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Genesis Microchip Inc. (GNSS)

F3Q07 Earnings Call

January 29, 2007 5:30 pm ET

Executives

Tonya Chin - Director of IR

Eli Antoun - President and CEO

Mike Healy - CFO

Analysts

Daniel Gelbtuch - CIBC World Markets

Tayyib Shah - Longbow Research

Craig Berger - Wedbush Morgan

Jennifer West - Merriman

Jason Pflaum - Thomas Weisel Partners

Andrew Huang - American Tech Research

Heidi Poon - Piper Jaffray

C. J. Muse - Lehman Brothers

Jay Srivatsa - Roth Capital

Brian Alger - Strata Capital Management

Adam Benjamin - Jefferies & Co

Presentation

Operator

Good afternoon, and welcome to the Genesis Microchip Third Quarter Fiscal 2007 Earnings Call. Today's call is being recorded and is copyrighted property of Genesis Microchip. Any rebroadcast of this information in whole or in part without the prior written permission of Genesis Microchip is prohibited. We will be conducting a question-and-answer session at the end of the company's prepared remarks.

And at this time, I'd like to turn the call over to Tonya Chin, Director of Investor Relations. Please go ahead ma'am.

Tonya Chin

Thank you for joining us today. With me today are Eli Antoun, President and Chief Executive Officer and Mike Healy, Chief Financial Officer. Today's discussion contains forward-looking statements, including without limitation, forward-looking statements regarding the company's revenues, gross margins, operating expenses, market share, and new products. The forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

Those risks and uncertainties include growth rate of the flat-panel TV, including HDTV, and LCD monitor markets and our customer share of those markets, customer inventory levels, our ability to introduce new products, gain design wins, and ramp new designs into production volumes, changes in expected product yields and manufacturing capacity constraints, competitive pricing pressures, availability and pricing of panels and other display components, sales of royalty-bearing products by our licensees and factors that affect stock-based compensation expense and tax rates.

Other factors are listed in today's press release and the company's SEC reports, including but not limited to the company's Annual Report on Form 10-K for the fiscal year ended March 31st, 2006 and the 10-Q for the quarter ended September 30, 2006. The forward-looking statements made today are the company's targets and not predictions of actual performance. In the past, the company's performance has deviated from its targets as of the beginning of the quarter. Participants are cautioned not to place undue reliance on these forward looking-statements, which speak only as of today's date. The company does not undertake to publicly update or revise these forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied in this discussion will not be realized. Any statements made by persons outside the company, speculating on the progress of the quarter or other aspects of the company's business will not be based on internal company information and should be assessed accordingly by investors.

During the call, the company will refer to both GAAP and non-GAAP financial information. A reconciliation of GAAP and non-GAAP results in accordance with the SEC's Regulation G is included in today's press release which has been posted on the company's website. Please note that an archived version of the broadcast is available on the company's website at gnss.com in the investor events and webcast section. Additionally, a replay of this conference call will be available through February 5th by dialing 719-457-0821 and the access code is 7466038.

And now, I would like to turn the call over to Eli.

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Eli Antoun

Thank you, Tonya. Good afternoon everyone, and thank you for joining us today. I will focus my commentary today on two key areas. First, I will discuss the factors that led us to our current position and the disappointment -- and the disappointing near-term outlook. And second, I will outline the steps that we are taking to address this near-term situation and which we believe will produce significant positive results.

In the December 2006 quarter, both our flat-panel TV controller and LCD monitor controller market segments exhibited weakness which we expect to continue in the near-term. In the LCD monitor controller segment, our largest end customer has suffered market share losses in 2006 that are impacting our results. This customer has also initiated its plans ramp of a second source for LCD monitor controllers and that has affected our market share at that customer. In addition, the gains in design wins that we have already achieved at other top LCD monitor customers have not ramped up enough to completely offset the decline and demand from our largest end-customer. This combination of factors has led to an overall loss in market share in the LCD monitor controller segment.

In the flat-panel TV controller segment, the disappointing results of our just completed quarter and a short-term outlook are also reflection of several factors. First, the absence of a Genesis single-chip ATV/HDTV solution during the 2006 design cycles significantly limited our ability to participate in the rapid growth of the large North American market. Second, we have experienced pronounced volatility in our flat-panel TV controller shipments to our top three TV customers who have significant exposure in Europe and are susceptible to the fluctuations in that market. Third, we are stopping to see the effects of previously announced design losses at two of our largest TV customers, specifically in Europe and Korea. And finally, our fourth quarter outlook is impacted by the traditional post-holiday seasonality in the market.

Despite these challenges, I am confident that we have implemented a series of corrective measures in our product and technology development, in product planning, in our sales strategy that we believe will position us for a solid recovery. Earlier this month, we demonstrated our Chaplin solution at CES and the customer response has been very positive. Chaplin is Genesis's single-chip ATV/DTV product with support for a 10 ATP panels as well as integrated support for 100 hertz, 120 hertz double scanning panels. We believe that Chaplin will provide Genesis with a number of opportunities in the calendar year 2007 design cycles that are targeted for the North American HDTV market and that were not available to us in the previous design cycles.

In addition, very shortly we will release our Chaplin-based DVB-T platform, which is targeted for the European HDTV market. With the ability to support both the European and North American markets with one product, Genesis will once again offer a solution that enables our end customers to design one platform that can be simultaneously targeted for these two large flat-panel TV markets. As a result of the customer response at CES, we are now actively working on multiple digital TV design win opportunities for calendar year 2008 volume shipments.

At CES, we also demonstrated two new analog flat-panel TV controllers. With Torino, the latest in our Cortez family of products, we highlighted the preexisting ability to support 100 hertz to 120 hertz panels. Torino has already been designed in at two of our largest customers. We also introduced Hudson II, which integrate support for worldwide audio, memory-less scaling, and the latest generation of our video decoder into a competitive single-chip controller for the entry segment of flat-panel TVs. Hudson II is already sampling with many of our customers, particularly in China.

