Genesis Microchip F2Q08 (Qtr End 9/30/07) Earnings Call Transcript

Nov. 1.07 | About: Genesis Microchip (GNSS)

Genesis Microchip Inc. (GNSS) F2Q08 (Qtr End 9/30/07) EarningsCall November 1, 2007 5:30 PM ET

Executives

Pam Goncalves - Senior Directorof Investor and Corporate Communications

Elias Antoun - President and CEO

Analysts

Jay Srivatsa - Roth CapitalPartners

Heidi Poon -Thomas Weisel Partners

Daniel Gelbtuch - CIBC

Mahesh Sanganeria - RBC CapitalMarkets

Quinn Bolton - Needham

Steve Park - Wedbush MorganSecurities

Tayyib Shah - Longbow Research

Adam Benjamin - Jefferies

Operator

Good afternoon. Welcome toGenesis Microchip's Second Quarter Earnings Call. Today's call is beingrecorded and is copyrighted property of Genesis Microchip. Any rebroadcast ofthis information in whole or in part without the prior written permission ofGenesis Microchip is prohibited. We will be conducting a question-and-answersession at the end of today's Company's prepared remarks.

At this time I would like to turnthe call over to Pam Goncalves, Senior Director of Investor and CorporateCommunications. Please, go ahead, ma'am.

Pam Goncalves

Good afternoon, everyone andthank you for joining us. With me today are Elias Antoun, President and CEO,Hildy Shandell, Senior Vice President of Corporate Development, and LindaMillage, Principal Accounting Officer.

Today's discussion containsforward-looking statements, including, without limitations, forward-lookingstatements regarding the company's revenues, gross margins, operating expenses,ASPs, unit shipments, inventory levels, new products and design wins,production schedule, profitability, market share and new market. Theforward-looking statements are subject to risks and uncertainties that couldcause actual results to differ materially from those projected. Those risks anduncertainties include, our ability to gain and maintain design wins, and rampnew products into volume production on schedule, changes in expected productcost and manufacturing yields, changes in our expected operating expenses,seasonal consumer demand for flat-panel TV and Monitor products into which ourproducts are incorporated, growth rates of the TV market and the market forDisplayPort products, our customers share those markets, and successive ourcustomers products into which we’re designed. Changes in the mix and pricing ofour products sold, and our inventory levels and customers inventory levels ofour products.

Other risk factors are listed intoday's press release and the company's SEC reports, including but not limitedto the company's annual report on Form 10-KA for the fiscal year ended March31st, 2007, and the 10-Q for the quarter ended June 30th, 2007. Theforward-looking statements made today are the company's targets and notpredictions of actual performance. In the past the company's performance has deviatedfrom its target as of the beginning of a quarter.

Participants are cautioned not toplace undue reliance on these forward-looking statements which speak only as oftoday's date. The company does not undertake to publicly update or revise theseforward-looking statements even if experience or future changes make it clearthat any projected results expressed or implied in this discussion will not berealized. Any statements made by persons outside the company speculating on theprogress of the quarter or other aspects of the company's business will not bebased on internal company information and should be assessed accordingly byinvestors.

During the call the company willrefer to both GAAP and non-GAAP financial information. A reconciliation of GAAPand non-GAAP results in accordance with the SEC's Regulation G is included intoday's press release which has been posted on the company's website.

Please note that an archivedversion of the broadcast will be available on the company‘s website at www.GNSS.comin the investor events and webcast section shortly after the conclusion of thecall. Additionally a replay of this conference call will be available through November 8th, 2007 bydialing 706-645-9291. The replay access code is 20136617.

And now I'd like to turn the callover to Elias.

Elias Antoun

Thank you, Pam. Good afternooneveryone and thank you for joining us today. I will first discuss the financialresults of the quarter, and then I will provide an update on our overallbusiness, followed by our guidance for our third quarter of fiscal 2008.

Revenues for the second quarterwere $57.5 million, representing an increase of 31% from the prior quarter andexceeding the far end of our guidance. Non-GAAP gross margins were 33.5%, adecrease from the previous quarter, which is largely attributable to write-offof mask sets which I will discuss in a moment.

Non- GAAP operating expenses werein line with our guidance at $25.2 million, and we recorded a non-GAAP loss of$0.12 per share.

Revenues from our TV controllerbusiness were $35.1 million, an increase of 55% from the prior quarter. Our TVcontroller business represented 61% of total revenues in the quarter. Shipmentsof flat panel TV controllers were 3.9 million units, an increase of 45% from theprior quarter. The increase in unit shipments was in line with expectations forstrong seasonal demand across most of our geographic markets.

