Pixelworks Inc (PXLW) 2006 Q3 法說會逐字稿

Good day, and welcome to the 3rd quarter earnings announcement for Pixelworks.

Today's call is being recorded.

At this time, I would like to turn the call over to Mr. Mike Yonker.

Please go ahead, sir.

Mr. Mike Yonker, Vice President, CFO, Treasurer and Secretary: Thank you, Melissa.

Good morning and thank you for joining us.

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

And, 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 third quarter ending September 30th 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 third quarter financial results.

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, operating expenses, EBITDA, net loss, and EPS which includes certain non-cash expenses for an amortization of acquired intangible assets, stock-based compensation, and restructuring charges required under GAAP.

The company uses these non-GAAP [majors] internally to assess its operational performance.

The company believes these non-GAAP [majors] provide a meaningful perspective on its underlying cash flow dynamics, but cautions investors to consider these [majors] in addition to, not as a substitute for, nor superior to its consolidated financial results as presented in accordance with GAAP.

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

I will now turn the call over to Allen.

Allen Alley, Chairman, President and CEO: Thanks Mike.

Before I get into the details, let me summarize some key financial results from the quarter.

Revenue came in stronger than we had originally anticipated.

It was about the high end of our outlook for Q3, 36.3 million, an increase of 5.4 million, or 17%, from the second quarter of 2006.

We saw strong revenue growth of 51% and 16%, respectively, in advanced television and digital projection portions of our business over the second quarter of 2006, non-GAAP gross profit margin in the third quarter was 39.6%, compared to 43% in the second quarter and 43.8% in the third quarter of 2005.

Included in GAAP and non-GAAP in the third quarter of 2006 were inventory related write offs and reserves totaling two million dollars that were recorded primarily for excess and obsolete inventory of older advanced media processor or amp products no longer in production.

Non GAAP operating expense in the third quarter was 20.2 million dollars, down from 20.4 million dollars in the second quarter.

The decrease came primarily from lower compensation and real estate costs associated with the restructuring plan we announced in April.

Turning to our balance sheet, we grew cash and marketable securities by $5.4 million in the third quarter, up $131.5 million, up from $126.1 million at the end of the second quarter.

We were able to grow cash in the quarter primarily as a result of improving EBITDA performance and lower working capital requirements.

One of the product highlights of the quarter was the increase in our Opal family of products.

Opal family unit shipments increased over 100% from Q2 and accounted for over 900,000 units, or almost one-third of all of our units shipped.

We made good positive progress this quarter as evidenced by improving financial results and the record shipments of Opal family products, but we clearly must do more on all fronts.

This is only one of several steps in our journey back to sustained profitability.

I'll now turn to a more detailed overview of our operations in the third quarter.

Advanced television revenue was $12.6 million in the third quarter, up 51% from second quarter revenue of $8.3 million.

Average sale prices in the quarter were down 4 % while unit volumes increased 58%.

On a revenue basis, we saw improved sales strength throughout most of the markets we serve led by an increase in China of over 100 %.

Japan and Taiwan were also very strong, coming in up over 50 and 60% respectively, with Europe up 16%.

The increase in television revenue was driven by the successful ramp up our Opal family of image processors with sales of Opal and Opal 2 increasing approximately 120% and 250% respectively over the second quarter.

Geographically, our shipments in the third quarter were led by China with 43% of total TV revenue followed by Taiwan at 33%, Europe at 8%, with Japan and Korea each representing approximately 7%.

The technology split of our revenue was 80% direct view LCD, 12% progressive scan CRT and 8% plasma.

A leading indicator of the progress we are making is the adoption of our technology by the tier 1 brand name customers.

During the quarter we won an advanced television design with Toshiba using our Opal 2 image processor for their 20 inch LCD television series.

The television has two models; one for North America and one for Europe.

I am especially pleased with the endorsement our DNX video processing and Euro-sync video decoder by a Japanese television company.

The products have been strong performers and we began ramping volume with them in the third quarter.

I-Supply, a leading television analyst, is estimating 9.9 million LCD televisions were shipped in the third quarter and 12.2 million LCD televisions will be shipped in the fourth quarter for a sequential increase of 23%.

Plasma units shipped were 2.3 million units in the third quarter, and we're expected to grow 13% to 2.6 million units in the fourth quarter.

Given over 80% of our chip volume in the third quarter went to supply television manufacturers shipping LCD TV's, we believe we grew market share in the third quarter.

When we outlook Q4, we must consider several factors.

Our advanced television business was up dramatically in Q3, even more than we anticipated.

We believe this was due in part to customers pulling in orders for what they believe will be a strong holiday season.

We shipped about $2 million worth of product in the third quarter that we were originally expected to sell in the fourth quarter.

Early Q4 order rates indicate customers are still working off that inventory.

We also believe we could see some seasonal softness in Q1 and this would typically be reflected in our December orders and shipments.

Taking all of this into account, we expect advanced television revenue in the fourth quarter to be down approximately 15 to 30% from the third quarter.

For the third quarter in a row, we experienced sequential revenue growth in the digital projection portion of our business.

Revenue for the projector market in the third quarter came in at the high end of our outlook and was approximately $16.8 million, up 15%, compared to $14.6 million in the second quarter.

Most of the increase came from our largest Japanese customers Seiko-Epson, Sanyo, NEC, and Sony.

Approximately 75% of projector revenue came from our top 5 customers.

ASP's were up 4% compared to the second quarter primarily due to product mix and unit volumes increased 11%.

During the third quarter, a number of our customers announced products that demonstrate the price performance capability of our solutions in this market and helped further illustrate the value of our DNX video processing capability.

Seiko-Epson introduced a new generation of ultra-portable projectors aimed at the mobile business professional segment called the power light 1700 series.

These high volume mainstream business projectors are sub-4 pound XGA resolution models using 3 LCD technology that retail from $1,299 to $1,799.

