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Article by DailyStocks_admin    (01-07-10 03:15 AM)

Filed with the SEC from Dec 24 to Dec 30:

Microtune (TUNE)
Hedge fund Ramius Capital has nominated four individuals for election to Microtune's board. Ramius further disclosed that it has engaged in discussions with representatives of Microtune, which designs and markets radio-frequency integrated circuits and subsystem modules. Ramius said that it expected to continue the discussions in connection with its nominations.
Its nominees are John Buckett; a former executive at Scientific-Atlanta; John Hamm, a general partner at venture-capital firm VSP Capital; Mark Mitchell, the managing director of Ramius; and Raghu Rau, a former Motorola executive.
Ramius owns 3,950,000 Microtune shares (7.5% of the total outstanding).
BUSINESS OVERVIEW

Website Access to Reports and Other Information

We make our Proxy Statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, available free of charge upon request by phone (telephone number: (972) 673-1610), by email to ir@microtune.com, in writing to our Investor Relations department at 2201 10 th Street, Plano, Texas 75074 or through our internet website, www.microtune.com , as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. You may also access these materials at the SEC’s website located at www.sec.gov.

Overview

Microtune, Inc. was incorporated in 1996. We design and market radio frequency (RF) integrated circuits (ICs) and subsystem module solutions for the cable, automotive entertainment electronics and digital television (DTV) markets. Our tuner, amplifier and upconverter products permit the delivery, reception and exchange of broadband video, audio and data using terrestrial (off-air) and/or cable communications systems. Our tuner products shipped into the cable and DTV markets are in the form of ICs while our tuner products shipped into the automotive entertainment electronics market are principally in the form of subsystem modules, but are expected to be increasingly in the form of ICs in the near future. Our amplifier products are principally in the form of both ICs and subsystem modules and our upconverter products are principally in the form of subsystem modules, but also contain our ICs.

Our products enable or target various consumer electronics, broadband communications and automotive entertainment electronics applications or devices, including cable television set-top boxes; DOCSIS ® -based, high-speed voice and data cable modems; car audio, television and antenna amplifier systems; digital/analog television systems, including high-definition televisions (HDTV); personal computer television (PC/TV) multimedia products; and mobile television receivers. We sell our products to original equipment manufacturers (OEMs) and original design manufacturers (ODMs) who sell devices, subsystems and applications to consumers or service providers within the cable, automotive entertainment electronics and DTV markets. We operate Microtune as a single business unit or reportable operating segment serving our target markets. We record our operating expenses by functional area and account type, but we do not record or analyze our operating expenses by market, product type or product. We attempt to analyze our net revenue by market, but in some cases we sell our products to resellers or distributors serving multiple end markets, giving us limited ability to determine market composition of our net revenue from these customers. In addition, certain of our OEM customers purchase products from us for applications in multiple end-markets, also limiting our ability to determine our net revenue contribution from each market.

The cable, automotive entertainment electronics and DTV markets are intensely competitive and historically have seen rapid changes in demand. Certain applications, such as PC/TV, within our target markets can be characterized as having short product life cycles due to rapid technological changes, relatively simple application designs and aggressive competitive pricing. These factors can result in rapidly decreasing average selling prices, which we attempt to mitigate with our product cost reduction efforts and higher levels of integration and functionality. The volatility of demand within our target markets makes it difficult for us to identify and discuss business trends or to predict future results.

Today, our products are marketed principally to OEMs and ODMs in the following markets:




Cable

Products targeting this market send and/or receive cable broadband signals. These products include tuners used in consumer premise equipment (CPE), including high-speed voice and data cable modems, digital cable set-top boxes and hybrid analog/digital cable set-top boxes; upconverter modules and

chipsets used in headend modulators; and RF amplifiers used to send and receive signals between the cable headend and CPE. In some cases, the same tuners may be used to receive digital terrestrial signals. In this market, performance, the ability to support industry standards and overall solution cost are key factors in competing for design wins. Design cycles in the cable market can range from a few months to more than one year.




Automotive Entertainment Electronics

This market includes products targeting mobile automotive and, to a lesser extent, commercial aircraft environments. Our automotive entertainment electronics products range from components for traditional AM/FM radios (including tuners and antenna amplifiers) to components for emerging entertainment applications, including in-car television; in-flight video; digital radio, such as digital audio broadcast (DAB); and HD radio™. Both performance and overall solution cost are key competitive factors in this market. Design cycles in the automotive entertainment electronics market are generally very long, in some cases, two to three years.




Digital Television

Products targeting this market receive digital terrestrial signals or digital and analog terrestrial signals. These products are designed for use in consumer electronics devices such as mobile televisions; integrated digital television (iDTV) sets; digital terrestrial set-top converter boxes; satellite and IP set-top boxes that include one or more terrestrial tuners used to receive local high-definition television broadcasts; portable DVD players; digital video recorders (DVRs); DVD recorders; and PC/TV multimedia products, including both USB and PCI or PCI Express OEM and add-on devices. One specific DTV opportunity is the coupon eligible converter box (CECB) opportunity. This market segment relates to the shut-off of full power analog terrestrial broadcast signals in the United States, and the need for a digital to analog converter box to allow analog televisions to receive digital signals. This market segment is non-recurring and is expected to be active through the first half of 2009. Products targeting these applications require both high performance and competitive overall solution cost. The design cycles for PC/TV are relatively shorter and require very low overall solution cost and low power consumption. Design cycles in the DTV market can range from a few months to more than one year for peripheral devices and from a few months to several months for PC/TV applications.