Our Torino solution ramps up atall four of our Tier-1 OEMs and at our lead customer in China. We also experiencedparticularly strong shipment for Cortez Plus and Cortez Lite. ASPs in our TVcontroller business increased 9% primarily attributable to a more favorableproduct mix.

Revenues from our monitorcontroller business were $22.4 million and increase of 5% from the priorquarter. Unit shipments of monitor controllers were 10.9 million units, whichrepresented an increase of 10% from the prior quarter. LCD monitor controllerASPs decreased by 5% in this quarter, attributable to a lower price productmix.

GAAP gross margins were 33.1% inthe September quarter, down from 38.5% for the June quarter. Non-GAAP grossmargins, which exclude stock based compensation charges were 33.5% down from38.9% in the last quarter.

During the September quarter weassessed our design win and engineering support activities for our Chaplin andDouglas products and decided to migrate all our HDTV customers to the Douglas platform. As a result we were off the class ofthe Chaplin mask sets and related inventory. The impact of the write-off on ourgross margin for the September quarter was 3.5%, which brought us to the lowend of our non-GAAP guidance of 37%.

GAAP operating expenses were$28.5 million in the September quarter. This includes approximately $3.3million in stock based compensation charges and amortization of certainintangible assets. Non-GAAP operating expenses were $25.2 million in theSeptember quarter.

Our GAAP net loss for the quarterwas $16.8 million for a loss of $0.45 per share this includes an $8.7 millionor $0.23 per share impact from the markdown on the value of the company'sinvestment in Mobilygen. Our Non-GAAP net loss for the quarter was $4.6 millionor a loss of $0.12 per share of which $0.05 per share relates to the write-offof the mask sets and related inventory.

On our balance sheet cash andshort-term investments decreased by $3.6 million to $182.8 million. We endedthe September quarter with inventories of $14.9 million, which represents anincrease of $2.5 million from the June quarter. Our inventory levels equate toapproximately 5.1 weeks of revenue. We expect inventory to increase at the endof the December quarter, as our new products ramp into production.

Trade accounts receivableincreased to $30.2 million, reflecting the increase in revenue during thequarter. Day sales outstanding were 48 days for the quarter as compared to 47days in the prior quarter.

I will now address other keyparts of our business. Our HDTV design win activity has acceleratedsignificantly since sampling our Douglas solutionin August. The Douglas feature set positionsGenesis very well for opportunities that value image quality and flexibility inplatform design.

While Douglasis targeted at primarily at the European DVB-T and the emerging China DMB-Tmarkets, we’re now also seeing increasing opportunities amongst Tier-1 TV OEMsin U.S. ATSC market

We are on schedule to take ourtwo early access Tier-1 TV OEMs to production with Douglas.In addition, we've added a third Tier-1 design win for Douglasand expect to close on the fourth Tier-1 OEM in the near future.

Lastly, we have migrated severalChaplin design wins in Chinato Douglas. All of which are expected to rampinto volume production during the first half of our fiscal 2009.

Recently, we are seeing a strongerdesire by Tier-1 TV OEMs to refocus on differentiating their systems on thebasis of improved video and audio quality, as well as innovative industrialdesigns.

Several Tier-1 OEMs are lookingfor solutions that enable worldwide platform development that will allow themto optimize their development resources. Douglasis well positioned to meet these requirements. And integrates the latestFaroudja video processing technology and integrated audio decoder that providessupport for worldwide standards and enables OEMs to port their own audioalgorithms without increasing their bill of materials cost.

Finally, Douglas enables the mostefficient platform development at a competitive bill of materials for theEuropean, Chinaand US markets for WXGA and 1080p resolutions.

We also recently demonstrated ournewest analog TV controller called name Sequoia at the Ceatec Show in Japan.Sequoia is schedule to go to production with a leading TV OEM in the DecemberQuarter. Sequoia is single chip analog TV controller that combines the samevideo and audio feature set as Douglas withoutthe digital TV functionality.

At Ceatec, we also demonstratedthe latest version of our MCTi solution. Customer reaction was extremelypositive. We are on track to ship our MCTi product in the second half ofcalendar 2008.

It is worth noting that Genesis MCTitechnology is a comprehensive solution designed to solve all aspects of motionestimation, motion compensation or MEMC. While current competitive solutions inthe market deal primarily and some times exclusively with the frame rateconversion from 50Htz and 60Htz to 100Htz and 120Htz. Genesis MCTi solution notonly support frame rate conversion, but also motion blurry reduction and film[each other] removal.

