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Executives

Mike Bishop – Investor Relations, The Blueshirt Group

Camillo Martino – Chief Executive Officer

Noland Granberry – Chief Financial Officer

Analysts

Christopher Longiaru – Sidoti & Company

Rajvindra Gill – Needham & Company

Richard Shannon – Northland Securities

Shawn Boyd – Westcliff Capital Management, LLC

Silicon Image, Inc. (SIMG) Q1 2011 Earnings Call April 26, 2011 5:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Silicon Image’s First Quarter 2011 Earnings Call. During the presentation all participants will be in a listen-only mode, after which we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Tuesday April 26, 2011.

I would like to turn the conference over to Mike Bishop. Please go ahead, sir.

Mike Bishop

Good afternoon, everyone, and welcome to the Silicon Image’s first quarter of 2011 financial results conference call. I’m Mike Bishop from Silicon Image’s Investor Relations. Joining me today 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 the discussion of the financial results and the product and market strategy from Camillo. Noland will then provide a more in-depth discussion of the financial results and provide a financial performance estimates for the second quarter of 2010. We will then open the call for Q&A.

Before I turn the call over to Camillo, let me remind the listeners that we will be making forward-looking statements based on our current expectations during the call regarding many aspects of our business and the markets in which we operate, including, but not limited to forward-looking statements about our financial performance, our current and future products and technologies, the timing of new product introductions, average selling prices, design wins, market demand for our products and operating expenses.

Our actual results may differ materially from our forward-looking statements and we disclaim any obligation to update any of our forward-looking statements. In addition our forward-looking statements and the company’s future results are subject to risks and uncertainties, which we described in today’s press release, as well as in the most recent periodic reports on Forms 10-K and 10-Q filed with the SEC. These documents describe certain relevant risk factors that could affect our future results.

I also want to mention that we have provided a financial metrics table and a reconciliation of non-GAAP financial information to GAAP information in our first quarter 2011 financial results press release, which is available on the Investor Relations section of our website at www.siliconimage.com.

And with that, I will now turn the call over to Camillo.

Camillo Martino

Thanks Mike. Good afternoon and thank you joining our conference call today. I will first give you a brief overview of our recent company’s events and performance followed by a market update. Then Noland will go through the numbers in more detail and provide you with an outlook for Q2.

Revenue for the first quarter of 2011 was $49 million, in line with the high-end of our expectations, compared to $52 million for the fourth quarter of 2010 and $34.3 million for the first quarter of 2010.

Non-GAAP EPS was $0.03 compared to $0.07 last quarter and a loss of $0.05 in Q1 of last year. We are pleased with our company’s performance in Q1, including the overall financial results, the progress we made in the mobile segment and the actions we took supporting our long-term corporate growth strategy resulting in the definitive agreement to acquire wireless technology company, SiBEAM.

Our philosophy is that consumers will want a variety of HD connectivity options regardless of whether it is wired or wireless and we are committed to providing a full range of HD connectivity solutions.

As we’ve seen in our recent conference call to discuss the announcement of the definitive agreement, SiBEAM has a successfully developed technology and products that wirelessly transmit HDMI-quality video between devices in the same room using the 60 GHz frequency band. They have solved many of the technical complexities associated with 60GHz technology to make it a commercially viable product.

SiBEAM’s technology with multi-gigabit data rates offers the highest throughput of any mass-market wireless solution available today and has already been designed into products for the DTV and PC markets.

Just this past week Dell’s Alienware has started featuring Notebook PCs that offer WirelessHD as a configuration option. In addition, a VIZIO Universal Video and Audio Kit compliant with WirelessHD is available at retail now and according to VIZIO product description it lets you mount you HDTV in one area of the room and have your Blu-Ray player or gaming console on our equipment up to 30 feet away.

Now let’s address why we have chosen to acquire 60 GHz wireless technology. For the closest to an HDMI cable like experience, this technology is the only viable wireless solution available today. That means wireless, real-time, interactive HD video delivery between different HD capable devices such as a notebook PC and a DTV.

60 GHz technology enables the transmission of multiple gigabits per second, a key requirement for uncompressed HD video. Its in-room characteristics allow for multiple non-interfering hotspots in the home or office, providing an enhanced overall user experience. Leading companies have also endorsed 60 GHz technology via two standardization efforts; WirelessHD and WiGig. SiBEAM’s products not only implement and support WirelessHD but also provide compatibility with WiGig.

