Silicon Image's CEO Discusses Q2 2011 Results - Earnings Call Transcript

Aug. 3.11 | About: Silicon Image, (SIMG)

Silicon Image, Inc. (NASDAQ:SIMG)

Q2 2011 Earnings Call

August 2, 2011 05:00 pm ET

Executives

Camillo Martino – Chief Executive Officer

Noland Granberry – Chief Financial Officer

[Elizabeth Bremner] – Investor Relations

Analysts

Christopher Longiaru – Sidoti & Company

Raji Gill – Needham & Company

Richard Shannon – Northland Capital Markets

Scott Searle – Merriman Capital

Todd Cohen – Cohen Advisors

Name - Company

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Silicon Image Q2 2011 Earnings Conference Call. (Operator instructions.) As a reminder the conference is being recorded Tuesday, August 2nd, 2011. I would now like to turn the conference over to [Elizabeth Bremner] of Investor Relations. Please go ahead, ma’am.

Elizabeth Bremner

Good afternoon and welcome to Silicon Image’s Q2 2011 financial results conference call. I’m Elizabeth Bremner 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 a 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 estimate for Q3 2011. We will then open the call for Q&A.

As stated in the previous quarters, Silicon Image continues to report its product revenue in three categories: consumer electronics or CE, mobile, and PC. CE revenue consists of DTV and home theater products. The mobile category includes HDMI and MHL-enabled mobile products. The PC category includes PCM storage products and IP revenue continues to be reported separately.

Before I turn the call over to Camillo, let me remind the listeners that we will be making forward-looking statements based on our current expectations during the call regarding many aspects of our business and the markets in which we operate, including but not limited to forward-looking statements about our financial results and performance, our current and future products and technologies, the timing of new product introductions, average selling prices, design wins, market demand for our products, and operating expenses. Our actual results may differ materially from our forward-looking statements and we disclaim any obligations 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 most recent periodic reports on forms 10K and 10Q 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 Q2 2011 financial results press release, which is also available on the investor relations section of our website at www.siliconimage.com.

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

Camillo Martino

Good afternoon and thank you for joining our conference call today. I am pleased to report that our results for the Q2 were at the high end of our guidance despite some challenges during the quarter. We also achieved a significant milestone during Q2 having shipped the highest number of chips for a fiscal quarter in our company’s history.

Revenue for Q2 2011 was $53.6 million compared to $49 million compared to Q1 2011, and $44.6 million in Q2 2010 representing a 20.2% increase year-over-year. Non-GAAP EPS for the period was $0.05 per diluted share compared to $0.03 per diluted share for Q1 2011, and $0.03 per diluted share for Q2 2010. Our performance for the quarter was driven by a strong uptick of our mobile products, sales of which continued to grow both in absolute and in percentage terms. In addition we saw strong revenue contributions from our high-margin IP business.

Mobile product sales were $17 million in Q2 compared to $6.2 million in Q1 for 2011. Both mobile HDMI and MHL-enabled mobile product sales grew in the quarter, with MHL showing strong momentum. The MHL-enabled products’ revenue ramp from Q1 to Q2 was driven by the launch of several MHL-enabled mobile devices at the Mobile World Congress in Barcelona earlier this year. Our MHL-enabled product sales are exceeding our expectations and for the first time accounted for more quarterly revenue than our HDMI mobile product line.

As we have said over the past few quarters, mobile is becoming a significant part of our revenue as we continue to reposition the company towards a more diversified product portfolio. In fact, in Q2 our mobile product revenue was nearly as much as our CE revenue, despite the MHL product line having been launched less than a year ago. For the second half of the year we expect our mobile product line to become our largest revenue contributor. Clearly, demand for HD-enabled mobile devices is increasing.

Based on our updated estimates we now expect approximately 20% to 25% of all smartphones sold worldwide to be HD-enabled in 2011. While we cannot predict at this point what portion of these HD-enabled smartphones will be using our mobile products, we believe that sales in Q2 represent a strong foundation for the future and we are pleased with the trends we see for our mobile product line.

Moving on to our CE products which include DTV and home theater – on our last quarterly earnings call we highlighted some developments that were potential headwinds for our DTV business. In particular we discussed the potential impact of the earthquake in Japan on revenue for our CE products as well as early signs of market pressure on higher-end DTVs. These trends clearly had an impact on our CE product revenue during the quarter and I would now like to provide some additional color on them.

CE revenue for Q1 2011 was higher than CE revenue for Q2 as OEMs were planning for a strong year. However, we are now seeing a realignment of expectations. Although we said last quarter that we expected the overall DTV market to show some growth in 2011, our current estimates indicate that this may no longer be the case. It has become clear that the higher-end DTV market in 2011 is not as strong as we initially anticipated.

We believe the reduction in demand for higher-end DTVs is due primarily to two compounding trends: firstly, the global macroeconomic pressures that continue to drive consumers to purchase lower-price CE products; and secondly, the earthquake in Japan which has affected both demand in Japan and the global supply chain for CE products. As noted in recent earnings reports from major consumer electronics companies, the global economic downturn impacted demand for higher-end CE products. Higher-end DTVs with the latest features and capabilities have been particularly affected by this trend which is the market segment where we typically deliver our latest innovations. Other contributing factors include a slow 3D market adoption which many brands assumed would be a catalyst for high-end DTV purchases but which has not grown as expected due to limited availability of 3D content and reduced demand for higher-priced TVs.

