Pixelworks Inc (PXLW) 2002 Q2 法說會逐字稿

Please stand by for commencement of the Pixelworks earnings conference call.

Good day, everyone, welcome to the Pixelworks Incorporated 2nd quarter earnings release conference call.

Today's call is being recorded.

For opening remarks and introductions, I will now turn the call over to the Chief Financial Officer, Mr. Jeff Bouchard.

Go ahead, sir.

Hello, and thanks for joining us.

With me today is Allen Alley, President, CEO and Chairman.

The press release we issued today includes an outlook section containing forward-looking statements about our business.

Additionally, on the conference call, we are going to be commenting on our business outlook and making forward-looking statements based on our current expectations.

Words such as expects, anticipates, intends, plans, believes, seeks, estimates and variations of such words are intended to identify such forward-looking statements.

All of our forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially.

Please refer to today's press release for a description of factors that could cause actual results to differ materially from those forecast.

The forward-looking statements we make today speak as of today.

We do not undertake an obligation to update any such statements to reflect events or circumstances occurring after today.

I will now turn the call over to Allen.

Thank you, Jeff.

First let me say that I'm very pleased with the second quarter financial results.

We delivered solid performance, even as the broad technology markets have continued to be soft.

This is reflected in our results.

Revenue and bookings hit record levels.

Our book-to-bill exceeded one for the second straight quarter.

Q2 backlog was up over 20% compared to the 1st quarter.

Overall unit shipments, in total, were up more than 25% sequentially to more than $1.3 million and unit shipments in each of our markets; projector, LCD monitor, and advanced television were each at all-time highs.

And net income, both on a GAAP and proforma basis, was up over the 1st quarter and in line with our business outlook we provided in April.

I will now spend a few minutes giving you an update on the business before turning the call over to Jeff to review 2nd quarter financial results in a little greater detail.

The projector market continues to be the largest revenue and margin generator for us. Both on a unit and dollar basis, we received record shipments of projector chips in the second quarter.

Second quarter projector chip revenue was up 9% sequentially, primarily as a result of a rebound in shipments to Japanese projector manufacturers who began replenishing the depleted March year-end inventory.

In June, we were in Las Vegas for Infocom.

By far, the largest and most significant trade show for the projector industry.

Over three days, we met with the world's leading projection companies. We demonstrated new IC's, designed for every segment of the projection market, from aggressively priced IC's, providing basic functionality for a new generation of sub-$1,000 projectors, to high performance chip sets for network projectors for the corporate market, and video-processing IC's for the emerging home theater market.

The second quarter, because of Infocom, is the peak season for new projector model introductions.

In the second quarter, the top 14 companies who in aggregate account for more than 90% of the market, introduced projectors powered by Pixelworks.

This number does not include HP and Dell, who also entered the market in the second quarter with products powered by Pixelworks.

Our record Q2 orders and subsequent strong backlog position are encouraging, but are also influenced by post Infocom optimism, where all the new products introduced by our customers are forecast to be huge winners.

Realistically, not all of these products will be as successful as forecast, which can lead to lower orders in subsequent quarters.

So, we try to appropriately temper our outlook based on our experience and historical patterns.

Looking at the entire year, we expect unit growth for the projector industry to be 5 to 15% and we expect our growth may exceed that a bit due to modest gains in market share.

While difficult to precisely measure, we believe we have saturated our market share opportunity in this segment and will continue to grow at rates that roughly reflect the rate of growth in the projector industry in general.

Beyond 2002, most industry analysts expect the projector industry to grow units at approximately 25% per year.

This growth is based on the introduction of sub-$1,000 projectors, the emergence of large PC companies such as Dell and HP entering the market, an increase in the use of projectors for home theater applications, and an improved economic environment.

We believe we're well positioned to maintain our industry leading market share position.

Turning to our LCD monitor business, we had record unit shipments in the second quarter with a sequential increase over Q1 of 26% and year-over-year increase of 59%.

The quarterly gain was almost entirely based in increased shipments of our smart panel products.

Our monitor performance was especially good considering the unusual dynamics of the monitor market in the second quarter.

Although industry LCD monitor shipments slightly increased during the quarter, more important to us are the reports that industry wide, LCD controller shipments, based on display search estimates, actually decreased about 14% from Q1 shipments of 9 million to about 7.7 million for Q2.

We believe this abnormal disconnect between monitor units and LCD controller units is due to the inventory build-up of controllers as customers bought product during Q1 in anticipation of a ramp in LCD supply.

It now appears that this ramp may have pushed out into Q4.

The net result is with our shipments going up, and the industry shipments going down, we estimate that we picked up several points of market share in terms of both units and dollars for the second quarter.

Speaking of dollars, revenue from our LDC monitor business represented approximately 25% of total company revenue and was flat with the first quarter as unit growth was offset by declines in average selling prices.

Due to a mix shift to lower ASP parts as well as competitive pressures, our aggregate LCD monitor chip, ASP, declined approximately 20% sequentially.

This was a little steeper than we anticipated and was driven by aggressive pricing in the SG&A segment.

During the quarter, we attended the Computex show in Taiwan.

We used Computex to publicly introduce our new PW-130 family of single chip fully integrated image processor IC's designed for the rapidly growing smart panel and mainstream monitor markets.

