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Silicon Image Inc. (NASDAQ:SIMG)

Q2 2012 Earnings Call

July 31, 2012 5:00 p.m. ET

Executives

Mike Bishop – Investor Relations

Carmillo Martino – Chief Executive Officer

Noland Granberry – Chief Financial Officer

Analysts

Charlie Anderson – Dougherty & Company

Christopher Longiaru - Sidoti & Company

Richard Shannon – Craig Hallum Capital Group

Simran Brar - Needham & Company

Tom Sepenzis – Northland Securities

Scott Searle - Merriman Capital

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Silicon Images Second Quarter Financial Results conference call. (Operator instructions) This conference is being recorded today, July 31st, 2012.

I would now like to turn the conference over to Mike Bishop of Investor Relations. Please go ahead, sir.

Mike Bishop

Thank you. Good afternoon everyone and welcome to Silicon Image's Second Quarter of 2012 Financial Results Conference Call. Joining me today is Camillo Martino, the Company's Chief Executive Officer and Noland Granberry, the Company's Chief Financial Officer.

The agenda for today's call includes a discussion of the financial results and a product and market update from Camillo. Noland will then provide a more in depth discussion of the financial results and provide a financial performance estimate for the third quarter of 2012. We will then open the call for Q&A.

Silicon Image continues to report it's product revenue in three categories; Consumer electronics or CE, Mobile and PC. CE consists of DTV and home theater products. The Mobile category includes both mobile HDMI and MHL-enabled products. The PC category includes PC and storage products. IP revenue continues to be reported separately.

Before I turn the call over to Camillo, let me remind listeners that during the call we will be making forward-looking statements based on our current expectations regarding many aspects of our business and the markets in which we operate. Including but not limited, to forward-looking statements about our financial results and performance, our current and future products and technology, the timing of new product introduction, average selling prices, design win, market demand for our products, operating expense and standards activities.

Our actual results may differ materially from our forward-looking statement and we disclaim any obligation to update any of our forward-looking statement.

In addition, our forward-looking statement and the Company's future results are subject to risks and uncertainties which we described in today's press release as well as, in our most recent periodic reports on Form 10-K and 10-Q filed with the SEC. These documents contain certain relevant risk factors that could affect our financial results.

We have also provided a financial metrics table on reconciliation of non-GAAP financial information to GAAP information in our Second Quarter 2012 Financial Results Press Release which is available on the Investor Relations section of our website at www.siliconimage.com.

And with that, I'd like to turn the call over to Camillo.

Camillo Martino

Thanks Mike. Good afternoon everyone and thank you for joining our Second Quarter 2012 Earnings Call today. I am very pleased to report that our Q2 results exceeded our quarterly guidance in all categories. We achieved higher revenue, kept expenses below the guidance range and generated a profit of $0.05 per diluted share on a non-GAAP basis.

We have a lot of exciting developments to discuss on today's call. As is customary, I will give you a brief overview of the Company's performance and a market update and then, Noland will go through the numbers in more detail and provide our financial outlook for Q3.

Our revenue which totaled $63.8 million for the quarter grew by over 16% sequentially and by over 19% on a year-over-year basis. We performed above our revenue guidance of $60 million to $62 million on the strength of continued growth in our Mobile business, which we grew by 34% over the prior quarter.

Our Mobile business continues to gain momentum driven by increased penetration of MHL-enabled products. Since we stated volume production of MHL-enabled products in early 2011, we have already shipped over 100 million units to our Mobile customers. During the first half of 2012, our customers have introduced numerous mobile devices worldwide, such as, the Samsung Galaxy S3 and Galaxy Note, HDC-1, the Huawei Ascend D, LG Optimus, Sharp Aquos and Sony Xperia among many others.

In January this year, we stated our expectation that over 100 million MHL-enabled smartphones and tablets would ship during 2012, roughly doubling the 50 million units shipped in 2011. We now believe that this number is closer to 125 million smartphones and tablets, and combined with the units shipped last year, we now expect that more than 175 million MHL-enabled smartphones and tablets will have reached the market by the end of 2012, further demonstrating the strong adoption of the MHL standard.

Market research firm iSuppli expects that more than 630 million smartphones will ship during 2012, meaning, roughly 1:5 smartphones will ship with our MHL products. With all of these smartphone models and diverse implementations of CE and other devices, we believe MHL technology is becoming a broadly adopted global HD connectivity standard.

