Pixelworks Inc (PXLW) 2002 Q3 法說會逐字稿

Good day, everyone.

Thank you for holding and welcome to today's Pixelworks, Inc. third quarter release conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Chief Financial Officer, Mr. Jeff Bouchard.

Please go ahead, Jeff.

Thank you.

Good afternoon and thanks for joining us.

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

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

Additionally on this 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, forecasts, believes, estimates and variations of such words and similar expressions 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 to cause results to differ materially from those forecasts.

The forward-looking statements we make today speak as of today, and we do not undertake any obligation to update any such statements to reflect events or circumstances occuring after today.

I will now turn it over to Allen.

Thank you, Jeff.

The financial results this quarter were very strong.

Revenue, gross profit margins, and as a result of forma earnings came in at the high end of our expectations.

Record revenue of $26.9 million came in at the high end of our outlook range due to very strong projector and TV business.

Gross profit margins of 49.2% were better than expected due to a favorable product mix.

Combined R&D and SG&A expenses of $11.7 min were right in line with our outlook.

Pro forma EPS of 4 cents was at the high end of our expectations, and we generated over $4 million of cash, bringing our total cash and marketable securities to over $100 million.

Additionally, our bookings hit record levels, exceeding the $30 million mark for the first time.

The book-to-bill ratio exceeded 1 for the third straight quarter, and backlog increased 30% over Q2.

I'll now spend a few minutes giving you a brief update on our product development progress, as well as our projector, LCD monitor, and advanced TV businesses before turning it over to Jeff to review the financial results in greater detail.

In product development, we have significantly increased our capabilities in IC design development over the past year.

During the third quarter, this investment began to show significant results.

With help from our design teams in Portland, Toronto, and Campbell, we taped out five chips that addressed every one of our market segments, from LCD monitors to projectors and advanced TVs.

The product development engine that we are building will drive the technology innovation and cost reduction necessary for us to be a leader in these rapidly-expanding markets.

The projector market continued to be very strong for us, representing approximately 57% of total revenue in the third quarter.

Projector shipments hit record levels with revenue up 11% sequentially and 14% year-over-year.

Shipments to Japan projector manufacturers were particularly strong in the quarter, up 17% sequentially.

Total projector bookings in the quarter were very solid, growing 23% sequentially.

The strong projector chip bookings in Q3 resulted in a Q3 book-to-bill for the projector business that was well above 1.

We believe the strength in the projector shipments and bookings in Japan were due to an aggressive new product introduction occurring at a number of projector manufacturers following the Infocom trade show in June.

It appears that this run of new product introductions will continue well into the fourth quarter.

While we are pleased with these excellent results in our projector business, our experience tells us when whenever there is accelerated growth like this, there exists the possibility of buildup of channel inventory; however, as of the end of the quarter, inventory of our chips at our Japanese distributor actually declined quite significantly quarter-on-quarter, so that is very encouraging.

We believe end demand for projectors has been reasonably strong in Asia with some growth in the United States market as well.

We believe Europe was seasonally soft in the third quarter.

Looking ahead, we anticipate single-digit percentage revenue growth in projectors for the fourth quarter.

Beyond that, the first quarter for projectors tends to be seasonably soft as Japan ends its fiscal year.

With that said, we still agree with industry analysts that are estimating unit growth for next year at approximately 25%, driven by the introduction of lower-cost projectors and the continued emergence of PC companies such as Dell and HP in this space.

We believe we continue to be well positioned to maintain our industry-leading market share.

The LCD monitor business, which represented 18% of revenue in the quarter, is changing for us.

We are in the midst of a product transition where the majority of our monitor business will convert over the next few quarters from using our discreet products to integrated single chip products.

While we were pleased to see bookings increase to over $6 million in the quarter, revenue from shipments to LCD monitor manufacturers decreased to 4.7 million, primarily as a result of some existing LCD monitor designs that reached end-of-life sooner than anticipated.

Specifically, the decline in revenue can almost completely be attributed to a decrease in shipments of XGA and SXGA chips for use in monitors sold by Compaq as a result of the consolidation of Compaq and HP monitor product lines.

As we mentioned in our last call, we have focused the thrust of our monitor strategy on the three most technically demanding and highest group segments of the monitor business.

These are: SXGA and higher resolution monitors, where a premium is places on high-speed mixed signal analog and digital design; dual interface and multi-media monitors, including analog, digital, and/or video; finally, and most importantly ,our focus on Smart Panel, the market-changing bet we are making at the high volume end of the market that we believe will ultimately deliver the lowest-cost highest-quality monitors in the world.

We continued to shift limited production quantities of our PW-130 family to early customers.

