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SiRF Technology, Inc. (SIRF)

Q1 2008 Earnings Call Transcript

April 24, 2008 4:30 pm ET

Executives

Geoff Ribar – CFO and SVP of Finance

Dado Banatao – Executive Chairman, Acting President and CEO

Kanwar Chadha – Founder and VP of Marketing

Rob Baxter – SVP

Analysts

Jay Goldberg – Deutsche Bank

Adam Benjamin – Jefferies

James Schneider – Goldman Sachs

Sanjay Devgan – Morgan Stanley

Eric Ghernati – Banc of America

Ramesh Misra – Colllins Stewart

David Wu – Global Crown Capital

Jeff Rath – Canaccord Adams

Mahesh Sanganeria – RBC Capital Markets

Tayyib Shah – Longbow Research

Charlie Anderson – Dougherty & Co.

David Niederman – Pacific Crest

Michael Sue – Oppenheimer

Tim Lash – Third Point

SimhaNimen – Interlink Research

Kenneth Marcus – First New York

Operator

Welcome to today's teleconference for SiRF Technology Holdings Incorporated, the first quarter 2008 financial results. At this time, all participants are in a listen-only mode. Later there will be the opportunity to ask questions during our Q&A session. Please note this call may be recorded. It is now my pleasure to turn the call over to Mr. Geoff Ribar, CFO. Please continue.

Geoff Ribar

Thank you and good afternoon. This is Geoff Ribar, Chief Financial Officer of SiRF. Welcome to our first quarter 2008 earnings conference call. Additionally, please see our Q1 earnings release, which was issued earlier this afternoon and it is also available on SiRF's Website. Participating today with me will be Dado Banatao, Executive Chairman and Acting President and Chief Executive Officer; Rob Baxter, Senior Vice President; Kanwar Chadha, Co-Founder and VP of Marketing; Dennis Bencala, Senior Director of Investor Relations. Dado will cover the overview of the first quarter, then I will walk you through numbers, and then Dado will wrap up the guidance for Q2. But before I begin I need to mention this call will contain forward-looking statements, which are based on our current expectations, including forecasted revenue, restructuring charges, gross margins, operating expenses, 2008 tax rate and earnings, among others.

These forward-looking statements are subject to a number of risks and uncertainties, including the risk of adverse changes in the global economy; delays in the release of new products; our ability to keep up with technological change; fluctuations in customer demand for SiRF; product or end-user demands for our customers' products; competition; anticipated benefits of our acquisition of Centrality Communications Inc. and our ability to achieve these benefits; customer product cancellation issues or delays; our expense levels; manufacturing inefficiencies; shortage of components used in our customers' devices; fluctuating foundry capacity; and intellectual property litigation common in our industry. We ask that you keep these in mind when relying on any such statements of expectation. Information provided here speaks only as of this date and SiRF disclaims any duty to update the information herein. For a more thorough discussion of the risks to which forward-looking statements are subject please to our press release from earlier today and to our Form 10-K for the year ended December 31, 2007 as filed with the SEC. At this time I'd like to introduce our Chairman, Dado Banatao to provide an overview of the business for the quarter.

Dado Banatao

Thanks, Geoff. This is Dado Banatao, Executive Chairman of SiRF Technology. Thank you all for joining us today as we discuss our Q1 2008 financial results. I would like to begin with discussing the recent management changes at SiRF. As you know, Mike Canning, SiRF's President and CEO, announced his resignation last week and the Board has appointed me as the Executive Chairman and Interim CEO. Additionally, Geoff Ribar has also resigned as our CFO effective May 8th and we are actively looking for his replacement. I would like to thank Mike and Geoff for their significant contribution to the growth of SiRF and wish them best in their future endeavors. I believe that SiRF has a strong management team in place to take the company to the next level and we are committed, as always, to do our best for our stockholders, customers and employees.

As we discussed in our March 25th, 2008 conference call, Q1 was a challenging quarter for SiRF, as our business experienced declines in both – both in terms of revenues and margins. Our revenues were affected by weak seasonal demand for GPS consumer product, increased competition and the macro economic uncertainty that SiRF and many of our customers are facing, especially in the PND space. As you may be aware, some of our PND customers have indicated weakness in consumer demand and the need to manage inventory levels in the retail channels in the first quarter. Additionally, our margins continue to be impacted by competitive pressures, as well as product mix. In this quarter we launched two new products to expand our leadership position in the PND market and expand further into location-enabled mobile consumer product markets.

