Pixelworks Inc (PXLW) 2005 Q1 法說會逐字稿

Please stand by.

Good day and welcome to the Pixelworks Q1 earnings release conference call.

Today’s call is being recorded.

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

Please go ahead, sir.

Good afternoon and thank you for joining us.

With me today is Allen Alley, President, CEO and Chairman.

The press release we issued today includes an outlook section containing forward-looking statements about our business.

Additionally on this call we’re going to be commenting on our business outlook and pending acquisition and making forward-looking statements based on our current expectations.

All of our forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially.

Please refer to today’s press release for a description of factors that could cause actual results to differ materially from those forecast.

The forward-looking statements we make today speak as of today and we do not undertake any obligation to update any such statements to reflect events or circumstances occurring after today.

Our comments will also include references to certain pro forma financial results which differ from results prepared in accordance with generally accepted accounting principles.

A detailed reconciliation between the statement of operations on a pro forma and GAAP basis is included with the financial statements that accompany the press release we issued today.

I will now turn it over to Allen.

Thanks, Jeff.

Earlier today we announced the signing of a definitive agreement to acquire Equator Technologies.

In this call, I’ll be covering both our first quarter results as well as giving more specifics on the Equator Technologies deal.

Under the terms of the deal, Pixelworks will purchase all outstanding shares of Equator for approximately $109 million in cash.

Additionally, all outstanding options to purchase Equator stock will be assumed by Pixelworks.

We anticipate the acquisition will close in June of this year, subject to regulatory approval and other closing conditions.

Before I describe the specific elements of Equator as a company, let me step back and provide strategic context for the acquisition.

Over the past two years, we have had one consistent strategic theme that has provided the underpinnings of all of our technology development and previous acquisitions.

That theme is owning the signal path.

We have continually built our portfolio of technologies and delivered solutions to our customers that step by step have expanded our coverage of every segment of the identified path.

Until recently, the signal path consisted primarily of those technologies necessary to provide a complete solution inside a television.

But within the past 12 to 18 months, the concept of internet protocol TV or IPTV began to emerge as a viable addition to the traditional tributaries of the signal path.

As we analyzed our position in a strategic direction, we identified what we believed is a very significant market trend.

The digital video recorder or DVR model of time shifted viewing has crossed the chasm, to borrow a Jeffery Moore metaphor.

The next logical and technological step in the evolution of the television signal path is a transition in content delivery from a broadcast television model where you watch what is available at the time it is available to the IPTV model that reflects the on-demand access of the internet.

With IPTV, you get to watch what you want when you want it, just like with a DVR.

Initially we believe these new IPTV/DVR capabilities will be delivered in set top boxes to retrofit existing televisions.

Equator’s presence in this market expands our customer relationships from our base of TV manufacturers into set top box manufacturers as well.

Moving into the future, Equator and Pixelworks together represent the technology to eventually embed IPTV capabilities within the silicon of advanced televisions.

Doing so will dramatically blur the distinction between a TV and a computer to the extent that they will both serve as portals to on-demand content delivered via the internet.

That is ultimately where we see advanced TVs heading and that’s why we think Equator acquisition makes sense.

Let me tell you a little more in detail about our new partner.

Equator is a company that we believe will help us dramatically broaden our product portfolio to address the ever expanding digital video and advanced display market.

They are a fabulous semiconductor company and video solutions provider founded in 1996 that is headquartered in Campbell, California near our existing Silicon Valley office.

They also have a software development center in Seattle, Washington.

They have about 50 people in Campbell and 25 in the Seattle facility.

They just completed their fiscal year 2005 in March at just over $20 million in revenue, with approximately 7 million of that revenue coming in the March quarter.

We are extremely pleased to be able to combine forces with Equator to drive their growth and to accelerate our penetration into some key digital video applications and products.

We specifically are excited about Equator for the following reasons.

Equator Technologies is at the forefront of delivering programmable advanced video compression technology with customer proven, system-on-a-chip IC and software solutions.

Specifically, they have experience with Microsoft Windows Media Video version 9, also known as VC1 for both encoding and decoding;

MPEG2 encode and decode;

MPEG4 encode and decode.

