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Silicon Image, Inc. (NASDAQ:SIMG)

Q3 2011 Earnings Conference Call

October 25, 2011 5:00 PM ET

Executives

Mike Bishop – IR

Camillo Martino – CEO

Noland Granberry – CFO

Analysts

Rajvindra Gill – Needham & Company

Christopher Longiaru – Sidoti & Company

Richard Shannon – Craig Hallum

Bob Sales – LMK Capital Management

Matt Gabel – Gabel Asset

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Silicon Image Q3 2011 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we’ll conduct a question-and-answer. (Operator instructions) As a reminder, this conference is being recorded Tuesday, October 25, 2011. I would now like to turn the conference over to Mike Bishop. Please go ahead, sir.

Mike Bishop

Thank you. Good afternoon, everyone, and welcome to Silicon Image’s third 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 a discussion of the financial results and product and market updates from Camillo. Noland will then provide a more in-depth discussion of the financial results and provide a financial performance estimate for the fourth quarter of 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 both mobile HDMI and MHL-enabled 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, operating expenses and standards activities.

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 most recent periodic reports on Forms 10-K and 10-Q filed with the SEC.

These documents contain certain relevant risk factors that could affect our future results. We’ve also provided a financial metrics table and a reconciliation of non-GAAP financial information to GAAP information in our third 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’ll turn the call over to Camillo.

Camillo Martino

Good afternoon. I would like to welcome everyone to our third quarter 2011 earnings call. In conjunction with our earnings announcement, there are two other important releases today, the first was news about Samsung, MHL, DTVs, and the second was of the announcement of the HDMI Forum. I will discuss both of these a little later. We are very pleased with our Q3 results.

Our mobile business continues to show strong results and despite continuing challenges in the global economy, our CE business returned – demonstrated quarter-on-quarter growth. In addition, we achieved a number of exciting milestones that included MHL-enabled DTVs hitting the retail channel. Number two, the introduction of a new family of MHL transmitters featuring more integration, followed by the first world – the first wireless HD projector based on our 60 gigahertz products and in addition, the introduction of our most advanced port processor featuring a number of industry-first, including six 300 megahertz HDMI inputs and our innovative InstaPrevue technology.

We’ll talk more about all of these milestones later on the call. Total revenue for the third quarter was $59.7 million compared to $53.6 million for the second quarter and $60.5 million for the third quarter of 2010. You may recall that our results for Q3 of last year included a one-time IP royalty catch-up of $7.5 million.

Excluding this extraordinary item, we grew revenue 12.7% year over year in a challenging environment. Our IP revenue was a little lower than anticipated in the quarter due to a licensing agreement that was expected to be signed in Q3, but was actually signed just literally a few days after the quarter closed. As a result, we expect to see overall Q4 revenue flattish from Q3 whereas we could have expected to see a seasonal drop of approximately 10% in Q4. Noland will give you more specific Q4 guidance in a moment.

Non-GAAP EPS for the third quarter was $0.06 compared to $0.05 for Q2 of 2011 and $0.18 for Q3 of 2010, including the one-time royalty revenue catch-up. The stronger EPS was primarily due to stronger product margins.

Now let’s look at our market segments. I am eager to share with you the progress we are making in several aspects of our business. Starting with mobile, our mobile products sale to the product revenue.

Amongst many new MHL-enabled mobile phones, the following were introduced in Q3. Samsung’s Epic 4G, Touch for Sprint, HTC Sensation XE in Europe, the Radar in Korea and Amaze for T-Mobile and new MHL tablets included the HTC Jetstream for AT&T, and in addition, there were some Samsung Galaxy tablets as well.

During Q3 we announced the new family of MHL transmitters featuring high levels of integration and support for various interfaces. By integrating a high speed switch into our MHL transmitters, we believe our customers can realize a reduction in their bill of material costs when implementing MHL functionality into their smartphones.

In addition, the MHL Consortium continues to make progress with more than 70 adopters and promoters now part of the MHL family, and that number is literally growing on a week-to-week basis. As one of the five founding promoters, we are very pleased of the progress thus far and we encourage you to visit the MHL Consortium website to see the latest adopters from the mobile, CE, PC accessory and semiconductor industries.

Moving on to CE now which includes our DTV and home theater products. During the quarter, we announced our most feature-packed port processors to date. The Silicon Image 9573 and 9575 products which deliver a fully integrated HDMI solution for audio, video receiver and DTV applications. Industry-first features include six 300 megahertz HDMI inputs with InstaPort S technology for single-second port switching, Dual MHL input ports for HD content input from smartphones and tablets and the InstaPrevue technology on all six inputs for intuitive visual port switching.

