Universal Electronics Inc (UEIC) 2009 Q4 法說會逐字稿

Good afternoon. My name is Angelia, and I will be your conference operator today. At this time I would like to welcome everyone to the Universal Electronics fourth quarter year-end 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. (Operator Instructions). Thank you. Ms. Chapman, you may begin your conference.

Thank you, Angelia, and good afternoon, everyone. Thank you for joining us for the Universal Electronics 2009 fourth quarter and year-end conference call. By now, you should have received a copy of the press release. If you have not, please contact Lippert/Heilshorn and Associates at 415-433-3777, and we will forward a copy to you.

This call is being broadcast live over the internet. A webcast replay will be available at www.uei.com for one year. In addition, a telephone replay of this call will be made available for 48 hours, beginning approximately two hours after the conclusion of this call. To listen to the replay in the US please dial 1-800-642-1687, and internationally, 1-706-645-9291. Enter access code 52254418.

Also any additional updated material nonpublic information that might be addressed during this call will be provided on the Company's Web site at www.uei.com shortly after the call, where it will be retained for at least one year. You may also access that information by listening to the webcast replay. After reading a short Safe Harbor statement I will turn the call over to management.

During the course of this conference call, management may make projections or other forward-looking statements regarding future events and the future financial performance of the Company, including the benefits the Company expects as a result of the acquisition of Zilog assets and personnel and the continued development and successes of products and technologies, including new products and technologies; the expected continued growth in HDTVs and DVRs; the Company's ability to successfully anticipate the needs and demands of the consumer with respect to new and innovative products and technologies, including the Company's recently announced QuickSet, XMP-2 and Glimmer technologies; the continued strong relationship with the Company's existing customers; the Company's ability to attract and obtain new customers, particularly in Asia; the strength of the Company's financial position; and the effects the Company may experience due to the continued softness in the worldwide markets due to the global economic environment.

Management wishes to caution you that these statements are just projections, and actual results or events may differ materially. For further detail on risk, management refers you to the press release mentioned at the onset of this call and the documents the Company files from time to time with the SEC, including the annual report on Form 10-K for the year ended December 31, 2008, and the periodic reports the Company has filed since that time. These documents contain and identify various factors that could cause actual results to differ from -- materially from those contained in management's projections or forward-looking statements.

On the call today are Paul Arling, Chief Executive Officer and Chairman, who will deliver an overview, and Bryan Hackworth, Chief Financial Officer, who will summarize the financials. Then Paul will return to provide the vision for 2010. Now, I would like to turn the call over to Paul Arling. Please go ahead, sir.

Thank you, Kirsten, and welcome, everyone. In the fourth quarter of 2009 we again achieved the highest quarterly revenue in the Company's history at $84.9 million. In addition, our fourth quarter earnings per share of $0.42 ties a quarterly record. As such, we closed the year with revenue of $317.6 million, net income of $14.7 million and earnings per diluted share of $1.05.

As we continue to execute on our strategy to win new customers and deepen relationships with exist customers, we have grown our business both domestically and internationally. A key part to this growth is the ability to turn leading technologies into solutions for our customers in multiple industries.

One example of the success of this strategy is DIRECTV's inclusion of our QuickSet on-screen setup application and its new suite of remote controls and HD set-top boxes. DIRECTV is the first television service provider to utilize the revolutionary UEI QuickSet application with XMP-2 to simplify the remote control setup process and improve the overall customer experience.

QuickSet dramatically simplifies the remote control setup process by reducing the complexity and number of steps required. Most remote controls require consumers to manually enter devise codes into their remote until each of the AV devices is set up. QuickSet enables this integration in just three easy steps guided by an on-screen GUI setup process.

XMP-2 technology complements QuickSet by providing a low-cost wireless two-way communication protocol between the AV equipment and the remote to complete this critical link. This system also offers the benefit of saving user-defined remote settings, which enables consumers to quickly and easily save and then transfer the setup configuration to a replacement remote, saving them time from having to reprogram the replacement remote.

This too creates cost savings for our subscription broadcasting customers, as it reduces truck rolls and time dedicated to customer service. Quickset and XMP-2 are but two examples of the technology leadership we have demonstrated over our history.

But probably the best validation of our technology leadership is the industry-leading customers who have adopted it. In North America, as many of you know, our customers include DIRECTV, Comcast, Time Warner, Cox Communications, Charter, Bright House, DISH Network, EchoStar, Rogers Cable and Shaw Communications to name just a few.

