Zoran Corporation Q1 2008 Earnings Call Transcript

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 |  About: Zoran Corporation (ZRAN)
by: SA Transcripts

Operator

Good day ladies and gentlemen and welcome to the Zoran first quarter 2008 conference call. My name is George. I will be your 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 this conference. If at any time during the call you require assistance please press * followed by the 0 and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Bonnie McBride, Investor Relations for Zoran. Please proceed.

Bonnie McBride

Thank you. Good afternoon everyone and thank you for joining us today to discuss Zoran’s first quarter 2008 results. By now you each should have received a copy of today’s earnings release.

Joining us today from Zoran’s management team are Dr. Levy Gerzberg, President and CEO, Mr. Karl Schneider, Zoran’s Senior Vice President of Finance and Chief Financial Officer and Dr. Isaac Shenberg, Senior Vice President of Business Development.

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

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

Levy Gerzberg

Thank you, Bonnie, and good afternoon everyone. During the first quarter Zoran achieved excellent growth in DTV and mobile phone processors which saw sequential revenue growth of 19% and 84% respectively as we continue to gain market share in these segments. The uncertain economic environment which some believe has put the U.S. economy in a recession has led to cautious order [inaudible] from some of our customers and we experienced atypical seasonality in both DVD and digital cameras.

Our printer imaging business experienced fairly normal seasonality for this time of the year.

In digital cameras Zoran’s results were in line with our cautious expectations given the economic slow down and maturity of this market. Our Coach processors continue to be in high demand however there were positive developments during the first quarter. Driven by the growing demand for high ISO image capture as well as blur prevention and other technologies our Coach 10 processor is being well received in the market.

Consumers are requiring cameras that capture excellent quality images even under poor lighting conditions and our customers tell us that our high speed ISO capabilities are a very key differentiator in the selection process. Video capabilities are also an essential technology for digital cameras which is delivered by our high definition H.264 video compression technology and high quality HD [like] features.

These high end performance functions are enabling Zoran to outpace the competition and maintain its leading market share. Other high demand features such as fast camera response and face tracking are also winning in the selection process. In fact, Nikon’s recently introduced S600 model powered by our solutions is the fastest power to shoot point and shoot camera in the world.

As the demand for these features become common even in the lower end and mid-range cameras, Zoran’s strategy to address the full range of the market is once again proven advantageous. For example, our Coach 11 processor delivers some of the Coach 10 technologies plus face tracking and blur correction in a more cost effective solution enabling our customers to address the mid-range market. As a result both Zoran and our customers are able to remain competitive in all segments.

Zoran’s solutions continue to dominate the Taiwanese, Korean and affordable Japanese branded camera markets. In Japan we began working with a new T1 customer and expect models to be introduced later in the year. The pricing environment was consistent with our expectations as camera makers are aggressively driving prices down in order to win business particularly in the low-end segment.

Looking to 2008 we expect the pricing environment to remain competitive. We believe we can grow share in the market however given the broad based concerns over the global economy we are maintaining our cautious outlook.

In the multimedia mobile phone market sales of our Coach 5C processor which is powering the LG electronic Viewty phone were outstanding exceeding expectations. We have begun additional projects with LG including the new model that is currently ramping into production as well as other models to be introduced throughout the year. Our understanding is that LG plans to expand its sales of the Viewty from Europe into Asia followed by penetration into South America and Zoran will obviously benefit from this expansion strategy.

In addition we expect samples of our next generation approach in the second half of the year. The widely publicized success of the Viewty is providing potential customers with an excellent proof of concept. We continue to expect this segment to be a major contributor to our growth in 2008.

In printer imaging we saw typical seasonality with revenues decreasing somewhat from our very robust fourth quarter. Demand for our Quatro product remains strong as did demand for our IPS page description language software.

Deployments of new models from customers incorporating our Quatro processors continue at a steady pace and included Color Laser All in One from Ricoh and Inkjet All In One from Samsung. We are seeing a tough competitive environment in the Inkjet all in one space and anticipate this segment to remain challenging for Zoran for the balance of the year.

However, our investments last year in the emerging color laser segment are expected to pay off later this year and more significantly in 2009.

During the quarter we continued to work on laser development program based on our Quatro processor family at several major OEM’s. IDC recently validated this initiative stating that “growth in the color laser segment will be driven by continued price decline and price cutting by OEM’s that are expected to reduce the price of replacement toner cartridges, thereby narrowing the gap between color and monochrome printers even further.”

Software revenue growth driven by continued demand for our IPS software which is now shipping in over 270 printers and [MFPs]. Some examples of recently introduced products based on this technology include HP’s Laserjet LP’s and MFP’s, Canon’s Refresh Color Image Runner MFP and [OC] Various Stream MFP which boasts 1500 impressions per minute and is believed to be the fastest IPS deployment today.

Interest in our latest generation of IPS which features an interpreter for Microsoft’s new XPS format continues and we are working closely with existing licensees to gain Windows logo certification for 2008 product launches.

In DVD, Zoran’s position remains strong though we experienced a decline in revenue driven by seasonality as well as reduced consumer spending. We are optimistic that we can maintain our market share and make further share gains in 2008 particularly in portable DVD’s and high end DVD players based on recent design win activity. While we are monitoring macro economic events we continue to see solid demand within brick countries for local DVD products.

We saw signs of demand weakness in China where we sell mostly low and mid-range products as well as in Korea and Japan. We are seeing a slowdown in the HDMI segment however Zoran achieved multiple design wins for future models coming to market later this year.

Current expectations indicate that demand will recover in the second half of the year, the traditional buying season. This coincides with the introduction of our new HDMI 1080PS OC solution which we anticipate will drive further share gains for Zoran in these segments.

We have multiple customers in the production phase or in many cases shipping with Zoran’s HDMI solutions such as Elco, Samsung, Toshiba among others. The trend to move [an effect] to China from other countries such as Japan and Korea will benefit Zoran throughout 2008. Zoran’s strong customer relationships with both ODM’s and OEM’s combined with our well established infrastructure in China has enabled us to become a leading supplier of this market.

We see many opportunities in working with Chinese manufacturers supplying the local domestic market. We continue to ship solutions to major OEM’s such as Clarion, JVC, [Kai Pine] and Sony for the expanding automobile DVD market. These products though smaller in volume constitute a high margin business and we are working with customers to take advantage of these opportunities.

On the Blue Ray front we believe that the market will ramp in volume in 2009 when cost effective players become available. Our integrated solution which includes both the front and the back end positions us to take a leading position in this segment of the market.