I would like to also update youon our DisplayPort progress. We are on schedule to bring our lead PC OEMinitial platforms into production during the December quarter.

In September, we demonstrated ourDisplayPort solution, with a prototype monitor from Dell, at the Inteldevelopers' forum. The demonstration was powered by an Intel CPU with anintegrated DisplayPort transmitter, communicating directly with the Dellmonitor that has a Genesis DisplayPort receiver.

We are aggressively expanding ourDisplayPort product roadmap. We will soon sample to panel vendors our firstproduct for the entry level direct drive monitor segment.

In addition, we are indevelopment with new products for the notebook segment of the PC industry. Thatwill address both the internal motherboard to panel connection, as well as theexternal connection from the notebook to the LCD monitor.

Further, we are making steadyprogress in introducing DisplayPort into flat-panel TV’s. We’re gainingtraction with some leading TV OEM’s who are contemplating the development oftwo box TV platforms, where the display will deliver the highest image qualityand most of the rest of the functionality is embedded in a separate box, withsingle DisplayPort cable connecting the display and the box. This strategy willgive vertically integrated TV OEM’s increased flexibility in their systemarchitecture.

We can already serve this marketwith our current DisplayPort transmitter/receiver solution. And we’restrategically embedding DisplayPort IP into our TV solutions going forward.

Finally, and in reference to myearlier comments with regards to innovative industrial design, the main themeof this years Ceatec show in Japan was the introduction of ultra-thin TV’s bymost Japanese OEMs. DisplayPort technology is a great fit for the very highbandwidth and simplified connectivity requirements in these TV’s.

On the organizational front, I amvery pleased to be adding two new members to the company's executive managementteam.

Robert Haefling joins us today asa Senior Vice President and General Manager of the DisplayPort MonitorBusiness. Recently, we merged our monitor product roadmap into the DisplayPortroadmap based on the advantages provided by DisplayPort to the LCD monitorspace. All of Genesis future LCD monitor controllers will integrate DisplayPorttechnology and the company is no longer developing LCD monitor controllerswithout DisplayPort.

In addition our DisplayPort roadmap now encompasses the notebook PC market, as well as a wide range of otherpotential connectivity markets.

Robert who will be responsiblefor driving our DisplayPort strategy and its implementation, was more recentlyCEO of Meridian Audio, a strategic partner of Genesis.

Prior to joining Meridian, Robert spent acombine eight years at Genesis in various management roles and brings with himan in-depth understanding of the company and our end markets. I’m also veryhappy to announce that Rick Martig will join Genesis on November 5th as thecompany’s new Chief Financial Officer, and Senior Vice President of finance.

Rick posses more than 20 years offinance and financial management expertise, the last 12 of which were at XilinxCorporation, one of the premier fables Semiconductor Company in Silicon Valley.

During it's tenure at Xilinx,Rick, progress through a variety of manageable roles in operations and businessunit controller ship, financial planning and analysis, accounting, external andinternal reporting, and SOX 404 compliance.

Most recently at Xilinx, he wasSenior Director of Corporate Finance, in his role as Genesis CFO, Rick willresume responsibility for all of the company’s finance functions, as well asthe IT and facilities groups.

The management team and I areexcited about the additions of Robert and Rick, and look forward to workingwith them to execute on our goals of returning the company to profitability anda leadership position in all our markets.

I will now address our guidancefor our third quarter of fiscal 2008. We expect revenues for the Decemberquarter to be in the range of $49 to $54 million. We expect unit shipments offlat panel TV controllers to be down 10% from the September quarter, which isin line with the expected seasonality. Flat panel TV controller ASP’s areexpected to decrease by approximately 10%. We expect unit shipments of LCDmonitor controllers to be flat and ASP's for LCD monitors controllers todecrease by approximately 5%.

We expect GAAP and non-GAAP grossmargins to be in the range of 34% to 36%. We expect our gross margins will beunder pressure during this quarter and next quarter. The initial productionramp for some of our design wins is in WXGA display resolutions, where ouraverage selling prices are lower.

We expect average selling pricesto improve, as you customers ramp up their 1080p flat panel TV platforms. Inaddition, we expect to incur, some additional costs related to our new productdesign wins, in order to, adequately support our customer's volume productionschedules.

As I mentioned earlier, we expectthese factors to affect our margins for the third and fourth quarters of fiscal2008. We estimate that our total GAAP based operating expenses will range from$28.5 million to $30 million. This estimate includes approximately $3.5 millionof stock based compensation and the amortization of certain intangible assets.

