Pixelworks Inc (PXLW) 2003 Q4 法說會逐字稿

Good day everyone, and welcome to the Pixelworks Incorporated fourth quarter earning’s release conference call.

As a reminder, today’s conference is being recorded.

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

Please go ahead, sir.

Good afternoon and 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.

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 forecasted.

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 pro forma financial results, which differ from results prepared in accordance with generally accepted accounting principles.

A detailed reconciliation between the statement of operations on a pro forma and GAAP basis is included with the financial statements that accompany 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 fourth quarter and full-year 2003 financial results in detail.

By any measure, the fourth quarter was very solid as evidenced by record revenue and record earnings, both on a GAAP and pro forma basis.

Record revenue of $40.8 million was up 15 percent sequentially and 40 percent year-over-year.

We experienced double-digit rates of sequential revenue growth in all three markets, projectors, monitors and televisions.

Despite robust revenue growth, our book to bill again exceeded one in the fourth quarter as a result of all-time record bookings.

On the bottom line, net income on a GAAP basis was a record $2.9 million or 6 cents per share, which was improved from a net loss of 9 cents per share in the prior quarter and net income of 1 cent per diluted share a year ago.

Included in fourth quarter GAAP results were one-time expenses related to restructuring the company, which we announced in October and discussed in our last conference call.

Jeff will cover those in greater detail during his financial review.

On a pro forma basis, net income was a record $5.2 million or 11 cents per diluted share, which improved from 2 cents in the prior quarter and 5 cents a year ago.

The balance sheet also strengthened considerably in the fourth quarter with total cash and marketable securities of $100.7 million, increasing $8.5 million from the third quarter.

For the year, record revenue of $140.9 million was up 37 percent with the greatest growth coming from our television business, which was up approximately 127 percent.

On the bottom line we had a small GAAP loss of $531,000, which was significantly improved over the net loss of $20.9 million in 2002.

On a pro forma basis, 2003 net income of $10.2 million was up 42 percent over $7.2 million in 2002.

Before I get into an overview of our market segments, let me bring you up to speed on the development of our two new families of advanced television products, Cheddar [phonetic work] and Photopia and on some of our strategic initiatives in China.

Cheddar [phonetic work] is our front-end co-processor that we designed to work with all of our existing image processors.

It is largely an analogue part that includes a high-speed analogue to digital converter, a DBI receiver and a multi-standard video decoder.

We continue to ramp the sales of our Cheddar [phonetic work] products in Q4.

We dramatically increased unit shipments primarily into the projector market by more than 100 percent sequentially.

This has enabled us to again preserve the average selling price per unit in our projector business in spite of slightly lower average selling prices on a per-chip basis.

In our last call, I announced the introduction of our Photopia family of products.

Since that time, the rollout of Photopia has gone very well.

We demonstrated both Photopia and the latest version of Cheddar [phonetic work] at the consumer electronics show in Las Vegas in January.

The customer reaction continues to be excellent.

We’ve very encouraged with the performance of, and the customer reaction to, our Photopia family.

We’ve demonstrated Photopia to over 80 customers in all of the major geographies and we are already actively engaged in product design efforts with more than half of them.

The most impressive point is that several of these designs come from some of the biggest and most recognized names in the consumer electronics world and span a wide range of applications, including projectors, LCD TV’s, plasma TV’s and rear projection TV’s.

We expect to have our early production units shipping to customers in the second quarter and to begin ramping volume in Q3 and Q4.

In the TV business, customers put us through a demanding series of tests that we call the video Olympics.

So far, our combination of Cheddar [phonetic work] and Photopia is doing very well and we are winning medals in just about every event.

We’ve packaged our video offerings in something we call digital natural expression or DNX video processing.

This packaging allows us to educate our customers, the media, and the channel on the benefits of using Pixelworks video processing products.

An example of these educational materials is the online DNX overview that you can access by going to www.pixelworks.com/dnx.

Please go try it and you will see why we say, quote, “reality is the ultimate benchmark”.

I think you’ll be as impressed as our customers.

In our last call, we announced a $10 million investment in our new Chinese foundry partner, SMIC.

Since that time, we have taped out our first chip and have received first silicon.

I can tell you the results are very positive and we expect to begin production of our first product in the middle of this year.

In our last call we also announced a sweeping restructuring that would enable us to invest in the critical skills necessary to drive our business forward.

Since our last call in October we have added engineers in our North American design centers and we continued to invest in China by increasing the engineering staff in our Shanghai office.

This brings our total employment in China to about 45 people.

We expect to continue this trend in 2004 to support our expanded customer base and our new foundry partner in Shanghai.

I’ll now give you an overview of the three end markets that we serve, projectors, LCD monitors and advanced TV’s.

I’ll start with projectors.

The projector business, which represented 51 percent of total revenue in the fourth quarter, continued to experience robust growth.