These customer wins and our ability to maintain and grow these relationships over the past decade have been driven by our technology expertise, our mastery of the device proliferation challenge faced by our customers and consumers in the ever-changing home entertainment marketplace.

Three key trends continue to drive our business -- HDTV adoption, DVR adoption and the total number of subscribers added. The important point to remember about these trends is this, that while economic cycles may affect the short-term speed at which these trends occur, they continue relatively unabated. For example HD television penetration is on the rise thanks to declining prices and increased availability. There are over 50% of households in the US that do not yet have HDTVs.

DVR technology is expected to reach 44% of all TV homes in the US by 2015, up from 29% in 2009, representing an increase of approximately 20 million homes over the next five years. According to ABI Research, subscriber bases are increasing worldwide. Global pay-TV subscribers are estimated to be more than 730 million by the end of 2011, reaching 115.4 million in North America alone. Global telco TV subscribers are projected to number 47 million by the end of 2011, with a compound annual growth rate of 22.5% over the next five years.

Initial successes in our international growth initiatives are evidenced by relationships in regions around the globe. In Europe, our customers include Sky UK, Sky Italy, United Pan-Europe Communications or UPC, Top Up TV, Telefonica, TV Cabo and FastWeb, again to name just a few. In key markets that are expected to grow substantially over the next five-to-ten years and where we have targeted customer growth as a strategic initiative, our efforts have produced results. We have partnered with Airtel, Astro, Reliance, FOXTEL, PCCW Hong Kong, Indovision and Chungwa.

In summary, in 2009, UEI withstood the difficult economy and thrived. But probably more importantly, we have positioned our business for future success. We have developed strong relationships with the leading companies in the industries we serve. We have positioned ourselves well in the growing regions of the world and have begun winning business with the leading companies in these regions. And as always, our team has continued to develop innovative solutions to the everyday challenges faced by our customers and consumers.

With that I would like to turn the call over to Bryan Hackworth, our CFO, to lead us through the financial discussion. Bryan?

Thanks, Paul. Net sales for the fourth quarter of 2009 were $84.9 million, up 8% compared to $78.7 million in the fourth quarter of 2008. Business Category revenue was $66.4 million, up 2% over the fourth quarter of 2008 revenue of $65.1 million. Our Consumer Category revenue was $18.5 million, an increase of 36% over the fourth quarter of 2008 revenue of $13.6 million. Gross profit for the fourth quarter was $28.6 million, or 33.7% of sales, compared to 32.2% in the fourth quarter of 2008.

Total operating expenses were $20.5 million, compared to $17.5 million in the fourth quarter of 2008. Breaking down our operating expenses, R&D expense was $2.3 million, compared to $1.9 million reported in the fourth quarter of 2008, reflecting our continued investment in innovation and future products. SG&A expenses were $18.2 million, compared to $15.6 million in the fourth quarter of 2008, reflecting the settlement of a lawsuit, the integration of acquired business and assets and a weaker US dollar versus the euro.

Operating income was $8.1 million in the fourth quarter of 2009, compared to $7.8 million in the fourth quarter of 2008. Interest income for the fourth quarter of 2009 was $95,000, compared to $368,000 in the fourth quarter of 2008, reflecting significantly lower interest rates. The effective tax rate was 27.9% in the fourth quarter of 2009, compared to 33.2% in the fourth quarter of 2008. The decrease is due to the resolution of our Dutch tax audit for the years 2002 through 2006, which resulted in approximately $400,000 of tax reserves being reversed and credited into income during the fourth quarter of 2009.

Net income in the fourth quarter of 2009 was $5.8 million or $0.42 per diluted share, compared to $5.8 million or $0.42 per diluted share in the prior year's quarter. For the 12-month period ended December 31, 2009, net sales were $317.6 million, compared to $287.1 million in the 2008, representing growth of 11%.

Gross profit was $101.6 million or 32% of sales, compared to $96.2 million or 33.5% of sales a year ago. Operating income was $21.9 million, compared to $20.8 million in 2008. Interest income was $471,000, compared to $3 million in 2008 due to significantly lower interest rates. Net income for the 12-month period was $14.7 million or $1.05 per diluted share, compared to $15.8 million or a $1.09 per diluted share in the prior-year period.