The earthquake in Japan also had a twofold impact: first, it reduced demand for higher-end TVs in the domestic Japanese market. Secondly, as a result of the damage to their production facilities, the brands shipped out a portion of their TV production to OEMs outside of Japan who typically supply the lower-end to mid-range DTV market.

While we have not spoken about the EcoPoints Program recently, we believe that the expiration of this Japanese government-funded program, a subsidy plan designed to encourage consumers to trade in old TV products for more energy efficient new models, also had an adverse effect on Japan’s consumption of CE products. We believe manufacturers and OEMs have calibrated their production capacities for the balance of the year, and as a result we expect our DTV-associated revenues to return to their seasonal patterns with a stronger Q3 revenue.

Our CE revenue was also adversely impacted by lower home theater revenue. In past conference calls we have openly discussed that our home theater product line revenues were projected to decline in 2011, due to underinvestment in prior years. We’ve been working very hard on improving our home theater business through additional investments, including the acquisition of video scaling and video processing technologies, and we expect to see revenue growth in the home theater segment to increase for next year.

Since our last call we have been very busy integrating the acquisition of SiBeam into the Silicon Image family. As we have said before, we believe SiBeam’s 60 GHz wireless technology is critical to our long-term HD connectivity strategy and we anticipate that products incorporating this wireless technology will contribute materially to our future financial results. In the meantime, we continue to sell existing Gen 2 products and we are working hard to win designs with our recently-announced Gen 3 products into a variety of CE and PC devices. Initial customer reaction to our long-term vision has been positive and we are seeing interest towards incorporating our 60 GHz wireless connectivity option into future models of customers’ products.

Our IP business was strong in Q2, contributing to our higher than anticipated gross margins for the period due primarily to increased HDMI royalty revenue. We have generally seen our IP revenue average between 15% and 20% of total revenue on an annual basis. We expect this trend to continue. With the addition of the Silicon Image wireless product line as a result of our recent acquisition, we are now playing a leadership role in four industry standards: HDMI, MHL, wireless HD, and SPMT.

I would now like to give you a short update on our standards activities as there are some exciting developments. The HDMI Consortium with an adopter base that recently surpassed the 1100 mark continues to be the leading standard for connecting HD displays and source devices. By the end of this year, we expect there to be a global install base of approximately 2.2 billion HDMI-enabled devices. We believe that the adoption of HD technology is evolving at a record pace and we are working together with other HDMI Consortium members to advance the HDMI standard by adding new feature enhancements, additional capabilities, and higher performance to meet future market needs.

On the mobile front, the MHL Consortium is making solid progress and continues to add adopters. During Q2 the first MHL-enabled mobile phones including models from HTC and Samsung, arrived in retail stores around the world. With the growing number of MHL adopters now exceeding 50 we expect further product introductions during the second half of the year. In fact, we expect MHL-certified DTVs from multiple brands to reach the retail market in the coming months. In addition, the MHL Consortium continues to work on advancing the technology roadmap to enhance the connected HD mobile experience. While MHL is still at the beginning of a multi-year adoption cycle, we are very excited about the initial uptake up MHL products and the long-term potential of this standard.

As for our involvement in the Wireless HD Consortium, Silicon Limited was recently elected as the chair of the consortium and we look forward to the consortium, and we look forward to bringing the same level of commitment, drive and determination to the wireless HD standards that we have demonstrated with our participation in the HDMI and MHL Consortiums over the recent years. Our expectations for wireless connectivity are high and we believe our involvement will help enable the broad market adoption of this standard. Finally, our mobile memory interface standard, called SPMT, continues to make progress and we expect to have an update for you in the coming quarters.

In summary, while there is certainly room for further improvement we are very pleased with our Q2 results. We expect that Q3 revenue, which is our seasonally strongest quarter, will be driven primarily by growth in the mobile segment and a slight uptick for our CE business. I will now turn the call over to Noland to provide a more detailed update of our financial results and our financial goals for Q3. Noland?

Noland Granberry

Thank you, Camillo. Good afternoon. I want to remind everyone that unless otherwise indicated gross margin, expenses, and earnings related items are reported on a non-GAAP basis which excludes stock-based compensation expense, amortization of intangible assets, restructuring charges and other non-recurring expenses. Our GAAP financial results and a reconciliation of non-GAAP measures referenced in today’s call are available on the investor relations page of our website – www.siliconimage.com.

Today, I would like to cover three topics: one, highlights of our Q2 financial results; two, our financial performance estimates for Q3 2011; and three, a financial update on the SiBeam acquisition. Starting with the highlights for Q2, our Q2 revenue increased 9% sequentially and 20% year over year totaling $56.3 million versus $49 million for Q1, 2011 and $44.6 million for Q2, 2010. Our revenue growth both sequentially and year over year was primarily due to the growth of our mobile and IP businesses during the quarter. Our newly acquired wireless business which is currently CE- and PC-related was not a material contributor, providing less than $1 million revenue in the quarter. We anticipate a similar level of revenue contribution from a wireless business in Q3.