Revenue in the fourth quarter increased 13 percent sequentially and was up 22 percent year-over-year.

The strong fourth quarter followed a strong third quarter in which revenue increased 11 percent sequentially.

Total unit shipments were up approximately 18 percent sequentially and 57 percent year-over-year.

The unit growth figures include the fact that we are now selling a greater number of companion chips with the core image processor chips.

These companion chips include video processing chips and front-end chips that include both an analogue to digital converter and video decoder.

While the overall projector chip average sales price, or ASP, defined as total revenue dollars divided by the total number of chips, declined 4 percent sequentially, our average dollar content per projector actually remained unchanged Q3 to Q4.

This was due to a greater average number of these companion chips being sold per projector in the fourth quarter.

For the year, projector revenue was up 27 percent on unit growth of approximately 65 percent.

From an industry perspective, the projector industry experienced solid growth this past year.

Pacific Media Associates, a leading projector industry analyst, recently estimated that approximately 2.5 million projectors would be sold in 2003, representing approximately 35 percent growth over 2002.

Based on the number of chips we shipped, and our estimate of our market share in the projector industry, we believe that final 2003 numbers may come in a little higher than the 2.5 million units, leading to actual unit growth of greater than 35 percent.

Recent projections from industry analysts estimate that approximately 3.3 million projectors will be sold in 2004, up 35 percent again over 2003.

Our informal survey of the projector market shows the continued trend to lower retail prices and lower retail prices drive volume.

The number of manufacturers of sub-$1000 projectors continues to be virtually unchanged from Q3 with 14 manufacturers selling 25 models.

The interesting news is we have broken another price barrier this quarter with the lowest retail price dropping to $799.

We now have identified 13 models priced under $900 from 11 different manufacturers, with Epson and InFocus offering two models each.

Looking at the projection technology used, 100 percent of these lowest priced models are polysilicon [phonetic work] LCD based.

Of the 25 models we identified under $1,000, 20 of them are LCD and five are DLT.

We are optimistic that the projector industry will continue to have robust growth in 2004.

Looking at current backlog and shipments to date, we believe projector revenue in the first quarter will be roughly flat with the fourth quarter.

It is not uncommon for the projector industry to be down in the first quarter, however, it looks to be shaping up to be a little bit better than an average year, hence, the roughly flat forecast.

We believe the projector market is benefiting from robust sales of new [technical difficulties], as well as an improving overall business environment.

We continue to be benefiting from selling a greater number of companion chips in addition to the core image processor chip.

In short, we’re 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.

Revenue from LCD monitors increased 20 percent sequentially despite unit shipments declining by 7 percent.

We were positively surprised with this part of our business as sales of chips from UXGA monitors rebounded strongly.

Looking at our revenue growth by monitor resolution, our XGA monitor business declined about 50 percent from the third quarter, while our SXGA and UXGA businesses increased approximately 20 percent and 130 percent respectively.

The richer mix of higher end monitor business also improved our gross profit margins in this part of the business.

In the fourth quarter, approximately 50 percent of our LCD monitor revenue came from UXGA monitors, 30 percent from SXGA monitors and 20 percent from XGA monitors.

Revenue from LTD monitors represented 14 percent of overall revenue in the quarter, which was up from 13 percent in the third quarter.

In terms of ASP’s, the average price of a monitor chip shipped in the fourth quarter increased 29 percent from the third quarter as we benefited from the greater percentage of higher ASP chips going into high resolution UXGA monitors.

From an overall LCD market perspective, all indications are that LCD monitors will continue to grow rapidly in 2004 with recent industry estimates showing growth of approximately 40 percent in 2004 to about 75 million units.

As we announced last quarter, we have deemphasized development of the lower end LCD monitor chips, but will continue to invest in developing smart timing controller products that reduce costs and improve in LCD’s panel performance.

And, also, we will continue to sell products into the high-end segments of the LCD monitor market.

From an outlook perspective, we believe the UXGA business will likely drop off a bit in the first quarter, which will lead to a decrease of about 10 percent in LCD monitor revenue in the first quarter.

I’ll now shift to advanced television.

The advanced TV category comprised of LCD TV’s, progressive scan CRT TV’s, plasma displays and digital rear projection TV’s continued to show robust growth in the fourth quarter.

Advanced TV revenue of about $13.4 million in the fourth quarter increased 15 percent sequentially and 209 percent year-over-year.

On a mixed basis, LCD TV’s represented approximately 45 percent of total TV revenue; progressive scan CRT’s, 30 percent; plasma, 20 percent and digital rear projection, 5 percent.

Advanced TV bookings were again strong in the fourth quarter, which led to a book to bill for the advanced TV business of well above one.

As I mentioned earlier, during CES we demonstrated our new generation of image processors for the advanced TV market, code named Photopia.

The Photopia family of image processor IC’s featured DNX video processing technology that we believe sets a new benchmark for video quality by optimizing the entire signal path.