InstaPrevue technology is our latest innovation which enables a thumbnail preview image on your DTV screen of all the sources connected via our HDMI ports to your DTV or AVR.

Instead of cycling through your inputs or navigating a text based menu that show sources literally as HDMI-1, HDMI-2 et cetera, the users can now view and select my preview window to switch between their Blu-ray disc player, set-top box, DVD player, game console or any other HDMI connected device. This is another example of our status plus strategy which we provide value added features in addition to a standards-compliant shipment [ph].

In addition to continued adoption of our InstaPort and InstaPort S technology by leading DTV manufacturers like Sony and Samsung, Toshiba and Sharp, we also saw the launch of MHL-enabled DTVs which can directly connect with the millions of MHL-enabled mobile devices already in the market. Toshiba launched their MHL-enabled Regza DTVs in August and starting in September, various DTV models now support MHL as well. Legacy DTVs can also support MHL technology through the use of an MHL to HDMI Adapter.

We expect that MHL-enabled TVs will increasingly become a checkbox item in DTVs as consumers will wish to simply plug their phone into a DTV at home to enjoy HD mobile content and mobile gaming on a big screen while charging their phone battery. Innovations like InstaPrevue and MHL enables our customers to continue to introduce feature-rich, differentiated products into the market and help Silicon Image drive market share. Furthermore, we are seeing developments on the horizon that we expect to drive future sales and growth in CE namely, the 4K x 2K displays and future versions of HDMI and MHL specifications.

2011 is turning out to be atypical year for our CE business. If you recall, Q1 was a very strong quarter for us in the CE markets and we’ll end up being a largest CE product revenue quarter for the year. The Japanese earthquake and subsequent slowdown, recent expectations and therefore Q2 was much softer. For the third quarter, our CE revenue increased approximately 15% quarter over quarter following typical seasonal patterns and therefore, we expect seasonal declines in Q4 and Q1.

Moving on to wireless, we are driving our wireless technology forward with our current products getting promising traction. During Q3, in conjunction with Epson, we announced the industry’s first wireless HD home cinema projector based on Silicon Image’s wireless HD chipset. The projector is ideal for ceiling-mounted and mounting and eliminates the need to run a cable through the floor, wall and ceiling. Visio [ph] incorporated our wireless technology into an adapter that has been available online for a couple of quarters and is now available at Costco stores nationwide and at Amazon.com. This combined with a gaming laptops available from Dell’s Alienware brand expands the presence of the wireless HD standard in the retail channel.

We are also improving the price, power and performance of the technology into the next generations. Our third generation wireless HD chipset is targeted for PCs, DTVs, projectors and home theater components. We expect revenue from this wireless platform starting in 2012. We believe the real opportunity for our 60 gigahertz wireless HD technology is when we are able to get both the power consumption and the cost low enough to be attractive for the mobile ecosystem. We view this as potentially a 2 billion unit (inaudible) in five years time including the mobile CE and PC product systems and we are investing in it to capitalize on this opportunity. We expect to realize the early part of this revenue opportunity in 2013.

Moving on to the IP business, our IP business revenue was 17.7% of total revenue in the quarter and in line with our long-term business model of 15% to 20% of total revenue. We are excited about the continued strength of our IP business and believe it is core to our future. Going forward, we anticipate enhancing our IP business with MHL technology licensing opportunities and other MHL related revenue as more MHL-enabled products come to market.

And as announced today, the HDMI founders which include Silicon Image announced the establishment of the HDMI Forum to foster broader industry participation in the development of future versions of the HDMI specification. This is an exciting development that we believe will enable the next leap in growth for the HDMI standard.

With over two billion HDMI-enabled devices having shipped since 2003 and 100% adoption in DTVs, Blu-ray disc and DVD players, we now see HDMI technology extending into an increasingly wide array of devices and applications in industry that include PC, automotive, hospitality, IT, digital signage, airlines and many more.

The HDMI Forum opens the door to interested parties that bring expertise in these new markets to take the HDMI specification to the next level. We are entering an exciting season for Silicon Image with CES coming up and Mobile World Congress just after that. We’ll be hosting an Analyst Meeting at CES and invite you to join us on January 12 at 9 A.M. at that time.

I will now turn the call over to Noland to provide you more detailed update of our financial results and our financial goals for Q4. Noland?

Noland Granberry

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

Today, we reported solid financial results for our third quarter ending September 30, 2011. While our revenues were slightly outside the low end of our guidance range, we believe we executed well in a challenging environment. Our product revenues grew during the quarter and our IP revenue totaled approximately 18% of the total revenue, well within our typical IP to product revenue range. More specifically, Q3 revenue totaled $59.7 million, increased 11.5% sequentially.