Business Strategy

Our goal is to be the leading supplier of RF tuner technology in our target markets. Key elements of our strategy include:




Focusing on RF tuner technology and products where we believe our experience, expertise and patent portfolio provide strategic and competitive advantages;




Leveraging our RF systems and support expertise to help our customers design superior performing and cost effective applications and devices;




Leveraging our core technologies and experience in real-world terrestrial environments to provide silicon solutions for evolving markets, including the automotive entertainment electronics and DTV markets;




Protecting or increasing our opportunities through expanded relationships with existing or new key partners;




Continuing to grow revenues and profits in the cable market through innovative product introductions and market share increases;




Combining our RF IC and automotive systems expertise and established products to expand our presence in the automotive entertainment electronics market as this market transitions from modules to more highly-integrated RF IC solutions;




Investing in new products to target the significant long-term opportunities in the DTV market;





Investing in new products to achieve a higher level of integration of the digital functions necessary for applications in our target markets; and




Investing in new technologies to remain competitive in all our target markets to produce more cost-efficient, low power consumption and more highly-integrated products that leverage next-generation technology.

Organization

To implement our strategy effectively, our systems engineering and marketing teams are organized into two specialties: automotive entertainment electronics and broadband communications electronics, which includes the cable and DTV markets. Our IC design, product and test engineering, mechanical design, quality, marketing communications, investor relations, sales, finance and accounting, information technology, legal, operations and human resources teams are generally centralized to achieve operational efficiencies.

Markets

The worldwide reliance on the internet; the transition from analog to digital transmission standards for both cable and terrestrial television; the greater use of broadband, mobile and wireless communications; and the growing interrelation of televisions, personal computers, cable communications and the internet, coupled with an end-user desire for mobility, have fostered dramatic changes in business and consumer electronics, broadband communications and automotive entertainment electronics. These drivers have propelled the development of new classes of products and new forms of entertainment and information, based on innovative technologies that deliver better, faster and improved communications.




Cable

According to an In-Stat study, total worldwide cable subscribers are projected to exceed 550 million within the next three years. During the last several years, the worldwide cable industry has evolved from a supplier of analog video programming to a competitive provider of digital voice, data and video services, including ultra high speed telecommunications services, supporting high definition (HD) formats and DVR functionality. In-Stat predicts that over 250 million households will be subscribing to digital video services by 2012.

In order to support these new services, cable service providers continue to invest in new technology and infrastructure, to upgrade their networks to 1 GHz to deliver more channels to consumers; digital and HDTV programming; high-speed data communications; home networking; and two-way interactive services, including digital telecommunications and on-demand services. As a part of this upgrade, cable service providers continue to deploy new classes of digital consumer equipment that allow users to access a range of enhanced services such as:







DOCSIS ® 2.0 Modems: Cable modems and Embedded Multimedia Terminal Adapters (EMTAs) which can be stand-alone devices or integrated into set-top boxes. DOCSIS ® 2.0 cable modems enable high-speed internet service via two-way cable, while EMTAs enable Voice over Internet Protocol (VoIP) for digital phone service;







DOCSIS ® 3.0 Modems and IPTV Set-top Boxes: Cable operators in Japan, Korea, the United Kingdom, the Netherlands, Brazil, the U.S. and Canada have launched new channel-bonded DOCSIS ® 3.0 services. As part of the new modems and IPTV set-top box solutions required for these new services, we provide the industry’s only wideband RF tuner, which was in every CableLabs ® DOCSIS ® 3.0 certified product in 2008.




CATV Set-top Boxes: Digital interactive set-top boxes, which serve as the home access point for a number of video services, including HD and standard-definition (SD) digital channels, analog channels and new applications such as digital video recording and video-on-demand services. In some deployments, the digital interactive set-top box is evolving into a “home gateway,” a multifunctional box designed to serve as the distribution “hub” for home networked video, voice and/or data services.



The cable industry’s adoption of industry standards, such as CableLabs ® standards for DOCSIS ® (cable modems) and PacketCable™ EMTAs, as well as support for complementary standards, such as tru2way™ to enable digital set-top box functionality in television sets, has served as an additional catalyst to fuel the deployment of enhanced broadband services. These standards are designed to ensure interoperability between different manufacturers’ customer premise equipment and cable infrastructure (headend) equipment products. They have stimulated a number of vendors to develop cost-effective, non-proprietary products that can operate efficiently and harmoniously in cable environments. New versions of the DOCSIS standard, DOCSIS ® 3.0 and Euro DOCSIS ® 3.0, are designed to achieve data communications speeds of 160 Mbps downstream and 120 Mbps upstream, or higher, via the cable network. Earlier versions of the standards only supported 30 to 40 Mbps in each direction. DOCSIS 3.0 cable modems require multiple and/or specialized cable tuners as well as a new generation of high performance upstream amplifiers. This new standard enables cable operators to offer a more competitive, new class of ultra high speed telecommunications and business services.

We provide tuners and amplifiers for cable modems, EMTAs and set-top boxes, which support the two-way transmission of data to and from the consumer and the cable operator’s headend. Multiple tuners are increasingly implemented in cable set-top boxes to support simultaneous viewing of one channel while recording a second channel using a DVR, on-demand services and internet access.

