Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Zoran Corporation (NASDAQ:ZRAN)

Q4 2005 Earnings Conference Call

January 30th 2006, 5:00 PM.

Executives:

Bonnie McBride, Investor Relations

Levy Gerzberg, President and CEO

Karl Schneider, Joint Senior VP-Finance and CFO

Analysts:

Jason Pflaum, Thomas Weisel Partners

Rick Schafer, CIBC

Brian Alger, Pacific Growth Equities

Quinn Bolton, Needham & Company

Craig Berger, Wedbush Morgan Securities

Robert Adams, Montgomery

Jennifer West, Merriman

Heidi Poon, Piper Jaffray

Tayyib Shah, Longbow Research

Jason Paraschac, Kaufman Brothers

Richard Prospero, Janney Montgomery Scott

Adam Benjamin, Jefferies

Greg McCole

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter Year-End Conference Call. My name is Michelle and I will be your audio coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today’s presentation. Operator Instructions. As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to host for today’s call, Ms. Bonnie McBride, please proceed ma’am.

Bonnie McBride, Investor Relations

Thank you. Good afternoon everyone, and thank you for joining us today to discuss Zoran’s fourth quarter and full year 2005 results. And each of you should have received the copy of today’s earnings release. Joining us today from Zoran’s management team are Dr. Levy Gerzberg, President and CEO; Mr. Karl Schneider, Joint Senior Vice President of Finance and Chief Financial Officer; 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 market for the company’s product, revenue projections, the outlook for our manufacturing capacities and new product development and certain trends affecting gross margins and operating expenses for future period. I wish to caution you that such statements are just predictions and actual results or events may differ materially. Please refer to the documents that company files from time-to-time with the SEC. These factors contain important factors that could cause the company’s actual results to differ materially from those contained in our forward-looking statements. I would now turn the call over to you Levy, please go ahead.

Levy Gerzberg, President and CEO

Thank you Bonnie and good afternoon everyone. The fourth quarter will mark the end of a very successful year for Zoran in which we achieved many key objectives. In our Mobile division, revenues from digital cameras grew over 217% annually as we substantially grew our market share. Annualized revenue from DTV grew 75% and we are quickly establishing ourselves as the leader in this market. In Imaging, we maintained a stable steady stream of revenues and profit, introduced multiple key products and secured our position in the growing photo printer market. And in DVD we greatly improved the financial model as a result of our continued success in providing increasingly feature-rich solution for the evolving market while reducing overall systems cost.

Throughout 2005, we secured many, many design wins across all product lines from major companies such as Canon, Dell, Epson, HP, Kodak, LG, Olympus, Orion, Pentax, Philips, Ricoh, Samsung, Sharp, Toshiba, Xerox and Xoceco among others. The impact of these achievements is translated into a much stronger company with continual increases in profitability from our well-diversified revenue base. We are looking forward to additional successes in 2006.

Before moving on to discussion of the quarter, I wanted to talk about another major event of the run, which we announced just last week. There was illusion for our case against MediaTek. As we announced on January 26, 2006 Zoran will receive an initial cash payment for licensing fees as well as ongoing monthly payment related to royalties. In addition, we expect to resolve a separate litigation against MediaTek and United Microelectronics Corporation within the next 30 days.

Now on to an update of our business. In digital cameras we once again achieved record revenue for the quarter securing new design wins with two tier one customers. Their ongoing strength in demand for our COACH solution in top tier manufacturers drove continued design-win activity and we are confident we increase market share. A significant portion of revenue came from our COACH 8 processor with numerous design wins, some of which we go into mass production with top tier manufacturers during the current quarter.

We began demonstrating the COACH 9, which offers enhanced image quality and increased performance along with many other new features to customers during the fourth quarter and already have commitments from some key players for future designs. We will be launching these innovative new solutions at the PMA show in February. Pricing in digital camera market continues to decline somewhat as the markets matures. However, as a result of the innovative features and a favorable product mix with our COACH product lines, our ASPs actually increase during the year.

In addition, many digital camera makers are experiencing margin pressure and are more interested in OBM solutions and replacing the expensive Captive ICs with more cost effective high performance solution from Zoran. We expect this trend to continue and enable further market share gains in the future.

In our multimedia phone market segment, we continue to achieve design-wins in China and Korea. We received initial sample of the APPROACH 5c, a highly innovative multimedia acceleration processor, which offers a wide range of features while maintaining its cost effectiveness. We re-launched this product in the upcoming 3GSM show in February and are very excited about the potential in the high growth multi-feature phone market.

Results for the Imaging business came inline with expectation, declining somewhat due to seasonality. The trends in the market however are favorable and we believe this business will grow in 2006. The continued growth of digital photography is driving increasing demands for snapshots photo printers and photo capable all-in-one, with OEMs aggressively pursuing new features such as Bluetooth wireless printing and automatic red eye removal. Our Quatro product line is a fully programmable DSP for image processing making it well suited to accommodate new proprietary features. Also surprising in the images, one and only segment continues to be a key competitive issue, we are pursuing a strategy of increased integration with our latest generation Quatro product with 4050 and with 4200.

