Zoran Q3 2007 Earnings Call Transcript

|
 |  About: Zoran Corporation (ZRAN)
by: SA Transcripts

Zoran Corporation (NASDAQ: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

Operator

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

Bonnie McBride

Thank you. Good afternoon everyone, and thank you forjoining us today to discuss Zoran's third quarter 2007 results. By now youshould have received the copies of today's earnings release. Joining us todayfrom Zoran's management team are Dr. Levy Gerzberg, President and CEO; Mr. KarlSchneider, Zoran's Senior Vice President of Finance and Chief FinancialOfficer; and Dr. Isaac Shenberg, Senior Vice President of Business Development.

Before we begin, I would like to remind you that during thecourse of this conference call, we may make forward-looking statementsregarding the market for the Company's products, revenue projections, the outlookfor manufacturing capacities and product development and certain trendsaffecting gross margins and operating expenses in the future periods. I wish tocaution you that such statements are just predictions and actual results orevents may differ materially.

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

Levy Gerzberg

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

Now for an update on each of our core markets, in digitalcameras we achieved a new record in unit ship and we maintain our leadershipposition with our market share in global digital camera sale expected to exceed30% as we exit 2007.

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

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

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

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

We expect to see additional wins in the coming and upcomingquarter. Our success was also evident in Taiwan,where we continue to be a leader, and in Korea, with Samsung is drawingexceptional growth in the digital camera market. Although the camera marketexperienced price erosion on entry and midlevel products, we believe ourcompetition was affected more severely than we were including the captivemanufactures.

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

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

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

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

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

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

These customers will deliver HDTVs to the market switchboard, 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 retailsegment of the market remains steady. Price points in this market continue todecline putting pressure on OEMs to devote considerable development andmanufacturing resources to new TV designs.

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

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

The first f these products will then display at IBC and isexpected to begin shipping to retailers during the current quarter withadditional brands expected to ship in the first quarter of next year. Our HDTVproduct line designed to address the European DVBT free to air, in Chinadigital cable markets continues to make progress.

For Europe, volume is shiftingto PVR, MHEG-5, and iDTV models, all of which Zoran supports. We are seeingsignificant offset in the Chinadigital cable markets, where volume is now ramping as the 2008 Olympicsapproach and one of our customers VVN is taking a leading share.

In print or imaging, we achieved record revenues increasing13% sequentially and 29% year-over-year. Growth was driven by strength in ourimaging hardware products, where we saw increased demand for Quatro products inboth the inkjet and laser segments, as well as strong demand for our IPS, pagedescription language software.

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

The Quatro 4230 processor specifically designed for this segmentbegan 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 andthroughout 2008.

Software revenues also grew during the quarter boosted bystrong demand for the latest generation of IPS software, which is now shippingin over 260 printers. Some examples of recently introduced products based onthis technology include a new high speed color MSP from Sharp as well as someadvanced MSPs from Xerox.

We are seeing strong interest for our latest generation ofIPS, which features an interpreter for Microsoft’s new XPS format andadditionally have commitments from eight licenses for our XPS format. We expectto see continuing demand for this product in the coming quarters.

In DVD revenues were strong growing 18% sequentially drivenby demand across all segments of DVD market from entry level 128-pin solutionsin the growing Chinese market to HDMI 1080p best players in Europe and the USZoran’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 suchas India, Russia, South America and Eastern Europe. Our ability to offer price competitive products, whilemaintaining our gross margin is enabling us to win additional designs from ourcustomers and achieve the kind of growth we saw during the quarter.

Volume also increased in the mid to higher end productsprimarily with our Tier 1 OEM. As leaders in HDMI solutions we benefited fromincreased customer demand for this feature. During the quarter, we also shippedsolutions to OEMs such as Clarion, JVC, SkyFi and Sony for the expandingautomobile DVD market.

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

Our Vaddis multimedia decoder was selected as the processorin this new product from SanDisk that enables consumers to transfer downloadeddigital video content from a personal computer using a small, secure flashmemory-enabled media player, and to plug and play this content on thetelevision connected via an AV cable.

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

Before turning the call over to Karl, I want to reiterateour enthusiasm for the results we are reporting today. We continue to executeon our primary objective to grow revenues and profits. We are growing andsharing each of our core markets digital cameras, digital TVs, DVD and printerimaging. We continue to add Tier 1 customers to our existing base as well asleverage our technology across all [sectors] to take advantage of new andevolving markets and applications.