Now turning to the cash flow and balance sheet review. During the 12-month period ended December 31, 2009, we generated $24 million in cash flow from operations and repurchased approximately 405,000 for $7.7 million. We ended the quarter with cash, cash equivalents and a term deposit of $78.3 million, compared to $79.2 million at September 30, 2009. DSOs were 68.2 days at December 31, 2009, compared to 68.4 days at December 31, 2008. Net inventory turns improved to 5.5 turns on December 31, 2009, up from 4.9 turns at December 31, 2008.

And now for our guidance. For the first quarter of 2010, compared to the first quarter of 2009, we expect revenue between $71 million and $74 million, compared to last year's revenue of $71.1 million. We anticipate gross margins for the first quarter of 2010 will be approximately 32.5% of sales, plus or minus one point, compared to 30.1% of sales in the first quarter of 2009. We expect operating expenses for the first quarter of 2010 to range from $20.3 million to $20.9 million, compared to operating expenses of $19.9 million in the first quarter of 2009. GAAP EPS is expected to range from $0.12 to $0.16 per diluted share. This compares to $0.06 per diluted share in the first quarter of 2009.

Looking toward 2010, we are excited about our prospects. During 2009 we benefited from a significant customer purchasing the majority of its remote controls from us. In 2010 we expect this customer to return to a more traditional dual-source arrangement where we will continue to supply 100% of the chipsets, but we will share the remote control volume. We estimate this will decrease our sales to this customer by approximately $25 million year-on-year.

However, growth in other customers, and the conversion of prospects both domestically and internationally, as well as the impact of the business and asset acquisition from Zilog will, we believe, more than offset this shift. As such for the full-year 2010, compared to full-year 2009, we expect revenue between $325 million and $340 million, compared to last year's revenue of $317.5 million. GAAP EPS is expected to range from $1.20 to $1.35 per diluted share. This compares to $1.05 per diluted share for full year 2009. I'd now like to turn the call back to Paul.

Thank you, Bryan. In January we had another successful CES. The booth activity and excitement levels were high as we demonstrated a variety of consumer control applications that leverage emerging wireless RF technologies in the home.

Through a development relationship with Broadcom we developed a Glimmer, an advanced wireless control platform with an integrated infrared and Bluetooth compatible chip solution. The device enables interaction between an existing network of devices in the home to a variety of Bluetooth enabled devices ranging from next-generation set-top boxes, game consoles and mobile phones. As I mentioned earlier, we also announced the inclusion of UEI's QuickSet on-screen setup application and DIRECTV's new suite of remote controls and HD set-top boxes.

We are continuing to build on our reputation as the leading developer of control solutions that enhance the increasingly complex home entertainment control experience. We are doing so by offering our customers and consumers the technology and solutions that meet their future needs. We expect to continue our successful tradition of winning new customers, growing relationships with existing customers and expanding our reach into new markets and geographies. We grew our business during a year where the economy was in recession, which again demonstrated UEI's strength and set us further apart from our competition.

The trends that drive our growth continue -- the movement to digital technologies, the growth of HD programming and hardware, the adoption of DVR and the addition of pay-TV subscribers in many regions of the world. These are inevitable trends that march forward. We are more excited than ever about the future prospects of our business, and our position as the leading company in our industry. We look forward to a great 2010. Stay tuned. I will now open the call up for question and answer.

(Operator Instructions). John Bright with Avondale Partners.

Thank you. Paul, Bryan, congratulations on a nice quarter.

Hi, John.

Hi, John.

Hey, guys. A couple of questions on the quarter, then to the guidance. First on the quarter. It looks like a nice higher contribution from the consumer, but it looks like it didn't flow through to the margin. Anything going on there? Or what is going on there that -- not allowing that to happen?

We actually wound up at 33.7%, John, and we guided between 33.5% and a half, plus or minus a point. So we actually were a couple of tenths of a point above the midrange. So we actually came in where we thought we would be.

Well, where you thought you would be. But what I was alluding to were some of the margins that you might have seen in years past when you had a similar mix of sales.

Yes.

You had a higher gross margin and I'm trying to find out what the dynamic at play is.

I think one of the biggest reasons is the fact that we are selling more to large customers.

Right.

So when you are dealing with large customers, the actual cost per unit is lower. The selling price per unit is a little lower. And we also had -- currency plays an effect as well.

How big were the currency plays?