Some of the key features of Photopia include DNX PixelBoost, a technology that improves pixel response to eliminate blurring in fast motion video is seen on some LCD panels.

DNX rich color processing, a technology that renders more than 1 billion colors with 10-bit color processing and also optimizes content appearance for various display technologies.

While several companies have developed and sold 10-bit processing using expensive proprietary solutions, we believe Pixelworks is the only supplier of a commercially available true 10-bit processing solution.

DNX advanced scaling to give clear, crisp images on four-by-three or 16-by-9 displays independent of input aspect ratio.

DNX video enhancement technologies, such as BCTI, DLTI, white/black level expansion and digital luminance peaking to produce sharp, rich picture quality.

Intelligent windowing, including split screen, POP and PIP with alpha blending and advanced 256 color bitmap onscreen displays features for high quality user interfaces.

We have received a tremendous response to our Photopia product line from leading television companies from all over the world and expect to begin shipping early production units to customers in the second quarter and to begin ramping volume in Q3 and Q4.

Looking forward to Q1, we expect plasma TV business to be up 5 percent to 10 percent.

We believe we will see an expected seasonal decline in revenue from progressive scan CRT manufacturers in China, but we believe this will be more than offset by a greater than 50 percent growth in our LCD TV business.

The result is, we anticipate overall advanced TV revenue in the first quarter to increase 15 percent to 20 percent over the fourth quarter.

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

Thanks, Allen.

Before I begin my overview, I want to mention that I will be referring to both GAAP and pro forma numbers, so please refer to the financial statement and notes in the earnings release for a reconciliation of the differences between pro forma net income and net income or loss according to GAAP.

I’ll first cover the income statement and then review the highlights of the balance sheet.

Clearly, this was a very strong quarter from a financial standpoint.

Record revenue of 40.8 million was up 40 percent year-over-year and 15 percent sequentially.

Gross profit margins of 46.4 percent improved 400 basis points over the third quarter.

Operating margins, both on a GAAP and pro forma basis, and both on a dollar and percentage of revenue basis, were the best in the company’s history.

Net income and earnings per share, both on a GAAP and pro forma basis, hit record levels with GAAP net income of 2.9 million or 6 cents per share and pro forma net income of 5.2 million or 11 cents per share.

And we generated 8.5 million in cash in the quarter, bringing total cash and marketable securities to just under 101 million.

As expected, we continued to see strong growth in advanced TV revenue in the fourth quarter, which was up 209 percent year-over-year and 15 percent sequentially.

Relative to our October outlook, we were positively surprised by the strength in projector and LCD monitor business, which both grew at double-digit rates from the third quarter.

Looking at the revenue mix in the fourth quarter, projectors represented 51 percent of total revenue, advanced TV’s, 33 percent;

LCD monitors, 14 percent; and other was 2 percent.

We continue to have a broad set of top tier customers in the fourth quarter with the top 15 end customers representing approximately 70 percent of total revenue.

There weren’t any 10 percent or greater customers.

For the year, revenue of 140.9 million increased 37 percent over 102.6 million in 2002 led by very strong growth in advanced TV business, which grew 127 percent.

Projector and LCD monitor business also grew nicely in 2003 with projector revenue increasing 27 percent over 2002 and LCD monitor revenue increasing 6 percent.

On the bottom line, we had a small GAAP net loss of 531,000 or 1 cent per share, which was significantly improved over the net loss of 20.9 million or 48 cents per share in 2002.

On a pro forma basis, net income of 10.2 million or 22 cents per diluted share was up 42 percent over 7.2 million or 16 cents per diluted share in 2002.

Looking forward, in the first quarter, we estimate revenue will increase to 41 million to 43 million, a 28 percent to 34 percent year-over-year increase.

Relevant to the fourth quarter, we expect projector revenue will be flat to, perhaps, down 5 percent.

LCD monitor revenue will decrease about 10 percent.

And advanced TV revenue will increase 15 percent to 20 percent.

In the TV business, we expect to see seasonal softness in progressive scan CRT business more than offset by strong growth in LCD TV business, which we believe will increase by more than 50 percent.

Relative to our overall revenue outlook, we currently have more than 80 percent at the mid-point of our revenue outlook in the first quarter either already shipped or in backlog scheduled for shipment.

Gross profit margins on a GAAP basis in the fourth quarter of 46.4 percent were up 400 basis points from 42.4 percent in the third quarter due to cost reductions on key products and a more favorable mix of LCD monitor business.

We anticipate gross profit margins will remain relatively unchanged in the first quarter.

Combined R&D and SG&A expense of 12.2 million were up approximately 300,000 from the third quarter, but were flat from a year ago.

As a percentage of revenue, R&D and SG&A expenses combined were 29.8 percent of revenue, down from 33.3 percent in the third quarter and 41.7 percent in the fourth quarter of 2002.

