Pixelworks Inc (PXLW) 2006 Q4 法說會逐字稿

Good day and welcome to the fourth quarter earnings announcement from Pixelworks, Inc.

Today's call is being recorded.

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

Please go ahead, sir.

Thank you, Rachel.

Good afternoon and thank you for joining us.

With me today is Hans Olsen, our President and Chief Executive Officer.

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 fourth quarter ended December 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 fourth quarter financial results.

Investors are cautioned that all forward-looking statements involve risks and uncertainties and 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 net loss per share.

These measures exclude certain expenses for acquisition-related amortization, goodwill and intangible asset impairment charges, stock-based compensation, restructuring charges and gains on the repurchase of long-term debt and a legal settlement as 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 nor superior to its consolidated financial results as presented in accordance with GAAP.

A reconciliation between GAAP and non-GAAP financial measures is included in the company's quarterly earnings release and is also available in the investor relations section of the company's Web site.

I will now turn the call over to Hans.

Thank you, Mike.

Before we get into the details of the financial results for the quarter, let me summarize some of the changes we are making to get the company strategically focused for success and on a path to return to profitability.

At CES in early January, we presented an overview of changes we are making to the strategic direction and business model for the company.

As we have assessed the company's capabilities and core strengths, we determined that in order for us to be successful, we need to focus and focus on our core competencies, which are delivering the highest level of video and image quality for the flat panel display markets and providing industry-leading system and chip solutions for our projector customers.

The core to our strategy is that we believe there is an inflection point emerging for the next generation displays coming on line later this year and in 2008.

Some of the display trends on the horizon are that LCD panels will be migrating from 60 hertz to 120 hertz.

LCD panels are continuing to move to higher resolution such as true 1080p and larger displays measuring 50 and 60 inches are moving into the mainstream over the next 24 months.

As our competition continues to look for ways to integrate more and more capability into even-smaller SOC image processor architectures they are making tradeoffs to reduce costs, resulting in lower-quality image performance.

As a result, we believe there is a growing chasm between display performance requirements and the ability of highly integrated SOC image processors to fill that void.

Accordingly, there will continue to be a need for high-quality video and pixel processing for the foreseeable future.

We believe we can continue to excel as a leader in pixel processing by pushing the performance to new levels and put ourselves in the leading position as the requirement for image and video quality increases and the panel transition occurs over the next 12 to 24 months.

Our strategy is embodied in the essence of our name.

We're going after the portion of the market that demands and needs superior image quality.

We're going to implement unique value-added technologies focusing on maximizing video performance and making pixels work.

And we will embody our technology in a series of pixel co-processors used in conjunction with our own Opal and Pearl and other image processors SOCs, driving even higher levels of pixel performance in systems and directly on to the LCD.

The other major focus of the company is the restructuring that began in the middle of last year.

We have announced plans and implemented a series of restructuring actions aimed at reducing our operating expenses and lowering our breakeven point.

The company has, for some time, been transitioning our organization from a North America-centric to a more Asia-centric organization and we have recently accelerated these plans.

Most significantly, in our restructuring is the alignment of our design centers.

Going forward, our primary design centers will be located in Shanghai and San Jose while we reduce activities in our Portland and Toronto facilities.

Our customers and partners are primarily located in Asia and we believe that in order to be competitive we need a business model with critical and cost-effective operations primarily based in Asia.

In late November we announced an additional restructuring plan designed to further reduce our operating expenses from fourth quarter 2006 run rates as we drive to a quarterly operating expense target of $15 million by the end of Q3 2007.

As we are making these strategic changes, we evaluated all of our IP and tooling assets and wrote off those that will no longer be used in development efforts.

Therefore, in the fourth quarter the company reported restructuring charges totaling $12.7 million, of which $2.1 million was charged to cost of sales and $10.6 million was charged to operating expense.

Of the total $12.7 million, $10.6 million relates to the write-off of IP and tooling, while $2.1 million is related to severance and related costs.

In addition, approximately $3.5 million to $4 million of restructuring charges will be recognized over the course of the next several quarters as head count is reduced and office space is vacated.

In addition to announcing our strategic realignment at CES in January, we announced several new products and showcased the development status of a number of others, all focused on our new strategy to maximize the video and pixel processing performance of displays for the advanced television and projection markets.

Let me give you a quick overview of several products we plan to bring to market in the first half of 2007.

In recent months, we have participated in several important trade shows, culminating in CES, where we demonstrated a full range of TV and projection products, including our new PixelAmp+ product.

