輝達 (NVDA) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the PortalPlayer, Incorporated, first quarter 2005 earnings conference call. Today's call is being recorded and will be available for playback beginning two hours after the completion of the call. To access the replay, please dial 719-457-0820 with the passcode 5879481. At this time, for opening remarks, I'd like to turn the call over to Kristine Mozes, Investor Relations for PortalPlayer. Please go ahead.

Thank you for joining us today. In addition to this call being available by phone replay, it is being webcast, broadcast live via the Investor Relations page of PortalPlayer's website 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 website. 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 Carlsen, PortalPlayer's chief financial officer. I will begin this 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 the future plans and growth development efforts, introductions of products and technology, the growth of and trends in the MP3 player market, our and our customers' market leadership, demand for our products, the expected benefits of our products and technology, and future financial results, including revenue, net income, expenses, growth margins, ASPs, stock-based compensation charges, 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 Form 10-K for the year ended December 31, 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 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. Gary?

Thank you and welcome, everyone. Once again, we had a great quarter. First quarter revenue more than quadrupled from the first quarter a year ago and rivaled the record revenue recorded during the seasonally strong holiday season last quarter. A key driver to this quarter's growth was the launch of our new PP5022 chip, which I will describe in more detail in a few minutes.

As you know, the consumer-tight industry can typically experience and up to 30% sequential decrease in the first quarter following the strong holiday season. So we are very pleased with the results we are reporting today. The high revenue results also showed us to achieve record cash flow in the first quarter of $13.6 million. In addition, our gross margin improved sequentially by 40 basis points when you exclude the one-time effect of that sale of the previously written-up material had in our margins in both Q4 and Q1. Olav will give you more details in a minute.

In addition, we created considerable excitement in the marketplace with some new revolutionary features that we demonstrated to our customers with two new semiconductor devices we introduced to the market. We believe these featured devices will help contribute significantly to our growth the rest of the year. Our new 5022 system-on-chip up to triples the battery life for today's hard-drive media players and can also support high-capacity flash media players.

Our new 5024 system in package, which we began sampling in Q1 is our first device that integrates the media processor along with the audio, car management and battery charging features in a single package for MP3 flash players. With both the 5022 and the 5024, we believe we can extend our hard-drive technology leadership as well as target a much larger percentage of the '04 personal media player market, both hard drive and flash.

Actually, Jon Erensen of the market research firm, Gartner, recently released new hard drive and flash digital audio player estimates. According to his report, the hard drive portion of the market is expected to grow 104% in 2005 over 2004 to be over 28 million units this year. The flash portion of the market is expected to grow 74% year-over-year to be close to 46 million units in 2005. In a few minutes, I will go into more detail about our new products, our first quarter progress, and some key market trends. But first I will turn the call over to Olav, who will take you through the details of our first quarter financials.

Thank you, Gary, and welcome, everyone. This first quarter of 2005 was again a quarter of very significant year-over-year growth. We are very pleased to report that net revenue for this quarter was $44.6 million, which is more than four times the revenue of $10.2 million in the same period a year ago, and about the same as the record revenue of $44.7 million we recorded in the fourth quarter of 2004.

As Gary just mentioned, the fourth quarter of any given year is typically the strongest for the consumer electronics market, and so we are very pleased that demand for products that utilize our technology continue to be so strong even during a traditionally weaker quarter. Again, this quarter, we saw strong demand from both our largest customer as well as from other customers from which we recognize to get more than $5 million of revenue. And in the first quarter, all of our revenue came from shipments for the hard drive based media players. We began shipping our new 5022 system on chip in volume during this quarter and demand for that product was quite strong. Revenue from the 5022 already accounted for a significant portion of our total revenue in the first quarter, and so, as you can see, the introduction of this new product has really been a great success.

Net income for the first quarter was $7.8 million compared with a net loss of $2.4 million in the same period a year ago. The first quarter 2005 net income resulted in an income of $0.31 per diluted share based on 25 million weighted average shares outstanding compared with a loss of $15.37 per share based on approximately 157,000 weighted average shares outstanding in the same quarter a year ago. And the significant difference in share count between these two quarters is, of course, due to the fact that in the first quarter of '04 we were still a private company.

Net income in the fourth quarter of 2004 was $10.5 million, or $0.50 per diluted share based on 21.1 million weighted average shares in that quarter and the increase in share count between Q4 and the first quarter of '05 is due to the fact that the share count is the weighted average. So shares issued in our IPO in late November only partially affected the fourth quarter average but that fully included in our first quarter numbers.

On the tax side, for federal tax purposes, we are still carrying forward approximately $6 million of freely available net operating losses. Based on our current strong financial performance and our business outlook for the remainder of 2005, as well as the fact that we are quickly using up most of our NOLs, we began to provide for tax liabilities as we sat last quarter using an effective tax rate of 25%. That compares with only a 3% tax rate that we used last quarter than all for alternative minimum taxes.