I would have to get that to you. I think for the quarter, on net income, it was nominal. I think it was actually about $800,000. Yeah, for the topline, gross margin is about $800,000, and then we actually have a natural hedge in Q4, where we actually had the offset of $800,000 more in expenses, which yielded basically negligible to the bottom line.

Okay. Let me stay with the quarter before I get to the guidance. The lawsuit settlement that you had included in your OpEx, can you expand upon that, please?

Yes, actually, it is -- I have got to be careful what I say, because there is a -- we signed a confidentiality agreement, John. All I can really say is the lawsuit involved a copyright infringement claim that we settled. And that is really all I can say. And I [have] to say, it was a significant amount, but I can't state how much.

Okay.

And we could -- we will explain a little bit in the MD&A, and that will be filed with our 10-K in a few weeks.

I understand. The next question then, guys, to guidance. The customer you are talking about that is going to return to a more traditional dual-sourced arrangement. Number one, why are they returning to a dual-sourced arrangement? And then number two, correct me where I'm wrong, why you wouldn't maybe have a better margin benefit if you were just supplying the chipsets and not the full remote volume?

Yes, I will answer that one, John. This is Paul. The switch back to doing approximately -- to sharing the remote volume is just returning to a traditional pattern. We were fortunate in the year 2009 that for a variety of reasons the customer chose to buy the vast majority their needs from us on the remote control, which pushes the remote volume higher and the sales volume higher.

In terms of the -- and what they planned to do, had done in prior years and other customers do, and they plan to do this year is return to a more dual-sourced model where they use 100% of the chips from us, because they wish for obviously to have the great technology in our chips and consistency of performance across all their subscribers, but have a dual source on the remote control.

So we sell chips to the other vendor, and we will get roughly half of the remotes versus the vast majority that we got last year. So it's just returning to a more steady-state position. We enjoyed the benefit of it in 2009 and won't in the year 2010.

In terms of the margins, we haven't really made a forward comment on that in terms of margins and won't on this specific customer, mainly because we don't disclose margin for chips and certainly wouldn't for this particular customer. But I will say generally the margin on chips is probably a little higher in margin percentage but lower in dollars, obviously, because it is a lower sale-price item.

Okay. A couple of other questions. One, what do you anticipate the impact of Zilog on the topline, and if you want to talk about profitability for 2010, might have. Before I think we talked about Zilog being roughly a $40 million annual customer. I think the transaction was finished in February of last year. What does that mean to 2010?

I'll answer that, John. Our acquisition of Zilog and the remote control business of Zilog has gone, so far, as planned. In 2010 we will be transitioning from the sales agency fee to a traditional sales relationship, where we ship directly to the customer and record the sale as well as the cost of goods. As expected in 2009, the Zilog acquisition was mildly accretive, as we expected, and we expect it to be more accretive in 2010.

But because we've integrated Zilog into the operations of UEI, it is becoming difficult to actually quantify it. It is no longer separate and distinct. But I will say this -- if you look at it, the integration of Zilog is one of the reasons why we expect earnings growth ranging from 14% to 29% off of overall sales growth of 2% to 7%.

Got you. And the Audiovox partnership, how is that progressing?

It is progressing well.

Okay. Is it -- are you seeing any meaningful consumer sales domestically?

Yes. Yes, we have -- well, obviously, versus historically where we had little domestic sales, we have enjoyed sales in that arena over the last year, so. It has gone as we have planned. There is -- we sell both chips and product to our retail partners in the US.

Terrific. Gentlemen, thank you.

Thanks, John.

Ian Corydon from B. Riley & Company.

Thank you. A couple of questions around QuickSet. Can you just talk about how that rollout will go with DIRECTV in terms of is it going to just new subscribers or can it roll out to the entire base? And kind of over what time period this will happen?

I can't really give any comment on the time period, because DIRECTV asked us to direct questions on that to them, as far as the rollout of the new hardware. But essentially what will happen is new subs can get this on specific boxes, the HD boxes that we have integrated the technology in, when introduced. And certainly current subscribers can, if they upgrade for instance from an older box or a non-HD box or an SD-box to one of the new boxes, they certainly will get the new technology embedded in this new box.

So essentially all new customers plus customers that upgrade to that box?

Well any new customers that are getting the services that are in these HD-DVR boxes that they placed the technology in will be getting the QuickSet as well as many other features from DIRECTV.

And is that in customers' hands at this point?