Also, we continue to make progress on our automotive initiative and we are pleased to note that [Shun Dai] Motor Company recently became a member of the MHL consortium.

Now, moving on to our CE business. Our CE revenue which includes both DTV and Home Theater products was in line with our expectation. I would like to highlight the increasing availability of MHL-enabled DTVs worldwide including various models from Samsung, LG, Toshiba, Sharp and Insignia. We expect the number of MHL-enabled DTVs will continue to increase going forward.

In addition, we are seeing increased product introductions as evidenced by Onkyo's AVR featuring support for MHL and InstaPrevue, a Sharp Blu-Ray recorder with MHL, as well as, AVRs from Yamaha and Sony.

The CE segment, specifically, DTVs and larger displays is one of our key markets and strategically important to drive the growth of our Mobile business as we continue to expand the MHL ecosystem using our wired and wireless products. Larger displays provide the context that drive global standards of connectivity and intra-operability with.

For example, smartphones and Blu-Ray players both connected wired and wirelessly. Our relationships with major CE OEMs continue to be strong and we expect a number of industry and product developments to drive our CE business, such as the potential for updated MHL and HDMI specifications, our unique InstaPrevue technology, the investments made in the Home Theaters product line, as well as the proliferation of our 60 gigahertz wireless HD solution.

Moving on to Wireless now. I am pleased with the progress we continue to make with our 60 gigahertz wireless HD technology and product roadmap. And I am excited about the opportunities that we see ahead. We are now in production with our Gen3 wireless HD solution and expect to see retail products introduced by customers in the CE and PC markets over the coming few quarters.

These new wireless HD-enabled products would join those already available in the market from companies such as, Dell, Alienware, Epson and Vizio that are based on our Gen2 wireless HD solution.

As I highlighted our last call, we believe that the most significant opportunity for our 60 gigahertz wireless HD technology will be in Mobile, in particular the high growth smartphone and tablet markets. Our 60 gigahertz technology is ideally suited to solving the industry challenge of wirelessly connecting a mobile device to a large display with a power efficient high bandwidth ultra-low latency solution. We continue to execute to our plan to sample the wireless HD solution to our strategic mobile customers by the end of this year.

Our IP and standard to business continues on a steady path and it remains a consistently strong revenue contributor.

In summary, I would like to highlight three key points that have focused on increasing shareholder value. First, Silicon Image delivered a great quarter, underlining our commitment to increase revenue and earnings.

Secondly, we continue to execute to our plan to expand the MHL ecosystem and deploy 60 gigahertz wireless HD video solutions across both Mobile and DTV applications.

Third, we initiated a $50 million share repurchase program that we announced last quarter. Noland will provide an update on this program a little bit later.

We believe all of these actions demonstrate our commitment to our shareholders and are confident in our business going forward. Now, before I turn over the call to Nolan, I would like to inform all of you that we intend to hold a Financial Analyst Day in New York City on November 13th. Please mark your calendar and plan to attend. We will be sending out invitations as the date draws closer. Noland?

Noland Granberry

Thanks Camillo. Good afternoon. I will provide you with a review of our quarterly financial results for the second quarter of 2012, as well as the financial performance estimates for the third quarter. We will then open it up for questions.

Unless otherwise indicated, gross margin, expenses and earning related items are reported on a non-GAAP basis which excludes stock-based compensation expense, amortization of intangible assets, restructuring charges and other non-recurring expenses.

Our GAAP financial results and a reconciliation of non-GAAP measures referenced in today's call are available on the Investor Relations page of our website, www.siliconimage.com. In addition, as with each quarter we have posted our metrics page and provided our quarterly comparative results.

As Camillo noted, we were very pleased with our Q2 financial performance as we exceeded all of our financial targets for the quarter.

Our revenue, which totaled $63.8 million for the quarter, grew by over 16% sequentially and over 19% year-over-year. With our performance this quarter, we have grown our revenue on a year-over-year basis 8 out of the last 9 quarters.

Product revenue for the second quarter was $51.5 million growing 19.6% sequentially and 22.5% year-over-year.

Our Mobile business revenue made up 58% of total revenue growing to $29.9 million for the quarter compared to $22.3 million for Q1 2012 and $17 million for Q2 2011.