At the Consumer Electronics Show in Las Vegas in January we introduced our SiRFInstantFix2 technology that is designed to significantly reduce the startup wait time of mobile navigation devices without requiring any network connectivity for assistance or updates. Also at the 2008 GSMA Mobile World Congress in February, we demonstrated SiRF prima multifunction platform that is designed to power the next generation of PNDs and other location-aware mobile devices. The strengthening of our product portfolio and design wins are encouraging signs for the long term. Now I would like to turn the discussion over to Geoff to cover the financials.

Geoff Ribar

Thanks, Dado. SiRF recorded revenues for the first quarter of 2008 of $62 million compared to revenues of $67.3 million in the first quarter of last year, a decrease of 7.9% year over year. Now let me give you our sales breakdown by product platform. Our revenue product platform for Q1 was approximately 50% in automotive, slightly more than 35% in wireless and slightly below 15% in consumer. Q1 revenue was comprised of $60 million from product sales and approximately $2 million from license and royalty fees. SiRF's non-GAAP gross margin for the quarter was approximately 49%. Non-GAAP gross profit was $30.3 million. Non-GAAP gross profit excludes stock compensation charges of $0.2 million and amortization of acquisition-related intangibles of $3.7 million in Q1.

Our gross margin continues to be impacted by a combination of competitive marketing pressures and a shift of product mix. For example, certain SiRF products, such as SiRFstarIII (inaudible), which includes a flash memory sell-through component, have a lower overall product gross margin. GAAP net loss for the first quarter of 2008 was $28.1 million, or a loss of $0.47 per diluted share based on 60.3 million weighted average shares outstanding. The first quarter net loss includes $8.9 million of stock-compensation expense, $6.2 million in amortization of the acquisition-related intangibles, $313,000 of acquisition-related and contingent payments, and restructuring and asset impairment charges of $473,000 This compares with Q1 2007 GAAP net income of $2.8 million, or $0.05 per diluted share based on 56.3 million average shares outstanding.

First quarter 2007 income included $7.3 million of stock-compensation expense, $1.1 million in amortization of acquisition-related intangibles and $750,000 of acquisition-related contingent payments. We recorded a non-GAAP loss in the first quarter of fiscal 2008 of $8.4 million, or a loss of $0.14 per diluted share, as compared to non-GAAP net income of $12 million, or $0.21 per diluted share for the first quarter of fiscal 2007. Litigation was a very large expense in Q1 at approximately $7 million. Almost all this was related to our ITC litigation with Broadcom. Q2 will also impa – Q2 will also be impacted by ITC litigation expenses of about the same absolute dollar amount. After the second trial is complete in Q2, we expect litigation expenses to drop. Non-GAAP net loss for the first quarter of fiscal 2007 excludes $8.9 million of stock-compensation expense, $6.2 million in amortization of acquisition-related intangibles, $313,000 of acquisition-related contingent payments, restructuring and asset impairment charges of $473,000, and a provision for income taxes of $3.8 million.

The non-GAAP net income for the first quarter of fiscal 2007 excludes $7.3 million of stock-compensation expense, $1.1 million in amortization of acquisition-related intangibles, $750,000 of acquisition-related contingent payments and a charge of $37,000 for provision for income taxes. The combined chipset and SOC volume increased approximately 22% during the first quarter of 2008 as compared to the first quarter of 2007, while ASP declined approximately 25% over the same period. Chipset unit and SOC unit volumes in Q1 2008 decreased approximately 34% from Q4 2007, while ASP declined 8%. SiRF had three 10% or greater customers; Promate, our Taiwanese distributor which supplies Tom Toms contract manufacturers, as well as MYTECH and the other Taiwanese OEM's. Promate accounted for approximately 22% of our revenues and we had two direct customers at 17% and 10% respectively. Headcount at the end of the first quarter was 719 versus 753 at the end of Q4 of 2007.

The reduction in headcount is a result of employee attrition and effective reduction in force, which was announced on March 25th. Q1 DSO was 33 days, an improvement from 34 days in Q4. We expect DSO to remain in the same range in Q2. Inventory turns in Q1 were at 4.2, down from 7.4 in Q4, as a result of an inventory buildup. The buildup of inventory was due to the weakness in our Q1 customer demands compared to our initial forecast. SiRF had cash, cash equivalents, short-term investments and long-term investments of $121 million as of the end of March 31, 2008, as compared to $139 million at December 31st, 2007. In Q1, we invested $13.5 million in a private GPS company in a form of a loan.

