Pixelworks Inc (PXLW) 2004 Q4 法說會逐字稿

Good day and welcome to this Pixelworks Q4 earning release conference call.

Today's call is being recorded.

At this time for opening remarks and introductions I would like to turn the call over to the chief financial officer Mr. Jeff Bouchard, please go ahead.

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 occuring 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 statements 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.

Since we are covering both a year end and fourth quarter results our prepared remarks are a little longer than usual and will take about 45 minutes.

We will then open the call for questions.

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

Overall the fourth quarter came in as planned from a revenue standpoint record advanced television business off set weaker than expected projector business resulting in total revenue of $38.5 million.

Earnings per share in the fourth quarter of $.08 on a GAAP basis and $.09 on a pro forma basis were a penny above the high end of our earnings outlook as a result of a tax credit provision that added approximately $.04 to the bottom line when compared with our outlook.

Jeff will discuss this during the financial review of the quarter.

Looking at the entire year both revenue and earnings were up considerably from the prior year.

Revenue of $176.2 million was up approximately 25% over 2003, primarily on the strength of shipments to advance television manufacturers which more than doubled year-over-year.

Revenue from advance television manufacturers represented 43% of total revenue in 2004 up from just 27% in 2003.

In the fourth quarter, Advance Television accounted for 54% of revenue, making the first time it is exceeded the 50% level.

Earnings were up substantially in 2004, not only from strong revenue growth but also do to increased gross profit and operating margins, pro forma operating margins increased from 11% in 2003 to 16.7% in 2004.

Net income on a GAAP basis of $21.8 million or $.45 per diluted share improved from a net loss of $535,000 or $.01 share in 2003.

On a pro forma basis which excludes certain one time and non-cash expenses, net income and earning per share more than doubled year-over-year from 10.2 million or $.22 per diluted share in 2003 to 23.1 million or $.47 per diluted share in 2004.

Looking back on 2004, there are a few key things that we accomplished that I believe significantly strengthen the company.

First, from a product standpoint we introduced some very exciting new products that provide customers with lower cost more highly integrated solutions for the projector and television markets.

The first series of products that was introduced in early 2004 was our Photopia product platform which combined our industry leading image processing with our latest generation video processing technology called DNX or digital natural expression.

Equally important as the Photopia chip platform was the introduction of our latest generation software platform, code named Cobalt which provided customers with a new level of performance and ease of use.

The next key product we introduced was the PWM 2000 media processor IC that resulted with our partnership with Toshiba.

The PWN 2000 chip, our first generation encoding product provides a cost effective high quality solution for customers developing high definition televisions.

More recently we announced our DTV in a box production reference design featuring the the PWM 2000 media processor at the core of the system.

The DTV in a box will enable customers to quickly develop and bring to market feature rich ATSC televisions.

The third key product platform we introduced was our latest generation video processor chips the PW 3300 and the PW 2300.

These chips provided customers a multi standard video decoder high speed analog to digital converter and DVI receiver with improved performance and integration.

This core technology along with the Photopia image processor, forms the foundation for the latest product to be introduced, our single chip platform of products for advance televisions and projectors just recently introduced at CES a few weeks ago.

Besides these key product introductions we also significantly increased our presence and capabilities in Taiwan and China over the past year.

Two key areas for us as more and more of the world's televisions will be built in these regions in the coming years.

While our total company head count increased by over 100 last year to 349, near 70% of the employee additions were in China and Taiwan.

We now have nearly 100 employees in China with our newest design center in Shanghai experiencing most of the growth.

Besides expanding our customer support capabilities we have also been developing IC design capabilities that we believe will pay dividends for us in the years to come.

We plan to continue investing heavily in China over the course of 2005 and expect we will have more than 150 employees across our three offices in China, by year end.

Last but certainly not least, we believe we strengthened our balance sheet in 2004 by raising $150 million in convertible debt at an attractive coupon rate of 1.75%.

This will provide us with greater flexibility as we consider strategic partnerships including acquisitions in the future.

We exited the year with over $272 million in cash and marketable securities, up approximately $172 million from just over $100 million a year ago.

Now let me turn to more recent developments and trends by taking you through the three end markets for our products, LCD monitors, multimedia projectors and advanced televisions.

I'll start with the LCD monitor market.

As expected fourth quarter shipments to LCD monitor manufacturers decreased about $500,000 sequentially to approximately $2.6 million and represented approximately 7% of total revenue which was unchanged from the prior quarter.

The majority of LCD monitor revenue came from high resolution UXGA monitors.

Bookings in the fourth quarter improved over the third quarter but not enough for us to outlook an increase in the first quarter.