In DTV Zoran’s performance was outstanding achieving new records in revenues and [inaudible]. Growth was driven primarily by demand for our latest generation of super HD processors for HCD TV’s. Multiple new models entered the retail market under well known brands found at Best Buy, Costco, WalMart and other retail stores including Anderson, Insignia, Magnavox, Sanyo, Toshiba and many others. We expect new models under these brands to be released later in the year in addition to models from new customers that will be announced in the coming quarters.

Zoran’s processors have reached a higher level of integration, image quality and cost performance than the competition. We have new design wins with large OEM’s beyond our existing customer base as well as increasing momentum with ODM suppliers. These customers will deliver HDTV’s to the market sweet spot from 26” LCD models up to 40” full HD 1080P televisions for the U.S. and Europe where we expect to drive substantial growth and further market share gain throughout 2008.

It is clear from our performance during the quarter and our outlook for the year that our ODM strategy is working. We are seeing substantial growth among all our ODM partners as the market continues to favor outsourcing of TV products rather than in-house development even for top tier brands. We believe that our ODM customers meet the requirements to be successful long-term suppliers to the TV market including global manufacturing, retail channel connections and close ties to TV panel manufacturers.

As the TV market transitions to an outsourced podium model, direct link to panel manufacturers will be required to win in this market. In Europe our top tier customer using Zoran’s SupraHD 670SOC is now in production. The new models are expected to reach the retail channel next month and we anticipate that we will grow our European market share in 2008 with further ramp in 2009.

On the broadcast transition front we are shipping the SupraHD 741 processor to multiple manufacturers to meet the anticipated demand for over 10 million applications for the coupon for the U.S. converter box. The already complex forces by which models are to be recertified for mass development were further complicated during the quarter when the FCC aided analog pass through support as a certification requirement. We finalized our new referenced platform and software which lowers the cost of the ATC converter box while also adding analog pass through capability. We expect our customers to begin shipping updated re-certified platforms supporting the analog requirement later this quarter positioning us to remain a leader in the market as volume ramps.

Our SDTV product line, designed to address the European DVDT free to air and China digital cable markets continues to gain traction. In Europe we see an increase in the UK due to the promotion of the Freeview Playback service. We are well positioned to address this segment with our existing customer, Alba, the leading consumer electronics manufacturer in the UK. Also, we are seeing a shift from DVDT set up boxes to digital televisions in the UK and other European markets. While this is lowering demand for our SupraTV base products we obviously see an opportunity to increase sales of our SupraHD processors. We believe we have already been designed into a number of digital television models which use an analog flat panel monitor with an integrated digital television module. So either way, Zoran wins.

In China's digital cable market there was some temporary softness as a result of the weather related issues in northern China. Though we expect the market to remain stable during the remainder of 2008.

In addition, in March we announced that [Core Ship] one of the leading suppliers of China set up boxes is shipping a new product based on our SupraTV processor. DTV and

mobile phone processors are expected to continue to drive growth for the year. However, the uncertain economic environment will likely impact consumer spending in the near term. We are cautiously optimistic that the second half recovery will enable us to return to normal seasonality in digital cameras and DVD and expect modest decline in our printer imaging business following a record performance in 2007.

Having said that we are confident in our position in each of our core markets and believe that we will maintain and even grow market share during the year positioning us well for a complete recovery along with the global economy.

And now, I will turn the call over to Karl Schneider for a review of the financials.

Karl?

Karl Schneider

Thank you, Levy. Good afternoon everyone.

For the first quarter ended March 31, 2008, Zoran recorded revenues of $109 million compared to the $129.4 million reported last quarter and $101.7 million for the first quarter of 2007.

Net loss under Generally Accepted Accounting Principles (GAAP) for the period was $4.7 million or $0.09 per share on 51.4 million common and equivalent shares. These results include non-cash charges of $9.2 million related to the amortization of acquired intangible assets and $2.9 million of stock based compensation expense as well as a tax benefit of $3 million.

This compares with GAAP net income of $58.7 million or $1.11 per diluted share for the previous quarter and a GAAP net loss of $5.9 million or $0.12 per share for the first quarter of last year which also included similar non-cash charges. As a reminder, our fourth quarter net income included a non-recurring tax benefit of $56.2 million.

On a non-GAAP basis, which excludes the non-cash charges for amortization of purchased intangibles stock-based compensation expense, as well as the $3 million tax benefit, our net income for the first quarter was $3.5 million or $0.07 per diluted share

compared to net income of $18.1 million or $0.34 per diluted share for the previous quarter. For the first quarter of 2007 our non-GAAP net income was $9.5 million or $0.19 per diluted share.

Hardware product revenues decreased to $94.3 million from $113.9 million reported last quarter but increased 8.2% from $87.2 million in the same period of the prior year.

Software royalties, licensing and other revenues decreased to $14.7 million from $15.5 million last quarter and increased 1.8% from $14.5 million reported in the first quarter of 2007.

Revenues by product market for the first quarter of 2008 were 27% digital camera, 25% DTV, 21% DVD, 19% printer imaging, 7% mobile phone processors and 1% other. As Levy mentioned earlier, we are experiencing solid growth and market share gains from our DTV and mobile phone products which are offsetting some of the unusually strong seasonal declines in DVD and digital camera.

Sales by geographic region during the first quarter were 36% China, 20% Japan, 18% Taiwan, 14% Korea, and 12% U.S. and the rest of the world.

Overall gross margin for the first quarter was 47%, which compares with 52.1% last

quarter and with 56.6% for the first quarter of 2007. The decrease in our overall gross margin in the quarter was driven by several factors including product mix, ASP erosion and cost challenges associated with new product ramps.

In DTV, where we are ramping several new products and rapidly gaining market share, we are experiencing a combination of mix, ASP and cost-related challenges which have resulted in lower than expected gross margins. Our margins were also challenged by the significant increase in mix of our mobile phone products which has lower margins, as well as softness in digital camera where margins are stronger but are also declining. We expect that we will see improvements in DTV and mobile phone margins as we go forward throughout the year as well as a strengthening in the mix as digital cameras ramp during the seasonal build.

The allocation of stock based compensation expense and our GAAP income statement for the first quarter is $95,000 to manufacturing overhead included in cost of product sales, $1.1 million in R&D and $1.7 million in SG&A.

Excluding these stock based compensation expenses Research and Development expenses decreased $2 million in the first quarter of 2008 to $26.7 million compared to the $28.7 million in the prior quarter. Compared with the same quarter of last year, R&D spending increased 10.9% from $24.1 million.

