going to come out of DTV. The CE number is made up of a variety of things. Its made up of digital television parts as well as what we call home theater parts and the home theater segment even though its also been attacked actually isn’t doing as badly as the TV is and this is the combination of set top boxes, DVD players, a variety of things like that that we call source side products. So that’s a basic mix analysis that should be relevant to 2009.


Your next question comes from the line of Adam Benjamin – Jefferies & Company

Adam Benjamin – Jefferies & Company

When you preannounced back in December you talked about the PC business being the weakest segment followed by CE and then storage and I guess the results is actually opposite, could you talk about what drove the strength in PC when the environment was pretty weak for everyone else and then what went on in storage.

Steve Tirado

Its funny because they’re both PC related. In the case of storage we’re on a lot of motherboards out of [Gigabyte], [Assousetech], MSI etc. and they just had a lot channel inventory and are moving those boards out before we’re going to see an uptick or a re engagement if you will on the motherboard side and we also have some new parts coming into the motherboards.

On the other hand however on the HDMI TX front actually our revenue volume doubled Q 3 to Q4 which was a little surprising and there’s a new category something called the net book that is catching on where Intel doesn’t have an integrated HDMI capability so that’s providing some upside for us.

Overall as I said back in last quarter because Intel is now supporting out of the [inaudible] HDMI, DVI, and display port, we expect that to hurt the PC business in 2009.

Adam Benjamin – Jefferies & Company

When you look at your bookings for Q1 can you talk about what segments will be the strongest or the weakest and the inventory that you talked about in storage, does that continue through Q1.

Hal Covert

I say at this point we typically star the quarter with somewhere around 60 to 70% of our business for that quarter in hand, we’re a bit below those levels now, maybe closer to 50 to 60 and I think as we indicated we don’t expect to see a lot of activity on the PC side because we had a heavy fourth quarter and the uptake for this quarter is going to be back on the CE side primarily related to DTV.

Its very early in the quarter right now for us to add much more color then that.

Adam Benjamin – Jefferies & Company

When you talked about Q1 potentially being up and the reason that you were offsetting some of what you were seeing in the overall market was new products, can you talk about what those new products, whether they got pushed out or why, I understand things have gotten weaker, but you were looking for up, when everybody else was looking down 20 30% at the time so just a little color what changed there.

Hal Covert

I think there was a couple of things, first of all as we got into the middle of December we started to see pretty clearly that we weren’t going to be able to make our initial guidance for the quarter so when we gave the preannouncement guidance we thought we were giving a fairly safe number and we did come in at the high end of that as we indicated earlier.

But what did happen also that we didn’t expect was we had a much deeper drop off in bookings in the back half of December so that put us in the position where where we thought we were going to be in Q1 simply just didn’t materialize. We were surprised because of that after again taking a look at channel inventories and the other indicators which would have led us to believe that we were going to have stronger bookings then we did.

Adam Benjamin – Jefferies & Company

Last year you talked about based on design wins you talked CE being down, obviously you have a weak environment now but when you look at your CE design wins this year, if we didn’t have this weak environment would you be looking for a CE business down or how did that design cycle shake out.

Steve Tirado

Our success really depends on the success within the industry. I believe we will gain market share this year based on the new products in the TV space. I think that’s about all I can say about it at this point.


Your next question comes from the line of Ruben Roy – Pacific Crest Securities

Ruben Roy – Pacific Crest Securities

You said earlier that licensing revenue is going to be greater then 15% for your Q1 [inaudible] profitability level, you have an exact number that you are modeling for the $200 million profitability level and what are you looking at for licensing revenue as a percentage for 2009.

Hal Covert

When we did the modeling for the $200 million break-even point we assumed the same mix between product and license that we have historically had. So that’s what the break-even point is based on. We believe there is some opportunity on the license side.

Steve Tirado

We’ve seen a lot more stability in the licensing numbers then we have obviously on the product side and if you look at our performance this quarter its indicative of that. That’s largely because a fair amount of the licensing revenue now is coming out of already won designs where we’re getting paid royalty or it’s a function of the HDMI standards which tends to be fairly regular because that’s a function of how many companies are participating in the standard itself.