The geographic revenue for the quarter by with region was Asia-Pacific at 66%, US and Americas at 16%, Europe at 14% and the rest of the world at 4%. We forecast 2008 non-GAAP effective tax rate of approximately 10% for the year. We also expect operating expenses to be slightly lower to flat in Q2 compared to Q1 2008. Litigation expenses again were approximately $7 million in Q1 and will remain at approximately that level on Q2 before an anticipated reduction in Q3 and Q4 And I will turn it back over to Dado to go over closing comments and outlook for the second quarter.

Dado Banatao

Thanks, Geoff. As I mentioned earlier, Q1 proved to be quite a challenging quarter for SiRF. In reviewing our revenue forecast for Q2, we are continuing to experience demand softness due to economic uncertainties and competitive pressures, especially within the PND market. This could also moderate the historical growth patterns for subsequent quarters this year. Consequently, as we indicated in our March 25th call, SiRF is in the process of implementing important restructuring changes to improve our product development cycle and bring spending in line with expected lower gross margins and lower revenue growth rate. As a result, we are guiding Q2 in the range of $60 million to $64 million non-GAAP EPS from a loss of $0.11 to a loss of $0.16.

This assumes a 10% pro forma tax rate for the year. Although we do not provide specific gross margin guidance, we expect our Q2 gross margins to be flat or lower than our Q1 2008 gross margins. At this time we will open it up to questions from callers. As we said, Kanwar Chadha, Co-Founder and VP of marketing; Rob Baxter, Senior VP; Dennis Bencala, Senior Director of Investor Relations; and Geoff Ribar, our CFO, will join me for the Q&A period. However – however, before we start I should point out that there are certain issues of confidentiality relating to various customers or partners that we are required to respect and this may limit how completely we are able to answer your questions. We will take the first question now.

Question-and-Answer Session

Operator

(Operator instructions) It appears that our first question comes from Brian Modoff with Deutsche Bank. Please continue.

Jay Goldberg – Deutsche Bank

Hi, this is Jay Goldberg calling for Brian Modoff. Thanks for taking my call. Just real quick, could you just give us an update on what's going on on the wireless front. You mentioned some design wins there. When are we going to see some more growth in units?

Dado Banatao

Let me hand that over to Kanwar Chadha.

Kanwar Chadha

Yes. As Dado just indicated and Geoff indicated in the discussion before, the wireless is becoming a bigger part of our revenue mix and the new design wins, which we have won recently will start having impact later during the year. As you know from our design win to production ramp-up typically is anywhere from six to nine month cycles.

Jay Goldberg – Deutsche Bank

Okay. And then I guess in a sort of broader picture, do you guys have the scale to compete in this market, and if it's a question mark, are you open to strategic alternatives, maybe joining with a larger player to compete more effectively?

Dado Banatao

At this point in time we are executing on a plan where we will look at our immediate needs of restructuring and make sure that we run the company with our current strategies and we think that, with the studies that we have put in place, we should be able to continue our advancement in technology and products in this market.

Jay Goldberg – Deutsche Bank

But would you be open to other alternatives?

Dado Banatao

Well, as responsible management and Board of Directors of the company, our number one focus is to make sure that we continue to execute on our business at this point in time and that's the best way for us to preserve value for our shareholders.

Jay Goldberg – Deutsche Bank

All right. Thank you.

Operator

And it appears that our next question comes from Adam Benjamin with Jefferies. Please continue.

Adam Benjamin – Jefferies

Thanks. Dado, you talked about, given your guidance that we may not see normal seasonality, not to put words in your mouth, going forward throughout the rest of the year. I just want to dig deeper into that comment. Am I interpreting that correctly? Is that what you were saying?

Geoff Ribar

Yes, Adam, this is Geoff. Yes, we are expecting that perhaps we will see lower-than-normal seasonality in the second half of the year.

Adam Benjamin – Jefferies

Is that a function of just the PND market itself or is that some dynamic that's being caused by some share losses as well?

Kanwar Chadha

Hi, Adam, this is Kanwar. As you know, a number of our customers and other providers into the PND market have indicated certain softness in the marketplace and clearly there are competitive pressures in the marketplace. So, based on what we see today and based on the economic uncertainly in the marketplace, I think it's prudent for us to assume that there will be a moderation of growth potentially.

