Pixelworks Inc (PXLW) 2006 Q1 法說會逐字稿

Good day and welcome to the first quarter earnings announcement for Pixelworks, Inc.

Today's call is being recorded.

At this time the call will be turned over to the CFO, Mike Yonker.

Please go ahead, Mr. Yonker.

Thank you.

Good afternoon and thank you for joining us.

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

The main purpose of this conference call is to augment the information provided in our press release earlier today announcing the company's financial results for the first quarter ending March 31, 2006.

The earnings press release and contents of this conference call contain comments about our business outlook including forward-looking statements and are based on our first quarter financial results.

These forward-looking statements include expectations related to factors impacting revenue, gross margin, operating expenses, design wins, market performance, recoverability of intangible assets and goodwill and expectations for new product transitions.

In addition, these forward-looking statements include operational expectations related to restructuring plans and investments made in electronic design tools benefiting future design performance.

Changes to our revenue are highly dependent on a number of factors, including but not limited to, consumer electronics, market seasonality, the company's ability to secure design wins, timely customer transition to new product designs, new product introduction and ramp yield, growth rates in our key markets, levels of inventory at distributors and customers and increased supply of products from the company's third party foundries.

Investors are cautioned that all forward-looking statements involve risks and uncertainties that could cause actual results to differ materially.

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.

Please refer to today's press release, our annual report on Form 10-K for the year ended December 31, 2005, and subsequent SEC filings for a description of factors that could cause forward-looking statements to differ materially from actual results.

During this conference call we will also be making reference to non-GAAP gross margins, net loss and earnings per share which exclude certain non-cash expenses for the amortization of acquired intangible assets, stock-based compensation and the impairment loss on certain acquired intangible assets required under GAAP.

The company uses these non-GAAP measures internally to assess its operating performance.

The company believes these non-GAAP measures provide a meaningful perspective on its underlying cash flow dynamics, but cautions investors to consider these measures in addition to, not as a substitute for, its consolidated financial results as presented in accordance with generally accepted accounting principles.

A complete reconciliation between GAAP and non-GAAP financial measures is included in the company's quarterly earnings release, which is available in the investor relations section of the company's website.

I will now turn the call over to Allen.

Thanks, Mike.

I will first give an overview of our financial results and our strategy and then give you an overview of our business.

Revenue for the first quarter was $36.6 million, down $6.7 million or 16% from the fourth quarter of 2005.

The drop in revenue occurred in the advanced television portion of our business.

While we expected to see weakness due to seasonality, we did not fully anticipate the extent to which we experienced it for advanced televisions in Europe and China.

Revenue for the other markets came in at or above the high end of our original outlook for the quarter.

Non-GAAP gross profit margin in the first quarter was 40.8% compared to 44% in the fourth quarter of 2005.

The gross profit margin shortfall came largely as a result of significantly lower than anticipated sales of our higher margin advanced television products and an additional inventory reserve of $1.8 million we recorded in the first quarter.

Non-GAAP operating expense came in at the positive end of our outlook at $23 million, up slightly from $22.6 million in the fourth quarter.

The increase was primarily as a result of higher depreciation expenses related to the EDA tool purchases made in the fourth quarter.

Clearly, our recent performance is not acceptable.

The management team is instituting measures to put the company on a path of growth and profitability, which I will outline in a few moments.

I'll now turn to an overview of the first quarter on a market-by-market basis.

Revenue for advanced television in the first quarter was approximately $13.8 million.

In our January call we estimated that revenue would be down up to 20% in Q1, but we experienced greater weakness than anticipated, particularly in China and Europe.

Several large ODM and regional branded customers who depend on Europe are transitioning from previous generation [YEM] and [PESTO] products to our new [Opal 2] and Pearl video image processing chipsets.

We know believe what we thought was a product transition at one of our largest European television customers was, in fact, a design loss.

This alone accounts for approximately $4 million in the overall advanced television revenue decline in the quarter.

Overall, revenue was down $9.2 million from the fourth quarter of 2005, with unit shipments down 36% and ASPs down 6%.

iSuppli, a leading television industry analyst, is estimating 10.2 million units were shipped in the first quarter, seasonally down 7% from 11 million units shipped in the fourth quarter of 2005. iSuppli is forecasting advanced television unit volumes to grow 43% from 49.1 million units shipped in 2005 to 70.3 million units in 2006, with most of the growth expected to occur in the second half of 2006.

As a result, we believe our advanced television market share declined from the fourth quarter.

Our TV customer base remained diverse in the first quarter with over 80 customers in total.

Our largest TV customer represented approximately 12% of total TV revenue and the top 5 customers represented about half of total TV revenue.

Geographically, shipments in the first quarter to China were 31% of total TV revenue, followed by Taiwan at 21%, Korea at 19%, Europe at 13% and Japan representing approximately 3%.

The technology split of our revenue in the first quarter was 72% direct view LCD, 16% plasma and 12% rear projection.

Looking forward to the second quarter we are still seeing softness in Europe and we have not seen the uptick in demand we expected from World Cup sales.

We also have two large Taiwanese OEMs who are beginning their product ramp with Opal 2 and most of their emphasis is on Europe.

Taking these factors into account, we expect revenue from the advanced television portion of our business to bottom out in the second quarter and be down about 20% to 25% from the first quarter.

We currently expect, based on design wins we have and anticipated ramp of our new products, revenue to pick back up sequentially over the course of the second half of 2006.

We also expect that falling panel prices, coupled with stronger second half seasonality, will help sales, as well.

Revenue for the projector market in the first quarter was at the high end of our outlook.

Revenue was approximately $13.9 million, up 10% compared to $12.6 million in the fourth quarter of 2005.

Unit shipments were up 14% and ASPs were down 3% compared to the fourth quarter.

Unit shipments were up 27% and ASPs were down 8% compared to the first quarter of 2005.

This increase from the first quarter of 2005 leads us to believe the overall growth of the projector business in 2005 was about as forecast and there was no meaningful shift of market share between polysilicon and DLP projectors.