PixelAmp+ is a post-processor chip that can be used with Pixelworks image process or, potentially more importantly, with any of our competitors' image processor chips.

At CES we demonstrated several TVs that are currently in production using PixelAmp+ as a back-end co-processor in combination with a competitive image processor.

One of the advantages of PixelAmp as a back-end co-processor is the low cost of implementation and speed to market, given that there is no additional software required.

Because of the compelling price/performance enhancement and speed to market capability of PixelAmp, we're being designed in to more platforms across multiple geographies.

As such, we'll be shipping production volume over the course of the first half of 2007.

Through the efforts and market 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 CRTs is expected to continue to shrink as the price/performance capability of LCD 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 opportunities.

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

Pixelworks created the concept of an HD-ready in single-scan CRTs for Chinese television manufacturers and the market is expected to grow to over 6 million units in 2007.

We demonstrated our Pixel [TX] image processor at CES, which is the first product to address this market and we have secured design wins with several Chinese television manufacturers.

We began shipping sample quantities in Q4 and expect to ramp volumes as new design wins go into production over the course of Q1 and Q2.

Another segment is the single-scan slim CRT.

We have created a breakthrough image processor capability that eliminates analog components and improves the price/performance of larger CRTs, allowing manufacturers to create a slimmer, lower-cost CRT TV.

Basic technology building blocks are derived from our industry-leading Keystone correction algorithm originally developed for the projector market.

The market size for slim CRT TVs is expected to be approximately 8 million units in 2006, growing to 35 million in 2009.

We are in discussion with several manufacturers of slim CRT TVs targeted at this segment of the market.

Our lead customer is a major tier-one OEM television manufacturer and we expect to begin shipping production volumes with that customer this quarter.

At CES we also announced the next generation of Pearl, called Pearl2.

Pearl2 is designed to meet the demanding requirements of the latest generation of display technology.

Pearl2 increases video processing performance and speeds by handling high bandwidth signals at up to 120 hertz in high-definition advanced televisions and projectors.

The newer high-speed technologies have dramatically improved pixel response rate and deliver smoother motion and less bordering and new integrated technology in the Pearl2 image processor is the Chroma Key Window function that enables improved video performance when connected to a PC source.

Developed for PC TV applications, the Chroma Key Window creates a flexible, sizable picture-in-picture window that displays an alternative video source such as set-top box or DVD player.

We are now in production in the first quarter with NEC as our lead customer using Pearl2 and its Chroma Key feature sets for their new PC TVs in Japan.

Demonstrating the versatility and breadth of performance of Pearl, we announced Sony as our lead customer using Pearl for its new high-end home cinema projector.

We began shipping sample quantities of Pearl in the fourth quarter and expect to begin ramping production volumes over the first half of 2007.

At CES we also announced the introduction of the third generation of our all-in-one Opal family of image processors, which has added features and functionality, as well as Cranberry, the new Keystone correction chip which offers innovative solutions for our digital projection customers.

Cranberry Keystone correction is a companion chip designed to extend the horizontal keystone correction up to 45 degrees.

The current Cranberry co-processor chip features 10-bit processing for a complete video signal path capable of displaying more than 1 billion colors.

We began shipping sample quantities of both products in the fourth quarter and we expect to see production volume in the first quarter.

Most significantly, we demonstrated our motion engine technology at CES.

As we have formulated our new strategy with emphasis of video and pixel processing, together with our key customers, we found that there is a need for better MEMC solutions than is available today and even expected tomorrow.

We believe our strategy is timely to address the growing technical performance as MEMC is becoming a requirement for the most-demanding video applications such as 1080p.

We believe we'll be able to command an industry-leading position with our solutions, offering MEMC technology at superior price/performance points for these demanding applications.

We have also learned from customers that our approach on the motion engine solution provided as a co-processor is viewed very favorably around customers' cost flexibility and ability to differentiate their solutions.

Our approach to addressing the market is bidirectional.

As we have discussed, we're going to market with a co-processor capable of working with our own image processors, such as Opal and Pearl, or with a third party SOC image processor.

Moving the other way, we are actively working with panel manufacturers to add these technologies directly to the panels, combined with a [key con] solution.

We expect to have our motion engine technology embodied in parts in the second half of 2007.

On the product front, I'm pleased with our progress on our recent product introductions, which was shown at CES.

Now we have a product strategy and road map that affords us an exciting new market opportunity in pixel processing and builds on our proven strength in this projection market.

Our product strategy focuses on efforts on what we're not only capable of doing, but doing well, and on market segments where we see sustainable revenue and margins.

