輝達 (NVDA) 2004 Q4 法說會逐字稿

Good day everyone and welcome to PortalPlayer Inc. fourth quarter and fiscal 2004 earnings conference call. Today's call is being recorded and will be available for playback beginning in approximately 2 hours after the end of the conference. To access a replay, please dial 1-719-457-0820, with the passcode 114335. At this time for opening remarks and introductions, I'd like to turn the call over to Christine Moses (ph), Investor Relations for PortalPlayer. Please go ahead.

Thank you, and thank you for joining us today. In addition to this call being available by phone replay, it is being webcast live via the investor relations page of PortalPlayer's Web site at www.portalplayer.com. Earlier today, we issued our earnings press release and filed it with the SEC. The press release is also available on PortalPlayer's Web site. That press release contains certain non-GAAP financial measures which we will discuss during today's call, together with the most directly comparable financial measures calculated in accordance with GAAP and reconciliations of the differences between these measures.

With me today is Gary Johnson, President and CEO of PortalPlayer and Olav Carlson, PortalPlayer's Chief Financial Officer. I'll begin the call by reading our Safe Harbor statement.

Before we begin our discussions, statements on today's call which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements include but are not limited to statements as to future development efforts, future introduction of products and technology, the growth of the MP3 market, the expected benefits of our products and technology, future financial results, including revenue, net income, expenses, tax rates, cash flow and future R&D spending. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those discussed in these forward-looking statements. Please refer to today's earnings release and our prospectus dated November 18, 2004 as filed with the SEC and from time to time in our SEC reports for information on risk factors that can cause actual results to differ materially from those differ materially from those discussed in these forward-looking statements. These forward-looking statements speak only as of the date hereof. PortalPlayer disclaims any intent or obligation to update these forward-looking statements. Additionally, this conference call is the property of PortalPlayer and may not be recorded or rebroadcast without specific written permission from the Company. Now I would like to turn the call over to Gary for his introductory remarks.

Thank you and welcome to our first earnings call following our initial public offering. We're very pleased with the financial and business achievements we're reporting for the fourth quarter and year end 2004.

During today's conference call, we will discuss some of the recent highlights, which include growing revenues 75 percent from third quarter 2004 revenues and more than quadrupling our fiscal revenue over last year. We also achieved a critical milestone of profitability both in Q4 and for the full year.

In November, we raised more than $113 million from our initial public offering and following the successful launch of our Photo Edition platform in early 2004, we saw this translate into design wins in the second half of the year with a number of leading grams (ph) worldwide.

I also want to acknowledge all our dedicated employees and their families around the world. With their help, the Company has been able to continue to offer its customers innovative products, leading to another record quarter for PortalPlayer. In a few minutes, I will go to more detail about our fourth quarter progress and fiscal 2005 outlook. But first, I will turn the call over to Olav, who will take you through the fourth quarter and year-end financials.

Thank you, Gary. Net revenue for the fourth quarter of fiscal 2004 ended December 31 was $44.7 million, the highest quarterly revenue in our history. This is up 75 percent from the $25.6 million in the third quarter of 2004 and more than 5 times the revenue of $8.1 million in the fourth quarter a year ago. Net income for the fourth quarter was $10.5 million, or an income of 50 -- that is 5-0 -- cents per diluted share based on 21.1 million weighted average shares outstanding. The effective tax rate was about 3 percent. This compares with a net income of $3.2 million or 18 cents per diluted share based on 17.4 million weighted average shares outstanding in the third quarter of 2004 and a net loss of $759,000, or a loss of $6.54 per share based on approximately 116,000 weighted average shares outstanding in the same quarter a year ago.

Excluding non-cash stock compensation charges of $755,000, non-GAAP net income for the fourth quarter of 2004 was $11.2 million, or 53 cents per diluted share. Non-GAAP net income for the third quarter of 2004 was $4.6 million, or 26 cents per diluted share and non-GAAP net loss in the fourth quarter of 2003 was $640,000, or loss of $5.51 per share. In our earnings release, we provided the detailed reconciliation between GAAP numbers and non-GAAP numbers which details the stock compensation charges.