On a sequential basis, R&D spending tends to fluctuate from quarter to quarter based on

the timing of major engineering related expenses such as [tape outs] which include mass sets and engineering wafers. Excluding the impact of stock based compensation charges, selling, general and administrative expenses decreased slightly to $24 million in the first quarter from the $25.5 million reported last quarter. Compared to the same quarter last year SG&A expenses decreased $2.3 million from $26.3 million.

Ongoing legal expenses associated with stock option related matters was approximately $1.5 million in the first quarter of 2008 compared to $1 million in the fourth quarter and $3.8 million in the first quarter of 2007.

Other income and expense for the first quarter of 2008 was $3.8 million compared to $1.9 million in the fourth quarter. The component of interest income included in these figures was $4.5 million and $4.8 million respectively.

Moving over to the balance sheet, cash, cash equivalents and total investments declined to $377.3 million compared to $405.2 million reported last quarter. Cash used for operations during the quarter was $25.9 million primarily due to the increase in

inventory balances in preparation of our upcoming seasonally stronger quarters as well as a decrease in our accounts payable balance where our days payable outstanding dropped from 103 days to 86 days due to timing of payments.

Accounts receivable at the end of the quarter were $55.1 million a decrease of $3.1 million from $58.2 million last quarter with DSOs increasing slightly to 45 days compared to 41 days for the previous quarter.

Inventory balances at the end of the quarter increased $15.6 million to $64.6 million compared to $49 million for the previous quarter in anticipation of our upcoming seasonal build quarters.

The majority of this increase in inventory is for DTV and mobile phone processors. Inventory turns for the first quarter were approximately 3.4 versus 4.9 in the previous quarter.

I will now address the company's outlook for the second quarter of 2008. During the question-and-answer session that follows you are encouraged to ask any questions that may not be covered during the course of our comments as we do not anticipate having to provide any additional financial guidance after this call.

Before we provide any forward-looking guidance I want to you remind you that

any forward-looking statements related to revenue projections, gross margin expectations and all other comments on the expected financial results for Zoran are just predictions.

Actual results may differ materially.

For the second quarter of 2008 we currently anticipate that revenues will range between $130-135 million with overall gross margins ranging between 46% and 46.5%.

Excluding amortization of acquired intangibles and stock based compensation, operating expenses are expected to range between $53-54 million . Acquisition related costs are

expected to be approximately $9.2 million. Stock based compensation expense is expected to be between $2.8 million and $3.3 million.

The company expects to record GAAP earnings for the quarter in the range of a loss of $0.03 per share to net income of $0.03 per diluted share. Excluding amortization of acquired intangible and stock based compensation non-GAAP net income for the quarter is expected to range between $0.14 and $0.18 per diluted share on approximately 52.2 million shares.

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

Question-And-Answer Session

Operator

Ladies and gentlemen if you wish to ask a question please press * followed by 1 on your touchtone phone. If your question has been answered or you wish to withdraw your question please press * followed by 2. Questions will be taken in the order they are received. Please press *1 to begin.

Your first question comes from the line of Heidi Poon, Thomas Weisel Partners.

Heidi Poon - Thomas Weisel Partners

Hi guys. This is Heidi. I just want to dig a little deeper on the gross margins side. I understand you know the mix issue and that you expect digital cameras to run back up in the second half but you have previously indicated $46 to $48 million long term target growth margin. Do you think we have already gotten to that target and if that is the case what do we see in terms of 2009?

Karl Schneider

Well you are right, Heidi, we have previously indicated longer term we were expecting gross margins in that range. I think we have definitely got there a little sooner than we would have liked to have gotten there. We are expecting margins to come back a little in the second half. We are expecting to see margin improvements in things like our mobile phone processor as we get into the second half of the year and remember that is a processor that is a multi-chip module so the margins are a little challenged right now but we expect improvements. I think TV right now will show some improvements in gross margins in the second half. So yeah we are moving there a little quicker than we had anticipated and again I don’t think it is going to deteriorate that much further in 2009.

Heidi Poon - Thomas Weisel Partners

Okay great. In terms of mobile...looks like it is ramping pretty nicely and you are expecting a stronger June quarter. Could you just give us a sense of the contribution target for 2008?

Karl Schneider

The contribution of mobile phones?

Heidi Poon - Thomas Weisel Partners

Yes. Essential contributions for this year.

Karl Schneider

Oh look, as I stated many times I think the mobile phones are going to have a pretty good year. When it is all said and done I don’t think the numbers I have talked about in the past are going to be that far out of line. We’re going to probably be at the higher end of some of the numbers I have indicated which is somewhere…I think I have said in the past between $30-50 million in revenue from mobile phones.

Heidi Poon - Thomas Weisel Partners

Got ya. Great. Thank you.

Operator

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

James Schneider – Goldman Sachs

Hi. Good afternoon. Thanks for taking my question. Looking out into Q2 what segments do you think are going to be up versus down the most and if you could rank order that would be appreciated.

Karl Schneider

As far as Q2 goes I would say most of the segments with the exception of printer imaging would be up. I’m not inclined to rank order them at this point in time but I believe in our TV group, our DVD group, the mobile phones and the cameras will all be up in Q2.

James Schneider – Goldman Sachs

Okay . Great. Then in terms of the order patterns you saw you know not in the ramping TV and handset area but really in your lower main screen DVD and digital camera businesses what kind of order patterns did you see as you progressed through Q1 and what have you seen so far within Q2?

Karl Schneider

Jim I would say the order patterns we experienced in Q1 were pretty typical from a quarter perspective, at least the linearity and I believe Q2 is about the same.

James Schneider – Goldman Sachs

Okay. Great. Then the last one for me in terms of digital television design wins you mentioned a number of them ramping this quarter in Q1 and then some additional design wins that will come in later in the year. Can you give us a sense of what kind of profile you expect in terms of the ramp of those new models later in the year? Timing? TV sorry.

Levy Gerzberg

First of all the ramp is based on LCD televisions and as we mentioned in the prepared statement we see the sweet spot around 32” and going up. We have at least two more important and famous customers coming up and will start ramping in the quarter and as mentioned earlier our strategy in the ODM markets is really starting to pay off. We’re gaining more and more design wins even with large companies including first tier names that are going with us because of our ODM capabilities and support capabilities and the product we have that provide solutions for the entire range including very high quality…image quality. So this is the [pattern] that we see and we see nice momentum that started actually in Q1 and will continue in the year.

James Schneider – Goldman Sachs

Great. Thanks so much.

Operator

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

Gary Mobley - Piper Jaffray

Hi. Karl in your prepared remarks in discussing the gross margin one of the factors that you mentioned was the declining ASPs and I’m assuming you are referring to your DVD and in-camera business and I’m just hoping you can give us a little more detail on how much gross margins in these two particular categories decreased in the quarter and what makes the margins get better in the second half of the year?

