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Silicon Image, Inc. (NASDAQ:SIMG)

BarCap Global Technology Conference

December 07, 2011 8:00 p.m. ET

Executives

Noland Granberry - CFO

Analysts

Unidentified Analyst

All right. We’ll go ahead and get started. Last but not the least, very happy to have Noland Granberry, the CFO of Silicon Image. I have known Silicon Image for a long time. They have transitioned into a very substantial mobile business. Very exciting and happy to have them. I’ll turn it over. Thanks.

Noland Granberry

Thank you, Glenn. Welcome. We’re glad here -- to be able to present here at the Barclays global technology conference. About 10 years ago, Silicon Image working with six other CE manufacturers, created the HDMI standard whereby we simplified the process of connecting your source devices, your VCR, or DVD player to connect to your TV. That standard actually grew and today is set up with adopters of over 1000 adopters. And today the HDMI standard actually creates over 600 million HDMI-enabled devices year over year. And that’s continuing to grow.

A very successful standard, and we’ve actually had the opportunity to play within that standard and garner a lot of revenues. Last year, we actually introduced a mobile standard whereby we’ve provided a simplified way to connect your mobile device to your larger screen. And that standard was introduced in June of last year. And in the quarter Q3 of last year, we actually realized mobile revenue of about $3 million. This year, our Q3 revenue, we recognized revenue of over $20 million, primarily related to this new standard.

The standard itself called the MHL or mobile high definition link – it’s a standard that’s growing, is over 80 adopters today. And what I will do over the next 20 minutes or so is walk you through a little bit about our business, a little bit about our HDMI space as well -- more primarily our mobile space, which is our growth story.

So to start with the Safe Habor statement. So little bit about Silicon Image. We’re a leading provider of wireless and wired connectivity connections. And a year ago today we could only say that we were a wired connectivity solution provider, with a lot of questions around what happens when you get – when everything goes wireless. Today we have an answer for that and I will talk a little bit about that as well.

We focus on the consumer electronics, mobile and PC markets, all large markets. We garner a very large position in our – in the space we play in on the CE side of things. And we are growing our mobile business. And as I mentioned earlier, it is our growth story. The PC space is one that we actually still have business in but there is not a lot of focus at this point in time.

If we highlight our revenue, take a look back at our revenue, looking at the trend, through nine months today, we’re over $160 million in revenue and on track to actually grow our revenues year over year by almost 20%. And so pretty good growth here particularly in light of the challenges we face on our CE business – within our CE business, off of the Japan earthquake as well as some mix-shifts we’re seeing relative to the high-end and mid-range on the CE side of things.

We have about 500 employees, headquartered at Sunnyvale. We do have a group of about 75 engineers, contractors in India who support our R&D activities. So we call ourselves having three R&D centers: Sunnyvale, Shanghai, and Hyderabad.

We have about 176 U.S. patents and that number is growing as we speak, continuing to build our strong patent portfolio. And as I highlighted, we actually play in the CE, mobile and PC space.

At the highest level, we have two businesses: the product business and the licensing or an IP business. Our product business focuses on the mobile, PC side and is actually geared off of standards. We’re – we believe our best opportunity to win on the product side is to create a standard, drive a technology, and build out a broad acceptance of that particular standard. And we’ve been successful with that.

We actually had participated in digital video interface standard, or DVI standard on the PC side of things a number of years ago. HDMI highlighted the success of that standard, and we’re seeing a lot of good traction with our mobile standards today.

Our product business makes up about 80% to 85% of our business. And our margins are pretty strong at 45% to 48% as well. We supplement that product business with an IP business, and that’s made up of standard -- fees from our standards activities, including adopter fees and royalties. And also, as a means for us to drive this standard adoption, we license our IP cores to the market and drive revenue from that, and garner the royalties from that activity as well.

Our IP business is generally 15% to 20% of our overall business, and the margin on that is much, much higher at 96% to 99%. On a combined basis, and when you look at our model long term, we push to achieve 55% or better gross margins, and the combination of our product and our IP business allows us to do just that.

If you look at how we go about things, we’re about connectivity. How we go about HD connectivity, or high-def connectivity, we are a product company, and we are innovator in that space. We also have a business, because when you are playing in the mobile side of things and the CE side of things, interoperability is very important. So we provide an additional add or value-add to our customers through our Simplay Labs testing and verifications. And that actually provides a means for us to create a way for our customers to ensure that their devices would interoperate with other devices in the market.

Problem for our customers is, they don’t like to see a device, so there’s (ph) go home with the customer and not match up with another device that customer has and both of those devices come back to the store. Very important that they do operate.

