Silicon Image's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.29.14 | About: Silicon Image, (SIMG)

Silicon Image, Inc.(NASDAQ:SIMG)

Q1 2014 Earnings Conference Call

April 29, 2014 5:00 PM ET

Executives

Alex Chervet – Senior Director-Investor Relations

Camillo Martino – Chief Executive Officer

Noland Granberry – Chief Financial Officer

Analysts

Charlie Anderson – Dougherty and Company

Tom Sepenzis – Northland Capital Markets

Rajvindra Gill – Needham & Company

Jonathan Tanwanteng – CJS Securities, Inc.

Jorge Rivas – Craig-Hallum Capital Group

Dan Scovel – Edison Investment Research

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Silicon Image First Quarter Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, April 29, 2014.

I’d now like to turn the conference over to our host Mr. Alex Chervet. Please go ahead, sir?

Alex Chervet

Thank you. Good afternoon, everyone, and welcome to Silicon Image’s first quarter 2014’s financial results conference call. I’m Alex Chervet, the Senior Director of Investor Relations at Silicon Image.

Joining me today from our headquarters in Sunnyvale, California is Camillo Martino, the company’s Chief Executive Officer; and Noland Granberry, the Company’s Chief Financial Officer. The agenda for today’s call includes a discussion of our Q1 financial results, and a short update on products and markets from Camillo. Noland will then provide a more in-depth discussion of our financial results and provide a financial performance estimate for the second quarter of 2014.

With that, I’d like to turn the call over to Camillo.

Camillo Martino

Thanks, Alex. Good afternoon, everyone, and thank you for joining our first quarter 2014 earnings call. We are off to a solid start, and the Company’s first quarter results indicate that we are on track towards achieving this year’s goals. Revenue for the first quarter came in at $61.6 million, which is at a high end of our guidance, and non-GAAP EPS for Q1 was $0.05 per diluted share.

On today’s call, I’ll give you a brief overview of the Company’s activities in the quarter, and talk about three major key initiatives, and then turn the call over to Noland who will go through the numbers in more detail, and provide a financial outlook for Q2.

I’m pleased with our results this quarter, and progress we have made on our key initiatives. During the quarter, the industry experienced consolidation and saw organizational changes at a number of companies including a symbol for their key customers including Sony, Toshiba and Nokia.

As the industry consolidates, we believe that after many years of innovation within the industry, we are well-positioned for significant relationships and a strong recognition of our technology and brand. Our strategy of driving down system level costs and providing features that go beyond the standard continue to make us the best choice for both connectivity needs.

Our first key initiative in 2014 is to drive MHL into big range phones by expanding our presence in China, India and emerging markets. We have increased our sales presence in these geographies and are forming new strategic partnerships in addition to MediaTek partnership we announced at the Mobile World Congress.

Our second key initiative this year is to expand our 60 gigahertz opportunity and drive a return on investment from that strategic investment. We believe that we have the industry’s most advanced 60 gigahertz technology, and we are also working to apply that technology to markets and applications beyond WirelessHD as the world starts to take advantage of available 60 gigahertz spectrum over the next few years.

While we are focused on our immediate 60 gigahertz WirelessHD goals, we are even more excited about the longer term prospects and business opportunities for 60 gigahertz technology in general.

We have met with many customers and potential customers that have asked us to consider applying how 60 gigahertz technology to emerging applications, making it clear that there are many areas where 60 gigahertz can provide a solution that cannot be achieved with other wireless technologies.

We see opportunities in other future markets such as wireless backhaul and we are also positioning ourselves for data applications based on the WiGig standard as those markets materialized.

Although it would take time to fully realize the benefits 60 gigahertz technology, we strongly believe that the adoption of 60 gigahertz technology is inevitable, and I believe we are one of the best-positioned companies to benefit from this.

Finally, our third initiative is to maintain our focus on operating expenses, and I’m pleased to report that our Q1 2014 expenses were lower than last quarter, and also lower than Q1 of last year.