Excluding noncash stock compensation charges of $384,000, non-GAAP net income for the first quarter of '05 was $8.2 million, or $0.33 per diluted share compared with a non-GAAP net loss in the first quarter of '04 of approximately $434,000, or a loss of $2.77 per share. Non-GAAP net income for the fourth quarter of '04 was $11.2 million, or $0.53 per diluted share. And in our earnings release, we provided the detailed reconciliation between GAAP numbers and the non-GAAP numbers, which detailed the stock compensation charges for each quarter.

So now let me discuss some information on this quarter's P&L, and then I will move on to the balance sheet. The first quarter was a great success on all accounts. Our gross margin for the first quarter was 43.1%. This is well within our long-term model of 41% to 44% and compares with 43.4% in the fourth quarter of 2004. Last quarter in Q4 our gross margin was favorably impacted by 90 basis points from the sale of previously written-off material. In Q1, however, the sale of previously written-off material had a favorable impact of only 20 basis points on our overall gross margin. So if you eliminate this impact to both quarters, the gross margin for our current product actually went up 40 basis points sequentially.

As we have said in the past, we expect a piece to decrease in the 20% to 25% range year-over-year on a single SKU basis, however we expect the blended portfolio ASP to decrease by only 10% to 15% year-over-year, as we are able to achieve higher prices on our newer products, which we accomplished this quarter.

Operating expenses were $9.7 million in the first quarter, which includes the $1.2 million increase in R&D and SG&A, offset by a lower stock charge in this quarter. So let me break this down for you -- the majority of the additional spending, about $1.1 million, was allocated to our R&D activities, which came in at $6.4 million. This represented 14% of revenues, which is below our target of 16% to 17%, mostly due to the higher revenue in the quarter.

Now, as expected, our focus on product development resulted in an increased level in our e-type expenses, but, more importantly, we were also able to fill some of our staff openings, especially in the strategic R&D area here in the U.S. and at our subsidiary in India. Going forward, we now expect to accelerate some of our important R&D milestones resulting in additional NRE expenses, especially in the second quarter. So we also plan to continue to hire additional resources, moving forward. Accordingly, we expect R&D in the next quarter to be about $8 million.

SG&A expenses in the first quarter were $2.9 million, or about 7% of revenue, which is $137,000 increase from the previous quarter. For the second quarter of '05, we expect SG&A to increase by about $500,000 mostly due to additional costs associated with our Sarbanes-Oxley compliance.

We expect our noncash stock compensation charges to be approximately $450,000 in the second quarter of '05, 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.

And so now let's turn to the balance sheet. Our accounts receivable were $22.8 million with an average DSO of about 44 days, and our inventory balance at March 31st was at $8.5 million, all of which is finished goods. So this balance is now much closer to our targeted inventory level of 30 days than the $1.8 million of inventory, which showed in our Q4 numbers, which only represented about six days of inventory at that time.

Deferred income, which represents the margin on those shipments that we defer in accordance with our revenue recognition policy was $4.3 million at the end of the first quarter, slightly above the fourth quarter number of $4 million. We generated a record quarterly positive cash flow from operations in the first quarter, more than $13 million, and so our cash and short-term investments increased to $137 million at the end of the first quarter.

Headcount at the end of the quarter was about 194. We added 13 employees during the first quarter, most of them in R&D. At the end of the quarter, more than three quarters of our overall headcount was focused on our current or strategic R&D activities and, again, half of our overall headcount was based in Hyderabad in India.

We also recently signed a new lease and are planning to move our Santa Clara operations to San Jose at the beginning of June. The new facility allows us to support our planned growth as well as take advantage of the very favorable real estate rate, which are among the lowest in the past decade.

We believe fiscal 2005 will continue to be a significant growth year for both the flash and hard drive MP3 markets, and according to market forecasts, demand continues to be strong in both segments. In the near term, we expect demand for personal media players to continue to be stronger than the typical seasonal consumer electronics trends. Therefore, we believe that our revenue for the second quarter of 2005 could be about the same as the first quarter revenue, and so we expect second quarter revenue to be between $41.6 million and $47.6 million.

Operating expenses are expected to be approximately $11.4 million, and we expect our stock-based compensation charges to be about $450,000, and GAAP net income per diluted share to be between $0.19 and $0.25 based on approximately 25.5 million weighted average shares outstanding.

The effective tax rate for the second quarter is expected to remain at 25% and non-GAAP net income per diluted share, excluding our compensation charges, is expected to be between $0.21 and $0.27.

So, at this time, I would like to turn the call back over to Gary for his comments. Gary?

Thank you, Olav. As you see from the financials, the first quarter was a great start to the new year. As Olav mentioned, the first quarter demand came from both our largest customer as well as from some of our design wins and new customers that launched their products in the fourth quarter last year.

Revenue from other customers, which includes iRiver, Olympus, Samsung, increased more than six times than the revenue we had from other customers in the same period a year ago.

As you may remember, our customer strategy is to focus our efforts on winning designs from those companies who are the brand leaders worldwide -- those that have the marketing clout and shelf space to enable their products to potentially ramp to significant volumes.