I'll now turn the call back over to Mike and he'll walk you through the details of the fourth quarter financials.

Thank you, Hans.

Advanced television revenue was $8.6 million in the fourth quarter, down 32% from third quarter revenue of $12.6 million.

Average sales prices in the quarter were down 2% while unit volumes decreased 30%.

On a revenue basis, China and Taiwan were down 27% and 44%, respectively, while Europe was 19%.

Geographically, our shipments in the fourth quarter were led by China with 46% of total TV revenue, followed by Taiwan, at 27%, Europe at 13%, Korea at 10% and Japan and other at 4%.

The technology spread of our revenue was 73% direct-to-LCD, 15% progressive scan CRT, 10% plasma and 2% other.

The reductions we experienced in the advanced television portion of the business were primarily the result of several factors, including reduced shipments to manufacturers of advanced television and digital projectors who experienced lower-than-expected retail sell-through of their products during the holiday season, combined with a decline in shipments of certain of our older legacy flat television IC products and seasonality in the television market.

As a result, the turns business we would typically expect to see later in the quarter did not materialize as OEMs either canceled or pushed out orders.

ISuppli, a leading television industry analyst, is estimating 13.5 million LCD televisions were shipped in the fourth quarter and 12.3 million LCD televisions will be shipped in the first quarter of 2007 for a sequential decrease of 9%.

Plasma units shipped were 2.7 million units in the fourth quarter and 2.1 million units are expected to ship in the first quarter for a sequential decrease of 22%.

As we outlook advanced television revenue for the first quarter of 2007, there are several factors that need to be considered.

First, inventory buildup for the holiday buying season continued to impact order rates going into the first quarter as the retail worked down their inventory to more appropriate seasonal levels.

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

Second, we are supply constrained on a certain end-of-life product that we expect to begin shipping again later in the first quarter.

Third, we also expect to see seasonal softness in the first quarter.

In addition, we are in the process of introducing several new products into new markets over the course of the first quarter.

Taking all of this into account, we expect advanced television revenue in the first quarter to be down 30% to 40% from the fourth quarter.

Front projector revenue in the fourth quarter was $14 million, down 17% from the third quarter revenue of $16.8 million.

Approximately 84% of projector revenue came from our top five Japanese customers -- Seiko-Epson, Hitachi, Sanyo, NEC and Sony.

ASPs were up 3% compared to the third quarter, primarily due to product mix, and unit volumes decreased 19%.

During the fourth quarter we began shipping our new Pearl image processor to Sony that is going into their high-end, polysilicon home cinema projector called the VPL-VW50.

In addition to the front projector design wins we have already secured with Seiko-Epson, Hitachi, Sanyo, [SQ], NEC and InFocus, we are positioned well in the front projection portion of our business to grow with the market and deliver product that uses both LCD and DLP display technology as we head into 2007.

Pacific Media Associates, a leading projector industry analyst, is estimating 1.4 million units were shipped in the fourth quarter with about a 50/50 split between DLP versus polysilicon display-based products, which is up 11% from the third quarter of 2006 and up 12% from the fourth quarter of 2005.

For the second consecutive quarter, there were slightly more polysilicon-based LCD projectors shipped in the fourth quarter than DLP-based projectors, which is a recent shift we have been observing in the market as our Japan-based polysilicon projector customers have continued to take market share in 2006.

Accordingly, we believe we held share in the fourth quarter of 2006.

PMA is forecasting projector unit volumes to grow 24% from 5.1 million units in 2006 to 6.3 million units in 2007.

In 2006, we were able to stabilize and turn around the front projection portion of our business with 11% revenue growth over 2005 after experiencing revenue declines in that portion of our business for approximately six consecutive quarters prior to 2006.

Looking to the first quarter of 2007, we expect to see seasonal softness in orders as our Japanese customers manage down inventory in anticipation of their March 31st fiscal year end.

We also expect to be somewhat supply constrained on one of our older end-of-life products before we see production volumes resume later in the quarter.

Taking these factors into account, we expect first quarter revenue from front projection to be flat to down by approximately 0% to 10% from the fourth quarter of 2006.

Revenue for the advanced media processor market, or AMP market, in the fourth quarter was approximately $4.3 million, which was up 17% from $3.7 million in the third quarter.

We continue to support a number of existing customer design wins in the AMP portion of our business as we wind it down over the course of 2007 as part of our restructuring effort.

Looking forward, we expect to see revenue from this portion of our business to continue to come down as customers switch to next-generation designs from other suppliers, however at a slower pace than what we had originally expected.