We were also pleased to see a couple of announcements of DLP based projectors using Pixelworks image processors.

At the [TV] show in September, Infocus launched the big play IN-78EX projector, a mid-range home entertainment projector.

The IN-78EX uses a 0.65 inch DLP panel at 720P resolution and retails for $4,499.

Finally, SIM-2, an Italian company, known for its high-end home entertainment displays debuted the HT3000 projector.

This model features a 1080P resolution delivered by a 3 chip DLP engine for a cinema-like experience in the home and retails for $15,995.

We are proud that we can deliver value and quality across the entire breadth of digital projection market from ultra-portable models used in business to high-end theatre systems as well as models using both DLP and LCD technology.

Pacific Media Associates, PMA, a leading projector industry analyst is estimating 1.3 million units were shipped in the third quarter, which is up 7% from the third quarter 2005, with about a 50-50 split between DLP versus poly-silicon display-based products.

Accordingly, we believe we grew market share in the third quarter.

PMA is forecasting projector unit volumes to grow 25% from 4.1 million units in 2005 to 5.1 million units in 2006.

We've had a great year in the digital projection business with our revenue growing every quarter, stabilizing market shares between DLP and LCD at 25% overall market growth and growing our share.

Looking to the final quarter of the year, we typically start to see the effect of our Japanese customers managing inventory down after the holiday builds in anticipation of their fiscal year end of March 31st.

This usually means we see a slowdown in our shipments at the end of Q4 and continuing into Q1.

We may also see some supply constraint on one of our older end of life products.

Taking these factors into account, we anticipate fourth quarter revenue from the digital projection portion of business to be seasonally down approximately 10 to 20% from the third quarter.

Revenue for the advanced media processor market in the third quarter was approximately $3.7 million down from $4.8 million in the second quarter as we continue to wind down portions of the amp business as part of the restructuring plan.

Looking forward, we expect Q4 amp revenue to be down 5 to 10% from the third quarter.

LCD monitor revenue in the third quarter was $1.6 million down from $2.4 million in the second quarter.

Our monitor revenue is highly dependent on a couple of customers and timing of their orders.

Looking forward to Q4, we expect revenue to be up about 10% from what we saw in the third quarter.

As we mentioned in the last call, we did not anticipate shipping any meaningful quality of timing controllers in Q3.

We did, however, continue development of our next generation product and continued qualification with Samsung.

We are developing a new product that will broaden the suitability of our timing controllers to a larger range of panel types and applications.

We expect to continue this development through the fourth quarter with shipments starting again in the first quarter of 2007.

Our turnaround strategy consists of three primary elements centered around focus and execution.

First, focus our revenue growth strategy around key tier 1 and [ ] customers; second, to invest in state-of-the-art design tools and processes to create a new product development execution engine; and, third, focus on reducing our operating expense run rate.

Let me give you an update of where we stand with each of these elements.

First, revenue and growth opportunities, with the addition of Jerry Ardizzone, as our new Vice President of Worldwide Sales, we are building renewed vigor and focus around our strategic account management and design-win planning process.

We have teams in key markets working closely on multiple lead customer relationships, driving engineering code development and sales efforts.

Our goal is to create incremental revenue growth from design-wins using recently developed products such as [Pixel-amp], [Pixel GX], and [Pearl], while we develop enhanced products from our new design architecture for the fall 2007 design cycle.

In recent months, we've participated in a pair of important trade shows where we demonstrated a full range of television and projection products including our new Pixel-amp product.

The shows were the [ether] consumer electronics show in Berlin in early September and last week we participated in the flat panel display show or FPD show in Yokohama.

Pixel-amp is a co-processor chip that can be used with Pixelworks image processors or, more importantly, our competitors' image processors.

Our [etha] and FPD demo took a new production television using a competitor's image processor and we showed it in side by side performance with one side Pixel-amp and one without it.

The difference is quite remarkable.

Pixel-amp colors are much more vibrant and detail is greatly enhanced.

The perception is the production model without Pixel-amp is foggy and muddy, while the Pixel-amp side is crystal clear.

The Pixel-amped product would clearly pop out of the "wall of death" at your local retailer.

Pixel-amp not only allows us to provide a differentiated solution for customers using our image processors, it also allows us to create incremental revenue opportunities to ship chips into customers using a competitive image processor.

While this strategy generates revenue for us in the near-term, it also creates an avenue to open doors for longer term strategic relationships.

We expect to begin shipping Pixel-amp in the fourth quarter and ramp production in the first half of next year.

Pixel GX, through the efforts and marketing knowledge of our China design center we are in the process of developing and releasing a family of products aimed at specific segments of the CRT market.

While the overall market for CRT's is expected to continue to shrink as the price performance capabilities of LCD and plasma improves there are certain segments of CRT that are expected to grow over the next three years.

We have products designed to take advantage of those market growth opportunities.

The first of these segments is referred to as the single-scan advanced CRT market.

Pixelworks created the concept of an HD-ready TV in single scan CRT's with Chinese TV manufacturers and the market is expected to grow to over 6 million units in 2007.

Our PW-60 image processor, otherwise known as Pixel GX, is the first product to address this market and we have secured a number of design-wins with several Chinese television manufacturers.

We shipped sample qualities of Pixel GX in the third quarter and expect to ramp volumes in Q4 and the first half of 2007.

Another segment is the single scan slim CRT.

We have created a breakthrough image processor capability called digital deflection controller, or DDC, that eliminates analog components and improves the price performance of larger diagonal CRT's allowing manufacturers to create a slimmer, lower cost CRT television.

The basic technology building blocks for DDC are actually derived from our industry leading keystone correction algorithms originally developed for the projector market.

The market size for slim CRT televisions is expected to be 3.6 million units in 2006 growing to 48.4 million units in 2008.

We are in joint development efforts with a tier 1 lead customer and we anticipate selling sample quantities in the fourth quarter and begin ramping production in the first half of 2007.