In addition our multimedia mobile phone segment is makingsignificant progress, which we expect to create substantial growthopportunities for Zoran in the future. All of these activities are enablingcontinued leadership in the digital market reserve. We are well position ineach of our core market for continued success.

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

Karl Schneider

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

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

On a non-GAAP basis, which excludes the non-cash chargesjust referred to, our net income for the third quarter grew 56.2% to $26.4million 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 thirdquarter of 2006, non-GAAP net income grew 46.7% over the reported $18 millionor $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 $4.5million of stock-based compensation expense. For the third quarter of 2006,non-GAAP net income excluded $12.4 million in amortization of acquired intangibleassets, and $3.8 million of stock-based compensation expense.

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

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

Overall gross margin for the third quarter was 52.3%, whichcompares 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 theresult of product mix and a small increase in our inventory reserves ofapproximately $1 million.

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

Excluding these stock-based compensation expenses, researchand development expenses decreased 6.3% or approximately $1.8 million in thethird quarter of 2007 to $26.7 million compared to the $28.5 million in theprior quarter. Compared with the same quarter of last year, R&D spendingincreased 11.3% from $24 million.

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

Compared to the same quarter last year, SG&A expensesincreased 10.2 from $23.5 million. Ongoing legal expense associated with thestock 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 of2006.

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 ofinterest income included in these figures was $4.3 million and $3.8 millionrespectively.

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

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

I will now address the company's outlook for the fourthquarter of 2007. During the Q&A session that follows, you're encouraged toask any questions that may not be covered during the course of our comments, aswe do not anticipate having to provide any additional financial guidance afterthis call.

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

For the fourth quarter of 2007 we currently anticipate therevenues will range between $128 and $132 million with overall gross marginsranging between 51.5% and 52.5%. Excluding amortization of acquired intangiblesand 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 between3.2 and $3.8 million. The company expects to record earnings for the quarter inthe range of $0.05 to $0.10 per diluted share. Excluding amortization ofacquired intangibles and stock based compensation non-GAAP earnings for thequarter are expected to range between$0.30 and $0.34 per diluted share onapproximately 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 fromthe line of [James Schneider] with Goldman Sachs. Go ahead.

James Schneider -Goldman Sachs

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

Karl Schneider

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

James Schneider -Goldman Sachs

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

Karl Schneider

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

James Schneider -Goldman Sachs

Perfect.

Karl Schneider

To clarify one other thing, Jim and the other one, I didforget to talk about the mobile phone segment as far as one of the markets thatwe 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 thinkmost of your share gains there are behind you or do you think there is someoneway to still to go?

Levy Gerzberg

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

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

And there are some interesting related markets like thepicture frame. And I don’t know if you had the chance to see to theannouncement by SanDisk, which we believe is a very exciting one because hereagain out technology is going to be used in related markets. So you candownload, 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 thesecure, flash technology from SanDisk and if using our DVD technology. So allin all when you add up all these things we will believe that our market sharewill 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 withThomas Weisel. Go ahead.

Heidi Poon - ThomasWeisel

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

Levy Gerzberg

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

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

Now regarding the converter box finally we believe it’sstarting to happen. We are seeing that the market is $20 to $25 million unitsfor those of you, who are not familiar with the term the converter box, whenthe analog broadcast will be shutoff by the FCC then all the analog TVsessentially will go down.

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

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

Heidi Poon - ThomasWeisel

Could you give an estimate based on our design wins in thisarea 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 wesee right now probably in the range of 25% to 30% and going up. So once thedeployment will happen, we will be able to give you more accurate numbers.

Heidi Poon - ThomasWeisel

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

Levy Gerzberg

Yeah. So first of all the behavior in the digital cameramarkets 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 goingdown in some markets under these expected some quarters ago. So, that was notsurprise for us, we planned for it. We knew its coming.

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

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

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

So, Q4 goes down and it start to go up again. We believethat in Chinafor example next year during the Olympic Games everyone will have a camera inhis pocket maybe a video camera or still camera with video. So, we are excitedabout it.

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

Heidi Poon - ThomasWeisel

Great and finally I just want a follow on DVD, as you sawmore into automotive, do you expect the seasonality in the DVD business tochange a little bit and also in terms of yourself into the emerging market. Areyou 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 theautomotive section is not so big for us so for but it is growing. So that willhelp we also hope that it will make it more predictable visibility we getbetter and I’m sorry the question on the cell phone?

Heidi Poon - ThomasWeisel

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

Levy Gerzberg.

