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SRS Labs Inc. (NASDAQ:SRSL)

Q4 2007 Earnings Call

March 13, 2008 5:00 pm ET

Executives

Ulrich Gottschling - CFO

Tom Yuen - Chairman, President and CEO

Analysts

James Basch - Dialectic

Steven Frankel - Canaccord Adams

Anthony Stoss - Craig-Hallum

Brad Hendrickson - Nicholas Capital

Steven James - NBS Capital

Mike Olson - Piper Jaffray

Bob Sales - LMK Capital Management

John Lopez - OTA

Chitra Sundaram - Turner Capital

Operator

Good day ladies and gentlemen, and welcome to the SRS Labs 2007 Year-end Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Ulrich Gottschling, Chief Financial Officer. Sir, you may begin the conference.

Ulrich Gottschling

Thank you. Good afternoon and welcome to the SRS Labs 2007 Fourth Quarter and Fiscal Conference Call. Before we start this afternoon's call, I would like to go over a couple of items. First, the press release of the results discussed today have been filed with the SEC on Form 8-K. If you have not received the press release, it is available on our website at SRSlabs.com in the press section.

Also, I would like to remind you that this call is being recorded, and a replay will be available through March the 20th 2008, at 866-837-8032. You can hear the replay by dialing this number and then entering ID number 12403344, when you hear the prompt. In addition, we are simultaneously webcasting this call and it can be accessed on our website for the next 60 days.

I would now like to read our Safe Harbor statement. Except for historical information contained in this release, statements in this release, including those of Mr. Yuen and Mr. Gottschling, are forward-looking statements and projections, which include statements concerning plans and objectives of the management for future operations that are based on management's belief as well as assumptions made by, and information currently available to Management.

While the company believes that its expectations are based upon reasonable assumptions, there can be no assurances that the company's goals and strategies will be realized. Numerous factors, including risks and uncertainties, may affect the company's actual results and may cause the results to differ materially from those expressed in forward-looking statements made by or on behalf of the company.

Some of these factors include, but are not limited to, the loss of any one significant customer, the concentration of our products and customers, our dependence on the consumer electronics market place, which is characterized by short product life cycles, fluctuations in seasonality and demand, the acceptance of new SRS Labs products and technologies, the impact of competitive product pricing, the timely development and release of technologies by the company, general business and economic conditions, especially in Asia, and other factors detailed in the company's Form 10-K and other periodic reports filed with the SEC.

SRS Labs specifically disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future development, or otherwise. I will start by giving an overview of the results from our operations for the three months ended December 31, 2007.

Our licensing revenues for the quarter decreased to $4.3 million, representing a 14% decrease for the quarter on a year-over-year basis.

We realized revenue growth in one of our five segments; automotive, which grew by $40,000 or 14% on a year-over-year basis. Revenues related to the automotive segment continued to be generated primarily in Japan, through our relationships with licensees that are providing our technology for the line install, dealer option, and aftermarket segments of the market.

Within the home entertainment segment, advance displays which is comprised of LCD, plasma, and projection televisions and monitors, grew by $400,000 on a year-over-year basis, primarily due to increased sales from Samsung, offset by decreased revenues from our Japan and China-based television manufacturers due to, in part, to a change in our contract methods.

We believe that this change in approach in our China-based customers will allow us to work directly with the licensees and will in the long term provide benefit to the company. As expected, our CRT licensing revenues decreased by $360,000 on decreased units sold.

In the personal telecommunications segment, NEC and Motorola continue to be our two largest licensees. Revenues in this segment decreased by $81,000 or 22%, in part due to decreased revenues from NEC. Portable media devices decreased by $62,000 or 13% on a year-over-year basis, predominantly due to lower unit volumes from several small accounts. And the personal computer segment decreased by $213,000 or 44% due to the loss of the Toshiba PC business.

A breakdown of our licensing revenues for the quarter by category and as a percentage of total licensing revenues is as follows; home entertainment, 70%; portable media devices, 10%; personal computers, 6%; personal telecommunications, 7%; and automotive 7%.

Net income for the quarter was $1.0 million or $0.06 per diluted share on 16.5 million weighted average diluted shares, as compared to net income of $1.2 million or $0.07 per diluted share on 16.7 million weighted average diluted shares for the same quarter during the previous year, a decrease in net income of $186,000 or 15%.

Total operating expenses for the fourth quarter of 2007 were $3.7 million or 86% of revenues, compared to $3.9 million or 77% of revenues in the same quarter of 2006. Included in the fourth quarter 2007 and 2006 operating expenses are $438,000 and $289,000 respectively, related to stock based compensation expense under FAS 123(NYSE:R).

During the fourth quarter, the major categories of operating expenses were as follows. Sales and marketing expenses were $1.6 million or 37% of revenue during 2007, compared to $1.9 million or 37% of revenues in 2006. This decrease of $237,000 or 13% is primarily attributable to decreased headcount in our marketing group, along with decrease bonuses and commissions.

Research and development expenses were $741,000 or 17% of revenues during 2007, compared to $658,000 or 13% of revenues in 2006. This increase of $83,000 or 13% is due to increased headcount and payroll related expenses as the company continues to allocate additional resources to development and implementation activities.

General and administrative expenses were $1.3 million or 31% of sales during 2007, compared to $1.4 million or 28% of sales during 2006. This decrease of $50,000 or 4% is primarily attributable to decreases associated with quarter performance bonuses.

Interest income increased $530,000 during 2007 from $441,000 during 2006. This increase of $89,000 or 20% is primarily the result of higher investment balances invested at higher rates of return.

Our effective tax rate from continuing operations was 6% as compared to 20% in 2006. The provision for income taxes during the fourth quarter of 2007 is principally comprised of AMT taxes related to the State of California.

Now for a summary of our results for the twelve months ended December 31, 2007. Our revenues for 2007 increased to a record $18.9 million, representing a 2% increase compared to 2006 on a year-over-year basis.

We realized revenue growth in two of our five segments, home entertainment, which grew by $1.5 million or 13% on a year-over-year basis and automotive, which grew by $276,000 or 26% on a year-over-year basis.

Within the home entertainment section advance displays, which is comprised of LCD, plasma and projection television and monitors grew by $2.7 million or 31% on a year-over-year basis primarily due to increased unit sales from several of our largest television licensees, including Samsung and LG partially offset by decreased amounts from Sony and several of our licensees in China.

As expected our CRT licensing revenues decreased by $1.2 million on decreased units sold. Revenues related to the automotive segment continued to be generated primarily in Japan through relationships with licensees such as Fujitsu Ten, Panasonic and Kenwood, which provide audio systems to companies such Honda, Toyota, Nissan, Subaru, Mitsubishi, and Mazda.

Three of our segments experienced decreases in revenues. Portable media devices decreased by $1.1 million or 39% on a year-over-year basis, predominantly due to the loss of revenues from one of our customers in the second quarter of 2006.

Personal telecommunications decreased by $192,000 or 13% on a year-over-year basis, primarily due to lower revenues from NEC during the first two quarters of 2007. And personal computers decreased by $181,000 or 10% on a year-over-year basis primarily due to the loss of the Toshiba PC business. This loss has been partially offset by increases in our software download business.

A breakdown of our licensing revenues for the period by category and as a percentage of total licensing revenues is as follows; home entertainment 68%, portable media devices 9%, personal computers 9%, personal telecommunication 7% and automotive 7%.

Income from continuing operations for the period increased by $2.3 million or 77% from $3.1 million or $0.20 per weighted average diluted share during 2006 to a record $5.4 million or $0.32 per weighted average diluted share during 2007.

Net income for 2007 as mentioned was a record at $5.4 million. Total operating expenses for 2007 were $15.3 million or 81% of revenues compared to $15.6 million or 84% of revenues in 2006. Included in the 2007 and 2006 operating expenses were $1.7 million and $1.4 million respectively related to stock based compensation expense under FAS 123(R).

During the period the major categories of operating expenses were as follows: Sales and marketing expenses were $6.7 million or 36% of revenues during 2007, compared to $7.3 million or 40% of revenues in 2006. This decrease of $627,000 or 9% is primarily attributable to decreased headcount in our marketing group and decreased commission in bonus compensation.