Now let me discuss our information on this quarter's P&L and then I will move onto the balance sheet. Our gross margin for the fourth quarter was 43.4 percent for a gross profit of $19.4 million. Operating expenses for R&D and SG&A were $8.1 million in the fourth quarter, an increase of approximately $2.2 million over the previous quarter.

Let me break this down for you. The majority of the additional spending, $1.4 million, was allocated to our R&D activities. We spent a total of $5.3 million in R&D this quarter, which is about 12 percent of our revenue. The sequential increase was primarily due to an increase in headcount and our e-type (ph) expenses. For the first quarter of 2005, we expect R&D to be at about $6.9 million as we continue to invest in our core technologies of semiconductors, firmware and software.

SG&A expenses in the fourth quarter were $2.8 million, or about 6 percent of our revenue, which is an $800,000 increase from the previous quarter. The increase was mainly due to higher spending for some marketing activities and the costs associated with now operating as a public company. For the first quarter of 2005, we expect SG&A to remain relatively flat at about $2.7 million. We expect our non-cash stock compensation charges to be approximately $400,000 in the first quarter of fiscal 2005. However, the stock compensation charge will also include a small variable element based on our ending stock price, and therefore the exact amount is hard to predict.

Touching briefly on the fiscal 2004 results, net revenue for fiscal 2004 was $92.6 million, more than 4 times the $20.9 million in revenue for fiscal 2003. Net income for fiscal 2004 was $10.4 million, or an income of 57 cents per diluted share based on 18.1 million weighted average shares outstanding. This compares with a net loss of $8 million, or a loss of more than $124 per share based on about 65,000 weighted average shares outstanding in 2003.

Non-GAAP net income for fiscal 2004 was $16.2 million, or 89 cents per diluted share compared with a non-GAAP net loss of $7.6 million, or a loss of about $117 per share in fiscal 2003. Both the results for the fourth quarter and for the year have benefited from our tax net operating loss carryforward that offset most of our taxable income in the year. For federal tax purposes, we're carrying approximately $6 million of freely available NOL forward into 2005, and taking this into consideration, we expect to use a 25 percent effective tax rate in the first quarter of the year.

Now turning to the balance sheet. In the fourth quarter, we successfully completed our initial public offering of about 7.2 million of shares of common stock, which included more than 900,000 shares the underwriters purchased when they exercise their full overallotment option. Net proceeds to the Company before expenses and including the overallotment were $113.6 million. With part of the proceeds, we repaid all of our outstanding balances under our bank borrowings, at the time $2.3 million, and are now debt-free. Our accounts receivable were 20.1 million with an average DSO of about 41 days and our inventory balance at December 31 was at $1.8 million, all fit finished goods. Deferred income, which represents the margin on those shipments that we defer in accordance with our revenue recognition policy, was at $4 million at the end of the fourth quarter. Headcount at the end of the quarter was 181. We added 25 employees during the fourth quarter, 90 percent of which were in engineering functions and 10 percent in other SG&A functions. And at the end of the quarter, more than 3 quarters of our overall headcount was focused on our current or strategic R&D activities. And again, half of our overall headcount was based on our location in (indiscernible) in India. And with that at this time, I'd like to turn the call back over to Gary for his comments.

Thank you, Olav. As you can see from the financials, the fourth quarter was a great ending to a great year. On the operations side, our dedication to providing innovative platforms has resulted in increased customer adoption during fiscal 2004. We're very proud to say that our fourth-generation platform, the Photo Edition, has recently resulted in innovative new products from Apple Computer, Gateway, Reigncom -- also known as iRiver -- Samsung and Tatung.