These new chips combine Pixelworks' award winning image processing technology with Analog Devices' world leading interface technology to deliver a complete, low cost monitor solution using a cost-effective .18 micron FAB process.

Worldwide, we are actively engaged with more than 25 customers who are in various stages of chip evaluation and system design.

We have begun the production qualification process at some of the largest monitor integrators and LCD manufacturers in the world.

We are making good process with these tier-one customers, and this gives us confidence that we will ultimately be successful in the targeted segments of the monitor business.

We believe our strategy continues to be correct and is being validated by the market.

We are going after the most technically demanding, high-performance segments and that plays into the strength of Pixelworks and our partner, Analog Devices.

The feed back from our customers is that our analog interface performance is already on par with the best in the industry, and we are improving it.

But tactically, we still have some work to do.

Our DBI digital interface has proven to be acceptable for XGA and some SXGA applications, but we need to improve it to reach the industry-leading performance levels customers expect and we demand from ourselves.

Working with Analog Devices, we have identified and implemented. improvements for SXGA DBI.

Our lead customers have been working with us throughout this process and have continues to develop software and qualified their designs for manufacturing.

Since most of our customers want to use our PW-130 series chips during Q4, while the bulk of the revenue ramp for these products will be delayed into Q1 and then continue to ramp into Q2.

We expect to continue to ship limited qualities of PW-130 chips while the bulk of the ramp for these products will be delayed through Q1 and continue through Q2.

This further underscores the developing and mass producing mix signal chips with integrated ADC and DBI technology that are capable of performing at SXGA and higher resolutions is extremely challenging.

Add on top of this integrating the timing controller, or T-CON, and you have very sophisticated chips that are difficult to design and produce in volume.

We believe there will ultimately be few companies in the world that can cost effectively compete in this space, and we believe we have invested in the technology, partnerships, and customer relationships to be one of the leaders.

We've continued to make progress in our Smart Panel business where we have partnered with several of the largest LCD manufacturers in the world, including Samsung, to streamline the process for the design and manufacturing of LCD monitors.

As an industry, we've done an excellent job of cost reduction through the integration of several discreet integrative circuits into a single chip.

At this point, for baseline, data only monitors, there's little room for further obvious cost reduction opportunities afforded by simple chip integration.

It's quite clear that now the remaining cost reduction opportunities come from reducing system cost by eliminating connectors, reducing board size, eliminating passive components, and improving manufacturing efficiencies, which is what Smart Panels are all about.

We've seen a significant shift in Smart Panel design activity in the past quarter as LCD manufacturers and monitor integrators alike have recognized the cost and performance advantages of Smart Panel.

Our production-proven reduced swing differential signal, or our SDS timing controller design, has given us a technological lead in this market, especially for the technically demanding 17-inch segment.

During the quarter, we believe Pixelworks was the first company to demonstrate a fully integrated dual interface SXGA chip with RSDS [INAUDIBLE], timing controller, on multiple 17-inch panels from multiple LCD manufacturers.

This technology is critical for winning SXGA Smart Panel business for next year.

The overall LCD market trends are very dynamic.

Worldwide LCD monitor shipments were relatively flat in the first half of the year due to a shortage of LCD panels.

Now, the industry is poised for growth again as a result of the production ramp of the fifth generation LCD fabs.

Recently, LCD prices have tumbled as this fab capacity has come online.

Our latest checks of monitor street prices show that 15-inch monitors can be found for as low as $299, and some 17-inch monitors are approaching the historically magic $500 level.

As a result, we believe the industry is on track to ship 32-33 million LCD monitors in 2002, which is about twice the number shipped in 2001.

As we look forward, several fundamental industry trends are positive for us.

Transition from XGA to SXGA and higher resolution monitors continues, with SXGA and higher resolution expected to pass XGA in terms of units as early as Q3 of next year.

Duly interface monitors are holding an increasing share, and the number of LCD monitors being manufactured and that are in design using Smart Panel is increasing.

These changes favor the most technologically advanced companies, and Pixelworks is one of the leaders.

The technology bar is being raised, and while undoubtedly there will be companies that are able to make the grade, we believe there will be companies left behind.

The companies left behind are those that do not have adequate existing technology or the resources to invest in product development at the levels required to compete in the LCD monitor market.

Recently this trend has been graphicly demonstrated.

For the first time, as reported in [DigiTimes] on October 2, "Facing technical barriers in reaching volume production, " three Taiwanese companies intend to give up plans for the 15-inch LCD monitor controller IC business, and the technical barriers are higher in 17-inch and larger size LCD monitors.

Finally we also believe that our business model of having multiple products that address other display markets such as projectors and advance TVs is critical for success in the LCD monitor market.