Now let’s take a closer look at our revenue for the first quarter starting with IP, then CE products, which include DTV and home theater followed by mobile products. Our IP business came in strong, representing over 20% our overall revenue due to the continued global success of the HDMI standard. There are now more than 1,000 HDMI adopters worldwide and it is forecasted that there will be an installed base of over two billion devices with an HDMI interface by the end of this year.

Broadly speaking the CE segment performed in line with our expectations in Q1. Our customers continue to design in our standards plus products into their high-end and mid-range DTVs and we are in discussion with a number of DTV manufacturers regarding the adoption of MHL and ViaPort technologies.

The recent tragic events in Japan are clearly an important consideration for the CE industry. The earthquake and tsunami combined with the nuclear crisis have brought terrible hardship to the region and our thoughts are with the people of Japan who have shown extraordinary strength and determination during this difficult time.

We have extensive relationships in Japan with customers and partners and so in addition to the overwhelming humanitarian concern we are also concerned about our employees, friends, customers and partners. A number of investors have recently called and e-mailed questions regarding this, and so I would like to share our thoughts on the potential economic impacts to the company.

Relative to the potential impact on our business, there are three points I would like to expand upon. First, our ability to supply product to our customers, second, the ability of our customers to manufacture and deliver product, and third, the worldwide consumption of CE products.

On the first point, we have informed our customers already that we do not anticipate any supply disruptions as a result of the events in Japan.

Regarding the second point, referring to our customers’ ability to manufacture products, we are in regular discussions with our customers to get the latest updates. But based on the information we have received to date, there appears to be only minimal impact so far to our customers’ manufacturing capabilities.

Regarding the third and final point, the potential negative impact on the worldwide consumption of CE products as a result of the earthquake, consumption outside of Japan appears to be in line with our expectations.

As for CE consumption in Japan, like many other companies, we are not yet able to fully determine the impact of the earthquake is going to have. We obviously continue to monitor the situation and gather more data points to get a better understanding of potential implications to our business.

While Silicon Image has typically derived approximately 30% of revenue from Japan based on billings, we note that CE products utilizing a Silicon Image device destined for sale in Japan are estimated to represent approximately 10% of our 2011 shipments.

Now, I’d like to talk about a couple of key trends in our CE business, which covers DTV and home theater. Looking at DTV specifically, based on recent channel discussions, we believe that major DTV brands are making a push for increased market share by focusing more in the mid-range and lower-end models. While the overall DTV market continues to grow, the high-end market segment may experience some volume pressure.

Home theater continues to be an important business for us, providing a complimentary business to our DTV product line. In past conference calls, we acknowledged a level of under investment in this area in prior years, which is resulting in underperformance.

With an eye towards bolstering this product line, we completed the acquisition of Anchor Bay Technologies in Q1 earlier this year adding video scaling and video processing technologies to our home theater portfolio. In addition, we expect wireless HD adaptors based on SiBEAM’s products to also contribute to this market segment.

Moving on to our mobile segment, mobile product revenue continues to grow both as a proportion of revenue and in terms of absolute dollars. In Q1, mobile represented nearly 17% of product revenue at $6.2 million. This compares with a 11% or $4.5 million last quarter.

MHL penetration into mobile devices is on a steady growth path and on the track to becoming an increasingly meaningful revenue contributor, as we have predicted over the past year. In fact, we expect the growth to be better than we had anticipated due to the number of MHL-enabled devices launched to-date.

In Barcelona, the Mobile World Congress, Samsung launched a Galaxy S2, the world’s first MHL-enabled smartphone. Recently, HTC also announced a number of mobile devices with MHL, including the EVO 3D smartphone and the Flyer Tablet.

As noted during last quarter’s call, based on our preliminary market data for 2011, we estimate the HD connected category of smartphones and tablets to grow to around 10% to 15% of the total market size. At this early point of the technology adoption cycle, it is difficult to estimate end market share, but we continue to be pleased with the trends that are shaping up.

We believe that we are reaching an inflexion point in the market and the MHL standard is still at the beginning of a multiyear cycle of penetrating the mobile market. We believe the robust growth we see in mobile products will offset the anticipated lower Home Theater revenue levels due to under investment in prior years, will also offset the potential impact of the Japan earthquake, and also any possible softness in the DTV market. We will of course update you on these trends on the next earnings call.