In addition, during 2004, our Audio Edition platform was used in products by iGo, one of the largest MP3 suppliers in China; Iowa/Stoney (ph), Apple Computer, Bang and Olufsen, BenQ, Median -- a leading German brand -- Mitac, Olympus, Philips, RCA, Rio, Rock Digital -- which is selling in Macy's and CompUSA -- Roland, Samsung, and Virgin Electronics. Our customer strategy is to focus our efforts on winning designs on most companies that we believe are brand leaders worldwide, those that have the marketing clout and shelf space to enable their products to potentially ramp to significant volumes. The combination of our robust system-on-chip solution, innovative firmware and software and flexible development kit has proven to be good fit for these customers who want to design leading edge differentiated products in this fast-growing market.

For example, iRiver, a Korean-based leader in the MP3 market, recently introduced the H10 MP3 Jukebox based on our platform. The H10 has 5 gigabyte, 1-inch hard drive with a color screen and detachable battery and an FM radio in space (ph) on our Photo Edition platform. The product has been receiving very favorable product reviews and was showcased by Bill Gates in his keynote at the consumer electronics show earlier this month in Las Vegas.

Another example is the recently introduced 5 gigabyte MR 100 M-Rove (ph) MP3 player by Olympus. The device is a sleek, stylish new MP3 player with a beautiful user interface and boasts some unique features, such as the ability to view song lyrics on the display. Olympus is the leading developer of award-winning products for consumer and professional markets alike and we're delighted to have them as a new customer.

In 2005, we intend to continue our focus on product development efforts on the feature-rich segments of the personal media player market, as well as launch a new platform generation that will enable our customers to continue to offer innovative industry-leading products. We have had significant ongoing initiatives in the area of power management and connectivity. We plan to detail in future calls when we're at liberty to discuss them.

We believe fiscal 2005 will be a significant growth year for both the Flash and hard drive MP3 markets as demand continues to be strong in both segments. On the supply side, we believe the addition of capacity from the HTD vendors will ramp throughout the year to support strong year-over-year growth. Given this, we believe that fiscal 2005 will not be as seasonal as the traditional consumer electronics historical trend.

This, coupled with the fact that we're coming up a strong fourth quarter revenue base, leads us to guide first-quarter revenues to be down only 10 to 20 percent sequentially. We expect GAAP net income per diluted share to be between 16 and 19 cents, based on approximately 26 million weighted average shares outstanding. The effective tax rate for the first quarter is expected to be 25 percent, which takes into consideration, among other factors, the Company's net operating loss carryforwards for income tax purposes. Non-GAAP net income per diluted share would exclude approximately 400,000 shares of stock-based compensation charges, is expected to be between 18 and 21 cents. We expect operating expenses to increase to approximately $9.6 million. The majority of this increase is due to R&D spending to develop new platforms. We also expect to continue to generate positive operating cash flow.

In summary, we're very pleased with our fourth quarter fiscal 2004 results and we're excited about our position going forward into 2005. Operator, we're now ready for questions.

(Operator Instructions). Randy Abrams, CS First Boston.

I wanted to start off, if you could talk about in fourth quarter what the magnitude of revenue growth at your largest customer was versus other customers? And implied in first quarter, do you expect concentration to I guess diversify?

I don't think I can be too specific there in the answer, but I think what I can tell is you in the third quarter, as we noted in our prospectus, it was like 92.5 percent revenue concentrated with our most important customer. And that for the fourth quarter, I'm ready to say that this was below 90 percent; it was in the high 80's.

And could you talk about how inventory levels look at your customers for your chip sets? And maybe if you look out over the next couple of quarters, do you expect to track pretty close with your customers, or could we have some workdown or build of inventory?

Well, I think I want to start answering in the following way, that we're always happy to give certain information on PortalPlayer's goal to progress each quarter. But I think you are aware that we do not intend to respond to questions specific to any one customer. In general terms with any customer, in the consumer electronics space, it is not as easy to track directly -- the track between supplier and customer is not always a direct tracking. There is buffer inventory in between. We only had visibility to a part of the supply chain, because usually, OEMs working with ODMs. We don't have visibility to that part of the supply chain, so it's not a direct track.

Okay. And just shifting over to gross margins, it look like it cam in a little bit better this quarter. What is your outlook going over for the next couple of quarters? Should we still stay with the same target model, or are there any swing factors, plus or minus?