Moving on from our key initiatives for 2014, let’s review our CE business first. Our CE business started the year on a strong note. Our Tier 1 TV customers have already begun shipping 4K Ultra HD products with our HDMI 2.0 and MHL 3.0 ICs. These ICs are the world’s first HDMI 2.0 and MHL 3.0 ICs for TVs and audio/video receivers that supports the HDCP 2.2, which is the industry’s updated link protection for 4K Ultra HD. We continue to be the leading provider of ICs for HDMI 2.0 with HDCP 2.2 as well as MHL 3.0 ICs which also supports HDCP 2.2.

Our CE business delivered $18.3 million in revenue for the quarter, keeping us on track for the 15% CE revenue growth we forecasted in our last call. Revenue was primarily driven by continued MHL penetration into TVs and audio/video receivers, and a strong initial up tick of our 4K Ultra HD path. We continue to see evidence that 4K Ultra HDTVs are going to be mainstream in 2014, and that HDCP 2.2 is a critical component required for these TVs and AV receivers.

Turning now to our mobile business. In February, we traveled to Barcelona for our most successful Mobile World Congress exhibit to-date, where we met with a record number of customers, partners, press and analysts.

We announced a new reference design with MediaTek on their MT6592 and MT6595 octa-core platforms, and expect that this continued collaboration will expand MHL penetration into the mid-range smartphones that ship into China and India.

In February, Sony launched their Xperia Z2 smartphone and tablet, both supporting 4K Ultra HD video output using Silicon Image’s MHL 3.0 IC. These first of a kind products were demonstrated in our booth in Barcelona.

As a follow-on to the Galaxy Note Pro Tablet announced at CES, Samsung introduced its latest flagship phone, the Galaxy S5 at Mobile World Congress. All of these models continue to use our MHL ICs. Several other phones with our MHL ICs were also launched at or just after Mobile World Congress, including the HTC One M8, ZTE Grand Memo II series and the Hisense Maxe X1 series.

Also at the Mobile World Congress, the MHL consortium announced that over 1.5 billion MHL devices have been shipped to-date, an impressive mark for a standard that is just over three years old.

Mobile revenue for Q1 was $25.3 million, and driven primarily by continued demand for MHL 3.0 ports. We expect that higher end smartphones and tablets will shift from MHL 2.0 to MHL 3.0 as the demand for 4K Ultra HD increased.

As we mentioned in our last call, buying patterns for mobile phone vendors indicate more of a slow and steady ramp as compared to the large initial ramp up seen last year. We attribute this primarily to tight inventory management, but also some softness in the high-end smartphone market worldwide. We continue to anticipate growth in high-end smartphones, but at a more measured pace.

Finally, we are seeing more interest in MHL from the automotive segment. By CES there were over 25 aftermarket car stereo models from seven different manufacturers including Pioneer, Clarion, Alpine, JVC and Kenwood that included MHL support.

Moving on to a wireless strategy. We have design activity with multiple 60 gigahertz customers covering a wide range of applications in mobile gaming, home theater and wireless backhaul.

We continue to believe that these designs will start to generate meaningful revenue for the company in 2014. At the Mobile World Congress, we announced and demonstrated a 60 gigahertz wireless backhaul solution capable of transmitting one gigabits per second of data up to 500 meters.

We believe our 60 gigahertz solution represents a technical leap forward that will enable lower cost industry solutions which are both easier to install and (indiscernible) over their life time.

As I mentioned in my introductory remarks, we remain confident in the 60 gigahertz wireless technology opportunity, and we continue to believe that the 60 gigahertz wireless technology is an important long-term growth driver for the company.

Moving on to our licensing business. Our licensing business also performed in line with our expectations. It continues to be a strong contributor to the company gross margins, but equally important is that by licensing IP cores from the standards we champion, we help those standards achieve higher penetration in the marketplace. Additionally, we had begun to see some revenue from our asset monetization strategy, and believe that this will continue to contribute in the coming quarters.

In summary, our first quarter results have established a solid foundation for achieving our 2014 financial goals, and executing on our three key initiatives, specifically, penetrating mid-range phones with MHL, driving our 60 gigahertz wireless business, and maintaining tight control on expenses. Finally, we continuously strive to increase shareholder value, which is an important focus for the management team.

