Pixelworks Inc (PXLW) 2003 Q3 法說會逐字稿

Good day and welcome to this pixelworks Incorporated 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 the chief financial officer, Mr. Jeffrey Brouchard.

Please go ahead, sir.

Good afternoon and thank you for joining us.

With me is Allen Alley, President, C.E.O. and Chairman.

The press release we issued today includes an outlet 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.

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

Our comments will also include references to certain proforma financial results which differ from results prepared in accordance with generally accepted accounting principals.

A detailed reconciliation between the statement of operations on a proforma and GAAP basis is included with the financial statements that accompanied the press release that we issued today.

I will now turn it over to Allen.

Thanks, Jeff.

I'm going to start by giving you an overview of the business and then turn it over to Jeff to review third quarter financial results in detail.

We continued to see good growth in the third quarter with record revenue of $35.5 million coming in at the high end of the $34 to $36 million range we gave in our prior out look.

Revenue was up 32% year-over-year and 9% sequentially.

Advanced TB business came in better than expected.

Projectors were in line with our out look and LCD monitor out look was better than expected.

On a bookings basis, though we had record revenue for the sixth consecutive quarter we had an overall book to bill greater than one.

This also marks the sixth consecutive quarter where book to bill has been equal two or greater than one.

Before I take you through the details of the advanced TV, projector and LCD monitor markets let me mention a few important developments since our last conference call.

As you know, we spent most of the year working on a proposed merger with Genesis Microchip.

The purpose of that merger was to add their strength in LCD monitors to our strength and projectors so we could focus our combined resources on the advanced television market.

On August 5th, we agreed with Genesis Microchip to terminate the proposed merger.

Even though the merger is terminated, the fact remains that we believe our industry is poised for exceptional growth in the advanced television market in late 2004 and 2005.

It is imperative that we position pixelworks with great products at the right time with the right customers at the right price to reap the benefits of this anticipated surge in demand.

Over the past couple of months since the termination of the merger we have taken the necessary steps to change the structure of our company to focus our resources to allow us to lead this potentially explosive market.

First let me start with some background. pixelworks is becoming recognized as a leader in the advanced television segment.

We are the leading supplier worldwide in the LCD/TV segment.

We are the leading supplier to progressive scan television manufacturers in China, and we believe we are near the top, if not at the top in supplying the plasma market.

We shipped more than 1 million chips into the advanced television market in Q3 alone.

We have done several things very well.

First, we have provided total solutions for our customers by creating and delivering production reference designs.

We created our, quote, 'TV in a box' program that has helped customers get very complex advanced televisions to market in record time.

Today, more than 70 advanced television systems are in development or already in production based on our TV in a box solutions.

Second, we learned from our experience in LCD monitors and from the outset have focused on delivering solutions for all segments of the LCD-TV market, high, middle and low.

We realize that we cannot sustain the leadership position in LCD-TV if we are not playing in all of the segments.

A perfect example of this broad focus is our partnership with Phillips that we announced in August.

Pixelworks is combining our digital sigma processing expertise with Phillips analog TV expertise to deliver a baseline TV reference design that targets the lowest priced, highest volume segment of the LCD/TV market.

Finally, we have rapidly developed two new families of advanced television products that we believe set new standards for integration, quality, and cost-effective performance.

These new products families were code named Cheddar and Photopia .

They will form the foundation of our new advanced television markets fore2004.

Cheddar is the front end coprocessor that we designed to work with any of our existing image processors.

It is largely an analog part that includes a high speed analog to digital converter, a DBI receiver and multistandard digital decoder.

Cheddar development was driven by our Toronto design center.

Our Cheddar products use a patent pending approach to integration which we believe will provide us with an architectural cost advantage, especially in the rapidly expanding market for HDTV or PC-ready advanced televisions.

Cheddar is now in production as the PW2200 and 3200 and we're already shipping tens of thousands of these key products per month to some of the leading consumer products companies in the world.

Today, we're announcing the arrival of the perfect partner to Cheddar, a product we code named Photopia.