Non-GAAP operating expenses areexpected to be between $25 million and $26.5 million. We are accelerating someinvestments in HDTV and DisplayPort product development and customer support,in order to ensure a successful and timely execution to our customer schedules.While we still manage our operating expenses closely.

In summary, we are makingsignificant progress with Douglas andexpanding our HDTV design win and opportunities. As DisplayPort industryadoption and momentum are accelerating. We have seen greater than anticipatedcustomer demand for multiple DisplayPort platforms that we expect will enablesus to gain market share in the LCD monitor market and expand into new marketsfor Genesis.

Finally I am delighted that wehave filled some critical executive management positions to help drive thisexecution. With that let me turn the call over to the operator for questions,operator.

Question-and-Answer Session

Operator

(Operator Instructions) And yourfirst question comes from the line of Jay Srivatsa with Roth Capital Partners.

Jay Srivatsa - Roth Capital Partners

Thanks for taking my questions.Just a couple of questions. Elias, you look ahead beyond December quarter, whatkind of run rate do you think you need hit to breakeven?

Elias Antoun

Jay, well first good afternoon,our goal is still to try to get to breakeven at the $65 million revenue runrate and we’re going to be a little bit behind in the December and the Marchquarter. But our goal is to try to get the $65 million revenue and breakeven atthat level.

Jay Srivatsa - Roth Capital Partners

Okay, second thing has to do withthe end markets, one of your competitors made a comment that there seems to bea shift in TV sales to kind of the mid to low end as supposed to the high endof the TV market. What are you hearing from your customers in terms of thattrend?

Elias Antoun

Jay, what I don’t want to do ischaracterize the shift to low end versus high end. What we’re seeing--first we sawa bifurcation between WXGA and 1080p, probably 10 months ago, and in theprocess of upgrading Chaplin to Douglas we tried to take care of that, and wethink that's part of the reason we're seeing increased opportunities for Douglas.

Having said that, we are sensingvery possibly that the Tier-1 OEMs which, for all intents and purposes, are thekey focus. The Tier-1 OEM have learned from one design cycle that they cannotcompete purely on pricing and cost and they are cycling back to focusing onvideo quality and audio quality, and to the extent that we can bring that tothem across there portfolio meaning WXGA and 1080p up and down we believe thatactually the markets from a Tier-1 perspective its shifting in that direction.

Jay Srivatsa - Roth Capital Partners

Okay. Last question. In terms ofyour hiring, where are you in terms of filling some of the positions that havebeen opened up due to the departures are you done or do you foresee yourselfhiring a few more key hires, where you added that?

Elias Antoun

So with the addition of Robertand Rick we have pretty much closed the requirements that we have at theexecutive ranks. We have a very solid and I am very happy to say low turnoverrate in the ranks just below the executive staff. Other than that we don’treally have issues. We have normal turnovers, but in general we are doing verywell and whenever we need to replace we are replacing, but with the addition ofRobert and Rick, I think we are doing pretty well.

Jay Srivatsa - Roth Capital Partners

Thanks, Elias. Good luck.

Elias Antoun

Thanks, Jay.

Operator

Your next question will come fromthe line of Heidi Poon with Thomas Weisel Partners

Heidi Poon -Thomas Weisel Partners

Hi guys. I just would like to geta little more color on the display port ramp. You mentioned that you will startshipping in the December quarter. When do you expect to ramp with othercustomers assuming that you have wins with other major tier OEMs.

Elias Antoun

Hi, Heidi. So our firstcustomers, first product will ramp in the later part of this quarter. Marchquarter will be probably our second customer and then we expect to see multipleplatforms with more customers starting to ramp in the second half calendar '08,basically in the July timeframe. We are also seeing an expansion in platformswith the customers that we already have on Board.

Heidi Poon -Thomas Weisel Partners

What is the expected margin andASP impact as you have more and more DisplayPort product for shipping?

Elias Antoun

We expect DisplayPort in generalto help margins to I guess create a positive impact on margins. But we expectthat to happen primarily in the second half of next year as the volume start tobe meaningful.

Heidi Poon -Thomas Weisel Partners

So, does that mean going back upto may be above 40 and low 40s range next year?

Elias Antoun

I am not able to answer that muchforward into the future Heidi but, again our expectations are to start creepingup and DisplayPort will be a contributor to that.

Heidi Poon -Thomas Weisel Partners

When you are looking at secondhalf '08 shipments these are wins that you already have, right?

Elias Antoun

So, on the upper right handcorner platforms, the platforms that are kind of on the higher end, these aredesign wins that we either already have or are pretty much coming in fairlyquickly as we speak. But we also expect to start ramping some volume with whatwe call the direct drive monitor, the entry level monitors. Those are designwins that we expect to close on in the beginning of calendar '08 and those tendto turn into production in the shorter cycle than the MFMs.