I would now like to turn the call over to Noland for a bit more details on the numbers. Noland?

Noland Granberry

Thanks, Camillo. Good afternoon. Before I begin, I would like to remind you that unless otherwise indicated, gross margin, expenses and earning related items are reported on a non-GAAP basis, which are reconciled to the corresponding GAAP numbers in the table accompanying our press release.

In addition, we have posted our financial metrics page to provide you with our quarterly comparative results. Revenue for Q1 2014 was $61.6 million compared to $61.4 million for Q4 2013 and $62 million for Q1 2013.

Product revenue totaled $46.8 million for Q1 2014 versus $46.9 million for Q4 2013, and $50.3 million for Q1 2013. Our Q1 product revenue was in line with our expectations, we continue to adjust to the dynamics of the high-end of the smartphone market and dealt the impact of inventory management from certain of our mobile customers as they transitioned to their next-generation devices.

For the first quarter, our CE product revenue continue to strengthen totaling $18.3 million as compared to $16.9 million for Q4 2013 and $13.7 million in Q1 2013. We began shipping our dual mode, MHL 3.0, HDMI 2.0 port processors in the quarter. We also continue to see success of our port processors that are optimized for mid and low DTVs.

Our mobile product revenue totaled $25.3 million versus $27 million for Q4 2013, and $33.6 million in Q1 2013. Our mobile product revenue for the first quarter reflects continued customer inventory management and seasonality.

As Camillo mentioned, we are pleased with our progress in securing mid-range design and we continue to maintain our strong position in high-end devices with video out as a key feature.

Our legacy PC business totaled $3.2 million for the first quarter. This compares with $3.0 million for Q4 2013 and $3.1 million for Q1 2013. We continue to see a revenue tail in our legacy business, although we do anticipate it’s decline.

In Q1 2014, our blended average selling price for our products was $0.91 per unit as compared to $0.90 per unit for Q4 2013, and $0.88 per unit Q1 2013. Our CE ASPs have increased sequentially, and on year-over-year basis with the adoption of HDMI 2.0, MHL 3.0 products.

Our mobile ASPs have declined year-on-year by less than 10%, as a result of the mobile product mix. Licensing revenue for Q1 2014 was $14.8 million, or 24% of the total revenue versus $14.4 million or 23.5% of the total revenue for Q4, 2013 and $11.7 million or 18.9% of total revenue for Q1 2013.

Royalties from our standard activities, core licensing deals as well as our patent monetization actions all were key contributors to our licensing revenue during the quarter.

Our gross margin for Q1 2014 was 60.3% versus 62% for Q4 2013 and 58.6% for Q1 2013. Our overall gross margins continue to exceed our long-term model of 55% due primarily to the mix of licensing revenue was generally as margins exceeding 98% versus our product margins which can range between 45% and 50% depending on the product mix.

Our product margin for the first quarter 2014 was 47.8% compared to 50.9% for Q4 2013 and 49.5% in Q1 2013. While in line with our expectations, our product margin change for the quarter was due to change in product mix. Operating expenses for Q1 2014 were $31 million compared to $32.3 million in Q4 2013 and $32.3 million in Q1 2013.

Our spend for the quarter was in line with our guidance and we remained focused on managing our expenses while pursuing specific growth initiatives. Stock based compensation totaled $3.1 million for Q1 2014 compared to $2.7 million in Q4 2013 and $2.9 million in Q1 2013. GAAP net loss for Q1 2014 was roughly $100,000.

For Q4 2013, our GAAP net loss was $1 million or $0.01 per share. For Q1 2013, our GAAP net loss totaled $0.7 million or $0.01 per share. For Q1 2014, our non-GAAP net income totaled $4.3 million or $0.05 per diluted share versus Q4 2013 of $4.1 million or $0.05 per diluted share and $3.1 million or $0.04 per diluted share for Q1 2013.

Diluted weighted average shares outstanding for Q1 2014 was 80.1 million versus 79 million for Q4 2013. Diluted weighted average shares outstanding for Q1 2013 was 78.4 million. The increase in weighted average shares year-over-year is reflection of the higher average share price during the period, resulting in an increased level in the money options to be included in the weighted average share count total.