In the first quarter, total R&D and SG&A expenses combined are expected to increase to 13 million to 13.5 million.

Most of the increase is expected to come in the R&D line in the form of increased project related NRE expenses, as well as increased compensation expenses due to increased head count.

SG&A expenses are likely to increase modestly as a result of hiring additional field applications engineers in Asia to support customer requirements.

Restructuring expense of 1.1 million in the fourth quarter consisted of primarily severance related expenses from the restructuring we announced in October and completed within the quarter.

Stock based compensation and amortization of assembled workforce expense was 2.4 million in the quarter.

Most of the expense was stock based compensation related to the restructuring.

In the first quarter we anticipate expenses for stock based compensation and amortization of assembled workforce combined to be approximately $300,000.

As I mentioned previously, operating margins in the fourth quarter were the best in the company’s history, both on a GAAP and pro forma basis.

GAAP operating income was 3.3 million or 8 percent of revenue, which compared to GAAP operating income of 358,000 or 1.2 percent of revenue in the fourth quarter of 2002 and a net operating loss of 6.9 million in the third quarter of 2003.

On a pro forma basis, operating income in the fourth quarter was 6.9 million, or 16.9 percent of revenue, up from 1.8 million or 6.3 percent of revenue a year ago and 3.4 million or 9.4 percent of revenue in the third quarter of 2003.

The tax provision in the fourth quarter, both on a GAAP and pro forma basis, came in better than we expected primarily due to a decrease in the valuation allowance associated with net operating losses in our Canadian subsidiary.

This provided the one-time benefit in the fourth quarter of approximately 838,000 or 2 cents per share, both on a GAAP and pro forma basis.

In 2004, both the GAAP and pro forma effective tax rates are estimated to be between 32 and 36 percent of income before taxes.

Net income, both on a GAAP and pro forma basis, hit record levels in the fourth quarter.

On a GAAP basis, net income in the fourth quarter was 2.9 million or 6 cents per diluted share.

This compared to a net income of 679,000 or 1 cent per diluted share in the fourth quarter of 2002 and a net loss of 4.1 million or 9 cents per diluted share in the third quarter of 2003.

On a pro forma basis, net income was 5.2 million or 11 cents per diluted share in the fourth quarter.

This compared to net income of 2.2 million or 5 cents per diluted share in the fourth quarter of 2002 and 801,000 or 2 cents per diluted share in the third quarter of 2003.

Looking forward, in the first quarter we estimate earnings per share will be 8 cents to 9 cents, both on a GAAP and pro forma basis.

I’ll now quickly touch on the balance sheet.

Cash and marketable securities of 100.7 million increased 8.5 million from the third quarter.

Accounts receivable of 8.5 million, representing 19 days sales outstanding decreased from 10.6 million or 27 days sales outstanding in the third quarter.

The decline in DSL resulted from front-end loaded demand in the quarter from our customers in order for them to bill and ship products in time for calendar year-end.

Additionally, the fact that Chinese New Year fell in January this year also resulted in an earlier request for products.

DSO is expected to be in the more typical range of 25 days to 30 days in the first quarter.

Inventory of 10.5 million representing roughly six weeks of shipments decreased from 11.3 million in the third quarter.

This is in line with our ongoing expectation for six to eight weeks of inventory.

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

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

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

Before turning it back to Allen, I will mention that in the first quarter we will be presenting at the DA Davidson Technology Conference in Park City, Utah on February 6 and Roth Capital Partners Growth Stock Conference in Dana Point, California on February 18.

I will now turn to Allen for his closing comments.

Thank you, Jeff.

I’ve now been CEO of Pixelworks for seven years, having celebrated our corporate birthday just a few weeks ago.

And I can say I’ve never been more excited about our products and our markets.

Flat panel displays have changed the way we interact in group presentations and at our desks.

Soon they will change the way we view our world from our family rooms and dens.

For Pixelworks, Q4 was another record revenue quarter for us, giving us a string of seven consecutive quarters of record revenue.

Even so, bookings were also at a record level and book to bill was still in excess of one.

And our Q1 outlook is for our record string to continue.

We again had record unit shipments of more than 2.6 million chips, representing a 96 percent increase over Q4 of 2002.

This brings our total chip shipments for 2003 to almost 9 million, compared to just over 5 million for 2002.

Television continues to be our largest segment, measured in units with shipments of about 1.2 million chips in the quarter.

We expect to see TV continue to widen its lead during 2004.

The sub-$1,000 projector of 2003 has become the sub-$800 projector of 2004, led by the advances in low-cost polysilicon [phonetic work] light engines and we are very pleased to be working with our customers to be able to offer the lowest cost models in the world.

We’re rolling out the biggest new product introductions in the history of our company with Cheddar [phonetic work] and Photopia.

This has been a well-coordinated effort from all of our engineering design centers and our field offices.