The PW-130 family of image processors is designed to be the world's first chips to deliver pin compatibility and software compatibility for traditional monitors and smart panels from XGA all the way to UXGA.

The PW-130 family of single chip image processor IC's combines Pixelworks award-winning image processing technology with analog devices world-leading flat pannel interface technology to deliver a complete low-cost monitor solution on a 0.18 micron process.

Pixelworks PW-130 family is also designed to reduce LCD monitor cost by reducing the total cost of electronics and by stream lining LCD monitor development and manufacturing.

By integrating a unique, programmable T-CON, or timing control, which supports either TTL or RSDS, that's reduced swing differential signal interfaced technology.

Manufacturers can build and monitor faster with fewer parts, resulting in lower costs.

We have begun limited production shipments of PW-130 family products to lead customers.

Now, let me give you an update on the evolution of our monitor's strategy.

In January of this year, we outlined a plan where we set a goal of 33% market share in monitors.

While this is still our goal, we have adapted our strategy to better position us in a rapidly changing market.

As I mentioned earlier, recent pricing in the XGA segment and in particular, the analog-only XGA segment is very aggressive with chip prices reaching $5 and projected to continue to fall.

We believe that many of our competitors are losing money in an effort to maintain market share.

It's difficult to envision that this is a sustainable long-term strategy, particularly for small companies with limited capital.

Rather than focusing on growing market share at any cost, we are focusing on growing market share profitably by allocating our resources to the most profitable and technologically defensible segments of the business.

We've developed a twofold strategy for the monitor business.

First, we will continue to participate in and plan to grow our share in the XGA market by offering the largest full-line monitor company a complete suite of pin-compatible software-compatible products.

This line of products rewards those largest customers with cost-effective solutions based on a single architecture that can be quickly brought to market and easily supported.

Secondly, we'll focus our market development efforts on smart panels, duel interfaced monitors and higher resolution SXGA and UXGA monitors.

This is where we believe the market is going.

It is also where our technological advantages, including our strong, working relationship with analog devices, gives us what we believe will be a sustainable, competitive advantage that will translate into profitable market share.

Pixelworks was one of the pioneers of the smart panel business model.

Pixelworks' spart panel shipments Q2 accounted for more than 40% of our total monitor unit sales.

This is up from about 25% in the 1st quarter and up from only 5% one year ago.

This growth is especially compelling when taking into account that our total monitor shipments year-over-year grew almost 60%.

Our focus on smart panels represents the market changing that we are making at the high-volume end of the market that we believe will let us profitably serve that end of the market.

The central issue in high-volume end of the market is price.

We believe smart panel production is the lowest cost-way to make monitors, but it does represent a change in the historical practice and people take time to change.

This is reflected by the forecast from display search for smart panel, only growing from 8% of the market today to just 13% of the market over the next year.

We're making a bet on smart panel.

If we're wrong and the market does not change, we bet wrong and that's a risk.

If we're right, we just may change the way the world makes monitors.

The duel analog and digital interface market is another segment where our technology strength and our partnership with analog devices should give us a competitive advantage.

The digital DVI interface is not trivial to implement and provides a barrier to entry for new competition.

According to display search this segment will continue to represent about 20% of the overall monitor market.

Finally, the most significant trend for Pixelworks in the monitor segment is the shift from XGA to SXGA and UXGA as the generation 5 and generation 6 LCD fab's come on-line.

This shift plays to our technology performance and quality strengths and will help us achieve our market share goals.

In fact, display search now forecasts that SXGA and UXGA resolutions will grow from 28% of the market in Q2 of 2002 to more than 50% of the market as early as by Q3 of next year.

We are well positioned as the market moves to our strengths over the next few years.

The LCD monitor segment in general is extremely competitive, and the XGA segment in particular has been characterized by falling ASP's and margins.

We believe that what is a high-end segment today will be subject to the same pricing trends and pressures in the future.

Any market with these characteristics places a high premium on operational excellence and control.

We believe we are demonstrating the operational capability to thrive in these markets, but it is extremely difficult to accurately predict how aggressive these trends will be or how successful we will be in keeping pace or in growing market share.

We believe that by executing our duel path strategy of providing a suite of pin-compatible and software compatible products from XGA to UXGA and by leading our industry in the most demanding segments of SXGA, UXGA, duel interface and smart panel, we can achieve our 33% market share objective.

Now let's turn to the advanced television market.

This market is comprised of progressive scan or digital CRT's, plasma displays, LCD TV's and high performance rear projection TV's, all of which are expected to grow rapidly in the coming years.

We continue to see strong growth in sales of our image processor IC's, and video processing IC's.

In the second quarter, revenue was up nearly 50% sequentially and over 350% year-over-year.

As a percentage of total company revenue, this piece of our business has gone from about 5% of our revenue, only a few quarters ago, to approximately 17% of our sales in the second quarter.

We experienced very solid growth in all segments of the advanced TV business.

Plasma displays experienced the largest sequential growth rate in the second quarter at just over 130%, followed by LDC TV's and progressive scan CRT's at 75% and 42% respectively.

The progressive scan CRT business was the largest portion of our advanced TV revenues in the second quarter, representing over half of the advanced TV business.

With LCD TV's and Plasma displays each representing approximately 20 to 25%.

