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Silicon Image, Inc. (NASDAQ:SIMG)

1Q 2012 Earnings Call

May 1, 2012 17:00 p.m. ET

Executives

Mike Bishop – Investor Relations

Camillo Martino - Chief Executive Officer

Noland Granberry – Chief Financial Officer

Analysts

Rajvindra Gill – Needham & Company

Richard Shannon – Craig Hallum

Christopher Longiaru – Sidoti & Company

Tom Sepenzis – ThinkEquity

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Silicon Image's First Quarter 2012 Earnings Call. (Operator instructions) As a reminder, this conference call is being recorded today, May 1, 2012. I would now like to turn the conference call over to Mike Bishop of Silicon Images, Investor Relations. Please go ahead, sir.

Mike Bishop

Thank you. Good afternoon, everyone, and welcome to Silicon Image’s First Quarter of 2012 Financial Results Conference Call. Joining me today is Camillo Martino, the Company's Chief Executive Officer, and Noland Granberry, the company's Chief Financial Officer. The agenda for today's call includes a discussion of the financial results and a product end-market update from Camillo. Noland will then provide a more indepth discussion of the financial results and provide a financial performance estimate for the second quarter of 2012. We will then open up the call for Q&A.

Silicon Image continues to report its product revenue in three categories; Consumer Electronics or CE, Mobile and PC. CE revenue consists of DTV and home theater products. The mobile category includes both mobile HDMI and MHL-enabled products. The PC product category includes PC and storage products. And IP revenue continues to be reported separately.

Before I turn the call over to Camillo, let me remind listeners that during the call we will be making forward-looking statments based on our current expectations regarding many aspects of our business and the markets in which we operate. Including but not limited to, forward-looking statements about our financial results and performance, our current and future products and technologies, the timing of new product introductions, average selling prices, design wins, market demand for our products, operating expenses and standards activities.

Our actual results may differ materially from our forward-looking statements and we disclaim any obligation to update any of our forward-looking statements. In addition, the company's forward-looking statements and the company's future results are subject to risks and uncertainties which we described in today's press release as well as in the most recent periodic reports on form 10-K and 10-Q filed with the SEC.

These documents contain certain relevant risk factors that could affect our future results. We've also provided a financial metrics table and reconciliation of non-GAAP financial information to GAAP information in our First Quarter 2012 Financial Results Press Release which is available on the Investors Relations section of our website at www.siliconimage.com.

And with that, I'd like to turn the call over to Camillo.

Camillo Martino

Thanks Mike. Good afternoon everyone and thank you for joining our First Quarter 2012 Earnings call today. First I'll give you a brief overview of the company's performance with a market update and then Noland will go through the numbers in more detail and provide our financial outlook for Q2.

Silicon Image again performed well in the quarter with revenue at the top end of the guidance range. Mobile continues to be the main driver for the quarter. And our IP revenue was above the guidance range accounting for 22% of the total revenue.

Total revenue was $55.0 million compared to $58.7 million for the fourth quarter of 2011 and $49.0 million for the first quarter of 2011, representing approximately 12% growth for the quarter year-on-year. You may recall that our CE revenue in Q1 2011 turned out to be unseasonably high, in retrospect and that the Japan earthquake in late March of last year, ended up being a catalyst for a fundamental shift for the CE industry and the CE business.

IP revenue was higher than our normal range of 15% to 20% due to continuing success of the HDMI ecosystem and seasonally lower product revenue. The higher IP revenue mix and stronger product gross margin lent to a stronger overall gross margin of 58.2%.

Our operating expense levels were somewhat higher than we had forecast primarily due to four reasons; firstly, increased marketing spending associated with MHL branding which we talked about last quarter. Secondly, R&D tape ad expenses. Thirdly, our MHL Automotive initiative which I will

discuss in a moment. And fourthly, higher than planned transition costs for our new R&D facility in India.

Noland will provide greater detail on our outlook of OP EX a little later.

This quarter's product revenue was primarily driven by mobile as the MHL standard is being adopted by many smartphone and table OEMs and we have achieved numerous design wins with our mobile product line. Starting with CES and continuing with Mobile World Congress we saw an increasing number of these product announcements. There are now a number of models from Samsung, HTC, LG, Wahway, plus Smartphones from Pantech, Mazoo, Lenovo and more and I am pleased that we have become a strategic supplier to many leading mobile phone manufacturers over the past 18 months.

MHL is also gaining traction on the T.V. and display side as well. Samsung, LG, Toshiba are shipping HD TVs with MHL, with Samsung also shipping computer monitors with MHL. Onkyo is shipping several MHL equipped AVRs and Sharp is shipping a Blue Ray recorder with this MHL technology. Pioneer announced their App Radio for aftermarket car applications which includes an MHL input port. At CES last quarter Roku announced their streaming SIC with MHL technology which plugs into a T.V. to provide streaming content.

With these diverse implementations we believe MHL technology is well on the way to becoming a broadly adapted connectivity standard. Many of these new smartphones announced this year at CES and Mobile World Congress are now starting to ramp into production. By the end of Q2 we expect to have better visibility into the total number of MHL enabled smartphones that will be shipped this year and we continue to believe we will meet or exceed our forecast that more than 100 million MHL enabled mobile devices will ship in2012.