Research and development expenses were $3.1 million or 16% of revenues during 2007, compared to $2.6 million or 14% of revenues in 2006. This increase of $535,000 or 21% is due to increased headcount and payroll related costs as the company continues to allocate additional resources for development and implementation activities.

General and administrative expenses were $5.4 million or 29% of sales during 2007, compared to $5.7 million or 31% of sales during 2006. This decrease of $217,000 or 4% is primarily attributable to reduced headcount, professional fees and costs associated with the annual shareholder report partially offset by increased costs associated with SOX 404 compliance. Interest income increased to $2 million during 2007 from $1.1 million during 2006. This increase of $905,000 or 80% is primarily the result of higher investment balances invested at higher rates of returns.

Our effective tax rate from continuing operations was 1%, as compared to 22% in 2006. The provision for income taxes during 2007 relates to AMT taxes for the state of California, and the provision for income taxes for 2006 is principally comprised of foreign withholding taxes related to revenues realized from our customers in Korea and Taiwan.

At December 31, 2006; we had approximately $15.5 million deferred tax assets related to net operating loss carry-forwards, foreign tax credits, research and development tax credits, and capital loss carry-forwards. We reported evaluation allowance of $15.1 million against these deferred tax assets as of such date. As we concluded, it was more likely than not that these items would not be realized in the ordinary course of operations.

During fiscal 2007, we continued to increase our deferred tax assets primarily related to increased foreign tax credits, offset by the utilization of some of our net operating loss carry-forwards. At December 31, 2007, we had approximately $18.2 million of deferred tax assets and we had reported a valuation allowance of $16.4 million against such assets.

During 2008, we will continue to evaluate the reliability of our deferred tax assets. At such time that it is determined, that is more likely than not that the deferred tax assets are realized, the valuation allowance will be adjusted. This adjustment is based on projections of future taxable income. The outcome of a change to the valuation allowance may result in an income tax benefit in one period followed by increased quarterly tax provision thereafter.

Turning to financial fundamentals, as of December 31, 2007 our balance sheet remains very strong with $45.1 million in cash and investments available for sale, an increase of $4.8 million as compared to December 31, 2006. Operating activities from continued operations provided $6.6 million of cash flows in 2007. An additional $1.8 million of cash flows was provided from the exercise of employee stock options during the year.

During the fourth quarter of 2007, we initiated a stock buyback program and utilized $2.9 million prior to year-end to purchase shares of our outstanding common stock from the market. We continue to be free from external debt.

This concludes my discussion of the financial results, and at this point, I would like to turn the call over to Tom.

Tom Yuen

Thank you, Ulrich for the financial discussion. Good afternoon, everyone. In 2007, we completed our new record year with record revenue at $18.9 million and a record profit of $5.4 million. Although we have set a new revenue record, the increase in sales from 2006 was only marginal. Our original plan was to achieve higher revenue in 2007 than we did. Our plan was cut short by the loss of a couple of key accounts during mid-year; these unfavorable events have ultimately led us to achieve a lesser success than we planned.

But as a positive consequence and acknowledging these temporary setbacks, management and our Board of Directors have work diligently to review, strategize, and execute programs to regain our business momentum, and to re-position the company for substantial growth. Taking into consideration the approximate 12 months lead time to revenue, I believe that in 2008 we'll begin to show the positive impact of these [separate].

So let me now give you a segment by segment update. The flat panel TV is the most significant revenue driver in 2007. The loss of an important licensee in this segment has dampened our ability to growth, although, we were able to maintain the same revenue level achieved in 2006. Despite this temporary setback, recent sale activities from the field lead me to report, that we are regaining the growth momentum.

And based on the lessons we have learned, we've revised our strategy; our newest strategy drives the team to be more focused on strengthening our relationship with key accounts such as Samsung and LG, and to continue aggressively to expand our licensee base, and to introduce new innovative technologies that meet consumers' need. The success of this approach is evidenced by our long-term agreement with LG and more frequent contacts with Samsung TV, as well as the other divisions within these two multifaceted accounts.

On the license fee based expansion front, thus far we have been able to sign up several volume TV makers in Europe such as Beko, Vestel, and Profilo. And wins with TV markers that decrease the usage in -- and have secure both new accounts in China and Taiwan, as well as we regaining new design wins with TV makers that decreased the usage of our technology in 2007. These accounts include Skyworth, Shenzhen MTC, Haier and Hisense. We are now also in the contract stage with branded makers in the US that will expand our presence in the mass warehouse and discount retail locations. These activities and successes will contribute to our 2008 revenue.

In the technology front we continue to expand our leadership position in these segments and have introduced two consumer lifestyle friendly technology solutions: the new generation of TruSurround HD4 and Volume IQ at CES. The responses to these technology introductions from our platform partners and OEMs have been very positive and several of our key OEMs have expressed strong interest to adopt these new technologies for their new models and designs.

Based on the advanced stage of the negotiation over the last eight weeks it appears that we're already off to a good start for 2008. The combination of the forecasted strong growth rate for flat panel TV in 2008, the fact that our technology features are in about one-third of larger flat panel TVs models and that nine out of the top ten flat panel TV makers feature SRS in their respective select offerings have built a strong reason for our optimism that will drive revenue growth in this segment, but of course provided we continue with our persistent diligence. Aside from the flat panel TVs in this home entertainment segment, we also see new rapidly developing growth opportunities through the products such as Digital Set-Top boxes and speaker power systems.

So turning to the portable media segment, we continue have good traction with [Raincom] in Korea and Actions in China. As reported previously our technology is being reintroduced in a Samsung Techwin digital camera with MP3 playback capability. We are preparing a new campaign to more deeply participate in the Apple iPod player accessory market and are re-attempting to win direct licensing opportunity with Apple.

With a variety of products in the personal media player aftermarket, these are predominantly products such as docking stations, headphones or headphone audio enhancement processors. In order to more effectively address this market, we are implementing sales structure changes to more broadly cover the large number of product makers each with moderate annual volumes but combined leads to substantial opportunity. We are pleased with the effectiveness of this new sales coverage, which has already resulted in contracts and design wins. And we expect to secure even more wins in this market soon.

For the cell phone segment, we continue to support NEC in Japan and Motorola in the United States. We are growing our business with both of these accounts. We believe that the growth of the Smart Phones will be strong in coming year. The addition of Circle Surround Headphone technology to our existing voice and audio technologies perfectly position us to capitalize on the need for cell phone makers and carriers to distinguish their products in the market that is quickly migrating towards rich media that demand surround sound and excellent voice quality.

In addition our lines with CSR, a dominant Bluetooth chip maker also provides us new opportunities to launch our wireless headphone technologies in the Bluetooth headset market. We've made inroads with many OEMs, in this space have been chosen by HP and Motorola to enhance their new stereo Bluetooth headphone offerings.

Of course the current high volume Bluetooth market is on the mono-voice headset side. By the completion of [reporting] of our superior voice technology VIP on to the CSR platforms, we are now well positioned to adjust this more, larger volume portion of the Bluetooth market.

For the PC market revenue was flat for the year. Our online SAS sales have offset the loss of licensing revenue from Toshiba PC. Our persistent assets to develop new licenses in the PC segment have made promising progress. We are now in volume contract discussions with several significant players in this market that we expect to close soon.

We are also finalizing plans now to further expand our product offerings for the online market, as well as to expand our reach to online consumers though affiliates and other online retailers. For our car market we saw expanding adoption of our technology for factory inline installation by Toyota and now Subaru.

Through Fujitsu Ten we continue to be offered [deal] 15-0.05 options by more and more Japanese car makers. Our car audio technologies are now available in select models of nearly every brand of Japanese cars. Panasonic, Kenwood and Pioneer also continue to increase usage of our technologies in the aftermarket products. This is the general summary of the state of our business in the five segments.

For consumer brand reorganization, it is an invaluable compliment to our best-of-class technologies. We are pleased with the addition of our new Vice President of Marketing, Mr. Allen Gharapetian. Allen has begun in earnest to map out a cost-effective powerful program to expand the consumer awareness of the new SRS brand.