We believe we will see LCD monitor revenue decline to come in at about 2 million in the first quarter representing 5% to 6% of total revenue.

The recent and projected declines in revenue in this part of our business is resulting primarily from our decision a little over a year ago to stop developing products for this market, rather than any particular industry dynamics.

While we are not continuing to develop commodity monitor chips, we are harvesting our previous product development efforts in this segment, through the development of new Smart timing controller products.

Four years ago we began to make an investment in the development of our Smart Panel products where we integrated the display controller with the LCD panel timing controller or T-Con.

To date, we've sold more than 2 million units of our Smart Panel products and through this process have developed customer proven advance timing controller technology and key customer relationships.

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

These products improved LCD performance by increasing response speed for video applications improving contrast for monitors and in some cases even improving panel yield.

Since our last call we've continued to sample these products and are actively engaged in product evaluation with leading LCD manufacturers.

While it's still too early to tell how broadly our technology will be accepted, we continue to be 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 projects in the next couple of quarters with he potential for revenue beginning in the second half of 2005.

I'll now turn to projectors.

Projector revenue in the fourth quarter was down approximately $7 million or 33% sequentially, and represented 37% of total revenue in the fourth quarter down from 48 percent in the third quarter.

We had expected a sequential decline of 15 to 20% in the fourth quarter, so the actual decline was more significant than we had anticipated.

Revenue from projector manufacturers across all regions was down at double digit rates so we believe there's been a general weakening of the projector market that has occurred at a time when there has been excess channel inventory to work down.

We believe this can be explained largely by two factors, we believe the overall projector market is weaker than originally forecast, and TI has gained more market share than previously anticipated with their DDP 2000 product especially in second tier Japanese customers.

First let me touch on the overall market.

The end market for projectors does appear to be weakening somewhat based on order rates from our customers as well as data we just received from Pacific Media Associates a leading industry analyst.

Compared with their forecast three months ago, Pacific media's most recent estimates for 2004 projector shipments will be 3.5 million units, down from the previous estimate of 3.9 million units.

This change alone could account for several million dollars of lost revenue opportunity for us in the second half of 2004.

Similarly, 2005 unit estimates are now 4.8 million units, down from the previous forecast of 5.8 million units.

The new estimates still reflect robust unit growth of 41% for 2004 and 36% for 2005.

Another factor beyond the overall softness in the projector market is that some second tier Japanese projector manufacturers who historically have been heavily weighted to using poly silicon LCDs in their projectors have introduced projectors using TIs DLP display device, the DDP 2000.

We believe TI has benefited from Sony's pull back from supplying poly silicon LCDs to the OEM market.

Additionally, we also believe TI has benefited from the prolonged weakness in the US dollar relative to the Yen.

Recently at the consumer electronics show, CES, inn Las Vegas in January, Fujitsu, Hitachi, Panasonic, Sanyo, and Sony announced they have joined forces with Epson to educate the market about the benefits of poy silicon LCD display technology.

At the show they showed very compelling demonstrations of the image quality, brightness, and resolution of what they refer to as 3 LCD technology.

We believe this is a positive competitive sign from the poly silicon LCD industry and is beneficial to Pixelworks as our image processors are used in a vast majority of the poly silicon LCD projectors produced by these companies.

At CES in January, we introduced new projector solutions that improved performance and lowered cost.

We showed our extreme Keystone correction chip that allows placement of a projector just about anywhere in a room and still give a crisp clear squared up image.

We also introduced our all in one integrated projector chip that in addition to including all of the image processing functions, high speed analog to digital converter and digital decoder, also integrates all of the memory necessary for video processing and the CPU.

This results in an extremely cost effective chip solution that also minimizes precious board space in today's small optimized projector designs.

Looking to the first quarter we do not expect a rebound in this part of our business based on backlog and recent order patterns.

All indications are that our largest Japanese customers will be further leaning down their inventories at the end of their fiscal year in March and that our revenue will be roughly flat, perhaps even down as much as 10% from the fourth quarter.

I'll now review advance televisions. 2004 was an excellent year for advance television business.

Revenue more than doubled with robust growth in all of our product lines led by growth in LCD TVs which grew about 135%, our CRT business was up 79%, and plasma TV grew about 65%.

For the fourth quarter we set a record revenue for our advanced television business with nearly $21 million in sales.

Advance television revenue was up approximately 13% sequentially, which was better than our expectations for sequentially flat plus or minus 5%.

The strong growth came from LCD TV business which grew at approximately 40% sequentially and was up over 150% compared to the fourth quarter of 2003.

LCD TV business has more than doubled for us over the past two quarters.