Karl Schneider

Well, when declining ASPs is pretty much one of those things that I think touches us on almost all of our products from quarter to quarter. I don’t think we saw anything out of the ordinary in declining ASPs. It was just one of the factors in the mix. I think the one area that we expected to see declines came you know in the digital camera side of things. I’ve been saying we were going to experience those declines because digital camera margins as you recall used to be quite high. We’re starting to see that happen. A lot of that didn’t necessarily happen just from ASPs. As we have ramped new products like the Coach 10 those products are on a little higher cost, however when we start ramping the Coach 11 which was meant for the mid-range market we will see that market come back.

So we are experiencing ASP declines across all of our product segments including TV, DVD, digital camera…nothing out of the ordinary.

Levy Gerzberg

One thing to add, Gary, is that in all product lines we are coming out with new products across the board. Including the lowest end DVD player chip to the most sophisticated HDTV or printer ship. So we are working on new products that we hope and believe will enable us to gain not only market share but also margin. So there is a mix issue and transition issue and all of this combined caused the [pattern] that Karl described including of course declining ASP in some of the legacy segments.

Gary Mobley - Piper Jaffray

Okay. Levy, I just have one follow-up question…on the Blue Ray front what are the prospects of Zoran hitting the design win window that may lead to a ramp in Blue Ray revenue for Zoran in 2009?

Levy Gerzberg

Yeah, this is our target in 2009 for Blue Ray and historically we have shown we are going up to the high volume segment. Of course this is not a big market yet and it will have one day a high volume and we believe we have a very good chance to be a winner there because we are looking at costs, we are looking at the integrated solutions front and back end which we have, and the software…you have to be able to integrate all the software and delivery. So similar to other markets that we entered after we realized we have a future chance like DTV, where we are gaining very nicely in market share, we believe 2009 represents a very good opportunity for us that will materialize.

Gary Mobley - Piper Jaffray

Thank you guys.

Operator

Your next question comes from the line of Suji De Silva with Kaufman Bros. Please proceed.

Suji De Silva - Kaufman Bros.

Hi guys. Can you talk about on the more mature segments, the DVD and DTV segments, what may help drive gross margins to offset some of the price of decline perhaps in the product cycle?

Karl Schneider

Well, Suji, in DVD we are coming out with a new integrated HDMI processor which will support 1080P that will help drive the cost structure down versus the two-chip solutions that we have had. We are gaining share in some of the higher margin markets like automotive for DVD. That is going to help. Digital camera we are going to see in the second half of the year the introduction of the Coach 11, I believe, which will help bring back some of the margin there. You know, if we get really lucky we will get our fabs to drop the price of wafers and we will see some…

Suji De Silva - Kaufman Bros.

Are you seeing signs of that yet? Wafer price decrease?

Levy Gerzberg

Well you know we have been working on a long-term arrangement with our vendors and as the volume goes up and we see some signs it is we see help coming from their side.

Suji De Silva - Kaufman Bros.

Okay great. And can you give a reminder of where gross margins have troughed historically and perhaps how you are positioned differently now versus when that happened last?

Karl Schneider

I’m sorry, can you repeat that question?

Suji De Silva - Kaufman Bros.

Sure. I’m sorry…where gross margins troughed historically? Where you see yourselves positioned now versus when that happened?

Karl Schneider

Wow it has been so long. Yeah. I think the trough in gross margins has been at least on an overall basis for Zoran has been down in the low 40’s. It can go back a number of years.

Suji De Silva - Kaufman Bros.

Okay. Great. Last question…on China you talked about a number of different areas where you saw softness. Can you talk more broadly of what you think the outlook there is? Perhaps going into the Olympics whether you think the demand can rebound there? Thanks.

Levy Gerzberg

What we see in general is China is a growth area and growth opportunity for us. Towards the Olympics we are supplying the digital cable TV solution to some of the leading vendors in that market. We mentioned one of them in the earlier remarks [Koshi] providing solutions to DVN. What is happening in China right now is the Chinese government is trying to make sure there are not too many changes in the infrastructure right now. They don’t want to have any unanticipated surprises. They want everything to work very smoothly. We do see growth in that market and in general. Digital cameras will become more and more pervasive in China. Certainly DVD and not to mention cell phones. We are providing today very cost effective solutions for the multimedia cell phones with a very good resolution; 5 mega pixel. The next generation will provide more than that and in the future we will have a mobile TV solution as well. We believe China will be one of the first markets to adopted [growth] and indeed our customer is aiming at that part of the world and we believe it represents a good growth opportunity for us. We have a very good infrastructure in China for support. We have 700 engineers in all disciplines; software, applications, even [inaudible] design. And we think the local support infrastructure is going to help us further to increase our market share in that country.

Suji De Silva - Kaufman Bros.

Great thank you.

Operator

Your next question comes from the line of Craig Berger with CBR Capital Markets. Please proceed.

Craig [Berger] – CBR Capital Markets

Hey guys. Thanks for still taking my questions. How are you today?

Karl Schneider

Very good Craig.

Levy Gerzberg

Good. Welcome back.

Craig [Berger] – CBR Capital Markets

Thank you. Can you just go over the competitive landscape a little bit in your digital camera chip market and your DVD chip market? Also I ask that because I heard there is maybe a new Korean competitor entering the DVD chip market. I don’t know how real that is or not.

Levy Gerzberg

Well in the digital camera market we do not see a major change in the competitive landscape. There are some vendors we see…the competitors are more or less the same so far. We continue to lead this market by integrating more and more functions…integrating more disciplines into the camera where we enhance optics now automatically…DSP. We even see that some of the…one of the suppliers in Taiwan for example we used to supply cameras and chips is now starting to work with us and using our chips. So overall we don’t see a major change in the landscape. Same players. One newcomer in the high definition video camera, but he is not new…at least not in the last year. We are familiar with this and we are coming up with our solution for this market.

So that is the digital camera…the major factor we see in the digital camera market is in the channel. Dropping the price, they want to entice consumers to buy more cameras. But no major changes in the competitive landscape. ASP is going down and we hope to increase it and to increase margin with new products.

In the DVD market it is essentially the same three players mostly. Zoran, Media Tech, Sun Plus and Samsung, I don’t know if you are referring to this supplier…they have been a supplier…Samsung Semiconductors has been a supplier to this market for some time on and off, on and off. They do not have the strong legacy of playability and quality that we have with our products. But we do not underestimate them. They have been in the market. These are the main players. We have not seen any other ones so far as for the DVD.

