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Silicon Image (NASDAQ:SIMG)

Q4 2009 Earnings Call

February 04, 2010 5:00 pm ET

Executives

Mariah Argetta - Investor Relations

Camillo Martino - CEO

Noland Granberry - VP, Finance and CFO

Analysts

Richard Shannon - Northland Securities

Christopher Longiaru - Sidoti & Company

Bob Sales - LMK Capital Management

Todd Cohen - MTC Advisers

Operator

Ladies and gentlemen, good day and welcome to the Silicon Image's fourth quarter and full year 2009 earnings conference call. Pleas e note that today's call and question-and-answer session are being recorded. At this time, I would like to turn the call over to Mariah Argetta for opening remarks. Please go ahead Ma'am.

Mariah Argetta

Thank you. Good afternoon and welcome to the Silicon Image's fourth quarter and fiscal year 2009 financial results conference call. I am Mariah Argetta from Silicon Image's Investor Relations. Joining me today is, Camillo Martino, the company's Chief Executive Officer and Noland Granberry, the company's Vice President of Finance and Chief Accounting Officer. Also on the call is Hal Covert, the company's President, who will be available during the Q&A session.

The agenda for today's call includes the discussion of the financial results and the company products and market strategy from Camillo. Noland will then provide a more in-depth discussion of the financial results and provide financial performance estimates for the first quarter of 2010. We will then open the call for Q&A.

Before I turn the call over to Camillo, 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 financial results and performance, our current and future products and technologies, the timing of new product introductions, average selling prices, design wins, market demand for our products and the anticipated impact of our operational infrastructure improvements on our business going forward.

Our 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 were 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 Form 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 fourth quarter and fiscal year 2009 financial results press release, which is available on the investor relations section of our website at siliconimage.com.

I will now turn the call over to Camillo.

Camillo Martino

Thank you, Mariah. Good afternoon everyone and thank you for participating in our conference call today. Having recently joined Silicon Image, as the company's CEO, I would like to begin by giving you a brief overview of my background and experience. I have spent more than 25 years in the high-tech industry in four different countries, including Hong Kong and Japan. And also at companies with a specific focus on the PC and CE industries. A particular relevance is my experience with semiconductor companies such as Zoran Corporation and National Semiconductor.

Earlier today, Silicon Image reported its financial results for the fourth quarter in line with guidance. For the quarter, the company reported revenue of $35.6 million and a non-GAAP loss of $0.07 per share and for the full year revenue of $150.6 million and a non-GAAP loss of $0.22 per share.

Before turning the call over to Noland to cover our financial results in more detail, I will discuss the following topics. First, I will share with you my impressions of Silicon Image before joining the company and then build upon my first 30 days, as the company's CEO. Second, I will review our product and market strategy.

Prior to joining Silicon Image, I was aware of the company's track record of developing and deploying leading edge connectivity technology. I was also familiar of the company's reputation for developing and working with industry leaders to deploy broad based industry standards that have been embraced by the world's largest consumer electronics companies.

Before accepting the CEO position with Silicon Image, I evaluated the company's product and market strategy as well as the strength of the senior management team. One of the primary goals during my evaluation process was to confirm that Silicon Image had the right skill set and resources in place to achieve the company's financial goals. I needed to see that the company had most of its design wins in hand or on track in order to achieve its revenue goals and confirm that Silicon Image was well underway with its product roadmap.

The results of my initial evaluation process were positive. Since joining the company, on January 6th, I have deliberately spent most of my time meeting with strategic customers, talking to our employees and working with the senior management team to further validate our product and market strategy and operating plan goals.

Although, I still have more work to do in this regard, my initial conclusions are as follows. With the introduction of the HDMI 1.4 specification by the HDMI Consortium, continued emphasis on our port processors with unique innovations like InstaPort and their mobile initiatives, I believe the company is on the front-end of a new product introduction cycle that will serve us well over the next 18 months to 24 months.

As we move forward, we will continue to drive industry standards as well as partner with our customers to introduce Silicon Image innovations. Next, I believe the company has an experienced management team and employee base with the necessary skills to achieve their goals. Going forward, I will continue to work with the team to enhance our capability, to drive execution in a timely and efficient manner, as we deliver our new products.

Finally, and most importantly, and after attending the recent consumer electronics show and meeting with some of our key customers, I am convinced that our customers value Silicon Image's technologies and products and that with a continuous stream of new product innovations, we will maintain our position as an important partner to the world's largest consumer electronics companies.

Now, I'd like to provide an overview of our product and market strategy. Our mission is to develop intra-operable products and technologies that deliver content, digital content, anywhere and on any device. The company has consistently been recognized, as an innovator of leading edge technology solutions, offering differentiating functionality at a competitive price.

In addition, our standards activities help create synergistic at eco systems. Our history tells us that when Silicon Image delivers its innovative products to our customers in a timely manner, customers have embraced our technology enabling the company to generate financial performance in line with or at the high-end of our peer group. I believe that with consistent focus on execution our product strategy is competitive and our business model can be financially rewarding.