Our successful penetration of the flat panel TV, our visibility through the Microsoft Windows Media Player, and our online audio product SAS Download have been effective in building a fair level of consumer awareness. It is our goal that by these new marketing programs, we'll be able to greatly accelerate our branding objectives. Of course, a successful execution of the brand building program combined with our broad and global class technology portfolio will be an incredible powerful success ingredient for our long-term growth.

So let me now share with you our future outlook. The lessons we've learned from 2007 are sobering, but it did cost the company to review its strategy and its execution methods. The reexaminations started in the second half of 2007 and results of these efforts ultimately led to the formulation of new strategies, new programs and actions. These new changes are beginning to produce tangible business benefits. I am encouraged by the quantity and quality of our business in the pipeline at this early stage of the year.

We're already having a record number of high volume business opportunities in contract stage. While we failed to achieve our traditional high revenue growth rate in 2007, based on the pace and the amount of business activities; I'm now optimistic about our 2008 business opportunity. Our traditionally strong home entertainment segment will benefit from the growth of the flat panel TV. Our existing account should continue to grow while the newly signed on licensee in Europe, China and US should add new revenue in 2008.

Other high volume and rapidly emerging products such as digital set-top boxes and [Speaker Bass] in the home entertainment segment will additionally add growth potential for this segment. We expect to reverse our trend in the PC segment, as we are already in contract stages with some of the key players in the PC space. Our new technology such as VIP and service surround headphone for Smartphone is generating a great deal of interest, amount leading cell phone makers. Our relationship with Samsung and LG is leading us closer to business opportunities of a sizeable cell phone market share as well.

We also plan to achieve greater success in the Bluetooth and accessory market, through alliance strategy with key complementary partners as well as executing a more effective sales coverage plan to address this new group of licensees. It's comforting that the management is fully aware of and excited by these opportunities that are immediately in front of us, and is committed to focus on efficient execution, so as to fully deliver on these business potentials.

So, I thank you for your interest, and now I would like to turn this call to the operator to help with the questions and answers. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). The first question is from James Basch with Dialectic.

James Basch - Dialectic

Hi, guys. I had a couple of questions. One is you guys have discussed with investors looking at '08 the expectations of 10% plus revenue growth. Now I know you don't formally give guidance on revenues, but I'm kind of asking you if that's a realistic target, especially in the context of what's being happening to the stock price, and maybe pessimism over the outlook for the company. It would be reassuring to hear that that is in fact a realistic target? And I have some follow-up questions.

Ulrich Gottschling

Hi, James, this is Ulrich. Thank you for your question. I think it's a question that a lot of people are asking, and are we going to be able to return to our traditional growth rates. Clearly as you've indicated, we've generally stayed away from doing forecast and projections because those things tend to sometimes work out real well and sometimes not to work out as well. I will say as Tom has mentioned in his comments, that there seems to be a tremendous amount of activity ongoing right now at various stages with significant customers of ours, to where we believe we'll be very successful this year in moving forward these contracts and generating revenue.

I think we also have mentioned over the course of last year that we've signed many new accounts, particularly those in Europe that will start generating revenue this year, accounts such as Beko and Vestel and Profilo. We've signed accounts such as Sharp TV for Europe and for Japan region that are starting to ship TVs. We've assigned additional other accounts. So we feel pretty confident that 2008 is going to be a very good and strong year for us. And as Tom mentioned, reverse that trend and get us moving back in the right direction.

James Basch - Dialectic

Okay. And so the only reason I guess you're not formally giving guidance on '08 is because you haven't in the past because again this is something that you guys have indicated to investors in the past that 10% plus is a realistic target. Is that the case?

Ulrich Gottschling

Again we do try to stay away from the forecasting and the projections, but I think clearly our goal would be to meet and exceed that kind of a number and we're hopeful that we'll be able to do that this year.

James Basch - Dialectic

Okay. And then just a couple of other quickies. Stock buyback how much you guys have left, I assume you're going to be back in the market given where the stock is. And then just a housekeeping question, what was the operating cash flow in Q4?

Ulrich Gottschling

To answer your question regarding the stock buyback; as you know we had announced a $10 million stock buyback plan. As of the end of December, we had executed against about $2.9 million for that, so we ended up -- I think we have about $7 million left. And we haven't formally discussed although, I have a meeting scheduled with Tom as well as the head of our audit committee for tomorrow to talk about the stock buy back program which we could get back into the market as early as next Tuesday morning.

Regarding operating cash flows for Q4, I don't have the number of hand because in the 10-K we just announced for the year the amounts but I can certainly get that James and we'll get that out to you.

James Basch - Dialectic

Okay. Great. I appreciate it and good luck in the future.

Ulrich Gottschling

Alright. Thank you.

Operator

The next question is from Steven Frankel from Canaccord Adams.

Steven Frankel - Canaccord Adams

Good afternoon. Ulrich, could you start with an update on the Sony situation?

Ulrich Gottschling

Sure. We've meet over the last several months with Sony and discussed the number of technical issues that are still outstanding as you know we've agreed upon between the Sony and ourselves that a third party intermediary would have access to certain information that Sony did not want to make directly available to us.

So far, I think, the vast majority of that information is been provided and Sony has been very cooperative in that regard. There's a couple more pieces that we are still waiting on, so that, that independent third party can reach a final conclusion on some of the technical issues. We currently do not have a standstill agreement in place. The standstill agreement expired as of last Friday.

So hopefully we’ll get that, the last remaining piece or two in the next couple of days and we’ll reach a decision on how we move forward. Hopefully it’ll be positive and together with Sony we can both reach a decision that’s good for both companies, and if not, you know all other avenues are available to us and we may have to have a third party try to reach the final conclusion.

Steven Frankel - Canaccord Adams

So is there something in your agreement that says you go to arbitration rather than to the court, if you end up disagreeing or if they agree to use arbitration?

Ulrich Gottschling

Arbitration is a possible outcome, but is not required under the current agreement we have with Sony.

Steven Frankel - Canaccord Adams

Okay. And then if I remember back a couple of quarters ago, you talked about reinvesting and marketing and reinvigorating the brand. Yes you are down, we've heard you say you are down several heads in marketing; explain to me why that happened or what happened to marketing headcount going forward?

Ulrich Gottschling

Good question, Steve and our apologies for not being more clear on that. In late 2005 we hired an individual, in fact several individuals to work at our marketing department, they worked with us through most of 2006, certainly into the latter part of the year, at which point in time we decided to go into a different direction. So we didn’t have that position filled, the Vice President of Marketing as well as a couple of other people in the marketing group, and we just recently filled those starting, starting to fill those with the announcement of Allen Gharapetian as our VP of Marketing. So it's really a timing issue more than anything else. I think Allen is really fun to work with. I think he knows the stuff and we're looking for some really positive things from him. We've also allocated resources behind him and his team to really make sure that we do and support the activities that we're in endeavoring to take on.

Steven Frankel - Canaccord Adams

What kind of price erosion should I assume for this year?

Ulrich Gottschling

So far, we continue to see price pressure particularly in some segments more sold in others. We really have been pretty good about keeping our prices at the right places. In fact, in some places we are actually seeing some positive news on the pricing side, because of some of the new technologies and other services that we are providing to our licensees. In some places, in some of our major accounts as we talked about, we've reduced some of our pricing to expand our relationship with them.

So, overall I don't think that we've seen a major deterioration, but as we've said Steve that as we move into some of these other areas, such as hopefully high volume of the mobile phone business, the pricing that we've traditionally averaged which is in the upper $0.30 range probably will come down because that kind of a price point isn't supported in the high volume mobile area.

Steven Frankel - Canaccord Adams

Okay. And then you mentioned something about changes in how you'll do business in China. Could you discuss that further?

Ulrich Gottschling

Sure. In the past we've traditionally asked our IC partners to bundle the technology as part of their chip and to pay us directly, every time they ship a chip because we were concerned either about the protection of our IP or the royalty reporting collection aspects of some of the OEMs in the area. So, over the course of the last four or five months, we've really started to move more directly to working with some of the China based companies, so that the IC partners delivered the DSP if you will to the OEM and we deliver the code and then the OEM puts the technology onto the chip.

