Zoran Q3 2007 Earnings Call Transcript

Zoran Corporation (ZRAN)

Q3 2007 Earnings Call

October 22, 2007 5:00 pm ET

Executives

Bonnie McBride - IR

Levy Gerzberg - President and CEO

Karl Schneider - SVP Finance and CFO

Isaac Shenberg - SVP Business Development

Analysts

James Schneider - Goldman Sachs

Heidi Poon - Thomas Weisel

Paul Coster - J.P. Morgan

Adam Benjamin - Jefferies

Tayyib Shah - Longbow Research

John Vinh - Collins Stewart

Daniel Gelbtuch - CIBC

Mahesh Sanganeria - RBC Capital Markets

Quinn Bolton - Needham & Company

Arnab Chanda - Deutsche Bank

Erik Rasmussen - Montgomery & Co

Steven Clark - Wedbush

Vijay Rakesh - Oppenheimer

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Zoran Third Quarter 2007 Conference Call. My name is Melanie and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session at the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Ms. Bonnie McBride, Investor Relations. Please proceed ma’am.

Bonnie McBride

Thank you. Good afternoon everyone, and thank you for joining us today to discuss Zoran's third quarter 2007 results. By now you should have received the copies of today's earnings release. Joining us today from Zoran's management team are Dr. Levy Gerzberg, President and CEO; Mr. Karl Schneider, Zoran's Senior Vice President of Finance and Chief Financial Officer; and Dr. Isaac Shenberg, Senior Vice President of Business Development.

Before we begin, I would like to remind you that during the course of this conference call, we may make forward-looking statements regarding the market for the Company's products, revenue projections, the outlook for manufacturing capacities and product development and certain trends affecting gross margins and operating expenses in the future periods. I wish to caution you that such statements are just predictions and actual results or events may differ materially.

Please refer to the documents the Company files from time to time with the SEC. These documents contain important factors that could cause the Company's actual results to differ materially from those contained in our forward-looking statements. I will now turn the call over to Levy. Please go ahead.

Levy Gerzberg

Thank you, Bonnie and good afternoon, everyone. We are very pleased with the results we are reporting today, which include record revenues for the company as a whole as well as new record in DTV and printer imaging. We also achieved record net income for the quarter in a non-GAAP basis. We continue to solidify our positions in each of our core market by securing multiple design wins across all of our product lines with manufacturers around the world.

Now for an update on each of our core markets, in digital cameras we achieved a new record in unit ship and we maintain our leadership position with our market share in global digital camera sale expected to exceed 30% as we exit 2007.

Our COACH processors continue to be in demand particularly in the mid range market where we are the dominant player with our COACH 9 solution. During the quarter we continue to receive feedback from our customer that our definition H.264 video compression technology and our high quality HDMI features are key differentiators in the selection of COACH processors in the mid to high end market segments.

In fact we expect H.264 video compression product to reach mass production in the current quarter. And other trend favoring the run is the increasing demand for our high ISO image capture setting which enable the user to capture excellent quality images even on the poor light conditions.

Consumers are now expecting this level of functionality on entry and mid level cameras in our COACH 10 is a clear winner in generating high quality pictures under poor lighting condition and we are seeing new design wins based on this ability.

Zoran solutions continued to dominate the affordable Japanese branded camera market with our COACH 9 processor, delivering an excellent combination of feature rich and high-quality image capture, with cost-effectiveness for our customers. During the quarter we secured another significant COACH win with a new Tier 1 Japanese customer that we believe will remain a long-term user of our COACH processors, and our first major COACH 10 customer is now in mass production.

We expect to see additional wins in the coming and upcoming quarter. Our success was also evident in Taiwan, where we continue to be a leader, and in Korea, with Samsung is drawing exceptional growth in the digital camera market. Although the camera market experienced price erosion on entry and midlevel products, we believe our competition was affected more severely than we were including the captive manufactures.

Price erosion in these markets creates new opportunities for Zoran because we are one of the only IC providers, who offer a complete range of solutions at multiple price points enabling us to mitigate declines in any one sub segments. For example, our COACH 9 solutions are extremely cost effective for customers in the entry and mid range markets, while our COACH 10 [captive] to the highest market segments providing the industry's best quality and high definition video compression technology.

The COACH 10 is enabling Zoran to further penetrate the higher end market segments, while maintaining a higher ASP. The ASP erosion also affects captive manufactures and drives them to accelerate reduction of third party solution many of which are COACH base.

In the multimedia mobile phone markets our first few customer for our APPROACH 5C processor went into mass production during the quarter. This multimedia phone first shown at the IFA in Berlin is a high-end 3.5G multimedia device with a 3 inch touch screen and 5 megapixel camera. In addition it capture video, it’s a 120 frame per second enabling to superb slow motion and video quality.

The phone is launching this month in Europe through multiple carrier. We have also started work on follow-on model and expect to be in mass production by the middle of next year. We are tracking to our plan for this business and remain enthusiastic about its prospect for the future.

In DTV, we achieved excellent results growing revenues 41% over the last quarter. Growth was huge largely by our increasing penetration into LCD TVs, where we are now shipping 2.4 times the units we were shipping a year ago.

Our latest family of SupraHD processor has enables around to reach a high level of integration, quality, and cost performance that has resulted in many new design wins with larger OEM beyond our existing customer base, as well as, increasing momentum in the ODM model.

These customers will deliver HDTVs to the market switch board, the mid to high end fully HD 1080p television for the US and Europe, which we expect to drive substantial growth next year. Demand in the retail segment of the market remains steady. Price points in this market continue to decline putting pressure on OEMs to devote considerable development and manufacturing resources to new TV designs.

Zoran’s level of integration and expertise has helped mitigate the impact of ASP version, while providing manufactures cost benefits to OEM. We continue to work with our retail connected ODM base during the quarter to meet the high demand from consumers for 19 and 22 inch LCDs and are now ramping in significant volume.

On the broadcast transition multiple DTV manufacturers have already developed new products based on Zoran’s ATSC converter box designed to meet the EPA’s ENERGY STAR requirements and deliver a cost effective solution for DTV manufacturers addressing the 2009 Analog Signal Cut-Off.

The first f these products will then display at IBC and is expected to begin shipping to retailers during the current quarter with additional brands expected to ship in the first quarter of next year. Our HDTV product line designed to address the European DVBT free to air, in China digital cable markets continues to make progress.

For Europe, volume is shifting to PVR, MHEG-5, and iDTV models, all of which Zoran supports. We are seeing significant offset in the China digital cable markets, where volume is now ramping as the 2008 Olympics approach and one of our customers VVN is taking a leading share.

In print or imaging, we achieved record revenues increasing 13% sequentially and 29% year-over-year. Growth was driven by strength in our imaging hardware products, where we saw increased demand for Quatro products in both the inkjet and laser segments, as well as strong demand for our IPS, page description language software.

During the quarter, there were multiple deployments of new models from customers incorporating our Quatro processors, such as inkjet all in one from Samsung and Lenovo. As expected the color laser segment is emerging as the major growth driver for this business and we kicked off new laser development programs based on our Quatro processor at several major OEMs during the quarter.

The Quatro 4230 processor specifically designed for this segment began shipping in two new products, a color laser MSP and a document scanner. We expect further product to be introduced during the remainder of the year and throughout 2008.