Our mobile revenue continued to show strength growing 26.9% during the quarter and our CE revenues grew 15.2% quarter over quarter. On a year-over-year basis, revenue declined 1.3%. It should be noted that included in our Q3 2010 revenue was a one-time royalty revenue catch-up of $7.5 million. Excluding the $7.5 million, our overall revenue grew 12.7% year over year.

Product revenue totaled $49.1 million or 82.3% of total revenue for Q3 2011 versus $42 million or 78.5% of total revenue for Q2 2011 and $46.1 million or 76.2% of total revenue for Q3 2010. For the quarter, our mobile revenue totaled $21.5 million or 43.8% of product revenue, up from $17 million or 40% in Q2 2011. CE increased 15.2% sequentially, totaling 45.6% of total product revenue. PC storage contributed 10.6% to product revenue, down from 13% in Q2 2011.

For Q3 2011, our average selling price was a $1.21 versus $1.24 for Q2 2011 and a $1.43 for Q3 2010. The ASP decline was in line with expectations and is primarily the result of the increasing mix of mobile revenue. Our IP revenue totaled $10.6 million for Q3 2011, representing 17.7% of total revenue. Q2 2011 IP revenue totaled 11.5% or 21.5% of total revenue, Q3 2010 IP revenue was $14.4 million or 23.8% of total revenue.

In the prior year, we recognized a $7.5 million royalty revenue catch-up. Product gross margin was 49.5% for Q3 2011 versus 47.3% in Q2 2011 and 51.3% in Q3 2010. Product margins improved due the quarter as a result of improved efficiencies in our manufacturing processes realized doing the quarter. Our IP gross margin was 98.6% in Q3 2011, 99.1% in Q2 2011 and 99.5% in Q3 2010.

As previously noted, our IP gross margins may fluctuate depending on the mix of IP customization revenues in any given quarter. Our overall gross margin for Q3 2011 was 58.2% and exceeded our guidance primarily due to higher product margins in the quarter. Gross margin was 58.5% for Q2 2011 and 62.8% for Q3 2010. Operating expenses for Q3 2011 were $29.2 million compared to $26.9 million in Q2 2011 and $23.7 million in Q3 2010.

Our operating expenses continue to be in line with expectations. As we previously mentioned, our operating expenses have increased on a year over year basis primarily due to our acquisitions this year, as well as certain additional R&D investments as we pursue our long-term strategy.

Operating income for Q3 2011 was $5.6 million or 9.3% of revenue as compared to operating income of $4.5 million or 8.3% of revenue in Q2 2011.

For Q3 2010, operating income totaled $14.3 million or 23.7% of revenue. Excluding the $7.5 million royalty revenue catch-up, our operating income for Q3 2010 would have been $6.8 million or 12.9% of total revenue. Stock-based compensation which is excluded from our non-GAAP results totaled $3.6 million for Q3 2011 compared to $2 million in Q2 2011 and $1 million in Q3 2010.

The increase in stock compensation was primarily, directly related to the current investing of shares under the prior year stock exchange program. Our non-GAAP net income was $5.0 million or $0.06 per diluted share as compared to $4.2 million or $0.05 per diluted share for Q2 2011 and $13.7 million or $0.18 per diluted share for Q3 2010, inclusive of the one-time royalty catch-up.

Excluding the $7.5 million royalty revenue catch-up, non-GAAP net income for Q3 2010 would have been $6.3 million or $0.08 per share. For Q3 2011, our GAAP net income totaled $0.7 million versus a loss of $1.3 million for Q2 2011 and net income of $9.5 million for Q3 2010.

Diluted weighted average shares outstanding were 83.4 million for Q3 2011. Diluted weighted average shares outstanding were 83.2 million for Q2 2011 and diluted weighted average shares outstanding were 78.1 million for Q3 2010.

Turning to the balance sheet, cash and investment as of September 30, 2011 was $155.2 million as compared to $160.4 million as of June 30, 2011 and $184.6 million at September 30, 2010. The net decrease in cash sequentially and on a year-over-year basis was primarily the result of payments in connection with our various investment activities over the past three and nine months as we have stated.

We continue to look for various opportunities to support and grow our future revenue streams. For Q3 2011, our accounts receivable totaled $34 million or 51 days sales outstanding. Days sales outstanding for Q2 2011 and Q3 2010 was 50 days and 36 days respectively. Q3 2011 inventory totaled $14.3 million or seven as compared to $14.5 million or 6.1 turns at June 30, 2011 and $11.6 million or 7.7 turns at September 30, 2010. Our inventory turns for the quarter are in line with our targeted turns.