Pacific Media Associates, a leading projector industry analyst, is estimating 1.1 million units were shipped in the first quarter, seasonally down from 1.2 million units shipped in the fourth quarter, with a 50/50 split between DLP versus polysilicon-display-based products in the quarter.

As a result, we believe we increased our projector market share in the first quarter of 2006 over the fourth quarter of 2005.

Pacific Media is forecasting projector unit volumes to grow 22% from 4.1 million units in 2005 to 5 million units in 2006 with most of the growth coming in the second half of the year.

This is in line with other industry analysts and our customers' analysis.

Most of the increase in revenue for Q1 came from our three largest customers -- [Safeluxon], Hitachi and NEC -- with over 75% of projector revenue coming from our top five customers.

By geography, 85% came from Japan, 11% from Taiwan and 3% from China.

Seasonally, the first quarter is the strongest for our Japan-based customers, given they are on a March 31 fiscal year end.

In addition, we have many of our projector customers transitioning to our new projector products during the second quarter.

Taking these factors into account, we anticipate second quarter revenue from the projector portion of our business will be down approximately 10% from the first quarter.

Revenue for our advanced media processor products in the first quarter was approximately $5.3 million, up 26% compared to $4.2 million in revenue in the fourth quarter of 2005.

Unit shipments were up 33% and ASPs were down 6% in the first quarter of 2006 compared to the fourth quarter of 2005.

The revenue split was approximately 43% from network communications, which does include video conferencing, 10% from set-top boxes, 13% from broadcast and 13% from imaging, with the remainder coming from various other applications.

Looking out to the second quarter, we anticipate revenue from our advanced media processors to be approximately the same in the second quarter as it was in the first quarter.

In the short term, the IPTV set-top box business continues to be lumpy and somewhat unpredictable as IPTV introductions are still in the early stages of rollout.

While the technology is still in its formative development stages, we continue to believe that this new model of video content delivery will take hold.

Our demo at CES of an ATSC-compliant TV with integrated IPTV capability continues to show our vision for the future of integrated IPTV.

It seems that every week a new announcement is being made regarding additional content that is available via the Internet.

Earlier this month, Disney ABC Television began offering some of its most popular programming via the Internet.

AOL last week launched In2TV, which archives of popular TV sales are available.

Also, last month's NCAA tournament introduced many U.S. customers to the idea of IPTV by broadcasting the men's basketball tournament on the Internet.

At the Optical Fiber Conference, OFC, in March a significant amount of discussion centered around the timing of optical fiber systems to support IPTV rollout over the next 3 to 5 years.

According to a March 2006 Citigroup telecommunications industry note, they expect to see steady growth of approximately 10% per year in optical fiber rollout over the next 3 years in support of IPTV applications coming on line.

We continue to believe that the IPTV market will be an attractive growth opportunity over the long term, especially with the integration of IPTV capabilities into the television itself.

We continue to work to integrate our AMP products into our mainstream advanced TV offerings.

We believe ultimately that the success of IPTV will be determined by integrating the capability to stream digital video directly into the television.

Short term we are developing systems to deliver an integrated turnkey solution for our customers.

Long term we are unifying our product road map so our next generation of image processors and media processors will unify into a single chip.

LCD monitor revenue in the first quarter was slightly better than our expectations entering the quarter, decreasing only about $500,000 sequentially to $2.2 million.

Due largely to a long-running monitor design with a major customer reaching end of life, we expect LCD monitor revenue to decrease to $1.5 million to $2 million in the second quarter.

On the panel products side, we continued to make progress, shipping approximately 75,000 units of our new timing controller, code-named Peanut, to Samsung in the first quarter.

While we made good progress, this still represents early production volume for one television panel and we experienced lower-than-expected initial yields for the product.

We're working to improve manufacturing yield over the course of the second quarter and to optimize the performance of Peanut in order to increase its applicability to a broader set of panel applications.

We expect to grow the production volumes of Peanut in the second quarter but will not see dramatically larger volume until we get manufacturing yields improved and the revised chip qualified by Samsung for a broader set of applications.

I now want to turn my comments to what we are doing to get the company back to profitability.

Our operating results over the past couple of quarters have motivated us to make fundamental changes to our underlying infrastructure in order to improve the financial and operating performance of the company.

Clearly, the results of the-- of our acquisition of Equator Technologies have been much less than we anticipated.

Coupled with this, we missed a design cycle in the advanced television business.

We cannot continue to operate the business in the same manner and cannot continue to chase every opportunity in both segments.

We are making changes to support and address both of these issues.

Over the next several months we will be bringing the advanced media processor group, formerly Equator, into our advanced TV business.

The transition plan includes integrated key elements of the Equator Internet Protocol television, or IPTV, technology with our advanced television technology and we are no longer pursuing the other stand-alone digital streaming media markets that are not core to advanced television.

This focus and integration will result in lower compensation costs and allow us to consolidate and reduce our office space requirements.

We recognize getting our operation-- our operating expenses in line is important but we also realize we are still at the beginning of an extraordinary market opportunity.

We cannot cut our way to market leadership.

We must prudently invest in our core competencies, design tools and continue to develop partnerships to bring leadership products to market.

We will continue to make critical infrastructure investments in our people, processes and state-of-the-art EDA tools to improve our time to market and execution on new product designs.

Even taking into account these critical investments, we anticipate the net annualized restructuring savings to be approximately $9 million.

We expect to begin realizing savings in the second quarter of 2006 and throughout the rest of the year.

Focus and execution over the next 18 months are two central themes driving our restructuring strategy.

Focus on core high-growth markets, focus on tier-one and ODM customers, focus our road map on innovative products our customers wants and creating a new product development execution engine to deliver innovative products much faster with greater predictability.

Winning in this business requires having compelling products at the right time.

Let me spend a few minutes discussing our road map.

As we look out to 2007, 2008 and beyond, the level of complexity of the solutions demanded by top-tier customers is rising dramatically.

Our goal is to introduce disruptive products into the marketplace.