Looking forward, we also demonstrated for the first time at CES our internally developed VSB demodulation technology running seamlessly on a Chaplin-based platform. We expect to integrate our VSB technology into our next generation single-chip HDTV solutions aimed at the North American market.

We are increasing our investment in the DisplayPort technology in order to continue meeting the expectations of our Tier 1 PC customers such as Dell, HP, Lenovo, and Samsung. At CES, we demonstrated the latest version of our DisplayPort Transmitter-Receiver Solution, and in a major step forward for the PC industry, the VESA organization held a press conference at CES, rolling out Version 1.1 of the DisplayPort Standard, which adds capabilities to support high bandwidth, digital content protection for viewing protected content.

As a major contributor to this standard, Genesis participated with key management from Dell, HP, Lenovo, Intel, AMD, Samsung, and others at this event, which highlighted the growing momentum for DisplayPort as the interconnect of the future for the PC industry.

Genesis continues our leadership in DisplayPort by supporting the timely launch of our leading customers’ flagship programs in the later part of calendar 2007. In the near future, we'll introduce a series of DisplayPort products for LCD monitors and expand our market opportunity to include notebook computers with value-added timing controllers.

Also, in response to several top TV manufacturers that have expressed interest in DisplayPort technology, and to capitalize on the opportunity that the DisplayPort offers in TV products, both for internal connectivity and as an external interface, we are planning to include DisplayPort technology in many of our upcoming TV controllers. The company also continues to make headway with design wins at new Tier 1 OEMs, in both the LCD monitor and flat-panel TV markets.

While it will be a challenge to fully overcome our market share loss within this upcoming fiscal year, we do believe, based on our current portfolio of design wins, that we are increasing our penetration in the top LCD monitor OEMs and flat-panel TV manufacturers.

Finally, in response to the challenges presented by our short-term outlook, we have implemented a series of actions aimed at the aligning our operating expenses more closely with our expected revenues, while maintaining the ability to invest in our growth opportunities. These actions are expected to reduce our operating expenses to the $24 to $25 million quarterly run rate, with the full effect of these reductions to be reflected in the quarter ending in June 2007.

We expect our fiscal 2008 to be challenging, but I am confident that we are taking all the necessary steps to reduce our cost, improve the company's financial performance, and build long-term value for our shareholders. Our fundamental remains strong, a tremendously talented and dedicated employee base, excellent technology, and improving product portfolio, a Tier 1 customer base, and a strong balance sheet. We expect to overcome our near-term challenges and to achieve a successful transition to profitable growth.

With that, I'll turn the call over to Mike to review the financial details for the quarter. Mike?

Mike Healy

Thanks, Eli. First, I will discuss the financial results of the third fiscal quarter and then I will provide you further details on our outlook for the fourth quarter.

Total revenues in the quarter were $51.1 million, a decrease of 26% from the September quarter. Revenues from our TV business in total were $28.3 million, a decrease of 38% from the prior quarter. Total LCD monitor revenues decreased 2% from their prior quarter to $22.8 million. Included in our monitor revenue for the first time, was licensing revenue from our agreement with MStar. This revenue included an upfront payment, as well as the first payments of an ongoing licensing stream.

Total TV controller shipments were 3.6 million units in the December quarter. Of that, our flat-panel TV controller units were 3.3 million units, representing a decrease of 35% from last quarter.

We estimate that those units represented are in 3.1 million TV chassis, which is a 30% decrease from last quarter's comparable number. The decreases in units and chassis were consistent with our expectations at the beginning of the quarter, given the high volume of shipments that we saw on the September quarter.

In terms of TV product families, Cortez, Hudson, and Malibu, all declined quarter-over-quarter. However, we did start shipments of our PurVIEW HDTV 500 chip, our first generation DTV chip during the quarter. In terms of geographies, our largest decline was in Korea. Conversely, sales in the Japan region showed modest revenue growth in the December quarter.

The other TV video category decreased 26% from September -- from the September quarter to 300,000 units.

Flat-panel TV ASPs decreased 6% from the September quarter with a modest part-for-part ASP decline coupled with negative product mix shift, as shipments of our higher priced Cortez products decreased during the quarter.

Shipments of LCD monitor controllers were 10.1 million units, down 12% from the prior quarter due to a continued transition of our largest indirect customer to a second source provider, and a drop in end-market share of that same customer. As expected, LCD monitor controller ASPs decreased 3%. We had some modest part-for-part declines, which were partially offset by a mix of higher price products.

Next, let me review our gross margin performance. Our GAAP gross margins declined to 40.8% in the December quarter, and non-GAAP gross margins, which excludes stock-based compensation charges, were 41.4% in the quarter. The decrease in gross margins from last quarter is a result of a larger mix of revenue from our lower gross margin monitor products and an increase in inventory reserves. This was partially offset by a favorable margin impact from the licensing revenue, as a result of the company’s recent settlement with MStar.

GAAP operating expenses were $136.4 million, which include a few items that I will now explain in more detail. Given the recent downturn in our market capitalization and our revised future profitability projections, we performed an analysis on the recovery of our acquired intangible assets and goodwill, as required by FAS 142. As a result of this analysis, the company recorded a $97.6 million impairment on our goodwill assets in the December quarter.

In addition, a $3.4 million reduction of our acquired intangible assets was done, totaling $101 million. In addition, we undertook a review of our deferred tax assets in the quarter in accordance with FAS 109, Accounting For Income Taxes. We concluded it was appropriate to establish a full valuation allowance under Canadian deferred tax assets until we could demonstrate sustained levels of profitability. Accordingly, the company recorded a $16.8 million in additional tax expense, as a result of providing a full valuation allowance under deferred tax assets in this tax jurisdiction.