And rear-projection TV's representing approximately 25%.

One of the more significant developments of the quarter was that in June we announced the first LCD televisions to join Sony's premium flat screen [INAUDIBLE] brand, are powered by Pixelworks.

These two Japanese models include a 17-inch WXGA resolution, LCD, and a 15-inch XGA resolution, LCD TV.

We're optimistic about the prospects for growth in this market, in the coming years as sixth generation LCD fab's come on-line.

According to an April report in Digit Times, it's anticipate that these fab's will be able to produce 30-inch LCD's at a cost of approximately $15 to $20 per inch or $450 to $600 for a 30-inch LCD.

At that cost., it's possible to envision seeing 30-inch LCD TV's approaching retail price points of $1,000.

Our partner, Jaldi semiconductor, continued to make excellent progress in the development of their reconfigureable system on a chip video DSP.

They participated in our private customer demonstrations at Computex and at Infocom.

The customer response has been very positive.

The features of the Jaldi chip are very compelling for high-end video applications including rear-projection television and Plasma TV.

Based on these results in May, we exercised our option to acquire Jaldi we except the transaction to close in the third quarter.

At the C.E.F. show in January, we introduced the PWM-1000, that embodies our jolt technology. With its' innovative user interface and ability to connect to the web, the PWM-1000 is creating a new standard for the next generation of high-end advanced televisions.

We have shipped Jolt hardware and software development platforms to our lead customers who represent leading consumer electronics companies from around the globe.

Given the overall market conditions, the rollout of the PWM-1000 and our Jolt technology has been somewhat slower than we originally anticipated.

We have focused our resources on some very solid lead customers and are working with them to develop a new generation of front projectors, multi-media monitors and advanced TV's with the intelligent connectivity and windowing features enabled by our Jolt technology.

We expect to have them in production with Jolt enabled products in late Q1 or early Q2 of next year.

Overall, we're convinced that the advanced television market is destined to be larger than the LCD monitor market.

With a number of new products designed to power your next TV, we believe we're well positioned to be a leader in this exciting market.

I will now turn the call over to Jeff for a review of the financials.

Thanks, Allen.

Overall it was a good, solid quarter for us, with top line growth that resulted in record revenue and proforma EPS that improved by a penny over the first quarter.

Proforma net income in the second quarter, which excluded non-cash expenses totaling $300,700, was $1.7 million or 4 cents per share.

Including these non-cash charges, net income in the quarter according to generally accepted accounting principals was $1.4 million or 3 cents per share.

Please refer to the financial statements and notes in the earnings release for reconciliation of the differences between proforma net income and net income according to GAAP.

Record revenue of $24.6 million increased 12% sequentially and 8% year-over-year.

We are particularly pleased that we had record units shipments in all of our three-end markets; projectors, LCD monitors and advanced TV's.

The strongest growth occurred in advanced televisions which increased to 17% of total revenue in the second quarter.

Projector business remained the number one revenue generator at 56% of total revenue followed by LCD monitors at 25%.

We also had 2% of revenue from other applications.

As we moved forward, we expect our revenue mix to continue to become more balanced with growth in LCD monitor and advanced TV business expected to outpace growth and projector business.

Looking at our customer concentration, our top 10 end customers represented approximately 65% of revenue in the second quarter, down slightly from 68% in the first quarter.

There weren't any customers representing 10% or more of revenue in the second quarter.

Gross profit margin in the second quarter of 50.2% was in line with our outlook of 49 to 51 %.

Gross profit margin declined roughly 2 percentage points from the first quarter, primarily as a result of a decline in projector chip margins, which was anticipated.

Operating expenses, excluding $175,000 in non-cash expenses for the amortization of deferred stock compensation, were $11.1 million in the second quarter.

This, again was in line with our April business outlook of 10.8 to $11.2 million.

Combined, R&D and SG&A expenses increased approximately $500,000, from $10.6 million in the first quarter.

R&D expense decreased $177,000 while SG&A expenses increased $651,000.

R&D expenses decreased due to less [INAUDIBLE] in development expenses, while SG&A expenses increased primarily as a result of higher outside services, recruiting, commissions and rent expenses.

Other income of $594,000 in the second quarter declined $49,000 from the first quarter, due to slightly lower average cash balances and a lower average yield on invested cash.

Income before taxes in the second quarter was $1.7 million or 6.9% of revenue.

This improved from a loss before taxes of $3.8 million in the first quarter and loss before taxes of $3.4 million in the second quarter of 2001.

Proforma income before taxes in the second quarter, which excludes certain non-cash expenses noted in the press release, was $2 million or 8.1% of revenue.

This was up from proforma income before taxes of $1.6 million in the first quarter and down from $3.5 million in the second quarter of 2001.

The tax provision in the second quarter was 327,000 or approximately 16% of proforma income before taxes.

We're currently estimating the tax rate for the remaining quarters of 2002 will be approximately 20% of proforma income before taxes.

We expect in 2003 our rate will be approximately 35% of proforma income before taxes.

Net income in the second quarter was $1.4 million or 3 cents per share.

This improved from a net loss of $3.9 million or 9 cents per share in the first quarter and net loss of $3.4 million or 8 cents per share in the second quarter of 2001.