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

Heidi Poon - ThomasWeisel

Okay great. All right thank you.

Levy Gerzberg.

You are welcome.

Operator

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

Paul Coster - J.P.Morgan

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

Karl Schneider

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

Paul Coster - J.P.Morgan

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

Karl Schneider

Yeah. So, I would say, I wouldn’t expect any majordifference in the fourth quarter unless something happens with the litigationwould be settled. If the litigation continues, which I am talking about thederivative kind of the lawsuits that all the companies that got involved inthese 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 orrevenues of any kind?

Karl Schneider

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

Paul Coster - J.P.Morgan

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

Levy Gerzberg

That’s correct. That the HD blue laser technology willenable 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 teento 20s and you can expect a similar behavior as before although probably not asthe 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 endof the mobile phone market. Can you perhaps kind of picture for us of how younow drums back new segment would be that one OEM that you will deepenpenetration 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 customerand working with new customers. So this is just a beginning. We believe we havea very unique technology that enables unique products for our customer. So Ican’t be quantitatively specific in my answer, but you can expect productionwill really take-off early next year.

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

Paul Coster - J.P.Morgan

Okay, last quarter. In next year the mobile segment willrepresent 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 enoughthat 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 withJefferies. Go ahead.

Adam Benjamin -Jefferies

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

Karl Schneider

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

Adam Benjamin -Jefferies

And the seasonality declined in the December quarterfollowed 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 onMarch is up or down, but at this point in time. But typically Q4 will be adecline 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 prettysignificantly to low 20 base up to the mid 20. Is that the kind of normal runrate, we should be thinking about it this business going forward. I mean, therehasn’t been much growth there. Just trying to get an understanding of what thatbusiness will look like going forward?

Karl Schneider

Well the imaging business, they did have a nice quarter inQ3. 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 increasedidn’t come from royalties; it came from ICs that were going into themultifunction peripherals. And so, it’s going to be slow and steady, it’s notgoing 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 weparticipating. Some of the licensing deals, which we’ve don’t happen everyquarter. So, they are kind of spiky. So you’ll see some kind of growth then itdeclines a little bit then it goes up again. But all in all if you look at thisbusiness, 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 youexpect seasonal decline in Q4 as we have all seeing over the last severalyears. 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 getunderstanding of how you guys get comfort there? What's your visibility into Q4and 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 andin the comfort to get there.

Karl Schneider

Well, again things have changed a lot the market. We gonethrough several transitions as people have some of the lesser known brand nameshave exceeded the market and today it’s more stable, it’s more top tier kindsof business with Samsung and LG and Philips and those kinds of names. So we’vegot from a visibility perspective. We got better visibility to-date than we’vehad 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 seein the fourth quarter. And if you take what we have guided on a company basisand we are not breaking out the individual segments.

But we are only talking about in the fourth quarter beingdown slightly less than 10% to just over 12% as a company and DVD will be downlittle bit more than that maybe closer to 15% versus some of the other productlines. 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 thoughtthat gross margin guidance would have been a little bit stronger given the factthat you see a mix shift, as you are giving out Karl DVD declining more thanthe other businesses and DTV growing. Is the DTV gross margin a drag there, Iknow, it’s been in the low 40. So, just trying to see what the driver of thatmargin guidance is?

Karl Schneider

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

And then again, we are not see what else is [OES] we’regoing to be shipping our more product into the handset market in the fourthquarter then we’ve ever shipped before. And so that’s going to have a negativeimpact 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 bitlower in the third quarter than they were in the second quarter, but not thatmuch.

Adam Benjamin -Jefferies

Okay. And then just one last question, and just a housekeepingitem. The tax rate you had mentioned was 12% in the fourth quarter, you talkedabout 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 somewherein the depending on what happens. It’s going to stay somewhere between 10% and20%.

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 withLongbow Research. Go head.

Tayyib Shah - LongbowResearch

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

Levy Gerzberg

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

Tayyib Shah - LongbowResearch

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

Levy Gerzberg

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

Tayyib Shah - LongbowResearch

Okay and then you talked about the digital camera business,building a direct relationship with the major OEMs there, as you begin to dothat, 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 themarket, so the lower end will continue to larger extend to come from theTaiwanese ODMs suppliers and need to high end will be in Japan. And eventhough, we’ve some design wins of course in Taiwanfor the midrange, and in Koreafor example as well. So, we believe that we will coexist.

Tayyib Shah - LongbowResearch

And you should be selling into both of these next yearright?