To further expand the MHL Ecosystem we expect the standard to expand into areas that we had not anticipated at the outset of the standard. This expansion is a natural evolution due to the technology's intrinsic benefits. For instance, we are talking with the automobile industry about using MHL technology to integrate smartphones into automobile entertainment and navigation systems.

Due to the positive reception that MHL technology received at CES and Mobile World Congress, we decided to accelerate spending to support our automotive initiative. While the number of units is smaller relative to the size of the mobile device segment, we believe it is strategically important to the MHL ecosystem. We expect to see revenue from this initiative to start in 2014.

We also believe another potential application for MHL technology is enabling cost effective, smart phone based computing in developing countries. Smart phones have become powerful computers you can carry in your pocket, and for the first time these smart phones are bringing Internet connectivity to developing countries where land lines are not common. Since most people already have a TV, it makes sense to connect the TV to an inexpensive MHL equipped keyboard, and smart phones to deliver an Internet computing experience. We have demonstrated this scenario to strategic customers who are focused on the India and China markets, and they are further exploring this potential.

Moving onto our CE business. Our consumer electronics business faced continuing challenges in the quarter, as our CE revenue was less than expected. The comparison versus last quarter shows a revenue decline of approximately 17%. Many of the industry's tier one TV manufacturers continue to lose billions of dollars, reflecting that the TV industry still has not stabilized. As these CE companies address their business challenges, we believe this will continue to impact our CE outlook for the year. We expect our CE revenues will stabilize in 2013 due to a number of industry and product developments, including our unique Instapreview technology, the investments we have made in the home theater product line and the potential for new MHL and HDMI specifications.

Silicon Image chairs both the HDMI Forum's Board of Directors and the technical working group that contributes to the development of a new HDMI specification. In addition, Silicon Image's subsidiary, HDMI Licensing, LLC, continues to act as an agent for the HDMI consortium and supports the HDMI Forum. We are pleased with the progress made by the HDMI Forum that was formed in October of 2011 to develop future versions of the HDMI specification. To date, the HDMI Forum membership has grown to 59 members who represent leading companies from the consumer electronics, computer, and semiconductor industries.

Moving onto wireless now. Our wireless technology continues to make progress in accordance with our plan. Our second generation products are currently in the market, and we are now sampling our third generation products aimed mainly at the CE, PC, projector, and tablet markets. As we have previously stated, the most significant opportunity for 60 gigahertz, low latency gigabit wireless video technology will be in the mobile space, which will require a small phone factor and a low power consumption. We are currently developing a product to address this market and are on track to provide samples to a key mobile customer towards the end of this year. We expect to see revenue from this mobile-specific solution starting in the second half of 2013.

Finally, as we announced earlier, the board of directors has authorized a $50 million repurchase program where, from time to time, as market conditions warrant, we may acquire our common stock to partially offset the dilutive impact of our equity incentive and employee stock purchase plans. We believe this action demonstrates our commitment to our shareholders and our confidence in our business going forward.

Overall, Silicon Image performed well in what is our seasonally weakest quarter. Looking forward, we continue to execute on our plan to expand the MHL ecosystem, to develop our 60GHz low latency gigabit wireless video solutions and also to stabilize our CE business. We believe we will grow our top line revenue by approximately 20% this year, year on year, even factoring lower outlook for our CE business. Nolan will provide the guidance for Q2 in his prepared remarks. Noland?

Noland Granberry

Thanks, Camillo. Good afternoon. I will provide you with a review of our quarterly financial results for the first quarter of 2012, as well as our financial performance estimates for the second quarter. I will then open it up for questions. Unless otherwise indicated, gross margin, expenses, and earning related items are reported on a non-GAAP basis which excludes stock based compensation expense, amortization of intangible assets, restructuring charges, impairment of intangible assets, and other non-recurring expenses. Our GAAP financial results and a reconciliation of non-gap measures referenced in today's call are available on the investor relations page of our website, www.siliconimage.com

Our revenue performance for the first quarter of 2012 was at the high end of our guidance range, totaling $55 million. This was sequentially down from Q4 of 2011 by approximately 6% and up year over year by approximately 12%. Our product revenue totaled R43 million, representing 78.2% of the total revenue versus R45 million, or 76.7% of total revenue for Q4 of 2011 and $38.1 million, or 77.7% for Q1 of 2011.

Our mobile revenue totaled over $22 million, approximately 52% of total product revenue, growing over 5% sequentially from $21.1 million in Q4 2011, and over $260 million from $6.2 million in Q1 2011.

While the first quarter is typically the seasonally lowest quarter, we were happy to see the sequential growth for mobile. Our CE revenues totaled $16.5 million, down approximately 17% sequentially and approximately 37% from the prior year.

Our DTV business continues to face challenges and our current outlook suggests that our CE revenue will be softer than originally anticipated and we now expect it to be down 15% to 20% year-over-year. Our updated outlook is the result of continued decline in the higher-end DTV business.

Our PC revenue totaled $4.3 million representing approximately 10% of our total product revenue. Our PC revenue declined approximately 6% from Q4 2011, approximately 24% from Q1 2011 both in line with expectations.

While we continue to see some design wins from our legacy parts, we do anticipate that our PC revenues from our legacy products will continue to trend down in the future.