The final unusual item included in both GAAP and non-GAAP operating expenses is a $4.5 million legal settlement paid in conjunction with our agreement with Silicon Image, as was announced in our press release on December 21, 2006. Also included in GAAP operating expenses were stock-based compensation charges and the amortization of certain intangibles, which totaled $4.6 million.

Non-GAAP operating expenses were $30.7 million in the December quarter, up from last quarter due to the inclusion of the $4.5 million Silicon Image settlement I just mentioned. Also included in our operating expenses this quarter were approximately $600,000 of duplicate rent cost and accelerated amortization, resulting from our plant facility consolidation in US to a single building nearby.

Our tax expense on a non-GAAP basis for December includes a charge of $431,000, which excludes the 16.8 million impact of the increase in our valuation allowance for deferred taxes, included in our GAAP income tax expense.

Our GAAP net loss for the quarter was $130.4 million or a loss of $3.57 per share due a large part to the goodwill and intangible write offs, increased tax expense, and the Silicon Image legal settlement. All of which had a significant impact on our earnings in the quarter. Our non-GAAP net loss was $7.7 million or $0.21 per share. As shown on our reconciliation of GAAP to non-GAAP results in today's press release, our non-GAAP net loss excludes stock-based compensation charges and the amortization of the intangibles, the goodwill and intangible impairment, and the increased tax expense, but does include the Silicon Image settlement amount.

Next, let me review the highlights of the balance sheet which remained strong. Cash and short-term investments increased to $193.7 million. Trade accounts receivable decreased to $28.5 million driven by the decrease in sales during the quarter and an improvement in DSO to 51 days. And finally, we ended the December quarter with inventory of $18 million which is down $7.3 million from the September quarter. Inventory at the end of the quarter represented about eight weeks of shipments which is at the low end of our targeted range of eight to ten weeks. Due to effective working capital management and inventory in AR, we generated $70 million in cash from operations this quarter despite the revenue and earnings decline.

Now, let me address our guidance for the fourth fiscal quarter of 2007. We expect revenues for the March quarter to be in the range of $35 to $40 million, primarily as a result of seasonal reductions in our TV business where the end market is expected to contract by 24%. As we discussed last quarter, revenues in March will also be impacted by the ramp down in volume from the loss of one of our Tier 1 TV customers.

For the March quarter, we expect a 30% decline in flat-panel TV controller units over the December quarter. We expect flat-panel TV ASPs to be consistent with last quarter, as our mix improves offset by some modest pricing pressure. In addition, we expect our other TV category to decline slightly in the March quarter, reflecting the seasonal trends in the TV/video space. We are expecting unit shipments from LCD monitor controllers to decline by 15% from December's volume of 10 million units due to continued softness from our monitor customers in Taiwan. We anticipate overall ASPs for LCD monitor controllers to be relatively flat with December.

We expect our gross margins to be in the range -- We expect our GAAP gross margins to be in the range of 35% to 37% and non-GAAP gross margins to be between 36% and 38%, primarily reflecting our expectations for lower revenues, a smaller amount of licensing revenue, and a less favorable mix of products. We estimate total GAAP-based operating expenses to be between $31 million and $32.5 million for the fourth fiscal quarter. This estimate includes approximately $4.5 million for stock-based compensation and the amortization of acquired intangibles. We are expecting that our Q4 non-GAAP operating expenses will be down from December quarter due to the nonrecurring nature of the $4.5 million legal settlement included in the third quarter results, partially offset by the inclusion of an estimated $1 million in severance and other related costs associated with the cost reduction actions discussed earlier. Additionally, our Q4 forecast includes higher professional fees related year-end audit activities.

In terms of the tax rate going forward in the near-term, we are expecting that we will have a modest amount of tax expense in the quarter, probably around $1 million regardless of our operating profit or losses, as we will be taking a full allowance against our deferred tax assets. Our tax provision is subject to other variations based on foreign exchange fluctuations, research and development tax credit, and other factors like transfer pricing rulings that may influence provisions in our international jurisdictions.

As Eli mentioned, we began a series of actions to bring our operating expenses in line with our expected revenues. One of these actions, which was completed last week, was to reduce labor cost by eliminating positions across the company with the majority of those job reductions occurring in North America. We are actively managing our discretionary cost such as reducing temporary employees and contractors, cutting travel, professional fees and other related costs. We expect to start seeing the benefits of these actions in April and we are targeting our non-GAAP operating expense run rate to be in the $24 million to $25 million range per quarter starting April 1.

In summary, I am disappointed in regards to our financial performance and short-term outlook on revenue. I am, however, optimistic that with our new DTV, analog TV and promising DisplayPort technologies, we will garner new design wins this year that will pay off in calendar 2008. In the meantime, we are taking actions to lower our operating expenses while balancing our investment needs to develop new products and support new and existing customers, all critical and ensuring a successful rebound. We have a very strong balance sheet with over $190 million in cash, which should enable us to weather this downturn in our business and come out stronger in the long-term.

With that, I'll turn the call back over to operator for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We do ask that you please limit yourself to one question to allow all participants to chance to ask a question.

Mike Healy

Operator?

Operator

Can you hear me? Sir, can you hear me? (Operator Instructions).

Mike Healy

Yeah, please standby audience while we are trying to get the operator queued up.

Operator

And we go Daniel Gelbtuch from CIBC World Markets.

Daniel Gelbtuch - CIBC World Markets

Hey guys, I just was wondering, I know you mentioned that you the Chaplin solution out and Torino, which will both be featuring double scan. My question is, do you have any plans on integrating Memec technology?

Operator

I do apologize. It does look like today's moderator, Ms. Chin, is unable to hear us. I am trying to reestablish her line and make so sure she can get a hold of this. One moment.

Mike Healy

Thank you for being patient with us. We're trying to get the operator queued up so we can take your questions.