The complexity of these products requires an extremely sophisticated system-on-silicon architecture, deep sub-micron semiconductor processes and a modular software platform.

Building on a new system-on-silicon architecture and development process is not a short-term project.

We have begun now to make the investments necessary for the future.

When we look at our technology portfolio, we determined the Equator architecture brought us part of the way there, but evolving the Equator architecture or, for that matter, an evolutionary change to the Pixelworks image processors will simply not yield best-of-class leading solutions.

Instead, we are unifying our Equator and Pixelworks image processor development teams to develop the new system-on-silicon architecture we will need to create disruptive leadership solutions for 2007, 2008 and beyond.

In addition to a new architecture and management methodology, the system-on-silicon solutions require the development of many technology blocks in order to meet all of the requirements of the most demanding tier-one customers.

We cannot develop all of them ourselves and we have created a cost-effective strategy to focus our resources where we can differentiate and license or acquire the other commonly available technology components.

We have already licensed or, through Equator, purchased many of the technologies we need for Internet Protocol television.

For video processing we are recognized as an innovator and we continue to improve to meet the ever-increasing demands of top-tier television brands.

We continue to drive innovation with new video processing technologies such as those we demonstrated in our Great Wall at CES.

Analog technology is also becoming increasingly important as we capture the entire signal path of a television.

Here we are both licensing key analog technology such as HDMI and are also significantly investing in our in-house analog design capabilities where we feel we can differentiate.

We are putting in place the tools, architectures and processes to allow us to lead our markets in the future.

This requires us to make-- to take a longer-term view and we are making these investments.

More immediately, turning to the second half of 2006, we will continue to tune the performance of our existing architectures while introducing certain elements of our breakthrough video processing which we showed at CES in January.

Specifically, this year we plan to release the final enhancements to our Opal and Pearl family of image processors.

We are planning to offer a high level of integration for the ATSC market while preserving our investment in software.

We continue to further expand our offerings for the entire signal path, including some of the innovative pixel processing technologies we debuted at CES.

We are tactically completing our technology portfolio for 2006 while making the architectural investments for 2007, 2008 and beyond.

Finally, we are continuing to add expertise in our management and board so that we can bring in more expertise and fresh perspectives.

Over the last two months we added the following key personnel.

Mike Yonker, our new CFO, has already begun to benefit our company.

He's been instrumental in working with me and the rest of the management team to help guide us through a planning and restructuring process aimed at getting the company back to profitability while preserving our ability to grow revenues and margins for the long term.

Jim Fiebiger and Dan Heneghan have expanded the breadth and depth of our board.

Both Jim and Dan bring a wealth of executive-level operational and financial expertise in the fabless semiconductor industry that I believe will be valuable to us as we move forward.

Changes of this magnitude are critical to get the company back to profitability as soon as possible while preserving our capability to grow revenue and margins by designing innovative products for the advanced television, IPTV and front projection markets.

I will now turn the call over to Mike and he will walk you through the details for the first quarter financial results.

Thanks, Allen.

Let's start with the income statement.

Revenue in the first quarter was $36.6 million, a $6.7 million or 16% from the fourth quarter of 2005 and a decrease of $3.7 million or 9% from the first quarter of 2005.

Overall, we expect revenue in the second quarter of 2006 to be between $30 million and $33 million.

As part of the first quarter close process, we performed an analysis on the recoverability of our acquired intangible assets, long-lived assets and goodwill in accordance with SFAS-144, Accounting for the Impairment or Disposal of Long-Lived Assets, and FAS-- SFAS-142, Goodwill and Other Intangible Assets.

As a result, recorded a $23.1 million non-cash impairment loss on certain acquired intangible assets in the first quarter, of which $21.3 million was recorded to cost of revenue and $1.8 million was recorded to operating expense in the first quarter.

Also included in the cost of revenue during the first quarter of 2006 was approximately $2.1 million of non-cash expenses for the amortization of acquired intangible assets and stock-based compensation recorded in accordance with SFAS-123R, Share-Based Payment.

Additionally, the company recorded a reserve of $1.8 million for excess and slow-moving inventory and lower-than-anticipated yields on a new timing control product which began ramping into production in the first quarter.

Accordingly, we had negative GAAP gross profit margin dollars of $8.5 million in the first quarter of 2006.

As we disclosed on April 3, 2006, in the preliminary earnings release, the company estimated GAAP gross profit margin would be 35% to 36% and stated that it was in the process of analyzing the recoverability of acquired intangible assets.

GAAP gross profit, excluding the impairment loss on certain acquired intangible assets, was 35.1% in the first quarter, unchanged from the fourth quarter of 2005.

Excluding non-cash impairment loss on certain acquired intangible assets and non-cash expenses for the amortization of acquired intangible assets and stock-based compensation, non-GAAP gross profit margin was 40.8% compared to 44% in the fourth quarter of 2005.

The difference in non-GAAP gross profit margin between was primarily the result of significantly lower advanced television product sales and the incremental inventory reserve of $1.8 million recorded in the first quarter of 2006.

We expect GAAP gross profit margin in the second quarter to be between 39% to 42% and non-GAAP gross profit margin to be between 41% to 44%, which excludes an estimated $800,000 in non-cash expenses for the amortization of acquired intangible assets and stock-based compensation.

Operating expenses on a GAAP basis were $27.8 million in the first quarter of 2006 compared to $24.4 million in the fourth quarter of 2005.

The increase in GAAP operating expense is primarily due to non-cash expenses for the impairment loss on certain acquired intangible assets and stock-based compensation.

Excluding these expenses, non-GAAP operating expense in the first quarter was $23 million, up slightly from $22.6 million in the fourth quarter, primarily from higher depreciation expenses related to the new EDA tool purchases made in the fourth quarter and the CES trade show in Q1.

For the second quarter we expect GAAP operating expenses of $24.5 million to $27.5 million and non-GAAP operating expenses of $21 million to $22 million.