As in many industries, a disproportionate share or a company's profit contributions comes from its higher-end products, while it ships high volumes of low-end products to reduce the cost of its entire product line.

Simply stated, the monitor market drives cost-efficiencies; the projector and TV markets drive technology innovation.

The companies that will lead this industry must have both.

Now let's turn to our third market, advanced televisions, which continues to be our fastest growing segment, growing 32% sequentially to 5.5 million.

Advanced TV revenue has grown from less than 5% of total revenue just a few quarters ago to 20% of revenue in the third quarter.

This market includes progressive scan, or digital CRT TVs, plasma displays, LCD TVs, and high-performance rear projection TVs.

We have a balanced business with more than 60% of revenue coming from progressive scan CRT business, and the remainder coming primarily from the rapidly growing plasma and LCD TV markets.

The market for advanced TV looks very good in the coming years as the world transitions to digital televisions.

According to industry analysts, there's expected to be approximately 6-7 million advanced TVs sold this year, growing to 30 million in 2005 for a compound annual growth rate over the next three years of approximately 70%.

We're seeing a strong uptick in design activity all over the world for progressive scan CRT and LCD TVs, in particular.

Based on our design win position, we think we are well positioned to take advantage of this trend.

Recognizing the strategic importance of the advanced TV market, we have a sizable portion of our resources aimed at this segment.

We've continued to develop our leading edge Jolt technology platform.

Jolt technology offers the prospect of bringing a new user interface paradigm to the television market that gives users the power of network connectivity and a windowing environment on their televisions without a PC.

During the quarter, we continued to work with our partners, Toshiba [INAUDIBLE] and QNX, on the development of our first jolt chip.

We're also looking at ways of bringing the essence of the Jolt user interface experience and connectivity to a broader range of advanced television products.

Besides internally developed technology and products, we have acquired two companies this year to augment the product line for the most demanding, high-end applications as well as cost-sensitive applications.

I would like to publicly extend a warm welcome to the new Pixelworkers that have joined us through our recently completed acquisition of the Jaldi Semiconductor.

We are fortunate to have these very talented people join the Pixelworks team.

Jaldi is making very good progress in the development of reconfigureable system-on-a-chip video DSP focused at the high end of the television market.

During the quarter, we demonstrated the first product to key lead customers and continued to refine the video processing algorhythms based on their input.

The features of the Jaldi chip are very compelling and offers unique capabilities to our advanced television customers.

We expect to continue the refinement process throughout the fourth quarter and move into production with lead customers next year.

Our design teams in China and in Campbell, California have made tremendous progress developing low-cost, high-quality products primarily for the fastest growing segments of the advanced TV market, namely LCD TVs and progressive scan CRTs.

Revenue from these products continues to contribute significantly to our success in the advanced TV segment.

We continue to believe that ultimately the advanced television market will be bigger than the monitor market.

Our portfolio of existing and new products designed to power your next TV positions us to continue to be a leader in this rapidly evolving and expanding market.

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

Thanks, Allen.

As Allen mentioned earlier, we are very pleased with the financial results in the third quarter.

We had record revenue, record bookings, record gross profit contribution, and pro forma earnings at the high-end of our outlook which also represented out tenth straight quarter of pro forma earnings since going public in May of 2000.

Pro forma net income in the third quarter, which excluded $7.1 million in non-cash expenses, was $2 million or 4 cents per diluted share.

Non-cash expenses included $6.3 million for in-process R&D expense that resulted from the acquisition in the Jaldi in the third quarter.

Including non-cash charges, the net loss in the quarter, according to generally accepted accounting principles, was $5.1 million, or 12 cents per share.

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

Record revenue $26.9 million, which was up 9% sequentially and 12% year-over-year, came in at the high-end of outlook range of $25.5-27.5 million, and a result of strong growth in projector and advanced TV business.

The strongest rate of growth was in the advanced TV business, which was up 32% sequentially, followed by projectors, which grew 11% sequentially.

Gross profit margin in the third quarter was 49.2%, which was down from 50.2% in the second quarter, but better than our outlook of 46-48% as a result of a more favorable product mix.

R&D and SG&A expenses combined were $11.7 million in the third quarter, up approximately $600,000 from $11.1 million in the second quarter.

R&D expenses of $6.5 million up $1.2 million from the second quarter as a result of higher NRE and product development expenses.

SG&A expenses of $5.2 million decreased about $600,000 from the second quarter, due primarily to lower compensation, outside services, and commission expenses.

As I mentioned earlier, we also incurred a one-time non-cash charge in the third quarter of $6.3 million for in-process R&D expense that resulted from the acquisition of the Jaldi Semiconductor.