Over the past year, our management team has been sitting on the course to focus on Silicon Image’s core competencies and build out our future growth strategy while simultaneously growing product and IP revenue. Combining our performance with our recent acquisitions, we believe we have set the stage to grow the company further and continue our mission of delivering advanced wired and wireless HD connectivity solutions.

Noland will now provide more details on the quarter and an outlook for Q2. Noland?

Noland Granberry

Thanks, Camillo. Good afternoon, I would like to cover three topics. Highlights of our Q1 financial results, our financial performance estimates for Q2, 2011, and a financial update on the SiBEAM acquisition. Unless otherwise indicated, gross margin, expenses, and earning related items are reported on a non-GAAP basis, which excludes stock based compensation, amortization of intangible assets, restructuring charges, and business acquisition related expenses.

Our GAAP financial results and a reconciliation of non-GAAP measures referenced in today’s call are available on the Investor Relations page of our website at www.siliconimage.com.

Before I begin with the detailed results, I would like to clarify that we have updated how we will present our product revenue category. And mobile is becoming a much larger piece of our business. We believe it is important to separately represent the mobile revenue results.

As such, beginning with this quarter, we will report our revenue in three categories; consumer electronics or CE, mobile and PC. Our CE revenue will consist of DTV and home theater. We will separately report under our mobile, our mobile activities including HDMI mobile and MHL. Well, actually we’ll classify all of our PC and storage activity under the PC category.

Revenue for Q1 was $49 million compared to $52 million for Q4 2010 and $34.3 million for Q1 2010. Product revenues totaled $38.1 million or 77.7% of total revenue for Q1 2011 versus $42.1 million or 80.9% of total revenue for Q4 2010 and $26.3 million or 76.6% of total revenue for Q1 2010. Our product revenue was down sequentially, in line with seasonal expectations and increased by 44.7% year-over-year.

Total CE revenue for Q1 2011 accounted for 69% of product revenue versus 71% in Q4 2010 and 83% in Q1 2010. Mobile revenues were 16% of product revenue for Q1 2011 versus 11% and 3% for Q4 and Q1 2010 respectively. Our PC revenue accounted for 15% of product revenue for Q1 2011 versus 18% in Q4 2010 and 14% in Q1 2010.

For Q1 2011 our average selling price was $1.23 versus $1.39 for both Q4 2010 and Q1 2010. The decrease is mixed driven primarily result of our lower home theater revenue, which has a higher ASP range, as well as increasing mobile revenues, which has a lower ASP rate.

IP revenue for Q1 2011 was $10.9 million or 22.3% of total revenue versus $9.9 million or 19.1% of total revenue for Q4 2010 and $8 million in Q1 2010 or 23.4% of total revenue. IP license revenue was slightly higher sequentially and on a year-over-year basis due to higher royalty revenue on increased activity.

Product gross margins approximated 48.3% for Q1 2011 versus 51.3% for Q4 2010 and 44.3% in Q1 2010. Product margins trended down in Q1 from Q4 2010 in line with expectations.

Our IP gross margin was 96.3% in Q1 2011, 98.3% in Q4 2010 and 99.7% in Q1 2010. The change in IP gross margin is a result of a higher mix of IP customization revenues in the current quarter versus prior periods.

Our overall gross margin for Q1 2011 was 59% as compared to 60.3% for Q4 2010 and 57.3% for Q1 2010. Operating expenses for Q1 2011 were $26.5 million compared to $25.4 million in Q4 2010 and $23.2 million in Q1 2010. Our Q1 operating expenses are in line with our expectations, increasing sequentially due to our seasonal spend on certain tradeshows during the quarter and increased employer payroll taxes, which are generally higher in the first two quarters of the year.

On a year-over-year basis, our operating expenses increased primarily due to the additional R&D investments we’ve been making in pursuit of our long-term strategy. Our headcount as of March 31, 2011 and December 31, 2010 was 442 and 432 respectively excluding contracted resources compared to 406 as of March 31, 2010.

Operating income for Q1 2011 was $2.5 million compared to an operating income of $5.9 million in Q4 2010 and an operating loss of $3.5 million in Q1 2010. The improved operating performance on a year-over-year basis was primarily driven by the increase in the revenue and increase in gross margin as a percentage of revenue offset by higher operating expenses.

