Pixelworks Inc (PXLW) 2004 Q3 法說會逐字稿

Good day everyone and welcome to the Pixelworks Q3 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.

Good afternoon and thank you for joining us.

With me today is Allen Alley, President and 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 a statement of operations on a pro forma and GAAP basis is included with the financial statement that accompanied 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 third quarter financial results in detail.

While revenue came in short of our July outlook, we're pleased that earnings actually exceeded our outlook, mainly due to better than expected gross profit margins due to a more favorable mix of product shipments.

Revenue in the quarter of $44 million was up 24 percent year-over-year, but down 9 percent sequentially.

Year-over-year, advanced TV revenue was up 58 percent, projectors were up 16 percent, and LCD monitor revenue was down 34 percent.

On a year-to-date basis, revenue up $137.7 million was up 38 percent over 2003 with advanced TV revenue leading the way, up 129 percent.

On the bottom line, net income in the third quarter on a GAAP basis was $5.4 million or 11 cents per diluted share, which improved from a net loss of $4.1 million, or 9 cents per diluted share a year ago.

On a pro forma basis, which excluded about $340,000 in non-cash acquisition related and non-cash stock compensation expenses, pro forma net income was $5.8 million, or 12 cents per diluted share, which was up from $801,000, or 2 cents per diluted share a year ago.

Looking at the individual end markets for our products, LCD monitors and advanced televisions were a little weaker in the third quarter than we had expected while projectors came in at the low end of our expectations.

Overall, we believe some of the weakness was attributable to slow consumer spending in the summer months, particularly in July and August, that we have yet to see dramatically change.

I'll take you through our 3 end markets in more detail, starting with the LCD monitor module.

Our LCD monitor business was definitely the weakest of our 3 end markets with revenue in the third quarter of just over $3 million, down 55 percent sequentially.

Going into the quarter, we thought revenue would be down approximately 30 percent sequentially.

Orders were very weak in the quarter, with virtually no turns business, which resulted in a book-to-bill well below one.

We believe the weakness in revenue in bookings resulted largely from our strategy to exit this segment of our business, and whenever you are exiting a business, it is difficult to accurately forecast the ramp-down of demand.

Secondly, we believe the LCD monitor market may be affected by some of the same-panel pricing dynamics that we have seen in the LCD TV business, and that has resulted in slower retail sales and some excess channel inventory.

Based on recent bookings patterns and backlog, it appears that this part of our business is likely to decline further in the fourth quarter and represent less than 5 percent of total revenue.

The potential upside to this part of our business is our timing controller, or T-Con line of business that we refer to as our nut products, code named Peanut and Cashew.

We believe the development of the T-Con business is core to our strategy of providing end-to-end solutions for our customers.

The nut products have evolved from the technology and customer relationships we created during our Smart Panel development.

These products are Smart Timing controllers that improve LCD performance by increasing response speed for video applications, improving contrast for monitors, and in some cases, even improving panel yield.

We have samples of these products, and are actively engaged in product evaluation with the leading LCD manufacturers.

While it is too early to tell how broadly our technology will be accepted, we are encouraged by the progress we are making and are becoming more optimistic about commercial viability.

If our rollout is successful, we will actively be engaging in products in the next couple of quarters with the potential of revenue beginning in the second half of 2005.

I'll now turn to projectors.

Revenue in the third quarter was up 3 percent sequentially and 16 percent year-over-year, which was in line with our expectations entering the quarter.

Projector revenue represented 48 percent of total revenue in the quarter, up from 43 percent in the second quarter, but down from 52 percent one year ago.

I am particularly pleased with how we grew projector revenue.

The increase in projector business was driven by large growth in front-end processors, both on a unit and on a dollar basis.

The current generation front-end processor chip, code named CHEDDAR, includes an analog to digital converter, DVI receiver and a video decoder in a single chip.

We believe we are now approaching a 20 to 25 percent attach rate for our front-end processors.

This growth in attach rate has allowed us to mitigate average sales price erosion this year.

While image processor selling prices are down about 12 percent year-over-year, the dramatic increase in front-end processor shipments has limited our overall per projector price decline to only 5 percent.

Besides addressing more silicon content in every projector, perhaps even more importantly, we have proven the robustness of our front-end processing chip architecture.

This architecture will also be used in our next generation of single-chip solutions for advanced televisions.

We now have developed and customer-hardened our front-end processors with some of the world's most demanding consumer electronics customers.

We have developed class-leading video decoder capability in a fraction of the time it would have required if we had integrated the decoder in a large digital part.

Looking forward to the fourth quarter, there are 2 factors dampening demand.

First, we believe we are seeing some softening of the overall projector market that actually began during the third quarter.

During the first half of 2004, we believed we would see a 35 percent to 40 percent increase in projector unit shipments worldwide, and the market was tracking that way.

We now expect the growth will be slightly less than that, and most of the softness is coming in the second half of the year.

Secondly, there have been rumors of lamp shortages for projectors.

This shortage has been largely attributed to the roughly 1 million unit growth of L-cost, LCD, and DLP rear-projection televisions this year, and little additional capacity.

As best as we can tell, this fear is overblown.

Nevertheless, it appears that customers have in some cases taken all of the lamps they could get and have built finished-goods inventory during the third quarter that will be worked down in the fourth quarter.

Taking these factors into consideration, our outlook for the projector business in the fourth quarter is for revenue to be down 15 to 20 percent.