So when you look at the stability of the licensing business relative to the drop off in product we think that there’s a good shot that we’re going to be up above 15% when we come out of 2009. So that’s positive for us because its more margin dollars and obviously we’ll do everything we can with the new initiatives to engage with customers around licensing some of the new technology. At the start of a new technology cycle for us we tend to have a lot of interest in getting in on the licensing and I think because of the success of HDMI we’ll probably see an even, a little bit better opportunity earlier, then we did with that standard.

Ruben Roy – Pacific Crest Securities

Are you giving any guidance on where your licensing revenue will be for Q1?

Hal Covert

Other then we think for Q1 and probably Q2 its going to be in the historical levels, roughly around 15%.

Ruben Roy – Pacific Crest Securities

You mentioned the new HDMI revision coming up, you have an idea of the timeline when that will occur?

Steve Tirado

I think we talked about targeting sometime around the first quarter, it will be sometime between now and probably June just to be save. We’ve made a lot of progress in terms of getting the spec together and we’re all very committed to trying to get it out as soon as possible. The founders felt very strongly that we wanted to indicate in the year that we won the Emmy what our vision was going forward and I think it’s a pretty aggressive vision but an exciting one and really there’s nothing that is in the way of us wanting to get it out other then making sure all the I’s are dotted and the T’s are crossed because we have to make sure the compliance test specification etc. is all ready to go so that when we roll this out we’re ready to start testing.


Your next question comes from the line of Unspecified Analyst – Needham & Co.

Unspecified Analyst – Needham & Co.

Going back to the inventory situation in the channel as you know there was a big inventory correction in the fourth quarter related to consumer electronics and PCs how do you see that inventory correction, do you see it actually occurring into the first quarter and what visibility do you have in terms of demand relative to the inventory fall off.

Hal Covert

You have to look at it from two aspects, first of all our channel inventory with our distributors that eventually go to our end customers and that’s at a very historical low level. We have less visibility into our customers’ inventory at their site as well as the retail channel and our feeling is that our customers have kept their inventory fairly low.

Steve Tirado

I think the best we can say is that our channels are very thin with respect to inventory. They are kind of holding tight, preserving cash and I think the end user or retail environment, I think everyone is playing the same strategy and is going to try to work their inventories down as much as possible now.

Having said that for the TV guys, some of our early customers, and we’re already getting our early product order builds, they are starting to build 2009 television, some of the early guys and we’re hopeful that in the second half we’ll see more of that happening.

I think everybody is really in a very cautious mode and they’re not going to really start ordering very aggressively until they’re sure the end customer inventory is gone.

Unspecified Analyst – Needham & Co.

Do you think that end market demand inventory has been worked through given the overbuild in the fourth quarter or do still think there’s excess inventory on your customers that still has to work through given the fact that demand levels might have dropped 20 to 40% given your commentary.

Steve Tirado

Its just really hard to say. We are of course trying to get that kind of information and the retail environment has been very aggressive about promoting TVs and I think they’ve sold quite a few of them but until I see the order turnaround out of my channels, that’s my only and best indicator that this has [at least bottomed out], but we haven’t seen that yet.

Unspecified Analyst – Needham & Co.

When you preannounced back in December 19, which was fairly into the quarter you had really good visibility into your customer forecast for the Instaport and MHL design wins with some of your Tier 1 TV OEMs, can you just give an update in terms of where those design wins stand now, when do you think those will get into production with your Tier 1 TV OEMs, have they pushed it out further.

Steve Tirado

All the design wins are in tact, we’re in good shape. Instaport was an unmatched feature in the market this year. There was no competitive replacement if you will unless you just didn’t want to offer that capability to your customer. We did a lot of other things, there’s a lot of things we did within the design that were very attractive for the OEMs. So design sockets are fine, design wins are in place, I have one customer that’s starting production builds already this quarter but not big volumes and so the others will start to kick in in Q2.

Again a lot will depend on have they exhausted the supply of products out in the retail channel but the design wins are there and the architecture are set and now its just a question of how much are we going to get in terms of overall quantities and I’ve been saying this, I think that we will in the end have gained market share for whatever relative volume is out there.