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 solutionsespecially for the need to higher end.

Tayyib Shah - LongbowResearch

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

Levy Gerzberg

It’s probably, two years or so that’s we believe willhappen. 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 - LongbowResearch

Okay. Thank you.

Levy Gerzberg

You’re welcome.

Operator

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

John Vinh - CollinsStewart

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

Levy Gerzberg

Both of them.

John Vinh - CollinsStewart

Okay.

Levy Gerzberg

Absolutely both of them.

John Vinh - CollinsStewart

Okay, great. And then you also said there is a lot ofinterest 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 integrationthis year?

Levy Gerzberg

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

John Vinh - CollinsStewart

Great.

Levy Gerzberg

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

John Vinh - CollinsStewart

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

Levy Gerzberg

Okay. Well, CRT is essentially going down to zero. We don’thave 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 greatfor us and set-top box is about 30%.

John Vinh - CollinsStewart

Okay, great. And then last question is just a follow-up onthe converter box opportunity Best Buy indicated that it plans on shipping inQ1. How come we look at the ramp of this converter box market, are you going tostart shipping in Q4 at this point?

Levy Gerzberg

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

John Vinh - CollinsStewart

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

Levy Gerzberg

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

John Vinh - CollinsStewart

Okay, great. Thank you very much.

Levy Gerzberg

You are welcome.

Operator

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

Daniel Gelbtuch -CIBC

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

Levy Gerzberg

The main reason Daniel is the market requirement. Ourcustomers are competing among themselves and there is a demand for highervolume cameras. The volume keeps going up, which is amazing and we shipped manymore chips. So, it’s, there is the lower end, low to mid range cameras volumeis 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 ourgross margins were in Q2 and Q3 on digital camera. There was not a whole lot ofmovement. We did see ASP erosion, but we also got cost breaks as well so thatnet the gross margin was not affected all that much in the camera side ofthings.

Daniel Gelbtuch -CIBC

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

Karl Schneider

This is new cameras.

Daniel Gelbtuch -CIBC

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

Karl Schneider

Well. We will run lots of Tier 1 direct. I mean, we’veannounced things like Nikon in the, and spoke about that, in the preparedremarks, I think Levy remarks was actually to a new one that we hadn’t had inthe 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 arenot dealing with.

Levy Gerzberg

Canon and then another 0.5 DRAM. But the real big ones arenow going we’d also. Then you'll see a new camera with a COACH 10 probably asthe 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 forramp in the in-house cameras really as an ’08 driver more so than anything thanthis year?

Levy Gerzberg

Yeah that’s correct some of it is happening in Q4 but notmuch.

Daniel Gelbtuch -CIBC

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

Levy Gerzberg

Well, no, we are looking for everyone thanks though we'venot seem them yet in new cameras there was a lot of software's that wasdeveloped on COAH up platforms for many years and its not so simple to changeit so we've have not seen it yet but we continue to watch around us, so far wehave not seen will a few competition to opposite our market share is going upwe 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 Iknow you have a pretty good relationship with Funai for DVD side etcetera? Areyou seeing them do you know what their plans are far as really penetrating theUS aggressively this year or next is there something you think is anopportunity for you guys?

Levy Gerzberg

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

Daniel Gelbtuch -CIBC

All right, very well. Thank you very much, I appreciate itthank you.

Levy Gerzberg

You’re welcome.

Operator

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

Mahesh Sanganeria -RBC Capital Markets

Thank you. I got a question on the license revenue that wentup one point over 16.6; so this is a record license for royalty revenue. Howshould we look at going forward, is that 1.2 primarily came from printingsoftware?

Karl Schneider

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

Levy Gerzberg

Mahesh, right, I do not know, if you referred specificallyto 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'mwondering that the increase came from IP core or the software? And how shouldwe 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 gonedown significantly? What is your target level for the inventory dollars?

Karl Schneider

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

Mahesh Sanganeria -RBC Capital Markets

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

Karl Schneider

No, no. Again, we're going to have to bring it up a littlebit 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 alot of it is the demand, as you go through the quarter and some of these marketthat we serve tends to change from different products even within say a DVDfamily, it's one shift you forecast for them and all of a sudden you see alittle bit stronger demand and a different product. And so that's one of thethings that we saw during the quarter, as we actually, probably, had put enoughwafers into the pipe. We didn't quiet get to the mix, and so it droved ourdollars down.

Mahesh Sanganeria -RBC Capital Markets

Okay. That's helpful. One last question on the DTV side. Imean, 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 quarterand as opposed to June and September going up similar amount?