Just as important, we are now poised today, to leverage our current and planned new product offerings across a large base of global Tier 1 customers. This opportunity will be our primary focus in 2010 and 2011. The following are our highlights of the enhancements that we've made in 2009 and are continuing to pursue to strengthen our business model.

Let's start with our product breadth. As the company enters 2010, we will begin shipping port processors and transmitters implementing the latest version of the HDMI standard version 1.4. The latest version of the HDMI specification offers, amongst other advancements, 3D over HDMI, ethernet connectivity over the HDMI cable and the Audio Return Channel to enable upstream audio connections via the HDMI cable.

Now, new 9389 port processor device offers five HDMI inputs and incorporates all of the mentioned HDMI version 1.4 features as well as Silicon Image's InstaPort technology, introduced in 2009. The 9389 port processor has just started shipping this quarter and will begin ramping in Q2. We believe that Silicon Image has an opportunity to generate increasing revenue from products implementing HDMI 1.4 features over the next 18 months to 24 months.

In order to continue to differentiate Silicon Image's port processor products, the company will expand the deployment of its InstaPort technology. InstaPort has been recognized as a must have feature in 2010 DTV models. As of January 2010, we have already shipped over 20 million InstaPort enable port processors into DTVs from leading manufacturers such as Samsung, Sharp and Toshiba. InstaPort is a prime example of a unique innovation that Silicon Image developed and introduced to the marketplace by working in conjunction with our customers.

Moving on to mobile now. On September 28th, 2009, the formation of the mobile high-definition interface working group was announced, consisting of Nokia, Samsung, Sony, Toshiba, and Silicon Image. The working group is making progress on its efforts to launch an industry consortium and release the first version of the specification. A particular importance is that the addressable mobile market includes smartphones, digital still cameras, and handy cams as well as other mobile devices and is much larger than our currently addressed DTV market.

Silicon Image is planning to introduce ICs that include this technology after the specification is released and will be in a position to start generating meaningful revenue from the mobile segment in 2011.

Turning to gross margin, with the revenue split of approximately 85% semiconductors, and 15% in licensing, we believe, we can continue to achieve our target gross margin of 55%. This goal takes in a consideration the innovative features and new products provide and the lower cost infrastructure put in place during 2009. With our current average selling price for our ICs, we believe, we are well positioned in the marketplace from a product features and functionality standpoint.

We have validated this view based on competitive analysis and direct customer feedback. Being in line with our targeted gross margin of 55% is a critical element of our long-term financial model.

Finally, I would like to address the challenge that SoC integration presents to the company. In our opinion, integration is and always will be a principal attribute of the semiconductor industry. However, as evidenced by our port processor strategy, we strongly believe a companionship focused on connectivity can successfully co-exist with an SoC.

We believe that our port processors are better suited than large DTV SoCs to deliver the latest HDMI innovations in a timely and cost effective manner. Silicon Image will continue to launch innovative port processor solutions that add value to our customers' products on a regular basis. The fact that we have port processor design wins in hand today with eight out of the top 10 DTV manufacturers support our belief that our port processor products will continue to be embraced by the world's largest DTV manufacturers, as the best solution for introducing differentiated connectivity features in their DTV products.

Before concluding my discussion on our product and market strategy, I would like to make a few comments about LiquidHD. LiquidHD technology forms a basis of connectivity vision that the company introduced in January of 2009. This vision encompasses how high-definition content will be displayed across networks in a seamless and simple manner.

Going forward, our focus will be on working with our customers to develop products that incorporate components of our LiquidHD technology for the DTV, home theater, mobile and PC markets that we address. We expect that products incorporating our LiquidHD technology will start generating meaningful revenue in 2012.

At the recent consumer electronics show and shortly thereafter, I had the opportunity to meet with members of the investment community. During the next several months, we plan to arrange face-to-face meetings with many of you in the investment community to address questions about our product and market strategy and financial goals discussed today. I look forward to meeting you then.

In summary, I would like to highlight the following four points. Firstly, Silicon Image expects top line revenue growth in 2010. Secondly, we have successfully lowered our breakeven point to the $160 million to $165 million range of the company. Thirdly, we are very committed to profitability. And finally, we have a strong balance sheet.

I will now turn the call over to Noland to provide a more detailed update of our financial results and our financial goals for Q1 of 2010.

Noland Granberry

Thanks, Camillo. Good afternoon. I would like to cover two topics, highlights of our financial results for Q4 '09 and the full year 2009 and our financial performance estimates for Q1 2010. Unless otherwise indicated, gross margin, expenses, and earning related items are reported on a non-GAAP basis which excludes stock based compensation expense, amortization of intangible assets, restructuring charges and other non-recurring expenses.

Our GAAP financial results and a reconciliation of our non-GAAP measures referenced in today's call are available on the investor relations page of our website, www.siliconimage.com. Revenue for Q4 '09 was $35.6 million compared to $37.2 million for Q3 '09, and $59.4 million for Q4 '08. Revenue for 2009 totaled to $150.6 million versus $274.4 million for 2008.