Unspecified Analyst – Needham & Co.

If you could just walk through the competitive landscape, how do you see that moving forward in this quarter and how do you see that going into the next several quarters in 2009.

Steve Tirado

I think on the discrete front the competition has weakened. We face companies like ADI, NXP, to a limited extent TI, and some smaller players and I don’t believe they’ve been very successful and I think they’re a lot less successful in an environment like this where people tend to return to quality and to known suppliers and so for HDMI related technology we tend to be the preferred choice.

With respect to the integrated market pretty much every SSC on the planet has integrated HDMI, its not longer a relevant issue largely because in most of these TVs now they need four to five connections. They want the advanced feature set that we’re offering in terms of supporting all the audio, all the bells and whistles associated with the standard and then of course Instaport was a real defining feature this year.

We think going forward MHL will be very important. We think LiquidHD is going to be important so what’s happening is the idea of having a front end port processor in a television that stays current with all the latest bells and whistles at a reasonable price is a reasonable way to go. The SSC vendors are not able to get any incremental value for integrating the HDMI technology largely because they’re behind the technology curve with respect to that and to integrate switching four to five ports, etc. they may do it in the future but right now its just not the direction they’re going.

They are really focused on trying to get a differentiation on image quality and they’re struggling with that.

Unspecified Analyst – Needham & Co.

On the non-GAAP, GAAP OpEx guidance, the guidance is roughly the same level that you provided when you preannounced, but revenue has gone down nearly 30% when you were guiding revenue to be up sequentially are you looking at your OpEx levels differently if you continue to see a slowdown in your revenue level.

Hal Covert

We did two restructurings in effect in the back half of 2008 and we think now that we have our break-even point down to a fairly reasonable level and we’ll continue to watch it going forward. Our expenses will drop as we move through next year as a result of the restructuring that we put in place in December. We actually won’t feel the full benefit of that probably until Q2. So we’re going to be on kind of a downward bent as we roll through the year.


Your next question comes from the line of [Tye Lamb – Integral Capital Partners]

[Tye Lamb – Integral Capital Partners]

With regards to your comments on net books, are you saying that you’re not going to be designed into the net books so that all the strength from the PC that would come from net books this quarter won’t go forward.

Steve Tirado

I didn’t say anything about nine or ten inch, I said the net book category typically because of the Intel architecture is using doesn’t have a [inaudible] that supports HDMI integrated so that’s given us a discrete chip opportunity on those platforms.

[Tye Lamb – Integral Capital Partners]

But that will be integrated coming up as well right.

Steve Tirado

In the mainstream platforms and its actually not everything but the new chip sets out of Intel, the [Southbridge] has HSMI integrated and this is why we said the PC market is going to be pressured in terms of revenue for us. Now the net book is a positive because there’s still opportunity there and its kind of a hot little segment. We’ll see how it goes but we’re not forecasting any growth as a result overall growth because we have the downward pressure from the mainstream PCs now utilizing the Southbridge capability that Intel has.

[Tye Lamb – Integral Capital Partners]

You said that things look, for bookings are slow and you don’t expect it to pick up until the second half of 2009 at the earliest, that’s just seasonality, right.

Steve Tirado

Yes, normally our build cycle, we start in Q2 and then it really goes up in Q3 and that’s all the buildups for the Christmas season.

[Tye Lamb – Integral Capital Partners]

I’m here doing some of my checks and there’s some decent into China’s LTD TV market, less so from the Japanese and the Korean’s, will you be benefiting from that, those guys ordering TVs to accommodate the Chinese government’s subsidies of appliances in China’s rural area?

Steve Tirado

We may see something. China still doesn’t represent a large percentage of our total business but we are focusing actually in that area, in fact we’re moving a larger organization into China. We think there is some interesting opportunity there but I couldn’t tell you if that will be meaningful in 2009. We think the trend is though that China will be meaningful and we have to be there and we have to be working with those companies. And we do today, we do have business actually with all the major Chinese guys out there especially in the high end of their TVs.


There are no additional questions at this time; we would like to thank you all for your participation today. Have a great day.

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