Zoran Corp Q4 2007 Earnings Call Transcript

Jan.28.08 | About: Zoran Corporation (ZRAN)

Zoran Corp. (NASDAQ:ZRAN)

Q4 2007 Earnings Call

January 28 2008 5.00 pm ET

Executives

Bonnie McBride - IR

Levy Gerzberg - President and CEO

Karl Schneider - SVP of Finance and CFO

Isaac Shenberg - SVP of Business Development

Analysts

James Schneider - Goldman Sachs

John Vinh - Colin Stewart

Mahesh Sanganeria - RBC Capital Markets

Heidi Poon - Thomas Wiesel

Ian Gilson - Zacks Investment Research

Gary Mobley - Piper Jaffrey

Arnab Chanda - Deutsche Bank

Steven Park - Wedbush Morgan Securities

Michael Bertz - Kennedy Capital

Tayyib Shah - Longbow Research

Operator

Good day, ladies and gentlemen, and welcome to the Zoran fourth quarter 2007 and year-end conference call. My name is Cynthia and I will be your operator for today's call. (Operator Instruction)

I would now like to turn the call over to Ms. Bonnie McBride. Please proceed.

Bonnie Mcbride

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

Before we begin, I would like to remind you that during the course of this conference call, we may make forward-looking statements regarding the markets for the company's products, revenue projections, the outlook for our manufacturing capacity, new product development, and certain trends affecting gross margins and operating expenses for future periods. I wish to caution you that such statements are just prediction and actual results or events may differ materially. We refer you to the documents the company files from time-to-time with the SEC. These documents contain important factors that could cause the company's actual results to differ materially from those contained in our forward-looking statements.

I now turn the call over to you Levy. Please go ahead.

Levy Gerzberg

Thank you, Bonnie, and good afternoon, everyone. The fourth quarter marks the end of a very strong year for Zoran, in which we executed on many key objectives. We achieved record revenues, profits and unit shipped for the year and grew our share in each of our core markets. We achieved record annual revenues in our digital camera business, growing 19% over last year and increasing our market share to approximately 33% for 2007.

We delivered record annual revenues in imaging, growing 24% for the year and now have eight contracts to license our XPS software which will enable us to secure a dominant position in this market. We continued to gain market share in DVD, driven by our ability to address the needs of emerging markets worldwide, a trend we expect to continue throughout the new year.

We secured many new design wins in DTV and expect to see several new models under well-known brands becoming available in the coming quarters enabling us to increase our market share during 2008.

And our multimedia mobile phone processor has been very well received by our Tier 1 customer and we are already designing follow-on models to the Viewty phone.

The impact of these achievements has translated in to a much stronger company, with continued increases in profitability from our well diversified revenue base. We are looking forward to additional successes in 2008.

Now, for an update on each of core markets. In digital cameras our COACH processors continue to be in high demand, particularly in the mid-range market, where we are the dominant player with our COACH 9 solution.

During the quarter we continued to receive feedback from our customers that our high definition H.264 video compression technology and our high quality HDMI features are key differentiators in the selection of COACH processors in the mid to high-end market segments.

Video capabilities are clearly becoming an essential technology for digital cameras, which is inline with our long term investment, as well as our commitment to high resolution advance video compression. And as expected we reached mass production with our H.264 video compression products in Japan, with our Tier 1 customer Pentax, and we'll go into production with several others during the current quarter.

Another trend that continues to favor Zoran is the demand for high ISO image capture settings, which enables the user to capture excellent quality images even under poor lighting conditions. Customers tell us that our COACH 10 is a clear winner in generating high-quality pictures under these conditions. And we began to see revenues from this product during the fourth quarter.

Zoran solution continues to dominate the Taiwanese, Korean and affordable Japanese branded camera markets. Our COACH 10 processor delivers an excellent combination of feature-rich and high-quality image capture with cost effectiveness for these customers and we expect to maintain and grow our positions throughout the year.

The pricing environment was challenging in the fourth quarter and we saw an increase in pricing pressure across all segments of the market. Camera makers are aggressively driving prices down in order to win business. For Zoran, this is an expected trend that we plan for when developing our product roadmaps.

Our strategy in all our target markets is to continually develop and introduce increasingly feature-rich products with reduced bill-of-material for our customers, thereby mitigating the impact of pricing pressure, while maintaining reasonable margin for Zoran.

This Thursday at PMA, we will be launching the COACH 11 IC family which we expect will replace the COACH 9 processors by mid-2008. The COACH 11 processor provides an outstanding combination of excellent image quality, including high ISO, while remaining very cost effective.

In the multimedia mobile phone market, we are receiving very positive feedback from our customers on our APPROACH 5C processor, which is powering the LG Electronics Viewty phone. Sales of the phone appear to be exceeding expectations and we are excited about the prospects of future designs. The Viewty, which many of you have seen firsthand at either the AA Conference or CS, is a high-end 3.5G multimedia camera phone, with a 3" touch screen, and 5 megapixel camera, in addition it captures video at a 120 frames per second enabling superb slow-motion and video quality. The phone is currently shipping through multiple carries in Europe and we have already secured follow-on designs with this same customer that will be shipping later in the year.

In printer imaging, revenues for the quarter increased 34% annually, driven by strength in both hardware and software products. Demand for Quatro products, particularly in the inkjet segment remains strong, following our record results last quarter. In addition we continue to see solid demand for our IPS page description language software.

During the quarter there were multiple deployments of new models from customers incorporating out Quatro processors, such as Fuji-Xerox's DocuPrint Color Laser and Multifunction Printer and NEC's personal fax All-In-One. The color laser segment continues to emerge as the new growth driver for this business and though we are still in the early stages from a revenue generating standpoint, work continues on laser development programs based on our Quatro processor family at several major OEM's.