Well, I guess all I can say is we have shipped, in terms of -- we have begun shipping, and you can -- we have been asked not to talk about the rollout of these boxes.

Okay. And then in your guidance for 2010, have you anticipated any new QuickSet deployments other than what you have won so far?

Yes, this is Bryan. When we do our guidance we include everything that we think will come into fruition.

Okay. And maybe you could just talk kind of broadly about the international opportunities that you are seeing, whether it is in Europe or in more emerging markets?

Yes, I think that the way this works is you have got the United States market, which is probably the most advanced home entertainment technology market, and the number of subscribers here is not growing substantially. The growth here is driven by service change-over. So, you have got -- over the many years you have had the analog to digital transition. You have the SD to HD transition. You have got non-DVR to DVR transition.

And then of course underneath that you have churn and movement amongst operators, because you have a lot of competitors in the market today that are drawing customers into their service, and we -- because we have such a broad customer base, we benefit from the movement of these customers as well as the adoption of those new technologies.

So that is what has driven growth here and is projected, as I put some statistics out from outside sources on the expectations of how those services will roll out over the next couple years here in the US between now and the year 2015.

Outside the US, maybe in contrast to that, you have got in Asia a totally different environment where it is much like it was here a few decades ago where you still have consumers that are signing up and there it is more about subscriber growth. Most of the technologies are already digital, and they're more satellite and IPTV than they are cable. But it doesn't really matter to us.

As they sign up those new subs in those areas, there is an opportunity for growth as they put the hardware into those homes. And again I mentioned a short list of customers we have already won in the region of Asia, and we think that over the next year, and over the next five years importantly, and over the next ten years that this is an area of the world where there is going to be significant changes. I think this is widely reported in the business press.

But one of those changes is going to be in the home entertainment marketplace. That most experts in our arena are predicting pretty significant growth in this region of the world.

So, we have positioned ourself, we have small sales offices there, a few people, sales and SAEs, and they have gone out and won customers, and we have begun shipping. And we are excited about the major players of tomorrow in that region are probably already there, just like they were here a couple of decades ago, and we are partnering with them today and building hopefully what is a long-term relationship with them.

I guess a little more specifically, are there a lot of RFPs out there, a lot of new customers to win? Or have you got the ones that you expect to be the major players, and you are going to benefit as their subscribers grow?

No, there are still more to win. I mean, it is not unlike here, again. Over ten years we win one this month, and then four months later you'll win another one. And sometimes it was system by system or region by region. So yes, there is still more business there to win.

We are targeting the leaders there. We have already won a number of them, but I do think there is probably, Ian, quite a few more RFPs that are going to go on over there. And we are very competitive, and we feel pretty confident that we have the solution that these guys are looking for. And again our early wins are evidence of that.

Okay. Thanks a lot.

Steven Frankel with Brigantine Partners.

Good afternoon. I missed the details around the lawsuit settlement. That was a settlement that reduced your expenses, or you were on the paying end of that lawsuit?

No, we were on the paying end, Steve.

Okay. Then could you give me an update on the business in the UK on the consumer side this quarter?

Yes, it is actually -- well, I can tell you versus prior year, it is very much improved. Of course, to be fair, the fourth quarter of 2008 was not a particularly strong quarter in the history of UEI. So again to be fair, it is probably not the best comparison but, yes, it was strong.

So you think that business has finally turned? I know it has been tough all year. Do you think you've hit the bottom there and it's started to bounce?

Well, we think so. But given the difficult environment we have been in, we want to be careful of declaring victory too soon. But the team has worked very hard. We have a very good group of people there in both product and sales, and they have done a good job. We -- it appears that the customers have returned to a more normalized pattern of ordering.

There is some foot traffic in the stores. It is probably not peak-level traffic, but we have done a good job of securing the business there. We have -- our share is as good now as it has been, and so we feel pretty good about it. But again, we are not going to declare that it is back to boom-like levels. It's still tough, but we are doing much better there.

And on your guidance for 2010, I didn't see any color commentary on the mix. And given that you have this shift going on, on the business side, could you give us some details on how you think the business will break out between business and consumer in 2010?

Steve, we are not actually providing the breakout between business and consumer. We are just giving it in total, which we said we think will range between, topline, $325 million to $340 million.

But can I infer from the fourth quarter performance that you now think the consumer business is on firmer footing and should grow in 2010?

Yes, I hope. I will go as far as saying that. We expect both business and consumer to grow in 2010 over 2009.

