輝達 (NVDA) 2006 Q2 法說會逐字稿

Welcome to PortalPlayer, Inc., First Quarter 2006 Earnings Conference Call. Today's call is being recorded and will be available for playback beginning two hours after completion of the call. To access the replay, please dial 719-457-0820 with the passcode 1470706.

At this time, for opening remarks and introductions, I would like to turn the conference over to Kristine Mozes, Investor Relations for PortalPlayer. Please go ahead, ma'am.

Thank you for joining us today. In addition to this call being available by phone replay, it is being broadcast live via the Investor Relations page at 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.

The statements on today's call that 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 our core competencies, business focus in being a market leader, our future in plans and growth, our customers' inventories, development efforts, features, benefits and introductions of products and technology, sales of the 5021 device, our entrance into new markets, our CEO succession, anticipated customer demand, our ability to execute our product roadmap, our revenue growth, market trends and demand for benefits of the feature-rich segment of the personal media player market, an anticipated growth of this market, market trends and demand for differentiated notebooks and anticipated growth of this market, the availability of Microsoft Vista SideShow technology, market trends and demand for products with wireless connectivity and anticipated growth of this market, our ability to be a leading supplier of wireless-enabled personal media players, demand for our products, anticipated benefits of our workforce reduction and future financial results, GAAP and non-GAAP, including revenue, net income, expenses, gross margins, ASPs, stock-based compensation charges, tax rates, cash flow, and operating expenses, including but not limited to future R&D spending and selling, general and administrative expenses.

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, our Form 10-Q for the year ended March 31, 2006, as filed with the SEC, and from time to time in our other SEC reports for information on risk factors that could cause actual results to differ materially from those discussed in these forward-looking statements. These forward-looking statements speak only as of the date thereof. 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.

PortalPlayer reports earnings per share and net income in accordance with GAAP and additionally on a non-GAAP basis. PortalPlayer uses non-GAAP additional measures to exclude certain expenses it believes appropriate to enhance an overall understanding of its past financial performance and also its prospects for the future. PortalPlayer believes that providing these non-GAAP financial measures is useful to both its management and investors, because they provide a consistent basis for comparison of the Company's financial conditions and results of operations between quarters, which comparison is not influenced by stock-based charges, the amortization of purchased intangible assets and the related tax effects of these items. The full reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued earlier today, and we ask that you review it in conjunction with this call.

Now, I would like to turn the call over to Gary for his introductory remarks. Gary?

Thank you and welcome, everyone. In Q2 we achieved a number of important milestones in our strategic roadmap to achieve a more diversified business structure. We continue to execute very well in forging relationship with leading customers in each of our target market segments. For example, in the personal media display market, we are now moving from a technology phase to the design phase. In the second quarter we announced collaborations with Acer, ASUSTek, Compal and Quanta, two of the largest notebook ODMs, and two of the largest notebook ODMs in Taiwan. We also enacted discussions with many other leading companies.

During the quarter we also secured our first wireless design win in the cellular space, and continue to receive positive feedback on the system performance capabilities in feature set from tier 1 handset manufacturers.

On the financial side, our second quarter results were in line with guidance we gave on the last quarterly conference call. Revenue came just about the midpoint of our guidance. Operating expenses were in line with guidance, even including $600,000 in severance charges related to our June restructuring. We generated cash from operations ending the quarter with a record cash and short-term investment position of $194.2 million. All in all, a solid quarter.

In Q2, we also regrouped our resources around our key growth strategies. We believe our core competency is in developing innovative, feature-rich technologies for personal multimedia devices, and that remains our focus. The technologies that we are developing today are targeted at more than just the personal media player market. They're also targeted at the established high growth notebook computer market, and the even larger wireless handheld device market. In order to successfully be a leader in these markets, we plan to, first, market our existing technology and find new superintegrated single-chip roadmap to a broader customer base within the personal media player market.

Second, successfully winning designs for our Preface technology and working with our customers to bring their products to market.

Third, continue to develop a wholly-integrated wireless solution that we believe will be applicable across multiple fast-growing markets and work with our early adapters. And, of course, we continue to ship our 5021 device to our largest customer for some of their iPod models, and we'll continue to focus our efforts on winning future designs with them.