CE represented 30% of our total product revenue and PC represented 11%, both were in line with our expectations.

IP revenue was 19% of total revenue and was primarily made up of royalty-related activities.

Gross margins were 59.4% as a result of favorable product mix and variances, as well as the strong contribution from our IP business. Our non-GAAP operating expenses for the second quarter totaled $31.6 million and were favorable to our guidance of $32.5 million and lower than our Q1 expenses of $33.2 million. As we continue to make investments to drive our revenue growth, we continue to remain focused on efficiently managing our operating expenses.

Stock-based compensation totaled $1.7 million compared to $3.3 million for Q1 2012 and $2 million for Q2 2011. The decrease sequentially reflects the first quarter adjustment of forfeiture rates on our stock options.

On our non-GAAP net operating income for Q2 2012 was $6.3 million or 9.9% of revenue as compared to an operating loss of $1.2 million for Q1 2012 and operating income of $4.5 million for Q2 2011. The improvement in our operating profit is a reflection of the operating leverage in our business for higher revenues and improved operating efficiency drive significant operating income growth.

Our non-GAAP tax rate was 30% for the quarter. On a GAAP basis, our net less was $0.9 million or $0.01 per share as compared to our Q1 2012 GAAP net loss of $9.6 million or $0.12 per share. For Q2 2011 our net loss totaled $1.3 million or $0.02 per share.

Our non-GAAP income was $4.3 million or $0.05 per diluted share for the second quarter. Non-GAAP net loss for Q1 2012 was $0.8 million or $0.01 per share. And for Q2 2011, our non-GAAP net income was $4.2 million or $0.05 per diluted share. Diluted weighted-average shares outstanding for Q2 2012 was 83.4 million and included the weighted averaging impact of the repurchase of 1.2 million shares during the quarter at an average share price of $4.37.

As a result of the shares repurchased during the quarter, we have approximately 44.9 million remaining for repurchasing additional shares under the plan.

Checking the cash flow and balance sheet, our operating cash flow for the quarter was $4.2 million and cash and investments as of June 30th 2012 was $147.4 million versus $151.3 million at March 31st 2012. A lower cash balance primarily reflects our net use of cash for the repurchase of stock, building of inventory and for CapEx purposes.

Our accounts receivable at June 30th 2012 totaled $37 million or 52 days of outstanding which are in line with our ESO range of approximately 50 to 55 days.

Net inventory as of June 30th 2012 was $17 million which represents just over 6 turns on an annualized basis. We have built inventory in advance of our normal seasonality as Q3 is generally our largest revenue quarter for the year. We expect inventory turns in the next quarter to align with our target turns of seven.

Capital expenditures were $1.8 million compared to $2.2 million for Q1 2012 and $1.8 million for Q2 2011.

Our quarterly depreciation is approximately $1.5 million.

This completes my summary of our financial results. Next, I would like to discuss our financial outlook.

The following represents our financial outlook for the third quarter 2012:

Revenue of approximately $73 million to $75 million. Gross margin approximately 58%. GAAP operating expenses of approximately $35.5 million. Non-GAAP operating expenses of approximately $32.5 million. Interest income approximately $0.5 million. Share of loss from equity method investment of approximately $0.5 million. Our non-GAAP tax rate of approximately 30%, and diluted shares outstanding of approximately 83 million to 84 million.

As we look forward to the second half of 2012, our third quarter is expected to be our strongest revenue quarter for the year. Mobile continues to be our primary revenue growth driver due to the increasing penetration of MHL in smartphones and tablets.

In addition, we currently see our Q4 2012 revenues being seasonally down from Q3.

This concludes my remarks. Operator, we will now take questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator instructions) Our first question comes from the line of Charlie Anderson with Dougherty & Company. Please go ahead.

Charlie Anderson - Dougherty & Company

Good afternoon. Thanks for taking my questions and congrats on the good quarter and guidance in a tough environment. I wanted to start with the guidance. Obviously, you guys are expecting your bump in mobile and MHL and you've been historically sort of really reliant on two big customers primarily in that bucket.

I wonder if you could talk about as we cross over into the second half in Q3 how you expect sort of the other customers to turn on the Huawei's of the world, sort of the diversity that you'll have in mobile.

