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Silicon Image, Inc. (NASDAQ:SIMG)

Q4 2011 Earnings Conference Call

February 2, 2012 5:00 PM ET

Executives

Elizabeth Bremner – Investor Relations

Camillo Martino - Chief Executive Officer

Noland Granberry – Chief Financial Officer

Analysts

Scott Searle - Merriman Capital

Rajvindra Gill – Needham & Company

Richard Shannon – Craig Hallum

Christopher Longiaru – Sidoti & Company

Tom Sepenzis – ThinkEquity

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Silicon Image Q4 2011 Earnings Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. (Operator instructions) As a reminder this conference is being recorded Thursday, February the 2nd, 2012. I would now like to turn the conference over to Elizabeth Bremner of Investor Relations. Please go ahead, ma’am.

Elizabeth Bremner

Thank you. Good afternoon everyone and welcome to Silicon Image’s fourth quarter and full year 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 update from Camillo. Noland will then provide a more in-depth discussion of the financial results and provide a financial performance estimate for the first quarter of 2012. We will then open the call for Q&A.

As stated in the previous quarter, Silicon Image continues to report its product revenues in three categories. Consumer Electronics or CE, Mobile and PC, CE revenues consist of DTV and home theater products. The mobile category includes those mobile HDMI and MHL enabled products.

The PC category includes PC and Storage products and IT 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 fourth 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

Thank you, Elizabeth. Good afternoon everyone and thank you for joining our fourth quarter 2011 earnings call today. We have made some exciting progress at Silicon Image in 2011 and we are happy to finish the year on a strong note. I will first give you a brief overview of the company’s performance, followed by a market update and then Noland will go through a numbers in more detail and provide a financial outlook for Q1.

Today we reported financial results for the fourth quarter of 2011 and we are at the high end of the guidance range we issued last quarter. Total revenues for the quarter was $58.7 million compared to $59.7 million for the third quarter of 2011 and $52 million for the fourth quarter of 2010 representing growth of approximately 13% quarter four over quarter four.

Product revenues were seasonally down from Q3 to Q4 as expected. And EPS for Q4 2011 was $0.06. IP revenues comprised 23% of the total revenues which is higher than our normal range due to factors including increased royalty momentum as Q4 tends to be a strong royalty quarter due to the holiday production season and seasonally lower product revenues.

Gross margins were quite strong in the quarter at 61% due to the rich mix of IP revenues and a robust product gross margin of 50%. For the full 2011 year, revenue was 221 million, an improvement of 15.5% compared with 20100. If you exclude the $7.5 million onetime IP revenue catch up in the third quarter of 2010, it represented a 20% increase year-over-year.

We achieved these results primarily due to the strong growth of our mobile and IT businesses despite the challenges in the consumer electronics market as a result of the Japanese earthquake and the global economic environment. Clearly, our mobile business was a catalyst for our company in 2011. Allow me to emphasize how much progress we have made over the last four quarters.

Mobile revenues were $4.6 million or only 11% of that total product revenues in the fourth quarter of 2010. It grew to $21.1 million or 47% of our total product revenue in the fourth quarter of 2011. During the year, we estimate more than 50 million smart phones were shipped with our MHL transmitters.

For 2012, we expect that there will be at least 100 million more smart phones shipped using our MHL transmitters. The MHL ecosystem will expand significantly if you include the number of TVs monitors adapters and cables as well.

As a result, we have become a valued supplier and strategic partner to the mobile OEMs around the world an achievement of which we are proud. Mobile is now the largest contributor to product revenues and Q4 set a new record for MHL product shipments. At CES a number of our key customers announced a new MHL enabled CE devices including PC from Samsung, digital TVs from LG and BenQ, various smart phone models from Huawei and AV receivers from Onkyo.

The MHL enabled Roku streaming stick was named by Popular Mechanics as one of its top gadgets of CES 2012 which was the Editors Choice. We are also excited about MHL moving into the automotive space with Pioneer’s appradio in-dash head units. I’m also excited about Silicon Image’s significant progress in the wireless HD.

Adding a wireless technology to our connectivity strategy was an important initiative for us in 2011. One which we achieved in May last year with the addition of the 60 GHz wireless technology. Our second generation wireless product is in the market today shipping in the Epson 3D home projector and the Dell Alienware product line of high end gaming laptops.

We expect to be sampling our GEN3 products soon that are aimed mainly at the CE, PC and tablet markets. We decreased the power consumption and size going from the second to the third generation. As we have previously stated, the most significant opportunity for 60 GHz technology will be in the mobile space requiring even lower power consumption, lower price and a smaller form factor. Our next step is to launch a product to address this market.

