Silicon Image Inc. (SIMG)
Company Conference Call
November 17, 2011 9:30 am ET
Noland Granberry – Chief Financial Officer
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Good morning everyone. Thank you for joining us today on our third and final day of the UBS Technology and Services conference. Today we have with us Mr. Noland Granberry from Silicon Image. Silicon Image provides connectivity solutions for distributing high definition content for consumer electronics, mobile and PCs. And with that, I give you Noland.
Thank you. Good morning everyone. Welcome to UBS’ Global Technology and Services conference and Silicon Image. I’m glad to be here to speak with you.
Almost 10 years ago, Silicon Image along with six other CE companies revolutionized the TV connect—connecting TVs to various source devices through a new standard—introduction of a new standard called a high definition multimedia interface, or HDMI. Today, that standard has over 1,000 adopters. There are over 600 million HDMI devices shipping annually and it has been a very successful standard, and Silicon Image has done quite well. Last year, Silicon Image along with four other mobile and TV CE companies introduced a new standard that allows you to connect your mobile devices to TVs or a larger screen. That standard, the multimedia high definition linked, or MHL standard introduced last year is growing rapidly. Today there are over 65 adopters and that’s growing every day. Over the next 20 minutes, what I’ll do is I’ll actually spend a little time introducing you to Silicon Image as well as share in how we utilize those standards to grow our business and profitability.
So a quick look at the Safe Harbor.
So a little bit about Silicon Image. We’re a leading provider of wireless and wire connectivity solutions, and a couple points to make here – one is that prior year, we couldn’t say anything about being wireless, but we’ve introduced a wireless technology to our technology portfolio and we think that will serve us well in the near future. But more importantly, we’ve broadened our view. Historically we’ve only been about HDMI, but today we’re about connectivity in general. So the highlighted HDMI has been successful for us, we have a mobile standard so we’ve got a mobile connectivity, and with this wireless technology we’ve got a wireless view. We’ve broadened that view and that’s important because it actually has allowed us to broaden our product portfolio.
We’re targeting consumer electronics and mobile to PC markets, all very large markets and particularly when you look at the mobile market, it’s one that grown quite rapidly.
A little bit about Silicon Image – if you look at our revenue trend this year through nine months, we’re at about 162 million and on pace to grow our revenues year-over-year. Last year we ended up at a 191, which included about a 7.5 million revenue royalty catch-up. After that one-time pickup, we were growing our revenues about 20% year-over-year. We have 500 employees worldwide. We do have a contracting group in India which we expect to bring on board here in the near future as a part of the Company, and hence we have three R&D centers – there is Sunnyvale center, Shanghai center, and Hyderabad where we have the India group. We have 176 U.S. issued patents, 109 pending, and we continue to build our patent portfolio. We think this is a key piece to the value of the Company and we continue to look to build on that.
At the highest level, we actually view ourselves as playing in two different businesses – one is the product side of things and predominantly what we do, which is our chip business; and the other then is also our IP business. If you look at our product business we focus on mobile, CE and PC space and we do so with the use of the standards, and we have a standards-plus approach where we essentially drive a standard that we’ve created, aka HDMI and its mobile standard, but we then look to add Silicon Image features and functionality on top of it. That’s important for us as we look at how do we differentiate ourselves in the market, how do we actually fend off integration or other discrete chip manufacturers. That product business generally is about 80 to 85% of our total revenue and the margins there are usually mid-40s or better, and we’ve seen that trend to the higher end of that range in the last several quarters.
Also, we have an IP business and it serves us quite well. It is where we actually license Silicon Image standard core technology. We will provide implementation services to companies who are looking to develop products along those standards lines and additional services and what have you. In addition as a part of the standards body, we act as an agent and we collect adopter fees, and that’s a revenue stream to the Company, as well as royalties for devices that are shipped under the standard. Those royalties are collected and shared with the rest of the consortium members.
At the highest level, our IP revenues are generally 15 to 20% of our revenue, and that may fluctuate depending on the quarter, depending on the specific IP core licensing activity in a particular quarter; but at the end of the day, the margins on the IP side of business is in the high 90s. On a combined basis, we expect to see margins 55% or better, and I’ll show you a slide where we’ve actually demonstrated that over the last eight quarters or so.