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Executives

Sylvia Summers - CEO.

J.H. Chang - President

Pete Mangan - Vice President Finance and Interim CFO.

Analysts

Chris Chaney - Stanford Group

Heidi Poon - Thomas Weisel Partners

Quinn Bolten - Needham and Company.

John Finn - Collins Stewart.

Olga Levinson – Lehman Brothers.

Sukhi Nagesh - Deutsche Bank.

Adam Benjamin - Jefferies & Company.

Tayyib Shah - Longbow Research.

Jay Srivasta - Roth Capital Markets

Mahesh Sanganeria - RBC Capital Markets

David Wu - Global Crown Capital

Trident Microsystems Inc. (TRID) Q2 2008 Earnings Call January 31, 2008 5:00 PM ET

Operator

Good day ladies and gentleman, and welcome to the Second Quarter Fiscal 2008 Trident Microsystems Earnings Systems conference call. My name is Eric; I will be your coordinator for today. (Operator instructions)

I would now like to turn your presentation over to your host for today’s call, Ms. Suzanne Craig. Please proceed

Suzanne Craig

Thank you, Eric. Good afternoon and welcome to Trident Microsystems second quarter fiscal 2008 earnings conference call. This call is being broadcast live over the web and can be accessed on the investor relation section of Trident’s website TridentMicro.com for 90 days. On today’s call are Sylvia Summers, CEO, J.H. Chang, President; and Pete Mangan, Vice President Finance and Interim CFO.

After the market close today, Trident issued a press release discussing the results for its second quarter of fiscal 2008 ended December 31, 2007. The press release is accessible online at the company’s website or you may call the blue-shirt group at (415)-217-7722, and we will fax or email you a copy.

Before we begin, please note that during this call, Trident management will discuss some factors that are likely to influence the company’s business going forward. These forward-looking statements include guidance on anticipated revenue for the second half of fiscal 2008, and financial information for future periods, statements about prospects for the company’s business, and the development status and planned availability of new products, as well as the design wins expected in future periods.

It should be clearly understood that actual results may differ substantially from the forward-looking statements made today and have, in fact, done so in the past. These projections or forward-looking statements are subject to certain risks and depend upon a number of factors including, but not limited to, the timing of product introductions, the failure to obtain design wins among major OEMs for Trident’s products, competitive pressures including pricing and competitors new product introductions, changes in trends in the television and entertainment industries, the emergence of alternative digital consumer technology, actions that may be taken or required as a result of our historical stock option investigation, and formal inquiries made by the SEC and the Department of Justice, and risks of litigation related to these issues, potential claims and proceedings related to such matters including shareholder or employee litigation and action by the SEC or other regulatory agencies, as well as negative tax or other implications for Trident resulting from or relating to these factors.

It is very important that you factor in the appropriate risk and arrive at your own judgment about any forward-looking statement management might make. For further information regarding the risk factors inherent in Trident’s business, please refer to the company’s registration statements, and most recent forms 10-Q and 10-K filed with the Securities Exchange Commission accessible at SEC.gov. We encourage you to read these documents.

Also, please note that non-GAAP financial results presented do not include infrequent or unusual items. Please refer to the non-GAAP information section of the earnings press release for further details.

Today’s call will proceed as follows: Sylvia Summers will begin the call with her opening remarks; Pete Mangan will then review the financial results for the quarter, and Sylvia will follow with further discussion on product development as well as an outline of her strategic growth plan. Finally, Pete will provide the forward guidance and we will open the calls for questions.

And now, I would like to introduce Sylvia Summers, Trident’s Chief Executive Officer.

Sylvia Summer – Chief Executive Officer

Thank you, Suzanne, and thank you all for joining us on our call today. We are pleased to report solid performance for the second fiscal quarter and at least it is the top end of the guidance. Revenues totaled $75 million in the December quarter, and non-GAAP net income totaled $0.30 per share on a diluted basis. Non-GAAP gross profit margins remained essentially flat in the quarter at 50.6%. We ended December with a healthy balance of $186 million in cash and cash equivalent, representing an increase of 16%. SVP-UX and SVP-WX are currently our principle revenue-generating products. As a reminder, these two products are the world’s first display processor chips to integrate MEMC, Motion Estimation Motion Compensation Technology in order to remove motion jitter artifacts from motion video.

During the TCS customer electronics show earlier this month, we demonstrated our new MEMC technology, multi-standard decoder technology S. 264, MPEG 2, MPEG 4, VC1, and mature software stacks for ATSC, DBV, ISTN. We are very glad to report that these created a lot of excitement from existing customers and generated what we believe will be significant new opportunities. In calendar 2008, we plan to introduce several new SoC solutions integrating these new advanced technologies.

Going forward, Trident will be in a period of product transition as we move to develop and deliver more SoC solutions. We foresee a more competitive environment and expect our results to be impacted in calendar year 2008. Our intention is to leverage our technology leadership and focus our resources on implementing an aggressive plan for strategic growth in 2009.

Before I review our strategic plan for driving growth in the future, I am very pleased to introduce you to Pete Mangan, Trident’s Vice President Finance, and Interim CFO, who joined us earlier this month. Please, Pete.

Pete J. Mangan – Interim Chief Financial Officer and Vice President Finance

Thank you, Sylvia. Good afternoon everyone. To begin, I would first like to briefly recap the financial results for the quarter. We reported net revenues of 75 million for the second quarter of fiscal 2008, representing a quarterly sequential decline of 15% compared to 88 million recorded in September, and a year-over-year increase of 10% from 68 million recorded in the same quarter of the prior year.

Revenue of our top three customers last quarter represented approximately 78% of our total revenues which was comparable with the prior quarter. Our number one customer, headquartered in South Korea represented 34% of total revenues and decline 21% from the prior quarter. Our second largest customer headquartered in Japan, grew 13% in the quarter and contributed 27% of our revenue, and our number 3 customer from Europe declined 26% in the quarter, and represented 17% of the company’s revenue.

Regionally, Korea and Japan each contributed about one-third of our revenue and were our largest regions. The other regions of Europe, China, and Taiwan, represented 19, 7, and 5% respectively.