Photopia was born from the seed of our jolt program and it couples the best of pixel's works image processing, our DNX video processing, network connectivity and our powerful user interface in windowing engines to create a new class of products.

Photopia was designed and demonstrated in record time.

We taped up Photopia on August 25, 2003.

Our goal was to demonstrate the product at the Computex show in Taiwan one month later.

Normally it would be a superhuman task just to get chips in a month, let alone to put together a demonstration.

Through extraordinary efforts by our foundry partner, WaferTech, a company that happens to be located 20 miles from our Portland headquarters we're were able to get first silicone in just 27 days.

We went from cold first chip silicone to working demonstration in 72 hours, and we gave our first customer demonstrations at Computex in Taiwan on a board with Cheddar, exactly one month and one day after tape out.

Speed is great.

But customer reaction is really the important point.

We concluded two days of standing-room only demonstrations in Taiwan with rave reviews.

Reports from the shows said that everyone who saw the demonstration said it was the best video chip they had ever seen.

Needless to say, we're excited about the prospects for our new families of advanced television chips.

We are continuing our internal evaluation and everything looks great.

We expect to sample lead customers in Q4.

We continue to cultivate our strategic advantage-in China.

Initially, this was based on developing the sales and marketing of our products to Chinese television customers.

Then we added systems engineering to support those customers.

Today, I am pleased to announce that we have taken the next step in the development of our China strategy.

In September, we closed on a $10 million equity investment in semiconductor manufacturing international corporation of Shanghai, China, also known as SMIC.

SMIC, established in 2000, is China's most advanced pure plate foundry, operating three facilities in Shanghai with .18-micron volume capability.

We participated in a recent $630 million financing, the proceeds of which will be used for capacity expansion and development of a new 300-millimeter, 12-inch facility in Beijing.

In conjunction with our investment in SMIC, we are also opening on IC design center in Shanghai to be close to tower Chinese consumer electronics customers and our new foundry partner.

Initial live the design center will focus on the timing controllers and also provide engineering services in support of our activities at SMIC.

And finally, we recently completed what I call a rearchitecture of the company.

After the termination of the proposed merger, we spent some time analyzing our business and our future.

Our organization has evolved over the last six and a half years and was not designed or architected to be a leader in the advanced television business.

We are planning on achieving this corporate metamorphosis procedure but given that it did not happen the architecture was required.

We have excellent strengths but need to refocus our efforts to ensure that we can compete with anyone in the world in the advanced television business.

While it is perhaps a little uncommon for a company to reorganize following a string of six consecutive record quarters, we believe this reorganization will further strengthen our long-term competitive position and potentially open up some additional market opportunities for us in the future.

We have reduced our North American workforce by approximately 15%.

This is similar to the reductions that we committed to make when we announced the Genesis merger back in March.

This reduction will result in $900,000 of restructuring charges in Q4 but will yield about 750,000 per quarter in savings for our reinvestment program.

We are going to reinvest the savings in key IC design skills in our North American design centers and will also use a portion of the savings to fund the opening of our new IC design center in Shanghai.

We have also unified the product architectures for our next generation of advanced television products.

These architectures feature the Cheddar family for front end processors and Photopia for our image processing and video processing.

I mentioned earlier that Photopia was born from the seed of our jolt program.

Jolt was a wonderful development platform for us but was not a cost-effective architecture.

Photopia is very cost-effective and embodies the best of jolt and our latest digital natural expression or DNX video processing technology.

We are, therefore, as part of our rearchitecture discontinuing the original jolt project as well as a parallel backup effort we were running with the development of Photopia.

The resulting charge that we recognized in Q3 is approximately $3.9 million.

All of this is part of a concerted effort to rebuild the company, our products and services to be globally competitive in the coming high volume advanced television market.

Another example of this effort is our new third-generation software platform which we call Cobalt.

Cobalt embodies all of the less sons that we learned, developing and bringing to market the broadest range of advanced display products with the most demanding tier one customers on critically tight schedules.

The name of the game is lower development costs and decreased time to market.