We’ve planned to provide samples to our key mobile customers in the latter part of this year which we should generate revenue in the second half of 2013. At our CES booth we had our 60 GHz wireless HD station where we showcased the various wireless possibilities. If you were able to visit out to that booth we demonstrated how our consumer can wirelessly transmit uncompressed interactive HD video and audio from station video devices like a Blu-ray player and from mobile devices like tablets and smart phones all without latency or without interference from the many surrounding Wi-Fi networks. We showed both a mirroring scenario and a dual view scenario in which gamers can utilize the tablet screen for one view and the TV screen for another.

Turing our attention to our CE business. As you know, our CE revenues were challenged in 2011and we expect to see these trends continue in 2012. We expect certain market trends and investments we made in our CE products to help drive our CE revenue in 2013.

Among them are the launch of our new InstaPrevue products which we unveiled or which we demonstrated at CES. In addition, MHLs advanced into the DTV market and some recent investments we’ve made in the home theater. Additionally, we expect full K displays also known as ultra high definition displays to start gaining traction in 2013 which should help grow the high end of the DTV market.

The HDMI standard also achieved a number of key milestones. At the end of 2011, there were 45 HDMIs forum members and 1166 adopters. Amazingly enough at the retail level, there are approximately 22 products using the HDMI interface sold every second of everyday. Based on industry forecast we anticipate an installed user base approaching the three billion product level using the HDMI interface by the end of 2012.

Looking back at 2011, we characterize it as a highly successful year. First, we successfully launched MHL, the new mobile HD video connectivity standard into the marketplace.

Second, we made a strategic investment in 60 GHz wireless technology that has the potential to provide new areas of innovation and growth. And finally, we grew revenue by 20% and profitability by 150% in our core mobile and CE businesses year-over-year excluding the onetime royalty revenue catch-up and the strategic wireless investment that we’ve made.

During our investor presentation at CES, we also highlighted the significant opportunities to grow over the next few years. We have positioned the company to benefit from an expanding TAM that we expect will grow to more than two billion units in 2015. As we said at CES, our goal is to have our HD connectivity technology in every consumer mobile and PC device shipped whether it is our semiconductors, or intellectual property.

Two years ago, we chartered a course to significantly grow the revenues in the years to come. I am happy to say that we are executing to this plan and we expect to approach annual revenues of $500 million within a few years. This is a big goal and we believe we have the capability to achieve it. To ensure we are well positioned to capture our share of this significant TAM we talked about earlier, we are making some incremental investments which you will see in future income statements.

These investments are primarily in engineering and marketing. We will be continuously monitoring the progress to ensure they meet our expectations. As a result, our operating expenses for 2012, should average approximately $32 million per quarter on a non-GAAP basis. We believe this incremental investment is justified given the significant opportunities in front of us. I would now turn the call to Noland for the detailed update of our financial results and our financial goals for Q1 2012. Thank you, Noland?

Noland Granberry

Thanks, Camillo. Good afternoon. I will cover the following topics. Highlights of our Q4 and full 2011 year financial results and our financial performance estimates for Q1 2012. 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 impairment of intangible assets 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. Revenues for Q4 2011 was $58.7 million, compared to $59.7 million for Q3 2011 and $52 million for Q4 2010. Revenue for the full year 2011 totaled $221 million versus $191.3 million for 2010.

Product revenue totaled $45 million or 76.7% of total revenue for Q4 2011 versus $49.1 million or 82.3% of total revenue for Q3 2011, and $42.1 million or 80.9% of total revenue for Q4 2010. For 2011, product revenue increased 14% to $174.2 million versus $152.8 million for 2010. The year-over-year increase in product revenue is due to strong demand for our mobile products during the year offset in part by decline in our CE and legacy PC businesses.

For the fourth quarter, and the full year our mobile product revenue increased 47% and 37.8% of our total product revenue respectively. Product mix is a major factor in the changes in our overall average selling price for products. Our average selling price for product sales was $1.21 per unit for both Q4 and Q3 2011, and $1.43 for Q4 2010. The major change between 2011 and 2010 is primarily the result of increased mobile revenues which carries a lower ASP.

IP revenues for Q4 2011 was $13.7 million or 23.3% of total revenue versus $10.6 million or 17.7% of total revenues for Q3 2011 and $9.9 million in Q4 of 2010 or 19.1% of total revenues. IP revenue grew sequentially and on a year-over-year basis primarily due to the seasonally higher growth in revenue realized in the quarter associated with both HDMI and MHL activities.

