FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (TMF Debit)

C-Cube Microsystems, Inc.
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1778 McCarthy Boulevard
Milpitas, CA 95035
(408) 944-6300
http://www.c-cube.com

UNION CITY, CA (April 27, 1997)/FOOLWIRE/ --- C-Cube Microsystems, Inc. released first quarter 1997 results on April 10th. Revenues in the first quarter were $94.1 million, up 38% from the $68.1 million reported in the year-ago quarter and, due to video CD ASP decreases, essentially flat with the $95.5 million reported in the previous quarter. Net income for the first quarter was $15.4 million or $0.41 per share on 37.9 million shares, up 13% compared with $13.6 million or $0.38 per share in the year-ago quarter, but down 11% when compared with $17.3 million or $0.45 per share on 38.6 million shares in the fourth quarter of 1996. The decrease in the number of weighted average shares in Q1 is due to the decline in their stock price from Q4 to Q1. This change is caused by the Treasury method of calculating common stock equivalents.

REVENUE BREAKDOWN. The revenue breakdown by product segment was in line with what they saw in Q4 1996. So, they had communication revenue as the largest revenue in the company. In Q4 it was 47% and it is at about the same level in Q1. The second revenue contributor is the video CD segment, a couple of percentage points below that of communication. DVD started to grow. It had been at a scant 1% in Q4 and is several percentage points in Q1 as they started to ship to two of their customers and there are probably a few percentage points covered in other categories. So, what they saw and what they are seeing as a trend for Q3 and going forward is for video CD as a percent of revenue to continue to decline, communication as a percent of revenue to continue to increase, and DVD to show the fastest increase toward the back-end of this calendar year.

ASSET MANAGEMENT. Thanks to substantially improved manufacturing costs in the first quarter and despite the ASP declines, gross margin was 56.5%, up 0.5% from the prior quarter. In the asset management area, cash and investments increased by $26 million to $109 million and inventories declined 30% from $28 million at the end of the fourth quarter to $20 million at the end of the first quarter. Accounts receivable increased 35% from $41 million at the end of last quarter to $55 million at the end of this quarter. At December 31st, their accounts receivable DSO was 38 days. They advised at that time that this was an unsustainably low number. A typical objective in their industry might be to maintain DSO below 60 days. So, the increase in accounts receivable was re the result of a return to the normal level of receivables with respect to sales. Accounts receivable days sales outstanding was 52 days. Their first quarter tax rate was 34%, slightly better than the 35% guidance they had given on their last conference call. They continue to evaluate their tax rate position and are striving for additional improvements in the future.

STRONG COMPETITION & C-CUBE MISTAKES IN Q4. In the fourth quarter of 1996, competition made significant in-roads in the video CD market. Competition was successful in entering the markt rapidly. Frankly, much more rapidly than C-Cube thought they would. This is the first mistake they made. The second mistake they made was to keep their price too high throughout the fourth quarter, thereby allowing competition to make significant in-roads in a price-sensitive and price elastic market. Throughout the fourth quarter their competition's products were priced more than $10 below C-Cube's. Consequently, the competition entered the first quarter with a great deal of momentum.

PRICE REDUCTIONS. During the first quarter of this year, C-Cube worked very hard to address these important issues. In particular, they responded aggressively by effectively bringing their decoders to price parity with those of the competition. They made this move rapidly and decisively early in the quarter. They met with all of their customers to present their new pricing, share their roadmap and enlisted their feedback and support going forward. The customer base quickly recognized how serious C-Cube was about sustaining their dominant position.

VIDEO CD MARKET SIZE. The video CD market was quite big in the first quarter and was sequentially up significantly from Q4 and it indicates that a 14-million-unit year for calendar year 1997 is a comfortable estimate and could even prove to be a conservative estimate by the end of the second quarter at this rate. C-Cube thinks that they have the ability to have the majority market share in video CD, greater than 50%, in 1997. As far as ASPs, they were in the mid to high $20s in the fourth quarter and in the mid-to-high teens in the first quarter. Exiting the first quarter they are in the mid-teens and moving toward the low-teens in the second quarter.