Moving to the balance sheet, we exited the quarter with $138.1 million in cash and investments or $1.72 per share. For the first quarter 2014, our accounts receivable totaled $37.1 million or 54 days sales outstanding and in line with our target DSO range of approximately 50 days to 55 days.

Net inventory as of March 31, 2014 was $15.3 million, which represents approximately 6.4 turns on an annualized basis. The sequential increase in inventory reflects our preparation for expected level of shipments in Q2. Capital expenditures for Q1 2014 were $1.3 million, compared to $1.7 million for Q4 2013 and $0.8 million for Q1 2013. This completes my summary of our financial results.

The following represents our financial outlook for the second quarter of 2014. Revenue, $71 million to $76 million; gross margin, approximately 56.5%; GAAP operating expenses, approximately 36 million; non-GAAP operating expenses, approximately $32.5 million; non-GAAP tax rate of approximately 30%; Q2 diluted shares outstanding, approximately 80.5 million.

Our outlook for Q2 reflects anticipated sequential growth of our products of over 20%. In particular, we anticipate that our mobile revenue will grow by over 40%, as our customers ramp their next generation products, and we begin to see some penetration in the mid-range. The gross margin guidance for Q2 is reflective of the increase in product revenue relative to license revenue.

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

Question-and-Answer Session

Operator

Thank you, sir. We will now being the question-and-answer session. (Operator Instructions) And our first question is from the line of Charlie Anderson with Dougherty & Company. Please go ahead.

Charlie Anderson – Dougherty and Company

Yeah, good afternoon. Thanks for taking my questions. I want to start with mobile royalties. So I appreciate the color there Noland on how to grow next quarter, but I think my back of the envelope is, it will still decline on a year-over-year basis that you have kind of three straight quarters of declines on mobile product revenue. It feels like your customers aren’t declining on a unit basis and your ASPs aren’t declining that much. So, help us understand how much this is still sort of an inventory overhang versus maybe just not exposed to the right places?

Noland Granberry

Well, sure. So, I think probably a couple of reasons what’s going on. The ASPs are coming down a little bit I think you pointed that out. Secondly, I think if you look at the first half of last year and you compare to the first half of this year for example, last year there was a dynamic where some of our customers really over I would say built. They built for significant ramps during last year, but didn’t frankly materialize as we saw and we’re still – even the customers still eating into that inventory declines towards the end of the year. I think this year, we’re seeing a different dynamics which is more of – more of measured ramp and that’s contributing to some of the softness in the first half of this year. I think that’s – that’s the biggest dynamic that we’re seeing at this point.

Secondly, as I mentioned in my remarks, one of the key initiatives, one of the three key initiatives we have for us as a company this year, is to really penetrate the mid-range smartphone with MHL. So we’ve done a pretty good job at penetrating the higher end. The higher end has a couple of challenges here and there, we’ve noticed from maybe some other companies that have talked about this industry. But one of the major focus for this year is penetrating the mid-range, so partnerships with SOC vendors who have focused on the mid-range is something that we are really working very hard. We’ve done a pretty good job so far, and we’re going to continue to work at it.

Charlie Anderson – Dougherty and Company

Well, I guess, I wonder, when do you feel like you’ll reach a quarter where you are more reflective of end market demand? Or do you feel like you are matched with sort of self-through get into Q2, that’s really what your customers are doing?

Camillo Martino

It’s probably not that easy to talk about this point in time, but I think we’re getting there. We’re working through it. I mentioned with the first half this year versus the first half last year was anomaly , that comparison wasn’t anomaly, and I think as we drove through the year we’re getting to closer to normalization, I mean, still early in the year, it’s only April and what we hope to track that later in the year. That’s where we are at this point.

Noland Granberry

Just if I could add Charlie is that in my prepared remarks, I did mention – expecting to be over 40% growing sequentially and that dynamic can improve as we get our mid range wins in and start that activity happening. But we do expect to see a ramp up in Q2 and that could be start of things in the 40% which is just one data point and it could be over that depending how the market play about.