Overall flat-panel television revenues represented 98% of the total for the quarter; flat-panel ASPs were down slightly from the prior quarter, approximately 2%, primarily driven by discrete SVP processors. Flat-panel blended ASPs were approximately $12.

Gross margins for the quarter on a non-GAAP base were essentially flat with a prior quarter at 50.6%. The difference between non-GAAP and GAAP gross margins was mainly due to

1.5 million of amortization of intangible assets which resulted from our acquisition of the 2005 minority interest held in our former Taiwanese subsidiary.

Our non-GAAP gross margins were approximately 200 basis points better than expected, approximately half of the improvement was driven by a one time benefit related to a customer return claim being settled for less than our crude estimate, and the balance of the improvement spread across several items with the largest associated with negotiated royalty rate reductions in the quarter contributing 40 basis points.

Non-GAAP operating expenses of 15.2 million or 20% of revenues for the quarter declined

1.8 million or 11% from the prior quarter. The reduction was driven by web commissions from lower revenues and annual bonus accruals being aligned with current projections for fiscal year 2008.

Operating expenses came in 2 million lower than expected due to product tape out delays resulting in lower R&D and RE expenses.

Overall, our non-GAAP operating income for the quarter was 30.3%, which was down slightly from the prior quarter. Total adjustments between our GAAP and non-GAAP comparisons totaled 12.2 million for the quarter, versus 14.1 million in the prior quarter. The 12.2 million included 8.4 in stock-based compensation expenses, 2.9 million in professional fees related to the company’s investigation into its historical stock-option practice, 1.7 million related to the amortization of intangible assets and was offset by an $800,000 gain from sale on equity investments.

Please note that stock-based compensation expenses for the past two quarters have included one-time adjustments related to certain options granted to individuals who are subject to a review by our special litigation committee. In the second quarter, a $3.7 million charge was booked as a contingent liability for options held during this investigation and not allowed to be exercised. Both stock-based compensation and professional fees related to our stock-option investigation, were reduced from the quarter by approximately 20%. Going forward, stock-based compensation is projected to be in the range of 4 to 5 million per quarter.

Net income on a non-GAAP base, which excludes the adjustments noted above, was approximately 19.4 million or $0.30 per diluted share in the second quarter of fiscal 2008. This compares to net income of 24.1 million or $0.37 per share from the prior quarter, and

18.1 million or $0.28 per share from the like period of fiscal 2007. Please note our diluted share count methodology for our non-GAAP income statement has changed and is footnoted in our table attached to today’s earnings release.

Now turning to the balance sheet. Cash and cash equivalents including short-term investments increased from the prior quarter by 18.8 million from 203.7 million to 222.5 million, finishing at approximately $3.50 per fully diluted share. This increase was due primarily to net cash flow from operations of 16 million which included improvements in working capital of 7 million. Also, proceeds of 7.8 million from UMC’s capital reduction initiative in the prior quarter, and was offset by a $5.7 million reduction from the lower mark-to-market evaluation of our UMC stock.

Account receivables of 15.7 for the quarter were reduced 13.4 million as second quarter shipments albeit down, were also more linear than the prior quarter which allowed us to collect more in the quarter. The ending AR balance is equivalent to 19 days sales outstanding, down from 30 at the end of September. The AR balance was concentrated with approximately 50% attributed to our top customer.

Total inventory of 12.1 million decreased 7.1 million in the quarter and on a days of inventory base, from 40 days down to 30 days on hand at the end of December. The reduction was primarily in our whip die bank inventory.

Payables decreased 13.8 million or 50% from the prior quarter due to the timing of payments made during the quarter. The day’s payable outstanding came down to 58 days at the end of December, as compared to 79 days at the end of September.

In summary, we continue to have a favorable cash conversion cycle in the quarter of nine days, with days payable exceeding receivables and inventory and we improved our financial strength with solid P&L performance contributing to a very strong balance sheet.

This concludes our financial review of the quarter, and I will turn the call back over to Sylvia, for further comments on the business.

Sylvia Summers – Chief Executive Officer

Thank you, Pete. As the digital TV market moves from discrete to SoC solutions, Trident’s business is also transitioning as we shift from our traditional SVP product line, to HiDTV Pro, which is our SoC product line. Our revenue growth for the next four quarters will be shaped by the relative strength of these two product lines as customer adoption patterns and product mix evolve.

In the midst of this transition, competition is and will continually be fierce, which could impact our results for calendar year 2008. The market share loss that we have recently experienced is primarily the result of two factors. Number one, comfortization of the low end LCD TV market segment caused OAMs to focus more heavily on cost. Our existing product portfolio did not include a competitive low cost solution to address this need.

Number 2, we were late in securing a design win with a top-tier customer for HiDTV Pro QX. Both of these issues have been resolved. Let me now share with you some of the progress that we are making.

Trident started a transformation to become an SoC company about three years ago. We are big on our core expertise and video processing. We also made significant system and software engineering investments both in terms of internal core resources and IP partnerships. This expertise and investments have positioned us well in the SoC market. In addition, the very close relationship that we enjoy with our top OEMs help us validate our solutions in the real world. Our positioning is particularly strong in the full high-definition quality segment.

In particular, HiDTV Pro WX, QX, is still the only chip in the market today, that supports in a single device full HD, double scan with ABFC capability. Our architecture provides our customers with superior cost savings, combined with very high quality video processing capabilities regardless of whether the customer wants to use a 50, 60, 100, or 120 hertz panel.

On the digital front, with HiDTV Pro we are making good progress. Three of the top four OEMs have chosen Trident HiDTV Pro Solution, which projected ramp-up staggered between now and the end of calendar year 2008. We are still working on a design win opportunity of the four OEM.

We are already enjoying design wins with our HiDTV Pro, QX, WX. During our current quarter, we expect to be sampling a version of HiDTV Pro QX that will provide significant improvement in picture quality by removing vertical jitter.

Moving forward we planned to enter the second half of our fiscal year with new reduced cost SoC chip. Last month we take that our new HiDTV Pro AX, which has further integrated the modulation and IP. We expect HiDTV Pro AX to be sampling in February and several ODMs and top OEMs are already showing interest.