Software revenues also grew during the quarter boosted by strong demand for the latest generation of IPS software, which is now shipping in over 260 printers. Some examples of recently introduced products based on this technology include a new high speed color MSP from Sharp as well as some advanced MSPs from Xerox.

We are seeing strong interest for our latest generation of IPS, which features an interpreter for Microsoft’s new XPS format and additionally have commitments from eight licenses for our XPS format. We expect to see continuing demand for this product in the coming quarters.

In DVD revenues were strong growing 18% sequentially driven by demand across all segments of DVD market from entry level 128-pin solutions in the growing Chinese market to HDMI 1080p best players in Europe and the US Zoran’s products continue to gain traction and market share.

We expect the increased volume and believe we gain share in China as well as in other emerging markets such as India, Russia, South America and Eastern Europe. Our ability to offer price competitive products, while maintaining our gross margin is enabling us to win additional designs from our customers and achieve the kind of growth we saw during the quarter.

Volume also increased in the mid to higher end products primarily with our Tier 1 OEM. As leaders in HDMI solutions we benefited from increased customer demand for this feature. During the quarter, we also shipped solutions to OEMs such as Clarion, JVC, SkyFi and Sony for the expanding automobile DVD market.

And we are seeing demand for our product in emerging sub-segments such digital picture frame and TV multimedia. These products, while smaller in volume constitute a higher margin business and we are continuing to work with customers to take advantage of these opportunities. Along these lines I hope you so our announcement this morning that coincides with SanDisk’s announcement of its new Sansa TakeTV Video Player.

Our Vaddis multimedia decoder was selected as the processor in this new product from SanDisk that enables consumers to transfer downloaded digital video content from a personal computer using a small, secure flash memory-enabled media player, and to plug and play this content on the television connected via an AV cable.

The increasing demand for functionality such as HDMI output and advanced video and audio features supports sales of our higher margin feature rich Vaddis product. HDMI technologies serving as the breach to the emerging blue laser in HD DVD base market. Zoran will be demonstrating what we believe we will be the most cost effective highly integrated product available that meets these requirements of both of these standards in the near future.

Before turning the call over to Karl, I want to reiterate our enthusiasm for the results we are reporting today. We continue to execute on our primary objective to grow revenues and profits. We are growing and sharing each of our core markets digital cameras, digital TVs, DVD and printer imaging. We continue to add Tier 1 customers to our existing base as well as leverage our technology across all [sectors] to take advantage of new and evolving markets and applications.

In addition our multimedia mobile phone segment is making significant progress, which we expect to create substantial growth opportunities for Zoran in the future. All of these activities are enabling continued leadership in the digital market reserve. We are well position in each of our core market for continued success.

And now I will turn the call over to Karl Schneider for review of the financials. Karl?

Karl Schneider

Thank you, Levy and good afternoon everyone. For the third quarter ended September 30, 2007 Zoran's revenues driven by DTV, DVD and printer imaging products increased 12.7% to $146.4 million, when compared to the $129.9 million reported last quarter and $129.4 million for the third quarter.

Net income under Generally Accepted Accounting Principles, GAAP for the period was $13.1 million or $0.26 per diluted share on $51.3 common and equivalent shares. These results include non-cash charges of $9.6 million related to the amortization of acquired intangible assets and $3.6 million of stock-based compensation expense. This compares with GAAP net income of $198,000 or $0.0 per diluted share for the previous quarter and GAAP net income of $1.9 million or $0.04 per diluted share for the third quarter of last year, which also included similar non-cash charges.

On a non-GAAP basis, which excludes the non-cash charges just referred to, our net income for the third quarter grew 56.2% to $26.4 million or $0.51 per diluted share compared to net income of $16.9 million or $0.33 per diluted share for the previous quarter. When compared to the third quarter of 2006, non-GAAP net income grew 46.7% over the reported $18 million or $0.35 per diluted share.

Non-GAAP net income for the second quarter of 2007 excluded $12.2 million for the amortization of acquired intangible assets and $4.5 million of stock-based compensation expense. For the third quarter of 2006, non-GAAP net income excluded $12.4 million in amortization of acquired intangible assets, and $3.8 million of stock-based compensation expense.

Hardware product revenues driven primarily by DTV, DVD and printer imaging ICs increased 13.4% sequentially to a $129.8 million from $114.5 million in the previous quarter. Software royalties licensing and other revenues increased by 7.9% to $16.6 million during the same period.

Revenues by product market for the third quarter of 2007 were 33% camera, 31% DVD, 18% printer imaging, 16% DTV, and 2% other. Sales by geographic region during the third quarter were 44% China, 25% Taiwan, 15% Japan, and 16% US, Korea and the rest of the world.

Overall gross margin for the third quarter was 52.3%, which compares with 53.7% last quarter and with 48.4% for the third quarter of 2006. The decrease in our overall gross margin in the quarter was primarily the result of product mix and a small increase in our inventory reserves of approximately $1 million.

The allocation of stock-based compensation expense in our GAAP income statements for the third quarter is $133,000 to manufacturing overhead, included in cost of product sales, $1.3 million in R&D and $2.1 million in SG&A.

Excluding these stock-based compensation expenses, research and development expenses decreased 6.3% or approximately $1.8 million in the third quarter of 2007 to $26.7 million compared to the $28.5 million in the prior quarter. Compared with the same quarter of last year, R&D spending increased 11.3% from $24 million.

On a sequential basis, R&D spending tends to fluctuate from quarter-to-quarter based on the timing of major engineering-related expenses, such as tapeouts, which include math sets and engineering wafers. Excluding the impact of stock-based compensation charges, selling, general, and administrative expenses increased slightly to $25.9 million in the third quarter from the $25.5 million reported last quarter.

Compared to the same quarter last year, SG&A expenses increased 10.2 from $23.5 million. Ongoing legal expense associated with the stock option related matters was $1.8 million in the third quarter of 2007 and $1.9 million in the second quarter and $3.3 million in the third quarter of 2006.

Other income and expense for the third quarter of 2007 was $4 million compared to the $3.9 million in the second quarter. The component of interest income included in these figures was $4.3 million and $3.8 million respectively.

Moving over to the balance sheet, cash, cash equivalents and short-term investments reached $356.6 million compared to $336.7 million reported last quarter. Cash generated from operations during the quarter was $21.4 million. Accounts receivable at the end of the quarter were $60.5 million, an increase of $11.5 million from the $49 million last quarter with DSOs increasing slightly to 37 days compared to 34 days for the previous quarter.

Inventory balances at the end of the quarter decreased significantly to $33.6 million compared to $47.1 million for the previous quarter. Inventory turns for the third quarter improved to approximately 8.1 versus 4.9 in the previous quarter.

I will now address the company's outlook for the fourth quarter of 2007. During the Q&A session that follows, you're encouraged to ask any questions that may not be covered during the course of our comments, as we do not anticipate having to provide any additional financial guidance after this call.

Before we provide any forward-looking guidance, we want to remind you that any forward-looking statements related to revenue projections, gross margin expectations, and all other comments on the expected financial results for Zoran are just predictions. Actual results may differ materially.

For the fourth quarter of 2007 we currently anticipate the revenues will range between $128 and $132 million with overall gross margins ranging between 51.5% and 52.5%. Excluding amortization of acquired intangibles and stock-based compensation, operating expenses are expected to range between $53 and $54 million. Acquisition-related costs are expected to be approximately $9.2 million.