Capital expenditures for Q3 2011 were $1.9 million compared to $1.8 million for Q2 2011 and $0.5 million for Q3 2010. The increased capital expenditures are primarily associated with our move to our new headquarters in July of this year. We expect these expenditures to trend down in Q4.

Looking out to Q4, our financial outlook is as follows. Revenue, $57 to $59 million; gross margin, approximately 57%; GAAP operating expenses, approximately $32 to $34 million; non-GAAP operating expenses, approximately $29 to $30 million; interest income, approximately $0.5 million; non-GAAP tax rate of 18%; and diluted shares outstanding, approximately $84 million shares. As we look to Q4, we realize there are some uncertainties related to our CE business as a result of the global economic conditions.

We continue to work to ensure we are well positioned in our CE business to take advantage of improving economic conditions as they occur. Our mobile business continues to show strength and we anticipate increased adoptions will further establish MHL and provide us with their positive outlook for mobile as we head into 2012.

Having said that, we believe our Q4 revenue outlook reflects anticipated seasonality and also considers any CE headwinds we continue to face.

In addition, our IP revenue is expected to be at the higher end of the 15 to 20% range of total revenue for the fourth quarter. Looking out to Q1, we fully expect our revenue trend to follow typical seasonal patterns and that our Q1 2012 product revenue will be seasonally lower than our Q4 product revenue.

This will now conclude my remarks. Camillo?

Camillo Martino

As we’ve highlighted throughout the call, our mobile business is our near-term growth driver. We believe our wireless business will become a significant growth engine in 2013. Further, our IP business continues to show strength and is a key indicator of the value of our intellectual property.

We continue to believe we are well positioned in the CE space and have developed new products to grow our CE business as the economy recovers. Lastly, we are continuing to make investments to further drive our growth prospects in 2012 and beyond. Overall, we believe we have the foundation to grow our business as we enter 2012. We will provide more insight into our 2012 expectations on our Q4 earnings call in February.

Operator, we’ll now take questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Rajvi Gill with Needham Incorporated. Please go ahead with your question.

Rajvindra Gill – Needham & Company

Yes, thank you and congrats on good results. On the CE business, growing 15% sequentially, was that mainly due to – very low compared to last quarter, was it kind of channel resale of a bottom or are we seeing some signs of kind of demand stabilization, are we undershipping demand or is the demand finally kind of stabilizing off the bottom?

Camillo Martino

It’s probably a mixture of all of those points you mentioned, Rajvi. We think overall it’s stabilizing. I tried to mention during my remarks that Q1 really was our largest quarter, which is very atypical, and as atypical for our CE business, but things were reset in Q2 because there was such a significant drop. So Q3 increased by 50%, but now we would expect that Q4 and Q1 would decline in line with the seasonality again, but the big reset occur between Q1 and Q2 for all the reasons that we had discussed previously.

Rajvindra Gill – Needham & Company

If you could remind us what the kind of normal seasonality is and the product revenue for Q1 typically?

Camillo Martino

Well, if you look at – if you compare the first half and the second half in a normal apples-to-apples comparison, I would say 45% of the annual revenue typically is delivered in the first half and say 55% is delivered in the second half, so now they would vary plus or minus a few points here and there depending on the year depending on the product strategy. And Q1 will be typically a little bit lower than Q2 and make up the 45 number.

Rajvindra Gill – Needham & Company

Okay. And just moving to the mobile side, good traction on mobile, should we be expecting within that range that you had given us sequential growth in mobile in the fourth quarter?

Noland Granberry

Yes, Rajvi, yeah, we think – we highlighted on our last call that we look for mobile to actually in the second half become our largest contributor and we expect that to happen in Q4.

Camillo Martino

We are pretty close in Q3, but we’re – at this stage, we are pretty confident it’ll happen in Q4.

Rajvindra Gill – Needham & Company

And any feedback in terms of kind of the adoption rate of MHL from the customer side, any data you can share with us or how the OEMs are advertising MHL now that it’s in a few phone – few additional phones?

Camillo Martino

I think that’s one thing that we’ve talked about in the past. I think one of the areas where we are trying to help the MHL Consortium and the other founding promoters is really with brand awareness and the promotion of what MHL can actually deliver. So, right now we are getting the first wave. The first wave is becoming quite successful where products are being shipped out there.