I think we're very satisfied with our current target model of 41 to 44 percent.

Okay. What was the factor that drove it to be a little bit better this past quarter? Was it just volume, that we got the better volumes?

It's good volume, it's good negotiations on our side, on the supply-side. There is a minimal impact from sales of inventory that was previously written off. It's the lower percent of impact. And I think that is the mix for this answer.

Final question. I know your strategy has been to go after the leading brands. Could you talk about now that you have a little bit more resources, is there any shift, at least in your mode, as to go after say some of the ODMs or new OEMs, or is it still not very profitable to chase after some of that business?

Our (indiscernible) strategy won't shift. The actual additional resources we talk about is really for us to accelerate development on new platforms. As you know in this market, Randy, there's lots of new feature sets that the customers are demanding in this space. So we think the strategy of focusing on the global brands or the channel that can reach global brands will have served us well, and we intend to stay that path. Our investment is focusing on really serving those major global brands with great product platforms. So, no, no shift in customer focus at the present time.

Thanks a lot, guys.

Quinn Bolton, Needham & Co.

Good afternoon, guys, great quarter. First question, Olav, don't know if you can give us any detail on how units and ASPs trended through the quarter, but any insight you could give would be helpful?

No, I cannot give you any inside point on those. Policy is not to comment on ASPs and not to comment on units. Sorry about that.

Not even qualitatively up or down? Obviously, units were up.

Qualitatively, units were up, quantitatively, and then no comment on ASP.

Okay. Can you give us some sense -- is there one quarter -- do you guys check annual price contracts. Is there one quarter where we may see a bigger change in pricing quarter-over-quarter, or do you tend to see a pretty linear change in the contract you signed with the big customers?

Frankly, I couldn't give you guidance to either of those. The discussion with large customers, it varies tremendously from customer to customer. And so I really couldn't give you guidance to the frequency or the timing of that. It really is depending on the customer at different times of the year. But not -- most customers do not directly link into a calendar year type of discussion, more on an ongoing project volume type of basis, design win type of basis. So I'm sorry, it is somewhat random. Actually, it will appear somewhat random through the year to an outsider.

Okay, but no one quarter where you may see a major reset in pricing, is I guess what I was just trying to drive at. And it doesn't sound like that's the case.

That generally is not the case. Now having said that, I cannot predict maybe there is an alignment at some point where this happens to be that way, but we have no particular insight into that and that's not generally the way it works out.

Okay. Second question on the gross margin. I just got back from Asia and it sounds like wafer pricing at the major foundries may be down as much as 10 to 20 percent in the first quarter. Wondering if you're seeing that kind of wafer cost decreases through e-Silicon (ph) and LSI Logic and whether that might bode well for gross margins to be at the higher end of the range in the first quarter?

We're not going to give you our forward-looking views on our costs either, unfortunately. The semiconductor wafer market is variable. You get the various trends as you indicated, and some of them impact us in a timely matter manner and some don't. So I can't give you direct guidance on a forward-looking basis there. But if there are movements, of course, we take benefit of those. Like you, we similarly track the trends in those costs. But in terms of guidance, unfortunately, I cannot give you any specifics.

Okay. Next question -- can you give us an update or how you are tracking with the new products? Are you still on schedule?

As we have not announced publicly what that schedule is, the good news is publicly, we are not off schedules. What I will say is that our platforms typically get refreshed on a sort of 12 to 18 month cycle and our Photo Edition platform was launched just over 12 months ago. So keep posted.

And last, just a clarification, Gary, on your comments about iGo. Did you say that that was a Flash Player win, or is that a hard drive player win?

I described it as a use of our audio platform. And typically as you know, our business today is centric around the hard drive business, and that in that case, is a 20-gig hard drive product.

Okay. Can you say whether you have any wins to date, any announced product in a Flash-based player?

We will make announcements as they become appropriate and they are aligned with our customers' announcements as well.

Great, thanks, guys.

Shawn Slayton, SG Cowen.