Historically, we have seen the demand for our products in the cable market follow a seasonal pattern, with the highest demand occurring during our fiscal second quarter and the lowest demand occurring during our fiscal fourth quarter resulting in a sequential decrease in net revenue from our fiscal third quarter. This seasonal pattern has also influenced our total net revenue since our net revenue from the cable market has historically represented the majority of our total net revenue.




Automotive Entertainment Electronics

Technology convergence and integration is beginning to impact the automotive and airline industries. In the automotive entertainment electronics market, for example, low-cost communications, navigation, information and entertainment technologies are combining with traditional in-car display and audio systems to create new applications and potential new markets for in-car systems. Driven by consumer demand, new applications are rapidly evolving beyond the conventional car audio system to include digital sound systems, digital radio, such as DAB and HD radio TM , and a suite of applications that allow passengers to watch digital television and video and play interactive games. These newer applications are expected to gain greater consumer acceptance during the next decade, driving continued market opportunity for providers of these products and services and for suppliers of the underlying technology.

Currently, the majority of our products sold into the automotive entertainment electronics market are utilized in car televisions and AM/FM radios, primarily for European end markets. Demand for car television and newer digital radio is expected to grow rapidly as automakers offer a range of systems in more vehicles, moving from luxury cars into mid-priced models.

Data delivered via RF communications is integral to these emerging automotive entertainment electronics applications, and we provide enabling technology, including AM/FM tuners, digital radio front-ends, antenna amplifiers and in-car television tuners, which are incorporated into automotive entertainment electronics subsystems to support these applications. Currently, we are supplying module-based tuner products for radio applications, both silicon and module-based tuner products for in-car television applications, and both silicon and module amplifiers for antenna amplifier applications. We are also currently developing silicon products for radio applications, although we expect the transition to silicon products within this market to take several years, primarily due to very long design cycles.



Digital Television

The worldwide transition to digital technologies represents a massive technology transformation. According to In-Stat, annual global DTV unit shipments are expected to grow from 119 million units in 2008 to over 166 million units by 2012. As originally conceived, the idea of digital television was to deploy improved bandwidth efficiency techniques to provide either a picture with much greater detail (e.g. HDTV) than that provided by an analog channel, or to provide multiple digital video streams within the bandwidth of an existing analog channel. Any digital data, from digital video and audio to packetized internet data, can be broadcast using digital transmission.

The definition of terrestrial ‘digital television’ is determined by standards adopted by various countries. For fixed terrestrial reception, the Advanced Television Systems Committee (ATSC) standard is deployed primarily in North America and the Digital Video Broadcast—Terrestrial (DVB-T) standard is implemented in Europe and other parts of the world. Japan and Brazil have adopted the Integrated Services Digital Broadcast—Terrestrial (ISDB-T) standard for digital terrestrial broadcast. China has recently taken steps to unify its domestic digital television schemes under the GB20600-2006 standard, also known as Digital Terrestrial Multimedia Broadcast (DTMB). In some cases, these same standards may also be suitable for and/or provide modes for mobile terrestrial reception, although there may also be separate standards for mobile reception (e.g. DVB-H in Europe, CMMB in China).

We provide tuners and amplifiers used for the RF tuning and reception of signals for DTV products. Historically, DTV customers have relied on subsystem module tuners for the RF front-end, either produced internally by the customer or purchased from a third-party for the RF front-end. We expect DTV manufacturers will transition to next-generation silicon tuner technology in the future and expect the transition from subsystem module tuners to silicon tuners will take several years.

Products

The applications or devices associated with the cable, automotive entertainment electronics and DTV markets require high levels of RF performance, power efficiency, functionality and integration, which must all be delivered with a low overall solution cost. Our products are engineered to address the complex, high-performance RF requirements of broadband transmission and reception.

We classify our products into two types: integrated circuit products or ICs (also referred to as “silicon”) and subsystem-level RF solutions (called “modules”).




Integrated Circuit Products

We offer a product portfolio that includes:

MicroTuner Single-Chip Broadband Tuners

Our premier products are our single-chip MicroTuner IC tuners. In 1999, we introduced the world’s first broadband television tuners with all active components implemented in a single microcircuit. We believe our MicroTuner chips are among the few single chip IC television tuners in high volume production today that incorporate all of the active elements of a RF broadband tuner, including low-noise and intermediate frequency amplifiers. Our MicroTuner chips are based on both a patented architecture and multiple patented integrated circuit implementations.

Silicon Amplifiers

We offer a family of amplifiers, including upstream amplifiers, Intermediate Frequency (IF) amplifiers and broadband antenna amplifiers, which can be used as companion products to our single-chip tuners, or used separately. These products enable or support a variety of specialized functions, including high-speed upstream cable communications and the distribution of a broadband signal across multiple tuners. Our silicon amplifiers support these functions by conditioning signals within the RF front-end and boosting them for distribution through a system. The amplifiers also enable two-way communications capability in cable access applications and provide downstream amplification in automotive radio and in-car television applications.




Subsystem-Level RF Solutions

Our subsystem-level products, called modules, are RF solutions consisting of tuner and/or transmit/receive functions that are pre-assembled into tested, production-ready RF front-ends. Our subsystem solutions are available for multiple applications, including analog and digital car radio, analog and digital in-car television, in-flight entertainment, automotive antenna amplifiers and cable system headend upconverters.