And we’ve identified some opportunities together with the Consortium where we need to get brand awareness really promoted significantly in the channel itself and that channel is not just in a store, like Best Buy or something, but in particular in the cell phone, carrier, right, the carrier stores as well. And I think until that program really is executed; this is not a one-month program; this is probably a six to 12 month program, I think only then can we really start to understand some real live feedback from end-user activity. I mean, right now we can give you some quick to fits. Everyone I’ve spoken to and a lot of other people we’ve spoken to and our customers spoken to, actually they quite enjoy the application, they like the feature, they like the application, but we would like to get more qualitative data on a much grander scale as opposed to just that.

Rajvindra Gill – Needham & Company

Okay, thank you.

Operator

Our next question comes from the line of Christopher Longiaru with Sidoti & Company. Please go ahead with your question.

Christopher Longiaru – Sidoti & Company

Hey, guys. I’ll add my congratulations. Great quarter.

Camillo Martino

Thanks.

Noland Granberry

Thank you.

Christopher Longiaru – Sidoti & Company

My first question has to deal with just the progression of 60 gigahertz, so you are outside of Epson with their recent design wind, when do you expect to see, first shipments of this, you said 2013 would be a significant revenue driver, but how does this progress?

Noland Granberry

Sure. I mean the Epson products actually it was released to production it wasn’t just the design wind that was actually released to production that is a product it’s out there. In addition to that there are some products by Visio, for example that you can purchase in various channels out there such as Costco, you can also get in Amazon.com. The Alienware product which is part of Dell, Alienware is a subsidiary of Dell it’s a laptop that you can purchase as well. So, it’s, you know, slowly starting to build the momentum. We think our revenue is more this year than next year it’s still single-digit that’s still not where we want it to be. Next year it will grow again, but if you look beyond next year, right, and in 2013 that is where we really see a phenomenal opportunity for Silicon Image to take advantage. And so there is a sequencing of generation so the products that are in production today that we refer to in the channel that is based on a platform called Gen2, generation two. In addition to that we talked, we introduced – we talk about the concept today of generation three that we will expect to see revenue starting the second half of next year. So design winds, we expect to capture, you know, between let’s say Q4 and Q1 and Q2 of next year with revenue generated in the back off of next year. But it’s even beyond that and I hate to call it a generation four because we don’t have a name beyond that. But I would say beyond generation three is a platform that we’re really targeting heavily for the mobile ecosystem and that’s where we see the tremendous opportunity; we are talking about the potential terms, for example. If this mobile specific platform will have the capability to be integrated within a mobile device such as a tablet or a phone as well as a TV as well as a laptop, and so if you project that three, four, five years from now and add up the annual volume terms for each one of these categories is a pretty significant revenue opportunity for us, and we hope to take advantage of this by being the leaders of this space.

Christopher Longiaru – Sidoti & Company

It’s very helpful, thanks. And the other question I have was more tied to – we’ve seen a 60 gigahertz technology come out of the SiBEAM acquisition but just on the expenses front, how do you expect that this trend – are you cutting anywhere or you hiring engineer, could you give us a little bit of infill on that please”?

Noland Granberry

So, Christopher, we still are selectively positioning or hiring relative to needs in our R&D space, but if you look at specifically for wireless, if you look at our run rate that talked about on the last call that is 3 million to 4 million range, we think that captured a lot of this roadmap activity that we’ve talked about and Camillo sort of laid out giving us to this 2013 revenue. And depending on tape-out in this range is a lot lower technology, so there are more expensive. We expect that we get the higher end of that range whenever we have tape-out go. But by and large 3 to 4ish range is what we look at to drive most of the development for is wireless, the wireless roadmap that we have.

Christopher Longiaru – Sidoti & Company

Great. That’s helpful. Thank you guys that’s all I have for now.

Operator

(Operator Instructions) Our next question comes from the line of Richard Shannon with Craig Hallum. Please go ahead with your question.

Richard Shannon – Craig Hallum

Hi, guys. I just need to follow-on the topic of 60 gigahertz in your previous commentary. Camillo you mentioned some targets to hit your products to drive 2013 potential excitement. Can you quantify (inaudible) characterizing anyway what you are thinking of in terms of the cost points and the power consumption points you are looking at to hit those – to hit the sweet spot of those markets you are looking at?

In terms of the cost points and the power consumption points you are looking at to hit those – hit the sweet spot of the markets you are looking at?

Camillo Martino

I think I am not sure it’s appropriate for me to make a public statement here on this call right now to what those numbers need to be precisely. But I think suffice to say that in the power consumption, we’re looking in the range of multiple, hundreds of milliwatts let’s just say that is a general number at this point in time. And the cost, of course we are looking at single-digits, but I think we don’t want to go beyond that.