Product revenue totaled $27.9 million or 78% of total revenue for Q4 '09, versus $30.7 million or 83% of total revenue for Q3 '09 and $49.2 million or 83% of total revenue for Q4 '08. Licensed revenue for Q4 '09 was $7.7 million or 22% of total revenue, versus $6.4 million or 17% of total revenue for Q3 '09, and $10.2 million in Q4 '08, or 17% of total revenue.

Our average selling price for product sales was $1.49 per unit during Q4 '09 and we're in line with our expectations. For 2009, product revenue totaled to $122.7 million versus $233.2 million for 2008. Licensed revenue for 2009 totaled $27.9 million versus $41.2 million for 2008. The decrease in revenue year-over-year was primarily due to our product transition, a shift in product mix within the DTV market as well as the impact of the global economic downturn.

Average selling price for 2009 was $1.52 per unit versus $2.02 per unit in 2008. The lower average selling price was the result of our shift in product mix to our port processor products. Product gross margin for Q4 '09 was 42.3%, as compared to 46.5% for Q3 '09 and 50.6% in Q4 '08.

During the quarter, our product gross margin was negatively impacted, as a result of unfavorable variances primarily associated with excess and absolute inventory amounting to approximately 4 points of margin. Our licensed gross margin was 92.4%, in Q4 '09, 97.6% in Q3 '09, and 98.8% in Q4 '08. The decrease in licensed gross margin was a result of higher mix of IP customization revenues during the quarter.

Our overall gross margin for Q4 '09 was 53.1% and was lower than our expected range of 54% to 55%, as a result of the excess and absolute charges previously mentioned. Excluding this charge, our gross margin would have been in line with our expectations. Gross margin was 55.3% for Q3 '09 and 58.9% for Q4'08.

For 2009, our product gross margin was 44.9%, versus 52.4% in 2008. Our licensed gross margin was 95.7% for 2009, versus 97.1% for 2008. Overall, gross margin was 54.3% for 2009, as compared to 59.1% for 2008. Our overall margins were negatively impacted by the charges associated with excess and absolute inventory, and excluding these charges, our overall gross margins for the year would have been at our expected levels.

Operating expenses for Q4 '09 were $24 million compared to $25.7 million in Q3 '09, and $32.4 million in Q4 '08. Operating expenses for 2009 and 2008 were $104.1 million and $135.8 million respectively. The decline in our operating expenses was primarily a result of our restructuring programs and tight expense controls. As previously announced, as of December 31, 2009, the company closed its sites in Germany. Our headcount as of December 31, 2009, was 405 after taking into the account the 121 employees affected by the Germany site closure.

Headcount, as of September 30th, 2009, and December 31, 2008 was 560 and 610 respectively. The full financial impact from the reduced headcount related to the closure of the Germany sites will be realized beginning in 2010. Our operating loss for Q4 '09 was $5.1 million compared to an operating loss of $5.2 million in Q3 '09 and an operating profit of $2.7 million for Q4 '08.

On a year-over-year basis, the lower operating results were primarily driven by the decline in revenues as well as the decrease in gross margin, as a percentage of revenue, both of which were partially offset by lower operating expenses. For the year, our operating loss totaled $22.3 million, as compared to an operating profit of $23.6 million for 2008.

The decrease in our operating profit for the year was primarily the result of lower revenue and gross margin, as a percentage of revenue, offset in part by lower operating expenses. For Q4 '09, other income was $0.8 million compared to $0.7 million for Q3 '09, and $1.1 million for Q4 '08.

For the year, other income totaled $3 million, as compared to $6.2 million for 2008. Other income for the quarter and for the full year decreased due to lower interest income, as a result of lower cash balances. During the fourth quarter, the company recorded the following previously announced non-recurring charges and allowances. One, approximately $28 million for the write-off of its investments in intellectual property acquired in 2007.

Two, approximately 15 million restructuring charge associated with the closure of its two German R&D sites. And three, approximately $14 million in net tax adjustments including the recording of a valuation allowance against our deferred tax assets. These charges and the tax adjustments are excluded from our non-GAAP results. Also excluded from our non-GAAP results is stock based compensation which totaled 2.7 million for Q4 '09 compared to 7.6 million in Q3 '09 and 5.1 million in Q4 '08.

For Q4 '09, our non-GAAP net loss was $5 million or $0.07 per share, versus a non-GAAP net loss for Q3 '09 of $3.4 million or $0.04 per share. For Q4 '08, our non-GAAP net income was $15.7 million or $0.21 per diluted share. For the year, our non-GAAP net loss totaled $16.3 million, or $0.22 per share, as compared to non-GAAP net income of $41.7 million for 2008, or $0.54 per diluted share.

On a GAAP basis, net loss was $64.6 million or $0.85 per share for Q4 '09, as compared to our Q3 '09 net loss of $15.5 million, or $0.21 per share and our GAAP net income for Q4 '08 of $5 million or $0.07 per diluted share.

Our GAAP net loss totaled $126.8 million or $1.69 per share, as compared to GAAP net income of $10.1 million or $0.13 per diluted share for 2008. Included in the $126.8 million loss is approximately $110 million of charges and allowances that relate to the following. Approximately $19 million for the write-off of goodwill, approximately $28 million to write-off intangible assets, $16 million for net tax adjustments including the valuation allowances against the company's deferred tax assets. Approximately $19 million related to the shutdown of the Germany sites, $18 million for stock based compensation, approximately $4 million for other restructuring charges, approximately $4 million for amortization of intangibles and $2 million for other fees.