Other income was $0.5 million for Q1 2011 and Q4 2010 and $0.6 million for Q1 2010 and in line with expectations. Stock based compensation, which is excluded from our non-GAAP, results totaled $1.9 million for Q1 2011 compared to $1.4 million in Q4 2010 and $2.2 million in Q1 2010.

For Q1 2011, our non-GAAP net income was $2.4 million or $0.03 per diluted share compared to non-GAAP net income for Q4 2010 of $5.3 million or $0.07 per diluted share. For Q1 2010, our non-GAAP net loss was $3.6 million or $0.05 per share. On a GAAP basis, we incurred a net loss of $0.01 per share for Q1 2011 as compared to net income of $4.2 million or $0.05 per diluted share for Q4 2010 and a net loss of $0.10 per share for Q1 2010.

Diluted weighted average shares outstanding for Q1 2011 and Q4 2010 were $82.4 million and $80.5 million respectively. Weighted average shares outstanding for Q1 2010 were 76 million.

With respect to the balance sheet cash and investments as of March 31, 2011 totaled $181.6 million versus $190.5 million at December 31, 2010, and $163.3 million in March 31, 2010.

The net decrease in tax sequentially was primarily the result of payments made for the asset and IP acquisitions made earlier in the quarter. For Q1 2011, our accounts receivable totaled $26.8 million or 49-day sales outstanding.

Day sales outstanding for Q4 2010 and Q1 2010 were 39 days and 46 days respectively. Net inventory as of March 31, 2011 was $11.2 million, which represents 7.1 turns on an annualized basis. This compares to $10.2 million or eight turns at December 31, 2010 and $6.5 million or nine turns at March 31, 2010.

Capital expenditures for Q1 2011 were $1.7 million compared to $1.5 million for Q4, 2010 and $1 million for Q1 2010. This completes my summary of our Q1 financial results. Next, I would like to discuss our Q2 2011 financial outlook.

Our financial outlook for the second quarter of 2011 is as follows. Revenue $51 million to $53 million, gross margin approximately 56%, GAAP operating expenses approximately $28 million, non-GAAP operating expenses approximately $25 million to $26 million, interest income approximately $0.5 million, non-GAAP tax rate of 18%, diluted shares outstanding of approximately 83 million shares.

While we continue to monitor the potential impact from Japan earthquake, we continue to believe our product business follows our normal seasonal patterns. As such, our guidance for Q2 reflects our expectations for a seasonal increase in product revenue for the quarter. We also believe our product revenue for the third quarter will be seasonally higher than Q2.

As announced earlier this month, we ended into a definitive agreement to acquire SiBEAM. The guidance above does not include any impact from this pending acquisition. The transaction is expected to close within the next month. Our fund flows, we will increase our head count by approximately 50 people and begin recording revenue expenses at that time.

We continue to finalize our estimates of the financial impact and currently believe that the dilutive impact on our 2011 results to be in the range of $0.06 to $0.08. More specifically assuming the deal closes within the next 30 days, impact on Q2 is estimated to be dilutive by approximately $0.02 to $0.03.

It should be noted that we are committed to maintaining profitability. Furthermore, we also recognize by maximizing our revenues we can maintain or improve our profitability. We believe with our current CE and mobile offerings and the pending acquisition of wireless products we will be able to continue to grow our revenue base with the optimum goal of meeting or exceeding our long-term model targets.

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

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen. (Operator Instructions) And our first question comes from the line of Christopher Longiaru. Please proceed with your question.

Christopher Longiaru – Sidoti & Company

Hi, guys. Congratulations on the quarter and the guidance.

Camillo Martino

Thank you.

Noland Granberry

Thank you.

Christopher Longiaru – Sidoti & Company

My first question is just in terms of the IP revenue, I mean historically you’ve been around 15%, you’ve been at around 20% in the last couple of quarters. Do you think that’s going to be kind of a new run rate or what do you expect going forward on the IP?

Noland Granberry

This is Noland, Chris. I think we still look at the range to be in the 15% to 20% range. And we’ve talked about in the past how the business is lumpy and it depends on deals that may or may not close up in the quarter. So, our outlook, we still provide that 15% to 20% range.