Accordingly, we expect first quarter AMP revenue to be down approximately 5% compared to revenue from the fourth quarter of 2006.

LCD monitor revenue in the fourth quarter was $1.7 million, up 7% from $1.6 million in the third quarter.

Our monitor revenue is highly dependent on a couple of customers and the timing of their orders and is heavily impacted by the availability of an end-of-life part that is supply constrained until later in the first quarter.

As we mentioned in the last call, we did not anticipate shipping any timing controllers in the fourth quarter.

We did, however, continue develop of our next-generation products and continued qualification efforts with Samsung.

We expect to begin shipping timing controllers to Samsung, once again, in the first quarter of 2007.

Accordingly, looking forward to the first quarter of 2007, we expect monitor and panel revenue to be down 20% to 25% from the fourth quarter of 2006.

Revenue in the fourth quarter was a total of $29.8 million, a decrease of approximately $6.5 million or 18% from $36.3 million in the third quarter.

Looking out to the first quarter of 2007, our run rate book-to-bill ratio for the fourth quarter was 0.8 to 1.0 and we expect to be partially supply constrained on an end-of-life product for a portion of the first quarter.

In addition, we are entering the seasonally slowest part of the year for our core television and projection market, combined with customers working through inventory built up for the holiday buying season and winding down the use of certain older legacy television products.

Therefore, we are anticipating overall company revenue in the first quarter to be between $22 million and $25 million.

GAAP gross profit margin in the fourth quarter was 31.5% compared to the third quarter at 37.5%.

Included in cost of sales during the fourth quarter was approximately $2.1 million in restructuring charges for the write-off of tooling and severance-related costs, along with $751,000 of non-cash expense for the amortization of acquired intangible assets and stock-based compensation.

Excluding these costs, non-GAAP gross profit margins improved 150 basis points to 41.1% in the fourth quarter compared to 39.6% in the third quarter as a result of the improved product mix and lower inventory reserves in the fourth quarter.

In addition, both GAAP and non-GAAP cost of sales in the fourth quarter included $950,000 in inventory reserved as scrap.

These charges reduced GAAP and non-GAAP-- GAAP gross profit margins by approximately 300 basis points in the fourth quarter.

We expect GAAP gross profit margin in the first quarter to be between 39% to 41% and non-GAAP gross profit margin to be between 42% to 44%, 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 $31.9 million in the fourth quarter, which included $10.6 million in restructuring charges for the write-off of IP blocks and severance-related costs and $2.2 million in stock-based compensation and amortization of acquired intangibles.

This compares to $24.3 million of OpEx in the third quarter, which included $2.2 million of stock-based compensation, amortization of acquired intangible assets and a $1.9 million restructuring charge.

Excluding all of these non-cash expenses in both quarters, non-GAAP operating expense in the fourth quarter was $19.1 million, down 5% from $20.2 million in the third quarter, primarily due to lower compensation, depreciation, rent and travel-related expenses associated with our restructuring effort.

For the first quarter we expect GAAP operating expenses of $20 million to $22.5 million and non-GAAP operating expenses of $18 million to $19 million.

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

Non-GAAP EBITDA was a loss of $2.6 million in the fourth quarter compared to a loss of $1.2 million in the third quarter.

Improvements in gross margin and OpEx were not enough to cover the lower revenue in the quarter, resulting in EBITDA coming in towards the lower end of our outlook for the quarter.

Through our restructuring efforts, our goal is to become EBITDA positive in the second half of 2007.

Interest and other income was $5.5 million in the fourth quarter compared to $0.7 million in the third quarter.

The increase was primarily due to a $4.8 million gain we recorded for the settlement of an outstanding arbitration claim on an Equator escrow account.

We expect interest and other income to be approximately $700,000 in the first quarter.

The provision for income taxes in the fourth quarter was a credit of $1.5 million compared to expense of $87,000 in the third quarter, as we trued up estimated interim taxes for the year in profitable cost-plus foreign tax jurisdictions and recorded an income tax receivable of $1.6 million for the carry-back of operating net losses in 2004.

We expect income tax expense in the first quarter of 2007 to be approximately $200,000.

The fourth quarter GAAP net loss of $15.5 million or a $0.32 loss per diluted share included non-cash expenses totaling $15.6 million for stock-based compensation and amortization of acquired intangible assets and restructuring charges.

It also includes a one-time gain of $4.8 million for the settlement of an Equator escrow account arbitration claim.