I’m very pleased with our progress, but more importantly, our early customers are pleased with our progress and that is all that really counts.

We will now open up the call for questions.

Thank you very much, Mr. Alley. (Caller instructions).

And our first question today will come from Brian Alger with Pacific Growth Equities.

Hi, guys.

Good afternoon.

Nice quarter, looking at the guidance on the go-forward, I’m surprised to see that the gross margin is holding firm, giving your outlook for the next.

Can you maybe explain what’s going on there?

Yes.

I guess relevant to what we just did in the prior quarter, obviously, we’re not expecting any material change one way or the other.

In terms of looking at the growth, we’re expecting the greatest growth to come from the TV segment of our business.

So we pick up some benefit there, relative to the monitor market, which is expected to decline at roughly 10% rate or so and that’s the lowest margin portion of our business.

So overall, that’s kind of the mechanics that get us into the flat guidance from a margin perspective.

And Jeff, one other thing.

I think some of the cost reductions that we saw in the fourth quarter are still rolling through in the first quarter and we’ll pick up a little bit from that as well.

Great.

And should we expect any material change in your cost of sales, when you’re able to start receiving shipments from SMIC?

Well, that’s out a few quarters and of course, depends on competitive conditions at the time.

So I think it’s just a little bit too far out to be able to forecast margins and what the impact of products that we’ll received from SMIC in terms of the overall margin impact.

But from a cost standpoint we’re pleased with the products that we’re going to be manufacturing at SMIC and feel that will help us competitively.

The other thing is, obviously, it will be a phase-in process where a small percentage of the products will be from SMIC initially and then we’ll roll more in.

And also, the reason to move to SMIC, yes, there’s a potential that it could help our margins, but the other thing is being able to offer more competitive products at more competitive prices as well, Brian.

Okay.

And you went through in pretty good detail the market outlook towards the projector market.

And Allen, thank you for breaking it down in terms of the lower cost products versus the higher cost with regards to the mix between Poly-si and DLP.

But I couldn’t help but notice that the number you’re using for growth on a year-over-year basis, you’re now talking about a 35% growth, versus last quarter I think you said 50%, albeit maybe it’s off of a higher base than what the analysts currently have out there.

Can you maybe address why the change in tone there?

And then separately, how much market share in terms of total units of projectors do you expect to lose to TI as they rollout their DDP2000?

I think in terms of the change in outlook that we provided last quarter in terms of projector market, we’re just referencing an industry analyst and as you would expect, their numbers are continuing to move around.

But I think you’re right, that a portion of that decrease in the projected rate for this year is the fact that I think the ’03 numbers are going to come in a little bit higher than they had anticipated a quarter or more ago.

But in terms of kind of explaining the difference from the 50 to the projected 35 or so, actually it’s projected to be about 35-40%, those are kind of the dynamics.

But there isn’t anything specific to attribute the change to other than referencing the numbers from the industry analysts.

Brian, I wouldn’t read anything into that, that we’re less bullish about the projector business this quarter than we were last quarter.

It’s just exactly what Jeff went over.

As far as TI goes, what we’re looking at is TI has somewhere in the range of 25ish points of market share and that about half of that is probably in the lowest end projectors.

So over a period of time as that rolls in, you’re looking at 12.5-15% of the market being those low-end TI projectors that the DDP2000 would directly address.

And that’s if there’s no sort of market share shifts due to lower cost polysilicon or liquid crystalline silicon that I think everybody’s aware of, is being introduced rapidly now.

Okay.

And in those lower cost devices, could it be possible that you could have the Cheddar in there on the front end?

Yes, absolutely.

Okay, so you wouldn’t necessarily be completely out of those designs?

Oh, in the TI designs?

Right.

Yes, I mean it still requires a Cheddar and that is an opportunity for us.

There’s still analog components around those TI designs that we could certainly address.

Okay, great.

Thanks for clarifying it guys.

Again, good quarter.

Thank you.

Our next question will come from Brian Foote, with Ryan, Beck.

Thank you.

In terms of the TI market, what would prevent TI right now from addressing the higher end of the DLP market, the 50% that you say they are unable to address right now?

Do you have intellectual property that prevents that?

It’s really just that the performance of the DDP2000 doesn’t have all of the features required to address the high end.

One key feature, no pun intended, is horizontal keystone correction and the DDP2000 does not do that.

The other thing is what I got into with the whole video olympics and how the high end of the projector market looks an awful lot like the television market.

And the kind of criteria that you’re measured against is the same kind of criteria, this video olympics criteria, that you’re measured in, in TVs.

And so far, that hasn’t been something that TI has chosen to address.

They could address it in the future, but it’s not addressed by the DDP2000 as far as we can tell.

In terms of projectors right now, what would you say your lead time is between the time you actually ship the chips out of your facilities to the time it actually ends up within the projector?

Has that changed materially over the past few quarters and if so, can you give us what the direction is?