Craig [Berger] – CBR Capital Markets

In DVD how much exposure do you guys have to kind of like the low end $1.75 decoders versus the more advanced HDMI or 1080 where you still get some ASP premium? Should that market get worse how much exposure do you still have to the low end stuff that you might walk away from?

Levy Gerzberg

We cover the entire spectrum of the market so far we are not walking away from anything. We are coming out with a new weapon for that market. We are constantly introducing lower cost solutions that will enable us to continue competing in the low end all the way to the high end. We are in some $2,000 DVD players as well as many of the HDMI DVD players but including the low end. For us it is a cash cow. Without heavy investment in R&D we can reduce the cost and we are more advanced design, more advanced technologies and we continue to generate profit in the low end market. So we can handle the $1.75 ASP as an acceptable margin. But we are investing in other areas to increase the ASP.

Craig [Berger] – CBR Capital Markets

One last question…one the demand side orders it sounds like things are getting a little bit better here bouncing off a pretty low bottom in March. Is there any signs of a broader pick up, seasonally? Is there any concern that U.S. macro risk can spread to China or Europe? Are you seeing any signs of that? Any additional color there?

Karl Schneider

I think we need to be reminded that Q1 is the slow season of the year and going into Q2 we are starting our seasonal build pattern. So I think what we are seeing is pretty typical. I think we are still very cautious about what…especially in the U.S. economy what is going to go on. I don’t think it is clear yet but there are some indications that there is hope for the second half of the year. Levy do you want to add anything to that?

Levy Gerzberg

You know we are looking at the entire food chain and it is interesting…we have been talking to the channels also. Recently Best Buy announced they were going to increase the number of Insignia brand flat panel TV’s. Insignia, for those of you who are not familiar with it, is the home brand name of Best Buy and they buy the complete solutions which we design with our customers from Asia and put their name on it. Of course they participate in the definition of it and because we have such cost effective solutions in a whole family of products now which address different features, different price range and different size we view this as a great opportunity. The reason they are increasing the Insignia is to overcome some of the economic concerns by providing a much lower cost solution. These are great televisions. You see them side-by-side, next to Sony in the Best Buy store and if you wouldn’t see the brand name it would be hard for you to tell which is which. We see this sweet spot of 32”…even the lower cost 40” television actually doing well.

So we see some positive signs from the channels. In China things are the same. Actually that economy is booming. It is not clear what will happen in Europe because of currency issues and so on, although for exporters into Europe things are good. As Karl said we are cautious and we plan for growth because we see the demand coming.

Craig [Berger] – CBR Capital Markets

Okay. Thanks.

Operator

Your next question comes from the line of Paul Paul Coster with J.P. Morgan.

Paul Coster - J.P. Morgan

Thank you. Good afternoon. A couple of questions for Levy and a couple of questions for Karl if you don’t mind. Levy, on the Blue Ray front when will the design wins be awarded for the 2009 models? Do you see the market going straight away to ODM or is that going to be sort of a slow transition?

Levy Gerzberg

Well we’re going to be in boxes starting…the design win is late this year, Q4. We are talking to a number of the major players in this market so they are familiar with our solutions. Some of them are working with us already. The real formal design win is in Q4 and we believe we will participate in the growth next year. This type of market is transitioning slowly. You will not see the ODM right away. It is a very complex design. The important thing is to show the manufacturers that we have a broad mix and a path to much lower cost and the ability to move the ODM and the demand will be there. We have done it before and that is what they like about us. Actually right now we are benefiting from it in the same pattern in DTV. So that is the time frame.

Paul Coster - J.P. Morgan

In the past you have talked of wireless connectivity as being on the future road maps to these consumer electronics products. Are they kind of taking a back seat at the moment?

Levy Gerzberg

Even there you see some wireless solutions but it is not a major solution yet. There are still some issues related to standard, robustness of the solution. But we are getting ready. We are talking to a number of players in this market and we make sure that when wireless will be needed we have the right interface and connectivity to the market. It is not a major focus yet.

Paul Coster - J.P. Morgan

Got it. Okay. Karl, I think you have about $85 million of auction rate securities on your books. Are you going to issue a kind of GAAP write down at some point in the future?

Karl Schneider

Well we had $85 million or so last quarter. At the end of this quarter we only had about $62 million so we did see an improvement in that area. Not that the auctions succeeded, but we saw a lot of calls and we’re continuing to see calls from the issuers. We did not and have not taken a write down on auction rate securities. We believe that we are in a position that we do not have pressure to liquidate that instrument in the near term so we can ride this out. Because of the trend and seeing roughly $20 some odd million being called in one quarter we believe that trend will continue and we will get out of it without having to take a write down at this time.

Paul Coster - J.P. Morgan

That is very pleasing actually. Then some investors are going to be concerned about level of inventory…we see a record level for you in terms of days [inventured] and in your prepared remarks it sounded like that inventory will cover several quarters out into the future. Is this going to weigh on gross margins? Can you give us, for instance, some sense of the composition of that inventory? I’m trying to figure out whether or not you are able to tie in your future gross margins to price or cost declines or whether you are locked into an inventory overhang.

Karl Schneider

Well it will take…there are several main components of the inventory. It increased about $15.6 million and I would say more than half of that was in television. All of that is newer product and I don’t see an issue because we are seeing a lot of growth there. We saw some in our mobile handset business…was part of the inventory increase and of course the prospects there are quite good. So we’re not going to see an issue there long term. There was a little bit of DVD inventory because of the softness but again we believe all of that is good inventory…it is not going to impact us long-term. We will work ourselves out of this situation in the next quarter and a half or two quarters if you count Q2 and Q3. But that is our build season.

So long-term this isn’t an issue so I think inventory, even though it is not where we want it to be or would like it to be…our target is to be somewhere between five and six turns, this is not a bad situation given that most of the increase is in product lines that are growing substantially for us.

Paul Coster - J.P. Morgan

Great. Thanks very much.

Operator

Your next question comes from the line of Quinn Bolton with Needham & Company.

Quinn Bolton- Needham & Company

Hi Levy and Karl. I apologize but I got disconnected for the tail end of Levy’s comments and most of your comments, Karl. So I was just wondering if you could come back and again highlight the change in the gross margin? Was that just product mix? Was it a steep margin drop in one product line? Particular maybe digital cameras? But sorry to make you repeat your prior comments.