Success with this product will help us to gain market share in our low-to-mid range market segments. Based on these factors, we firmly believe that we will exit the current calendar year as a recognized SoC company, having strengthened our technology leadership. We also expect to resume revenue growth during the second half of calendar year 2008. As we work to transform ourselves from being a discrete image processing business, to a business based increasingly on digital SoC platforms, our focus will be on executing our product roadmap and optimizing our cost structure while strategically investing in our future.

I would now like to discuss with you, the steps that we are taking during this period of transition to ensure that Trident remains on target to maximize our competitiveness in this evolving business environment.

Engineering capability is Trident’s strength. We will continue to invest in R&D around next generation products, as well as higher levels of integration in our current products. As time to market is more critical than ever, under the leadership of our President, J.H. Chang, Trident will increase the focus on engineering deliverables, productivity and efficiency. The market has become more competitive, and in order to capture more than our fair share of the market, we intent to reinforce our sales and marketing organizations and bring support closer to our customers. I will personally be focused on driving these initiatives.

With these challenges lying ahead, we remain committed to leveraging our technology leadership to recapture our market leadership in the digital TV market.

Before I conclude, let me take a moment to formally welcome David Courtney, who we announced earlier this week, has joined our Board of Directors. His extensive background in technology companies such as TiVo and financial companies such as Goldman Sachs, will greatly add to the depth and breadth of our board both professionally and strategically. We look forward to David’s contribution as we move forward.

In closing, allow me to share some perspective after one full quarter on board as CEO of Trident. I can see the entire organization is pulling together to address the challenges that this new competitive environment has laid at our doorstep. Trident has a history of demonstrated execution, solid design teams, and top tier customer relationships. And today, we have the determination to lead in the marketplace.

We have exciting market opportunities ahead and excellent customer acceptance of our product line. The steps we have outlined will underpin the consistent delivery of our solutions. Strategic resource investment, timely delivery of new products, and sharp management focus will all contribute to improved results in the long term. I am confident that we are currently building a foundation that will enable Trident to achieve its growth objectives, while simultaneously adjusting for market challenges. This repositioning is one step in our overall strategy to lead the digital TV market by providing superior products and customer service, leading in turn to improve shareholder value. I look forward to reporting our progress to you in the quarters ahead.

And now, let me return the call to Pete to provide our forward guidance.

Pete Mangan - Vice President of Finance and Interim CFO

Thank you, Sylvia. And now for the business outlook. I would like to remind everyone that the following statements are based upon current expectations of today and include forward-looking statements. Actual results may differ materially. There can be no assurance of a stable economic environment, that generational transitions in digital media will favor the company, or that seasonal strength and consumer-based purchasing cycles will materialize.

Following the publication of our outlook and our quarterly earnings press release, Trident will continue its current practice of having outside corporate representatives and designated management meet privately during the quarter with investors, the media, investment and trade analysts, as well as others. At these meetings, Trident may reiterate the outlook published in this earnings release. The outlook will not be updated during the quarter and up until the time of the next quarterly earnings release unless Trident publishes a notice stating otherwise. Again, Trident will not update our guidance until the next quarter earnings release, so please ask your questions today during the general Q&A period.

Today we will provide a view of the next six months to set a baseline going forward. It is not our intent in the future to provide anything beyond quarterly guidance. As such, total revenues for the second half of fiscal 2008 or the six months ending June 2008, are expected to be in the range of approximately 100 to a 110 million. Breaking down the half a little further, we expect the current March quarter will be the stronger of the two quarters.

Non-GAAP gross margins are expected to decline to the range of 45 to 47% in the second half of fiscal 2008. Please note as the company’s SoC products ramp, and the market matures in the future, gross margins are projected to reach a level closer to 40%. Non-GAAP R&D expenses for the second half of 2008 are projected at the 11 to 14 million per quarter, driven primarily by increased spending on NRE, and further investing in engineering resources in the company’s China Development centers. Non-GAAP SG&A expenses are projected to remain flat at approximately 6 to 7 million per quarter through the second half of fiscal 2008.

That ends our prepared statements, and now we would be happy to take your questions. Eric.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Chris Chaney with Stanford Group. Please proceed.

Chris Chaney

Thank you very much for taking my question and good afternoon. First of all, I will begin with, Sylvia, could you just give us an outline or an outlook what you think about the overall LCD TV market for the calendar year. What’s your view on worldwide growth, regional growth? And then secondly, I would like to know whether or not there were any issues with double-scan panel availability in the quarter, whether or not that is going to be an issue going forward and sort of how is the supply of that product growth going forward? Thanks.

Sylvia Summers

Okay. The outlook that we have today is the LCD market is still growing, and we are not seeing right now, some double-scan panel issues. Insight the demand from our customers has been stronger in the past quarter than we were actually expecting. Hence, the fact that we have beaten our guidance.

Chris Chaney

Okay, could you maybe discuss sort of the ASP trends. I know the ASPs were down only slightly, what 2% to $12 in the most recent quarter, but as you move to the SoC, would you talk about the trend as you see that next increase, and what sort of ASP declines do you expect to see once you’ve got that product as the majority of your mix?

Sylvia Summers

Sure. As we integrate more and more features into the SoCs, we actually expect ASPs to remain fairly flat. We are having a lot of price pressure as you all know, but once again, there is more and more value into the chips that we are providing to the market, hence my answer.

Chris Chaney

Okay. Now as the unit volume grows in ‘08 and your foundry obviously you’re going to see, hopefully we will be able to give you some good pricing on wafers or is there – is that discussion underway, are you seeing progress in wafer pricing?

Sylvia Summers

Yeah, of course, it’s on the way. In fact, we have a very significant focus on cost reduction for our products, and it is not only wafers. It is also system you will take, it is packaging, and so on. The other focus of the company, by the way, is long cost. The value that we provide is not only in the chip and the integration, but the overall value is that we are actually reducing the bond cost below material costs for our customers.

Chris Chaney

Excellent. Okay, last question on the AX and the QX, I understand the AX is now taped out and sampling. Do you expect to see that in production in the second half of the year?

