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Executives

John Swenson – Director Investor Relations

Bami Bastani, Ph.D. – President, Chief Executive Officer & Director

Pete J. Mangan – Chief Financial Officer & Executive Vice President

Analysts

Zung Nguyen – Asset & Wealth Management

Raji Gill – Needham & Company

Trident Microsystems, Inc. (TRID) Q3 2011 Earnings Call November 3, 2011 5:00 PM ET

Operator

Good day ladies and gentlemen and welcome to the third quarter 2011 Trident Microsystems Incorporated earnings conference call. At this time all participants are in listen only mode. We’ll be facilitating a question and answer session towards the end of today’s conference. (Operator Instructions). I will now turn the presentation over to your host for today’s conference Mr. John Swenson.

John Swenson

Welcome to Trident Microsystems conference call for the third quarter ended September 30, 2011. After the market closed today, Trident issued a press release discussing the results for the quarter. The press release is accessible online at www.TridentMicro.com. This call is being broadcast live over the web and is accessible using the link found in today’s earnings press release. A replay of the webcast will be available starting tomorrow by accessing the investor relations section of Trident’s website.

Before we begin, please note that during this call we will make forward-looking statements. These include statements regarding financial expectations for the fourth quarter fiscal year 2011, expected restructuring activity, and our evaluation of strategic alternatives to improve liquidity. We are not obligated to update these statements. Actual results may differ materially from the forward-looking statements made today and have in fact, done so in the past.

These projections or forward-looking statements are subject to certain risks and uncertainties. These risks include in particular, our success in pursuing strategic alternatives to improve our liquidity, our ability to reduce expenses, our ability to negotiate more favorable payment terms with certain vendors, our ability to obtain design wins among major OEMs for our products, the timing of mass production of new products, and competitive pressures including pricing and competitor’s new product introductions and our ability to retain key employees globally.

These and other factors are discussed in our press releases and in the company’s filings with the SEC. We encourage you to read these documents and to come to your own conclusions about the risks and uncertainties inherent in Trident’s business. Also, please note that we will present non-GAAP financial information in this call. For a reconciliation of our non-GAAP information to the most comparable information under GAAP. Please refer to our earnings press release.

On today’s call are Dr. Bami Bastani, Trident CEO and President and Pete Mangan, Executive VP and CFO. Bami will begin with an operational and market update and Pete will review the financial results for the quarter and our financial outlook. Then we will open the call for questions. Please note however, we will not be answering questions on strategic alternatives. Now, I’ll turn the call over to Bami Bastani.

Bami Bastani, Ph.D.

Thank you for joining the call today. I will provide some comments on the results and highlights for Q3 as well as color on our business activities in our core markets of TV and set-top box, but first I would like to address the subject of Trident’s near term liquidity and our decision to evaluate the strategic alternatives.

During the past several months we have moved the business forward in a meaningful way. We secured design wins for future production, began a substantial restructuring to reduce our breakeven level, and agreed to the sale and lease back of our Shanghai building which will contribute cash in the quarter. On the downside, we recently lost a significant expected IT licensing and an [RE] deal which we had anticipated would bring $10 to $15 million to the company.

We also have seen delays in the production of certain new programs and continuing weakness across consumer electronics. As a result, we anticipate that the quarterly loss in Q4 will be at least as large as what we have seen quarterly over the past year further eroding our cash position. We therefore are evaluating a strategic alternatives including additional sales and licensing of IT, sales of certain assets, and other measures that would potentially improve liquidity and preserve our design wins, and customer relationships. This effort has begun and is ongoing which is why we will not discuss these matters further in the question and answer session.

Now, let me shift to a discussion of Q3 and additional color on our business. Revenues of $80 million slightly exceeded the high end of the guidance. We achieved a sequential increase in both set-top box and TV driven in part by seasonal demand improvement as realized initial new programs ramps of SXL and TV 550 in the TV market. Margins in the quarter were at the lower end of the revenue as we wrote of certain inventory in light of this softening of the near term outlook.

Expenses were at the high end of the range leading to a non-GAAP operating loss of approximately $20 million for the quarter. Compared with our guidance of $16 to $19 million. Cash at the end of quarter came in around the middle of guidance at $36 million. Pete will elaborate on our detailed financials later in the call.