We also then get paid directly from the OEM, which generally causes a delay if you will in when we collect our royalties. Rather than when the chip is shipped into manufacturing we get paid when the finished product is shipped to retail. The goal here of course is to expand and deepen our relationships with these companies, because just like the Samsung's and LG's and another major OEMs in the world. They do a lot of things besides just TVs and so hopefully we will have a direct business relationship within that stronger and we can expand not only onto to more TVs, but also some of their other complimentary devices as well.

Steven Frankel - Canaccord Adams

Okay. And do you have any exposure to the auction rate market in your cash or securities balance?

Ulrich Gottschling

We have no exposure at all.

Steven Frankel - Canaccord Adams

Great, thank you.

Operator

The next question is from Anthony Stoss from Craig-Hallum.

Anthony Stoss - Craig-Hallum

Hi, guys. I have a couple of questions. You mentioned Sony and I think that was a good update on where you stand or can you give us a sense of how much you spend in Q4, specific to the Sony?

Ulrich Gottschling

You are talking about legal fees Tony?

Anthony Stoss - Craig-Hallum

Yes.

Ulrich Gottschling

I think we are probably somewhere, I am guessing at around $100,000 or so I don't think it's been much more than that at this point in time.

Anthony Stoss - Craig-Hallum

Is that a fair number to assume for kind of Q1 prior to any other your additional strategies?

Ulrich Gottschling

I think it's probably going to be a little bit higher than that because we have engaged as I mentioned with this independent third party and they are doing quite a bit of work on the analysis and technical aspects of this. So, I think that number will be a little bit higher but I don't think it's going to be material. Again there's couple of weeks left this quarter so you never know what's going to happen but right now it seems to be in a familiar territory for us.

Anthony Stoss - Craig-Hallum

Okay. Then also you mentioned about being far along with several sizable PC makers. Are any of those deals signed perhaps that you just can't announce?

Ulrich Gottschling

I need to be careful with that one Tony because obviously it would be difficult to go too far down the road. Let’s just say that in those deals where in what we believe to be in the final stages of those deals and from our perspective the time line on the deal goes from you know all the way from initial contact with the customer, to presentations, to negotiations, to proposals all the way through to not only contract stage but also the announcement of those products. So we're in pretty deep -- parts of those with several of the PC makers.

Anthony Stoss - Craig-Hallum

Okay given kind of an expected let's say assignment in a timeframe that you would expect. Is this Q2 or Q3 or Q4 revenue when would you think it would begin?

Ulrich Gottschling

All of the above but probably for 2009 not 2008, I think what we're endeavoring to do Tony and we've been very upfront about this we're not trying to get in any of the segments that we're with any of our customers on a model here or a model there. We're actually working diligently to become a core technology that’s part of their widespread product offering. And those things take a little bit more time not only at the front end but also at the implementation stage.

So my expectation is in some cases like the announcement we made with ViewSonic we're going to be on the monitors that they sell that have speakers in them, those can go to production very rapidly and we should start to see revenues from those quickly. In terms of getting deals done with major PC companies, I would think that those products would probably start launching towards the end of the year and that revenues we may get some in Q4, but because we get paid a quarter in arrears more likely than not those revenues will really start picking up in 2009, if we are able to bring these deals across the finish line.

Anthony Stoss - Craig-Hallum

Okay. Same question for you on digital set-top boxes and speaker buyers timing?

Ulrich Gottschling

Digital set-top boxes, we started that initiative earlier this year and we feel pretty good with some of the progress we are making there. We've lined up some very good partners that are working with us to assist us in this endeavor. I think if we are successful with that and we get to moving those forward rapidly, I think we'll probably start to see revenues maybe as early as Q3, but probably Q4 and forward.

Anthony Stoss - Craig-Hallum

Okay.

Ulrich Gottschling

Now we'll be presenting Tony next week and then for everyone else at CCBN, which is one of the largest shows of the year for the set-top box business in Beijing and will have a full team of people there to support our activities regarding the set-top box business.

Anthony Stoss - Craig-Hallum

Okay. Also if Tom is there or Ulrich or either one, if you won't mind updating us on the reception you've got from your recent launch of the volume equalizer product for TVs?

Tom Yuen

Yes. I think that this is a interesting product that relies on the current state-of-the-art DSP processing power and advanced audio knowledge in terms of band processing type of algorithm. So that it allows for very intelligent control of the volume. As you know that one of the most annoying phenomena watching, whether it's a Cable TV or even watching YouTube is the sudden shift of volume an annoying advertisements comes on board or a channel program switch.

So we demonstrated our technology at CS to a great number of our TV OEMs and also platform partners. And they are very satisfied with the performance. The performance is very effective, not only it does what it says, it also takes very little processing power, very little resource, so that they are not going have to scramble for more costly DSPs to do the job for them on their existing products.

So I think that we are seeing some of these being across at the point of crossing a finish line to be incorporated in new models. And we are talking about significant volume makers that are looking at incorporating these features. So I think it looks really good, and the application is more than just the TV market, it can go into other device as well, and also for the online kind of new type of consumer generated content as well.

Anthony Stoss - Craig-Hallum

Okay. Another kind of a trend question for either you or Tom. Are you seeing any migration from your existing customers or new potential customers on the TV side, to move your technology in to smaller screen sizes or is it still 36 inches and above?

Ulrich Gottschling

I think, Tony we are seeing. I think you are seeing it certainly with some of the major players, major customer of ours that are putting us in more and more devices at all different sizes. I think, there was a large show this week down in San Diego for display research and there was a number of things that came out of that, and then clearly the big battleground is going to be in that space that you’ve talked about, that 37 to 42 inch range where a lot of the sets are going to be sold. But you are correct in that we are seeing more TVs from our major licensees that are moving us into the smaller sets, and we're actually very, very pleased with that.

Tom Yuen

Yeah. So I think that, I had the opportunity to talk to a couple of the CEOs that are making the TVs and that they are all seeing strong demand for the smaller set. And also in the China space, there are lots of demand for the smaller even to the 26-inch range. And so I think that while in the US DisplaySearch indication is the larger size, but from the makers, they are certainly indicating that there's also a strong interest even in the US market for the smaller sets to be the second or the third flat panel TV installed in the smaller rooms.

Anthony Stoss - Craig-Hallum

Okay, last question. If I'm not mistaken Tom I heard you say that you guys have recently signed deals on the Bluetooth headset side with both Motorola and HP. Is that correct, and if so could you give us a little bit more detail?

Ulrich Gottschling

Sure. The answer to that is correct. So one of the first devices you will see coming out from the HP is a Bluetooth headset. I believe it's going to launch in just a next couple of weeks. It's been shown by HP, at the Mobile World Congress in Barcelona a few weeks ago, and received a very, very strong reception. Our understanding is that the audio quality on it is been touted as being exceptional. So, we're very excited about that, and again I think HP is looking to launch that product probably before the end of this month as I understand it.

With Motorola, we're on two of their devices, one is a Mobile Bluetooth headset and the other is an accessory that goes with your mobile devices that you can play through some external speakers. Both of the products are very good, we've been working very diligently with the teams in Motorola on that, and I think everybody is excited for those products to be launched here shortly.

Anthony Stoss - Craig-Hallum

I would assume that these are high volume opportunities for you?

Ulrich Gottschling

Well we hope so. Clearly as we've talked about in the past, on the Bluetooth accessory side, the vast majority of the business continues to be on the mono side rather than on the stereo side, but hopefully we are starting to see the transition of that, and hopefully these head sets will really give consumers the confidence that they can get great quality audio flows, stereo quality thorough a Bluetooth device that’s ergonomically very comfortable, very stylish and priced at a very good price point.

Anthony Stoss - Craig-Hallum

Great. That’s all my questions. Thank you.

Ulrich Gottschling

Okay.

Operator

The next question is from [Brad Hendrickson] from Nicholas Capital.

Brad Hendrickson - Nicholas Capital

Hi, good afternoon.

Ulrich Gottschling

Hi.

Brad Hendrickson - Nicholas Capital

Hey just one or two question on the balance sheet. I just wanted to confirm the $5.5 million or so in investment up for sale, that is just longer term, longer dated maturities right, but it's probably government AAA rated government stuff, right?