So, you will see a variety ofplatforms ramping into production in the second half of '08, some of which wehave the design wins today, some of which the design wins will be probablyclosed in January, February, and March.

Heidi Poon -Thomas Weisel Partners

Great. And also I would like toknow in term of your TV controllers are you pricing fairly aggressively toachieve the design wins that you've been able to achieve in WXGA or what do youexpect to do in the next few quarters, such that our gross margin will not beimpacted further?

Elias Antoun

Well, pricing to market Heidi.So, we’re clearly not -- what I believe, we’re clearly not more aggressive thanwhat the market is out there. The two quarter ahead that we’re talking about onthe gross margins right now are quite associated with some additional cost wereincurring in order to make sure we support our customers time to market, andthat’s kind of the best I can say right now. I think as we ramp up more andmore DTV platforms in the second half of the year, our ASPs should improve,gross margin we should start seeing a recovery. But it is really hard toforecast that far into the future. But again I would reiterate, we’re pricingto market.

Heidi Poon -Thomas Weisel Partners

Okay great and follow on may bejust on OpEx so should we expect the OpEx to go back to maybe $24 million to$25 million non-GAAP level after these two quarters. But do the additionalexpenditures for supporting this customer’s ramp?

Elias Antoun

The best guidance I can give youin OpEx right now is what we have in the December quarter.

Heidi Poon -Thomas Weisel Partners

Okay, great. Thank you.

Elias Antoun

Thank you

Operator

Your next question will come fromthe line of Daniel Gelbtuch with CIBC.

Daniel Gelbtuch - CIBC

Just wanted to get someinformations and color about your TV roadmap, I guess with Douglasand beyond. Is there any plans to demand and number two, does integration of HDMIwould be and there is new products like HR264 et cetera is that in your roadmap right now?

Elias Antoun

Yes, Daniel. Let me answer itsystematically. So, we already have launched the development of our nextgeneration single chip HDTV solution. And it is targeted again to be asflexible as possible for our customers design capabilities, I can say thatwe’ll be integrating HD H.264 we’re considering demand integration that’s notyet final it's still early for us, we still have some time to make that decision.And also I would like to circle back and say that we already have a HDMI1.3integrated in our Sequoia and Douglassolution. So, for us that would be just the second generation of HDMI1.3.

Daniel Gelbtuch - CIBC

Okay. And as far as you mentionedthat you already have two Tier-1 OEMs and then you are about to add two others,when you say two others you’re adding does that include ODM based wins or isthat direct OEM?

Elias Antoun

Two others we are talking aboutour direct OEM additions.

Daniel Gelbtuch - CIBC

Thank you.

Daniel Gelbtuch - CIBC

Thank you.

Operator

Your next question will come fromthe line of Mahesh Sanganeria with RBC Capital Markets.

Mahesh Sanganeria - RBC Capital Markets

Thank you. Elias, just tocontinue on that, can you give a little bit more color on your Douglas, did yousay that you have four design wins at four Tier-1 customers?

Elias Antoun

No, let me reiterate, Mahesh. Wehave two design wins at Tier-1 customers. We have one more design win, so wehave two design wins at Tier-1 customers that will ramp in to production in theshort-term. We have a new design win a third one at a Tier-1 customer and thenwe expect to close on a fourth design win at a Tier-1 customer, directengagements in the near future. And then we have migrated three design wins in China from Chaplin to Douglas.

Mahesh Sanganeria - RBC Capital Markets

So, total Douglasyou have potential going into '08 may be at least seven or eight customersramping?

Elias Antoun

May be, up to seven at the...

Mahesh Sanganeria - RBC Capital Markets

Okay, right. So and these are canyou give us an idea of four Tier-1, is that all targeted to Europemarket or they are going in multiple markets. I think you made some comment canyou go over that one?

Elias Antoun

Yes, our first two Tier-1 OEM'sare targeted for the European market. The next two Tier-1 OEM's the one thatwe've already locked up if targeted for the U.S. ATSC market and then thefourth one which is again stealing discussion. Hopefully, we can close on thatin the near future. From what we can tell right now is targeted for the U.S.ATSC market.

Mahesh Sanganeria - RBC Capital Markets

So, that is a part, which is veryinteresting because I think last discussions. We have had or you have talkedabout, you had kind of given up on U.S. market completely saying that it's amarket for low video quality, high screen size but low cost. But is there achange in the sentiment from TV OEM's that TV quality is becoming moreimportant in U.S.?

