Pixelworks Inc (PXLW) 2004 Q1 法說會逐字稿

Good day and welcome to the Pixelworks Q1 Earnings 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 CFO, Mr. Jeff Bouchard.

Please go ahead, sir.

Thank you.

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 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 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 will begin by giving you an overview of the business and then turn it over to Jeff to review the first quarter financial results in detail.

Clearly this was a great quarter for us.

Better-than-expected demand for our products led to record revenue and earnings that exceeded even the high end of our outlook.

Record revenue of $45.3m was up 11% sequentially and 41% year-over-year.

Leading the growth was advanced TVs, which was up 28% sequentially and 283% year-over-year.

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

While record revenue is fantastic, I'm also especially pleased with our performance on the bottom line.

On a GAAP basis, net income of $6.6m, or 14 cents per diluted share, more than doubled from $2.9m, or six cents per diluted share, in the previous quarter, and increased more than 26 times, from $248,000, or one cent per diluted share, a year ago.

On a pro forma basis, which excluded $417,000 in non-cash acquisition-related and non-cash stock compensation expenses, pro forma net income was a record $7m, or 14 cents per diluted share, which was up 33% sequentially and 195% from a year ago.

The balance sheet also strengthened considerably in the first quarter, with total cash and marketable securities increasing $24m, to over $124m.

Before giving you an overview of our markets, let me spend a few minutes giving you an update on some general business developments.

First, I'm very pleased to announce we shipped our first early production Photopia products in the first quarter.

Photopia is our latest generation image processor, targeted at the advanced TV and projector markets.

We expect to ramp shipments of the Photopia product family in the second half of the year.

I'm pleased with the design win activity we have had and the velocity of the current activity.

We have expanded the list of customers who are actively engaged in product design efforts from about 40 last quarter to more than 50.

Several of these designs come from the biggest and most-recognized names in the consumer electronics world.

The customers represent all of our major geographies, including Taiwan, Korea, Japan, China, and Europe.

The applications cover a wide range of projects, from LCD TVs, rear projection TVs, plasma TVs, projectors, and even some PC TVs.

The customers are clearly impressed.

We believe our Photopia platform of products, combined with our analog front end products, which integrate an ADC, [DBI], and analog video decoder, provide a compelling one-two punch that delivers world-class solutions to our TV and projector customers at very competitive prices.

Our customers look to Pixelworks to provide complete product solutions, not just a catalogue of integrated circuits.

These solutions must include chips, reference designs, software, and a software development environment.

Software has always been a strong point for Pixelworks.

We've honed our software by working with our customers to bring some of the most complex, multi-media products to market in record time.

About a year and a half ago, we embarked on an aggressive program to re-architect our software and development tools to match our new products and to provide a new level of performance and ease of use for our customers.

We have recently released this new software platform, code named Cobalt, with Photopia.

I'd like to give you an example of the performance and power of Cobalt.

Channel changing in a television is a critically important function.

The channels must switch quickly and the new channel must be acquired and displayed without obtrusive artifacts.

If there are delays in channel changing, surfing becomes almost impossible, and for many, a poor surfing experience means a poor television viewing experience.

To achieve a great surfing experience, the software must work hand-in-glove with the hardware to accomplish this task quickly and efficiently.

Many competitive solutions have struggled to achieve an acceptable level of performance.

With Photopia and Cobalt, we have achieved channel changing speed and quality that has actually resulted in one of our lead customers asking us to insert wait states in the software to slow it down.

We believe Cobalt will provide an outstanding software platform to support growth in the advanced television and projector markets.

Our strategy is to provide total solutions for our customers.

In order to provide these solutions, we must provide all of the major functional blocks of the signal path.

We've been very active in pursuing all of the blocks necessary to complete our offering.

Today, I'm pleased to announce that we have made another large step forward toward our goal to provide all of the blocks necessary for a complete, high definition television solution.

High definition digital television requires decoding of an MPEG video stream.

We have been working with our partner, Toshiba, to develop high-performance television multi-media products.

I am pleased to announce the culmination of those efforts in a product family we call the Pixelworks Media Processor 2000.

The PWM 2000 brings together the strength and experience of Toshiba and Pixelworks to provide a total solution for high definition digital televisions.

Some highlights of the PWM 2000 family include MP at HL, MPEG2 decoding, a smart card interface and controller, a MIPS-compatible 32-bit RISC CPU, a USB 1.1 host controller, PCI BUS, AC 97 support, and advanced audio processing.

The PWM 2000 supports all worldwide DTV standards.

We're integrating the PWM 2000 with our Cobalt software and expect to begin sampling the PWM 2000 to lead customers in the third quarter of this year.

Before I get into the review of our markets, I would like to comment on our current foundry capacity status and outlook.

The industry has seen a wide-ranging tightening of wafer supply, with significant increases in cycle times over the past several quarters, especially this past quarter.

This is also been the case for our foundry suppliers, and although we have been able to satisfy our demand to date, our robust growth has created a lengthening of our lead times, and in some limited cases, allocation situations.

We've been working with our foundry partners to secure additional capacity and they have shown their belief in Pixelworks and our markets by strong support of our requirements.

Infineon, TSMC, and Toshiba has all gone to extraordinary lengths to support our ramp in excess of our forecasted volumes.

In order to secure timely supply and additional capacity for our upside demands in Q2 and beyond, we are incurring increased cost for certain products.

We are currently absorbing these costs while not increasing our prices to customers.

It is our strategy to maintain as much as possible our current pricing structure, as we believe this is very important as we pursue securing market share for what we believe will be a ramp in the advanced television segment in 2005 and 2006.

We are on schedule with respect to bringing products to market manufactured by our new foundry partner, SMIC.

We are now qualifying production-level silicon from SMIC and expect to begin shipping our first production product from SMIC in late Q2 for early Q3.

Additional capacity from TSMC for some of our newest products will help us meet our growing demand while providing great value for our customers.

We will continue to work closely with all of our foundry partners and believe we have adequate foundry capacity to meet projected demand.