These charges and the tax adjustments are excluded from our non-GAAP results. Weighted-average shares outstanding for Q4 '09 and Q3 '09 were 75.4 million and 75 million respectively. Diluted weighted-average shares outstanding for Q4 '08 was 74.9 million. Weighted-average shares for 2009 and 2008 were 74.9 million and 76.7 million, respectively.

Moving to the balance sheet, cash and investments, as of December 31, 2009 was $150.6 million versus $153.2 million at September 30th, 2009 and $185 million at December 31, 2008. For the year, the company used a total of $27.3 million to fund operations and capital expenditures and $7.1 million for restructuring costs.

For Q4, our accounts receivable totaled $21.7 million or 55 days sales outstanding, or DSO, and was in line with our expectations. Days sales outstanding for Q3 '09 and Q4 '08 was 59 days and 9 days respectively. The lower DSO in Q4 '08 was a result of the drop-off in shipments and billings during the last part of the quarter, as a result of the global economic downturn. Our target DSO, based on customers paying within specified payment terms is approximately 55 days.

Net inventory as of December 31, '09 was $7.7 million which represents 8.3 turns on an annualized basis. This compares to 5.2 turns at September 30th, 2009 and 7.6 turns at December 31, 2008.

Capital expenditures for Q4 '09 were $1.9 million compared to $0.6 million for Q3 '09 and $0.2 million for Q4 '08. For 2009, capital expenditures totaled $4.9 million versus $5.6 million for 2008. We did not repurchase any of our common stock during Q4, 2009. This completes my summary of our financial results.

Next, I would like to discuss our Q1 2010 financial outlook. As indicated by Camillo in his comments, the company is on the front-end of our now product introduction cycle, we believe new products are expected to gain meaningful traction in the second quarter this year and as a result, the first quarter is still subject to the product transition. Also, the first quarter is impacted to some degree by typical consumer electronics seasonality, and as such, we anticipate that revenue for Q1, 2010 will be lower sequentially.

The following is our financial estimates for Q1 2010. Revenue, $30 million to $32 million, gross margin 54% to 55%, GAAP operating expenses, approximately $26 million, non-GAAP operating expenses approximately $23 million, interest income approximately $0.7 million, our diluted shares outstanding, approximately 75 million, from a tax rate standpoint with the establishment of a valuation allowance in Q4 '09, the company's GAAP tax provision in Q1 2010 will consist primarily of foreign income taxes and foreign withholding taxes, which we anticipate will be approximately 2% of revenue.

Finally from a cash standpoint, as previously mentioned, we expect to payout approximately $18 million for restructuring charges during the first half of 2010. However, we anticipate receiving a similar amount in the form of a tax refund within the same period. The timing of the payment and receipt of the refund may not coincide, however, we would expect that two amounts will offset each other on a net basis over the first half of the year.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Let's first go to Needham & Company.

Unidentified Analyst

Thank you. Just wanted to know what the revenue breakout is in the fourth quarter among the consumer electronics, PC storage segments in the past you typically provide a little bit of color there?

Noland Granberry

So, this is Noland. The breakout similar to past quarters, CE was about 84%, and PC and storage was about 7% and 6% respectively.

Unidentified Analyst

Okay. Now, going into, in the first quarter you mentioned that you're not going to get meaningful traction yet of these new products. What has been kind of the feedback from the, I guess, the TV OEMs win with the adoption of 1.4, are they committed to moving those TVs as 1.4 in the second quarter, which gives you such confidence for that to happen in the second quarter?

Camillo Martino

Sure. You know, this is Camillo. So, we anticipate starting to ramp in Q2, as I mentioned in the previous commentary. Our customers to-date are encouraged in that they feel that the part meets their requirements, and so we will see, you know, you will see consistent growth throughout the quarter-on-quarter.

Unidentified Analyst

Okay. So, are you still committing to your goals, last quarter when you provided 2010 preliminary outlook in which you said that you expect to breakeven on a non-GAAP basis in the second quarter of '010, be profitable on a non-GAAP basis in the third quarter and be profitable for the full year on a non-GAAP basis in 2010, are you still sticking to those goals?

Camillo Martino

So, as we indicated, right now we are giving quarterly guidance. The management team in conjunction with the Board, have agreed to give quarterly guidance. However, I mentioned earlier in my prepared remarks that I mentioned a few points that you can obviously interpret. One, Silicon Image expects to generate top line revenue growth in 2010. That's the first comment. Secondly, we have successfully lowered our breakeven point to the $160 million to $165 million revenue range. And three, we are very committed to profitability. So I think, we believe very strongly in those three points. We have a very strong balance sheet, of course, as well, but the company, today, the company policy is to give quarterly guidance.