Some of our subsystem-level products contain our own IC components, which we believe provides a competitive advantage through high levels of functional integration. Our modules are pre-configured and pre-tested for ready placement on motherboards, printed circuit boards or chassis.

See Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for discussion of net revenue by product type.

Technology, Intellectual Property and Research and Development

We were founded in 1996 on a commitment to RF IC innovation. We have an established track record of introducing advanced products, based on our pioneering RF IC technology, that address emerging markets and serve customers in existing markets.

As of December 31, 2008, we had 129 technical personnel. Our technical team represents one of our most important strategic and competitive assets. Our team, comprised of RF, analog and digital IC, systems, and product and test engineers and technicians, enables us to produce differentiated RF IC and subsystem module solutions for applications in our targeted markets. Team members are located in our design centers in Plano, Texas; Plantation, Florida; Boulder, Colorado and Ingolstadt, Germany.

We believe we have a strong intellectual property portfolio, which is of vital importance to our business as many of our competitors are larger, more diversified companies with substantially greater financial resources. Our ability to protect our proprietary innovations from exploitation by our competitors is crucial to our future success. We have in the past and will continue to vigorously pursue and maintain protection for the proprietary technology used in our products. Currently, we hold 83 issued United States utility patents and have more than 25 additional United States patent applications pending. Our issued United States patents begin to expire in 2015. Our patents generally cover various aspects of our RF and analog technologies at the broad architectural, circuit and building-block levels.

See Part IV, Item 15., “Exhibits, Financial Statement Schedules” for our patent license agreement with Broadcom Corporation.

Our research and development expenses were $25.9 million, $23.7 million and $21.4 million for 2008, 2007 and 2006, respectively. Of these amounts, stock-based compensation expense comprised $1.9 million, $2.4 million and $2.6 million, respectively. We internally sponsor all of our research and development activities. See Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of research and development expenses.

Sales and Marketing

As of December 31, 2008, our worldwide sales organization consisted of over 30 employees with offices located throughout the United States: Plano, Texas; Huntsville, Alabama; Duluth, Georgia; Naperville, Illinois; Campbell, California; Irvine, California and Raleigh, North Carolina, and in regional centers around the world:


Ingolstadt, Germany; Taipei, Taiwan; Tokyo, Japan; Seoul, South Korea, Shenzhen, China and Basingstoke, United Kingdom. Our sales organization consists of technical sales, service and customer support professionals and includes a field application engineering staff that is involved with customers during various phases of design and production. The field applications engineering function, located throughout our worldwide sales offices, is a critical element in achieving customer design wins. We also provide customers with application engineering support from our systems engineering personnel based in Plano and Ingolstadt.

We centralize and manage sales for all of our products across each of our target markets under one worldwide sales organization. We primarily sell our products directly to our customers and to a lesser extent via a network of distributors and independent sales representatives located around the world.

Historically, revenues from international markets have represented the majority of our total revenues. See Item 1A., “Risk Factors” for a description of this risk and other risks. See Note 11, “Geographic Information and Significant Customers” to the Notes to Consolidated Financial Statements for a discussion of financial information by geographic area.

Backlog

Our sales are made primarily pursuant to standard purchase orders for delivery of products. Industry fluctuations in the supply and demand balance for component parts result in frequent and potentially significant changes in the lead times provided by our customers when placing purchase orders. Although our backlog at the beginning of a quarter represents a significant portion of the net revenue we anticipate for that quarter, we do not believe that backlog is a reliable indicator of future revenue levels.

Customers

We market and sell our ICs and subsystem module solutions directly to OEMs, ODMs and their suppliers who sell devices or applications to consumers, other OEMs or service providers (cable) within the cable, DTV and automotive entertainment electronics markets. The devices or applications that our customers produce include cable television set-top boxes; DOCSIS ® -based, high-speed voice and data cable modems; car audio, television and antenna amplifier systems; digital/analog television systems, including HDTV; PC/TV multimedia products; and mobile television receivers. We also market and sell to third-party manufacturers and to distributors who sell directly to OEMs and ODMs. We engage with customers at multiple levels within their organizations, provide design and systems services and applications engineering support, and align our product roadmaps to meet their product requirements.

We supplied our ICs and module products to more than 50 customers or their contract manufacturers worldwide during 2008, including the following:

Cable: Advanced Digital Broadcast, ARRIS, Cisco, Hitron, Humax, Motorola, Pace, Panasonic and Samsung.

Automotive Entertainment Electronics: Delphi Delco Electronics (formerly Fuba), Harman Becker Automotive Systems, Hirschmann Car Communications, Lear, Magnetti Marelli, Panasonic, Pilkington, Rockwell Collins and Thales.

Digital Television: AccessHD, AMD, Apex Digital, Echostar, Hauppauge, Lasonic, Pace, Sansonic, TiVo, Toshiba and Zinwell.

See Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of net revenue from significant customers and Item 1A., “Risk Factors” for a description of risks associated with our significant customers.