I highlight the Standards Plus business model here, because we drive the standards. But one other way we actually win and differentiate ourselves in the market is we actually add features and functionality that are Silicon Image based, that sits on top of the standard.

Now I’ll talk a little bit about that as I go through our CE business. As I mentioned earlier, we play in the three connected markets, the consumer electronics, which consists of primarily DTVs – the DTV space and home theatre business. On the mobile side of things, and our current focus is on the smartphone and tablet market – devices in that market. And to a lesser degree on the PC side of things.

One of the things I like to highlight is our customer base. And we feel very proud of the fact that for a company of our size, we have very tight relationships with lot of the major CE and mobile manufacturers, including Samsung, Sony, Sharp, Vizio. We pride ourselves the fact that as we drive these standards, we view it as a partnership to understand where we think the market is going, create innovations that help drive that, push that within the standard or create Silicon Image solutions that we can set up on top of the standard, and work with our customers to make those things happen.

So spend a little bit time on product side of things. First, I’d talk about is our mobile. I highlighted this is our growth story. What you will find – this is a Samsung device here. Mobile devices have evolved quite a lot over the last several years, where today these devices essentially, I call them laptops that you can put in your pocket, very high processing power, lots of memory, and lot of content is being maintained and viewed and used on these devices.

The only downside if you were to point to something is your screen size. And I highlighted that. We created a standard that simplifies the processing of connecting these mobile devices to a larger screen, mirroring activity. So our mobile solution is driven towards that.

What does the market look like for driving this connectivity? Today there is three ways to actually make that connection. One is through an HDMI connection, and we actually sell chips into that space – HDMI space. That’s one where you would connect. In using the HDMI connection, you require to have a separate HDMI connector in connecting to your TV. Two, you can have a proprietary type of connector. I can say (indiscernible) as an example where their connector is a way to connect and you have what we call a dongle solution to connect into a CE device.

And third, you can use mobile – our MHL solution which we look at it as an easier way to connect in essence that it allows the manufacturer to decide what type of connector they want to use. Today most of the manufacturers would use a micro-USB, a way to connect and connect right into your TV with one cable.

The market for that is actually one that’s growing quite a bit. This year, we believe there is over 400 million – 470 million smartphone devices shipping. And those that have this HDI connectivity, whether it’s HDMI, proprietary or an MHL solution, there is about 25% penetrated this year. We expect the market to grow to over $600 million next year and that penetration rate to increase to 35% or better. So we see the market growing quite a bit.

I highlighted for us that we had about $3 million in revenue in Q3 of 2010. All of that revenue was HDMI related. When you look at, fast forward to Q3 of this year and I mentioned we had $21 million of mobile revenue. The majority of that – over 80% of that was actually MHL revenue. And the highlight of that is that while HDMI has had success in it, there has been this transition of moving to MHL relative to making this mobile connectivity.

Looking at the MHL ecosystem, there is a lot of places where the MHL can play into, primarily TVs. If you want to have MHL on the other side of TV, and you say, why is that? One of the main features you get with MHL is the ability to power the mobile device. And when you are in a MHL environment with a MHL TV, you will be able to power the device, use the connector of choice. And also with the TV remote, you’re actually able to manipulate the activities on the screen, whether you are watching a movie, you want to fast forward or whatever you like, you’re actually able to use a TV remote to do that in an MHL environment.

Today, though, there is millions and millions of TVs that don’t have MHL enabled and using the small connector allows that to happen. And we actually have a chip that goes into that connector, which allows you to connect an MHL enabled phone to a non-MHL enabled TV. In essence, there is another revenue opportunity for us, and this is viewed as a separate cell in the eyes of the carrier.

Our focus mainly for the mobile device is on the smartphone side of things but it can go into tablets. There is opportunities within PC monitors, laptops as well as in the home theater space. So there is a lot of places for our devices to play into and it’s a growing space as well.

Where does this ecosystem stand today? We’ve highlighted that Samsung and HTC has been major customers of ours. LG and Meizu, a Chinese mobile manufacturer, have introduced devices that have MHL functionality in it as well. And we expect to see 3, 4, 5 more cell phone manufacturers introduce product in the next six to nine months. That’s the mobile side of the ecosystem.

On the TV side, today Toshiba and Samsung have announced TVs that actually have MHL functionality built into it. And as the new TV season comes about next year, we anticipate to see sale of more TVs which will have MHL built into them.