Charlie Anderson – Dougherty and Company

Got it. And then a big picture question from me on 60-gig, would be great Camillo comment on that. I wonder if you could just sort of step back and talk about the environment. I mean there has been – I think relatively over the last six months more talk about 60-gig that’s been in a while, other potential silicon suppliers. When do you feel like maybe this market reaches an inflection point and you know we see this little bit more of a broadly deployed technology just from your advantage point?

Camillo Martino

Yeah, look the momentum is building in 60-gig. We are starting to see more activity and at the same time you are starting to re-board better in the industry as you mention. So we think the 60-gig deployment is going to happen over the next couple of years. We start to see traction now as I mentioned and it really depends on the use case. So there are multiple used cases. We tried to highlight some of that Myers Squibb. So there is used cases such in gaming for example used case, you know such as in data application that is 60 gigahertz opportunity as well as long haul, the wireless backhaul. So there is a few applications which we believe and not just us I think our competitors also believe that 60GHz is the right technology, its just takes – its taking little a bit longer than what perhaps a lot of us anticipated, as we talked about in the previous calls.

But one comment that I tried to make it in my prepared remarks is that the long we felt more bullish now about the long-term opportunity for 60GHz that we have had before frankly speaking. And unfortunately, the near-term if you look at the last year, we didn’t have much to show for it. We established our tracks this year. But this is about a long-term new opportunity for the industry at large. This is not about some new little (indiscernible) chip that’s been launched, but this is a major opportunity for the industry and we are continuing to invest with them.

Charlie Anderson – Dougherty and Company

Great. And then just one quick last one on housekeeping, are you reiterating all of your full year financial goals in terms of total company top line on 60GHz potential revenues and then last one is the 10% customers, if you had anyone in the quarter?

Camillo Martino

Sure. What we said last quarter is at the beginning of the year, what we said was that we anticipate growing top line this year in line with what we achieved last year. So at this point in time, we had a good start – we had a good start for the year. We think we are reasonably positioned for the rest of the year. It’s still early of course. But at this point in time, we think we are in a good situation to complete out the year.

Now I think we also said in addition to the revenue guidance, we said that EPS should be going – growing, excuse me, at a faster pace than the top line with the comment that we made. And I think also by and large we’re also comfortable with that segment as well. Again, it’s still April, it’s early, but at this point in time that’s where we are. I think you also asked if there was a 10% customer, is that correct Charlie?

Charlie Anderson – Dougherty and Company

Yeah. That and then also, are you reiterating your 60 gig double-digit million guidance?

Camillo Martino

Well, I think this is a similar question to what you just asked prior. But again, at this point in time, we have a number of design activity going on across the globe, but still early in the year. And at this point in time, I think we’re moving forward in a positive manner.

Noland Granberry

As far as the 10% customer, same player that we’ve had in the past that hasn’t changed. Yeah.

Charlie Anderson – Dougherty and Company

What was the percentage, Noland?

Noland Granberry

It’s still around the 40% level.

Charlie Anderson – Dougherty and Company

Right. Thank you so much.

Camillo Martino

All right. Thanks, Charlie.

Operator

Thank you. And our next question is from the line of Tom Sepenzis with Northland Capital Markets. Please go ahead.

Tom Sepenzis – Northland Capital Markets

Hey Noland, I was wondering you mentioned 40% plus mobile growth in Q2. I’m wondering if you have a kind of target for the CE business.

Noland Granberry

I didn’t mention anything specific in our – in my prepared remarks, but I think what we’re seeing is we’re seeing a strong Q1 and we think things are play out in a seasonable fashion like we’ve had historically where you would see Q2 growing. And that range can be anywhere between say 8% and 10% or something like that there in historical fashion. So I think that’s what we will be looking at.

Tom Sepenzis – Northland Capital Markets

Great. Thank you. And then the guidance for gross margins was a little bit, it’s a pretty big drop on a sequential basis, is that going to continue throughout the year or is that – where do you think that level is up?