On our last conference call, we mentioned iRiver, a recognize leader in the MP3 market had recently introduced the H10 MP3 jukebox based on our photo edition platform. The one-inch hard drive, 5-gigabyte design has been well received in the marketplace not only for its MP3 capabilities and color LTD screen, but is also one of the first Microsoft plays-for-sure compliance products that supports the recently launched subscription music service.

iRiver also just recently introduced a 20-gigabyte version of the H10, which can bolt to the subscription model allowing users to download greater amounts of digital media. The best example of the MP3 brand leader is, of course, Apple Computer. The new iPod mini-models that were introduced in late February utilize our latest system-on-chip technology, which I will discuss in a few minutes.

On the operations side, we are dedicated to providing high-performance semiconductor solutions, innovative firmware and software, and flexible development kits that help our customers to design leading-edge, differentiated products in the high-capacity feature-rich hard drive and now flash memory markets.

In the first quarter we dedicated much of our time and effort to further improving our existing technologies and working on upcoming technology initiatives that we believe will drive market growth and differentiation for our customers in the future.

First let's look at the improvements we've made. In early March we launched our fifth-generation SoC, system-on-a-chip, the 5022, and announced the 5024, which is a new systems in package targeted at the high-capacity, feature-rich MP3 market. The technology incorporated in these solutions dealt with three major initiatives -- battery life, analog integration, and price points. So let's go through each of these new products, and I will discuss the improvements and features along the way.

First, let's look at our new 5022 SoC. This chip, which is manufactured on a 0.13 micron processor, up to triples the battery life of the hard-drive media players, while increasing system peak performance by up to 25%. It also supports flash memory storage media. Hard-drive-based media players based on the technology can now play for up to 28 hours, or about 2 hours a day for two weeks. We believe this two-week usage model puts to rest the question about the battery life that media players can achieve with our products.

On an ongoing basis, we plan to continue to develop new innovations not only with audio power management improvements, but also with driving industry-leading support for decoding high-resolution photos and digital rights managed video content.

Second, in addition to battery life improvements and increased system performance, our 5022 offers a host of new and upgraded features such as best-in-class photo viewing for music slide shows, USB 2.0 host, On-the-Go, and pig sync, offering compatibility for the first time to a large range of camera models. Also MJPEG video MPEG-4 video, and high performance co-processor support through our co-processor system interfaces. And, finally, 2 to 3 megapixel image support for integrated camera applications.

The 5022 also meets the demands of today's diverse display technologies, which is high-resolution, normal LCD displays, and television out support. Our dual view display technology enables users to navigate a handheld LCD to preview and select music follow the video or playing a different image concurrently on a television screen. We are very excited about the achievements we have made with this new device and how smoothly and quickly we have been able to wrap manufacturing. Reviews of the models using the 5022 with this dramatic extended battery life have been extremely favorable.

Third, our new 5024 system-in-package, or SIP, takes many of the high-performance hardware features that are in our new 5022 chip and combines them with analog integration to deliver revolutionary solution for feature-rich, high-capacity MP3 players. By integrating our new 0.13 micron media processor with a 0.135 micron mixed signal SoC that we worked jointly on with AustriaMicrosystems, we now have a fully integrated in a small 10x10 mm chip package solution that is designed for high-capacity, feature-rich, flash-based designs.

The SIP integrates a system processor along with the audio, power management, and battery-charging features, and this is a first step in our analog integration roadmap.

The 5024 is our first product to utilize stacked dye System-in-Package technology and enables us to create semi-custom integration options of highly integrated devices that supports specific customer and product requirements. Stacked dye enables us to offer a mix-and-match approach to particular customer platform, and enabling solutions offer a small footprint, ease in design the board, and a simplified firmware support model since variation is reduced.

The 5024 brings, for the first time, those features that are used in hard-drive players such as color screens and support for the multi-media features like gaming and video to high-capacity flash memory-based personal media players, and we are doing so at attractive price points. The 5024 will be generally available in the second half of the year for 995 at 10,000-unit volumes and as is typical, significant discounts apply to higher volumes offering very competitive price points.

We are often asked what will be the target market for 5024, how big will that market be? In order to define this opportunity, we look at the combination of storage capacity and features the players will offer. The design must have enough storage to say this solution is feature-rich, one adds a database, more advanced content management and license support for DRM-based content, and we expect OEMs to become interested in offering these types of features and functionality beginning with a 1-gigabyte flash player supporting subscription music services. This market is emerging, however, we believe as flash costs continue to decrease, companies will move quickly to design high-capacity flash products.

By the end of the year, we believe that 1-gigabyte or greater high-capacity flash market could exceed 20% of the total flash player volume run rate. As a reminder, Gartner is expecting the flash market to be 45.8 million units this year.

We believe the 5022 and 5024 will enable us to target a larger percentage of the '04 digital player market and should help us win new designs with new customers as well as our existing customer base.

I'll shift gears a little bit and talk about some of the market trends. There are many emerging trends that are expected to fuel the demand for future personal media players, and inspire the development of new, innovative products. We believe we are on the forefront of developing these technologies.

First is the emergence of alternative voice to download music. We are seeing the pay-as-you-go model of downloading music has been very successful. The next step is to introduce alternative models to suit different people's needs. We believe, to that end, there could be a variety of different models that appeal to different music types.