Proforma net income in the second quarter, which excludes certain non-cash expenses noted in the press release was $1.7 million or 4 cents per share.

This was up from proforma net income of $1.4 million or 3 cents per share in the first quarter and down from $3.5 million or 8 cents per share in the second quarter of 2001.

I'll now quickly cover the balance sheet highlights.

Cash and marketable securities of $96.2 million decreased $4.3 million from $100.5 million in the first quarter.

The primary uses of cash were $1.6 million, used in operating activities and $2.7 million used for long-term asset purchases.

Year to date, cash and marketable securities declined by $5.1 million with approximately 400,000 provided by operating activities and 400,000 by financing activities, being more than offset by $4.4 million used for long-term asset purchases and $1.5 million used in the acquisition of NDSP.

Year-over-year, cash and marketable securities was up approximately $600,000.

Accounts receivable of $8.2 million, increased approximately $700,000 or 9% from $7.5 million in the first quarter.

The increase in AR was due to second quarter revenue increasing 12%.

DSO of 30 days decreased from 31 days in the first quarter.

Inventories of $5.1 million decreased from 7.8 million in the first quarter.

Inventory turns of 7.6 turns improved from 7 turns in the first quarter.

That concludes a review of our financial results.

Let me quickly touch on some of the major elements of our business outlook.

Looking forward, we believe revenue will increase to 25.5 to $27.5 million in the third quarter, followed by a 10 to 20% sequential growth in the fourth quarter.

This represents about a 15% reduction for the year compared to our April business outlook, which is due primarily to the following factors.

First, LCD monitor chip ASP's are falling faster than anticipated.

Smart panel LCD monitor growth is less than anticipated due to a slower ramp of LCD panels and slower adoption of the new business model, and poor economic conditions have continued for longer than expected.

This has an effect on all of our end markets.

Taking a closer look at Q3, we currently have a little more than 80% of the mid-point of the outlook's revenue range either already shipped or in backlog scheduled for Q3 shipment.

This is a little better than where we were at this point in the second quarter.

We have the most visibility on projector and advanced TV business in leased LCD monitors.

Growth in the LCD monitor business is dependent on the successful introduction and ramp-up of our new PW-130 family of products, which to date has only been manufactured in limited volumes.

Growth is also dependent on a modest increase in the supply of LCD panels in the third quarter and the assumption that demand for LCD monitors doesn't soften.

We're also assuming we'll see a 25% or so sequential increase in LCD panel supply in the fourth quarter, which is dependent on a successful ramp of new [GEN] 5 LCD fab's.

We anticipate gross profit margins will come down from 50% in the second quarter to 46 to 48% in the third quarter, and 45 to 47% in the fourth quarter.

The decreases are expected due to modest gross profit and [INAUDIBLE] and projector advanced TV business, plus the assumption of a greater percentage of LCD monitor business, which is lower margin business.

Combined R&D and SG&A expense are expected to increase to $11.5 to $12 million in the third quarter, and $12.5 to $13 million in the fourth quarter.

Most of the expense increase in the third and fourth quarters is related to higher head count, primarily in the R&D area, as well as product development and NRE expenses related to new products in development.

The R&D and SG&A expense forecast contemplates the acquisition of Jaldi semiconductor in the August/September time frame.

At this time, we can't reasonably estimate the magnitude of other potentially large non-cash expenses related to the Jaldi acquisition, including, but not limited to, a one-time in process R&D expense or ongoing expenses for the amortization of deferred stock compensation.

For information on all elements of our business outlook, please refer to the press release issued earlier today, announcing our second quarter financial results, which also contained a business outlook section.

The press release is available on our website at www.pixelworks.com.

I will now turn it back to Allen for closing comments.

Thank you, Jeff.

Pixelworks has thrived in one of the most difficult technology markets ever.

I believe great companies are built in difficult markets and through difficult times.

We are focused on building a great company.

We've turned in another very solid quarter and are continuing to deliver our new product lineup that we began releasing earlier this year for projectors, monitors and advanced television.

There's no doubt that our markets are very competitive and our ultimate long-term success is still unknown, but our vision is clear.

We see a world where flat panel displays replace the CRT.

Those displays require image processing IC's and we intend to be the leading provider of those chips.

We'll now we open the call for questions.

Thank you, today's question and answer session will be conducted electronically.

If you would like to ask a question, please do so by pressing the star followed by the digit 1 on your touch-tone phone.

Again, that's star 1 to ask a question.

We'll proceed in the order you signal us and take as many questions as time permits.

Our first question today comes form Brian Alger of Pacific Growth Equites

Hi, guys, good afternoon.

Hi.

Couple of quick things just on a bookkeeping stance.

Jeff, the 132,000 that you guys said was in the amortization of developed technology in the press release.

Right.

Where does it reside in the GAAP?

That's within cost of sales.

So we should take that out of C.O.G.S., is what you're saying?

Yes.

Okay.

It is noted in a footnote below the income statement, as to the amount.

Right, right.

Is that something we should expect going forward on an amortization basis?

Yes, that's being amortized over seven years, so, you should expect $132,000 each quarter for quite a while.

Okay.

Okay.

And I noticed that we brought down the deferred stock comp in the model as well.

Is that something we should expect going forward, that sort of level or is that tied to the stock price?