In a few minutes I'll go into more details about each of our target markets and the milestones we achieved. Before I turn the call over to Olav, I want to update you on my personal plans. As indicated in the press release early today, I announced I intend to leave the Company by the end of 2006. My true passion is in leading companies through their initial rapid growth phases. When I joined PortalPlayer, the Company had one product and very limited cash. Today it has several design teams working on products in three major markets, and nearly $200 million in cash. During this time I also built an outstanding management team to complement members of the founding team. Together we have built an exceptional company, and I have thoroughly enjoyed the intensity of the past three years. There is never a good time to transition out of a company, but we've laid the foundation for and are executing well on our diversification strategy, and I firmly believe that PortalPlayer is well poised to be a leader in its new chosen markets.

With these initiatives well in hand, I feel that now is the right time for me to look at other opportunities where I can be instrumental in the early stages of the company's growth, just as I have been here at PortalPlayer. In the meantime, I am committed to working with the management team and employees to continue to lead the Company in its key growth strategies, as well as work with the board to search for a successor and ensure a seamless transition.

Now, I will turn the call over to Olav.

Thank you, Gary, and welcome, everyone. The second quarter financial results we are reporting today are in line with or better with our previous guidance. Revenue was $34.6 million and the second quarter revenue increased from what we've always termed "Other Customers." As a matter of fact, in Q2 we sold about $4.8 million to accounts other than our largest customer, which makes it the highest revenue contribution from other customers in the past five quarters.

Our second quarter gross margin of 42% was within our operating target model of 41% to 44%, and the same as in the previous quarter. As we mentioned last quarter, we expect increasing margin pressure throughout the rest of the year resulting in an overall gross margin for the full year to be at or slightly below the low end of this long-term guidance of 41% to 44%. This is due to the fact that our largest customer does not intend to transition to our follow-on product, to the 5021 device specifically due to anticipated significant ASPE clients for the 5021 device, as we expect to ship it through the rest of the year.

Net income for the second quarter was $1.4 million, compared with a net income of $6.3 million in the same period a year ago. The second quarter 2006 net income resulted in an income of $0.05 per diluted share based on 25.3 million weighted average shares outstanding, compared with a net income of $0.25 per diluted share based on approximately 25.1 million weighted average shares of outstanding in the same quarter a year ago.

Net income in the first quarter of 2006 was $6.5 million, or $0.26 per diluted share based on 25.5 million weighted average shares. This included not only stock-based compensation charges, but also amortization of tangibles and the tax effect on those items.

Now, in the second quarter we also booked a net tax benefit of about $1 million to our P&L even though we were profitable, and why is that? In order to book a quarterly tax provision, we have to evaluate our overall financial performance for the entire year including an outlook for the remaining quarters. During this quarter we actually increased the outlook for all of 2006 compared with our outlook a quarter ago. With better expected financial performance, those expenses that cannot be deducted for tax purposes become less relevant as a percent of pre-tax income. Accordingly, while the non-GAAP tax rate of 35% stayed the same, the annual effective GAAP tax rate used for our tax provision could be reduced from the previously recorded 51% to now 43%. When we adjusted our year-to-date tax provision to this 43% rate, it led to the net tax benefit in the second quarter.

Now, excluding stock-based compensation charges of $2.3 million in accordance with FAS 123R, also including the $344,000 amortization of our recently acquired IP, as well as the tax effect associated with these charges, and the effect associated with the adjustment of the GAAP tax rate that I just described, non-GAAP net income for the second quarter of '06 was $1.9 million, or $0.08 per diluted share based on 25.3 million weighted average shares outstanding. I'd like to point out that these results already include the severance charges that we incurred in the second quarter.

The non-GAAP effective tax rate was again at 35%, which is in line with our previous guidance. This compared with a non-GAAP net income in the second quarter of '05 of approximately $6.8 million, or $0.27 per diluted share, and non-GAAP net income for the first quarter of '06, which in addition to excluding stock-based compensation also excludes the amortization of intangibles, as well as the tax effect of those items, was $10.4 million, or $0.40 per diluted share.

In our earnings release we provided the detailed reconciliation between GAAP numbers and non-GAAP numbers, which details the stock compensation charges, the charges resulting from the amortization of intangibles together with the tax effect for each relevant quarter, as well as effect associated with the adjustment of our effective GAAP tax rate.