Camillo Martino

Thanks, Charlie. As we've been saying for the last couple of quarters, we expect throughout the year, we expect other major customers to come on stream. I think specifically, we said we expect China to start getting into volume production the second half of this year. But even more materially so, I think China would have an impact next year.

So, I think it 's playing out exactly as we've shared with you in the past. All of the companies that I mentioned like, Samsung, HTC, that I mentioned earlier, LGs, ETEs, Sony, Huawei, there's a whole host of them that are either already in production or about to enter production. So I think that is how we would characterize the outlook for the MHL smartphones.

Charlie Anderson - Dougherty & Company

Great. And then, as your CE business has kind of continued to contract here, I wonder how you view the outlook of that. Has it gotten any better, any worse since you guys last updated us?

Noland Granberry

Hey Charlie, this is Noland. Yes, Q2 ended up being as we expected, flat, slightly down from Q1. We anticipate that there will be a seasonal uptick for Q3. Not a strong uptick there, but we do expect it to be up some in Q3.

Charlie Anderson - Dougherty & Company

And then two housekeeping questions, I don't know if I missed ASP, total ASP and then also, Noland what are you implying in your product gross margins in your consolidated 58% for next quarter?

Noland Granberry

One, for the ASPs, we were at $1.07 which compared to $1.14 from last quarter and relative to our product margins, we've been running in the high 40s and we expect that it would continue to be in that range going into next quarter as well.

Charlie Anderson - Dougherty & Company

Great. Thanks so much.

Operator

Thank you. And our next question comes from the line of Christopher Longiaru with Sidoti & Company. Please go ahead.

Christopher Longiaru - Sidoti & Company

Hey guys, congratulations on the results.

Noland Granberry

Thank you.

Camillo Martino

Thanks.

Christopher Longiaru - Sidoti & Company

So, I guess my first question is, there was a lot of concern when Huawei postponed the launch of the Ascend D and it showed up in your stock price and it doesn't look like that had much of an effect on you. Can you talk about just in terms of when you see orders versus when products are set to ship? And what you saw in the quarter with respect to that particular device?

Camillo Martino

I don't think it's probably reasonable to start talking on a one customer-by-customer basis. I will say though, that I think it was either today or yesterday, I happened to see an article in DigiTimes suggesting that Huawei was planning for 60 million smartphones in 2012 is the data point, which is about 3x what they did last year. So, and I think next year that will continue to grow.

So I think when we gave the guidance, I think we took a lot of things into consideration as best we could and in the end, we exceeded the guidance. So I think that's the best way to characterize that.

Christopher Longiaru - Sidoti & Company

And the other question I had was for Noland, just on the tax rate, what's your expectation going forward and what should we be modeling going forward?

Noland Granberry

As we talk about, I mentioned in my prepared remarks, that we still look from a non-GAAP rate to be 30%. And the one thing relative to our GAAP rate, we continue to be in that valuation allowance position. So that still gives us an unusual tax rate from a GAAP perspective, but 30% from non-GAAP view.

Christopher Longiaru - Sidoti & Company

Great. That's all I have for now, but thanks and congratulations again, great results.

Noland Granberry

Thank you.

Camillo Martino

Thanks, Chris.

Operator

Thank you. And our next question comes from the line of Richard Shannon with Hallum Capital Group. Please go ahead.

Richard Shannon - Craig Hallum Capital Group

Hey guys. I'll echo the congratulations here. Some very nice guidance, so that's wonderful. I guess a couple quick questions to start off here. Maybe I'll ask a question here more explicitly regarding 2012 yearly sales. In your last conference call you talked about 20% growth here, you've given a number for the third quarter and seasonally down, should we still expect at least 20% ? Can you quantify what you're thinking in terms of seasonality in the fourth quarter at all?

Camillo Martino

I don't think we, I mean, we could probably back it out, but I think we're still on track to achieve the 20% year-on-year growth as we mentioned the last quarter. The last quarter, we specifically mentioned this, we're comfortable with that.

Richard Shannon - Craig Hallum Capital Group

Okay, just wanted to make sure of that. The other numbers you mentioned in your last quarterly conference call was regarding expected yearly growth in the CE business, I think you said down to 15% to 20%. You're CE bucket for products in the second quarter, is down slightly, easily below seasonality. Any updated expectations you can provide for us, Camillo?