Unidentified Analyst

Right. Well, I mean, that's a deviation from what you've done in the past. Based on that 160 to 165 range, it implies a pretty big sequential ramp from March to June and June to September. And usually the TV market doesn't grow 15%, 20% in June or in September. So, I'm just wondering how confident, to even hit that 160 for the year?

Camillo Martino

Well, at this point, we haven't suggested here that we're going to hit $160 million to $165 million. What we're saying is, we have successfully lowered our breakeven point to that range. Now, I can tell you from our product point of view, we have a significant number of design wins and we see the traction already for products that are ramping in Q2. The new products are being well accepted, they're being prepared right now by our customers, but naturally we can't announce who those customers are until they've actually started shipping product.

But we do see a healthy up-tick. We do understand the implication obviously Q2, Q3, Q4, in order to hit that number, the 160 number, of course, there will be a substantial revenue expectation. Naturally we understand that.

Unidentified Analyst

Okay. Then on the mobile side, you said, you're planning to introduce your MHL products after the release of the first specification. When is that going to occur in terms of when that relies is going to happen? And I guess, I mean, any feedback in terms of what the adoption would be on MHL?

Camillo Martino

Sure. Firstly, MHL, we expect it to be a very significant addressable market opportunity for us, as a company. In total, this year alone, if you add up the potential market for products such as smartphones, such as handy cams, camcorders, et cetera, et cetera, the addressable market for an MHL type product is roughly just over 300 million units in 2010 and we expect that addressable market to increase 15% to 20% year-on-year.

Now, the working group announced back in September 28th, 2009, the announcement was made by the working group that they're working together to put together the formation of a consortium as well as a specification as well. Now, we would anticipate that the working group would be in a position to do both things, both things meaning both the formation of a consortium and also the release of an MHL technically compliant specification within the first half of 2010.

So, based on that, we expect to launch products towards the end of 2010 with meaningful revenue in 2011. Now, one thing, I wanted to point out, the 2000 in revenue plan is not based primarily on 1.4. In fact, it's not even really heavily dependent on 1.4 at all. We have a very substantial and significant business with the products which are already shipping, and so the 1.4 HDMI product portfolio is incremental to that.

Unidentified Analyst

Alright. Thank you very much.

Camillo Martino

Okay.

Operator

Our next question will come from Richard Shannon with Northland Securities.

Richard Shannon - Northland Securities

Hi guys, how are you?

Camillo Martino

Good, Richard.

Richard Shannon - Northland Securities

Good. I guess, my first question is kind of a look at the [v1.4] design wins with your DTV customers here. I wonder, if you can characterize them in a slightly different way, kind of curious if you were, what screens size down to which you're going to be enabled on, and you said you were in 8 of the top 10, kind of curious why you weren't in 2 of those?

Camillo Martino

Sure. I'll try and address as many of those as I can. So, I think, if you look historically, the company has been launching these products and selling these products into the high-end TV market. I think, one of the transitions that's occurring over the current fiscal year is, you're going to start to see Silicon Image products in mid range type TVs as well. That is what is increasing the overall addressable market for Silicon Image. So, that's one. Now, we don't expect that any of these designs based on the relationships that we have with our customers, are dual sourced. They're all single-sourced and we have very, very close relationship with each of those customers.

In fact, I joined on the 6th of January, today's the 5th of February but I already spent nearly 12 days in Asia just doing that, spending the time, the necessary time with our key Tier 1 customer base. So, I'm pretty confident on that point. And but naturally, it's their responsibility to not take that relationship for granted. We're going to have to continue to deliver value on an ongoing basis, as you would expect us to do. So, we're confident about that.

Richard Shannon - Northland Securities

Any idea what percentage of the DTV unit TAM your customers are covering, as they transition here, is it like 40% or 60% or any guess on the unit TAM you're covering?

Camillo Martino

I would say it's in the 40%-plus range, potentially 50%. I mean, every customer would be a little bit different in the way they position their products and portfolios, but I would say in the 40% or 50% range.

Richard Shannon - Northland Securities

Okay, fair enough. Second question, follow-up on the discussion on MHL from the last questions. It sounds like a slightly different timeframe by which you expect the MHL consortium to be announced, it sounds like you're saying first half of 2010, versus early in 2010. Did I capture that correctly?

Camillo Martino

Well, you know what, I can say there are five companies in the working group, all relatively large companies, except for Silicon Image, of course. You have Nokia, Toshiba and Sony, Samsung, for example. So there's obviously, there's always complexity from time-to-time relative to legal and technical issues. But the group is working very hard, I mean, the group is working very hard to announce the formation of a consortium and technical specification, as early as possible. But I mean, this is the responsibility of the working group, I mean, I don't think it would be responsible of Silicon Image at this point in time to predict an exact date.

So, what we're saying is, we anticipate it to be in the first half. It could be mid-way through the first half at which point that's even better for all the companies out there who plan to adopt this specification. But we will be launching, based on this schedule, we'll be launching product into the market in the latter half of this year with meaningful revenues starting to be generated in 2011.

Richard Shannon - Northland Securities

These complexities you refer to, would those be a technical nature or just working with large companies and hammering out legal ease sorts of things?