Our primary focus going forward will be on these new ICs and we expect several new designs based on them including inkjet all-in-one and (indiscernible) printers to reduce shipping over the next several quarters. In the enterprise or office segment market, new products based on our IPS 7 software were introduced during the quarter and we expect to see many more throughout 2006. Our IPS 8 which will be available in the third quarter includes our new interpreter for Microsoft new document format to be included in the next major release of Windows operating system, Vista.

In DVD, revenue results were inline with expectation while profitability improved. The improvement was due to a favorable mix including strong sales of our higher margin Vaddis 8 processors in an increasingly wide range of products such as portable home theatre in a box and premium DVD players. Nearly all of our customers has transitioned to the Vaddis 8 with the exception of a few making very high-end products using Vaddis 7. They are likely transitioned during 2006.

Early this month, we introduced our latest generation Vaddis 9 processor, which has transit the full range of DVD application and is optimized for the growing portable market. The introduction of this product delivers on our strategy to improve margins in our DVD business by continually introducing innovative new products with lower system cost. Customer’s acceptance is already strong with many getting ready for mass production in the coming months. We expect to transition customers to this new product during the year.

Another significant achievement was our introduction of a new generation of our Activa DVD recorder chipset, a solution designed to meet the demands for our customers at affordable price level. The Activa family now includes the high-speed integrated drive electronic interface to enable full personal video recorder functionality. We continue to lead the DVD combo market and see increasing demand in particular for DVD plus audio or SACD as well DVD portable.

In addition to top-tier customers we’ve mentioned in the past, we are now shipping all these DVD processors to LG, Philips and Samsung. Our HDMI product continues to be in a very high demand across multiple geographies exceeding our expectation. In DTV, our strategy to address the foreign market including CRTs, flat panel and set top boxes with technology that served high-end, mainstream and high volume end markets is coming to provision. In addition, our advance technology in this space has already positioned us to be a leading supplier to the growing DTV market DCU and in the future. In HDTV, we successfully launched our SupraHDTV processors into production for new TV product from several top-tier OEMs. At CES, company such as Philips and Orion demonstrated mass market ATC compliance CRTs based on a combination of our SupraHD 640 and Cascade 2 ICs. We expect this new compliance market created by the FCC mandate to grow rapidly during 2006 and our overall position with our product offering and customer base to capture large portion of this 25 inch and above market.

We are extremely pleased with the market acceptance of our SupraHD 660 IC. This SLC demonstrates the high level of integration required to become a leading supplier in the integrated TV controller and MPEG video recorder market. Our customers are particularly attracted to the quality of the analog video processing and scaling performed by this SupraHD IC. At CES this product was demonstrated in production in SCV television from Sanyo as well as by key manufacturers such as Xoceco.

In addition, we are seeing renewed demands for our Generation 9-Elite product as a result of its strength in the emerging market for high definition PVR system for the Japan cable market as well as for the growing digital TV market in Australia. Existing and previous customers are coming to us to address this demand and large cable set top box companies such as Humax and Homecast have already demonstrated new product.

Zoran’s Cascade 2 demodulator product line achieved significant growth during the fourth quarter. This IC family is shipped to many of our SupraHD customers as well as into the tunnel network interface module market. Major suppliers including Semco, Sharp and Thomson are now in production. Our HDTV product line exceeded our expectations during the quarter as many of our customers secured new export business for free-to-air set top boxes for markets in the UK, Spain, Germany and other European countries through major regional brand such as Grundig and Goodman. These product line continues to grow market share and revenue for Zoran and is successfully being deployed inside flat panel television supporting the DVB-T standard. Several of our customers are currently designing products to address this market and already two Xoceco and Acer has introduced models to be shipped under well-known brand.

The low-end DTV market has two significant growth drivers. First, is the FCC tuner mandate, the next tuner mandate must to know March 1, 2006 when all mid-sized TVs 25 inches and larger manufactures or imported into the US must include ATSC digital TV tuner demodulator and decoder. By March 1, 2007 a 100% of TVs regardless of size and 100% of VCR and video recorders – DVD recorders with a TV tuner must also meet this requirement.

The second growth driver is the DTV transition wave, which is nearing Passage. At last report, the House and the Senate have agreed that February 17, 2009 is the last date for TV stations to complete the transition to digital broadcasting. This transition from analog to digital TV should begin on January 1, 2008 as TV stations start returning their analog licenses to their government and licenses for the free spectrum will later be auctioned off generating up from $30 billion. For the industry and Zoran, these are excellent developments since we are already working with several manufacturers to these conservative workers to meet potential demand once the compression starts the program is rolled out in early 2008.

In addition, in December, we announced the availability of two new reference designs for DVD recorders with integrated support for digital broadcast standards: one is ATSC compliance for the US; and the other offers DVD for Europe. We believe these factors coupled with continued success across all of our products in DTV business are enabling Zoran to emerge as a leader in the existing and fast-based digital television market.

Before turning the call over to Karl, I want to reiterate our enthusiasm for Zoran’s achievements for the quarter and for the year. Our strength across product lines was prominent at CES where over 100 new products were on display. We are now executing on all our key objectives, diversifying our business and revenue stream, increasing profitability, growing market share and taking a leadership position in all our target market. We look forward to updating you on our continued success in the coming quarter. Karl?

Karl Schneider, Joint Senior Vice President of Finance, and Chief Financial Officer

Thank you Levy, and good afternoon everyone. Revenues for the fourth quarter ended December 31, 2005, were $109.3 million, a 7% decrease from the $117.5 million reported last quarter and $46.1% increase from the $74.8 million in the fourth quarter of 2004.

