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Silicon Image, Inc. (NASDAQ:SIMG)

Q1 2008 Earnings Call

April 22, 2008 5:00 pm ET

Executives

Steve Tirado - President and CEO

Harold Covert – CFO

David Allen – Director of Investor Relations

Analysts

Tayyib Shah - Longbow Research

Sanjay Patel - Goldman Sachs & Co.

Sukhi Nagesh - Deutsche Bank Securities, Inc.

Heidi Poon - Thomas Weisel Partners

Sandip SenGupta - RBC Capital Markets

Chris for Adam Benjamin – Jefferies

Operator

Hello, thanks for holding everyone and welcome to Silicon Image’s first quarter 2008 financial results conference call. Please note that today’s call and question-and-answer session are being recorded.

At this time, I’d like to turn the call over to David Allen. Please go ahead, Mr. Allen.

David Allen

Good afternoon and welcome to Silicon Image’s First Quarter 2008 Financial Results Conference Call. I’m Dave Allen, Silicon Image’s Director of Investor Relations.

Joining me today are Steve Tirado, the company’s President and CEO, and Harold Covert, our Chief Financial Officer. The agenda for today’s call includes a discussion of the first quarter highlights from our CEO and more in-depth discussion of our financial results from the first quarter and our guidance for Q2 and the balance for the year by our CFO. We will then open the call for your questions.

Before I turn the call over to Steve, let me remind the listeners that we will be making forward-looking statements based on our current expectations during the call regarding many aspects of our business and the market in which we operate, including but not limited to forward-looking statements about our future products and timing of new products introductions, design with market demands, financial results and performance. Actual results may differ materially from our forward-looking statements.

Moreover, our forward-looking statements and the company’s future results are subject to certain risks and uncertainties which are described in today’s press release, as well as, our filing with the SEC, including but not limited to our most recent periodic reports from Form 10-K and 10-Q. These documents describe certain relevant risk factors that could affect our future results.

I now would like to turn the call over to Steve Tirado.

Steve Tirado

Thank you, Dave, and good afternoon everyone. Our financial results for the first quarter represented a solid start down the path of achieving our targeted financial goals for 2008. We’re particularly pleased with our growth margin performance for the quarter at 58.6% of revenue. Our focus throughout 2008 will continue to be on delivering financial performance in line with our stated goals. At the same time, we will be bringing new products and technologies to market that will position Silicon Image for growth over the next several years.

Let me now summarize Q1 2008 with the following key highlights from the quarter.

Number 1: We achieved top line Q1 ’08 revenue of $67.1 million, above the high end of our revenue guidance of $61 to $63 million. This was largely driven by better-than-expected traction in our major OEM accounts, stronger HDMI adoption in RPC’s, and better than expected performance for select emerging accounts in the America and Asia.

Number 2: Overall growth margins came in at 58.6% for Q1 with product margins at 52%. The mix of new products complemented by product cost reductions enabled our overall gross margins to be above our long-term target range of 55 to 57%.

Number 3: Non-GAAP operating margins came in at 4.7% of revenue, significantly below our long-term target model range of 15 to 20%. However, we are expecting steady improvements throughout the year, especially in the second half of 2008 as we expect relatively stable product and overall margins and increased revenue while we keep operating expenses flat.

Number 4: Our consumer electronics and PC product sales were stronger than anticipated. As was mentioned previously, this was due to better than expected sales into our strategic OEM accounts and selected merchant accounts. Storage went down although we’re expecting an improvement from this quarter going into Q2. Overall, product sales were on track during the first half of ’08 with product sales expected to be flat going into Q2, given the increased sales levels in Q1 with a seasonal improvement in the second half of the year.

Number 5: New product introductions for 2008 are substantially on track. These products are targeted at identified mobile device opportunities with major OEM’s. The high end of the digital television market where advanced HDMI and other digital connectivity features are valued, and very importantly, in the area of broadband connectivity, where our advancement and protocol for device discovery, user interface, security, and network streaming are state-of-the-art. This latter set of technology falls into a new product categories for Silicon Image which we refer to as the personal entertainment network. You’ll hear more about this promising new set of technologies later in the year.

Digital connectivity features represent a rich area for innovation at Silicon Image but we’ve not stopped there. We’ve also worked hard to integrate analog features with state-of-the-art performance to offer higher level of integration and better price performance for our customers. We are uniquely focused on raising the bar for intelligent communication between and among devices and had been consistently able to differentiate ourselves from the market with this strategy.