Christopher Longiaru – Sidoti & Company

Okay. And just on your guide here in terms of the operating expenses are down a little bit it seems slightly even with increased revenue, what is that a result of I mean or was there any initiatives that you took to lower those operating expenses?

Noland Granberry

So for Q1, we indicate actually on the call that we thought they would be up from Q4, which they were and they were in line with what we were expecting. But we do think our trend going forward is in that $25 million to $26 million range that we talked about before. And if you look at what happened in Q1, it was tradeshows and the employer taxes were the main drivers to the higher than what we typically see or expect in our OpEx run rate.

Christopher Longiaru – Sidoti & Company

Okay. That’s all I ask for now. Thank you, guys.

Noland Granberry

Okay.

Operator

(Operator Instructions) Our next question comes from the line of Rajvindra Gill. Please proceed with your question.

Rajvindra Gill – Needham & Company

Yeah. Thanks. With respect to the SiBEAM acquisition, any more granularity in terms of the financials, in terms of revenue and gross margin. You talked about the OpEx impact, any details there on a going forward basis would be helpful for modeling purposes?

Noland Granberry

So Rajiv, I think as we’ve mentioned before the deal is actually not closed yet, they will close in the next 30 days. At this point what I’ll try to do is just provide some high level ranges of where we think things would be. But I think as after we close, we will be in a better position to provide that and expect to provide that late on our next earnings call when that become part of our numbers. And we will do that in next quarter.

Rajvindra Gill – Needham & Company

(inaudible) details on this earnings call.

Camillo Martino

Yes. Raj, that’s correct. Two weeks ago when we had the last call that’s what we did say. We’ve had more information on this call. Unfortunately the deal, we feel very uncomfortable in providing you more details until the deal officially closes. And the deal will officially close in the next month and that’s the reason for hesitating at this point in time. We think it’s only fair to do that until the bill is officially closed. But I think the data points that we have given you, we have given you a few data points. One, we should do a $0.06 to $0.08 for the reminder of this year dilutive. I think that’s one data point we mentioned.

We also said that if the deal closes in the next 30 days for this quarter specifically it’s roughly $0.02 to $0.03 dilutive. And I think the third data point we mentioned is that the head count is in the 50-ish range, 150 is there about. So at this point, I think that’s probably the best that we can provide you, but rest assure we’ll provide as more information as it becomes available. And once the deal officially closes, I think it’s only fair to do that first.

Rajvindra Gill – Needham & Company

And if I did the math correctly, it seems like in this quarter that the CE business, I just look at the TV business in isolation was down almost 30% sequentially. And that seems well below seasonal. And then going forward, we think a good initial ramp, which is good. But do you expect seeing revenue to be up off that kind of weaken there and did I characterize it right in Q1 basically?

Camillo Martino

You’re saying Q4 to Q1 TV is 30% down. I don’t think that’s the case. Remember last quarter we included the mobile number in CE, right. This was the first time actually no one tried make that comment before. This is the first time where actually a mobile was breaking it out separately as its own standalone number. In the past we always refer to it as a passing percentage. So last year the CE number included mobile. This year CE number excludes mobile and it’s really only TV and home theaters. So I think that that’s one of the reasons why you make the observation like you just did. Does that make sense?

Rajvindra Gill – Needham & Company

Yes. And on the initial ramp, any kind of matrix in terms of longer term? You talked about meaningful percentage of your revenue. It’s now about 15% of your product revenue. Any guidance in terms of longer term, what percentage do you think that could be?

Camillo Martino

I guess, I can tell you that the number is growing. As you can see its grown now sequentially for the last three quarters or so, which is that, we’re very pleased. We’re very are happy with what we’re seeing. So, another comment that we’ve made in the past is that we expect that the majority of the first half mobile revenue was going to be HDMI as compared to, Rajiv, it’s a comment we made in the past.

We are actually starting to see a mature traction and a very, very positive one. And so the transition from HDMI to MHL in the mobile category could come as early as middle of this year or slightly earlier than middle this year. So we’re pretty happy with that trend. So, I think you’re going to start to see the percentage continue to increase at least for the next quarter or two until it may stabilize. I have to tell you, I have to say specifically, at the end of the year we definitely expect that that percentage to increase even further in a much more meaningful way than the 16% number today.