Stock-based compensation expense is expected to be between 3.2 and $3.8 million. The company expects to record earnings for the quarter in the range of $0.05 to $0.10 per diluted share. Excluding amortization of acquired intangibles and stock based compensation non-GAAP earnings for the quarter are expected to range between$0.30 and $0.34 per diluted share on approximately 52.5 million shares.

With that, we would like to open up the call for questions. Operator, please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of [James Schneider] with Goldman Sachs. Go ahead.

James Schneider - Goldman Sachs

Hi, guys thanks for taking my question. First of all, could you talk a little bit in more granularity about your expectations for Q4? Are there any segments you expect to be up for Q4, and are there what's the segment you would expect to be down the most?

Karl Schneider

Sure Jim. In Q4, we are expecting the TV will be up. In the fourth quarter, we are expecting seasonal declines in DVD, as you remember that’s been down each of the last well since the market essentially started at the fourth quarter has been a seasonally down quarter. We are expecting a little bit of seasonal weakness in digital camera. And then, our imaging business will be flat to slightly down.

James Schneider - Goldman Sachs

Great, thanks. And in terms of your OEM customers, what do you seeing in terms of their order patterns going into September and then into October, so far?

Karl Schneider

We see a pretty good order pattern. It was similar to the same kind of a pattern, we saw in the previous quarter. We are not expecting at this point any major pullback in the consumer market and the products that we serve.

James Schneider - Goldman Sachs

Perfect.

Karl Schneider

To clarify one other thing, Jim and the other one, I did forget to talk about the mobile phone segment as far as one of the markets that we do expect to see up in the fourth quarter.

James Schneider - Goldman Sachs

Great. And then last one is on the DVD market, do you think most of your share gains there are behind you or do you think there is someone way to still to go?

Levy Gerzberg

Jim we think that our market share will continue to increase and we see it in several areas. First of all we see a growing penetration into the China markets, which is very important for us. We were not a major player in the domestic market in China and we see this growth area on the other territories that we mentioned earlier like Eastern Europe, South America, India Brazil and so on.

And other segments HDMI will be come as standard in DVD we believe. And we dominate the segments and we are the pioneer in adding HDMI output and upscale capability in DVD players. Now everyone wants to have it and all the new products. So that will enable us to continue and gain share. And as we mentioned earlier, we are getting into new segments like the car DVD.

And there are some interesting related markets like the picture frame. And I don’t know if you had the chance to see to the announcement by SanDisk, which we believe is a very exciting one because here again out technology is going to be used in related markets. So you can download, view video content to a disk and key like USB device similar to that. It’s a little more fancy for the remote control and our output. This is the secure, flash technology from SanDisk and if using our DVD technology. So all in all when you add up all these things we will believe that our market share will continue to grow.

James Schneider - Goldman Sachs

Great, thanks very much.

Levy Gerzberg

You are welcome.

Operator

Our next question comes from the line of Heidi Poon with Thomas Weisel. Go ahead.

Heidi Poon - Thomas Weisel

Hi, congratulations on a good quarter. In terms of your digital TV design win, can you comment on what segment of the TV market you are get in. It’s mostly the 26 inch, 32 inch market. And also, if you could quantify what you are excepting for the opportunity mixture?

Levy Gerzberg

Well, I think, we believe, we are gaining share in the segment that you mentioned. It’s a 26, 32, but also a 40 inch television. We see a very nice growing demand in the small screen size especially, as we move into the holiday season and beyond. We’re also gaining share in the high end segments.

We are in some top of the line very high quality televisions. We’ve demonstrated them -- our customers demonstrated them in Japan in the CEATEC conference just few weeks ago. We’re in the new fugitive line that you can see in the Magnolia stores, which are now owned by Best Buy. Mitsubishi has new models with our chip and more are coming. So, we believe that our momentum is really there and our market share is increasing, and we are very excited about it, as it manifested itself in the results of the fourth quarter.

Now regarding the converter box finally we believe it’s starting to happen. We are seeing that the market is $20 to $25 million units for those of you, who are not familiar with the term the converter box, when the analog broadcast will be shutoff by the FCC then all the analog TVs essentially will go down.

So, to help these, the congress agreed to actually subsidize a converter box and hopefully many of those boxes will have the line of chip in them. We have a number of customers who are ready to start deploying those boxes. So inputs will be HD and the output from box will be SD and it will go to the television that are only is under definition and that will not go direct.

So, this is what we see took longer than we expected to take-off that we now seeing it happening. Though many challenges there it turns out the power consumption was the key issue how much power it draws on the whole size and of course cost always and quality. We nailed it all and we are looking forward to see growth there as well.

Heidi Poon - Thomas Weisel

Could you give an estimate based on our design wins in this area like your estimated share in the converter box? I missed.

Levy Gerzberg

Yeah. In the converter box, it has to measure design wins, because books are not in the market yet. But we feel good with it. We told we see right now probably in the range of 25% to 30% and going up. So once the deployment will happen, we will be able to give you more accurate numbers.

Heidi Poon - Thomas Weisel

Great, also another question about digital camera. It was down this quarter was that within your expectations and also in terms of the competitor front I heard that TI new chip is very competitive in terms of power consumption performance at a higher megapixel. Can you give us a sense of what you are seeing in the market in terms of a competition from a pricing or decline momentum area?

Levy Gerzberg

Yeah. So first of all the behavior in the digital camera markets for us in general for us is not surprising. The only surprise we see, that the markets actually continues to grow in general in units are not going down in some markets under these expected some quarters ago. So, that was not surprise for us, we planned for it. We knew its coming.

We are gaining momentum. Actually the number of units in the market is going up, and our units counting is going up. As we mentioned in the prepared comments the price of the cameras is coming down, and we are helping our customers to add features even into the low costs cameras.

So, we see for us the markets will in terms of units, in terms of market share will continue to grow. We do see some competition from some customers. We do not see a lot of TI. TI use to be a major player in this market. But we believe that with very innovative solutions that we provide our solutions are also low power they are integrated, we are now able to enable our customers to reduce the requirements from the optic using signal processing.

So, this is very important. We are doing it also in the cell phones. That is why we are gaining market share. But one thing that we see in the camera market because it’s now becoming so progressive and it’s everywhere, cameras are everywhere, we see this market becoming seasonal, seasonal to other consumer markets.

So, Q4 goes down and it start to go up again. We believe that in China for example next year during the Olympic Games everyone will have a camera in his pocket maybe a video camera or still camera with video. So, we are excited about it.

We see this continuing to grow. So, we are watching the competition. All I can tell you is that our market share is going up, and we continue to work on the new generations enough sitting and waiting. So, we are coming out with more integrated devices on one hand and much lower cost, low power consumption on the other hand.

Heidi Poon - Thomas Weisel

Great and finally I just want a follow on DVD, as you saw more into automotive, do you expect the seasonality in the DVD business to change a little bit and also in terms of yourself into the emerging market. Are you selling more portable or it just on the DVD players that it’s on the table?

Levy Gerzberg

Well, in terms of seasonality having more market segments, actually may keep it more flat relative to what we see before. Now the automotive section is not so big for us so for but it is growing. So that will help we also hope that it will make it more predictable visibility we get better and I’m sorry the question on the cell phone?