Pearl is the foundation not only of our next generation premium performance project products, but we are also engaged with a couple of tier 1 advanced television potential customers as well.

Pearl builds off the capability of the Opal image processor with enhanced video performance and integrated HD in mind.

We continued to make progress with Pearl during the quarter and passed a series of critical milestone tests for video performance with one of the tier 1 customers.

This is especially critical because it means that the image quality of Pearl is capable of winning in what I have called "the Video Olympics", with some of the most demanding and knowledgeable customers in our industry.

Sony is our lead Pearl customer for their next generation of front projection products and we shipped a few thousand early production units in the third quarter.

We anticipate ramping volumes in the fourth quarter and in the first half of 2007, while we continue our efforts to expand Pearl into other products and applications.

Second, investment and design tools processing competencies; we continue to make critical infrastructure investments in people, processes and our new DDA design flow to improve our product design capabilities.

During the third quarter, we continued to move new product designs along in the new architecture, while at the same time transitioning certain older products to the new flow.

We believe we are on track to develop new products using our new DDA tools and design architecture for the fall 2007 design cycle.

Third, operating expense reduction; in late April, we announced a restructuring plan to get our run rate operating expenses down from over 23 million in the first quarter to 20 million by the fourth quarter of this year, excluding non cash restructuring charges, stock based compensation and amortization of acquired intangible assets.

I'm pleased with the progress we continue to make in this area of our turnaround strategy.

We have achieved our operating expense goal of $20 million and did so one quarter ahead of schedule.

Key elements of the plan that drove further expense reductions in the third quarter centered on successfully consolidating space and lowering compensation costs through head-count management.

Accordingly, as we announced in the last conference call, we recorded a restructuring charge in the third quarter of $1.9 million primarily for vacated space we are no longer using.

Actions like these have also contributed to another key milestone in our turnaround journey as evidenced by our improving EBITDA performance.

EBITDA, in the third quarter, was a loss of $1.2 million compared to an EBITDA loss of $3.8 million in the second quarter, an improvement of $2.6 million in cash flow in the third quarter.

While these are positive signs that we are making progress, we have more work to do as we drive toward returning to sustained profitability as a company.

Accordingly, we plan to continue to focus our efforts on further reducing operating expense spending in the fourth quarter and into 2007.

I'll now turn the call back over to Mike.

He'll walk you through the details of the third quarter financial results.

Thank you, Allen.

Revenue in the second quarter was $36.3 million, which was an increase of $5.4 million or 17% from the second quarter of 2006.

Looking out to the fourth quarter, our run-rate book to bill ratio for Q3 was 0.9 to 1 and the supply constrain on and end-of-life supply product this quarter.

Additionally, we believe customers pulled in orders particularly in the advanced television portion of our business in anticipation of a robust holiday season.

Although quarter to date we have not seen tangible evidence of strong holiday sales through.

Seasonally, we also expect projector customers to begin leaning down inventory levels as they enter calendar 1 2007.

Therefore, we are anticipating overall company revenue in the fourth to be between $28 million and $32 million.

GAAP gross profit margin was consistent with the second quarter at 37 1/2%.

Also included in cost of sales during the third quarter was approximately 750,000 of non cash expense for the amortization of acquired intangible assets and stock-based compensation.

Excluding the amortization of acquired intangible assets and stock-based compensation, non GAAP gross profit margin was 39.6% in the third quarter compared to 40% in the second quarter.

In addition, both GAAP and non GAAP cost of sales in the third quarter included $2 million worth for inventory scrap and reserves that were recorded primarily for excess and obsolete inventory related to older advance media processor products that are no longer in production.

These charges reduced GAAP and non-GAAP gross profit margins by approximately 550 basis points in the quarter.

We expect GAAP gross profit margin in the fourth quarter to be between 39 and 41%, and non-GAAP gross profit margin to be between 41 and 43% which excludes an estimated 750,000 in non cash expenses for the amortization of acquired intangible assets and stock-based compensation.

GAAP operating expenses were 24.3 million in the third quarter which included 2.2 million in amortization of acquired intangible assets and stock-based compensation and a $1 million restructuring charge.

This compares to 157 million in the second quarter, which included a $133.7 million goodwill impairment charge, 2 ½ million in amortization of acquired intangible assets and stock-based compensation and a $900,000 restructuring charge.

Excluding all of these non cash expenses in both quarters, non GAAP operating expense in the third quarter was $20.2 million down 1% from $20.4 million in the second quarter, primarily due to lower space and compensation costs as a result of the restructuring plan.

For the fourth quarter, we expect GAAP operating expenses of 21 to 22 1/2 million and non-GAAP operating expenses of 19 million to 20 million.

Excluded in non-GAAP operating expenses are an estimated 2 million to 2 ½ million in non cash expenses for stock-based compensation and amortization of acquired intangible assets.

In October, we filed a proxy statement with the SEC for a special shareholders meeting to be held later today in order to put to vote a proposed stock option exchange program.

If approved by our shareholders, the proposal will allow certain eligible employees the choice to either keep existing under-water stock options or exchange outstanding grants at $4.75 a share and higher at an exchange rate of four older options in exchange for one newer option.

The options exchanged from the old plan will expire immediately and are not available to be recaptured for future grants thereby reducing the stock option overhang and future dilution potential of outstanding stock options.

New options granted in exchange of the old options will be issued with a new vesting period of 18 months, which estimates the average remaining vesting life of the old stock option grants that are being given up.

While the proposal, if approved, will reduce the overhang and future dilution potential of stock options outstanding, it will not reduce stock-based compensation expense until the vesting period on the new stock grants lapse.

We have received positive support for approval of the proposal from the institution of shareholder services, or ISS, and we anticipate approval from our shareholders later today at the special shareholder meeting.

If we receive approval, we will then file a form PO statement in the next couple of days with the SEC to provide our employees 20 business days to review the information and decide whether or not they want to participate in the exchange program.