Ulrich Gottschling

That is correct.

Brad Hendrickson - Nicholas Capital

So, okay, I'll treat it as cash equivalent then.

Ulrich Gottschling

That would be fair.

Brad Hendrickson - Nicholas Capital

Okay. And then the deferred revenue, looked like it increased by almost $1 million in the quarter. I just breezed through your 10-K at the start of the call here, that's related to LG I think?

Ulrich Gottschling

That's predominantly correct.

Brad Hendrickson - Nicholas Capital

Okay. So is that kind of at a steady state now, or are we at a point where may be we should be adding back the difference to revenue, because I was looking at your revenue, if I add that back, your revenue was actually up year-over-year, if you look at the increase in deferred revenue, which might not be correct because I know it's a long-term contract.

Ulrich Gottschling

Yeah, that's correct. LG, as you know we entered in to a long-term contract with them for the utilization of our technologies or certain of our technology through 2010. And it required them to pay a significant piece of that before the end of the year with the remaining amount in February. So LG has now paid us through 2010 for all of their, that utilization of our technology on their TVs. All of that's been collected and so in fact at Q1 the deferred revenue number will go up again and then it will start diminishing each quarter though the end of 2010.

Brad Hendrickson - Nicholas Capital

Okay.

Ulrich Gottschling

At least the part that relates to LG.

Brad Hendrickson - Nicholas Capital

Good to know. So, definitely helps the cash balance, I guess. Okay. And then on the stock buyback, Ulrich, I am assuming that was in December. So I am assuming the average price on the 30% or so that you've done so far was between five and six bucks a share.

Ulrich Gottschling

I think that's probably right. I think it's at the higher end of that range, because we went into black out in the middle of December, so there was only a short period of time. I think the average price was probably right under $6 and then the price started to deteriorate after that. As you know we've been in blackout now since about the 20th December and so we will come out of blackout next Tuesday morning and hopefully we will reach consensus and it's right thing to do to continue to buy.

Brad Hendrickson - Nicholas Capital

Okay. Just to delve into that just a little further or somewhat related question. I noticed 147,000 in CapEx, obviously real small number than last year. I am assuming that's sustainable at that small level.

Ulrich Gottschling

I don't think that there is anything significant that's going to change from year-over-year, you know those are predominantly computers and those types of things that our folks use either for sales or engineering activity. We will probably spend some CapEx this year on our building here. We have a commitment based on some of our activities that we see going on throughout the Americas as well as some of our other regions. We feel very confident about our future prospects going forward, and we are going to continue to bring on more folks to do that, so we will be doing some TI work here in the building to make sure that we have the appropriate facilities for those people to do their work.

Brad Hendrickson - Nicholas Capital

Okay. And so I guess based on that little CapEx I'd love to get Ulrich or may better Tom your just general philosophy. I assume then you guys are still looking to put cash towards buybacks, and if you are a buyer at six bucks, I would think would be a buyer.

Tom Yuen

I think it is an exceptionally good opportunity for us to look at best way to spend our cash. And we continue to except us to do well and I think that we expect to continue to generate cash. So at the moment we are not looking at any other extra ordinary expenditure. And so I think that definitely the stock buyback would be one of the key ways to properly and wisely spend all cash.

Brad Hendrickson - Nicholas Capital

Good, I agree. There's like 260 a share in cash and so I agree. Last question for you guys. As Tom on the volume equalizer, will that royalty be bundled with existing TV royalties or will it be a separate add-on for the OEM.

Tom Yuen

It's a separate add on, and it independently can be a standalone product with a pretty decent per unit royalty standard.

Brad Hendrickson - Nicholas Capital

So you think that per unit royalty can kind of equal, kind of what you guys are averaging already on the existing TV technology?

Tom Yuen

The rest [employees] is higher than the current ASP. So I hope that people recognize - the value is very recognizable. So I think that we hope to see very decent return on this invention.

Ulrich Gottschling

Brad, so let me extend on that. We have a price reference list that we use that covers all of our technologies. We also have because many of our licensees use multiple of our technologies in any one application, we have a methodology of how we deal with customers using more than one technology at a time. So we feel confident that the VIQ technology in and of itself is a standalone product. It provides as much value as any of our other technology, so should someone want to license that on its own, the price point would be comparable to our other technologies. But again, the formula for many of our licensees is based on multiple technologies.

Brad Hendrickson - Nicholas Capital

Okay. But just to be clear, this in the formula, this could be one of the more significant modules if you are all right?

Ulrich Gottschling

Yeah, absolutely it could.

Brad Hendrickson - Nicholas Capital

Okay. I'll probably pay you $100 if you're going to get to see me see this stuff.

Tom Yuen

Okay, we'll take that.

Brad Hendrickson - Nicholas Capital

And last question Tom.

Tom Yuen

Yes.

Brad Hendrickson - Nicholas Capital

When is the first timing for when royalty is on the volume equalizer?

Tom Yuen

I think.

Ulrich Gottschling

Yeah, I think you could see them as early as Q2.

Brad Hendrickson - Nicholas Capital

Oh, great. Okay, thanks guys so much for your time.

Tom Yuen

Yeah, it's completed technology.

Ulrich Gottschling

Yeah, its launch reported number of chips already and we expect to see implementation of that occurring very quickly.

Brad Hendrickson - Nicholas Capital

Right, thanks so much for your time hey guys.

Ulrich Gottschling

You bet.

Operator

Our next question is from [Steven James from NBS Capital].

Steven James - NBS Capital

Hi, good afternoon. I wanted to ask you, could you folks talk about the way you changed your sales strategy in China, what that affect might have been for the quarter?

Ulrich Gottschling

Sure. Again, let me make sure I understand the question. Is it a question about how the strategy is deployed or the question is, what is the financial impact of that?

Steven James - NBS Capital

Yeah, what was the revenue impact between, when we stopped recognizing revenue from the chip makers, but have not yet recognized revenue from the TV manufacturers in China, what was that impact to revenue?

Ulrich Gottschling

We're kind of tabulating right now, but I would say its probably in the $300,000 range that their impact was for Q4, because we had already worked out way through some of them that were going to start moving into direct mode already. We picked up pieces of that a little bit during Q4 and then Q1, we should start to see that pick up again on that.

Steven James - NBS Capital

So there was also some impact in Q3?

Ulrich Gottschling

That's correct.

Steven James - NBS Capital

Okay. And you're saying by Q1, we should be back to recognizing revenue?

Ulrich Gottschling

Absolutely. Again, it wasn't that we were able to take all of our license fees all at one time and say, at one day you're all going to make this change.

Steven James - NBS Capital

Right.

Ulrich Gottschling

There is production cycle and the things that come in to play in that.

Steven James - NBS Capital

Okay. And then, secondly, could you talk about, I think, you won't give guidance for next year, but could you talk generally about where operating expenses will be next year compared to this year?

Ulrich Gottschling

Okay. In a general sense, what we've try to do is to make sure that any changes in our expenses do not negatively impact our net income numbers. So to the extent that we're going to grow our revenue side, we want to make sure that that at least equals or exceed any additional expenses that we would incur. Where this gets a little bit difficult for us, is as we've mentioned before and I think Tom mentioned in his comments here earlier today that there is typically a nine months, 12 months, maybe as much as a 15 months cycle on when we engage with the customer to win business and when we actually start recognizing revenue from that.

So one of the things that we have to be very careful here is, despite the fact that we see that there could potentially be short-term impacts in a negative way to our P&L, we're really confronted with tremendous opportunities in many of our segments right now. And we want to make sure we have the right personnel at the right time to go after that business and make sure that we win.

So to answer your question for '08, I think that our expectation is that we will maintain and even hopefully grow our net income despite that fact that we intend to make significant investments this year in personnel here in the Americas as well as well as other regions around the world.

Steven James - NBS Capital

All right. Thank you very much. I appreciate it.

Operator

And the next question is from Mike Olson from Piper Jaffray.

Mike Olson - Piper Jaffray

Hi. Good afternoon. Ulrich, can you repeat what you said stock-based comps was in the quarter?

Ulrich Gottschling

Stock-based compensation? I believe the number was right around $450,000 I believe was the number. Let me kind of pulling it up here as we speak.