Heidi Poon - Thomas Weisel

When you talk about your penetration with emerging market is that one portable DVD players or just standalone DVD player here?

Levy Gerzberg.

It’s mostly standalone. This is where the volume is.

Heidi Poon - Thomas Weisel

Okay great. All right thank you.

Levy Gerzberg.

You are welcome.

Operator

Our next question comes from the line of Paul Coster with J.P. Morgan. Go ahead.

Paul Coster - J.P. Morgan

Thank you. I got a couple of house keeping questions. First Karl probably you can just give us some advice on the tax rate and legal cost for the next quarter?

Karl Schneider

Well, at this point in time, Paul I think the tax rate expected to be what we did in Q3 as we adjusted the rate to an annual rate that was somewhere closer to 12% for the year. And so we at this point in time we expect that will be the rate we deploy to the fourth quarter. What’s the second half of that question?

Paul Coster - J.P. Morgan

Legal cost, $1.8 million in the third quarter wasn’t that and so.

Karl Schneider

Yeah. So, I would say, I wouldn’t expect any major difference in the fourth quarter unless something happens with the litigation would be settled. If the litigation continues, which I am talking about the derivative kind of the lawsuits that all the companies that got involved in these option things we are now facing the legal expenses will continue.

Paul Coster - J.P. Morgan

Okay. On the fundamental side of the business, blue laser, can you give us some sense when do you think that will be a driver of growth or revenues of any kind?

Karl Schneider

Yeah. This is we believe that in the market, it says the growth that we would like to see. We will have some probably in 2009. We are working in a very advanced technology and product very cost effective that we will introduce early next year. And not, a lot of revenues until late next beginning of '09.

Paul Coster - J.P. Morgan

But it would be correct to assume that at that time your revenue per unit should increase?

Levy Gerzberg

That’s correct. That the HD blue laser technology will enable us to have higher ASP at least for a while.

Paul Coster - J.P. Morgan

Okay. Can you give us some order of magnitude or….

Levy Gerzberg

For the ASP in these markets…

Paul Coster - J.P. Morgan

Yeah

Levy Gerzberg

Well, it’s hard to tell. But it's in the range of mid teen to 20s and you can expect a similar behavior as before although probably not as the first.

Paul Coster - J.P. Morgan

Okay.

Levy Gerzberg

Should not go down as the first.

Paul Coster - J.P. Morgan

Got it. Now you had this tremendous success at the high end of the mobile phone market. Can you perhaps kind of picture for us of how you now drums back new segment would be that one OEM that you will deepen penetration or do you think you will immediately go into additional handsets. So some sense of how you are going about is what would be helpful.

Levy Gerzberg

Well, we are working on new model with our existing customer and working with new customers. So this is just a beginning. We believe we have a very unique technology that enables unique products for our customer. So I can’t be quantitatively specific in my answer, but you can expect production will really take-off early next year.

It’s starting now. We are shipping hopefully soon. We’ll have some models to show you and we will be able to talk about it. And next year more models from our existing customers and of course there is a lot of interest in our technology from other telephone manufactures.

Paul Coster - J.P. Morgan

Okay, last quarter. In next year the mobile segment will represent more than 5% revenues?

Karl Schneider

That as a possibility, Paul I can’t quantify at this point. But if this is all pretty successful then those numbers will get large enough that we will probably break them out. So you can see it.

Paul Coster - J.P. Morgan

Okay, great. Thanks very much.

Levy Gerzberg

You are welcome.

Operator

Our next question comes from the line of Adam Benjamin with Jefferies. Go ahead.

Adam Benjamin - Jefferies

Thanks guys. Nice quarter. A couple of questions just start out with the digital still camera side; you saw big sequential growth in the June quarter and a slight decline in the September quarter. Can you talk a little bit about the dynamics what was going on there; you expect that business to decline slightly in Q4 as you said Karl. So can you talk a little bit about what's going on there in terms of was it a pullthrough early in the season or other dynamics would be helpful? Thanks.

Karl Schneider

Adam, one of the things Levy was trying to say in earlier answer is that actually the units shipped for digital camera in Q3 were higher than in Q2. We saw some ASP erosion in the quarter-over-quarter numbers, which actually brought the revenue down somewhat. In Q4, we don’t expect to ship quite as many units, as we’ve shipped in Q3 or even Q2. And so, we are starting to see more seasonality there.

Adam Benjamin - Jefferies

And the seasonality declined in the December quarter followed by an additional decline in the margin and stabilization after that?

Karl Schneider

I am not sure, we can say, whether the March the follow on March is up or down, but at this point in time. But typically Q4 will be a decline from Q3, and we will wait and see what happens in Q1.

Adam Benjamin - Jefferies

Okay. On the imaging front, I mean, you jumped off pretty significantly to low 20 base up to the mid 20. Is that the kind of normal run rate, we should be thinking about it this business going forward. I mean, there hasn’t been much growth there. Just trying to get an understanding of what that business will look like going forward?

Karl Schneider

Well the imaging business, they did have a nice quarter in Q3. We are expecting relatively slower growth in that segment of our business. The imaging guys are not anticipating that Q4 will be up. Most of that increase didn’t come from royalties; it came from ICs that were going into the multifunction peripherals. And so, it’s going to be slow and steady, it’s not going to be big jumps or downtimes.

Levy Gerzberg

And one other thing Adam regarding the imaging business, we’ve a good software elements. We really dominate the software area that we participating. Some of the licensing deals, which we’ve don’t happen every quarter. So, they are kind of spiky. So you’ll see some kind of growth then it declines a little bit then it goes up again. But all in all if you look at this business, it's growing steadily over a period of a year. It's going up.

Adam Benjamin - Jefferies

Okay. On the DVD front cost I know you mentioned that you expect seasonal decline in Q4 as we have all seeing over the last several years. The definition of seasonal decline is somewhere in the range of 15%, 20% upwards of 50, 60 percentage as you guys have seen. So I’m just trying to get understanding of how you guys get comfort there? What's your visibility into Q4 and your guidance seems to imply somewhere in the magnitude of about 30% decline. So I’m just trying to understand, how you guys are get into that and in the comfort to get there.

Karl Schneider

Well, again things have changed a lot the market. We gone through several transitions as people have some of the lesser known brand names have exceeded the market and today it’s more stable, it’s more top tier kinds of business with Samsung and LG and Philips and those kinds of names. So we’ve got from a visibility perspective. We got better visibility to-date than we’ve had in the very long time.

We do not see any major inventory build-ups in the channels. And so that we were feeling pretty good about the decline that we expect to see in the fourth quarter. And if you take what we have guided on a company basis and we are not breaking out the individual segments.

But we are only talking about in the fourth quarter being down slightly less than 10% to just over 12% as a company and DVD will be down little bit more than that maybe closer to 15% versus some of the other product lines. So, that’s the major driver of why we are down in the fourth quarter.

Adam Benjamin - Jefferies

Okay. And then on the gross margin, I would have thought that gross margin guidance would have been a little bit stronger given the fact that you see a mix shift, as you are giving out Karl DVD declining more than the other businesses and DTV growing. Is the DTV gross margin a drag there, I know, it’s been in the low 40. So, just trying to see what the driver of that margin guidance is?