IP revenues for 2011 totaled $46.8 million versus $38.5 million for 2010. Our 2010 results included a one-time catch-up of $7.5 million and excluding the catch-up IT revenue grew over 50%.

The growth percentage year-over-year was primarily the result of increased royalty activity during the year. Product gross margin approximated 49.5% for both Q4 and Q3 2011 as compared to 51.3% for Q4 2010. Our product gross margins continued to be stronger in the fourth quarter based on product mix and looking forward we expect our product margins to decline to approximately 45%, 46% as a result of manufacturing yield issues of certain new CE products we are ramping this quarter as well as certain expedite fees we have incurred this quarter.

Beginning with Q2 we expect our margins to move back to approximately 48% range. Including our IP mix we fully expect that our overall margins will continue to be better that our long-term of 55%.

Our IP gross margin was 98.9% in Q4 2011, 98.6% in Q3 2011 and 98.3% in Q4 2010. Our IP margins continue to track in the high 90s and any change in IP gross margin as a result of changes in the mix of IP customization revenues.

Our overall gross margin for Q4 2011 was 51% it was a result of strong product margin performance as well as the higher IP contribution as a percentage of our total revenue. Gross margin was 58.2% for Q3 2011 and 60.3% for Q4 2010.

For fiscal 2011year, our product gross margin was 48.7% versus 49.7% in 2010 our IP gross margin was 98.3% for 2011 and 99.3% for 2010. Overall gross margin was 59.2% for 2011 as compared to 59.7% for 2010. Operating expenses for Q4 2011 were $29.8 million compared to $29.2 million in Q3 2011 and $25.4 million in Q4 2010.

Operating expenses for 2011 and 2010 were $112.3 million and $95.2 million respectively. On a year-over-year basis, the higher operating expense level as a result of our two acquisitions during the year, in addition as we move more of our products to lower geometries, our take on expenses will increase.

Our headcount as of December 31 was 521 excluding contractor resources compared to 503 at September quarter and 432 a year ago. The increase in headcount is primarily the result of completion of our two acquisitions in 2011. More recently in Q1 2012, we converted approximately 75 contractors located in India to Silicon Image employees as a part of our acquisition of this R&D team.

While we are incurring certain one-time start-up cost in Q1 2012, we fully expect the overall cost of having these employees on board to be lower than a trading cost as contractors during 2011. During the quarter, the company reassessed its position with respect to certain of its technology investments and recorded an impairment charge in the amount of $4.2 million reflecting the shift in strategic focus away from the technology acquired. This restructuring charge is excluded from our non-GAAP results.

In addition, during the fourth quarter, we adjusted our methodology for accounting for our investments and the privately held semiconductor company by moving from the cost method to the equity method. This transition is a result of our revisiting our level of a significant influence over the privately held company.

As a result of the change, we are not recognizing our share of the private in this net loss. The effect in the fourth quarter totaled approximately $0.7 million on a non-GAAP basis. While we are in the process of updating our current investment arrangement with the company we believe are sharing the losses on a go forward basis will be approximately $0.4 million per quarter on a non-GAAP basis.

For Q4, 2011, net income was $0.6 million as compared to $0.5 million for both Q3 2011 and Q4 2010 respectively. For the year, net income, other income totaled $2.2 million as compared to $2.3 million for 2010. Stock-based compensation totaled $1.9 million for Q4 2011, compared to $3.4 million in Q3 2011 and $1.4 million in Q4 2010.

The decrease of stock compensation for Q4 2011 was directly related to the vesting of shares under the prior year stock exchange program which was substantially completed in Q3 2011. For Q4 2011, our non-GAAP net income was $4.8 million or $0.06 per dilute share. Non-GAAP net income for Q3 2011 was $5.0 million or $0.06 per diluted share.

For Q4 2010, our non-GAAP net income was $5.3 million or $0.07 per diluted share. For the year, our non-GAAP net income totaled $16.4 million, or $0.20 per diluted share for 2010, our non-GAAP net income totaled $17.4 million or $0.22 per diluted share.

On a GAAP basis, our net loss was $5.9 million or $0.07 per share, for Q4 2011 as compared to our Q3 2011 GAAP net income of $7.7 million or $0.01 per diluted share. For Q4 2010, our GAAP net income totaled $4.2 million or $0.05 per diluted share.

For the year we realized a GAAP net loss of $7.3 million or $0.08 per diluted share compared to GAAP net income of $8.2 million or $0.10 per diluted share, for fiscal year 2010. Diluted weighted average shares outstanding for both Q4 2011 and Q3 2011 were $83.4 million.