On a GAAP basis, our net loss for this period was $2.1 million or $0.05 per share on 45.2 million common shares compared with net income of $5 million or $0.11 per diluted share on 46.6 million common and equivalent shares for the previous quarter, and a net loss of $30.1 million, or $0.70 per share on 43.2 million common shares for the fourth quarter of 2004. Included in the GAAP net loss for the quarter were charges of $13 million related to the company’s amortization of certain ongoing acquisition related expenses such as the amortization of purchase intangible assets and deferred stock compensation.

Excluding these charges are adjusted non-GAAP net income for the fourth quarter was $10.9 million, or $0.23 per diluted share on 47.1 million common and equivalent shares. This compares with non-GAAP net income of $18.1 million or $0.39 per diluted share reported last quarter, and with a non-GAAP net loss of $16.3 million or $0.38 per share, for the fourth quarter of 2004.

For the full year of 2005, total revenues increased 4.5% to $395.8 million compared to $378.9 million for 2004. Our GAAP net loss for the year was $27 million or $0.61 per share compared to a net loss of $47.4 million or $1.11 per share for 2004. Non-GAAP net income for 2005 which excludes amortization of acquisition-related purchase intangibles, deferred stock compensation and in-process research and development charges from reported operating expenses was $27.5 million or $0.61 per diluted share, compared with $2.8 million, or $0.06 per diluted share for 2004.

Hardware product revenues decreased sequentially by $8.8 million or 8.4% during the fourth quarter to $95.4 million. This decrease was primarily the result of seasonal declines we typically experience in our DVD business. Software royalties, licensing and other revenues increased by $600,000 or 4.5% to $13.9 million during the same period. Revenues by product families for the fourth quarter of 2005 were 34% DVD; 34% mobile; 18% imaging; and 14% DTV. This is clear evidence that our diversification strategy is working when compared to the same period last year which was 50% DVD; 28% imaging; 14% mobile; and 8% DTV.

Sales by geographic region during the fourth quarter were 38% China; 26% Japan; 16% Taiwan; 12% US and Europe; and 8% Korea. Overall gross margin for the fourth quarter was 54.5%, this compares with 54.3% last quarter and with 25.8% for the fourth quarter of 2004. Our gross margins remained strong in the fourth quarter as DVD margin excluding any benefit from the release of inventory reserves continue to improve even faster than we had expected. Our DTV margins also showed improvement over the previous quarter as we began shipping our new SupraHD par. Product revenue mix, which included a solid showing of 34% from our mobile product family driven by COACH also contributed significantly to our gross margin results.

During the fourth quarter the benefit to our gross margin derived from the release of inventory reserve associated with Vaddis 6 was less than 100 basis points measured strictly on the change and the reserve account. We are no longer benefiting from the sales of previously reserved Vaddis 6 inventory.

Research and development spending increased by 2.6% in the fourth quarter of 2005 to $24.1 million from the $23.5 million reported last quarter. Compared with the same quarter of last year, R&D spending increased 15.9% from $20.8 million. This year-over-year increase in R&D spending can be primarily attributed to the acquisition of Oren Semiconductor. R&D spending tends to fluctuate from quarter-to-quarter based on the timing of major engineering related expenses such as takeoffs, which include map set and engineering wafers.

Selling, general and administrative expenses increased by approximately 12.4% to $24.5 million in the fourth quarter from the $21.8 million dollars reported last quarter. Compared to the same quarter last year, SG&A expense was up 44.1% to $17 million. SG&A increased during the fourth quarter as we took a precautionary measure and increased our allowance for accounts receivable by $3.5 million to cover slow paying account. This is a non-recurring charge and we believe will be recoverable in future quarters and as our conservative approach to potential risk associated with increasing business in certain regions of the world.

Moving over to the balance sheet, cash, cash equivalents and short-term investments increased by $19.2 million to $149.3 million from $130.2 million reported last quarter. Cash generated from operations during the quarter was $17.7 million. Accounts receivable ended the year at $70.2 million, a decrease of $10.5 million from the $80.7 million last quarter with DSOs decreasing to 58 days versus 62 days in the previous quarter.

Inventory balances at the end of the quarter increased to $32.6 million from $27.3 million for the previous quarter. Inventory returns for the fourth quarter were approximately six.

I will now address the Company’s outlook for the first quarter of 2006. During the Q&A session, you are encouraged to ask any questions that may not be covered during the course of our comment as we do not anticipate having to provide any 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.

Our guidance for the first quarter of 2006 excludes, I repeat, it excludes the benefit and the resulting tax impact from the proceeds to be received pursuant to the agreement entered into with MediaTek in connection with the recent settlement of patent litigation. The following outlook is based only on Zoran’s expected results from core operation. The settlement proceeds will have a positive impact on revenue and other income in the first quarter as well has a possible impact on our tax expense for Taiwan tax that maybe withheld.

For the first quarter of 2006, we currently anticipate the revenues will range between $103 and $106 million, or down approximately 3% to 6% from fourth quarter levels, which is a smaller decline than we normally see during this period. Overall gross margin should range between 50% and 51%, excluding any acquisition related cost and option expense under FAS 123(NYSE:R), which we will adopt in the first quarter.