We typically see seasonal strengthening in the fourth quarter, but to this point, we have not seen a pickup in orders.

I'll now turn to the advanced television business.

The advanced TV business comprised of LCD TVs, digital CRT TVs, plasma displays, and digital rear-projection TVs decreased 7 percent sequentially but was up 58 percent year-over-year.

Sequentially, units were down 4 percent, while the average selling price of a chip decreased 3 percent.

Again, in the third quarter our breadth of business across all of the major advanced TV product types smoothed the overall revenue level while there was a significant mix change compared to the second quarter.

Despite the much-publicized slowdown in the LCD TV market due to current LCD panel pricing dynamics and generally weak consumer spending, revenue from products sold into LCD TVs increased quite substantially in the third quarter and reached an all-time record.

LCD TVs represented over half of total advanced TV revenue in the third quarter, up from about a third of our advanced TV revenue in the second quarter.

Progressive scan CRT business, after increasing sequentially in the second quarter, decreased in the third quarter.

The decrease in the third quarter was largely attributable to one large customer, one of the largest television manufacturers in China who cut orders substantially in the third quarter in order to work down excess inventory.

Progressive scan CRT revenue represented approximately one-fourth of total advanced TV revenue in the third quarter after representing about one-third of total advanced TV revenue in the second quarter.

Plasma TV business was sequentially down in the third quarter after increasing significantly in the second quarter.

We believe there was some inventory balancing going on our end customers that resulted in the decrease this quarter.

Plasma TV revenue represented about a fifth of total advanced TV revenue in the third quarter.

We believe the instability in the LCD TV pricing is also affecting plasma.

On the customer side, we had some significant announcements this quarter, which are a confirmation of our strategy, specifically around the announcement and rollout of our DNX video-quality certification program.

Pixelworks DNX is the industry's first video-quality certification program to help ensure the video performance of our customers' TV systems.

We have observed that occasionally, customers unnecessarily make tradeoffs in implementing our designs that can compromise video quality.

In an effort to help them maximize the performance of our technology, we set out to establish a program that objectively measures video quality.

We are taking the video experts' golden eye out of the evaluation process and have actually developed a series of tests and measurements to define the true performance of a television at every step along the video signal path.

By using these exclusive DNX tools, our customers can achieve system performance that allows them to stand out in the competitive landscape.

Our DNX program is gaining momentum in the market.

The first DNX-certified product using our Photopia image processor is the Dell W2600 26" LCD television that was introduced in August.

In November, Dell will also begin shipping 2 new 42" plasma televisions, the 4200HD and the W4200ED.

Both of these products have also earned DNX certification.

We've discussed LDC TV pricing, and the effect on the market in our recent presentations.

After a roller coaster ride this summer, it appears panel pricing has stabilized in September.

The LCD fabs have somewhat reduced supply, and we are seeing some increase in consumption for the Christmas season.

For example, the 23" LCD TV panel price has stabilized around $400, which has enabled the aggressive television manufacturers to break the $1,000 barrier for a 23" LCD TV.

We believe LCD panel pricing will remain somewhat stable during the fourth quarter before dropping again in the first half of 2005.

After lagging panel prices for several months, recently LCD TVs have come down in price, and some customer have now aligned LCD TV prices with the early summer drop in panel prices.

We feel Dell in particular h as done a good job of rationalizing pricing of their LCD TVs and plasma TVs.

In fact, Steven Baker, Director of Industry Analysis for NPD Techworld said that the $3,499 price the company intends to charge for the W4200HD high-definition plasma television is "a great price, it's a disruptive price".

In fact, Baker went on to compare the $3,499 price to the $2,999 price that launched the 42" standard-definition plasma market 2 years ago.

Some of the other television companies have wildly varying pricing, depending on the model and retail partner.

While Dell has cracked the $1,000 barrier for a 23" LCD TV, a similar product from a large Japanese TV company still has a list price of $1,699 with street price ranging from approximately $1,200 to $1,699.

Even more dramatic is the comparison for the 26", where Dell is at $1,649 and the Japanese company has a list price of $2,499 with street prices of around $2,000.

We believe these seemingly irrational price discrepancies confuse the market and limit growth.

The good news is we are now seeing prices change daily and believe the market will conform to the new lower panel prices as we move through the fourth quarter and into the first quarter of 2005.

Looking to the fourth quarter, the advanced television business is very tough to call at this point.

Seasonally it should pick up but order patterns and backlog at this time continue to be weak.

Our best guess at this time is that our advanced television business will be equal to the level in the third quarter, plus or minus 5 percent.

As we look forward into the first quarter of 2005, we are pleased with our position and our future in the advanced TV segment.

The response to our new advanced television products has been excellent, and our DNX certification strategy is creating differentiation for us and more importantly for our customers.

On the chip side, Photopia has only started to ramp into production.

We shipped production Photopia products to only a handful of lead customers in the third quarter.

As we speak, we are actively engaged with completing multiple designs with more than 40 customers.

We expect to have a large number of customers in volume production in the first quarter of 2005.

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.

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

Our revenue of $44 million in the third quarter came in a little shy of our expectations entering the quarter.

They were up 24 percent year-over-year and we delivered solid earnings of $5.4 million, or 11 cents per diluted share on a GAAP basis, and $5.8 million, or 12 cents per diluted share on a pro forma basis.

Earnings came in at the high end of our outlook, primarily as a result of a more favorable product mix that resulted gross margin profits coming in about 400 basis points higher than we had expected.