Additionally, we had $676,000 in non-cash stock compensation expenses in the quarter, a small portion of which was related to the acquisition of Jaldi.

Other Income was $542,000 in the third quarter, which decreased from $594,000 in the second quarter due to lower than average yields on invested cash.

Pro forma income before taxes, which excludes $7.1 million in non-cash expenses, was $2.2 million or 8.2% of revenue.

This represented a 10% increase over the second quarter.

Including the $7.1 million in non-cash expenses, the loss before taxes according to GAAP was $4.9 million, or 18.3% of revenue.

This compared to income before taxes of $1.7 million, or 6.9% of revenue in the second quarter.

The tax provision in the third quarter was $229,000 or 10.4% of pro forma income before taxes, which brought the yea- to-date rate to 12.3%.

The tax rate for the fourth quarter is expected to be between 10-15% of pro forma income before taxes.

The net loss in the third quarter was $5.1 million, or 12 cents per share.

This compared to net income of $1.4 million, or 3 cents per share in the second quarter and a net loss of $3 million, or 7 cents per share in the third quarter of 2001.

Excluding $7.1 million of non-cash expenses, pro forma net income in the third quarter was $2 million, or 4 cents per share.

Pro forma net income was up 18% sequentially, while pro forma EPS of 4 cents was unchanged from the second quarter.

I'll now quickly review some of the major items on the balance sheet.

Cash and marketable securities of $100.6 million increased $4.4 million from $96.2 million in the second quarter with $3.1 million of the increase in cash generated from operations.

Accounts receivable of $9.9 million increased $1.7 million from $8.2 million in the second quarter.

DSO of 33 days was up slightly from 30 days in the second quarter.

The increase in AR and DSO was primarily related to the increase in revenue in the quarter and an increase in the percentage of advance TV business in China, which carries longer payment terms.

Inventories of $4 million decreased from $5.1 million in the second quarter, which resulted in inventory turns improving from 7.7 to 12.

Good will increased $16.8 million to $100.3 in the third quarter as a result of the Jaldi Semiconductor acquisition completed in September.

The aggregate purchase price of Jaldi was $25 million, which consisted of $1.85 million shares of Pixelworks common stock and options representing representing approximately 4% of the outstanding shares of Pixelworks, $7.5 million in cash resulting from our January 2001 investment in Jaldi, plus closing costs.

At the $25 million purchase price, $6.3 million was expense for in-process R&D in the third quarter, while the remaining $18.7 million remained on the Pixelworks balance sheet at quarter end.

That concludes the review of our third quarter financial results.

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

We believe revenue in the fourth quarter will increase to $27.5 to $29.5 million.

We are currently anticipating revenue growth across projectors, LCD monitors and advanced TVs.

We currently have a little more than 80% of the mid-point of the estimated revenue range either already shipped or in backlog scheduled for Q4 shipment.

This is very similar to the position we were in at the same point last quarter.

We expect gross profit margins of 46-48% in the fourth quarter, up from the previous outlook of 45-47% but down from 49.2% in the third quarter.

We expect gross profit margins to decline from the third quarter as a result of a greater amount of LCD monitor business, which carries lower gross profit margin.

Combined, R&D and SG&A expenses are expected to increase to 12.5-13 million in the fourth quarter, which is unchanged from our July outlook.

Most of the expense increase in the fourth quarter is related to having a full quarter of expenses from Pixelworks Toronto, formerly Jaldi Semiconductor.

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

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

Before turning it back to Allen, I wanted to quickly mention that we will be presenting at the upcoming AEA conference in San Diego on November 4 and 5.

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

Thank you, Jeff.

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

I'm especially proud of our record of, on a pro forma basis, ten consecutive quarters of profitability since our public offering in May 2000 and posting in Q3 our highest revenue, unit shipments and bookings in our history.

And all of this was accomplished despite the fact that we have yet to hit our stride in the monitor segment.

There are few, if any, technology markets today that are as compelling as ours.

It's clear now that more than 215 million CRTs for TVs and for monitors on a yearly basis will convert to flat panel display technologies, and that is only the beginning.

All of those displays will require image processing ICs, and we are focused and dedicated on being the leader in providing those chips.

We'll now open the call for question.

If anyone would like to ask a question today, you may do so by pressing the star key followed by the digit 1 on your telephone keypad.

We will take questions in the order you signal us, and we'll pause for a moment to assemble our roster.

Again, that's star 1 now.

Brian Alger of Pacific Growth Equites has our first question.

Hi, guys.

Nice quarter in a tough environment.

Thank you.

Thank you.

My biggest surprise is that LCD revenues were down sequentially.

Can you walk us through the environment that you're seeing?