Diluted weighted average shares outstanding for Q4 2010 was 80.5 million shares. Weighted average shares outstanding for Q4 2011, Q3 2011 and Q4 2010 were $82.5 million, $81.4 million and $77.9 million respectively. The increase in shares of outstanding was primarily due to shares issued in connection with the acquisition and incentive grants to employees.

Moving to the balance sheet. Cash and investments as of December 31 was $161.4 million versus $155.2 million at September 30 and $190.5 million at December 31 2010. The next phase in the company’s cash position on a year-over-year basis was primarily the result of cash used for investments as the company focus on building out this technology portfolio. For Q4 2011, our accounts receivable totaled $27.4 million or 42 days sales outstanding improving from 51 days in Q3 2011 and slightly higher than the 39 days for Q4 2010.

Net inventory as of December 31 2011 was $10.1 million, which represents nine turns on an annualized basis, this compares to $14.3 million or seven turns at September 30 2011 and $10.2 million or eight turns at December 31 2010. Capital expenditures for Q4 2011 were $2 million compared to $1.9 million for Q3 2011 and $1.5 million for Q4 2010. For 2011, capital expenditures totaled $7.8 million versus $4.7 million for 2010.

The increase in capital spending year-over-year is associated with the addition of R&D equipment and IT related equipment. This completes my summary of our financial results. Next I would like to discuss our financial outlook.

As Camillo commented earlier, we anticipate that our average quarterly OpEx level will be approximately $32 million due to the investments we are making to expand our addressable markets. Specifically, in the first quarter we normally see an increase initiatives spending associated with our typical first quarter charges including cost associated with CES and Mobile World Congress Trade Shows, the resumption of employment tax expense.

This year we also have the India set up cost. Beginning in the fourth quarter of 2011, management committed to increasing our marketing activities for our MHL solutions and in addition, we continue to push our standard efforts including wireless HD the HDMI form and Wi-Fi. With these ongoing activities we expect our OpEx to be in the $32 million range. The following represents our financial outlook for the first quarter of 2011.

Revenue $51 million to $55 million, gross margin approximately 56% to 58%, GAAP operating expenses approximately $36 million, non-GAAP operating expenses approximately $32 million, interest income approximately $0.5 million, share of loss from investments of approximately $0.5 million, non-GAAP tax rate of approximately 22%, Q1 diluted shares outstanding approximately 84 million.

Our guidance reflects the seasonality of our business for our product revenues as such we expect our Q1 2012 be sequentially down from Q4 2011 with product revenue growth resuming in Q2.

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 Scott Searle please go ahead.

Scott Searle - Merriman Capital

Hey good afternoon. Noland, could you just quickly repeat the product revenue breakdowns between CE, Mobile and PC and as part of that I guess an idea of what the 10% customers look like and we are citing should go out in the quarter?

Noland Granberry

Sure Scott. For the quarter, if you look at the breakout, consumer electronics was about $19.9 million, or 44% of total product and Mobile was 21.4 or 47% and PC was $4 million and these numbers are available on our metrics page if you want to go out and take a look at that. And we are talking about the mix of our customers pretty much the same players as before that we’ve had historically as far as greater than 10% same customers.

Scott Searle - Merriman Capital

And Noland within mobile, was there any HDMI contribution or is it all MHL now at the current time the HDMI is kind of run its course in that product as well.

Noland Granberry

I think as we talked about Scott and that our HDMI business would continue in those programs that have HDMI continue to run on. They wouldn’t turn off obviously they were a good portion of these revenue but the amount that was related to MHL was over 85%, so significantly MHL activity. And we expect that to continue to increase as time goes on.

Scott Searle - Merriman Capital

And from a CE perspective looking out at all of 2012, what’s your comfort level in terms of the growth rate or what you think CE is going to look like over the course of 2012?

I think given the macroeconomic backdrop particularly in the push from larger displays to smaller displays and from high end to mid and lower end has been problematic over the past couple of quarters. But is your current thought process that the market proceeding will be flattish this year, down 10% how are you thinking about it?

Noland Granberry

I think without providing a specific guidance Scott as you know we give more specific info out in one quarter. But our outlook is that and then we talked about this before is that we think CE will be down this year but we have made certain investments and as Camillo highlighted in his comments when you look at where we are and things we are doing with respect to InstaPrevue MHL and we expect to see that turn in 2013.

Now having said that, I think when we look at 2011, and it’s down from 2010 we do not expect to see that level of a decrease. We are expecting to flatten out and again to position ourselves for 2013.

Scott Searle - Merriman Capital

Gotcha.