Sylvia Summers

It has taped up, it will be sampling, okay. And yes, we expect to see production in the second half of calendar year ‘08.

Chris Chaney

And do you expect one, two, or three design wins by year-end, or any idea how that progress is going.

Sylvia Summers

It’s too early to answer, but yes we expect a lot.

Chris Chaney

Okay. And then finally the QX. The QX, I suppose, is in production now. Are you going to be sampling the (Inaudible) rev C?

Sylvia Summers

Yes.

Chris Chaney

And are you sampling it yet, and have you had any feedback yet from that device?

Sylvia Summers

Go ahead Chang.

J.H. Chang

(Inaudible) that during the CS we already demonstrated our new MENC technology and quality, and that is the one that will be in our new QX revision and the feedback from our top tier OEMs are very positive.

Chris Chaney

Okay. Thank you very much.

Sylvia Summers

You are welcome.

Operator

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

Heidi Poon

Hi guys. Could I get a little bit more color on the March comment. You mentioned that it’s expected to be stronger, and then later you said ASP outlook is still fairly flat. So I guess the decline then is mostly driven by unit. Is that related to your customer’s production plan or shipment plan at this point? Could you give us some more color about that?

Sylvia Summers

The decline is related to the product transition that we are talking about. I mean, when we talk about calendar year ‘08 being a transition year from us, as we see our SVP line changing and becoming SoC. This decline in the first half is the result of those two relative ramps.

Heidi Poons

So basically, the way to understand is that you are shipping a lot less SoC, and then while the image processor ASP declines, but sort of shipping at market volume. Is that the way too?

Sylvia Summers

No, we are -- SoC volumes are expected to ramp this year. The SVP product line volume is expected to decrease as our customer transition to SoC.

J.H. Chang

Yeah, as Sylvia measure earlier that we have engaged three first-year OEMs and they will be using our digital SoC throughout this year, actually among those three first-year OEMs, one will start ramping production in Q1, the second one will be ramping production in Q2, I mean, March quarter and the June quarter, and the third one is expected to start ramping in the September quarter.

Heidi Poon

I see, I see. So, based on the three customers defined by you, do you expect that your first half and second half of calendar ‘08 can still maintain sort of like a 30-70, or 20-80 type of revenue split, between the first half and second half of the calendar year?

Sylvia Summers

No, what we expect will happen is that in the first half of the calendar year, we will be shipping the majority SOC revenue. However, as we reach toward the end of ‘08, we expect to reach the inflexion point between the two product lines.

Heidi Poon

So by the end of the December quarter, we should expect that you have 50% plus revenue from SoC.

Sylvia Summers

Close yes, yes. Okay. And – I mean, you misunderstand that as we have won those design wins, it’s all predicated upon how fast the customers will actually be ramping up SoC?

Heidi Poon

Okay, great. The final thing you have from with these three customers is it for all regions? Is it like U.S. and Europe, or it is more focused on a specific region?

J.H. Chang

As we explained in the past, the first year OEM is the first-time engagement for them to use our digital SoC. They typically will start from one geographic region. Then they quickly expand from there. Among those three first-year accounts one of them this year will be their second times to engage with us. So we do expect that they will start to use it in more geographic regions. The other two is the first time, so they will start with one, but I believe the expansion to the other geographic region will come soon.

Heidi Poon

Great. And lastly, just in terms of cash use, you have mentioned previously that you might address the low-end segment by perhaps purchasing certain design teams. Is that still in the works or is there more clarity about that strategy?

Sylvia Summers

So, right now we intend to address the low and mid range of the market with our PRO AX product which I discussed before.

Heidi Poon

Okay. So, no plans to make purchases at this point?

J.H. Chang

Well we continue evaluating various possibilities and if we see it really fits well into our overall product development strategy, then we will certainly consider it.

Heidi Poons

Okay, great thanks.

J.H. Chang

Thank you.

Operator

The next question comes from the line of Quinn Bolten with Needham and Company. Please proceed.

Quinn Bolten

Hi, I wanted to followup on Heidi’s question about the design wins at the Tier-1s on HiDTV Pro. It sounds like you are ramping in select geographies in calendar ‘08, and look to expand that to multiple geographies in model year ‘09. Can you talk a little bit about for those design wins if you have won say the European business, what that OEM is doing for model year in ‘08 in the U.S., Japan, or Asia, I mean, are they using your digital SoC in Europe and they are using Broadcom’s SoC in the U.S., and they are using Genesis’ SoC in yet another region, or is it that they are still using the SVP line in some of those other geographies?

Pete Mangan

Well, in general, they started in Europe, but at this point, they are actually considering using our Pro QX, WX as well as considering AX for multiple geography region.

Quinn Bolten

Okay, but to, again, just trying to get a feeling for the competitive landscapes, in some of the prepared comments, do you talked about increasing competition. Are they using digital SoC from your competitors and testing those out in geographies or are they still using discrete solutions in those other geographies?

Sylvia Summers

The answer depends on the customer. So some of them are postponing, some of their decisions on SoC. This is four top OEMs we were mentioning before. Some others are selecting a mix of vendors and we are one of them. This being said, as we are discussing with those top tier OEMs it seems obvious that they intend to give us a significant share of that platforms going forward. The question about the forecast is how fast they will do that?

Quinn Bolten

Is it a there a fair amount of software investment that needs to take place around a digital SoC, I mean, did the Tier-1 OEMs have enough resources to select multiple digital SoC vendors, and you know, give you 70% of the volume or 70% of the geographies and another vendor 30%, or do you think ultimately most of the Tier-1 OEMs will select just one digital SoC vendor because of the software investments?

Sylvia Summers

When I met with those customers, it was pretty obvious that they intended to choose at least two, but not four.

Quinn Bolten

Okay.

Sylvia Summers

Some of the OEMs today are using four, and very clearly because of the cost reduction in the market and their owning competition, they intend to focus only on two vendors, precisely for the reason you are saying. I think the strategy that’s right on task today to provide actually a platform, the whole HiDTV Pro series I mean, enable the customer to work with us on the software, and they will have to redo the work as they go from one platform to the next. So it is really a value that we provide to them.