I think we talked about it in the call.

It was almost completely attributable to the Compaq/HP merger.

As a result of that, I think those of us that follow us know we have a extraordinarily strong position in the Compaq business.

They made decisions to stop several of those monitor projects which, during the quarter, lowered our revenue and lowered our unit shipments directly related to those, and that's really what caused it.

Okay.

Ramping up in the fourth quarter, would you expect to kind of get back to where up maybe in the June quarter or is that maybe too aggressive?

Well, I think we aren't really prepared to give you a specific in terms of revenue levels specifically what our guidance would be, but we are expecting to increase over the third quarter levels and certainly would be hopeful that getting back to the Q2 legals or greater is certainly a possibility.

I guess, Brian, the bottom line is that we feel good about the progress, overall, that we are making in the monitor business.

We did have the hiccup with the Compaq/HP merger there which put a divot in the middle of things, but overall,, we are still happy with the process we are making.

All right.

In the SXGA space, we've been noticing that that's been increasing as a share of the LCD market.

Historically, that's been kind of your backyard.

But I think in the most recent [INAUDIBLE] report, there was mention that the dual interface was the strongest area, and I think you made comments that you are still having issue with the DBI?

What I said was the DBI that we've got has worked fine for XGA, and for some SXGA applications it's been fine.

To reach the kind of class performance that we want to have which is the best in the world, we needed to make changes to that.

We worked with analog devices to make the changes.

We implemented changes, we feel good about those and rolling that out during the fourth quarter.

So we have had the DBI performance at SXGA hasn't been up to what we wanted to be.

We think we've got fixes in place improve that now going forward.

I think you're absolutely right.

The dual interface, including DBI, is extremely important and very important to us, and we think we've got a great solution for that going forward.

And we'll move on to Noel Atkinson at Emerging Growth Equites.

Hi, folks.

I was wondering if you could talk a little bit about the price change over the last quarter by segment.

Sure.

I'll take a shot at that, Noel.

In the projector space, we don't get specific, but it's in the mid-single digit range.

Overall, aggregate ASP is declining sequentially.

In the monitor space, because we had a richer mix of SXGA and higher resolution business, our aggregate ASP didn't line in the third quarter.

It was essentially flat with the second; up just modestly, but less than 1%.

And then same for the TV space.

Again, that's more driven by mix; depending on the mix of business and progressive scan, CRT versus plasma vs.

LCDTVs, those are three major elements of the advanced TV revenue.

So it's more mix-driven, and the mix this quarter essentially resulted in the aggregate ASP not changing.

It was just cents away from the prior quarter.

And how are you seeing it so far this quarter?

In terms of in general, I think we expect to continue seeing projector ASPs decline modestly in the low-single digit range per quarter.

In the LCD monitor business, as we ramp up our single chip integrated solutions, which in general carry lower ASPs, there will be a little bit of pressure on our ASPs there, so we've outlooked in general double-digit declines on a quarterly basis there.

Much is dependent in the next quarter or so on the growth in the SXGA and UXGA in particular for us, so it's difficult to estimate that precisely.

Then again, in the TV space that we'll see a lot of change there in the overall aggregate ASPs.

That you won't see a lot?

Right.

In the near term.

Much is dependent on the particular mix that we get.

Plasma display, for example -- plasma display ASPs, for example, tend to be higher than progressive scan CRT or LCDTV business, and they can vary all over the map on a quarterly basis in terms of specific.

And another thing, Jeff, that's happening now is we are beginning to get multiple chips and chip set sales into each of these different segments, which is -- the ASPs that we are quoting are chips, right?

It's not by chip set or -- so that's another thing that's happening is we are getting multiple chips into some of these interlacing products and that sort of thing which is going to start to blur some of this data and make it maybe not quite as useful as it has been.

So then you are starting to see -- are you seeing the acceleration then of the bundling of your products?

Yeah.

We're having increasing success with some of our view processing chips used in conjunction with our image processing chips, our discreet scaling chips.

And we're mixing and matching those, we're producing reference designs with chip set bundles that are Pixelworks end-to-end, and we're doing more and more of that and rolling out more and more as we roll forward.

What's going to happen in some of these products is there's going to be two or maybe even three Pixelworks chips in each of these products, so our ASP per product may be significantly higher than the number you see is an ASP per chip, if you follow what I'm talking about.

And as a reminder, if you do have a question, press star-1 at this time.

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

Hey, guys.

Trying to get through the LCD questions here.

You guys have had relative success with the Smart Panel market.

To the best of my knowledge, most of the Smart Panel implementation so far has been at XGA.

Do you think we'll see the market move toward Smart Panel in SXGA as well?