Operating expenses are expected to range between $46 million and $47 million. Acquisition related costs are expected to be approximately $13 million. The GAAP net loss for the quarter is expected to range between $0.18 and $0.15 per share; excluding our acquisition related costs which are not considered part of our core operating expenses and option expense under FAS 123(R). Non-GAAP earnings for the quarter are expected to range between $0.10 and $0.12 per share on approximately 47.5 million shares. With that we’ll open up the call for questions, operator please go ahead.

Questions-and-Answer Session

Operator

Thank you, sir Operator instructions and our first question, sir, comes from the line of Jason Pflaum of Thomas Weisel Partners, please proceed.

Q - Jason Pflaum

Yes sir, good afternoon, nice job guys.

A - Levy Gerzberg

Thank you.

Q - Jason Pflaum

Maybe just to start on the outlook there, can you talk generally about where you seeing the better than seasonal strength of it, is it coming mainly from your DTV business or is it a combination of several businesses? That will be helpful, thanks.

A - Karl Schneider

Yeah, Jason, I think we expect a little bit of strength in the TV business. We expect you know our Imaging business to run in the flattish range of course and then DVD is the one that’s typically down a little bit in the first quarter and then our mobile business we are expecting to be down slightly in the first quarter.

Q - Jason Pflaum

So, DTV up sequentially?

A - Karl Schneider

Yeah.

Q - Jason Pflaum

Okay, and then as far as the gross margin, given some of the mix consideration of DVD down, DTV up, I guess that one would expect, what is expected gross margins to be a little bit higher if you could just talk about what’s behind some of your gross margin guidance there?

A - Karl Schneider

Sure, one of those primary guidance, as I mentioned in the prepared remarks, you know, our mobile group had played a fairly significant part of the strong gross margins. We do anticipate that going forward COACH margins will come down. I think we are fairly consistent in that message. We are seeing improvement in DVD margin, and so it’s primarily a product mix issue right now.

Operator

And our next question sir comes from the line of Rick Schafer of CIBC. Please proceed.

Q - Rick Schafer

Hi, congrats again guys on another good quarter. I just got a couple of questions, I guess, the first one is following upon your Karl your digital still camera comments. Looks like with camera about 34%, 35% of fourth quarter sales, its really becoming looks like your biggest business maybe going into 2006 if we are thinking of it the right way, something of it with the right way, you know, usually lot of drivers there maybe I don’t know what’s your comment or what you think organic growth is in that market and maybe comment on what penetration rate is right now for merchant supply versus what you think it might be by the end of the year?

A - Levy Gerzberg

Yes, Rick the number of drivers for our growth in this market. First of all our market share is growing, there is no question about it and there are several reasons for it. One, there is a definite transition from the captive solutions to the merchant solution and we started to see it already and as we said we have a number of new first few customers, players in this market using our solution. So, this is one driver, second we have new products that are we believe superior. They are very competitive, very cost effective, many new features and that has the growth of market share, in addition to it the entire market is growing. The estimates are that this market will continue to grow about 10% ’06 over ’05. And another driver in this market many new features, high resolution, consumers are switching, reflecting their cameras, the new cameras and all in all we believe that a percentage of the captive to answer your last question is down to about 40% it used to be this time last year it was probably close to mid 60 or closer to 60%, now it’s 40% captive, 60% merchant and the number of merchant is increasing and we are growing with it.

Q - Rick Schafer

And that’s, now you are talking about that’s today, that’s not by the end of this year, right?

A - Levy Gerzberg

Oh, by the end of this year we believe that the percentage of the captive solutions will be even smaller. We will approach the 30% and we know it will stand, because we are working with some of the main players in the market and we see where they are going.

Q - Rick Schafer

That’s great, and then just a quick follow-up on DVD. It sounds like DVDs its going to be down sequentially like it usually is. Is it down less than normal, I mean are you guys seen any inventory out there from any, you know, any competitors have any inventory in the channel? That’s my last question, thanks.

A - Levy Gerzberg

No, we do not have any inventory problems or build-up in the DVD market and channel, as you found, we think that if there will be any decline from this seasonal decline between for many, many years in Q1 then starts to take off again. And we believe that with our new product from the market the Vaddis 8, the Vaddis 9, the Vaddis 7 also, we’ll see a good momentum into the year.

Operator

And our next question comes from Brian Alger of Pacific Growth Equities, please proceed.

Q - Brian Alger

Hi guys, obviously it’s a bit difficult for you guys to quantify what kind of benefit you are going to get from the MediaTek settlement. I am wondering if you could, you just help us clean up our books in terms of how much you’ve been charged over the past several quarters in terms of the legal cost?

A - Karl Schneider

Okay, Brian I’ll do, I’ll do my best to quantify that for you. In 2005, towards the second half, of course our legal cost came down a little bit; the trials were in the first half of the year, so on a cumulative basis during 2004 and 2005 the total legal costs that we paid were somewhere probably approaching $15 million.

Q - Brian Alger

Okay, so based on the press release, we are going to get a positive return on that as a result?

A - Karl Schneider

Sure, absolutely.

Q - Brian Alger

Okay, and I know this is a, you know, bit of touchy subject, but you went through on the inventory write-off sent and how you had less, I guess than a 100 basis points benefit in the quarter. How much benefit did you see from the written-off inventory in terms of, you took a charge, and then how much did you sell it or what the net delta there?