Camillo Martino

Yeah, I think, it's more the latter. I would anticipate, I'm not involved in every day-to-day activity, but that would be my sense at this point.

Richard Shannon - Northland Securities

Okay. Two last questions for me. Noland, on the numbers you were discussing for cash in the first quarter, I didn't get all the numbers, so I apologize for repeating this, but kind of curious of the expectations of cash flow in the first quarter, and how much of that component was from the restructuring charge you expect?

Noland Granberry

So, I think, as I mentioned, we anticipate paying out about $18 million related to the restructuring in the first half, and that's split between, you know, half between Q1 and Q2, but we are also expecting a refund. So, our cash balance, as we exit this year was about 150 million and with the major junk outlay for this restructuring being covered by the tax refund, we expect to be somewhat cash flow neutral, as we go forward.

Richard Shannon - Northland Securities

Okay. So, excluding the restructuring and the tax benefit, whatever quarter they're going to come in, what's your cash flow expectations for the first quarter then?

Noland Granberry

For the first quarter, again, it would depend on the timing. Even though, I tried to allude to is that if the refund would come in early, we'll be much higher on the cash, I think, at the end of the quarter, based on the payment. If the refund comes in later, we actually would be lower. But our anticipation is still be around the $150 million.

Camillo Martino

Essentially, a neutral, if the timing works out well, it's essentially a neutral.

Richard Shannon - Northland Securities

Okay. And last question for me, Camillo, kind of a big picture question, obviously, you've been here for a month, you're familiar with the consumer electronics industry, you have evoked your kind of a viewpoint for the next one to two years here. The good things are going for Silicon Image. What do you think are the, what kind of obstacles and challenges do you see for the company this year?

Camillo Martino

Well, there's always short-term and long-term challenges, I can tell you very honestly, I think, the product roadmap that we have in front of us is very, very compelling that I can tell you very honestly. Our challenge, of course, it would be any challenge to any company is to make sure that you relentlessly continue to deliver the value to their customers to their expectation. And so that would be typical of any company, but some companies have a bigger problem. They don't know what the roadmap is. They're guessing.

So, what I'm saying, it's a little bit different here. I'm very comfortable with the roadmap we have laid out here for the next couple years, and over the next coming months, I'm going to be working very closely with the management team and the Board to ensure that we continue to have that growth, not just for the next two years, two to three years, but three years and beyond. And that's going to require some more thinking of course, and some serious decision making, but right now, short-term characterized the next two years, very comfortable with the roadmap, the challenges there just to continue to deliver on the products, the products with the value that our customers expect.

Richard Shannon - Northland Securities

Okay, great. Thank you, Camillo, and I look forward to working with you.

Camillo Martino

Absolutely. We look forward to it as well.

Operator

Let's go to Christopher Longiaru with Sidoti & Company.

Christopher Longiaru - Sidoti & Company

Can you hear me?

Camillo Martino

Yes.

Christopher Longiaru - Sidoti & Company

Okay. I guess my again was first, how much more restructuring charges do you see going forward and when do you think the restructuring effort will be done? And then, I have just a couple more.

Noland Granberry

Okay. So, this is Noland. We believe and Camillo indicated on his prepared remarks that we, through 2009, we've actually completed the majority or all of the restructuring, major restructuring activity that we expect to undertake at this point. So, as we look out, there's nothing significant at this point that we have in the plans. One thing to note is that as we continue to do is look at how we can continue to be efficient and effective. But at this time, there's no specific plans for any major additional restructuring.

Christopher Longiaru - Sidoti & Company

Okay. And the other question that I had was kind of just how you see the product ramps going. Now, let's, just, I mean, HDMI 1.4 started to ship obviously this quarter. How do you see that ramping? And also, let's say that mobile high-definition link, let's take the most conservative approach to it and say it's approved and starts by the second half. How do you see those two major parts of your business ramping from this point?

Camillo Martino

So, you know, we do expect, probably the first thing, I will say, again, is this year's plan is not heavily dependent on the 1.4 or the MHL. Yes, sure, we do anticipate some level of revenue, but the up-tick we're seeing today is really in the DTV port processor product portfolio that we have in place and shipping today. And remember, the shift that we talked about, the shift that our products migrating from the high-end down to the mid range as well.

So by definition, your TAM is expanding, your business is going to expand as well. When you're in 8 of the top 10 TV manufacturers, your business is going to expand. So, while we see 1.4 revenue starting to grow, and we see the MHL revenue start to kick in potentially towards the end of the year, it's not really a very large component of the overall plan. But we do expect to see consistent quarter-on-quarter growth. But again, the main up-tick or the basic plan we have today is the whole family of InstaPort processors being deployed in both the mid range and high-end TV.

Christopher Longiaru - Sidoti & Company

Okay. That's very helpful, thank you.

Operator

(Operator Instructions) And let's go to Bob Sales with LMK Capital Management.

Bob Sales - LMK Capital Management

Hi. Camillo, the cycle for Silicon Image historically has been that the company, the HDMI cycle turns to 1.X, to 1.X plus one, and Silicon Image gets in some discrete sockets for a period of time, and then that momentum fades. And I want to try and understand when you look out to 2011 in particular, what's different this time that will allow you to escape that cycle of being designed out and then ultimately the SoCs having the functionality that the big OEMs need?

