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Silicon Image, Inc. (NASDAQ:SIMG)

Q3 2012 Earnings Call

October 30, 2012 5:00 pm ET

Executives

Mike Bishop - Investor Relations

Camillo Martino - Chief Executive Officer

Noland Granberry - Chief Financial Officer

Analysts

Charlie Anderson - Dougherty & Company

John Tanwanteng - CJS Securities

Richard Shannon - Craig Hallum

Raju Gill - Needham & Company

Tom Sepenzis - Northland Securities

Operator

Welcome to the Silicon Image's third quarter financial results conference call. (Operator Instructions) I would now like to turn the conference over to Mike Bishop, Investor Relations for Silicon Image.

Mike Bishop

Thank you. Good afternoon, everyone, and welcome to Silicon Image's third quarter 2012 financial results conference call. I'm Mike Bishop from Silicon Image's Investor Relations. 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 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 fourth quarter of 2012. We will then open the call for Q&A.

Silicon Image continues to report its product revenue in three categories; Consumer electronics or CE, Mobile and PC. CE revenue 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, and 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 wins, 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 the 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 future results.

We have also provided a financial metrics table and reconciliation of non-GAAP financial information to GAAP information in our third quarter 2012 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

Thank you, Mike. Good afternoon, everyone, and thank you for joining our third quarter 2012 earnings call today. First of all, our thoughts and prayers are with those impacted by Hurricane Sandy. We are very grateful to those, who could make the call today, given the very difficult circumstances.

It has been another strong quarter and we are pleased that we continue to execute and deliver on our goals. On today's call, I'll give you a brief overview of the company's performance and a business update. And then, Noland will go in through the numbers in more detail and provide our financial outlook for Q4 as well as a visibility into Q1.

We are proud of the execution this quarter, as our financial and operational metrics continue to improve, just as we demonstrated last quarter. In fact, we achieved a record number of product shipments in the quarter, more than 62 million units, beating the last quarter's record of 48 million units.

I am happy to point out that we achieved revenue of $73.9 million. Quarter-over-quarter revenue growth was 16% and year-over-year growth was a healthy 24%. Of note, our product revenue grew by 21% quarter-over-quarter. This is above our seasonal pattern and continues to highlight the increasing traction of our MHL-enabled mobile products among worldwide smartphone and tablet manufacturers.

Our non-GAAP EPS was $0.11 compared to $0.05 last quarter, and is an 83% increase from $0.06 a year ago. Our robust earnings growth, which has accelerated throughout 2012, resulted as seasonally strongest quarter. Operating expenses continue to be well controlled and coupled with the increased revenue and resulting rise in profitability, demonstrates the leverage in our financial model. Mobile continues to be the key driver of that growth, growing 88% year-over-year and 30% quarter-over-quarter.

In September, we introduced four new MHL ICs, targeted for our mobile and CE customers. The first was a new MHL 2.0 Transmitter that provides meaningful system cost reduction for our MHL smartphone customers, by integrating the latest MHL features and a 4-to-1 multimedia switch into a single IC.

We also introduced two new MHL 2.0 Bridge ICs that enable accessory manufacturers to develop adaptors that bridge MHL-enabled devices to HDMI and VGA displays. And the last of the four new MHL products we introduced was an MHL 2.0 Receiver IC, targeted for MHL-ready displays and pico projectors. As the global smartphone market expands, our mobile business driven by our MHL-enabled products continues to garner numerous key design wins and increase market penetration.

Our MHL Transmitter ICs have been designed into and are now featured in many of the latest global smartphone mobiles. We have design wins with the vast majority of android phone manufacturers. This includes models from Acer, Asus, Fujitsu, Google, HTC, Huawei, Lenevo, LG, Meizu, Apple, Handtec, Samsung, Sharp, Sony, TCL, Xiaomi and ZTE.

MHL technology now spends a wide range of products from high-end to mainstream, smartphone to tablet, and laptop accessories to pico projectors. In addition to being designed into the high-end Samsung Galaxy S3 smartphone, which is a global hit, MHL is also featured into the mid-range TCL S800 smartphone, which sells unlocked in China for around $200. MHL is a key element of the new Asus Padfone 2, an innovative smartphone, which docks into a 10-inch tablet over an MHL connector.