Operator

Ms. Chin, are you there? We can all hear you, but you are unable to hear us. We will now go back to Daniel for his question.

Mike Healy

Daniel, are you there?

Eli Antoun

Hey, Daniel.

Daniel Gelbtuch - CIBC World Markets

Yes, I was wondering -- it sounds like you have a pretty ambitious product rollout with your Chaplin and Torino products. I was wondering -- I know you have -- it sounds like you have double scan technology for both, any intention on integrating Memec technology?

Eli Antoun

Yeah, we're -- Daniel, we're in development with our and what we call MCTi which is commonly known in the -- our segment of the industry as Memec And we expect this solution to be coming out in the calendar third quarter of this year and with integration into our HDTV solutions to follow soon thereafter.

Daniel Gelbtuch - CIBC World Markets

Okay. Now, it sounds like you have VSB Demod on path for later on this year as well, any intention on working on DVB-T Demod RF Demod and maybe QAM?

Eli Antoun

The simple answer on DVB-T, Daniel, is yes, but we will talk about it more at the appropriate time.

Daniel Gelbtuch - CIBC World Markets

Now, you also mentioned about DisplayPort, it sounds to me like it’s going to start out within -- on the internal side of monitors and LCTVs, I assume to replace LVDS, how long do you think it’s going to take before we starting seeing DisplayPort connectors on the outside of TVs and -- or should we expect to see other capture OEMs or CE OEMs that will support DisplayPort for DVD players, set-top boxes, et cetera?

Eli Antoun

Yes. Just sorry, Daniel, before I answer this question, I also want to add in terms of our VSB, it also does include the QAM with the current development. So, when we come out with VSB, it will be with QAM. Going back to the DisplayPort question, we definitely saw a significant up-tick and interest by a couple of major TV manufacturers to consider adopting DisplayPort across the board, meaning -- across the board, meaning at least internally to their system architecture. At this point in time, we are not in a position to say that DisplayPort will be adopted even by these TV manufacturers as an external interface. But we do believe that success in helping our customers move forward with an internal -- as an internal connectivity solution will almost naturally lead them to an external interface, but that's a little bit further down the road.

Daniel Gelbtuch - CIBC World Markets

Okay. Thanks and good luck.

Eli Antoun

Thank you.

Mike Healy

Thanks, Daniel.

Operator

We'll go next to Tayyib Shah from Longbow Research.

Tayyib Shah - Longbow Research

Hi, guys. If I can ask about your Korean customer, where you are indicating that you maybe losing some market share going forward, how much of that customer base is now going towards the single-chip DTV solution, is that like half of your next year's solutions or even more than that?

Eli Antoun

Tayyib, the -- our belief is that the North American market is -- any opportunity that's being designed with the system being targeted for the North American market is a single-chip HDTV analog TV solution. And that's why it was important to highlight and we believe that was the case also in the 2006 design cycle. We do not see that yet for the European market, but we expect the European market to undergo the same transformation over the next couple of years. Japan is -- it's all in different piece, if you will, it is single-chip analog TV, digital TV solution; however, there are additional solutions in the system to handle the very high requirements for graphics and so on in Japan. And China is couple of years away from that.

Tayyib Shah - Longbow Research

So then, your engagement with that customer was primarily for the European market, where is this market share loss coming from that's leading you to a weak revenue outlook?

Eli Antoun

I think there are a couple of factors here. One is on the -- with this particular customer on the entry level, we used to have for a while – it’s been gone now for a while, but we -- most of the dribbling out finished this quarter. On the low-end, we don’t ship into them anymore. And then number two, they were very bullish in our Q2, which is the September quarter and took significant shipments from us in that quarter and it seems like the European market did not pan out as expected for them and we -- and they have been continuing to flush out, we believe, inventories over the December and we suspect this coming -- this March quarter.

Tayyib Shah - Longbow Research

Okay. And then, can you provide some color on your initial customer engagements for Chaplin. Are you looking to migrate some of the current Cortez designs to Chaplin or are that Cortez designs going to migrate only to Torino.

Eli Antoun

These engagements are very early right now, but to the extent that we were, if you will, “shutout” of the North American market in the last designed cycle, any opportunity we win for the North American markets with Chaplin is a new design win opportunity. And then most of the rest will be some amount of migration and a lot of them will be new opportunities. But again, it’s still pretty early stage engagements.

Tayyib Shah - Longbow Research

Okay. And then finally, I mean if I look at your customer base, you have higher exposure to the Chinese manufacturers. You think you should be maybe focusing -- shifting the product development focus away from the Torino kind of product and more towards the single-chip DTV solution, the Chaplin kind of product? And is there anything you are doing for -- in that regard?

Eli Antoun

We are already shifting our developmental efforts, more and more away from single-chip analog-only solutions to single-chip completely integrated HDTV, analog TV solutions. We are definitely addressing the China market and focusing on that because our position there is strong and it also represents a significant growth opportunity in terms of units over the next two to five years, and we will have more to talk about in the next few months about a China-focused DTV platform solution.

Tayyib Shah - Longbow Research

Okay, thank you guys.

Eli Antoun

Thank you, Tayyib.

Mike Healy

Thanks, Tayyib.

Operator

We go next to Craig Berger from Wedbush Morgan.

Craig Berger - Wedbush Morgan

Good afternoon. Thanks for taking my questions. I wanted to dig in a little bit on the gross margin decline. It seems to be fairly steep heading into March, and I was just wondering if you could provide a little more color on that please?

Mike Healy

Sure, Craig. It is really a combination of things. Our product mix is declining more towards monitor and those products have less gross margin, as you know. And it's also -- when you have a lower revenue base, there is a certain component of cost of sales that are fixed and spreading out over a smaller revenue base, half into the gross margins. And we are expecting a little less licensing revenue, which as you know, comes with 100% gross margin. So, all three of those factors are contributing to that decline in gross margins from December to the March guidance.