Karl Schneider

That’s alright. Again, it was a combination Quinn of product mix and I would say that may have been the stronger component. There was also ASP declines as usual, some more some less. We also got impacted as we rolling out some of these new products like the new TV products, even the mobile phone processor as we wrapped up these multi-chip modules as we had some product ramp issues and yield issues on some of those devices that are going to improve over time. So we’ve got some of that experience behind us and we expect we will see some recovery in some of these products as we go across the year.

Quinn Bolton- Needham & Company

Karl, is it safe to say that it looks like gross margins across most of the product lines probably did decline? I mean Coach processors are maybe excluded from that group since that is a relatively new product, but most of the existing product line did see margin compression?

Karl Schneider

I’d say that is safe to say.

Quinn Bolton- Needham & Company

Okay. Just in terms of the growth quarter to quarter. Your commentary seemed somewhat cautious and yet your guidance for rev to grow $20-25 million sequentially seems fairly healthy and certainly seems to be more indicative of a more normal seasonal pattern. I know you were asked end quarter your growth earlier and you didn’t comment but are you seeing typical seasonal growth in digital camera and DVD? Are those businesses recovering? Or is it really coming still from the TV and Coach processor lines here? Camera and DVD’s softer than the normal seasonal pattern?

Karl Schneider

I think we are seeing things pretty much typical. DVD is going to recover in the second quarter. TV is going to be tough. Digital camera is going to make a come back in the second quarter as we would typically see in the seasonal build. I think in my prepared comments…was it prepared comments or the first question…the only thing that we expect to see that probably will not be up in the second quarter is the hardware side of the printer imaging business.

Quinn Bolton- Needham & Company

Okay. Then just a last question given sort of the drop in the digital camera business in the first quarter…can you keep that revenue flat for the year? Is that a realistic goal or do you think that business line given the first quarter where Q1 came out that now maybe you’re looking at a down year in digital camera revenue?

Karl Schneider

I think it is too early to tell. On a conservative side you could say maybe down but we’re hoping to keep it flat.

Quinn Bolton- Needham & Company

So flat is not…it is still a possibility?

Karl Schneider

It is still a possibility.

Levy Gerzberg

And we believe that our market share will continue to increase.

Quinn Bolton- Needham & Company

Great. Thanks. I apologize again for asking you to repeat your prior comments.

Operator

Your next question comes from the line of Michael [Bertz] with Kennedy Capital. Please proceed.

Michael [Bertz] - Kennedy Capital

Good afternoon gentlemen. Just a couple of housekeeping things guys. You guys have talked about this before but you didn’t break it out today. In terms of the licensing software piece how much of that is printer software and how much of that comes from [inaudible] stuff?

Karl Schneider

Well let’s see…the licensing for the quarter was about $14.7 million and the majority of it…every quarter we still have at least for the first part of this year we still have about $1.5 million of royalties from Media Tech and the major portion of the rest of it is from the printer imaging side. I mean, a major, major portion of it.

Michael [Bertz] - Kennedy Capital

Right. Okay. Then the second thing is in terms of sort of forward look on interest income you are expecting, what are you guys projecting as that for the year? Is that going to have to come down some?

Karl Schneider

Interest income?

Michael [Bertz] - Kennedy Capital

Yes.

Karl Schneider

Yeah, we are expecting interest income…the reality is that the rates have trended down a little bit. We saw some decline in the rates the first quarter. I think if you take our rates at the end of the year the fourth quarter we earned somewhere just under 5% on our total cash if you look at the yield we earned in the total cash balances. In Q1 that was down to the 4.6 or so range. So yeah we are trending it down. The biggest drop in cash in the quarter was a slight inventory build with a pay down of some payables. I still think we will generate cash. It is a question as far as where our interest goes it is a question of how much cash we generate, where the rates go…and you know what else we do if you remember we did during the quarter announce a buy back and we’ll see what happens there.

Michael - Kennedy Capital

Okay. Thanks fellas.

Operator

Your next question comes from the line of Adam Benjamin with Jefferies & Co.

Adam Benjamin- Jefferies & Co.

Can you hear me guys? Thanks. Karl just a follow-up on the approach gross margin you gave a little color…I know that the multi-chip module hurt you a little bit and memory pricing, I figured that margin is in the 20% range. Can you talk about where you think that can peak out at over time?

Karl Schneider

Well look, Adam, I don’t think the margin there in a combined basis is in a 20% range. I think it is in a 30+% range. If it wasn’t for the multi-chip module and the buy resell and the DRAM that is inside the margin on the approach would be over 40, maybe in the mid 40’s. I think we’re going to see improvement in time in that as we get better at the multi-chip module and we get better yields and better pricing on the DRAM.

Adam Benjamin- Jefferies & Co.

So you are expecting to see something with a 4 in front of it as you finish the year?

Karl Schneider

I can’t say that, no. I’m not saying…not for the combined. I’m just saying our [silicone] would have yielded without that by resale above 40.

Adam Benjamin- Jefferies & Co.

Got ya. Just to follow-up on the TV’s you guys saw some good strength in a seasonally weaker quarter about 25% up sequentially. I know you had mentioned in the last call some issues in Q4 that caused some product deliver delays or push outs. Can you talk about how much of that sequential growth that you saw from Q4 to Q1 was a cause of that push out from Q4?

Levy Gerzberg

Yeah you are right, Adam. We had…this was our new product and we had some yield related, testing related issues which we have overcome. The push out, as you called it, from Q4 to Q1 was not very big. There was growth which we saw in Q1 was mostly Q1 business.

Adam Benjamin- Jefferies & Co.

Okay. That is helpful. Follow-up on the DVD side, it would appear the business is not snapping back as it historically has from Q1 to Q2. Obviously Karl you mentioned it is coming back. Can you talk about your confidence level as you go through the rest of the year and your expectations for the full year?

Levy Gerzberg

Well we have been in a situation like this before in the DVD area. We had a slower Q1. An typical slower and it is actually on a relative basis it is similar to 2007 pattern and we are confident the DVD business will go up. We are a major player in this market. We are working with major suppliers. We now see the expansion of this market as I mentioned into the brick countries…South America, India, Eastern Europe and again we see in the car DVD and portable DVD with some new features. Even some of the picture frames that they are using our DVD chips are going to create some growth. We are working on a number of things to make sure to enable us to regain momentum in this market. We have a number of new chips coming out, lower cost chips, some new features and HDMI there was a slow down in the HDMI [reduction] but we believe it will take off again. We hear it from our customers. So all in all we think we are well positioned in this market and we are doing some special things to make sure we see renewed momentum there.