Over the past several months we have been highly engaged with customers as design in activity for 2012 production. In Set-top boxes we’re continuing to drive our position as a technology leader. As an alternative the current market leader in the client segment of the North American cable market. We also are continuing to explore our first mover advantage with Android. We announced wins with LG CNS and Cowen Media for Android based hybrid boxes. We worked closely with those customers to develop differentiated set-top box solutions that leverage the open platform and fast time to market characteristics of Android to handle traditional broadcast content, video on demand, and IT based content.

We also announced deployment of the LG CNS box to the GBN of South Korea which we believe is industry’s first deployment of an android based hybrid cable box. We are very pleased to provide the SoC platform and software expertise that made this milestone possible. In TV we have announced that Philips won the coveted EISA award for best 3D picture quality using our industry leading TV550 SoC and our recently launched FRC-V 240Hz Picture Quality Engine.

For 2012 we anticipate that our TV550 and Fusion products will power Philips’ Smart LED and 3D TV solutions including 8000 and 9000 series and the Cinema 21:9 Platinum series. We also announced that AOC working through their large ODM TPV in Taiwan has selected our SXL connected [mid stream] SoC for deployment in the growing Brazil market.

Now, I have a few comments on the state of our markets and Trident’s current positioning. Our markets clearly are moving towards connected services and are demanding connected platforms. We are a recognized player in this area through early adoption of Android, certification of much of the critical [mediaware] and innovation in areas such as social media. At CES in January, we expect to showcase social media features on our products including smart devices that allow users to reach out and interact with friends and contacts. We believe this represents the next wave of requirements for Smart TV and we are focused on continuing to innovate in this category.

In set-top box we are focused on HDTA and UDTA, client and connected boxes for cable and IP. I believe we have good set-top box products and design momentum with Tier-1 customers. The TV market continues to be very challenging and highly competitive. This is reflected in our Q4 outlook and in the recently announced decisions by several suppliers to exit the TV business. The major TV OEMs currently are feeling pressure on margins as well as slack demand. The lone bright spots are Connected TV and Smart TV which are growing categories that provide opportunities for OEMs to differentiate their products and earn margins. We have made a considerable investment in Connected TV and Smart TV and we believe we have good product offerings in these categories.

To summarize, we’re executing on the turnaround we discussed on the last call. We are winning new designs and reducing costs, while we are mindful of our cash run rate and we believe we need to evaluate a variety of strategic alternatives to improve our near term liquidity. We’ll report more to you on these subjects as we can. With that, let me turn it over to Pete for his review of the financial results.

Pete J. Mangan

Today I will provide the financial highlights for Q3 then cover our guidance for the fourth quarter. Net revenues for the third quarter came in at $80.1 million, up 15% from $69.6 million in Q2. TV products increased 17% quarter-over-quarter to $45.7 million and represented 57% of total revenues. Set-top box revenues in the quarter were $32.7 million, up from $30 million in Q2 and represented 41% of total revenues. Revenues from IP licensing and royalty programs totaled $1.7 million in the quarter, equal to 2%.

Looking at sales by customer, Philips was number one with 13% of total revenues and Arrow, a distributor was number two with 12%. For the distribution channel overall, revenue in the quarters were 35% of total compared to 40% in Q2. Revenue by region for the company showed Asia Pac with 35%, EMEA 26%, Americas 19%, Korea 17%, and Japan 3%. Non-GAAP gross margins of 32.6% were down six points from Q2 driven by [TV BU] inventory right down write down.

Non-GAAP operating expenses for the third quarter were $46 million, down 6% from $48.7 million in Q2 and down 23% from the like period last year. Our non-GAAP operating loss for Q3 was $19.8 million, down from $21.8 million in Q2. The non-GAAP net loss was $20.3 which compares with $21.7 million in Q2. The GAAP net loss of $39.1 million includes $18.8 million of net adjustments. The adjustments primarily included amortization of intangibles of $8.9 million, impairment charges of $4.8 million, restructuring charges of $3.5 million and stock compensation of $1.5 million.

Now, turning to the balance sheet. Cash of $35.9 million compares with $51.6 million at the end of Q2. Cash use in the quarter of $15.7 million was primarily related to the non-GAAP EBTIDA loss of $11.2 million as well as severance of $3.5 million. Trade account receivables for the quarter was up $6.8 million on higher sales with a DSO essentially flat at 45 days. Inventory was up $5.6 million and increased to 35 days. And AP and accrued’s were up $14 million at 79 days.