H.264 also known as MPEG4 part 10, now generally known as AVC both encode and decode;

Real Media Player D1 decode;

H.263 and H.323 video conferencing;

DVX encode and decode; and ON2 (ph) encode and decode.

In addition to these codecs, Equator has shift the digital rights management or DRM solutions for Microsoft Windows Media DRM10 and secure media encryptonite DRM.

We believe this combination of multiple customer hardened codecs and DRM solutions are the broadest in the industry.

Equator expands our customer base from the television into the set top box for internet protocol television or IPTV.

We believe this opportunity rivals the transformation we are already participating in as the television sets morphs from the CRT to flat panel displays.

During the transition from broadcast TV to IPTV, there will be a cacophony of standards as products evolve.

Having the ability to quickly deliver multiple codecs in customer hardened solutions and to have these codecs be software upgradeable in the field will be a key differentiator.

In the beginning of this move from today’s broadcast networks, many of these solutions will be delivered in set top boxes to retrofit existing televisions.

Equator has the customer relationships and the technology to win in this space.

The IPTV market is beginning to move from a technical curiosity that is theoretically possible to a mainstream delivery network.

This is especially true in Asia where population density drives down the per user cost of installing wide area high speed networks.

Industry analysts project the IPTV set top box opportunity will experience triple-digit rates of annual growth over the next few years, growing from just under a half a million units in 2004 to nearly 15 million units in 2008.

Another exciting aspect of this market opportunity is that every one of those IPTV set top boxes delivers content to a TV and requires outstanding video processing to deliver the best user experience.

The marriage of Equator with Pixelworks’ DNX video processing will allow our customers to get the best image quality no matter what the source.

Digital video means the video was encoded and delivered digitally.

It does not mean it was perfectly encoded, transmitted or decoded.

Pixelworks’ DNX provides a superior customer experience and gives our customers the best ability to differentiate their products.

Pixelworks’ current strength is with television manufacturers.

We believe as these new digital video standards mature and stabilize the IPTV solutions will have to merge into the integrated television products we offer.

We believe we will be able to introduce new codecs to set top box customers and later roll these codecs into dedicated, streamlined chips for television customers as the standards mature, all while continuing to deliver the DNX video quality value proposition.

By acquiring Equator, we effectively jumped the cable from the TV box moving us further up the signal path and broadening our total available market.

Some of our most advanced television customers are already asking us to integrate IPTV capabilities sooner rather than later.

Equator will allow Pixelworks to immediately offer some really compelling new features for our most advanced television customers.

Not only is Equator capable of providing multiple codecs and the ability to field upgrade these software codecs, but they also have both decode and encode capability.

This gives us the ability to cost effectively deliver personal video recorder or PVR type capabilities to these televisions.

We believe we can accelerate the penetration of Equator solutions into televisions by bundling the Equator chips with Pixelworks’ television chips, systems and solutions.

By piloting the delivery of solutions that support these emerging standards, we put ourselves in the position to lead and define products rather than follow and react.

Equator is engaged with some of the thought and product leaders in the digital video space to define the future of these emerging standards.

This is exemplified by their work with Microsoft and their delivery of one of the first certified Microsoft Windows Media Series 9 codecs.

Pixelworks will reap the benefits of this early engagement through early customer adoption and by gaining an intimate knowledge of these products and the issues of deployment of these standards on a wide scale.

Looking forward, we expect to see good growth from Equator during 2005.

We are only anticipating revenue in 2005 from chips that are already in production with customers.

There are, however, several customers that are ramping new designs into production so there is the usual risk associated with new product ramps.

Based on current forecasts, we believe the Equator business should experience sequential revenue growth, averaging 15 to 20% each quarter through the remainder of the year.

Currently Equator gross margins are running in the high 40s.

Assuming we are successful in closing the transaction by the end of June on a pro forma basis, which excludes non-cash expenses associated with the acquisition, we believe the acquisition will be approximately $0.02 dilutive to earnings per share in the third quarter, the first full quarter of combined operations, break even in the fourth quarter, and accretive in the first quarter of 2006.