I think really we need to be aggressive. We understand the challenge that’s ahead of us, and one of the things that we’ve done since the merger of SiBEAM and Silicon Image is really redirect the roadmap towards this global ecosystem opportunity. I think just the numbers that we discussed before should be able to represent that it is a tremendous opportunity for us. We are leading the space.

So, coupled with Noland’s comments before that our rough OpEx, operational expense today for that division is roughly in $3 to $4 million. So, the quarter, we are carrying that today until this real revenue opportunity kicks in. If you back that out that the existing business in terms of the wire business we have today is actually quite profitable for us and the company. So we are really investing here for a significant opportunity that we hope to realize in 2013. Now between now and 2013, the wireless business will continue to grow, but again I emphasize the real opportunity for us will occur in 2013.

Richard Shannon – Craig Hallum

Okay, perfect. Thanks for that characterization, Camillo. Second question on mobile and kind of looking on, you said it’s very nice numbers for the third quarter, kind of curious kind of looking over the next few quarters, you made some statements in your past calls about first of all, talking about total mobile HD connectivity penetration of – in the 20% to 25% range and then looking at kind of middle of next year maybe seeing a total of five to six mobile device OEMs in the market with MHL, how do those kind – how do those bogies [ph] sit today based on your current thinking?

Noland Granberry

I think we are happy with those numbers we mentioned previously.

Richard Shannon – Craig Hallum

Okay. All right, great. Next question in the TV space, you mentioned last quarter unfortunate headwinds in terms of mix shift from high-end to mid-range, what are your latest thoughts, what are you hearing and seeing from your customers in terms of any sorts of additional headwinds and also any thoughts on how your progress in penetrating more of the mid-range?

Camillo Martino

I don’t think our estimates rule have changed frankly for the last quarter relative to the high-end and mid-range. I think the headwinds and challenges are still there. I just happened to notice this morning, I think it was on CNBC, I saw a number of flash across the screen that the consumer confidence index is at an all time low below 40%. So there is a number of things going on out there, but despite all that we were able to increase our business, our Q3 on a obviously a pretty low Q2, but – and we are still working on getting some extra sockets [ph] on the mid-range as well much as the high-end. And I think MHL, if you look at the MHL standard, I think that represents an opportunity for us in 2012 to try and drive MHL through not just the high-end but also the mid-range. So I think that’s really our strategy for how to attack the mid-range in 2012 is to focus on MHL in that segment, and we are talking to all the main Tier I companies as you can imagine.

Richard Shannon – Craig Hallum

Okay, that’s great. Segue into my last question for you Camillo, kind of looking out to the 2012 your TV business, kind of curious about the status of design wins, it seems to be about the time of the year where you are kind of getting visibility and how those designs are going for next year, or do you think your share will play out relative – in 2012 in a high-end relative to where you are this year? And then any idea of how much you are getting into the part of the mid-range will help influx that overall TV business upwards from there?

Camillo Martino

Well, the last time we made this prediction we had an earthquake and a whole bunch of other things happening, so maybe we should at least wait a couple of more months as we get towards the end of the year. But we feel pretty confident; we are making progress in all the accounts. We have, as we said, a line of new products that we expect to be going into production in the first half of next year and we believe that the MHL technology will feature prominently on those integrated port processors at each of our target customers. So there is a number of customers that we expect to be shipping in the first half of next year with their new integrated processor that’s featuring both HDMI as well as MHL.

Richard Shannon – Craig Hallum

Okay, that’s great. I will jump in the line, guys. Thank you.

Camillo Martino

Thank you.

Noland Granberry

Thank you.

Operator

Our next question comes from the line of Steve Bush [ph] with South Palo [ph] Please, go ahead with you question.

Unidentified Analyst

Thank you, gentlemen for taking my call. My question is related to an announcement our Cisco regarding their ISB7005 wireless receiver, are you in that product at all or do we get royalties from that kind of product as they roll it out with AT&T, U-verse?

Camillo Martino

If it’s related to the U-verse announcement that was made today, I think that’s a Wi-Fi product, it a Wi-Fi 5 gigahertz product. I am not sure if it’s Cisco or not. I mean, all I am saying is that the U-verse announcement, I think it was made in the last 24 hours, Wi-Fi specific announcement, and so that’s 5 gigahertz product as opposed to the technology we are focusing on which is a 60 gigahertz technology product. I believe it’s got – presumably it’s able to deliver high definition program to multiple servers or TV’s essentially. So – I think the usage case is a little bit different if the user is only trying to stream one way, just project one way, I think Wi-Fi is fine to a certain degree. Our technology really is about delivering a maximum uncompromised experience, it’s uncompressed. Remember in Wi-Fi, it’s a compressed strategy in 60 gigahertz, it’s uncompressed, so this is a different value proportion. Both will coexist really depending on the applications.

