Pixelworks Inc (PXLW) 2003 Q1 法說會逐字稿

Good day.

Welcome to the Pixelworks, Inc. first quarter earnings release conference call.

Today's call is being recorded.

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

Please go ahead, sir.

Good afternoon.

Thank you 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 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 expect, anticipate, intend, plan, forecast, believe, estimate, 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 any obligation to update any such statements to reflect events occurring after today.

Our comments will also include references to certain pro forma financial results, which differ from results prepared in accordance with GAAP.

We believe our pro forma results help investors better understand our liquidity position and the use of tangible resources in our operations and provide an alternative measure by which to evaluate our underlying operating performance.

A detailed reconciliation between pro forma and GAAP gross profit, income from operations, income before taxes, and net income is included with the financial statements that accompany the press release we issued today.

This press release can be accessed on our website at www.pixelworks.com.

In addition, in connection with the proposed merger with Genesis Microchip, Pixelworks filed a joint proxy statement prospectus on form 4S with the SEC on April 18, 2003.

This document includes important information about the merger as well as information concerning the participants in the solicitation of proxies in connection with the merger.

Investors are urged to read this document.

Copies of Pixelworks' filings with the SEC as well as the form 4S are available free of charge on the SEC's website at www.sec.gov and from Pixelworks by contacting us at 503/454-1750, extension 527 or by emailing irinfo@pixelworks.com.

This call will also be archived in the investor relations section of our website at www.pixelworks.com.

I will now turn it over to Allen.

Thanks Jeff.

The first quarter of 2003 was an excellent start to what we believe will be a new genesis for Pixelworks.

It marks our fourth consecutive quarter of record revenue and continues our string of 17 consecutive quarters of record unit shipments.

First quarter revenue and operating expenses all came in very favorably relative to our outlook, which resulted in earnings of one cent per share on a GAAP basis and better-than-expected earnings of five cents per share on a pro forma basis.

The first quarter of 2003 marked our third out of the last four quarters of profitability on a GAAP basis and our twelfth consecutive quarter of pro forma profitability.

This means Pixelworks, on a pro forma basis, has been profitable every quarter for the three years since our public offering in May 2000.

I am especially proud of these achievements considering it has been accomplished in one of the worst global technology business environments in memory.

The first quarter was another record quarter for us with $32 million in revenue.

This represents an increase of $2.9 million or 10% over Q4 and is up $10 million or 45% year-over-year.

We had record unit shipments again in Q1 of more than 1.8 million chips, an increase of almost 500,000 chips sequentially over Q4 and an increase of 83 percent compared to the first quarter of 2002.

This increase was due largely to strength in our core projector business and the continued emergence of our monitor smart-panel business.

We were again cash flow positive in the first quarter resulting in a strong balance sheet with over $104 million in cash and marketable securities.

Finally, and most importantly, we announced the signing of a definitive agreement to merge with Genesis Microchip.

We believe the combination will create a broad line display IC supplier with a compelling portfolio of products for use in business and consumer electronics products that utilize advanced display technology.

As you know, Genesis pioneered the development of display controllers for LCD computer monitors and is the current leader in that industry.

Pixelworks is considered the leader in the development of image processors for the most technically demanding display devices including multi-media projectors.

Both companies have had excellent initial results from their efforts in the emerging advanced television segment.

We are excited about the future growth prospects in this area.

On a combined basis, with strong product offerings in both the high-end and high-volume segments of the display industry as well as the emerging advanced television sector, we believe the new company will be better positioned to deliver value to our customers and thereby compete effectively in an intensely competitive industry with both large and emerging competitors.

Let me now turn back to Pixelworks first quarter operating results.

I'll begin with the advanced television business, which we believe is likely ultimately to be the largest business of the three we serve today.

This year the demand for advanced TVs, meaning progressive-scan CRTs, LCD TVs, digital rear-projection TVs, and plasma displays will be about 15 million units.

There are currently more than 150 million TVs sold annually.

We believe that ultimately they will all be flat.

Our advanced chip unit sales in Q1 were up 13 percent from Q4 and 41 percent from Q1 of last year.

Even with the increase over Q4, advanced television book-to-bill was still is in excess of 1:1.

The advanced television business accounted for about 14 percent of our overall revenue, which compared to about 15% in the previous quarter.