Elias Antoun

Yeah, so that’s what I tried toallude to in the script that we’re sensing from the Tier-1's that theiropportunity to differentiate really lies with video quality and audio qualityand display technology. And we’re sensing that the Tier-1's are coming backacross the board and want to put solutions that are competitive from a bondperspective, but deliver quality above all. So in the last I would say six toeight weeks we have experienced interest in Douglasfor the U.S. ATSC market that we did not anticipate 10 to the 14 weeks ago.

Mahesh Sanganeria - RBC Capital Markets

Okay that makes a very clearthat’s very interesting. And can you give us which region this OEMs are Japan or Korea or…

Elias Antoun

It's really difficult for me toanswer this question right now Mahesh, until we feel a lot more comfortableabout how close we're to closing the deals.

Mahesh Sanganeria - RBC Capital Markets

Okay and then other thing youmade comment on that your inventories are going to go up in December quarter tosupport the ramp of at least some of these products. Can you elaborate a littlebit on that?

Elias Antoun

Yes again inventories will go upalthough we don’t except inventories in terms of numbers of week of inventorythat will go up dramatically. We’re moving into high value products if you willwe’re moving into 300 millimeters wafers, 110 nanometers that will be ramping Douglas and Sequoia. So the value of these things will behigher because we’re prepping for ramps up for Douglasand Sequoia and so you will see some inventory ramp by the end of the Decemberquarter.

Mahesh Sanganeria - RBC Capital Markets

Does this Douglasramp does that alter your seasonality a little bit for the first half of '08?

Elias Antoun

Yes. So the simple answer is yes.What we are hoping is that the drop of from December quarter to March quarterwill be slightly modulated mitigated. At this moment in time we don’texpect--we don’t know enough yet -- but we don’t expect that there will be asurge in revenue from December to March, but we expect that there will somemodulation due to the ramp up of Douglas and Sequoia.

Mahesh Sanganeria - RBC Capital Markets

Ok, thank you very much, that’svery helpful.

Elias Antoun

Thanks Mahesh.

Operator

Your next question will come fromthe line of Quinn Bolton with Needham.

Quinn Bolton - Needham

Hi Elias, I apologize because Imissed the first part of the call, but was wondering if you could just, you'dmentioned in prepared comments just before wrapping up that you guys haveprepared the Douglas DisplayPort WXGA and 1080p just kind of wondering if youcould expand on that point. Obviously you got different price points I thinkgoing into those two TV segments?

Elias Antoun

That’s correct. So thecapabilities of Douglas, Quinn are a super set. Basically the capabilities Douglas can deliver 1080p at a very, very competitivebond cost to the OEM's. As such the 1080p capabilities are super set of WXGA.We are at a slight bond disadvantage for a WXGA platform. However because of theimage quality and the enhancements we have made to Douglasin that area and the audio capabilities that it brings, because customers cansave on the audio functionality. We are seeing that customers are willing toundertake the slight bond disadvantage that's related to Douglasin return for enhanced image quality, enhanced audio quality, and a commonplatform.

Quinn Bolton - Needham& Company

So, you have Douglas and bothWXGA and 1080p sets you have a common platform and in the WXGA you might have aslight bond disadvantage, what do you think the OEMs will pay because of thesuperior video quality?

Elias Antoun

That's right. And then also weare pricing then to Douglas obviously wellslightly differently. We tend to take a little less for WXGA and little morefor 1080p and we try to balance it out.

Quinn Bolton - Needham& Company

Okay, great. And then you madesome comments about the DisplayPort, any sense you might give us where youthink it could be in terms of percent of monitor revenues by the end of 2008,is that 10% to 20% I don’t know if you --?

Elias Antoun

(inaudible) in monitor revenues.

Quinn Bolton - Needham& Company

Yeah.

Elias Antoun

It's really difficult to answerat this point Quinn, but let me just say it will be a substantial proportion ofour monitor revenues. I am not able to quantify that accurately right now.

Quinn Bolton - Needham& Company

So, substantial greater than 10%but little less than 50 or substantial meaning like the majority?

Elias Antoun

Don't corner me, but I will saygreater than 10%.

Quinn Bolton - Needham& Company

Okay, great. And then just lastlysounds like you've got with the ramp up of new products, you talked about thegross margin sort of trending little bit lower than you would like here in thenext couple of quarters but sounds like the DisplayPort ramping that shouldstart to drive margins higher, the monitor business as you come into the secondhalf, and I imagine if you get Douglas ramped to higher volume do you thinkthat also perhaps bring some margin recovery is that a good way to look at itbeyond the March quarter?