We talked about connecting your mobile device to the TV as one angle for this MHL adoption. Another angle and we’re getting a lot of good feedback from is in the mobile – is in automotive space. There is a lot of screens that are being built in the cars. And one advantage we see is that folks like to use these devices as they are – we call them set top box that you can carry around. It would be great to be able to plug this in your car and display that content on to your screens in your car. And this is an area that we are actually getting some traction with the automotive industry.

And if you check the website, mhlconsortium.org, you would see that BMW has actually become an adopter of MHL recently. And that’s one testament or statement that the auto industry is closely looking at this technology as a way to connect your mobile device within the automotive -- the auto.

Moving to the CE space, I can talk a little bit about what’s happening in the space. We’ve talked about this quite a bit is that we are seeing a lot of headwinds, we call it, after the Japan earthquake. And with the economy the way it has been, we’ve seen our CE business face some challenges that we didn’t see in 2010. Our Q2 revenue level was off from our first quarter. Although we were able to bounce back in Q3, we anticipate Q4 to be seasonally down but more on the higher end of the range that we would have.

But we still believe we’re actually well positioned in the consumer electronics space. We still have nine of the top 10 tier-1 manufacturers. We still believe in the space that we play in. We have a very high market share. And we’ve actually looked at other ways of repositioning ourselves to do more within the space. For example, we’ve got a part that we can actually sell into the lower end TVs, that provides for an MHL connectivity opportunity in the lower end TVs, as well as our MHL dual standard port processor.

I talked about – when you look at what we do as far as standards plus, here is an example of where we’ve taken the HDMI standard, created that standard and then delivered additional features and functionality that sits on top of that standard, whether it’s InstaPort, whether it’s our new feature InstaPrevue, where it provides a means to see the devices that are connected to your TV. And then MHL also is one of the key things driving that ecosystem growth on the mobile side of things.

This is just highlighting the fact that we are the first and only provider of a dual port -- dual-mode port processor allowing you to switch between HDMI and MHL in the DTV world.

So I mentioned earlier that we were not able to consider ourselves a wireless company a year ago. But there was a lot of talk about what do you do when the world goes wireless? Where is Silicon Image positioned? In May of this year, we actually completed the acquisition of a wireless company – company called SiBEAM.

SiBEAM actually was one of the founders of the wireless HD standard – a 60 gigahertz technology that is more of an in-room type of an experience. It’s totally different from WiFi, a much higher bandwidth, a much higher speed set. And when you look at, it is actually an area where we call it’s as close as you can get to a cable like experience.

So if you are connecting your – if you are considering your HDMI wired connection as your baseline, this 60-gig solution, wireless technology is the closest you can get to that wired experience. So we’re very proud of it. One of the big things about the acquisition that we think was key to our making this acquisition is that it’s proven technology.

We are not in a process today of actually proving the development of it, it actually is CMOS-based. And we actually have product that we are selling in the market. We are selling it in spaces where it’s getting challenge. For example, one of the customers is Dell. They have it in their high-end gaming platform. So we’re actually being robustly tested in that space. We recently announced – Epson announced a – one of their projectors for the home theater space – high-end home theater space where they are using the 60-gig solution. And actually we also sell devices in the home theater space, Vizio branded devices in the home theater space.

So there is a lot of – the big thing about it is that it’s actually a proven technology. But for us the real driver with the acquisition was not the fact that we could create an additional means to connect your source devices to your TV. Our focus really is that when you look at these mobile devices having an MHL wired connectivity is good, but there is always questions on (indiscernible) you to be wireless devices, how do you actually make it happen in a wireless fashion? And our focus in this is driving this technology to go into the mobile device.

We have a roadmap in place. We anticipate that we will be sampling product that can get into the space end of next year, or early part of the following year. And we also expect that we could see revenue from this in 2013. So when you look at the opportunity, from a wireless perspective, we are selling product in the CE and PC space. But our real focus is getting this into the mobile space. We’re – if you look out a number of years, you’ve got 470 million smartphones today. There is talk of it going to a billion units in 2014. We believe it’s a strong opportunity for us to play in.

Here is just an example of ways that this – just use case of ways that this wireless capability can play in. The gaming type solution, where you have smartphone access, the game controller and you can wirelessly connect to your TV and play game on it.

So I’d spend a few minutes looking at the financials and then take any questions after that.

From a financial perspective, if you look at our revenue by segment, CE continues to be the dominant contributor to our revenues. However, we talked about it – when we look at Q4, we expect the mobile will be the largest contributor and as we go into next year, we expect mobile to be the largest contributor. To the company, it actually, as I said, is our growth driver. We do – our mix of revenue channel is 67% through the distribution, 33% direct. And the make-up of revenue by region, today majority of revenue is going into Korea, and that’s primarily associated with the Samsung business, and Taiwan with the HTC business.