Karl Schneider

Yes. So, I mean, yes, DTV is up in the fourth quarter and DTV gross margins are less than the overall average of the company, as you said low 40s, low to mid 40s, and so that’s expected. We will probably see a little bit of decline on the camera side in gross margin.

And then again, we are not see what else is [OES] we’re going to be shipping our more product into the handset market in the fourth quarter then we’ve ever shipped before. And so that’s going to have a negative impact because those margins right now are lower than the core company average.

Adam Benjamin - Jefferies

Okay. But the DVD margins are relatively stable?

Karl Schneider

They’ve been relatively stable actually. They are little bit lower in the third quarter than they were in the second quarter, but not that much.

Adam Benjamin - Jefferies

Okay. And then just one last question, and just a housekeeping item. The tax rate you had mentioned was 12% in the fourth quarter, you talked about 10% to 15% for 2008 is that where we should be modeling things?

Karl Schneider

Well in 2008, I would say it’s still going to be somewhere in the depending on what happens. It’s going to stay somewhere between 10% and 20%.

Adam Benjamin - Jefferies

Okay.

Karl Schneider

Depending on what we have to do with some other things.

Adam Benjamin - Jefferies

Alright, guys. Thanks a lot.

Levy Gerzberg

You are welcome.

Operator

Our next question comes from line of Tayyib Shah with Longbow Research. Go head.

Tayyib Shah - Longbow Research

Hi, guys. Congratulations on a good quarter. Can you talk about your attraction with the global top four TV OEMs? Where any design wins with these guys behind the ramp in the third quarter in the DTV business and what are your prospects with them in this year design cycle?

Levy Gerzberg

Well, we are making progress with top TVs almost every one of them is now looking at our new chip. Some of them are working on some new designs. It cannot be specific at this point and interestingly some of our ODMs are gaining momentum with the first year, for some of the model that they have to get from an outside the supplier. So we have two vectors getting into the first year. But we can tell you we are making progress and it’s not going to generate a lot of revenue this year, but it’s not in next year. So stay tuned.

Tayyib Shah - Longbow Research

So the 40% plus revenue jump that was mostly from the Chinese OEMs and the Taiwanese ODMs?

Levy Gerzberg

That's correct. We had some higher end model that has the jump, but that was not a big portion.

Tayyib Shah - Longbow Research

Okay and then you talked about the digital camera business, building a direct relationship with the major OEMs there, as you begin to do that, are we going to see you out grow the Taiwanese ODMs next year?

Levy Gerzberg

No, we think that’s the nice thing about this market for us. We think they will co-exist. They will just cover a different ranges of the market, so the lower end will continue to larger extend to come from the Taiwanese ODMs suppliers and need to high end will be in Japan. And even though, we’ve some design wins of course in Taiwan for the midrange, and in Korea for example as well. So, we believe that we will coexist.

Tayyib Shah - Longbow Research

And you should be selling into both of these next year right?

Levy Gerzberg

Absolutely that’s what we’ve been doing for quite sometime. But especially now, we’re penetrating the first year with some new solutions especially for the need to higher end.

Tayyib Shah - Longbow Research

Okay. And finally on the Blu-Ray and HD DVD how fast do you expect the OEMs to migrate to merchant silicon vendor such as yourself as opposed to just using an in-house solution?

Levy Gerzberg

It’s probably, two years or so that’s we believe will happen. Now, we’ve been looking at what happened in other markets in the past. So, that’s usually the case maybe here with the new slot.

Tayyib Shah - Longbow Research

Okay. Thank you.

Levy Gerzberg

You’re welcome.

Operator

Our next question comes from the line of John Vinh with Collins Stewart. Go ahead.

John Vinh - Collins Stewart

Good afternoon. First question on DTV, as you’ve talked about that you have couple of factors going into next year to penetrate Tier 1 design wins. Are you able to give us a little bit more color on which one do you feel that a bit more confident, are we likely to see you penetrate Tier 1 through an ODM channel or we more likely to see you penetrated through direct channels going into next year?

Levy Gerzberg

Both of them.

John Vinh - Collins Stewart

Okay.

Levy Gerzberg

Absolutely both of them.

John Vinh - Collins Stewart

Okay, great. And then you also said there is a lot of interest on your latest chip, is this be the SupraHD with the integrated demod, where most of the TV guys looking at simply just digital decode integration this year?

Levy Gerzberg

I know, we’re talking about our new chip that has the integrated demodulator and all the display functions everything and it’s a single package that has and it also an analog function.

John Vinh - Collins Stewart

Great.

Levy Gerzberg

So it’s probably one of the most integrated system on a chip. It include also a memory integrated in the package, the memory is external. So we look at one package it has your HDTV and successful for the turner.

John Vinh - Collins Stewart

Great, okay. And then also just a follow-up on HDTV, can you us kind of the preset mix breakdown the DTV between set-top box, CRT and then flat panel TV?

Levy Gerzberg

Okay. Well, CRT is essentially going down to zero. We don’t have much business in the CRT business. And it’s primarily LCD maybe 70% LCD. This is what we see the growth also the demand in the market, which is great for us and set-top box is about 30%.

John Vinh - Collins Stewart

Okay, great. And then last question is just a follow-up on the converter box opportunity Best Buy indicated that it plans on shipping in Q1. How come we look at the ramp of this converter box market, are you going to start shipping in Q4 at this point?

Levy Gerzberg

Yeah, there will be some volume in Q4 and then it will start increasing.

John Vinh - Collins Stewart

Gradually throughout the year, kind of a gradual ramp, how we should be thinking about at it?

Levy Gerzberg

That’s right. We believe the ramp will be pretty fast between Q1 and Q2.

John Vinh - Collins Stewart

Okay, great. Thank you very much.

Levy Gerzberg

You are welcome.

Operator

Our next question comes from the line of Daniel Gelbtuch with CIBC. Go ahead.

Daniel Gelbtuch - CIBC

Hey, congratulations on a great quarter. Getting back to digital camera, you mentioned gross margins were eroding may be not as a fast pace. But why would you attribute the erosion to that is you might have lot of competition here in the market?

Levy Gerzberg

The main reason Daniel is the market requirement. Our customers are competing among themselves and there is a demand for higher volume cameras. The volume keeps going up, which is amazing and we shipped many more chips. So, it’s, there is the lower end, low to mid range cameras volume is going up, the prices are going down, you can go to Best Buy and you can see, you can get pretty good cameras for less than $200. So, that’s a major driver.

Karl Schneider

And Daniel, we actually didn’t see, if we compared what our gross margins were in Q2 and Q3 on digital camera. There was not a whole lot of movement. We did see ASP erosion, but we also got cost breaks as well so that net the gross margin was not affected all that much in the camera side of things.

Daniel Gelbtuch - CIBC

Okay. And as far as penetrating the high end of the market you already have brokerage with at least one OEM? What you think the timetable is to get more penetration into that market, as this second half ’08 shipment or is this are we done for the year now with the Tier 1 penetration for in-house cameras?

Karl Schneider

This is new cameras.

Daniel Gelbtuch - CIBC

Yeah for now getting it to again direct into Tier 1 as supposed to the ODM in Taiwan?