Adam Benjamin – Jefferies

All right. With respect to the roadmap going forward and multifunction radios, how do you guys plan on competing on that front? It requires significant investment and to date the company has had a difficult time bringing to market chips, outside of the SiRFstarIII, just what's your strategy there, Dado? Can you bring in more engineering? Can you make acquisitions? What's the strategy there?

Dado Banatao

Yes, at the end of the day we are dealing with semiconductors and I for one, and my management team, we look at it simply that way. Over the history of semiconductors there are basically a few things that we need to take care of. Wireless that you mentioned is simply a branch of that semiconductor space where, while it does acquire a little bit more attention in the physics of the devices, we're not dealing with rocket science here and frankly, it is not the case where you can throw money at it. You just have to have the right kind of people, the right kind of engineers, who what they're doing and assuming that the company is structured properly, which obviously we are attending to, it is not a matter of bulk or size. You really truly have to have the right engineers and that's the area that we are focusing on today and we are organizing – or restructuring to where there is the ultimate focus in the space that we are attending to, not only in wireless, but the evolution of PNDs, feature sets and things like that.

Adam Benjamin – Jefferies

So the investment that you pointed out in the prepared remarks of $13.5 million, can you elaborate a the bit on that? I'm just trying to understand the rationale there, as well.

Geoff Ribar

Yes. So as we said, we made a loan in a private GPS company for $13.5 million. I think that's all we're going to comment on right now.

Operator

And it appears that our next question comes from the side of James Schneider with Goldman Sachs. Please continue.

James Schneider – Goldman Sachs

Hi. Dado, just from a top level strategic perspective, maybe you can try it a little bit different way. As you look across the organization can you address some of the main execution issues you've seen either on the engineering side or the sales side and how you might go about fixing those?

Dado Banatao

Again, there are fundamental things that not only SiRF, but a lot of companies have to make sure that I guess taken [ph] care of. A lot of it is simply blocking and tackling, as we call it in our industry. Obviously part of that is we are in the process of completing a thorough review of the company's business, organization, strategies and customer relationships which have to do with affecting how we define our product. This is currently the main focus that I have here plus, obviously, the entire management team. We are confident company will get back on track. To get back again to the basics of how we define innovative products, which is pretty much the history of SiRF from the beginning, we started to consumerize this business and we led the market for a long time. We just need to get back on track.

James Schneider – Goldman Sachs

Okay. Then do you have a timeline for when you might complete that strategic review and have something more material to share with the Street?

Dado Banatao

No, we cannot comment on how, what time or how slow or fast we can do that. It's something that we obviously – any company will always keep on doing in any case. So it’s a never ending process. We just need to make sure that we scale up proportionate to the challenge and the business.

Operator

And next it appears that our question comes from Sanjay Devgan from Morgan Stanley. Please continue.

Sanjay Devgan – Morgan Stanley

Thank you so much. Thanks for taking my questions. Briefly you'd alluded to increasing competition and I was just wondering if you could help us get a sense of – with the headwinds that you face, how much of it if you can quantify is due to the increased competition versus just the general macro slowdowns in the general spending environment? If there's any sense of that if you could give us some color on that.

Dado Banatao

Hey, Rob, would you take that, please.

Rob Baxter

Sure. I don't think I'd want to identify the mix between the two. Clearly there is a mixture of those two pressures as we've gone through Q1. The PND space, you've seen some other announcements, has slowed down a little bit compared to what was previously expected. What I think I would prefer to focus on is the momentum going forward, where our designing momentum has been very strong. Obviously, as Kanwar said, that will take some time to get back to some revenue growth from our point of view, but the success of our new products has been exceptional in this space. So, going forward, obviously we're working hard to counter the competitive threats and it's more the market momentum that we're looking at as we go forward that will drive the growth.

Sanjay Devgan – Morgan Stanley

Okay. If you – I guess this is a follow up, then rephrase it differently would you care to take a crack at what you believe your market share is now in the PND space?

Rob Baxter

No, we historically, of course, have had a very high market share and that continues to be the case. And as we've said before on previous calls, we win designs and we lose designs and that is ongoing all the time and our focus really is to have the product roadmap that wins more than we lose and we think that is the case because that continues to be the case. Prima, for example, the latest SSC device, we think sets new benchmarks in this industry for cost performance and the reception our customers are giving it has been exceptional. And our intent is to keep on releasing products like that and setting the benchmarks in this industry and we think we've done that and we will continue to do that.

Operator

And our next question comes from Eric Ghernati with Banc of America. Please continue.