Gross profit margins of 50.2 percent on a GAAP basis increased from 48.2 percent in the second quarter, and were up from 42.4 percent a year ago.

Lower than expected operating expenses and better than expected interest income also contributed to earnings coming in at the high end of our expectations.

R&D and SG&A expenses combined were $14.7 million, which was up about $300,000 from the second quarter, but was below our July outlook of $14.8 to $15.3 million primarily due to lower than expected product development expenses.

Net interest income of $638,000 was better than expected as a result of the average yield in our portfolio of marketable securities coming in higher than anticipated.

The effective tax rate in the third quarter of 30.3 percent on a GAAP basis was better than our expected rate of 34 to 36 percent, as the effective tax rate for the year decreased from 35.5 to 34 percent.

The decrease in the effective tax rate resulted primarily frp, a decrease in the projected taxable income for the year.

Taking a look at our revenue by geography, Japan and Korea grew sequentially in the third quarter, while China, Taiwan, and Europe experienced sequential decline.

Japan grew approximately 30 percent sequentially on the strength of projector and advanced television business.

The strengthened TV business came primarily from a significant ramp in LCD TV business from a leading consumer electronics company.

Korea grew 4 percent sequentially as solid growth in LCD TV business was partially offset by a decrease in LCD monitor business.

In Taiwan, revenue declined 45 percent sequentially as a result of a sharp fall-off in LCD monitor business, as well as the decrease in projector business.

Advanced television business was up just slightly from the prior quarter.

We believe the decline in monitor business was caused by a combination of some of our customers' products reaching end of life, as well as excess inventory that needed to be worked down.

The decline in projector business was likely due to the ongoing rollout of TIDDP 2000 engine since DLP is widely used by projector manufacturers in Taiwan.

Revenue from customers in China declined 33 percent sequentially with most of the decline coming from CRT business, although plasma and LCD TV business was also down in the quarter.

The decrease in CRT business resulted primarily from a major TV manufacturer working down inventory after purchasing a large amount of product from us in the second quarter.

In Europe, which is mainly comprised of advanced television business, revenue decreased 42 percent sequentially.

Plasma business decreased quite substantially due to softness in the market for those products, while LCD TV business increased sequentially.

Overall, we continue to have a broad customer base in the third quarter with only 2 end customers representing 10 percent or more of total revenue.

In total, these 2 end customers represented approximately 25 percent of total revenue.

Our top 10 end customers represented approximately 61 percent of total revenue.

Now turning to the balance sheet.

Cash and marketable securities consisting of cash and cash equivalents, short-term marketable securities, and long-term marketable securities were $266 million in the third quarter, down approximately $2.5 million from the second quarter.

We generated just under $2 million in cash from operations that was more than offset by capital expenditures of approximately $4 million.

Accounts receivable of $17.9 million, representing 37 days sales outstanding decreased from $19.5 million, or 36 days sales outstanding in the second quarter.

Inventory increased $5.3 million to $21.3 million in the third quarter.

This represented approximately 11 weeks of inventory.

The increase resulted primarily from lower than anticipated revenue in the third quarter.

We expect to bring inventory in line with our ongoing 6 to 8 week target within the next 2 quarters.

I'll now provide a little color on some elements of the fourth quarter outlook provided in the earnings release issued earlier today.

We expect revenue in the fourth quarter to be approximately $37 to $41 million.

We expect LCD monitor and projector business to be down sequentially, and advanced television business to be roughly flat.

At this time, we have approximately 75 percent of the mid-point of the estimated revenue range for the fourth quarter either shipped or booked and scheduled for shipment.

This compares to most quarters where we have had 80 percent or more of the mid-point of the revenue either shipped or in backlog at a similar time in the quarter.

As it turned out last quarter, we only got about 10 percent of the quarter's revenue in turns business, which resulted in revenue coming in below the July outlook.

The primary reason we are forecasting a greater than normal amount of turns business from this point is primarily due to seeing customer lead time shortening in some cases.

Given our customers are facing uncertain demand and knowing that we have product available to ship has resulted in some customers waiting as long as possible to place orders.

Gross profit margins in the fourth quarter are projected to be 46 to 48 percent, which is down from approximately 50 percent in the third quarter.

The decrease is expected due to a less favorable product mix.

R&D and SG&A expenses combined are expected to be $15 to $15.5 million in the fourth quarter, an increase of $300,000 to $800,000 over the third quarter.

The increase in expenses is expected to result from an increase in product development expenses, as well as compensation expenses related to increased headcount.

The effective tax rate in the fourth quarter is expected to be 20 to 25 percent of income before taxes on a GAAP basis and slightly lower on a pro forma basis.

The lower rate projected for the fourth quarter results primarily from the recent reinstatement of the Federal R&D tax credit, which is retroactive to July 1.

This lowered the projected effective tax rate for the year to 31 to 32 percent from 34 percent through the third quarter.

Earnings per share are expected to be 4 to 7 cents on a GAAP basis and 5 to 8 cents on a pro forma basis.

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

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

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

Before turning it back to Allen, I will mention that we will be presenting at the AA Classic in Monterey November 9.

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

Thank you Jeff.

We've made investments in the advanced television business that have paid off for us in 2004 and we expect to accelerate in 2005.

Year-to-date, our advanced television business is up 129 percent and we are well positioned with design wins as we go through the fourth quarter and into the first quarter of 2005.