Number 6: Our MHL, or Mobile High Definition Link digital technology aids in solving the base stand connectivity between digital televisions, cell phones, personal media players, digital still cameras and camcorders, continues to receive favorable responses from several major OEM’s on the handset and DGB size of the link. In the case of cell phones, OEM’s have a need for low power mobile function connector that combines high quality digital audio and video, USB charging analog and headset functionality—is the company’s key requirement for handset design—By offering both physical and virtual solutions for MHL—in other words, both chip and IP products in the handset market and our willingness to drive an industry standard solution—we’ve achieved a healthy level of interest. At the same time, we’re offering a full complement of HDMI solutions in the mobile handset base for markets where a single connector at a multi-function capability is not yet a requirement. Our chipset for the DGB market are now fully complemented with the ability to process both high quality HDMI and MHL or where the Mobile High Definition Link digital technology in a single facility making the cost effective for our major OEM customers and differentiating our solutions in the marketplace.

And finally, number 7: We’re pleased as our accelerated stock repurchase program is coming to a conclusion, and this year’s result is approximately an 18% reduction of outstanding share accounts. This will help drive an overall improvement in EPS going forward. It is my and the management team’s goal to make 2009 a banner year for Silicon Image while we aggressively manage cost and design with traction in 2008.

With that, I’ll turn the call over to Harold for financial updates and forward guidance before we take your questions.

Harold Covert

Thanks, Steve. Good afternoon. I’d like to cover three topics: Highlights of our financial results for Q1 ’08, our financial goals for Q2 ’08, and some directional statements about our financial goals for the full year of 2008.

Or else otherwise indicated, gross margin expense and earnings related items are reported on a non-GAAP basis, which excludes stock-based compensation and amortization of intangible assets. In addition, revenue for Q4 ’07 does not include $6.7 million related to a one-time change in the recognition of distributor revenue that we discussed in the last conference call in February.

Revenue for Q1 ’08 was $67. 1 million compared to $78.6 million for Q4 ’07 and $69.1 million for Q1 ’07. The decrease in revenue sequentially reflects historical, seasonality patterns and to a lesser degree, the impact of a product transition currently underway that we have discussed during our Analyst Day presentation in November and conference call in February.

Product revenue for Q1 ’08 was $57.2 million, for Q4 ’07, $68 million and Q1 ’07, $56.3 million. License revenue for the quarter was $9.9 million versus $10.7 million in Q4 ’07 and $12.8 million in Q1 ’07. Semiconductor sales for CE applications accounted for 74% of our product revenue while PC applications accounted for 18% and storage 8%. Product revenue for PC applications were higher than Q4 ’07 as more and more multi-media notebook computers are being shipped with HDMI functionality.

For the quarter, approximately 44% of our CE semiconductor sales were for HDMI Version 1.3. Semiconductor average selling prices for the quarter were in line with our internal expectations and historical patterns.

Total gross margin for Q1 ’08 was 58.6% versus 59% for Q4 ’07 and 56% for Q1 ’07. Product gross margin for Q1 ’08 was 52% compared to 53.5% in Q4 ’07 and 50.7% in Q1 ’07. Our total gross margin for Q1 ’08 was favorable when compared to our target range of 55 to 57%, primarily due to revenue volume and favorable mix.

Operating expenses for Q1 ’08 were at $36.2 million compared to $36 million in Q4 ’07 and $30.6 million in Q1 ’07. Operating expenses for Q1 ’08 were higher than our stated target of $34 to $35 million, due to litigation expenses. On a year-over-year basis, the quarterly increase on operating expenses is for the most part were related to R&D expenses.

Headcount as of March 31, 2008, was 642, compared 635 as of December 31, 2007, and 614 as of March 31, 2007. The increase in headcount on a year-over-year basis is essentially related to R&D staff.

Our operating profits for Q1 ’08 was $3.1 million at 4.7% of revenue versus $10.4 million at 13.2% for Q4 ’07 and $8.1 million or 11.7% for Q1 ’07. The decrease in operating profits sequentially is due to lower revenue while the decrease year-over-year reflects higher R&D expense, and to a lesser degree, lower revenue.

For Q1 ’08, other income, which is basically interest income, was $1.9 million compared to $2.8 million for Q4 ’07 and $3 million for Q1 ’07. The decrease both sequentially and on a year-over-year basis reflects the use of $62 million of cash in the first half of February 2008 for our stock repurchase program and the lower interest rate environment throughout Q1 ’08.