The Quatro 4230 processor, specifically designed for this segment, continued to gain momentum during the quarter and we expect new products to be introduced throughout 2008. Software revenues remained strong with continued demand for our IPS software, which is now shipping in over 265 printers and MFPs. Some examples of recently introduced products based on this technology include enhanced Canon imageRUNNER MFP lines, as well as new models from Ricco and Xerox.

We are seeing strong interest in our latest generation of IPS, which features an interpreter of Microsoft's new XPS format, and now have commitments from eight licensees. Zoran is a member of the ECMA Technical Committee working to turn XPS into an international standard document format, further driving its adoption in the industry.

In DVD, revenues grew 74% over the same period last year, while Q4 unit shipment declined slightly on a sequential basis due to normal seasonality. From entry level 128-pin solutions in the growing Chinese market to HDMI 1080p-based players in Europe and the U.S. Zoran's products continued to gain traction and maintain market share.

Our position remains strong in China as we saw strong demand from manufactures for entry and mid-level products, as well as strong demand for our HDXtreme and HDMI solution. We continue to increase our market share in this region and believe that current trend to new manufacturing to China from other countries such as Japan and Korea will benefit Zoran throughout 2008. Zoran’s strong customer relationship with both ODMs and OEMs, combined with our well established infrastructure in China, has enabled us to become a leading supplier to this market.

In addition, we’re also seeing strength in other emerging markets such as India, Russia, South America and Eastern Europe. In particular, we experienced growth in shipments to the Chinese manufactures supplying the local domestic market and the demand for local sales in Eastern Europe and other areas in Asia. While maintaining our growth margin, our ability to offer price comparative products is enabling us to win additional designs from our customers.

Demand for HDMI continues to gain momentum and as leaders in HDMI solution we benefit from increased customers demand for this feature. Several customers including Alco, Samsung, Toshiba and other manufactures in China went into production with new models during the fourth quarter and additional customers are currently in design phase with Zoran’s HDMI solution.

We continue to ship solutions to OEMs such as Clarion, JVC, Skypine and Sony for the expanding automobile DVD market. And, as we exited 2007 we continue to ship our solution to grow our market share in the emerging digital picture frame submarkets.

These products with Zoran's volume constituted a higher margin business, and we are continuing to work with customers to take advantage of these opportunities.

In addition, SCS we replaced the balance with our new Blu-Ray platform based on a new solution developed for the high-definition Blu laser market, another potential growth market for Zoran.

In DTV, we continue to see demands for our latest family of SupraHD processors, which have enabled Zoran to reach a higher level of integration, image quality and cross performance. As a result, we have new design wins with large OEMs beyond our existing customer base, as well as increasing momentum in the ODM model.

Our penetration into LCD TVs remains strong, and we shipped 2.4 times the units in 2007 over 2006. We began production shipments of our SupraHD 770 and 780 HDTV processors to our customers and expect to see product shipments to retail during the current quarter.

This product family has been particularly successful in penetrating Japanese T1 customers, including multiple new models from a well-known brand, and as well as other household brands, and we expanded our customer base, both in number of ODM suppliers and branded manufactures.

These customers will deliver HDTVs to the markets' switchboard from 32-inch LCD models up to the full HD 1080P television for the US and Europe, where we expect to drive substantial growth throughout the year.

Demand in the retail segment of the market remains steady. Price points in this market continue to decline putting pressure on OEM’s to devote considerable development and manufacturing resources to new TV designs. Zoran's level of integration and expertise has helped mitigate the impact of AHD origin, while providing manufacturers cost benefits to OEMs. We continue to work with our retail connected ODM base during the quarter to meet the high demand of 19 to 42-inch LCDs televisions now ramping in significant volume.

On the broadcast transition, we began shipping the SupraHD 741 processor to multiple manufactures for the US convertibles market in preparation for the availability of coupons this month. Over 1.3 million household submitted applications representing nearly 2 million coupons for set-top boxes in the first few days of January.

Based on this early demand, and the fact that these coupons need to be used in 90 days of their issue date, we believe we will see significant increase in volume from our customers during 2008. Zoran Solution is design to meet the EPA's ENERGY STAR requirement and deliver a cost effective solution for manufacturers addressing the 2009 analog signal cut off.

Zoron’s convertible customers that were already being NTIA certified include AMTC, AccessHD, Apex Digital, MicroGEM, RCA , and Tivax among others. Our HDTV product line designed to address the European DVB-T Free-To-Air and China digital cable markets continues to gain traction. For Europe, volume is shifting to PVR, HMEG-5 and IDTV models, all of which Zoran supports.

In the China digital cable market we experienced strong growth, where volume is now ramping as the 2008 Olympics approaches. In addition, we are positioned to increase our share in this growing set-top market during 2008, with our new advanced video codec technology, which addresses the increasing consumer demand for video-on-demand through IP. Stay tuned for more on this emerging market later in the year.

Before turning the call over to Karl, I want to summarize, what we believe are key factors that point to continuing success for Zoran. We continue to execute on our primary objective to grow revenues and profits. We are growing share in each of our core markets, Digital Camera, DTV, DVD and printer imaging. We continue add Tier 1 customers to our existing base, as well as leverage our technology across all the vectors to take advantage of new and evolving markets and applications. And, our multimedia mobile phone segment is making significant progress which we expect to create substantial growth opportunities for Zoran in the future.

All of these activities are enabling continued leadership in the digital media markets we serve. We are well positioned in each of our core markets for success in 2008. And now, I will turn the call over to Karl Schneider for a review of the financials. Karl?

Karl Schneider

Thank you, Levy, and good afternoon everyone. For the fourth quarter ended December 31st, 2007 Zoran recorded revenues of a $129.4 million, compared to the $146.4 million reported last quarter and $96.3 million for the fourth quarter of 2006.