Subscription services have been introduced in the past few months that only enable streaming music to any music the listener desires with one monthly rental fee but, more importantly, allows downloading the song to the personal media player under the same rental fee. We believe that subscription services will be particularly attractive to users with high-capacity players who can pay a monthly flat fee to access thousands of songs without buying each song individually.

In the future, we see the appeal also increasing as the content is expanded to include data from other types of audiobooks, short video clips, news reports, POD casts and photos. POD casts, for example, began as an underground movement but has quickly emerged and is now being used by companies such as General Motors, Sun Microsystems, and Nintendo. We see these as significant drivers for high-capacity players that need a powerful solution that can manage the content, catalog the data, and provide a robust and snap-in user experience. This is exactly where PortalPlayer excels.

The latest example is Microsoft's "Play for Sure," technology which has both elements -- a subscription model and a download model. We believe that PortalPlayer is a leader in making customers to design products off of both these technologies, and we currently have customers shipping products that incorporate both of these features.

The move to high-resolution color screens is another trend that is clearly underway. In 2004 we introduced our photo edition platform, which enabled color displays in personal media players. In 2005, we expect color displays to transition from the high end to more mainstream products. And the new products that we introduce this year, we expect will help migrate the same feature set into the high-end, feature-rich, flash media player market. We believe that media players that incorporate this feature will be among the most attractive to prospective new buyers.

Another driver of color displays on personal media players is the proliferation of billions of digital photographs. As capacity increases and color displays become more sophisticated, media players are the perfect device to store additional photos, show them to friends and family in a slide show in a music-enhanced manner. The problem right now, however, is there isn't much interoperability and compatibility between these camera devices and digital music players. That is why we recently became a founding member of the pig sync [ph] consortium. The consortium is a voluntary industry effort of companies in the digital media player, digital camera, and portable data storage markets working to make it easier for consumers to transfer photos between digital cameras and car players and to and from consumer electronic storage and playback devices. PortalPlayer is contributing significant support to this initiative.

Our new 5022 device allows users to hook up their portable media player up directly to their digital camera. We see the ability to store and display digital photos as a growth driver to the media player market, and we'll continue to work with other industry leaders to help evolve the standards in technology to capitalize on this growth opportunity.

The last trend I'd like to talk about today is the development of unified devices. These are devices that incorporate the functionality of personal media players, cell phones, PDAs, wireless e-mail, and gaming devices. We believe that these types of devices will represent an exciting market opportunity down the road, and we are making the appropriate investment in this area today.

So, in summary, we are having great success with our current customer base, our 5022 significantly raises the bar on our technology offering, our 5024 enables us to target an even larger portion of the overall market, and the momentum to remain strong in 2005. We intend to remain on the forefront of the technology development as well as a market leader.

We are happy to now open up the call to take your questions about our business, but I do want to remind everyone that it is our policy not to comment on specific customers' products or their roadmap. So, Operator, we are ready for questions.

[OPERATOR INSTRUCTIONS] Randy Abrams, Credit Suisse First Boston.

To start off, I wondered if you could elaborate a little bit more on what is driving the strength and your outlook for second quarter? Maybe talk about the outlook, whether that's from existing products or whether you see some new products that's helping the outlook for the coming quarter?

Overall, as we said, we see that strength in the quarter. It's reflected directly from our backlog. That backlog, as you know, with our concentration, is made up with some very large customers today. So, as I said, we reiterate the strength of that quarter is really driven from the backlog we have in front of us. So it is from both a broad range of customers, and that's probably the color I can give you on that.

Okay, and turning over to the flash product -- just maybe provide an update on how it's been received from customers and how sampling activity is going.

Our customer reception has been strong. As you may know, the CS was the first time that we demonstrated this product both in stand-alone and in actual compelling mockup platforms that we have produced. As I said, reception has been strong. We are targeting a second half general release of that product, and we believe we're on track for that.

Okay, and just one final question on the cell phone market -- Nokia just came out with a 4-gigabyte hard disk drive in a BOD [ph] phone. Maybe talk about the cell phone market a little bit more -- are you starting to see more engagement from Hensa [ph] vendors and carriers? And if you look at your chips that's now -- do you see that being able to sell into this space, or do you see additional functionality you need just to target that market?

That was a great question, Randy. We think there's a lot of excitement in the market. We believe that the mobile phone experience could really benefit from a great music experience. So as you indicated there are some early products being announced that may be here the end of the year, high price point, low battery life. So the areas in our active conversations, where we're really focusing on, which makes a big difference, is both the user interface, the power of the platform, and the power consumption, and we're having great conversations with the key players in this marketplace.

Glen Yeung with Salomon Smith Barney.

Hi, this is Jim on behalf of Glen. In the past you've discussed that your Apple revenues have been about 88% and non-Apple about 12% in Q4. Can you give us an update for Q1 and the outlook.

Update is, as I said earlier in the prepared remarks, we sold more than $5 million of product to non-Apple customers this quarter, and I can't break it out for you, Jim, for the second quarter. We don't give that kind of guidance.

Anything for year-end?