Karl Schneider

Adam I don’t know if you remember we were having this same conversation a year ago about the DVD market coming out of Q4 of 2006 and our ability to recover after that quarter. So I think going forward we’ve got some issues playing into the market like ultimately the transition of high definition but we believe the market is still relatively healthy. It is still a large market. It is not declining very quickly. I mean we expect actually still a slight increase in the market this year in units.

Adam Benjamin- Jefferies & Co.

Got ya. One last question, can you give us some color on your bookings and typical visibility this time of year? Maybe how much turn business you typically have and kind of where you stand in terms of bookings compared to prior years this time of year?

Karl Schneider

Sure, look things are running along pretty normal versus what we have typically done at least in the last couple of years as we have diversified the company. Actually things are looking fairly good from a seasonal pattern right now in Q2.

Adam Benjamin- Jefferies & Co.

Can you give us some color, Karl, on what percent booked you are at this point?

Karl Schneider

I can’t give you a number. It is pretty typical for what we have seen in past quarters and it has gotten a whole lot more linear than it used to be.

Adam Benjamin- Jefferies & Co.

Okay. Fair enough. Thanks a lot guys.

Operator

Your next question comes from the line of Tayvib Shah with Longbow Research.

Tayvib Shah – Longbow Research

Hi guys. Let me ask TV OEM’s turn to ODMs and low cost chip solutions it seems that you are squaring off against your old foe Media Tech. How would you compare your competitive position against them in the TV space?

Levy Gerzberg

First let me just mention that when we say low cost we do not necessarily always talk about low cost chips. We talk about low cost solutions. That is very important because integration is the name of the game here. We have a very integrated solution that doesn’t require all kinds of chips around our chips as some of the competition requires. So low cost doesn’t mean low cost chips. Although we provide a very attractive solution. You are right in this segment we see Media Tech, just like we see them in DVD. We see them in DTV. In some areas they are stronger because of some of their areas of local support. In other areas we believe we are gaining momentum. We believe for example in the U.S. we are gaining momentum. Our market share is growing dramatically in the U.S. and it is coming from some of our competitors.

Tayvib Shah – Longbow Research

Okay. And we have seen Sony and Samsung aggressively cut prices in recent months. Are you seeing an impact on second tier brands from those price cuts and does that affect your business in any way?

Levy Gerzberg

You know, theoretically it should have an impact whenever brand names are cutting prices. It impacts the entire chain. But let me tell you something from our experience. When these brand names start cutting costs they have to come to use to help them in the next phase. It has happened before. We have seen it many times in every market. Particularly in digital cameras that is exactly what happened. So we see real strong movement, faster than expected, to the ODMs and we are ready. We are working with all those people. I cannot mention specific names but I can tell you almost everyone in the top tier list is talking to us about such a move.

Tayvib Shah – Longbow Research

Okay. And Levy among the Taiwanese digital camera ODMs not all of them use DRAM processors and some use their own [atechs] for low cost models. What are the chances that you can penetrate that segment of the market with maybe a low cost approach and replace the in-house [atechs] at those ODMs?

Levy Gerzberg

It is a very good chance and I mentioned it in a response to an earlier question. It is already happening. I cannot tell you we are shipping. There are not many like this, by the way. The ODM market share in Taiwan is very big and we have a very big market share there. There are a couple of suppliers that have their own chip and in particular one of them has declared they will split the business. They sell cameras and they are starting to look for outside solutions. So we are addressing it. We have a very good chance of addressing it. Karl mentioned earlier the Coach 11 in response to another question. This is a very powerful product but it is aimed at the low end of the market with some unique features. So we are very cost minded and we understand the challenges there and we are looking at the entire spectrum including the local ODM’s.

Tayvib Shah – Longbow Research

Okay. Finally I wanted to come back to the DVD business not withstanding what is happening in automotive and portable, DVD’s are down 50% from their peak in the third quarter of last year and it doesn’t look like you will be able to achieve that 50% plus sequential increase in this quarter that you achieved last year. So should we just reset our expectations to a much lower level for this business and maybe a more double-digit decline in revenue in calendar 2008?

Karl Schneider

I don’t think it is necessarily a huge double-digit decline. I think it could be down slightly. But not double-digits necessarily.

Tayvib Shah – Longbow Research

Okay.

Levy Gerzberg

The interesting part of that is the unit count is going up dramatically and of course our challenge is to make sure that our cost goes down to generate better profit bringing it to the bottom line, plus address new segments as it will enable us to increase revenue in spite of this declining ASP in the low end segment. But our unit count is going up.

Tayvib Shah – Longbow Research

Thank you.

Operator

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

Mahesh Sanganeria – RBC Capital Markets

Hi guys. This is Casey covering for Mahesh. On your DTV front where it seems you have the most success this quarter it seems to me that there are three plus end markets, channel segments or call it what you will. First there is the store brands. The second there is the sales inter ODM and third there is the potential sales directly to tier one. If I want to look to two to three quarters out which of these three segments do you think has the most opportunities and also how would you compare the gross margins across these three segments?

Levy Gerzberg

I think you are right in your analysis that there are three segments, the store brands, the ODM’s…there is some overlap in these two because usually the store brands are customers of the ODMs and then the tier one. And even there we see an overlap because some of these tier ones are starting to use ODMs so it is a very interesting dynamic in the market. So right now we have experienced a huge momentum in the store brands and the ODM’s. Of course the tier one…we are working with a couple of the tier ones. They are designing. They are doing very detailed reviews with our engineers. We believe that before the year will be over we will have some more specifics to tell you about. So in terms of opportunity we see right now it is ODM and store brand names…it is moving towards 20% of store brand names, 40% ODMs and 40% direct tier one/tier two.

[Casey] – RBC Capital Markets

Okay. So 20/40/40 split of sale target for existing [for the year]?

Levy Gerzberg

Yes. Exactly.

[Casey] – RBC Capital Markets

How would you compare the margins from these sort of [inaudible]?

Levy Gerzberg

This is harder to characterize and actually we prefer not to get into these details.

[Casey] – RBC Capital Markets

Okay. Are the larger markets that are mixed ongoing that is forcing the tier one folks to move faster to ODM strategy?

Levy Gerzberg

Absolutely. We see it happening and it is happening faster than before.

[Casey] – RBC Capital Markets

Okay. Have the margins from the DVD segment come down faster than first anticipated?

Levy Gerzberg

Has the margin from the DVD segment…come down faster than expected? Well… you know we expected it to come down. Has it come faster? Probably not much faster than what we expected or modeled.

Karl Schneider

I think the biggest issue there Casey is the transition from some of our older products to the new products and the ramp of getting those products into production. They are higher quality products. They are more complicated products and a lot more intricate software. We’ve seen some yield issues ramping those products which has impacted the margins. We expect those margins will improve as we go across the year.