Nice quarter you're posting here. It seems as if the R&D expectations for the current quarter may have some non-recurring components there. How should we look at R&D on an absolute basis after the first quarter? Are there mass set expenses in Q1 that we won't see in Q2? And also kind of related to that, can you speak to the strategy of how you're going to grow headcount, in what areas, maybe more towards the silicon side, or more towards the software side? Thanks.

Maybe let me start with the latter part of the question. The plan to increase headcount is absolutely heavily balanced towards R&D. We have given guidance -- I've given guidance to staying flat on SG&A in Q1 over Q4. And it's not my policy actually to make forward-looking statements besides what is in our earnings release, so I'm not going to comment on Q2. But I think in general, how you want a look at our company, it's heavily R&D balanced. So we have, what I said, like -- more than three-quarters of our employees are engaged right now in strategic or current R&D activities. And that's how you should look at this company, in terms of growth and focus.

I'll add, in terms of, give you some sense of focus. As you know, this company's built around a platform, as you know, which means that we invest both on the semiconductor firmware and software. So unlike probably many of our competitors, we do put significant effort on the firmware and software side. So overall, if you look to us as a company, we believe that is a significant investment and it has served us very well and we will continue to have a sort of balanced R&D effort across all of those three areas.

Gary, I want to revisit the pricing discussion a little bit. If you don't want to talk in absolute terms, what are your expectations? Obviously, you're selling more than just silicon. What are your expectations for pricing trends for your offerings over the next several quarters? And maybe you can put that in the context of some of your peer companies and competitive offerings? Maybe help us understand this industry little bit. It's somewhat of a new industry, but if you could provide some context there, that would be great.

Yes. The way that we generally look at this industry, as you said, it is a sub-segment of the consumer electronics space. So we have seen dramatic volume growth and continued improvements in integration and performance feature-add. Having said that, typically you should expect, and the way we look at that is on an individual SKU, you may see price declines on an annual basis of maybe 20 to 25 percent. And of course, it depends on SKU by SKU, but this is just to give you a sense of the market in general. And then overall on a blended ASP, i.e., when we introduce new products, we're generally able to sort of reset the pricing generally not back to the same point, but we're generally able to reset pricing because of the added value. And so overall, when you look at our portfolio, we believe that a blended ASP decline you should look at for the year, if you saw the 10 to 15 percent number, we think that is consistent with this type of growth in a consumer electronics market. So 20 to 25 percent on individual SKU. Then when you introduce new products and new features, you end up on a portfolio of around 10 to 15 percent.

Okay, that's helpful. And then I guess in that context, can you just give us your view of the competitive landscape right now? Maybe are you seeing any new competitors over the last quarter or two and maybe talk about some of the new players maybe in Asia? Thanks.

From a competition point of view, the landscape is not changing dramatically here. We're garnishing off more than our fair share of the hard drive wins across the entire market. So that space is staying fairly consistent with the players in the market. I think what will be interesting as we go through 2005 and the way we look at the market is an interesting (indiscernible) will be as the Flash capacity starts to get into the ranges of our gigabytes, for the first time, that market starts to look attractive for us. And so that market plays to our strength of a very powerful chipset, powerful file and media management. So as we look at that market, that will introduce a new set of competitors and a new set of players. And that, again, I've indicated, we're looking at with quite healthy interest.

One last question. Gary, in the context of PortalPlayer, what things should we be paying attention to with regard to portable compressed audio, digital rights management? What factors in DRM influence PortalPlayer, and what do you guys care about, and what trends are you looking for in portable compressed DRM? Thanks.

From a compression standard point of view, there continue to be some innovations there. But essentially, the key underlying standard is MPEG 3 or ASC. It really produces a very solid rock bed. The DRMs themselves are getting well proven and stable. I think the interesting thing to watch in this market is will the way people buy music change over the next few years. Will a subscription model start to become more popular than the purchase model? And frankly, I'm not sure we know the answers to that. And the way that we're building our platform is to be able to support both those type of markets. But a subscription model where the device stores thousands and thousands of songs and you have a monthly fee versus the model today where you may be purchasing individuals songs, that we're frankly watching with significant interest. And we make sure that we have the right platforms and software applications to be able to serve that. So that would be probably the trend that we're looking at with interest, and I would suggest the market hasn't yet resolved either.