Product revenue totaled $42 million, or 78.5% of total revenue for Q2, 2011, or $38.1 million, or 77.7% of total revenue for Q1 2011; and $30.4 million, or 86.1% of total revenue for Q2 2010. Our quarter to quarter growth was in line with our seasonal growth expectations, however the product mix making up the Q2 product revenue highlights the larger DTV trends in the industry. Our mobile business outperformed our expectations, growing from 16% in Q1 2011 of our product revenues, to over 40% for Q2 2011. Our CE business continues to be the largest contributor, providing approximately 46% of product revenues and our PC business attributed approximately 14%.

As Camillo noted in his comments, we are seeing the headwinds noted from our last earnings call resulting in our CE business being down 26% sequentially, a departure from the normal seasonal pattern. While we anticipate these headwinds to continue for another quarter or two, we expect our CE revenue will nominally increase sequentially based on our current visibility into Q3.

For Q2 2011, our average selling price was $1.20 versus $1.23 for Q1 2011, and $1.41 for Q2 2010. The decrease is primarily mix driven as a result of the increasing mobile revenue that in general has a lower ASP. IP revenue for Q2 2011 was $11.5 million, or 21.5% of total revenue, versus $10.9 million, or 22.3% of total revenue for Q2 2011, and $6.2 million or 13.9% of total revenue for Q2 2010.

Our IP revenues have performed to the high side of our guided range. This is a result of continued increases in royalty activities as well as our ongoing IP licensing activities. Product gross margin approximated 47.3% for Q2 2011 versus 48.3% in Q1 2011, and 49.6% in Q2 2010. Product margins trended down for Q1 2011, in line with expectations due to product mix. Our IP gross margin was 99.1% in Q1 and Q2 2011, 96.3% in Q1 2011, and 99.8% in Q2 2010. A previously noted, our gross margin may fluctuate depending on the mix of IP customization revenues in any given quarter.

Our overall gross margin for Q2 2011 was 58.5% and exceeded our guidance primarily due to the higher IP revenue contributions during the quarter. Gross margin was 59% for Q1 2011 and 56.5% for Q2 2010. Operating expenses for Q2 2011 were $26.9 million compared to $26.5 million in Q1 2011, and $23 million in Q2 2010. Including our newly acquired wireless business, our operating expenses were in line with our expectations. Our wireless business added approximately 1.5 million in additional operating expenses during the quarter starting from the May 16th acquisition close date. On a year-over-year basis, our operating expenses increased primarily due to our acquisition this year as well as certain additional R&D investments we have been making in pursuit of our long-term strategy.

Operating income for Q2 2011 was $4.5 million, or 8.3% of revenue, as compared to operating income of $2.5 million or 5% of revenue for Q1 2011. For Q2 2010 operating income totaled $2.2 million or 5% of revenue. Stock-based compensation, which is excluded from our non-GAAP results, totaled $2 million for Q2 2011 compared to $1.9 million in Q1 2011, and $2 million in Q2 2010.

Our non-GAAP net income was $4.2 million or $0.05 per diluted share as compared to $2.4 million or $0.30 per diluted share for Q1 2011, and $2 million or $0.03 per diluted share for Q2 2010. For Q2 2011, our GAAP profit before tax totaled $1.3 million versus $0.3 million for Q1 2011 and $0.6 million for Q2 2010. Our Q2 GAAP tax revision totaled $2.6 million and we lauded in a GAAP net loss of $1.3 million, or $0.02 per share. The Q2 GAAP tax expense consisted of foreign withholding taxes and tax charges associated with stock compensation.

Our G1 GAAP net loss was $0.8 million or $0.01 per share; for Q2 2010, our GAAP net income was $1.8 million or $0.02 per diluted share. Diluted weighted average shares outstanding were $83.2 million for Q2 2011. Diluted weighted average shares outstanding were $82.4 million for Q1 2011 and diluted weighted shares outstanding for Q2 2010 was $77.5 million.

Turning to the balance sheet, cash and investments as of June 30th 2011 was $160.4 million as compared to $181.6 million as of March 31, 2011, and $168.7 million at June 30th 2010. The net decrease in cash sequentially was primarily the result of payments in connection with the SiBeam acquisition. For Q2 2011, our accounts receivables totaled $29.7 million or 50 days’ sales outstanding.

Days’ sales outstanding for Q1 2011 and Q2 2010 was 49 days and 35 days respectively. Q2 ’11 inventory totaled 14.5 million or 6.1 turns, as compared to 11.2 million or 7.1 turns at March 31st, 2011; and 10.2 million or 7.6 turns at June 30th, 2010. The reduction in turns is primarily related to inventory acquired from our acquisition of SiBeam. Capital expenditures for Q2 2011 were $1.8 million compared to $1.7 million for Q1 2011, and $1.2 million for Q2 2010.

Moving to our Q3 financial outlook, our financial performance estimates are as follows: revenue - $60 million to $62 million; gross margin – approximately 56% to 57%; GAAP operating expenses – approximately $32 million to $33 million; non-GAAP operating expenses – approximately $29 million to $30 million; interest income – approximately $0.5 million; non-GAAP tax rate of 18%; diluted shares outstanding – approximately 84 million shares.