We are extremely pleased to announce this transaction today.

We are very optimistic about the current opportunities for Equator in their core business of digital video and set top boxes and for our ability to expand the use of their products into our existing digital television solutions and sell them to our existing customers.

I’ll now turn to a review of our business in the first quarter.

From a financial perspective, our top line came in above the high end of the outlook as a result of better than expected revenue from advanced television and LCD monitors.

Advanced TV continued its strong growth, up 13% sequentially and set another revenue record for us.

LCD monitor business increased a surprising 22% sequentially on the strength of high resolution monitor business.

On the bottom line, both GAAP and pro forma earnings per share came in at $0.02 per diluted share, which was on the high end of our outlook for GAAP earnings and right in the middle of our outlook for pro forma earnings.

Jeff will cover the financial results in greater detail later in the call.

Let me now take you through our three end markets, LCD monitors, multimedia projectors and advanced televisions.

I’ll also give you a brief update on the state of our LCD timing controller products, which have the potential to serve both the LCD monitor and LCD TV markets as well as potentially some notebook PCs.

Starting with LCD monitors.

Shipments to LCD monitor manufacturers unexpectedly reversed course in the first quarter, with revenue increasing 22% sequentially following two quarters of sequential declines.

Booked to bill also exceeded one which was encouraging as we look to the second quarter.

The increase in first quarter revenue resulted from a significant increase in high resolution monitor business.

As we had mentioned previously, we are opportunistically serving the LCD monitor market where it is profitable to do so, but are no longer developing mainstream products for this market.

We are, however, using our relationships and technology developed in this market to benefit the development of a new generation of LCD timing controllers.

Our timing controllers improve LCD performance by increasing response feed for video applications, improving contrast and in some cases even improving panel yields.

We are continuing development of these products and believe we are nearing production with Samsung, our lead customer and the largest producer of LCD panels in the world.

Samsung has been very helpful in providing feedback along the development process and we are becoming more optimistic that there may be a significant business opportunity for us as a supplier of programmable advanced timing controllers beginning in the second half of 2005.

Looking at the second quarter, after the 22% in jump in revenue in the first quarter, we do not expect to see any significant rise in the second quarter.

We may have some very limited timing controller revenue in the second quarter, but it will not be material.

I’ll now turn to projectors.

Projector business continued to be weak in the first quarter as sluggishness in the overall market combined with excess channel inventory of finished products made for a poor start to the year in this part of our business.

Projector revenue in the first quarter was down approximately 2.4 million or 16% to approximately $12 million.

The reduction in project revenue coupled with growth in the other parts of our business resulted in projector revenue declining to 30% of total revenue in the first quarter, from 37% of total revenue in the fourth quarter.

We attribute most, if not all, of the weakness in this part of our business to generally sluggish market conditions and excess finished goods inventory of projectors rather than any new competitive situation negatively impacting us.

Both TI and In Focus in recent comments have comment this general market softness.

We continue to be by far the leading supplier of discrete image processing solutions to this market.

Further confirmation of this market softness is that Pacific Media Associates, a leading projector industry analyst, is now forecasting the projector market to grow 3.9 million units in 2005, a 26% growth rate.

This is down from an earlier forecast for 2005 of 4.8 million units, which is down from a forecast that had been as high as 5.8 million units late last year.

Pacific Media is forecasting that the market share gains of DLT made during last year appear to be flattening and that is generally good for our business.

While polysilicon LCD-based projectors require one or more of our chips, we are mainly used in only high end DLP projectors.

A recent forecast by Pacific Media estimates that the mix between polysilicon LCDs and TICLT is expected to remain relatively stable throughout 2005 with 52% of projectors using polysilicon LCDs and 48% of projectors using DLP.

This should help bring some stability to our projector business for the remainder of 2005 and enable us to start growing at market rates of unit growth offset by some degree by ongoing ASP erosion.

Looking forward to the second quarter, we do not expect a rebound in the projector business and are projecting basically flat sequential revenue.