A - Karl Schneider

I guess, we have to add it up, I mean basically buying we ended up selling almost all of that inventory but I don’t have the total benefit in front of me, but we ended up selling all that inventory in 2005.

Operator

And our next question comes from the line of Quinn Bolton of Needham & Company, please proceed.

Q - Quinn Bolton

Sure, just wanted a clarification and then a couple of questions, the Vaddis 6 inventory now just for clarification that is totally gone, there is no more benefit going forward?

A - Levy Gerzberg

There is no more benefit going forward.

Q – Quinn Bolton

Okay, great, and then second, sort of following on Brian’s question about the legal expenses, I mean, seems to me you had some higher legal expenses in ’05 with MediaTek as well as the MediaTek UMC suit expected to settle in 30 days, it would seem me to that legal expenses going forward should come down plus you talked about $3.5 million bad debt expense included in SG&A in the fourth quarter. So, I guess I am surprised at the OpEx number is roughly flattish, its down a little bit but you know still fairly high, I mean, I would probably you would see a bigger decrease in the first quarter. So I am just wondering if you can kind of go through some of the OpEx guidance?

A - Karl Schneider

Well, first of all, the OpEx guidance, remember last quarter I think we guided about $44 million to $45 million and if you take the $3.5 million that we put away for accounts receivable reserve, we are actually at about $45 million. So yeah, we also expecting that there will be some benefit going forward in legal but it’s not, you know, it’s over yet. I mean we have recovered quite a bit of cost up through, you know, the first quarter as far as getting the settlement done, and if you remember what Levy said in his earlier comments there is still another piece to come. So, that being said, the other thing it will drive up some of the cost in Q1 is primarily related to the number of engineering case outs in the light that are in the quarter. As you may remember, we are actually transitioning to some 90 nanometer technologies and so some of the takeoffs that we are going to start experience are little, that we are going to experience going forward are little more expensive than they have been in the past. So, all in all we were expecting OpEx to be up a little bit.

Q - Quinn Bolton

Okay, but CapEx tend to be lumpy and legal expenses once MediaTek UMC is wrapped up may go down, so this maybe…

A - Karl Schneider

Yeah that’s true.

Q – Quinn Bolton

So, June quarter could be, I know you are not giving guidance but could be down on OpEx basis?

A - Karl Schneider

You can draw your conclusion from what we’ve said.

Q - Quinn Bolton

Okay and then just the last clarification on, you’ve mentioned two new tier 1s for the COACH product, both of those tier 1s ramping in the March quarter, is that what you said?

A - Levy Gerzberg

Yes, they are in production now and we will start to ship soon, but we are not in a position to disclose the remainder.

Operator

And our next question comes from the line of Craig Berger of Wedbush Morgan Securities. Please proceed.

Q - Craig Berger

Good afternoon, and thanks for taking my question. Just on the DVD pricing front, can you give us an update on how pricing is rising?

A - Karl Schneider

Sure, actually DVD pricing was not too bad in the quarter. We saw an ASP, actually in the quarter, ASPs declined sequentially, actually ASPs on player declined less than 3%, so DVD ASPs are pretty strong.

Q - Craig Berger

I mean, is that part for part or blended?

A - Karl Schneider

That’s blended for player.

Q - Craig Berger

Got it, and can you discuss your design win visibility for DVD recorder chips in 2006 and what type of contribution you take back in May again I am just, whether you think that DVD segment overall can be a growth segment in ’06?

A - Levy Gerzberg

Yes, the DVD segment is going to grow, we see a growth this year 2006, both in the player segment, primarily because of our many, many new design wins with the new products that we have of course in the recording, you asked about the DVD-R in particular, actually both DVD-R and in the playback, we have a segment which is the premium type of players and recorders that we are in. Also we see a very nice growth in the portable DVD player market, and we believe that our market share there is increasing rapidly. As far as the recording is concerned, we did show at CES, number of new platforms and we have a number of new designs. Actually the Thomson, Combo DVD-R and hard drive has been receiving many awards for the best quality in this class of recorders, the best quality solution, and are more our first view and second view’s accounts that we have designed in, you will hear about them in the coming month. So we see a nice growth for us in both segments this year.

Operator

And our next question comes from the line of Rob Adams of Montgomery. Please proceed.

Q - Robert Adams

Nice quarter, gentlemen. Can we talk a little bit about your Vaddis 9 processor? Can you refresh me specifically, I want get an idea as to how we look that ramping. Can you comment on design-win activity and product placement for this, is this clear, is this strictly for the portable market or this is applicable for other products as well?

A - Levy Gerzberg

Actually the Vaddis 9 is optimized for the player of market in general, in particular very attractive solution for the portable because of some of the features, including low power consumption and HDD drive capabilities, direct drive capability that it has and we designed this product, actually mainly for the low end part of the market, the course of this product is very attractive. It’s very compact integrated device and we believe it will be a very successful product this year, the demand for this product is growing. So, we believe that in the second part of the year this product will probably be the majority, we’ll content the majority of the applications and the models that we are in probably on 60% or above.

Q - Robert Adams

Okay, okay thanks. Obviously, it’s a very cost effective, competitive type of a product, but is there any pressure to your aggregate ASP line as we transition to the Vaddis 9 product?