Net income under Generally Accepted Accounting Principles or GAAP for the period was $58.7 million or $1.11 per diluted share on 52.7 million common and equivalent shares. These results included tax benefit of $56.2 million, which I will discuss in more details in a moment. And non-cash charges of $9.2 million, related to the amortization of acquired intangible assets and $3.5 million of stock-based compensation expense. This compares with GAAP net-income of $13.1 million or $0.26 per diluted share for the previous quarter and a GAAP net-loss of $11 million or $0.22 per share for the fourth quarter of last year, which also included similar non-cash charges.

On a non-GAAP basis, which excludes the non-cash charges for amortization of purchased intangibles, stock based compensation expense and the onetime tax benefit associated with the release of valuation allowance on our deferred tax assets, our net income for the fourth quarter is $18.1 million or $0.34 per diluted share, compared to net income of $26.4 million or $0.51 per diluted share for the previous quarter. When compared to the fourth quarter of 2006, non-GAAP net income grew 285.1% over the reported $4.7 million or $0.09 per diluted share.

The majority of the $56.2 million tax benefit mentioned above is a result of the need for accounting purposes to value our deferred tax assets. And analyzing our recent historical results and our outlook for 2008 and beyond it was determined that the company is more likely then not to benefit from these deferred tax assets that are mostly attributable to net operating losses accumulated in prior years. Prior to the fourth quarter of 2007, the future realization of these deferred tax assets was considered uncertain under relevant accounting guidelines, which required us to provide full valuation allowance netting the deferred tax assets to zero on the balance sheet. In releasing this valuation allowance, we are establishing a deferred tax asset value of $55.9 million by recording a one-time tax benefit of $51.8 million and decreasing goodwill by $4.1 million.

As a result of this determination, the accounting benefit of these net operating losses is no longer available to offset current book income. Consequently, the company's book income tax rate will increase in 2008, and in subsequent years to a level that more closely reflects the weighted average of the statutory rates of local and foreign tax jurisdiction in which it operates.

For actual income tax filing and cash payment purposes, the company does not expect any increase in the level of cash payments as it continues to benefit from its net operating losses.

For the full year 2007, Zoran's revenues increased to $507.4 million from $495.8 million in 2006. Revenues for 2006 include $35.8 million pursuant to the settlement of litigation. Net income under Generally Accepted Accounting Principles or GAAP for the full year 2007 was $66.2 million, or $1.29 per diluted share on 51.4 million common and equivalent shares. These results include non-cash charges of $43.2 million related to the amortization of acquired and tangible assets, $14.8 million of stock-based compensation expense and a difference in tax expense of $53.3 million from income tax associated with GAAP release of the valuation allowance. This compares with GAAP net income of $16.3 or $0.33 per diluted share for 2006.

On a non-GAAP basis, which excludes the non-cash charges, as well as the one time tax benefit just referred to, our net income for 2007 grew 36.1% to $70.9 million or $1.37 per diluted share, compared to net income of $52.1 million or $1.3 per diluted share for 2006.

During the fourth quarter of 2007 hardware product revenues increased to $113.9 million from $80.7 million in the same period of the prior year. Software royalties, licensing and other revenues remain constant at $15.5 million during the same period. Compared to the prior quarter hardware product revenues, for the fourth quarter of 2007 decrease seasonally from the $129.8 million reported in the previous quarter.

Software royalties licensing and other revenues decreased by 6.6% from the $16.6 million recorded in the pervious quarter. Revenues by product market for the fourth quarter of 2007 were 32% digital camera, 27% DVD, 19% printer imaging, 17% DTV, and 5% % other. Sales by geographic region during the fourth quarter were 42% China, 21% Taiwan, 19% Japan, 8% Korea and 10% U.S and rest of the world.

Overall growth margins for the fourth quarter were 52.2%, which compares with 52.4% last quarter and with 52.9% for the fourth quarter of 2006. The slight decrease in our overall gross margin in the quarter was primarily the result of revenue mix from a lower percentage of software and other revenues compared to hardware product revenues.

Allocation of stock based compensation expense in our GAAP income statement for the fourth quarter is $141,000 to manufacturing overhead included in cost of products sales: $1.4 million in R&D and $1.9 million in SG&A.

Excluding these stock based compensation expenses, research and development expenses increased $2 million in the fourth quarter of 2007 to $28.7 million compared to the $26.7 million in the prior quarter. Compared with the same quarter of last year R&D spending increased 23.7% from $23.2 million. On a sequential basis R&D spending tends to fluctuate from quarter-to-quarter based on the timing of major engineering related expenses such as “tape-out”, which included mask sets and engineering wafers.

Excluding the impact of stock based compensation charges, selling, general and administrative expenses decreased slightly to $25.5 million in the fourth quarter from the $25.9 million reported last quarter. Compared to the same quarter last year SG&A expenses decreased $1.2 million from $26.7 million.

Ongoing legal expense associated with stock-option related matters was approximately $1 million in the fourth quarter of 2007compared to $1.8 million in the third quarter, and $2.8 million in the fourth quarter of 2006.

Other income and expense for the fourth quarter of 2007 was $1.9 million, compared to the $4 million in the third quarter. The component of interest income included in these figures was $4.7 million and $4.3 million respectively.

Other income and expense in the fourth quarter of 2007 included foreign currency translation losses as a result of the decline in value of the US in comparison to currencies in countries in which we operate, as well as a write-down of a long-term investment by $2 million. This write-down was not related in anyway to the ongoing credit crisis associated with sub-prime mortgages. We’ve reviewed our investment portfolio and found no direct exposure to mortgage back investments.

Moving over to the balance sheet, cash, cash equivalents and short-term investments reached $405.2 million, compared to the $356.6 million reported last quarter. Cash generated from operations during the quarter was $31.2 million. Accounts receivable at the end of the quarter were $58.2 million, a decrease of $2.3 million from the $60.5 million last quarter, with DSOs increasing slightly to 41 days compared to 37 days for the previous quarter.