For Q1 ’08, our effective tax rate was approximately 30% before discrete items has been essentially 0% after such discrete items compared to our targeted effective tax rate of 42 to 44%. Normally, discrete items do not have much of an impact on our effective tax rate. However, for Q1, with a pre-tax loss that was close to break even, discrete items did impact the overall tax rate for the quarter. The reason for our lowered effective tax rate (i.e. 30% versus 42 to the 44%) is the result of shipping a significant part of our investment portfolio from taxable to tax-exempt securities. This change, combined with a meaningful amount of interest income projected for 2008, as a percent of our total projected pre-tax income, resulted in a lower effective tax rate for the quarter. Our current investments portfolio is in compliance with our investment policy guidelines that place principle preservation and liquidity as a top priority.

Non-GAAP net income for Q1 ’08 was $3.4 million or $0.04 per diluted share. For Q4 ’07 $9.5 million or $0.11 per diluted share and for Q1 ’07 $6.3 million or $0.07 per diluted share. Our GAAP net loss for Q1 ’08 was $0.6 million or $0.01 per diluted share. For Q4 ’07, our GAAP net income was $7.6 million or $0.09 per diluted share and for Q1 ’07, $2.9 million or $0.03 per diluted share. The decrease in non-GAAP and GAAP net income sequentially is primarily due to lower revenue while the decrease year-over-year reflects higher R&D expenses, and to a lesser degree, lower revenue.

Stock-based compensation, which is not included in our non-GAAP net income, was $4 million in Q1 ’08, compared to $4.9 million in Q4 ’07 and $4 million in Q1 ’07. Non-GAAP diluted shares outstanding for Q1 ’08 were $81.6 million. For Q4 ’07, $85.2 million and Q1 ’07 was $89.5 million.

Moving to the balance sheet, cash or investments as of March 31, 2008, were $194.4 million compared to $249.7 million as of December 31, 2007, and $224 million as of March 31, 2007. The decrease in cash or investments reflect the use of $62 million of cash in the first half of February 2008 for our stock repurchase program. During Q1 ’08, we generated approximately $7 million in cash, excluding the afore mentioned $62 million.

Capital expenditures for Q1 ’08 were $3.5 million compared to $3.3 million for Q4 ’07 and $5.7 million for Q1 ’07. Net accounts receivables as of March 31, 2008, were $227 million which reflects 36 days of sales outstanding. This compares to 22 days of sales outstanding on December 31, 2007, and 43 days of sales outstanding on March 31, 2007. The sequential increase in accounts receivables is a result of day sales outstanding, starting to return to our historical and target range of 40 to 50 days.

Net inventory as of March 31, 2008, was $14.1 million which represents approximately 7.7 terms on an annualized basis. This compares to approximately 6.2 terms on December 31, 2007, and 4.5 terms on March 31, 2007.

Now, I would like to discuss the company’s common stock repurchase programs. In February 2008, our Board of Directors authorized a $62 million accelerated stock repurchase program to complete the $100 million stock repurchase program announced in February 2007. In connection with the $62 million accelerated stock repurchase plan, the company has received $11.5 million shares. This plan will be completed no later than June 30, 2008. To date, the company has repurchased $16.5 million shares of our common stock under the $100 million program. The Board also authorized a new stock repurchase program for the repurchase of up to an additional $100 million of our common stock over a 3-year period, beginning with the conclusion of the afore mentioned accelerated stock repurchase plan on the terms and conditions described in our press release issued on February 7, 2008.

This completes the summary of our Q1 ’08 financial results. There is a reconciliation of our GAAP to non-GAAP measures borrowed from today’s call on our website, www.siliconimage.com, and one is also included with our press release issued earlier today.

Next, I would like to provide some highlights for our financial goals in Q2 ’08 and make some directional statements about selected financial goals for the total year of 2008.

First for Q2 ’08, the company has targeted the following financial goals:

Revenue – $66 to $68 million

Growth margin – 57 to 58%

GAAP operating expenses - $41 to $42 million

Non-GAAP operating expenses - $35 to $36 million

Interest income - $1 to $1.2 million

Effective tax rate – approximately 30 to 35%

Diluted shares outstanding – approximately $73 million

GAAP expenses for Q2 include approximately $4 million for stock-based compensation and $2 million for amortization of intangible assets. These expenses are not included in our non-GAAP expenses.