For year-end, no, certainly not. The guidance is only for one quarter, and we don't break out by customer.

Okay, can you comment on units and ASPs in Q1?

I'm sorry, again, I can't comment on ASPs. You know what we said before -- ASPs traditionally declined in the consumer electronic space. We said we see this on a SKU basis, 20% to 25% decline. As we add new products and new features, and with that new value, you can slow that down and decrease that decline to maybe 10% to 15%. As you reset the price for new products, and we have been very successful and accomplished something this quarter by when we introduced the 5022.

[OPERATOR INSTRUCTIONS] Shawn Slayton with SG Cowen Investment Bank.

Hi, gentlemen, good afternoon -- a nice quarter, nice guidance. When would you expect -- maybe to Gary -- when would you expect meaningful revenue from your flash SIP? Could it hit this year, or are you setting the table for early '06?

Of course, it all comes back to the definition of meaningful. As we said, we have planned, and we believe that we'll be seeing revenue in the second half of this year. As you know, from our breakdown of the flash market, we are still very much targeting the high-end, high-capacity, high-feature part of the market. We think the market is moving to us. We think, as the price point of flash memories are decreasing rapidly, the big picture for us is really positioning for 2006 where the sweet spot, we think, the high-capacity players move very much into our strength, which is high-capacity, large databases, large content count. So, yes, we'll see revenue this year, but the tone of your question is also very strong, and 2006 is where we think the market moves to us to be a very meaningful push for us into that space.

Okay, thanks. Olav, I think there exists some investor jitters out there as to absolute inventory levels in flash and hard-drive players. So can you maybe characterize for us your visibility and comfort level as to inventory first, at your largest customer, and maybe can you characterize for us your visibility into the hard-drive player sales channel. So in other words help us understand consumption in the context of existing channel fill? Thanks.

I don't have the visibility, and I can't comment on our customers' channel inventory, but if we believe that there was excess inventory, we would not be seeing the strong backlog orders we have translated into our strong revenue guidance. So do you want to know what our inventory level --

We can obviously make the presumption that you have very good visibility into the levels of your ICs at your largest customer. That's kind of a no-brainer, I guess, right?

We're very comfortable with the guidance that we've given. We work with the brand leaders that have very good material planning processes, who are very tight in that process, and as you know we're already in our 8th week of revenue recognition, you know, in accordance with our revenue recognition policy.

Can you frame for us how you monitor what I'll call "finished goods." Your end customer, end brand, finished goods out there in the sales channel, thanks.

Well, we have the same data access that you have. We certainly look at MPD data, we look at our own sales into the channel, and we have the same access to the data that you have when our customers release information about their software.

Okay, so with the information available, you're comfort level is high. I don't want to put words in your mouth, but is that what I'm hearing?

Yes, that's what you're hearing.

Absolutely.

Jason Pflaum with Thomas Weisel Partners.

Yes, good afternoon, guys. Maybe just to follow on that question as far as your visibility into Q2. You mentioned that you have pretty strong backlog. What percentage of your guidance is in that backlog today? Or in other words how much more do you need to turn this quarter to hit your guidance?

Well, I can't break that out for you, Jason. I can't tell you exactly whatever our sales are. Again, we're in the 8th week of our revenue recognition already . You know that we cut off our revenue recognition -- for Q1 we cut it off in the basically March 10. So everything after March 10 is Q2 revenue.

Jason, I'll give you a little flavor on the graphics chip company. We are not experiencing the tremendous hockey stick type of dynamics in this business at this point, and so we don't want to characterize exactly the shape of that curve, but I can color it -- it is not like the type of experience you can see in other types of consumer electronics chip businesses, which are very hockey-stick loaded.

I guess looking at your flash market strategy there, are you planning to expand your sales and distribution footprint at all to service a broader customer base? Are you really doing a rifle-shot approach, where you're targeting just the big guys out there?

It's building from the brand leaders. That is where we have excelled and really honed our skills, but you bring up a great point in that we are investing in Asia, in geographies with feet on the street in locations like Korea, like Taiwan, particularly. And so we are expanding on that, because, as you indicate, there are different customers, different strength of customers we can attack there. But we're putting some strength at the branded customers, but we are also expanding our footprint in Asia, because that will serve, as you know, brought us to the customers first, as well.

Okay, and then maybe just looking at the handset opportunity -- can you talk a little bit about the design cycles that you're seeing there and maybe just give a flavor for when you think the earliest you could see potential product in the market?

Yes, we think today you're seeing the first generation of the music phones -- relatively limited storage and much of the difficult user experience tied into music services over the air and through the PC or connector services. So for us it's also important to synchronize the timing of when the carriers and new types of providers will be providing these music services. So that really does start to point towards more 2006 timeframe. And that, frankly, is probably more driven by really getting a great end-to-end user experience than a particular chip availability. So I would point you toward a 2006 timeframe for, really, what we think will be a great music experience on a type of music-based cell phone.

Okay, 2006. And then, finally, did you give gross margin guidance for Q2?

No, we haven't, Jason, but if you're asking about it, the long-term target model that we have is completely intact. So we expect our margin to be in the 41% to 44% range.