I’m looking at Jeff, but my guess is, is has not changed over the past few quarters.

Jeff, do you have any data on that?

Yes.

Brian, you’re asking from the time we ship it to the time that it’s in a completed projector and our end customer is shipping it to one of their customers?

That’s right.

I would estimate somewhere, in general, in the four to six-week range.

Okay, great.

Thanks, Jeff.

In terms of LCD monitors, we did see a year-over-year decline.

Are there any things on the horizons, any new resolutions or new form factors where you think you might be able to get growth back in that segment?

Well, certainly the UXGA segment in the last quarter was very good.

And we’re shifting more of our resources away from sort of the traditional monitor business to really focusing on the timing controllers that we developed in conjunction with our work on SmartPanels.

And it does two things for us.

One, it allows us to continue to participate in the lowest price segments of the monitor business, but it also has the potential to expand our footprint beyond monitors into even notebook computer panels and also into panels used in televisions.

So what we’re really doing is kind of bifurcating our efforts in the monitor business to still produce products for the high end of the monitor business, but at the very lowest ends really redirect that to our timing controller developments.

So in time we could conceivably see those comparisons declining in terms of revenues, until that TCON business picks up?

Yes.

We’re outlooking – I think that it declines a little bit in the first quarter.

Beyond that it’s really going to be based on how strong the UXGA business is and then how fast does the TCON business pick up in Q2, 3 and 4.

Looking backward, I would presume then that there are design wins that you had in prior years and prior quarters that are trailing off and going somewhere else.

Is that fair to assume?

Certainly in the XGA segment, yes that’s true.

But I wouldn’t say that across the entire board.

Okay.

Switching back to projectors, Allen, where do you think projector pricing is going?

Do we see a $500 projector on the horizon?

If so, when?

I know you look at price points a lot, but I’d be interested in your thoughts on that industry in this year and next.

Well, I think the physics of all the components that go into a projector certainly could get you to kind of the magic 499 projector.

As I look at it, I don’t see why that can’t happen.

It’s very much volume based though.

As the volumes start to get up into 3, 4, 5, 6, even 10m units a year, that’s where you can see that happen.

So I don’t think there’s a limit in terms of the physics of getting down to 499, but the timing is going to be a little harder to predict.

We may have to get to sort of a single panel polysilicon or a single panel LCoS solution to hit that barrier and that’s not impossible over the next, I’d say, 18-months or two-years.

Okay.

One final question.

I know you have insight into the channel.

Was pricing more or less aggressive in the fourth quarter, versus previous quarters from your perspective?

In the projector business are you talking about now?

Yes, from the standpoint of your customers.

I don’t think I can really say.

I don’t think we have enough data to really be able to help you out in terms of answering that question.

I guess just over the past quarter, as Allen mentioned earlier, we’ve seen some projectors getting as low as 799 and that’s really something that’s just happened over the last couple of months.

So those were coming from perhaps $100 or so higher for some models.

In terms of the overall industry and what’s happening from a pricing standpoint, I don’t think we have enough data to get too specific there.

Is it fair to say though that your pricing as a major component supplier was less aggressively marked down than say the 899-799 people?

In terms of our kind of chip by chip ASP decline, we only experienced about a 1% decline.

As Allen mentioned in the call, if you just take our total revenue divided by our total number of chips shipped it was about 4%, but that contemplates mix changes.

So, on just a pure ASP per chip reduction basis we saw about a 1% decline and again, we offset that by shipping more companion chips.

So, very modest decline for us.

Okay.

Well thanks very much, guys.

Next we’ll hear from Michael Kim, with Roth Capital Partners.

Good afternoon, gentlemen, nice quarter.

With respect to your projector business, I don’t know if you have this level of granularity, but can you talk about if you know the ratio of companion chips to your [image processing] chips, if there’s like a 2:1 ratio?

I’m just trying to get a sense of what the penetration rate is.

It’s continuing to grow in terms of our penetration rate, but it’s well below 2:1 at this point.

As a matter of fact, I think I can safely say it’s below 1.25:1.

We’ve been shipping video processing chips alongside image processors for a year or so now and we’ve just begun to really introduce the front end chip.

So we are hopeful that that metric will continue to go up, but at this point it’s not a lot above 1:1.

Okay.

And what’s the AST delta between the two?

Between these companion chips and an image processing chip?

Yes.

The companion chips, roughly speaking, are $10ish chips and the image processing chips are generally in the 20s and into the 30s.

Okay, interesting.

So I guess if we were to assume sort of 1:1 match up with all of your image processor with companion chips then the total dollar opportunity I guess would be roughly in line with that.

Okay.

But just so it’s clear, Jeff, we’re not at 1:1 today, image processors to coprocessors?

We’re a little bit, in terms of the average number of chips going into a projector, I think that’s what I was trying to answer.