Karl Schneider

Well. We will run lots of Tier 1 direct. I mean, we’ve announced things like Nikon in the, and spoke about that, in the prepared remarks, I think Levy remarks was actually to a new one that we hadn’t had in the past that’s not [unredeemed] that you know. So, we are dealing with likes, I would say on the camera side, there is a only a couple of Tier 1 OEMs we are not dealing with.

Levy Gerzberg

Canon and then another 0.5 DRAM. But the real big ones are now going we’d also. Then you'll see a new camera with a COACH 10 probably as the PMA of 2008 which will lead to production later in the year.

Daniel Gelbtuch - CIBC

All right. So, again, so basically I should be looking for ramp in the in-house cameras really as an ’08 driver more so than anything than this year?

Levy Gerzberg

Yeah that’s correct some of it is happening in Q4 but not much.

Daniel Gelbtuch - CIBC

Mostly next year, okay. And then as far as competition is concerned, there were some mention of TI are you seeing MediaTek being a new core acquisition getting active in this space or how far behind are they are or are you seeing them active at all?

Levy Gerzberg

Well, no, we are looking for everyone thanks though we've not seem them yet in new cameras there was a lot of software's that was developed on COAH up platforms for many years and its not so simple to change it so we've have not seen it yet but we continue to watch around us, so far we have not seen will a few competition to opposite our market share is going up we are gaining share from at least one of the names that you mentioned.

Daniel Gelbtuch - CIBC

Okay. As far as getting back to the TV side of the market I know you have a pretty good relationship with Funai for DVD side etcetera? Are you seeing them do you know what their plans are far as really penetrating the US aggressively this year or next is there something you think is an opportunity for you guys?

Levy Gerzberg

The answer is yes to two questions. We know what their plans and we think it’s an opportunity.

Daniel Gelbtuch - CIBC

All right, very well. Thank you very much, I appreciate it thank you.

Levy Gerzberg

You’re welcome.

Operator

Our next question comes from the line of Mahesh Sanganeria with RBC Capital Markets. Go ahead.

Mahesh Sanganeria - RBC Capital Markets

Thank you. I got a question on the license revenue that went up one point over 16.6; so this is a record license for royalty revenue. How should we look at going forward, is that 1.2 primarily came from printing software?

Karl Schneider

I would say, we still license on a quarterly basis various video IPs, and some quarters we get a license or two in some quarters, we don’t. So I would say on that line, we’re probably not going to see any major changes in the near term. So, it was up a little bit because we did a fairly nice IP license during the quarter to a semiconductor company.

Levy Gerzberg

Mahesh, right, I do not know, if you referred specifically to the VLSI core IP or through our overall software business.

Mahesh Sanganeria - RBC Capital Markets

Well the way, I thought that you get a very steady about $11.5 from the printing software and the rest of it come from IP cores. So I'm wondering that the increase came from IP core or the software? And how should we look at, 60 million is a good number to look at?

Karl Schneider

Yeah

Levy Gerzberg

It's mostly our software.

Mahesh Sanganeria - RBC Capital Markets

Pardon me.

Levy Gerzberg

It is mostly our software, imaging software.

Karl Schneider

It was a mix.

Mahesh Sanganeria - RBC Capital Markets

Okay. And second thing on the inventory, your inventory gone down significantly? What is your target level for the inventory dollars?

Karl Schneider

Well from a target perspective, we would like to maintain turn somewhere probably in the 6 range, plus, minus. So, the inventory was, we had a very strong quarter, and so inventory levels were drawn down. We believe the demand was good. We see that demand carrying over into Q4. We’re looking again to try to drive the turns back toward the 6, and so have a buffer, so that we can cover upsides when they come.

Mahesh Sanganeria - RBC Capital Markets

But are you comfortable with this inventory level or it’s you think it's….

Karl Schneider

No, no. Again, we're going to have to bring it up a little bit because as I said the turns are coming out of Q4 were a little over eight, and we prefer them being around six. So, we’ve buffer. So, we actually, and a lot of it is the demand, as you go through the quarter and some of these market that we serve tends to change from different products even within say a DVD family, it's one shift you forecast for them and all of a sudden you see a little bit stronger demand and a different product. And so that's one of the things that we saw during the quarter, as we actually, probably, had put enough wafers into the pipe. We didn't quiet get to the mix, and so it droved our dollars down.

Mahesh Sanganeria - RBC Capital Markets

Okay. That's helpful. One last question on the DTV side. I mean, looking at your past revenue it's hard to figure out the seasonality. Your seasonality is little different than what the other DTVs. Going forward, should we be modeling the similar way that the very strong September quarter and as opposed to June and September going up similar amount?

Karl Schneider

Yeah. No, we don't think that the seasonal trends will change that much when it comes to Q2, Q3, those are the big consumer quarters. We might offset some of it as we grow market share and we do hope to continue to grow market share in these various markets. But we plan on Q3 being our biggest quarter. We will typically see a falloff in Q4. As you said, how far it falls off has not been predictable. But I think this year is more in line with based on the guidance we've given is more in line with what we expected. And then at the same time, there are certain markets that we are serving that we will see growth in the fourth quarter like television.

Mahesh Sanganeria - RBC Capital Markets

Well, I was referring more to in Q2 you had a 4% revenue growth of this year and Q3 you had close to 40%. What I am wondering next year probably it’s not going to be the same profile; you will growth number probably will be higher in Q2 than…

Karl Schneider

As a percentage.

Mahesh Sanganeria - RBC Capital Markets

Maybe, as a percent, yes. Or let me ask the question?

Karl Schneider

I think in the past within the past couple of years, we’ve seen Q3 moderate as a percentage versus what we see in Q2. Q2 is kind of the start of the consumer, and what we are seeing is that some of the major OEMs versus where we used to be in DVD with Tier 2, Tier 3 kinds of guys are much more predictable. They start their plans earlier. They rollout their products earlier. And so we see that the percent increase that we used to see from Q2 to Q3 moderate somewhat, and we see it happen earlier in the consumer season. That makes sense?

Mahesh Sanganeria - RBC Capital Markets

Okay, yes, yes. Okay, thanks a lot.

Operator

Our next question comes from the line of Quinn Bolton with Needham & Company. Go ahead.

Quinn Bolton - Needham & Company

Let me just wanted to follow-up on the converter box opportunity I know the government is going to be giving a couple of coupons to each of the qualified households. Do have a senses to when that coupon program kicks in primarily not going to drive a lot of the demand for these converter boxes.

Karl Schneider

That’s right. We believe it will happen around end of first quarter.

Quinn Bolton - Needham & Company

End of Q3 '08?

Karl Schneider

Q1

Quinn Bolton - Needham & Company

Oh end of Q1. Okay so that’s sounds like that probably ties back into your earlier comment as to why you expect a pretty good ramp between Q1 and Q2 next year?

Karl Schneider

Exactly.

Quinn Bolton - Needham & Company

Okay, great. Second quarter just on you mentioned China (inaudible) was up to 44% of sales, kind of curious is that products into Chinese domestic brands or is a good part of that the multinational that are just manufacturing in China?

Karl Schneider

Its probably mostly multinationals that are manufacturing in China.

Quinn Bolton - Needham & Company

Okay, so you guys

Karl Schneider

But we are picking up little shares, for example in the China domestic DVD market.

Levy Gerzberg

And set-top boxes.

Karl Schneider

And set top boxes.