In addition, Korea Telecom's Spider Laptop, an accessory that features an MHL input, becomes an ultra-portable smartphone powered laptop, when connected to the Samsung Galaxy S3. And MHL-enabled pico projectors are now in the market for manufacturers, including Samsung, 3M and Aiptek, providing ultimate portability and simplicity for mobile professionals.

In our last earnings call, our stated expectation was that 120 million smartphones and tablets will ship with Silicon Image MHL-enabled chips during 2012, up from our original January estimate of 100 million. With the continued strong adoption of MHL and continued design win momentum, we now anticipate that at least 140 million Silicon Image MHL-enabled smartphones and tablets will ship in 2012.

We are seeing increased MHL technology adoption as evidence by a wide variety of MHL-enabled DTVs, AVRs and other displays available worldwide from numerous manufacturers, including Acer, Best Buy's, Insignia, LG, Philips, Samsung, Sharp, Sony and Toshiba.

Innovative multimedia devices such as the Roku's new MHL-enabled Streaming Stick provide a simple way to add smart TV functionality to MHL-enabled DTVs and displays. Because of the features and benefits MHL provides, the Roku Streaming Stick ships without a separate remote control or power supply, instead relying on the DTVs existing remote control device and power provided by the DTVs MHL port.

In addition, 3M has introduced its MHL-enabled streaming projector, which bundles the Roku Streaming Stick, therefore, providing a portable smart TV experience. Going into 2013, we are seeing good design win for our CE business and expect the number and variety of MHL-enabled DTVs, projectors and other displays to continue to grow as the MHL standard advances.

In the Home Theater segment, we are seeing good traction with MHL and our InstaPrevue Technology. InstaPrevue technology not only enables fast switching between HDMI and MHL inputs for products like AVRs and HDMI switchboxes, but it also provides a thumbnail video preview of each of the connected sources instead of having to remember whether the Blu-ray disk player is on input one, two, three or four.

At the recent CEATEC show in Japan, both MHL and InstaPrevue were featured in various HDMI home theater products by Onkyo, Sony, Denon and Sharp. The CEATEC show is known for showcasing up and coming technologies in the CE industry. And this year, 4K also known Ultra HD was broadly demonstrated. 4K or Ultra HD provides more than four times the resolution of HD video and is widely expected to replace HD over the coming years.

As part of this anticipated industry transition to Ultra HD video, we recently introduced two new video processes designed to scale SD or HD video content up to 4K resolution. These two new video processes also incorporate our high-quality, the VRS ClearView technology, which improves the quality of low resolution video streams. We expect to see new CE products incorporating these video processes in the first half of 2013.

CE remains one of our key strategic markets and is important for driving both the expansion of the MHL standard and the growth of our mobile business. We expect that their customers will continue to bring innovative products to market that showcase the features and benefits of the MHL standard as well as our unique technologies such InstaPrevue.

In addition, our relationships with global CE OEMs continue to be strong and we expect the number of industry and product developments to drive our CE business, including the anticipated release of updated MHL and HDMI specification. With this in mind, we expect that our 2013 CE business will grow over 2012.

Moving on to wireless now. We remain on track with our 60 gigahertz WirelessHD technology and product roadmap, including the launch of our new mobile WirelessHD solution. We are pleased that Sharp has introduced a WirelessHD adaptor based on a Gen 3 wireless solution. Sharp's new VR-WH1 wireless adaptor is designed to connect up to four source devices, including MHL-enabled smartphones to HD displays using wireless HD technology.

Sharp's new product joins those already available in the market from companies such as Dell Alienware, Epson, ZyXEL and DVDO. The DVDO Air WirelessHD products were showcased at the CE trade show in September, where they won two industry awards for the custom in-store market.

In August, we launched our approved module program for our Gen 3 product. Companies that participate in this program will receive a complete 60 gigahertz WirelessHD module design certification and regulatory package from Silicon Image, thus accelerating time to market.

We are pleased that already four manufacturers have joined the program, (Evercom), Askey, AzureWave and (Tusi). While we continue to see market traction with our Gen 3 product, we believe the most significant opportunity for our 60 gigahertz WirelessHD technology will be in the mobile space, 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 larger display with a power efficient, high bandwidth, ultra-low latency solution. We have taped out a low power mobile WirelessHD solution and we are on target to providing samples to our strategic mobile customers by the end of this year.