In the fourth quarter, LCD TV represented over two-thirds of total advance television revenue, up from a little over half of the total advanced television revenue in the third quarter.

Last quarter, we announced our partnership with Dell for both their new 26" LCD TV and their two new 42" plasma televisions.

Dell was the the first company to be certified to our Pixelworks DNX video quality standard.

Dell created a new market moving price point for the 42" high definition plasma television during the 2004 christmas season at $2,999.

Judging from the back order status on the Dell website, we believe they're capturing market share with aggressive pricing and excellent video quality brought to market courtesy of Pixelworks DNX.

We continue to ramp our Photopia product during the fourth quarter especially in the TV business.

Photopia shipments rose from tens of thousands of units in the third quarter to more than 100,000 in the fourth quarter.

The ramp is especially significant because both Photopia and our new integrated all in one chip code named, Opal, both used our new Cobalt software.

This means Photopia customers are making the commitment to our new software platform and will be able to easily migrate to Opal for their next generation designs.

There's much discussion in our business regarding television customers and penetration in the top accounts.

Our take on this is somewhat different than our competitors who have stressed their relationship and penetration with many of the few television manufacturers.

We believe breadth is just as important as depth.

Given that people are throwing around some pretty confusing claims, I thought it would be helpful to give you our take on the market backed up by some data.

While we believe penetration into these top tier accounts is important, it is quite literally, only half of the story.

We can play what I call the name game and say we are in production with five of the world's top seven television brands, or we can also say we are in four of the top six LCD television brands because we are.

But, we believe what differentiates us is that we have a much broader customer base.

In the fourth quarter we had more than 60 television customers and only two accounted for more than 10% of our television revenue.

Our top customer list includes many of names that you would recognize but also includes many of the names the average American consumer would not recognize.

We believe our excellent price, performance, and service including our history of providing turn key solutions, makes us very attractive to this broad customer base.

Many of these customers who have their own brands, and many of them are also OEMs who build product for the more well-known consumer brands.

We believe the biggest reason to have a broad focus is quite simply this is where the biggest volume opportunity is today.

Looking at each of the segments of the TV business, CRT, rear projection TV, plasma, and LCD, the top six or seven brands account for only about half of the total volume.

The interesting thing is that today, almost all of those brands have in-house integrated circuit solutions that they use in their televisions for much of their volume.

We're working hard to develop products to create such a compelling price performance advantage that these brands will eventually switch to merchant olutions like ours but, we expect, at least for a while, much of their volume will be filled with internally developed ICs.

Today we estimate that about half of their total volume is available to consider merchant solutions and we are very actively and effectively competing for this business.

So if you run the numbers, about half of all of the televisions produced come from the top few brands.

For those top brands about half of their needs are filled with in house developed ICs, this means that currently the total servable market with the top tier brands is about 25% of the overall television market.

The other group, our customers in Taiwan, Turkey, and China are building products for themselves as well as building OEM products for the top TV brands.

They are also the design and manufacturing engine behind the new entrance like Dell and HP these other brands actually account for 50 % of the entire television market.

The important thing for us is virtually 100% of these companies in 100% of their products use merchant silicon from companies like Pixelworks.

Again, our video processing developed to win in the very competitive Chinese CRT TV market coupled with our excellent customer service and turn key support, is tailored to getting customers to market in the shortest time with great Pixelworks' certified DNX video quality.

This is why we are successful in this segment and why we believe that in this industry you have to be both broad and deep.

From a product standpoint we believe we are very well positioned to compete in this fast growing market with some exciting new products that we just introduced and will begin shipping later this year.

In January at CES, we demonstrated to more than 100 qualified customers the largest suite of new products we have ever rolled out, as well as providing our customers a glimpse into the future of Pixelworks.

We announced our new all in one line of products that takes our [INAUDIBLE] and combines with our Photopia image processor for a highly integrated low cost high quality single chip solution for advanced television manufacturers.

We believe we not only have achieved a very high level of integration but have done it cost effectively with features that will distinguish us from our competitors.

At CES, we also introduced a DTV in a box production reference design for ATSC television manufacturers.

This reference design builds on the success of the TV in a box solutions we introduced well over a year ago that enabled us to get design wins from a broad range of television manufacturers because it gave them time to market advantages using our production reference design.

At the core of the DTV in a box is the PWM 2000 Media processor IC, the highly integrated MPEG video decoder chip that supports digital ATSC video stream formats.

With Pixelworks, our customers can quickly get to market integrated ATSC compatible televisions that seamlessly integrate legacy analog video capabilities with the new HDTV functions in a single easy to use user interface.