Our blended ASP was $1.11 versus $1.21 for Q4 2011 and $1.28 for Q1 2011. The lower ASP reflects the increasing mix of our mobile revenue which carry a lower ASP.

Our IP business continued to show strength primarily from royalties during the quarter totaling $12 million or 21.8% of total revenue. As we have noted previously, our product revenue is generally seasonally lower in the first quarter of the year and as a result our IP revenue mix exceeded our 15% to 20% range. We anticipate that our IP revenue will return to that range in the second quarter.

Our gross margin was 58.2% as compared to 61% Q4 2011 and 59% for Q1 2011. Our margin performance exceeded our expectations as a result of our IP revenue mix and our higher than anticipated product margin.

Product gross margins were 46.8% as compared to 49.5% for Q4 2011 and 48.3% in Q1 2011. Despite the challenges, we highlight our previously related yield issues for certain CE products and increased our costs associated with expediting product delivery, our product margin was better than anticipated. We expect our product margin to further improve in the second quarter.

Our IP gross margin was 995 as compared to 98.9% in Q4 2011 and 96.3% in Q1 2011.

Our operating expenses were $33.2 million and exceeded our guidance of approximately $32 million. The increased spend was primarily the result of MHL marketing expenses, R&D tape out expenses and acceleration of certain activities associated with our MHL automotive initiative.

In addition, we incurred higher than planned transition costs associated with the acquisition of the India R&D resources. Excluding the addition of 75 contractors located in India that were converted early in the quarter, our headcount remains flat. As we discussed the acquisition of the India R&D team is expected to lower our overall costs when compared to the carrying costs of these resources as contractors.

The current quarter's portion of the $3 million acquisition costs of these newly acquired employees total $1.5 million and is excluded from our non-GAAP results.

Stock-based compensation totaled $3.3 million compared to $1.9 million for both Q4, 2011 and Q1, 2011, respectively. The increase reflects the first quarter adjustment of forfeiture rates. Our non-GAAP tax rate was 30% for the quarter and was higher than our guidance of 22%. The increase in the rate reflects our updated expectations for net cash taxes to be paid for the current year which are primarily foreign income, foreign withholding taxes.

We are currently determining when to reinstate our global tax structure to provide enhanced tax benefits. When reinstated, we anticipate our tax rate percentage could be in the low 20s or high teens. On a GAAP basis, our net loss was $9.6 million or $.12 per share, as compared to our Q4 GAAP net loss of $10.2 million, $.12 per share.

For Q1, 2011, GAAP net loss, $0.8 million, or $0.01 per share. Our non-GAAP net loss was $0.8 million or $0.01 per share. Non-GAAP net income for 2011, $4.8 million or $.06 per diluted share. For Q1, 2011 our non-GAAP net income was $2.4 million or $0.03 per diluted share. Weighted average shares outstanding for Q1, 2012, Q4, 2011, Q1, 2011, were $82.7 million, $82.1 million and $78.7 million, respectively. Diluted weighted average shares outstanding was $83.8 million, as compared to $83.4 million for Q4, 2011, and $82.4 million for Q1, 2011.

The increase in shares, outstanding, was primarily due to shares issued in connection with prior year acquisitions, and incentive grants to employees.

Shifting to the balance sheet, cash and investments as of March 31, 2012, was $151.3 million versus $161.4 million at December 31, 2011, and $181.6 million at March 31, 2011. The lower cash balance primarily reflects investments related to long-term strategy, as well is the payment of $3 million for the acquisition of the India R&D resources.

Our accounts receivable totaled $37.3 million, 61 days sales outstanding, versus $27.4 million, or 42 days for Q4, 2011 and $26.8 million for 49 days in Q1, 2011.

The increase in our accounts receivable balance is primarily due to the timing of shipments during the quarter, as well as, the timing of the closing of certain IP agreements.

Our target ESO range is 50 to 55 days. Net inventory out of the March 31, 2012 with $12.2 million, which represents 7.5 turns on an annualized basis. This compares to $10.1 million for 9 turns at December 31, 2011 and $11.2 million or 7.1 turns at March 31, 2011.

Our inventory balances are in line with expectation, as we look to ramp in the second quarter.

Capital expenditures were $2.2 million, compared to $2.0 million for Q4, 2011 and $1.9 million for Q1 2011.

Our quarterly depreciation is approximately $1.6 million. This completes my summary of our financial results. Next I would like to discuss our financial outlook.

The following represents our financial outlook for the second quarter of 2012. Revenue $60-$62 million. Gross margin 57% to 58%. GAAP operating expenses approximately $36.5 million. Non-GAAP operating expenses approximately $32.5 million. Interest income approximately $0.5 million. Shares of loss from investment of approximately $0.5 million. Non-GAAP tax rate of approximately 30%. Q2 diluted shares off standing approximately $85 million.

As we have historically discussed, I wanted to provide some directional color to our Q3 outlook. Camillo noted in his prepared remarks that despite our CE outlook we will be able to grow out top line revenue by approximately 20% year-on-year.

Consistent without seasonal patterns we expect our Q3 product revenue to increase by more than 20% sequentially from Q2.

This concludes our remarks. Operator, we will now take questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Richard Shannon, please go ahead.

Richard Shannon - Craig Hallum

Gentleman, hi. How are you?