Camillo Martino

I think I’ll just add the other couple points. The four points that we identified as it will drive we believe will drive the growth in CE again in ’13 obviously in addition to what Noland mentioned about MHL and InstaPrevue, we also have the full K displays the ultra high definition displays that we talked about as well as our home theater business.

Our home theater as we mentioned on a number of occasions we’ve been missing an home theater in the last 12 to 18 months and I think in the latter part of this year and more importantly, in next year we’ll see that kick in as well. But that they are really the four points that we believe will start to stimulate the CE business again next year.

Scott Searle - Merriman Capital

And lastly if I could Camillo, just on MHL you mentioned 100 million units. I want to just clarify that smart phone and/or tablet devices and then incremental opportunity on top of that would be MHL whether it’s into the CE market whether it’s into cables et cetera.

Could you just clarify that maybe talk a little bit about it, if you could what are the OEMs you think are going to come on board and I think today if I look down the list you probably got about a third of the handset units are represented by OEMs with permitted and/or deployed between Samsung, LG, HTC and the Chinese. Are there others that you expect to come onboard this year?

And what is the cable attach rate that you are thinking about on a per device basis. It’s been pretty low but is that starting to shift in the other direction? Thanks

Camillo Martino

Well that was probably three or four questions there buried together. But let’s see how we go. But look, I think in terms of the over 100 million number and that is right, that’s in smart phones and tablet, that’s our estimate at this point in time.

In addition to that of course there will be televisions, monitors, you may have seen at CES the monitor like from Samsung as an example. So that’s in addition as well. Home theater AVR there was a product in our area from Onkyo I believe that had MHL as well. So and cable adapters and what have you, 3D players. So there is a whole host of products in addition to the 100 million.

So you can start to see the ecosystem really starting to build out. Now the attach ratio, this in the last four months as we’ve talked pretty openly about this point is relatively low. It is probably even 10% range or lower than 10% it’s in that area. We would consider that as relatively low and as a result of this, we have identified one of the big focuses for the consortium for the image consortium, they have identified the fact that they have to put a real marketing push in this area and I think that reflects and not only the consortium but Silicon Image as a promoter of this standard.

We’ve decided we’ve got a conscious decision to increase that marketing expenses in this area to go and promote the use case the application and ultimately we are going to see the attach ratio drive much higher in particular next year. But that’- so that’s what we have today, but the marketing push for 2012 will start to bear fruits we believe in the latter part of this year in 2013.

Scott Searle - Merriman Capital

Thank you.

Operator

Our next question is from the line of Raji Gill. Please go ahead.

Rajvindra Gill – Needham & Company

Yes thanks and congrats on good results in light of a tough environment. The question is on strategic investments going up to $32 million. Is that more you said you are going to allocate some dollars to marketing. What about the R&D development efforts for SiBeam? Is that also a part of the investment that will go into that area? And when do you think we’ll be able to get start getting a return on SiBeam?

Camillo Martino

Absolutely, the increase in OpEx is both engineering and marketing it’s both, so we talked about the marketing aspects. Regarding engineering wireless is one of those areas that is taking increased investment and so. If we – so today we are in the market as I mentioned with that wireless products.

But the real opportunity is the product that we are going to be sampling in the latter part of this year and once we do that we believe we can start generating meaningful revenues and a significant return in the second half of next year. So that’s really the timeline for the 60 GHz. When the acquisition was completed in May of last year, the company that we acquired SiBeam was really focused on how to connect Blu-ray players to TVs and what have you.

And that application was fine. It was a good application. But I think what we’ve tried to do since that acquisition, is trying and significantly expand the TAM and revenue opportunities for that same technology in order to do that we’ve had to change the roadmap to focus on mobility as well. And by doing that, that really means we have to reduce the form factor, the whole size the power consumption and the cost. And we are confident that the products that we sample in the latter part of this year will hit that goal.

Rajvindra Gill – Needham & Company

The MHL the metric is doubling to about 100 million units in 2012 maybe if you could walk us your thought process there, is it increasing penetration at Samsung and HTC are you building in higher sell through forecast at those accounts? How much is new accounts account for as a percent of that $100 million? Any details or you r thinking on how you are getting that 100?

Camillo Martino

Well really within the accounts that we are currently selling to they are expected to increase their overall market share. I think one of those customers in particular; Samsung has already announced their plans for this year as smart phones which is significantly larger than last year.

So we would expect that our share would increase proportionately this past. In addition to the existing customers, we do also expect to see new customers out there and some like the Huawei phone that was announced at the CES, LG phone that was out there at CES, the Pantech phone as well and also other ones. So there are a number of other platforms as well that will contribute to the overall growth of the smart phone category.