During the first and second quarters of 2003, we are laying the foundation for the second half of the year.

As I mentioned in our Q4 2002 conference call in January at the Consumer Electronic show in Vegas, we introduced two digital TV production reference designs that we developed to slash time-to-revenue for manufacturers of flat-panel televisions using LCD or plasma technology.

We call them "TV-in-a-box".

The response to our TV-in-a-box strategy has been outstanding as companies look for ways to shorten time-to-revenue in this rapidly growing business.

To date, we have shipped more than 100 TV-in-a-box production reference systems to the world's top consumer electronics companies.

These production reference systems have already yielded more than 60 commitments from customers to begin the design process.

Last Thursday we announced the first of what we believe will be several exciting new design wins in the advanced television business.

Ben Q, the second largest LCD monitor manufacturer in the world, has made a strategic decision to target the rapidly growing LCD television business.

They are doing it with Pixelworks.

Ben Q surveyed the available solutions and has decided to standardized its LCD television products on Pixelworks image processor and video signal processor IC solutions.

By using Pixelworks reference designs, Ben Q developed the H-200 and Q-150 models using a common hardware and software platform helping them enter the rapidly growing LCD TV business quickly.

To quote Mr. Eric Ky Yu, CFO of BenQ, "we are extremely proud of our first LCD televisions and how well they have been received.

Pixelworks technology contributed significantly to assisting us in entering the exciting LCD TV business by providing a system solution that was easy for us to learn while delivering outstanding performance and features."

Display Search held their annual conference in April.

The advanced TV business was one of the hottest topics of conversations.

They reconfirmed that they believe that the most exciting technology in advanced television will be liquid crystal TVs.

They now forecast that LCD televisions will grow from approximately four million units this year to approximately 24 million units in 2006, a compound annual growth rate of more than 80%.

And, they stated that this forecast could be conservative.

We're very focused on doing what it takes to become a leading supplier of semiconductor products to this burgeoning business.

Today the growth of flat-panel monitors has been driven by the development and production of the generation five LCD fabs where up to twelve 17-inch displays can be fabricated at a single time.

While 17-inch is a very nice size for a desktop monitor, larger sizes will be required to replace the mainstream CRT televisions.

Generation five LCD fabs can only fabricate six 27-inch displays at a single time.

In 2004 we expect to see generation six LCD fabs coming on line.

These fabs will be capable of producing on a single sheet twelve 27-inch displays, an ideal size for replacing the mainstream 29-inch to 30-inch CRT televisions of today.

We are working to position ourselves strategically to be a leading supplier to this exciting rebirth of the television business.

We believe we're off to a great start in the advanced television business.

Pixelworks is considered the leader in the development of image processors for the most technically demanding display devices including multi-media projectors.

We believe that televisions, because they including both data and video, complex user-interfaces, and a variety of input peripherals are more like projectors than a simple desktop monitor.

Our strength in developing and delivering these system solutions, we believe, gives us an advantage over competition that is focused on providing only semiconductors.

I will now turn to the LCD monitor business.

The first quarter was a good one for us in the monitor business.

Units were up about 90% sequentially to approximately 820,000 largely on the strength of our smart-panel shipments and the continued ramp of our PW-130 family.

Even with the increases over Q1, monitor book-to-bill was still in excess of one-to-one.

Monitor revenue accounted for about 24% of our overall business, which was up from 22% last quarter.

We continue to be committed to the monitor strategy we outlined several quarters ago.

We believe our progress in the monitor business is confirmation of that strategy where we focus on the three most technically demanding and highest growth segments of the monitor business.

Specifically these are: SXGA and higher resolution monitors where a premium is placed on high-speed mix-signal analog and digital design; dual interface and multi-media monitors including analog, digital and/or video; and finally our focus on smart-panel.

The cornerstone of our monitor strategy continues to be the PW-130 family of products.

These new chips combine Pixelworks' award-winning image processing technology with Analog Device's world-leading interface technology to deliver a complete low-cost monitor solution using a cost-effective 0.18 micron fabrication process.

We shipped more than 240,000 chips of the PW-130 family including XGA, SXGA, and versions with our integrated, reduced-swing differential signal interface timing controller or TICON.

Smart-panel unit shipment snapped back from an unusually low Q4 and accounted for about 35% of our overall monitor units.