Yeah, we have pretty good traction in both sides, XGA and SXGA.

One of the things that we talked about was this RSDS T-CON, Reduced Swing Differential Signal T-CON.

It's especially important at SXGA, because it saves a lot more cost at SXGA.

We have been shipping our 17-inch RSDS T-CON for nine months now, Jeff, something like that?

So it's production-proven, and we just started rolling it out.

I mentioned we just demoed it last quarter on multiple 17-inch panels from multiple fab's from all over the world, actually.

I was actually involved in that, and we're getting a great reaction to that, because, like I said, we've pretty much rung out all the cost savings from just reducing down to a single chip.

Now you have to reduce the system cost.

And the way to do that is with things like what we're doing where you can reduce board size and numbers of connectors and interconnects and that sort of thing.

You've kind of implied that you don't think the competition at SXGA will be as intense as the XGA.

Allen, you're fairly technical, can you kind of dumb it down for us as far as why that may be the case and why we shouldn't expect companies like Real Tech and some of these other emerging players to come in and bomb prices?

One of the things is just look at the data of how many people are trying to do it and what kind of traction they are getting at SXGA.

It's just that the amount of data and the speed that the data is coming in is much, much higher and faster than it is at XGA.

And the quality of the electronics necessary in order to capture that data and present an image on the screen that has the full richness of color, the full contrast gamut and also do it without putting any noise or artifacts on the screen is more difficult at SXGA, and then to be able to do it at millions of chips per month at SXGA is more difficult.

There's very limited number of companies that is have been successful, and fundamentally, Analog Devices is one of those companies, and we believe that by partnering with Analog Devices, that combination is going to make us successful at SXGA.

I'm not going to sat that nobody is going to get over the hurdle;

I think it's possible to do it, it's just that it is difficult.

Okay.

Just one last question with regards to margins, Jeff, you indicated that margins were going to be down sequentially because of a higher percentage coming from LCD.

Can you maybe give us some granularity, I know you're not going to give us specifics, but granularity as to the difference between the margins for the projectors, LCDs and then advanced TV space?

I think you have a great reference for LCD monitor margins by looking at Genesis, of course, they tend to be in the 30s.

Then looking at our overall aggregate gross margins high 40s would tend to suggest that our margins in the other businesses are a little bit higher than average.

So that's kind of roughly speaking how it falls.

Okay.

And then in terms of the projector space, you've seen pretty good price stability there.

Are you seeing any price pressures there yet, and is that something you're building into your expectations for next year at all?

Yeah, the pricing pressures really come from the projector manufacturers that are trying to work aggressively on lowering the overall price points for the mainstream projector products, so that's where the pressure is coming from.

We talked about this before, from a competitive standpoint, we aren't seeing really a whole lot of pressure there.

But again, working with our customers who are constantly trying to introduce lower-price projectors, we're going to continue to see some ASP erosion in that segment, but I think it's at very manageable rates.

Brian, what we are seeing in the projector business is it's stratifying into the guys that are trying to come out with the below $1,000 projectors, and we're working with them to come up with some extremely cost effective solutions that is basically look like slightly souped-up versions of monitor chips to address that segment, all the way up to the conference room segment where they're very feature-rich and they compete on features, and we've introduced new products the at that level, as well, that really give them things that can differentiate the products.

In some cases, the ASPs are actually going up a bit at the high end.

They're going down at the low end to help our partners hit those aggressive cost targets that they are trying to hit.

And still no signs of any real competitors?

Every quarter there's somebody else that's sort of making a run at the business.

But so far, I think we've really focused on defending that business and coming up with the most compelling solutions at the most compelling prices in every segment of the market , and we feel pretty good about our competitive position, overall.

Thanks for answering all the questions, guys.

And follow-ups from Noel Atkinson.

Hi, I was just wondering if you could talk about, it looks like the LCDTV is going to be probably in your breakout space, I would think, out of everything going forward.

What do you need to have happen for trends in this space in terms of cost for the LCD glass, cost for plasma displays; where do those have to go to really start seeing some acceleration in your chip sales?

I think all the cost trends are going to naturally happen.

The increase in LCD volume from the generation five FABs and now we're hearing an awful lot of talk now about generation six FABs, it's naturally going to drive the cost out of the LCDs.

I think the other thing that's happened is with the kinds of chips that we're producing now, it doesn't require a special LCD anymore for an LCDTV.

You can pretty much use monitor LCDs.

And with our chips as the interface, we can get the kind of video performance that you need in order to produce very, very compelling LCDTVs with monitor -- with the same LCD that you use in a monitor.

What that means is that if the monitor business can't absorb all of the LCDs as fast as they come online, I think those LCDs are going to move into the TV business at significantly lower prices.