Noland Granberry

Pretty good.

Richard Shannon - Craig Hallum

Good. I guess, first question, just big picture on your guidance. The product is growing roughly 20%, or I guess maybe more in the second quarter. Just got that number here at the end here. I'm not sure, does that mean IP is going to be flat or could that actually row a little bit in the second quarter?

Noland Granberry

Alright now, our current outlook with that will be more flattest than much growth than for the IP side of things. So you're right.

Richard Shannon - Craig Hallum

Okay.

Noland Granberry

I think at the end of the day, we're looking for 20% year-on-year, of the 20% growth year-on-year for Q3, 20% from a product revenue standpoint.

Richard Shannon - Craig Hallum

Okay. Perfect. Then Noland, if you could can repeat the revenues for Mobile in the first quarter. It went by pretty quickly. I missed that number.

Noland Granberry

Oh, I'm sorry, 22.3.

Richard Shannon - Craig Hallum

22.3, Okay. Perfect. Great. Follow-up maybe, for committal on your comments regarding CE for 2013? You expressed some confidence in that will stabilize. Can you give a sense of where that confidence comes from?

The stabilization, that being flat, can it grow and is this based on some share gains, or can you just give us a sense of what you're thinking there for next year?

Noland Granberry

Well, we have to put it into context of what we're seeing in the last couple of years, right. I think when we say stabilize we're hoping that the revenue will do as much as what we're doing this year for CE business and so anything on top of that would be a bonus. So that's at the highest level, Richard, is how I would characterize it. Now remember the CE business has a few different factors. TV is just one component. We also have the home theater business in there as well.

And so you may recall, last year we made a small acquisition of Anchor Bay Technology and so some of those products are going to start hitting next year. So we expect the home theater portion of the revenue to start growing. In addition, we expect MHL is going to continue, the penetration in the TV, as well.

So when we talk about MHL, it's not just as a phone play but as the ecosystem starts to build out in the TV as well, that should be a catalyst to start seeing the TV side stabilizing or growing somewhat. So I think all together there are a few factors. And not to forget, there are a few specifications that we are anticipating as well. That was one of the comments I think I made, that both MHL and HDMI standards are expected to be refreshed before or by the end of the year.

So that potentially could be another catalyst for growth in 2013 and also in particular 2014. So when that standard is refreshed, that is the opportunity to stimulate some other revenue as well. There's a number of reasons. Probably, the other point that may not be so obviously to you, is wireless.

When we do our wireless, we spend a lot of time talking about wireless as it relates to a mobile platform, whether it be a tablet or a phone. However, there is the other side of that link, the other side of that ecosystem of the wireless is going to sit in the display itself. And if it's going to sit on the display, we would characterize that as part of our CE business as well. As the ecosystem starts to build out, later this year, next year, that is another catalyst for the CE category to start to grow.

Richard Shannon - Craig Hallum

Okay. Perfect, thanks for those thoughts there, Camillo. Maybe a multifaceted question on mobile, you expressed some confidence in meeting or exceeding your 100 million goal for smart phones this year. I think your comments said something about hoping to see some developments later this quarter might allow you to raise that and wanted to hear what those developments might be. And also, if you could weave in comments about a broadening base of MHL customers on the smartphone side and whether you expect to see any expanded contribution from operating systems other than Android?

Camillo Mantino

Sure. By the way, just on the last comment on the operating system, I was just reading a report, literally minutes before this call started that showed that Android was approximately 50% of the smartphone [inaudible] in the U.S. and even greater than that outside the U.S.

In the U.S and probably even greater outside of the U.S. and so I think that strategy is doing okay. Now regarding just penetration in Q2 specifically, at the end of the day I think Silicon Image probably has about 18 months or so of experience in mobile. So I think that comment is more based on what we observed last year, Q2, at exactly the same point in time.

If you look at the chronological order, in Q1 there were some announcements made, especially at the CES Show in January. Followed by the Mobile World Congress in Barcelona in February. And then after that, we started to see a ramp in Q2 and more of a definitive product plans, I would say, from our customer base towards the end of Q2.

So I think that's really what we're saying is that we expect the same pattern to occur this year. But at the end of the day, we've been doing business with mobile customers now for roughly 18 months, so we expect that pattern to continue.

Richard Shannon - Craig Hallum

Okay.

Camillo Martino

Does that make sense Richard?

Richard Shannon - Craig Hallum

Yes. That's very helpful, thank you. And maybe one last...

Camillo Martino

In addition to that, sorry. In addition to that, we do expect more customers to kick in. Of course, we have a handful I would say, of quite large customers but there are many more expected to deploy shortly.

Richard Shannon - Craig Hallum

Okay. My question is, it seems like you have one mobile customer who is a very strong portion of your mobile revenues. I'm wondering if we are going to see a percentage from the rest of the customers be a bigger piece of your pie, MHL and mobile pie in the second half of the year?

Camillo Martino

That would definitely be our expectation. We are working diligently to broaden customer base. I think I mentioned at least four or five in the prepared remarks and more others were mentioned that were coming. So it is true that we have one very large customer but we continue to broaden that base with the company names that I've listed in this call.