Inventory balances at the end of the quarter increased to $49 million compared with $33.6 million in the previous quarter back to normalize level and consistent with prior periods. Inventory turns for the fourth quarter were approximately 4.9, versus the 8.1 in the previous quarter.

I will now address the company's outlook for the first quarter of 2008. During the Q&A session that follows, you're encouraged to ask any questions that may not be covered during the course of our comments, as we do not anticipate having to provide any additional financial guidance after this call.

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

For the first quarter of 2008, we currently anticipate that revenues will range between $104 million and $109 million, with overall gross margins ranging between 50% and 51%.

Excluding amortization of acquired intangibles and stock-based compensation, operating expenses are expected to range between $52 million and $53 million. Acquisition-related costs are expected to be approximately $9.2 million. Stock-based compensation expense is expected to be between $3.2 million and $3.6 million. The company expects to record a GAAP net loss for the quarter in the range of $0.15 to $0.19 per share. Excluding amortization of acquired intangibles and stock-based compensation, non-GAAP net income for the quarter is expected to range between $0.05 and $0.09 per diluted share on approximately 54 million shares.

With that we will open up the call for questions. Operator, please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of James Schneider from Goldman Sachs. Please proceed.

James Schneider - Goldman Sachs

Hi, guys. Good afternoon, and thanks for taking my question. I guess the first one would be: when you look in to your Q1 guidance, how much of that is due to this inventory that’s out there retail, versus pricing pressure going in to Q1, versus market share shifts?

Levy Gerzberg

We seeing in Q1 some softness in demand in general, because of some uncertainties that we see in the consumer electronics market in the first half of the year, but we do not believe it’s a result of any inventory issue.

James Schneider - Goldman Sachs

I see: so just slower demand and not excess inventory?

Levy Gerzberg

Correct.

James Schneider - Goldman Sachs

Okay. And could you comment on, if you were to rank your different business segments: which ones in Q1 you expect to be down or down the most versus down the least and/or any suppose to be up?

Karl Schneider

Jim, I think in Q1 what we are expecting is that we see more seasonality in camera, we see it in imaging, we see it in DVD, we are expecting that Q1 will be stronger in digital television and we are expecting of course Q1 to be fairly strong in the handset business. And as far as ranking them, its hard to rank them, I'd say they are all fairly -- as far as the seasonality those three that I mentioned they are fairly even.

James Schneider - Goldman Sachs

Okay. So: would DTV and handset to be up in Q1 then?

Karl Schneider

That’s the plan.

James Schneider - Goldman Sachs

Okay. And finally: can you comment on the tax guidance? How would that be recorded exactly in terms of pro-forma versus GAAP breakout going forward?

Karl Schneider

Pro-forma GAAP breakout, well that’s a difficult question. This event is really a one-time event from the benefit we receive, going forward, behind it; the rate is expected to be similar for both GAAP and non-GAAP.

James Schneider - Goldman Sachs

Okay. Thanks very much.

Operator

Your next question comes from the line of John Vinh. Please proceed.

John Vinh - Colin Stewart

Hi, good afternoon. Just to follow-up on that tax question. So, for modeling proposition: we continue to model, kind of the 15% to 18% tax-rate at this point?

Karl Schneider

No. For modeling purposes: the tax-rate's going up into the 30 plus/minus range, probably plus.

John Vinh - Colin Stewart

Great, Okay.

Karl Schneider

From this tax perspective the rate is moving up at this point-in-time. We hope going forward as things develop and we become more profitable in the businesses where the IP is domiciled offshore. The rate will come back down. Not to the 10% to 15% kind of levels where we've been, but closer to the mid 20's, longer term.

John Vinh - Colin Stewart

And: what sort of a timeframe could those rates start to come back down? Are we talking several quarters, about a year out or?

Karl Schneider

Somewhere in a year to 18 months out.

John Vinh - Colin Stewart

Great, okay! Next question is on the camera side: I mean: on the handset side. You talked about getting design into another platform at LG. Is this is an additional platform? [VOD] As to say: next generation platform to the VOD? And then also you had also talked about simply some optimism of getting in at some other Tier 1 handset OEM's. Can you give us an update on that progress as well?

Levy Gerzberg

Yeah, what we see, (John right?) is: new design. We see a new design win with the following customers that we’ve, it’s a new model altogether and we hope to see some other derivative models. And we’re putting a lot of energy into it, we’re very excited about it because the [WT] is been received in Europe is the most popular phone in Europe right now and we've seen increasing demands and we believe that we’ll see a similar thing, a similar excitement about it in other territories, other countries, directly with the WT and then follow on models. As far as other first tier companies we’re working with them, but we cannot give any focused prediction as to when you will see models from these accounts. Stay tuned.

John Vinh - Colin Stewart

And you also believe that this could be 5% of your revenues this point in ’08?

Karl Schneider

Yeah, its looks like that’s about the right kind of sizing.

John Vinh - Colin Stewart

Got it, okay. And then last question is on our gross margins: are we to see some of these newer segments start to the growth drivers? Few of them actually carries slightly a lower gross margins. You had guided margins down in Q1: can you talk about how much of that is a mix issue versus you talked about seeing some pricing pressures? And as following to that: how should we be thinking about your margins going through the rest of 2008 at this point?

Karl Schneider

Well I think John as far as Q1 goes the answer is: “it’s a combination of both, right?” So, we've got, as I said, we got a higher mixture of hopefully TV and handsets, and though of course handsets are much lower, not much, but they’re lower than the corporate average TV is also lower than the corporate average to this point, so from that mix it is definitely not a good mix. However, we also see some price pressure also out there in the market on cameras and other things; that's normal. We typically see [ASP] erosion. I don't think it's out of line with what we've seen historically.