Quinn Bolton with Needham and Company.

Hey, guys, good quarter. A few questions -- Gary, you had some real interesting comments about the color screens moving to the mainstream market. I'm assuming that when you say mainstream, you're moving into the flash player market, and so I'm curious as you look across the competitive landscape, you look at the 5024 versus some of the other offerings out there in the market, what kind of color screen support do you have or do you have advantages over the, say, existing silicon in the market, and then I've got a few follow-ups.

When I talk about the penetration of color, I think it's into the mainstream hard-drive market and into the high-end, high-capacity flash players, but the trends are clearly there. I think people love color, they love the vitality and such like.

What we mean by our capability in the flash market is to be able to support screens up to your 2x3 inches -- either TFT or DSTN technology, and so in our technology supports really crisp, vibrant photo display or movie display -- on those pocket-sized displays.

Is that a quarter VJA or even higher resolution? What kind of pixel resolution can you drive with the device?

Quarter VJA is about right for the price point, because the interesting trend here is if you really push too high on the cost of those screens and on the resolution, you start to push them out of, really, the critical price points for personal media players. So QVJA provides a very nice experience and, again, the other great feature we have in our chipset is the ability to also simultaneously display on a TV, and customers are loving that approach to be able to have two different images -- one on the media player and one on the TV. So now we've had a great experience in music, we're adding that music experience to photos and to the movie clips, video clips that we are enabling.

Okay, moving to this flip between the 5022 and the 5020. You said 5022 was significant for us. I'm just trying to see if you give a little bit more color. I mean, is that double digits? Is it more than 10 but less than 50? Anything you can provide there. And a related question is when do you think the older 5020 product would start to go end of life? Is that a product that will still ship into 2006?

So the color and the split? No, I can't provide but I can tell you, yes, in double digits. Significant for me is certainly double digit. Somewhere between 10 and 90.

That's a pretty wide range, but okay. What about the 5020, can you comment as to when you think that may fall out of the revenue mix?

The tail will probably be going into the early '06. That's probably where the product will tail off -- second half is where, as you say, with these new product introductions, which is off to a really tremendous tripling of battery life, is a very compelling feature set that made a huge difference to the impact of our technology in this space. So I think, frankly, by the end of this year, the front end of next year, is where you'll see that diminish to a fairly small percentage of our business.

Okay, and then just one final question on the market. Can you talk about the handset market in terms of whether you're seeing opportunities in, I guess, the nearer term for stand-alone MP3 player chips used only in an MP3 player application that would sit to, say, a camera processor or a media co-processor/apps processor, or do you see the 5022 or future generation of products really replacing or filling the entire apps processor or media co-processor role in the handsets?

The answer is both of those. It's really dependent, frankly, on the time-to-market for some of the various players here in the market. The 5022 offers a significant power savings over solutions in the market today, and if you think about today's solutions in the handset market, they work really great when they're not transmitting. They work great in high transmit power, but as constant operation mode, which is how MP3 or music playback works, is really the forte that PortalPlayer has developed. So we're seeing interest in both those applications you described.

Okay, great, and then the last quick one -- can you give a comment on where lead times are -- sort of, eight, 12 weeks, any comment you could give?

About midpoint between those two.

Dan Ernst with Hudson Square Research.

This is Frank calling in for Dan. Just one quick housekeeping question -- the other income seemed a little bit high around $900,000. Could you explain why that was?

It's mostly interest. We have $137 million invested, and yields are, as you know, doing much better now. So it's mostly interest income, Dan.

Okay, that makes sense. And, secondly, just -- I know Q2 is usually a little bit slower for electronics, but given that the MP3 market is not really penetrated that highly, are you comfortable with your inventory level going into Q2? I know you said your days inventory outstanding is around 30 days, long term. That's what you want it at. Is that still a good level considering the strength you see going into --

Absolutely, we believe we're at the right level, and we feel good about that, very good about that.

Okay, and, lastly, I know that the handset question has been kind of asked a lot. I'll just try one more time. Given that Motorola is looking at releasing an iTune [ph] possibly by the end of the year, probably more likely in 1Q and keeping the hard drive in their phone and DVDH capabilities on your chip -- if the video market for handsets were to materialize in early to mid 2006, does that necessarily mean you would have to start sampling chips with any potential handset vendors by the end of this year or is there some other way of looking at in a timeframe --

No, you're not far off the timeframe. The answer is, I think, someone asked the earlier question -- is the architecture you would use for that chipset implementation, and we can be positioned, depending on the customer requirements, in either of those two actual socket positions. So what we learned, I think, is being a pioneer, frankly, in the MP3 space for the last five years, is you have to make sure that the complete end-to-end experience is put together, and I think we learned that very actively in the MP3 market of understanding how to put together both tying into the applications, the firmware, and the chip, and we think that customers on the cell phone are going to want a great music experience. So that's what we're focusing, and we're making sure we're making the right investments to do that for us.

Carter Driscoll with IRG Research.