Cobolt software coupled with Cheddar and Photopia hardware and next generation TV in a box reference designs does both in our engineering expertise has been proven by the most demanding customers on the most demanding projects in the world.

We are also making a fundamental shift in our resources to enable us to execute on our very aggressive product road map while carefully managing our operating expenses.

We are dedicated and focused on not only delivering great products but build aggregate company that can responsibly manage expenses to deliver superior products and a superior operating model and earnings.

I am especially pleased with my management team for having the vision to take these actions now.

We are putting ourselves on a path to deliver the advantages of our former proposed merger without the shareholder dilution we would have incurred.

During our strategic planning process, weave looked at opposites to expand our market footprint but frankly we believe we are already in one of the hottest semiconductor markets in the world.

We will continue to aggressively develop products for the advanced TV and multimedia projector markets.

For the LCD monitor market we will continue to invest in our smart panel developments and future developments of what we're now calling our smart timing controller product line.

Now let me talk about our three end markets, projectors, monitors and advanced televisions.

First projectors.

Projectors came right in line for the outlook for the third quarter.

Revenue from multimedia projector manufacturers increased 11% sequentially and 20% year-over-year.

Projector revenue represented 52% of total revenue which was up slightly from 51% in the second quarter.

As I have discussed in previous calls, earlier this year, we began shipping chip sets rather than single image processors into projectors.

This is turning out to be quite a successful strategy.

These chip sets include our video coprocessors and our video decoders and they allow us to add to our silicon content per projector.

Coprocessor chips account for almost 10% of our total processor chip shipments in third quarter.

Put another way, the contribution of the coprocessor chips effectively raised our per projector average sales price to the point where our per projector total silicon content actually increased over the second quarter.

Going forward, we see a similar effect in fourth quarter where coprocessor shipments will continue to grow and largely offset any overall ASP reductions.

The projector market has continued to grow fairly well over the past few years despite a difficult IT spending environment.

According to Pacific Media Associates, projector units grew at an annual percentage right at 23% from 2000 to 2002 and are expected to increase 35% in 2003 and 55% for 2004 and 2005.

Driving the recent and projected growth is the introduction of sub $1,000 projectors for corporate and home use.

By our latest estimation, 15 leading projector brands have already introduced 24 models of sub-$1,000 projectors and we're beginning to see projectors advertised and sold for home use in places we have never seen before.

Projectors are now the lowest cost way to get a large sized quality video image when evenly year or two ago that was not the case.

For example, a $1,000, 1,000-lumen projector is capable of projecting a 10-foot diagonal image.

That equals $8.33 per display inch.

Applying this metric to a 42 inch plasma display would it have a retail price of $350 or about $1 -- about 1/8 of today's price.

From a competitive standpoint we continue to be by far the leading supplier of chips to the projector market.

Beside's small number of solutions developed internally by projector manufacturers, the only near term competitor of significance that we see is Texas instruments.

T.I. recently announced their DPT2,000 DLP Engine which will be begin shipping in the first quarter.

The DDP2000 incorporates some of the features that our current solutions provide and will address a portion of the DLP projector market which in total represents about 25% of the overall projector market.

Looking forward, the fourth quarter for projectors is typically mixed, where we get off to a fast start but things begin to seasonally tail off the further into the quarter we go.

Taking this into account, fourth quarter is solid but not explosive with revenue trending up slightly from Q3.

In short, we continue to be pleased with the prospects for growth in the projector business, and believe we continue to be very well positioned to benefit from this growth.

I'll now turn to LCD monitors.

We got off to a fast start in the monitor business in the first half of this year with success of the PW-130 products and the strength in -- with revenue increasing 18% and units up 67%.

This success slowed in the third quarter as the effects of our potential merger with Genesis Microchip began to be reflected in our results.

While Q3 units were up a robust 61% year over year, revenue was basically flat.

Compared to second quarter units were down 16% and revenue was down about 33%. 2003 year to date, LCD monitor revenues are up 13% through the third quarter and units are up 65%.

While we expected a sequential decrease in LCD monitor revenue, the size of the decrease was greater than we had expected.