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

Excluding the non-cash expenses, restructuring charges and the one-time escrow claim gain, the net loss on a non-GAAP basis in the fourth quarter was a loss of $4.7 million or a loss of $0.10 per diluted share compared to a net loss of $5.2 million or a net loss of $0.11 per diluted share in the third quarter.

Now let's move on to the balance sheet.

Cash and marketable securities, consisting of cash and cash equivalents, short-term marketable securities and long-term marketable securities, were $134.6 million, an increase of $3.1 million from a balance of $131.5 million at the end of the third quarter.

The increase in cash during the quarter came primarily from the settlement of the escrow-- Equator escrow claim of $4.8 million, ongoing management of working capital, offset by payments on long-term obligations.

Accounts receivable, at $9.3 million, decreased $6.4 million or 40% from a balance of $15.7 million in the third quarter on lower revenues and strong cash collections in the quarter.

As a result, we improved our days sales outstanding, or DSO, metric to 28 days compared to 39 days in the third quarter, contributing over $3.5 million of positive cash flow from working capital in the quarter.

Inventory, at $13.8 million, came down $900,000 or 6% from a balance of $14.7 million in the third quarter, primarily from our proactively managing inventories to lower levels, coupled with scrapping certain older products no longer in production.

During the quarter we either wrote off as scrap or recorded reserves for excess or slow-moving inventory totaling $950,000, which is compared to $2 million of reserves in the third quarter.

As a result, inventory turns remained basically unchanged between quarters at approximately 5 turns.

Property and equipment of $21.9 million came down $4.3 million or 16% from a balance of $26.2 million in the third quarter, primarily from proactively managing capital-- capital expenditures as part of our goal to improve free cash flow, combined with the write-off of tooling and lease-hold improvements as part of our restructuring plan.

In 2007, we expect our depreciation and amortization expense to raise between $3.5 to $4 million per quarter and to have approximately $6 to $8 million in capital expenditures.

Other assets of $9.3 million came down $9.9 million from a balance of $19.2 million in the third quarter, primarily due to the write-off of IP blocks no longer expected to be used in new product development going forward as part of restructuring the company.

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

Thank you, Mike. 2006 was a challenging year for Pixelworks by any measure and we are, obviously, not satisfied with our results.

We have responded by making significant restructuring changes with further consolidation of our North American design centers and greater emphasis on our Asia operations.

In addition, we announced a major shift in strategy to refocus our revenue generation and new product development efforts on leveraging our core competencies in video and pixel processing.

As a result of these changes, we are laying down the foundation for success as we enter the new year.

We're on track to deliver a new product lineup, ramping in the first half of 2007, a much lower operating cost structure capable of reducing operating expense to $15 million per quarter by the back half of 2007 and a leaner, more focused engineering organization consolidated into two key design centers located in San Jose and Shanghai.

This is the new Pixelworks.

We are a new team with a new focus and a vision that is embodied in our new product strategy.

As I mentioned earlier, our road map offers us an exciting market opportunity in pixel processing and builds on our proven strength in the projector market.

This new strategy focuses our efforts on what we're not only capable of doing but what we are doing well.

Our technology innovations in pixel processing and our image processor architecture for projectors will propel the company into the future in areas where we have an advantage and where we see sustainable long-term business opportunities that will increase shareholder value.

Thank you.

We can now open the call for questions.

Thank you. [OPERATOR INSTRUCTIONS] And we'll take our first question from Jennifer West.

Good afternoon.

Congratulations on some of your cost-reduction efforts.

I had a quick clarification on your operating expense target in the third quarter.

That $15 million, that's non-GAAP?

That's correct.

That is correct.

Okay.

Can you update or, if you can, talk to anything for the timing control?

I know that's going to start shipping in the first quarter.

Do you have any more clarification on potential volumes of that product?

As we-- I believe we discussed in earlier calls, we continue to be engaged with-- with Samsung on the timing controllers, although we did reduce the level of investment that we're doing in new development until we recognize significant volume on this product line.

We are engaged with Samsung on several programs that have yet to go into significant production, but we are engaged with them and it will roll out over, probably, the next couple of quarters.

But at this point, we have limited visibility on what the actual production volumes will be.

Okay.

With the PixelAmp+ you talked about several designs there.

Do you have any detail as far as what kind of customers those are going into, tier-one, tier-two, tier-three or a geography or a certain size TV?

PixelAmp+ has been designed into a pretty wide range of TVs and projectors, for that matter, in several different geographies.

As you know, we do not announce design wins until customers are actually getting the product into the market, but suffice to say that we are in multiple geographies and different display sizes.