We're especially pleased with the progress we are making in the development of our smart-panel business.

We believe we are creating significant intellectual property in the development and volume production ramp of our advanced TICON technology.

We believe this advanced TICON intellectual property has the potential to create a competitive advantage similar to those that were created with the high-speed analog-to-digital converter, DBI receiver and scaler intellectual property for conventional monitors.

A successful company in this business will need to excel in the development of all such technologies.

We continue to believe that the smart-panel methodology provides the lowest-cost monitor solutions and ultimately the lowest-cost solutions will prevail.

We're optimistic about the prospects for growth in the LCD monitor industry this year with the ramp of generation five-fabs and in the coming years with the introduction of generation six fabs.

Our latest checks of monitor street prices show that 15-inch monitors can be found for below $250.

Almost all 17-inch monitors are less than the historically magic $500 with many hovering around $400.

Display Search forecasts approximately 46 million LCD monitors will be sold in 2003, up from about 32 million in 2002, a growth of more than 43%.

They forecast continued growth as LCD's replace CRTs and that annual LCD monitor sales will reach 125 million units by 2006.

Finally, I will discuss the projector business.

The projector business continued to be very strong for us representing approximately 58% of total revenue in the first quarter, which was unchanged from the previous quarter.

Shipments to projector customers hit record levels with revenue up nine percent sequentially and 48% year-over-year.

While revenue was up sequentially, the book-to-bill was less than one in the first quarter as we continued to see our Japanese projector customers shorten order lead times.

Inventory at our Japanese distributor decreased slightly from the fourth quarter indicating strong customer demand.

The increase in projector shipments, especially in the normally soft first quarter was not expected.

Typically the first quarter in the projector business is soft after a historically strong fourth quarter.

This year we had solid demand throughout the quarter with no significant cancellations or push-outs.

We believe this surge in demand could be from new product introductions of consumer projectors that were introduced at the CES show in January.

This is a new dynamic for the projector business as projectors move from the board room to the family room.

We believe it is prudent to be cautious in our outlook for this business until we have more data to support a sustained increase in demand.

We are working closely with projector manufacturers to drive projector prices to new thresholds of affordability.

Later this year we expect to see projectors break the historically significant $1,000 price point.

Today several $1,000-plus models lumen models are hovering near the $1,000 price point.

We believe Pixelworks has been instrumental in driving this cost reduction.

We have leveraged our work in monitors to provide manufacturers with new chips offering higher levels of integration while preserving Pixelworks' features and image quality to deliver significant cost advantages.

These reductions have certainly contributed to overall system cost reduction.

More importantly, the quality of our scaling technology allows our customers to use much less expensive lower-resolution light engines and still deliver a clear, sharp perfectly-corrected image on the wall.

We believe the cost difference between a low-resolution light engine and a higher resolution light engine is hundreds of dollars.

Pixelworks chip sets combining image processors, D-interlacers, and keystone correction extension parts give our projector customers unmatched feature flexibility for new value-priced projectors.

We believe we have made the right moves to continue to maintain our leading position in the projector business.

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

Thanks Allen.

We are very pleased with the financial results in the first quarter.

We had record revenue and record bookings.

We're profitable on a GAAP basis and delivered pro forma earnings that exceeded our expectations.

The first quarter also marked our twelfth straight quarter of profitability on a pro forma basis since going public three years ago.

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

Record revenue of $32 million, which was up 45% year-over-year and ten percent sequentially, exceeded our outlook of $29.5 to $31 million.

Revenue was higher than anticipated as a result of strength in the projector business, which was up 48% year-over-year and nine percent sequentially.

We had expected projector revenues to be relatively flat with the fourth quarter.

Revenue for projector manufacturers in both Japan and Taiwan grew in the first quarter, which was better than expected in what is typically a seasonally soft quarter.

As expected, LCD monitor revenues also grew solidly in the first quarter, up 22% year-over-year and 17% sequentially.

In particular the smart-panel business picked up nicely for us in the first quarter, which accounted for the bulk of the growth in the LCD monitor revenues.

TV revenues were up 73% year-over-year and three percent sequentially.

This was in line with our expectations for the first quarter, which we anticipated to be a seasonally soft quarter.

Business from LCD TV and digital CRT TV manufacturers was up sequentially while plasma TV business was down.