I think it's pretty much inline with the consumer markets in that 15% to 20% annually ASP erosion kind of a range, but we are introducing of course new products, transitioning people to new products this week at the PMA show, we're introducing COACH 11, which is a chip, a new chip targeted at the lower cost cameras to try and improve our gross margins, and we're doing that across all of our product lines. So we're doing our best to hold it.

Going forward, I have been fairly consistent that our gross margins will trickle down overtime. The north of 50% kind of gross margins that we've been running, we're not going to be sustainable long-term, and our long-term gross margin model target has been in the high 40s, and so we expect to see that pressure throughout 2008 and beyond.

John Vinh - Colin Stewart

Great! Thank you very much.

Operator

Your next question comes from the line of Mahesh Sanganeria from RBC Capital Markets. Please proceed.

Mahesh Sanganeria - RBC Capital Markets

Thank you very much. Can you talk little bit about your camera business? Little bit more as to: what is driving that kind of downside? If I take your numbers the way you are saying different segments, I would say from your peak numbers, which are close to $50 million, you will be down 40%. So that’s, and this is the first time you have had a three-year downside in this business, you have been growing. There were small fluctuations, but it was growing pretty good. What is happening here? Why do we have this weakness?

Karl Schneider

As I said, first of all, I don’t think its 40%. I think the camera business will be down, I think it’s more of a seasonal thing. We’ve gained substantial market share in the digital camera market with somewhere around 33%, 35% market share I believe. And what we are seeing is for the first time, because we haven’t been able to grow through it, is a real seasonality. And so that’s what we believe we're experiencing, also as we’ve mentioned, there is some, especially in the US where a lot of…… there is a lot of cameras being consumed here. There is this somebody’s: “macro economic overhand” sitting out there and so those are the kinds of things that we think are potentially entering into this issue.

Levy Gerzberg

Now Mahesh, let me add a couple of points though. First of all let me make it very clear, we do not see decline in the digital camera market this year. Our units are going up, ASP is going down, but, in our internal plans, we do not see a decline in this market; we see an increase in market share. Now, as Karl mentioned, we are getting to a point where the prices are getting lower and lower. You can buy a digital camera with a very good resolution for $200. We have new chips existing and identify to cope with this, in order to bring up the margin; we have been doing it in another product line during the year. But I want to emphasize: the market itself continues to grow. Our market share is growing and our business is a “come up” for the year. I am not talking about Q1, which is a mix issue and the softness, that you see everywhere in the consumer electronics, I think it’s temporary.

Furthermore, the new products that we are introducing, including one version of the COACH 10, will be aimed at the higher end cameras. So, it's like mid to high-end. And you will see it in several quarters from now, when our customers will introduce these higher end cameras. So, we will cover the entire echelon all the way from low-end video cameras that are selling very well to high-end and you will hear more about it. But, we see this market in general entering this phase of very high volume and maturity and we are handling in a way I mentioned earlier.

Mahesh Sanganeria - RBC Capital Markets

So, may be you can help a little more? So, in typical consumer electronics the ASP is down 20%, it's very usual. And so, assuming that you don’t grow market share from here: what kind of unit growth? If you take 10% unit growth and 20% ASP down that indicates that your revenues are going to go down for the '08 compared to '07.

Levy Gerzberg

Correct, but that’s not our plan. That’s not what I said. Our plan is to see units going up, market share going up. Almost every week we hear about new 1st tier that is using our COACH device, including this week. Probably there will be some introductions of new products at PMA later this week. Now the mix is important and: what do we see in Q1? We see a mix where the lower end actually is higher in volume compared to the middle to higher-end.

Mahesh Sanganeria - RBC Capital Markets

Okay. Just last one: if you can help? I mean: I understand you have restrictions on how much can you talk, just on the total overall market: what are your thoughts on that? What is the unit growth? And: what do you see concerning the ASP pressure? That will help us come up to a number?

Levy Gerzberg

Well in terms of fueling growth and it depends on what market research report you are looking at, we’re looking at growth from about a 120 million units, market size in 2007, to over a 130 million, somewhere around the 135 million or so in 2008. But, on top of that, we hope that our market share will continue to grow and this is based on the current design win base that we’ve, and this is almost with everyone in the market, almost every first tier is now doing something; except only a couple of them are successful. So, on top of this we hope that we plan for an increase in our market share beyond the 33%, so it will be somewhere between 33% to 40%. So, the combination of these two, plus an introduction of some new products, will help us continue and grow this market.

Mahesh Sanganeria - RBC Capital Markets

But: the ASP decline of 20% is reasonable? Is that reasonable?

Karl Schneider

No that’s probably beyond the high end of that Mahesh.

Mahesh Sanganeria - RBC Capital Markets

Okay. Thanks a lot, very helpful.

Levy Gerzberg

You are welcome.

Operator

Your next question comes from the line of Heidi Poon from Thomas Wiesel Partners. Please proceed.

Heidi Poon - Thomas Wiesel

Hi guys. I just wanted to have a little more color on the digital TV, I recall that for Q4 your expectation for that segment to be up a little bit, but it seems like it was down about 6% or so: do you see any further softness in the market based on maybe lower consumer demand expectation?

Karl Schneider

No. Heidi, actually the reason it was down versus up, which is what I was telling you that it would probably be is, has nothing to do with demand or the orders, or our backlog. The issue with us not meeting the target and being up was the supply issue. We couldn't get the chips to the customers at the very end of the quarter. So, we didn't lose that business, this business is still very strong. So, we're still quite positive about the DTV and our position in that market.

Heidi Poon - Thomas Wiesel

Was that: a foundry issue?

Karl Schneider

I can't say that it was: a foundry issue. It was part of the supply chain.

Heidi Poon - Thomas Wiesel

Okay. But --

Karl Schneider

It's a new part, and most of it was -- let's say it’s a ramp of a new product, which we were showing at CS, and it was just getting that product out the door.