If all goes as planned, we anticipate to complete the exchange process by the end of November or early December.

This is a voluntary program only available to certain employees.

The top 5 highest compensation employees including the CEO, COO, and CFO, and Board Members are not allowed to participate in the proposed exchange program.

Non-GAAP EBITDA was a loss of $1.2 million in the third quarter compared to a loss of $3.8 million in the second quarter.

The improvement in EBITDA was driven primarily by revenue growth on lower operating expenses in the quarter.

For the fourth quarter, we expect the EBITDA range to be between a loss of 500,000 and a loss of 3 1/2 million.

Interest and other income net was 800,000 in the third quarter compared to 600,000 in the second quarter.

The increase in interest income in the quarter is primarily due to increased cash and investments and higher interest rates on our investment portfolio versus a fixed 1 3/4% interest rate on the convertible bond.

We expect interest and other income to be approximately $600,000 in the fourth quarter.

The provision for income taxes in the third quarter was $87,000 compared to $201,000 in the second quarter as we trued up estimated interim taxes for the year.

We expect income tax expense to be approximately $100,000 in the fourth quarter.

The third quarter GAAP net loss of $10.1 million or $0.21 per diluted share included non-cash expenses totaling $4.9 million for stock-based compensation, the amortization of acquired intangible assets and a restructuring charge.

This compares to a net loss of $145.6 million or $3.02 per diluted share in the second quarter which included non cash expenses totaling $137.9 million for the impairment of goodwill, stock-based compensation expense, the amortization of acquired intangible assets and a restructuring charge.

Excluding the non cash expenses and restructuring charges the net loss on a non-GAAP basis in the third quarter was 5.2 million, or $0.11 per diluted share compared to a net loss of $7.7 million or $0.16 per diluted share in the second quarter.

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 $131.5 million, for an increase of $5.4 million from a balance of $126.1 million at the end of the second quarter.

The increase in cash during the quarter came primarily from improving EBITDA cash flow from operations combined with lower working capital requirements as a result of continued working capital management of receivables, payables, and inventory.

Accounts receivable net of $15.7 million increased only 2% from a balance of about $15.4 million in the second quarter even on significantly higher revenues as a result of strong cash collections in the quarter.

As a result, day sales outstanding, or DSO, improved to 39 days compared to 45 days in the second quarter.

Inventory net of $14.7 million came down $5.5 million, or 27%, from a balance of $20.2 million in the second quarter primarily from our proactively managing inventories to lower levels, coupled with scrapping certain excess older products no longer in production relating to the amp portion of our business.

During the quarter, we either wrote off as scrap or reported reserves for excess in slow moving inventory totaling $2 million.

As a result, inventory turns improved to five turns compared to 3 ½ turns in the second quarter.

We will continue to focus on improving inventory turns over the course of the year to enhance cash flow from working capital sources.

Property and equipment net of $26.2 million came down to $2.2 million, or 8%, from a balance of $28.4 million in the second quarter primarily from proactively managing capital expenditures as part of our goal to improve free cash flow of the company.

On the restructuring front, as Allen mentioned earlier in the call, we are continuing our efforts to optimize internal operations.

Accordingly, we announced a restructuring plan in late April to improve our break even point by reducing manufacturing overhead costs and operating expenses and focusing, operationally, on our core market.

As a result, the company recorded a restructuring charge of $1.9 million in the third quarter primarily for space related and severance costs.

That concludes the review of the third quarter financial results and key elements of the fourth 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 third quarter financial results.

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

Thank you, Mike.

Before we wrap up, I have some information on an upcoming investor relations event.

On November 7th and 8th, we will be attending the [ ] Classic in Monterrey presenting on both days and this event will be webcast.

In summary, I am pleased with the progress we made during the quarter to improve the operational performance of the company.

Revenue was up 17% sequentially on the strength of our Opal-based image processor in both advanced television and projector portions of our business.

We lowered operating expenses to $20.2 million, the lowest it has been since Q2 of 2005.

We improved EBITDA performance by $2.6 million in the quarter.

We improved our accounts receivable DSO by 6 days lowering it to 39 days.

We lowered our inventory 27% to 14.7 million and, as a result, we grew cash by $5.4 million to $131.5 million.

While all of these are indicators of improving financial performance, there is more work to be done in order to get the company back to sustained profitability.

Looking forward, we must continue to reduce operating expenses while, at the same time, make the investments necessary to win tier 1 business and to complete the development of our next generation of television and projector projects.

We believe new product introductions such as Pixel-amp, Pixel GX and Pearl, will help create near term revenue opportunities for us as we reposition the company for long term success.

Thank you.

We will now open the call for questions.

Thank you.

The question and answer session will be conducted electronically.

If you'd like to ask a question, please press star 1 on your telephone keypad at this time.

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

Again, that's star 1 for questions and we'll go first to Craig Berger of Wedbush.

Good morning.

Thanks for taking my question.

Hi Craig.

How are you?

Good.

I'm wondering if you can provide investors with any greater detail with respect to potential 2007 revenue streams from some of the new products you talked about;

Pixel-amp and Pixel GX, or even your mainstream TV products, Opal, Opal 2, and Pearl.

Yeah, Craig.

Obviously, we're not outlooking 2007 yet.

I talked a little bit about the Pixel-amp in the call.

It's a very interesting product for us.

It's been very well received especially when you look at designs that are done with -- I guess I'd call them, not tier 1 image processors.

People that do a design for a 20 inch TV or a 26 inch TV with something that's kind of derived from what I call a monitor chip and it's a good TV at 20 or 26 inches but you're just not going to use it at 30 or 32 inches.

You take Pixel-amp and put it on that design and all of a sudden it looks very acceptable at 30 and 32 inches.

It's a very similar product to what you're tier 1 television companies, Sony or Samsung, already have.

Each of those companies have their own sort of enhanced pixel processor that often times in the high end they used in conjunction with somebody else's image processor.