Karl Schneider

Yeah. No, we don't think that the seasonal trends willchange 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 continueto grow market share in these various markets. But we plan on Q3 being ourbiggest quarter. We will typically see a falloff in Q4. As you said, how far itfalls off has not been predictable. But I think this year is more in line withbased on the guidance we've given is more in line with what we expected. Andthen at the same time, there are certain markets that we are serving that wewill 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% revenuegrowth of this year and Q3 you had close to 40%. What I am wondering next yearprobably it’s not going to be the same profile; you will growth number probablywill 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’veseen Q3 moderate as a percentage versus what we see in Q2. Q2 is kind of thestart of the consumer, and what we are seeing is that some of the major OEMsversus where we used to be in DVD with Tier 2, Tier 3 kinds of guys are muchmore predictable. They start their plans earlier. They rollout their productsearlier. And so we see that the percent increase that we used to see from Q2 toQ3 moderate somewhat, and we see it happen earlier in the consumer season. Thatmakes sense?

Mahesh Sanganeria -RBC Capital Markets

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

Operator

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

Quinn Bolton - Needham & Company

Let me just wanted to follow-up on the converter boxopportunity I know the government is going to be giving a couple of coupons toeach of the qualified households. Do have a senses to when that coupon programkicks in primarily not going to drive a lot of the demand for these converterboxes.

Karl Schneider

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

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 tiesback into your earlier comment as to why you expect a pretty good ramp betweenQ1 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 intoChinese domestic brands or is a good part of that the multinational that arejust manufacturing in China?

Karl Schneider

Its probably mostly multinationals that are manufacturing inChina.

Quinn Bolton - Needham & Company

Okay, so you guys

Karl Schneider

But we are picking up little shares, for example in the China domesticDVD 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 playermarket it does sound like that stepped up meaningfully, that’s been a source ofvolatility in your revenue stream in past just trying to get a sense as to whatthat’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 stillthe minor player compared to say Sunplus or MediaTek there.

Levy Gerzberg

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

Karl Schneider

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

Quinn Bolton - Needham & Company

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

Karl Schneider

Thanks for the question, Quinn. No, we're looking at all thealternatives for the cash. The company as I stated last quarter, we havestrategic 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 themarket 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 withDeutsche 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 atthis point revenue growth in ASPs will kind of offset itself or is it yourrevenue growth requires maybe new OEMs. If you could talk about thatqualitative a little bit for 2008 and I have a couple of [hopes]?

Levy Gerzberg

Yeah, we see that the unit growth and ASP will probablyoffset each other next year specially since we're getting into a higher-endcameras 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 marketas well especially we hope to be in some digital it allows in the future thelow cost as well some other application. So all in all we think they willoffset each other with some growth.

Arnab Chanda -Deutsche Bank

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

Levy Gerzberg

We cannot be very specific. All I can tell you is thatyou'll see more models from the current customers that we have the first tierand 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 ofthings that just maybe I’m little confused about. So, you talked about how muchof the business LCD TV versus converter boxes. In the digital that what wewould call maybe the HDTV or the digital TV market, so the panel or the LCD TVmarket, where is your position in terms of design wins for Tier 1. Are youexpecting that to be in 2008 or it would be direct versus, are you displacingsomewhat 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 aregoing through a first tiers in 2008 based on what we see right now the level ofdesign-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 itis a displacement of another competitor. Although the customers are coming outwith many models, so initially they split it and hopefully our relative volumewill go up, hence they will be happy with us.

Karl Schneider

The other thing is happening Arnab, is in these top tier TVguys. They are moving from discreet multi-chip solutions where there’reseparate display processors, separate HD decoder, separate Demod, separatevarious and sundry other functions. They are moving to single chip and that isgoing 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 ofpeople 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 goalthat 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 aretoo. As you look out to 2008 why would you think is the operating margin? Whatkind of operating margin would you like to shoot for the year, maybe questionfor either for Karl or Levy? Thank you.

Levy Gerzberg

Well, Arnab. We are looking to increase the operatingmargin. I think, when we look out at 2008 on a cumulative basis, we wanted tobe 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'dlike to see it get up to 20%, I think that's what we put in our business modelslide when we go out and do investor presentations and that's what we arelooking for when we get out into the '09, '10 timeframe.