Good afternoon, gentlemen, well done. Many of my questions have been answered, but I want to take a step back and ask indirectly what you're seeing in terms of NAN [ph] and microdrive prices and when you're seeing the continued deceleration in pricing trends and whether you think that bodes well for continued MP3 player pricing to come down into the sweet spot and drive more demand at the higher end -- just a top-level question to start off with, and then I have a follow-up.

Are you asking on the hard drive or the micro hard drive versus the flash?

Just general pricing for the storage medium itself and where you see it directly translating into the ability of the vendors to bring down their own prices and drive unit growth that we're all forecasting.

Well, as you know, the hard drive market itself has a smaller volume base, smaller number of players, but we are now starting to see the big players really step into stride, and we're seeing announcements of their suppliers increasing their production through the year. So we think you'll see steady decline on the micro hard drive prices, not significant steady declines, but also the introduction of new capacity points, for example, say, 10-gig in this type of space.

Also, there's been announcements from companies like Western Digital, their intent to enter this market as well, so that is generally increasing the competition, increasing the availability, and increasing the price competition in the hard drive space.

On the flash market, from a price point of view, is much more vibrant. You're looking at between 40% and 45% price decline in the flash market, and we think that's going to continue significantly in the second half as well. Again, that's why our strategy of not chasing the flash market down into the low flash capacity sizes -- half a gig, 256 -- we think is a smart one, because we think end of this year, 2006, you're going to see really 1 and 2-gigabyte be the sweet spot for the flash MP3 players.

Could you comment at all, again, you're a little bit indirectly removed from this, but demand geographically and where you see it accelerating or decelerating versus your own expectations?

It really hasn't made much of a mix. I think there is always, as some of the new music services get launched by some of the very large players in this market that stimulates demands within different locations, if someone -- you know, a new music start in Australia or in Central Europe obviously helps that from a regional point of view. We still see the U.S. as a very strong driver for the hard drive MP3 market. Career [ph] just loves new innovation, and so the career market, in general, laps up all types of variety of MP3 players, and then the rest of the world tends to be more cost-conscious. So that I would paint as the general picture, and it's fairly consistent, so far, quarter-over-quarter.

Are you at all concerned or, obviously, you've taken this into account with your strategy, but attempts in the past, especially in the handset market, to integrate multimedia functionality or beyond adding one or two main applications such as potentially adding video or music to the cell phone itself has had mixed success, at best. What makes you more confident that we've reached a critical point, which, you know, battery management has always been a huge issue, going forward. What gives you confidence that we're at that critical juncture, that we're actually going to introduce products that consumers aren't going to be disappointed with yet again?

Well, I think you echo exactly the point I was making. It's pulling together the complete solution and knowing how to both deliver encrypted content in a very low-power profile, having produced very snappy user interfaces, how to give people common user interfaces between, for example, say, their PC and their handset. And these are all areas that we have excelled in as we've built our personal media player business over the last five years. We have the power optimized solutions now for photos, for music, we have integrated camera solutions, we have the video clip capabilities, and so our leadership and our management plus the real deep insight into end-to-end services, we think offers, for us, a very interesting competitive advantage as we talk to the players in the market.

And just a last question for Olav -- can you break out the cash from operations into a couple of components -- one, possibly the stock option exercise contribution?

Our stock option exercise contribution was absolutely minimal. Mostly from our net income and then certainly you see that inventory and then some noncash working capital components have changed. There is probably $7 million to $8 million from net income and maybe $5 million to $6 million from changes in noncash working capital.

Jason Paraschac with Kaufman Brothers Equity Research.

A question on the second quarter guidance -- can you give us some color there in terms of whether you think it's for new product inventory builds or is that your customers planning for a very strong summer ramp, and so they're building inventory ahead of that, or do you think that we're just seeing a very strong linear ramp through the year in terms of consumer demand?

If we believed this is excess inventory, we wouldn't be seeing those strong backlog orders. So we think we're not seeing extraordinary differences or information back from our primary vendors. As Olav indicated, we have strong, good relationships with very material planning aspects. So if we believed there was excess inventory, we wouldn't be seeing these strong backlogs. So and that, frankly, has translated directly into our strong revenue guidance for this next quarter -- for this Q2 quarter.

So should I take away from that that you believe that consumer demand is just ramping in a linear fashion that strongly?

I'm not sure I can put a linear number on that. As you saw from the Gartner numbers, we are still in a great accelerating and growing MP3 market. The numbers forecasts from Gartner are showing well, and, as we indicated, our guidance is better than seasonal as compared to a similar electronics trend. That's because the MP3 market is vibrant and, of course, blowing our own trumpet here, we have great products designed into great customer products, and they're winning in the market.

Does that include new products that you're selling into now that will be released later on in the year?

This quarter and the effect is really on a quarter-by-quarter basis. The second half we'll talk about when we get to the second half. In this market, I don't believe that people really build long chains here in terms of building shelf life here. So, no, we think this reflects business opportunities that our customers are expecting.

Okay, and then just two housekeeping questions -- just trying to clarify on the blended ASP question. Olav, I know you talked about you have a 10% to 15% blended ASP decline, but given the strength -- apparent strength of the 5022, is it possible that ASPs, on a blended basis, actually increased this quarter?