Quinn Bolten

And then just a question on the competitive landscape. Have you seen a bifurcation in the sort of folks you compete against in the 1080-P double scan market versus, say the WXGA, I mean, are folks like M-Star, competitive at the low end, but not competitive at the high end, are you seeing sort of the same group of competitors in both market segments?

Sylvia Summers

Go ahead.

J.H. Chang

Yeah, the different competitors, they have different strengths. Overall, we are very well positioned in the full HD quality segment, and we believe that we are still commanding the leadership in both the display quality as well as the world-wide software stack. So back to your earlier questions. We are actually very glad that the three first tier OEMs already started adopting our solution. Because once they start investing in our software solution, and also because of our strength in overall display quality, we believe that we will be able to grow our digital SoC, our business opportunities in those first tier OEM accounts.

Quinn Bolten

Great. Thanks J. H Chang and just one last question for Sylvia or Pete. I think you have said in the past that you expect to be profitable each quarter of calendar 2008; I know you haven’t given specific revenue guidance for March and June, but it sounds like June is going to be below March. Would you still expect, based on current forecast, to be profitable in the June quarter?

Sylvia Summers

Yes, we still expect to be profitable on the non-GAAP basis in the June quarter.

Quinn Bolten

Great, thank you very much.

Sylvia Summers

You are welcome.

Operator

Your next question comes from the line of John Finn with Collins Stewart. Please proceed.

John Finn

Great. Good afternoon. The first question I had is what do you believe is going to be the deployment of double-scan TVs within your Tier-1 customer base. What percentage of TVs do you think that they will be shipping in, the second half of the year will have double-scan and what do you think that could be in 2009 at this point?

J.H. Chang

Based on our information from the double-scan panels in ‘08 our top tier accounts will be about 15% and they will be greatly increased in 2009.

John Finn

You said 15% J.H.?

J.H. Chang

Yes, one five.

John Finn

Okay, and what percentage of that segment of the market, what market share do you guys think you have in 08 at this point. Have you broacher that market share at this point?

J.H. Chang

Well, our customers, they are renting at different times as I mentioned Q1, Q2 and Q3, so once they fully ramp, I mean, if you talk about this, probably for example, the end of the year and we believe we will have significant share of that.

John Finn

Okay. And then, on the competitive from, in terms of MEMC, can you give us an update, J.H., in terms of you know, who are you seeing and obviously we would assume you’re seeing Micronas there, but are there other competitors that you think are making progress on the MEMC front?

J.H. Chang

Yeah, on the MEMC front, actually the solution providers can counter on the MXT, Micronas, Media Tek, and us. But in terms of the fully integrated solutions, we are actually leading in that front, and with our PRO QX, and with the new MEMC technology that we have demonstrated, we believe that we will have the upper hand.

John Finn

Right. Next question is, you talked about the 40% gross margins as your long-term target. Can you give us a sense of what assumptions have you guys built into that 40% gross margins? Is it -- are you going to start going after, kind of the low end of the market, a little bit more aggressively? Is it pricing pressures, and then can you talk about what sort of timeframe you guys would expect to start seeing 40% gross margins at this point?

Pete Mangan

John, this is Pete. Um, I think the connection that you should make is, as Sylvia described in the SOC ramp, that we would be sort of at an inflexion point towards the end of the year, as we transition to SOCs versus discrete, and it would be around that time period of the ramp indicated in the press release.

John Finn

So the calendar of 08 is potentially when you would start to hit that?

Pete Mangan

Yes.

John Finn

Okay. And last question, Sylvia, you had mentioned that you feel that you guys are investing now to position the company for aggressive growth in 2009. Can you give us a sense of, kind of your strategy for 2009, what do you see as some of the major market trends right now, and what aspects of the market are you hoping to kind of capitalize in 2009 to return the company to growth at this point.

Sylvia Summers

Well clearly what we are doing in the SoC is going to be significant in 2009. I mean, basically when we talk about 2008 as being the year of transition, we are in the process of capturing SOCs as we speak. And we believe that we have real opportunities beyond the current OEMs that we have. Going forward, we have also a very aggressive roadmap which continuously integrates more features on our SOCs, and we believe that as we talk about this roadmap to our customers, they are showing a lot of interest. So for us, what’s happening right now is that as J.H. explained, as we are getting engaged with our customers on the SOC, as they are getting used to working and designing those products, using our software, and as we deliver the next products, we believe that we will be in this competitive situation to expand beyond the current OEMs that we have.

John Finn

And, are there other secular trends that are you going after where you have talked about IPTV in the past, or are you thinking about diversifying your business outside of digital TVs, or are you primarily focusing on just getting share and integrating more bottom costs into your SoC going forward as a growth driver?

J.H. Chang

Yeah, I think we are actually looking to all of those. First of all, we want to secure our technology and quality leadership in the quality segment, and secondly, we are very aggressively doing the cost down such that we can be cost competitive, and at the same time we are looking into other adjacent markets and see how we can take advantage of our technology core competency, and we will be able to go into other market opportunities.

John Finn

Great, thank you.

J.H. Chang

Thank you.

Operator

Your next question comes from the line of C.J. Miu, with Lehman Brothers. Please proceed.

Olga Levinson

Hi, this is Olga Levinson calling in for C.J. I had a couple of questions. I think on the last, you generally tend to provide the revenue breakout between your four largest customers. Can you give us what percentage of your revenues was the fourth customers that are mentioned?

Pete Mangan

It is less than 10%.

Olga Levinson

Okay. And then, and then on the European customer who I think have adjusted, accounted for 17% of revenues or down about 26%, is there a reason for the decline, given that you are only now beginning to win business from them in market share, and know, the 26% decline seems a little steep for where we are in terms of seasonality. Can you discuss that?

J.H. Chang

Yes, some is because of seasonality but a big portion of that is because of the product mix shift. They actually are ramping down on the SVP-CX and start migrating to SVP-WX.

Olga Levinson

Okay, and does that entail lower units or lower ASPs I guess…

J.H. Chang

Yeah, the SVP-CX is used more broadly compared with the SVP-WX.