Now, let’s discuss the financial impact of our SiBeam acquisition in a little more detail. We closed at our wireless acquisition at May 16th, 2011. As we indicated at the close, we acquired approximately 50 employees and anticipated the dilutive impact to be approximately $0.02 to $0.03 for Q2, and $0.06 to $0.08 for the year. As I previously noted, our wireless revenue for Q2 was left of $1 million and with expenses of approximately $1.5 million. Given the partial quarter of activity we resulted in a $0.02 dilutive impact in Q2.

We now expect total revenue contribution from our wireless technology to be approximately $3 million from the acquisition closing through the end of 2011 with expenses of approximately $8 million to $10 million. Provided this revenue and expense outlook, we believe the dilutive impact for 2011 will be approximately $0.08 to $0.10 for the year as compared to the original guidance of $0.06 to $0.08 provided in May. Overall, while we face the CE challenges and work to build our wireless technology business, we continue to be excited by mobile opportunities and look for the mobile business to continue to lead our revenue growth.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions.) Our first question comes from the line of Christopher Longiaru with Sidoti & Company. Please proceed.

Christopher Longiaru – Sidoti & Company

Hey guys, congratulations on the results. My biggest question is you had said you expected the MHL brand earlier to take over HDMI as a bigger contributor to mobile revenue – I think the original target was December. You hit that two quarters really early. What does this say about your original expectations for the long-term ramp of this technology and should we move our models up accordingly? How do you expect this to really boost the trend here?

Camillo Martino

Well, I think we can say that MHL is starting to take good traction. We’re happy with the performance so far. The switchover from MHL to HDMI in the mobile segment did happen earlier than expected and so we’re pretty bullish about the long-term outlook following the adoption of MHL standard in general. Unfortunately with the headwinds that we talked about on the CE side, it did not allow us to really capitalize on that opportunity short-term, but we expect as the coming quarters proceed that the CE business will start to turn around and so we’ll have both a high-growth MHL business as well as the CE business is expected to come back later on.

Christopher Longiaru – Sidoti & Company

Great. And then just turning toward the operating expenses, with the acquisition of SiBeam where do you think that the combined companies’ expenses are going to level out? What can you strip out from SiBeam and from the $32 million to $33 million of GAAP operating expenses that you have guided to?

Noland Granberry

This is Noland. I think what we provided in the script sort of outlined where we think the expense run rate will be. I think one thing to point out and we highlighted in Q1 was that we thought Q2’s expenses from our existing business would go down and that was the case, and we were at the low end of the $25 million to $26 million range. We think that SiBeam will add somewhere between $3 million to $4 million depending on what’s happening in a particular quarter; i.e., tape outs or what have you. So when you combine those two, we’re in the $28 million to $30 million range we think as we look out.

Camillo Martino

Yeah Chris, I think the main goal here now is to grow the revenue as quickly as possible, just grow the top line. I mean that’s the focus of our energies at this point.

Christopher Longiaru – Sidoti & Company

Great, thank you guys. That’s all I have for now.

Operator

(Operator instructions.) Next question comes from the line of Raji Gill with Needham & Company. And your line’s open.

Raji Gill – Needham & Company

Great, thank you, and congrats on really phenomenal MHL revenue. Just want to dig a little bit deeper on MHL if I can – the ramp was pretty significant quarter over quarter; obviously MHL wins. Can you maybe talk a little bit about of the MHL mobile revenue of $17 million, were you getting any revenue from attach rates from cable accessories or anything like that? Did that contribute to anything meaningful within the $17 million?

Camillo Martino

Yeah, I think there was some attach ratio. I don’t think it was very meaningful for this particular quarter. For this particular quarter the revenue was driven primarily by the handset and/or the tablet, not so much on the associated revenue. But we would expect perhaps later in the year and next year to get some more meaningful revenues on those other types of accessory products, Raj. The $17 million that we talked about included both HDMI and MHL, so the category was the $17 million number. Either way I mean it really is a significant number for us as you can imagine. If it’s not clear I think in the commentary, the MHL portion of that $17 million was actually more than half of the total. And that ratio will just continue to grow.

Raji Gill – Needham & Company

Right, absolutely, and that’s primarily just based on the sell-through units that you’re getting from all these new phones. And then you did mention, which I thought was interesting, was in the second half that MHL mobile will be the largest revenue contributor, outstripping CE. Is that primarily driven would you say, or how would you kind of characterize that? Would you characterize it by the higher sell through forecast that you’re getting from some of the existing phones? Is it tablet sales or is it also newer smartphone or tablet customers that are joining outside of the simple models that you’re in right now?

Camillo Martino

I think probably the safest answer at this point is it’s all of the above. It’s more from the existing customer base, there’s potentially new customers and also tablets as well being added. So it’s all of the above, Raji.

Raji Gill – Needham & Company

And then on the CE side, TVs were down sharply. What makes you confident that you’re going to see some recovery in the second half for TVs? You talked about nominal growth in Q3 for CE – what makes you comfortable that there’s going to be nominal growth at all in Q3 and Q4?

Noland Granberry

So one thing, Rodney, I think when you look at Q1 to Q2 we had a non-seasonal decline that was pretty substantial. We think based on the visibility that we have that that is actually, if I can say “bottom door” or at this point in time where we see that there will be an uptick. We look at Q3 as really our seasonally strongest quarter. We think there will be some but like we said, we think it’ll be nominal. We don’t think it’ll be at the same level that we would typically see from a Q2 to a Q3.