Excluded in non-GAAP operating expenses are approximate-- are an estimated $2.5 million to $3 million in non-cash expenses for stock-based compensation and amortization of acquired intangible assets and $1 million to $2.5 million in restructuring charges.

Interest and other income, net, was $3.5 million in the first quarter, up from $378,000 in the fourth quarter of 2005.

The increase in other income during the quarter was due to a net realized gain of $3 million on the repurchase and retirement of $10 million in the company's convertible bonds at a discount to their face value.

The provision for income taxes in the first quarter was $252,000 compared to $27.1 million in the fourth quarter of 2005 and relates to miscellaneous foreign taxes.

The large provision in the fourth quarter of 2005 was primarily attributable to the company recording a valuation allowance on its deferred tax assets.

We expect nominal income tax expense for the duration of 2006.

The first quarter GAAP net loss of $33.1 million or $0.69 per diluted share included non-cash expenses totaling $28.2 million for the impairment loss on certain acquired intangible assets, stock-based compensation and the amortization of acquired intangible assets, partially offset by a realized gain on the repurchase of long-term debt of $3 million.

This compares to a net loss of $35.9 million or $0.75 per diluted share in the fourth quarter of 2005 and net income of $836,000 or $0.02 per diluted share in the first quarter of 2005, which included non-cash expenses totaling $269,000 for stock-based compensation and amortization of acquired intangibles.

The net loss on a non-GAAP basis in the first quarter was $7.8 million or $0.16 per diluted share compared to a loss of $32.1 million or $0.67 per diluted share in the fourth quarter of 2005 and net income of $1.1 million or $0.02 per diluted share in the first quarter of 2005.

The non-GAAP net loss in the first quarter excludes $23.1 million for the impairment loss on certain acquired intangible assets, $2.3 million in amortization expense of acquired intangibles and $2.8 million in stock-based compensation expense and a realized gain on the repurchase and retirement of convertible bonds of $3 million.

Now let's move over to the balance sheet.

Cash and marketable securities consisting of cash and cash equivalents, short-term marketable securities and long-term marketable securities were $130.6 million, a decrease of $15 million from a balance of $105.6 million [sic -- see Press Release] at the end of the fourth quarter of 2005.

The decrease in cash during the quarter came primarily from the loss from operations, the use of $6.8 million in cash to repurchase and retire $10 million in convertible bonds, a use of cash from a decrease in accounts payable and accrued liabilities offset by cash provided from lower accounts receivable and inventory.

Accounts receivable of $17 million came down $2.9 million from a balance of $19.9 million in the fourth quarter, primarily as a function of lower revenue in the first quarter.

Days sales outstanding remained relatively unchanged at 42 days compared to 41 days in the fourth quarter of 2005.

Inventory, at $23.6 million, came down $3 million from a balance of $26.6 million in the fourth quarter and came down primarily from our proactively managing inventory to lower levels in the first quarter, coupled with an increase to our inventory reserve.

During the quarter we recorded an additional reserve for excess and slow-moving inventory of $1.8 million as we transition out of previous generations of products to new chip designs and migrate to lead-free parts in compliance with the RoHS requirements later this year.

Inventory turns remained constant at 4 turns compared to the fourth quarter.

Inventory continues to be a source of focus for us as we work balances down over the course of the year to improve cash flow from operations.

Other long-term assets of $20.5 million increased $2.2 million from a balance of $18.3 million in the fourth quarter, primarily as a result of purchased IP.

Acquired intangible assets of $11.9 million decreased $25.4 million from a balance of $37.3 million in the fourth quarter as a result of the impairment loss on certain intangible assets of $23.1 million and $2.3 million of amortization expense in the first quarter.

Because the fair market value of the company continued to remain above book value during the quarter, no adjustment to the carrying value of goodwill was recorded in the first quarter.

However, as long as the market value of the company approximates its net book value, it is reasonably possible we could have a goodwill impairment and, therefore, we will be required to perform an impairment test on an interim basis during the year that could-- that could result in additional charges.

Long-term debt of $140 million decreased from a balance of $150 million in the fourth quarter as a result of the repurchase and retirement of $10 million in convertible bonds during the quarter.

Now let's talk about the restructuring.

As Allen said earlier in the call, we are continuing our efforts to optimize internal operations and are announcing a restructuring plan to significantly improve our breakeven point by reducing manufacturing overhead costs and operating expenses and focusing operationally on our core markets.

As a result, the company expects to incur restructuring charges totaling between $1.6 million to $3.5 million over the second and third quarters.

Approximately $1 million to $2.5 million of the restructuring charge will be recognized in the second quarter for reduction in workforce-related costs and $0.6 million to $1.0 million in the third quarter as office space is vacated.

The anticipated savings in 2006 are expected to be $5 million with net annualized savings of $9 million.

The anticipated net annualized savings is primarily the result of significant reduction in compensation expense, partially offset by an increase in depreciation expense on new design tools and software.

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

For more 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.

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

Thanks, Mike.

Our results over the past couple of quarters have motivated us to make fundamental changes to our underlying infrastructure in order to improve the financial and operating performance of the company.

By making these changes we will focus our resources on developing innovative products for the advanced television, panel, IPTV and front projector markets.

Focus and execution over the next 18 months are two central themes driving our restructuring strategy.

Focus on core, high-growth markets, focus on tier-one and ODM customers, focus our road map on innovative products that our customers want and at the same time we must execute and create a new product development engine to deliver innovative products much faster and with greater predictability.

From focus and crisp execution will come future profitability and growth.

As many of you know, like you, I am a Pixelworks shareholder.

In closing, let me explain why I am a long-term investor.

The markets we play in are large and are poised to be dramatically larger over the next 5 years.

They could support the creation of a $1 billion company.

Digital television, high-definition television and IPTV are growing dramatically all over the world with different heterogeneous standards that dramatically increase the complexity of solutions required and create opportunities for differentiation.

We have built a large portfolio of the IC technologies required and we have made the software investment necessary for success in this market.

We have developed technology, specifically our pixel processing, that is valuable to anyone trying to compete in these markets.