Camillo Martino

So as you know, our long-term model is 55%, right. And so we’ve been very good about exceeding that over the last several quarters. I did highlight on our last call that I look for margins to trend down in this quarter as well over the next several quarters. We do still – we’re still focused on achieving and beating that long-term target range. If you look at specifically at say next quarter, one of the dynamics you find in particularly Q2 and Q3 is the mix between licensing and product, favors more product. And that has a pretty profound impact on the margins. So you’ll see that’s a primary impact that’s happening in the next quarter.

Tom Sepenzis – Northland Capital Markets

So the – given the product mix versus licensing mix it’s not necessarily the products margins are coming down by getting pressure?

Noland Granberry

I did highlight on our last call, that I do anticipate our product margins declining some. What I did note was we had some favorable activities in 2013 that resolved in some favorable items for 2013 that we won’t see the same level of savings that we expected this year, and we’ll still see – we always will see the ASP pressure. So we are seeing product margins trend down some, but again I think at end of the day we were focused on exceeding our long-term model and that’s what we think we’ll lay at.

Camillo Martino

And Tom just piggy backing of what Noland said, if – well, I think when we announced for Q1 is that IP licensing revenue represents approximately 24% of the total. And that’s kind of outside of the normal guidance we typical give of 15% to 20%. And so, I guess next quarter there’s a chance that it would more normalize within the 15 to 20 range. So that’s as Noland said, that is one of the biggest dynamics that’s going on there.

Tom Sepenzis – Northland Capital Markets

Yes. I’m not sure. Appreciate it. And then actually Camillo, if you could just talk a little bit and I appreciate you mentioning on the call the back haul for wireless since infrastructure was 60 gigahertz, is that a 2014 type event in terms of just entering the model or is that something that is more of 2015 event?

Camillo Martino

Well, it is a 2014 event from a designing activity, in fact even last year we were working on this as well. I would say, we would anticipate revenue from this model and probably in the back half of 2015. So I would say, its more of a 2015 opportunity, its how we would see that product line.

Tom Sepenzis – Northland Capital Markets

Great. Thank you and congratulations on the quarter.

Camillo Martino

Thanks, Tom.

Noland Granberry

Thanks, Tom.

Operator

Thank you. And our next question is from the line of Rajvindra Gill with Needham & Company. Please go ahead.

Rajvindra Gill – Needham & Company

Thanks for taking my questions. Question on the MHL growth rate, I think you touch little bit about it – last earnings call you talked about kind of growth rate kind of decelerating to 10% year-over-year versus like 20 odd percent in 2013. Can you talk a little bit about from the puts and takes of that growth rate this year and how do you look at that growth rate going into 2015 as you kind of shift into the mid range further?

Camillo Martino

Yes. That’s kind of – that’s a pretty open question and probably a lot more detailed and what we’ve typically given in the past. But look at this point in time, we do expect that our mobile business to grow – if you look directionally we are very confident about the MHL strategy, you may have seen in the press release for that by the MHL consortium announcing that over 500 million units cumulative have been shipped with MHL that’s the outstanding result in just over three year period, frankly speaking.

So the long-term direction is clear and the ecosystem is building out on falls on television, monitors, blue ray et cetera, et cetera, so the directional trend is very, very positive. In the first half of this year as I am not sure to get the opportunity to listen to my last comment on this, first half of this year we had some challenges relative to the first half of last year. Some inventory management is going on in addition to that the biggest challenge there is that some of that customers that ramped for a very, very strong year earlier in the year and that model is changing. I think this year is more than measured and tampered approach in the way they ramp up their models of have been done. So I think we feel pretty confident about the long-term outlook.

Rajvindra Gill – Needham & Company

Okay. And on the 60 gigahertz commentary, double digit revenues, but wireless backhaul second half of 2015. Where do you see the revenue coming from, I know you talked about TV and kind of home theatre. Can you talk a little bit more detail specifically about where you see the revenue coming from this year and any update in terms of the discussions with smartphones or tablet that actually incorporating 60 gigahertz chipset in the smartphone or tablet how that progressing?