Operator

The next question is from in from Bob Sales from LMK Capital Management

Bob Sales - LMK Capital Management

I'll listen to the answer for the stock-based compensation just to be courteous.

Ulrich Gottschling

Okay. Hold on, we're going to, why don't we go and take your question while we've got some of our accounting folks pulling out the number. I think I have got it right here. So that number was $438,000 for Q4 compared to $289,000 in Q4 in the prior year.

Bob Sales - LMK Capital Management

I have a couple of questions, one is can you give us an idea of where your CRT revenue stood in the current quarter versus the more advanced display technology?

Ulrich Gottschling

Yeah. No problem. Let me hold that up for you. So CRT revenue for the current quarter, as we've talked about we're pretty much down to the bottom of that. So our CRT revenue was about $33,000 for Q4 of 2007. On the advanced display side, we're more in the range of $2.7 million or $2.735 million.

Bob Sales - LMK Capital Management

Just for kicks, what was CRT, do you have it in front of you what Q3 and Q2 was?

Ulrich Gottschling

I don't have or maybe I do. Hold on.

Bob Sales - LMK Capital Management

Is it gotten fairly immaterial?

Ulrich Gottschling

Yeah. I mean for the year, we did $160,000 for the year, $162,000. So very, very small versus on the LCDs and plasma, for example, between the two of them were almost $11.5 million.

Bob Sales - LMK Capital Management

Got you. Okay.

Ulrich Gottschling

So, I mean our expectation is that CRT is not something that we're going to be able to do a lot with for at least the time being.

Bob Sales - LMK Capital Management

Right. And then in the European, could you just tell the European manufacturers one more time on the flat panel side that you expect to be in?

Ulrich Gottschling

Sure first one is Beko, next one is Vestel and the other is Profilo.

Bob Sales - LMK Capital Management

And did you mention Sharp in Europe

Ulrich Gottschling

We're in Sharp in Europe and in some Asia regions.

Bob Sales - LMK Capital Management

And is that a new opportunity or have you been there the whole time?

Ulrich Gottschling

No, it's a new opportunity. It should start shipping here very shortly. In fact, I think it did start shipping in Q1.

Bob Sales - LMK Capital Management

Okay. And then just to understand when is your expectation, do you have been citing a couple of customer loses since middle of '07? And given that you did recognize your royalty and arrears, can you help us understand, is Q1 going to still suffer from some of that degradation revenue from the loss of these customers, in other words, kind of a a downward trajectory from Q4 that you just reported?

Ulrich Gottschling

I think looking at the amount of revenue, for example, that we received from Sony TV, I think there will be a slight decrease from Q4. It maybe a small amount, I don't think its going to be necessarily material. I'd say maybe $20,000, $25,000 difference in that regard. I think Toshiba on the PC side definitely we'll see it. Still it continued and probably a pretty significant reduction either relates to the PC. I'm sorry. I shouldn't say that. I think it's not going to be down material in either case, but I think it will be material as compared to Q1 a year ago.

Bob Sales - LMK Capital Management

Sure. But, sequentially, is most of that put off?

Ulrich Gottschling

Yes.

Bob Sales - LMK Capital Management

Okay. Next question for you is on the Telco handset side of things, we took a look at your products at CES and help me understand why given the focus on music, why do you think it's taking a while to penetrate that market and be successful in ramping up big volumes in the hands that manufactures?

Ulrich Gottschling

Well, it's a million dollar question. On the Telco side, frankly, I don't think that anybody has ever really been truly successful in deeply penetrating that market. I think there has been a number of folks over the years that have tried with a number of different kinds of applications. The question has always been how does, what we or somebody else, what we do how does that change buying pattern and increase the sales of those particular units vis-à-vis somebody making a different choice on a different handset.

I think that in many respects that's now changing and we feel pretty comfortable with where were are at in the sales cycle with some of these companies in recognizing that audio is becoming -- and music and audio related to music is becoming an increasingly important feature within the handset devices whether it's over the speakers themselves or whether it's through some kind of an hear about or headphone scenario.

Many of these devices are doing a lot more than they have in the past. And I think the combination of them being music phones and other applications is giving us some great opportunities in this area.

Bob Sales - LMK Capital Management

But when you talk about it going through '08 opportunities, it sounded like if I just read, listen to your wording that the Telco opportunity was just saying that you were probably counting on less than some of the other categories for '08?

Ulrich Gottschling

I don't think that that's true. I think we feel like we have significant opportunities in that segment as well as other segments. Ultimately, it will be dependant on us pushing these deals across the finish line, they're starting to recognize revenues from them. But I would not at all say that we are any way or shape perform negative about the segment at all. We're extremely positive about some of our activities there right now.

Bob Sales - LMK Capital Management

Okay. That's helpful. And then lastly on the volume equalization, I would second the gentleman that said I'll give you a $100 bill right now if you can fix it. It's terrible on the high desk channels, in particular, is what I've noticed. Can you just one more time articulate for your existing versus new customers for that volume equalization? Can you help us, it sounds it could be a huge opportunity and help us understand, if we're going to the unit times price mechanism to understand the impact, what is the pricing strategy that you will likely realize for existing customers and new customers with me understanding that you have to be a little careful about what you say here.

Ulrich Gottschling

A couple of things, one thing that is both good and bad about our business is that designs come and go. So what we did on a particular TV design in one year, there maybe even from an existing customer a completely different line of products for a following year that has different requirements, different feature sets and so it presents opportunity to put in different technologies, or even within an existing customers, they move through their different price points, their different retailers, their different geographic areas that they sell to. There will be different features sets that they use.

As it relates to our existing customers; the Samsungs, the LGs, the big players in this world, obviously they are existing customers of ours, any additional technology that we would deliver to them it would be at an incremental price point and we would negotiate a price points that's appropriate for what it is that they are trying to do. There are formulas that we have in place with our major customers. I think every ones aware we have a long-term agreement with Samsung that’s been secured and signed by Samsung as well the one with LG.

The Samsung one does not obligate them to pay us any. In other words it doesn’t obligate them to use our technology, but clearly we've addressed with them a whole series of significant issues that they had, including how we might price new technologies that we introduced, because its one of the things that SRS special in this space and forgives us a distinct advantage over our competitors. Is that we are constantly working on road maps with our partners to make sure that we have the technologies implemented when they need them and want to deliver them to the market place.

So for our big customers there is already formulas in place, and we are looking forward to them adoption not only our volume IQ technology but other technologies that were in the process of developing. For our new customers, again if they purchase it as a standalone product we have reference price for that, and if they purchase it as a part of a package of technologies to predict different settings then there is also formula is in place for that.

Bob Sales - LMK Capital Management

But if it's a new customer, may be you said this before. If it is a new customer and they are wanting that standalone product, is that pricing higher than your existing surround sound product?

Ulrich Gottschling

I think they are comparable.

Bob Sales - LMK Capital Management

Comparable, got you. And then last question someone also had before here. You talked about your Apple strategy and I heard the part about going after the accessories like headphones and docking stations. Did you say that your, that you have an effort to go directly add Apple as a customer?

Tom Yuen

We have been doing that for a last couple of years, and I think that Apple is a very high quality company and very careful about adding additional technology that might dilute their brand or their technology. And also when their product was selling briskly, the response is that why do we want to add extra cost. But as we continue to work with Apple, and I think that there are areas that we could introduce new features that will may be expand the advantages of whether it's the iPhone, the iTouch or the iPod. And so we will continue to bring to Apple new features that help to really continue their lead in the audio quality side.

But on an independent basis, we have been successfully marketing a downloadable software for the Macintosh and iTunes so that it makes the download of music playback extremely and much more robust. For that the product is called iWOW, and we received couple of awards already, including one of the larger magazine, the Apple magazine, [MacLife]. And we are hopefully that the package version of these products may appear on retail show very soon. So, I think -- but of course the most rewarding accomplishment we want to achieve is to be able to convince and win the Apple direct business. And we maybe included as a standard feature in one of their high volume products.

Bob Sales - LMK Capital Management

Great. That's wonderful. Thank you for the patience with my questions and actually a very good job of steering through a pretty difficult transitionary period, so I commend you on it.