Quinn Bolton - Needham & Company

And set-top -- but your exposure to the China DVD player market it does sound like that stepped up meaningfully, that’s been a source of volatility in your revenue stream in past just trying to get a sense as to what that’s, how much that that’s accounted for the DVD strength?

Karl Schneider

No. There is not the majority of it. No, it's we are still the minor player compared to say Sunplus or MediaTek there.

Levy Gerzberg

What we see a good momentum going is in the set-top boxes for the Chinese markets.

Karl Schneider

Yeah, the digital cable conversion for the Olympics is going to drive us there.

Quinn Bolton - Needham & Company

Okay great. And then lastly my question greater view obviously your cash balances continue to go up, any sense of what you might be looking to do with that cash?

Karl Schneider

Thanks for the question, Quinn. No, we're looking at all the alternatives for the cash. The company as I stated last quarter, we have strategic markets that we're looking at and technologies that we're looking at. We will be looking at how and what's the best vehicle to possibly go into the market and buyback shares and you just have to stay tuned for that one.

Quinn Bolton - Needham & Company

Okay.

Levy Gerzberg

Quinn, we're not ruling out anything related to the case. We're looking at all opportunities.

Quinn Bolton - Needham & Company

Great, thank you.

Operator

Our next question comes from the line of Arnab Chanda with Deutsche Bank. Go ahead.

Arnab Chanda - Deutsche Bank

Great. Couple of questions maybe either for Karl or Levy. First of all, if you look at the digital camera market, do you think that at this point revenue growth in ASPs will kind of offset itself or is it your revenue growth requires maybe new OEMs. If you could talk about that qualitative a little bit for 2008 and I have a couple of [hopes]?

Levy Gerzberg

Yeah, we see that the unit growth and ASP will probably offset each other next year specially since we're getting into a higher-end cameras that we will mitigate the problem with ASP, but unit growth continues, because our market share is continuing.

The market itself is continuing to grow, but not very fast. And so of course, we're getting into some new segments within the camera market as well especially we hope to be in some digital it allows in the future the low cost as well some other application. So all in all we think they will offset each other with some growth.

Arnab Chanda - Deutsche Bank

Great. Thanks, Levy. Now, talking about the handset, you've talked about a very high end product starting in Q4. Do you think that we will see any other OEMs in 2008 or maybe you could switch out some line on how many specific models or kind of a range of model that we should see here in volume production for '08?

Levy Gerzberg

We cannot be very specific. All I can tell you is that you'll see more models from the current customers that we have the first tier and other models from other customers in '08, yes.

Arnab Chanda - Deutsche Bank Securities

Okay, great. And then on the TV side, there is a couple of things that just maybe I’m little confused about. So, you talked about how much of the business LCD TV versus converter boxes. In the digital that what we would call maybe the HDTV or the digital TV market, so the panel or the LCD TV market, where is your position in terms of design wins for Tier 1. Are you expecting that to be in 2008 or it would be direct versus, are you displacing somewhat between ODM channels, if you could talk a little bit about that?

Levy Gerzberg

First of all the answer to both questions is yes. We are going through a first tiers in 2008 based on what we see right now the level of design-in as our customers are working on.

So, we are confident that '08 will have first tier. Now, these will be some new models and in this market when you enter a first tier it is a displacement of another competitor. Although the customers are coming out with many models, so initially they split it and hopefully our relative volume will go up, hence they will be happy with us.

Karl Schneider

The other thing is happening Arnab, is in these top tier TV guys. They are moving from discreet multi-chip solutions where there’re separate display processors, separate HD decoder, separate Demod, separate various and sundry other functions. They are moving to single chip and that is going to be the high volume mainstream of their TV products come at the end of '08 and going into '09. And so that's where we see the opportunity to move in. So, as far as displacing things go hopefully we'll be displacing a lot of people from that perspective.

Arnab Chanda - Deutsche Bank

Okay, great. And then sorry, last question for you Karl. So, it seems like you have nicely exceeded that 15% operating margin kind of goal that you’ve talked about for the quarter. As we look out to 2008 -- Hello?

Levy Gerzberg

Yeah, we are here.

Arnab Chanda - Deutsche Bank

Yeah. Someone is very excited. But anyway hopefully you are too. As you look out to 2008 why would you think is the operating margin? What kind of operating margin would you like to shoot for the year, maybe question for either for Karl or Levy? Thank you.

Levy Gerzberg

Well, Arnab. We are looking to increase the operating margin. I think, when we look out at 2008 on a cumulative basis, we wanted to be 15% or north of it that's the goal. What we can achieve the different story, I think this year we'll do when Q4 set done, we'll be in probably 12% range. So, I would say 15% is a good target maybe even north of 15%. Longer-term I'd like to see it get up to 20%, I think that's what we put in our business model slide when we go out and do investor presentations and that's what we are looking for when we get out into the '09, '10 timeframe.

Arnab Chanda - Deutsche Bank

And is there a certain level of revenue growth that claudicates, is it a 10%, 15%? Is that the type of, what type of revenue, do you need you think to get to that 15% operating margin at least?

Karl Schneider

Well, I think, 10% to 15% is reasonable. I think that will get us to the 15%. And we are looking at doing our best to increase our gross margin targets or keep them closer to 50% and then reduce our OpEx spending, as a percentage to hit those numbers.

Levy Gerzberg

Actually Arnab, if you look at the last several years you can see that we started to leverage very nicely the revenue growth with higher growth percentage wise in the bottom line. So, we see more efficiency and better leverage of all our different divisions and product lines as well as the global efficiency that we start to benefit from.

Arnab Chanda - Deutsche Bank

Okay. Well thanks Karl. Thanks Levy.

Levy Gerzberg

You are welcome.

Operator

Our next question comes from the line of Erik Rasmussen with Montgomery & Co. Go ahead.

Erik Rasmussen - Montgomery & Co

Hi, guys thanks for taking the questions and congrats on a nice quarter. Real quick most of my questions are answered or have been answered. But on the digital camera you talked about exit in 2007 with about 30% market share. Where do you see that kind of playing out in 2008? I know, while you are certainly seeing a lot of strength in there, and you talked about a number of growth vectors for that and earlier unit growth, but offset with SME ASP erosion. But in terms of your market share, where do you see that heading in 2008?

Levy Gerzberg

Yeah. We mentioned that 2007 to be north of 30% and we believe that next year which will be 35% or higher. And we are saying it based on the design win base that we’ve right now and the new trust fewer customers that we’ve which is the majority of them and plus some new markets. New markets are opening out for cameras. So, this is why we're confident that this market share will continue to grow up. We'll do the best to achieve that.

Erik Rasmussen - Montgomery & Co

Great, thanks. And just real quick on DVD gross margins. I don’t know, last quarter, I think you said they were a little bit better than they had been in the past around the 40% range and it seem like they get down probably a little bit below last quarter of that 40% range. Do you see them kind of going back or stabilizing in that low 40% or up 40% this quarter and then heading into next year or maybe just give some direction on that if you can?

Karl Schneider

Yeah Erik. I think the DVD gross margins are fairly stable. They have been with plus/minus 2% for the last two or three quarters and we don’t anticipate they're going to move significantly in either direction.

Erik Rasmussen - Montgomery & Co

Great. That’s all I got. Thanks guys.

Levy Gerzberg

You're welcome.

Operator

Our next question comes from the line of [Mark Kurlin] with Bear Stearns. Go ahead.