The good news is that orders increased in the first quarter, so we believe that we may have touched bottom after two consecutive quarters of decline in this part of our business.

I’ll now review advanced televisions.

As was the case last quarter, advanced televisions continued to surprise us on the positive side.

Record TV revenue in the first quarter increased 13% sequentially versus our outlook for 5 to 10% sequential growth.

The better than expected growth resulted from strong LCD TV and plasma TV business which increased 17% and 75% respectively over the previous quarter.

We set records for both revenue and units for our advanced television business in the first quarter.

We continued to ramp our Photopia products during the first quarter, especially in the TV business.

Photopia shipments rose from tens of thousands in the third quarter to more than 100,000 in the fourth quarter, to just over 200,000 in the first quarter of 2005.

The ramp is especially significant because both Photopia and our new Integrated all-in-one chip family code named Opal (ph) both use 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.

We expect to see the ramp of our Photopia products continue through 2005.

LCD TV revenue exceeded 17 million in the first quarter, and represented approximately 17% of total TV revenue.

Plasma TVs held the number two spot at 19% of total revenue, up from 14% in the prior quarter.

CRT business was weak in the first quarter, dropping to approximately 6% of total revenue from approximately 11% in the prior quarter.

Turning to the advanced television market dynamics, we have very recently seen some movement in pricing.

Dell recently lowered prices of their LCD and plasma TVs pretty much across the board.

The 42 inch HDTV plasma is now $2,799.00 and the 26 inch LCD TV is $1,199.00.

We believe this reflects some new panel pricing that is now filtering into the market, but could also reflect some overall immediate market softness.

We believe our advanced television business will be up 5 to 10% over the first quarter.

Looking further out, the advanced television market is expected to continue to grow rapidly in 2005, with industry analysts expecting the second half of the year to really gain some momentum as new LCD fabs (ph) come online producing more cost effective panels, and this coincides with the year end consumer electronics buying season.

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

Thanks, Allen.

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

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

Revenue in the first quarter of 40.3 million increased 5% sequentially, and exceeded our outlook of 37 to 40 million due to better than expected advance television and LCD monitor business.

Advanced television revenue continued to represent a growing portion of our total revenue in the first quarter, increasing to 58% of total revenue from 54% in the previous quarter.

We remained well diversified from a customer standpoint in the first quarter with only one 10% customer and the top ten customers representing only 54% of total revenue.

Gross profit margin on a GAAP basis in the first quarter of 42% was below the outlook of 43 to 45%, primarily as a result of a less favorable product mix.

Additionally, in the first quarter we began allocating information technology and facilities expenses to all cost centers including operations which is included in cost of sale, so that negatively affected gross profit margin by approximately 171,000 or 42 basis points.

We also began classifying expenses for the amortization of assets to cost of sales, thereby decreasing gross profit by approximately 181,000 or 45 basis points.

The prior year period in the press release reflects the new classification of these expenses for an apples-to-apples comparison.

R&D and SG&A expenses combined increased to 16.5 million in the first quarter.

This was within our outlook of 16.5 to 17 million.

Most of the increase from the prior quarter was related to higher compensation expenses as total company headcount increased 28 to 377.

Most of the increased headcount was in China, which grew to 113 employees at quarter end.

As mentioned in our last call, we are investing heavily in expanding our presence in China and anticipate having over 150 employees in China by the end of the year.

On the bottom line, first quarter GAAP and pro forma earnings per share came in at $0.02 per diluted share, which was within our outlook range.

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 approximately 270 million ending the first quarter, down approximately 2 million from the previous quarter.

Accounts receivable of 15.2 million in the first quarter increased from 14.6 million in the fourth quarter; however day’s sales outstanding, or DSO, remained unchanged at 34 days as accounts receivable increased proportionately to revenue.

Inventory of 13.6 million decreased from 18.6 million in the previous quarter as planned.

After having built up inventory in the second half of 2004, we have successfully brought inventory back in line with our ongoing target of six to eight weeks.

I’ll now turn to the second quarter outlook to provide a few details behind the outlook provided in the earnings release issued earlier today.