Camillo Martino

And that’s why we refer to it as a slight uptick. And obviously we’re monitoring our customer base and their behaviors; it’s all purchasing behavior at this point in time, so I think at this point we’re comfortable with the slight uptick in CE growth in Q3. That comment we’re certainly comfortable with.

Raji Gill – Needham & Company

So if you just kind of factor in for Q4 with also flat growth, CE is going to be down pretty sharply in terms of revenue. And so do you see the overall TV market because units are contracting; meaning that there’s going to be less units in 2011 overall versus 2010?

Martino Camillo

I think the analysts are updating their models in real time while at the beginning of this year analysts expected the TV market to grow year on year. I think the most recent report we saw showed a kind of flattish to a slightly down trend in total number of TVs year on year, and that may even be further updated as we get further into the year. But I think the most recent one we saw had kind of a flattish to down year on year comparison.

But the real trend is not just total number of TVs; it is the trend where higher-end TVs weren’t selling as well, the middle range to high-end. They sold more in the lower range than the mid-range, and I think that’s probably what happened. That’s really one of the biggest impacts to our business that we tried to articulate both on this call and tried to highlight a potential trend that we saw some very early signs of a quarter ago. So while we indicated that it may be happening a quarter ago, one quarter later which is now, we actually saw it.

At the same time, I’m not sure if you recall the last call we had, but we did actually state at that time that any potential decline in the CE business, we felt confident that would be offset by growth in mobile, and indeed, that’s exactly what happened.

Ricky Gill – Needham & Company

Which is true, absolutely. And a last question from me and then I’ll go back in the queue – you mentioned a very interesting metric. You said 25% to 30% of the smartphones will be HD-enabled in 2011. I’m just wondering how you’re getting to that number because I think IDC’s forecasting about 430 million smartphones, so based on that you’re looking at about 130 million units that will be HD-enabled. I’m just wondering if you could maybe talk a little bit about what are the drivers of that? Are you thinking about that being migrating to HDMI? And MHL, will that be integrated to be a processor versus discreet? Any thoughts around that metric because I thought it was quite compelling? Thank you.

Camillo Martino

Yeah, so the number we mentioned today was 20% to 25%. You may recall, Raji, at the beginning of this year I think we indicated 10% to 15%, but frankly a lot of things have happened since then, since the 10%, 15% number. The other thing is that the iPhone 4 – technically you need to include that as well. Even though you can’t directly connect the iPhone platform to a large-screen TV, if you bought an adaptor or a dongle then tentatively you can do the same thing. So the iPhone 4, which is the new product, needs to be taken into consideration as well. So that’s how we would get overall to a 20% to 25% number. It’s not just MHL and HDMI, I think, for clarity.

Ricky Gill – Needham & Company

So you’re talking about tablets as well? I’m not aware of the iPhone 4 having a dongle; I know the iPad 2 has a dongle for HD connectivity.

Camillo Martino

Yeah, I think technically it’s the same dongle. The announcement was raised regarding the iPad, but technically you can do it with an iPhone 4 as well.

Ricky Gill – Needham & Company

Great, thank you. I’ll get back in queue.

Operator

(Operator instructions.) And our next question comes from the line of Richard Shannon with Northland Capital Markets, and your line’s open.

Richard Shannon – Northland Capital Markets

Hey guys, congratulations on very nice mobile numbers – that’s probably my first question for you, Camillo. I’m kind of curious if you can give us a bit more clarity on exactly how much of the mobile number comes from MHL? I know you said more than half – any more clarity you can provide?

Noland Granberry

I’m sorry for jumping in on Camillo’s question. The way we want to look at it is we really look at it as a mobile business, and I think we wanted to provide the color around the switchover as a commentary as to the traction MHL is picking up and it’s been very positive in that it has crossed over. As far as diving into splitting we’d rather not get into it.

Camillo Martino

I think it’s probably fair to say at this point the following: one, the switchover occurred six months faster than perhaps what we’ve talked about in the past – that’s true. But you know, in the past we’ve also talked about if we fast forward one further year, like 2012, we’ve also said that if our strategy is successful, we continue to execute on this path, that we would expect that our MHL portion of the mobile category would really be 80%, 90% of the total. So I think we’re on track to hitting that percentage split for the year 2012. So right now we’re more than half and that percentage is only going to increase until we get to this 80%, 90% of the total mobile revenues. Does that help you with that question?

Richard Shannon – Northland Capital Markets

Yeah, I think so. Yes. The second question is in regards to thinking not only about Q3, but maybe if you can divine a thought here, looking out maybe over a year’s time. Obviously we’re very curious about the diversification of the customer base of MHL. You’ve got two announced OEMs out there. Any idea how many OEMs we might be able to expect to see this time next year? Could we see as many as five or six out there or will it be a more concentrated portfolio still at that time?

Camillo Martino

I think five or six is a reasonable estimate this time next year, perhaps even more. I think that’s a fair number.

Richard Shannon – Northland Capital Markets

Okay, great. Next question on your IP licensing, obviously a very nice number especially given that Q2 should track Q1 trends which are typically seasonally down substantially there. I’m kind of curious as to what’s driving that? Any sense as how we can think about that going forward? I know you mentioned you still expect it within the framework of 15% to 20% on a yearly basis? Any sense of how we can think about that?