Craig Berger - Wedbush Morgan

Are you able to quantify that last factor at all?

Mike Healy

The licensing impact?

Craig Berger - Wedbush Morgan

Right.

Mike Healy

It’s immaterial -- it’s immaterial enough impact, because this December quarter we did get by an upfront payment from MStar that certainly helped gross margins.

Craig Berger - Wedbush Morgan

Okay. And then with respect to some of the spending reductions, should we expect that more in the R&D line or the SG&A line?

Mike Healy

Predominantly in the SG&A line. When we did these reductions, we really tried to focus just and leave essentially product development alone and take customer we could in all the other areas of sales, marketing, and G&A with the primary focus in the SG&A line, so a little bit in R&D, but really wanted -- our success is really dependent on getting new products out in the marketplace and ramping up Chaplin, so we didn't want to disturb that momentum, as least as possible.

Craig Berger - Wedbush Morgan

Right. And then lastly, you commented briefly about some unit share losses at our largest monitor customer, do you see continued reduction in share there or has that loss mostly occurred already?

Mike Healy

Craig, we're adjusting two layers of market share losses there. We believe that the customer themselves have lost market share, so we are hoping that they turn the corner and they rebound. They're pretty aggressive customer in the end and so we hope to benefit from that. In terms of the ramp-up of the second source there are -- from what we can tell, it started sometime in the September quarter, and we believe now that the ramp has reached its equilibrium level. So, we do not expect any additional market share loss there, but we compete for every opportunity there.

Craig Berger - Wedbush Morgan

Let me just sneak one last question in here, I guess, we're heading into a New Year 2007, it’s not your fiscal year, but is there any visibility or color or commentary you can provide us at all with respect to how you see the rest of the year playing out, particularly on the TV side?

Eli Antoun

I think as we try to say this is going to be a challenging year. We're not able to give visibility beyond the current quarter that we're in. And because of that to a large degree a lack of visibility by ourselves, it's hard for us to comment any further.

Craig Berger - Wedbush Morgan

Thanks a lot, and good luck.

Eli Antoun

Thanks, Craig.

Mike Healy

Thank you, Craig.

Operator

We'll go next to Jennifer West from Merriman.

Jennifer West - Merriman

Good afternoon. I wonder if I could just follow-on on that last question, as maybe you could talk to, just may be any opportunity that you foresee in calendar year '07 with either any of the Tier 1 OEMs like Samsung or Sony, or maybe with new outsourcing opportunities like Panasonic?

Eli Antoun

We cannot at this point. Again, what I'd like to do is reiterate what I said, which is the response to Chaplin at CES. We had given a sneak preview of Chaplin to some customers even before CES. The combination of the responses that have come from these two activities give us pretty good confidence that we are doing the right things, and that if Chaplin is on schedule and we have every intention for it to be on schedule that we'll do reasonably well. We'll have new customers that we haven't had before. We'll have customers that we have had before, but not on Digital TV, and we'll go forward from there. And at the right time, in collaboration with our customers, we'll be able to announce these opportunities.

Jennifer West - Merriman

Okay. Can you talk your ASP expectations in monitors and in TVs for calendar year '07, are we expecting the same kind of pricing pressure as we saw last year or is any kind of competition in either market increasing the pricing pressure?

Mike Healy

Yeah, I mean when not giving specific guidance, we certainly expecting to have pricing pressure on the analog side in TV with our older products. But I am reasonably hopeful that our mix will change as Chaplin in the PurVIEW HD 500 ramps up that helps our mix and overall pricing pressure -- ASPs don't decline that much because our mix helps us. And then monitor -- the same kind of story in that. With DisplayPort ramping out that we'll be able to charge a premium or a stall expected ASP price decline. So, we think with our mix coming out of new products, we won't see as aggressive price reductions as we've seen over the last year.

Jennifer West - Merriman

Okay. And then, can you maybe talk to where your breakeven level is today and where you expect that to go, I guess in June of this year on a revenue and margin level?

Mike Healy

Yeah, I mean without giving you specific numbers, if you assumed a $50 million revenue base, we'll have to have Op expense around $24 million or $20 million to be breakeven. So certainly in the March quarter what we're looking at in terms of Op expense, we haven't guided revenue yet. It will be hard for us to say what'll be breakeven at March.

Jennifer West - Merriman

Okay. Thank you.

Operator

We'll go next to Jason Pflaum from Thomas Weisel Partners.

Jason Pflaum - Thomas Weisel Partners

Yes, good afternoon, couple of quick questions here. Maybe just to start, when you look at your guidance for the March quarter and take it by your customers there, do you think March is a true base as far as good look forward based in -- most of the share erosion has already hit you and then that's kind of the base you should forward to?

Eli Antoun

This is a perfect soft log, Jason, for me to comment and say I absolutely don't believe it. But again, our -- I mean, I absolutely believe this is the low point. But again, our visibility beyond a quarter a time is really hampered just by the nature of the business we are in and the fact that over the next quarter or two also, we'll be ramping up new programs. So, I would very, very much like to answer the question, yes, this is the low. But again, we'll take it one quarter at a time.

Jason Pflaum - Thomas Weisel Partners

Does the low mean you don't anticipate further share erosion from here or is a low on an absolute revenue basis?

Eli Antoun

On an absolute revenue basis.

Jason Pflaum - Thomas Weisel Partners

Okay. Do you anticipate further share erosion as some of the products that you may have lost last year just start ramping say in June as opposed to March? Or do you not see much more of an impact?

Mike Healy

It still has been a side, right. That one is going to continue to ramp down. We are certainly seeing some impact in March from Philips. June will be worse. And then, by the September quarter, we'll have very little revenue from that. That customer -- that will be offset by the seasonal trends moving up in TV from all of our other TV customers.

Jason Pflaum - Thomas Weisel Partners

Okay. Maybe it would help, but I think last quarter you gave general share expectations for your top three customers, are you able to do that again today?