Rajvindra Gill – Needham & Company

And of this $6 million any color in terms of – was that more smartphones versus tablets?

Noland Granberry

I guess this is probably about 50-50 at this point. I mean it’s still a relatively small number at this point on the grand scheme of things. But I think as a first order approximations for now that’s probably about right.

Rajvindra Gill – Needham & Company

Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Richard Shannon. Please proceed with your question.

Richard Shannon – Northland Securities

Hi, guys, two questions from me. I guess first of all related towards your prepared comments on the increased confidence in mobile. Can you care – if you’d care to have a guess on how many customers you might see buying, purchasing MHL Transmitter solutions finishing this year. I assume that some of this confidence comes from an increasing customer breadths, so I’m kind of curious if you give us some thoughts there, please?

Camillo Martino

I don’t think its appropriate to maybe mention the exact number, but you can see that the number of adopters if you look at the image adopters that’s increasing, in fact you may have noticed in addition to what we talked about previously, we talked about Samsung and HTC. But in the last I think recently I think that LG is also joining the theme as well. So that’s meaningful. And there are you will expect, we expect more and again I am not sure to give an exact number. But we do expect more adopters to come into the game in the coming quarters. So we are very positive on the way we are today. I think we’ve even used commentary. I used commentary. We are ahead of where we thought, better than expected, which I don’t like. Normally saying that is a general guide. But we’re pretty pleased with where we are today.

Richard Shannon – Northland Securities

Okay. Fair enough. And I also want to ask the question. One of your comments regarding the shifts within what you’re seeing from our TV OEM customers, the shift towards the mid-range here. I guess any thoughts on what’s driving that and to the extent; if I understood your comments correctly you’re accessing some caution on that dynamics specifically. Is there anyway, I don’t know if there’s anyway in what timeframe you might be able to address those, I guess these were shortcomings in previous year in the mid-range part of the market?

Camillo Martino

Yes, I mean, it’s a cautionary comment I think that we are putting out there. We still expect that our TV business will grow year-on-year. Can we achieve the double-digit number that we’ve talked about in the past, that’s still our goal, but it’s possible that we may not reach the double-digit goal this year. But we are still working closely with all of our partners. Clearly if you look at the impact Japan earthquake may have had, in Japan the televisions there are typically more higher end. And so, when some of the consumption in Japan maybe impacted that as a result of the earthquake, clearly the high-end category will be impacted there as buying a TV or buying any consumer gadget at this point in time given what has happened in Japan is probably the last thing on your mind if you go and do. So that’s why we are just putting a little cautionary note out there and we are working with our partners to make sure that we have the right data. But on the July call, we will be in a much better position to provide you more details. But we wanted to put it up there today, jump ahead of the curve and just make sure the comment is out there. That’s all.

Richard Shannon – Northland Securities

Okay. And I guess to compete more in the mid-range and we were just talking about just developing a product maybe a small number of ports or is there some other dynamic that, some are preventing you from more directly addressing that opportunity?

Camillo Martino

We have been looking at that for a while. The question is whether we opt an even more (inaudible) solution in terms of features at a lower price, that’s one path we can go down. But at the same time, we have a long-term strategy of driving this connectivity processor strategy and that clearly as we mentioned is going to take, at least two years, three years to take effect. So that’s the situation today, it’s a strategic choice. We want to participate offering additional products in the lower price point portfolio or do we want to continue on what we’ve been investing in to-date into what the connectivity process of strategy. Clearly, I got to do that or do we did both in parallel, when it becomes an affordability perspective of what can we afford to do concurrently. So that’s really the internal strategic thinking that’s going on right now, but we know we’re not in a position today to make any public statements.

Richard Shannon – Northland Securities

Okay. That’s fair enough, maybe one or maybe two more questions for me, Camillo?

Camillo Martino

Sure.

Richard Shannon – Northland Securities

Obviously, MHL is seems to be ramping very nicely in the products side. I am kind of curious, looking a little bit far out, but I’m getting a few questions on this, when do you think we might see a risk from integrated MHL on the transmit side integrate into a based vendor applications processor? So something that happens next year, is that more of a 2013 story? Any thoughts about how you are thinking about that?