Moving on to our licensing business. Revenue from our licensing business of $11.7 million for our Q3 2012 was in line with expectations and declined by 5% over the prior quarter. In comparison with Q3 2011, our licensing revenue in Q3 2012 increased by approximately 11%. The HDMI adopter base increased by 11%, Q3 2011 to Q3 2012. The MHL adopter base increased by 158% for the corresponding quarters, Q3 2011 to Q3 2012.

Regarding our core licensing business, we continue to sign new licensing agreements with industry leaders, including those in China. In addition, we expect to continue to sign new licensing agreements across a variety of applications within the mobile and CE markets.

Before I turn the call over to Noland, I would also like to extend the invitation to our Analyst Day, which we are hosting in New York on November 13. I look forward to meeting many of you and having the opportunity to share our products and strategy with you. Noland?

Noland Granberry

Thanks, Camillo. Good afternoon. Before I review our Q3 results and performance estimates for the fourth quarter, I would like to remind you that unless otherwise indicated, gross margin, expenses and earnings related items are reported on a non-GAAP basis as described earlier by Mike. Our GAAP financial results and a reconciliation of non-GAAP measures in today's call are available on the Investor Relations page of our website, www.siliconimage.com.

As with each quarter, we have posted our metrics page to provide our quarterly comparative results. As Camillo noted, we feel very good about our financial performance for the quarter. We met or exceeded all of our financial targets for the quarter, including a record shipment for revenue of over 62 million parts.

Our revenue for the third quarter grew $73.9 million, representing a 16% increase sequentially and 24% increase year-over-year. This represents nine out of the last 10 quarters that we've grown revenue year-over-year. The strength of our performance this quarter was again driven by our mobile business and was also helped by our seasonal improvements in our CE business.

Our product revenue grew 21% sequentially in line with our expectations and consisted of 62% mobile revenue, 29% CE and 9% from our legacy PC business. More specifically, our total mobile revenue for the quarter of $38.7 million, represented 30% growth quarter-over-quarter. Growth of our mobile business was driven by our largest customer Samsung as well as increased sales to a majority of the other leading android-based smartphone and tablet OEMs.

As we expected, we have seen increasing design win traction with China-based OEM, and look for this trend to continue to be a growing market for our mobile business. Our CE business improved quarter-over-quarter by approximately 12% and was in line with our expectations. We have proved our position in the home theater segment of our CE business. Our DTV business, representing some challenges, grew in line with similar trends.

Our licensing revenue for Q3 was totaled $11.7 million, declined 5% sequentially, while growing 11% year-over-year. Our performance of our licensing business was in line with our expectations with the sequential and year-over-year fluctuations, representing the ongoing shifts and timing of royalty revenues and adapter fees as well as the lumpiness of our core licensing activities. HDMI and MHL standards continue to grow their adopter bases. We continue to look to sign new HDMI and MHL core licensing agreements across various mobile CE and certain other applications.

Our gross margin in the third quarter was 58.6% and continues to track above our long-term target of 55%. Our Q3 margins were slightly lower than the prior quarter, primarily due to the higher mix of product revenue versus licensing revenue. That said, our product margins during the quarter were at approximately 51% due to improving yields as well as the increasing leverage of our existing overhead.

Our non-GAAP operating expenses for the third quarter totaled $30.5 million and were better than our guidance of $32.5 million, and lower than our Q2 operating expenses of $31.6 million. A lower spend was the result of our continued focus on expense management as well as the timing of certain tape outs.

Stock-based compensation totaled $2 million compared to $1.7 million for Q2 2012 and $3.6 million for Q3 2011. The change in our stock-based compensation expense year-over-year reflects vesting of shares in 2011 related to our 2010 stock exchange program. All shares under this program have either vested or have been canceled.

Our non-GAAP operating profit totaled $12.8 million and represented over 17% of total revenue. As we previously noted, we expect our business to achieve results in line with our long-term operating profit model of 15% to 20%, as we continue to grow our revenue and leverage our operating expenses to improve earnings. Our non-GAAP tax rate was 30% for the quarter.

On a GAAP basis, our net income totaled $7.1 million or $0.08 per diluted share versus a net loss of $0.9 million or $0.01 per share for Q2 2012. This also compares to net income of $0.7 million or $0.01 per diluted share for Q3 2011. Our non-GAAP net income was $8.8 million or $0.11 per diluted share versus non-GAAP net income of $4.3 million or $0.05 per diluted share for the second quarter. Non-GAAP net income for Q3 2011 was $5 million or $0.06 per diluted share.