It is not easy to duplicate and there are only a handful of companies in the world who have developed cost-effective, world-class pixel processing.

We have a leadership position in the front projector market that is growing units at 20% to 25% per year.

We're engaged with one of the largest LCD panel suppliers in the world to develop innovative panel ICs that bring new features and performance to the panel and weld our solutions on to the panel itself.

We have shown the financial discipline to lower our breakeven point from approximately $60 million to $43 to $45 million.

We're managing our expenses to gain maximum leverage from our global resources, including our early investment in our China design center.

And finally, have the necessary customer relationships, sales and applications support with top-tier consumer electronics companies and with their OEM suppliers to harvest these opportunities.

Thank you.

We will now open the call for questions.

Thank you very much, sir. [OPERATOR INSTRUCTIONS] Our first question is from Jennifer West from Merriman Curhan Ford and Company.

Please proceed with your question, ma'am.

Good afternoon.

I guess my first question is on the design win loss in Europe.

Since-- you've got other product transitions from YEM and so is this a-- like one socket that you lost or do you lose this customer all together or can you give some more detail about-- on this?

No, it was a particular program.

It was-- it was a good high runner with YEM and we thought it was going to transition to either Opal or Pearl.

It did not and it looks like it won't.

There's a chance that it will later in the year, but at this point in time I'm not going to count on it.

We do still have other programs with that customer, but they're just not as high volume as that one was.

Can you say if that was like a tier-one or a tier-two customer?

Well, it's a-- it's a large European customer who sells under their own brand and then also does a lot of work selling to tier-one brands in Europe, as well.

Okay.

And then can I get some more detail on-- on your decision to not pursue any more stand-alone digital media streaming markets.

Is-- maybe could you give us some more detail on exactly what products you're factoring out and what percentage of like your current AMP revenue falls into that category?

Sure.

Mike, if you could look up the AMP revenues by split out while I answer the question.

The-- what we're really looking at is we think the highest leverage in the-- in that space is really integrating it with our TV business.

It's where we've got the best customer relationship.

It's where we think the highest upside is.

The AMP business or the Equator business also sold into everything from printers, copiers, certain security applications and that sort of thing.

We just don't have the sales force bandwidth, the FAE bandwidth to customize the products for all of those different markets.

So what we really want to do is focus on the-- on the intersection of IPTV and the TV itself.

Now we have customers in those other markets and we're going to continue to support those customers in those markets and we'll continue to support those customers as they roll forward into the new AMP products.

What we just don't want to do is send the sales force out and the FAEs out looking for other opportunities in that space.

The-- the breakout of the AMP revenues -- $43 million-- or 43% was from network communications, which includes the video conferencing and there we have one large customer.

We'll continue to support them, both on the existing products and if they want to roll forward into some new products, we'll support them. 10% from set-top boxes and, again, continuing to support those customers and, in fact, that's really key because the essence of the set-top box is what rolls into the TV.

13% from broadcast, support existing customers but will not target that market and not go after that market with new programs and 13% from imaging and, again, supporting those customers but not trying to chase a bunch of new imaging customers.

Okay.

Thanks for that.

And then, I guess it's my last question is you've got a pretty big gross margin range for the second quarter.

What are the factors behind?

So maybe talk about your mix expectations for next quarter?

Is that what it is or is there some other factor going in there?

Well, there's a couple of factors that come into play there.

Part of it is mix and that's going to come into play with the ramp for the panel product-- the panel product for Peanut.

We also have a variability in a couple of the non-cash charges that we are going to incur in there, as well as just anticipation of the transitions that we have to continue to make from old generation products to new generation products and the impact on both-- primarily any potential inventory reserves that we might have to take and/or warranty costs that we might incur.

All right.

Thank you.

Thank you very much, ma'am.

Our next question is from Tore Svanberg from Piper Jaffray.

Please proceed with your question.

Hi.

This is Heidi Poon calling in for Tore.

Can you just talk a little bit more about the development in your projector end market, perhaps some of the developments that might allow you to grow more in the second half and your end customers?

Yes, I think-- we're not seeing any dramatic-- dramatic shifts or changes in the projector business right now.

The market share split between polysilicon and DLP seems to be stabilizing.

I think I mentioned in the last call or it might have been in the call that we had earlier, just a couple of weeks ago, that there are some customers that are beginning to re-enter the polysilicon business after leaving the polysilicon business and we think that's a very positive trend for us.

But I think just generally speaking polysilicon seems to be doing a pretty good job right now and that's where our strength is.

Don't seem to have any dramatic shifts in market share between polysilicon and DLP and the design wins that we have we have pretty good visibility throughout this year on the design win position that we've got in that space.

So with the visibility you have right now, do you see the projector segment maybe growing beyond the mid single digits for the year?

Well, I guess if you-- if you do the intersection of everything I just said, it would be that we don't think polysilicon/DLP is going to change much.

We don't think we're-- our market share position in polysilicon is going to change much.

We think the growth is going to be in that, what was it, low 20s?

20% to 25%.

20% to 25%.

The ASP erosion year-over-year was about 8%.

8%.

So you can-- you can do an intersection--

Sorry.

Say that again.

About 8% on ASP declines.

Okay.

And you can do an intersection on that and come up with a pretty good number for the projector business, I think.

And then it really hinges on overall growth of the projector business and then are we right on not having much of a market share shift during that year.

If it goes toward polysilicon, that's advantageous for us.

If it goes towards DLP that's-- that's not advantageous for us.

Okay.

My second question is regarding the annualized saving of $9 million.

Can you give us a little bit more details about how it's split between cost of revenues, R&D and [inaudible]?

It is predominantly below the line OpEx, just a little bit about the line and it's going to be ratably recognized over the course of the year.

We're going to get started this month in May.

We'll start to see the benefits of that kicking in and then there are elements of it that transition throughout the year.

You can't recognize the benefits for certain elements of it until, for example, you vacate the space.

So that will stay in our run rate probably through Q2 and most of Q3 and then once we get the space vacated, we take the restructuring charge.