In rough terms, LCD TVs represented about 35%of total TV revenues, plasma about 30%, digital CRTs about 35%.

The balance was other digital TV technology including liquid crystal on silicon or L-COS TVs.

This is the first quarter LCD TVs have represented the number one spot in terms of overall revenue contribution in our TV business.

Overall, the mix of revenue for us in the first quarter was 58% projectors, 24% LCD monitors, 14% TVs, and four percent other.

In terms of customer concentration, the top ten customers represented approximately 60% of total revenue in the first quarter with the largest customer representing nine percent of revenue and the smallest representing four percent.

This was unchanged from the fourth quarter.

Gross profit margin in the first quarter was 46% excluding $132,000 in non-cash charges for the amortization of purchase development technology.

Pro forma gross profit margin was 46.4%, which was in the middle of our forecasted range of 46 to 47%.

Pro forma gross profit margins were down from 48% in the fourth quarter primarily as a result of a higher concentration of LCD monitor business, which carry lower-than-average gross profit margins.

Operating expenses consisting of R&D and SG&A expenses of $12.1 million, remained unchanged from the fourth quarter and were lower than estimated primarily as a result of lower R&D product development expenses.

SG&A expenses increased in the first quarter due primarily to higher professional services expenses as well as higher sales commissions.

As a percentage of revenue, R&D and SG&A expenses combined were 37.9% of revenue in the first quarter, down from 41.7% in the fourth quarter and 48.4% in the first quarter of 2002.

R&D and SG&A expenses as a percentage of revenue have decreased in four consecutive quarters leading to a 10.5 improvement over the last year.

Expenses related to the proposed merger with Genesis Microchip were $1.6 million in the first quarter.

We anticipate an additional $700,000 to $900,000 of merger-related expenses in the second quarter.

As a result of higher revenue and stringent expense controls, and despite $1.6 million in merger-related expenses and approximately $500,000 in other non-cash charges, we were profitable on a GAAP basis generating $594,000 of income from operations.

Pro forma income from operations of $2.7 million tripled year-over-year from $915,000 in the first quarter of 2002 and was up nearly 50% sequentially from $1.8 million in the fourth quarter.

As a percentage of revenue, pro forma income from operations increased to 8.5% of revenue, the fourth straight quarter of increase.

While net cash balances increased again in the first quarter, net interest income of $379,000 was down from $494,000 in the fourth quarter and $645,000 a year ago as a result of declining interest rates over the past year.

Income before taxes on a GAAP basis of $973,000 in the first quarter improved from a loss of $3.8 million a year ago.

Pro forma income before taxes of $3.1 million, which excluded $1.6 million in merger-related expenses and approximately $500,000 in non-cash charges nearly doubled from a year ago and was up 32% over the previous quarter.

The tax provision in the first quarter was $725,000 or 23% of pro forma income before income taxes, which was better than the outlook rate of 35% primarily due to the effect of the first quarter merger-related expenses on the tax provision as it relates to the effective pro forma tax rate.

We anticipate the tax provision in the second quarter to be approximately 35% of pro forma income before taxes.

However, it can fluctuate a few points depending on the level of merger-related expenses we incur as well as our overall level of profitability.

Net income on a GAAP basis was $248,000 or one cent per diluted share, which was improved from a net loss of $3.9 million or nine cents per diluted share a year ago.

Pro forma net income was $2.4 million or five cents per diluted share, which was up approximately 68% from $1.4 million or three cents per diluted share in the first quarter of 2002 and up nine percent from $2.2 million or five cents per diluted share in the previous quarter.

The balance sheet remains strong in the first quarter.

Cash and marketable securities of $104.6 million increased three million from the previous quarter and were up four million relative to a year ago.

Cash generated during the quarter included $3.8 million from operations and approximately $600,000 from stock option exercises.

The $4.4 million of cash generated was partially offset by $1.4 million in capital asset purchases.

Accounts receivable day sales outstanding improved to 25 days in the first quarter from 32 days in the fourth quarter.

The decrease in DSO is due to a smaller percentage of shipments that occurred in the last month of the quarter when compared to the previous quarter.

In general, we expect DSO to be in the 30-to-35-day range.

Inventory of $10.4 million was up from $6.8 million in the previous quarter.

This represented about seven weeks of inventory on hand or eight inventory turns, which was within our target of four to eight weeks of inventory.