Camillo Martino

It probably is still a little bit early at this point. You know, Noland, I think mentioned that we expected to be slightly up, seasonally up, as we would expect in Q3. So at this point probably still a little bit too early to go outside of that, I think. But we're pretty comfortable with the outlook, and more importantly, we're comfortable strategically, you know, with our position in the Displays.

I mentioned in my remarks earlier that Display is very important for a company like us as we try to drive industry connectivity standards. If we try to drive these standards, it's very, very important that we participate on both ends of that connection. Either wired or wirelessly, meaning either on the phone as well as the display.

So, strategically, the Display and the CE, in general, is important to us, and that's why we've gone in the past and said that we expect this business to stabilize in 2013. And we expect to grow from then on. That's the way we would positioned the CE because strategically it's very important to us.

Richard Shannon - Craig Hallum Capital Group

Okay. And certainly, the strategic positioning makes a lot of sense to me and I'm assuming others. Maybe following up on your comment about stabilizing next year, is that a business you expect to stabilize without the benefit of wireless, I mean just in your business that exists today, or is that something that wireless will be necessary to help "stabilize."

Camillo Martino

We expect that the base business stabilize next year. That is our expectation at this point. Absolutely.

Richard Shannon - Craig Hallum Capital Group

Okay. Perfect. Let's see here. Maybe just a couple of quick questions. I'm going to follow up on one from earlier regarding your customer breadth in MHL. Clear that, you know, a single customer is driving a lot of it, in your top two, most of it.

Is there any way to quantify or help us understand how you might broaden this customer base in the second half or next year? Maybe, I'd just throw out a couple of quick numbers in terms of trying to quantify, but perhaps seeing a third or even a half of the MHL product revenues coming outside of those two customers. Is there any way that you can help us get a feel for how you see this ramping out over the several quarters?

Camillo Martino

Sure. You know, I think we have mentioned a few times already that we expect China and Korea, you know, we talked about it, it's not just Samsung, with LG, [Pantech.] But if you look at China, one is the Huawei we talked about today, just before doing 60 million smart phones for this year. That number is likely to increase further next year. You're going to have the ZTE in a very material amount. You have Mazoo that we partnered with earlier, and there's a whole host of other manufacturers in China that are probably not that critical to mention right now, but really as a category, we expect China Inc. to be a good contribution next year and for years to come.

Really, if you go back to what we said probably 6 to 12 months ago, we said we're in the first innings of this MHL evolution. And maybe we're coming out of the first inning about two enter the second inning, but there's a long way to go in this MHL adoption. A lot of good positive activity and momentum is what we're expecting.

Richard Shannon - Craig Hallum Capital Group

Okay. One last question from me and I'll jump out of the queue here. You've mentioned an expected refresh of MHL by the end of the year. Any expectation in the timing of that and what sorts of feature updates, or speed updates, or anything that we should be looking for?

Camillo Martino

You know, I think the consortium is represented by five companies, of which Silicon Image is one of those five companies. They're actively I'm sure, working together as a team to advance the specification as any organization should . . . is to advance the specification on a regular basis. I don't think it probably appropriate to start talking about what specific features they're looking at because we're one of the five companies.

But I think at the appropriate time, there will be a representative of the consortium clearly talking about the road map and where it's going. But, you know, as one of the five companies, our expectation is that the road map will be refreshed every year or two, in that ballpark. I'm confident that with Silicon and the other partners within the consortium that will likely happen.

Richard Shannon - Craig Hallum Capital Group

Okay. Great. I appreciate the thoughts, Camillo. I'll jump out of line.

Operator

Thank you. (Operator instructions) And our next question comes from the line of Raji Gill with Needham & Company. Please go ahead.

Simran Brar - Needham & Company

Hi, thanks for taking my question. This is Simran Brar on behalf of Raji Gill. My first question was do you experience any float on any MHL ramp due to the [HTC One S NV] delays in the U.S. and Samsung delays?

Camillo Martino

The question was a little bit faint, but I think do we experience any slowdown in the mobile business. I think we had a pretty good quarter driven by mobile. We gave pretty good guidance again driven by mobile, so I think overall I think we're taking a lot of things into consideration like that, and other potential factors at this point to the best of our knowledge at this moment.

Simran Brar - Needham & Company

Okay. Thank you for that. And then my next my second question was could you just talk a little bit about your expectations for MHL growth in 2013, and have you gathered any feedback from end users on MHL adoption?