Rajvindra Gill – Needham & Company

And on the CE business, CE was down probably nearly 30% in 2011, we are expecting it to be down again in 2012 albeit now at the same rate. You know what’s happening in the TV business? Are we seeing kind of a permanent mix shift to integrated HDMI? Is it just poor demand in the developed markets? I guess what makes you confident on throwing up this idea that it was going to recover in 2013?

Camillo Martino

Well, I think the areas that we talked about as what will be the catalyst for 2013. We talked about a brand new feature which I think you may have seen yourselves at the CES which is called InstaPrevue. And InstaPrevue, it really put out to be a - obviously I can’t say a knock out feature, because you got to wait till the products are shipping but the response we received from everybody was quite amazing actually.

That I really believe that that feature was an important feature that they can build their 2013 platforms upon. That’s one and remember that features outside the standard. That’s not inside the standard that’s outside the standard. Secondly, as the number – as the ecosystem for MHL starts to play out, the number of smart phones the number of monitors, all of these, MHL infra system starts to build out, we believe that they are going to be more TV manufacturers willing and to deploy MHL on their TVs in 2013.

So the ecosystems success in smart phones is going to feed into the TV growth next year. That’s what we believe. Thirdly, and it’s not only 2013, but actually ’14 and ’15 frankly is the introduction of the ultra high definition displays the full K display that the industry refers to and I think the fourth point that we identified was the investments that we made in home theater will start to pay off actually not just next year, but also in the latter part of this year as well. I think they are the four points Raji that we would say as a catalyst for continued CE growth.

Rajvindra Gill – Needham & Company

That’s great. Thanks again and congrats.

Camillo Martino

Okay, thank you.

Operator

Our next question comes from the line of Richard Shannon, please go ahead.

Richard Shannon – Craig Hallum

Hey guys, how are you doing?

Camillo Martino

Very good.

Richard Shannon – Craig Hallum

Good, I guess so maybe a quick question on 2012 consumer electronics business. When you look at your – I guess specifically the TVs, how much of the reason why you are expecting to be down somewhat is due to mix or for the guys purveying a higher end TVs removing some features as opposed to market overall market growth.

Noland Granberry

I think it’s more for 2012 is your question, I think four of a mix it’s the mix share for the 2012. That’s how we would characterize it.

Richard Shannon – Craig Hallum

Okay. Do you think you share position remains solid in the places where you’ve consistently had historically been present then?

Noland Granberry

Yeah in the high end, that’s a little bit, we’ve been very, very strongly positioned there. Our relationships with customers are very strong. When help this to define roadmaps for follow-on models but really what’s happening is and what’s happened in 2011 very specifically, and we expect in 2012 is that that size of the opportunities at the high end has actually shrunk somewhat, because really the technology or the standard and the technology really hasn’t had a quantum change.

Some of you are wondering why the HDMI was announced the 1.4 was announced over two years and ago they haven’t seen a new standard by the consortium and which is frustrating for the seven companies in the HDMI consortium and so as a result of this, I think the industry got together and decided to put this HDMI form together and that’s the catalyst to get a new standard out which will be another catalyst in few years time to drive incremental revenue again.

So we’ve talked about in the past, there are two things. It’s really important for two key points to a math every single year and one is the standard itself and the secondly is features and innovation that’s outside the standard and I think InstaPrevue is an example of that feature that’s outside the status. Just like InstaPort was a couple of years ago as well.

Richard Shannon – Craig Hallum

Okay, that’s a good seg into my next question I just speak to on InstaPrevue. You’ve talked about being in nine of the top-ten TV OEMs. So what percentage including more of the top two or four or five or whatever that are thinking about that seriously and is there any kind of things like that, like what you have with InstaPort from a testing perspective have really driven the interest beyond what the interest would be for the consumers?

Camillo Martino

Well, from a consumer perspective I mean InstaPrevue is a material feature for the end-consumer. You are - I think you are referring to the InstaPort advantage that we had on the testing side which was a manufacturing and that’s not, InstaPrevue is very, very much once its value proposition for the end-consumer. That’s our guess.

Richard Shannon – Craig Hallum

Okay, fair enough. And I guess just a last question on the mobile opportunity in 2012. I think you get a question asked previously similar to this but, anyway that you can describe how much contribution you might expect from OEMs that have announced products more recently as opposed to your two major customers in last year? And also do you expect any, especially smart phones that are introduced at lower price points maybe the $250 level or even below this year?