Richard Shannon - Craig Hallum

Okay. Fair enough. And then maybe one last quick question for me is for Noland. Regarding your tax structure and 30% tax rate here, I'm not sure what changed with your overall global tax structure and when we might see it come back down to that level. What was the cause for the higher tax rate for now and when might we see that come back down to 20% or lower level you mentioned in the prepared remarks?

Noland Granberry

So, Richard, this is related to our non-GAAP rate and as we talked about historically, that ties itself in our current tax situation where we have a valuation allowance position that we based on a cash basis. And when you look at the drivers for that, the main drivers for an income and foreign withholding, and it depends on the jurisdictions we expect that to come from, whether there is treaties in place, that there is zero rate or a lower rate.

As we did our analysis looking further out into the year, there was a shift in where we saw that mix and that was a primary driver, in addition to some additional withholding we expect, based on the level of royalty inputs that we're seeing. So, those are the two drivers.

We do look to see, by the end of the year, into the first part of next year, that we would be able to exit this valuation allowance position and get into a more normalized tax situation, and at that point in time, we will definitely look at re-engaging the global tax structure. As I highlighted in my prepared remarks, we do anticipate that that rate would come down to the low 20s or high teens, at that point in time, around that time.

Richard Shannon - Craig Hallum

Okay. Thanks for that update and I will jump into line guys. Thank you very much.

Camillo Mantino

Thank you, Rich.

Operator

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

Tom Sepenzis - ThinkEquity

Yes. Hey guys. Are you having any problems getting capacity, in particular for the MHL products, that is maybe slowing growth, there?

Camillo Mantino

I think we work very closely with our supply chain to make sure that our channel can be supported. There may be, time to time, that you see little hiccups here and there but, by and large, I think we don't see any challenges to that, at this point in time.

Tom Sepenzis - ThinkEquity

OK. So, you're not experiencing anything like what Qualcomm stated on their call with 28nm, in your product line?

Camillo Mantino

Qualcomm, if I remember correctly, in their announcement, were specifically referring to the 28 nm process. Our products are primarily, today, in the 130 nm and moving to 65 nm. That's the main difference between a predominantly digital IC versus what we have, more of a mixed signal complexity.

Tom Sepenzis - ThinkEquity

Good. And, Noland, could you just tell me what we should be looking for, in terms of amortization, going forward because that's had some pretty wild swings here?

Noland Granberry

If you look, we had about 500K, in the quarter, as well as there is the 1.5 million related to the India acquisition. There will be one more 1.5 million in the Q2 and then that goes away and then it's about a 500K run rate from there, based on what we have in place, now.

Tom Sepenzis - ThinkEquity

OK. Good. Just in terms of the CE business, a lot of the component suppliers are going into the display market, and some of the larger display companies have been talking about seeing an actual uptick in Q2 and your comments seem to go against that, in terms of what the rest of the market is expecting, in terms of volumes.

So, I'm just wondering, how confident are you that your business will actually see declines or . . . Or, what is it that you're seeing that's different from the panel makers and the component suppliers in the television market?

Camillo Mantino

Yes. That's a good question Tom. I think the message that I believe we have tried to communicate over the last few quarters regarding this is, the growth that you are seeing right now is more seen, I would say, in the value segment of the TV. That's where a lot of the growth is coming from in terms of just sheer volume.

Our products are more focused at the higher end of the segment, so although you're seeing a potential uptick in this value segment, we are not directly participating in that because our product base is more focused on the premium end of the segment. Does that make sense?

Tom Sepenzis - ThinkEquity

Yes. Okay. I guess, just a follow on to that then is what would the Consumer Electronics business on a unit basis have been down between December and March? Because you had, maybe, 2 TVs that had MHL at the beginning of the quarter and now there's about 30 that I've seen that are actually shipping with MHL. Am I correct in assuming that the unit volumes would have been down a lot more than 17% in Q1?

Camillo Martino

I'm not sure it's that easy to extrapolate that way. There was a decline as we talked about sequentially, there was a much bigger decline year-on-year as we talked about on the call. If you were familiar with us, exactly a year ago you may recall that Q1 of one year ago, was really, unseasonably or unusually high. And it was at the end of March where things started to change for us fundamentally.

So I think the number we mentioned this year, I think Noland specifically mentioned in his prepared remarks, but the CE business this year is expected to decline at least 15% and potentially up to 20% which is more I think that what we had expected. It is a disappointment, frankly. But it doesn't change our position.

One thing that's very important I think for all of us to understand, in order to drive a conductivity standard, and this is what we do as a company. This is what we do for a living, is drive conductivity standards and we do it very, very well. We have done it a number of times now and we are going to continue to repeat this model.

You need to participate in both ends of the ecosystem. You can't just play on the mobile side, you need to have a strategic location, a strategic position on the display side as well. And this is the reason why we are continuing to invest on the display side now. It's true perhaps our investments on the display side may be a little bit more moderate, a little bit more tempered now given the fact that we have seen a decline in our display, our CE revenue.

Nonetheless, having a strategic location, a strategic position on the display is very fundamental to our business model, our connectivity standards business model.

Tom Sepenzis - ThinkEquity

Great. And then just a final question, if you could maybe help me understand the handset business itself. I mean we saw one of your largest customers did 42 million units plus in the quarter with virtually all of their high-end phones incorporating MHL, you know, with Samsung with the Galaxy S-series, the S2, the Nexus and tabs and pretty much all of their phones are shipping with MHL.