Noland Granberry

This is Noland. Yeah, I think we continue to believe that 15% to 20% is the range that we will look at for IP business tracking for the quarter, actually good activity from the royalty side. And one thing that we noted in Camillo’s comments that we’re actually up over 1100 adopters and at the end of this year we expect 2.2 billion total installed devices. So when you talk about our particular activities in CE, there’s still a lot of activity happening from the CE side of things that’s supportive of our royalties coming out as they have. And then we also have some other IP licensing activities that played into the quarter as well.

Richard Shannon – Northland Capital Markets

Fair enough. And then just two last quick questions from me and then I’ll jump out of line, guys, both on the TV side. You mentioned expecting some TV customers to roll out some MHL-enabled receiver chips or full processors in the second half of the year. How diverse of a customer base are we talking about? You’ve talked about being in 8 or 9 of the top ten OEMs out there; how broad will this adoption be this year?

Camillo Martino

I think this year is still a growing year. It’s interesting how things turned out in the last year or so. I think when we originally launched the standard, I think here at Silicon Image we felt that our TV customer base was likely to be the first to deploy and the handset guys would follow afterwards. And as it turned out it actually was the opposite in reality, if you think about it.

The handset companies have adopted it in a very meaningful way because the value proposition for the handset companies was actually greater in the short term if you think about it, because they were able to eliminate a connector. They were able to reduce overall costs as well and still work with a legacy TV, so there was no fear of not being able to connect. So the value proposition for a handset company was extremely strong and so it was a lot easier for them to adopt it.

And so now we would expect the TV companies to start adopting it. More meaningful would be next year because I’m sure you’ve followed our company closely – TV companies like to launch typically in the beginning of the year, like a Q1 time period or a first half, and those models will carry them through, pretty much through the whole year. And we only launched our samples back in October of last year, and so an October launch for a Q1 announcement by a typical TV customer just didn’t work frankly, and I think that’s why we were not able to have some TV announcements with MHL in the first half of this year.

So while we do expect some TVs with MHL announcements in the coming six months, this is really the very beginning stage of a many-year adoption. And remember the challenge, and the challenge of all of us associated with MHL is not just to get MHL into the high end, right? We think MHL is such a compelling feature it should be on every single TV from the low end to the high end. And I think that’s really our goal and that’s what we’re trying to make happen, either through our sales of chips or through licensing of our intellectual property, or just by having an adopter license the HDMI trademark or what have you. So any one of those strategies we’re happy with, but MHL should be adopted by all TVs, not just the high end.

Richard Shannon – Northland Capital Markets

Okay, well we look forward to seeing that ramp up over the next several quarters. My last question, Camillo, kind of a two-parter but kind of on the same theme in terms of having your market share in the TV space. You’ve talked in the past about the mid-range part of the market where obviously the market seems to be moving here at least temporarily. I want to get your thoughts on how well you think you’re doing in terms of getting share there. Then also it seems like one of the great untapped parts of the TV market for you might be in the Chinese market. I’m kind of curious to your thoughts as to how we might see some share growth through that geography in the next year.

Camillo Martino

I think our penetration of the midrange in some companies has done reasonably well; and other companies for this particular quarter did not do as well as we would hope for the reasons that we discussed before. Our company goal, and I think we’ve really reenergized that focus in our company, is not just to be focused on high end but really put a greater emphasis on the midrange as well. And I think with MHL technology and some newer HDMI products that we have coming out, we are going to be more focused on that mid-range category as well. So that’s a general statement. I think the results of that we will start to see in 2012 and beyond.

Now, regarding China, we definitely I would say are including China in our product planning – what products are appropriate for China? And the product definition of a product for China may not necessarily be the same product definition of a product that’s intended for launch in the United States or Europe. So we are closely driving this roadmap now for products specifically intended for China, the result of which we would also expect in the coming years ahead. This is not a 2011 impact strategy but clearly one that we would expect to have an impact in the coming years ahead.

Richard Shannon – Northland Capital Markets

Okay, I appreciate your thoughts, Camillo. Thank you.

Operator

Our next question comes from the line of Scott Searle with Merriman Capital. Your line’s open.

Scott Searle – Merriman Capital

Good afternoon. Nice job on the mobile side. I apologize, I got on the call a little bit late so I hope this isn’t redundant, but did you provide 10% customers? And also within MHL, how many revenue producing customers were there in the quarter? Did it extend beyond Samsung and HTC, and maybe if you can give us an idea of how that might have broken down?

Noland Granberry

So from 10% customers, the same for the quarter; we had similar [cash secured] to a couple of our distributors and the Samsung, as the leaders. Relative to a breakdown of MHL customers, I don’t think we have anything that provided what’s been announced at Samsung and HTC.

Camillo Martino

I think they’re clearly the two most material customers we have to date for MHL. There is some other activity but in terms of materiality, the way we’d look to define this question, I think Samsung and HTC are the most significant today.

Scott Searle – Merriman Capital

Gotcha. And in terms of HDMI within the mobile category, was that up sequentially?

Camillo Granberry

The HDMI portion. I think it’s a good question; I don’t have the data in front of me. I think it was up sequentially but still it’s in the less than 50% compared to MHL.

Noland Granberry

Yes, it was up quarter to quarter.