Diluted weighted average shares outstanding for Q3 2012 was 83.4 million, taking into account the repurchase of approximately 271,000 shares during the quarter. Our Q2 2012 and Q3 2011 weighted average shares outstanding were also 83.4 million. Subsequent to September 30, we acquired over 300,000 more shares.

Looking at our cash flow and balance sheet. Our operating cash flow for the quarter was $3.8 million and cash and investments as of September 30, 2012, totaled $145.3 million versus $147.4 million at June 30, 2012. The lower cash balance primarily reflects our net use of cash for the repurchase of stock, investments, building of inventory and for CapEx purposes.

Our accounts receivable at September 30, 2012, totaled $41.9 million or 51 days sales outstanding, which compares to 52 days for the prior quarter and 51 days year-over-year. This is in line with our target DSO range of approximately 50 days to 55 days. Net inventory as of September 30, 2012, was $18.5 million, which represents 6.6 turns on an annualized basis. Of somewhat higher than our expectations, we expect inventory turns in the next quarter to align with our target turns of 7. Capital expenditures were $2.7 million for Q3 2012 versus $1.8 million for Q2 2012, and $1.9 million for Q3 2011.

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

For the fourth quarter, we expect our financial performance to approximate: revenue of $64 million to $67 million, which would represent year-on-year growth in the range of 9% to 14% for the fourth quarter; gross margin 58% to 59%; GAAP operating expenses $35 million to $36 million; non-GAAP operating expenses $32 million to $33 million; operating expenses in Q4 reflect the timing of the tape outs, as previously discussed; interest income of approximately $0.5 million; share of loss from equity method investment of approximately $0.5 million; non-GAAP tax rate of approximately 30%; diluted shares outstanding of approximately $83 million. Our Q4 reflects a seasonal decline ranging from 9% to 14%, which is higher than our typical 5% to 10% range.

This trend is due impart to three factors: one, our PC business beginning to finally taper off as expected; two, our CE business being down more than we would seasonally expect as we exit the year; and three, with respect to our mobile business, we are seeing some of our customers accelerate their product transitions to new models earlier resulting in a shift in their order patterns to Q1 2013. With this shift and the new design wins, Camillo noted within our CE business, we believe our product revenues for Q1 will be flat to slightly up from the fourth quarter of this year, which is better than our typical seasonal pattern.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Charlie Anderson with Dougherty & Company.

Charlie Anderson - Dougherty & Company

You talked about how Q4 to Q1 transitions for product. I wondered, if you could talk a little bit about the licensing business there?

Noland Granberry

When you look at our Q4, we've shown in the last few years that the Q4 IP run rate is generally at the higher end. We talk about IP being 15% to 20% of total revenue. And the Q4 is typically at the higher-end, if not outside that range. But when you move into Q1, it does tend to trend down in absolute dollars. Although, you might see that the percentage still stays mid-to-high end of range. The expectation is that when you look Q4 to Q1, that you would see a decrease quarter-to-quarter.

Charlie Anderson - Dougherty & Company

And then, there was an announcement today by Google in terms of a new smartphone they've brought in, sort of a new, I guess you would say competitor to MHL, which was the slim port HDMI. I wondered, if you had any thoughts on that as a competitor as we move into 2013?

Camillo Martino

I think over the last couple of years, I think we've demonstrated that we're building a pretty strong MHL ecosystem, and that's evidenced by the number of phones and the number of TVs. We didn't really talk about explicitly on the script. But this year, although, the number of TVs with MHL is still a little bit on the lifestyle say roughly, we've seen up to 10%.

Next year we anticipate that the number of TVs with MHL could actually be one third of all shipments. Now that's either as a discrete component or as an SOC component. And following that, based on our visibility that we have in 2014, we believe the number of TVs shipped with MHL could easily exceed half of the total.

So that's really the direct answer to your question. Are there alternative standing, sure. There is absolutely alternatives standing, year have always shown this. But we are building an ecosystem and ultimately we believe that is what's going to win out at the end of the day.

Charlie Anderson - Dougherty & Company

And then sort of a related question, you mentioned upsizing the guidance on MHL for this year. Any step at MHL for next year?