So the expectation is, with the changes that we're driving in workforce reduction and space consolidation and discretionary spending control, that we should have a full quarterly run rate benefit for the first quarter where we have all of those things combined in our Q4 run rate.

We'll have elements of it in Q2 followed by additional elements in Q3, full quarter in Q4, and then the plan is to hold that spending for the entire 2007 timeframe so we get the full benefit of the $9 million annualized in 2007.

Thank you.

Thank you very much.

Our next question is from Craig Berger from Wedbush Morgan Securities.

Please proceed with your question, sir.

Good afternoon.

Thanks for taking my question.

I just want to touch base with you on where we are with the new product development.

I know you guys were a little late a year ago with some of your TV chips and I want to get an update on where we're at with Opal 2, Pearl, et cetera.

Yes, Craig, we talked in the call about a couple of key Taiwanese OEMs rolling out Opal 2 and they started taking some product in this quarter.

They will be ramping in-- when I say this quarter, I mean Q1.

They'll be ramping in Q2 and then the big push is really Q3 and Q4 of this year for those guys.

The Pearl product -- we really targeted Pearl at tier-one accounts.

We will sell it to others but we've really targeted it at a couple of selected tier-one accounts and we're working with those folks about trying to secure design wins there.

I'd say we have some traction already and I'd put some in the win column right now, but they're smaller.

They're not the mainstream products in the tier-ones.

But certainly the process is you get a couple of nibbles at the tier-one accounts and they give you some of the smaller products and then you-- or smaller runners of their products and then you go from there.

How are those tier-one customers receiving Pearl and what do you handicap your chances for winning a major tier-one socket for 2007?

Well, I think the response have been very, very good from a technology standpoint.

I think you were at CES and certainly the buzz at CES and since then has been from a raw silicon and software performance standpoint we're doing very, very well and people have been very pleased with that.

That raw performance gets you in the door at the tier-one accounts and then it's really how do you hand-hold them through the design win process and how the sets roll out throughout the year.

And you're right, there would be some signs of it at the end of 2006, but these are really things that we're focusing on for 2007.

And, Craig, at this time I don't want to-- I don't want to go any further than that other than just say we're focused on it.

We've got some early traction at one or two tier-one accounts, nothing that I really want to take to the bank yet, though.

And then can we hone in a little bit on the TV shipments for the back half of the year?

I realize you're only giving one quarter forward guidance, but TV revenues have fallen off somewhere between 50% and 55% from Q4 to Q2 guidance.

I'm just wondering how you see that picking back up since you noted sequential growth in that segment in Q3 and Q4?

Yes.

It's-- it's getting visibility on the people that we already have design wins with that we're currently engaged with ramping.

I mentioned a couple of the guys in Taiwan.

Whenever it's-- it's folks in Taiwan you have some visibility of who their customers are but you don't have complete visibility, especially for the Christmas season this year.

So step one is getting them into full-blown mass production and so far it looks good.

They did take some production volume in the first quarter.

The second step is really working with them to lock down those OEM relationships for these new products as we roll out into the second half of the year.

And right now it looks pretty good, Craig, for at least growth in the second half of the year.

Do you-- do you think we can get back to the Q4 '05 TV segment revenue levels or is that something we might have to revisit in '07?

We're not specifically outlooking that other than to say at this point in time it looks like there's growth in Q3 and Q4 but, I'm sure-- well, obviously at the next call I'll be giving you more color on better numbers and honing in on that.

And just one last question from me.

Can you comment on the demand situation in Europe in, say, the last two or three weeks?

Has it been continued weakness or are you-- or are we turning the corner there yet?

Yes, Craig, it still appears pretty weak and I think most of the folks that I talked to are a little bit puzzled by it.

We though World Cup would certainly be a driver.

I think you've also heard that panel prices have finally begun to knee over and start dropping pretty precipitously, especially in the 32-inch range, and what that means is people don't want a bunch of inventory floating on a boat headed from Taiwan or anywhere else to Europe because it's like bananas.

They rot by the time they get to Europe and you could be underwater by the time it gets there.

So there appears to be a little bit of that, as well.

I've also heard people say that they think that maybe the guys in the channel have underestimated World Cup and they're going to get caught short on product but right now, at least from what we've seen, we haven't seen any dramatic changes from a couple of weeks ago when we talked last time.

Thanks a lot.

Thanks.

Thank you very much, sir.

The next question is from [Richard Pogaro] of [Infinity Capital Management].

Please proceed with your question, sir.

Hi, guys.

I applaud you guys for making the changes in the business.

I know that that's not easy but I have to ask the question, when you look at the breakeven and your breakeven's above both of your publicly traded competitors that that still looks too high and I'm sure that you're going to see how the '07 design cycle happens before you make the changes but even if you get above your breakeven from today your $30 million in sales to $50, you're doing maybe $0.20 to $0.30 non-taxed.

So my question to you is you had a run at it, Allen, to do the Equator acquisition.

It didn't work out.

That was $2.50 a share to shareholders that has basically turned into very little if not zero.

Why not-- and what we would like to see is the board hire an outside investment banker who looked at strategic alternatives.

Because it seems like the road you're going down is the same road that you would have to go down if the business was sold.

If the business was sold, they'd move manufacturing.

They'd consolidate R&D.

They'd cut costs.

They'd go through this whole thing and if all the work you're going to do is produce that sort of earnings, why go through it?

Why not sell the business and let somebody else do it?

Yes, Richard.

Go ahead.

The bottom line is we would like to see the board hire an investment banker to look at strategic alternatives because we are concerned that you guys aren't making the changes or you're duplicating changes that another company should do.

Yes, I think, Rich, certainly we agree that the Equator transaction didn't work out the way we wanted it to and completely understand that.

We also believe that the changes that we're making really just focus the company on the core business and you're right, they're the kinds of changes that anybody would make coming into this company and taking a good look at it with 20/20 vision and hopefully we're doing that and Mike has helped me do that as we work through that process.