As a result of more of our products moving to a COT or customer-owned-tooling flow, which results in greater levels of work-in-process inventory, we are now targeting inventory on an ongoing basis to be in the six-to-eight-week range.

That concludes the review of our first quarter financial results.

I will now quickly touch on the major elements of our business outlook.

We believe revenue in the second quarter will be $32 million to $33 million, which is up 30% to 34% year-over-year and flat to up three percent sequentially.

Based on current backlog and order projections, we believe that the projector business, which is by far the largest piece of our total revenue, will be sequentially flat to slightly down in the second quarter.

We believe that the LCD monitor business will be flat to up modestly and the advanced TV business will increase 10 to 20 percent.

We currently have approximately 80%of the midpoint of the estimated Q2 revenue range either already shipped or in backlog scheduled for shipment.

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

We expect pro forma gross profit margins, which exclude an expected $132,000 in non-cash expenses for the amortization of purchased developed technology, to be 45% to 46% in the second quarter.

This is down slightly from 46.4% in the first quarter primarily as a result of a lower percentage of revenue coming from projector business, which carry higher-than-average gross profit margins.

Combined R&D and SG&A expenses are expected to be $12.4 million to $12.8 million in the second quarter, which is up from $12.1 million in the first quarter.

We expect the bulk of the increase in expenses will be the R&D line in the form of product development expenses.

We also anticipate approximately $700,000 to $900,000 in merger-related expenses in the second quarter resulting from the proposed merger with Genesis Microchip.

We expect the second quarter tax provision to be approximately 35% of pro forma income before taxes.

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

The press release is available in the investor section on our website at www.pixelworks.com.

Before turning it back to Allen, I want to mention that we will be holding our annual meeting of shareholders on May 23 at 1:00 pm here in Portland at the Oregon Museum of Science and Industry.

We will also be presenting at the upcoming Citigroup Semiconductor conference in Monterrey, California on June 5.

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

Thanks, Jeff.

In summary, let me say it's very pleasing to start the year on such a strong note.

We achieved record revenue again in the first quarter giving us record revenue for each of the last four quarters.

We delivered solid financial results including our twelfth consecutive quarter of pro forma profitability since going public.

Most importantly, we made a giant stride toward positioning ourselves to achieve our vision of creating a billion dollar semiconductor company when on the morning of March 17, we announced the signing of a definitive agreement to merge with Genesis Microchip.

The conversion from the analog CRT to digital displays is happening in every aspect of our lives.

It occurred first in the way we conducted business with the conversion of the conference room from 35 millimeter slides and transparencies to power point presentations on digital projectors; secondly, the way we work at our desks, with the conversion to space-saving and power-efficient LCD monitors.

Finally, it's happening with way we relax at home with flat-panel televisions.

This is truly a genesis for the way we view our world at work, at home, or at play.

We will now open the call for questions.

Thank you sir.

Today's question and answer session will be conducted electronically.

If you would like to signal for a question, you may do so by pressing the star key followed by the digit one on your touch-tone phone.

If you are using a speakerphone please make sure your mute function is turned off to allow your signal to reach our equipment.

Once again, that is star one for questions.

Our first question comes from Brian Alger of Pacific Growth Equities.

Great quarter.

Can we get a little bit more clarification on the projector market?

Obviously up sequentially in the March is a bit of a surprise to us.

What about the units and ASPs?

Can we get some color there?

On the ASP side of things, sequentially ASPs dropped around 10 percent.

A lot of that is mix driven.

As the manufacturers of these projector are introducing these lower price points into the market, we have a broad array of chips, some of which are priced for those lower-priced projectors.

A lot of the aggregate ASP decline we saw this quarter was driven by the overall mix of the projectors being produced.

In terms of the unit growth for the quarter, it was up roughly 20% or so sequentially, which was a little bit of a surprise on the positive side for us.

Typically we expect to see the first quarter be a little seasonally soft.

That is why we've, I think, taken a more prudent approach to our forecast for the second quarter.

Another thing is that we've started to see some of the companion chips starting to sell into the projector business - the D-interlacer chips, which typically have lower ASPs than the image processors.

As that starts to occur, that mix change will have an affect on overall ASPs in the projector business as well.

OK.

Does that imply any shift in the projector gross margin?