So, we're just rolling it out right now.

We're encouraged with what we've seen so far, but we don't really have a 2007 outlook for that.

In terms of Pixel GX in the CRT market, again, we're rolling it out, we have some design wins, not clear on what the revenue potential for Pixel GX is in 2007 at this time but interesting product getting traction and - mostly with China CRT manufacturers.

Then we have the deflection controller that I mentioned that is being developed with a lead customer, a tier 1 lead customer, in the television business.

It's a very interesting product because it really allows them to do a cost effective slim CRT that gets the footprint of the CRT down to the same size as an LCD with the base of the LCD.

We asked a couple of customers where these slim CRT's are selling and they said they're selling extremely well everywhere but North America, Europe, and Japan.

So, we don't see them in North America.

You won't see them in Europe, but in China and in some of the other emerging economies, they're actually selling pretty well.

Hi Craig.

This is Mike.

On the Pixel GX side, we tried to do a little bit - on both the Pixel GX and then also on the slim CRT side with the DDT product - some market data and it looks like the GX market is going to be about 6 million units in '07 and the slim CRT market in '07 is going to be about 13 million units growing to 48 million over the next several years.

Thank you.

And then can you just talk qualitatively about the prospects for any Opal or Pearl design wins with any of the kind of top 5 or 6 TV manufacturers for next year.

Sure.

Again I talked in the call about a couple of things.

One is -- we mentioned that Opal is now in production with a Toshiba product which is great news for us.

It validates the image processing capabilities, specifically with Toshiba, the main market for that product is Europe and it validates our ability to do telecasts and C-Cam.

It also validates the start capabilities.

There's a special connector in Europe, and, as you know, the European qualification is very, very tricky and we've confirmed that, with Opal 2, we've got a very, very solid product.

Pearl is the follow on product to that; an enhancement of that product.

The key thing that I mentioned there is that in -- we're in a couple of tier 1 accounts that we're working with on potential Pearl design wins.

Just recently, we got through what I call "the Video Olympics" in one of those tier 1 accounts with Pearl and they confirmed that the image performance now of the tuned version that we've done is sufficient for them to use in their television products.

And, this has been probably a 2 year effort with about 9 to 10 months of earnest engagement with them to get to this point.

It's not a design win at this time.

I can't declare victory, but I think the most difficult part of getting into one of these top tier accounts is getting through this video performance gate.

The next thing is starting to work with them on price and performance, which models they're targeting and which models can we get into.

So, I'm very, very encouraged with what I've seen there.

And I think it answers one of the questions, at least that I've been hearing from people, is your raw performance, is your IP good enough to participate at top tier account?

And I think both the Toshiba with Opal and then also getting through this video Olympics with another top tier customer really confirms that that is, in fact, true we do have the IP to compete.

Thank you.

And then I just have one last question.

You talked a little bit about the TV consumers pulling shipments in to Q3 from Q4 in advance of the holiday selling season.

Is there any particular geography that's worse than the others and can you just talk to how that may affect seasonality heading into Q1?

Yes, I don't think there is any particular geography.

I think I mentioned in the call by geography the upkick that we saw.

So, it was pretty much across the board.

And, again, we have several dynamics working here.

A lot of these Opal products, when you see a 100% increase sequentially in Opal units and that sort of thing, these are new products that are ramping in production so they bought a product in Q3, wanted it in Q3, wanted to bill it out in Q3 and then as we go into Q4 in the early part of Q4, you wouldn't expect to see a reorder.

As we get further into Q4, it's right in the next couple of weeks that we'll know whether or not we'll get another turn in Q4 or not on those products.

Perfect.

Thanks a lot, and good luck.

Thanks Craig.

We'll take our next question from Jennifer West from Merriman.

Good morning.

I had a follow-on question about Pearl.

I understand the design wins are not set yet but based on what you think you'll be able to get for like, Christmas '07 models, based on that and also your other new products that are ready to ramp up next year, where do you think your share could go in '07 versus where you think it is today?

Yeah, Jennifer, you're right.

The Pearl would be in time for Christmas of '07.

It's just a matter of which products it would go into, if we can secure those products and, again, a negotiation on price for that one.

With Pixel-amp and Pixel GX, this is where our share numbers get interesting, because obviously our share right now is small.

In the LCD market it's below 10%, or something.

Probably right around 10%.

Right.

So, Pixel-amp is really focused on the other 90% of the market that we don't have.

So, when I sell a Pixel-amp product, do I get to count that in my share?

Maybe;

I think we'll be very up front with you and we'll let you know what share numbers are, with and without Pixel-amp, just so we're very clear on that.

I don't know yet.

I don't know how widely Pixel-amp is going to be adopted as we go into next year.

But that would really be the key product in terms of share, I think.

Pearl will be a good product for us and sort of a conquest product in terms of tier 1's.

That's what we're really looking for.

And then later on in 2007, based on the new flow and the new tools and everything, we have a whole new architecture that we're going to be rolling out that is using some of the IT that we developed in Pearl and then Pixel-amp and some other places but actually in a completely new and much lower cost architecture that we think can be extremely competitive.

Okay.

Thank you.

And, then, just kind of looking out at the March quarter, I know you probably have limited visibility, but given -- I think the projector is typically seasonally strong in that quarter and then with all these new products that are expected to start ramping then, do you have any comment on maybe, you know, revenue upswing what you would see typically as far as seasonality goes?

I think it's just too early to say for the March quarter.

Let's get through Q4 and see what happens with what we're seeing in Q4 right now.

And, we'll be able to give you some update in January.

Okay.

I'm going to try to ask that a different way.

When would you expect to achieve EBITDA break even; the first half of next year at some point?

Well, it's absolutely our goal and focus to get to EBITDA breakeven and there's a couple of levers to do that.

Operating expenses is one lever to do that, growing the top line is another lever to do that.