Now turning to 2008—2008 is a product transition year for Silicon Image. As part of this transition, we plan to sample and subsequently announce a number of design wins throughout 2008. Volume shipments with the new products with the latest of these design wins are in projection to start occurring in the first half of 2009. There are self [inaudible] will to generate revenue in the second half of 2008 from new products. However, at this point in time, it is too difficult to predict the level of such revenue with any degree of conclusion as certainty. Based on the situation this describes, the following are directional statements related to our overall financial goals for 2008:

Revenue is targeted to be in the range of $270 to $290 million. Gross margin as a percent of revenue is anticipated to be in the range of 55 to 57%. GAAP operating expenses are projected to be $165 to $168 million, which includes stock-based compensation at approximately $19 million and $6 million for the amortization of intangible assets. These expenses are not included in non-GAAP expenses. Non-GAAP expenses are projected to be in the range of $142 to $144 million. This is approximately $4 million higher than our initial projection provided in February, due to higher litigation and R&D expenses. The effective tax rate of approximately 30 to 35% as previously discussed. The change in our projected effective tax rate is a result of shipping the majority of our investment portfolio from taxable to tax-exempt securities. And finally, diluted shares outstanding of approximately $72 million in the second half of 2008. By achieving this goal, we have reduced our outstanding shares by approximately 15% when compared to the $85 million shares outstanding as of 12/31/07.

We will continue to update you during our quarterly investor conference calls on our progress as we work with customers to roll out new products. While our major focus is on successfully addressing our product transition in 2008 and entering 2009 with revenue generation momentum, we will continue to strive to achieve our gross margin goals, tightly control expenses in line with our operating plan and economic environment, and drive cash flow from operations throughout 2008. This concludes my remarks.

Operator, we will now take questions.

Question-and-Answer Session

Operator

Thanks very much. (Operator Instructions)

First up is James Schneider with Goldman Sachs. Mr. Schneider, your line is open if you have a question…Hearing no response, we will move on to Tayyib Shah at Longbow.

Tayyib Shah - Longbow Research

Hi guys. Steve, what change that led to better traction in your major OEM accounts and was it for 1.3 products or was it for all the generation products?

Steve Tirado

Is, what I would say, is for some of the major OEM, they’re doing better than we thought they would and they’re probably even better than they thought they would, and it’s almost all of that 1.3 base.

Tayyib Shah - Longbow Research

And the strength that you saw late in the quarter or was it fairly early on right after the last call that revenues were tracking better than expected?

Steve Tirado

I think that generally we’ve seen the strength throughout the quarter.

Tayyib Shah - Longbow Research

So it sounds like this falls on demand strength within the market and in your account. It wasn’t so much market share gain on your part, right?

Harold Covert

Yes, I would definitely write it that way. Yes.

Tayyib Shah - Longbow Research

And then I want to understand the second quarter revenue guidance. It’s flat—traditionally it’s been up and this year, you’re also are [inaudible] so just trying to understand why it’s flat sequentially.

Harold Covert

The way we look at the revenue guidance for Q2 is in our finding process the first half of the year, we thought was essentially going to be pretty close to the same quarter-over-quarter. Now, we were a bit stronger in Q1 and we’re being cautious about Q2 and not getting ahead of ourselves. The real goal for us is as we focus on Q3 and we do expect a sequential increase in Q3 as we’ve historically seen, as well as, getting traction from some new products that we’re going to have. In addition to that, we are seeing the strength in our PC and storage lines right now and we expect that to continue.

So, our real goal is to achieve our internal plans which are in line with our guidance for the first half of the year and then we’ll get the bump up effect that we’re looking for in the back half of the year.

Steve Tirado

Yes. Tayyib, if you look at your own model—you look at the first half revenue—I think that we’re on track.

Tayyib Shah - Longbow Research

Yes, and finally, Harold, when do you start to get some clarity into the revenue potential for mobile handset opportunity, what it can be in calendar ’09, and at what point do your customers start to finalize designs that will go into production next year?

Steve Tirado

We actually already have one design that’s going to come out this year in Asia. We’re really excited. I can’t give any details on it unfortunately but it’s a very exciting phone application that’s going to get rolled out in Asia. So, we’re all ready to give our design with traction with our mobile chipset—this particular design was a cell phone one but if we have others in the personal media player market—in accordance, cameras and camcorders are continuing to do pretty well—in those particular markets. But we’re not going to be able to tell you about 2009 until towards the end of the year. I mean, there’s no way I could give you any sense of that until we’re coming out of Q3 going in to Q4.