No.

We wouldn't expect to see any significant shift in the margins.

Great.

Flat-panel was good as well - 820,000.

That's a nice boost.

I haven't seen these sort of numbers in awhile.

It also implies that ASPs finally took their big hit.

Is that something we should model going forward on a normal sequential decline?

Do you expect Q2 ASPs to be different than normal?

I don't know if you recall, the fourth quarter our ASPs increased about 30%, which was related to a greater mix of UXGA business.

You are correct.

This quarter ASPs in aggregate declined about three percent.

We would not expect to see that type of decline on a quarterly basis moving forward.

Our ASPs in aggregate are still higher than the overall market.

We do expect to see declines in ASPs that are at a rate that is faster than the overall market is declining as we ship more XGA and XSGA chips.

For modeling purposes, I think it would be safer to assume ASP reductions per quarter probably than run in the 10% range for us for the foreseeable future from this point.

OK.

As a clarification, you did say you had a book-to-bill greater than one in that group, right?

Yes.

Great.

Thanks again.

Nice quarter.

We'll now go to Noel Atkinson of Emerging Growth Equities.

Hi folks.

Again, great quarter.

Could you talk a little bit about your R&D - how it dropped last quarter and it's going up this quarter.

Are you seeing any shift in your R&D activity or your focus since either you've launched the PW-130 or since the merger announcement?

No, there hasn't been any change.

It's just a timing of some of the take-outs.

They fall on one side of a quarter or another.

Since the mask sets, especially at 0.18 micron are expensive, that is what drives the math.

OK.

What are you expecting to see to drive the advanced television revenues into the next quarter?

Is it going to be these LCD television wins that you've received?

Yes.

I think we tried to give you some color on that with the TV-in-a-box strategy.

We said we shipped 100.

We actually sold 100, which was a slight distinction, but I think significant because people are buying the reference designs from us.

We said we had about 60 basically designed starts.

We didn't call them design wins because we typically don't classify something as a design-win until we start shipping production of it.

Those design starts are very significant.

There is a good correlation between design starts and what eventually turns out to be design wins.

We think that is a leading indicator of the growth in the second half of the year.

OK, great.

Following up on the last question that projector ASPs had fallen in the last quarter.

Are you looking for something similar in the next quarter as well?

I think we'll see much more modest ASP erosion in the next quarter.

A lot of this was mix-driven this quarter.

We've gone through other quarters in the past where we've seen this type of erosion followed by a quarter where it's flat to even up.

It's so much mix-driven.

The best estimate at this point is that we wouldn't be seeing much in terms of ASP erosion in the second quarter.

OK, great.

The last question is; you've talked about book-to-bill in each of your division segments.

Do you see your overall book-to-bill above one?

It was just about one right on the button for this quarter.

OK, great.

Thank you.

Our next question comes from Michael Kim of Roth Capital Partners.

Good afternoon, gentlemen.

Very nice quarter.

A couple questions.

First, can you discuss a little bit about the competitive landscape you're seeing in the monitor segment for your business.

There has been quite a bit of market talk about competitors coming in and being very aggressive on pricing in the second half and then into next year.

Are you seeing that at all?

Can you provide a little bit color behind how you fit into that.

The monitor business has certainly been very competitive and continues to be very competitive.

I think our strategy has-I wouldn't say isolated us.

It has distanced us a little bit from the most competitive segments, which I would say are analog-only XGA and maybe followed by analog-only SXGA, although there is still a significant technology hurdle to cross there.

The dual interface products are significantly more difficult to produce - and the higher resolution products, SXGA and UXGA.

Finally, the folks that we have on smart-panel.

We're not unique in the focus on smart-panel, but we are a select few that have focused on smart-panel.

With the smart-panel business, your design-in cycles are much, much, much longer, I think.

But the return that your customer can get not only from the chip that you're doing, but the performance gains that we can give the LCD manufacturer offset the cost of the chips.

We've been-we're not isolated from it.

We're a little bit distanced from the most competitive segments of the business, I'd say.

Are you willing to go out and put out an expectation on potential market share?

I did that once.

I'm not going to do it again.

Fair enough.

Turning to the TV business, between the various sub-segments within there.

If I hear the take-away, the primary focus for you going forward is LCD TV.

Or is that PDP and digital CRT also in the background?