The following outlook does not include the effect of the planned Equator acquisition in the second quarter.

We expect revenue in the second quarter to be approximately 40 to 43 million, which is roughly flat to up 7% sequentially.

We expect advanced television revenue to increase 5 to 10% and projector and LCD monitor revenue to be flat, plus or minus 5%.

At this time, we have approximately 75% of the midpoint of the estimated revenue range for the second quarter, either shipped or booked and scheduled for shipment.

Gross profit margins in the second quarter are projected to be flat with the previous quarter at approximately 42%, plus or minus a percent.

We don’t expect any significant shift in mix in the second quarter, hence the sequentially flat margin guidance.

R&D and SG&A expenses combined are expected to 17 to 17.5 million in the second quarter, up from 16.5 million in the first quarter.

As with first quarter, a majority of the increase is expected to be in compensation expenses related to increased headcount, particularly in China and Taiwan.

On the bottom line, earnings per share are projected to be break even to $0.02 on a GAAP basis, and $0.01 to $0.03 on a pro forma basis.

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

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

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

Before turning it back to Allen, I will mention that we are attending the upcoming Piper Jaffray conference in New York on May 11 and 12th.

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

Thank you, Jeff.

The first quarter of 2005 was solid, lead by the growth in our advanced television business.

We continue to make the investments necessary to lead this potentially explosive market for advanced televisions, projectors, flat panels and now with the acquisition of Equator, a variety of new digital video applications including IPTV set top boxes.

The projector business continues to be going through a transition.

Market growth overall is slowing, but the split between polysilicon LCD-based projectors and DLT projectors seems to be stabilizing at around 50/50.

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

The 27 inch LCD TV has broken the $1,000.00 barrier and the 30 inch LCD TVs are approaching it.

We believe that as the new seventh generation fabs continue to ramp this year, we will see further reductions in the larger sized LCD TVs and believe we will see the $1,000.00 price point for a 30 inch LCD TV broken by this fall.

We believe we have the largest market potential in the history of our company and continue to make the investments necessary to lead.

We are rolling out our largest series of product introductions which began in 2004 with Photopia and FEDA (ph) and continue in 2005 with our newly highly integrated chips.

We are expanding our addressable applications from advanced televisions and projectors to a broad range of LCD panel products, and now with the addition of Equator, much deeper into digital video and set top boxes.

We raised $150 million a year ago because we believed our company markets [inaudible] opportunity.

We continue to execute on our strategy of owning the signal path and are making the right investments to lead our competition as our markets rapidly expand.

Operator, we will now open the call for questions.

Thank you.

Today’s question and answer session will be conducted electronically.

If you’d like to ask a question, you may do so by pressing the star key, followed by the digit one on your touchtone telephone.

As a reminder, if you are using a speakerphone, please make sure your mute button is turned off to allow your signal to reach our equipment.

Once again, that is star, one for questions and comments.

Our first question will come from Tore Svanberg with Piper Jaffrey.

Hi, this is Heidi Poon for Tore Svanberg.

I’m sorry if I missed this, but can you elaborate on the 2 cent dilution after the Equator deal is closed in Q3?

Yes.

We’ll have more details on the combined plan once we close the deal so I don’t have those elements to take you through at this point.

Can you give me a revenue size for Equator last year?

Yes.

They just finished their fiscal year in March and did just a little bit over 20 million with about 7 million of that - just shy of 7 million - coming in the March quarter.

Okay.

Thank you.

That’s it.

Thanks.

Okay.

Next, we’ll go to Vijay Rakesh with Next Generation.

Hi.

A couple of questions.

On the projector side, I guess 12 million was a bit light.

I was wondering what the percent of the LCD decline and the unit declines were in the March quarter.

Yes.

Overall, the unit decline was about 3% and the average selling price declined by 14% sequentially.

But most of that decline in the sequential ASP is driven by a mix change, so we have front end processors or co-processors that sell generally at less than $10.00 each, and then we have our image processors that start kind of in the high teens and going into the twenties.

And the mix changed quite dramatically from Q4 to Q1.