Finally, as CES we gave our customers a look into the future by showing technology demonstrations of new extremely cost effective television solutions, as well as some of our new high end video processing capabilities that take great images, and enhance them to make them look better than reality.

These technology demonstrations give our customers a tangible road map of where their investment in Pixelworks architecture, software, and tools will take them into 2005 and into 2006.

Turning to the television market dynamics.

In the fourth quarter, we began selectively seeing advanced televisions are more aggressive prices that were aligned with new LCD panel prices.

For example there are now 27" LCD televisions below $1,000 and 30" LCD televisions just $200 there are more.

We believe the $1,000 price for a 30" LCD TV is an important price point to ignite breakout adoption similar to what we saw when LCD monitors hit the $1,000 threshold.

While we were encouraged with the lower retail prices, we did not see the first tier brands drop price as much in the fourth quarter which likely had a dampening effect on overall demand.

The first quarter is going to be a little tough to call.

A lot will be dependent on whether we see aggressive pricing from a broad grouch manufacturers, if we do not see more aggressive pricing from a broader group of advanced television manufacturers.

If we do not see more aggressive pricing, we would expect a seasonally slow first quarter for the overall market.

Despite expecting the fist quarter to be somewhat seasonally soft, we are still ramping new products into production, so it appears to us based on current backlog and projected orders, that our business maybe up 5% to 10% over the fourth quarter.

Looking a little further out, the market for advance television is clearly positioned for some exciting growth with industry analysts projecting LCD and plasma televisions roughly doubling year-over-year, I'll now turn the call over to Jeff for his review of the financial results.

Thanks, Allen.

Before I begin my overview, view 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 earning release for a reconciliation of the differences between pro forma net income and net income according to GAAP.

Revenue of 38.5 million in the fourth quarter came in just below the mid point of our revenue outlook.

Projector business was weaker than anticipated, monitor business was in line with expectations.

And television business was better than we had expected.

Television revenue reached an all time high in the fourth quarter, growing 13% sequentially to nearly 21 million.

Representing 54% of total revenue.

Projectors represented 37% of total revenue, and LCD monitors represented 7% of total revenue.

For the year, revenue of 176.2 million increased 25% over a 140.9 million in 2003.

Advance television revenue more than doubled year-over-year.

Projector revenue increased 6% and LCD monitor revenue was down 30%.

Gross profit margins in the fourth quarter of 45.3% on a GAAP basis were down from 50.2% in the third quarter, as a result of less favorable product mix resulting from less projector revenue, our highest margin business.

For the year gross profit margins on a GAAP base of 49.1% improved from 45% in 2003.

The improvement in gross profit margins resulted from higher product margins in all three markets for our products.

The most significant margin improvement came in LCD monitors where we focused on higher margin business.

R&D and SG&A expenses combined were 15.2 million in the fourth quarter up approximately $480,000 over the third quarter.

About half of the sequential increase was related to increase compensation expenses primarily related to increase head count.

In the fourth quarter we added 30 new employees, bringing told head count to 349 at year end up from 241 a year earlier. 20 of the 30 employees added in the fourth quarter were in China, mostly in our Shanghai office.

For the year, R&D and SG&A expenses combined were up 19% on a 25% increase in revenue.

There by contributing to the improvement and operating margin which on a pro forma basis increased from 11% in 2003, to 16.7% in 2004.

Fourth quarter GAAP net income of 4 million or $.08 cents per diluted share exceeded the high end of our outlook at $.04 to $.07 per share as a result of a credit of 1.2 million in the tax provision.

Relative to our outlook, this contributed approximately $.04 cents to our earning per share.

Similarly, pro forma income of 4.3 million o r$.09 per diluted share also exceeded the high end of our outlook at $.05 to $.08 a share, due to the favorable tax credit.

The benefit in the fourth quarter tax provision resulted primarily from a reduction in our state tax rate and the release of evaluation allowance on deterred tax assets for federal and state [INAUDIBLE] credit.

With the fourth quarter benefit , the effective tax rate for the year was 26.8% on a GAAP basis, and 25.7% on a pro forma basis.

In 2004, GAAP net income of 21.8 million or $.45 cents per diluted share, reflected our achieving GAAP net income in each of the four quarters of the year for the first time in the company's history.

We improved considerably from the net loss of $530,000 or $.01 per share in 2003.

On a pro forma basis net income of 23.1 million $.47 per diluted share more than doubled from 10.2 million or $.22 per diluted share in 2003.

When calculating earnings per share, the recent adoption of EITF04-8 required us to include the effect of the conversion of our debentures into common stock when calculating weighted average shares and net income per share using the IF converted method in any quarter or year during which the effect is dilutive.