The sub-$1000 projector has become the sub-$800 projector led by the advances in low cost poly silicon LCD light engine.

In fact, 9 of 10 lowest priced models we identified in the U.S. are polysilicon.

We continue to roll out the biggest product introductions in the history of our Company with Photopia and FETA as we harvest our design wins and ramp them into production.

During the fourth quarter and into the first quarter of 2005, we will expand from our lead customers like Dell to a broad set of customers in all of our application areas and all geographies.

We believe the retail price of new advanced televisions will remain the single most important factor that will dictate the pace and magnitude of consumer adoption over the next 12 to 24 months.

To achieve these key price points, lower LCD panel pricing is the single most important factor.

We have been fortunate to see panel prices finally begin to drop this summer, but it has resulted in a somewhat sloppy and disorganized market.

We have recently seen some rationalization of LCD TV and LCD panel prices, with top tier brand 23" LCD TVs breaking the $1,000 barrier.

We expect that this will continue as television manufacturers clear the channel and re-price their new products.

We remain confident we will see the $1,000 30" LCD TV by Christmas 2005.

Through all of these market dynamics, we have continued to make the critical investments necessary to this business to position us for growth.

We have great new products, outstanding customer relationships, and a portfolio of design wins to grow our business in 2005.

We will now open the call for questions.

(OPERATOR INSTRUCTIONS) Tyrone Lee, Piper Jaffray (ph).

Can you give us a sense for the linearity for the fourth quarter?

Yes, typically Tyrone we're fairly linear.

And I don't expect any significant changes from that.

When I say linear on a monthly basis, we typically ship anywhere between 30 and 40 percent in any particular month.

And I expect it'll be somewhat linear, maybe slightly weighted towards the back end.

Okay, and my next question would probably be it's been a while since you've done a product refresh on the progressive CRT side.

Any kind of timeline for that and any kind of must-have features you would include there, and additionally any sense of pricing?

Yes, it's an area that we're very focused on, especially ramping up our Shanghai design center.

And that's one of the areas that Shanghai has really focused on.

And we've got kind of a nice closed-loop system between customer requirements, design center, and fab in Shanghai to enable that to happen.

We haven't announced anything or what those new products would have.

At a high level, you could just look for further integration of some of the things in the signal path for CRT.

And also driving lower and lower costs as well.

Okay, final question will probably be on inventory.

You guys are now at 11 weeks versus you stated range of 6 to 8 weeks.

How do you expect this inventory reduction to play out, 50 percent in Q4 and another 50 percent in Q1?

Or would it be more front-end weighted?

Yes, I think we'll work it down a bit in Q4 and coming up with a specific percentage is a little tough because we don't know exactly revenue will be in the fourth quarter.

We have a range of expectations, but we'll make steady progress, I think, in the fourth quarter, and it will probably, obviously extend into the first quarter.

But I don't know how exactly that will play out.

All right, thanks Jeff.

Daniel Gilthreck (ph), CIBC.

Hey guys, I was wondering how would you characterize the advanced TV, the LCD TV, the interlacing market and the back-end market, however you want to characterize it.

As you see the competitive landscape, how do you guys fit in?

Our sales are all, if you go out and talk to customers, people have been very impressed with the new level of performance that we've shown with FETA and Photopia.

And in fact, have sort of vaulted Pixelworks into a different class of video processing capabilities.

FETA was the first product that had 3-D processing all over the world, including Pal.

And Photopia video processing just keeps getting better and better.

So I think from that standpoint, we've done very, very well.

But the question for us has been, and it constantly comes up is higher levels of integration.

We've taken a little different strategy in proving the analog side separately from the digital side and the integrate.

We've said that we're working on those integrated products, and since the analog products and the digital products are both .18 micron, and on similar processes already that integration should be pretty straightforward for us.

In terms of the other competitors out there, I don't think the landscape has changed very much.

It's all the Genesis, Trident and not too much from Taiwan and not too much from any of the larger companies that have sort of been looming over this business.

And what would you say is your biggest hurdle in to cracking into top 5 OEMs?

What do you find that they are looking for?

I doubt they're looking for integration as much as quality.

But which portion of the puzzle?

Are they looking from the video decoder, or are they looking for the interlacer or video processing?

What would you say is the biggest part of the hurdle?

That's a great question.

What we're finding is in those top tier accounts, and I think what you're talking about are the big Chinese and Korean brands basically, right?

Right, well actually mostly Japanese as well.

Okay, exactly.

The thing that they are looking for is somebody to help them out on the systems integration side, and some of our image processors, even without the interlacers are being very, very well accepted.

The other thing is that there is a specific feature that we can bring to the table that enhances their product offering that works in conjunction with one of the processors that they have.

That's always valued, so our co-processors are things that are embraced in those accounts.

And what I really think will happen and what we do is we stay engaged with them by selling discrete components.

And then as we move through time, we continue to integrate and dramatically lower those cost points, they start looking at using those in some of their lines of business, maybe not across all of their lines of business.

And eventually I'm still confident that we will be the merchant supplier to most of those big brands over the next several years.

All right, now just to refresh myself, the CHEDDAR product, you say it has a video decoder.

I presume that's an analog video decoder.

It's actually a digital decoder.

A digital decoder, okay.

An MPEG2 decoder of some sort?

No, it's a standard definition television decoder.

The MPEG decoder that we have is through a partnership with Toshiba.