You had the ramp with H2-C1. I'm just wondering when should we expect to see, is it Q3 that we should expect to see this jump in terms of contribution from that segment? Because it almost seems like Samsung should have done 22 million at least on its own.

Camillo Martino

So there's two comments there. One, I have seen various reports that don't all add up to the same number, frankly, in terms of market size but the latest data I think I saw coming from my supply had Samsung, I think, at roughly 32 million units for the quarter. That's what I saw. So that's one data point.

I think we've communicated and we've tried to communicate in the past that we believe that we are in about 40% or so of their models. We are not in 100% and it's not intended to be in the 100% as a standalone chip. We do anticipate and we do expect over time that potentially the MHL standard may appear in the phone over time, in all smart phones. But, you look at our business in terms of selling a discrete component, I think approximately a 35% to 40% proxy is a reasonable estimate, at this point in time, Tom.

Tom Sepenzis - ThinkEquity

Okay. But do they have phones then that have MHL that are not using your chips? Are they making their own and saying you...

Camillo Martino

No. [inadudible] They have smart phones that just don't have that TV-out feature at all, in that case. It's not even a matter of image or not image, they just don't have that feature. So typically, the higher-end of the smartphone segment today is where MHL has started to see success. And overtime, the MHL feature or the MHL standard will start to creep to lower end of the models.

I think there was an announcement by Samsung, they'll be making more announcements this quarter. I think they have an announcement specifically this week is when they plan to unveil one of their new models.

Tom Sepenzis - ThinkEquity

Great, thanks very much. Appreciate you taking my questions.

Camillo Martino

All right, thanks Tom.

Operator

Our next question comes from the line of Christopher Longiaru. Please go ahead.

Christopher Longiaru - Sidoti & Company

Hey, guys congratulations, good quarter.

Camillo Mantino

Thank you.

Christopher Longiaru - Sidoti & Company

I guess I wanna kind of hone in on the expenses a little bit. I mean, you mentioned some of India, some tape out, custom automotive and it's actually, it shows up in your guide where you're about a $1 million, $1.5 million, $1.7 million something like that, lower from June to March with higher revenue. I'm just trying to get a handle on what we should be modeling relative to a revenue run rate going forward and what your expectations are as the year progresses for operating expenses.

Noland Granberry

So, Chris, just to, if you look at this year to last year, one of the big changes is the addition of wireless acquisition overall. So if you do just a year-over-year look there's one of the big changes. But having that factored in, if you recall on the Q4 call we talked about a few things and Q1 is generally our highest expense quarter because of the CES activity and what have you. But one of the things we did note and Camillo noted as well as myself, we did have some increased spend in the quarter around our marketing on MLH. We had some shuttle related to R&D for tape out costs, as well as the automotive item we talked about in the India transition.

Going forward, I had highlighted that we would be in a 32-ish range. I think we're modeling for Q2, I guided 32-and-a-half. For the remainder of the year, I do believe there will be some fluctuation, just for timing of tape outs, but I still think we'll be somewhere between $32 to $33 million overall when you look at the end of the year where our OP EX totaled out on an average basis for the year. So you may see 34-and-a-quarter because of tape outs, but then also would see 31, possibly in that follow-up quarter or whatever, just more on timing of significant tape outs particularly related to our wireless work we're doing.

Christopher Longiaru - Sidoti & Company

And that's kind of regardless of the revenue, I mean, you'll get a little more, I guess on the SG&A line, but in terms of, you know, you just stated on your gross, that's going to stay consistent despite growth?

Noland Granberry

Yes, I mean, that would be considering the revenue, pretty much, there would be a little bit, you're right, on the selling/marketing line as revenues increase related to say, commission and incentive related items, but should be still within that range.

Christopher Longiaru - Sidoti & Company

And in terms of, you know, you said that you'd be sampling some products, some wireless mobile products in 2012. In terms of just how, how that progression goes, you know, when, after you sample, what's the time frame for design in and when will you know in terms of your expectations for shipments after you start to sample?

Noland Granberry

Sure. You know, Chris, I, what we said was we expect to sample toward the end of this year. That's one data point but we'll be unveiling the demonstration, the technology demonstrations both in Las Vegas in January as well as the Mobile Web Congress event in Barcelona in February. But following that, we would expect some, perhaps, one or two design wins in the middle of the year with a view towards shipments towards the second half of next year.

So that's the timeframe that we are looking at, revenue generation in the second half of 2013.

Christopher Longiaru - Sidoti & Company

Got it. And you'll know what you're doing some time in mid-2013 is the idea?

Noland Granberry

Yes, I think the middle of next year, absolutely.

Christopher Longiaru - Sidoti & Company

Thanks guys, that's all I have.

Nolan Granberry

All right, thanks Chris.

Camillo Martino

Thanks, Chris.

Operator

Our next question comes from the line of Rajvindra Gill, go ahead.

Rajvindra Gill - Needham & Company

Yes, thanks and congrats on good results. Just a couple housekeeping questions first, if I can? On the share count going up about under $3 million, you have a share buyback. That doesn't include the guidance, the guidance doesn't include a buyback does it?