Elias Antoun

And the ramp of 1080p platformswith Sequoia, and so on. Yes.

Quinn Bolton - Needham& Company

Okay, great. Thank you.

Elias Antoun

Thank you.

Operator

Your next question will come fromthe line of Steve Park with Wedbush.

Steve Park - Wedbush Morgan Securities

Hi. Just have a quick questionregarding the gross margins, I know it’s right now right around kind of the 35%or is this something that cam get to 37% or 38% in the next quarters or so oris that more than it be by around 35-36%.

Elias Antoun

I will not categorically say yes,Steve. But our goal is to achieve breakeven at $65 million in revenue whichtranslates to 37% to 38% gross margin, of course, we would like to get betterthan that but our goal is to get there beyond the March quarter.

Steve Park - Wedbush Morgan Securities

Okay. Guarding kind of therevenue goal there is that something that you guys can hit over the next fiscalyear there or is that something out possibly?

Elias Antoun

I am not able to answer that atthis point.

Steve Park - Wedbush Morgan Securities

Just one last question, withDisplayPort ramping. Do you think there is going to be some OpEx increase afterDecember with the DisplayPort there by an when did you--?

Elias Antoun

The best guidance again I cangive is our December quarter OpEx that we have today, we continue to manageOpEx very closely, though we also need to make sure we invest in ensuring thatour customer succeeds, so that ultimately we succeed also.

Steve Park - Wedbush Morgan Securities

Okay. Great, thank you.

Elias Antoun

Thank you.

Operator

Your next question will come fromthe Tayyib Shah, with Longbow Research.

Tayyib Shah - Longbow Research

Hi guys.

Elias Antoun

Hi Tayyib

Tayyib Shah - Longbow Research

I would like to get some morecolor on the Douglas design win activity for2008 production. The traction with three Tier-1 customers, how many of thoseare top four TV OEM's globally?

Elias Antoun

Yeah. Definitely, Tier-1's andthey are in the top six or seven.

Tayyib Shah - Longbow Research

Okay. So, is there any one ofthem who is in the top four?

Elias Antoun

Absolutely.

Tayyib Shah - Longbow Research

Okay. And then most of thedesigns that you won are they mostly below 40 inch designs or are they abovethat range?

Elias Antoun

Our engagements with our top twoOEMs Tayyib are multi-platform engagements, which is why we support them acrossthe Board WXGA up to 1080p and our typical direct Tier-1 OEM engagementinvolves 32-inches all the way up to whatever size they want.

Tayyib Shah - Longbow Research

Okay. And how fragmented is themarket for Douglas right now at the top OEM?Do you expect most of them to use multiple DTV chip vendors next year? Andthen, aggressive price competition between those competitors or is it going tobe just one dominant supplier for each top OEM?

Elias Antoun

That strategy variescustomer-to-customer. We engage with customer that want to select one strategicpartner and do all their work with them and that’s actually, a significant partof our business, and then we deal with customers who want to put two or threesuppliers up against each other and then see who comes out and typically we trynot to engage at that level.

Tayyib Shah - Longbow Research

Okay

Elias Antoun

But it varies, that strategyvaries customer-to-customer.

Tayyib Shah - Longbow Research

And finally, if you do a get thefour top tier design wins that you’re targeting, any thoughts on where yourshare of the DTV market can be next year?

Elias Antoun

I cannot answer that questiondirectly, it will still be relatively small, first of all it will be increasingdramatically, but hopefully by calendar '09 we will be one of the top three orfour suppliers in the DTV market, that our goal is to be one of the top threeor four suppliers in that market.

Mahesh Sanganeria - RBC Capital Markets

Okay, so basically we have torely on the next years design cycle to get more share in that phase?

Elias Antoun

That's correct.

Mahesh Sanganeria - RBC Capital Markets

Okay thank you

Elias Antoun

Then I would like to emphasizethat ramping up our customers with Douglas at this time of the year positions Douglas quite well for next years design cycle.

Mahesh Sanganeria - RBC Capital Markets

Thank you

Elias Antoun

Thank you

Operator

Your next question will come fromthe line Adam Benjamin with Jefferies

Adam Benjamin - Jefferies

Thanks guys, first just to drilldown a little bit more Ely, on these wins that you have with Douglas.Are those wins with existing TV customers that you are shipping to today or arethey new customers?

Elias Antoun

Two wins are with existingcustomers, which we talked about last earning call. One win, is with a customerthat we have done some TV business with but we have never done DTV businesswith and then the last one would be with a totally new customer. That one isnot closed yet.

Adam Benjamin - Jefferies

Okay.