Using this method, the convertible debt was not dilutive to earnings per share in the fourth quarter, however it was slightly dilutive to earning per share in 2004.

Because it was slightly diluted for 2004, the diluted earnings per share of $.45 on a GAAP basis and $.47 on a pro forma basis cannot simply be calculated by dividing reported net income by the weighted average number of shares.

We currently don't anticipate the adoption of EIT-F to have any meaningful impact, if any, on earnings per share in 2005.

Now turning to the balance sheet, cash and marketable security consisting of cash and cash equivalent, short-term marketable securities, and long-term marketing securities, were approximately 272 million ending the fourth quarter, up approximately 6 million from the third quarter.

We generated 10.5 million in cash from operations during the quarter, that was partially offset by 4.8 million in capital expenditures.

For the year, cash and marketable securities were up approximately 172 million with a 145 million coming from the convertible debt offering in the second quarter, and 28 million of cash generated from operation.

Accounts receivable of 14.6 million in the fourth quarter decreased from 17.9 million in the third quarter.

These sales outstanding are DSO were 34 days in the fourth quarter, down from 37 in the third quarter.

Inventory of 18.6 million decreased approximately 2.7 million from 21.3 million in the third quarter. [INAUDIBLE] anticipate inventory levels continuing to come down a little in the first quarter.

I'll now turn to the first quarter outlook.

We provide a few details behind the outlook provided in the earnings release issued earlier today.

We expect revenue in the first quarter to be approximately 37 to 40 million.

We expect advance television revenue to increase 5 to 10% sequentially.

Projector revenue to be flat to down 10%, and LCD monitors to be down roughly a half a million dollars.

At this time, we have a little over 80% of the mid point of the estimated revenue range for the first quarter, either shipped or booked and scheduled for shipment which is a little better than where we were at this point last quarter.

This time we have a little over 80 percent of the mid point of the estimated revenue range for the first quarter either shipped or booked and scheduled for shipment which is a little better than where we were at this point last quarter.

Gross profit margins in the first quarter are projects to be 43 to 45% which is roughly flat to down two points from the fourth quarter.

Because projector gross margins are the highest of our three end markets, we will probably be in the higher end of our gross profit margin outlook if projector revenue is flat.

If projector revenue is down, we will likely see a decline in our gross profit margins.

R&D and SG&A expenses combined are expected to be 16.5 to 17 million in the first quarter, up from 15.2 million in the fourth quarter.

Roughly half of the sequential increase in expenses is expected to come from higher compensation expenses, primarily related to increased head count.

We are continuing to invest heavily in expanding our capabilities in China in particular.

The other half of the expense increases come from a variety of expenses, including increase product development expenses.

The pro forma effective tax rate in the first quarter is expected to be 24 to 28% of pro forma income before taxes.

This is in line with the actual pro forma effective tax rate in 2004 of 25.7%.

This is a little lower than we were expecting previously, primarily as a result of a lower anticipated state tax rate.

We're not able to provide any reasonable estimate for the GAAP effective tax rate, at this time, due primarily to the difficulty in predicting stock base compensation expenses in 2005, as a result of FAS 123R becoming effective mid year.

On the bottom line, earnings per share are projected to be break even at $.02 on a GAAP basis, and $.01 to $.03 on a pro forma basis.

That concludes the review of fourth quarter and 2004 financial results, and the first quarter business outlook.

For information on all elements of our financial results and business outlook, please refer to the press release issued earlier today, announcing fourth quarter and 2004 financial results.

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

Before turning it back to Allen, I will mention that we are attending two investor conferences in February.

The Thomas Weisel 2005 tech conference on February, 7th in San Francisco, and the CIBC semiconductor summit on February 10th, in Vail Colorado.

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

Thank you, Jeff.

I'm pleased with our position as we enter 2005.

The advance television business has grown nicely for us and with our new product introductions, I believe we are well positioned to continue that growth.

The projector business is going through a transition forest, but the macro market dynamics are still very positive.

Our quarterly survey of the U.S. market shows that the sub $1,000 projector has become the sub $700 projector led by advances in low cost poly silicon LCD light engines.

In fact , eight of the ten lowest price models we identified in the U.S. are in fact poly silicon.

We continue to roll out the biggest series of product introductions in the history of our company. 2004's Photopia and [INAUDIBLE] have been combined into one cost competitive integrated solution for 2005 that offers even more improved image quality over our critically acclaimed Pixelworks DNX certified video.

We are seeing panel pricing drive new price points for LCD and plasma television.

The 27" LCD TV has broken the $1,000 barrier and high definition 42" plasma has cracked $3,000.

In fact, some standard definition 42" plasma TV have broken $2,000, making them a viable alternative to even rear projection CRT televisions.