Thanks much, guys.

Glenn Young, Smith Barney.

This is Craig Berger, sorry for the difficulties previously. A couple of questions. One on inventory, it looks like you guys were at about 6 days of inventory on a single point quarter basis exiting Q4, very much hand-to-mouth. What's your plan to be able to respond to customer upside requests, if those should arise in seasonally strong periods?

I think the snapshot that you get there through the balance sheet is really a snapshot. This is not representative of our inventory policy. We're certainly targeting something that is higher than just 6 days of inventory. Now our model that we're operating in is where we only take finish goods, keep them, turn them around -- is certainly driving towards -- I don't want to call it just-in-time. But certainly, a low level, very cash flow oriented inventory model. Now 6 days is not my target. And again, I want to repeat, that's not representative of how the quarter looked. It is the snapshot at the end of December. I don't want to give you any details inside right now, how we want to drive this in the following months, but it's certainly going to be higher than 6 days.

Okay. Do you have any plans to move away from e-Silicon or LSI in the next year?

Both of those vendors have served us out, have -- they're serving us extremely well. They have very flexible business models and have worked very well with the foundries. So we're very satisfied with the support and the business model we're getting from those supplies. We of course always look at alternative supply models, and one of them would be a COTO (ph) direct engagement with the foundry. But we have made or announced no specific plans there. We're getting great support from those partners, but of course we will keep evaluating alternatives. Our volumes are now in the range where we have that flexibility, but we've made no announcements and are really able to say more in the investigative phase at this point.

Is there a particular volume point at which becomes very worthwhile to interface with the foundries and OSAT guys on your own?

This is more of an industry metric. It's highly unscientific. But typically, people say around 10 million units a year gets the interest of the fabs themselves and also allows you to drive some efficiencies there. So that is a typical industry metric.

And I may have missed it, but have you guys provided a target for sort of what you think your units could be in '05?

No, we haven't. We avoid the ASP and units forward-looking targets.

Great. And if we look at our your R&D which spiked up significantly in December, is there any way you can help us understand how much is related to ongoing headcount versus period NRE?

I can give you that color. It's basically almost split evenly.

So the $1.4 million increase is split evenly between headcount and NREs?

That's right.

Okay, that's helpful. I guess my other question was just on gross margins. I think you guys have said your model was 41 to 44. Is that still the operating model?

It is the operating model, yes.

And you guys aren't willing to provide any color within that range for Q1?

No, not at this time.

Okay, great. Thanks a lot guys.

Jason Pflaum, Thomas Weisel Partners.

Good afternoon. Maybe just to start, can you maybe describe the level of visibility you have into Q1, maybe discuss how much turns business is required to hit, say, the midpoint of your guidance?

Let me answer on the first part certainly, what's the visibility. We have a pretty good visibility overall with our customers. It comes from when you focus on the big players in the market, you have a certain level of revenue concentration, and you also get a little bit better relationship management there. So I think it's reasonable to say that our visibility into Q1 is very good, but we all know that things can change. Backlog orders, planning, data can change, can be pushed around. Now also take into consideration that when we give guidance, we give guidance to GAAP numbers. And we know that, based on our revenue recognition policy, there is a deferral that occurs at the last two to three weeks of the quarter so that the shipments that occur in the last two to three weeks are deferred. And so a change in the plan for maybe just a day or something was supposed to ship on a day, and this has come in a day earlier or is going out a day later, can certainly significantly impact the guidance. So whatever the visibility is, in terms of the shipments, there is another level of difficulty when we give guidance for GAAP purposes.

And then just considering the linearity of Q1 as far as your plan goes, would you say it's somewhat back-end loaded?

I cannot comment on that yet at this time. I think it's too early to really look and give comment on how the quarter really shakes out, in terms of where the shipments occur.