Yeah, I'm outlooking a new lower level at about 625,000 per quarter for the remainder of this year and then the amortization of deferred stock comp is done on an accelerated basis.

So it declines each year, but I haven't outlooked a number beyond this year, but you would expect it would decline from those levels.

Okay.

And the 35% tax rate for next year, that's new to me, at least.

Why do you think you will see a higher tax rate?

That hasn't changed from the last few quarters.

It's the same guidance we've given for the last couple of quarters.

We have not actually provided an outlook for 2003, but that's the one data point that I have handed out.

And that's just because we will, at that point in time, have run out of net operating losses to apply against profits and we're really going to be more fully taxed at that point.

Okay.

You mentioned something interesting with regards to the 130 series.

You said you shipped it in production, volumes to limited people.

Is this basically like sample quantities from production runs?

Or are all of the model numbers running through in production today?

Brian, this is Allen.

It's [LOSS OF AUDIO ] small quantities of what we call production parts to some of the lead customers.

It doesn't necessarily imply that we've shipped all of the different permutations of the 130 in full production quantities to multiple customers.

So, some small quantities of what we call production units to lead customers.

It is the beginning of the ramp.

Okay.

Fine.

And then finally, Jeff, you mentioned that the guide down or the reduction from previous guidance was attributable to a number of things.

None of which had to do with projectors.

Do you expect you're going to be able to maintain your greater than 90% market share? And do you expect ASP's to remain where they are today?

In terms of our market share position through the remainder of this year, we think we're in pretty good shape there.

And we haven't really specifically quoted that we're at 90% market share, but clearly we have a very significant market share position in that market.

We do expect to continue to see some ASP erosion in the projector chip ASP's through the remainder of the year.

We don't expect that we will see the type of erosion that we're seeing in the monitor business, for example.

But we do anticipate, you know, some single digit ASP erosion each quarter.

Okay.

And do you have any sense as to what kind of market share gains you have made in the projector space?

It seems like your unit volumes to date and the projectors is well above the market rate of growth to date in the projector market?

Don't probably have any numbers for you there.

One of the challenges has been, I think for the industry analysts that follow the projector industry is just to get their arms around the size of the projector market and, you know, we have a pretty good idea of that because we supply, you know, most of the projector manufacturers with our product.

But in terms of specific market share, quantifying the market share gains for you, we really wouldn't be in a position to do that.

We do believe we picked up additional share, you know,the first half of this year.

And at the same time, feel that we've probably pretty much exhausted our opportunities there to pick up any additional share.

Okay.

And then one last question with regard to the LCD market, 20% ASP decline in a single quarter is obviously a bit rougher than what we had hoped for at the beginning of the year.

What are you guys looking at with Q3 and Q4 and continued pressures in the market and certainly your focus in the XSGA market maybe isn't as competitive as the low-end XGA, but what do you guys think you're you facing?

It's definitely been more aggressive than we had originally anticipated and best estimates would be to see erosion sequentially in the teens.

High teens or mid teens?

That's hard to say, you know, I think it could range from the low to the high teens.

And Jeff, is that our ASP or market ASP?

Our ASP.

Okay, thank guys.

And part of what we're seeing with our ASP erosion is lower prices for the chips, but also a big mix shift for us as we go from, you know, supplying, UXGA and SXGA chips that do frame rate conversion with internal memory to mainstream smart pannel chips with T-cons going on the back of panels.

So, the ASP difference is quite significant and a mixed change drives our ASP's down pretty quickly.

Got it.

Thanks, guys.

You bet.

Moving forward, we will hear from Noel Atkinson of Emerging Growth Equites.

Guys, congratulations on a nice quarter.

Thank you, Noel.

I wondered if you could talk about, have you had design wins in the flat panel monitor that you expect to ramp in Q3?

You know, we have not announced anything in particular.

We did say that we shipped some production 130's to customers, so, I guess you could infer from that that we probably have some design wins for those products.

The growth primarily in the monitor business was from just ramping of our existing smart panel customers in Q2.

So, you can't really infer anything from that, but other than those data points, we haven't really come out and said, you know, this is where the design wins are, this is where we have them, but obviously if you look at the 130's in particular there must have been something going on there.

Okay.

Do you see that the ramp in the PW-130 is dependent upon, you know, the ramp in the 5G for example?

Samsung sounds like they're going to ramp their 5G into fourth quarter, which seems a little later than previously expected.

Yeah, I think we're all anticipating the ramp in 5G.

Right now, I think Display Search is talking about something 25+ percent increase in LCD panel supply in Q4 over Q3.

And that, you know, that should raise all the boats, a rising tide raising all the boats.

So, we're all looking forward to that and what we, in particular, are looking forward to is the move to 5G means more of the larger panels, XSGA and UXGA and we think that fits with our strategy extremely well.

Okay.

Are you guys seeing any problems in obtaining capacity or seeing your lead times lengthening at the foundries or see even a wafer for prices rising?

I would say that our foundries have been extremely cooperative and very, very supportive and I've said this before in the calls; that the foundries see our market as a market where its incremental new silicone going into the new devices.

It is not just a market that's a certain amount of silicone and we're taking share from each other.

This is brand new silicone.