Eli Antoun

It's very hard -- that's very hard to answer. Again, our position at Toshiba is very, very strong. Our Toshiba -- our position at LG continues to be strong, but there are different opportunities there that we were not part of, and we've already announced that Philips is going to continue to go down until we've made our final shipments to them and that may take another two to three quarters to go out.

Jason Pflaum - Thomas Weisel Partners

Okay. I guess the last question and then --

Eli Antoun

And we are not in a position to comment at this point in time, vis-à-vis any other gains that we've made with other customers in terms of specific market share numbers.

Jason Pflaum - Thomas Weisel Partners

Just a last question then, was Philips a 10% TV customer this past quarter?

Mike Healy

Yes, they are an overall 10% customer.

Jason Pflaum - Thomas Weisel Partners

Okay. And the March quarter?

Mike Healy

March quarter, they will not be.

Jason Pflaum - Thomas Weisel Partners

Okay. All right, thanks guys.

Mike Healy

Thanks, Jason.

Eli Antoun

Thank you, Jason.

Operator

We'll go next to Andrew Huang from American Tech Research.

Andrew Huang - American Tech Research

Just kind a follow up on that last question, were there any other 10% customers in the quarter?

Mike Healy

In the December, no, just Philips.

Andrew Huang - American Tech Research

Okay. And then, when I look at your unit projections for the March quarter, I mean -- I guess the question I have is, where is your conviction level coming that your monitor business will be down only 15% sequential and your TV -- flat-panel TV business will be down only 30% sequential way, I mean could it be worse than that? And I am just kind of trying to figure how you've got those forecasts?

Eli Antoun

Again, at the moment in time that we do our forecast and we give our guidance, we are four to five weeks into the quarter. We are measuring against what we already have on the books, our own internal forecasts. We continue to work very diligently with the field and with the customers, and this is our best representation of what we know at this point in time.

Mike Healy

I am sorry, Andrew to interrupt. We can't anticipate market share wins or losses from our customer base until we know what their order is. So, that's what plays a little bit of -- gives us a little bit of variation in our revenue numbers, certainly in our unit numbers.

Andrew Huang - American Tech Research

Okay, and then one follow-up. Are there any programs that -- maybe ramping new programs or new designs wins that you're ramping in the March or June quarters that could potentially provide some upside?

Eli Antoun

We have new programs ramping up with customers almost every quarter and the customers give us their best guess estimate as to what these volumes are. And the potentials for upsides and downsides come from the customers' actual performance in the marketplace, and that's really the best way for us to look at things. And when we give the guidance, we try to embed almost all this information into the guidance.

Andrew Huang - American Tech Research

Thank you.

Mike Healy

Thank you, Andrew.

Operator

We'll go next to Tore Svanberg from Piper Jaffray.

Heidi Poon - Piper Jaffray

Hi, this is actually Heidi for Tore. Just follow-up question on the DisplayPort product. You mentioned earlier that it'll be extended to all your TV products. What is your HDMI 1.3 strategy for the TV products in the meantime?

Eli Antoun

We expect to support HDMI 1.3 in all of our TV products.

Heidi Poon - Piper Jaffray

Okay, great. So, good job on the working capital management here. I just wanted to see if there is any more room for that type of management that where do you see cash flow operations? Are we going to see that to fluctuate with your net income level or are there any other inflow [ancillary] there?

Mike Healy

Yeah, we -- there are two big ones [ancillary], inventory and AR. We manage those as close as we can. So, a lot of the cash flow positive or negative results really at this point come from earnings, we're -- we're managing the inventories as close as we can, but we got to make sure we have enough product to ship to our customers and we can always meet any upside they may have. So it’s really more cash flow depending on overall earnings at this point in time. And we're not investing heavily in any CapEx or anything like that.

Heidi Poon - Piper Jaffray

Okay, great. Thank you.

Operator

We'll go next to --

Mike Healy

Thank you.

Eli Antoun

Thanks, Heidi.

Operator

For a follow-up from Tayyib Shah.

Tayyib Shah - Longbow Research

Hi guys, a question for Mike. Are you -- should we expect margins to trend in the mid-30% range, longer-term from here? And are your TV margins now beginning to look pretty similar to your monitor margins?

Mike Healy

So the second part of the question is, yeah, the margins in TV are still better than the margins in monitor, although I would say the gap is closing a little bit from what it used to be. In terms of looking out in the future on gross margins, a lot of variables to consider, certainly as we grow revenue in our TV business to expect stronger, that would help gross margins. I am not ready to talk about what our long-term numbers is going to be. What we're certainly looking to try to improve that from where we are at this quarter, the March quarter and doing everything we can to lower our product cost, keep our ASPs up, and grow the gross margin lines, but no predictions beyond the March quarter.

Tayyib Shah - Longbow Research

Okay. The reason I asked the question is because, if I just take the product mix shift in the next quarter, I only get a little bit of margin deterioration, so I was just wondering if in your TV business, your ASP erosion on a part-for-part basis has accelerated in the next quarter -- I am sorry, in the current quarter?

Mike Healy

On a part-for-part basis, no, it's been pretty consistent over the last couple of quarters in the TV space, the part-for-part erosion. That certainly has some impact on gross margins, but it’s not much different. Again, the thing driving down gross margins in the March from December, as product mix a little less, TV revenue expected in this quarter, and less licensing revenue, which comes with a 100% gross margins.

Tayyib Shah - Longbow Research

Okay. And then --

Mike Healy

And overall lower revenue level, right.

Tayyib Shah - Longbow Research

Okay. And then the two-to-one chip transition looks like you still have 200,000 units difference between the TV chassis and the flat-panel TV unit, does that get flushed out of the system in the March quarter?