CEO BACKGROUND

Restricted Stock
Unit Awards (1)(2)
James A. Fontaine Chief Executive Officer and President $ 350,000 80,000
Jeffrey A. Kupp Chief Financial Officer $ 256,025 30,000
Albert H. Taddiken Chief Operating Officer $ 256,025 48,000
Robert S. Kirk Vice President of Worldwide Sales $ 166,002 28,000
Barry F. Koch Vice President and Managing Director,
Microtune GmbH & Co. KG € 147,624 (3) 24,000
Phillip D. Peterson General Counsel $ 210,000 16,000

MANAGEMENT DISCUSSION FROM LATEST 10K
NOTE: For a more complete understanding of our financial condition and results of operations, and the risks that could affect our future results, see “Risk Factors” in Part I, Item 1A., which describes some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this report and in our other filings with the SEC, before deciding to make an investment in our stock. You should also read “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A.

You should also read the following discussion and analysis in conjunction with “Financial Statements and Supplementary Data” in Item 8.

OVERVIEW

We design and market radio frequency (RF) integrated circuits (ICs) and subsystem module solutions for the cable, automotive entertainment electronics and DTV markets. We operate Microtune as a single business unit or reportable operating segment serving our target markets. We record our operating expenses by functional area and account type, but we do not record or analyze our operating expenses by market, product type or product. We attempt to analyze our net revenue by market, but in some cases we sell our products to resellers or distributors serving multiple end markets, giving us limited ability to determine market composition of our net revenue from these customers. In addition, certain of our OEM customers purchase products from us for applications in multiple end-markets, also limiting our ability to determine our net revenue contribution from each market.

We monitor and analyze a number of key financial performance indicators in order to manage our business and evaluate our financial and operating performance. Those indicators include:







Net Revenue : Our net revenue is generated principally by sales of our integrated circuits and subsystem module products directly to OEMs and ODMs who sell devices or applications to consumers or service providers within the cable, automotive entertainment electronics and DTV markets. The devices or applications that our customers produce include cable television set-top boxes; DOCSIS ® -based, high-speed voice and data cable modems; car audio, television and antenna amplifier systems; digital/analog television systems, including HDTVs; PC/TV multimedia products; and mobile television receivers. We also market and sell to third-party manufacturers and to distributors who sell directly to the OEMs and ODMs. The majority of our net revenue is generated through the efforts of our sales organization. However, we generated approximately 14%, 10% and 18% of our net revenue from sales made to distributors in 2008, 2007 and 2006, respectively. The increase in net revenue from sales made to distributors in 2008 was due to increased shipments of silicon tuner products for the CECB market segment. See Part I, Item 1A., “Risk Factors” for a description of the risks associated with the CECB market. Our net revenue varies based upon economic and market conditions in the semiconductor industry and our target markets; the timing, rescheduling or cancellation of customer orders; our ability, as well as the ability of our customers, to manage inventory; seasonality in the demand for consumer products into which our products are incorporated; and large orders placed by our key customers. These factors may cause our quarterly and yearly net revenue to fluctuate significantly, which makes it difficult for us to discuss revenue trends or to predict future results. We expect these fluctuations will continue in the future. We analyze trends in total net revenue and we attempt to analyze total net revenue trends by market, which is limited due to our lack of visibility into customers and/or applications, as described above. We also analyze revenue from key customers, focusing on our ten-percent customers, and aggregate net revenue from our top ten customers.




Cost of Revenue and Gross Margin : Cost of revenue includes the cost of subcontracted materials and wafer fabrication, IC assembly, final test, factory labor and overhead, shipping of materials, shipping costs to customers, customs expenses, warranty costs, production employee expenses and inventory charges or benefits relating to excess or obsolete inventory. We also report expenses for the depreciation of our test and handling equipment and logistics in cost of revenue. Significant items impacting cost of revenue include our product mix and volumes of product sales; the position of our products in their respective life cycles; the effects of competitive pricing programs; manufacturing costs; fluctuations in direct product costs such as wafer pricing and assembly, packaging and testing costs, and overhead costs; and provisions for excess or obsolete inventory. Stock-based compensation expense recorded in cost of revenue under SFAS No. 123(R) was insignificant, and is expected to continue to be insignificant as we use third-party contract manufacturers to produce the majority of our products enabling us to employ a limited number of production employees. Our cost of revenue may increase due to price fluctuations and cyclical demand and we may not be able to pass this increase on to our customers, which makes it difficult for us to determine if cost of revenue and gross margin trends will continue or to predict future results. We analyze absolute gross margin dollars and gross margin percentage. We also analyze the key drivers of gross margin, namely typical selling price trends and the components of cost of revenue. In 2009, we expect the average selling prices of our products to slightly decrease. More significant decreases, should they occur, could have a material adverse effect on our gross margins, results of operations and financial condition.




Operating Expenses : Operating expenses are substantially driven by personnel-related expenses, including cash and stock-based compensation expense, lab supplies, training and prototype materials, professional fees and insurance expenses. We record stock-based compensation expense in operating expenses in accordance with SFAS No. 123(R), which has resulted in a material charge each period as the majority of our employees are classified in this category. We analyze trends in the absolute dollar value and percentage of net revenue for research and development and selling, general and administrative expenses. We also analyze the underlying expense inputs of significant operating expenses.




Other Income and Expense : We analyze the individual components of other income and expense. We also analyze interest income and the rate of return earned on our cash and cash equivalents and short-term investments.