This can almost all be attributed to lower than anticipated UXGA bills.

XGA and SXGA monitor business, which represented 75% of our total LCD monitor revenue, was flat with the second quarter.

UXGA represented 25% of our total LCD monitor revenue in the third quarter down from about 50% in the second quarter.

The shift away from UXGA also had a negative impact on monitor gross margins and, therefore, overall growth margins.

As I have mentioned in the past, our success in the LCD monitor business on a go forward basis is tide to the growth in the smart panels which industry wide has not yet been significant.

We still believe in the architecture and, in fact, there have been some recent industry discussions around further development and extensions of this architecture.

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

An outgrowth of our smart panel business is our development of what we call smart timing controllers.

What we have found is that our programmable or smart timing controllers developed for the smart panel has the potential to be a great product on its own.

Because our timing controllers are smart, we can add features to an LCD panel, improve performance, and reduce cost.

Another benefit of the smart timing controller is, it actually broadens our potential market beyond monitors continue to include televisions and even the possibilities of notebook computers.

The traditional timing controller competitors are typically component suppliers, not system on a chip companies so they're at a disadvantage on this business.

Our smart timing controller is already customer hardened in our smart panel products.

We are engaging with several potential customers to develop product road maps and feasibility studies.

Looking forward to Q4, we expect our monitor revenue to be flat to slightly up from Q3 based on the fact that bookings in the third quarter did increase over the second quarter and book to bill ratio was greater than 1.

I will know shift to advanced TV's which continued to be the fastest growing part of our business.

The advanced TV category come priced of LCDTV's, progressive scan CRT's, plasma displays and digital projection has exceeded our expectations all year and the third quarter was no exception.

Advanced TV revenues of $11.7 million in the third quarter increased 45% sequentially and 113% year-over-year.

This reflected much stronger growth than we had anticipated.

For Q4, advanced TV experiences the same phenomenon as the projector business getting off to a fast start and seasonally tailing off at the end of the quarter.

Even considering these seasonal factors we expect revenue to be up an additional 10 to 20% over Q3.

Getting back to Q3, LCD TV business continued to grow the fastest, up 57% sequentially, followed closely by plasma displays which were up 53% sequentially.

Progressive scan CRT business also grew quite nicely, up 35% sequentially.

As a percentage of total advanced TV revenue, LCD-TV's represented 50%, progressive scan CRT's, about 25%, and plasma displays about 20%, and rear projection TV's comprised the remaining roughly 5%.

Advanced TV bookings were again strong in the third quarter which led to a book to bill for the advanced TV business of greater than one.

Prices of advanced TV's have continued to fall while quality continues to improve.

Sharp maintained the price of the 20 inch AQUAS below $1000 since dropping it from $1800 earlier this year.

There are now many 42-inch plasma televisions below $3000 with some approaching $2500.

All of the factors are pointing to a 30 inch LCDTV approaching the magic $1,000 price point by Christmas 2004.

If that happens, we believe there will be a jump in volume from 2004 to 2005 similar to the jump we saw in LCD monitor volumes between 2000 and 2001.

I would like to wrap up this advanced television section with an email that I received from Peter Brown, the head of our sales team in Taiwan, after the first day of Cheddar and Photopia demonstrations at Computex.

Keep in mind Photopia was a week out of the Fab when he wrote the following message.

"We wrapped up Computex with a frenzied final day demo of Photopia and every customer that saw I said they thought it was the best video chip they had ever seen.

I am not kidding.

We played Super Speedway and then we would pop in the test disk to close them.

The final meeting of the day was with the guy who has consistently been the toughest, most educated video critic I have had to deal with.

When we walked out of the meeting, he said, quote, congratulations, it's a master piece, close quote.

I couldn't believe it.

I doesn't get any better than that.

From all of us who had the pleasure to soak in that moment, we would like to tip our hats to the entire Cheddar and Photopia design teams for an incredible effort.

Its going to be hard not to sell these chips".

Peter, I couldn't have said it better myself.

I will turn the call over to Jeff for his review of our financial results.

Thanks, Allen.