Arnab Chanda -Deutsche Bank

And is there a certain level of revenue growth thatclaudicates, is it a 10%, 15%? Is that the type of, what type of revenue, doyou 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 willget us to the 15%. And we are looking at doing our best to increase our grossmargin targets or keep them closer to 50% and then reduce our OpEx spending, asa percentage to hit those numbers.

Levy Gerzberg

Actually Arnab, if you look at the last several years youcan see that we started to leverage very nicely the revenue growth with highergrowth percentage wise in the bottom line. So, we see more efficiency andbetter leverage of all our different divisions and product lines as well as theglobal 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 withMontgomery & Co. Go ahead.

Erik Rasmussen -Montgomery & Co

Hi, guys thanks for taking the questions and congrats on anice quarter. Real quick most of my questions are answered or have beenanswered. But on the digital camera you talked about exit in 2007 with about30% 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 abouta number of growth vectors for that and earlier unit growth, but offset withSME ASP erosion. But in terms of your market share, where do you see thatheading in 2008?

Levy Gerzberg

Yeah. We mentioned that 2007 to be north of 30% and webelieve that next year which will be 35% or higher. And we are saying it basedon the design win base that we’ve right now and the new trust fewer customersthat we’ve which is the majority of them and plus some new markets. New marketsare opening out for cameras. So, this is why we're confident that this marketshare 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. Idon’t know, last quarter, I think you said they were a little bit better thanthey had been in the past around the 40% range and it seem like they get downprobably a little bit below last quarter of that 40% range. Do you see themkind of going back or stabilizing in that low 40% or up 40% this quarter andthen heading into next year or maybe just give some direction on that if youcan?

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 wedon’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] withBear Stearns. Go ahead.

Unidentified Analyst

Yeah, hi, it's actually Bob. I got one question for youguys. On your press release, you talk about the camera phone. The curious thingand you don’t mentioned, who it is, but the thing I'm wondering is, have if youwere going to guess, are you saying that you're going to be on $5 million unitsnext year of this one guy or is there a chance for you to be on more than $5million units next year? And that’s one question. And then, I won’t come backto 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 thisparticular first few customer, if this customer is successful with the numberof companies that have or provider that have endorsed the phone, we hope toramp 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 thisaward, 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 overallmarket 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 youget 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 areleveraging all our experience of many years and the market position in thecamera market and now we are moving it into the cell phone market, and believethat in terms of camera features and quality, it's better than what we haveseen.

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

In terms of the market that we are addressing, we are nottargeting every cell phone in the world that has a camera in it. We are morefocusing on the….

Unidentified Analyst

High-end?

Levy Gerzberg

I would say it's a mid range, it’s a high-end in terms ofthe 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 thatmarket was about $100 million units, again the segment that we're going afterlet me check, actually it’s a little more than that. It's about 150 millionunits and growing up to several hundred million units because eventually when you'llhave the choice to buy a 5 mega or 8 mega camera cell phone even if you willnot use it, you will buy the high resolution.

Unidentified Analyst

All right.

Levy Gerzberg

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

Unidentified Analyst

So, Levy, you are saying you're targeting 100 million cellphones, 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 iscoming 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 withWedbush. Go ahead.

Steven Clark -Wedbush

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

Levy Gerzberg

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

Steven Clark -Wedbush

DVD.

Levy Gerzberg

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

Steven Clark -Wedbush

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

Levy Gerzberg

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

Steven Clark -Wedbush

Okay, thank you.

Operator

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

Vijay Rakesh -Oppenheimer

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

Levy Gerzberg

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

Vijay Rakesh -Oppenheimer

Okay. So, here kind of up 35% is basically, I mean just onetime 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 livewith that movement.

Vijay Rakesh -Oppenheimer

Okay.

Karl Schneider

All in all, the trend is up and this why we are in thismarket, and with so many new applications you can imagine that some people willprint directly from their cellphone to the printer; there is new softwarecoming out, like the new XPS that -- for which we have a number of good largelicenses, and there are more applications like wireless printers. So, it willcontinue to grow.

Vijay Rakesh -Oppenheimer

Got it. And I probably missed this on the tax rate line, itlooks like your tax rate went from 19% in Q2 to 12% in Q3. What is the tax ratein 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 youmentioned 70-30 split between TV and setup box in Q3. Is that kind of where itwas 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 sessiontoday. 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'revery pleased with our results for the third quarter and believe we arewell-positioned in each of our core markets for continued success. And we willbe presenting at several conferences in the coming months and we are lookingforward 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 intoday's conference. That does conclude the presentation. You may disconnect.Have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of 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.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!