Excluding stock compensation and the amortization of intangibles, our operating expenses were up $13.7 million for R&D and SG&A in the second quarter, $2.8 million lower than our Q1 spending, and this already includes the $600,000 for severance-related expenses that we guided to in our June 8 press release. If you exclude those severance charges, our operating expenses of $13.1 million, or about $400,000 below our $13.5 million guidance, and more than $5.5 million, or about 30% below our OpEx level in the fourth quarter of last year. This shows again how flexibly and swiftly we can react to changes in our business. We will continue to be very cautious with our spending to achieve a balance between investing wisely so we can successfully execute on our technology roadmaps and providing a financial model that supports our current transition to a much more diversified business model.

Accordingly, we do not plan to use our current cash position to fund our regular operations throughout the rest of the year. Our stock-based compensation charge of $2.3 million this quarter was for stock-based compensation in accordance with FAS 123R, including expenses related to our restricted share grants that we began issuing in 2005, elements of amortization of deferred compensation, and some variable charges. For Q3 we expect our total compensation charge under FAS 123R to be at about $2.9 million before the effects of taxes.

Now, let's turn to the balance sheet. In the second quarter we continued to successfully manage our inventory level. At quarter end, our inventory balance was $2.1 million, about three-quarters of which was work in process for our 5024 device. Our deferred income position, which represents the gross margin for shipment in the last two to three weeks of the quarter was $6.3 million, a pretty high level of activity as we left the quarter.

Headcount at the end of the quarter was 274, and this is about 40 employees fewer than last quarter, mainly because of the reduction in workforce we undertook in June while we regrouped our resources around our important key initiatives, which Gary mentioned earlier. As a result of the regroup, we not only reduced overall headcount, but we also redirected personnel to key product areas. We expect a yearly savings from the regrouping to be about $6 million to $7 million.

Before I turn the call back over to Gary, let me summarize our guidance for the third quarter. We expect revenue to come in between $32 million and $42 million. Total OpEx before stock charges is expected to be about $12.8 million, which includes about $1 million of nonrecurring engineering expenses related to the tape-out of new chip technology. Stock-based compensation charges are expected to come in at $2.9 million before the effective tax. GAAP net income per diluted share is expected to be between break-even and $0.08, based on approximately 25.6 million weighted average shares outstanding, and excluding the stock compensation charges, $344,000 of amortization related to our purchased intangibles and related tax effects. Non-GAAP net income per diluted share is expected to be between $0.07 and $0.17.

At this time I would like to turn the call over to Gary.

Thank you, Olav. So, a well-executed quarter financially as well as technically and operationally in each of our target markets. We used our flexible spending model and restructuring to create a solid financial structure. We made solid progress with our Preface technology and achieved a key design win for our wireless technology in the cellular space. Let's now take a look at the milestones we achieved in our target markets.

First, let's talk about the personal media player market. We are marketing our highly integrated roadmap to a broader customer base, as I said. We believe that the feature-rich segment of the personal media player market has a lot of innovation ahead. By adding a variety of wireless technologies, such as Bluetooth, Wi-Fi, HSDPA, and so forth, to our platform, we can enable customers to develop feature-rich players that no longer need [inaudible] by cable with a computer. We can enable content providers, new ways to distribute their media content, and we can help enable cell phone carriers create new revenue models through the downloading of content through the airwaves.

By developing a superintegrated chip that incorporates low power, wireless, audio and video capabilities, we can help customers design feature-rich players with innovative form factors and save money on the overall bill of materials, which in turn translates into savings for the device. We believe that through continued silicon innovation and integration, the personal media player market will continue to evolve and grow.

On the customer side, SanDisk announced in their recent earnings call the other day that the Sansa e200 audio players which use our technology have been well received, helping them to solidify their number two market share position for flash players in the U.S. retail market in the second quarter. Of course, we also continue to ship our 5021 device to our largest customer and support them with their designs. We also plan to aggressively pursue future business with them.

Now, let's talk about personal media displays for notebook computers. During the second quarter at two important trade shows, WinHEC 2006 in Seattle, and Computex in Taipei, we demonstrated to customers in the media our innovative practice technology. These included a personal media display that can detach from the notebook computer and connect to it wirelessly by Bluetooth, and also a variety of software gadgets that have been developed to allow users to access data such as PowerPoint presentations, stock quotes, picture SideShows and weather reports. These were very successful shows for us.