Noland Granberry

No. And just to make it clear, the $85 million that I highlighted was a diluted share count while the actual count presented for the quarter was just a weighted average due to the loss situation. If you reflect and you look at the prepared remarks, I did highlight that. For Q1, our diluted was 83.8 or somewhere in that range. That would be a reflection of additional shares outstanding for the year.

We have our ESPP plan that executes twice a year and one is executed in part of Q1. I'm told it will be an outstanding for our 4 period in Q2, things like that, right? The 82 million is just a weighted average share. It's about 85 is representative of diluted share count.

Rajvindra Gill - Needham & Company

But we should expect share count to start to come down throughout this year and 2013. Are you going to be pretty opportunistic on buying back shares, especially with levels now?

Camillo Martino

As we look at the opportunity to buy shares back, we would look to take advantage of that.

Rajvindra Gill - Needham & Company

And just one last question on the...

Camillo Martino

And offset partially our dilution.

Rajvindra Gill - Needham & Company

Got it. Just on the tax rate, dealing with the foreign tax income and withholding on foreign side, should we be modeling at least 30% tax rate for third and fourth quarter? You talked about maybe dipping down but you didn't provide any specifics. How do you think we should look at the tax rate at end of '12 and probably all of '13?

Noland Granberry

At this point, looking out for the rest of the year, that would be my best view. Again, it's based on our outlook on the, primarily, with the royalties and the resulting withholding taxes as the primary driver in the jurisdictions with which we think that those will come into play.

As far as getting into a more normalized tax position, that's where we would get out of this valuation allowance position and we think that would happen at the end of the year or at the start of the next one. So the real affect of that would not really be until 2013 activity.

Rajvindra Gill - Needham & Company

And on the mobile side keeping the 20% revenue growth for the year and talking about a big ramp and product revenue which obviously is coming clearly from the MHL side and mobile side. We talked a little bit about it but are you seeing, is that based on kind of higher sell-through forecast, maybe if you could kind of rank them qualitatively. Clearly, the MHL number is going up, that's the only logical assumption to make.

I know you want to be hesitant about saying it but you've kept the top line the same and made comments on 3Q. So MHL is going to be higher than what you initially expected. So if you could qualitatively talk little bit about the main drivers in rank order, that would be helpful?

Camillo Martino

Well, I think there are two contributors. One is our existing customers, I would say, are selling more than expected. And the second, of course, is newer customers we expect to start coming on stream this quarter and more so through the second half of the year.

I mean they are the two contributing factors that are contributing.

Rajvindra Gill - Needham & Company

Okay. And just a last question on the wireless side, should we expect any revenue from Cybeam [sp] this year, and if so, maybe you could quantify it? I know you're going to have samples for handset OEMs end of this year, but any, at least initial feedback from the handset OEMs or the marketplace in general about 60GHz?

Camillo Martino

Sure, I mean, we do have revenue this year. It's not a very substantial amount. Today that revenue is focused on two primary applications. One is a PC, PC laptop gaming, specifically. In fact specifically, Dell has some models there. The second is Epson. Epson is on the projector side. They are selling projectors into the home market, I should say, 3D projectors with our 60 GHz wireless.

Well, you can see there, there are two types of applications. One is PC, two is CE. There are another couple expected to be announced in the next few months. I don't want to make any forward-looking statements other than to say that we do expect some other announcements to come out in the next few months.

But the real opportunity, the real opportunity if this 60 GHz strategy, if this strategic, I would say investment, pays off, it going to pay off in mobile. And that's where we see the largest opportunity for our company and that's the reason why we have decided to, effectively, increase our investments. Increase our wireless investment to chase this opportunity.

If you go back to last May when the acquisition was announced. This was not the immediate challenge or the immediate opportunity for us that we were pursing. We decided that it was an important objective for us to really pursue the mobile opportunity and as a result. We made a conscious decision to increase and accelerate I would say, our investment. It's not easy challenge. It's not an easy challenge to take the very, very robust, highest quality wireless video technology in the industry and try and make it a handheld product overnight.

There's a significant investment required, but we made a conscious to do that. That's reflected in the higher operational expenses. I mean we talked about it in the past, the wireless side of the investment is probably in the $4 million a quarter area. That's a very substantial investment for us. It's something that we know, again that it was a conscious decision for us to do that.

If you look at the wired portion of the business, the wired portion of the business is today is actually quite profitable. It's this strategic investment we're making in wireless of roughly $4 million a quarter that we expect to start paying dividends in the latter part of 2013. That's how I would characterize it, Rajvindra.

Rajvindra Gill - Needham & Company

I understand that you're making a strategic bet, and you're ramping expense and take out. I'm just trying to understand the timing of it, and what gives you confidence that this will be adopted as opposed to just saying, you know, we're hoping that this will take off.

Clearly the handset guy that you're sampling with doesn't have the samples yet. They can't necessarily make an evaluation yet. I was just wondering if there's initial conversation with handset OEMs or industry feedback that kind of makes you feel like this is something where you see some small but growing adoption.

Camillo Mantino

I think that although our customer base today is not able to see an exact hand-held solution. They are able to evaluate our technology that we have today. Both the generation two that's actually in the product that I mentioned earlier. Like the Dell product and the Epson product, but also the new generation three that we've just recently started sampling.