Okay. And then maybe if you could talk a little bit about what you're seeing from some of your hard drive vendors that you work very closely with. Have the constraints out there largely subsided? If not, when would you expect supply to catch up with demand?

We do see the situation improving from where we sit. We still believe that the demand is outstripping the supply into the segment. And if we had to -- when we look at the analysis, we look more towards the second half of this year to be a time where you might have some more equilibrium. We still think that the demand is very strong and it could well be the second half of '05 before that demand reaches balance.

Okay. So the second half, it normalizes in your guys' view. I guess along those same lines, do you see from your customers much pent-up demand that I guess was not serviced in Q4 that could roll into Q1? And how much of that is planned into your Q1 guidance?

I'm not sure I can answer the question about the pent-up demand, but the guidance that we have given is significantly better than what you would expect in a normal, seasonal cycle in a year. Consumer electronics industry probably expects something going down like 30 percent. We got it down 10 to 20 percent from a very strong fourth quarter to not to forget this. So is this pent-up demand, or it is that part of that growth cycle that we're still in, it is hard to really say. But what I can reiterate here, we're absolutely excited about what we see in the first quarter and what we guided to.

Okay, terrific. Thanks a lot guys.

Daniel Ernst, Hudson Square Research.

Good afternoon, Gary and Svend. Thanks for taking the call. Three questions, if I might. First of all, if you could give us both a general sense of your pipeline for potential design wins in the first half of the year, and then more specifically, on the plays for sure (ph) download-enabled devices. I know at the consumer electronics show, Microsoft was pretty bullish about rapid expansion this year devices geared for that new technology, which if my math is correct, you're in 4 of 7 that are currently enabled for that. So there's a general sense of the pipeline, and also specifically on the price per share. And then the second question, if you could comment on what you're initially seeing on demand substitution (indiscernible) mini and how that might impact your business for the year? And then the last question, could you just give me the number on your NOL carryforward for the year? I think if I read the math right, we should be expecting 4 (ph) corporate tax rates in the second quarter.

I'll pick up real quick on the third question. So it's a $6 million NOL that we're carrying forward into 2005 for federal purposes freely available. And we've disclosed in the prospectus that there is a lot more NOL available, but it is limited in use to $1.5 to $1.6 million per year. Does that answer your question?

Yes.

So let's stop back to the first question then, which you combined on the pipeline and play (indiscernible). On the pipeline view of our business, CS is always an important event for us, in terms of the start of a calendar year. That generally allows our customers to work with us and look at new models and do new model planning together.

From a macro sense, what that really means is the heavy work and engagement goes on in the Q2 timeframe with really new designs that come out of CS not really appearing into the market for Q3 and Q4 which is the peak demand. So from a pipeline cycle, CS is an important primer of the pump for the Q3, Q4 timeframe. Having said that of course, other customers have their own -- have worked with us to maybe earlier in the cycle, have faster development plans, have different ways to springboard one product from another, and their product cycle will be completely dependent on their competitive positioning and how they release. So with my earlier comments, I wouldn't want to dismiss Q2 as a blank period. But CS certainly feeds Q3, Q4, and then the customer announcements themselves from various customers also come out in the spring timeframe as well.

On the play for sure (ph) initiative, again, the beauty and power of the PortalPlayer platform with the power of the 2 CPU architecture, the strength of our firmware and software platform, means that sort of fairly complex but important innovations like play for sure, which need lots of horsepower and capabilities, absolutely match what we're good at. So we've been working very diligently on that program with both the Microsoft and a number of customers very closely. So yes, we're very supportive of the program. When our customers demand different types of applications and music services, we of course support them. So we're very supportive of that program.

Let's move onto the second one, which was your question about demand and substitution. We're absolutely not going to dive into discussions of our customers' product and product mix, so we will avoid and we will not be answering those types of questions. But if I step back and instead maybe just look at the market and look at some of the market dynamics, all of this I think is a lot of this is about price points, judging the right price points of functionality, having products that get more and more users into using MP3 and AAC music we think is great overall and we think consumers will then start to grade up into more feature-rich products, which will resell in that market very strongly. So overall, anything that expands this market and gets more users using MP3 AAC we think is a great demand driver for the overall market.