Mike Healy

Yes, I expect it would be pretty much done in the March quarter and not have to talk about it. Our largest TV customer essentially moved away from the two-chip solution they were doing, Cortez plus Hudson and gone to Cortez Advanced, or Cortez Lite or Plus. So that was the biggest impact and certainly it had a big impact this quarter from September, but going into March, I expect the impact to be very minimal from two-to-one transition.

Tayyib Shah - Longbow Research

Thank you.

Mike Healy

Thanks, Tayyib.

Operator

We'll go next to C. J. Muse from Lehman Brothers.

C. J. Muse - Lehman Brothers

Yeah, good afternoon. I guess couple of questions. First off on the monitor front, it looks like the upfront and royalty was about3, 3.5 million bucks. And I guess my question is, how much of that was upfront and then how should we think about royalties going forward?

Mike Healy

Yeah, C. J., it’s -- the terms of the agreement are confidential, so it’s hard for me to give you an exact number, but we did get -- the amount upfront was bigger than the ongoing -- first payment on ongoing stream we got and we expect that ongoing stream to be relatively consistent quarter-over-quarter without giving an exact number, because it’s terms are confidential.

C. J. Muse - Lehman Brothers

And how much uplift do you think that gave you to your gross margins this quarter?

Mike Healy

It helped probably 2 to 3 points.

C. J. Muse - Lehman Brothers

Okay. And then moving over to TV side, what do you think PurVIEW 500 will be as a percentage of your mix here in calendar '07?

Mike Healy

So, if you -- go ahead, Eli.

Eli Antoun

The five -- the PurVIEW 500 will contribute some appreciable revenues in calendar '07, but we’re not counting on it to be significant as we support more and more of our customers on Chaplin to go to production at the very latter part of '07 and early '08. We do have one customer who has gone into production. We have two more working on programs to take the production between -- let’s say, between April and July, and we expect that those customers will generate, again, some appreciable revenue, but the bulk of Genesis’ HDTV revenues will come from Chaplin beginning in the latter part of this year, the very latter part of this year and into '08.

C. J. Muse - Lehman Brothers

Okay. And then I guess trying to better understand what the trajectory on the TV side will look like for you here in calendar '07. I guess when you look at -- now that we have exited calendar ’06, all the businesses you had there, all the customers you had there, and I guess factoring in loss -- a major loss from one of the customers, what kind of units could you see from that existing customer base without throwing in additional wins?

Mike Healy

It’s -- this is very difficult to answer and again it’s -- our visibility is very difficult. So it’s, we cannot, in good conscience give you numbers. I mean, I think what we can say is, we will lose market share this year on the TV side, again, driven primarily by this -- by the customer that we've lost. We have made -- we have achieved design wins and new customers that will be ramping up over the course of the year and the success rate of these design wins will determine to a large degree how we perform over the rest of -- over the rest of the calendar year.

C. J. Muse - Lehman Brothers

Got you. Great, thank you.

Mike Healy

Thanks, C. J.

Operator

We go next to Jay Srivatsa from Roth Capital.

Jay Srivatsa - Roth Capital

Yeah. Hi, Eli, hi, Mike, couple of question, if I may. If I take a long-term view, obviously '07 looks like it's going to be a tough year for you. Can you just kind of look ahead to '08 and kind of set the stage for us in terms of what kind of strategic changes you’re going to be making to your business model and strategy to really put yourself in a position to do well in '08?.

Mike Healy

So, from an overall strategy -- by the way, hi, Jay. From an overall strategy, first we are making -- we are taking every step possible to ensure that we are fully back on track in both of our monitor and TV business. The single biggest strategic move on the monitor side other than continue with our roadmap to support our customers there is to bring up DisplayPort, to launch it successfully this year with our customers, and initially it'll be in -- mainly in their big flagship programs, big meaning the higher-end flagship programs, and then over the course of the year, win the designs that start to help our customers and us moving to high volume production with DisplayPort products. That's the single biggest strategic move on the monitor side of the business. On the TV side, just like the North American market has completely switched over to single-chip ATV/HDTV solutions, we're now with Chaplin first in a position to start participating significantly in the North American market, but also with the preparation of our European platform within the next few months and our China platform, very soon after that we will be in a -- we believe in a very strong position from a TV perspective to be a key player in all the HDTV design win opportunities, and our strategy is going to be focused on succeeding in these two areas in all the IT, all the support that goes to support these two key objectives.

Jay Srivatsa - Roth Capital

Okay, fair enough. You have a pretty sizeable cash balance here, which has obviously been a good positive for you. Can you share with us what your plans are? Are you looking at any key acquisitions that could give you head start going into '08 or maybe any other plans you may have in terms of use of cash?

Mike Healy

Yeah, our most important uses of cash are actually two-fold. One is to continue investing in the products and the IT that we have today that need to come to market in order to put us back on track, again, within the strategy that we've outlined. And number two, as we've said in many forums, the company still potentially needs to use some of this cash to acquire pieces of IP and technologies that are very important to continue the ultimate success of this strategy in preparation, again for European HDTV, for the China HDTV markets, and that's where we expect to be investing most of our cash.

Jay Srivatsa - Roth Capital

Okay. Thank you, good luck.

Eli Antoun

Thank you, Jay.

Mike Healy

Thanks Jay.

Operator

We'll go next to Brian Alger from [Strata Capital Management].

Brian Alger - Strata Capital Management

Hi guys. Thanks for taking the call. I appreciate it. A couple of things, in your written docs you talked about European week, I am wondering if that is a function of the end market or the fact that you've lost the customers, specifically in Europe with LG and Philips?

Eli Antoun

Brian, from what we can tell is that the end market itself has experienced significant volatility. There were significant -- there was a significant, I guess upside in the June quarter and expectations for the September quarter in that market that we benefited from. And again, they did not -- the types of expectations that our customers had did not materialize and they have had to readjust their orders from us accordingly. Now separately, our customers are -- have very strong exposure in Europe and that means that's positive, but at the same time there are other top OEMs in Europe and they have been very aggressive also. And so, there is always a tug and pull amongst the end customers as to who wins what in Europe, and we do see those results reflected in our own results also.