Noland Granberry

Well, other than what we have said in already Q1, I think it's a little bit more than what we normally said in the past. But I think you can expect 2013 will certainly grow again over 2012. That's where we're pretty confident about, our ability to grow in retail business next year.

Operator

Your next question is from the line of John Tanwanteng with CJS Securities.

John Tanwanteng - CJS Securities

With regards to the guidance for next quarter, you gave a little bit of color on why expected to be down. Is it related to like specific customers or regions or any particular products besides, it's not MHL, right, if I'm asking?

Noland Granberry

We did note that the three factors, PC, CE and mobile, and obviously mobile is primarily driven by MHL. So seasonally we do see that's down, but as we highlighted is that there are a number of customers that are pulling in their new platforms, which we didn't see in last year, and that's caused some changes, and now we've seen their ordering patterns or are expected for their ordering patterns for this quarter.

Relative to CE, as I highlighted, that being down more than what's typically seasonal, really this has been a challenging year from CE standpoint all year. But I think Camillo really highlighted the fact that we're seeing a number of designs wins across all of the CE manufacturers. So we're expecting that there is a good turnaround as we go into next year relative to CE, and should see that stabilize or even grow some.

Camillo Martino

I think what we're saying for the last couple of quarters that we expect 2013 CE business to stabilize. And as we approach towards the other year we fairly feel more confident about that statement we've been making for last two quarters.

John Tanwanteng - CJS Securities

And then can you talk about ASP a little bit, I'm not sure if you said that before, where they're heading and which products are expected to effect in the most?

Noland Granberry

We didn't specifically call it out, but our ASPs were right around $1, on a blended basis, $0.99 to $1 which is down some from last quarter. And it's really driven by the mix of mobile. As you maybe aware that when you look at our mobile products, they are generally sub-dollar part and anything that's in the Home Theater, CE, PC space is generally above. I mean, as our mix shifts, you can see that being part of the pressure, as well as you'll see on what we'll have the ongoing pricing declines that we typically see in the markets which we play.

John Tanwanteng - CJS Securities

And then finally, can you talk a little bit more about the penetration into mainstream front. You gave us an example with the $200 handset in China. What will it take to really increase that on your part? Is that a lower cost part or is it really just being driven by demand from customers?

Camillo Martino

It really is both at the end of the day, right. It's the high-end of volume, typically the costs come down and the price come down. The prices doesn't come down by itself. So cost and price will track each other and that's why the gross margin is still pretty healthy.

I think the other thing to point at it is, we don't just have one chip, as we're trying to put out, we have a number of different chips and they serve different segments of the market. One type are for high-end featured rich sort of a phone, accessory, switch sort of a phone, and we have others which are suited and targeted for the mid-range. So we took both segments to the market.

Operator

Our next question is from the line of Richard Shannon with Craig Hallum.

Richard Shannon - Craig Hallum

I guess, my first question, maybe, I'll just follow-up similar track from last two guy here, maybe focusing on the first quarter thoughts here, product revenue is expected to be flat up. Can you give us a sense to your confidence in that, I mean, clearly, I guess it makes sense to some transitions here, but can you just relay your confidence in that? Is this coming from a small segment of your customer base? Is it purely mobile or do you expect any sort of unusual trends in CE as an example.

Camillo Martino

Well, I think as we mentioned CE, we do see lot of activity going on and we're pretty confident about the uptick in the CE starting from Q1. It's applicable over multi customers, that's not one customer, that's a lot of the Tier 1 TV manufacturers.

Richard Shannon - Craig Hallum

I guess, maybe on some more directly here, so it seems pretty clear based in your commentary that mobiles that you're expecting to be up in the first quarter. Is CE expected to be seasonally better as well or it's just purely mobile dynamic in the first quarter?

Camillo Martino

No. I think what I'd like to say specifically for Q1 is that CE will be higher than what the run rates that we've been saying in the past. That is the primary driver in Q1.

Richard Shannon - Craig Hallum

MHL into China, I guess more so on the phone side, but maybe more generally speaking if you'd like to. Can you give us a sense of how much of MHLs in the third quarter was from China and where do you expect that to go, maybe looking out into next year sometime?