Camillo Martino

Sure, that's an excellent question. You know, I think one of the, historically, I would say Silicon Image has heavily relied on the launch of their products to a particular release of a standard, like you know, an HDMI say 1.2, or 1.3, or 1.X shall we say at this point in time, as you referred to. And I think, one of the biggest differences you're seeing right now is the addition of some new innovations, some proprietary innovations in addition to the spec.

So, if we look at the bulk of the business for this calendar year, it's 1.3. It's not 1.4. So, you're probably wondering, how can that be if you're ramping 1.4. Well, it's the InstaPort feature. Everybody wants the InstaPort feature. So, I think, one of the things you're starting to see differently is the launch of a family of products within say, 1.3 specification or within a 1.X specification. So that gives you significantly greater business opportunity for the company. That's a big difference. So, we don't anticipate being caught behind because there's multiple products within each of these standards and specifications.

Bob Sales - LMK Capital Management

And what, it strikes me, I find it very positive that you're getting a ramp on 1.3 starting in Q2 as opposed to 1.4. It supports what you're suggesting. Now, my question is this. What has happened to create the ground swell behind InstaPort where you have what appears to be a pretty meaningful adaption of that feature by the mid, in that mid-to-high-end TVs?

Camillo Martino

Okay. So first of all, maybe perhaps one clarification I'll mention here. I wouldn't say the grand swell is around 1.3. The ground swell is around InstaPort. It just so happens that this particular generation that's going to generate the majority of our business this year is based on 1.3. But the InstaPort…

Bob Sales - LMK Capital Management

Camillo, that is what I meant, I meant the ground as well around InstaPort.

Camillo Martino

Okay. So, okay, so that's good, on that point.

Bob Sales - LMK Capital Management

So, what is that has allowed you to develop that momentum in InstaPort? It seems like these are…

Camillo Martino

Okay. So, I think in order to develop features like this, you need to have very close working relationships and collaborations with your customers. Clearly without that, it's impossible for any company to define these sorts of features. But if you look at InstaPort very specifically, this has very compelling features for the consumer, and in addition, as a by product, it has significant advantages to the manufacturer himself.

Specifically, if you have five, just hypothetically, five HDMI ports, historically it would take 5 to 7 seconds to switch between each HDMI input, I mean, that's quite frustrating for the consumer with a remote control in his hand. So, clearly there's a tremendous advantage on the consumer side.

Now, let's go to the other side. Let's look at the manufacturer. Today, the manufacturer, he has to test every one of these ports on the production line and of course he needs to spend that same 5 to 7 seconds for every single port. So, when you have millions of these that need to be tested, you can see considerable amount of time being wasted just on this point.

So, now that we're approaching the one second purport barrier, it offers tremendous value. Not just for the manufacturer, but also the consumer, but in short, the key point in how we can position ourselves in such a way, it's primarily based on you need to have very close working relationships with customers and obviously you need to have the key technology and people to make it happen. So we have both.

Bob Sales - LMK Capital Management

And why won't the SoC players come up with a competitive feature that accomplishes the instant switching functionality in the SoC rather than having a discrete input processor?

Camillo Martino

Well, you know, they could. The question is, they need to decide which battle they want to pick. And so, I don't want you to think that InstaPort is the only weapon in our, we have here. So, our challenge, and our opportunity is to continue to deliver this value on a regular basis quickly, much faster than SoC vendor can turn it around. That's the point. If we can continue to deliver that value and that is the strategy, we believe, as I mentioned earlier, that we have a companionship, a dependable socket that will sit there side-by-side. And as a company, we're going to continue to innovate and continue to launch these new innovations on a regular basis.

Bob Sales - LMK Capital Management

Okay. And the same thinking on the MHL development, by the time MHL gets into production in 2011 and that, why won't the bigger OEM handset manufacturers simply have talked at the base band guys enough that discrete MHL transmitter is it necessary, and in particularly the cost of additional discrete part certainly isn't desirable by the OEMs and you guys don’t have the opportunity to get in there and get big unit share?

Camillo Martino

There's a number of reasons, but the first thing I will say to you is, the strategy that I just articulated on the DTV side or the opportunity for us to continue to innovate on a regular basis, that same opportunity exists in a cell phone, okay? That's a first comment. Second comment is, in a cell phone, don't think that the SOC vendors can launch new products every three to six months. I mean, they have a lifecycle of their own. In fact, I would say in some respects they're much slower and they take much longer time to launch a new product than the CE industry does. So, I think, when you consider those two points, we believe that we have an evolution of products that we can launch around the MHL standard over many years to come.

Operator

Let's go to Todd Cohen with MTC Advisers.

Todd Cohen - MTC Advisers

I had just a couple of questions. Nolan, in the discussion about cash flow for the first quarter, I wasn't exactly clear on the answer. Did you say that irrespective of the restructuring charges that you would be pretty much cash flow neutral in the first quarter?