Before I begin my overview, I don't want to mention that I will be referring to both GAAP and proforma numbers so please refer to the financial statements and notes in the earnings release for reconciliation of the differences between proforma net income and net income or lost according to GAAP.

I'll first cover the income statement in-depth and then review the highlights of the balance sheet.

Starting with the topline, revenue of $35.5 million up 32% year over year and 9% sequential live came in at the high end of our outline.

As Allen mentioned earlier, advanced TV revenue was the main growth driver in the quarter increasing 113% year-over-year and 45% sequentially.

The revenue mix in the third quarter was 52% projectors, 33% TV's, 13% monitors and 2% other.

This compared to 51% projectors, 25% TV's, 22% monitors, and 2% other in the prior quarter.

As we move forward, weave expect TV revenues to continue growing as a percentage of the mix.

Already, TV has moved into the top spot on a unit basis in the third quarter and we expect them to continue expanding their lead.

Our outlook for the next quarter is for revenue of 37 to $38.5 million which would represent year over year growth of 27 to 32% and sequential growth of 48%.

Most of the growth is expected to come from advanced television business.

Similar to the last several quarters, we currently have over 80% of the midpoint of our outlook revenue range shipped or on backlog scheduled for shipment.

Gross profit margin on GAAP basis was 42.4%, down from 45.1% in the second quarter.

Excluding 132,000 in non-cash expenses for the amortization of acquired development technology, proforma gross profit margin of 42.8% was down from 45.5% in the second quarter.

Gross profit margin declined as a result of lower average product margin in the monitor and advanced television portion of the business.

Average monitor chip margins declined as a result of shipping less higher margin high end chips in the third quarter.

Average advanced TV margins declined due to a greater than expected mix shift towards products with lower average margins.

Looking forward to the fourth quarter, we expect overall growth profit margin to be flat to up a point relative to the third quarter.

Combined, R&D and SG&A expenses of $11.8 million were down approximately $500,000 from the second quarter due to lower than anticipated product development expenses.

As a percentage of revenue, R&D and SG&A expenses combined were $33.3% of revenue, which was down from 37.9% of revenue in the second quarter.

In the fourth quarter, we expect combined R&D and SG&A expenses to be relatively flat on a dollar basis compared to the third quarter but decline as a percentage of revenue.

Expenses related to the terminated merger with Genesis were $6 million in the third quarter.

These expenses were comprised of $5.5 million paid to Genesis, for reimbursement of their transaction expenses in another roughly $500,000 in primarily legal expenses that we incurred.

We don't expect any additional expenses related to this transaction in the fourth quarter.

We also incurred a $3.9 million restructuring expense in the third quarter.

These expenses represented the write off of assets in the form of intellectual property licensed from a third party, associated prepaid royalties and mass sets for products that were discontinued.

We also expect approximately $900,000 in additional restructuring expense in the fourth quarter for severance related expenses.

Because of the large merger related and restructuring expenses which totaled $9.9 million, we incurred a loss before income taxes on a GAAP basis of $6.7 million.

On a proforma basis, which excludes these two extraordinary expenses, as well as other non-cash expenses totaling $400,000, proforma income before taxes was $3.6 million or 10.1% of revenue.

Proforma income before taxes increased 30% from $2.8 million in the prior quarter and increased 65% from $2.2 million in the third quarter of 2002.

As you can probably tell from hour earnings release, the tax provisions in the third quarter, both on a GAAP and proforma basis were unusually complex.

On a GAAP basis we had a net tax benefit of $2.6 million.

This was comprised of two components.

The first component was a tax benefit of $3.6 million related to the pre-tax loss in the quarter.

The second component was a one-time tax expense of $1 million that resulted from a change in the valuation allowance of tax assets related to the implementation of a research and development contract with our subsidiary in Canada.

The net effect tax rate for the quarter was 38% of the pre-tax loss.

On a proforma basis, we had net tax expense of $2.8 million or 78% of proforma income before taxes.