Eric Ghernati – Banc of America

Hi, thanks for taking my question. Geoff, just a question for you with respect to how should we think about the operating expense trajectory after the second quarter? It's currently at 67 – 65% of sales on a pro forma basis, doesn't look like there's going to be much change in the June quarter. So, given your outlook for the second half of the low seasonality, how should we think about OpEx? Thank you.

Geoff Ribar

Okay. So, Eric, the first part of it is the big – one of the big expenses in Q1 and Q2 has been litigation. We run approximately $7 million a quarter. Coming in Q3 and Q4 that will with be materially less. I think the second point is the company obviously announced a restructuring, right, to reduce operating expenses. Those activities, some have already taken place and some will take place over a period of time. All those should dramatically reduce our break-even over time.

Eric Ghernati – Banc of America

And what is – how should we think about your break-even again, maybe in the second half or 2009?

Geoff Ribar

Breakeven will be approaching the low 60s – 60 to 65 in the second half, certainly by Q4.

Operator

And our next question comes from Ramesh Misra from Collins Stewart. Please continue.

Ramesh Misra – Colllins Stewart

Good afternoon, gentlemen. Dado, I wanted to ask you in regards to your historical experience and how it applies to the GPS space, you've seen graphics that one time being a very exciting field and seeing a lot of growth and then basically consolidating very significantly. Where in the life cycle do you see the GPS base to be at this point?

Dado Banatao

Is this Rajesh? Ramesh – sorry – so a little bit, I guess, of what I've been involved with in the past, you mentioned graphics. Yes, I left that a on long time ago, so although I do keep track of it occasionally but to compare the GPS to answer your question, unlike graphics where it is attendant to a one platform market and it really controlled by a couple of big guys, GPS applications is all over the place, meaning services at the end of the day will drive how we use location information and if you look at the scale of ten as the saturation point of where extortion of the capabilities of how to use location, my guess is we are really between one and two. People are just beginning to realize how we use location for financial services, security, of course, the navigation, all the well known stuff, those are the easy ones. But if you look at how the services will come out, especially with the fact that the Internet infrastructure carries a lot of this data, it's limitless, at least for now, as to how we imagine these services will play out over time. Platforms are varied. Anything that moves we believe will have GPS in it, or some location information that is useful to that platform. So, again the comparison of graphics and GPS is slightly different, I think, simply because, again, the graphics is a pretty much a one platform kind of phenomenon.

Ramesh Misra – Colllins Stewart

Okay, fair enough. In regards to your comment about weaker-than-normal seasonal trends, can you say is this more because of pricing degradation or are you actually seeing even unit growth potentially getting compromised and further down the line basically?

Kanwar Chadha

This is Kanwar. So, what we are saying is that with all of the economic uncertainty there potentially is moderation in growth in the second half from a seasonality perspective. There are different segments in the marketplace. Some of them may grow faster than the others, where as the overall, when you look at the over all market size, considering the economic uncertainty, you have to take somewhat of a conservative view and that, as we have indicated many of the other players in this field have come out with similar comments. Competition-wise – competitively, of course it's a competitive market and for every socket you have to fight and you have to – our strategy is with our products, especially with the multifunction Prima platform, which is getting very, very good reception, we have a good, strong momentum in terms of design win. All that translates into revenue obviously has to go through (inaudible) sample their products.

Operator

And our next question comes from David Wu with Global Crown Capital.

David Wu – Global Crown Capital

Yes. I was just curious about two things. Number one, in terms of the gross margin of the products how much of that is a function of competitive pricing pressure and customer pricing pressure, rather, and how much of that can your new products make a difference, particularly in the second half of the year? And then I will have a quick follow up which has got to do with – in the wireless market there are big opportunities for design wins in the second half of this year and I was wondering how much of that design win possibility for SiRF is dependent on existing SiRF's III architecture or can [ph] potentially have to wait until you get your next generation out?

Geoff Ribar

Okay, I will – this is Geoff, I will take the first question on gross margins. There's three major drivers to our gross margins. The first driver, as you mentioned is competitive pressures (inaudible), and so we've clearly have been talking about that for the past few quarters and even longer than that. So there are clearly competitive pressures which impact margins. The second issue that's going to impact margins is mix, right? Different products have different margins within our product families and that will change as the mix changes in our products. The third thing, as you also mentioned, is new products and that's really going to be the key to us to get our gross margins back up is to get the new products out into the marketplace.