We're working on both of those, but you're absolutely right.

EBITDA breakeven is our focus as kind of the first rung on the ladder and then a operating profitability, and then a GAAP profitability are the three steps.

Those are the things that we're looking at for 2007 in building our plans around for 2007 right now.

I don't have an exact time frame but that really is the focus of 2007.

You're spot on for that.

Okay.

Thank you.

And we'll take our next question from Tayyib Shah with Longbow Research.

Hi guys.

If you look at the early part of 2007, the first half before your design wins, if any, come through, how do you see your market share in terms of design wins, where you stand today versus maybe six months ago?

Yeah.

I haven't looked at it from that perspective and, again, it depends.

When we talk about design wins, with what we're doing it's a little bit -- I mean, design wins in terms of Pixel-amp, are design wins they also include someone else's image processor typically since we only have about 10% of the market.

So, in terms of quantifying it in market share, whatever; it's difficult to do.

I haven't looked at it from that perspective.

I looked at it six months ago and I would say it's up because of the strength of how Opal has done in the last quarter or so.

Yeah, last six months or so.

Yeah, it would have to be.

That's right.

So, even if you strip out Pixel-amp and GX, if you look at Opal 1 and 2 you would say that you basically have a broader portfolio of design wins today as opposed to maybe 2 to 6 months ago.

The data would have to say that.

I mean --

Yeah.

I mean, we were significantly down six months ago on this date and we grew over 55% in unit volume based on the design win progress that we've had and the advanced TV business.

So, yeah, it's up pretty strong from 6 months ago.

Okay, and then you said the Pixel GX, you said the market size is about 6 million units.

If the design wins that you are going after do come through, do you have any idea how much share you can win off that 6 million units next year?

At this point, it's too early to say.

We're just getting started with ramping that product, and getting it out into the marketplace, and it's a new space for us.

So, we're excited about it, it's just a little premature to say how big, big could be at this point.

I'd rather get some run rates and history behind it first so that we can then build off of that.

Okay.

And then I think you said [ ] in the third quarter were about 2 million.

Can you give the figure for second quarter as well, and how much of that is built into the fourth quarter guidance?

Yeah, we had a similar amount in the second quarter for [ ] parts that we had reserved for in Q2.

The reserve in Q3 related predominantly to some older production models for our amp portion of our business; the advanced [ ] process portion of our business.

In Q4, I don't anticipate there being a reserve of that magnitude.

We've got a majority of the inventory issues, I believe, behind us, that are part of the transition strategy that we put in place so now we're down to a level, in my opinion, where we're at 5 to 6 turns, where we're running the business on current inventory that we're going to be carrying forward, so I would suspect that any inventory related issues in the fourth quarter would be significantly less than 6 million.

Is any of that built into your gross margin guidance for fourth quarter?

Yes, it is.

I'm sorry.

Was that a yes?

Yes.

Okay.

Thank you.

Thank you guys.

Thank you.

We'll go next to Tore Svanberg of Piper Jaffray.

Hi, this is actually [Heidi Kuhn] calling in for Tore.

Hi Heidi.

Hi, how are you?

I just want to get a little more color in terms of the end market demand surrounding your comment about inventory adjustment that you're seeing with your customers; do you think it's more of an issue of maybe a miscalculation of maybe a market demand leading to that inventory buildup or do you think that maybe your customers are also losing a little bit of share?

I just want to get a little bit of color in terms of end market demand there.

Yeah.

Obviously, it's a little difficult for us to tell.

I would guess if you listen to everybody's comments over the past couple of days, they would say it's probably more general market issue than our customers in particular.

It sure sounds like if you listen to all of the public information that's out there right now that other people are seeing similar things to what we're seeing.

And, you know, you've got to take it into perspective.

I mean, this move to flat-panel TV's is a tidal wave that we're participating in.

Anecdotally, you go to Wal-Mart now, and, even nine months ago, there were lots of CRT's at Wal Mart.

Today, there's no CRT's at Wal-Mart and there's walls of flat panel displays, and they're investing heavily in advertising.

So, I don't think there's anything in the macro-trend that's been affected here or that price points aren't being hit or anything else.

I think it's just people took product in Q3 in anticipation of Q4, and they're working through that inventory, and we'll see if we get a turn for the holiday season and then we're going to roll right into Chinese New Year.

And that's another factor that affects us and we'll see what happens with Chinese New Year.

And, with a large portion of our television business being in China, that is another thing we're going to watch very closely as we roll past the end of this year into next year.

Would you say that some of the inventory build they're seeing right now relates to maybe your products going to more of a CRT market or is it proportionally more in the LCD TV product?

No, I don't think it's biased either way.

I think we're seeing similar things on both sides.

Got it.

In terms of competition, who are you seeing mostly now in this market that you've competed with and how would you characterize your pricing vis-à-vis your competitors?

Well, obviously in many of the tier 1 accounts, you run into Trident, and you also run into their own products; the stuff that they've built internally.

Increasingly, we're trying to work with the tier 1's to offer a product that can replace all the [silicon] in their TV, including their value-added differentiated [silicon] and do that in a manner that still allows them to differentiate their products.

It depends upon size and geography also.

At the small sizes, you see Taiwanese competitors.

In the midrange, you see kind of the usual folks, Trident, Genesis and us.

We are seeing [ ] and ATI in the integrated [ ] market.

And, interestingly enough, that's an opportunity for us with Pixel-amp as well.

When somebody wants to build an integrated [ATSE] product and maybe the product isn't coming from somebody that has deep experience with Pixel processing and the image processing and the color processing and things like we do; you can add Pixel-amp on top of that and create a visually compelling solution that really does put out in what we call "the wall of death".

So, I think it varies across the line.

I don't see any major changes in terms of competition.

In terms of pricing, we've always said that we've got good price performance and that with our video processing that really came from the Chinese CRT business as the roots of our video processing that we have very cost effective video processing at very good quality and I think that's what people are starting to recognize.