Elias Antoun

We still have work to do.

Adam Benjamin - Jefferies

Thanks. With respect to Chaplin,can you just go through what was the change there in terms of moving to Douglasfrom Chaplin and why it appears that some of your customers weren't takingChaplin and now they are moving more aggressively or you are moving them towardDouglas?

Elias Antoun

Just to put things in context, Douglas sampled in August and we had already committed itto two customers. At that point in time, we felt that's about the limit of ourbandwidth to support early access Tier-1 OEM's. In the meantime, we hadgarnered some Chaplin design wins that required a different kind of support.But as our progress with Douglas really accelerated -- this is again we'retalking about less than three months, the quality of Douglas, the execution onDouglas, and ramping up our capabilities there started to out pace Chaplin, andthe increasing opportunities for Douglas we had to face a decision of do youwant to support two products or are we better off supporting one product andbiting the bullet on the other one and that’s a decision we made.

Adam Benjamin - Jefferies

Okay and just a follow upquestion. Ely, you used some terminology regarding the March quarter modulationand I wasn't quite sure what you meant. Were you talking about more moderateseasonal decline in the March quarter than in past, is that what you werereferring to?

Elias Antoun

That's right.

Adam Benjamin - Jefferies

Okay and was that for the totalbusiness or was that just referring to specifically the TV business?

Elias Antoun

Well it's for the total businessAdam, but the TV business is the one that causes the biggest impact, becausethe September quarter is heavily dominated by Christmas shipments. The Decemberquarter has still some impact before the Christmas shipments and then someimpact for Chinabecause typically the New Year is in February. But by the March quarter all ofthat is gone and seasonal it's quite down from that perspective. Now themodulation comes from the fact that we'll be ramping up DTV platforms thatuntil now the company has not had, so that would help a little bit.

Adam Benjamin - Jefferies

Okay so in March, just to definemodulation you’ve historically last couple of years has been down about 25%,some seasonality for consumers down 10%. Is it somewhere in the middle there orclose to towards the 10?

Elias Antoun

I am not able to give youguidance that forward in the future, Adam at this point to that specificity.

Adam Benjamin - Jefferies

Okay. But I am in right ballpart?

Elias Antoun

Still to not answer that, I thinkyou are thinking correctly, but I cannot answer that to that specificity.

Adam Benjamin - Jefferies

All right. And then just one lastquestion, you talked about the break even point is 65 million, 37% to 38% grossmargin, in terms of timing there, is that something that you are not willingcommit on but is that something that your goal is to achieve in calendar year'08?

Elias Antoun

Our goal is to achieve this asquickly as possible that’s the best I can say, right now.

Adam Benjamin - Jefferies

Good answer, Elias

Elias Antoun

Thanks.

Adam Benjamin - Jefferies

Thanks. That’s all I have.

Operator

(Operator Instructions). We havea follow-up question from the line Mahesh Sanganeria with RBC Capital Markets

Mahesh Sanganeria - RBC Capital Markets

Elias, just some moreclarification on that modulation term. If I look at historically from yourperspective, I can come up with any consistent answer but I would say 10% downis a more seasonal I would think the average seasonal 10% down is that correct?

Elias Antoun

Mahesh, it's actually my inpre-March quarters here, I have seen it vary. So, it's very hard for me answerthat question.

Mahesh Sanganeria - RBC Capital Markets

Okay.

Elias Antoun

This is quite different in thethree data points that I have.

Mahesh Sanganeria - RBC Capital Markets

Well, but the last time was thisMarch was unusual because you were ramping down Philips is that fair to say?

Elias Antoun

Certainly Philips had an impacton module 7 results, yes.

Mahesh Sanganeria - RBC Capital Markets

Okay. All right. I will give up.

Elias Antoun

Thanks Mahesh. What I've justlearned is I should never use the world modulation again.

Operator

(Operator Instructions). And atthis time there are no further questions, I will turn the call back over to Ms.Goncalves for closing comments.

Pam Goncalves

Thanks again for joining ustoday. Please note that in November Genesis will be participating in road showswith RBC in New York and Longbow in San Francisco and Southern California.

At CES 2008 in Las Vegas, we will be hosting an investorevent on January 8th, as well as participating in Visa's DisplayPort pavilionevent from January 7th through January 10th.

As a reminder, a replay of theconference call will be available through November 8th. In addition, a copy oftoday's earnings release is available on the Company's website at www.gnss.com.This concludes today's conference call. Thank you.

Operator

Thank you. Ladies and gentlemanthis does conclude the Genesis Microchip's second quarter earnings conferencecall. You may now disconnect.

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