Kanwar Chadha

And this is Kanwar. I will address your question on the wireless market. We are not dependent on our next-generation platforms for design win in the marketplace for this year. Our current new products out of the SiRFstarIII architectures, especially the SiRFstarIII single-drive product is getting good design wins at customer base. So anything which goes into design later this – into production later this year or early next year we believe our current product portfolio is strong enough that we will win many of those designs.

Operator

And our next question comes from Jeff Rath with Canaccord Adams.

Jeff Rath – Canaccord Adams

Great, thanks very much. I wonder, Geoff, if you could remind me what the Promate percentage of revenues were in your fourth quarter? Do you have that handy?

Geoff Ribar

Yes, hang on a second. So in the fourth quarter Promate was – sorry, hang on – Promate was in the last quarter, in the quarter we just ended was about 34%. They were north of 40% in Q4.

Jeff Rath – Canaccord Adams

So if I got that right, they were 40% in Q4 and the quarter you just reported – I thought I wrote it down here – it was 22%. Am I wrong?

Geoff Ribar

You're right, 22%, 22%.

Jeff Rath – Canaccord Adams

Okay, I guess as a follow up to that on your March 25th call I believe you spoke a little bit about segmentation in the PND market – first of all, PND market is a key element of weakness from a demand standpoint and then you really called out tier two that some differences between, I guess, tier two and tier one customers there. I'm wondering if you could update us on that dynamic particularly. Are you seeing – you've now provide us some more color about your outlook as it relates to seasonality and called out that PND seasonality is going to be weaker, how does that weakness relate to the tiering of your customers? Is it pretty consistent, you're still seeing – expecting to see weakness in the tier two's, or do you think that's more –is it more broad based now?

Rob Baxter

Yes, this is Rob here. So, I will try and take a stab [ph] at that. There is tiering, obviously, in the the PND space and what we see happening is, and of course we're engaged with all of those tiers. I think just about every PND customer has a SiRF product in some shape or form in their portfolio. Not every product, but the majority of products, so we have pretty good visibility of that, and what we see generally is that the tier two guys – or we sort of call those – some of them are white label brands that are manufactured in China. They get supplied to many other brands in Europe and the US. Typically the seasonality of those white label brands is very, very accentuated. So much of their business is Q3 and Q4, and then in Q1 and Q2 they basically – they struggle very badly and, of course, we see that and that's one of the factors that we've baked into these expectations here. The tier one guys, who we would name as people like TomTom Garmin, Mio, Magellan, that type of customer, they still see the seasonality. When you can look at any earnings report from those guys and you will see it, Q4 to Q1 they are still very significant, but it probably is not as significant as what we call the white label or tier two brands. So, the answer to your question, it is endemic in the consumer product that we're talking about is a PND, but it's more accentuated at the low end white label area than the tier one guys.

Operator

And our next question comes from Mahesh Sanganeria with RBC Capital Markets.

Mahesh Sanganeria – RBC Capital Markets

Hi, this is Sandeep (inaudible) calling in for Mahesh Sanganeria. There's one thing I wanted – previously you've always talked about centrality or SOC revenues. I was wondering if you can give us some more information on what your expectations are for the SOC products for Q2 and for the whole 2008 just to see like what contributions that would make to your overall revenues?

Geoff Ribar

Sure, this is Geoff. So, we fully integrated the SOC business into our normal business, so we're no longer going to guide the individual sections of our business. Obviously it's a key part of our business. We've been very happy with the performance and that's where we are.

Mahesh Sanganeria – RBC Capital Markets

Okay, fair enough. I just had another question. Can you give us a breakdown for Q2 of how you think your automotive versus wireless versus customer is going to track and for the rest of the year?

Kanwar Chadha

This is Kanwar. There are a number of things happening in the marketplace and in our product portfolio. So, at this point in time it's difficult to give you the kind of information you are looking for, but I would like to emphasize a few points. In the PND space, independent of the market growth we do have a momentum – product momentum, especially with the Prima platform, which sets – literally sets a new standard of what is needed to make the next generation of multifunction PNDs. So that will contribute to a certain extent, not just in units but also in – socket revenue per unit goes up significantly when you have products like Prima which are both leading edge in performance as well as bring much, much more value to the platform. On the other side in the wireless space, we have products which are addressing the cost needs of the wireless platforms, where people have to (inaudible) for very, very small sized, easy-to-integrate product, so the ramp-up of that market will be driven by new products but a different category of products in that sense. And (inaudible) the relative growth of those two markets, back end of the year, as we have indicated, there are so many uncertainties that’s very difficult to project how they will in the end balance out.