So, for us, it's never been a cost issue.

It's never been that our inherent video processing was costly.

For us, it was could we get confirmed at the tier 1 and could we win in the Video Olympics?

And, I think we're starting to see some signs of winning in the Video Olympics and getting validation at the tier 1's.

Okay, great.

And, lastly, I missed part of the call have you discussed your CapEx plan for the rest of the year?

I mean, sorry, for '07?

Yes.

For this last quarter, it was about a million and a half in terms of CapEx and I don't anticipate it being probably a million to a million and a half this quarter.

For next year, I would assume about 8 million.

Okay.

Great.

Okay.

Thank you.

Thanks.

We'll take our next question from Adam Benjamin with Jefferies and Company.

Yeah, thanks guys.

Can you just talk a little about gross margin?

It appears, excluding the one time charge, you're at more like 45% in the September quarter and then you got it to 42; so, can you just get a little bit more granularity as to the moving parts in the gross margin there?

Yeah, there's a couple of factors in there Adam.

One is in anticipation of about 4 to 5% [AFT] decline.

Some of that has to do with product mix and the other piece I mentioned earlier there's some assumption in there for reserves that hit both the gross and net calculation for revenues and then also for inventory.

So, to the extent that I don't need those reserves, it could be on the higher end of that outlook; but the rest of it has to do with product mix and then an assumption around [AFT] decline.

Okay.

I know you guys have been hesitant in the past to kind of give ball park gross margins by business line, but that would be helpful as you look to next year and you see what the drivers are, what are you kind of forecasting those gross margin target levels could be in each one of the buckets, specifically the projectors and TVs and monitors?

Well, you're right.

We are hesitant because there are a broad array of people who are on this call and that's really competitive information that we like to try to keep closer to the company.

But I think, overall, if you look at the market as a whole I think it is prudent to assume about 4 to 5% [AFT] declines on a quarterly basis.

Now, we're able to keep pace with that to a large extent with bond cost reductions, we're doing some things with our suppliers and with geometry and things like that to deal with that for the longer term.

As we bring up some new segments particularly if we see timing controllers take off this next year or some of the CRT business that Allen had mentioned; both of those markets have lower gross margins than the overall company average and so I would say that just on whole it's probably safe to assume gross margins in the low 40% range for next year without inventory reserves.

This last year we had inventory reserves, if you add them all up, of about almost 6 million and if you take that into consideration for the year, our gross margins for the year would have been about 45%.

Okay, and then just two questions on amp.

That business is still on track to continue declining throughout '07 on a sequential basis and finish around 2 million by the end of the year?

And, then, secondly, gross margin-wise, without giving it; is that kind of in line with your gross margin for the corporate average or does it help or hurt?

I think you're right on the amp portion of the business, we're expecting it to continue to come down.

We had some long lead time customers that we're going to continue to support as they migrate to other sources of supply and we expect that we will continue to supply product to them throughout next year, calendar '07.

Gross margins for that particular portion of the business in certain segments were higher than the average and others were about at the company average.

So, at this point, by the time you get into '07, comparatively, to '06, it would have a downward impact and that's considered in the overall outlook that I gave you of 40%.

Okay; and then just one last question just on the projector business.

As you look out and you do your internal forecasting, what are you guys looking for in the growth in the market year over year '06 to '07 and kind of what share do you think you can have in that market?

Thanks.

Well PMA is saying next year growth of about 25% again.

A lot of that is driven by several new projector categories coming out.

You've got significant growth still expected on the consumer side, you have a new concept called pocket projectors that several manufacturers are working on including a couple of our key customers.

And, so, they're anticipating still pretty robust growth on a unit basis in the projector space for next year.

As Allen mentioned earlier in the call, we've seen several macro level elements in that business for us this last year.

First, our [poli-silicon] customers have done really well and have taken market share over the course of the year, which has stabilized the split between [DLP] and [poli] in the marketplace.

And, then, we're also starting to see customers come to us asking for image processing coming from Pixelworks for [DLP] based designs.

When you get into a 3 chip [DLP] cinema projector, that's a pretty big deal; and so I think for this next year we would continue to expect to see our processors going into both -- predominately high-temperature [poli], but also into [DLP].

So, year on year, I think we should probably see it at least be stabilized with this last year; maybe, potentially up a little bit.

And then -- when you say stabilized with last year, are you talking about your revenue, because if units are up 25%, it sounds like you're saying you could have some more content, but you'd have some [AFP] declines with your netted out somewhere between 0% and 25% would be your revenue growth?

Yes, the trick for us is going to be largely the DLP poli-silicon split.

And, if it continues at 50/50 and overall units are up; you can back into the math and figure out where we're going to be.

And, then there's [ASP] decline that are going to occur during next year.

If it moves a little bit toward DLP, that's not as advantageous for us even though we are getting some DLP design wins we have a vast majority of our revenue coming from the poli-silicon side.

So, we'll be able to give you a little bit more color in the Q1 call as we really sit down and look at what the forecasts are and talk to our customers.

The bottom line is we've got a great set of customers, solid design wins.

Over the last year, the poli-silicon guys have taken a little bit of share and that's very positive.

We just haven't looked out to see if that's going to continue during 2007 yet.

Great.

Thanks a lot.

Next we have Vijay Rakesh with Oppenheimer.

Hi Allen and Mike.

I've got a question on your IP TV segment and the [ ] timing controllers.

Let's start with the timing controllers, can you tell us where that's going, where you see it in Q1?

What are the prospects on that?

You know what we said we've got a new version that we're working on, we've been working with Samsung, anticipate to get that out in the fourth quarter and ship some in Q1.

We don't know yet.

It depends upon how broadly they roll it out.

If we get one 17 inch wide monitor, something like that, it won't be so big.

If we get a wide number of panels, it could be very large and I know that's not very helpful for you at this point in time in terms of modeling but that is pretty much where we stand at this instant with Samsung.