Camillo Martino

I think it's a little bit too early to talk about next year MHL growth. I think if you look at the pattern that we have demonstrated for 2010, 11, 'and '12. As a company we have grown on average 20% in each of 2011 and 2012 on the average. And as we said earlier, we expect to grow 20% in 2012. So if you look at next year as a proxy, next year probably would be in the same vicinity. If you look at the overall market, this year the smart phone market is projected to be 630 million units.

Next year, I think industry analysts are projecting somewhere in the 800 million-plus market, so that's a pretty healthy growth. We are today, based on the math we presented, we're in one in five smart phones. We're hopeful that number will improve next year as well. As we get closer to the end of the year or early next year, we'll probably have much better visibility to give you a more informed answer at that time.

Simran Brar - Needham & Company

Okay. Thank you. And my last question is what is the road map on 60 gigahertz and what is the status there?

Camillo Martino

Actually, we are very happy about our progress in 60 gigahertz. As we mentioned in the past, we are on track to sample to our key customers towards the end of this year. We'll be publicly unveiling this technology at both CES in January as well as the Mobile World Congress in February in Barcelona. So we're on track there so far. And as we stated earlier, our goal with the new handset solution, we're expecting to have a couple of customers partnering with us in the Christmas cycle of next year.

Now probably one thing I should point out here if it wasn't obvious, I'm not sure how close many of you have been tracking us on this topic. Everything I just talked about just now regarding this brand new handset solution that is for this ultra mobile solution for the hand set. That is true. But we are actually in production today with the 60 gigahertz, and we've just made available to production what we call the Wireless Gen 3 platform, and that's available for TV-type applications or Blu-ray applications, or any dongle applications.

In fact, we're the only company today that is shipping volume of 60 gigahertz technology. So we're quite happy about the fact that we're in production today, and we're deep in development right now of a brand new mobile solution that we'll be happy to talk about in the coming quarters.

Simran Brar - Needham & Company

All right. Thank you for your time and congratulations on a great quarter.

Camillo Martino

Thank you.

Operator

Thank you and our next question comes from the line of Tom Sepenzis with Northland Securities. Please go ahead.

Tom Sepenzis – Northland Securities

Hey, guys. Congratulations along with everyone else on a great quarter.

Camillo Martino

Thank you.

Tom Sepenzis – Northland Securities

I just wanted to follow up on that last comment. You said that you are already shipping 60 gigahertz. Is that in any kind of volume and where do you include that in terms of the model, and where would that revenue go? In the Consumer Electronics business?

Camillo Martino

Well, it depends on the customer. I think we have talked about in previous quarters we have customers like Epson, for example, in a projector; we have customers for dongle in a TV application. It was Mazoo that was mentioned earlier. We also have the Dell Alienware. So, each one of these are kind of a little bit different. So, if it's a PC application, it would appear in the PC, and it's also true for the others, right? CE and what have you. We don't have anything today in the mobile category.

And the number is still small. It is still small, very consistent with what we said in the past. There's nothing new there, but we're quite happy about the relationships we're developing with the key customer base at 60 gigahertz, and in anticipation of the new mobile solution that we'll be rolling out next year.

Tom Sepenzis – Northland Securities

That's great. You think that becomes say 5% or more revenue that gets broken out into a different segment, or do you just continue to put it in whichever slice of the pie it ends up in?

Camillo Martino

Wireless is a technology, you know, it's a technology, and so as such, we think it's more appropriate to really include in the market segment that it falls in. So that's the reason why we're doing it this way.

Noland Granberry

This is Noland, Tom. It's not any different from HDMI and MHL across the various markets in which we play in, so it'll follow that same path.

Tom Sepenzis – Northland Securities

Got you. And just from a curiosity perspective, how do you see where you talked about China, Inc. becoming a bigger portion next year, how do you see that playing out with all the sub-$100 handsets? Are these guys going to incorporate MHL as well, or is that kind of off the table for you guys? How do you see that unfolding throughout 2013?

Camillo Martino

Look, we're in the platforms with a number of companies in China today. Today we are in the higher end of the smart phone, that is true. We do expect, however, that MHL will be in 100% of all smart phones within a number of years to come. Really, that is our expectation. Now the way we get to the 100% market share is some of this TAM is going to be broken out with feature-rich, value-added MHL discrete products, and they're products that we absolutely to be a leader in supplying.