Olga Levinson

I guess, if it is used more broadly, so they are basically cutting it out of some of their socket is basically what you are implying.

J.H. Chang

Yes, yes, a portion of it.

Olga Levinson

Okay, got you. And then given your, I am assuming most of the market share loss that you have had versus 07, is pretty much playing out over the next couple of quarters and you have, relatively good visibility to at least with the second half of 08 will look like. Can you, I guess, give us relative ranges for your expected market share at your top customers for 08?

Sylvia Summers

No, what I said at the beginning was the following, I think the year is going to. The result of this year is going to be based on the relative ramps of our two product lines, and it is too early for us to give us guidance for the second half including market share.

Olga Levinson

Got you. Okay. And then, I think you know in the past like month or so you have indicated that you got three wins with your HiDTV Pro, you are working on the fourth, and then, I believe you also have hinted that you may potentially be picking up a fifth Tier-1. Can you talk about progress there, if that is going to materialize this year, if you’re getting increasing confidence in that?

J.H. Chang

Yeah, our new product especially Pro QX and also the upcoming Pro AX, we have received very good feedback. Others from our traditional top tier OEMs, we also received very high interest from the other customers that we have not engaged in the past.

Olga Levinson

All that, given what they are telling you right now, would that mean some sort of traction this year, or would that be more of an ‘09 picture?

J.H. Chang

It’s too early to say for sure, but we certainly hope that some of that can happen within this year.

Sylvia Summers

Let me try to recap here what we said, okay? We said that we lost market share because we didn’t have a low cost solution which enabled us to compete. We now have it, and we demonstrated this at CS, and we have a lot of interest. Customers are showing a lot of interest, existing customers, but also potentially new customers. We also said that our

Pro QX, last quarter we said we are designing that two top OEMs, this quarter we are saying there is a third one we are designing as. And we are working on the fourth one. But fundamentally, as the quarters – the various quarters of the years progress, we will be communicating on those design wins and then we will be giving guidance quarter-by-quarter. It is today, too early to say.

Olga Levinson

Okay, and then, I guess one final question on, given that you are now sampling the AX and you have sort of received good feedback initially from the customers, I guess how -- are you getting traction at, you know, some of the ODM customers and the Chinese Tier 2 and 3 customers? Is that also more of an 09 picture or will you see some of that fall into ’08?

Sylvia Summers

HiDTV Pro X has been typed out in December and will be sampling in February. So, what we are doing right now is demonstrating our products, explaining what is product, though the customers have not seen samples yet. But I guess, ODMs are interested and top OEMs are interested.

Olga Levinson

Okay. And then, just I guess, one final question on, given that you are going to be sampling, beginning to sample the AX and targeting pricing around $12 to $13, have you seen Media Tek try to become even more aggressive with their integrated solution to make sure that they maintain share at the ODMs?

Sylvia Summers

Let me correct you here. Nobody said that we were targeting $12 to $13 on Pro AX. And are we seeing Media Tek, yes we are seeing Media Tek as a competition.

Olga Levinson

Okay. Alright, thank you.

Operator

Your next question comes from the line of Sukhi Nagesh with Deutsche Bank. Please proceed.

Sukhi Nagesh

Yeah hi, thank you. In terms of your outlook for the next six months that you gave here, can you quantify kind of how much March will be, since you have any kind of visibility in what June will be? You just said March was going to be better than June, but how much I guess, that would be really appreciated.

Pete Mangan

Yeah Sukhi, this is Pete. Actually, we have sort of laid out the, that have to give you visibility to really the next six months, and again, just stay with the language that we gave in the statement, that as a stronger March quarter than June.

Sukhi Nagesh

Okay, well Pete, in that sense, do you expect your top tier customers to grow in both March and many of your top tier customers to grow in March or June in a sequential basis?

Sylvia Summers

Yeah, if you are asking us if we are going to be losing share in the first semester, the answer is yes.

Sukhi Nagesh

That you will be growing?

Sylvia Summers

No, I mean, you are asking us if the customers are going to be growing, right?

Sukhi Nagesh

Yeah.

Sylvia Summers

And, I am just making the statement that if you are actually asking us if we’re going to be losing share in the first semester, calendar year 08, then the answer is yes.

Sukhi Nagesh

Okay. Then on the operating expenses front, just trying to figure out, at this point, given that you have to get back on track, how much confidence do you really have in maintaining quarterly operating expenses under 20 million. Did you grow head count this quarter, are you expecting, I mean, I know in your press release you plan to grow a headcount particularly in China, but where are you on the headcount front, relative to last quarter, and how do you expect that to play out?

Pete Mangan

Well Sukhi, I would go as far as to say that the main driver for expenses in the next quarter or two is really the timing of our tape outs and our entry expenses, that we do have planned expansion in China as indicated in the press release. But the main driver is really mass tooling charges. So depending on the timing of those devices.

Sukhi Nagesh

Did your headcount improved in this last quarter?

Pete Mangan

Yes, we increased headcount slightly in the quarter.

Sukhi Nagesh

Okay. This morning, one of your biggest Japanese customers indicated that for at least for 2008, they were expecting blended ASPs to decline roughly 25% year-over-year, especially in the large screen LCD TV space. In your implicit assumption for this year, what are you assuming for ASPs decline in those markets that you are targeting there?

Pete Mangan

Yeah, as Sylvia had mentioned earlier, the blended ASPs look to remain at a similar flat level. The only other comment I would make, would be as we go through the quarters for March and June that we would have a declining ASP, let’s say mid-single digit this quarter, but really the signal of flat ASPs as the SoC business begins to contribute more.

Sylvia Summers

Remember that the value that we provide actually is in bottom cost reduction for the OEMs. So we look at HiDTV Pro-AX for example. The bottom cost for the end user, the OEM is significantly lower than it was say two years ago with SVP. That’s the value of integrating all of these features on one chip.

Sukhi Nagesh

Okay. Just the last question I had on the HiDTV side of things, can you give us a breakout of your main competitors, both in the UX and WX as well as the AX side. I mean, are you seeing the same competitors in both sides on the high end as well as the low end new entrance in that market that you are aware of?