A - Levy Gerzberg

Well, you know the low end part of the market is always subject to ASP declines, although we’ve seen the platform, you know it’s not going down so rapidly as in the past and we’ve designed this product to address that. So, even if ASP will go down this product will help us maintain a good margin. And we’ll enable our customers to reduce the system cost at the same time, that’s the nice thing about it.

Operator

And our next question comes from the line of Jennifer West of Merriman, please proceed.

Q - Jennifer West

And a great job on the quarter. I had a question on your long-term outlook on margin, have they changed given the improvement that you are seeing in DVD?

A - Karl Schneider

I don’t think long-term it’s changed, Jennifer as I’ve mentioned earlier I think we expect camera margins to continue to be under pressure and those were pretty high in recent quarters and so they will come down. So, maybe if you look, you know, in our long-term slide in our quarter presentation it seems like 46% to 48%. I think we go out long enough, you know, that’s the kind of where it needs to go. I think in the near-term we can see it remain a little bit higher than that.

Q - Jennifer West

Okay, and then kind of relating to that, can you just talk to your annual ASP declines that you are signing up for 2006 maybe in the various business segments and TV versus and DVD and then camera?

A - Karl Schneider

We can give you some general ranges, I think as we just stated on DVD, we don’t expect to see ASP’s decline be significant going forward. We are experiencing maybe, you know, 2% to 3% a quarter on DVD player. I think with the new Activa product we are going to actually see ASPs go up because it’s a more integrated part. We expect probably on the camera side to see ASPs come down a little bit, but not tremendously. When you look at our television business, and you look at the mix as we go forward Supra HD versus Gen 9 there is going to be a fairly significant ASP decline because the Gen 9 is the $25 plus part versus the Supra HD, which is less than $20 part and so as we transition to that we are going to see ASP decline there. But, overall even if we take the TV we expect the impact on gross margins to actually improve as we transition to Supra HD its a better margin part.

Operator

And our next question comes from the line of Tore Svanberg of Piper Jaffray, please proceed.

Q - Heidi Poon

Hi, this is Heidi Poon calling in for Tore. Karl, could you comment on perhaps your multimedia phone product. What’s your expectation for that product in ’06 and what is the margin profile?

A - Levy Gerzberg

Well, the expectation for the product line, which we call approach is very positive. It’s all going to be a huge win for us, yes. This is mostly a 2007 business but we see a significant growth this year in these product line. We actually experienced a nice growth during 2005. Again on an absolute basis a new trust is that this will become a major revenue contributor in’07.

Q - Heidi Poon

And in terms of margin in that, you know, because it comes under the DSC segment, what is the profile?

A - Karl Schneider

Yeah, the margin profile on the legacy of COACH products that we have been selling up to this point, the margins are not that great, they are fairly low, more like the DVD products we had a year ago. However, with the new APPROACH 5c which is what’s going to drive the revenues into 2007 and beyond the margin profile is a much improved margin profile back closer to the corporate averages.

Q - Heidi Pin

Okay, could you also give us your outlook on the imaging business?

A - Karl Schneider

Yes, as we mentioned in the prepared comments, we see that the Imaging business will grow in 2006 actually in two areas. First of all, in the household area with our new Quatro solution, we have a number of new design-wins and some of them are from first year, our customers and we see it going up. And of course on the enterprise side of the business is softer, we are encouraged about the current business continuing to grow in the new operating Microsoft operating system Vista, which we described a little earlier that we would be compliance to this and it will generate new business for us. So, the imaging business will continue to grow. It shows a very fast growing type of market, it is steady growth and quite profitable.

Operator

And our next question comes from the line of Tayyib Shah of Longbow Research, please proceed.

Q - Tayyib Shah

Hi, guys nice quarter.

A - Levy Gerzberg

Thank you.

Q - Tayyib Shah

I think you guys have talked about in the past about doubling the DTV business in revenues this year. Can we maybe a assumption that to hit the $100 million revenue mark for the DTV business there has to be a steep increase in DTV revenues sometime in the second half of this year and if that’s the case what would give you confidence at this point about such a revenue ramp in the DTV business in the second half? Have customers with whom you have design-wins have they kind of shared their volume targets for second half of this year?

A - Levy Gerzberg

That’s correct, your last question is correct. We have a broad design-win base, existing customers, we are in very close contact with them and we are confident that our business will grow significantly as you said especially in the second half and based on these existing design-wins and also we see happening in the markets with our new product is a very competitive.

Q - Tayyib Shah

And, I mean these customers, do they already have the market shares in the DTV space to support their volume forecast or are these guys kind of hoping to increase their market share in the second half?

A - Levy Gerzberg

Actually, we have tier I customers with a very good market share today and of course we are focusing on those accounts that are very aggressive, we have been trying to increase on market shares going forward. So we are focusing on both and in this market similarly to other markets that we are in, we see a very fast move from some of the testing solutions. Those companies that make the TV and their own chips or SOC is moving to their merchant solutions like Zoran so we are not talking about totally newcomers into these markets, talking about real-known brand names and strong players.

Operator

And our next question comes from the line of Jason Paraschac of Kaufman Brothers, please proceed.