The tax expense was unusually high because in addition to the normal proforma tax for the quarter, which would have been approximately $1.3 million or 37% of proforma income before taxes, we had two incremental tax expense adjustments totaling $1.5 million.

The first incremental tax expense was the one-time, $1 million tax expense I noted when explaining the GAAP tax provision.

The second incremental tax expense component was approximately $457,000, representing additional tax expense in the current quarter to bring the proforma effective rate on a year to date basis up to the new projected proforma tax rate of 37% for the full year excluding the $1 million one time expense.

The projected proforma effective tax rate for the year increase primarily as a result of higher projected proforma income before taxes for the year.

In total, the $1.5 million in incremental proforma tax expense had the effect of lowering prose forma EPS by 3 cents.

In the fourth quarter, we anticipate that the proforma effective tax rate to return to a more normal rate of approximately 37%, which I'm pleased to say should make this section of the call much shorter next time.

On a GAAP basis, the net loss in the third quarter was $4.1 million or 9 cents per share.

This compared to a net loss of $19 million or 44 cents per share in the third quarter of 2002 and net income of $420,000 or 1 cents per diluted share in the second quarter.

Looking forward, in the fourth quarter, we estimate GAAP earnings will be three to four cents per diluted share.

On a proforma basis, net income was $801,000 or 2 cents per diluted share.

As I mentioned earlier, the proforma tax provision in the third quarter included two unusual and large incremental items that had the effect of lowering proforma net income by approximately $1.5 million or 3 cents per share.

For the comparative periods, proforma net income was $2 million or 4 cents per diluted share in the third quarter of 2002, and $1,798,000,000 or 4 cents per diluted share in the second quarter.

In the fourth quarter, we estimate proforma earnings will increase to 6 to 7 cents per diluted share.

I will now turn to the balance sheet.

Cash and marketable securities of $92.2 million decreased $13.7 million from the prior quarter.

The decrease was attributable to the $10 million development we made in SMIC and $6 million in merger related expenses.

Excluding these two extraordinary items cash flow was a positive $2.3 million.

Accounts receivable of $10.6 million, increased 4% over the prior quarter, which was below the 9% rate of sequential revenue growth.

As a result, DSO decreased to 27 days from 28 days in the prior quarter.

Inventory of $11.3 million was up from $9.7 million in the second quarter, which was in line with our expectations given revenue growth.

Inventory turns were 7.7, which improved from 7.1 in the prior quarter.

That concludes the review of our third quarter financial results and fourth quarter business outlook.

For information on all elements of our financial results and business out look, please refer to the press release issued earlier today announcing our third quarter financial results.

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

Before turning it back to Allen I will mention that in the fourth quarter we will be attending the AEA classic conference in San Diego on November 3 and 4.

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

Thanks, Jeff.

I'm especially pleased with our performance during some pretty difficult times for technology companies and I feel we're making the moves that will make us even stronger.

An indicator of our success is on October 14th for the second consecutive year we were named by Deloitte and Touche to their Feist 500 list.

This list consists of the 500 fastest growing technology companies in the United States.

We ranked 40th-fastest growing company overhaul and the 10th fastest growing public company.

Q3 was another record quarter for us giving us string of 6 consecutive quarters of record revenue and book to bill was still in excess of 1.

We had record unit shipments of more than 2.3 million chips representing a greater than 80% increase over Q3 of 2002.

Television became our largest segment, measured in units, with shipments of more than 1 million chips in the quarter.

The $ub1,000 projector moved from a novelty offered by a couple of leading manufactures to the mainstream of the market, with 15 manufacturers offering 24 models.

And finally, during this quarter, we implemented the biggest strategic changes since founding the company six 1/2 years ago.

We're taking the steps necessary to position pixelworks to lead the industry by introducing ground breaking products in record time, making investments in china to improve our competitiveness, and by restructuring our company to cut operating costs, and to focus our efforts to deliver superior returns for our investors.

I'll now open the call for questions.

Thank you.

The question-and-answer session will conducted electronically.

To ask a question, please press star, 1 on your touch-tone telephone at this time.

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

Once again press star, 1 to ask a question and we will pause for just one second.