Noland Granberry

You can go to our metrics page, where we highlighted the mix, but our China business has grown to over $23 million overall, and a good chunk of that growth has been around the mobile space. And we expect that to continue to grow, going forward. I mean, I think Camillo highlighted the number, the players that we have involved there, whether it's ZTE, Huawei and Xiaomi, those players are actually showing a lot of positive traction with the design wins we have in place. So we're expecting to see a lot of growth in the China market.

Richard Shannon - Craig Hallum

Care to take a guess as to what percentage of the phone business could be China OEM based next year?

Camillo Martino

I guess, it's probably little bit too early to tell you Richard, but I think one thing can say, if you look at the China portion, and look at just the China total dollar revenue, the percentage of mobile within that number is dramatically increasing. I mean to a point where next year, it could be more than 70%, 80% of the China revenue, the mobile specifically. Now, that's how dramatic it is.

Richard Shannon - Craig Hallum

Maybe two last quick questions for me, I'll jump out of line. The competition for MHL discrete Parade announced the product several backs here. What impact do you expect them to have on your share? Where in the market do you expect them to be, any thoughts on them and potentially any other entrance?

Camillo Martino

I think if you've been tracking the MHL adopter list for the last year, you'll notice that there are a number of companies that joined in the last 12 to 18 months. And I think, I don't know exactly when, but for Parade I think what you've mentioned, they were one of those companies. It's an example of one of those companies that joined some times ago.

So we would expect others to be entering the market as well. So the market is big, let's not forget that. If you look at the number of smartphones, in 2012 that number alone is in the order of likes 600 million smartphones. Next year that number is probably somewhere between 750 million to 800 million smartphones total, then you couple that with another 250 million TV's, couple that with another 100 million PC monitors, couple that with cable adaptors.

I mean, this is big market. Somehow we need to kind of just think at the magnitude of the opportunity here, and as a result there will be a number of suppliers we would expect. And in the better way, that's testimony to the fact that the MHL standard is a strong, viable and a growing standard. So we still expect to grow.

If you look at the last few years, in particular, since I've joined Silicon Image roughly on the average we've grown up roughly 20% year-on-year, if you look at the last two, three CAGR. And we would expect to do the same thing next year. And this is a rough general comment.

Noland Granberry

And then I want to clarify one thing Richard I'd say, that I talked about the China market, the $23 million as annualized run-rate where it's more like $6 million. If you look at the metrics page, more like $6 million or so for the quarter. But I had an idea that we're seeing a lot a good positive growth in that market.

Richard Shannon - Craig Hallum

I trying to think about how we're modeling your licensing revenue stream next year, and kind of thinking about the puts and takes there, HDMI versus MHL, obviously the non-Samsung customers which drive that, how should we overall think about kind of growth rate in that business? Could it accelerate above trend, maybe at or higher than high end of that 15% to 20% range you typically talk about? How should we think about that for next year?

Camillo Martino

I actually think, as you look at that, it probably will start in. We've talked about this. This is our product revenue continues to grow. We're not anticipating that the licensing revenue side will grow as quickly maybe in the 10% range. I think what you got to look at is the components. We should see more royalties received from the MHL side of things, relative to what we had this year as that market continues to grow. And we'll continue to see some growth on the side of HDMI royalties as well.

And then, obviously, the one of the swing factors is what we do from the core licensing side of things. Play into that overall number, but clearly we don't expect it to be on the same growth trajectory as our product revenue. And So I think about the 10% range is probably a reasonable product as we're thinking about that.

Operator

Our next question is from the line of Raju Gill with Needham & Company.

Raju Gill - Needham & Company

The $140 million MHL forecast that's being raised upwards, what's kind of driving that? Are you seeing increasing penetration at existing accounts? Are you seeing new handset customers come online? And just if I kind of do the math for MHL, I'm getting something closer like $125 million of revenue for 2012. Is there some sort of price erosion that you're seeing in MHL?

Camillo Martino

So I'll talk about the companies and the adoption and Noland can give you more information on the dollar aspect. But I think if you look at some of the announcements, look at some what Samsung announced just in the last week or two. I think they announced that they ship for the quarter Q3 alone, was approximately 56 million smartphones. So that is one driver in itself. And our share of that is probably to somewhere 45%, maybe a little bit north of that. So that's on dynamics.