We have made investments through 2004 in new product development and support.

We will continue to increase those investments in 2005.

We believe there's a tremendous market opportunity for us and we are dedicated to do what is necessary to lead in this market.

We will now open the call for questions.

The question and answer session will be conducted electronically.

If you would like to ask a question, please do so by pressing the star key, followed by the digit one on your touch tone telephone.

If you are using a speaker phone, please make sure to disengage your mute function, or pick up your handset before pressing star one so that your signal will reach our equipment.

Please limit yourself to one question and one follow up question.

So that we make questions from as many of you as possible, please limit yourself to one question and one follow up question.

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

Once again please press star one on your touch tone telephone to ask a question.

We'll pause to for a moment to assemble our roster.

We'll take our first questions from Tore Svanberg of Piper Jaffray.

Yes, good afternoon.

First of all looking at the projector business given that there's a lot of moving parts there as we speak.

How should we view that business in '05?

You mean in terms of unit growth or which parameter?

Well given you talked about some of the moving parts, potential market share losses to DLP, maybe some inventory still as an overhang, I realize what the guidance is for the March quarter, but I'm just trying to understand for the whole year.

Is it more of a flattish type opportunity for you or you actually do expect to see some growth?

Yeah, I think, it's hard to tell, and that's -- you characterized it accurately, there are a lot of moving parts.

It's especially hard because the analysts are moving their numbers down although the point they've moved them down to still shows like 37% growth for the year.

Our order rate, reflects softness across all geographies of the projector business, and all sort of segments of the projector business.

So I'd anticipate that we're still going to see overall market growth this year.

I don't know if it's going to be 37% or not, but I'd expect that we're going to see overall market growth.

Prices have come down and that's a good sign.

Are there any forecast, Jeff that you've seen on PI's penetration this year? .

Yeah, I think the most recent estimate that's I've looked at from Pacific Media do show they're projection is that the balance between poly silicon and DLP is expected to move a little more on DLP's direction over the course of the year, I think roughly it's a 60/40 split poly silicon to DLP.

The numbers I looked at I think move in more in the 55/45 direction.

So that would work against us if that ended up playing out, but, you know, it's a forecast over a long period of time so we'll have to wait and see how that develops.

But kind of the high level things to think about, overall the unit growth for the industry supposed to be 36 %.

Our ASP erosion has been fairly modest historically.

Tended to run in the low teens over on an annual basis.

And then you have the question of what happens to the poly silicon DLP mix over the year.

We're also, I guess, working in terms of things working on our side we're working hard to sell more of these companion chips along with image processors, so if we can continue to increase the attach rate for every image processor we sell, to sell more of these front end chips, you know, that will help us a bit.

Very well, and just a follow up on the TV business.

Allen, as you mentioned it seems to be there's two camps or there's two markets.

In one with the brand names and the other with the less brand, which of those two do you think would probably grow faster?

Obviously that would depend a lot on how the [INAUDIBLE] outsource, but based on your take which of the two do you think grows the fastest in 2005?

Well, you know, it's really interesting because you'd expect that the regular old CRT TVs are a proxy for how this is going to settle out, and when I look at the CRT TVs, the top -- and I don't know if these numbers are perfect, they're based on some Q3 '04 numbers.

One, two, three, four, five, six.

The top six guys account for roughly half of the TV, the CRT TV market .

So the other half of the TV market is from the guys that aren't in the top six or so.

And right now in the LCD market, it's about half, in the PDP market it's about half, the only anomaly here is rear projection TV is almost exclusively the domain of the top brands which is kind of interesting, but all the other ones are about half.

So based on that, there may be some short term [INAUDIBLE] where one grows faster than the other, but I'd say it looks like it's about a 50/50 split and they'll grow together.

We'll take our next question from Brian Alger with Pacific Growth Equity.

Hi, guys.

Good afternoon,.

Hi Brian.

I guess I'm trying to get my arms around the projector market.

Obviously DLP is taking much greater share of that market then, I think we certainly anticipated at the beginning of this year.

The current quarter and I guess kind of the outlook for a down sequential implies that the Japanese are losing share hand over fist given that they're generally strong in Q1.

I'm wondering if your softness in that segment is tied to, I guess a disproportionate share in poly silicon or do you see an overall weakness in the industry itself, in that there's a glut in inventory, there's a drop in demand, an oversaturation, can you maybe characterize what we're dealing with?

I think we pointed out that the numbers are coming down in the fourth quarter the numbers dropped about--was it about half --what was it?

About $300,000 units. $400,000 units.

$400,000 units.