Let me just answer it this way -- ASPs do decline in our business. I mean, there could be a quarter where you could see a flat ASP development depending on when you introduce a product and what the additional feature is. Q1, I think it's exactly in line with what we have guided to.

Okay, thank you, then just a question on the flash product the second half of this year -- do you think that there is going to be -- or can you give us any color on a difference in the gross margin of that product versus the hard drive products?

We don't break out individual products by product set. We are confident of the long-term model that we've guided and have frankly building a business to -- 41% to 44%, and that we have given guidance through the rest of this year at this point.

Randy Abrams, Credit Suisse First Boston.

Just a follow-up with the cash you're generating this quarter and then potentially in the coming quarter -- do you have any plans to potentially even buyback stock with some of the lockup just to try to soak up some of the shares that might be coming up? Maybe better talk about what your targeted cash levels might be?

There is no plan that I can talk about right now about a buyback program. We just went public, there's cash, there's a lot of opportunities out there, we're very happy that we generated the amount of cash. I don't know exactly what -- I can't give you any guidance on any planning on what our target level is and what we would actually enter into such an agreement. It's a little early, and we're still executing our plan right now, and we're very happy with our Q1 results with our Q2 guidance. So when the time comes, I'll make the appropriate disclosures.

Chris Chaney with Stanford Group Brokerage.

Thank you and great quarter, guys. I just wanted to ask a question about your supply chain and that is -- you guys have crossed over the threshold now of well over 10 million units per year at which point the [inaudible] and LSI Logic relationships maybe aren't quite as necessary as they were. Do you have any plans coming up that you can talk about at all to perhaps help protect your gross margin? If ASPs decline more than you expect or anything like that to sort of boost overall profitability in that area?

The answer to that is our existing supplies, as you indicated, are actually proving to be very nimble and quite flexible partners. They know that they have to respond to market changes as well. So they're doing a good job for us. They are doing a good job on this cost reduction plans we have in place, but, as you said, in this last quarter we actually had started to make the headcount investments and some of the other critical investments we need to beef up our operational capability in-house, and we'll be looking at the transition, as you alluded to, to what's got the COT technology real, a part-by-part basis, as we go through the year. So our existing partners are serving us well. They're being good, flexible partners, but we have started to add the headcount that will be needed to make a decision on a SKU-by-SKU basis to a transition to COT.

Shawn Slayton, SG Cowen.

Gary, you mentioned video clips. On an industry basis and not at a customer's specific level here, is there a rush to bring new MPEG4-enabled media players to market this Christmas? Or do you feel like the industry is still getting its sea legs as to subscription-based audio this year, and MPEG4 is most likely an '06 event? Thanks.

The answer is it really is customer-specific. I think as customers start to look at how they differentiate between each other, we do see quite different trends. In Asia, for example, there's quite an excitement around video type of content, and the content that we think is the most valuable and most pertinent for a personal media player is clips that go between 15 seconds and 15 minutes. And so out of our Asia customer base, where customers are more willing to download content in a slightly more haphazard manner, we're seeing interest. I was in Korea recently, and we saw significant interest there.

To your point, not having an integrated, easy to use type of service, that probably is '06. And so we see both. It's a great position to be in.

Shaw Wu, American Technology Research.

Okay, thanks, just some questions on the 5024 -- is this product aimed solely at flash or will it also be used for hard drives? And then a little better color as to the timing of second half. Is that the first half of the second half or the second half of the second half? Thanks.

I'm just smiling here on the timing aspect. The 5024 is what is optimized for the flash market. Actually, by using the second 0.35 micron chip has all the great power levels and power hours you need to play on the flash player -- the display, back light, power USB 2.0 -- so 5024 is the specific, well-targeted point for a complete high-end, flash play solution.

In terms of the second-half guidance, frankly, I'm not going to give you any more color at this point. Wait and see, is the answer.

Okay, and just a quick follow-up, if I may. In terms of next-generation hard drive platforms, do you see -- you say that you're 5022 supports MPEG, video, I guess, with the co-processor. Any plans on having that fully integrated?

Actually, we fully support motion JPEG and MPEG 4 in the native mode today without any external support there. What we have introduced through a defined co-processor interface is if you really want to push the performance levels of video, it will take significant power, frankly. We now interface into solutions out of the market to give you really a very high-performance solution. So mainstream video we have covered in our integrated chip today.

Sorry, just one last one. Do you give the number of units you ship in the quarter?

No, as a policy to now we've actually declined to give color both on ASPs and volumes.

All right, I think at this point we thank you again, all of you, for joining us today. It was a great pleasure to have you on the call and for your interest. We plan to be on the road meeting with investors quite often during the next few months. Olav will be attending a Merrill Lynch technology gathering on May 3rd. We'll both be present at the CIBC World Markets Communications and Technology Conference on May 11th as well as the Salomon Smith Barney conference on June 2nd, and, of course, the Western Annual Technology Conference on June 7th. So we both look forward to seeing many of you at these conferences and, with that, we'll conclude this conference call. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. We appreciate your participation in today's discussion, and you may disconnect your phone lines at this time.