Scott Searle – Merriman Capital

And then looking out through your guidance for September overall, you gave an indication that sounds like CE will bounce back a little bit. Obviously mobile will be up but directionally should we expect PC to be up and also IP licensing as well, just kind of given the performance of CE? Or will that be affected on a one-quarter lag basis?

Noland Granberry

So relative to the PC, we talk about that being currently more of the legacy activity and it will continue. We think it’ll continue to be in the 15% range going forward. And then relative to IP, I mean like we said, it’s actually in that 15% to 20% of total and that’s where we see it shaking out at this point.

Scott Searle – Merriman Capital

Okay. And in terms of mobile on a sequential basis, September quarter, how many meaningful customers do you expect to be revenue producing in the quarter? Will we start to get LG contributing in a more meaningful fashion? And I think someone had asked earlier about the Chinese contribution – when would you expect the first contribution on the Chinese front?

Camillo Martino

I think in terms of adopters, we can see I think LG has become an adopter. I believe Lenovo has become an adopter. I think there’s some other also that have become adopters as well in China, and you may have missed this point, Scott, but we’ve just crossed the 50 adopter threshold, which we’re quite pleased with that to date. Now so just based on the fact that these types of companies are now becoming adopters, we could anticipate that a company like that would be maybe launching towards the end of this year or maybe even early next year. I don’t think it’s fair for us to preannounce anything on their behalf but they’ve become an adopter and they’re [molded] to specification, and so it stands to reason that within some period of time after becoming an adopter that they’ll be launching a product. I think that would be a typical cycle.

Scott Searle – Merriman Capital

Gotcha. And just from a reporting standpoint, Camillo, I think you mentioned that we’re very shortly going to see the initial or first series of TVs that will support the MHL feature. From a reporting standpoint will you be categorizing that in mobile or will that continue to go into CE?

Camillo Martino

Oh, that’s definitely CE. So anything that’s in a TV would be part of our CE category, and anything that would be part of a tablet or a handset would be mobile. And that’s the way we break it down.

Scott Searle – Merriman Capital

Okay. And lastly if I could, just from a competitive technology standpoint – obviously tremendous traction in terms of adopters but also OEMs putting product into the marketplace, specifically Samsung and HTC. Are you seeing though any traction from competing technologies out there? Or at this point is it really looking like MHL is the de facto high speed interconnect? And I guess as part of that, some of the early devices that are in the marketplace haven’t fully been branded MHL. It sounds like some of those marketing issues, if you will, are going to be solved in the not too distant future. If you can just kind of give us an idea about how we should be thinking about seeing products come to the market that are more branded MHL. Will we see that better positioning so that consumers are aware of what they’re buying? Thanks.

Camillo Martino

Sure. I think in terms of wired connectivity between phone and display, in terms of a TV display in particular, it seems like the most popular choice in terms of a wired connectivity is either HDMI or MHL. I mean that’s what we see at this point in time, so from that standpoint we’re well positioned. And obviously there’s wireless technologies as well and we believe we’re also well positioned there as well, as we talked about the 60 GHz technology. You had a second part to the question, if you don’t mind Scott? Are you still on or have you dropped off the line now?

Scott Searle – Merriman Capital

Just in terms of some of the more visible MHL marketing, and maybe possibly folding into that the idea that there are a bunch of adopters out there who I kind of characterize as fence-sitters if you will – the Nokia’s of the world and guys like that who tend to be waiting for the other side of the ecosystem, specifically TVs, to be populated in the marketplace. Maybe without naming OEMs will some of these guys, more meaningful guys with share, start to come in the MHL direction in the not too distant future? Thanks.

Camillo Martino

Yeah, we believe so but just regarding branding, I think we have noticed that there’s a huge opportunity for improvement in the whole MHL branding. And we’ve actually raised it to the MHL consortium because it’s not that easy to tell frankly that there is MHL. You really need to go and look at the documentation or something else, and so we’ve raised this point to the MHL LLC as a task that they should look at to go and improve in the coming twelve months ahead. So while we’re happy with the initial deployment it is creating a little bit of a channel confusion in some cases because the branding is not clear, so that’s why we’re really focused on that.

Scott Searle – Merriman Capital

Great, thank you.

Operator

We have a follow-up question from the line of Raji Gill – Needham & Company. Your line’s open.

Raji Gill – Needham & Company

Yeah, just on the SiBeam acquisition you had kind of bumped up the dilutive impact for ’11 to $0.08 to $0.10. Are you still holding that ’12 will be netural?

Noland Granberry

Yeah, Raji, we actually continue to target that as our objective, and I think Camillo highlighted it. We have our hands around the expense side of things and it’s really about us driving the revenue, and we’re clearly focused on that. We did announce the Gen 3 products that we’d hope to send out at the end of this year, and that will play into our pursuing design wins. So we have that as one of our major targets for 2012 – we want to build the wireless technology business, but by the same token I think we want to highlight that this is really a strong, strategic opportunity for us to build on. And we’ve talked about it as an opportunity in the mobile space and we look to pursue that as a part of our roadmap.

Raji Gill – Needham & Company

So in terms of OPEX, correct me if I’m wrong. You had talked about $8 million to $10 million in OPEX in ’11 related to SiBeam?

Noland Granberry

Yes.

Raji Gill – Needham & Company

So should we be expecting what type of ramp in terms of ’12 for the OPEX?