Camillo Martino

I think what we said in our prepared remarks, the CE is one category for us what we see there is well its opportunity – we see accessory type opportunity. So these are the opportunities that we are driving for this year and even more so next year. So that’s the business that we are focused on right now. The mobile opportunity we’ve been talking about this for the last year or so with the home ecosystem needs to develop for the mobile opportunity to play out and have the ecosystem as we see it is not just the manufacturing community, but also with the content community. And so this is all part of the long-term play we are talking to a number of companies in this area and we have various stages of run activity with each of them. So again, I think we are pretty confident about the long term outlook and we are hoping that the years going to play out according to our plans laid out at the beginning of the year.

Rajvindra Gill – Needham & Company

Last question on the OpEx, you did a very good job on managing the OpEx in the quarter-over-quarter, year-over-year. How should we look at that OpEx going forward I mean should that be trending down on year-over-year I mean will OpEx be down year-over-year for the full year or is it more of a moderate – slight moderate increase as you start to get the leverage?

Noland Granberry

I think based on the actions we took beginning of the year and highlighted that in our last call. And we are looking for our run rate to be somewhere between $31 million and #33 million a quarter and that sort of ties itself to take out that are currently the big driver of expenses in a particular quarter. So that sort of the range we generally should find over the course of the year.

Rajvindra Gill – Needham & Company

Okay, great. Thanks and congrats.

Camillo Martino

Thanks.

Operator

Thank you. And our next question is from the line of Jon Tanwanteng with CJS Securities. Please go ahead.

Jonathan Tanwanteng – CJS Securities, Inc.

Hi guys. Thanks for taking my question. Licensing revenues were a nice surprise. What portion of that was kind of due to new IT modernization efforts and was that a one time thing or more of a recurring stream?

Camillo Martino

Jon, as we talked about it, it’s more – the way we structured it is more of a recurring stream activity. It may have its ups and downs depending on how things play out. But generally there is a recurring stream to it. It was a contributor in the quarter. We really haven’t provided the detail breakout of the pieces, but we are quite happy with the contribution that it made to our number this quarter.

Jonathan Tanwanteng – CJS Securities, Inc.

Okay. Just on the back of previous margin questions, do you see a point where the gross margins actually start trending back up with the introduction of safety gears or new product versions or more modernization from the IT?

Noland Granberry

It sort of would depend on the licensing mix I mean, we have our run rate of – higher run rate like we’ve had this quarter of 24% of the total. But generally, as we said, is when you look long-term, we expect that our product revenue will grow at a faster pace than the licensing and having said that, you will generally see the pressure of bring down the overall margins. At the end of the day, in the near-term, we expect to be over our long-term model of 55% and we continue to manage our OpEx picture our goal is to drive to – and continue to improve our operating profit getting into our long-term model of 15% to 20%.

Jonathan Tanwanteng – CJS Securities, Inc.

Right. You mentioned that you are pretty pleased with the growth in CE in the quarter. Did that exceed you expectations and if so do you expect that momentum to continue?

Noland Granberry

I don’t think necessarily exceed expectations, I think what was good about it was the fact that we saw some uptick – uptick our new offering MHL 3.0, HDMI 2.0 parts that was more case start to get adoption. We think that’s good and as we talk about the story for the year is how much attraction will 4K get and obviously the better attraction its get the better news for us, right. And so we saw a good start in Q1 and hopefully this will continue throughout the year.

Jonathan Tanwanteng – CJS Securities, Inc.

Okay. And then finally, one of your largest customers just announced lower sales and pretty lukewarm outlook for smartphone demand. Are you seeing that being offset by other customers either in the mid-range space or from just the other high-end vendors?

Camillo Martino

We didn’t see that announcement generally speaking. I think they made some commentary around that, I think if you look at the some other comments in the past week, some comments as we also talk about an [indiscernible] relative to potential softness or a saturation at the high end by far. And so, we think that that’s going to take a little while longer to work through, but our focus this year is really penetrating the mid range smartphone and this is going to set ourselves up quite nicely for next year’s growth as well both in China as well as India.

Jonathan Tanwanteng – CJS Securities, Inc.

Thank you very much.

Camillo Martino

Thanks John.

Operator

Thank you. And our next question is from the line of Jorge Rivas with Craig-Hallum Capital Group. Please go ahead.