And what we did there is Toshiba had this part that they sold mainly into set-top box applications, mainly in Japan.

It's a proven MPEG decoder.

We were able to get that part from Toshiba, work out a cooperative agreement with them, and we integrated it into our reference designs.

This one happens to be called Venus, like the planet, and then we write all of the software and user interface to tie all those things together to provide a turnkey solution to the customers.

And I guess looking ahead, do you plan on moving upstream into the plug and play market with an internally-harvested HD MPEG2 decoder, or are you going to keep licensing that product to Toshiba?

Well, we're always looking at a make/buy decision, but ultimately these things will keep getting integrated together, and we expect to offer higher levels of integration in the next generation and the generation after that.

So however it comes, it will be in a more integrated form.

All right, just a last question.

I don't want to hog up all of your time.

You've mentioned that you hope to see $1,000 price points for 30-inch LCD TV by next Christmas.

Now, that would be fantastic for the market, but do you expect that across all types of brands or do you expect that to be stratified, meaning that Chinese and Taiwanese are at 1,000, maybe Korea are at 1,200, and Japan is at 1,300 or 1,400.

Where do you see the different brands shaking out next year for 30"?

I think the physics are in place for anybody to do it.

In terms of panel price, electronics price, channel, ways of taking things to market.

If we look at what's happening right now, you can buy Taiwanese and Chinese brands below $1,000 for a 23".

In fact some of the 26" that we see on the street in Taiwan are right around $1,000, maybe $1,100.

I mentioned Dell in the prepared comments.

I think Dell has done a really good job of pricing, and pricing as aggressive as just about anybody in the world.

They are not quite as low as the cheapest off-brands that you could buy, but there's a nice, rational structure in the Dell pricing.

And I think you'd see the same thing for Christmas of next year.

Somebody like a Dell could get that product down below $1,000 and then rationally price everything off of that.

But the thing that's encouraged me is that from the chaos that we saw in the middle of the summer, we are starting to get some people to rationalize their pricing and sort it out.

And it is beginning to make sense.

So you actually believe the bogey is $1,000 for 30" for just about everybody next year?

Or it should actually gravitate quickly towards that point.

Yes, $1,000 is kind of a magic price point in any of these display businesses, and the 30", 32", I won't really draw a distinction there, I think it could be a 32" as well seems like a compelling size to sort of reignite this thing at the next level.

I was hoping that we'd see 26" hit $999 this year.

It doesn't appear that we will see that.

Maybe we'll see some specials around Christmas time to get them down there.

But it looks like the 23" has pretty much popped down below the $1,000 barrier for this year.

Well, thank you very much and good luck.

Thanks.

Jason Pflaum (ph), Thomas Weisel Partners.

Maybe just to revisit the inventory a little bit here, could you characterize the composition of the inventory today by technology or in market?

Is the majority there in the advanced TV side?

And then maybe just try to describe whether you think there's any risk to that inventory being written down.

You know, I don't think proportionately it's much different than probably how our revenue looks, and I don't have the specific numbers for you here.

But if you look at kind of third quarter where we were a little bit shy on revenue relative to our expectations, it was in the TV area and in the monitor area, so a little bit probably more than we would have ideally had in those 2 areas.

Projectors were a little bit light, but within our general expectations.

And then moving forward, again I think that it's close to what the mix should be, not far off.

Okay, and then as far as risk to potential write down, are you feeling pretty comfortable that you'll be able to move that?

Yes, we look at it monthly, and certainly take a hard look at it quarterly, so relative to our demand as we look forward, we look at the inventory we have and then make an assessment whether there's any excess or obsolete inventory.

And in this past quarter, didn't-- there wasn't anything significant.

There are very immaterial amounts of inventory that was reserve.

So yes, take a look at it on a quarterly basis, but at this point in time, we think we're in pretty good shape.

Okay, and maybe you could just discuss a little bit more the projected market, your guidance down I believe 20 to 25 percent.

Fifteen to 20.

I'm sorry, 15 to 20.

You know, where are you seeing that softness.

Is it largely a result of the customers, you know, working down inventory or are you seeing more pressure from TI?

If you could shed some light there.

Well, like we said, there has been this lamp phenomenon where I think there was a little bit of a panic that occurred and I think you've probably seen some of the things written about it.

But because the rear projection TVs have increased about a million units year-over-year, that the lamps in those are fundamentally the same lamps used in the front projectors and people bought up as many lamps as they possibly could and built them into finished goods products.

Most of the softness, I'd say, that we're seeing is Japan in the projector business and that is the polysilicon products and I believe that's where this lamp issue was probably the greatest.

We-- in the call I think we said that the first half of the year we sort of thought the market was growing at 35 to 40 percent, right Jeff?

Yes.

And we think it's still growing nicely, but it's probably not growing at the 35 to 40 percent clip that it was, kind of, in the first half of the year.

So I think it's just a-- it's a little bit of a pause.

They bought a little bit more in the third quarter because of the lamp situation and we'll just get better visibility on it as we move through the fourth quarter and then going into the first quarter.

OK.

Then maybe, just to help us understand, Japan roughly accounts for how much of your projector business?

Yes, they're roughly-- it's roughly three quarters.

Three quarters?

Yes, if you look at the top tier projector manufacturers, it's basically, you know, there's a handful, call it five or so, that have, you know, anywhere from 8 to 12 percent market share each and then-- and then InFocus is somewhere in that range, as well, probably closer to the top end of that.