Operator

Next we have Tayyib Shah with Longbow Research, please continue.

Tayyib Shah – Longbow Research

Hi, guys. Kanwar, there seems to be increasing emphasis on connected PND and GPS phones at one of PND customers where Qualcomm had a design win. Are you seeing that trend in the other two PND customers, as well, where they may be looking at a GPS solution with cellular connectivity?

Kanwar Chadha

Let me put the perspective on that. There is an intersection point between the wireless and the PND space, which is where you talk about navigation phones and connected PND. There are a number of elements you have to have in place for that kind of system. Services element, how these are – what kind of service is provided, what kind of content is provided, things like that. We have talked about the fact that connected PNDs are going to be effective in the long run in this marketplace, but it's an intersection point between a navigation phone and a connected PND. For the mainstream of the PND space the way we view it today, it's still going to be out of the box experience driven by things like more rich visualization experience, multi-functionality built into those PNDs and we believe that that, on one end, and really extremely affordable PNDs on the other end, which is what our Atlas product line is optimized for, already going to be the driver in the marketplace. Now each one of our customers clearly have their own view and their own plans and we would let them talk about it.

Operator

And it appears our next question comes from Charlie Anderson with Dougherty & Company. Your line is now open.

Charlie Anderson – Dougherty & Co.

Good afternoon, thanks for taking my questions, guys. I wondered if you could just give a little color on ASPs in the PND business, really just taking a look at the legacy SiRFstarIII versus the SOC, maybe on a sequential basis if there was much difference between the two in terms of ASP declines?

Rob Baxter

Well, I think both – this is Rob here by the way, Charlie – yes, both product families are experiencing the same competitive pressure. This market is a consumer market, so year on year the like-for-like product then, you've seen in the announcement year-on-year ASP declines and pretty much in line with what's in the announcement. Of course, long term, we'd expect the SOC value to hold up better because the functionality that's embedded in the SOC, the platform has inherently more integration value than the original SiRFstarIII product. So, long term we'd expect the ASP declines in that space to be less pronounced and, of course, that's where Prima comes in, again. That's the value of Prima, the integration and the value we put into that will allow us to – well, first of all, will allow our customers unprecedented cost performance in the PND platform, but secondly it allows us to capture more value within that platform. I guess over the last 12 months we've seen erosion in the SiRFstarIII and also the SOC products like for like, along the lines that we have we've said in the announcement.

Charlie Anderson – Dougherty & Co.

Got you, and this is the follow-up question for you, Rob, on Prima. I just want to take your temperature on design wins into some of the tier one players and I wonder with Prima are your guys maybe able to regain some share that maybe you've lost in the past to some dual sourcing because of the advantages of that product?

Rob Baxter

Well, the answer, of course, we intend to aggressively promote this to all tiers and I did infer that the success rate we've had so far – and we started out with a tier one customer that you expect us to start out with. The reception for that product has been exceptionally good and so we expect to – and obviously our intent is to have great market share in this space as this market continues to grow with Prima at the high end – well, high end and midrange and at the low end with our Atlas platform, which has got additional cost-effective features. So our strategy is pretty clear and it's successful going forward, we think.

Operator

Our next question comes from David Niederman with Pacific Crest. Please continue.

David Niederman – Pacific Crest

Thanks. Geoff, you had mentioned on the gross margin commentary earlier at the third point in terms of mix that gets better. Can you – and I assume that's dependent on the new product introductions that were mentioned earlier. Can you talk about what some of the delays are from a practical standpoint on those new product introductions?

Geoff Ribar

So, it's perhaps better to let the business guys comment on it, but again, my comment on the gross margins was related to new products, our key to getting margins up. Right.

So, the question is do – has there been a delay that's impacted gross margins, right, and I don't believe there is

Geoff Ribar

So there hasn't been any really delays that have impacted gross margins. There's been a competitive pressures and mix and again, new product introductions are the way to fix the gross margin over time.

Kanwar Chadha

And I would say just again here, bringing the word Prima in again, the execution on that platform has been outstanding. I've never seen anything quite as good as that over the execution from the design to first silicon to sampling customers to getting the software running to having customer evaluations done and acceptance by the customer. It's been an exceptional process and, of course, it isn't finished yet but everything says our execution is world class from that point of view.

David Niederman – Pacific Crest

Great. And aside from that, so you've talked about litigation expenses progressing on next quarter in regards to Broadcom and the ITC. Should we expect any litigation expenses in regards to the class action lawsuits that are about?