Japan had been our – one of our largest regions, and still is one of the largest regions although it has dropped to three – number three at this point.

If you look at our trend – revenue trend, we’ve been actually able to grow revenues year on year consistently over the course of the year, and anticipate that to be the case for Q4. If you look at Q3 2010 and compare to Q3 2011, one of the drivers of – in 2010 was $7.5 million royalty catch-up that we highlighted in that quarter. And that was – if you were to back that out, you could see a healthy growth Q3 2010 to Q3 2011. I think one of the key metrics that’s here is our margins. We’ve been able to keep our margins at the high side of the 55% range, which is a testament to our ability to provide these innovations that our customers want.

From an operating expense model and operating profit model, we haven’t been able to get into our long term model, which is 15% to 20% from an operating profit. Our belief is that we’ve got already positioned well to pursue these certain markets that we are in. And actually we would get in there by growing our revenue, and we believe, we’re well positioned to make that happen as we get into ’12, and ’13 as far as getting into that operating profit level.

From a balance sheet perspective, we exited Q3 with $155 million in cash, about $1.90 per share. We don’t have any debt. So we have a pretty clean balance sheet. And we actually used over the course of the year to the tune of about $43 million in cash and stock for strategic transactions, including the wireless acquisition.

We get questions from time to time, what is our intention with the cash? And today, we are actually looking at how we can continue to fulfil our strategic roadmap with any other technology that we should license or acquire or invest in to help us build out our strategic roadmap.

So if you look at Silicon Image, and how we’re driving to long term growth, there’s a number of factors that come into play. One is we’re not just about HDMI any more. We’re about advanced connectivity, we’ve broadened that view. That means that it’s not just, like I said HDMI, it’s mobile -- it’s our mobile solution, it’s our wireless solution and it’s everything we think that might be application in bringing about an advanced connectivity. And we’re planned in the high growth markets, the mobile being the main one that we exist in today – pushing in today.

As the standards champion, we’re actually able to position ourselves well, be a leader and innovator in the space and work with a lot of the major, major customers in the spaces that we have. And that’s why our strategic customer relationships is key to our long term – long term growth.

We historically have been viewed as a one trick pony, one product, one product definition. We’ve broadened that and we’ll continue to broaden that as we continue to grow. And be strategic in finding other connectivity solutions and acquiring those either through licensing or an investment or whatever to really help facilitate that long term growth.

And with that, I’ll take questions.

Question-and-Answer Session

Unidentified Analyst

For the SiBEAM application, is that going to use a lot of power for that application to transfer to TVs or something like that or is that –

Noland Granberry

Yeah. So today, and I think, when you look at where SiBEAM was when we acquired, they were focused on the CE and PC business. So they weren’t really focused on power and price – power and cost as much. We recognized as we’ve kind of gone into our MHL push. We understand power and cost is very key to actually get a solution in place. And our R&D roadmap is geared towards that.

As I highlighted, we’ve got a solution that works. We’ve got a wireless HD solution that works. Now it’s about driving the power down and the cost down. As we were going through the acquisition process, one of our diligence activities was – is that possible? Is there a way to get there? We definitely believe there is a way to get there. And as I mentioned, we expect the sample products end of next year. That would allow us to get into the space.

Unidentified Analyst

The last question. In HDMI, you had a couple of competitors that kind of chased you. You always had a lead on the standard. And maybe just the competitive landscape in MHL.

Noland Granberry

We anticipate a similar type of play on the MHL side where there will be – will be a discrete play. One of the things we do want to see because we think it’s actually important for the standard to continue to gain traction, is that integration which is our main competition we view that, that comes into play. You have players like Qualcomm, MStar and MediaTek that have joined the consortium, they are as adopters that we think pushes the integration side and push the standard. But there will be discrete players.

If you look at the list of adopters today, SMSC is the player in the space. ON Semiconductor is a player in the space. Parade Technologies is a player in the space. So we fully anticipate that there will be competitors on the discrete side. Our approach will be similar to what we’ve done on the HDMI where we actually continue to evolve the standard, right? And be a leader in that space but then add features and functionality that Silicon Image their own that will sit on top of the standard.

Unidentified Analyst

Great. I guess, we’re out of time. Thank you, Noland.

Noland Granberry

Okay.

Unidentified Analyst

Breakout room is immediately following (ph).

Noland Granberry

Okay.

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