Tom Yuen

Thank you

Bob Sales - LMK Capital Management

Thank you

Operator

The next question is from [John Lopes from OTA].

John Lopez - OTA

Hi, thanks. A couple of quick ones if I might. The PC opportunity you guys have talked about, I apologies (inaudible) questions, but the mechanism with which you would achieve success what does mean competitively. I mean, in other words, your function now is being addressed and one would say performed by the PC vendors as it is. So, do you think that you are successful as you have described. What does that mean for sort of the ecosystem?

Ulrich Gottschling

I'm not sure I understand the question, maybe you can kind of rephrase that a little bit, because you had mentioned that you think its being addressed in one way form or another already. How do you mean that?

John Lopez - OTA

Well, I guess my assumption or my understanding is that people are -- the functionality that you are offering on the PC side is being offered in existing skews or is that in correct assumption.

Ulrich Gottschling

That is generally not correct.

John Lopez - OTA

So anything you do on the PC side is incremental to what's already offered in any of the discussions that you are having.

Ulrich Gottschling

Well, let's back out and make sure that I understand your question. As you know we've had a long-term relationship with Microsoft that will continue on for several more years, where some of our basic technologies are included in their Windows Media Player. And so every PC that ships with the Microsoft operating system in it and the Windows Media Player by definition has SRS technology in it.

Okay, in the past we’ve had relationship with the number of different PC companies such as Toshiba PC, where we have indeed included in their PCs a higher level of our technology and they paid us a royalty for that, Microsoft does not pay us a royalty for the use of our technology, as it relates to the Windows Media Player. What we are now endeavoring to do, is to make a significant penetration into the PC marketplace with a number of different high volume PC companies and to see if we couldn’t be helpful to them in achieving a number of their audio objectives on their desktop machines, their laptop machines and also to address some of their voice concerns regarding Voice-over-IP.

John Lopez - OTA

That's extremely helpful. So maybe just ask it directly. My understanding is that Dolby for example is being paid a royalty for functionality similar both on the PC side and the operating system side. Is what they are doing completely separate from the functionality you are discussing?

Ulrich Gottschling

I think in most cases in, I don't want to generalize too much because certainly it could vary by one PC for another. I think Dolby traditionally has not been very successful and not focused on the audio enhancement segment of the business. They do, do a number of things and they do them extremely well, but this is an area where SRS is the market leader throughout the world in audio enhancement. We’ve shown that in TVs, we are clearly showing that in the automotive side, and we are endeavoring to address that now in some of the other market segments and we are hopefully going to be successful in doing that. So I would say that the things that we endeavor to do right now with the PC companies is something that’s different that what they have experienced in the past.

John Lopez - OTA

Now that makes perfect sense. So just to make sure I understand, to the extent, and this is my assumption, to the extent an existing PC vendor is currently paying a royalty to Dolby and currently Microsoft is paying a royalty to Dolby. What you are saying is to the extent that you are also designed in and they would pay you a royalty above and beyond the prior two that I just referenced.

Ulrich Gottschling

That’s correct.

John Lopez - OTA

Terrific. I apologize I know it was a stupid question.

Ulrich Gottschling

No, not at all.

John Lopez - OTA

The last one I had just related to your sales method in China. It would trick me that that move actually makes your payment process more difficult, your collection process more difficult. In other words, instead of tracking down a handful of semiconductor vendors, now you are tracking down a multiple of that finished product vendors. Do I not understand that right, and is there any knock-off to either cash flow or receivables as a result of this strategy.

Ulrich Gottschling

Well, I think you are absolutely correct that it does increase the complexity of what we are doing. One of the ways that we intend to combat that and our combating is, that we are in the process and in final stages of establishing our first formal foreign entity, which will be based in Shenzhen, China, and we will have direct employees there, including individual associated not only with sales activities and engineering and marketing and a full team of individuals, but there will also royalty compliance individuals that will be based in that location to make sure that we are cognizant of the royalties that are due to us in the utilization of our technology. But the thing that really is important about it is that these OEM companies and many of these are large companies, companies such as Haier that are significant players worldwide and deliver a lot of products.

It gives them the flexibility to pick and chose whichever other partners they want to deal with, for example like IC companies, and doesn't restrict their use to particular IC companies if they want to utilize our technology. These are great strong companies that are born to reputable businesses and we're very excited to be able to work with these kinds of quality companies directly, and expand our relationship.

John Lopez - OTA

Got you, okay. So just specifically in your mind no impact to the cash flow cycle or to the receivable balance or the DSO trend maybe better way to say it specifically?

Ulrich Gottschling

We don't anticipate that that will become materially different than it is today.

John Lopez - OTA

Great, thanks for the help, I appreciate it, guys.

Ulrich Gottschling

Okay.

Operator

Your next question is from [Chitra Sundaram from Turner Capital].

Chitra Sundaram - Turner Capital

Yeah, hi, thank you, and congratulations. A couple of questions on the revenue numbers for Q4. So when we look at home entertainment, is it possible to identify year-over-year Q4 of '06 how much of Sony was in that revenue stream, so that we can look at an apple-to-apples revenue growth and then the same for the PC side for Toshiba?

Ulrich Gottschling

We do, we want to be careful how much we disclose on that, Chitra.

Chitra Sundaram - Turner Capital

Oh, I see.

Ulrich Gottschling

But as it relates specifically to Q4 I would say between Sony and Toshiba PC collectively the negative impact is in the area of probably $0.50 million or so between the two of them.

Chitra Sundaram - Turner Capital

Okay. And in Q3 what might the Sony related legal or mediation expenses have been you mentioned probably about 100,000 in Q4?

Ulrich Gottschling

It was less than 100,000.

Chitra Sundaram - Turner Capital

Okay. And then, let me just see, the other piece that we just wanted to understand a little bit about was, as we start building out the operations in China that you just mentioned and then you all start reinvigorating your marketing force with the new Head of Marketing and so forth. What does that do to your cost structure as we go into Q1 of this year or is it that the revenue lines starts taking off, but then you know we're net-net in it?

Ulrich Gottschling

Well, as it relates to the China business; we’ve already started hiring individuals there thorough an agency which is what we need to do for the time being until we are certified and get all those things done and we are building the team there and they have already gone through training. And they are, to use the saying, they are up and running and they are going out and helping to get business for us. So, we are really, really excited about the quality of the people we've been able to retain there. Our regional sales director has done a very good job of putting together a plan and starting to execute against that plan.

As you know in China, the price structure of people is a little bit different than it is in other parts of world, so it's not as prohibitive, but that team has been put together and built right now. Again, as far as the marketing is concerned, we're just getting going on some of those activities so the impact as it relates to Q1 is not significant but as we move forwarded into Q2, Q3 and Q4, we put numbers in the budget that we think will be a representative of the type of investment we'll be making.

Chitra Sundaram - Turner Capital

Sure, and just two more data questions. Sarbanes-Oxley, was there any, may be I mentioned this, was there anything in Q4 that we need to strip out, just [maybe] in Q4?

Ulrich Gottschling

I think, we did, our controller really did a terrific job with that and we were able to go through all of the Sarbanes-Oxley 404 certification this year. The impact to the P&L from a cost side was probably somewhere in the $50,000 to $75,000 range for Q4.

Chitra Sundaram - Turner Capital

Okay

Ulrich Gottschling

So a lot of the work was done internally by herself and her team and they did a great job with that and then of course there were some costs for the outside auditors to take a look at some of those things.

Chitra Sundaram - Turner Capital

So, just roughly on the Chinese OEMs, hello?

Ulrich Gottschling

Yes.

Chitra Sundaram - Turner Capital

Yeah. Sorry on the Chinese OEMs you mentioned $300,000 impact in Q4 is there a similar kind of impact you can give us for Q3 again just to get the core revenue growth?

Ulrich Gottschling

I think it was a little bit less than that, but Chitra I don’t have the number here. I have just got the Q4 and the annual stuff.

Chitra Sundaram - Turner Capital

Well that's great thank you.

Operator

Your next question is from Mike Olson from Piper Jaffray.

Mike Olson - Piper Jaffray

Alright I'll give it another shot here I will make this short. The call is getting long but on Samsung is there are any thoughts right now on chance of inclusion and Samsung going on flat panel models. Is it still purely to have a good read on there?