Camillo Martino

Yes, I think we’ve made some comments in the past. It’s more of a 2013 plus sort of a situation, even 2014 sort of a scenario. So, on the next couple of years in this early stage of growth I think there is tremendous opportunity for everybody out there. And so really to answer your question because everybody (inaudible) 2013 and 2014.

Richard Shannon – Northland Securities

Okay. And Camillo, I just still have more of a question on your TV side, please remind us whether your port processors today are all include MHL capability and what percent of your customers there do you think are actually using that right now?

Camillo Martino

All of our new port processors have an MHL feature that is true, but that comment is more appropriate to say for 2012 product line-ups. This year because the standard only became official, the 1.0 standard became official at the end of June of last year enabled us to have samples of that in September, October of last year. That really prevented us from having customers all adopted in 2011. It is just physically time constraints did not allow that to happen. So although all of our new port processors have MHL included as well as HDMI, I think the impact of that we will start to see in 2012.

Richard Shannon – Northland Securities

Okay. Fair enough. I appreciate the thoughts once again guys, thank you.

Camillo Martino

Okay. Thank you.

Operator

Our next question comes from the line of Shawn Boyd. Please go ahead.

Shawn Boyd – Westcliff Capital Management, LLC

Hi. I want to clarify on the consumer electronics revenue share as we look at this going into the June quarter and thinking about that, number one, given what I am hearing on the call so far and where we’re guiding to the $51 million, $52 million, it looks like we’re looking that relatively flat. And it looks like the majority of that is due to kind of uncertainty around what’s going on in Japan, but I feel like I might have missed something earlier on the share shift and the mid-range market. Can you just clarify that a little bit for me? Thank you.

Camillo Martino

Sure. I think in Q1 we announced $49 million, that’s true. We’ve guided $51 million to $53 million. So it is up seasonally, that’s in line with our seasonal increase for Q2 as compared to the peak quarter, which is typically Q3. So we don’t look at that as flat. I guess, we look at that seasonally up and certainly in line with our expectations.

Secondly, regard to other points that you raised, what we talked about is I guess two cautionary notes in the TV area. One is relating to the Japan earthquake itself and we’re still trying to gather information as to what impact it would have on us as a company. But clearly one of the impacts that we talked about is that Japan typically purchases more feature rich and higher-end TVs. And given the recent tragedies there this is probably going to feel some softness. I mean this is our expectation, that we have an indication right now today to actually make that comment. Probably I would say it’s not a definitive feeling, but it’s a cautionary note that we’re putting out there as based on just common sense we would say there could be a problem there. So that’s what we gave the guidance that we did.

I am not sure whether you’ve picked up in the prepared remarks, but the Japan shipments or shipments of our products that will be consumed in Japan is roughly 10% of all of our product shipments. So that was – as apposed to the 30% number that we reported in the past, which is always referred to the billing basis. So the 10% is more for products that are consumed locally.

And the other point, I think, that you picked up on was the segmentation shifting from – instead of shipping the high-ends for some of the reasons that we just talked about is more mid-range and say entry level TVs going out. Of course we do participate in mid-range as well, but the comment we are putting out there is that there could be some potential softness in the TV and so that’s the reason why we made those statements before.

Shawn Boyd – Westcliff Capital Management, LLC

Understand. Okay. And I mis-communicated that. (inaudible) I was not looking at total revenues, I’m already making the assumption that your mobile is going to continue to grow. So that’s my assumption, not yours, but it looks like that’s going fairly well here. So let me just follow that if I can and in terms of the industry shipping more mid-range TVs versus higher-end, can you just speak to that and maybe from a seasonality perspective would you expect that to come back here in the September quarter, what have we looked at the past, how long does that generally kind of push us back?

Camillo Martino

It’s difficult to say and some of it is as a result of just the customers, major TV brands making a conscious decision to ship more mid-range and lower-end products, but at the same time as some vessels were impacted from an earthquake perspective for the reasons that we mentioned, so with an earthquake clearly that could be at least a couple of quarter impact as a minimum, but really it’s hard to provide more details on that and so we expect to provide more commentary in the coming two quarters and certainly in July and then later on in October, but these comments are really based on recent conversations we have had with the channel and we’ll continue to work with the channel and update you in the coming months ahead.

Shawn Boyd – Westcliff Capital Management, LLC

Got it. Okay thank you.

Operator

(Operator Instructions) Our next question is a follow-up question from the line of Rajvindra Gill. Please go ahead.