Can you provide a little color on how you seeing that playing out for you?

We think the LCD TV business is the segment of that business that has the highest potential for the knee-in-the-curve type adoption rates.

If you look at LCD monitors, there was a jump at a five percent penetration rate where the business doubled in one year.

We think that potential exists in P-LCD business.

The quality of the products are excellent.

The image that you get is excellent.

Also with the generation six fabs coming online there is a structural reason for the costs to drop and to get that up-tick.

In the meantime, the digital CRT business is a nice business for us and growing especially in China.

We're not as aggressive in terms of our outlook for rear projection.

The outlook for plasma, I would say, is not as aggressive as it is for LCD TV, although I think the newest Display Search numbers are a little bit more optimistic about plasma especially in the 2006-2007 timeframe than they were before.

It looks right now that if generation six fabs come online, LCD TVs are going to be the dominant technology in that space in the 2005, 2006, and 2007 timeframe.

OK, great.

Do you have a sense of what the business would look like in a couple years coming from TV.

Is it somewhat a third, a third, a third in your three main businesses?

Is it a mix shift between that?

In terms of-once I think you get a couple years out, our expectation-I think this is consistent with others that follow the advanced TV space, is that LCD’s will be the predominant display technology.

I think we would expect that the bulk of our revenues, or certainly the number one spot within our advanced TV business, would come probably out of the LCD TV space.

I think over the next couple years, the CRT business will still be a good business as well because right now it's priced at the lowest price point.

It's attractive from that standpoint.

Plasma is going to be, we believe, a nice market as well.

It's going to be much smaller relative to these other markets as you look out a couple years.

Your question-were you asking about within television or--?

Actually also for the overall business between projectors, monitors, and TV.

Projectors will probably move from our largest segment on a revenue basis to the smallest segment on a revenue basis.

I think television will be the largest piece for us.

LCD monitors will fall somewhere in between for us.

The way that I've said it in the past is that televisions are a 15-million unit market going to 150 million units.

Monitors are 30 million units going to 150 million units.

Projectors are two million units going to six million units or something like that.

The higher ASPs in the projectors don't make up for 10 or 20 times difference in the total available market in the 2005 to 2007 timeframe.

So as far as 2004-ish making a lot of headway towards that shift at the inflection point?

Is that more of a 2005 event?

It depends on LCD supply, I think, and how aggressive people get with pricing the advanced televisions.

We'll know more for Christmas 2003.

I think there are going to be some very interesting 15-, 17-, and in the low 20-inch products available for Christmas 2003.

During 2004 sometime, I think is when you are going to see the 27- to 29-inch LCD’s.

If those things get down below $1,000, you could see the acceleration start in the 2004 timeframe, I think.

OK, great.

Thank you very much.

Nice quarter.

We'll now go to Clark Westmont of Smith Barney.

Good afternoon folks.

This is Ramesh Misra calling in for Clark.

You talked about projectors potentially becoming the smallest proportion of business.

How should we think about gross margins going forward?

Over time, we would expect-in terms of looking at the business today the LCD monitor business is the lowest margin business for us.

Then you move up into the TV space followed-or on top, by projectors.

As projectors become a smaller proportion of the overall revenue mix, we would expect to see some declines in the overall gross margins over time.

It depends on the rate of growth within the three business areas that we participate in today.

In regards to your monitor business, how do you see it fitting together with the Genesis portion when that merger is consummated?

I think what we've talked about is that our focus in the monitor business is quite complementary to what they're doing.

We've focused on smart-panel and development of the timing controller and development of the technology and customer relationships there.

We think we've done a nice job.

It's an area where we've spent a lot of time and a lot of effort.

It's beginning to pay off for us.

Also, the highest resolution segment of the monitor business is something that we've focused on.

That has been a strength of Pixelworks through each generation.

Today it's UXGA and even higher resolutions.

We think that has paid off well for us.

We think there are a lot of complementary things between the two that fit together.

Even with the growth that we've had, on a market share standpoint we're still not very high in market share in the monitor business.

The market share that we have we believe is good complementary market share.

OK, thanks very much.

Congratulations.

Once again, that is star one for questions.

We now have a follow-up from Brian Alger.

Looking at each of the sectors, you mentioned that your total chip unit volume was about 1.8 million units.