We’re a little bit above 1, but not a lot above 1.

Okay, great.

And then touching on the advanced TV business, are you starting to see some stronger acceptance for your solutions kind of at the higher volume, mainstream side of the market or at the higher performance range, or just pretty much across the board?

Can you provide a little color on that?

Yes, I’m just thinking.

I’d say it’s pretty much across the board, from everything from kind of a 17-inch LCD TV is pretty much where we start in the LCD TV world.

We may be in some smaller ones, but you can kind of think of us as kind of starting at a 17-inch LCD TV and then going up from there.

Certainly in the CRT world where we have quite a bit of revenue, you’re down in $500, $400 products in that world.

So in CRTs it kind of starts around $400 or $500 and in LCDs it kind of starts at 17-inch and then goes all the way up to the largest plasmas that you can think of.

Interesting.

And in terms of sort of the competitive landscape, how are you seeing that shaping up and how are you sort of stacking up with some of those competitors out in the market?

I don’t think it’s dramatically changed over the past quarter or so.

We still have Trident and Genesis and Phillips and STMicro and Toshiba and all of our friends are in this business.

And I don’t think it’s radically shifted.

I think we’re certainly very optimistic about our new Photopia and the cheese line of products that we have.

And continue to get good feedback on that.

And from our perspective that’s probably the biggest seismic shift here, is that we do have a new line of products that we’re really happy with the performance of so far and we’re very focused on rolling those out over the next year.

From a strategy perspective, is that still in line with your sort of “TV in a box” turnkey solution that you outlined previously or is this in addition to that?

It very much is.

What we’ve done is we’ve dramatically reduced the number of chips required to do “TV in a box” with these new chips, but the solution cell is still exactly the same, where we’ve just done a new board with these new chips, and providing the complete software stack associated with that is absolutely part of our strategy.

So that still remains the same, the chips are different though.

Okay.

And I don’t know if you can give us a sense of sort of design starts to actual commercial production.

I think last quarter you gave a metric on how many design wins were in progress and I wasn’t sure what percentage of that reached actually commercial volumes at some point in time?

Last quarter we didn’t talk about design wins for Photopia.

This quarter was the first quarter I talked about something related to that and that was how many customers we had demoed to and how many of those customers we’ve engaged in the design process with.

We’re pretty rigorous about not calling something a design win until it goes into production.

And the metric that we gave was we demoed to more than 80 customers and about half of those guys have engaged with us on design so far.

So, pretty much all of those guys will ultimately come out with an actual television for the consumer market?

Well, they’re all either in the business with other existing products or you’re right, they could be new entrance into that business.

But all 80 of those folks are target customers with target products that they could produce and about half of them have engaged with us on working on a design, which is good as far as we’re concerned.

We’re pleased with that progress.

As we get into the quarter and next call we’ll be able to give you an update on that.

Okay.

And then as you guys are migrating over to SMIC, what’s your confidence level on startup yields?

I mean, typically there are some [teething] issues.

Do you guys have a pretty close handle on that?

Well that’s why I said that we’ve already taped out a chip and we’ve received first silicon back.

It’s kind of our pipe cleaner chip.

It’s a chip that’s an existing chip that’s in production.

We produce it in volume.

So we’re going to be able to compare that with the yields that we get at the existing foundry and kind of run them in parallel.

And that will give us an idea of what kind of yields we can expect as we start to move some other designs over and actually initiate new designs at SMIC.

And we’ll be able to give you an update on that at the next call as well.

And actually, if we were to look out a year ahead, what percentage would SMIC handle?

Would it be kind of more than half?

Well, it’s really tough to tell, we’re so early in the relationship.

But we certainly expect SMIC to be a very major supplier to us over the next year and a half or so.

Okay.

And then in terms, I guess of overall ASP pressure in the advanced TV segment, should we count on something like 20-odd, 30% annually or maybe a little bit more aggressive than that?

I think we’re so early on and it’s a little bit difficult to predict, but through this point at least, the type of ASP erosion that we’ve seen has been very manageable.

And so I think though, estimating something probably in the 20% range for a year, which would be a little bit less than 5% for a quarter, is probably not something that would be unrealistic to assume.

But it’s difficult to do that with much accuracy at this point.

Okay.

And then lastly, if you guys can speak to your product roadmap, expansion on the cheese line and Photopia or some follow-on products or adjacent products to that?

We haven’t really gone beyond the cheese line and Photopia disclosures.

Those are product families and obviously there’s going to be follow-ons to those products as we move forward.

We’re beginning to flush out the new roadmap beyond that and that may be something that I can bring up to speed on in the next call as well.

Okay, great.

Well thank you very much and nice quarter, guys.

Our next question will come from Cherrie Prinz, with D.A.

Davidson & Company.

Good afternoon.

Just a quick one, probably for you, Jeff, on ASPs in the television segment.