Beyond that, our customers like LG, Huawei, HTC, ZTE they are all shipping and in quite substantial volume. Also LG, I mean, LG both in the phone side and we expect that relationship to blossom into the TV side next year as well. That is a very good customer for us. All of them are good customers. So it really is upon both dimensions, its increased penetration, I would within the existing accounts, and broadening the customer base at the same time.

And I think the last three quarters now we've said that we expect China to be a stronger contributor in the second half of 2012, while we seen that. And we expect 2013 to be even stronger. So I think that's how I would characterize that. Noland, if you had maybe more on the $125 million number.

Noland Granberry

Raj, I think you're right. We talked about this pretty openly about as volumes continue to increase. You will see some price erosion that happens. And our approach has always been that we continue to evolve the standard, bring up the new products, and that is our way of mitigating the price pressure. So that's what we're looking to do. But as you would expect, we would be seeing some pricing pressures on existing products. And we talked about this transition thing happening, that's part of to push, our strategy to sort of mitigate those price decline.

Raju Gill - Needham & Company

So we're kind of looking at just kind of around $0.90 for MHL potentially going down maybe further in 2013?

Noland Granberry

Probably, a little more, I think we talked about earlier in the year that we've gotten to sub-dollar. And so I think we're definitely seeing where that's happening. So I would look that this will be a little lower than the $0.90 range that you're highlighting.

Raju Gill - Needham & Company

As we go into 2013, you had talked about MHL representing 25% of the smartphone market, and if you ex Apple out of it, maybe it goes up to something like 35%, 40%. What's your expectation with the percentage of MHL next year on the smartphone side and tablet side?

Noland Granberry

I think at this stage, I think the safest thing we can probably say is that we expect that 25% number to increase next year. I think we definitely expected to grow. But that's probably a little bit too early to say, by how much at this point as we get through our next earnings call, end of January, beginning of February, I think we'll probably give a little more color at that time.

Raju Gill - Needham & Company

On your 60 gigahertz roadmap, any sense of the revenue contribution or when you'll start to breakeven on the investment, you know that was a dilutive acquisition? Any sense there as we look into 2013?

Noland Granberry

It wasn't a dilutive acquisition and even with that I think we're managed in Q3. This quarter just passed, we managed to achieve more than 17% operating profit. So I think that was a very good result for us. But if we look at moving forward, you can see with a number of different analyses, we've made in last six months relating our existing Gen 3 wireless solution.

We have a bunch of module manufacturers, which are building modules over in Taiwan and China. And, you saw the announcement, I think just in the last couple of weeks by Sharp as well for that. So that business, it's going to grow systematically, quarter-on-quarter.

But I think as we mentioned in my prepared remarks today, we still believe that the real opportunity exists on the mobile side. And that we're very excited about that opportunity. As we've mentioned we've taped out our new mobile chipset solution, two-chipset solution. It's on track.

We've been saying and we're going to be sampling of this at the end of this year and we're absolutely on track to do that at this point. So we're going to be unveiling this at the two big shows in Q1, both CES and Mobile World Congress. So I think so far we're pretty confident about being on track with all of the milestones that we had set out for ourselves, probably at beginning of this year and so that we expect to start seeing some revenue in the back half of 2013.

So I think it's very consistent with what we've said in the past and we're on track to still achieving that and so taking everything into consideration 2014, really should be breakout year for the wireless technology.

Raju Gill - Needham & Company

And then just last question from me on the MHL, you've mentioned there are competing standards, and new customer, new competitors that are using MHL standard. From the barriers to entry, it is an open standard. So people can get access to it. So what are the barriers to entry from competitors who are trying to use the existing standard moving in? And what are these barriers to entry for competing standards to MHL and itself, at some point it's a competing standard to MHL?

Noland Granberry

That product is more proprietary, but I think I wouldn't call it a standard right now. I would say MHL is truly, it's a standard. That's available to every adaptor that would like to signup for the standard. What are the barriers to entry, I think was one of your questions. Well, I think MHL has a number of unique advantages for both of their customers and end consumer. And that was demonstrated in the very first version of the standard MHL 1.0 that was large to over two-and-a-half years ago.

It was demonstrated with MHL 2.0 that was announced earlier this year. And we hope and we believe that the MHL Consortium might be announcing a new version of the standard sometime next year. And so as long as the innovation continues to evolve, and continuous to be deployed, and that's a responsibility for all the five, the founding members of the MHL Consortium. This has got a long way to go. I mean, the innovation will just continue to beat the competition in our opinions. So there is roadmap ahead for MHL that is many years long.