Q – Jason Paraschac

Hi good afternoon, nice quarter guys. Just hoping you could clarify the outlook for the DVD business that you gave. It was kind of my presumption that with the Generation 9, I am sorry, the Vaddis 9 ramp that your blended ASP would come down over the year. So can you give us a sense of what you expect for unit volumes for the whole market as you have in the past. And then in terms of market share, should we expect things to remain equal on the player and then do you pick up some incremental market share on the recorder side?

A - Levy Gerzberg

`

Actually, we believe that our market share will increase both in the player side and on the recorder side. In terms of overall market size, we were still waiting to get the final data, which we believe that it was somewhere in the range of 125 million to 130 million units and we believe that our market share is somewhere in the range of 27% to 30% and growing. Now as far as the ASP that you mentioned, the fact that we are major player both in the premium DVD players, the feature-rich machines as well as portable enables us to maintain a pretty good ASP. Now, of course in all these market space peak is going down but we do not believe, it will be what we have seen in the last couple of years, it’s not so stable now.

Q – Jason Paraschac

So the 2% to 3% price declines, you talked about, that could also be assumed for the blended ASPs now?

A - Karl Schneider

No, no, no, no. I said that’s only on the player side, and I actually think that on the recording side as we transition to the Activa, the new integrated part we are going to see ASPs goes up.

Q – Jason Paraschac

Okay. And then on the digital television business, can you just give us a sense of the licensing side there, you had some, you know decent revenue in the past quarter too. Is that been growing for you guys? And what we will be expecting in 2006 there?

A - Levy Gerzberg

I think you are referring to our IC business?

Q – Jason Paraschac

Yeah.

A - Levy Gerzberg

Including our DTV division, it is a pretty stable business; it is a strategic business for us. We do not expect to see a major growth in this as we continue. So for the last several years actually it has been pretty steady.

Q – Jason Paraschac

Okay.

Operator

And our next question comes from the line of Richard Prospero of Janney Montgomery Scott, please proceed.

Q – Richard Prospero

Hi, can you give us any guidance on where you like your present revenue breakout by segments in the 2006?

A - Karl Schneider

Where we would like it or where it might be?

Q – Richard Prospero

Well, we’ll go where it might be? I guess, you give us both if you want it.

A - Karl Schneider

Well, you know, we are trying to diversify the revenue, and trying to balance it out. So I think when its all set and done what we will see in 2006 is we’ll see DTV come up as the percentage, as we are expecting that business as was mentioned earlier to double, one of the callers. We expect, you know, some growth in both the DSC market and we expect a little bit of growth in the Imaging market, so I would think that, you know, DVD would remain somewhere in the low mid-30’s, I think DSC stays somewhere in the low mid 30’s, I think or actually it comes down a little bit, both of them probably come down closer to 30 and I think TV goes up from the teens into the 20s, someplace and in imaging since there is not a huge growth there, we’ll bring up or make up the difference.

Q – Richard Prospero

Okay, and for inventories, the inventories been trending up just a little bit over the past three quarters, can you give us the insight into both lead times and to – what might be caused that inventory increase?

A - Karl Schneider

Well, I think inventory increase – I don’t think the increase was very significant. I think if you go back in the previous quarter, especially I think we ended Q3 with very low inventory levels. Our turns were really pretty high for a semiconductor company. I think the level we are at today is more reasonable. We do see that capacity is tightening up a little bit, lead times are pushing up, so I wouldn’t be very alarmed about the increase in inventory at this point.

Operator

And our next question is a follow-up question from the line of Brian Alger of Pacific Growth Equities, please proceed.

Q – Brian Alger

Hi guys, a couple of clarifications with regards to the MediaTek, you mentioned briefly that there was going to be a tax impact from Taiwan, should we look at the settlement between ESS and MediaTek as a good proceed for what the Taiwanese are going to take off the top?

A - Levy Gerzberg

I don’t know if we can do that. I think there is potentially a withholding tax on some of the money coming back across; there is an exemption applicable for that. It’s a little bit early to speculate on what the exact impact is going to be.

Q – Brian Alger

Okay and the pending settlement that also involves UMC, without giving us, you know, too well, love that great clarity but whatever you can give us, with regards to the relative side, is this a bigger or smaller more strategic type of settlement, what can you tell us about this pending one versus the one you just closed?

A - Karl Schneider

Brian, we can’t comment on the UMC settlement at this time.

Q – Brian Alger

Okay, and then last one, would the inventories, you know, obviously not allowed, but just kind of inching up, can you maybe help us out with the composition of those inventories are they waited towards one area versus another and what kind of checks do you guys have in place to prevent the kind of write-off we saw by the year ago?

A - Karl Schneider

Actually Brian, the inventories are actually fairly balanced across the product family. So, we are watching them very closely, you know, we are hoping that - I think the bigger challenge is going to be, you know, in the least in the coming quarters given what the fabs are saying is giving parts in a timely basis. So, we are not too worried about accumulating inventory to the point where we have to write it off.

A - Levy Gerzberg

Also Brian, we did not anticipate the discontinuity that we saw in DVD market towards the end of ’04 were about 40 companies who went out of business in China overnight because the Chinese government basically shut them off and some of them their own inventory was dumped all over the world, part of it illegally. But, we do not see it happening, we are increasing our focus on first year account and we feel quite confident that we have a much better feeling, the feel and visibility in the market than before.

Operator

And our next question comes from the line of Adam Benjamin, of Jefferies. Please proceed.