The generation three has one application that's actually a tablet. While the generation three does demonstrate lower power, smaller form factor, it doesn't go sufficiently enough to be able to fit into a true hand-held solution. However it could fit into a tablet or a tablet accessory there is a fair opportunity that we think the generation three can participate. What gives us confidence is the following.

One, Silicon Image's 60GHz wireless technology is the highest quality wireless video technology you can get on the market today. Period. Second to nothing. End of story. That gives us all confidence.

The second one is, our customers have been asking us well, how do we get this fantastic great quality, this highest level quality into a form factor that we can actually use in a handheld.

Meaning very low power and low latency, and very small form factors. Not just low power. If you look at the size of the module it has to be significantly smaller than the size of the module that we're seeing today, both in generation two and generation three.

I think this is what gives us confidence, that A, we have the right technology and we're very confident about that, and B, it's now an engineering challenge to try and put this right technology into the right size, for lack of a better word.

But it's still early in the process. It's still early in the process. We hope to see some more generation two products being announced. We hope to get some design whips of generation three by the end of this year as well. These are other checkpoints along the way.

The other checkpoint of course, is to be able to unveil publicly our handheld wireless solution in cue one of next year. That's really the checkpoints we have along the way.

Rajvindra Gill - Needham & Company

Okay. Very good. Thank you very much.

Operator

(Operator instructions)We have time for one more question. Next up is the line of Greg Scott. [sp] Go ahead.

Unidentified Analyst

Hi, good afternoon guys. Thanks for taking my questions. Just taking back to the wireless, could you remind us what some of the other competing ways to do wireless HD is out there right now?

Camillo Mantino

You know, at the highest level I would say there's two types of wireless standards. There is one wireless standard that focuses around 5GHz, and 5GHz, think of it like Wi-Fi display and things of that nature.The other one is around 60GHz.

So you've got a 5GHz competitive scenario, and you have various flavors within 5GHz, the other is 60GHz, and there's a couple of flavors in 60GHz.

The fundamental difference between the two, in the 5GHz, by definition, you need to compress the content otherwise there's no way you can put that much content in such a smaller frequency band.

In 60GHz, one of the main difference of course is it's uncompressed, so we're able to deliver higher quality HD content in an uncompressed manner and deliver a really great user experience.

I think that is the real difference. In terms of applications, if you want to look for difference in applications between the two types of standards would say the 5GHz is okay if there's very little interaction. If the source really, let's say a one way streaming video, no interaction, point to point WIFI is fine.

When I say its fine, it's fine if you're in a lab environment, but as we all know in homes, in apartments, and what have you there's a lot of interference going on that may impact it.

Five gigahertz is by-and-large acceptable for many of those applications.

When 60GHz really start to shine, and really starts playing into its own is when the application is very much interactive. One such application is gaming. Gaming is a typical example of a highly interactive and a must be low latency application. Now, we need to be careful when we say gaming. There's different types of gaming.

There's low resolution gaming at which point it's less of an issues, but if you're expecting to play a game in HD resolution interactive, then 60 gigahertz clearly is the better choice. That's what we're focused on Greg.

Unidentified Analyst

OK. Great, yes. Very helpful. Then just lastly, have you seen an improvement in the attach rate on the MHL side now that you're starting to get TV's out there, and other products. How are you seeing the consumer interaction with that?

Camillo Mantino

Well, I can tell you the last three or four months we've seen a significant uptake on two things. One is just in the press coverage. Let's start off with the press coverage. Six or nine months ago there was very little press coverage on MHL. I'm talking about specifically the trade press.

Secondly, we're starting to see some of the retail stores and some of the big cell phone operator stores, like an AT&T for example.

I'm aware that MHL consortium of that organization is now spending time in an official training program, trying to create MHL awareness, user awareness, on how to sell the product.

I noticed myself, six or nine months ago, you'd walk into a store and you'd walk out without anybody asking you a question of would you like to hook up your phone to a TV, in which if that question is asked it's an easy up sell to be able to get the additional accessory product.

There's a lot more awareness today, both in the trade press as well as within the retail store itself. Now there's still a long way to go. We're in, I would say, of the beginning of our second year of a multi-year cycle. The best analogue I could give you is HDMI. I mean HDMI is probably eight, nine years post today.

It's been a long time coming. I would say that we don't believe that MHL will take or needs to take as long as HTMI because it's a different world today. If you look at the world that HTMI was in, eight, nine years ago when they were down (inaudible) that the penetration rate of flat screen TVs was pretty low. The penetration rate or the availability of HD content was also quite low. Both of those challenges really that don't exist today. So I think MHL should be a little faster acceleration if you're comparing apples for apples at the same point in time.

So, I think it is growing and considering it's really the second year of a multi-year cycle and given the fact that there's more and more phones becoming available, we feel pretty confident that the adoption rate and the end-user consumer case will start to increase, as well, Greg.

Unidentified Analyst

Okay. Great. Thank you very much. That's it for me.

Operator

Mr. Martino, there are no further questions at this time. I'll turn the call back to you. Please continue with your presentation or closing remarks.

Camillo Martino

Great. Thank you all for joining us today. We will be at the B. Riley and Craig-Hallum conferences later this quarter and we look forward to seeing you there if you plan to attend those events. We look forward to speaking with you again in a quarter's time. Thank you, again. Operator?

Operator

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

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