Liquidity and Cash Flows : Our cash flows are primarily driven by our cash operating results and sales and purchases of investments. The primary source of our liquidity is our cash and cash equivalents and short-term investments. From period to period, we experience fluctuations in various items, including our working capital accounts, capital expenditures and proceeds from the exercise of employee stock options and shares purchased under our employee stock purchase program.




Balance Sheet : We view cash and cash equivalents, short-term investments, accounts receivable, days sales outstanding, inventory, inventory turns, and working capital as important indicators of our financial health.

The increase in net revenue in 2008 as compared to 2007 was primarily the result of increased shipments of silicon tuner products for the cable market, particularly for set-top box applications, module products for the automotive entertainment electronics market, particularly for car radio applications, and silicon tuner products for the DTV market, primarily relating to the CECB market segment, partially offset by slightly lower average selling prices of silicon tuner products for the cable market. Net revenue from the CECB market segment was $7.6 million for 2008. Silicon tuner unit shipments increased approximately 22% in 2008 from 2007, primarily relating to the cable market and the CECB market segment. Module unit shipments for the automotive entertainment electronics market increased approximately 26% in 2008 from 2007, primarily relating to car radio applications.

The increase in net revenue in 2007 as compared to 2006 was primarily the result of increased shipments of silicon tuner products for the cable market, partially offset by decreased shipments of silicon tuner products for the DTV market, particularly for PC/TV and mobile television, and decreased shipments of silicon amplifier products for the cable market. An increase in shipments of module products for the automotive entertainment electronics market also contributed to the increase in net revenue in 2007. Silicon tuner unit shipments increased approximately 55% in 2007 from 2006, primarily in the cable market. Silicon amplifier unit shipments decreased approximately 57% in 2007 from 2006, primarily in the cable market, due to the integration of its functionality into one of our partner’s demodulator products and also certain of our next-generation silicon tuner products. Module unit shipments increased approximately 17% in 2007 from 2006, primarily in the automotive entertainment electronics market.

We expect net revenues to decline significantly in 2009 as compared to 2008, primarily due to the impact of the economic slowdown, and to a lesser extent, the expected decrease in revenue from the short-term CECB market segment opportunity.

Gross margin increased in 2008 as compared to 2007 primarily due to an approximate $16.9 million increase in net revenue, partially offset by a 1.6 point decrease in gross margin percentage. Gross margin percentage in 2008 as compared to 2007 was negatively impacted by slightly lower average selling prices of silicon tuner products for the cable market, an increase in net revenue for the automotive entertainment electronics market as a percentage of total net revenue, which had a lower gross margin percentage as compared to other markets, and lower than expected yields on initial product runs of a new cable silicon tuner during the first quarter of 2008.

Gross margin increased during 2007 as compared to 2006 primarily due to an approximate $21.9 million increase in net revenue and to a lesser extent a 1.1 point increase in gross margin percentage. Gross margin percentage in 2007 as compared to 2006 was positively impacted by an increase in net revenue from the cable market as a percentage of total net revenue, which generally had a higher gross margin percentage as compared to other markets, and to a lesser extent, a change in the product mix of our silicon tuner products for the cable market and our module products for the automotive entertainment electronics market. Gross margin percentage in 2007 as compared to 2006 was negatively impacted by a change in the product mix of our silicon amplifier products for the cable market and silicon tuner products for the DTV market.

We expect our gross margin percentage in 2009 to be similar to 2008 and fall within our target range of 49% to 50%.

Our cost of revenue for 2008, 2007 and 2006 benefited from the sale of inventory which had previously been identified as excess to expected demand and expensed in prior periods. The total value of these inventories for 2008, 2007 and 2006 was $0.4 million, $0.8 million and $1.1 million, respectively. The net impact of changes in the inventory valuation allowance was insignificant in 2008 and a charge to cost of revenue of $0.4 million for 2007 and 2006, respectively.

CONF CALL

Jeff Kupp
Thank you, good afternoon everyone and thank you for joining us today. I am joined on this call by Jim Fontaine, President and Chief Executive Officer and Barry Koch, Executive Vice President.
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Earlier this afternoon Microtune issued a press release announcing our financial results for the quarter and nine months ended September 30, 2009. This press release was also filed on Form 8-K with the SEC and has been posted to Microtune’s website at www.microtune.com.