Noland Granberry

I think it’s probably little bit difficult for us to start pre-announcing what some of our customers are doing. There may be some more announcements later on at the Mobile World Congress Show in next month and I suspect frankly there will be other announcements throughout the year. But the growth this year some of it will come from our existing customer base, but there is also a big chunk of the growth is going to come from new customers that have not yet made any public announcements frankly. So, they are both going to equally contribute to the growth.

Richard Shannon – Craig Hallum

Okay, that’s fair enough. I think that’s all for me right now. Thanks a lot guys.

Operator

(Operator instructions) Our next question comes from the line of Christopher Longiaru. Please go ahead.

Christopher Longiaru – Sidoti & Company

Hi.

Camillo Martino

Hello. Chris.

Operator

I’m sorry. Mr. Longiaru, this is the operator, could you check have you muted your lines?

Christopher Longiaru – Sidoti & Company

Hello can you hear me?

Camillo Martino

Yes, we can.

Noland Granberry

Hello. Great, we can hear.

Christopher Longiaru – Sidoti & Company

Okay, I’ll add my congratulations on the results. My question has to do with; I’m just kind of piggybacking on the CE conversation. Can you make a comment on where inventories lie in terms of your business in the channel and how that kind of compares to the history and basically where it typically lies in the healthy environment?

Noland Granberry

So, this is Noland, Christopher. We think they are in line with where we would normally see them today. I think if you go back a year in 2010, there was a lot of the supply chain challenges. Last year where things were pretty low, but at this point, things seem to be pretty normal or maybe even low in some areas that we see at this point.

Christopher Longiaru – Sidoti & Company

Okay, and normal weeks of inventory in the channel for over that you typically see?

Noland Granberry

If you look at overall, somewhere in the six to eight weeks range.

Christopher Longiaru – Sidoti & Company

And can you just towards that six week range or below that at this point?

Noland Granberry

Well, it’s sort of some of them in some areas if you look at our overall product portfolio some areas that we see lower – towards the low end but some of them are towards the higher end of that.

Christopher Longiaru – Sidoti & Company

Okay.

Noland Granberry

So it’s mixed.

Christopher Longiaru – Sidoti & Company

Okay. That’s helpful. Thank you very much.

Noland Granberry

Okay.

Operator

Our next question comes from the line of Tom Sepenzis. Please go ahead sir.

Tom Sepenzis – ThinkEquity

Hi guys. Congratulations on a great quarter, given the environment.

Noland Granberry

Thanks.

Tom Sepenzis – ThinkEquity

And most of my questions have been answered. I just wanted to ask if what if any progress has been made with the Windows phone operating system, will it work with MHL or if they are working on that? Or if there is anything at all you can tell us about that?

Camillo Martino

I guess that we can’t talk about customers’ products. Today many of the phones – pretty much all the phones out there that are supporting MHL based on Android and various flavors of Android including the most recent one which is Android 4.0 code name actually I’m saying.

So, Microsoft in terms of the Windows phone specifically, I don’t think it's fair at this point for us to comment on a deployment plan. So we would expect as the overall MHL ecosystem continues to grow, I think they are going to be more and more companies and more and more technology partners like Windows phone s the technology partner and that will endorse MHL in the coming months, in the coming months ahead.

Tom Sepenzis – ThinkEquity

Wonderful, thank you very much.

Operator

Our next question comes from the line of Stewart Reinhardt please go ahead.

Stewart Reinhardt

Hi Noland its Stewart here we met recently.

Noland Granberry

How are you doing?

Stewart Reinhardt

How are you doing?

Noland Granberry

Good.

Stewart Reinhardt

What does the balance sheet look like? I think lot of people focus on the growth story as do I but also all take cash in the balance sheet and that seeing you are overcapitalized now, what might you do with that cash if anything? And how much free cash flow you foresee generating next year? And then after that, I just have a couple questions on the strategic advisory side. And also to reconfirm the stabilization that you’ve seen in the CE markets indeed it may affect the misunderstood. So can we start with the balance sheet?

Noland Granberry

Sure, sure, I think if you do take a look at our balance sheet it’s actually pretty straightforward. We did grow cash in this quarter. And actually, receivables decreased and inventories decreased, turns improved, and so the balance sheet is pretty straightforward.

We are still in a position with no debt. And to your point on being overcapitalized and how we expect to deploy our cash, I think we are continually – continue to be focused on our connectivity strategy. I think if you look at what we talked about particularly since Camillo came onboard is that, we really have broadened our view and focused on connectivity in a more broad focus and so that’s our initial focus on how we are ensuring we have looked at and where possible take advantage of technologies that help broaden that connectivity strategy.