First question will come from Michael Kim of Roth Capital Partners.

This is James calling on behalf of Michael Kim.

Can you guys talk a little about the competitive landscape in your advanced television business and who you are going up against the most?

Sure.

There's sort of three classes of competitors, and it's mostly by size not necessarily by the segment that they focus on.

And one class of competitors is sort of a tiny Taiwanese group.

They're typically people coming from the monitor business and sort of eyeing the advanced television business as an interesting business.

And they're actually looking at diversifying their portfolio and moving into the advanced television business.

The second class of competitors I would characterize as companies sort of like pixelworks, kind of American public companies that in this business, and companies like Trident, sort of fall into this category but they kind of fall in between the two a bit.

Genesis certainly falls in that category, ZORAN falls in that category.

Even guys like can fall into that category.

And then the third category of competition is really the large multinational companies including folks like Phillips and ST Micro, even Toshiba.

And the difference in the advanced television business compared to the monitor business is that the large companies actually have quite a bit of business with CRT-TV's where they didn't really have a lot of business in the CRT monitor space.

So they're entrenched in some of these larger accounts.

They happen to be entrenched on the CRT side of the business.

So what you have is sort of the classic struggle between entrepreneurial startup, you know, venture backed or early public companies in these rapidly emerging markets going after some of the larger, more entrenched competition.

In addition could you provide color on the ASP trends in the advanced television trend business?

I can talk certainly in the most recent quarter on a sequential basis.

And it's -- you know, this isn't necessarily always apples to apples because you have a different mix of chips where we have opportunities where we're selling multiple chips into a single end unit advanced TV.

But if you just took revenue and divided that by the total number of chips and compared that ASP to the prior quarter, there was about an 8% decline in this most recent quarter.

And, you know, in terms of a chip by chip basis, we're planning for something that certainly would be kind of in the low to mid single digits on a quarterly basis.

Again we're also going after additional silicon opportunity moving forward.

So similar to the remarks that Allen had in the projector business.

Jeff, so the 8% includes decline because of mix as well as just pure lowered price on a per chip basis?

Right.

Thank you, gentlemen.

You bet.

We will move to Brian Alger of Pacific Growth Equities.

This is Jenny calling on behalf of Brian Alger.

I wanted to say nice quarter.

Congratulations.

Thank you.

I was wondering, where did the head count reduction come from?.

It was -- do you mean geographically or function or. ..

Both.

OK, geographically it was in North America in all three locations that we have here in North America.

Both in Toronto, here in Portland, and also in Campbell.

And what it really was is looking at sort of how our business has evolved over the last six years.

Let me give you an example of this.

Six years ago basically all of of our large customers had to come here to do the systems integration work.

We didn't have much engineering spore in the field.

So we built up a capacity here both on a physical plant-wise in terms of customer labs and also inners of engineers to support the customers here.

Over the last six years we have evolved to have much much stronger applications engineering support in the field, yet we haven't really realigned our resources.

So what we did is we looked across the entire company.

And in many different areas we found those same sort of inconsistencies where you kind of evolved to a point rather than, you know, architect the company to that point.

And we went through and took out resources and those areas where we felt that we had a little bit of extra bandwidth to give us some capacity to add back in critical areas and those critical areas that we have identified are pretty much all in the integrated circuit design area and also in integrated circuit design in our new Shanghai office.

And my second question is -- I guess second and final question.

If T.I. is going to address approximately 20% of the market, is this concentrated on the sub-$1,000 projector market?

It will be concentrated on the low end certainly.

And some of those $1,000 projecttors certainly will be affected.

The only reason I'm hesitating is that some of those sub $1,000 projectors are actually home theater projectors.

There's opportunities for interlacing chips in those things so I would say generally yes but there are exceptions to that.

Thank you very much.

Once again that is star, one to ask a question.

Moving to Ryan Beck of Ryan Beck and Company.

How did the units break out in advanced TV among the four segments on a percentage basis.

You say you shipped a million chips there.

How does that break out percentage wise?