During this call we will discuss certain non-GAAP measures. Please refer to our press release for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures in accordance with SEC Regulation G.
During this call we may make forward-looking statements. Please refer to the cautionary forward-looking statements language included in our press release and SEC filings. Also please read our Form 10-K, Forms 10-Q and other reports filed with the SEC for a discussion of the risks and uncertainties facing our business.
Now I will review our third quarter results after which Jim will provide a market and strategic update.
Third quarter 2009 revenue was $18 million which included about $400,000 of Auvitek product revenue. Our net revenue level compared favorably to our stand-alone revenue guidance range of $16 to $17 million primarily driven by stronger than expected demand for cable modem, cable set top box products and to a lesser extent slightly higher than expected demand for car radio products.
On a sequential basis revenue was up by about $400,000 or 2% if revenue from Auvitek products is included and revenue was essentially flat with Auvitek revenue removed from the comparison.
From a market end market segment perspective cable revenue was up about 1% with cable modem revenue up about 4% and set top box revenue down about 1%.
Within the cable modem segment we saw strong demand for our DOCSIS 3.0 products with our revenue up over 35% sequentially, although demand for DOCSIS 2.0 products was down about 8%.
Within the cable set top box segment we saw a 41% sequential increase in international set top box business and a 33% decrease in our North America set top box business. We expect the North America set top box business to recover to Q2 levels in the fourth quarter.
Automotive revenue is down about 4% with revenue from antenna amplifiers and specialized avionics products being up and revenue from car TV and car radio both being down slightly.
DTV revenue was up about $400,000 or 83%. Almost all of the increase coming from Auvitek demodulator products, but with some modest gains in tuner sales in the DVB-T and Brazilian IS DB-T markets.
Compared to the prior year third quarter and year-to-date revenue levels were down significantly due primarily to the economic environment and the significant non-recurring revenue in the second half of 2008 from coupon eligible converter boxes. Comparing the third quarter of 2009 to the prior year revenue declined by approximately 44% with decreases of 57% in automotive, 22% in cable and 86% in DTV. Excluding the $5.7 million in converter box revenue in the third quarter of 2008 third quarter 2009 revenue was down about 31%.
Consistent with the guidance we provided in July we expect fourth quarter 2009 revenue to increase from the third quarter; specifically we expect revenue to fall between $19 and $20 million.
Third quarter 2009 gross margin was 53%, up about 5 points from the second quarter and well above our target range of 49% to 50%. There were several factors driving the higher than expected gross margin percentage including that we had no new net excess inventory reserves, we actually had a small benefit from the release of existing reserves, and we also benefited from the value added tax refunds relating to certain prior periods. Year-to-date through September 30th our gross margin was 49.4%. For the full year of 2009 we expect gross margins to be around 50%.
In the third quarter of 2009 non-GAAP operating expenses, which are comprised of non-GAAP R&D and non-GAAP SG&A expenses were $12.6 million and included two full months of Auvitek operations. The $12.6 million represents a sequential increase of $1.5 million virtually all of which is explained by the acquired Auvitek operations and transaction expenses. For the full year of 2009 on a non-GAAP basis we expect R&D expenses to increase between 7% and 10% and SG&A expenses to increase between 4% and 6%.
For the full year of 2010 also on a non-GAAP basis R&D expenses are expected to increase between 3% and 8% and SG&A expenses are expected to decrease between 15% and 20%.
The guidance numbers we are providing already contemplate the cost impact of the restructuring activities that we announced last week. We expect that the majority of the cost reduction efforts will be implemented before the end of the year and will result in a restructuring charge of approximately $1.3 to $1.5 million. Once fully implemented we expect the cost reduction efforts will decrease our spending by about $7 million or more on an annual basis.
Compared to our GAAP numbers the non-GAAP numbers exclude 123-R stock based compensation, certain legal and professional fees associated with the litigation between the SEC and certain former officers, and now moving forward the amortization of intangible assets relating to the Auvitek acquisition.
In terms of the acquisition accounting total consideration paid was about $9.1 million. The $9.1 million will hit our books as follows: $0.7 million of net identified assets and liabilities which includes normal course of business items like fixed assets and inventory; $1.3 million for intangible assets for developed technology; $1.6 million for intangible assets for in process research and development; and $5.5 million for goodwill. We have begun to amortize the developed technology and tangible asset of which about $55,000 will hit our cost of goods sold on a quarterly basis. The in process R&D intangible is not yet being amortized and will not be amortized until the related technology achieves technological feasibility.
We continue to be pleased with the strength of our balance sheet. Of the $115 million in assets $80.7 million is represented by cash and short-term investments. Our cash and investments balance decreased by $9.2 million compared to last quarter driven by the $7 million in cash consideration paid in the Auvitek acquisition. In addition, our accounts receivable balance was up slightly although we still maintained a very attractive DSO metric of 41 days and our inventory balance decreased slightly resulting in a turns metric of a very healthy 6.1.
That concludes my prepared remarks, so I will turn the call over to Jim. As always thanks for your support.
Jim Fontaine
Thank you, Jeff. Today I will provide a progress update on our efforts to transform Microtune from a tuner only company to a more broad based receiver solutions company. First however, I will add a little more color to Jeff’s comments on the state of our business.
We are pleased to report that the revenue at $18 million exceeded the top line range of our guidance. Given the continued weakness in the economy we view this as a solid achievement. We also achieved a respectable gross margin at 53%, well above our guidance range. As Jeff mentioned, we recently initiated a plan to reduce our operating expenses with a target to achieve break even revenue of approximately $22.5 million per quarter, essentially reducing our total OpEx to a pre-Auvitek acquisition levels while making no R&D headcount reductions with our newly acquired Shanghai engineering team, which is focused on the development of digital demodulators and micro receivers.
Our expense reduction plan is being implemented with the goal of returning to profitability by mid-2010, at the same time refocusing our R&D development and product marketing resources to align more effectively with the new market opportunities, in particular the expanded opportunities in digital television. Based on our customers outlook we now believe that we have passed through the bottom of the revenue trough and are on an upward revenue trajectory. We are guiding between $19 and $20 million in revenue for Q4 and as our break even commentary implies we see revenue growth continuing as we enter 2010.