And so, yes, within Japan they still have, you know, call it 75 percent market share.

You have InFocus with kind of low teens and then you have Taiwan with 15 percent or so, roughly.

OK.

All right.

That's helpful.

Thanks very much.

You bet.

Brian Alger, Pacific Growth Equities.

Hi, guys.

Good afternoon.

Good afternoon.

I'm trying to get my arms around kind of the mix.

I mean, the market dynamics, I guess, we're all in a bit of quandary trying to figure out.

But within your advanced television mix, obviously we saw some good sequential growth in LCD basically gaining back what we gave up in the June quarter and in regards to CRT, I guess, you know, we're kind of giving back what we picked up, you know, I guess a quarter ago.

And what it looks like if, you know, if I king of, you know, just kind of smooth it out or regress it a bit is you've kind of been on a steady run rate in these two groups and maybe you had, oh, a customer pop up in a given quarter versus another.

Do you think there's any indication that real material market share has been gained or lost in either of those segments or is it just a function of the markets are so young right now that any customer with any particular skew has a pretty dramatic effect on the segments?

Yeah, I think it's-- I think it's more the latter.

Certainly in the CRT market we saw that in this quarter and, in fact, that same customer that took the product in the second quarter is the main reason for the second quarter kind of being a spike.

The other thing is, there's just so many designs going on right now, Brian, you know, so many products, so many churns.

The situation in Taiwan I think you probably understand that we've had a pretty good success rate in terms of design wins in Taiwan and the way it works in Taiwan is you get the design wins, they build the products and then they go peddle them.

And they go out and look for OEM opportunities to sell those products and it's rather unpredictable when they're going to win.

And the trick there is you have to be very, very broad.

You have to have basically everybody using your product so that if anybody wins, you win.

And that's really what we've been focusing on this year with the rollout of those new products.

So I'd say the reason is more the latter rather than the former.

OK.

And when we-- when we think of LCD monitors on a go-forward, we should be thinking more along the lines of the T-Con, not so much of the controllers.

Is that fair to say?

Yes and, in fact, we're probably going to change the nomenclature for that segment.

If we're successful with the T-Cons -- and I'm cautiously optimistic right now -- those timing controllers are sold into panels that go into TVs, panels that go into notebooks and panels that go into monitors.

So calling it the monitor business will be somewhat of a misnomer and we're going to have to kind of sort through that as we go.

We may end up with four categories before we drop down to three.

OK.

And just one last question.

One of the-- one of the other guys in this space, Silicon Images, you know, talks about the great opportunities with HDMI and the anticipated ramp-up of that interface.

Is HDMI something that you guys are supporting today through your partnership with Analog Devices?

And what's your thoughts towards that interface versus, you know, any of the half dozen others that we've seen come and go?

Yeah.

Right now, the products that we're shipping are DVI, which is the-- you know, the underpinning of HDMI, and also DVI with HDCP, which is the copy protection.

We haven't shipped or announced any HDMI products yet.

Most of our customers that are shipping products with it, if they choose to have HDMI, are just planning a discrete chip.

I'd say, you know, right now I'd say that it does appear to be getting some traction and that people are interested in HDMI.

It's a little expensive in terms of adding it right now.

It's one of those things that we do need to integrate in order to get the cost down on it and I'd say on a go-forward basis we probably will be integrating HDMI.

We just haven't announced the timeframe yet.

Vijay Rakesh, Next Generation.

Hi, guys.

Most of my questions have been answered, but just a couple of short ones here.

I'm just wondering how many design wins you have on the Photopia for the top five OEMs.

You know, I don't have that data in front of me.

I can tell you that in the list of customers, there's many names that you would recognize across all of the different geographies, but I don't have the list in front of me of exactly which ones we have and which ones we don't have.

And what proportion of revenues do you expect from Photopia in the first quarter and second quarter of '05?

You know, we haven't outlooked first or second quarter.

And, you know, I'd like to get through this quarter, get those designs in place, get some more visibility on what's going on in Taiwan, see what kind of OEM deals they can land before I'd hazard a guess.

Right.

I'm also wondering if you could give some color on the inventory correction that you mentioned with the Chinese manufacturer.

Was that just something that they built up in June or was it switched back to somebody else and do you expect them to switch back?

Yes.

No, it was just a buildup of our product.

We did not lose the design.

They-- they got aggressive.

They were ramping up a new product.

They got excited about it, ordered a bunch of product.

It didn't quite work out the way they thought and they're just working it off over the next couple of quarters.

That's all.

OK, great.

Also, on the Dell design wins, I guess the 26 and 42-inch are positive, but I was wondering if you could take a stab at how the Photopia was positioned with (indiscernible) or the HDTV S3 chip from Trident?

In those wins, you mean?

Yeah.

Well, I think one of the important ones was that the quality is great and I think one of the really important things was the whole DNX program with Dell.

Dell really embraced that and worked very, very closely with it.

You can imagine from Dell's standpoint, if we have a program where we can actually measure video quality and prove video quality, not just by looking at it but numerically and write a report, it certainly gives Dell comfort because they go out to different suppliers for those television sets and they can absolutely verify that the quality from each of those different suppliers and each of those different designs achieves the video quality standard that we've established and I think that really was very powerful and then, obviously, we had to compete head to head on price and performance.

OK.