Tayyib Shah - Longbow Research

Okay, thanks. I just wanted to understand the timing. Thank you.

Steve Tirado

You’re welcome.

Operator

And now we’re back to James Schneider with Goldman.

Sanjay Patel – Goldman Sachs & Co.

This is Sanjay Patel on behalf of James Schneider. Thank you for taking my call. Can you tell me the clarity on 1Q and what do you expect for Q2?

Harold Covert

Again, I think the clarity in that Q1 and we expect the same thing with Q2 is actually pretty good throughout the quarter. One of the reasons are DSO’s are down right now because we’re getting our billings out in a fairly orderly fashion throughout the quarter. So, based on everything we know right now, that will continue.

Sanjay Patel – Goldman Sachs & Co.

Okay. More of the inventory in return channel and has it increased? Can you give us any color on particular products or components?

Harold Covert

I would say right now that in particular over the last few quarters that we haven’t seen much change in our channel inventory. It’s generally in line with our overall guidelines. One of the things we are trying to do is just an asset management standpoint is to watch our internal inventory, as well as, our channel inventories to make sure that we have the right balance between both of them. But again, no real changes over the last few quarters.

Sanjay Patel – Goldman Sachs & Co.

Okay. One more question—How much of revenue do you expect in process for 2008?

Harold Covert

We really haven’t disclosed that number. At this point, we’re not ready to do that.

Sanjay Patel – Goldman Sachs & Co.

That’s fair. That’s all for me. Thank you.

Operator

Next up from Deutsche Bank—this is Sukhi Nagesh.

Sukhi Nagesh - Deutsche Bank Securities, Inc.

Hi, guys. Did you talk about the number of units you sold in the quarter, broken down by your different segments?

Harold Covert

We did not but we will get that for you shortly.

Sukhi Nagesh - Deutsche Bank Securities, Inc.

Okay, and then just a few guidance for the next quarter—what segments do you expect to be up or down in the quarter?

Harold Covert

The quarter’s getting a look actually very similar—Q2 to Q1. But where we’re seeing particular strength has been actually in the PC and storage markets. The other plate that’s been showing some strength is what we call home theater, which tends to be a lot of these DV receivers and set-top box DVD players. And there’s been a shipped over to blu-ray. We have a lot of design went there even though the 18 DVD sales went away, blu-ray’s picking up and there’s been a little strength there.

Sukhi Nagesh - Deutsche Bank Securities, Inc.

The design went to where, Steve? Set-top boxes to blu-ray or—?

Harold Covert

No. The blu-ray wins are over the DVD side.

Sukhi Nagesh - Deutsche Bank Securities, Inc.

Just analog DVD or blu-ray to DVD?

Harold Covert

The B’s are typically stand alone.

Sukhi Nagesh - Deutsche Bank Securities, Inc.

All right, and then you’ve talked in the past about how you were expecting your license revenue this year to be greater than 2007 levels. Is that something we should—?

Steve Tirado

What we said was we’re moving from a 10 to 15% to a 15 to 20% average. We still expect we’ll be in that range for the year.

Harold Covert

Yes, again, I think in the past we indicated that we think we’ll be right around 15%. And back on the break out by segment, we did actually have our fee was about 74%, PC was 18%, and storage was 8%.

Steve Tirado

That’s on a revenue basis, right?

Harold Covert

Yes, it’s on a revenue basis. It’s actually up a little bit quarter over quarter. And that if you look into more detail which we’ll have posted a little later today. You’ll see the difference CE and PC’s and so forth, and the break down between those quarter-over-quarter, other than PC.

Sukhi Nagesh - Deutsche Bank Securities, Inc.

Your guy’s gross margin went up so well. I was wondering if year-over-year by end of this year, you’re going to see any increase in licensing revenue relative to last year, which is going to help the gross margin?

Harold Covert

Again, I think in the first half of the year, we’re anticipating the favorable gross margin from our overall guidance, primarily because of mix. Now, as we get into the back half of the year and we start shipping at a higher volume level and so forth, we expect to get back into the targeted range that we have. So mix has really driven us so far.

Steve Tirado

In the licensing front, we’re not expecting—we’ll kind of be at the low end of that range as how we’ll stay about 15% of revenue should come out of licensing.