So the mix is really what drove that overall ASP reduction.

If you looked at just image processors, which is the core chip, in Q4 to Q1, the ASP didn’t change at all.

So again, it was all mix driven.

So going into the second quarter, you said you’re guiding it flat.

Is it more kind of - the mix issue is kind of over for now?

Yes.

I mean, the mix will influence it.

It’s possible that the overall ASP could go up again if there’s growth in the image processor area that’s faster than growth in the, for example, co-processor area.

It really depends on the mix.

So overall just in general, ASPs in this part of our business, you know, generally decline on a chip by chip basis, kind of a couple of percent a quarter.

And that’s, I guess, how I would model that.

On the LCD TV side, on Opal, did you have any new customers in the March quarter or are we expecting any in the June quarter?

Yes.

We haven’t - I don’t think, Jeff, we’ve talked about specific Opal customers.

So we haven’t released any of the customer information on Opal.

I can tell you that I’ve been pleased with the reaction that Opal has received.

And I think I mentioned in the script that its path is being greased because the Photopia FEDA combination uses the same software, the Cobalt software as we used for Opal.

Okay.

Another timing controller, if you could run me through the - with the ASPs and what the market size you’re looking at.

I know you mentioned Samsung as one of the potentials out there, but -

Yes.

Let me - I’ll talk a little bit about the market.

The ASPs, since we haven’t really started shipping those in volume yet, I’ll defer until next quarter.

But the timing controllers are specifically targeted at the higher performance end of the LCD market, although they have pretty broad applicability.

So if you just take the overall LCD market, kind of start with the larger sizes, go down to about, oh, I’d say, 20 inches or so on the TV side, and then on the monitor side, again in the larger sizes, probably 19s and 20s and 23s.

And then in the notebooks, multimedia notebooks, any notebooks that are tailored to run video applications, those would all be part of the total available market for this generation of timing controllers.

Okay.

So and this would be like $2.00 to $3.00 of ASP?

Is that what you said for the timing controllers:

We haven’t said anything about the ASPs for the timing controllers.

We’ll give you an update in the next call once we start shipping them in production.

And one last question on the Equator.

Did you give a [inaudible] for Equator on the set top box side in the quarter?

Yes.

I’ve got it for the year, the trailing year.

They did about 27% of their revenue was set top box.

Somewhere around - and these are just rough numbers - somewhere around 40% or so of the revenue was in the video conferencing area.

Okay.

And who are their top customers?

You know, we’re not prepared to give out that information, either.

Okay.

Great.

Okay.

Thank you.

Thank you.

And as a reminder, that is star, one for questions or comments.

Next, we’ll go to Brian Alger with Pacific Growth Equities.

Hi, guys.

Good afternoon.

Nice quarter.

Good afternoon.

Thank you.

Obviously, things seem to be chugging right along on TVs and looking pretty good certainly in Q1.

What leads you to believe that there might be some softness going into the second quarter?

It’s sort of tea leaf reading on my part with prices to knee over.

And like I said in the script, you can either attribute that to we’ve got some more panels coming out and panel pricing has dropped, or people are trying to incite demand a little bit there.

So I guess if you look at everybody out there, there has been some strength in the TV business and certainly with us, and we’re outlooking strength in the TV business.

I think it’s really going to hinge on where panel prices go probably during Q2 as mainly Samsung ramps that seventh generation fab in anticipation for aligning prices for Christmas this year.

All right.

I guess there’s - so what you’re talking about in terms of softness, you’re talking about at the end market level with the consumers?

Yes.

That would be my - and again, that’s kind of pure speculation on my part just looking at what people have been doing on finished unit pricing.

How about with business that you guys are directly involved with in terms of the order rates you’re seeing from your customers.

Have you seen any changes or reductions in terms of the production forecast?

Well, I think what we’ve looked at is 13% sequential growth and outlooking 5 to 10% for next quarter.

Yes, but you outlooked 5 to 10% for the first quarter, too.

Yes.

And it came out a little bit better than that.

It’s tough to predict.

No.

I hear you, and I’m just trying to get a sense for has there been any change from your customers that would indicate that they are changing their production levels at this time.