So the designs are all in place.

People are all teed up.

I think it's just a matter of watching how this market goes forward and watching how the LCD supply rolls forward.

During the next year or so, we're going to see a nice uptick in the LCDTV business.

Do do you have an idea of where the pricing needs to go in the advanced TV, in the LCD and Plasma, for it to really take off?

You know, I said this back several years ago when we were looking at LCD monitors, the magic price points are the first ones to break $1,000, and this was true when color CRTs came out.

It's been true when LCD monitors came out.

LCDTVs have been hovering just above that for the past year or so, and I think now they're just starting to to break below that first $1,000 barrier; and that's typically when you see the first knee in the curve.

The second knee occurs at $500, and I think all of the technologies are in place to see LCDTVs drop very quickly based on the availability of glass from $1,000 to $500, and that's that second knee of the curve.

And then I think the third knee is when they break into the 200-ish, you know, $200-something range.

And I think everything is in place for that to happen, not in the next quarter or so, but certainly within the next year or so.

So I think everything's in place to do that, but we have to hit kind of those magic price points.

I mentioned the 17- inch SXGA monitors appear to be flirting with $500 right now, and I think that's the price it will take to really ignite those, as well.

Okay.

I just have two more questions.

One: Can you talk about the percentage of your monitor shipments and the scaler shipments in Q3 that were Smart Panel?

A little bit over half.

Wow.

Okay.

And then the final thing is what do you guys expect for a tax rate in 2003?

Currently we're estimating 35%.

Great, that's it.

Thank you.

We'll move to Mike Millman with Salomon Smith Barney.

Thank you.

I wanted to follow-up on the questions on the projector.

Can you give us -- a couple questions -- Can you give us some idea of how much of the cost of a $1,000 projector might be represented by your chips?

Secondly, related to that, do you think there will be a $1,000 projector in ' 03 and also at the high end feature rich, what is the average, what does your chips account for as part of the price.

Then maybe give us an idea of what you are seeing in terms of -- what you would expect in terms of growth of projectors in ' 03 and maybe in the long-term?

Sure.

In terms of the cost of goods.

It's in the single, kind of, mid-single to low-single digits of percent of the cost of goods.

It's not a -- it's mid-single digits cost of goods for something like that.

The trick isn't necessarily us taking dollars out of our chip, but it's, again, similar to the monitor business of us helping our customers take dollars out of the system cost, and what types of system things can we absorb, and what other types of functions, can we eliminate other chips; and that'e where you really get the cost savings.

A $3-4 cost savings on our chip isn't going to make or break a $1,000 projector.

By clever design, we may be able to can save $15-20 of other components, and that really would help a lot.

In terms of features, the key feature in the projector business remains keystone correction, and for the sub $1,000 projector, we've kind of established keystone correction on any projector as a minimum ante, and our keystone correction is excellent.

So what we are doing is we're bringing excellent keystone correction in terms of quality of image and also range of keystone correction, amount that we can do to the sub-$1,000 segment in a very cost effective package.

Then going forward, the industry analysts for '03 are looking at something on the order of 25% unit growth for projectors in '03.

That would get us up to about what, Jeff, do you know?

Over $2 million.

And then over the next couple of years going --

- roughly at the same rate.

- kind of 25%, compounded?

Yeah.

Can you explain in Lehman's in language keystone correction?

Sure.

When you take a projector and you're in a conference room and you elevate the front of the projector to shine up onto the screen, what happens is the top of the projected image flairs out, and the resulting image, if you don't do anything to it, looks like a keystone.

The keystone that goes on the top of an arch way, that trapezoidal shaped stone; that's what the image looks like.

It's wide on the top and narrow at the bottom.

And what we do is electronically we resize and scale the image in order to give you a perfectly square image no matter how you point the projector at the wall.

And it gives you a much more aesthetically-pleasing image, if it's trued up like that.

And with the Pixelworks technology, pretty much today it's so good people can't tell you've manipulated the image at all.

People walk in the room and look at it and say, Wow, that looks great, even though we've significantly worked the image to in order to give them a nice, square picture.

I see.

That was a good explanation.

Part of the question, are there likely to be $1,000 street prices of $1,000 or less this year, in '03?

It's a challenge, and it's the challenge everybody sort of staked out.

There are projectors down in the $1,300 range right now, and that's existing on the market today.

So everybody is striving for it.

I don't know if we're going to crack that barrier today.

I'm sure we'll crack it in '03.

I'll sure it's going to be cracked at some point in the future, but it is the goal that everybody is shooting for right now.

We'll take your next question from Jay Dada at [INAUDIBLE].

Hello?

Mr. Data, are you online?