Noland Granberry

Before I comment on that, I actually wanted to point out that I had misread a number in my prepared remarks. I actually had said, for operating expenses for 2008 was 135.8 million but the number should have been 138.5 million. So I wanted to clarify that. And getting to your question, Todd, as far as the cash for Q1, as I've mentioned, we think it really will be a timing impact. If we are actually are able to do what we can to get this refund in as soon as possible, and hopefully we are actually able to get it in Q1, that actually will be a positive offset for the severance payments that we're actually paying out related to the restructuring within Q1.

Todd Cohen - MTC Advisers

So are those severance payments coming out of just your SG&A?

Noland Granberry

No, actually, those are all accrued as a part of the December 31 year-end and that was the $19 million that I mentioned, were expenses for 2009 related to the Germany closure. So those have already been accounted for, in our expenses and now it's a function of timing for which we've paid. And we've actually had paid some at the end of the quarter but we looked, the balance of those payments are due to be paid out over the next six months, there are big chunk of cash so the receipt of the refund really will drive.

Todd Cohen - MTC Advisers

So you're saying that that's already been expensed, so that money is already gone out?

Noland Granberry

The expense has already been recorded, yes, the actual cash flow will come out in the remaining to be paid, which is about $18 million, will be paid in Q1 and Q2.

Todd Cohen - MTC Advisers

Okay. So if that were $9 million in the first quarter, you would hope to get 9 million in refund?

Noland Granberry

Well, the refund is around the full amount that I've mentioned, and if we actually are able to get the refund, we'll get that entirely, it would be over the peak period.

Todd Cohen - MTC Advisers

But my point is, irrespective of this unusual expense, the severance expense, and the collection of the tax, irrespective of that, you're saying your cash flow are neutral?

Noland Granberry

Our goal for Q1 is the cash neutral, yes.

Todd Cohen - MTC Advisers

So irrespective of this, the severance and the tax credit?

Noland Granberry

Yes.

Todd Cohen - MTC Advisers

Then the other questions I had, Camillo, we are basically kind of tied around some of your earlier discussion in the call, you basically highlighted that, prior to taking this job, and I don't know when you started that process, but that you were basically able to confirm kind of the direction and guidance the company had laid out. I' m not sure if I heard that right, but that basically through the design wins that the company had in hand, and of course with the right people and resources that you seemed to be confident and that the company would be able to get to kind of the goals that you just laid out. Which is, a top-line that is greater than the top-line that was just for the year that was just completed.

Camillo Martino

Yes. I think the short answer to that question is yes, I mean, I used a variety of different channels and confidential discussions, in order to confirm as best as I could. Obviously, no process like that is perfect and absolute until the end of the year is concluded but to the best of ability, it gave me the confidence that this was that we had a good solid plan here.

Todd Cohen - MTC Advisers

Just so clarify going back to an earlier question, I mean, obviously there's got to be a meaningful ramp, first, second, third, fourth quarter to make that happen.

Camillo Martino

Yes, that is correct. And we'll start to see that ramp and as we mentioned, the new product launches will be start to kicking in, in Q2. We're not seeing that in Q1, and that's why you're seeing a slightly larger than what is a seasonal decline in Q1. But in Q2, we start to see the new product launch to really kick-in, and obviously we anticipate a pretty healthy second half.

Todd Cohen - MTC Advisers

And then you've referenced obviously InstaPort and it's a great feature. Is that incorporated in the 1.3 as well?

Camillo Martino

In the product, yes, it's not in the specification.

Todd Cohen - MTC Advisers

So all of the InstaPorts that you've shipped were incorporated in 1.3?

Camillo Martino

To-date, the InstaPort products that we have shipped have all been based on a 1.3 specification, yes, that is correct. And moving forward, say like 1.4 will also incorporate the InstaPort features, plus some other features as well.

Todd Cohen - MTC Advisers

My last question is related to LiquidHD, I don't completely understand that business. I did see a kind of a demo at CES and it looked interesting, it looked like something a lot of other folks out there are trying to do, in getting media to different devices. But you indicated you felt this would be a meaningful contributor, I mean, in 2012. So my question is, what does meaningful mean? And what kind of resources today, as it relates to dollars and people are kind of focused on this effort that is obviously going to produce nothing here for a couple years, and that's the question.

Camillo Martino

Okay. So the LiquidHD strategy, I would say as in any responsible company, you would have the majority of your resources focused on revenue generating products, the next 12 months, 18 months and two years. Beyond that, also a responsible company should have a certain proportion, and obviously, I don't think it's appropriate to disclose at this point-in-time, what that amount is. But we obviously want to have a certain portion of the R&D on futures, on futures meaning 2012, but just to put everybody at ease here, because it sounded like there was a little bit of concern, the vast majority of our resources today are all focused on generating revenue in 2010 and 2011.

Operator

And that does appear that's all the time we have for questions at this time. I'd like to turn the presentation back to Mr. Martino for any additional or closing remark.

Camillo Martino

Okay. Thank you. I just wanted to thank everyone for attending our call today and we look forward to meeting with you in the coming months ahead. Thank you. Good-bye.

Operator

Once again this concludes our conference call for today. Thank you for your participation.

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