J. H Chang

On the quality segment, currently the main competitors will be Media Tek and mainly they are using the low price strategy, try to get that share. And the low end, we believe the major competitor will be like a Morningstar?

Sukhi Nagesh

Right. Thank you.

J. H Chang

Thank you.

Operator

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

Adam Benjamin

Thanks. I know you talked a little bit about the seasonality and your split between March and June which would go against typical seasonality, but obviously you are not a good proxy for the market at this point given your share losses. But as you look out in September, I mean, that’s typically the seasonally strongest quarter, but is it possible to think that’s a flat to down quarter again?

Sylvia Summers

Right now we believe that the second half of calendar year '08, our revenues will start increasing

Adam Benjamin

And that's based on what?

Sylvia Summers

That's based on what we know of our design wins

Adam Benjamin

And those design wins are primarily in the digital SoC side, correct?

Sylvia Summers

Right.

Adam Benjamin

Okay.

Sylvia Summers

In fact we are not investing in engineering any longer on the analog side. All of our engineering is focused and has been focused for a while on SoC. Really, we believe, we are going to be able to capitalize that going into towards the end of the year,

Adam Benjamin

One of the things it appears that you are struggling from at least in the first half of calendar year ‘08, that your solutions are addressing a much smaller percentage of the overall market. What makes you think that changes in the second half?

Sylvia Summers

Because right now we will be sampling HiDTV Pro AX, which would enable us to expand beyond the current market that we can have with Pro QX

Adam Benjamin

So you are assuming in that assumption for the second half that you will have some AX revenue, even though the chip is not sampling until February?.

Sylvia Summers

Based on what we know today, we are assuming and the guidance we are giving, we are assuming that we are going to grow semester on semester. We are not giving you any guidance yet on how big that growth will be, because we are still working this out. But as we said, we will be sampling Pro AX. We are doing very well with Pro QX right now, we will be sampling Pro AX in February. We are seeing some interest and as the quarter is progressed, we will be informing you on what design wins we have.

Adam Benjamin

Got it. I mean, just to be clear typical seasonality in design cycles for TVs from the Tier-1s has been kind of a wrap up in the September or October timeframe for the following year. I mean, given the timing of where the AX is coming out, we cannot really expect any Tier-1 ones to be shipping that product in late calendar year 08?

J. H Chang

Adam, the three top tier OEM that we talked about actually one of them is considering using both our ProWX and QX and the other two one will be using the WX, the other would be using QX, so it's not just the double scan panel that's the only market opportunity for us. And furthermore, one of the first Tier OEM, they actually have two design cycle per year and the late engagement which I mentioned earlier that will have their product ramp up in the September quarter that actually will be replacing whatever solution they will be using in the first half.

Adam Benjamin

Got you. Thanks J. H. And then just last question on gross margin, historically you guys have talked about HiDTV Pro carrying not only a higher ASP, but a better gross margin. So – can you walk us through the dynamics of why the margin comes down so dramatically when the digital SoC becomes a much higher percentage of the mix, and then as you look out to calendar year ‘09 with that become even a higher percentage of the mix should we be thinking about a lower gross margin than 40?

J. H Chang

Well at this point I think the market is kind of under consolidation. So everybody is fighting like crazy to win market position. So we are facing much stronger price pressures in digital SoC markets as compared with our SVP product line. And that’s the reason to cause the gross margin decline as Pete mentioned earlier.

Adam Benjamin

Got you. So we should be thinking something in the lines of a 30% level going forward.

Pete Mangan

Yeah. I think we're looking at it is that the leader of this market will be able to achieve around 40% and competitive margin could be less than that.

Operator

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

Tayyib shah

Hi guys. I wanted to clarify something about gross margin guidance of 40% fall in the ramp of DTV products. Do you expect to have low margins on DTV products right out of the gate or is it that that DTV revenues are not materializing to the extent where they would be meaningful and compensate for margin erosion and legacy products?

J. H Chang

Yeah. It really depends on each customer engagement and also the competitive situation that we are facing at each customers. At this point we feel that it is important for us to grab the market share, and as the market went through this consolidation phase, we do see some opportunity in the futures where we may be able to gain back some point at the gross margin side.

Sylvia Summers

Margins will depend also of the HiDTV Pro mix as we are introducing a broader portfolio and more integrated portfolio bringing more value potentially, we could derive better margin from the high-end.

Tayyib shah

So has your gross margin outlook deteriorated because now you're expecting a lower level of revenues from DTV products through calendar '08 than before?

Sylvia Summers

No. The margin is coming down because the revenue from SVP is coming down.

Tayyib shah

Okay.

Sylvia Summers

The SVP revenue was extremely profitable.

Tayyib shah

Okay. And can you give us an idea of where the DTV products are priced at this point. It sounds like you are addressing them fairly, aggressively. And should we think that you still will be able to get reasonable premium for DTV products versus your analog products?

Sylvia Summers

I wouldn't say it's like this. What we said was that on a blended basis we believe our ASP's are going to stay flat going forward. The value in the SoC is actually growing. But overall from a business and from a financial standpoint we should be able to maintain ASP's kind of flat going forward. We're not comparing the same thing right. As this market matures you're putting more and more features into the silicon. And so, the value we bring to the market is higher. At the same time because of price compression the ASP's we derive from that are remaining fairly flat.

Tayyib shah

Okay. And then, given the revenue decline that you guys are forecasting for the first half of '08. Have you considered any headcount reduction? And what would be a sustainable level of OpEx in the second half of calendar '08?

Sylvia Summers

Though we are going to be working on a strategic plan as I said in my presentation. We have not considered any headcount reduction yet. Our headcount is mostly engineering. The engineering organization is the crown jewel of this company. So as we transition during this year, as we go through fairly difficult time at the beginning, but we expect to start growing again as we are wining design as we are speeding up our roadmap. I think that's what is strategically important.

Tayyib Shah

Okay, thank you.

Sylvia Summers

Welcome.

Operator

Your next question comes from the line of Jay Srivasta with Roth Capital Markets. Please proceed.