And it's a very successful product.

We are in production ramp at the moment and that will continue through next quarter and we will be announcing design wins here, probably, pretty quick.

Okay.

And then given that you have such a high concentration of revenue from China in your TV business, are you expecting any kind of impact from Chinese New Year at all in the first quarter?

Yes, we are and that is already built into our plan.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS] And we'll take our next question from Craig Berger from Wedbush Morgan Securities.

Craig, you there?

Good afternoon.

Thanks for taking my question.

With respect to the TV business, it gets news to decline here to around $8 million in Q4, guided down in Q1.

When do we kind of reach bottom in that business and some of these new products that you're talking about more than offset the declines that you're seeing?

We believe that this quarter would be the-- would be the low point.

As you know, we are in a-- we are in a transition between some of our legacy products that are in some of the current designs for customers and the transition to some of our new products, newer generations of Opal and Pearl, as we've discussed, as well as the new products from both the CRT business, as well as PixelAmp.

So we expect that you will start to see a turnaround in our TV business and it should be at the low point in the current quarter.

In Q1.

Yes.

And with respect to the kind of $6-plus million of expected Q1 TV revenues, what is that primarily comprised of?

Who are the customers that are taking that-- those products today?

Craig, in the past we haven't disclosed in detail who those are.

The ones that we have been disclosing we've provided in the detail on the call.

The-- I would say they're primarily currently in the-- from a historical perspective, in regional second-tier-type ODMs.

They're ODMs.

It would be your typical ODMs.

And are those taking your older generation image processor chips, primarily?

It's a mix.

It's a mix.

Some of them are in transition between the older generation of Opal and the new generations of Opal and Pearl.

Right.

And then just moving on to the slim CRT product you guys have, I guess you said your lead customer's a tier-one, possibly Korean, customer with some shipments in Q1.

How material of a business do you think that can be for you in 2007 and can you just give us a rough idea of pricing on that product?

The-- the slim CRT market is a new market, as you know, and there's a lot of interest and there's a lot of forecast data from our customers.

We have not been able to assess with high confidence what our-- what our business might be there yet.

We know that it certainly has the potential to be very significant.

We have a significant design win with this tier-one customer and we believe that this could be a very successful product line for us.

When, exactly, would you be getting visibility into the magnitude of that business in 2007 or what are the milestones that you're looking for specifically?

Is there a particular design window that these slim CRTs are following?

Is it more of an ad hoc design process?

Or what are some of the milestones you're looking for?

Okay.

Well, I think what you-- what you'll see is that the production ramp is happening now and I think by the time of the next earnings call we would have much more visibility on it.

Thanks a lot, guys.

Good luck on the recovery.

Thanks, Craig.

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

Thanks, guys.

Can you talk a little bit about the seasonality in the projector business and how you expect-- you're guiding from flat to down in March, but how you can expect us to be looking at that through the rest of '07?

Yes, Adam, this is Mike.

Yes, the-- as we pointed out in the call, this is a particular foundational element to our business in that we've been able to stabilize the front projection side.

We had seen over the last couple of years a deterioration between DLP versus high-temperature-polysilicon-display-based projectors in the market and that's now stabilized over the course of '06 and we actually are starting to see polysilicon take back some share and we expect that it'll probably remain at about a 50/50 split as we go into 2007, which bodes well for us.

We've also recently announced some design wins on the DLP side.

So when you combine the position we have with our high-temperature-polysilicon customers in Japan, along with some design wins on the DLP side, we think we'll probably grow with the market in this space here in '07.

The seasonality piece that you see in Q1 really ties to our current customer base.

As I mentioned in the call, we have over 80% of our revenue coming from our top five customers and those five customers are all from Japan and they have March 31 year-end.

So they're pretty meticulous about managing our inventory levels to as low as-- as low a point as possible going into their fiscal year-end and then they open things back up again and get going and you see things pick up in Q2 and Q3.

So the PMA guys that follow the space think it's going to grow about 24% on a unit basis.

I would suspect you'll probably see ASP declines over the course of this year somewhere in the 4% to 5% range a quarter, so you're looking at a 3% to 5% market growth, in that area.

Okay.

And just to clarify on the profitability, I think your prior target was full-year EBITDA breakeven and I think you're saying now EBITDA breakeven for the second half of '07.

Is that the right way to be looking at it?

We'll cross over the EBITDA breakeven in the back half and we'll be EBITDA positive at the end of the year, but not for the entire year.

That's correct.

Okay.

All right, great.

Thanks a lot, guys.

Yep.