Now for our fourth quarter outlook and some other additional comments. Net revenues are expected to be in the range of $50 to $56 million. GAAP gross margins are expected to be in the range of 16% to 20% including the impact of approximately $8 million of amortization of acquired intangibles. Non-GAAP gross margins are expected to be in the range of 32% to 34%. GAAP operating expenses are expected to be in the range of $49 to $52 million including the impact of approximately $3 to $4 million of cash restructuring, $2 million of stock compensation expense, and $1 million of amortization of acquired intangibles.

Non-GAAP operating expenses are expected to be in the range of $43 to $45 million. GAAP operating loss is expected to be in the range of $38 to $43 million. This reflects the impact of an expected $14 to $15 million of total GAAP adjustments mentioned above. Non-GAAP operating loss is expected to be in the range of $24 to $28 million. Revisions for income taxes is expected to be approximately $1 million.

Finally, cash balance as of the end of the quarter is expected to be in the range of $25 to $35 million. This includes the expected net proceeds from our Shanghai building sale of approximately $20 million and assumed more favorable payment terms with certain vendors. Please note the Shanghai building proceeds are expected to be used primarily in China. Also, to improve operational flexibility, today we announced that we chose to cancel our working capital line of credit with Bank of America in light of the strict covenant structure. We have not drawn on the facility and we expect to have no further obligations or collateral requirements related to the line.

That concludes our formal comments. We will now take your questions and again, as a reminder, we will not be discussing strategic alternatives at this time.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Zung Nguyen – Asset & Wealth Management.

Zung Nguyen – Asset & Wealth Management

[Inaudible] over the next six months to nine months, or maybe a year, what is the biggest risk or challenge to the company?

Pete J. Mangan

I would say the key right now is the near term liquidity of the company and hence the announcement today that we’re evaluating strategic alternatives.

Zung Nguyen – Asset & Wealth Management

So the risk would also be that you can’t find a reasonable strategic alternative?

Pete J. Mangan

At this point we’ve just mentioned that we’ve begun to evaluate those strategic alternatives. We’re not making any further comment at the time on those paths.

Zung Nguyen – Asset & Wealth Management

Operator

Your next question comes from Raji Gill – Needham & Company.

Raji Gill – Needham & Company

Since you can’t talk at all about the strategic initiatives, can you maybe comment on Broadcom exiting the TV, Blu-Ray, DVD market and what that means to you and how you’re thinking about the overall TV environment going forward? And maybe if you can talk a little bit about what’s happening in the supplier environment there? Is it kind of rapidly moving more to the Asian suppliers like Mediatech and Mstar? Maybe describe some dynamics going on there?

Bami Bastani, Ph.D.

I would not comment specifically about other players or competitors in the market. Clearly, when some big names exit this space it shows the highly competitive as well as the tough consumer market environment. And so each company makes those decisions on their own merits and on their own criteria. But clearly, it’s a signal that it is a highly competitive and with a significant headwind given the macroeconomics of our time.

Raji Gill – Needham & Company

Could you elaborate a little bit what happened with the loss of that $10 to $15 million IP deal? What was the context of that, what was the purpose of that deal? Any details there?

Bami Bastani, Ph.D.

It involved licensing of some significant amount of IP. As you know, we have significant positions in picture quality and so forth. It was a $10 to $15 million but we had a deposit of certain amount on and we had started the work with that particular entity. Unfortunately, midstream their plans changed and consequently our plans changed.

Raji Gill – Needham & Company

How many patents do you have right now in your portfolio?

Bami Bastani, Ph.D.

We haven’t given specific numbers but it is a significant amount.

Raji Gill – Needham & Company

With your purpose to license IP, transforming yourself to an IP company who would you license the IP to? Other SoC suppliers, to TV OEMs, software companies, who do you have in mind?

Bami Bastani, Ph.D.

I would say in general we see a convergence of TV with mobilities and other aspects of the industry so the patents that we have, have a broad range of applicability in these markets. So it’s not a one unique market segment, but the area that plays to our strength as everybody knows in motion, picture quality, and other aspects of TV. So a very potential wide range of users that we are probing.

Operator

We have no further questions in the queue so I would like to turn the call back over to management for closing remarks.

Bami Bastani, Ph.D.

Thanks everyone for joining the call today. As we have announced that we have started a strategic alternatives look, we will not be presenting at the AEA next week and we will keep you informed as we can. Thank you.

Operator

Ladies and gentlemen that concludes today’s conference. We thank you for your participation. You may disconnect. Have a great day.

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