I think the other thing is that I-- and you might have heard me say this before is that once you start, quote, doing things to sell a company in terms of trying to make the company look attractive for sale, generally speaking you screw up the fundamental underpinnings and the value that you're trying to create for the shareholders or for a prospective acquirer.

I think we're doing the right things to maximize shareholder value, whether the shareholder is you or whether the shareholder is somebody coming in and looking at a strategic partnership.

I think you know my background and I think we've been-- we've been really up front with this is that we're interested in getting a return for our shareholders any way we can get that return, whether it's making the fundamental changes necessary to build value long term in what we think are great markets or selling the company to somebody who has an offer that makes sense to us at the appropriate time.

I think the other thing is is that the value of the company has been beaten down so low right now, any kind of sort of market increase or market multiple from where we are right now still gives you a pretty low value and, in fact, if you-- if you look at the pieces, which I did at the end of my talk, there's some rather valuable pieces of intellectual property that we have at the company and, starting from the base where we are right now I don't know if they're accurately reflected in the public market, and, in fact, an acquirer coming in is going to look at the public market price as a starting point.

So I guess step one is to-- is to try to get the company to a profitability point and get that top line moving in the right direction.

Based on that, we think the public markets would respond positively to that and we think we can get a fair value for our investors, either in the public market or if we were to sell the company to an acquirer.

I guess that goes back to what we talked about-- what I just talked about that if your sales increase back to $50 million you're still only making $0.20, $0.30.

You put a public market multiple on that you're a $4 to $5 stock.

So I still would like to see the board look at that and say-- and not get delusional about the valuation, but what is a reasonable revenue number that you can achieve if you hit all your targets and if your expenses do what they think they can do with a normal market multiple of earnings and then compare that and then see are we better off selling the business.

And, once again, I understand what you're saying about that but there's no reason the board can't hire that and start shopping the company and put out a book today to see and then the board could make the decision are we better taking $6 for the business today or Allen's got a plan to make us $0.50 in earnings here in '07 and that makes a lot more sense because we'll get a 20 multiple and we'll get $10 out of it and it's worth waiting for that.

Yes.

Yes, Rich, I think if you look at our space right now companies aren't valued off of earnings multiples.

It appears that they're valued mostly off of tier-one design wins, revenue expansion and then certainly profitability is a factor there.

I would disagree, Allen, on that.

I mean Trident, [inaudible], Genesis are all trading off a normal PE multiple you would expect relative to their growth rate.

Okay.

So, I mean--

Sure.

I think we're saying the same thing, Rich, is that with-- with the growth rate that Trident has, with the tier-one design wins that they've got, it's-- they're getting an outsized PE multiple, certainly based off of trailing PE.

Maybe not based off of future PE as much, but, Rich, we're-- we're focused on getting you the kind of returns that you can get and wherever we get that, in the public markets or we sell the company, either way, those are options for us as we go forward.

Okay.

We're going to stay on this topic in future calls, too, so--

Okay.

Yep, hear you, Rich.

Thanks.

Thank you very much, sir.

The next question is from Tayyib Shah from Longbow Research.

Please proceed with your question.

Hi, guys.

I apologize if you already addressed this in your comments.

Can you talk about design activity for your MPEG decode box?

Have you secured any design wins either in the CRT space or the flat panel space for this box?

Sure.

We didn't give you any specific numbers on that.

I think the one data point that I can point you towards, we talked about Dell last year where we had design wins in that space and the-- I'm just checking my notes here.

I believe the products that ViewSonic introduced at the CES show at Las Vegas are all ATSC products.

That's a 47, a 37 and a 32.

And I'm not trying to imply those are the only design wins that we have, but I'm just trying to point you towards some things that have been announced, but yes, we have design wins for those ATSC products.

And-- I mean, is that going to be a substantial portion of your TV revenue in the second half of this year or is it still small?

I wouldn't say it's a substantial portion of the TV revenue.

What we really did there was we partnered with some people to get the software stack done in reality.

Our business tends to be more heavily weighted toward Europe.

The new Opal 2 product that we came out with, specifically we call that our EuroSync technology.

We've really focused on Europe and, therefore, when Europe doesn't go the way that we wanted it to go and there's softness in the European market we've been a little more affected than otherwise.

I think I did mention in the last call, although the ATSC portion of our business is smaller than the European portion, when we looked at the results for Q1 it appeared that the people that we know that are doing more ATSC business were more stable or solid in the first quarter than the European sales that we had.

So it-- that was one of the pieces of data that we used to triangulate on the softness in the European market.

Which-- and then, Allen, you talked about one customer not transitioning from YEM to Opal.

If you look at your design win portfolio, what's already in, what's the risk that we see further market share loss through the year?

We've got pretty good visibility on where we have design wins now for this year and we're actually working on a couple that could manifest themselves as design wins in late Q3 and Q4 for this year, but, as you get further into the year you start turning your attention towards just getting the people that you've got into production and then right around Computex we'll start turning our attention -- Computex, I'm sorry, is a Taiwanese show that occurs at the first week of June.

We'll starting our attentions to 2007 introductions and then EFA in Europe is a fall show.

So we're kind of in the period of where we're just-- there's a couple of little odds and ends for 2006, could have an effect on 2006.

It's mostly just ramping the people that you've got into production.

Okay.

And then you talked about the video conferencing business.

What's the likelihood of your largest customer, Dell, choosing you for their next generation video conferencing solution and if they don't do that then how fast is your existing business going to taper off?

Yes, the video conferencing market, it's longer design in and design out cycle.

So I would say that if they picked somebody else we might start seeing some effects, I don't know, later this year but certainly we'd be in that business through 2007 or so.

There's an awful lot of tuning and software that's required in that business.

Thank you.

Thanks.

Thank you very much, sir.

Our next question comes from Eric Reubel from Miller Tabak Roberts.

Hi.

Good afternoon, gentlemen.

Allen, if you can help frame my expectations with respect to the '07 design cycle.

You mentioned that you've got some traction with one to two top-tier customers for television for the '07 design cycle.