We'll take our next question from Jason Pflaum from Thomas Weisel Partners.

Hey, guys.

This is actually Alex Kim, calling in for Jason.

Hey, Alex.

Just a couple quick ones here.

As far as your current mix on the unit perspective versus what would you consider legacy versus new product, what is that mix today for the December quarter and what do you think it will look like for the March quarter, on the TV side?

On the TV side?

I don't know.

I don't have that right at my fingertips.

I guess it depends on how you want to define what-- what "new" is.

I can tell you that we know that the Opal-based family of products, which is in Opal [MDM] and in Opal2, is a significant portion of our overall revenue and Opal MDM goes into projector and Opal2 goes into-- into television.

But these other products that we described for you in the call are just really beginning to come on line.

Okay.

So, basically, a small portion of the mix today is new product and a lot of it is still legacy.

I mean, we can expect to see the new product really start to develop in the March quarter?

I mean, is that the way to think about it?

That's probably the way to think about it.

Okay.

A question on the AMP revenue.

I think that's still a somewhat material portion of the mix and, obviously, that's going to fall off and it looks like it's going to be around for March, only down 5%.

How do you-- how should we think about that kind of waning down over the next year?

I think what you-- there's probably going to be a slow decline through the year.

I don't think you're going to see major falloff in-- during this-- during this calendar year.

It's a pretty stable product line and I think we'll pretty stable revenue through the year, but some decline through the end of the year.

Okay.

Okay, that's fair.

And then just one final question on gross margins.

Obviously, you guided a little bit-- modestly up here.

This-- a similar question or the earlier question with respect that was answered to revenue, what are your general expectations for gross margin?

How should we look at that for the following year, as well?

Well, Alex, we don't outlook it long term.

Right.

But I think what we're trying to say here, going into the next quarter, is that because of product mix and some new products that are coming online and the expectation that most of the inventory issues that we've been dealing with here as we've been ramping down through the transition on the television side are behind us.

So we're expecting it to come up here as we go into the first calendar year quarter.

At this point in time, there are too many variables to talk about for the whole year on the gross margin side.

Okay.

Does it kind of feel like the floor?

I know that there was an earlier comment about revenue kind of feeling like the floor, as well?

Well, on the revenue side, you're right on the floor.

In terms of gross margin, what's more difficult to tell is how-- how quickly some of these new products ramp, because some of them have higher gross margins than company average and some of them have lower gross margins than company average and so if we're wildly successful, say, in one particular segment, like T-cons, for example, those-- that would have a lower gross margin than the overall company average and could pull the percent down, but add more margin dollars.

Okay.

So we're awaiting to see how these new products take hold over the next quarter or so and then we'll have more information for you on that.

Great.

Thank you.

We'll take our next question from Michael Bertz from Kennedy Capital.

Good afternoon, gentlemen.

Just a couple things I want to ask you about.

So first, on the inventories that you guys were talking about and I know, Mike, you said you were managing stuff proactively.

It sounds like you wrote about $950,000.

Inventories came down by about $900,000.

I mean, was there inventory that you guys were building that you did manage proactively or-- it looks pretty flat to me.

So can you walk me through that a little bit?

Sure, yes.

We were able to get to that on lower revenue and so you have to be out in front.

A lot of times you're looking at pretty long lead times in certain areas of the business and so you're looking at revenues at one point in time and then you're looking at a different revenue picture later in time and as-- as-- one of the things that we wanted to be very careful of is we did not know exactly where and when the turns business for Q4 might happen, because of the buildup going in-- into Q4 from the holiday buying season.

And so as we saw things really stabilize about mid-- at the mid-point of our outlook, we were able to proactively manage that the growth level, bringing in anything more and keep our overall inventory at the level that you saw.

So it was a combination of where it could have been had we not been proactively managing and, you're right, the net difference is about $900.

Okay, great.

And then I know you guys mentioned a few times on the call about the supply constraint on the legacy part and I presume that means you're going to run some more wafers for it and actually build some more of this stuff.

Is that something that you saw as you tried to proactively manage this or is that something not related to that and how should we think about that legacy part coming back?

Well, what happened here is that the part that runs on a-- really on a obsolete process, it's an embedded DRAM technology that's-- that's many years-- many generations back.

We are working or have been working with our foundry partners and the process is back on line and we are running wafers and we are getting supply again here this quarter and we will be catching up with the situation here through the end of this quarter and early into next quarter.

Okay.

Mike, we carried some backlog.