Levy Gerzberg

Yeah, Heidi. Let me -- it was a ramp really in the last few days of the quarter, but it did not have anything do with our customers, they are taking this product, actually they're asking for more. We feel pretty good about our DTV product line, because first of all, we really improved the quality of our images, the video as reflected by the feedback from customers and by the design wins that we are getting. The number of design wins is really increasing very nicely. It's a very integrated device, very cost-effective, its part of our roadmaps, our customers like it, very software heavy, it's all out software, backward and forward compatible, so we don't see any weakness at least in our customer base related to DTV opposite.

Karl Schneider

And actually Heidi the DTV business was flat to Q3, it wasn't down 6%.

Heidi Poon - Thomas Weisel Partners

It's a rounding issue, so: is there a little bit of push out of the TV business into Q1? Is it suggesting that may be the digital camera and the DVD of all the imaging businesses are basically dropping rather significantly to get to the guidance that you gave at Q1 for Q1?

Levy Gerzberg

Yeah I mean, I think that’s fair, I think that’s what I said earlier that those three businesses were the ones that would be the seasonally weak. Q1 business is and then the TV is quite strong and handset business is quite strong.

Karl Schneider

We still some growth compared to last year. So, in spite of the decline in ASP, we see a growth Q1 over last years Q1.

Heidi Poon - Thomas Wiesel

Okay great. Also given that a some of your demand is driven by overseas demand for just China set-top box business: do you have any sense of any Q2 visibility right now? Especially, because of the ramp of these China cities conversion into digital? And on top of that recently some shipments into the ATSC converter box on US market we got in that timeframe.

Levy Gerzberg

Yeah, this is where we see some growth. First of all the ATSC, the converter box is happening. We projected a quarter ago that it will start in February and actually its starting a little ahead of schedule so this is one growth victor for us. And yes, in China, we see good momentum in the digital cable market. Actually we are one of the top players there, and the Olympic games are driving it. So this where we see growth coming, that’s why we feel good about this market record.

Karl Schneider

Q2 Heidi, is normally the beginning of our seasonal build so, other than softness we see in Q1, we see no reason today to believe that the consumer season is not going to come back and we are going to see nice growth as we usually do in the second quarter.

Heidi Poon - Thomas Wiesel

Okay, great. Thank you.

Levy Gerzberg

You are welcome.

Operator: Your next question comes from the line of Ian Gilson from Zacks Investment Research. Please proceed.

Ian Gilson - Zacks Investment Research

Thanks you very much. Karl, just a quick question on the increase -- is that the impact of the tax accounting?

Karl Schneider

I'm sorry, Ian you broke up there when you said the increase in what?

Ian Gilson - Zacks Investment Research

The other assets went from $22.9 million to $70.5 million?

Karl Schneider

Yes, that is the increase primarily from the tax evaluation.

Ian Gilson - Zacks Investment Research

Okay. And: long-term liabilities from 12.8 to 20.8?

Karl Schneider

Long-term liability went from

Ian Gilson - Zacks Investment Research

Yes, sir.

Bonnie McBride

5 million.

Karl Schneider

We took 5 million off of goodwill, but that’s an assets. Our tax liability went up 5 million.

Ian Gilson - Zacks Investment Research

Okay, fine. Thank you.

Levy Gerzberg

You are welcome.

Operator

Your next question comes from the line of Gary Mobley from Piper Jaffrey. Please proceed.

Gary Mobley - Piper Jaffrey

Hi, guys. Levy, I had a couple of high level questions for you that relates to that shift from red laser to blue laser DVDs, players. Just curious when you struck perhaps some sizable revenue from the blue laser market: what you market shares goals are there? And then I have a follow up questions.

Levy Gerzberg

Okay, well, first of all, the shift from red laser to blue laser is not happening as fast as some people expected. So, we believe in the market itself, the significant shift will happen earlier next year not before. And we’re timing our introductions and the work that we are doing with some of our key customers accordingly. So, we will start to see an increase in revenues very late this year and beginning of next year when the change in the market will appear.

Gary Mobley - Piper Jaffrey

Sure. [Granted] only sell in the market place about $4 million blue laser players in ’08 versus $160 million in the total DVD player market. But I am just curious: with the introduction of blue laser players, have you seen your OEM customers trying to reduce the price of red laser players to make the cost differential between blue and red laser greater thus sustaining some momentum in the laser market? And hence: does that provide pricing pressure for you guys?

Levy Gerzberg

Actually, we see some interesting things in the red laser. We see the upscale market actually taking off. It’s a great opportunity for Zoran and we’re benefiting from it. You have a red laser with a standard definition and we upscale it to make it look like HD, although it’s not exactly as good as HD. We do it internally and now on new chips. We've been doing it for sometime and then we feed it to the high definition screen with HDMI, which is on integrated in our chip and trick is ready to make it at low cost and have good margin. And we’ve been planning it for a number of years and we see the fruits of it.

So, that’s what we see in terms of the high definition versus red laser. We don’t see price competition or even strategies of our customers in order to balance the two one against the other. And in our case, because we see more integration, we add more value, we see actually in some segment an increase in the ASP and DVD. This is for the red laser.

Gary Mobley - Piper Jaffrey

Okay. Thanks, guys.

Levy Gerzberg

You're welcome.

Operator

Your next question comes from the line of Arnab Chanda from Deutsche Bank. Please proceed.

Arnab Chanda - Deutsche Bank

That's definitely interesting rendering, but anyway a couple of questions if you don't mind. So Levy, I think what you are saying basically, if I can sort of characterize it, you are gaining share in pretty much all of your markets and definitely not loosing share in anything, but it seems like your guidance overall assuming pretty strong seasonal declines. Could you talk a little bit about excluding the digital TV market? You're seeing pretty good declines in some of the other markets also, is it sort of unit-driven or pricing-driven: do you think this is a kind of a cautious ordering pattern in terms of that you are getting more turns orders? I'm kind of curious on that, and then I have a couple of follow-ups.