Unidentified Analyst

Yeah, hi, it's actually Bob. I got one question for you guys. On your press release, you talk about the camera phone. The curious thing and you don’t mentioned, who it is, but the thing I'm wondering is, have if you were going to guess, are you saying that you're going to be on $5 million units next year of this one guy or is there a chance for you to be on more than $5 million units next year? And that’s one question. And then, I won’t come back to the camera phone after that.

Levy Gerzberg

Yeah, Bob we expect this is the run rate we hope to reach. The question is what time during the year, we’ll reach that but from this particular first few customer, if this customer is successful with the number of companies that have or provider that have endorsed the phone, we hope to ramp up to it.

Unidentified Analyst

Then the second question with that is, I am just curious, how big is the camera phone market altogether? And as your chip if you won this award, how does your chips stack up relative to the other chips on the market, I mean, [true you say], I am just curious in terms of how big is the overall market and how's the stack up in your opinion relative to the other guys?

Levy Gerzberg

Yeah, first Bob, you will say that it’s the best once you get your hand on the phone like this.

Unidentified Analyst

As a shareholder now I'll say it's definitely the best.

Levy Gerzberg

Okay. You should buy it, it will increase our revenue. So, the unique thing about this phone, first of all, the camera features. We are leveraging all our experience of many years and the market position in the camera market and now we are moving it into the cell phone market, and believe that in terms of camera features and quality, it's better than what we have seen.

Of course, the competition is working on it does well, but we are not sitting and waiting. We will continue to migrate technology. Remember, we also have digital television technology, which lend itself very nicely to mobile applications. So, we feel good about the uniqueness about this phone and we will continue to enhance it.

In terms of the market that we are addressing, we are not targeting every cell phone in the world that has a camera in it. We are more focusing on the….

Unidentified Analyst

High-end?

Levy Gerzberg

I would say it's a mid range, it’s a high-end in terms of the camera, and expectation is that this market will grow at about 30% a year. The segment that we are addressing reaching actually in 2007 we think that that market was about $100 million units, again the segment that we're going after let me check, actually it’s a little more than that. It's about 150 million units and growing up to several hundred million units because eventually when you'll have the choice to buy a 5 mega or 8 mega camera cell phone even if you will not use it, you will buy the high resolution.

Unidentified Analyst

All right.

Levy Gerzberg

And we see many new applications. We can capture 120 frames per second, we do not know if any cell phone who can do this, and not many people understand it what they can do with this, but its amazing, once you see teenagers love it.

Unidentified Analyst

So, Levy, you are saying you're targeting 100 million cell phones, did I hear that that's your addressable market?

Levy Gerzberg

That’s right now, but its going to be a much more than this, it would be three times as much

Unidentified Analyst

Okay.

Levy Gerzberg

In the next several years, and plus the High Definition is coming and we're targeting that as well in the cell phone.

Unidentified Analyst

Alright, that's what I want to know. Thanks very much.

Levy Gerzberg

You are welcome.

Operator

Our next question comes from the line of Steven Clark with Wedbush. Go ahead.

Steven Clark - Wedbush

Just had a quick question regarding DVD growth, is that something that over the kind of if you look over the next few years, is that something that can grow to actually positive revenues over the next few years?

Levy Gerzberg

Positive revenues? Oh, yeah, absolutely. The DTV you are talking about.

Steven Clark - Wedbush

DVD.

Levy Gerzberg

Oh, I m sorry. You are talking DVD. Yeah, the number of units is continuing; its not a humongous growth but it is considering to grow. In our case its growing because we are entering new segments both geographically speaking and applications like the automotive picture frame. You heard about new SanDisk the Sansa TakeTV application which is based on this kind of technology; TV multimedia and connectivity to DVD players. So, all in all, for us we think the number of units and revenues will continue to grow because of this reason.

Steven Clark - Wedbush

Okay, just had another question as well. I know you mentioned about ASP erosions. Is there anything that you have seen that’s may be kind of out of line, I don't know may be the current quarter or what you expect kind of going forward in regarding DVDs or digital cameras?

Levy Gerzberg

Steven, we don't see anything out of line. I think DVD, ASP erosion is kind of standard as it hasn't changed plus minus. We -- camera ASPs held their own for a long time. As the price of the systems come down we start to see erosion there, but again nothing out of the ordinary. So, there's, in camera there is really nobody pushing as other than the cost of the system at this point.

Steven Clark - Wedbush

Okay, thank you.

Operator

Our next question comes from the line of Vijay Rakesh with Oppenheimer go ahead.

Vijay Rakesh - Oppenheimer

Yeah, hi guys, good Q3. Talking about out of line, just a couple of questions on the printer imaging side. It looks like Q1 was up pretty nicely up 32%, then Q2 came down a little bit flat out and Q3 was up quite a bit, how do you look at the printer imaging side, how do you moderate, I mean looks this kind of and you can elaborate what's caused that lumpiness?

Levy Gerzberg

Well, Vijay as far as printer imaging goes, how we modulate it is that from a yearly perspective we are expecting somewhere in the neighborhood of plus/minus 10% growth in total out of that group. We don’t think their swings have been drastic. So, yeah, it tends to be a little lumpy depending upon the loyalties. Some quarters the enterprise copier guys have good quarters and other quarters they don’t, but it doesn’t move more than plus/minus 500k on a quarterly basis. We're seeing a little bit of a rebound now in the MFP Inkject LaserJet market. As you know, we have talked about in the past – a year ago we were heavily tied to Lexmarks there and we are seeing a rebound in those segments and we've expanded our customer base and so, we're reaping the benefits of that right now.

Vijay Rakesh - Oppenheimer

Okay. So, here kind of up 35% is basically, I mean just one time you think its kind of normalized result or what do you think?.

Levy Gerzberg

Yeah, again, it's you kind of going to have to learn to live with that movement.

Vijay Rakesh - Oppenheimer

Okay.

Karl Schneider

All in all, the trend is up and this why we are in this market, and with so many new applications you can imagine that some people will print directly from their cellphone to the printer; there is new software coming out, like the new XPS that -- for which we have a number of good large licenses, and there are more applications like wireless printers. So, it will continue to grow.

Vijay Rakesh - Oppenheimer

Got it. And I probably missed this on the tax rate line, it looks like your tax rate went from 19% in Q2 to 12% in Q3. What is the tax rate in Q4? Is it flat?

Karl Schneider

For Q4, leave it at the same rate that it was in Q3.

Vijay Rakesh - Oppenheimer

Okay. So 12%, okay. And on the TV setup box, I think you mentioned 70-30 split between TV and setup box in Q3. Is that kind of where it was in Q2 as well?

Karl Schneider

Plus or minus, yeah.

Vijay Rakesh - Oppenheimer

Okay. Great. Okay, thanks a lot guys.

Karl Schneider

You are welcome.

Operator

Ladies and gentlemen, that does conclude our Q&A session today. I would like to turn the call back over to management for any closing remarks. Please proceed gentlemen.

Levy Gerzberg

So, thank you for joining us everyone. Once again, we're very pleased with our results for the third quarter and believe we are well-positioned in each of our core markets for continued success. And we will be presenting at several conferences in the coming months and we are looking forward to see you there. All these are conferences are posted on our website. So, thank you again and good bye.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.

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

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