Well, I think if you go back through and you look at all the numbers from the last call and you look at all the numbers in this call, you can infer that we must have had a little more turns (ph) business in the first quarter than we typically experience meaning short term orders.

Sure.

Okay.

I guess I would just add, I think it’s safe to say we haven’t seen any major shifts going on.

So the fact that we grew 13% last quarter and we’re outlooking 5 to 10, you know, that’s not a completely different environment, I guess I’d say.

No.

I mean, it’s consistent with what we’re seeing out there.

I mean, after all, the forecast is 100% growth this year.

Yes.

So okay.

Moving on.

On the Equator front, you know, clearly they’ve been working with PolyCon (ph) a hell of a lot more on the video conferencing end, at least as far as the success rate, than they’ve seen in the set top box.

Can you maybe talk to some of their successes in the set top box arena because there’s been a fair amount of discussion already this year with a number of participants chasing after project light speed and the like with SBC and then the Verizon projects and, you know, several projects over in Europe.

To the best of my knowledge, Equator hasn’t made even the first cut.

And I was just wondering where you think their strength in IPTV is going to be found?

Yes.

Like I said, Brian, we’re not going to talk about their individual customers that they’ve got in this call.

We might be able to give you some more color in the next call.

But they’re forecasting that their revenue split between this year and next year - we said it was about 27% in set top boxes in fiscal year ’05 which ended in March, and we’re looking at growth of that into the high 30% in fiscal year ’06.

So obviously there is some forecasted business in the set top box that’s considerably stronger than what we had in fiscal year ’05.

Good.

And finally, should we anticipate, you know, given that the advance television market is growing at a faster clip than your other segments, any material change in the gross margin outlook through the rest of this year?

Yes.

I mean, we’re kind of taking that one quarter at a time.

I mean, I’m hopeful that we can try to improve that over time, but as we said, you know, over and over again, I think the industry is probably headed for gross margins that may even dip longer term into the 30s.

But I’m not predicting that at this point.

And again, we’ve seen - we’ve gone through cycles where our margins have come down and then come back up again.

So as we ramp our new products and those typically have better margins than products that have been out there for a couple of years, you know, we’re hopeful that we can improve margins.

But there’s a lot of work ahead of us to do that.

Okay.

All right, guys.

Well, keep up the good work and I look forward to keeping track of Equator.

Thanks.

All right.

Thanks.

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

Good afternoon.

Just a quick question on Opal.

Allen, could you provide just a little bit more color of what it provides over and above the Photopia family?

Yes.

It’s basically an integration of Photopia and a FEDA.

So FEDA was mostly an analog chip that had an ADD converter video decoder built into it, some image enhancement circuitry.

And basically what we’ve done is combine the Photopia and the FEDA into a single chip.

So you can - it’s a superset of Photopia.

Great.

And with respect to Equator, did you provide any outlook as to the timeline of when we would see an integrated product where you’re integrating your technology along with theirs and providing it to the TV manufacturers, just in general terms?

We did not, but clearly this gives us a path to do that in the future as we roll forward.

The first step will be to broaden their market footprint and introduce some of their products into our TV customers.

I think the other thing is, is that it broadens our market footprint because you can introduce some of our DNX chips, the video chips, into the set top boxes as well.

So there’s a cross-pollnization.

But we didn’t give a timeframe on IC integration.

Okay.

Great.

Thanks a lot.

Thanks.

Next, we’ll go to Eric Ross with [inaudible].

Hi, thanks.

Can you give an idea on the Equator gross margins, whether they run or above or below your current gross margins?

Yes.

We said that the Equator gross margins right now are in the high 40s.

Great.

Thank you.

And that is all the time we have for today’s question and answer session.

Mr. Bouchard, I’d like to turn the call over to you for closing or additional remarks.

Okay.

I’d like to remind you that we’ll be presenting at the Piper Jaffray conference in New York on May 11 and 12th.

Thank you for joining us today.

Once again, that does conclude today’s teleconference.

We thank you for your participation and have a wonderful day.