Okay. And what does it take to get gross margin improvement from here?

That is a difficult one to answer. There is a lot of moving parts there. In terms of raw materials, you have got the chip, the plastic resin. I mean, there probably are opportunities there. In terms of pricing it comes down to, on that one, on the commercial side, it is more about mix, I think. Because a lot of times what happens is we will have in subscription broadcasting -- in the subscription broadcasting and OEM area or the business category -- typically it is a negotiated price.

That is not changing month to month, so you are driven more by mix. And by mix you'd have -- if larger customers make up a higher percentage of your business, it pushes your margin down a little. If smaller customers are a bigger percentage of the mix it will push it up a little. Same on the consumer business.

We have seen over the last year, and I think we said this on prior calls, that the mix shift -- and this makes logical sense for many of the companies that you guys cover or watch -- that the premium product has sold slightly less, and more mainstream product has become more popular as consumers have become a little bit more frugal. So the mix shifts to a slightly lower margin product line. So you have got a lot of moving parts there. It is one of the reasons that we typically try to provide guidance for margins one quarter out, because we have better visibility on that, but in terms of mix shifts across a 12-month period, it is difficult for us to know that.

I can assure you, though, that on the cost side we are looking every day at ways to negotiate better sourcing arrangements with our providers. The real open question there is consumer behavior. Which types of products are more popular next quarter or the quarter after that. That can be sometimes difficult for us to know. So we try to provide only the guidance out one quarter, because we have a better handle on that.

And on QuickSet, will DIRECTV be promoting those technologies, so perhaps it gets ingrained in the consumer mindset and might help consumers pressure their cable providers to provide the same kind of thing? What kind of profile is QuickSet going to have?

Sure. Well, I think it will have a profile. I mean obviously DIRECTV is always adding new technologies into these new boxes, so there will be other things that they will also be promoting along with these box introductions. But no, the important thing for us is to have it in there. To have it be a feature that they do market.

But also it helps you with the other customers, because they are seeing how easy this is to do, how much they can both enhance the consumer experience, which many people in the subscription broadcasting companies care about. But in addition to that, can help them streamline their business, that they don't have as big a problem. If a consumer buys a new TV it is very easy for them to set up. They don't have to search for the manual. They can just hit a button and go through a simple menu and set up that new television.

Or worse, if they break their remote or lose it, which is for most people an unfortunate reality. For us, great. But these remotes have a way of growing legs or getting broken or getting thrown against the wall when your favorite team is losing on Sunday.

No, never.

They have a way of breaking and/or getting lost, and the replacement becomes very simple. Because, again, in the traditional world, you have to find a manual or have them ship you one and then you have to go through the process of hitting the button, watching the thing blink twice, and then look up the code in a table. And it can take a little bit of time.

And then what happens is Mrs. Smith calls the cable operator to help, and they spend a half hour on the phone with her. With this, the setup information is stored. You hit a button, you go into the menu, you say -- it says would you like to set up the new remote just like your old one was set up. You hit the yes button and out blasts the setup information, the remote is done.

Is there incremental margin for you in this new technology, or just a slightly higher ASP?

Well, given that customers will listen to this, the answer to that is no.

Okay.

We are going to make no margin on this project.

Lose money on every unit. Make it up in volume.

Make it up in volume.

All right, (multiple voices) Thanks.

We make a fair margin on these products.

Thank you.

(Operator Instructions.) Andy Hargreaves from Pacific Crest.

Hi, guys.

Hey, Andy.

Wondering if there is an ongoing component of this lawsuit?

No, it is settled and it is --

So there is no --

And done.

Can you just talk then about costs through the year? What are your expectations? I mean I know we can kind of figure out or you have given us some indication, but what is going into the quarter-to-quarter increase in costs, especially when you back out the lawsuit and --

So you are referring to Q4?

Q4 to Q1, yes.

Well, Q4 had some extraordinary items. One is the lawsuit settlement we talked about, which I can't specify the amount. We also had the integration of Zilog. So when you look at Q1, Q1 '09 will have a full quarter of the Zilog integration, where the prior year it only had a partial quarter, because the acquisition was done on February 18th.

I think if you look -- if you want to look at -- we are not giving specifics for operating expenses for 2010, but I will say this -- we are going to leverage well. And you can see that off of the estimated range for EPS looking at it, it is nearly 15% to 30% off of 2% to 7% topline growth. And I really think that the operating expenses in 2010, they will be relatively flat throughout the year quarter-to-quarter, and not much higher than '08 -- or '09, I'm sorry.