And another category of the TAM, the more lower end part of the TAM is going to be including this feature probably integrated in there, so over time, in the couple of years to come. So our goal is not to make this some fancy, high-end feature; our goal is to make this 100% standard right across the board. And we're coming out with a number of products, some targeting the high end, some targeting the mid-range to even lower end.

In fact, we are targeting that today, but remember the goal. The goal is to make this adopted 100% across all smart phones. That is our goal, and it's not going to happen in 6 months or 12 months. It's going to take a number of years for that to happen, but we understand our mission, our challenge, and we're well on the way to achieving it.

Tom Sepenzis – Northland Securities

100%, so do you have something to tell us about Apple?

Camillo Martino

[laughter] We have a mission and a challenge in front of us and we're on the way to achieving this. It's going to take–look, in order to make a 100% standard, it's going to take a number of years. If you look at HDMI, I mean, HDMI is ten years today; ten years in the making.

Thankfully, it's only been two years for MHL, and I would argue that MHL is probably happening at a much faster clip than HDMI at the same point in time. I think that's driven primarily by the smart phone is a much higher volume category. So I think overall we're confident in our goal.

By the way, we didn't talk about HDMI to date, but today, if you look at 2012 inclusive, HDMI is expected to hit close to 3 billion units of an installed base cumulative from the beginning. A 3 billion installed base, which is a very healthy and respectable number, but again, today we're at year ten in the making, and MHL is just in its second year.

Tom Sepenzis – Northland Securities

Great. And just one last question. I don't know if you have any update at all that you could give us in terms of your progress with Microsoft and maybe getting on the Windows 8 platform or Windows 8.5 or 9? Anything you can provide us there would be great.

Camillo Martino

Yeah, I mean, it's still only August. We expect in the coming year or so that Microsoft will be endorsing MHL in some form or another. There's two different flavors. There's the Windows 8, which is probably being used in tablets. That's one category. And the second category is the Windows Phone 8 as well. I think over time in the coming months ahead, we can provide more visibility, but just like with the success with Android, at this point in time, we expect that some point in time, we would have similar success with Microsoft operating system as well.

Tom Sepenzis – Northland Securities

That's great. Thanks very much for taking my questions and congratulations again.

Camillo Martino

Thank you.

Operator

Thank you. And we have a follow-up question from Richard Shannon with Craig Hallum. Please go ahead.

Richard Shannon – Craig Hallum Capital Group

Hey, guys. A few questions. I guess, Camillo, I want to follow up on a response you had in one of the recently asked questions regarding MHL being integrated into the SOC. Is there any timeframe that you expect that to happen? I mean, could this be something that happens before the end of 2013, or do you think it's farther than that.

Camillo Martino

I think it's going to depend on the segment, whether it's a TV, or whether it's a mobile phone. So the MHL specification is still advancing. We would expect that there would be some integrated TV solutions possibly in 2013, which is a good thing. That's actually a positive to drive the overall ecosystem.

Our estimate at this point in time for a mobile phone is more closer to 2014 at this point in time, which is also very positive. That's a good thing. And as this happens, remember the standard is further advancing in real time, so that as long as that standard continues to evolve at a regular clip, and a regular clip is defined as every one to two years, I think you are going to see this business model continue to thrive.

Richard Shannon - Craig Hallum Capital Group

Okay. Appreciate those thoughts, Camillo. Second one, also in MHL, it's been surprising–at least to me–to see the lack of competition for MHL products. You mentioned earlier success your expecting in China starting in the second half and going into next year. Should we expect, and do you expect, to see any material competitors for MHL transmitters emerging, especially with Chinese companies?

Camillo Martino

Look, I think at some point in time you have to expect competition is going to jump in. Again, that's another endorsement of the success of the standard, so that's actually a positive. So, I think some time next year there is a possibility that there will be a couple of competitors entering this market.

Remember that number of applications though, there are many applications. We are talking about phone and TV. There's a monitor application; there's a cable adaptor application; there's a camera application. There's a bunch of different applications, so really we're talking about at some point in time a multibillion unit TAM per year. So this is not just a phone TAM only. This is a very significant TAM, and you'd have to expect, as with HDMI after a number of years, as the standard becomes successful, you have to expect other companies to join the party.