We do get a lot of questions around dividends, buybacks and what have you and all the things that we talked about but nothing been in place at this point and we continue to consider things. But right now our focus is on making sure we have the right focus on the technologies that may be out there to drive our connectivity strategy.

Stewart Reinhardt

And I think I would go with you there. Relative to, as I heard you say in terms of the CE side, I think the exponential damage has been done there and what I’m hearing when I reaching firm – reaffirm with you guys that sort of won’t gap down and that will be flat to potentially misunderstood in guessing the contributions on the CE side. Is that, can I just reaffirm that?

Noland Granberry

Could you repeat that, the question again?

Stewart Reinhardt

On the CE side, I just want to reaffirm you are seeing stabilization and it’s flattened out that curve that gap down on the CE side.

Noland Granberry

Yeah, I think what, if you look at 2011, 2010 we worked our significantly over 30% and we definitely as we look out to 2012, we do believe that our CE business will be down year-over-year but it will be much smaller declined in our minds. But if you step back and look at us, I kind of take a step back…

Stewart Reinhardt

Are there opportunities there that maybe potentially misunderstood – misunderstand – misunderstood starts?

Noland Granberry

So I think what Camillo highlighted on a earlier question regarding the things that we’ve done in this space is where we think we really continue to keep ourselves in a strong position in this space and attack the part of the market that we have a best chance to win in which is an mid and high-end range.

But one of the things I was going to mention is that if you look at the company overall, the business overall, I think one of the things that we are pretty happy with that is if you go back over time, we’ve been able to grow our revenues over the last two years over 20% and we are looking at growing at a reasonable clip for 2012 as well.

Stewart Reinhardt

That’s probably one of the ways that we think to make here on a related topic and strategically as company, what we do is, we invent the technology, we drive global standards and the particular standards that play in it is very, very important to make sure that we can address both the displays as well as the mobile device.

We must be represented on both end of that lengths whether it be a cable or whether it be wireless, that the only way a wireless or a wired standard is going to deploy as right across the board and I think this is the reason why it’s important for us as a company to invest in technologies that not only on the mobile side or on the PC side but also on the displays.

They connect together and that’s how we believe our standards plus business model will continue to succeed. It’s very much a strategic reason why we continue to invest in display and we have a growth story. In 2013, we expect that CE business to continue to grow, no question.

Stewart Reinhardt

Yeah I would agree with that, I’m not pushing for a special date or a buyback. I think we are in a good – great path decision, lot of people kind of don’t look here and that does leads to my next question, just taking along the timeline, if you could touch briefly on where you stand in the timing on the auto market opportunities and also, let’s talk about Apple and Google and what you guys are doing in understanding to making it longer term. And what is going on with those two. We can start with the auto.

Camillo Martino

Yeah and I think the auto is probably the only one that is fair to talk about at this station such a public environment. I think the automotive area is something that we’ve talked about is of interest was we believe that we have the right technology, we believe the MHL technology is appropriate for the automotive industry.

There was in fact I think we notice and see is Pioneer also announced some automotive-related applications based on the MHL standard. So the automotive application typically takes a little bit longer to materialize. I think the – it’s the design-in cycle shall we say, is long.

But once the production starts, you are obviously in there for long time as well. So that’s the problematic part of the automotive. So, our guess that the earliest that we probably would see automotive revenue or MHL revenues in the automotive industry would probably be in 2014-ish or so in that vicinity. So between now and then, it’s very, very important that we make sure the standard is broadly – there is a lot of technology work that’s going on between now and then.

And business development partnership activity that’s going on between now and then and we hope that in 2014, there will be revenues that can be materialized. So, going back to our comments, we don’t – can't talk about anything else, what the plans are of those two particular companies and how can we talk about any other company’s plans out there?

Stewart Reinhardt

Well, and maybe that good trends at this way. Would Apple build their own platform out or it might say, it’s interesting like two issues and so clear like you?

Camillo Martino

Look, I think you need to ask Apple that question. I think it’s probably more appropriate.

Stewart Reinhardt

Okay, okay, I’ll stop there. Thanks a lot and congratulations once again.

Camillo Martino

All right. Thank you.

Operator

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

Camillo Martino

Thank you.

Noland Granberry

So, thank you all for joining us today to discuss our fourth quarter and year-end results. We are looking forward to 2012 as we continue to execute on our strategic and operational plans. We believe we will continue to deliver financial growth while making investments in our future products. We look forward to speaking with you again in a quarter. Thank you again. Operator?

Operator

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

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