MIGRATING VIDEO CD CUSTOMERS TO NEW PLATFORM. During the first quarter they also redoubled their efforts to migrate the customer base to their superior next generation video CD platform, the CL-680. The advantage they see is in reducing the chip count in a video CD player. The advantage they see is in enhancing the image quality in video CD players, specifically as they have integrated this NTSC encode functionalty, they have benchmarked the 680 along side the leading standalone NTSC file encoders and are demonstrating that the 680 has a significant increment for improved quality over discrete alternatives. This function allows reduced system costs, very important in such a price elastic market. The 680 has other additional enhancements beyond the NTSC file encoder having to do with how they treat audio and those are proving to be quite desireable in the video CD market in reducing system cost and reducing part count. The competition is not attempting to build single-chip solutions at this level of integration, but is rather attempting to integrate the functionality in a two-chip solution. They think as they continue to push the integration on single chip, they will have both a cost advantage and a product advantage in the marketplace. They are very excited about the prospects of the 680 and the follow-on direction the 680 shows for them. By now, over 20 companies are at advanced stages of bringing their CL-680 based designs into production. The CL-680 itself entered high volume production in March.

LOWER PRICES DRIVE VOLUME. Some good things came of this. The much lower price point has had a very positive impact on the market. The retail price of a video CD player is now at an all-time low. The market has proved to be not only very elastic, but at these new price points the market came out of the Chinese New Year without skipping a beat. In fact, C-Cube shipped more volume than they had in February or in January. Their shipments i the first ten days of April have only served to confirm that they have successfully renewed their momentum. The video CD market which they had estimated in their Q1 conference call to be in the range of 10-12 million units in 1997 is showing signs of a market that will be north of 14 million units this year.

PRICE REDUCTIONS DIDN'T IMPACT GROSS MARGIN. The outstanding work done for the past several quarters by their manufacturing and engineering teams put them in a situation where the dramatic decline in video CD ASP from Q4 to Q1 had effectively no impact on their video CD gross margin percentage and, therefore, on their corporate gross margin.

DIGITAL VIDEO COMMUNICATION. They continued to make good progress in digital video communication. Their efforts to position themselves as suppliers of end-to-end solutions for digital video broadcast networks gained further momentum during the quarter as their DiviCom subsidiary continued to perform ahead of their expectations. They are confident that they strategy they articulated last Summer when DiviCom and C-Cube merged, is a winning and defensible strategy going forward.

DVD SOLUTION INTRODUCED. They introduced their DVD solution during the first quarter. They introduced their DVD authoring solution which defines the highest quality and lowest cost of current DVD offerings. They also introduced their DVD decode solution which achieves the highest level of integration yet in DVD and is today the first and only audio/video highly integrated solution to be Dolby Digital compliant. In fact, they introduced more new products in the first quarter of this year than in any prior quarter at C-Cube. They introduced important new encoders, new decoders, as well as new products that will pave the way for them to strengthen their market leading position in digital video.

DVD MARKET. Calendar year 1997 DVD market size is estimated at approximately 2 million units and most all of it is back-ended. So, in C-Cube's revenue expectations and their numbers, they have discounted market size for calendar year 1997 DVD significantly because of the back-ended nature and because it is a new market that can easily slip a quarter or come in a quarter. In calendar year 1998, the market size is estimated in the 3-4 million units and C-Cube is comfortable with this. They will be more comfortable when they see how the market did in the Chrismas season 1997. They think that the 1998 numbers may be conservative if the Christmas season this year goes well as they expect it to. They think that the PC side of the market has the ability to be in the 60-70% range of the market early on. They are seeing very strong indications that PC manufacturers want to be Christmas 1997 with fully configurable units capable of DVD video playback. All the work C-Cube is doing with them shows that they want to move very quickly in 1997. They think this percentage will invert itself in calendar 1998 or at least for PC and DVD consumer to be equal before the consumer segment becomes the majority of the DVD unit shipments in the latter part of 1998.

PIRATED TITLES. They were asked about pirated titles in the Far East. They responded that there are indeed some pirated titles in the Far East. The proportion of pirated titles to the overall titles is small, they estimate it in the 15-20% range, largely because the Far East is a high consumer of karaoke titles, of Jackie Chan titles, and locally authored titles, and the titles that might be pirated originated in the US and represent a small minority of all titles. What they have found more and more in the past several months is that the titles coming out in the new players coming out that for the first time may not embody a C-Cube chip, that these new players sometimes are not fully MPEG-1 compliant and that is creating a fair amount of disruption in the marketplace because for the first time, the market no longer being a C-Cube platform, the market is not in the position to play any and all titles. It is becoming a greater issue. C-Cube is redoubling their efforts to brand, reassure the market, educate the market about the benefits of being fully MPEG-1 compliant, and they think over the next several months this will play out to their strong advantage in that they have invested a great deal in ensuring the very basic MPEG compliance of all of their products and thereby ensure that all titles will play in a C-Cube engine.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.