Yes, I am.

Hello.

Yeah, Jay.

Sorry, I wanted to ask you about advanced TV revenues.

You said 60% of that came from CRT.

Who are the major customers for that product?

I think what we've talked about in the past is that we have a terrific position in the progressive CRT market in China and we've announced that we've had great relationships, and I don't know if we've announced exact details yet, but certainly top four six, or four or the top six Chinese television manufacturers are using Pixelworks chips.

And I think if you kind of do the intersection of these comments, you pretty much can figure out it's coming from Chinese television manufacturers, predominantly.

Okay.

And you said the margin on that market is higher than the LCD monitor margin, so am I to assume that CRT product also has margin consistent with that of plasma TV or other advanced TV?

In terms of the end, the product margins of our chips?

Yeah.

Your margins for those.

The higher in general, the more advanced the product and specifically the end product that it's going into, the margins tend to be better.

In general, though, in the advanced TV space, the margins are certainly better.

From even, kind of the low-end TV space to the higher-end then the LCD monitor business.

Jay, I think one of the things here we've talked about is that our technology that originally came from the NDSP group and that we've worked on since then inherently is a really nice, cost-effective solution that gives you outstanding performance at a very reasonable price.

I think that's allowing us to enjoy decent margins in this business and still offer very, very low cost solutions that can be competitive in the most demanding segments, including the CRT business.

Okay.

Because this business is increasingly getting bigger for you.

I'm trying to understand, given what you just said, CRT business and CRTTVs are not that high-end of a product as plasma or LCDTV.

So just comment, does that mean CRT does not give you that much of a margin as plasma or other advanced TVs give you?

Not necessarily, no.

No, what I was trying to get to, Jay, is that if you look at some other folks that may be in this business, is that they have technology that was developed for much higher-end systems that they are trying to bring down to competitive price points.

And the CRT business is definitely competitive.

Our technology for that segment was developed with the CRT segment in mind.

And we offer extremely good quality video processing, but the guys who're extremely focused on doing it at a very low cost and a very small dye size.

We think we have got very competitive solutions where we can deliver outstanding image quality at low cost and still have reasonable margins, even in a competitive market like the CRT market.

And do you think CRT business, especially in China, will grow at a faster rate than you expect the plasma or LCDs to grow over the next year?

Our best estimate would be for the progressive scan CRT business to grow at a rate faster than that of plasma displays, and whether it's faster or slower than LCD monitor, LCDTV growth, I think that remains to be seen.

I think those are going to be the two markets, based on the numbers we're seeing and the projections that we're seeing. that will grow the most rapidly in the coming years.

When we came into this business, I don't think I've completely appreciated the size of the Chinese TV market.

China has become the largest market in the world for cell phones as a contiguous market.

It's approximately equal to North America in televisions this year, and next year is expected to either absolutely equal or pull slightly ahead.

On a unit basis, it's basically the same size as the United States television market is today.

And Sherry [Prims] has your next question.

Good afternoon.

I just have a couple of quick ones.

In talking about the flat panel market and being positioned for growth again due to panel prices decreasing, just wondering if you guys have seen any offset on the buying side due to the IT spending decreases and consumer spending skiddishness?

Sherry, do you mean like slowdown in consumption of the monitors we have?

Exactly.

We certainly have the supply coming online, have we see a slowdown in consumption.

Exactly.

I would say in the markets that we're strongest in, and again, we're strongest in the higher -end markets, SXGA, UXGA, we haven't really seen a slowdown in that.

It still seems like there's an appetite, especially for these larger size 17, 18, 19, 20-inch monitors, there's an appetite that's exceeding the current capacity to produce the glass.

I think -- and this is -- you need to ask people which are, much heavier weighted towards the low end of the business, but I think there has been a little softness and pushback, and that's why you've seen monitor pricing of the15-inch monitor, for example, drop to what I've just looked as about a $299 price point; and I think they may even fall a little bit lower than that as we get into the Christmas season.

So what remains to be seen is this $299 ignite the 15-inch monitor market.

I think $500 - $499 definitely ignites the 17-inch market.

And the current pricing of 19s and 20s seems to be creating a balance between supply and demand right now.

Great.

And then just two housekeeping questions: Did you give a total unit sales number for Q3.

No.

Okay.

Are you going to?

Nope.

And how about number of employees now with Jaldi?

Just over 250.

Okay.

Thanks, so much.

Thanks, Sherry.

And I show no further questions at this point, gentleman.

Did you have concluding comments today?

No, just like to remind people that we will be at the AEA conference coming up and please stop in and see us down there.

Thank you.

Then that will conclude today's audio conference.

Again, we do thank everyone for their participation.