Any other major customers out there that are single sourcing right now, where you think there is risk?

No.

Okay.

Well, major customers, I'm thinking here -- I think almost without exception are dual sourcing. I know the two largest are dual sourcing now, yes.

Okay.

It is more typical for that -- there to be that situation, a dual source with one, in these cases, with one chip provider.

And just so that I'm thinking about it right, I mean it is kind of appropriate then to think that, not that you are taking money out of 2010, but you got a bonus in 2009. If we want to look at a clean comp, we could take that out.

Yes, sure, (multiple voices) that is one way to look at it. I mean, if the purchasing pattern had held with tradition, then you could look at it that way, yes.

And then, Bryan, just really quick, what are the FX assumptions that are embedded into the guidance?

We use -- right now they are actually consistent with prior-year. We are using the euro versus the dollar. It's $1.40. And we use $1.60 versus the British pound.

Okay, thank you.

Ivan Holman from RBC Capital Markets.

Yes, I'm sitting in for Scott. Thanks for taking my call. A lot of my questions have been asked. But looking to the out years, with regard to trends such as 3D television, when do you think something like that could start to ramp? Would there be some kind of impact on your business? Could you quantify or just directionally give us an idea as to when something like that could hit?

Sure. I think can't really quantify it yet, because I don't think there are many out there who have made any solid predictions. But a couple of questions you asked in there. Sure, it could hit this year, and to the extent it does, we would participate.

Because if you look at it this way, when -- the trends in our industry are such that when new technologies come along or new services that -- particularly ones that require a new set of hardware, HD, DVR, the transition from analog to digital and other things, then what happens is the new hardware gets installed, and it has always installed with a new control device.

So, that's certainly a trend. It is not really clear how quick it will ramp. I have seen a lot written on it and heard a lot in the industry talk about it. Some are saying it is the next big thing. Others are saying that there are some consumer issues to overcome, like the fact that you have to pull out glasses in order to watch it.

But -- so -- yes, predictions on it are difficult to come by. To the extent it ships in any volume this year, we can -- we certainly are positioned to benefit from it. And longer term, if it takes off over the next five years, even better for us.

And what kind of margins do you think that type of product would be able to command? Would that be an above average margin? Something below? I know that obviously this is kind of in the out years, but where would you see that falling out, especially if it starts -- if it could potentially ramp towards the end of this year.

And is that something that might offset (multiple voices) -- sorry, that might offset the loss of that customer with regards to the dual sourcing? Is this something that could kick in toward the end of the year?

Certainly it could. To the extent it did, then we would benefit from it. So it could offset it. I will say though that the offset, we did have the dual-source relationship, which we now have returned to with a major customer. But despite that our sales are going to be up and the earnings are going to be up, I think 14% to 28%, or $1.20 to $1.35. We think despite all the things going on underneath the surface, which we've obviously fully explained here, we are going to have a very successful 2010.

And one last question if I could. I'm sorry if I didn't hear this before, because I actually joined a little bit late. I had some technical difficulties. Can you kind of address what the timing of the impact of that loss would be? And especially I see just in 2010, would that be back loaded? Is that something that started to ramp up now? Would that be evenly distributed? Any color on that would be greatly appreciated. Thank you.

Yes, that was incurred in Q4 of 2009.

Okay. Thank you.

Neal Goldman from Goldman Capital Management.

Hi, guys.

Hey, Neal.

One quick question on the stock-based comp. What was the expense this year, and what is your assumption for 2010?

Total stock-based comp for the cash flow, and that includes everybody, Directors, was $4.3 million.

That's what, $2.5 million after tax or --

That sounds about right.

If you were to tax it.

If you were to tax it like that, that sounds about right.

So you are dealing with 20 some odd cents for the past year?

That sounds correct.

And for this year?

It should be about the same.

All right, guys, thank you.

Sure.

(Operator Instructions.) There are no further questions. I would now like to turn the call back over to management for any closing remarks.

Okay, everybody, thank you very much for tuning in. We are looking forward, as I said earlier, to a great 2010. And we will probably be on the road meeting with both new and existing shareholders during the year, so we hope -- we look forward to seeing you. And that's it. Talk to you soon.

This concludes today's conference call. You may now disconnect.