In our last call I discussed at length our well-defined strategy, strategic direction, and vision for the Company. I explained how our acquisition of Auvitek coupled with our new generation of products under development will prepare us for the future. Microtune’s mission simply stated is to be a dominant supplier of receivers in the cable, digital television, and car radio markets.
Let me give you an update on our acquisition of Auvitek which occurred in July. History tells us that the results of any acquisition are mixed at best no matter who the acquirer is. So, the No. 1 priority of any acquisition has to be an efficient and effective integration of the acquired party into the Company in order to make the ultimate outcome financially successful. We believe that we are making good progress in the integration of the Auvitek team ad products. We have executed well on our initial integration efforts and are on track to meet our integration milestones. We have completed the integration of our sales, accounting, and manufacturing teams, we are now operating with a combined infrastructure and have taken advantage of the synergies associated with our merged strengths.
We have developed and are actively promoting a tuner and demodulator combination, particularly in the China market where we were able to quote attractive and highly competitive pricing and this Fall we will have the first of our tuner demod reference designs that will make it easy for customers to adopt our technology for complete RF digital front ends. We have reorganized our engineering and cooperatives and are putting in place new communication initiatives to better promote a cooperative, multi-national engineering developments which we believe will result in faster delivery of products to the market. Our most important and I think our most exciting accomplishment in this phase of our Auvitek integration is that we have defined a unified product road map and have begun the engineering process to make the combined road map a reality. Our road map is now able to leverage the technologies, the intellectual property and talent of our tuner and demod teams and we are engaged in the design of the next generation highly integrated receiver solutions which we expect to expand our market opportunity in the digital television.
We are already beginning to see synergistic benefits from the acquisition, particularly in China, which for us represents a new high volume market opportunity. The greater reach of our combined sales force and Microtune’s credibility and established silicon fire is starting to generate new opportunities. The roll out of China’s home ground digital terrestrial TV broadcast system continues to be supported and driven by various government bodies across all provinces in China. We are making good progress in securing a number of nascent design wins in China in a variety of DTV applications.
The China standard previously referred to as DTMD and now more commonly referred to as CTTB or China Terrestrial TV broadcast represents a most complex and technically advanced digital terrestrial system in use today. With other new and equally complex standards such as the next generation European terrestrial DTV broadcast standard DVDT 2 the value captured by the receiver in the overall system naturally increases. Microtune has positioned itself to take maximum advantage of these changes in the market.
I am also proud to report that our demodulator product has been validated by state owned Chinese TV broadcasters in extensive field trials across multiple cities and provinces in China. In each case our demod was able to deliver not only superior lab test results, but also excellent real world demodulator performance. Validation is a significant achievement, particularly given the rigorous and complex Chinese digital TV standard.
The acquisition of Auvitek was one of the first steps in our transition to become a buyer of highly integrated receiver products and our expanded move into digital television. This transition process was reinforced this week with the announcement of our micro receiver platform. I referenced this platform briefly in our last conference call and described it as technology foundation for a suite of upcoming products. Let me give you an update on our new micro receiver technology in these products.
First of all, what is a micro receiver? A micro receiver is a new technology platform for a highly integrated front-end receiver. It is a complete analogue and digital demodulation system in a single chip. We base the micro receiver system on a proprietary new architecture that erases the boundaries between the tuner and the demodulator and fuses their functions together in a single device.
The first product based on the micro receiver platform was a new part for digital TV. We are currently engaged with customers, have sampled the part to them, and expect to formally introduce this part in December. The strong road map for our micro receiver products is receiving good responses from major TV manufacturers and consumer suppliers as we begin to emphasize Microtune’s commitment to the DTV market.
Based on feedback from our leading customers we are also beginning to see major transitions in our three target markets that will occur over the next three to five years. These changes will affect the architectural evolution of our products: for example, some of these market transitions include cable migration to connected interacted multi-media entertainment hubs; digital television manufacturers are migrating to single electronics panels for all TV models and price points; and car entertainment is driving to new world standard multi-media receivers with a common hardware platform that will reduce complexity and costs.
Speaking of car entertainment we are also tracking on a new silicone car radio device. This product is also based on a new architecture and is already being sampled to select customers. It has generated significant interest from worldwide auto manufacturers.
Our investment in new R&D is designed to leap frog the current state of the art in technology and lead the market transitions. We believe this will translate into very advanced, competitive products with future growth.
I think it is important to point out that our customers are not only looking for advanced technology, they are looking for competitive solutions with features that aligns to their own evolving needs. We feel that our proactive engagement with our customers about their product requirements, backed by our dedicated applications in engineering support is truly a significant differentiator. As an example of the effectiveness of this philosophy, we are pleased to be recently recognized by Cisco in an award to Microtune Cisco’s Technology Alignment Supplier of the Year award. As Jodi Kail, Senior Director of Global Supply Management Cisco stated, “Microtune’s development execution leads its competition with consistent and reliable focus on meeting all specifications. Microtune is very actively engaged with our engineering staff to create products that align to Cisco’s road map and our customers evolving requirements. We are pleased to honor Microtune with this award”. Needless to say we are proud to receive this award from Cisco and believe it validates our philosophy at Microtune that the customer is king.
In summary, we achieved solid quarterly results and are beginning to see a number of positive trends in our business. We are actively managing expenses to reduce our break even while maintaining our R&D investment in our micro receiver road map strategy. We are making good progress on the full integration of the Auvitek team. We have a solid balance sheet, and we remain focused on preparing for the future with a well-defined vision and focus on execution.
Thank you. We will now take questions from our listeners.

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