Can you give us a feel for what they did in Q4 and can we assume they’ll probably go up in Q1 as Photopia starts early production?

Is that mix going to change things?

In terms of Q4, on average, our ASP went down about 2%.

And then in terms of the influence of Photopia, that wouldn’t begin really until the second half of the year.

We begin shipping some product in the second quarter and then that would ramp from that point forward.

Okay.

So for Q1 would it be fair to stay around the same spot?

Yes, from a modeling perspective you might assume some modest erosion, but I don’t think we’ll see much.

Much of this metric will depend on the mix – mix of [class], progressive scan CRT and LCD TV.

We are expecting the LCD TV business to grow rapidly in the first quarter and the progressive scan CRT business to come down a little bit with plasma going up modestly.

So you need to consider those things.

But I would say no real significant change in terms of ASPs overall in the first quarter.

Okay great.

Thank you, that was it.

And we’ll take a follow-up question from Brian Alger.

Hi, guys.

Jeff, you mentioned in the projector space that you have one set of chips that’s getting somewhere in the neighborhood of the 20s or 30s and then you have the front-end chips that are getting, call it around the $10 range.

Is it safe to assume that given the current penetration rate and the hopes that we have greater, that by just a function of math, we see a decline in the average selling price for the projector [inaudible] units?

Yes.

In terms of that metric overall, that if we’re successful with these companion chips, the metric that we hand out each call would result in a lower number.

But that doesn’t mean that the content per projector is going down.

Right.

And ex that trend, is it safe to assume that at this stage of the game we should expect some form of ASP erosion on the existing image processing chips?

Yes, but it’s been historically, fairly modest and we aren’t predicting anything significant in terms of ASP erosion and any significant change relative to what we’ve experienced historically.

It’s like 5-10% annually?

Yes, we’ve typically seen in the low single digits per quarter, so that gets you probably about 5%.

I think in the low double digits annually is something we probably expect to see this year.

Okay.

And then coming back to the market numbers, just kind of crunching it through, if the market – and again, obviously, these are coming off industry analysts, so whatever good we are.

Growth at 35% and if TI is successful with the DDP2000 you can lose 12-15% market share year unit growth adding in some extra penetration per unit, call it 20-25%, is that reasonable, given where industry numbers are kicking out?

I hesitate to give you any real significant guidance at this point, because there’s, in terms of estimating market share that may go to TI over the year and the rate at which they might get that and all these other variables.

But I know you’re qualified to go through and look at those variables and come up with a number that’s reasonable.

I haven’t looked at that real hard.

But it doesn’t seem like it’s way out of whack.

I guess where I’m leading with this is, combining the ASP discussion and the unit discussion, it sounds like the projector market is going to be a little less exciting in terms of the growth driver for the business.

Is that fair to say?

Certainly we expect the TV business to grow the most rapidly in the coming years.

Great.

All right, I think that covers it for my math.

And there is time for one additional question.

That question will come from Craig Berger, with Smith Barney.

Hi, good afternoon, guys.

Just on the projectors currently, what are you seeing in terms of consumer versus corporate and where should we expect that to go in 2004?

We don't have great visibility on consumer versus corporate from our end, because many of these projectors that are built, they’re doing two projectors of virtually the same electronics chassis with maybe just a little bit of tweaking.

So it’s tough for us to tell what that mix is doing.

It’s something that we’re very interested in, because we actually believe that the consumer business is going to be one of the drivers.

And just our anecdotal – Jeff and I out talking to people, once these projectors hit $1,000, people in our one on one meetings start saying hey, where can I buy one and give me the website that I can go to.

So we feel like there’s an uptick in the consumer projectors, but unfortunately we probably don't have the kind of visibility to make an accurate call on that.

Got it.

On the advanced TVs, how do the margins stack up there for the different form factors?

Not materially different if you’re comparing plasma displays versus [indecipherable] CRTs or LCD TV.

I mean, I’d say we see more variation by customer even within a product category than if you looked at each individual product category and compared them against each other.

So, I don’t think that from a modeling perspective we’re trying to anticipate how the margin might change, if there’s anything significant to consider there [indecipherable] the three groups.

On your LCD TCONs, how are ASPs there, relative to your image processors?

We haven’t rolled out the pure LCD TCONs yet.

I said we’re working on them and we’re working to sort of [differcate] them out from our monitor line.

So we haven’t released those yet.

And I’d be able to give you an update over the next couple of quarters as we do release those.

Okay great.

Thanks, guys.

And that does conclude the question and answer portion of our call.

I’d like to turn it back over to you, gentlemen, for any additional or closing remarks.

All I’d like to do is remind you that we’ll be at the D.A.

Davidson Technology conference in Park City, Utah on February 6th and the Roth Capital Partners Growth Stock conference in Dana Point, California on February 8th.

Thank you for the call.

And that does conclude today’s conference call.

We thank everyone again for your participation and have a great day.