Sukhi Nagesh - Deutsche Bank Securities, Inc.

Okay, and one last question on the [inaudible] front. You said in the past that you would accelerate investments in the consumer place. Given the current US slowdown, especially consumers, do you see any reason to make a pull back on the [inaudible] front on the CE investment at least?

Harold Covert

Again, our goal for this year is really all about 2009 as we come to product transition. We’re heavily invested right now in R&D and we haven’t seen a slowdown of our customers at this point and hopefully we won’t. But we’ve set our game plan for the year and unless there are sub reasons for that to dramatically change, we’re going to stick with the plan.

Steve Tirado

The other thing is that we have talked about the fact that it was a very strong portfolio of product execution this year or next year that we’re all rolling out. We’ve rolled out two major initiatives in the marketplace, one being the MHL and the other one that’s coming is—we are expecting the announcement of a new version of HDMI this year. So those are two big events and there are a couple of other things that are going to happen that you’ll hear more about as we get through the year.

Harold Covert

Just a couple of other quick points. In the back half of the year, if our revenue picks up like we believe it’s going to, then our operating profit as to percent of revenue is going to start pushing back towards our overall model. Now, we won’t get that for the year of 2008 but I think as we head into 2009, we should start pushing back into our 15 to 20% goal that we’ve established.

Sukhi Nagesh - Deutsche Bank Securities, Inc.

Okay, so Steve, I guess you guys are on track into the 8 to 10 products this year as you were mentioning?

Steve Tirado

Yes, that’s going well.

Sukhi Nagesh - Deutsche Bank Securities, Inc.

All right. Thank you.

Operator

We’ll move on now to Heidi Poon at Thomas Weisel Partners.

Heidi Poon - Thomas Weisel Partners

Hi guys. I just want to ask a little bit more about the PC growth that you’ve seen. Given that a lot of the unit growth and the nimble market is going to be driven by low cost segments, the HDMI adoption or the growth in multi-media PC you’re seeing—is that 1.3 or can you tell us a little bit more about the growth you’re seeing there?

Steve Tirado

You know a lot of it is not 1.3, it’s 1.2. We have chips for 1.3 and 1.2. The mix is a little bit more favored towards the older version but a lot of the notebook vendors are positioning their notebooks as entertainment multimedia devices. And so, since HD might as well cover on all the TV’s that you’ve got to have it. So, in previous quarters, we thought it was going to take off but finally this year, it’s really starting to get a lot of traction. People like the TV connectivity.

Heidi Poon - Thomas Weisel Partners

I see. So, in terms of pricing here, is there any difference between the chipset you’re selling from formidable market at 1.2 or is it pretty much similar to the market prices at this point?

Steve Tirado

You mean the difference 1.3 or 1.2 parts?

Heidi Poon - Thomas Weisel Partners

Yes, in terms of your pricing to the PC market versus the consumer electronics market given what we’ve seen.

Steve Tirado

It’s comparable pricing. It’s comparable pricing—CE and PC.

Heidi Poon - Thomas Weisel Partners

Also, a little more on the mobile connectivity area—given some of the emerging wireless HDMI solutions out there—seems like there’s also some OEM backing for those alternative solutions. Could you give me a sense of when you discuss with your customers what’s the sense of the push in that direction or is everybody just hedging their bet?

Steve Tirado

Well, a lot of the wireless solutions that if you’d go look at the pricing on, they’re anywhere for $800 to $1000 for a couple of radio boxes that fit in maybe two inch of room. So they’re very expensive and every one of these vendors has a different method so there’s no consistency, which I think makes it really hard for the industry.

Our view is that it will go wireless eventually but it’s probably going to require a solution that allows you to go to maybe just very cheap commodity wireless like 802.11, NRG, or something like that. The reason we’re focused on the mobile high-def link is they are interested in a base band connection which they know will always be the same. (i.e. Once you do it, it’s the same forever). And so, what we’re finding is they’re very interested in that. It’s a low cost way to get immediate connectivity and the handset folks who told that they will never put exotic radios in their phones—they’re just not going to do it. So, now I’m focusing a little bit more on the cell phone market but I would say that that’s probably likewise true for the still camera and the camcorder. Everybody’s looking for a much lower cost way to implement connectivity and I believe that wireless capability is most exciting for mobile devices that are occasionally connected. The devices that are always sitting in the living room. There’s no reason why not to run a cable to them rather than use wireless. There’s not a whole lot of value in that. I think we’re going to see traction for wireless is in the mobile device world gets up, and that’s going to have to be much cheaper than what we’re seeing in the market today.