In the last quarter they whacked $400,000 units out of the overall market and about 1 million units out of their forecasts for 2005, so I think everybody agrees that growth in the projector business is not as robust as we thought even three months ago.

Although the net of that is, is that it's still growing pretty well, 40 some percent this year, or 40 some percent in 2004 and still 36, 37% in 2005.

I think you are right, though.

We also said that it looks like TI has taken more share than we had anticipated, specifically with the DDP 2000.

We certainly still play in the TI projectors at the higher end and work really well with them.

Our image processing and Keystone correction is still used in those projectors, it's just that TI has -- with the DDP 2000 has sort of tried to stake out a lower end of the business.

All right, and just a quick clarification.

You talked about the advance television revenues being up 13%, what were the units?

We don't typically give the units but just, I guess, a rough feel it's near 2 million.

Once again as a reminder, if you would like to ask a question please press star one at his time, and if you are using a speaker phone, please pick up your handset or disengage your mute function before signaling.

We'll go next to Vijay Rakesh of Next Generation Equity.

Hi, guys, a couple of questions.

Looks like a solid TV revenue growth in the quarter, just wondering, any new customers on Photopia?

Yeah, we definitely had new customers go into production with Photopia, in the quarter so we, you know, we're optimistic that that trend will continue, we think in the first quarter we'll see a further increase in the number of customers that are using Photopia.

I don't have have any specific numbers for you but definitely up.

Okay.

So you have new customers in the quarter?

Yes.

Any you would want to name?

Or share with us?

No, we don't have names to share with you.

One thing that we can say is about 85% of the Photopias, something like that, 85 to 90% went into televisions.

Okay, I'm glad on the inventory side do you expect that to go down further quarter to quarter [INAUDIBLE]

Our inventory?

Yeah, I think it'll come down a little bit, I wouldn't expect to see, probably it come down the same magnitude in the first quarter that it did in the fourth.

We'll take our next question from Craig Berger with Smith Barney.

Good afternoon, guys.

A little bit more on projectors here, I guess you did about 14 million in the quarter, do you think that that 14 million represents consumption levels of your chips, or do you think there's still some inventory lowering throughout the supply chain in the fourth quarter?

Yeah, I think it looks based on speaking with our customers in Japan, in particular, that they typically, they like to get kind of lean with their inventory levels, at the end of the first quarter which is their year end.

So at the distributor level our inventories continued to come down in the fourth quarter, we don't have as good a visibility at the end customer level, but again all indications are that they intend to have lean inventories at their -- in their companies as well, so I would suspect that if anything, inventories would continue to come down on average this quarter a little bit.

So if just the inventories declined in December that implies that you were shipping below consumption levels?

And what about on the TV side?

Were there any excessive inventories being lowered in the fourth quarter, and where do you see the supply chain in Q1?

Yeah, I don't think we had--as at least we didn't have indication entering the fourth quarter that inventory levels were necessarily an issue.

Entering the fourth quarter like we knew they were in projectors but again, overall the best visibility we have is that of our distributors and overall inventory levels at all of our distributors combined came down about 25% this quarter and they were already what I would have considered reasonable, overall, entering the fourth quarter, so it doesn't appear that there are inventory issues that we can see at this point.

We'll go next to Cherrie Prinz with D. A. Davison & Company

Good afternoon, out of the one-third of your TV revenue left, could you split between digital CRT and plasma and then comment on how digital CRT business was in the quarter?

Yeah, so, roughly 70% were LCD TVs, about a little over I think it was 17% or so CRTs, and about 12% or so plasma.

And CRT business quarter-to-quarter came down a bit from the third quarter.

Okay, and going into Chinese New Year, this following quarter do we expect the same sort of trends?

Yeah, I don't think we expect any probably significant change one direction or the other in the first quarter.

As far as mix, right, Jeff?

Yeah.

And once again if you have a question or a follow-up question, please press star one at this time on your touch tone phone.

We'll go to the follow-up question from Tore Svanberg of Piper Jaffray.

Yes, you mentioned about 80% visibility at the beginning of the quarter or was that at the the beginning of the quarter or was it based on where we stand today?

Where we stand today.

Okay, thank you.

Our next question comes from John Lau with Banc of America Securities.

Hi.

It's actually Michael Cole calling in for John Lau.

Can you give us a sense of the linearity, what is normal in the first quarter?

Yeah, we been historically what I would consider fairly linear in almost all quarters so in the projector business has helped us out in that regard, but we've typically -- it's been very unusual where we've had a month that's either been below 30% of the quarter's revenue or above 40.

And you know I would expect it would probably still fall within that range again in the first quarter -- a variation but it hasn't been dramatic.