Unidentified Analyst

Okay. Thank you.

Operator

Our next question comes from the line of Bob Sales with LMK Capital Management. Please go ahead with your question.

Bob Sales – LMK Capital Management

Yes, couple of questions, probably both longer term. Can you talk about what the landscape could look like if MHL becomes innovative at some point on the – in the application processor of specific guys that are involved in the Android phones and I am talking about specifically whether there still would be a need for an additional chip or switch or whatever other functions have been for MHL and when you look out on the horizon when you think the timeframe would be where you have to worry about that?

Camillo Martino

Well, first of all I say this every quarter and I’ll say it again. Don’t be shocked by what I am about to say, but we can’t wait for that to happen, because in order for MHL truly to become a 100% across-the-board standard, it’s important that it’s selling at each segment of the category, meaning we want to be in the inter level, we want to be in the mid-range, we want to be in the high-end, irrespective of whether it’s a television or a mobile device. So it’s a very, very important that each of the companies, the big SoC vendors, let’s say the mobile phone, be it Qualcomm or NCI or a MediaTech [ph] for example, companies like that is very, very important that they integrated that, as is also true on the TV side, the major SoC vendors there are either in-house proprietary solutions or for example like an MStar or a MediaTech.

So it’s very, very important that they do that. That’s the first statement that I’ll make. So once we know it’s a 100% penetrated right across the board, then the opportunity for us is to continue to innovate in the top half of the tam [ph], just like we do on the TV, in the TV today where we are continuing to innovate on two fronts. One front is on the specification; remember, we’ve only announced today, excuse me, the Consortium has only announced today MHL 1.0. There are a whole series of announcements or advancements to the specification that we would expect the Consortium to announce in the coming years ahead.

By definition, a standalone solution will always be to market first before an integrated solution. Just the way the technology works and engineering execution, so you always have an advantage on the specification side. Outside the specification, we are going to continue to advance technology like we’ve done on the TV side. We are going to introduce new features that are value to customers, that are outside the specification. So this model of MHL standalone chips will continue, but we are not pretending here to say that we are going to be selling one billion chips for every single smartphone per year, that’s not the objective at all.

The objective is really to grow the overall tam [ph], advance specification every 18 months to two years and continue to deliver advanced solution, integrating switches. There is always an opportunity for our switch for many, many years to come and that’s what we expect as well. And in addition to that, we are going to be adding wireless solutions as well. So MHL and wireless, they are going to coexist for many years to come, just as HDMI, I think we see all three playing together, we see all three as important for our future.

Bob Sales – LMK Capital Management

Okay. That leads to my second question was, when you allude to your wireless technology being incorporated into mobile devices and then I think about what you are offering now on a projector which sounds like a wireless receiver. Help me understand where your product solution will fit into the mobile world, will it be a receiver on a handset or a transmitter on a handset?

Camillo Martino

It will be truly a transmitter and the receiver will be on the TV side or some other display side, some other large display.

Bob Sales – LMK Capital Management

Yes, okay. That makes lot of sense. Thank you. Thank you for your answers.

Camillo Martino

Okay.

Operator

Our next question is a follow-up question from Rajvi Gill with Needham & Corporation. Please go ahead with your question.

Rajvindra Gill – Needham & Company

Yes thanks for the follow up. So the 28% sequential growth in mobile from 3Q to 2Q, was that driven by additional skews or additional new customers, handset customers or tablet customers or was that largely driven by higher sell-through from the existing accounts, maybe how would you characterize the sequential growth there?

Noland Granberry

I think the majority of the growth was higher sell-through and also I mean multiple skews within the existing customers that are out there today that’s the primary driver but there is also in addition to that some other companies that are just starting to get into the market as well as I don’t believe there has been any announcements made to date. So, it’s best that respect that and not talk about it today, but the majority of the growth is primarily from existing customers, more skews and higher sell-through, some more thrust.

Rajvindra Gill – Needham & Company

And the –

Camillo Martino

And probably – probably, I am sorry if or actually I would say the – the other thing to mention here is I remember the launch of the Galaxy S II in the United States, you know, until now the Galaxy S II has been selling outside the US and I think it’s been a least maybe nearly two months ago now, one to two months the Galaxy S II platform was a big press release by Samsung on the East Coast, that was in New York specifically and so that’s going to drive volume and I have seen in the last two weeks another Galaxy platform, the Galaxy Nexus was introduced as well and so I think there is more products like that right now, which are starting to take hold up here in the channel.