So in the short-term, base stand wireless connections will be very popular and we’re going to drive that trend with our technology.

Heidi Poon - Thomas Weisel Partners

And in terms of when you mentioned standard driving activity, are you trying to drive standards or licensing groups that you’ve done in the fees-based in mobile connectivity? Just wanted to clarify that.

Steve Tirado

Yes, exactly right. So the mobile high-definition link we’ve made is very clear. We’re very open to promoting the use of that technology and defining a standard that works for the handset side of the market and what’s unique about it is they really want a highly multifunctional connector with a very low convertible power. So they want to do things like charging in USB and high performance visual AB, as well as, being able to handle your headsets and analog.

For what’s happening in the North American market in particular is the carriers are really pushing for standardization because it’s just too expensive to support all the various different chargers and headsets and all that sort of stuff. So, we think it’s very timely. The OEM’s are telling us it’s very timely so we’re going to work very closely with them to drive the use of this new kind of visual connection standard for the handset market.

Heidi Poon - Thomas Weisel Partners

Great. Thanks.

Operator

Question now from Mahesh Sanganeria at RBC Capital Markets.

Sandip SenGupta - RBC Capital Markets

Hi, this is Sandip SenGupta, calling in for Mahesh. One question I had on the Mobile High Definition Link was that—do you see some competition from hi-speed USB or [inaudible] applications because that’s already a standard versus this is something that’s still on the verge of getting standardized?

Steve Tirado

Certainly, it’s a possible technology. We’re not seeing USB to be very popular on the TV set because it requires software stacks of poor version control, etc. so I’m not that that’s the way it will go. I think what we’re proposing is more reasonable. What we’ve done for the market is integrate the MHL technology in with our HDMI technology so we can offer the TV guide and integrated solution that’s basically extremely cost effective and give them both kinds of connectivity. We just think it makes more sense to go that direction.

Sandip SenGupta - RBC Capital Markets

And regarding your gross margins—obviously compared to the June quarter ’07—things are significantly better and you mentioned that product mix is one of the reasons for that. Is that true that the PC sector gross margins are better than the gross margin in the CE sector?

Harold Covert

In general, I think that the mix with the higher PC element is helping us.

Sandip SenGupta - RBC Capital Markets

And so do you expect the gross margins to go down in the second half because your gross margin numbers are lower than what you’re guiding for Q2?

Harold Covert

Yes, as our revenue picks up in the back half of the year based on our plan, we do think that the gross margins will go back into the target range of 55 to 57%. Now, PC stays at the level—will probably be at the higher end of that range but we do expect to get back in the range.

Sandip SenGupta - RBC Capital Markets

And I think you already addressed this to some extent but I was still wondering why your revenue guidance for Q2 is flat like going forward. Typically, things should be getting stronger and especially with the PC sector, you said, PC segment and the storage as being up. Can you address why you think it will be flat for the total quarter?

Harold Covert

Yes, again I think it’s the way we look at the plan was first half of the year, second half of the year, and we got a little bit ahead of ourselves in Q1 and at this point, we don’t see a reason for changing our overall guidance for Q2. In other words, keeping the first half of the year intact with our overall plan. As we get into the second half of the year as I mentioned earlier on, we do see an uptake from a seasonality standpoint, particularly in Q3. And we also expect us to have some new product revenue in the back half of the year. We believe that we’ll continue to see strength in both our PC and storage and that’s the reason why we believe that we can get an uptake in the back half of the year and get in line with our overall guidance for the year.

Sandip SenGupta - RBC Capital Markets

Right, so you may be being conservative for the Q2 guidance then?

Harold Covert

The way I would characterize is that we had a stronger Q1 than we had anticipated. We’re holding pretty close to the internal plan for Q2 and we’ll see what happens.

Sandip SenGupta - RBC Capital Markets

Thank you.

Operator

(Operator Instructions)

We have a follow up now from Tayyib Shah at Longbow.

Tayyib Shah - Longbow Research

Hi guys. Sony and Samsung has been [inaudible] prices and you would say that this would relate a tendency on using cheaper solutions than maybe integrated HDMI solutions other than your discrete solution. So I just wanted to ask how do you think you are participating in the low end segment of the market, especially the sub $1000 DV models?