I would say the foundries have been very, very amenable to us, both in terms of getting us supply and getting us wafer starts as well as pricing.

So, I think we've been in good shape from that standpoint.

Are you looking to expand beyond your existing foundries as well, to pick up like a second tier foundry to augment in case of problems?

You know, we're always looking at foundry strategies that will help optimize us going forward.

We think we have some great foundry partners now, but it's always a consideration as we go forward to look at new foundry opportunities and new geographies that might make sense for us in the future.

Okay.

Jeff, could you give us a projected share count for Q3?

I would estimate it probably increases relative to Q2 numbers, about a million shares, roughly.

And partially, a portion of that is based on the assumption of the closing of the Jaldi acquisition in kind of that August/September time frame.

So, depending on the precise date of closing, that will influence the number of shares that are increased in the quarter.

Are you looking at more acquisitions? Is that a part of your continuing strategy?

We're always looking at opportunities, you know, especially in markets like this.

There are opportunities created because good companies just can't quite get financed the way they have in the past.

We're always looking at those kinds of opportunities.

It's part of our, you know, it's part of our corporate fabric, I would say.

Okay.

Thanks very much.

Thank you.

You bet.

Just as a reminder, to ask a question, please press star 1 on your touch-tone phone.

Moving forward, we will hear from Jim Supa, Salomon Smith Barney.

Thank you.

Seeing that you have an impressive 80% backlog already set up for Q3, can you briefly touch on the mix of that, as far as digital projector and flat panels?

And are there specific geography strengths and weakness areas?

And then my last question is, with the forecast of 8%, I was curious to see that we are actually expecting it to be a little stronger with the seasonal up tick. Is there something that I am missing?

Or can you discuss that please? Thank you.

Sure, I will address the second question first.

In terms of the outlook, we've outlooked 25.5 to $27.5 million for the third quarter, which reflects a 3 to, I believe, 12% revenue growth over the second quarter, so I am not quite certain where you're getting the 8% figure from.

And then with regards to the backlog. Just typically, kind of to take you back a step here, typically the longest lead time is in the projector and advanced TV business.

And that's exactly kind of, if you looked at our backlog, how the backlog would be reflected, you'd see a greater percentage of that 80% of the mid point of the revenue range in the advanced TV and projector space, and there is obviously, LCD monitor backlog.

However, lead times for monitor orders are, you know, 2 to 6 weeks on the long end and probably more frequently in the 2 to 4 week range.

So, less backlog in monitors, more in advanced TV's and projectors.

And what about any geographic strengths?

Geographic strengths, projectors, you know, a good chunk of those are manufactured in Japan.

So, you'd expect that geographically that would be a strong area.

We also, you know, in our TV business, a fair amount of that is being done in China.

So, you'd expect there to be some relationship there.

But I would say for the most part, Japan, China would probably be a little bit heavier relative to the regions that are more focused on the LCD monitor business, which is, you know, predominantly Taiwan, Korea.

I'm making some generalizations here because those are projector regions there.

But that I think kind of gives you a sense for the flavor of the backlog.

Thank you.

You bet.

We'll now hear from Sherry Prince, D.A. Davidson and Company

Hello, regarding your change in strategy for flat panel monitors and the goal still being 33% of the market, can I assume what you're change going after the higher resolution products, that this time has gone out past '02?

Yeah, Sherry, that is true.

The shift over to a majority of the market being high resolutions doesn't occur, at least based on the display search numbers until about Q3 of next year.

And with that focus, we're going to have to ride the Generation 5 fab's to increase that share in those spaces.

We're still going after XGA business and expect that we're going to be able to increase share in the XGA business through our smart panel and also through our customers that want a complete suite of products of incompatible products.

But that's pretty accurate.

I think you have the gist of it.

Okay.

And last call we talked about a transition from your PW-112, from there to the 114 and 115.

And has that successfully happened, have customers migrated to the higher-end?

Yeah, the increase in the smart panel shipments, in fact, we said that pretty much all of our monitor increase was in the smart panel area.

Definitely is a shift from older generation 112's to newer generations 114's and 115's, including parts with the T-con and including parts with the reduced swing differential signal interface.

So, yeah, those did shift in volume production last quarter.

Okay, so those parts, when you say smart panel, I can think of that family basically versus the 130?

The 130 also has some smart panel products, certain of the 130 products include timing controllers.

The 133 and the 135 include timing controllers.

So, there is a family of 130 products that include timing controllers as well.

But what we said was we had about a 25% increase in monitor shipments, that 25% increase was mostly smart panels.

Uh-huh.

And we said that we shipped very modest quantities, although we did ship some 130's, so, you can infer from that that the increase in smart panels was from the 114's and 115's, not from the 130's, at least in Q2.

Great.

And one last question, Jeff, for the gross margin guidance going forward, I thought you said it was due to project erosion in projectors and televisions --

Well, we just expect to see, you know, very modest, but some declines in the gross margins in those two areas.

But obviously probably a more significant influence is a greater percentage of monitor business, which is the lowest margin business out of the three we have.

Okay.

So it's price erosion, then.

Yes.

Okay.

Got it.

Thank you.

You bet.

And as a find reminder, if you would like to ask a question, press star 1 on your touch-tone phone.

We will hear from [INAUDIBLE] from RBC.