So, will that still be a focus for you as you go in the initial part of 2006 to keep on working on that as you say, you've been doing that for some time now?

Yes, you know, this is one where it's very important strategically to us, understanding what the largest panel manufacturer in the world is doing in terms of panel technology and where that's going and what the two year road map looks like for that, what they're integrating into the panel.

It's very, very important for us in terms of understanding what we put in our image processors and how that goes.

So that's one thing.

The second thing is obviously there's a great revenue opportunity there and there's a great opportunity to sort of drive what the split is between what goes into the panel and what goes into the image processor.

But, we evaluate those things every quarter.

It's not a lot of resource for us to do it.

We have a small team in China that really works on this and a marketing manager that's deeply steeped in this business.

So, it's not a huge investment for us at this time, but you're right we do analyze that every quarter and look at the return that we're generating off those assets employed.

Great work with [ ], 22.2 million for the last September quarter.

Where do you see that going for March quarter, I guess?

Well this is Mike.

We've only outlooked Q4.

We think that we're want to be somewhere between 19 down again somewhere between 19 and 20 million in Q4.

As we mentioned in the call, we think that there's opportunities for some continued synergies that we can develop out of the network of offices that we have worldwide in terms of business processes, and then in terms of some discretionary spending areas and in order to keep EBITDA cash flow positive and operating income positive as we go into '07, it's something that we're going to continue to work on as we go through 2007.

I just don't feel we're at a point where we can outlook what that's going to look like in Q1, but I do feel confident in outlooking it in the 19 to 20 million range for Q4.

Got it.

As you look out into '07 do you see that 19 to 20 stay there or do you see a substantial more up on it or should it stay there flat or come down a little as you go through the year?

Vijay, you're really good at asking the same question multiple ways.

And, I respect that totally.

At this juncture it's just probably too soon for me to comment on that.

I would have a hard time believing that it's going to go up.

So, I think you can --

Okay, that's good enough.

The Pixel GX that's the CRT market; right?

Yes.

And I think in your prepared remarks, you said that that market is coming and that's going away.

Why are you going after that market?

Actually, the sub segments of the market that we're going after are actually growing, and if you attend the conference in Monterey on November 6th and 7th, or 7th and 8th Mike will have the slides that show you this.

If you sub segment that CRT market into a 15 KHz -- The bottom line is there are sub segments of the CRT market that are growing; the slim CRT's and some of the digital CRT's.

We're focusing on the ones that are growing.

And, it's very, very interesting because there are -- because of our keystone correction capabilities and our image processing capabilities, it turns out we've developed some pretty sophisticated image warping that you need when you get into these slim CRT's; and our image warping capability is extremely cost effective so you can do image warping if you throw Gates at it and you have multi hundred square millimeter chips but ours is very, very cost effective from 10 years of doing it in the projector business.

And, it just so happens that the challenge in these slim CRT's is very similar.

So, it doesn't take a lot of R&D resource for us to spin a chip that uses the image processing warping capabilities to go into a CRT.

We're already in the CRT business, we've already got the relationships, and the slim CRT market is expected to grow by tens of millions of units over the next several years.

So, it's a very interesting little harvest business for us taking IP from another one of our businesses and harvesting it in the slim CRT space.

Okay, one last question guys.

Can you outlook the DSP?

What kind of DSP decline do you see for '07 on the projector side and the TV side?

Well, I think, overall, I should probably use 4 to 5%; probably a little bit less on the projector side, but just overall for the company we're anticipating it being about 4 to 5% a quarter.

Got it.

Okay.

Great.

Thanks a lot.

We'll take our next question from [Jeff Cohen] with Southpaw Asset Management.

Good morning.

You mentioned during the quarter this investment in the seed capital investment;

I'm wondering if you can provide a little more detail around the size of the investment and the rationale and what you hope to gain from it, and then maybe if you could discuss the cash position and how we should be looking at that going forward.

Okay.

Yes.

I'm glad that you asked that question.

The investment is in a company called Elemental Technologies.

Mike West is the founder of elemental and he is one of the co founders of Pixelworks.

Mike was the chief architect of many of our most successful products that we had here.

He got the entrepreneurial bug and wanted to go out and do this.

We've collaborated with him on the business plan for what he's doing so that it's synergistic with what we're doing.

It's probably a little riskier than what we do in our own portfolio, but if it's successful it has a pretty significant return potential.

The amount of the investment was $200,000.

It's in a convertible note so that it will convert into equity once they raise their first round of financing.

It's not a material amount of money for us.

It certainly is a material amount of money.

Believe me, when we started Pixelworks, I had $10,000 and $200,000 would have been all the money in the world to us at the time.

There are three guys that went from Pixelworks; two IT designers and one software guy.

They've got some very innovative bright ideas.

They're a little bit in stealth mode right now, and we're trying to help them get them started introducing them to some people that we know and, hopefully, we'll get it funded.

I don't anticipate that we're going to put any more money into it.

This was something to get them launched and to try to help get them funded.

Okay.

Thanks.

If you can just turn to part two which is the company's current cash position and any insight into how we should be thinking about that for the next quarter, or potentially beyond.

Yeah, I think for the next quarter cash flow-wise I would expect it'll probably come in somewhere around the $127 million range; $125 to $127; part of that is going to be associated with depending upon -- a lot of it depends on whether or not we get that extra turn on the revenue side that Alan was talking about in the marketplace which would affect EBITDA pretty significantly.

So, I'd say $125 to $127 for exiting this year and for next year I really don't have a complete outlook on that just yet.

I'll be able to provide folks with that probably in the January call.

Okay.

Thanks very much.

It appears we have no further questions at this time.

Okay.

Thank you.

I hope to see you at the [ ] conference coming up on November 7th and 8th.

Thanks for dialing in today.

Once again, that does conclude today's call.

We do appreciate your participation and you may now disconnect.