Rajvindra Gill – Needham & Company

Just to clarify the point, when you talked about the 30% of Japan’s sales is based on billings, the actual shipments that are consumed in Japan are only 10%. Does that mean that when you ship it to the Sony or Innotech you recognize a revenue you put in the Japan category, but they are shipping that product outside of Japan, is that fair?

Camillo Martino

Yeah, that’s a true statement.

Rajvindra Gill – Needham & Company

Okay. And if I look at the kind of 10-Q, Sony/Innotech was about 11% to 13% of sales, there are other distributors, I guess other OEMs that you sell into that then sell out of Japan. Are you not worried about their ability to sell out of Japan or not really – the manufacturing is mostly of the TVs for those particular remaining percentage of sales outside of Japan?

Camillo Martino

Yes. It’s a good question, but in the comments that I made really there were three things that I mentioned that we were focused on trying to eliminate any potential risk to the business. And the first is, do we have any risk in our ability to supply our own chips to a TV? And so what we said was we don’t have any risk there. In fact, we’ve already informed all of our key customers with that commentary as well.

The second point that we focused on and I mentioned in my prepared remarks was that we’re also focused on our customers’ ability to manufacture, let’s say a full TV, whether it’d be a television or a home theater system using not only our products, but everybody else’s product and was there any damage to that customer’s factory. And based on the information we have to date, we don’t believe there is any material risk to our customers’ ability to manufacture a product. And so in that case they are certainly capable to ship the product out of the country or even within the country, so that really addresses the second point.

And the third point that I mentioned earlier was really focused on consumption, not just consumption outside Japan, but in particular the local consumption in Japan and we studied pretty closely now for the last month or two and we feel that our exposure in terms of shipments destined for local consumption meaning going to the Akihabara store in Tokyo and buying that in retail is approximately 10% of all of our product shipments and so that’s what that 10% refers to as opposed to the 30% number that we’ve reported in the past, which is really the billings based number. Does that help you?

Noland Granberry

And I think just to get clarify, I think what you’re speaking is all customers, when we say all that make it up that shipment into Japan that 10% consumption.

Rajvindra Gill – Needham & Company

Can you give me a sense within the 30%, we do know that 11% to 13% of sales are Sony/Innotech, where are the other, what makes up the other percentage?

Noland Granberry

It could be distributors, other distributors, we do have some customers that are outside of Japan that ship into Japan. You know we talk about Toshiba and Sharp being customers around of ours, it’s just not totally Sony specific.

Camillo Martino

And so for example, we talked about the Samsung Tablets, all right. The Samsung Tablet is sold in Japan. And so that would be an example of a product that would come under this 10% category, does that make sense. Its really is any of our customers worldwide that are shipping to Japan, we’ve tried our best, we really, we exercise everyone in the channel, our organization to try and come up with an estimate of what is our exposure of products being shipped to Japan for local consumption because I think there was some concern, right, there was a concern amongst the investment community that we were 30% of the revenue is coming straight from Japan. In fact we after analyzing it very carefully, our estimates now really is 10%, is destined for local concern in that order of magnitude as opposed to the 30% number, which is more focused on a billings based analysis. Does that make sense?

Rajvindra Gill – Needham & Company

Yes, thank you for that clarification. That was very helpful. And last question from me and I think someone else might have touched on it. But as we go into the second quarter, mobile business grew over 30% sequentially in March Q4 to Q1. And we’re kind of entering the TeleWare and start to accelerate in the second half. So if I look at the second quarter, will mobile drive the majority of the growth in the business sequentially, what do you say?

Camillo Martino

I think if we’re talking about how things are growing, mobile is definitely the one that’s growing the fastest, and we see that to be the case. And its in line with what we’ve talked about in the past, when we said, we thought TV grows at a certain amount, but our main growth driver would be mobile. And that’s exactly what we’re seeing.

Rajvindra Gill – Needham & Company

All right. Thanks.

Operator

Mr. Martino, there are no further questions at this time. I’ll now turn the call back to you.

Camillo Martino

Thank you for joining us today to discuss our first quarter results. 2011 is off to a good start and we look forward to speaking with you on the second quarter conference call. In the meantime, we may see several of you as we conduct the quarterly meetings in the coming weeks and months ahead. Thanks again.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.

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