Hi, good morning.

Good afternoon.

Hello.

Can you give us a sense of the competitive situation on the advanced TV side?

We've heard a lot of the Taiwanese monitor players shift focus to the TV side also, Can you give us a sense of what you are seeing in that market in terms of pricing and competitive pressures?

Yeah, there's certainly beginning to participate in that segment of the business.

One of the characteristics of that business that is a little bit different than the monitor business is when you have a liquid crystal television set, pretty much 100% of the time you are scaling or you're changing the size of the image from the input signal to what the display is.

In the monitor business, many times we're just running the monitor, what we call 1:1.

Whatever the computer is outputting is sent directly to the monitor screen.

What that means is when you're scaling, the quality of your scaling technology and the way that you do the scaling technology is much, much more important and has a bigger impact on image quality.

If you ask people the Pixelworks scaling technology is arguablly the best in the industry and has been for a very long time and continues to get better.

So, in the market, in the LCD TV market, in particular, scaling quality is something that a premium is placed on.

Cost is also important, but here, you know, kind of on-screen performance is something you look at everyday, every time you turn on an LCD TV, which is a little different than the monitor business, as well.

The other thing in the LCD TV business, you're doing video processing, which is taking the incoming video signal and de-interlacing that video signal to map it onto a progressive scan display.

That's an area that we've spent a lot of time in and also or NDSP group and the Jaldi group has spent a lot of time in.

It's not trivial to do that.

It's also an area where each of these companies has their video olympics that they put you through to test your video processing capabilities.

That's another area where we have a strength.

So, the dynamics are slightly different, although we still believe it will be ultimately very cost competitive and we're willing to participate in that and think we're well positioned to do that.

And if you can give us a sense of where you expect kind of long-term industry margins to move on the TV side versus the monitor side?

Do you want to talk about that, Jeff?

Yeah, I mean without getting too far out, I guess, certainly as we look out over the next year or so, we expect to see advanced TV margins be in excess of the margins that we see in the monitor business and that's some of the reasons that Allen described in terms of the technological hurdles that have to be overcome.

There is less competition, there is less people that are able to bring all the technologies that are necessary to compete effectively in that market.

So, it's good margin business for us today, and I don't see in the near term that, you know, margins getting anywhere close to the monitor margins.

Okay.

Great.

Thank you very much.

You bet.

Our next question comes from Jay Data.

Hi Jeff and Allen, I wanted to ask about Sony when do you expect that to go into production?

We only announce products once they are already in production.

Okay.

So, to my knowledge that product is already in production.

Yep.

You're talking about the LCD TV.

Yeah.

Yep.

Yep that's in production.

Okay.

And what kind of ramp do you think it will have?

Well the LCD TV market in general is just a small, emerging market at this point.

Last year about half a million units shipped in total going to somewhere close to 2 million units this year.

So,solid growth this year, but it is still a relatively small market and this is a few models within that industry.

So, you know, we're very glad to have this business and particularly with a customer as notable as Sony and, you know, we think that is going to position us well for the future. But any individual product isn't necessarily going to, you know, drive revenues, you know in an upward direction in an unreasonable way.

I think the data you should take away from these LCD TV design wins, especially the early ones; is that we've achieved a threshold level of quality where we've passed the video olympics, whether it is for SANYO or Sony or any of our other customers.

And in the television market, that hurdle is and was rather -- rather high, much higher than it was for our monitor, for example.

So, I think that's the real nugget here.

And then going forward as LCD TV business increases, we're well positioned to take advantage of that.

Okay.

And any idea what your market share might be in LCD TV business?

You know, no one really tracks that.

At this point we're still kind of in a transition between internally supplied electronics versus a lot of these companies moving to, you know, externally source the electronics.

So, I would say to date it is relatively small for any of those companies, like Pixelworks that are an external source for the solutions.

But we expect that that will become more prevalent as we move forward.

So, when you look at the growth in the markets, we actually think there is, you know, going to be greater growth, or greater opportunities for growth for companies like Pixelworks because of the move to outsourcing these functions.

Okay.

So at this point, external sourcing is a small portion of the market.

It is growing.

Okay.

And at this time, other than the usual competitors, who are the competitors that you're seeing that are new?

In which market?

In the I'm sorry, the advanced TV market.

Well, I think it's all, you know, your usual host of -- of companies that you've seen migrating -- the difference here is that they're migrating from two different directions.

It is people migrating from LCD monitors and those would be all the companies that we typically compete with. But then there's also companies that are strong in the CRT television business that are moving from CRT TV's into the LCD business.

And they happen to have some strengths, particularly in video processing and understanding the video world.

So, the competition is kind of coming from two sides in this light, one from the LCD monitors and one from the CRT television folks.

Okay.

And did you announce any other Japanese win other than Sony?

This past quarter?

Or in the past, in the advanced TV market?

Yeah, we've had other announcements with Japanese customers, and, for example, I can't recall the specific dates-

But I think the best bet would be to go to our website.

We will have a listing of all the press releases we've done on product announcements.

Okay.

And the last question I have, is which of our chips are you shipping right now to the advance TV market?

It's a variety of chips.

It includes image processing chips and also our video processing chips.

The video processing chips are the 12, 12-10, 12-20, 12-30 line.