Levy Gerzberg

Okay. No, but I think it's all of the above. So, in some markets we see an ASP decline and the mix impacted in one segment more than other for example in the camera, we've seen an ASP decline in initially the beginning of the year. And we see an improvement going forward.

In terms of DTV and handset, as you mentioned, we do not see it there. Actually we see a good momentum. In the other markets, the DVD and printer market, we see some lack of visibility that some of our customers have, including the channels, we've been talking to the channels all the time to the best buyers of the world Circuit City and so on. And everyone is very careful in terms of increasing orders right now, everyone believes, including us in the second half of the year, it will start to improve. Some vectors will improve before the second half.

Arnab Chanda - Deutsche Bank

Great, sure. Talking a little bit about some of the segments, you said the DVD is that you are expecting to see some growth in the blue laser market in the second half of the year. Do you think that, is there a certain sort of crossover point where, I know you are seeing red lasers doing well right now the up conversion, but in your internal goal: do you think if there is a crossover point? Is it sort of ’08 or ’09 where that becomes a kind of year-over-year revenue growth, growth here? And I just have a couple of follow-ups.

Levy Gerzberg

It's probably beyond that, there we will cross over; we will take a long time. Probably in the 2010 time frame it will start. But we believe that later this year, very close to the end of the year we will start to generate some revenues, we will see it increasing during ’09, but we are very careful in counting on too aggressive growth in the blue laser. We were used to big numbers in our huge much larger markets, and we don’t see there yet, but it will come, we were working on very high integration, we showed it at CS. We probably had the most integrated device that was demonstrated, the most cost effective and the more versatile. We showed a number of applications, that we show you and other people at CS with out new device, but we are not counting on real revenues increase, if it may happen it will be great, it's an upsight.

Arnab Chanda - Deutsche Bank

Great. And then kind of on a more positive note, if you talk a little bit about DTV’s and your camera phone, I understand the camera phone toward where you are ramping with new design wins, but TV’s are obliviously consumer product: what is exactly happening there in terms of share? Are you seeing kind of the tier 1 guys that use ODM’s and that is benefiting you? Or: are you directly selling into tier 1's? If you could talk little bit in detail about that, that would be great.

Levy Gerzberg

Yes, both of the above. First of all, our model with the ODM, the triangular model as we call it, where you have the first tier, the ODM and Zoran interacting with both of them is working very nicely, and we’re gaining real momentum in that market. So, we’ve been penetrating first tiers, actually we are the ODM. Furthermore, we have the number of design wins with direct first tiers. We have it in a number of -- we mentioned Japan, but we have (inaudible). So, we see a good progress there. And the fact that we are integrating everything gives us a hedge, we see compared to some of the scalar companies. Those companies that provide just the scalar, the strong markets as the result of the scalar position having more competitive pressure, because we have an excellent quality right now in our integrated chip. It integrates the scalar at the front end, everything. And furthermore the software, this is our software and we control it, we own it. So we don’t have to pay third parties money for the software and then transfer it to the customers. And plus the support associated with these. So, direct design wins we trust is many ODMs design wins, some of go also to first tiers. So, it's all of the above.

By the way, we see it in a number of product lines, not only in DTV. This is what we've been seeing in digital camera. We do not see it now in the cell phone, although we believe it will happen, but right now we are focusing only on the first tiers in the cell phone. And we see a similar trend in some areas in the printers. So, it's everywhere. This model is working very well and we have an excellent infrastructure to support it.

Arnab Chanda - Deutsche Bank

Last question for Karl. Karl, you've talked about your operating margin targets of being in the double digits, based on obviously the guidance in Q1 you are pretty far from that. Do you expect to do -- are you depending on revenues to get you there or are there any other actions that you are contemplating? Or: if you could give an update on that? Thank you.

Karl Schneider

As far as operating margin goes our targets are to not see them deteriorate over the levels that they are at. I think our business is seasonal, it’s been a seasonal trend in the first quarter, which is usually seasonally down. It is the operating -- we do not need the longer term of even cumulative annual operating target goals, so we believe that they will rebound in Q2, Q3 and will get back to the levels that hopefully we experience in 2007, across the year of course we are doing lots of things to try to control that. We are focusing on putting infrastructure in low cost places such as China and we are very conscious of increasing our spending and our head count across the company. So, we believe we have the ability to grow our revenues, handle some margin erosion and still bring to the bottom some decent operating margins.

Arnab Chanda - Deutsche Bank

Thanks, Karl. Thanks Levy.

Levy Gerzberg

You are welcomed. (audio gap)

Operator

Your next question comes from the line of Steven Park with Wedbush Morgan Securities. Please proceed.

Steven Park - Wedbush Morgan Securities

Hello, just had a few questions. So, in terms if kind of longer term for the digital camera business: are you guys expecting kind of growth in the 5% to 10%? Do you guys think that you can get there? Or: is that going to be less than that for the year? What do you think?

Karl Schneider

Of course in the digital camera we are expecting some probably with the ASP erosion and our gain in market share and all things combined, it’s probably closer to 5% kind of a number. So, we are optimistic that we can grow that business still.

Steven Park - Wedbush Morgan Securities

And just, the kind of the other two segments for digital TV is, kind of, 40%. Is that still possible for the year or is that going to be much lower than that?

Karl Schneider

I would say within that, certainly in the range of numbers that we could hit.

Steven Park - Wedbush Morgan Securities

And then the DVD business is that kind of flattish for the year, are we expecting -- do you expect that to be up year-over-year?

Karl Schneider

Well I think I have been fairly consistent there for quite while, we did a fairly decent job of holding '07 flat to '06 and I think in red laser we will do the similar kind of job in '08.

Steven Park - Wedbush Morgan Securities

Just on last question on digital camera side. I mean: is the Q1 going to be the trough quarter here? Do guys have some visibility in to that? Or: is that right now just -- there is no clarity?