Brian Alger - Strata Capital Management

Okay. And just one last one. Obviously, the monitor market is going to be tough flooding with second source coming in at Dell, which we've anticipated for years. When we look out over the course of calendar '07, realizing that you are going to have some share loss here. What should we think of in terms of total unit volume for the monitor market here?

Eli Antoun

Again, along the same lines as we answered the previous question on total TV units, it's very hard for us to give guidance on total units for the longer period of time. So, we will take you one quarter at a time. We did -- we've talked openly about losing some share at our largest customer, but we've also won design wins at some of the other top OEMs and we hope that our share there will grow, and overtime not just overcome the losses that we have at our top customer, but help the company grow further in that market.

Brian Alger - Strata Capital Management

Okay. And just one final one. It kind of seems like many of us on this call had seen the movie before with some others in this industry. How aggressive are you going to be on the cost cutting, realizing that obviously you want to keep one foot on the gas with the product development and on the other hand, burning through that cash base which obviously is your strongest asset right now is a bit precarious, what's you philosophy as you look at that?

Eli Antoun

Our philosophy is that we believe at this point we've taken the necessary measures to align our operating expenses a little more closely to our revenue, although our revenue is not where we wanted to be. We believe that the investments that we have to make right now and continue to make right now are really critical and very important in order for us to succeed in the steps that we've already taken to get us back on track. And again, Mike and I are keeping our eyes very closely on our expenses and managing those very, very carefully, and we will take it again one quarter at a time. But right now, we have taken the steps that we need to take and we are focused on the top line of the company, winning the designs, and brining in the customers, and re-growing the top line.

Mike Healy

So, operator, I think we have time for one more question.

Operator

Yes, sir. We'll go next to Adam Benjamin from Jefferies & Co.

Adam Benjamin - Jefferies & Co.

Thanks guys. With respect to the LCD monitor business, have you thought about any kind of strategic alternatives there as to what you can do? The end market unit growth is declining or slowing and you have lost some share there and it's going to continue to be tough on ASP front. I am just curious if you are thinking about ways to monetize that business at all? Thanks.

Eli Antoun

Yeah, Adam, this is the kind of question that we really are not able to comment on. So right now, our focus is on the product road map for this business, on winning designs, and on growing the top line for this business, just as we are focused in the same manner on our TV business.

Adam Benjamin - Jefferies & Co.

Okay. So, if you were to maintain it Eli, what kind of unit growth do you expect over the couple of years and as well as ASP declines that would cause that business to show revenue growth on a year-over-year basis?

Eli Antoun

Again, it goes back to the visibility a long-term beyond what we have in front of us. So, I am not able to answer it very specifically. However, we clearly have expectations for DisplayPort to create a position for us that is far better than the position we are in today and that's why we are investing in DisplayPort. We have a couple of major, again flagship type design wins with top two customers in that market -- top two end customers in that market. And we expect that as we succeed with DisplayPort, a lot of the numbers will start coming back and we'll talk a lot more about that.

Adam Benjamin - Jefferies & Co.

Okay. One last question on DisplayPort. Do you expect any specific degrading I guess or eating away at your existing LCD monitor business from DisplayPort as that gets adopted in a marketplace?

Eli Antoun

DisplayPort products that contain DisplayPort that are intended for direct drive monitors, I mean the desktop is sold directly with the monitor that comes with it and uses only DisplayPort to go from the desktop to the monitor clearly precludes the need for a scalar in that monitor. So, that's where kind of some of the cannibalization will happen. We expect that that segment of the market will be pretty small in the first year of ramping up DisplayPort because many of the monitor OEMs and the many of the monitor system integrators will still want the safety of having legacy product -- ability to support legacy desktops and legacy products to sell DisplayPort and some of our -- variations of our products will ship along with scalars and that's additional opportunity.

Adam Benjamin - Jefferies & Co.

Okay, but overtime you do expect the scalars to go away?

Eli Antoun

Overtime, -- and that time could be several years. We do expect that scalars will go away from the PC side of the business.

Adam Benjamin - Jefferies & Co.

Okay. Can you just still remind us what kind of ASP you are targeting on DisplayPort?

Eli Antoun

It's really early right now. Our existing -- our first generation products will have reasonably high ASPs when compared to other monitor products, but they are also targeted for flagship higher-end monitor solutions at this point. But again, I think an equilibrium DisplayPort products will be priced in the relative range of what's scalar products are priced today in the monitory business down the road.

Adam Benjamin - Jefferies & Co.

$3 to $5 makes sense?

Eli Antoun

That's really difficult and impossible to answer, Adam.

Adam Benjamin - Jefferies & Co.

Okay. All right. I'll go away guys.

Mike Healy

Thanks, Adam.

Eli Antoun

Thank you.

Operator

And there are no further questions.

Eli Antoun

Again, thank you all for joining us. Mike and I and the rest of the executives team at Genesis are disappointed with our results and our outlook, but I want to assure everybody that we are doing everything we can to continue to invest, to take advantage of the growth opportunities that the company has in front of it while maintaining a very, very close eye on our costs. Thank you for joining us and take care.

Operator

And that does conclude today's conference. Everyone have a great day and we thank you for your participation.

Tonya Chin

[technical difficulty] earnings release is available on the company's website at gnss.com. Genesis will be participating in the following upcoming conferences, the Thomas Weisel Partners 2007 Technology Conference on February 5th in San Francisco, the Roth 19th Annual OC Conference on February 20th, the D.A. Davidson 5th Annual Technology Conference on February 22nd in Phoenix, and the USDC Needham Display Conference on March 1st in this New York City.

This concludes our call. Thank you for joining us.

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