I'll now give you a quick overview of the three end markets that we serve -- projectors, LCD monitors, and advanced TVs.

I'll start with the projectors.

Projector business, which grew 8% sequentially and 20% year-over-year, was better than anticipated in the first quarter.

Projector revenue represented 49% of total revenue in the quarter, down from 51% in the fourth quarter and 58% a year ago.

We believe the combination of continued brisk sales of sub-$1,000 projectors and a somewhat prolonged introduction of TI's DDP 2000 engine contributed to higher-than-expected projector revenue for the quarter.

Overall unit shipments were up 10% sequentially, while ASPs declined by 2%.

Year over year, units were up 39% and ASPs were down about 14%.

The projector market still seems to be poised to grow about 35% this year, driven by lower-cost projectors and continued expansion of projectors into the consumer market.

Compared to the end of the fourth quarter, the market has continued to expand, especially in the sub-$1,000 segment.

We have identified 34 models of sub-$1,000 projectors available in the U.S., up from about 25 in Q4.

There are 18 different brands represented.

LCD projectors continue to lead in price, with 23 out of the 34 sub-$1,000 models all powered by LCD light engines.

In fact, all of the eight lowest-priced models and nine of the top ten use polysilicon LCD light engines.

Similar to the pattern we saw last year, our projector bookings in the first quarter were down from the fourth quarter.

We believe that we are likely to see second quarter projector revenue flat to down about 5% from the first quarter.

Some of this decline is a seasonal result of Japan ending their fourth quarter at the end of March.

Our Japanese customers tend to build as much product as possible by the end of March, and then begin to ramp again in the middle of April.

We also believe some of the decline is related to the continuing rollout of TI's DDP 2000 engine for some of the DLP-based projectors.

Overall, we remain pleased with our leading position on the projector market and believe the market is poised for continuing growth for the foreseeable future.

I'll now turn to LCD monitors.

As expected, revenue from LCD monitor manufacturers, which represented 10% of total revenue, was down in the first quarter.

Overall, LCD monitor revenue decreased 16% sequentially, with XGA business roughly flat, SXGA business down about 20%, and UXGA business down about 25%.

Compared to Q4, units were down approximately 11% sequentially and the average selling price was down 6%, although most of the decline in average selling price was due to a smaller proportion of UXGA chips sold, which carry the highest ASPs.

Our ASP for a monitor chip in the first quarter was essentially the same as a year ago, due to a greater proportion of UXGA chips sold as compared to Q1 of 2003.

We've also seen monitor margins improve considerably over the past couple of quarters, as we have focused on selling only to the most profitable segments of the monitor market.

Looking at mix by resolution in the second quarter, UXGA monitors represented 45% of total monitor business, SXGA 30%, and XGA 25%.

While LCD monitor revenue was down sequentially in the first quarter, bookings were strong, which resulted in a book to bill well above one.

Based on our backlog position, we believe LCD monitor business in the second quarter will likely grow 10% to 15% over the first quarter.

At this time, it looks like we'll see growth in all segments of our LCD monitor business, including XGA, SXGA, and UXGA resolutions.

From an overall LCD monitor market perspective, all indications are that LCD monitors will continue to grow rapidly in 2004.

Recent industry estimates showing growth of approximately 40% in 2004, to about 70 million units.

I'll now turn to advanced TVs.

The advanced TV business comprised of LCD TVs, progressive scan CRT TVs, plasma displays, and digital rear projection TVs, continued to grow robustly in the first quarter, with sequential revenue growth of 28%, nearly double the 15% sequential rate of growth in the fourth quarter.

On a year-over-year basis, advanced TV revenue was up 283% and represented 38% of total first quarter revenue.

As we had expected, LCD TV business led the way, growing 58% sequentially and 468% year-over-year.

Plasma TV revenue grew 8% sequentially, and was up 122% year-over-year, and digital CRTs grew a modest 2% sequentially, but were up 292% year-over-year.

LCD TV and plasma TV business grew roughly in line with our expectations, with our digital CRT business exceeded our expectations.

Looking at revenue mix within advanced TVs, LCD TVs continued to be in the number one spot, at 54% of total TV revenue in the first quarter.

Digital CRT TVs at 26%, plasma TVs at 18%, and digital rear projection TVs at 2%.

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

As a result, we again expect double-digit sequential growth and triple digit year-over-year growth in advanced TVs in the second quarter.

We're estimating sequential revenue growth of 15% to 20%, which would equate to year-over-year growth of roughly 150%.

We expect LCD TVs to continue to be the number one revenue generator, followed by digital CRT TVs, plasma TVs, and finally, digital rear projection TVs.

From a market perspective, we believe we will see the advanced TV market grow at 75% to 100% this year and are excited about the prospects for continuing growth in this portion of our overall business.

I'll now turn the call over to Jeff to review 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 statements and notes in the earnings release for a reconciliation of the differences between pro forma net income and net income according to GAAP.

The financial results in the first quarter were clearly very solid, with record revenue, record operating margins, and record earnings, both on a GAAP and pro forma basis.

Revenue of $45.3m was up 11% sequentially and 41% year-over-year and exceeded our outlook, due to better-than-expected advanced TV and projector business, which were up 28% and 8%, respectively, over the fourth quarter.

Our customer base in the first quarter continued to be very broad, with our largest customer representing only 12% of revenue.

Our top ten customers represented 57% of total revenue in the quarter.

Gross profit margins of 52.3% on a GAAP basis and 52.6% on a pro forma basis were up 590 basis points from the previous quarter and were better-than-expected, mainly due to wafer and back end product cost reductions, as a result of our increased volumes, as well as the sale of previously reserved end-of-life inventory.

The sale of the fully reserved inventory improved gross profit margins by 90 basis points.

Operating expenses consisting of R&D and SG&A expenses of $13.5m were up $1.3m from the previous quarter, which was in line with our expectations.

R&D expenses increased primarily as a result of higher non-recurring product development expenses, as well as higher compensation expenses related to increased headcount.

As a percentage of revenue, R&D and SG&A expenses combined remained unchanged from the fourth quarter, at 29.8% of revenue.

We delivered record operating income, both on a GAAP and pro forma basis, and both on a dollar and percentage of revenue basis.

On a GAAP basis, operating income was $9.9m or 21.9% of revenue, which tripled from $3.3m, or 8% of revenue, in the previous quarter, and was up over 16 times, from $594,000 or 1.9% of revenue a year ago.

On a pro forma basis, operating income was $10.3m, or 22.8% of revenue, which was up 50% over $6.9m, or 16.9% of revenue, in the previous quarter, and it was up 282%, over $2.7m, or 8.5% of revenue, a year ago.

The effective tax rates, at 35.5% of income before taxes on a GAAP basis, and 34.1% on a pro forma basis, were in line with our expectations.

On the bottom line, GAAP net income was a record $6.6m or 14 cents per diluted share, which more than doubled from $2.9m, or six cents per diluted share, in the previous quarter, and it was up 26 times, over $248,000, or 1 cent per diluted share, a year ago.

Pro forma net income of $7m, or 14 cents per diluted share, was up 33% over $5.2m, or 11 cents per diluted share, in the previous quarter, and nearly tripled from $2.4m, or five cents per diluted share, a year ago.

I'll now quickly touch on the balance sheet.

Cash and marketable securities, consisting of cash and cash equivalents, short-term marketable securities, and long-term marketable securities, increased $24.1m to $124.8m in the first quarter. $11m of the increase came from ongoing operations, and $13m of the increase came from reclassing and revaluing our investment in SMIC, our new foundry partner in China, due to their initial public offering in the first quarter.

Following SMIC's IPO, the $10m investment we made in SMIC moved from the line on our balance sheet called ``other assets net'' to ``long term marketable securities.'' The value of the investment is carried at the after-tax value of the securities, which was $13.3m at the end of the first quarter, and will be adjusted to reflect the after-tax market value of the securities at the end of each quarter.

Our current intent is for this to be a long-term investment.

Accounts receivable of $17.1m, representing 34 day sales outstanding was up from $8.5m, or 19 day sales outstanding, in the fourth quarter.

The increase in receivables and resulting DSO was attributable to the fourth quarter being unusually low due to the particular timing of shipments that quarter and the first quarter being a little high, due to a slightly higher percentage of shipments occurring in the last month of the quarter, due to the product supply patterns.

Based on our typical pattern of fairly linear shipments throughout the quarter, we would expect DSO to be around 30, plus or minus a few days.

Inventory of $9.8m representing 8.5 turns, was down from $10.5m in the fourth quarter.

This represented approximately six weeks of inventory, which is a little lean for us but within our target range of six to eight weeks of inventory.

Let me now spend a few minutes on our outlook for the second quarter.

We expect revenue to increase to $47m to $49m, which represents 4% to 8% sequential growth, and 44% to 50% year-over-year growth.

We expect projectors to be flat to down 5% sequentially, LCD monitors to be up 10% to 15%, and advanced TVs to be up 15 to 20%.

At this point in time, we have more than 80% of the midpoint of the estimated revenue range for the second quarter either shipped or booked and scheduled for shipment.

Gross margins are projected to be 47% to 49% on a GAAP basis and slightly higher on a pro forma basis.

This reflects a roughly three to five-point decrease from the first quarter, due to recent product cost increases in order to gain additional capacity to meet growing demand, as well as a less favorable product mix with projectors, which carry the highest margins, expected to represent a smaller percentage of total revenue in the second quarter.

R&D and SG&A expenses are expected to increase $1m to $1.5m in the second quarter, to $14.5m to $15m.

We expect a majority of the increase will be in the form of higher development expenses, as well as compensation expenses related to increased headcount.

We expect the tax provision to be 34% to 36%, both on a GAAP and pro forma basis.

And on the bottom line, we are projecting earnings per share to be 10 to 12 cents on a GAAP basis, and 11 to 13 cents on a pro forma basis.

That concludes the review of the first quarter financial results and second 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 first quarter financial results.

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

Before turning it back to Allen, I will mention that we will be presenting at a few upcoming investor conferences -- the CSFB Digital Media Landscape Conference in Boston on May 12th, the Piper Jaffray Technology Conference in New York on May 19th, and the Smith Barney Semiconductor Conference in Monterrey, California, on June 2nd.

Also our annual shareholders meeting will be held in Portland, Oregon, on May 25th.

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

Thank you, Jeff.

We're off to an excellent start for 2004.

Our first quarter revenue of $45.3m marked our eighth consecutive quarter of record revenue.

Even with our record revenue, bookings were also a record, and book to bill was well in excess of one.

Our outlook for Q2 is to continue the string of record revenue quarters.

We again had record unit shipments in the first quarter and for the first time shipped more than three million chips.

Television continues to be our largest segment, measured in units, now accounting for about half of all our shipments.

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

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

We continue to roll out the biggest product introductions in the history of our company, with Cheddar, Photopia, Cobalt, and now our new, high-definition MPEG media processor, the PWM 2000 family.

Our excellence is being noticed.

We have been recognized by Display Mate with a five-star, Best Video Hardware Award.

Display Mate is the industry standard for testing of image and picture quality.

Over 200 computer and video publications in 50 countries use Display Mate for their lab testing, evaluations, and editorial reviews of video hardware.

This marks the fifth consecutive year that we have been honored with their top award.

We've gotten off to a great start in 2004.

The market wave of advanced television is rising, our design teams are delivering on our customers' vision of the future, our foundry partners are supporting our growth, our entire Pixelworks extended family of business partners are all pulling together to deliver the right products at the right price, at the right time, to take advantage of this incredibly opportunity.

We will now open the call for questions.

Thank you. [Operator Instructions] We will take our first question from Tyrone Lee of Piper Jaffray.

Hi, guys, great quarter.

Quick question here -- can you talk about, you know, any kind of changes to your existing contractual foundry partners, or is there any kind of- any kind of promises or kind of quotas?

No, in general, the partners have been outstanding.

When you've had quarters like we've had and upsides like we've had, you can imagine that we're asking them to produce product inside of typical lead time, and they've been great at doing that for us and all of them have been terrific working with us, under pretty tough conditions in the market.

But I think it speaks a lot for what they think of Pixelworks and what they think of our markets that they had been able to step and deliver us what they need.

OK.

Can you- you've highlighted the PWM 2000.

When do you expect to see, I guess, significant revenue contribution from that product line?

You know, we didn't talk about that.

We just said we'd be sampling it in the second half of the year.

I think Q3 was what we said, Jeff, right?

Yeah.

And we haven't talked about when the revenue ramp will occur.

Once we start sampling it, we'll get a better picture of that.

OK, fair enough.

Thanks a lot.

We will take our next question from Brian Alger of Pacific Growth Equities.

Hi, guys.

Great quarter.

Thank you.

Thanks.

In looking at the business, it seems like the projector market is something where it's slowing down but you're more than making up for it with the advanced television.

Is that a fair characterization?

I don't think so.

Not necessarily.

I mean, it's going to grow at 35%, roughly, in units this year.

We are seeing TI come in with the first real competitive product we've had in several years here, and expect that to take what kind of share, Jeff, do you think?

Yeah, up to about 15%, we think, share over the next 18 months, roughly.

But in terms of the overall growth in the market, Brian, I mean, it's expected to grow at roughly, you know, 30% to 35% this year, which is somewhere in the range of what it grew last year.

So the only thing that really is changing, I think, is just the introduction of TI's DDP 2000 engine.

The other dynamics, in terms of ASP erosion and overall growth in units for the market are roughly the same.

So suffice it to say, in the second half of this year, you expect higher revenue levels, even in the projector market as well?

Well, we're going to take one quarter at a time.

But again, you know, we've given all the information that we can in terms of things for people to estimate that type of thing, including, you know, projected ASP erosion, market growth in the overall projector space, and then, you know things that are perhaps a little bit more unknown would be, you know, the rollout of TI's DDP 2000 engine and how that rolls out throughout the year, so that will have some impact that is different from the prior year.

Yeah, but Brian, one of the other things that I think we're seeing is there does seem to be a seasonal effect in Q2 for us that's this phenomena where Japan ships a lot of product in their last fiscal quarter and then has a slow ramp in the second quarter, so I think that's another factor that we're seeing here.

And then once we get through Q2 we'll take a look at Q3 and see where we stand.

OK, and one last question with regards to the advanced television business.

Obviously things are just ripping in the LCD and PDP, with the capacity coming on line.

At this point in time, rear screen projection hasn't really been that strong of a category for you.

Can you maybe explain why that is?

I don't think there's any sort of fundamental reason for that.

You know, we're out there and we're selling pretty much equally to all the different segments.

And you know, just as I think about the customers and the design wins that I'm hearing about, there doesn't seem to be a strong bias any way.

There's nothing different about our product that makes it stronger for one or weaker for another.

Jeff, did you have anything that you wanted to say?

Yeah, the only other thing I'd add is if you look at the entire market, and you look at the different segments within advanced TV, the digital rear projection TV market is the smallest segment that we sell chips in today, so I would expect that to be the smallest segment of revenue for us, within the advanced TV revenue that we generate.

Great.

OK?

Thank you.

Great quarter.

Thanks.

We will take our next question from Vijay Rakesh of Next Generation Equity.

Hi, guys, congratulations on a good quarter.

Thank you.

Thank you.

My question is, when you look at penetration into China, into the China market, how do you see that progressing, in terms of your competition, I guess?

Yeah, I'll make some comments that are unfounded in fact, but just kind of my reaction to you know, working with customers and things, is that we've got some great customer relationships in China.

We've got a great management team in China, and we've got a great team on the ground in China, and they've been able to take many of our solutions and customize them for the China market.

And I think that's one of the reasons why we've been very successful and continue to be successful, is we have people tuning our solutions both at a board level, solution level, and also from a software level for the Chinese market and working hand-in-glove with our Chinese customers.

And also we have great relationships with pretty much every Chinese TV manufacturer that I can think of.

Jeff, did you have any comments on China or--

No.

From a factual standpoint?

Great.

If we look at, you know, you talked about the Photopia and the Cheddar and new PWM 2000.

When you look at in terms of the front end and back end integration of these chips, how do they compete with, you know, like a [Faruja].

I don't know of you see them in the field at all, but--

Sure.

Yeah, I think each of us takes a little different approach to integration.

We have focused on integrating on the digital side and then sort of integrating on the analog side, so that we tend to keep all the analog pieces sort of collected together in the Cheddar chips, or in our cheese family, and we think that's the right way to do it -- those chips need to be tuned for each of the different geographies that they sell into.

Got it.

And we spin those chips much more frequently than we spin the digital chips.

That also allows us to move to more aggressive process technologies on the digital side while leaving the analog chips on some of the more cost-effective processes.

Ultimately we think everything will be integrated into fewer and fewer chips and ultimately single chip solutions, but we think at this stage of the market we're pursuing the right strategy.

Got it, got it.

I was also wondering, when you look at your margins, I think in the latest quarter, they look pretty good.

I was wondering what kind of contributed to that-- to the improvement over the last quarter, even though your projector revenues as a percentage was probably down.

I was wondering if you could elaborate more on that?

You want to talk about that, Jim?

Yeah, the biggest thing is, early in the quarter, at the tail end of last quarter, we did get some product cost reductions, both back end related and wafer-related that certainly had a better-than-expected impact on our overall margins in the quarter.

So the cost reductions were a little in excess of what we anticipated.

And that was the biggest contributor to the improvement in the margins from the prior quarter.

We also did sell some end-of-life inventory that had been full reserved, and as I mentioned in the script, that contributed almost 1 point, 90 basis points, of margin improvement.

All right.

In the first quarter.

OK.

Great.

Thanks.

Thank you.

[Operator Instructions] We will take our next question from Kalpesh Kapadia from Unterberg.

Good afternoon, Allen and Jeff.

Congratulations on a great quarter.

Thank you.

Thank you.

Question relates to more [inaudible] side of the business.

With the lawsuit that [Genesys] had with the Taiwanese, are you seeing any positive impact going into Q2, since you're forecasting growth in that business?

Are you seeing any customers coming to you, since you, you know, have your own IP and you're pretty much unscathed with the lawsuit?

Yeah, you know, I-- the-- I don't really think it's appropriate for us to comment on any kind of fallout of that.

I know there's an awful lot of work that's still to be done between the companies that are involved in the lawsuit, and I really don't want to comment on anything that we're seeing, Kalpesh, if that's OK.

So it's more of a market growth for you, or it is some positive impact?

That was my question.

Yeah, I think from our standpoint, it's-- we have some products at the high end of the market that are very cost-effective for multi-function monitors at the high end, and so if high-end multi-function monitors get a little bit of an uplift, we've got some nice design wins there and we get an uplift with that, and I think that's-- that's really what's driving any kind of success that we're having in the monitor business.

OK, the next question is on the product side -- we talked about the PWM 2000 with Toshiba and also the Photopia and Cheddar.

Can you elaborate on what kind of relationship you would have with Toshiba in terms of IP sharing on the PWM 2000-- or what is the development role that Toshiba has and how would they benefit from this?

Yeah -- we buy those chips from Toshiba, just like we've had in the past.

It's a foundry relationship with Toshiba, and we cooperated with them on the development of that chip, just like we have on other chips that we have.

But it's an ASIC flow for us for a chip like that, that we purchase from Toshiba.

OK.

On the Photopia and the Cheddar side, on the analog front end, what is the current status in terms of using your own analog or ADI or some other license that you might consider?

All of our analog is ADI-licensed, on the Cheddar products.

The Photopia products don't have analog front ends built into them.

The Cheddar products have the analog front end from ADI.

And that came from our-- originally started with our monitor relationship with ADI and how now migrated to the-- what we call the ``cheese products.''

And any other internal development or other licensing arrangement you might consider for that site?

The only thing we've got is ADI right now.

OK.

Question on the advanced TV side.

You know, how does the Chinese market coming along, you know, after the Q1, early Q1, New Year?

How have you seen the trends, month over month, in February, March, and now going into April?

Yeah, for us, in China in particular, and specifically, you know, if you're referring to the progressive scan CRT market, we were actually up from the fourth quarter sequentially, so quarter to quarter, we were up about 2% in the CRT business, and China was up even more than that, a fair amount more than that.

So, China-- you know, business in China for us was a little bit better than we anticipated in the first quarter, primarily because the progressive scan CRT business was better than expected.

But we're also getting business, other types of TV products, in China as well.

They seem to be doing fine.

And how much was the advanced CIT business up in Q4, quarter to quarter?

The what?

Can you repeat that?

In Q4, in December, how much was it up sequentially?

In March, you said it was up 2% sequentially-- December--

For just the CRT business?

Yes.

The CRT business was up, I'm doing this fairly roughly, but it looked like it was up about 30% or so.

OK.

In Q4, it was up-- actually probably closer to 40%.

And then in Q1, it was up--

In Q1, it was up 2%.

Yeah.

OK, and in terms of seasonality, Allen, are you hearing anything out of China in terms of Olympics, you know, in Q2, clearly there's a meeting coming up, but the Olympics in the summer, any excitement around that?

Yeah, there clearly is.

I think what I'm feeling in China is the whole progressive scan CRT business is robust, and we're seeing more and more people moving to that platform and that architecture and I think that's going to be a great business for us, going forward.

So you know, it still a small percentage of the total TVs sold in China, so I think any major event, whether it's, you know, World Cup or Olympics or whatever is certainly going to juice that.

But I think just in general, the business in China is very robust and I think there's lots of areas for growth.

And lastly, on the LCD TV side, how much of the LCD TV revenue is strictly video versus scaler plus video?

I don't have that breakdown for you, at my fingertips here.

So I don't know.

Let me ask you this -- do you account of individual scalers, stand alone, that are sold into the TV market, as TV revenue?

Yes, if it's sold into a dedicated TV, so not a multi-media monitor, but if an image processor is sold into an LCD TV, yes, absolutely.

Yeah, and Kalpesh, even-- I think this is true, that even our lowest-priced scalers still do a progressive-- an interlace to progressive scan conversion, although not a very sophisticated interlaced to progressive scan conversion, they can all do it.

And then we move up the line to more and more sophisticated features, so even our lowest-cost chips still do scan conversion.

That would be called a video scaler, something like that?

Well, yeah, it would-- we- yes.

I mean, it has interlace to progressive scan conversion, it just doesn't have-- not all of them have a motion adaptive interlaced to progressive scan conversion.

And lastly, Alan, you know, your advanced CRT into China is strictly domestic consumption, to the entire dumping should not have any impact on that side of the business, right?

Yeah, as far as I know there's not a lot of those TVs that are coming into the United States that we can identify, that's true.

Thank you, and congratulations again.

Thank you.

Thanks.

Moving on, we will take our next question from Cherrie Prinz of D.A. Davidson.

My question was just asked.

Thanks.

Thank you.

[Operator Instructions] We will move now to Brian Alger with a follow-up question from Pacific Growth Equities.

Hi guys, just a bookkeeping question -- you mentioned that you had one large customer at greater than 10%, at 12% -- can you tell us who that was?

No, we don't provide that information, Brian.

OK, can you tell us which category that customer sells into?

They actually are a customer that's very diversified, that manufactures, you know, products for all three markets, that we sell into.

OK, can you tell us which region?

They're not a U.S. customer.

Thanks, Allen!

No, that's enough, Brian, thanks.

We will move next to [Craig Berjer] of Smith Barney.

Hi, guys.

Great job this quarter.

Thank you.

Thanks.

On advanced TVs, I noticed you had given some sequential unit and ASP indications for your other segments but didn't do that for TV.

Are you able to provide that information?

Yeah, for TVs, for this next quarter, we really don't anticipate much change to the average selling price of a chip going into an advanced TV.

How about Q1?

Oh, what was it for Q1?

For Q1, it declined 3% sequentially.

Got it.

And of the $1.5m advanced TV chips, can you give any color on how many are front end cheese products versus your back end processors?

Yeah, they're aren't very many front end cheese products going into TVs at this point in time.

We just started ramping that product over the past six months or so, so in the future we expect to sell, obviously, greater volumes, but at this point in time, there isn't a lot there on the front end products.

So the 1.5 million units doesn't necessarily equate to 1.5 million advanced TVs.

Is that--

Correct.

Yeah, it's comprised of primarily video processing chips and image processing chips, as well as some front end cheese products, but not many, and in some cases, we sell multiple chips into a single advance TV.

Right.

So what's your average chips per TV today, if you have that?

I don't have that.

I don't have that information for you.

And in some situations, we're selling -- for example, in China, we're selling just video processing chips into progressive scan CRTs.

Other parts, you know, for other types of products, plasma displays and LCD TVs, again, we're selling multiple chips into those types of products.

But I don't have that information for you.

Great.

On the R&D, it took a step function up this quarter, and you're again guiding Q2 higher?

Right.

Right.

Now you said some of it was for non-recurring research wafer starts.

Is that right?

Yeah, it's-- we get lumpy product development expenses related to [tape-ups] of products and just our ongoing product development efforts.

So they can be rather lumpy.

But in this case, yeah, this quarter, it went up, you know, fairly substantially and we again expect to see that in the second quarter.

So $14.5m to $15m in opex for Q2, is that a level we should expect throughout the rest of the year, or do you expect to see that continue to ramp up?

I would expect, and our overall plan, is to continue to increase spending as revenue and gross profit margin increases.

With the overall, longer-term objective to have operating margins in the 15% to 20% range, which, if you look this quarter, our operating margins were actually in the 22% range, so we're obviously very profitable.

Our longer-term objective is to, you know, we feel a healthy rate of profitability with making sure that we're investing appropriately in the business would be operating margins in the 15% to 20% range.

And what would-- what's the plan for gross-- or the long-term plan for gross margins?

Longer-term, I mean, we've said-- as we look out, you know, a couple of years, we think that margins are likely to come down.

We're selling products in a competitive marketplace, selling into a consumer market, and our expectation is that they will likely, you know, come down in the coming years.

It's hard to quantify exactly where they may end.

We've said, though, that we believe it's possible in the coming years that when the volumes are much higher that margins could get down even into the high 30s, gross margins.

But again, with higher revenues, and managing our expenses, we believe maintaining operating margins in the 15% to 20% range is very reasonable.

Real quickly, on panel supply, glass prices have been going up for much of Q1.

How do you-- you know, what's your outlook for panel availability, panel pricing, and how do you view that as affecting your business in terms of-- from a financial perspective?

Yeah, I think-- it never ceases to amaze me, my inability to predict what panel prices are going to do.

That's the first thing.

And I-- I'm constantly checking on my trips to Asia.

But I think although it may have some short-term effect, the macro trend is still flat panel displays and progressive scan displays are replacing CRTs, so I don't worry about it that much, or even think about it that much.

These price increases don't seem to have a dramatic effect on consumption.

They have some effect on consumption, but it doesn't seem to be a dramatic effect on consumption, and long-term, the trends are you get the generation six and generation seven fabs out there, and these prices will come down dramatically, and I think the real thing that we need to be focused on is when are we going to pass through the $1,000, 30-inch TV, and is it going to occur, you know, sort of by Christmas time this year or some time next year, and I think we'll get a little more visibility on that as we get out into Q2 and Q3.

Got it.

Thank you very much.

Thanks.

[Operator Instructions] We will take our next question from Michael Bertz of Morgan Keegan.

Hi, guys, just a couple quick questions.

The first, you talked a little bit about the sort of expectations for product costs that you had this quarter and what you're sort of looking, and in terms of wafer capacity and what you have from your foundries.

Can you give us some sense about what your expectations are about that cost, as we go out over the next couple of quarters, if that capacity remains tight?

And then furthermore, contrast that with your ability to sort of stay ahead of that with some cost reductions, which you did see this quarter?

Yeah, in terms of pricing going forward, I think it's really tough to tell.

I think the other thing is, is that, and I'll reiterate that our foundry partners have been very, very good to us in terms of getting us the right pricing and getting us the right parts.

The other thing that we're going to be seeing later on this year, obviously, is ramping some of these new parts -- the Photopia parts and some of the new cheese parts, and we're going to have that effect rolling in, in the second half of the year as well, and they come in a whole range of performance, from very high performance to extremely low-cost, so the mix is going to have a have a huge factor on what we're going to be able to do there.

So I'm not giving you a very crisp answer, but that's because I don't really-- I can't really see out much more than just the second quarter, other than our foundry partners have been very cooperative and they've been very willing to work with us to get us the product that we need at the prices that we've been able to get.

OK.

And then let's-- talking about the Chinese OEMs a little bit, now obviously they're all looking to differentiate their products from each other in the end market.

Could you kind of handicap or even kind of tier out what they're looking for from you as a supplier in terms of ability to provide either a systems solution or a more integrated solution, or sort of what the different ends of that market are looking for, you know, whether it's software, et cetera?

Yeah.

Well in China, we provide total solutions, even to schematics of boards that go into some of these products.

And all we have to do with the Chinese OEMs is work with them on their board design to build a header and then we can work on the digital board design that plugs into that header, and we provide a total solution to their specification.

And that works very well for them and that works very well for us because we can-- we can control the entire software environment and everything that goes on there.

I think that's what, A, given us a strong relationship with the customers and B, allowed us to ramp products quickly to volume production, specifically in China.

So we have a very large team that's been doing this, building the relationships and working with them, hand-in-glove, like I said earlier.

And I think that's really one of our greatest advantages in China.

And then the solutions are very cost-effective -- they have to be in China, and obviously we are, and then they have to supply great quality and-- you know, in terms of image on the screen or image on the wall, we do a real good job of that as well.

OK.

And then just one last question -- I know we talked a little bit about the average chips per TV, which obviously you guys don't have that number, but in terms of qualitatively, between LCDs and plasmas, which, you know, ostensibly, have more than the progressive scan CRT at the current time, as you start adding these other chips and these other functionality being built into these designs, can you sort of handicap which one is going to grow faster than the others, in terms of chips that will go into each TV?

In terms of multiple chips?

Yes.

I-- you know, I can't.

I think our value proposition in all these is about the same, and it's really, you know, which customer likes your solution and which customer wants to have more of an integrated pixelar solution than another customer.

It's-- it isn't like it's-- there's something inherent in our chips that make then, you know, better for plasma or better for LCD.

It's really just on a customer by customer preference basis.

OK, great.

Thanks.

Thanks.

Moving on, we will take our next question from [Sam Ferreri] of [Seligman & Company].

Hey guys, great quarter.

Just a couple of questions.

On the projector side, what was the average dollar content per projector this quarter?

I know you said ASPs went down.

Did dollar content per projector go down as well?

It went down very slightly.

The average ASP went down about 2% and the average content went down, you know, roughly in that range as well.

In terms of the average content per projector, it's kind of in the mid 20s.

OK, so does that imply the penetration of the front end chips as well as the video processing chips didn't increase, then, quarter--

Didn't really change much from the prior quarter.

OK.

And what is the penetration of the front end chip versus the video processing right now?

Umm, let's see, it is, and this is off the top of my head, but I'm going to say maybe it slightly tilted in the direction of the front end chip, but it's probably not too far off from 50-50 at this point.

OK, so 50-50.

So I thought last quarter it was the other way around, wasn't it?

Was the video processing was a lot more and the front end was a lot less, because it had just started ramping?

Yeah, I think the video processing chips probably would have been a little bit more-- again, I don't think it would have been far off from, you know, 50-50 is my rough guess.

It could have been 40-60 either way.

OK.

I don't have the numbers in front of me.

And what's the percentage of the total projector chips, do you think, is co-processors now?

I think it's still probably 10% co-processors, if you include this analog front end chip or a video processing chip, combine those into a category called co-processors, compared to image processors.

It's roughly ten image processors to every other type of chip.

OK.

And should we, you know, I guess TI talked about their DLP revs being up 50% quarter over quarter, and I'm not sure what the exact break out between projector and TV was.

Is there a chance that they're growing materially faster than you guys this quarter?

I mean, was the share loss pretty large this quarter?

I mean, what's your sense of--

Well, yeah, if you look at the projector market, it's somewhere around 70% polysilicon LCD-based projectors and 30% DLP-based projectors, and I don't think there's been any material change in the split of projectors this quarter versus the prior quarter.

So if they grew 50% in the quarter, I suspect that that would be representative of some growth in the advanced TVs, the rear projection, digital rear projection TVs, which have, you know, are shipping in very low volumes and but increasing probably at a healthy rate.

So I would imagine that's probably where most of that business came from.

But, I mean, at the margin it would seem that-- I mean, if your projector revs are up 8%, I would think their projector revs would probably be up above 8%, right, or not necessarily?

Not necessarily for the projector market.

I mean, they're replacing, you know, again, if you're thinking about the effect of the DDP 2000 engine, they're essentially replacing another engine that they've been selling previously.

So it's not necessarily an incremental dollar opportunity for them there, unless the overall mix changed in the projector market, which we don't think it is.

Moving on, we will take our next question from Tom Leach of Bennett Lawrence Management.

Yes, good afternoon, gentlemen.

You talked about that you have to pay a little bit more for chips, basically because your customer demand is greater than expected.

Is this a temporary thing such that as your foundries now understand your increased demand, you won't have to pay that [adder]?

Well, it's something that we see short-term and it's every piece of the supply chain, when you're pulling stuff ahead.

So you're shipping stuff faster than you normally would, your packaging and test houses -- every piece of the supply chain gets affected until your forecasts can more accurately reflect the demand that you're seeing.

And with lead times stretching out, that becomes a little bit of a challenge, so short-term, it's something that we see.

Longer term, again, the foundries have been terrific in working with us, and in fact, everybody have been terrific in working with us and I'm sure that longer term, that won't be an issue.

And what geometries are you guys built on, mostly?

Most of it is .18.

Anything further, Mr. Leach?

I'm all set.

Thank you very much.

Thank you.

We'll move now to C.J.

Muse of Lehman Brothers.

Yeah, good evening.

With 80% plus of second quarter revenues shipped or scheduled to be shipped less than one month into the quarter, would you characterize your guidance as potentially conservative or is the tight foundry capacity limiting top line strength?

No, that-- that's a metric that we've used for almost as long as I can remember, so it characterizes that it's a fairly typical position for us, given this point in the quarter, and certainly there are foundry limitations and in fact, there's supply chain limitations.

Like I said, the whole supply chain right now is pretty much fully booked, as close as I can tell.

But that's a number-- I don't know if you have a comment, Jeff -- that's a number that's fairly typical of what we've given every quarter for pretty much as long as I can remember.

Yeah, it's just based on us looking at our backlog, you know, and forecasts from our customers, so it's our best estimate of revenue for the second quarter, based on all the information that we have.

OK, if I could just quickly follow-up with a second question -- what kind of lead times are you seeing now across your various product segments?

You mean from the foundries?

Yeah.

Or from our customers ordering product?

From the foundries.

Well, it's stretched out.

I don't want to-- I don't want to say exactly, but it has moved out -- at least their request dates have moved out, and like I said, they've been working with us to do as best they can, but they would like to have more visibility than we had-- then they were asking us for sort of six months ago or a year ago.

Gotcha.

Great, thank you.

Thanks.

Next, we do have a follow-up question from Kalpesh Kapadia of Unterberg.

Hi, and could you provide a geography mix of your revenue?

I don't know if you provided that number in the past.

Jeff, can you do that?

Let's see, god, that's a lot of numbers Kalpesh.

So you want to know by market within every geography what the mix is?

I can-- I can--

I can give you the overall geographical mix.

Yeah.

Sure.

That-- this quarter, it was about 39% Japan, 26% Taiwan, 15% China, 10% Korea, and then 10% rest of the world.

And Allen, how much of your supply comes from Infineon versus TSMC versus Toshiba?

Do you have a mix of that sort?

You know, I don't think we've ever broken that out.

They're all pretty sizable for us, but I don't think we've ever really broken what that is, Kalpesh.

Fair enough.

The question, then, is why is there such a wide swing in gross margin from Q4 to Q1 to Q2?

You know, what is-- what are we missing here?

You know, you got a benefit, now you're forecasting lower, you know, because of wafer cost increases or supply chain cost increases.

Yeah, just a comment from me is that if you look at the second quarter and you look at the fourth quarter, I think those margins are going to be pretty similar, right, Jeff?

And that everything landed right, you know, we had some one-time things that landed right for the first quarter.

We had some cost reductions that fell just perfectly, so that they didn't get into the fourth quarter and did get into the first quarter, and it's one of those things where everything just falls perfectly and you get one that kind of jups up, and I'd say that what we-- what we expected, really, was something more like fourth quarter and second quarter, with maybe a little rise in between, but not what we saw.

It's just mix landing perfectly, it's all of those things happening, so that Q1 is actually-- I would call it more of an aberration rather than a trend reversing or something.

Jeff, did you want to--

Yeah, no, I don't think there's a whole lot to add there.

Yeah, just in terms of second quarter outlook, though, it's-- you know, 47% to 49%, which would be on the low end of that, basically, where our gross profit margins were in the fourth quarter, so as Allen mentioned, we popped up a bit in the first quarter, but expect to see gross profit margins at kind of where they were in the fourth quarter, or maybe possibly up a couple points.

So should we expect, going forward, in that high 40s range in terms of gross margins?

Well, we're taking it one quarter at a time.

You know, as we've said, if you look out over the next couple of years, we think they'll come down, but we haven't seen any signs of that in the near term.

You know, if you exclude this one quarter here, first quarter to second quarter effect.

So over the long term, yes, we do expect that they'll come down, but in the very near term here, we obviously still see them in the high 40s, mid to high 40s.

So lastly, you know, and I had heard that customers who are going to SMIC are seeing price increases from TSMC.

Is it a result of your move-- your $10m investment into SMIC or is it something that TSMC is instituting across the board?

No, not at all.

I mean TSMC has been really good to work with and have supported us tremendously.

Many of our new parts are taping out at TSMC and no, we've had nothing but great support from TSMC.

Thank you.

Moving on, we will take our next follow-up question from Brian Alger of Pacific Growth Equities.

Hi, Jeff.

Just wondering if we can get into some of the numbers a little bit.

You talked about the ASPs being down-- or I'm sorry, let me shift gears here.

The ASPs were down slightly for projectors, but the units were up about 10% sequentially.

What was that unit growth on a year-over-year basis?

39%.

OK.

And as I recall, we saw some good acceleration in the second half of last year.

Is that correct, in terms of the market and you guys, in terms of units?

Yes.

All right, so if-- if what you described in terms of you guys maybe giving up a little bit of share to TI over the course of the next year or so, and the annual growth rate being, you know, in the neighborhood of 35%, does that imply that we should be thinking maybe in terms of flattish to maybe down slightly in terms of unit volumes, over the next few quarters or so, as we start to see the TI impact?

Well, no.

We- last year, if you looked at the pattern for '03 in projectors, we actually declined a bit in the second quarter from the first quarter, and then what we typically expect to see in the projector market is some increase in the third quarter and then a strong fourth quarter.

So you know, depending on how the quarters work out and the overall growth rate in the projector market, and then again, trying to estimate the impact of the DDP 2000 engine, there's a lot of variables there.

But no, I think the prospect still exists for growth in the projector market this year.

And then we also have these companion chips, you know, one that's just been recently introduced, in the past six months, that we're certainly worked hard to sell more and more companion chips, both the front end analog chip as well as video processing chips, alongside our image processor.

And if the consumer market grows at three times the rate of speed the business projector market grows, we in theory have, you know, a greater opportunity to sell more video processing chips into that segment of the projector market.

And we will take our last question from [Sam Ferreri] of Seligman & Company.

Hey guys, two more questions.

One on the China-- the progressive scan CRT market, are you guys getting a lot of share there, quarter over quarter, or does it look like the overall market is just doing a lot better than you would have expected?

And number two, the written off inventory -- what was that last quarter and where is most of that written off inventory?

Is that projectors or flat panel monitors or TV business?

Yeah, in terms of- there's a couple of questions in there, I think.

In terms of China, yeah, it's hard to- you know, estimating market share at any point in time is pretty difficult.

And with respect to getting good market data on the progressive CRT market, there aren't many people that are following it closely, so it's hard to know.

We did expect to see some seasonal softness in the first quarter, which you typically in the progressive scan CRT market.

We obviously didn't see that, so you know, you would have to wait for-- to see what other suppliers to that market, you know, did in the first quarter, to get, I guess, an understanding, you know, at least a reasonable understanding of how we might be doing, from a market share perspective.

But the first quarter was better than we had expected in that part of our business, so we think that business is doing pretty well and is expected to grow at a nice clip this year.

I think the market projections are somewhere 50% to 70% annual unit growth in that market.

So, you know, we expect that'll be a good market for us.

Let's see, remind me of--

The inventory writeoffs.

Oh, the inventory writeoff and where that product was sold -- it was a combination of some going into monitors, LCD monitors, and some going into TVs.

I don't think there was any projector business in there, and I think it was roughly a 60-40 or 75-25, roughly, split between going into TVs and monitors.

And there appears to be no further questions at this time.

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

Thank you very much.

I'd just like to remind you to see us at the CSFB Digital Media Landscape Conference in Boston on May 12th, the Piper Jaffray Technology Conference in New York on May 19th, and the Smith Barney Semiconductor Conference in Monterrey on June 2nd.

Also, our annual shareholders meeting will be held here in Portland on May 25th.

Thank you for joining us today.

And that does conclude today's conference.

We thank you for your participation.

You may now disconnect.