Going back to the top five or six OEMs, I guess if you look at the Japanese guys -- Sharp, Sony, any even the Korean guys like LG and (indiscernible) and Philips, a lot of them use captive solutions and their (indiscernible) are probably-- well, at the high end are probably much slower, right?

It's mostly like a Samsung who does a lot of supply at the high-end TVs.

Is that right?

Well, I think you just named people that are all customers of Pixelworks and the thing is, is that they use a mix and match that in some cases we'll get a design win with somebody where they just use what we call an image processor without a de-interlacer and then they'll use their own de-interlacer.

In some of those instances, we may just have a front-end processor or video decoder and analog-to-digital convertor, for example.

Even in some of those cases, even in those top-tier brands, they use a complete solution from Pixelworks and they-- you know, maybe they acquire that from a Taiwanese manufacturer for a certain segment of their business.

So we're in all those accounts.

It's just that, you know, it isn't like one of those big brands have said, "I'm standardizing on all Pixelworks solutions up and down."

And I don't think that's going to happen any time soon where one company is going to take all of the business from one of those big brands.

So is Dell using a Photopia chipset itself?

Is who?

Is Dell?

Yes, that's what we said today was the 2600 Dell plasmas use Photopia.

Right.

And going into the first quarter are you trying to add customers to that list or--?

To the Photopia list?

Yes.

Oh, sure, yes, absolutely.

We said we ramp from just a handful to over 40, probably, in the first quarter.

John Lau, Bank of America.

You mentioned the inventory levels at Pixelworks.

I was wondering if you can give us a little more color on the lead-- you had mentioned that lead times are shorter.

I was wondering, are shipments now more in line?

And I'm asking that question to see if the customer inventory levels are now in line with demand?

Thank you.

Yes, we have the best visibility in those situations where we ship to a distributor who then ships on to our end customer and specifically looking at inventory levels at our distributors, and the largest one is in Japan, inventory levels were down from the second quarter.

Our next largest distributor in Taiwan, those inventory levels were down and I guess I would, just in general, looking at the-- all the distributors' inventory levels, they're definitely down relative to the second quarter and relative to historical levels of kind of numbers of weeks of inventory that they like to hold, it's-- I would say it's very comfortable, if not appearing slightly on the lean side relative to historical levels.

So at the distributors I don't think there's any inventory issues there.

It's a little bit harder as we take the next step, because our end customers don't provide reports to us to give us their specific inventory level.

So it's really a matter of, you know, looking at their ordering patterns, speaking to them, listening to them talk about their forecasts.

And I think that is a little bit hard-- harder for us to get a sense for inventory levels, except, as we mentioned, in the projector area, in particular, it does seem clear to us that there are some excess inventory levels with some of our major projector customers in Japan and I think that could be both at their site, as well as in their channels of distribution.

And-- but in terms of the Taiwanese and the Japanese distributors on the other products, it seems pretty-- it seems pretty clean?

Yeah, the Taiwanese distributors, like I said, were down quarter-to-quarter and relative to the amount of business we'd expect to do in Taiwan in the coming quarters it doesn't look like there's any issues at this point at the distributor level.

And then, again, in Japan, TED is the largest distributor and there's definitely not an issue there relative to historical levels of inventory that they've carried.

Craig Berger, Smith Barney.

Can we dig into the projector business a little bit?

What I'm wondering is how far along the DDP-2000 penetration are we?

You know, if you take your guidance for Q4, we're looking at revenue growth this year of something like 11 to 12 percent.

Add in, maybe, 15 points of ASP decline.

That gets you to somewhere in the mid-20s in terms of unit growth.

What-- how far is the DDP penetration and how does that impact the business for 2005?

Yeah, the-- we're pretty much through, I would say, conversion of our Taiwanese customers to DDP-2000 and now the business that we-- and Taiwan is mostly DLP.

There's some polysilicon, but mostly DLP.

The business that we have in the DLP market in Taiwan now is sort of co-processors and higher end projectors where they're still using our de-interlacers and that sort of thing.

And Japan is pretty much all polysilicon.

So-- and InFocus has pretty much converted over what InFocus is going to convert over, as well.

So what we're now doing is we're-- we've got the market share that we've got in the products that we can get it in.

There weren't competitive threats in terms of getting designed out of any of the polysilicon designs that we have.

So now we're just kind of riding the market with our partners and then we're looking at what does the DDP-2000 take or not take.

And I would say generally we don't think that it's growing dramatically.

I think I gave you the nine out of the top 10 of the lowest-priced models in the United States in our little survey are polysilicon and, you know, pretty much all of those are powered by Pixelworks.

So, you know, we'll see as we move forward, but it doesn't appear that that's what's causing the slowness in the projector business in Q4.

Got it.

You had mentioned that Cheddar attach rates were at 20 to 25 percent projectors.

Do you have a similar metric for TVs?

No, we don't.

The original Cheddar product, what we did we really went after the projector business hard with it and Cheddar, because it's not as broad of a multi-standard decoder as FETA, it was really well suited to projectors but not as well suited to TVs.

FETA is really the product that we've really gone after the televisions with.

So as we roll out FETA, we can start to develop some metrics around that, but it's really, really difficult to give you accurate numbers.

Some of the products have two front-end chips in them.

Some of them have two image processors and one front-end chip in it.

So it's really tough for us to try.

So when we say kind of 20 to 25 percent, it's very much a ballpark figure, but I don't know that I'm ever going to be able to get more precise than that.

Right.