Noland Granberry

I think I noted we would look at this more. I said that $3 million to $4 million is the range of spending we have related to SiBeam and we expect that to be the range that we’re looking to. And that varies depending on what’s happening in a particular quarter; i.e. you have tape outs that happen in a certain quarter and those are the higher quarters or what have you.

Raji Gill – Needham & Company

$3 million or $4 million a quarter for SiBeam for the OPEX?

Camillo Martino

Right, but as Nolan’s last comment, Raji, was the reason why you may see $4 million would be if you were to do a tape out through any particular quarter, so that’s a more significant and expensive quarter. So that’s why there’s such a range.

Raji Gill – Needham & Company

And so the revenue then to be any kind of neutral would be somewhere again in the $12 million to $16 million range for SiBeam. That’s kind of what you’re looking at targeting. I don’t know why we’re not clear in terms of how much revenue we think we can get from SiBeam.

Noland Granberry

So, if I look at where we are when we talk about mobile, we talk about CE and we talk about 2012. We’re not providing any specific guidance around that, Raji, so I think we have a target to achieve the neutral standpoint and that’s what we’re shooting for.

Camillo Martino

Maybe to make the point a little bit more clear, Raji, we’re not trying to be coy here but we see wireless as a technology, just like we see the wired products as a technology as well. And the 60 GHz wireless technology we expect to be deploying in the coming years in CE products, we expect to be deploying it in mobile products, and we expect to be deploying it in PC products as well. We actually expect to be deploying in all three categories, and I think that’s why we’re not breaking it out today because we view it more as a technology that’s shared across all our market segments that we participate in. I think that’s the point that Noland’s trying to explain.

Raji Gill – Needham & Company

Right. And then just my last question in terms of MHL adoption, it’s unbelievable MHL numbers of mobile numbers, but any data in terms of customer usage of MHL from the MHL Consortium? Are consumers actually using it? Are they enjoying it? Do they demand this feature?

Camillo Martino

I think at this point it’s probably still a little bit early to have data. I mean we’re still trying to get data telling us what the 2011 DTV shipments were like for last year. (interference) responsible in how consumers are using this but I think our customer base is pretty excited about its potential and it’s how you use the technology, and so they’re going to be putting marketing campaigns around that.

Raji Gill – Needham & Company

Okay, great. Thank you.

Operator

And our next question comes from the line of Todd Cohen with Cohen Advisors. Your line’s open.

Todd Cohen – Cohen Advisors

Good afternoon, guys. (inaudible) of the $17 million in mobile, how much of that would be smartphones versus tablets?

Camillo Martino

You know, I don’t have the number right in front of me but I think the vast majority I would say it would be smartphones.

Todd Cohen – Cohen Advisors

Okay. And then on the other side, when this chip starts to get put into the (inaudible), is that ruled as a combo chip with an HDMI socket?

Noland Granberry

The question on how does it go into the TV side of things?

Todd Cohen – Cohen Advisors

Yeah, how does it go? Obviously there’s one little chip in the phone but from my understanding you’re going to get a higher AST on the television side, and I was wondering if that was integrated into your HDMI boards?

Camillo Martino

Yeah, as part of the HDMI protocol, Todd, it’s just a feature. MHL is just a feature that we are providing as part of our overall integrated connectivity chip. So that’s why we don’t break out that as MHL revenue. It’s just part of our CE differentiated product line; that’s how it’s done there.

Todd Cohen – Cohen Advisors

Okay. And the standard today that you highlight when you talk about MHL, is it still just the one-dot standard right now?

Camillo Martino

That’s right. Today it’s the 1.0 standard and the Consortium members we believe are actively working on increasing or improving the specification with the launch of a 2.0 at some point in time in the future.

Todd Cohen – Cohen Advisors

So with the 2.0, if you’ve already got the 1.0 then, is there a way to upgrade it with some software or are you stuck with the old standard?

Camillo Martino

I think it’ll be backwards compatible to it and it’ll definitely work with HDMI. It’ll always work with the legacy base of HDMI so there’s no fear of not being able to connect. I think that’s the main point.

Todd Cohen – Cohen Advisors

Okay. And then you were referencing earlier that this MHL is a product that will probably address the low end audience than some of the products that you’ve introduced before at the high end. Does that include anybody and everybody that’s got a phone, tablet for videos or family pictures or videos or whatever and you want to be able to share that on any type of screen?

Noland Granberry

Yeah, I think that’s really the gist of it, just being able to very quickly and simply connect your mobile device to a larger screen to share anything, frankly. In fact at our recent board meeting just last week one of the presenters actually presented his presentation from his MHL smartphone, frankly, so it was pretty cool. He didn’t have a laptop or anything else, he just had a smartphone. So it’s not for consumer things; in that particular case he actually was presenting it directly from his smart phone as well.

Operator

And ladies and gentlemen, that’s all the time we have for question and answer. I’ll now turn the call back to you for your closing remarks.

Camillo Martin

Thank you for joining us today to discuss our Q2 results. We believe the momentum we’ve built from mobile connectivity will propel us into the back half of the year. We look forward to speaking with you on the Q3 conference call. In the meantime we may see several of you as we conduct our quarterly investor meetings. Thank you again.

Operator

Ladies and gentlemen that does conclude your conference call for today. We thank you for your participation and you can now please disconnect your lines.

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

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

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