How should that play out?

What are my-- frame my expectations for me on when those designs would be chose?

It's my understanding that would be done sometime within the next three to four months.

Yes.

The design cycle-- typically Computex sort of kicks off the season and that's right in the middle of the year in June and then EFA in-- I think it's September this year is the next step and you really want to have your products-- ideally you want to have your products in silicon somewhere between September and October of the year.

Up until then, everybody's so busy trying to get stuff ready for this year the engineers and the management just aren't very engaged.

I mean, they may look at stuff, but-- and then, like I said, CES is kind of the, okay, let's go.

You do your deals, shake your hands at CES and when everybody comes back after Chinese New Year you're working in earnest getting the new products designed for the fall again.

So it's something on that beat.

Okay.

And then with respect to the product integration, integrating the media processor with the existing platform, the existing advanced television platform, the MPEG technology currently the PWM controller you license from Toshiba.

You talked for the first time today about an integrated chip, one chip platform.

Am I to understand that it's the Equator MPEG technology that is going to be the single chip platform?

I didn't say exactly what it was.

I said that-- I gave you a little more color.

In the past we said we will have a single chip solution and that's certainly on our road map and we're working on doing that.

What I said today was-- is that we plan to release something this year and when we release that, which we will-- one of our goals is to protect the software investment that our customers have made in the software in this area because the real long pole in the tent here, the really difficult part, is getting all of that software done both for ATSC, DVD, DCR, all these different standards, MPEG in Europe and we think we're doing a pretty good job of getting that software done and need to get that-- that platform in place so that we can leverage that investment that we've made in the software.

A couple more quick questions--

I didn't say exactly where it would come from.

You're right.

A couple more quick questions.

Allen, could you talk about your thinking behind the repurchase for the convertible notes and how are you thinking about that going forward?

Sure.

We've watched it for a while and when it got down under 70%--

Yes, it got down to 68%.

Was it 68%?

Is that where we bought it?

We thought we'd go into the market and buy $10 million and see how that went, just to see how it reacted and see-- We hadn't repurchased any before and we just wanted to sort of test the system to see that.

And it seemed to work pretty well.

It was a fairly painless transaction.

We were able to take $3 million-- bring down $3 million through the process.

On a go-forward basis, we'd just evaluate it looking at our cash needs and looking at where it's trading.

And evaluate it on a case-by-case basis depending upon what we think our cash needs are and where we see them trading.

Mike, did you have--?

I guess, yes.

Eric, this is Mike and from a current perspective cash flow is really, really important for the company and we need to make sure that we monitor and manage that as effectively as possible.

So I doubt that we're going to be looking at any kind of future retirement, but you never know, depending on what the markets do.

At this juncture we're pretty much going to stick with what we have but we'll continue to monitor it over the course of the year.

Okay, Mike, and then just one last quick one.

Depreciation -- how should I run that for the rest of the year?

It's running about-- between-- it's between $4 million and $4.5 million a quarter.

Thank you.

Thank you very much.

The next question is from Jason Pflaum from Thomas Weisel Partners.

Please proceed with your question.

Hi.

Good afternoon.

This is actually Alex Kim, calling in for Jason.

Just touching on the previous question regarding an integrated chip solution, you talked about potentially introducing a product sometime in the near term.

Maybe you could elaborate on as far as is that going to be in time for the '07 design cycle?

And when do you think, in particular, in '07 could we see a revenue impact?

Yes.

We certainly would plan to have it in time for the '07 design cycle.

That would be our ideal scenario and that would mean that in the fall sometime we'd be out demoing that product.

And when we look at the board right now there's probably four main chips that are left and there may be some ancillary ones, but there's a-- in an ATSC design there's typically a demodulator chip, there's some kind of audio chip, there's an MPEG chip, and there's an image processor chip.

And people have combined those in various forms to create a, quote, single chip solution.

And today for us those are four separate chips and today we don't offer ATSC demod.

So those are your opportunities to combine those into a, quote, single chip solution and that's what we're looking at doing for the fall of this year.

Is that a significant undertaking from an engineering standpoint?

I know that you introduced a slew of new products in the CES timeframe.

I'm just wondering if that-- if you've basically somewhat given up on those designs that were introduced and realizing that you need to re-spin some more integrated solutions?

Well, it's leveraging what we did.

If you look at-- kind of our pattern has been to introduce the technology like an A to Z convertor, our DVR receiver, decoder, whatever, as a separate solution, get that into production with somebody and then integrate from there.

So what we'll be doing is looking at the pieces that we have and at CES we introduced an audio solution.

We introduced a demod solution but not for ATSC.

We've certainly had an MPEG solution out for a while and we certainly have a lot of image processors and analog components.

So it's more of putting the pieces together rather than completely starting over from scratch.

And if you-- if you listen to what I said in the call, we also recognize that just merely putting those pieces together will probably serve us well for the fall of 2006 but as we roll forward and we look at the visibility that we have with IPTV and with what we've done with Equator, we do think we need to invest in a new architecture for the fall of '07.

And we are investing in that new architecture for the fall of '07 and that's one of the things.

If you go back through and you listen to what we said in the call you'll be able to get that theme as well.

Okay.

And just one final question on inventory composition today.

Is the majority of your inventory related to advanced TVs?

Well, it's-- it's pretty well evenly distributed the [technical difficulty] Most of it in each segment is predominantly finished goods and our turns are roughly about 4 turns pretty much throughout all the segments.

Okay.

That's helpful.

Thanks, guys.

Thanks.

Thank you very much, sir. [OPERATOR INSTRUCTIONS] Gentlemen, it looks like we have no more questions.

Please proceed with your closing statements.

Okay.

Thank you for joining us today.

I did want to mention that Mike will be at the Piper Jaffray conference in New York and be able to have some one-on-one meetings out there on May 10th and May 11th, coming up in just a few weeks.

Thank you.

This concludes today's Pixelworks, Inc., first quarter earnings announcement conference call.

Thank you for joining, everyone.

You may now disconnect.