And several of our image processors, everything from low end image processors to actually pretty high end image processors for some of the larger LCD TV's that include things like picture in picture function.

So, it is really a variety of products over almost our entire range.

Okay.

Thank you.

You're welcome.

We'll now take a final follow-up question from Brian Alger.

Hi, Jeff.

Coming back to the gross margins and the amortization there?

Yeah.

Should we assume that the amortized number is not included in your guidance for the go-forward periods?

No, you can assume that it is.

For example, I reference that the gross margin including the 132,000 within the cost of sales, so, I mean it's relatively insignificant.

But I'm including that $132,000 in cost of sales when giving you gross margin guidance.

Okay, so that's the difference between say 50.2 and 50.8 in the period?

Right, right.

Okay.

Thanks for clarifying that.

And then looking at a couple of competitive landscapes, in the projector market, we've seen announcements from SGM and there has been some noise from MRT in the space.

I guess from your backlog that you don't expect to be facing too much competition the remainder of this year.

Would you assume that that market is big enough to draw more competition in the coming years, especially when we move into home entertainment?

Yeah.

The way the projector market works is Infocom, which is in June, is pretty much the big introduction for I'd say a majority of the new projector products.

We're getting some, you know, sort of the CES cycle now, but traditionally it's been June.

So, once you get through June with all the new product announcements, the next year is pretty much taking care of.

There are some, like I said, there are some fall and winter announcements now sinking up with CES that occurs in January.

I guess our take on the projector business is, it's harder than it looks like from the outside is what I'd say.

These are extremely complicated systems with lots and lots of inputs and lots and lots of things that you control.

The demands in terms of quality and getting a perfect image every time no matter what you plug into it or significantly higher than they are in the monitor business.

People will bring in any old computer and plug it into a projector and expect to get an image.

So, where on the surface it may look more like a monitor with some keystone cretchin features, which also isn't trivial.

The system side of it is much, much more difficult.

We think we have a great line of products we've introduced to defend all the segments of the projector business from the low-end all the way up to the high-end and think we're in good position.

Now, if the projector business went from -- oh, I don't know, a million five units to 7 or 8 million units in the next three or four years, yeah, it could draw more competition into it.

But if you look at the forecast by the people that are forecasting the projector business in the out years, they're kind of all over the map right now.

I don't know if you've taken a look at that, but there is a huge spread on it.

I would put a question mark on it in two, three, four years from now, but, you know, short-term and over the next design cycle, we think we have the design wins and products that put us in great shape.

Looking at the market, it is dominated by the Japanese clearly and we're starting to see the new entrance from Taiwan get involved.

Do you think the change in the U.S. dollar will effect you on a pricing level is that exactly what you're pointing to with your forecast for ASP declines in that space?

We price our products in dollars and all the businesses transacted in dollars.

That hasn't -- you know, actually a few years ago it was a much bigger factor than it is now.

It seems that pretty much for key components like this, everybody's gotten used to them being priced in dollars.

The thing that is happening is the advent of $1,000 projector.

That's definitely going to happen.

The projector requires a lower cost of every component goes into it.

We think we've got some outstanding new products that offer some great capabilities for thousand-dollar projectors as well.

We think we're positioned well for that as it comes on, too.

Okay.

And then kind of getting a handle on what you guys are expecting the market landscape to be and the monitors, it's obviously been a bumpy road this year.

And your contemplating some improvements in 5G, capacity coming on in Q4, we're obviously burning through some inventory on the controller IC's, primarily Genesis and the XGA, limiting the total IC market here in this quarter. But what do you think the panel capacity and the panel build going into monitors is going to be in Q3, you know, before we get that Gen-5 up and running, what are you contemplating for the next quarter's forecast?

Yeah, I think, Brian, our expectation is that it will just very modestly increase in the third quarter.

We're not expecting any tremendous growth on panel supply in the third quarter.

I think that's consistent with what display search is forecasting as well.

And really not anticipating any significant uplift in panel supply until the fourth quarter.

Would you say there is any possibility for a decline?

And in monitor shipments?

Well, certainly I wouldn't, you know, I wouldn't want to say it is not possible.

You know, I guess our best estimate would be, again, for some modest, you know, improvement in the supply of panels and then assuming, you know, that is an ongoing assumption, that demand at the price points of the LCD monitors today is still going to be sufficient consuming the panel supply.

That's something that's obviously a little bit tricky to estimate.

But going into this, our assumption is that demand will be sufficient, you know, consumed the number of panels that are supplied in the third quarter.

Yeah, and just a comment on that, brian, I think that earlier in the year we plight have been out of sync a little bit with what display search was forecasting and over the past couple of months, I think we've -- we've resolved that and we're pretty much synced up with exactly what they're forecasting right now.

And, in fact, seem to be in lock step with them for Q3 and for Q4.

So, if we look at the display search numbers themselves, they should pretty much mirror what your internal numbers look like?

Yes.

Yes, I think those assumptions are very reasonable assumptions.

Okay, thank you.

You bet.

And at this time, there are no further questions.

Mr. Alley I will turn the call back over to you for closing remarks.

Thank you for joining us on the call today.

And we'll be looking forward to seeing you on the next call, next quarter.

Thank you.

That concludes today's conference call.

Thank you all for your participation.