Q – Adam Benjamin

Thanks guys, nice quarter.

A - Levy Gerzberg

Thank you.

Q – Adam Benjamin

Can you talk a little bit more about gross margin, guidance and the mix there? But the guidance, it does imply pretty significant reduction from your current quarter, which is very strong, can you give us a little bit more detail as to how we should be thinking about that kind of going forward now in Q1, but going forward as to whether it should be more along the lines of your guidance along Q1 or is it kind of trend upward depending on mix? Thanks.

A - Karl Schneider

Well, Adam I think – I think for gross margin going forward, you know, we had a pretty good fourth quarter based on mix again I think it is indicated by the mobile results which the COACH chip has a very strong gross margin today, we believe that does trend down on a quarterly basis going forward. We expect that DVD will make a comeback and become a more prevalent in the mix we expect that to grow. We don’t believe of course the DVD margins are not going to be up at the 50% level. So, as those come back, we expect that to impact margin and as, you know, as TV becomes stronger in the mix, we will see that the TV impact our margins and the TV margins are still probably closer to the mid 40 kind of a range versus the mid 50 kind of range where COACH is sitting today.

Operator

Our next question comes from the line of Greg McCole of (indiscernible) Capital. Please proceed.

Q - Greg McCole

Hi, can you give us an idea of I may have missed this, what’s your tax rate likely to be in’06?

A - Karl Schneider

From a pretty conservative point of view not including any tax that might come as a result of this MediaTek settlement, we expect the tax rate to be no higher than 20% and now that it in all probability it would be lower than.

Q - Greg McCole

Okay, and when might you have a better idea of what the, you know…

A - Karl Schneider

Well kind that gets reviewed on a quarterly basis now.

Q - Greg McCole

Okay great. Okay thank you.

Operator

And our next question is a follow-up from the line of Jason Paraschac of Kaufman Brothers. Please proceed.

Q - Jason Paraschac

Hi, thanks for taking this, just a clarification on the inventory and gross margin issue. You said you had a 100 basis point gain in the quarter from the Vaddis 6, was that meant to be the Vaddis 6 or any kind of inventory were out in the quarter? Thanks.

A - Karl Schneider

No, I think what I said is the benefit in the quarter was less than a 100 basis points that didn’t even make it to a 100-basis points and that was strictly the change in the reserve account we are associated with Vaddis 6. And so the number is rather small and the total change in the reserve account was not much larger than that.

Q - Jason Paraschac

Okay, thank you.

A - Karl Schneider

And by the way, that reserve account changes every quarter, it’s only the quarters when it gets large like it was when we were dealing with Vaddis 6 inventory that it becomes the something that you guys see.

Operator

And our next question is a follow-up question from the line of Tayyib Shah of Longbow Research, please proceed.

Q – Tayyib Shah

Hi guys, with the Vaddis 9 out, do you see a chance that the MediaTek, and Sunplus will have some kind of a matching product coming out in the next two to three quarters that may force you to affect prices on Vaddis 9 instead of using the cost advantage to improve your margins?

A - Levy Gerzberg

Well, this possibility is always there in our market, but based on what we see right now nobody is on the market with a product like this, of course they may always introduce a product like this and we always built into our model some price decline because of competitive pressure or otherwise, so it’s always possible, but we have not seen it so far, did see or at least for this class of a product in terms of integration and features.

Q – Tayyib Shah

And Karl, if I could clarify something about the settlement with MediaTek, you are not including that in your guidance for the first quarter but then you will start to get the cash payments within this quarter, correct?

A - Karl Schneider

Yes, that’s correct.

Q – Tayyib Shah

And how will you guys be creating that? Will you include the royalty payments within the pro forma, and then exclude the one-time payment from the pro forma?

A - Karl Schneider

Well, that’s remains to be same; I guess what I can tell you is it’s based on how that looks now, the forward-looking royalty payments, the quarterly payments we are going to be getting will be in the revenue line. It will not be pro forma out. The upfront payments will come and be on the other income line, as most likely where those will land and I don’t intend to pro forma them, but you will be able to see them on that line.

Q – Tayyib Shah

So the payments I guess start in February right? The first payment --

A - Karl Schneider

The payments will come in February.

Q – Tayyib Shah

Excellent, okay, thank you very much guys.

A - Karl Schneider

You are welcome.

Operator

Ladies and Gentlemen, this thus concludes the question and answer portion of today’s conference call. I would like to turn the presentation back over to Mr. Gerzberg for closing remarks.

Levy Gerzberg, Chief Executive Officer, President

Thank you very much everyone for joining us, and once again we are very pleased with our results for the fourth quarter in the year. And we believe that we are well positioned in each of our core markets for solid growth in 2006. We will be presenting at the following investor conferences in the upcoming months; The Thomas Weisel Technology Conference on February 7th in San Francisco; The CIBC Israeli Technology Conference on February 27th in New York; The Wedbush Morgan Conference on March 2nd in New York; The Montgomery Technology Conference on March 15th in Santa Monica; and CIBC Annual Technology Conference on March 16th in Vail, Colorado. We hope to see you there, thank you very much and goodbye.

Operator

Ladies and Gentlemen thanks for your participation in today’s conference call. This does concludes the presentation and you may now disconnect, have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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

Source: Zoran Q4 2005 Earnings Conference Call Transcript (ZRAN)

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts