Pixelworks Inc (PXLW) 2004 Q2 法說會逐字稿

Good day everyone, and thank you so much for your patience.

We'd like to welcome you to the Pixelworks Q2 earnings release conference call.

As a reminder, today's call is being recorded.

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

Mr. Bouchard, please go ahead.

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 will 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 are 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 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 second quarter financial results in detail.

We were clearly pleased that the second quarter came in at the high-end of our expectations, both from a revenue and earnings standpoint.

Record revenue of $48.5m was up 49% year-over-year, and 7% sequentially.

Leading the growth was advanced television business which was up 146% year-over-year, and 15% sequentially.

On the bottom line, net income on a GAAP basis, was $5.8m or $0.12 per share which improved from $420,000 or $0.01 per share a year ago.

On a pro forma basis which excluded $345,000 in non-cash acquisition related, and non-cash stock compensation expenses, pro forma net income was $6.1m or $0.13 per diluted share, which was up 152% from $2.4m or $0.05 per share a year ago.

We also strengthened our balance sheet in the second quarter by completing a $150m convertible debt offering.

We believe this additional balance sheet strength will be valuable as we continue to expand our technology portfolio through internal development, licensing, joint development efforts, and potentially, acquisitions.

At the end of the quarter, we had $269m in cash and marketable securities on the balance sheet.

Before giving you an overview of our markets, I will spend a few minutes giving you an update on some of our product development efforts.

Photopia, our latest generation image processor for the advanced T.V. market, is beginning to shift in early production volume to lead customers.

Customer design activity with Photopia has been very good.

As we mentioned last quarter, we have many customers across all geographies and applications, actively engaged in product design efforts using Photopia-based products.

Additionally, many of these customers are engaged in not just one project, but are doing multiple product designs.

We believe Photopia, and derivative products from the Photopia platform, will be core contributors to our television business over the next few years.

Also, key to our television business in particular, are our analog front-end products that integrate an analog-to-digital converter, digital receiver, and video decoder onto a single chip.

In the second quarter we announced our next generation front-end product called Feta [ph].

Feta [ph] offers customers our proprietary DNX, 3D cone filter technology, which we believe is one of the world's first to work with both NTFC, and panel video signals.

It also incorporates our proprietary SteadySync weak-signal compatibility technology that compensates for broadcast and cable signals that are less than optimal by being able to better lock onto a signal and display a picture.

We expect [Feta]-based solutions will begin shipping this year, with volumes ramping in 2005.

Another key to success in our markets will be the performance, and the ease of use of the software that is provided to customers.

We believe that our latest generation software platform called Cobalt will be a competitive differentiator for us.

Cobalt was released with Photopia, and we have received very positive feedback from customers.

We are very encouraged, not only by our latest generation chip platforms, but also our new software platform as well.

Over the past several months we have been discussing our strategy to provide a total signal path solution for our customers.

The analogy we use for this signal path solution is a pipeline.

During the past quarter we continued to add pieces of pipe, through internal developments, and also through several licensing agreements.

I see companies that provide a point component solution, but not an entire system solution, are recognizing the power of our strategy.

Many of these companies are recognizing the power of our strategy to offer a total solution, and are partnering with Pixelworks to provide the best solutions at the lowest cost.

By licensing technology from these component suppliers, we are able to get to market with the best customer proven solutions in the shortest amount of time.

These licensing agreements totaled approximately $6m in the quarter.

For competitive reasons, we are not going to give the details on these licenses, but we will say they are focused on bringing the best, most complete, world-wide television solutions to market in the shortest time.

Looking at our foundries, we continue to enjoy very supportive relationships with our foundry partners.

We entered the second quarter expediting product from our foundries through test, and packaging process to meet customer requests.

By the end of the quarter we have largely met the customer upside, and polling demand, and we were able to build some buffer inventory.

All of our foundry partners have been extremely supportive and have responded to our change requests in a timely manner.

We expect this cooperation to continue as we ramp our new Photopia, and Feta [ph] products into full production over the next several quarters.

I will now give you a quick overview of the three end markets that we serve;

Projectors, LCD Monitors, and Advanced Televisions.

Projector business in the second quarter was up 25% year-over-year, measured sequentially, we saw the same trends this year that we saw last year with projector revenue increasing in the first quarter, and then declining in the second quarter.

Projector revenue was down about 8% from Q1, which was a little weaker than our April outlook.

Units were down 3% sequentially, while ASPs were down 4%, ASPs were 11% lower than a year ago.

This year we believe some of the sequential decline in revenue was due to the continuing roll out of TI's DDP2000 display engine.

Orders however, driven by the strength of our polysilicone LCD customers were up in the second quarter compared to the first quarter, and in fact, were the highest we have ever recorded.

The trend to lower prices continued in the second quarter led by polysilicone LCD Projectors.

We have identified 36 models of projectors priced under $1,000, up three from Q1. 25 of the 36 models used polysilicone LCD's and all of the lowest priced eight models are LCD.

The lowest priced projector was a polysilicone projector at $769, down $59 from Q1.

We believe these trends will continue, and the projector market is on track to see unit growth of approximately 35% this year, with the consumer segment growing faster than the business segment.

We also believe that we will continue to see the price points of projectors come down, and believe it is possible we will see projectors approaching the $500 price point within the next two years.

This will be achieved as both the reflective device and polysilicone display manufacturers continue to drive down the cost of their optical engine components, the largest single cost driver within a projector.

Pixelworks has been a pioneer, and a leader in not only supplying components to, but driving innovation in the projector business.

Our imaging scaling quality allowed our customers to reduce the cost of their light engines and optics that was instrumental in creating the Sub $1,000 projector.

In June, of this year we again took a leadership position in our industry by creating the Pixel Prize to reward truly breakthrough innovation and projector business.

We announced the creation of the Pixel Prize in my keynote to the Projection Summit in Atlanta, just before the Infocomm Trade Show.

The Summit is an annual of business leaders who get together to discuss trends and issues in the projector industry.

In my speech I spoke about breakthroughs, that we as an industry need to accomplish such as pushing for truer color representation and higher resolution.

However, I singled out portability as a direction that deserves more attention, because learning how to make projectors smaller, lighter, and more able to run on batteries will create opportunities for new applications, and growth.

Rather than just let it stand with my speech, I decided to put my money where my mouth is, and created a challenge to my colleagues.

Create a handheld projector, with more than 200 lumens of brightness, at least SVGA resolution that has an 8-bit color range, is no larger than 100 cubic centimeters, operates for 2 hours without being plugged in, and most importantly is powered by Pixelworks, the first company or person to do that will win the $50,000 Pixel Prize, a first for our industry.

We are in the process of finalizing the legal information for the Pixel Prize which we will post on our website shortly.

Our hope is that the Pixel Prize will provide an incentive for someone to push the limits of what is possible, and help us all to, as we say, "See the future" of digital projectors.

Moving to our outlook for the third quarter, the projector business is usually seasonally slow in June and July, and picks up in August and September.

Looking at our business trends our orders were up in the second quarter, and in fact hit record levels which we believe points towards a strong August and September.

Overall we believe this will result in projector revenue in the third quarter increasing up to 10% over Q2 levels.

I'll now turn to LCD monitors.

As expected, LCD monitor business was up sequentially in the third quarter.

What was surprising, however, was the magnitude of the growth.

LCD monitor revenue grew 47% sequentially, versus our outlook of 10% to 15% sequential growth.

Units were up 53% sequentially, while average selling price of an LCD monitor chip was down 4%.

The average selling price of an LCD monitor chip was down 6% from a year ago.

As a result of the strong growth, LCD monitor revenue represented 14% of total revenue in the second quarter, up from 10% in the first quarter.

The stronger-than-expected growth came from SXGA and UXGA monitor business.

Looking at mix by resolution in the second quarter, UXGA monitors represented approximately 51% of total monitor business;

SXGA 31%; and XGA 18%.

The dramatic 47% rise in our monitor business appears to be a nice spike rather than a sustained trend.

Based on current backlog, and estimated orders, we believe we will see LCD monitor revenue drop by about 30% in the third quarter, returning to our more normal run rate.

I will now shift to LCD TVs.

The advance TV business comprised of LCD TVs, digital CRT TVs, plasma displays, and digital rear projection TVs, continue to grow robustly in the second quarter with sequential revenue growth of 15%.

Units grew 12% while the average selling price increased 3%.

On a year-over-year basis, advanced TV revenue was up 146% in the second quarter, with units growing 175% and average selling price decreasing 11%.

Pixelworks' breadth of applications in the television business paid off for us in the second quarter.

The solid sequential revenue growth, and advanced TV business came from digital CRT and plasma TVs which offset some weakness in our LCD TV business.

The dynamics of the LCD TV business has been much publicized over the past several weeks, but looking back to the beginning of the second quarter, the softness that the industry experienced was somewhat surprising.

The quarter began with LCD panel pricing steady, and in some cases even a shortage of supply.

Then early in June, it appeared that Generation 6 LCD fabs began to come on line in a meaningful way.

The result was that panel pricing started to drop.

This drop coupled with the market moving into the slower summer season, caused the TV manufacturers to shorten lead times, and to be very cautious about investing in LCD panel inventory.

This resulted in a softening in our LCD TV business.

We expect this phenomenon to continue until TV manufacturers begin their Christmas build cycle in late August and September.

The price drops in LCD panels will ultimately be good for our business because lower panel prices drive lower TV prices, and lower prices drive volume.

Our latest informal survey of the panel prices in Taiwan indicates that across the board, in the last month alone, LCD panel prices have dropped between 5% and 15% with the larger size TV panels at the high end of this range.

We believe panel prices will continue to drop over the next several weeks, and months as we lead up to the Christmas build cycle.

These price moves coupled, with the introduction of our new TV IC products, are making the dream of a 30-inch, $999 LCD TV more real every day.

The short-term uncertainty of the LCD TV business ramp makes our outlook for this segment a little more difficult to pin down than in some of our past quarters.

Our best estimate at this time, is we expect to see softness in the LCD TV business during July and August as panel prices continue to decline.

We believe we will see strengthening as we enter September as panel prices stabilize at the new lower levels, and the Christmas build cycle gets into full swing.

Taking these factors into account, we are estimating revenue for our advanced television business on a whole to be up approximately 5 to 10% over Q2.

From an overall market perspective, despite the current slowdown in LCD TV sales, we continue to believe we will see the advanced TV market grow at 75% to 100% this year, to 18 million to 20 million units, 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 for his review of our financial results.

Thanks, Allen.

Before I begin my overview, I want to mention that I'll be referring to both GAAP and pro forma numbers.

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.

Revenue of $48.5m in the second quarter was up 49% year-over-year, and 7% sequentially.

Our book-to-bill ratio in the second quarter was right around 1:1.

As result of solid growth and advanced television business, we continue to see advanced televisions represent a greater portion of our overall revenue stream.

In the second quarter, projectors represented 43% of total revenue; advanced televisions 41%;

LCD monitors 14%; and other was 2%.

Regionally business in Europe and China was particularly good in the second quarter.

On a sequential basis, Europe and China grew 56% and 46% respectively.

China represented 21% of total revenue, up from 15% in the first quarter.

We continue to have a broad customer base with no single end customer representing 10% or more of total revenue in the second quarter.

Our top five end customers represented 34% of total revenue.

As expected, gross profit margins declined in the second quarter.

We outlooked gross profit margins on a GAAP basis to be 47% to 49%, and they came in at 48.2% which was in the middle of the expected range.

Gross profit margins were down 410 basis points from the first quarter, as a result of a less favorable mix of business, and increased product costs that resulted from expediting products through the supply chain.

Relative to a year ago, gross profit margins were up 310 basis points.

R&D and SG&A expenses combined were $14.4m or 29.6% of revenue which compared to $13.5m or 29.8% of revenue in the first quarter.

Expenses increased about $900,000 from the first quarter, as a result of increased compensation expenses from higher headcount, an increase in depreciation and amortization expenses, as well as outside services' expenses.

Operating margins of 18.2% on a GAAP basis, and 18.9% on a pro forma basis were down from the first quarter due to lower gross profit margins, but were up significantly from a year ago.

Our ongoing target is for operating margins of 15% to 20%.

As a result of completing the $150m convertible debt offering in May, interest income and interest expense increased significantly in the second quarter.

Additionally, we incurred $115,000 in expenses in the second quarter, from the amortization of debt issuance cost which totaled $4.8m.

Debt issuance costs which represent underwriting, legal and accounting fees from the convertible debt offering, were capitalized on the balance sheet, and will be amortized over the effective life of the convertible debt which is seven years.

The effective tax rate in the second quarter was 35.5% of income before taxes on a GAAP basis, which was in line with our expectations.

On the bottom line, net income on a GAAP basis in the second quarter was $5.8m or $0.12 per share, which increased from $420,000 or $0.01 per share a year ago.

Net income on a pro forma basis, was $6.1m or $0.13 per share which increased from $2.4m or $0.05 per share a year ago.

I will 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 $144m to $269m in the second quarter.

The primary source of cash in the quarter was the $145m in net proceeds from the convertible debt offering.

We also generated about $5m in cash from operations.

Accounts receivable of $19.5m representing 36 day sales outstanding increased from $17.1m or 34 day sales outstanding in the first quarter.

Inventory of $15.9m representing 7.8 turns increased from $9.8m or 8.5 turns in the first quarter.

This represented approximately eight weeks of inventory which is within our target range of six to eight weeks of inventory.

Let me now touch on some elements from the third quarter outlook, provided in the earnings release issued earlier today.

We expect revenue in the third quarter to be approximately $47m to $50m which represents year-over-year growth of 32% to 41%.

Looking at the components, we are estimating that LCD monitor revenue will experience a sequential decrease of approximately $2m or 30%, while projector and advanced television revenue will increase sequentially.

We believe advanced television business will be up 5% to 10% sequentially, and that projectors could be up as much as 10%.

Somewhere in the last quarter at this time, we have approximately 80% of the midpoint of the estimated revenue range for the third quarter either shipped or booked and scheduled for shipment.

Gross profit margins are projected to be 45% to 47% up from a year ago, but down from a little over 48% in the third quarter.

The decrease is attributable to normal levels of ASP erosion without any offsetting decrease in product costs this quarter.

R&D and SG&A expenses combined are expected to be $14.8m to $15.3m in the third quarter, an increase of $500,000 to $900,000 over the second quarter.

The increase in expenses will come primarily from higher product development expenses, as well as compensation expenses related to increased headcounts.

Earnings per share are projected to be $0.08 to $0.11 on a GAAP basis, and $0.09 to $0.12 on a pro forma basis.

That concludes the review of the second quarter financial results, and third 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 the second 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 we will be presenting in a few upcoming investor conferences; the Adams Harkness Summer Seminar in Boston on August 5th; the Citigroup Technology Tour in New York on September 8th; and the Sidoti Emerging Growth Institutional Investor Forum in San Francisco on September 13th.

We will also be hosting institutional investors at the company's headquarters on August 16th as part of the Oregon Technology tour.

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

Thank you, Jeff.

Our first quarter revenue of $48.5m marked our 9th consecutive quarter of record revenue.

We again had record unit shipments in the second quarter, shipping just about 3.5 million units.

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

We expect to see TV continue to widen it's lead on a units' basis during 2004, and even become our largest revenue segment by the end of the year.

The Sub $1,000 projector has become the Sub $800 projector led by advances in low-cost polysilicone LCD light engines.

We believe this trend will continue and projectors will become a common casual-use movie theater in a box as the price approaches the magic $499 level over the next several years.

We continue to roll out the biggest product introduction in the history of our company with Photopia, Cobalt and now our newest video decoder family called Feta [ph].

The Generation 6 LCD fabs are coming on line and are increasing the availability of economically-priced panels for large format LCD TVs.

This represents the next step towards the $999 30-inch LCD TV, and makes the achievement of that goal, not a matter of if, it is only a matter of when.

We will now open the call for questions.

Thank you, gentlemen.

The question-and-answer session will be conducted electronically.

If you would like to ask a question, please press the star key followed by the digit (1) on your telephone.

Remember if you are using a speakerphone, to turn off your mute button in order to allow your signal to reach our equipment.

Once again, if you'd like to ask a question, please press star (1) now.

Our first question will come from--I'm sorry, Vijay Rakesh with Next Generation.

Hi, guys.

I was looking--when you look at your [inaudible] were up 15%, I was wondering if you could some color to the units across both LCD TVs, projectors and monitors?

Yeah, sure in terms of unit growth for projectors, sequentially you're referring to?

Right.

So projectors the units were down 3% sequentially; monitors were up about 53% sequentially; and TV units were up about 12% sequentially.

Can you give absolute numbers for LCD TVs?

No, no.

That's not just LCD, that's all the advanced TVs that I'm giving you the unit growth for.

I don't have the break-out for just LCD TVs.

Got it.

Also on the guidance you mentioned Q2 LCD TVs were up 15% and Q3, the 5% to 10% guidance, is that softness across the board in the markets, is that what you're seeing?

Or should I read something else into it?

In the advanced TV market in particular?

Right.

I think most of it is likely covered, the current uncertainty about LCD TVs, and exactly how many are going to get shipped in the Christmas season.

And how long are people going to hold off, and what that ramp is going to be?

And I think that is the biggest factor driving our range for the advanced television segment.

Okay, great.

Thanks.

You're welcome.

Next up from Pacific Growth Equity, Brian Alger.

Hi, guys.

Good afternoon.

Hey, Brian.

All right a number of questions, gosh where to begin.

Let's start with the projector market.

The growth that you're forecasting for the September quarter, kind of looking back over previous years, down 8% in the June quarter is not too bad.

It was certainly worse than you expected.

How high is your degree of confidence that you can see a 10% growth in September, with some ASP erosion?

Well I think what we said is that the growth can be up to 10%, and we also said that orders in the second quarter were higher than the first quarter, and in fact, record orders in the first quarter.

So given that the revenue was down in the second quarter, and orders were at a record level, we feel pretty good about the projector business as we head into the third quarter given our range of--it could be up to 10% higher than it was in the second.

Okay, and in the projector space, we've heard of a number of supply constraints affecting the unit volumes for a number of the manufacturers.

Do you think the supply mix had anything to do with a disappointment there, versus your previous expectations in the June quarter?

It's hard to tell exactly, we we're off, we said it would be flat to down about 5% I think.

It was actually down about 8%, so it's a few percentage points different than what we thought.

It's not really material from our standpoint, I think things kind of played out the way we thought they would.

Okay.

Shifting gears into the Advanced Television, in the past you have kind of given us a sense of how much of that was made up from digital CRT, versus the other segments.

You have characterized it as being certainly stronger in plasma, and digital CRT, versus the weakness in the LCD TV.

Can you give us the percentages?

Yes, I don't have the exact percentages, but progressive scan CRT's and LCD TVs were roughly the same this quarter, and they were about one third each of the total advanced TV revenue.

And then Plasma was between 25--I think like 25%, 27%, something like that, and then the balance would have been rear projection.

Okay and we aren't seeing any ASP difference between those segments at this time are we?

There are differences; there's differences between the number of chips we're selling into some of the products, would be one thing.

And then there are differences even in the individual chips in terms of; are they going into a higher end or--even within a--pick a LCD TV, a lower-end to a higher-end LCD TV can vary in terms of the chip ASP.

So there are differences, and I would say that for the most part it correlated to the price of the product, or the price of the end product.

So the higher the price, generally the higher the price of our chips going into those products.

Brian, I think we talked about; we have a product that we call, it was a solution that we called [TV-K 2], that really is targeted at the lowest-end of the LCD TV business, 15 and 17-inch LCD TVs.

So, yes we have some LCD TV products that are sold at very low prices, and then some of the progressive scan CRT stuff is low, and then some of the LCD TV stuff is sold into kind of 30-inch and above, is significantly higher ASPs.

That's helpful, and then finally, I'm trying to understand what is going on with the gross margins.

This quarter no major surprises, but in kind of looking at your guidance, if we do in fact get towards the higher end of your range for the projected growth there, we are going to see a positive shift back towards projectors, as a percentage of the mix.

I am wondering why we're forecasting the decline in gross margins.

Actually, those are--the fastest growing segment in terms of our outlook would be TVs, right at 10% to 15% growth, followed by projectors growing up to 10%.

So, in terms of the greatest weight that would be assigned to the TV revenue which is kind of in the middle of our gross margin range.

Projector, Jeff said, had a little bit higher gross margin than our average margins, and monitors have a little bit lower.

On average though you would expect to see some improvement based on the overall outlook mix.

But, when we look at just--we're looking at our backlog, the projected business that we expect to get in, in terms of orders, and the fact that this quarter we expect to see ongoing, kind of normal levels of ASP erosion, and we really don't have any cost decreases that we see that will kick in, in this quarter.

So it's really just a matter of the fact that we are getting some ASP erosion without any significant changes to our product cost this quarter.

Brian, some of those projector products are using our last generation embedded memory chips that we designed, and we're not really getting cost-downs on those.

In fact, costs tend to be flatter, even drift up a little bit in some cases, that's another factor that we've got.

So until we turn those over, we won't be on a chip platform where we're getting your typical semiconductor cost-downs as we roll forward.

It's not dramatic, but it is a factor.

All right, and last question, I promise.

You talked about losing shares to TI, with the DDP2000.

In the past you've kind of characterized that risk as 15% to maybe 25% of the market in terms of the market share risk.

Do you still see that as the limits to how much market share might be at risk to TI, or has that changed?

I would say it's probably closer to the 25%, Jeff, would you?

The trend is exactly what we have seen, the numbers are moving in the direction we anticipated.

If anything it has been delayed from what we had originally thought it would be.

But I would say it's in that range, probably a little closer to 25%, than the 15%, but it's in that range.

Okay, thanks guys.

Next up we have Tyrone Lee, with Piper Jaffray.

Hi, this is Tyrone Lee for Piper Jaffray, for Tore Svanberg.

Gentlemen, could you quantify your expectations for Photopia, as a percentage of revenue in shipments, first by the end of the year, and then by the end of the first half of '05.

I don't think we can get very specific there, but certainly we expect it to continue to grow, beginning early in the second half of this year.

That's a platform that we think will be significant for us for many years in the future.

But in terms of trying to quantify the percentage of revenue that is going to come from Photopia it's, I think, very, very difficult, and dangerous to do, because it's a brand new product that is just beginning to hit the market.

And it's just something that I guess we're not willing to go out on a limb to give you at this point.

Okay secondly, could you talk about the status end of your relationship in progress with SMIC?

Yeah, we got our first production parts out of SMIC in Q2, and started shipping them.

Everything seems to be on track, they are performing well.

The parts, in terms of speed, performance are performing well.

The quality looks good, but it's just the very, very first parts that we have gotten out, and started shipping them.

So, I wouldn't say it was much volume at all, but I would say that we have moved into a production mode with SMIC.

Okay, if I could just have a follow-up.

What kind of percentage do you expect to outsource from SMIC by the end of the year?

And are you guys seeing the margin benefits that you were expecting?

Yes, again, I don't think we ever give out the mix from a foundry standpoint.

But, SMIC is going to have increasing business with us going out through the next year, and specifically focused at doing some of the chips for the lower-end of our TV business.

And becoming a partner on kind of an equal footing with some of our other foundry partners as we move forward in 2005, and that's about all that we can say about it.

Okay, and my last question.

Can you talk about your lead times from your foundry partners, this quarter versus last quarter, and your expectations for the September quarter?

Foundry--certainly the capacity is freeing up, and I don't know that lead times have actually gotten shorter.

I guess marginally they have probably gotten a little bit shorter, but capacity is definitely freeing up.

The foundries have responded to our requests, so we're in good shape from that standpoint.

Okay, great, thanks guys.

You're welcome.

And gentlemen, let's now move on, from Smith Barney, Craig Berger.

Good afternoon.

Hi Craig.

A couple of questions.

A lot of the questions have been asked, but can you help me understand historically when panel prices have decreased, which obviously hasn't happened for the last 12 to 18 months.

But historically when panel prices have decreased, how long does it take for those price declines to roll through to the end product?

It usually happens very quickly.

But I think Craig; the thing that makes this one a little bit unusual is when it happened.

I went back and looked, it looked like the last time we went through this, it was right in the middle of--at the end of Q3, and going into Q4.

So it was at the sort of maximum market velocity time when the panel prices were dropping.

What happened this time is we went into the summer season, and the panel prices are dropping, and that's what causes this one to be a little bit different, I think.

So, we don't have that market velocity turnover that just sort of sucks the inventory out of the system the way we did in the previous time.

So I think we are going to go through a period here, where it's a little bit uncertain but we also believe that with the panel prices dropping, and I said to Jeff the other day, I talked to the guys in Taiwan on Sunday, and by Monday my prices were out of date by about $5.

So it's very uncertain about what the panel prices are doing right now.

And we're going to see that during July and August, but we think that by the end of August, and going into September, we're going to start to get that velocity because we have to build for Christmas, and then we will see how it shakes out at that time.

Got it, that's helpful.

On your advanced TV you said ASPs were up 3% in the quarter, I'm assuming that is mix adjusted.

Do you have any same-part pricing?

Unfortunately not, you're right that is mix adjusted, and I don't have that information.

Okay, but essentially you're seeing some ASP pressure on an absolute basis, and that's what is driving the decline in gross margins?

It's been pretty modest.

I would say the ASP pressure to this point, in the advanced TV business, so it's just throwing out an estimate, I feel comfortable, it's on a quarterly basis, it's not exceeding probably 5%.

It's been very modest to this point.

Okay, let's see, on your Photopia product, can you help me understand content with Photopia versus your prior generation image processor?

I understand it's not really going to ramp until 2005.

In terms of what functions are on it?

Just in terms of dollar content per system, on Photopia versus Legacy products?

Brian, it's hard to pin a number on it, there are a whole range of products from entry-level TV's all the way up to the most advanced TV's, all kinds of different feeds and speeds.

In some cases we sell one Photopia; in some cases we sell a Photopia and a front-end chip; some cases we sell two Photopias and two front-end chips.

It can be anywhere from low teens to $50 depending upon the configuration of the solution.

So in terms of maybe an average content per system, is there any meaningful difference between Photopia and the prior chip?

Well I guess the one thing that clearly was in Photopia, no matter which particular product we're speaking to, whether it's the lower-end Photopia solution or a higher-end would be, it does include our latest generation of video processing technology which has been to this point really incorporated in a separate, discreet chip.

And those discreet chips tend to run in the $10ish range.

So I would say, again this is generalizing quite a bit, but there is some significant value that's being added to the Photopia platform that hasn't been in our prior generation chip.

So let's say the dollar content per TV though, we're rolling in some front-end processors that we never had, we've rolled in Photopias--Photopias don't have memory in them though, the other ones did, and in general I'd say it's kind of preserving your ASP per television.

And that's a real ballpark number, and this is with new chips phasing in and old chips phasing out, and everything.

But just generally I would say our ASP TV is staying approximately the same, something like that.

So we should still think that in the $25 to $30 range, for the back-end.

Again, it depends on the type of product that we are speaking about, it varies depending on whether it's a lower-end or a higher-end, and whatever mix ends up being between plasma displays, and CRT's and LCD TV.

So to come up with an overall average I think it's pretty hard to do, because we're having to estimate what the mix is, a year out from now, between all of those different types of things.

Can you help me to understand attach rates for your analog front-end, I guess Cheddar is the high volume product now, I guess in both the projector and the TV space?

I mean just in general they are still low, but they are accelerating and I am encouraged with what I am seeing.

The trick with these analog front-ends is to get them out, get them in production with customers and get them what I call; "customer hardened".

Because they are very, very tricky.

And they are very tricky whether you are trying to capture a video signal off a dirty VCR with dirty heads in China, or whether you're trying to catch an off- air broadcast in Bolivia.

And so the thing with our analog front-ends, specifically our video decoders, is we have had them in production for a year-or-so now.

Feta [ph] represents I'd say kind of the third generation, we are world-class right now in what we are doing, in fact we will go head-to-head with anybody that has a video decoder out there, and do a shoot out side-by-side with them, in fact in some cases we have features and performance that other people don't have even though they have been building these things for 20 years.

The numbers aren't as significant as the process to get it customer hardened, and to be establishing that building block that becomes part of our signal path pipe.

Got it, and my final question is, can you just give us a brief competitive overview, if you're seeing anything come out of Taiwan, or maybe some of the smaller start-ups, or other established firms over there, particularly in the ATV space?

I don't think things have changed very much over the past quarter or so, there is a bunch of things that you hear about coming out of Taiwan, that you haven't really seen too much of.

The larger competitors have all kind of staked out their turf.

We feel really good about what we're doing, and about the products that we are rolling out.

I'm very encouraged with what I have seen so far with our products on a competitive basis, and I would say the landscape has not changed much at all since last quarter.

Thanks.

You're welcome.

Gentlemen, we have a follow-up question from Pacific Growth Equities, Brian Alger.

Hi guys, I was just wondering, with the ramp coming late in the quarter here on the monitors, and especially more for the TVs, what sort of lead time have you guys seen from when you guys are delivering the chips to when the products are on the shelves?

I guess the reason I'm asking is, it seems as though if the panel prices are starting to crater now, as certainly we're seeing, and if you're seeing a $5 difference per day, it's probably going to accelerate going forward.

If those prices are going to start materializing on the shelves at a lower level, and call it that September time frame, or maybe even in the October time frame, when do your customers need to receive chips from you in order to facilitate that sort of delivery?

Yes, it's hard to say Brian, because are they going to get into air shipping stuff, or boat shipping stuff, that kind of thing?

I think the--it's going to be very chaotic; it's going to get really crazy in August, and September, and October here.

I've talked to customers about things like how long will they be building for Christmas, and they've said; "Well, Christmas Eve, of course", right up through Christmas Eve, and they will air ship Christmas Eve to get it in for even after Christmas sales.

So, I don't--the bottom line is I don't know, but I expect that we'll see people air shipping stuff, and we'll see some unusual things done that will shorten the time.

Typically it might be six or eight weeks from the time we ship a chip to the time it's on the shelf, and it might get down to three to four weeks from the time we ship a chip to the time it's on the shelf, or something like that.

Okay, so even if it contracts, comes into that four week kind of time frame, in the September quarter for chip, TV sales, what we're really talking about is the unit volumes that are going as far as into October?

Is that correct?

Yes, pretty much, yes.

Okay, thank you.

And that is all the time we have for questions at this time.

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

Thank you, I wanted to remind you about our conference schedule; we will be at the Adams Harkness Conference on August 5th, Citigroup on September 8th, and Sidoti on September 13th.

We will also be hosting Institutional Investors, here in Portland, on August 16th.

Thank you for joining us today.

That does conclude today's conference call, thank you everyone for your participation.