Steve Tirado

We’re mainly in the mid-range and high-end of the marketplace on the television side. But remember, we serve in other markets. We’re also on the floor side and that’s actually a very sizable business for us. What we do in the AD receive DVD set-top box side so there are some strengths there and we tend to do better on the margins in that market.

Tayyib Shah - Longbow Research

Okay and can you just tell us what percentage of PC revenue is now coming from HDMI and how much is [inaudible]?

Harold Covert

I think we said overall 18% of our revenue were PC. That’s what we show from our product standpoint. I’m not sure the breakup between the different categories of PC revenues. I think 8% was for storage.

Steve Tirado

8% was from a sizable HDMI components to our PC chip sell.

Tayyib Shah - Longbow Research

Okay.

Steve Tirado

It’s going to get dominated by those chipsets going into the latter half of the year. In other words, DVI as a technology is no longer being—other than some old platform—it’s really not a seller for us anymore.

Tayyib Shah - Longbow Research

Okay, and also storage—can you give us an idea of how much is now consumer storage? Is that meaningful now?

Steve Tirado

When you say consumer, you mean like a CE market?

Tayyib Shah - Longbow Research

Exactly.

Steve Tirado

No, the vast majority of it is in the PC market. Now, four media storage though but the vast majority is in the PC market. We’re getting a lot of traction on the PC—not only on references but we’re going into production, both in desktops and notebooks with SteelVine chips.

Tayyib Shah - Longbow Research

And finally, the mobile processor IP I see that you just announced, is that in any way sized to your HDMI roadmap for mobile devices?

Steve Tirado

I missed the first thing you said Tayyib.

Tayyib Shah - Longbow Research

The third megapixel mobile processor IP that you just announced. Is that in any way sized to your HDMI roadmap for mobile devices.

Steve Tirado

No, it’s a separate technology we had developed. We actually got through the acquisition of Sci-Worx. One of the things we are doing though is servicing the mobile accounts are we’re talking about what we can do both from the connectivity and the camera side of the equation. It is helping us get closer to those kinds of customers.

Tayyib Shah - Longbow Research

Thank you.

Steve Tirado

You’re welcome.

Operator

And now we have a question from Adam Benjamin at Jefferies

Analyst for Adam Benjamin– Jefferies

Hi, this is Chris for Adam. I know you’ll put on your website in a little bit. Can you break up the licensing revenue by product line?

Harold Covert

Yes, I don’t have that right in front of me. It’ll be on the website shortly.

Analyst for Adam Benjamin– Jefferies

Okay, and then info processors in the past—you can’t give us a ballpark of how many you’ve shipped so far and can you give us any update on that for Q1?

Harold Covert

Yes, we’ll give you an update on that on the next call for the first half of the year.

Analyst for Adam Benjamin– Jefferies

Okay. And then for the licensing revenue—you were saying between 15 and 20%. Was that for Q2?

Harold Covert

No, what we said was for the full year of 2008, we think would be around 15% for the year as it was in 2007. Now, Steve indicated our goal in the longer term is to push it to a higher level but we’re still pretty much consistent with the 15%.

Analyst for Adam Benjamin– Jefferies

Okay, so it should sort of mirror what was in ’07?

Harold Covert

Exactly, and the break up from a product standpoint—I don’t remember it exactly—but it was fairly close to our past quarter.

Analyst for Adam Benjamin– Jefferies

Okay.

Steve Tirado

Yes, ’07 was where the mix improved for licensing. We were down below that around 10 to 15% and now it’s moved up and our intention is that we got some new things coming out that we hope will drive that percentage even higher.

Analyst for Adam Benjamin– Jefferies

Okay and then for Q2, can you give any color on your visibility into the quarter? Is backlog similar to what you’ve had in the past quarters? Just trying to get an idea of how far out.

Steve Tirado

We have excellent visibility. We feel very good about the number.

Analyst for Adam Benjamin– Jefferies

Okay. All right. Thank you.

Harold Covert

Again, as I indicated earlier on in the call, that if you look at our accounts receivable, one of the reasons our DSO is down is because we are pretty good right at the moment. Following up on Steve’s point, we have fairly good visibility heading into our Q2.

Chris – Jefferies

Okay. Great.

Operator

With that, gentlemen, there are no other questions holding in the roster.

Steve Tirado

Thank you, Operator. This concludes our call. Thank you very much for joining us today and have a great day.

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