Rajvindra Gill – Needham & Company

Did the revenue from the cable accessories are well nominal as well?

Camillo Martino

You know starting to grow, I would – I think probably the word nominal is appropriate at this point in time I think that opportunity is still there, I think there is an opportunity we haven’t really realize and I think it goes with some of the comments that I have made before, right, let’s face you need to get all the phones out there and get the TVs. Secondly, there is an education – there is an education in the channel, the brand awareness what this technology can do and then what brand awareness is there, you are going to stop to see this a whole adopter in line of business stop to grow quite significantly. So today I would say it’s just a nominal it’s best we expect it to grow, no question.

Rajvindra Gill – Needham & Company

And just a technical question, the TVs do not, they are not MHL enabled, you need an active cable to do the switch from HDMI to – I’ve heard from MHL to HDMI so the TV can receive it, is that cable need to be powered separately as well?

Camillo Martino

Yes, if you – if you want the charging feature then yes, if you don’t want the charging feature you just want to able to connect (inaudible) less of an issue. So, so is this really no concern nor a phone manufacturer whatsoever as to whether his phone will be able to connect to a legacy TV or not because through an adaptive solution you can always connect (inaudible) never going to be a problem. However, if you want the charging features as well in that case you would then add an external power solution, is that make sense?

Rajvindra Gill – Needham & Company

Yeah, thank you.

Operator

And our next question comes from the line of Matt Gabel with Gabel Asset Management. Please go ahead with your question.

Matt Gabel – Gabel Asset

Yeah, I am wondering that the current environment, what kind of visibility if any you have into the first calendar quarter of 2012? Thank you.

Camillo Martino

I think at this point in time as I – I just know than I am just to reiterating my comments from the prepared remarks was that we look, basically what we can see now we do anticipate that Q1 will follow our typical seasonality and be lower than Q4. If you look at how our business has historically run and Q1 is typically is typically the lowest revenue quarter and Q3 is typically the highest. Camillo made the comment that this year 2011 is somewhat an unusual scenario because of the factors that came in the play, you know, talking about the earthquake and there is the economic you know outlook so maybe we look at the Q4 or Q1 our visibility today is that it will be down but we will provide more information on that as we get to the Q4 earnings call.

Matt Gabel – Gabel Asset

Okay, so right now it’s just, it seems typical, nothing out of the ordinary, typical seasonality?

Camillo Martino

At this point but again like I said we will actually give you more clarity when (inaudible)

Matt Gabel

Thank you, very much.

Operator

Our next question is a follow-up question from Richard Shannon with Craig Hallum. Please go ahead with your question.

Richard Shannon – Craig Hallum

Hi, guys, just one quick follow-up for me, you made an announcement today about this HDMI Forum which seems quite interesting, kind of alluded to other markets outside the additional plethora of refined HDMI today. It certainly makes sense there. I do have two quick questions along those lines, first of all do you think this Forum is going to in any way I guess hurt or downward inflect the potential you’ve had from what you call your standard plus business model, i.e., competition from other innovators around HDMI and also does this imply any sort of change in the terms from the (inaudible) Consortium that Silicon Image receives?

Camillo Martino

Really, I think that’s the (inaudible) question as those we have done, we don’t anticipate the financial model is going to change at all, the guidance that we give on a quarterly basis at this point, the 15 to 20% outlook for IP business that we expect to continue for the foreseeable future. And remember we are attacking maybe that’s not good, the appropriate word, the word attacking, but we are trying to expand the HDMI opportunity to a much, much bigger overall annual half, I think today the annual tam [ph] is five, 600 million units per year growing. We think we can grow into even a bigger number if we can have a much wider industry participation. It is very difficult for a seven founding members of HDMI today, which overall consumer heritage, consumer electronics heritage, it’s not – I don’t think it’s practical for those seven companies to be able to be in a position to really determine what are the technical requirements of all these other industries that we just don’t participate in a day to day basis. So by adding more companies to those – to this – to the team I would say and calling it the Forum, we believe the overall tam [ph] will expand and we welcome contribution from all other companies.

Richard Shannon – Craig Hallum

Okay, certainly that makes a lot of sense. Thanks a lot Camillo.

Operator

I’ll now turn the call back to Camillo Martino. Please go ahead with your presentation and or closing remarks.

Camillo Martino

Sure, thank you. So, thank you for joining us today to discuss our third quarter results. We are excited about Q4 and we think we will finish 2011 quick momentum. We look forward to seeing you with a number of financial conference this quarter and at CES in January. Thank you again. Operator?

Operator

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

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