During Computex, Quanta computer and Compal were promoting their notebook products that utilize our practice technology. In addition, ASUSTek and Acer also announced they're working with us in our practice technology to leverage the full capabilities of Vista, Microsoft's new operating system in a new class of notebook computers. We're also in active discussions in many other leading companies.

Preface is now being developed in multiple form factors including inlet displays as well as detachable versions. While both form factors offer their unique advantages, detachable designs are seeing strong momentum with customers given that it makes the SideShow data and music even more accessible and add new capabilities, like VoIP handsets to the system.

In May we launched the Preface Developer's Program for developers to test personal media display gadgets and mini-applications real-time. We also continue to be active in supporting Microsoft in its worldwide third-party training, and have supplied more than 180 Preface development kits into this effort with more on the way.

Recent Microsoft comments indicate they plan to launch Vista operating systems for X price site licenses in November, with a full consumer enterprise product launch in January. Assuming an on-time release of Vista, we are planning on initial Preface orders in fourth quarter 2006. We're excited about this market and the opportunity it gives us in leveraging our existing technology to an entirely new space, targeting a new customer base, and significantly expanding our target market.

Now, let's take a look at our wireless initiatives. As I mentioned in my opening remarks, we believe that our highly integrated wireless solutions will be the foundation of future platforms in all of our target markets. In the second quarter we continued to demonstrate our wireless platform to potential customers and received positive feedback on our system capabilities, and feature sets from tier one handset manufacturers. As I said earlier, we are very pleased to have secured our first wireless design win with a top-tier customer, and we plan to have our wireless-enabled platform working for a broader customer valuation in the second half of this year.

Our vision of wireless-enabled personal multimedia players is not just about handsets. In the future we believe the combining of core competency in developing innovative feature-rich multimedia technologies will be applicable to any handheld mobile device that needs to manage large amounts of content, such as audio players, video-media players, Preface-enabled personal media displays, handsets, GPS systems, and so forth. Our goal is to be a leading supplier to these types of devices, focusing on a high level of integration and low power capability.

Since we are broadening our target markets to now include personal media displays as well as devices, we have been building an infrastructure to support those initiatives. In June, our new Taiwan Development Center formally became a fully registered PortalPlayer branch. The Development Center employees are focused on developing our practice technology and providing local engineering support for Preface to customers and partners in Taiwan and China. The head of the office is W. S. Shiau, who is also our new Vice President of Worldwide Sales. W. S. has 27 years of sales and marketing experience in the semiconductor market, and has been working with Taiwanese, OEMs and ODMs for many years. He joined us in June of this year and has extensive management experience previously at National Semiconductor and at AMD.

Also as part of our internal regrouping, we have organized our engineering teams under Dave Weigand, who is now our Senior Vice President of Engineering. Dave is responsible for the development of PortalPlayer's next generation system on chip solutions, firmware, and systems engineering. He has more than 20 years of wireless industry experience, having architected, tested, designed and brought to market leading edge GSM, CDMA and PDC silicon and handsets while at Motorola and National. For the past year he has led our wireless development as Vice President of Wireless Technology. Dave holds numerous patents in the area of architecture design, development and production of cellular phones and wireless chipsets.

We have also promoted Venkat Raja Raman to be the Vice President of Engineering in India reporting to Dave. Venkat has more than 18 years of semiconductor product design and technical management experience. He joined PortalPlayer just over three years ago and since that time has been leading our entire [ASIC] organization in India. Prior to joining us he held management positions at Sun Micosystems here in the United States, where he worked in the network/security and graphics areas, and in the UltraSPARC groups, and prior to that, Synopsis.

In summary, we are executing well on our efforts to diversify into high growth markets. The market segments we have targeted we expect to see significant long-term growth, and we continue to make substantial investments in developing technologies to enable highly integrated, feature-rich products to pursue them. We are working with leading customers in these markets to jointly develop innovative products.

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

Thank you. (OPERATOR INSTRUCTIONS) Our first question will come from Glen Yeung from Citigroup.

Thanks, guys. I wanted to ask a question about sort of the momentum in you various lines of business. Obviously, we see your major customer numbers start to come down, but now you're starting to benefit from some business in new markets. Do you feel like -- and figure this out as sort of to average out seasonality -- do you feel like you're sort of at a revenue run rate right now which you think is more -- hello?

We just lost the last 10 seconds.

I was just wondering if you feel like you feel like you've gotten -- if you sort of normalized for seasonality, if you feel like you're at a run rate of revenues, which is a little more stable than maybe your view was a quarter ago?