Karl Schneider

No, I think we have some visibility in to that and we believe that Q1 is the trough quarter.

Steven Park - Wedbush Morgan Securities

Okay. Terrific!

Levy Gerzberg

Steve it’s also a transition quarter for number if our customers. And for us too, we are transitioning products. And we think it will create a positive momentum going forward.

Karl Schneider

Again, one of the things, again we would like to invite all of you to come by and see us at the Photo Marketing Show, its happening in Las Vegas, starting with Thursday of this week and you will be able to see just how strong Zoran's position is in the digital camera market at that show.

Steven Park - Wedbush Morgan Securities

Okay. Terrific, thank you.

Levy Gerzberg

Yeah, welcome.

Operator

Your next question comes from the line of Adam Benjamin from Jeffries. Please proceed.

Unidentified Analyst

Hi, this is Rich setting in for Adam. Just on your gross margin for DVD: is it safe to assume you will maintain those in Q4 sequentially?

Karl Schneider

Gross margins for DVD?

Unidentified Analyst

Yes.

Karl Schneider

Yes.

Unidentified Analyst

And by the segment: can you highlight which segment might be declining the most?

Karl Schneider

No, I believe I said earlier on the call that as far as the three segments that are down they have all got similar kinds of weaknesses.

Unidentified Analyst

Okay. And just to clarify you said DVD you expect to maintain flat year-over-year for calendar year '08, when you just look at the numbers it seems like it should have a pretty substantial decline in Q1: you think you'll make that up? And: is there going to be a pretty linear return? Can you give me some color how you are going to make that up?

Karl Schneider

Well, I think we had the same conversation a year ago, coming after Q4 we had in '06, so yes I believe that we believe that we can make this up. Its just softness in this quarter that we are seeing, we expect that it will bounce back.

Unidentified Analyst

Okay: Kind of far from normal seasonality?

Karl Schneider

Yes.

Unidentified Analyst

Okay. Thank you.

Levy Gerzberg

You are welcomed.

Operator

Your next question comes from the line of Michael Bertz from Kennedy Capital. You may proceed.

Michael Bertz - Kennedy Capital

Hi, Karl and Levy. Just wanted to ask a couple of questions here on the inventory, Karl can you talk a little bit about the composition of inventory you are seeing in the quarter please?

Karl Schneider

What I will tell you is that the majority of the inventory increase came, a lot of it is probably still whip I don’t know the exact breakout, but it was primarily TV and handset. That’s the increase.

Michael Bertz - Kennedy Capital

Okay. And then: can you talk little about sort of what inventory turns would be at and how we should think about that as we roll in to Q1?

Karl Schneider

Well, target turns -- our goal and our historical results have been somewhere between 5 and 6. Last quarter when we turned 8 times that was more of an anomaly, this quarter the turns where 4.9 which is back to that 5 number and so that's, this is where we expect it to be versus where we were last quarter.

Michael Bertz - Kennedy Capital

Okay. So would you expect inventory to trend up down or sideways here in Q1?

Karl Schneider

I would say, just its going to be sideways roughly. Its still going to be in that five to six turns range probably at the end of the quarter. Again, we were fabulous company, we build inventory to forecast. We do not build to order and so we try to maintain the next, what we are going to do in the quarter plus a half a quarter out so that we can cover upsides.

Michael Bertz - Kennedy Capital

Okay, great. Thanks guys.

Operator

Your next question comes from the line of Tayyib Shah from Longbow Research. Please proceed.

Tayyib Shah - Longbow Research

Hi guys. I know it’s early at the stage to predict the second quarter, but given the steep decline in the first quarter: should we expect a significant rebound in second quarter revenues and if so which product do you think are likely to lead that?

Karl Schneider

Tayyib, we are expecting to see a seasonal Q2 and so from that perspective I would imagine most all of our products will show upside in that quarter.

Tayyib Shah - Longbow Research

Okay. But, I mean, something on that order of just 5% to 10% nothing more than that?

Karl Schneider

Now, look, it’s like you said it's a little early to tell, but it will come across the board, mostly in the consumer area?

Tayyib Shah - Longbow Research

Okay. And then this is the, I think the third time out of the last four years that your revenue guidance either going in or coming out of the holiday season has delivered a negative surprise to the market. And if I look at DVD's specifically, its down 20%, 25% in the fourth quarter and guidance indicate something similar in the first quarter, is there a desire on your part from a strategic perspective to steer your resources away from end markets that has become so seasonally volatile as well as commoditized and if so: what you are you doing in that regard?

Levy Gerzberg

Well, Tayyib we'd love to see things not so seasonally, but for us to move to that kind of a business we would have to exit the consumer market altogether and that's not practical, this is the market we live in. The seasonality we see it does fluctuate somewhat and its something that we're growing at somewhat accustomed to living in. So I don't know what else you want us to do -- the consumer market is seasonal and we believe we're doing quite well at serving that market, the company has grown nicely year-over-year, but we do so having to deal with the lumpiness in the quarters.

Tayyib Shah - Longbow Research

Okay. Then finally: how much do you think is your market is the converter box market at this point?

Karl Schneider

It’s hard to say, Tayyib, that market is just now starting. There are going to be lots of players providing into that market and we believe we'll get to somewhere in the neighborhood to 20% to 25% market share.

Tayyib Shah - Longbow Research

Okay good thank you.

Levy Gerzberg

You welcome.

Operator

Ladies and gentlemen, there are no questions in queue you may proceed with your closing remarks.

Levy Gerzberg

So thank you all for joining us and once again, we are very pleased with our results for the fourth quarter and the full year 2007. And we believe we are well positioned in each of our core markets for continued success and we're excited about the coming year. We will be presenting at several conferences in the coming month, all of which are posted on our website. So hopefully you can join us, and thank you again, everyone. Good bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.

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