Operator

Our next question is from the line of Tom Sepenzis with Northland Securities.

Tom Sepenzis - Northland Securities

I'm just wondering in terms of the timing of the taped out, I think it's known, you mentioned it was increase in the operating expense in Q4. What should we be expecting in Q1? Let's back to a run rate based on Q3 or will that stay or should we keep out of the run-rate similar to what we're seeing in Q4?

Noland Granberry

I think while we haven't closed off to provide that Q1 the guidance, but I think, if we look at our roadmap there are few taped outs that we would anticipate in Q1 as well.

But I think if I just go back and look at what I had highlighted when we talk a last quarter I did talked about the mix Q3 and Q4. And if you look at the entire back half of this year, overall spin has been in line with what we expected and actually even a little better than what we had talked about as we have been continually focusing on managing expenses.

So we'll continue down that path, as we go on to next year, as really trying to manage the spin. But as you know, Tom, Q1 is generally our highest spin quarter because of the tape outs that I might have mentioned, but also the thing that come into place, such as the trade shows that we participate in, that Camillo mentioned, as well as the employee taxes. That's where you're taxes and what have you those type of dynamic. So things will have to be factored in as we look out to Q1.

Tom Sepenzis - Northland Securities

Just wondering how the market for accessories or table was during Q3. And what you're expecting going forward, in terms of maybe an attachment rate or what percentage of MHL firms have a cable sold, any kind of color you can give on that will be great?

Camillo Martino

I'd say that the number is still growing. It's still relatively small today, the number of cables, let's say or dongles. But the number is growing. So we're pleased about that. And we expected it to continue to grow.

If you look at the different phases of launching any new standard, right? First, you're got to deliver the value proposition. We have done that. Then you got to convince the manufacturing community to adopt and use the chip and launch the chip and we've done that, and we've really done that, very, very well. And the next phase, is as we started that already, and we're going to continue to work on that is market awareness. And as market awareness really starts to develop, you're going to see the attachment rate of dongles to phones continue to grow.

And I think the other thing to point out, that Tom, I mentioned already earlier in this call that the number of TVs with MHL is going to grow quite substantially next year. So somewhere we believe could be close to one-third of all TV ship which is quite substantial compared to where we were today.

And if you look at some of the products, the Roku and 3M have announced, both the Streaming Stick product, the pico projectors. Even the Samsung has got a pico projector as well. These are all great endorsements of the MHL. And we haven't talked about monitors in a big way today. The number of PC monitors with MHL is growing as well, quite substantially. So the overall MHL ecosystem is really growing quite well. We're very pleased. We couldn't be more happy, or frankly, than where we are at this point with just a strength of the ecosystem build out.

Tom Sepenzis - Northland Securities

And on that how the developments with the automotive market progressing, I know that if we're still a little ways out.

Noland Granberry

We'll be ways out, but we're doing very well. We're in constant dialogue with all the key automobile manufactures and manufacturing partners within the automotive ecosystem. So we're reasonably confident about the prospects in 2014 and 2015.

Tom Sepenzis - Northland Securities

One last question and I'll get back in the queue. You mentioned on the call, the two new video processors that basically, I guess up raise from standard and HD to Ultra HD, is that correct?

Noland Granberry

Yes.

Tom Sepenzis - Northland Securities

Can you talk about those and maybe the applications where those, whether these go into phones, they go into monitors, they go into TVs, where will be TVs? and maybe you should give us a little detail?

Noland Granberry

Initially you're going to see this in Blu-ray players as well as AVR receivers and also in some displays as well.

Operator

At this time I'd like to turn the call back over to Mr. Martino for closing remarks.

Camillo Martino

Thank you again for joining us today. We're pleased with our performance. And we're looking forward to seeing you in a few weeks of the Analyst Day. If for some reason, you've not received an invitation yet for the Analyst Day please contact Mike Bishop. Mike's contact details are on the earnings release. And he would be happy to provide the details. Thanks again for your participation today.

Operator

Thank you, ladies and gentlemen, that does concludes our conference for today. If you'd like to listen to a replay of today's conference, please dial 303-590-3030 or 800-406-7325 and enter the access code of 4570138. I'd like to thank you for your participation. And you may now disconnect.

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