Geoff Ribar

So, of course there will be some expenses on the shareholder litigation. There's also insurance we have and so those will be materially less than the share of the (inaudible) ITC litigation.

Operator

It appears that our next question comes from Michael Sue with Oppenheimer. Please continue.

Michael Sue – Oppenheimer

Hi, thank you. My questions have been answered already.

Operator

Excellent. (Operator instructions) And our next question comes from Tim Lash with Third Point. Please continue.

Tim Lash – Third Point

Hi, everyone. Could you be a little more specific on your cash burnout look. It looks like X litigation and X the loan in the first quarter you would have been cash positive. I guess in the second quarter a lot of litigation, but can you give us some sort of idea of when you think you will be able to stabilize the cash situation?

Geoff Ribar

Well, so – obviously we don't give guidance on cash and we only give guidance on revenue and overall EPS and we only do that really for the next quarter. As Dado said early, the expectation is he's driving is return of profitability. It will – when we return to profitability our cash flow will recover.

Tim Lash – Third Point

Got it, okay. You talk about a return to profitability, that would be – you're talking in pro forma terms, is that correct?

Geoff Ribar

That is correct, non-GAAP cash-driven profitability.

Operator

And it appears that our next question comes Simha Nimen [ph] with Interlink Research.

SimhaNimen – Interlink Research

I would like to ask two questions. Number one, would you please – wouldn't it make a little bit of sense as a shareholder that we should be (inaudible) bought out by Nokia, which is our customer or one of our customers where they get the whole comp let's say for $10 they could get like $600 million they get the full company and they lower their expenses and they get their research and they have a full company, number one? And number two, how are we getting along on the litigation with Broadcom?

Geoff Ribar

Okay. So this is Geoff. Again we don't comment on rumors and everything related to –

SimhaNimen – Interlink Research

Not as a rumor. Why wouldn't it make sense we should be put up with one of our customers?

Geoff Ribar

Again, we don't comment on rumors or suggestions along those lines, right? And on the second question, litigation with ITC, with Broadcom, we’ve had the offensive trial happened in late March and the second trial, the defensive trial happens in April, later in April.

Operator

And it appears that we have another question from Jeff Rath with Canaccord Adams. Please continue.

Jeff Rath – Canaccord Adams

Thanks. Dado, just wanted to follow up on the lawsuit. Given the management changes and that lawsuit strategy presumably was – had a lot of input from previous management as to strategies and benefits to take this to trial as opposed to maybe seek an out -of-court settlement and things like that. I wonder if you could share with us your views on your patent strategy, suing versus settling and how do you think about that now that you've got a coup – you've inherited the CEO interim position? Were you just status quo here or do you think that maybe you will revisit your strategy around how to protect your IP?

Dado Banatao

We obviously cannot comment on your question right now.

Operator

And it appears that our next question comes from Kenneth Marcus with First New York. Please continue.

Kenneth Marcus – First New York

Hey, how are you? I was already in the queue. My questions have largely been addressed. I was wondering, though, if you've received any overtures from any other companies or if you've taken any actions with respect to protecting against a bid that doesn't reflect the full value of the company?

Geoff Ribar

Yes. Kenneth, again, we don't comment on rumors. Sorry.

Kenneth Marcus – First New York

Okay.

Geoff Ribar

Thanks.

Operator

And it appears that we have another question from Mahesh Sanganeria with RBC Capital Markets.

Mahesh Sanganeria – RBC Capital Markets

This is Sandeep again calling for Mahesh. Just had another question this terms of can you give us some more information on units and ASPs for Q1?

Geoff Ribar

Yes. Again I will repeat what I previously said, right? Units were down quarter over quarter 34%, ASPs declined 8% from the immediate prior quarter. ASPs year over year were down 25% while unit volume increased 22% year over year.

Mahesh Sanganeria – RBC Capital Markets

Thank you.

Geoff Ribar

Okay. And that was the last question, so we'd like to turn it back over to Dado for our concluding comments.

Dado Banatao

Thanks, Geoff. Notwithstanding the lower numbers and the uncertain outlook that we are reporting today, the fundamental opportunities in our markets are still intact in the long run. We expect our product portfolio strength combined with the structural changes that we are implementing to have a positive impact on our financial performance late this year and to take full impact in 2009. Thank you all for joining us today.

Operator

This does conclude today's teleconference. Thank you for your participation, and have a great day.

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Source: SiRF Technology, Inc. Q1 2008 Earnings Call Transcript
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