Ulrich Gottschling

I would say that we're very confident at this point Mike. We were over there just a few weeks ago with the head of our R&D team, as well as the head of our sales team, as well as obviously the head of our Korean operations and his team. We spent multiple days with them, working with them on all kinds of activities from design opportunities and tuning opportunities and sharing road maps and so on. So I would say right now we feel very good we feel that the meetings were very constructive and positive, but ultimately I think it will be several more months before Samsung makes those final decisions on their technology choices. But overall we didn’t hear anything that I am aware of that caused us to have any kind of a negative feeling at all.

Mike Olson - Piper Jaffray

Okay. I guess you'd expect that you are maybe sometime in three months or so is that a good guess?

Ulrich Gottschling

I think so and again our expectation would be that we would continue on and we would continue to expand our relationship with Samsung. They have been a great partner and we really enjoy working with them. Yeah and - -

Mike Olson - Piper Jaffray

Just one other [room].

Ulrich Gottschling

And Mike just a follow-up, I mean a lot of the things that Samsung wanted to address with us last year. There were several others who went to Korea for multiple trips and our VP of sales was very instrumental in helping address the issues with Samsung. And as I mentioned we've signed an agreement with them through 2010, which we believe addressed all of the issues that they raise from road mapping and technology to marketing to co-branding to all kinds of activities that we feel like we should be able to move forward with them for the next couple of years.

Mike Olson - Piper Jaffray

Okay. And then, I know you don't want to give any segment specific guidance, but home entertainment I think we got around 14% in '07. Are you [kind of] agreeing as home entertainment revenue growth rate will slow or accelerate in '08 compared to '07?

Ulrich Gottschling

Well. Let me break it down into three different pieces. I think we'll continue to see very good and strong growth in the LCD business, the plasma business, because of the contracts that we've signed with companies like Beko and Vestel and Profilo and certainly with Sharp. And hopefully we will be able to make some additional announcements soon for new licensees that will be shipping products still before the end of the year.

The second segment within home entertainment is CRTs and as you know we've gone dramatically, we probably dropped $1.2 million for the year in CRT business,'06 to '07, but we're down pretty much at the bottom now, so there can't be too much deterioration in the CRT business. And then the other area that I think presents some opportunities for us with some of our technology offerings is the set-top box business and hopefully we'll be able to pick that business up and turn that into something more meaningful as the year goes on.

I think in maybe Q1, we might actually see a negative impact on the set-top box business, but I'm hopeful that as we move into Q2, Q3 and Q4, you're really going to start to see some momentum there. We're putting some resources there. We have a team leader that we think is going to do a really great job in that area and she has been with us for many years and has great relationships within the industry and we're hopeful she'll do a great job.

Mike Olson - Piper Jaffray

Alright, thanks.

Operator

The next question is from Steven Frankel from Canaccord Adams.

Steven Frankel - Canaccord Adams

Hi, could you just give us the customer concentration numbers for Q4, Samsung and any other customer that was over 5%?

Ulrich Gottschling

We can give you the Samsung number; I don't think we have with us here anybody else that's going to exceed the 5% number. I'm trying to look up right now what the Samsung percentage was. I think what they are showing me here is 28% with Samsung for Q4.

Steven Frankel - Canaccord Adams

Thank you.

Operator

The next question is Anthony Stoss from Craig Hallum.

Anthony Stoss - Craig Hallum

Hi, quickie follow-up. I didn't hear too much commentary on the VoIP opportunities Tom. You mentioned quite a bit on your last conference call giving us a quick update on VoIP? Thanks.

Tom Yuen

Actually we did mention about the voice opportunity -- what going over the Bluetooth side of our business and as we know that the Bluetooth shipments are primarily the mono voice headphones with the hands free sort of telecommuters, I mean people are using cell phones in a car. And the VIP technology and VIP plus, it took us a while to get it integrated into the most market leading platforms; namely the CSR. So we've been successful in putting those technologies now onto the CSR platform.

And so, I think that the alliance with CSR is a good one, and I think that having these very unique voice technologies now ready available for the OEMs to adopt. I think that it's actually a pretty reasonable opportunity, but amongst a lot of the other exciting progresses, such as the TV growth and PC turnaround potentials. We might not have highlighted significantly the progress we have been able to achieve with this voice intelligibility technology.

Definitely, I think there is some co-marketing opportunity. We are looking forward to doing with CSR in Japan very soon. So hopefully, with their existing mono-headphone market share and that the integration of our technology now being available on their platform, I think that we should benefit from this relationship and get into this high volume mono-headphone market.

Anthony Stoss - Craig Hallum

Thank you.

Tom Yuen

Yeah.

Operator

Our next question is from James Basch from Dialectic.

James Basch - Dialectic

Hi, guys. Quick follow-up. I'm actually very happy that we have this many people on the call.

Ulrich Gottschling

James, before I let you ask your question, the answer on the operating cash flow is with $2.6 million positive in Q4.

James Basch - Dialectic

Okay. That's great, I missed the question before where the gentleman was asking about a potential Samsung milestone where he was concerned, I guess, was asking about the relationship that you have with Samsung. Can you address that again I just missed that part of the question?

And then second question is that you guys display that promise, this is it. Say, you guys display a phone, a Nokia phone at CES, do you have a design win into that phone?

Ulrich Gottschling

Okay. I'll answer the two different questions. We'll start with the Samsung question, James.

James Basch - Dialectic

Yeah

Ulrich Gottschling

Okay. So we have a relationship that we've had for many years with Samsung on their TV business and we have a contract in place with them that identifies all kinds of different issues as we've talked about and that contract effectively goes through December 31, 2010.

James Basch - Dialectic

Okay

Ulrich Gottschling

However, within Samsung as with most CE companies, consumer electronics companies, they do a lot of decision making in the spring and early summer of each year for the products that they plan to introduce either for the holiday season that year or most likely things that they will introduce at CES and other trade shows early the following year for their next year activities.

James Basch - Dialectic

Okay

Ulrich Gottschling

Okay. So we feel good obviously about our activities with Samsung for 2008. We feel like we have great penetration in their account and there are more things we can do but we feel very good about that. We are in the process of working with Samsung right now on their 2009 TVs that they will presumably introduce at CES in January of next year that will then launch in the second half of 2009.

James Basch - Dialectic

Okay. Got it.

Ulrich Gottschling

Okay. So that's the Samsung deal and we feel like that's going forward pretty well. As it relates to Nokia, Nokia has different groups throughout the world. And there is a group here in the United States that do some design work and do some phones, both for the US market as well as some phones for the international markets. And we have been informed that we've won some design wins for those phones that we'll probably ship later this year, and then, moving forward into '09.

We're not sure what the volume application of those phones is going to be, but it was really something where we wanted to work with Nokia. We wanted to work with some of their contract manufacturers and ODMs and chip providers to make sure that we had a great solution for them and that we really improved the quality of those phones. And then, hopefully, based on that, we would be able to open up a dialogue in a greater sense with Nokia moving forward.

James Basch - Dialectic

Okay. Thanks guys.

Tom Yuen

I would like to also readdress Tony's question on voice. Actually, we have also been very successful with the voice technology in the cell phone area. The NEC relationship continues to be working to our benefit. They are looking at new additions. And in addition, we have been presenting our voice VIP technology to other cell phone companies that have shown interest now to look at improving their voice quality.

So, some of these are mass volume cell phone makers. Therefore, the PC marketplace, there is a lot of Voice-over-IP application, whether it's the iPhone or other similar situations, and we do have other voice complimentary technologies that continue to be demonstrating very well in front of some of these prospects, in terms of how it improved even Voice-over-IP quality phones, I mean the voice quality.

James Basch - Dialectic

Thank you.

Operator

There are no further questions.

Ulrich Gottschling

Okay. Thank you, Adrianne. Well, to everyone, thank you very thank you very much for your interest and for joining us on the phone call today. We look forward to continuing to update everyone on our activities and, hopefully, our successfully results of those activities. So thank you very much.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect.

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Source: SRS Labs Inc. Q4 2007 Earnings Call Transcript
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