I think Gary can talk about the momentum and the customer. I'll talk about the financial impact of that momentum.

Sure, let me try to give you some color to that, Glen. So, if you look at our global market, as you said, I think we do feel that we're garnishing good momentum with these initiatives. If you look at the PMP business, again as we talked about in the script, SanDisk had good momentum to the market. And also we like particularly that growth with SanDisk in that they really have strategic access to compose like the flash memory, and so we think that will continue to give them good success in the market there.

If you look at the Preface side, as I mentioned, we are starting to certainly extend the types of customers we're working with. Computex was a very successful show for us there in that, as you know, for Asia, that is probably one of the premier IT shows, and we got tremendous traffic, tremendous press efforts from there. So, overall, yes, I think the factors are certainly pointing in the right direction. I'll let Olav address the second part of your question.

Yes, on the revenue side you asked whether we see a more stable revenue stream maybe through the end of the year. Certainly, I mean, there are two answers to that. Number one, as we get closer to the end of the year, you certainly increase in general visibility. We already gave you guidance for Q3. I know that we've gone through major announcements just a couple of months ago, and we didn't have very good visibility at the time that we made those announcements. These were new situations. But time has passed and we've certainly seen things come along, and we've told you earlier in our prepared remarks that we intend to shift the 5021 for the rest of the year, and this is based on all the information we have today including customers planning input. You heard from Gary that momentum with other customers has picked up. In terms of revenue, the revenue with other customers was really surprisingly strong this quarter, with the highest Other Customer revenue in the past five quarters compared to the revenue which we always had very highly concentrated with one customer.

So, in short, it is much more stable. You've also heard that we adjusted our tax rate because of that, so we have actually upped our internal financial forecast for the second half of the year compared to what we saw a quarter ago, which had a positive impact on our tax rate, or the benefit that we hoped. So, I hope that kind of gives you a little bit of an insight how things have developed following the announcement in April.

Oh, maybe just to follow on from that. Part of managing a business is not only understanding where the opportunities are, but understanding how the business that you've acknowledged that you've lost is sort of transitioning. Do you feel like you've got a reasonably good grip a couple of months into it now that you understand how that business will move away from you?

I think we already announced what we think what kind of business is moving away from us. I think the focus is now on the business that we have, and I think what I just told you is really focused on the business that we have, not just with our largest customer as we see it today, but also the other customers.

No, understood. I know -- what I'm suggesting is a pattern in which it will fall away. There is always some discussion about how much was in inventory, how much other parts, when those may or may not transition away as well. Do you have any sense of that, or you still don't have a view of that?

Yes, we do have a much better view now than we had weeks ago. I'm not sure I can share all that with you, because a lot of that is certainly associated with roadmap discussions and customer information, which I can't share. But internally, yes, we have a pretty good view now, which is why we have changed internal forecasts and [inaudible] models.

That's good to know, okay. The only other question I had was if you have any guidance for next quarter's cash from operations?

I don't have a particular guidance for you. I mean, you've seen our guidance on EPS and you know that we don't really -- we're not very cash-intensive in terms of investing in other than our current operations, so usually when we're guiding towards profitability, you can also assume that it's almost equal to generation of cash, unless there are changes in working capital and noncash working capital, or investment decisions that are not known at this point.

At this point you don't expect anything out of the ordinary, I guess is the way to think about it?

No, nothing that I can talk about right now, or nothing out of the ordinary as you would point, yes.

That's good to know. Thanks. Appreciate it.

And moving on to Michael Masdea with Credit Suisse.

Hi, this is Ahmad Seroff calling in for Michael Masdea. You mentioned in your prepared comments, I think this follows up on the previous question, that you don't plan to use your cash position to fund current operations. Should we think about that going forward as you're going to generate enough cash flow to fund your operations, or if there's a shortfall there might be some cost cuts going forward? Could you just expand upon those comments.

Sure. It was the first comment that you made, basically. I mean, we do not intend to use any of our one hundred -- more than $194 million of cash that we currently have on the balance sheet to fund the operations for the two quarters to come for the rest of the year. We usually only give guidance for a quarter. We wanted to extend that a little bit here for the rest of the year. It is because we expect to generate sufficient cash from our operations to not have to use any of our cash.