Jorge Rivas – Craig-Hallum Capital Group

Hi guys. Thanks for taking my question. I’m calling in for Richard today. And just a couple of questions from me. First, there are probably tier downs that indicate that MHL 3.0 didn’t make it to your largest customer related flagship product. So just wondering if we should expect any headwinds in ASPs in mobile during 2014, or do you think you can capture all of these signs that are backing off or stay back.

Camillo Martino

Sure. I think we are – I think you are specifically talking about the model the Galaxy S5. And I think in that case we are very happy actually with an overall partnership with Samsung and – therefore – the past few years in mobile and for many years to come. So I think we’re both cooperating, collaborating in charting this plan, this roadmap together so that’s pretty exciting.

I think at that point in time specifically I think it’s more of at that time -- the timing issue more than anything else, but I think if you look at the longer term trend, we’re pretty positive on the long-term outlook.

So relative to ASPs and headwinds I think which you asked about very specifically. I think a lot of that has already been build into a commentary that Noland specifically gave relative to ASP trends and we don’t think the ASPs are going to deploy out of the norm specifically. I think it’s in line probably with what we’ve done in the past. So I don’t see any hike ups or surprises. They are certain at this stage. And certainly in the year of course, but that’s how we feel at this moment.

Jorge Rivas – Craig-Hallum Capital Group

Okay. Thanks. One last question. I wondering if you can provide any color on their success of MediaTek and as far as timing when should we see a meaningful contribution from your relationship with MediaTek in the mid range part of the market.

Camillo Martino

Yes. I think the relationship is going very well. We’ve been working together for some time and we’re going to continue to work together. So we’ve made some announcement early this year. And that goes to the past I wonder if that’s. And we expect some of this to play out in the second half of this year and we’d also, excuse me, for in 2015, so we see the results of that really playing out over the next 6 to 18 months.

Jorge Rivas – Craig-Hallum Capital Group

Okay. Thanks a lot. That’s it from me.

Camillo Martino

Thank you.

Operator

Thank you. [Operator Instruction] And our next question is from the line of Dan Scovel with Edison. Please go ahead.

Dan Scovel – Edison Investment Research

Thank you, good quarter. Noland, in the quarter the step down in the product gross margin you had mentioned it was mix. Can you remind us is that new products, old products or consumer or mobile?

Noland Granberry

If you look at it, its more mobile based. And our CE business was favorably impacted with the new – the amount of 4K parts that we set that had a higher ASP so it’s in the mobile side.

Dan Scovel – Edison Investment Research

Okay. So it was increased a richer mobile mix puts pressure on the gross margins?

Noland Granberry

Yeah. Well, the margins, yeah, there is some impact from the margin side, yes.

Dan Scovel – Edison Investment Research

Okay. And then also the second quarter guidance there are obviously some solid double digit sequential growth. The mix on the license revenue is coming down. I guess just to confirm, you are expecting license revenue decline sequentially, I just want to confirm that?

Noland Granberry

Yeah. I mean, if you’d run through the calculation, one, product revenue we expect to be higher. I talked about the growth in the – sequential growth in the mobile side of 40% and from the earlier call highlighted we thought CE might go. But what you would find is that, if we move down from a 24% level of IP to something within the 15% to 20% range, you would expect to see a little decline there in the licensing side.

Dan Scovel – Edison Investment Research

Okay. And then also just housekeeping question was there any shares repurchased last quarter, I assume that?

Noland Granberry

Very minimal in the quarter. But we do still have the program. We still exercising a right to acquire shares and I will continue on for the -- grow continue on to the future.

Dan Scovel – Edison Investment Research

Okay. Great. Thank you.

Operator

Thank you. And I’m showing no further questions. I’d like to turn the call back over to Mr. Martino for closing remarks.

Camillo Martino

So, thank you everyone, for joining us today’s call. And we look forward to speaking with you again next quarter. Thanks.

Operator

Thank you. Ladies and gentlemen, this concludes our conference call for today. If you’d like to listen to a replay of today’s conference call, please dial 303-590-3030 or 1-800-406-7325 and enter access code 4678792. We like to thank you for your participation. And you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!