About 55% going into LCD's TV's, about 30% into progressive scan CRT engines and 10% or so in plasma displays and the balance in rear projection

Thanks.

Second thing, on the R&D spending is this a temporal event where you will be going down temporarily in terms of dollars spent and then picking back up as we approach 2004?

Yes.

Any guidance as to what level you would need to be?

We would need to be when?

In 2004?

No, I don't have any guidance at this point for 2004.

OK.

For the fourth quarter weave expect R&D line to pick up probably, you know, a few hundred thousand, I would say.

Because we have some offsets because of the head count reductions.

Then back to the T.I. issue, how quickly would we see T.I. coming on as a competitive threat and realistically, how many of -- how much of your volume does this effect, as you estimate it right now?

Well, like we said, we anticipate that we will start to see some of the T.I. product shipping in the first quarter.

And the T.I. in total accounts for about -- about 25% of the total market, and that's low end, medium range and high end.

So the sort of maximum exposure there would be 25% and we don't anticipate at anywhere near 100% of that is going to convert over.

So we might start to see some of it in the first quarter, but, you know, after the fourth quarter we will be able to give you more visibility in that in the first and second quarter as we move forward.

I think the thing that we're pointing out, though, is that the projector market is expected to grow sort of 55% in 2004 and 2005.

Nice growth rates in both of those years.

We still anticipate that is going to happen.

So we think that more than offsets anything that we would see from any competitor.

Now, in terms of that, do you believe that the bulk of that growth will be at any certain resolution?

Will we be seeing wholesale movement back to SVGA because of the growth?

What are your thoughts on that?

SVGA has indeed hung in there.

And we think actually we have been helping that with the scaling quality that we have, especially with video projectors and the quality of the interlacing that we're doing.

We actually think we have been encouraging that.

And I think you're going to see the poly-silicon guys responding.

Some of the lowest cost projectors available on the market today are poly-silicon not DLP projectors.

There's a lot of people working on liquid crystal on silicon, a lot of very, very large companies and Fabs working on liquid crystal on silicon and I think on low cost systems you will see that.

Probably not early 2004 but as we get further into 2004 and 2005, I think that will be much more common as well.

OK, great.

In the case of these DLP projectors would T.I. be totally designing you out of these or would you have a way to address the silicon in there?

Well, there are waives to address the silicon.

T.I. has not you included the ADD converter, the DDI receiver, the video decoder, or the high-end interlacing so there's certainly silicon content opportunities in those projectors.

We're just going to have to see how it plays out as we roll forward to see how much of that we can garner.

Great.

Thanks very much, guys.

And we'll hear now from Sherry Prince of D. A. Davidson.

Good afternoon.

Just two questions for you.

Looking ahead to Q4 in the monitor market, are you expecting us to stay in the low end, you know, sub-UXGA, as far as what is the market is doing?

Well, it turns out that's where our smart panel strength is.

In XGA and SXGA.

So, yes, from the smart panel standpoint, sure, we will stay in that.

Now, from a stand alone chips standpoint, selling those into the integrators, going head-to-head with all of the time between these guys and the lowest end of the Genesis chips, we probably won't.

We're going to keep focusing on enhancements to our timing controller and looking at developing a line of business around the core competence that we have developed in the timing controller.

That's how we're going to address that piece of the market.

OK.

And speaking of timing controllers, you mentioned that you're engaging with customers now.

When could we expect to see that become product advertised and part of your -- productized and part of your revenue.

I don't want to give you information on that.

I can give you an update in the Q4 call and I think we will be closer to more concrete plans there and may be able to give you a little more visibility on that.

Great.

The one last quick question on projectors, book to bill for Q3, did you provide that?

No.

It was right around 1. 1 to 1.

OK.

Great, thank you very much.

You bet.

That concludes our question-and-answer session.

I will turn the conference back over to our host for any additional or closing remarks.

Thank you.

The only thing I would like to remind you of is that we will be at the AEA classic conference in San Diego on November 3 and 4.

Please stop in and see us there.

And that concludes today's conference call.

Thank you, everyone, for your participation.

You may now disconnect.