And when does the real sort of volume ramp on FETA kick in?

Oh, I'd say it's probably lagging behind Photopia a little bit and so it's definitely a 2005-type ramp, probably Q2, Q3, something like that.

Great.

And just a little bit on seasonality.

You know, normally we would expect Q1 to be seasonally down.

After a couple quarters of maybe inventory burn, do you think that '05 would still follow normal seasonal patterns or could we expect, maybe, a little bit better than that.

Well, every time we do the Q1 call, we're always confounded because we get more new information and I guess the short answer is, I don't really know.

But I can give you some data.

The end of Japan's fiscal year is March and that means projectors have been unusually strong for us in Q1.

Chinese New Year occurs in Q1 sometimes and that has an effect on the China business for us.

So there's-- there's all these factors.

We've got a bunch of new designs that are going to be ramping in that Q1 timeframe.

So, you know, I'll withhold my Q1 forecast until we get together in January and have our call, but there's a lot of factors that don't make it a simple answer.

(OPERATOR INSTRUCTIONS) Michael Bertz, W.R. Hambrecht.

Just a couple of quick questions to sort of wrap things up.

One, in terms of design cycles that you're seeing, maybe you can talk a little bit about what you're and the differences in timing and how long it's going to take for some of your Taiwanese guys that are going to take that product and then go to OEMs or what you might see with a top-tier OEM and just sort of what that cycle looks like?

Do we have to see products with chips in them at the CES and just sort of where you stand on it?

Yeah, it's interesting because I would say in Taiwan they can get a product spun in three to four months, but many times then they go out to sell it and it takes three to four months for them to find a customer and then you start the bigger ramp.

Sometimes they have a customer right from the very beginning.

You know, in a Dell situation, typically you know who you're working with and you work with Dell and you work with the integrator.

In the larger OEMs, in the larger Japanese companies, for example, it might take twice as long to get the product out, but you know once they get the product out the brand and the channel is in place.

Net/net it takes about the same amount of time, whether it's Taiwan or whether it's Japan.

It's just that time is divided up differently.

Your other question about CES is right and that's why there's a bunch of designs that are-- that we're working on right and we'll be dramatically increasing our number of customers between now and Q1 is because CES is the design win window that you've got to have products up at CES in order to hit that first wave of the first half of the year.

So, yes, CES is important and that's really what we're all pointed out at right now.

OK.

Just to expand briefly on that, Allen, you know, we talked about sort of your Chinese customers and how it can be kind of lumpy depending on how the ramps are.

Does that work on kind of a different dynamic?

I mean, obviously, there's not necessarily CES there for their domestic market.

Do you see something where it ramps and then it just sort of trails off for a quarter or two and then it will ramp again or how does that work for the Chinese guys?

There's different cycles in China.

There's a Chinese New Year cycle.

There's kind of a May cycle and there's an October cycle and so you can tend to see lumpiness around those phases.

Also we have international sporting events that drive cycles, as well.

But China sort of has those three lumps.

So Chinese New Year is really the big one for China, but you need to have those products designed and pretty much in production, you know, by about this time in order to hit Chinese New Year.

OK, great.

And then, Jeff, a quick question for you.

I'm trying to get some overall sense of ASPs and how they tracked quarter-to-quarter.

Can you give us maybe a little tighter (indiscernible) on each of the segments, if you can?

Sure.

Yes, ASPs for-- part of this is mix driven, so there's-- you know, we're selling multiple chips into these end markets so the numbers that I'm going to give you also include the fact that the mix is changing.

But the TV market, ASPs were down about 3 percent sequentially and were down about 6 percent year-over-year.

So overall, the ASPs are, you know, not declining at a very rapid rate and that's been true over the past year, really, in that market.

They've been very manageable.

In the monitor market, our mix changed dramatically this past quarter.

We had a sharp falloff in revenue, so we were much more biased toward higher end solutions.

So our average selling price actually went up 69 percent, but our units were down dramatically.

So, you know, again, we're not a very good representative of what's going on in the LCD monitor market at this point in time.

And then I think Allen spoke a little bit earlier about the projector market.

There's different components.

And, again, our mix is changing dramatically since we're starting to sell more of the front-end chips alongside the image processors.

So our average selling price, considering that mix, went down fairly substantially in kind of the teens sequentially, but if you looked at the components, our image processors were-- the ASP of our image processor, which is the core chip, was down 4 percent sequentially and the front-end chips were down in kind of a mid-single-digit rate within the quarter.

So I think that should give you a sense for what's going on, you know, in the three markets for us.

Eric Rubel (ph), Miller Payback Roberts (ph).

A couple questions if I could on operating cash flow, CapEx and depreciation in the quarter.

Yes, cash from operations was just under $2 million.

CapEx was around $4 and, let's see, what was your last question?

Depreciation and amortization.

Depreciation was just under $2.

I don't have that exact number in front of me.

Hang on here.

It was actually $2.3.

2.3?

Any guidance for next year on CapEx?

A lot will depend on our IT purchases, but our ongoing, kind of non-IT-related purchases tend to run at about $5 to $6 million a year.

OK.

Software tools is a good chunk of it.

As there are no further questions, I'll turn it back over to you, Mr. Alley, for any closing remarks.

OK.

I just wanted to mention that we will be presenting at the AeA Classic in Monterrey on November 8th and 9th and would welcome to see any of you there.

Thank you for joining us today.

(OPERATOR INSTRUCTIONS)