Jay Srivasta

Thanks for taking my question. In terms of your confidence for '09, it appears you feel reasonably comfortable with these new products coming out. Have you considered any stock buybacks to reflect the confidence?

Sylvia Summers

I have been asked this question several times and the answer is no. In fact I've had different feedback from analysts telling me oh my god! Don't touch your cash right now. So, we had a board call and we decided not to do it.

Jay Srivasta

Okay. In terms of the '09 cycle itself, what gives you the confidence that the products you're developing today are going to be at the right moment at the right time? Clearly what happened over the last 12 months is not in sync with what your products were going. So, can you address how would you adapt to the changing environment?

Sylvia Summers

The only thing I can tell you is what I have witnessed. I mean, a quarter ago, we had two design wins with HiDTV Pro QX. This quarter we had three design wins. A quarter ago we didn't have Pro AX, now we're going to be sampling Pro AX and customers are interested. And we are speeding up our roadmap. We have a roadmap which is very aggressive. We are working with our customers to determine what feature they would like to see in our next SoC. And then it's all a matter of execution. So we need to execute. And if we execute, we'll be able to regain the market share that we've lost.

Jay Srivasta

Okay my last question, ever since Genesis got sold, there's been a lot of talk about how you'll be in play. Where are you at in terms of looking at merging with other companies or being acquired? What is the board's position here?

Sylvia Summers

The board's position is that we have to regain market share and we have to start growing again. And the board's position is that if there is some future, then we'll talk to them.

Jay Srivasta

Thank you.

Sylvia Summers

You are welcome.

Operator

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

Mahesh Sanganeria

I just want to understand your guidance a little bit more. I can understand why you don't want to give a lot more color on how the second half is. But you can help us in terms of some scenario so that we can reasonably come up with a model. And so, should I think of this way that your June is down because you're losing few sockets in June in terms of market share. And then with a base level of June you should grow seasonally and little faster because you've new sockets coming in line, so going forward that you are not losing SVP sockets in the second half of '08. Is that the good way to think about it?

Sylvia Summers

We are going to be low and coming down in the first semester because we lost sockets in the past. We're currently working on winning sockets of top customers and whether or not the second half will be strong will be the result of how fast the SVP product line will come down versus HiDTV Pro will go up. Now HiDTV Pro, as J. H. mentioned, one customer is going to turn it on actually right now, in this quarter. And then you're going to have these staggered with the other customer during the year. How much of this will go up really depends on those two lines, on those two product lines.

Mahesh Sanganeria

So is SVP is declining every quarter? Going forward?

Sylvia Summers

Yes. We are transitioning to a full SoC Company and we are transitioning to on the SoC product line.

Mahesh Sanganeria

But you’ve mentioned that at least one customer has pushed up the transition, so they will continue to use SVP. So that customer should be ramping SVP in the second half. Right?

Sylvia Summers

It is all relative, right?

J. H Chang

Yeah, that particular customer that Sylvia mentioned earlier, they are postponing their new digital socket selections until the mid of the year for the 2009 production. But overall, as Sylvia mentioned earlier that we do expect that the second half of the calendar year, we will resume growth in the second half. What I'm saying – what I am asking is that growth is coming entirely from the digital, the SVP quarter-over-quarter. It has continued to decline every quarter.

J. H Chang

Of course the combined revenue as Sylvia said, we will resume growth which means that we are seeing the more significant contributions from our digital SoC at the second half such that we can resume our overall growth.

Mahesh Sanganeria

So, out of your four customers three are transitioning to SoC, but they are transitioning to newly to SoC in the beginning of this year?

J. H Chang

Yes. One we'll start renting up in the March quarter, the second one in the June quarter, and the last one in the September quarter; however, one of them actually will be continually using our I mean, the display solution.

Operator

We have time for one more question. Your next question comes from the line of David Wu with Global Crown Capital. Please proceed.

David Wu

Yes. Good afternoon. Maybe I've a question each for J.H. and Sylvia. J.H., when you have a large engineering group that is been used to doing high performance, high end leading edge chips, how do you divide that engineering group into two, one of which thinks like the old Trident and another group have to think like a Morningstar? Because essentially you got to compete against the Morningstar and the Media Tek sort of world moving forward, and on the AEX, can you say that how does that compare with the kind of class of products that Media Tek and Morningstar are fielding at the $500 to $900 TVs that I see at Costcos and Wal-Marts? For Sylvia I was wondering whether you can talk about what are the most logical places you can go besides just LCD TV with an elevation into say set-top box like some of the other people came from set-top box into LCD TV, but whether it's a more logical diversification on a horizontal scale either or for you?

J. H Chang

Okay. First addressing your question about the design team. In the past, we have one design team looking on the working on the SVP borderline and the second design team working on the HiDTV borderline. Right now we have those two design teams all working with the HiDTV SoC borderline. One focus on the midrange and high-end and the second team is working on the low-end.

Your second question about the comparison of HiDTV Pro AX against the other competitors' product. From the IT integration, from the integration point of view is comparable, but we do believe that we will deliver better display quality. So, with everything equal we believe that from the top tier OEM point of view we will still be the favorites.

Sylvia Summers

On the question for the future, I mean, obviously the topic of connected TV is an important one to us, which we are going to be addressing going forward. We're putting teams together right now to identify where our technology could best apply and it's really way too early for me to talk about these. The first goal of this company is to regain growth and regain market share, and become prominent again on the high deviation LCD TV as it moves to connected TV. Then, as we come closer to making a decision on the adjacent market, we'll make sure to report on that.

Operator

Ladies and gentlemen, this concludes our Q&A session. I'll like to turn the call over to Sylvia Summers for closing remarks.

Sylvia Summers

So, I want to thank everyone today for being here and thank you operator. J.H., Pete, and I really appreciate your presence in joining us today. We hope to see some of you at the upcoming Thomas Weisel Conference in San Francisco next week. We will be there, Pete and I on Monday 4th. Thank you for your interest and support for Trident. We look forward to reporting on our progress next quarter. Thanks a lot.

Operator

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect and have a good day.

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Source: Trident Microsystems Inc. Q2 2008 Earnings Call Transcript
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