[Casey] – RBC Capital Markets

When do you expect them to go back up?

Karl Schneider

They are rolling. It will start happening in Q3 or Q4.

[Casey] – RBC Capital Markets

Okay. Lastly, do you guys do any hedging to control your non-U.S. expenses?

Karl Schneider

You mean currency hedging?

[Casey] – RBC Capital Markets

Yes.

Karl Schneider

We don’t have a huge program in place. The biggest majority of our exposure is in Israel. We thought the Israeli shekel and dollar had reached a trough against each other at the end of Q4. When we were looking at hedging in Q1 there very few people believed it was going to move as far as it did in Q1. We definitely have a plan in place to correct this.

[Casey] – RBC Capital Markets

Okay. Thanks.

Operator

Your next question comes from the line of Daniel Amir with Lazard Capital Markets.

Daniel Amir – Lazard Capital Markets

Thanks a lot guys. A couple of questions here. First of all on the converter boxes what is kind of your expectations during the next…here in 2008 or maybe it is more of a 2009 opportunity and what type of upside could we see from that segment?

Levy Gerzberg

Okay, the converter box right now in our projections we are kind of playing it down a little bit because of this hiccup that the FCC introduced suddenly the analog pass through to enable some segments of the market still to receive analog. We see this as a great opportunity. As I mentioned earlier about 10 million coupons that were already obtained and now that this analog pass through issue has been resolved hopefully the FCC won’t introduce any other surprise. But this is a second half opportunity we are counting on and it will of course spill over to the first half of next year. We have a major percentage of the manufacturers who have made boxes already. We announced it in a press release. So we are playing it down right now. We are not counting on it big time right away but in the second half we will start to see it growing momentum.

Daniel Amir – Lazard Capital Markets

Could this be as much as part of your mobile phone business or not necessarily that big?

Levy Gerzberg

Well that is a compounded question.

Karl Schneider

You know it depends on what time period, Daniel. It is…the mobile phone business is doing really well. This is a window of opportunity. We’ll se exactly what it is going to be. It could be $20+ million on a quarterly basis starting in Q3 and Q4.

Daniel Amir – Lazard Capital Markets

Okay. A couple of other questions. Housekeeping on the tax rate stuff…what should be continuing to model here going forward?

Karl Schneider

On a pro forma number for the balance of this year we are looking at somewhere in the neighborhood of 31-32%. It was a little bit lower in Q1 because of some one-time corrections that occurred in the quarter but it was based on the 31.5% rate. On a GAAP basis the number is just above 33% and being that we are on a GAAP basis we generated a net loss for the quarter and of course we booked the benefit.

Daniel Amir – Lazard Capital Markets

Okay. Then final question…on the technology front or from a strategic direction are you currently looking at potential acquisitions or do you feel that you have in your current product road map enough on your plate to address kind of the growth markets currently?

Levy Gerzberg

We never feel we have enough on our plate because we like to increase our competitiveness. We are constantly looking at new exciting opportunities and new technologies. There is a lot going on in the market and many new interesting opportunities on the technology side so we are constantly looking.

Daniel Amir – Lazard Capital Markets

Okay. Thanks.

Operator

Your next question comes from the line of [Yaiar Rainer] with Oppenheimer and Co. Please proceed.

[Yaiar Rainer] - Oppenheimer and Co.

Thank you. My questions have been answered.

Operator

Your next question comes from the line of John Vinh with Collins Stewart.

John Vinh - Collins Stewart

Great. I just had a few follow-up questions on DTV. Recently Philips has announced they are going to license their brand to [Funai]. Is that a platform where you guys would expect to gain share later this year?

Levy Gerzberg

Well we hope so because [Funai] is a major partner and customer of Zoran so this announcement of this multi-year exclusive license by [Funia] from Philips represents a great opportunity for us.

John Vinh - Collins Stewart

So your expectation is will you be able to ramp in the second half of the year?

Levy Gerzberg

We hope to start benefiting from it at that time.

John Vinh - Collins Stewart

Great. You also mentioned that you expect to pick up share at two tier one brands earlier in the call, I believe. Will we expect to see you in a full HD flat panel TV greater than 40” later this year at a tier one brand?

Levy Gerzberg

The answer is yes. The first tier that we are working with are talking about the 40” range and then 60-62” range as well.

John Vinh - Collins Stewart

Great. Final question is on TV. It seems like TVs are tracking better than expected at this point. Can you give us a sense of what you would expect for year-to-year growth in DTV this year?

Levy Gerzberg

Well we cannot talk specifics about the rest of the year but we see higher growth opportunities…

Karl Schneider

We’ve got good momentum in the TV space. We’re expecting a nice growth year. Again we’re not at liberty to specifically qualify that percentage but it is going to be a nice growth.

John Vinh - Collins Stewart

You previously kind of thrown out a 40-50% year over year growth. Is it safe to say you are tracking maybe a little bit north of that?

Karl Schneider

I’m not willing to step out and go north of that but it is going to be a healthy growth.

John Vinh - Collins Stewart

Okay thank you.

Operator

Your final question is a follow-up from the line of Suji De Silva with Kaufman Bros.

Suji De Silva - Kaufman Bros.

Hi guys. One quick follow-up. A number of [anti trust] companies, semi companies talk about slight weakening in Europe. I know LG is ramping with a [DVD]. Can you talk about what you saw in the demand patterns there relative to some of the other commentary?

Levy Gerzberg

We do see a nice demand based on what LG…actually LG has just announced they see a nice ramp. Their phone in Europe called Viewty is doing very well because in combination with the carriers it provides a very attractive solution versus the iPhone for example. They predict they may outpace the iPhone. Actually on April 16 there was a report by Information Week that said LG checks in with record financial performance. In that report it says thanks to strong sales of its high end mobile devices including the Viewty, Voyager and Venus, returns for the quarter will hit $24.4 million and they expect shipments to grow in emerging markets; China and the Middle East and so on. So we hope to benefit from it. Plus designing some new models that will start to impact our business later in the year.

Suji De Silva - Kaufman Bros.

Okay. When would you expect the contribution from that customer outside of LG? Is that in your 2008 number or is it 2009?

Levy Gerzberg

There is a lot of interest in our solutions after the success of LG. So we are talking to these people but this is more like next season’s opportunity.

Suji De Silva - Kaufman Bros.

Great. Thanks guys.

Levy Gerzberg

So this was the last question I understand. I would like to thank you for joining us everyone and to remind you we will be presenting at several conferences in the coming months, all of which are posted on our website.

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