Back-of-the-napkin math, it is looking like the television units were somewhere in the 500,000.

Can you give us perspective on what that is sequentially in terms of quarter-over-quarter and what that implies for ASPs.

In terms of unit growth?

Yes.

Unit growth in TVs sequentially was up 13%.

It was up 41% year-over-year.

In aggregate the ASPs declined in the quarter sequentially about eight percent, but year-over-year were up 22%.

A lot of-in the TV space because it's a young, emerging market.

It is heavily influenced by the mix that we're selling into, whether it's plasma displays or LCD TVs, or progressive scan CRTs, the aggregate ASP can bounce all over the place in any particular quarter depending on the particular mix.

The other thing that is happening is that there are multiple chip opportunities in the advanced TV space.

It's not necessarily a one-for-one correlation - number of chips sold into the total number of end products that you expect to see in the market this year.

Sure.

With the BenQ announcement that came out last week, it implies that there are a number of chips going into those designs.

Specifically for those products, what are you shipping into those televisions?

There is an image processors.

It's one of the frame buffer-less.

It's not one of the embedded memory image processors.

That handles on-screen displays, scaling - those sorts of functions.

This product doesn't need to do frame-rate conversion because it's a television set.

We also have one of our video D-interlacer products in there, one of the 12-3X family of the interlacer products.

It's a two-chip set.

OK, great.

Looking at the overall growth that we're expecting in LCD TVs-or maybe Display Search is looking at in the total DTV market, we're looking at some phenomenal growth.

Do you think you can match that sort of growth on the full-year basis year-over-year looking back at last year's total revenue number?

I don't think that we want to venture out and make any estimates as to what our advanced TV business might do relative to what we did last year at this point.

There are so many dynamics going on at the same time that I think the range of estimates would be very, very broad.

Right.

I am looking for some clarification for this ramp that you're talking about in the second half.

Certainly 60 design starts and 100 reference systems being purchased implies that we could have a big number out there.

I don't want to get ahead of myself.

Can you rein us in a little bit.

I think what we're trying to do-the bottom line is it's fuzzy because it's a brand-new market with brand-new entrants.

Some of them have brand-new brand names.

Some of them are selling to OEMs.

It's very difficult to pin down.

It's not like it's a market that has been there for four our five years and it's easy to predict.

We are trying to say that we feel good about the design-win activity we've had.

We feel very good about our strategy.

There is quite a bit of uncertainty about who the eventual winners are going to be and I guess I'd say about whether the design partnerships that we have are with those people that are going to be the eventual winners in this space.

Unfortunately I can't give you a whole lot better color than just from windage standpoint we think we're in a competitive position.

There are an awfully lot of pieces to this puzzle that have to fall in the right way in order for it to take off in the last half of this year or going into 2004.

Right, Just one last question.

Would you expect seasonality to come into play?

Or are we just in such an up-and-to-the-right parabolic curve that seasonality isn't a factor yet?

In the advanced television business?

Yes.

It certainly is a factor.

There is definitely in the CRT business and the rear-projection and I'd say even in the plasma business, a seasonality.

There is the underlying growth of the LCD TVs but it's very, very much dependent upon demand in the monitor business, prices in the monitor business, and then ramp of some of these new fabs.

Do they allocate some of the generation five capacity to do some of the larger sizes?

There is some seasonality.

It is definitely a growth market.

Fourth quarter we expect will be seasonally the strongest quarter in that business.

Great, thanks.

Our final question due to time constraints will be a follow-up from Noel Atkinson.

Thanks.

You folks mentioned a split in revenue between the different parts of your television business.

Could you give that again please.

Sure.

It is roughly 35% LCD TVs; 30% plasma; about 35% digital CRTs; and five percent other.

OK, great.

Thanks.

You also mentioned the jump in the inventories due to COT tooling.

Is that in any particular segment?

No.

Today it's primarily monitor and TV related.

OK, the number of employees that you had at the end of the quarter?

264.

OK, great.

Thank you.

Mr. Alley, I'd like to turn the conference back over to you for any additional or closing remarks.

I would like to thank everybody for joining us today and remind you that on May 23 at 1:00 we are having our shareholders meeting here in Portland.

We will be attending the Citigroup semiconductor conference in Monterrey, California on June 5.

Thank you.

Once again that does conclude today's conference.

You may disconnect at this time.