We've been carrying some backlog here for about the last four months here with this product and it's one that we've been watching closely and it's just hanging around longer-- as Hans said, it's been around a long time.

It's hanging around-- around longer than originally expected and so we have an opportunity here to fulfill that backlog and get caught up and take care of business as we get into the next quarter.

Okay, fair enough.

And then the other thing -- and I guess this is-- is going to be a bigger picture question.

It's going to take several different pieces so bear with me to kind of work through it a little bit.

You talked about Q1 kind of being the low point in TV and as you think about all these new products that you guys are bringing on, as well as the stuff that's kind of rolling off, can you give a sort of a broader picture of how we might expect the older stuff to come off and this to pick up and see that happening in Q1.

What I'm curious about in more than just a broad sense like that is whether you can break it down by either product or what the forecast is going to be in the end-market category it's going to and sort of lay out for us how you see that taking shape over the next quarter or two?

And it'll roll into a bigger question, but I wanted you to kind of address that first and perhaps you can talk about relative pricing in these things.

Are we seeing newer products that have ASPs than your older stuff?

I mean-- Because we're trying-- what I'm trying to get to is how confident we can be in this forecast as it goes forward.

Well, as you know, we're not outlooking past this current quarter.

I think what-- you can make some assumptions based on the new products that are coming on line will be in volume production towards the second half of next quarter, the March quarter and into Q3.

And as we-- went through the prepared remarks, there are several that will be-- that are in that category.

The harder part is actually to forecast the tail-off of some of the legacy products, how long they stay in production.

So we, obviously, have made some modeling and we're confident that we can deliver improved results and, no, unfortunately we cannot share the details that make us, but there is the-- a change here, a significant change, between the legacy products and the new products coming on line.

The other thing-- in the back half -- you might talk a little bit about the back half, with our motion estimation in terms of the size of the potential market there.

Some of the new products that are coming on line, especially the product that embodies our motion engine technology, will come on line later this year.

It will-- we expect that it's going to find its way into customer models in the back end of this year and then start really serious production early next year.

And I think there's a-- there's a major opportunity here as we move-- as the display moves from 60 hertz to 120 hertz refresh rate and we think we're very well positioned here with the motion engine technology to be able to capture a major part of that market as that emerges.

Okay.

Since you open the door to that a little bit, when you talk about being in customer models the back end of this year, where do you think that's targeted at?

Is it going to be the sort of traditional tier-two ODM guys?

Or do you see that being in some place where you have significant volume at the end of this year?

Can you tell me a little bit more about that?

Actually, it's pretty board.

We-- we are in discussions with customers at many different levels, both tier-one as well as your classical tier-two customers.

It has fairly broad appeal, also, in the display-- the display manufacturers.

And, as you know, we have been-- historically been heavily involved with companies on the panel side.

So we're heavily engaged there, as well, and we also believe that it's going to find its way into applications outside of the traditional flat-panel display market.

So we see there are major opportunities for us there and it's pretty board.

Okay.

One final question and to kind of tie this back together and, again, I know you guys can only give guidance about Q1.

That's fine, but as you think about sort of the direction that you have on the TV business and let's put, let's say, a reasonable expectations, not even conservative, not aggressive, but just something reasonable, I mean, do you think it's realistic to think that on a qualitative basis, TV business for '07 can be greater than TV business in '06?

Mike, I think we've got to be really careful with that.

It's just another way of sounding like a broken record and saying that we're not going to outlook beyond the next quarter -- several reasons for that, one of which is we-- we're coming at this with a unique strategy and we don't want to tip our hand too much to several other people that we know are listening on this call.

And so we want to be careful with what we say about the specifics beyond that, what Hans has already said.

But we do feel confident enough to say that we believe from a revenue basis that this quarter that we're heading into here in Q1 will be the low water mark and then let's-- when you combine that with the OpEx reductions that we've set -- and we've given you a target of $15 million by the end of Q3 -- we-- that we would expect to cross over the EBITDA breakeven point into EBITDA positive territory as we go into the latter part of this year.

I think you can do the backwards math from there once you back out what you need to do with the projector business and the information that we gave you there.

But we just need to be careful how much more detailed we get on this call.

Yes, sure.

Fair enough.

Okay.

Thanks, guys.

[OPERATOR INSTRUCTIONS] And, Mr. Yonker, it appears we have no more questions at this time, sir.

Okay.

Well, Rachel, thank you so much.

I want to thank everybody for joining us on this call today and we'll sign off now.

Thank you. 'Bye-bye.

That does conclude today's conference call.

Thank you very much for your participation and have a wonderful day.