Okay, and also can you give us a sense for what type of attach rate you guys expect for FETA with the Photopia chip?

Oh, it varies wildly.

Because some customers commit to it and commit hard, and we get 100% attach rate, or 150% attach rate because they use two of them.

And other customers just, they use a solution, sometimes they have their own solution as a matter of fact, I don't know how to quantify it, Jeff, do you--we don't really--?

Yeah, I don't have a good number for you right now, I would expect it, it would be less than a number of Photopias we sell, but I don't have a good number to give you.

Yeah, we don't actually track -- we track total FETAs or cheddars and total Photopias but we don't actually track which Photopias are attached and which ones aren't, so it's kind of hard to piece that out.

Our next question comes as a follow-up from Brian Alger with Pacific Growth Equities.

Hi, guys.

I apologize if this has been asked or answered.

I'm bouncing between four calls.

But I'm just wondering what we're seeing in terms of ASP trends on a part for part basis, both in the advanced television sector as well as in the projector markets.

Yeah, and TVs especially have been very modest to date, overall, and I don't have a detailed analysis for you on a chip by chip basis, but overall our ASPs actually were flat quarter-to-quarter, third quarter to fourth, so it's been modest.

Generally I'd say in a just a specific chip by chip basis it's been in the kind of mid single digits per quarter, so it's been very manageable given the unit growth.

And projectors, it's less competitive, so we tend to see ASP erosion within, you know, a couple, 2, 3, maybe 4% a quarter.

We've managed that based on cost productions that we get and we pass along to our customers, but just to give you a few numbers, last quarter for projectors ASPs on average went up, but again it was [INAUDIBLE] then in year-over-year they were down 12%.

TVs were overall, the average price of a TV chip was flat sequentially and down 4% year-over-year.

But again, that's not representative of an individual chip and what's happening there, but on average, that's what our ASPs have done.

That's helpful, thanks, guys.

You bet.

Once again, if you have any questions or any follow-up questions, please press star one at this time.

We'll go to Craig Berger with Smith Barney.

Hi, guys.

Did you--I'm sorry, I got dropped for a second, but did you -- I just heard the end of the ASPs did you talk to Saint Bart ASP declines?

Yeah, kind of mid single digits for TVs on a sequential basis on average and for projectors it tends to run in the lower single digits per quarter.

Got it.

And do you see any lamp shortages impacting either TV or projector business in 2005?

No.

Nothing that we can see at this point, I mean, I guess it's possible, I know there's been concerns about that not too long ago, but I guess a lot will depend on how successful the rear projection TV market, in particular, in '05.

Right.

On the TIDDP 2000 push, you know, you guys have historically characterized that as, you know, the DLP solution could capture a third of the market.

Now I guess you're saying 45 to 50, but, you know, how far along into the penetration of their addressable market do you think the company is?

Yeah, I think and those weren't our numbers necessarily, I mean we didn't disagree with them but they were analyst numbers that had TI at about 35%.

Now that we've seen projections at 45% or so for '05 and, you know, we'll have to see what happens there.

And yeah, that's just something we're going to have to have to follow over the year.

Did you have a comment, Allen?

Yeah, in terms of penetration, how far they are, you know, in terms of rolling that in, I think we probably still have another order or two where they're rolling it in and then we'll be still participating in some of the high end products and products where people want to use the Pixelworks video processing or our extreme Keystone capabilities will still be in those products even though their DLP products.

Yeah, well we've been caught a little bit by surprise -- seen some of the second or third tier of Japanese projector manufacturers starting to introduce DLP projectors because based on on our understanding DLP is very competitive -- or I'm sorry poly silicon is very competitive with DLP from a cost standpoint, so we think it might be a function of TI being more aggressive pricing their DLP solutions then Epson which is now the sole supplier of poly silicon LCDs is being pricing their LCDs to the Japanese customers of theirs.

So we don't think from a cost standpoint there's an advantage that TI has so that we would expect people to move more towards the TI solution, we think it could be more of just a pricing strategy where TI is being very aggressive and offering great prices to some of these second and third tier Japanese projector manufacturers.

And that will conclude our question and answer section for today I'll turn the conference back on Allen Alley for any additional closing remarks.

And that will conclude our question and answer session for today.

I'll turn the conference back to Allen Alley for any additional or closing remarks. conferences.

Okay, thank you.

I'd like to remind you that we will be attending two investor conferences in February.

The Thomas Weisel 2005 tech conference on February 7th in San Francisco, and the CIBC semiconductor summit on February 10th in Vail, Colorado, this concludes our call.

Once again, this will conclude today's presentation, we appreciate your participation.

You may disconnect at this time.