Okay, fair enough. If I could just follow up on the first question on the pipeline. Coming out of CES, I understand from talking over the industry, there was a lot of new technology demoed by PortalPlayer unseen by the market. So I had the sense that the pipeline was pumped well, but your comments were a little bit vague, so it gave me a sense of how you feel in it. Right now, you are 80, 90 percent market share on hard disk drive players. How do you feel coming out of CES, that you will exit '05?

We feel very strong. The innovation that we've continued to deliver and execute on again -- having that combination of the firmware and excellent chip platform to build upon means that we deliver to our customers a whole new range of exciting applications time and time again. And so you're right. We have not yet disclosed these exciting new innovations in CES. Time will tell. We will be getting there soon. But that has fed our customers' product planning cycles very well and so we're very positive. They were very positive and we had an excellent CES.

Okay, I look forward to hearing about it.

Andrew Neff, Bear Stearns.

I want to clarify one question or one that you raised before in terms of your mix of business, in terms of -- you said your largest customer you said dropped from 95 percent in September to the high 80s -- I'm sorry -- in September, the high 80s in December -- is that what you said?

That's what we said, yes.

Can you give any sense about as you have given your guidance of about 15 or 20 percent sequential decline, where your largest customer will be in March?

No, we haven't given anything. We haven't given that information and we won't do that, in terms of guidance.

Also, the guidance we gave was 10 to 20 percent. So just making sure we're on the same wavelength, yes.

So in terms of your largest customer, would you, given the different directions things are going, is your goal to diversify your mix? Do you think that you're trying to ask the question different ways?

Let's step back and look at the year, rather than the quarter. I think we have made it no particular secret. Of course over time as we develop new technologies and have new capabilities, we hope that customer concentration does become less pronounced. Having said that, we support our large customers incredibly well. So yes, in general, as we introduce new technologies and they start to impact adjacent markets, we think we'll see a natural diversification of our market share. That should not be opined directly therefore to the success of any particular MP3 supplier in the market. So just naturally as a company, we're looking to have new technologies that broaden our base. But again, Andy, we're going to be very careful of course to not divulge or give any forward-looking views that would be impactful to our large significant customers.

I understand. Thank you very much.

Quinn Bolton, Needham & Co.

Hi, guys. Just wanted to follow up on your question or your comments about seasonality. One, can you sort of lay out for us what you think season might be in a typical year, first quarter, second quarter, third quarter and fourth quarter? And then a second quick follow-up.

In a typically year, I would expect the first quarter to be probably somewhere 25 to 30 percent below the fourth quarter. And then the second quarter, maybe another drop of 10 percent over the first quarter. And then on the third and fourth, it's a little harder to predict because then it depends on what products are introduced. But there's a significant ramp from the second into the third quarter for us. So let me separate ourselves a little bit from the consumer space. Time will tell whether our strongest quarter is the third or the fourth, but both quarters in our internal planning are very strong quarters.

The second question was just, when you commented about 2005 being potentially better than a seasonal year, was that really focused on the first quarter, or do you think that every quarter through the year has the potential to be better than seasonal?

Well, the comment was certainly focused with what we know and see right now, which is the first quarter. The visibility into the second quarter is certainly not as clear as our visibility in the first. But there is, in terms of planning, the second quarter might be a little better than the first if the trend of the first quarter just grows into the second.

Okay, great. Thank you.

Ladies and gentlemen, that does conclude our Q&A session. I'll turn the conference back to Gary Johnson for closing remarks.

Thank you everyone for joining us today on our first call. Thank you very much for the support and great questions. We do plan to present at the Thomas Weisel Partners 2005 Tech Conference on February 9 and look forward to seeing many of you there. And with that, I'd like to thank you again and we will conclude this conference call.

Ladies and gentlemen, that does conclude our conference. We do appreciate your participation. You may disconnect at this time.