At this point in time, it's still small. It's not a big number that we anticipate. But in the coming years to come, we do expect that there will be more competition. At the same time, we as I mentioned earlier, we are one of five companies who are working together aggressively to make sure that the standard is being actively addressed and actively advanced. That's the key point of the business model. The key point is the standard every year or two has to be refreshed, and you're going to see this business continue to thrive at a good clip.

Richard Shannon - Craig Hallum Capital Group

Okay. One or two other quick questions from me. Just kind of looking out beyond this year in terms of your OpEx. You've kind of given us thoughts that you remain consistent here for the second half. How should we think about OpEx into next year in terms of head count or other R&D projects? Any kind of relative growth that we can think about there? Should we expect you to be sort of flattish? Any thoughts you can convey would be great.

Noland Granberry

Hey, Richard. This is Noland. At this point, it's probably a little early to talk a lot about what we look for as far as the OpEx run rate. We have, as I mentioned earlier, continued to keep our focus on managing the spend. We will continue to do that. We do anticipate that there be some activity associated with wireless as that begins to take off, but it's a little early to provide any particular color around that at this point.

Richard Shannon - Craig Hallum Capital Group

Okay. That's fair enough. Thanks once again, guys. Appreciate it.

Operator

Thank you and our next question comes from the line of Scott Searle with Merriman Capital. Please go ahead.

Scott Searle - Merriman Capital

Hey. Good afternoon. Nice quarter, guys. Just a couple of quick follow-ups. Noland, did you provide an exact number of shares in terms of the buyback?

Noland Granberry

There is about 1.2 million is what I highlighted in my prepared remarks. Yes.

Scott Searle - Merriman Capital

Okay. And then, just to follow up in terms of some of the MHL mix and composition, could you provide a little bit of granularity, just in terms of Samsung, maybe China, and non-mobile, or more specifically the adaptor or a [catrade] on that front?

Camillo Martino

I think that's probably a little bit too granular at this point in time. I think by next quarter towards the latter part of this year, we'll have a lot more granularity that we can probably share, but not at this point.

Scott Searle - Merriman Capital

Well, maybe to probe just a little bit deeper, is China greater than 10% of the mix right now, or is that still coming in the future?

Camillo Martino

I think it's probably approaching the double digit. I don't have the number right here in front of me. I think it's approaching double digit. I don't think it's crossed that barrier at this point in time. So, but number of design wins is very significant. That's why we mentioned it. In at least the previous two quarters, we talked about how the second half we're going to start to see China a more material impact to that revenue flow, as well as next year, even more materially. So, based on the design win activity, we feel pretty confident about the growth in China over time.

Scott Searle - Merriman Capital

And then, maybe to follow up on, I believe it was Tom's question, in regard to Windows Phone 8. It sounds like you certainly moved the ball forward with that camp, and that you are more optimistic that it's going to happen. It's more a question of timing it sounds like, you know, when versus if. Is that correct, and should we without a doubt then expect to see Windows Phone 8 models shipping next year that support MHL at some point?

Camillo Martino

I don't think we want to make any forward-looking statements like that. I think as with any partner, we're working diligently with all the various OS companies out there. We've had a lot of success with Android, a tremendous amount of success. And so, what I said earlier was we're working with Microsoft, and we would expect that over time that they would support MHL. But I don't think we want to make any forward-looking statements about their product launch plans at this point.

Scott Searle - Merriman Capital

Okay. Great. Hey, guys, thanks so much. Nice quarter.

Noland Granberry

Thank you.

Operator

Thank you and I'm showing no further questions. I'd like to turn the call back to Camillo Martino for any closing remarks.

Camillo Martino

Thank you. So before signing off I wanted to mention that Noland and Mike will be at the BWS Conference in New York in August, and we also expect to visit a number of shareholders in this quarter. Thank you all again for attending this call. We appreciate your continued to support and look forward to speaking with you again next quarter. Thank you.

Operator

Ladies and gentlemen, this concludes the Silicon Image's Second Quarter Financial Results Conference Call. This conference will be available for replay after 4:00 p.m. Pacific Standard Time today through August 14th at midnight. You may access the replay system at any time by dialing 1-303-590-3030 or 1-800-406-7325 with the access code of 4552593. This concludes our conference for today. Thank you for your participation. You may now disconnect.

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