Got it. And then on the operating expense line, I mean, similar to the revenue question before, do you expect operating expenses to be at a run rate going forward leveling off, or do you see any big changes going forward?

I think for the quarters to come, at least the one -- since we look a little bit in this call toward the end of the year, I do see the operating expenses to get down a little below what I guided to for Q3, because we guided to 12.8. That includes, however, 1 million sort of expense for tape-out expenses. So I think the natural run rate outside of these one-time NRE expenses is closer to $12 million, which is also in line with the guidance that we gave when we announced the RIF. We said we expect $6 million to $7 million annual savings from the RIF, so about $1.5 million on a quarterly basis. We work the run rate at about 13.5 million per quarter as recently as in Q2. So if you deducted that savings, you get to a more natural run rate of 12 million or slightly below.

Got it. And just a final question, on the Preface technology, I know that's been co-marketed with Microsoft Vista. Vista was delayed once. Do you see Preface still going out 100% with Vista, or if there's a future delay in Vista, are you going to go ahead with your schedule, or try and go ahead with your customers before Vista comes out?

As part of the development effort for Vista, for Preface, it is important and as we previously announced to have an XP strategy, that could be a fallback position, as you indicated, if Vista was delayed further. But at this point our primary focus is to make ourselves part of and surround ourselves with the Vista launch with the marketing dollars that go with Vista. There is always the XP potential, but I think at the moment there is a lot of momentum, lots of good feedback coming back from evaluation of Vista, and the developer's efforts. So at this point we are very much committed to align ourselves with the Vista launch for good or for bad.

Got it. Thanks a lot.

Moving on to Jason Pflaum with Thomas Weisel Partners.

Hi, this is actually Alex Kim calling for Jason. I guess my first question is regarding the wireless opportunity that you talked about. It's nice to see that you have a design win there. Is this foreshadowing potential future design within the very near future? I'm just trying to get a sense of is there more to come here? And secondly, with respect to that win, when can we expect a revenue contribution for that win, and how does that ramp look like?

In terms of, absolutely, we hope that the rollout of the wireless platform that we're developing, we certainly don't focus that on just one customer. So, we think it is a precursor to other exciting focus areas for us in the wireless cellular space. I don't want this point to tip our hand in terms of the roadmap for that or the timing. In terms of when would we see revenue from that, as you know going through things like IOT and such like, this is realistically -- more realistically more a revenue opportunity from this one in the second half of next year. But it is -- we are excited about it. We think it's -- with our partner that we've got some very innovative technologies and capabilities going into that. So, it is a very meaningful design win for us.

Great. Just one other question regarding Preface. With Vista being delayed somewhat here, I'm just trying to get a sense of the revenue opportunity. I think in the past during CS, you had given some broader guidance on Preface, and I think that is somewhat reduced given the Vista delay. Any sense of the impact to revenues with respect to Vista in the second half?

I don't think the question is revolving really around the delay of Vista. We're actually -- you're right, we gave sort of our views from sort of stepping back as a pioneer of this technology with Microsoft in 2005. Now we're, frankly, getting much better input because we're getting direct customer input as we work with them on designs. And actually at this point, collating that customer input, that volume input and that timing. So, I don't have an update for you at this point, but we are at the point where we're collating that customer input and I think we're certainly getting much better visibility.

Okay, perfect. Thank you.

Moving on to Krishna Shankar with JMP Securities.

Yes, first of all, Gary, congratulations on your efforts here at PortalPlayer, and best wishes on your new opportunities.

Thank you. I appreciate that.

A couple of questions. One, you did mention that your largest customer is continuing to use the 5021, and I guess what you said last quarter was that you are not in the next generation flash-based product line. Is that kind of what you said? How should we interpret your continuing momentum there with the video iPod.

Well, again, so I don't recount the language correctly, I'm not going to sort of completely paraphrase you here, but from a top level point of view, I think if you look at the technologies in our customers' roadmaps, there's generally a flash-based product line and a hard drive-based product line. As we said in our prepared remarks, we expect the 5021 to ship through the rest of this year, and I think you could associate that more than likely for certain customers to a hard drive product-based line.

Okay. And then with respect to the broadening of the customer base, you mentioned here in Q2 you had 5 million in terms of revenues from customers other than your largest customer. Is that right?

It's 4.8, to be exact, yes.

Okay. And can you give us a sense of other customers beyond SanDisk that you can talk about? Are there Asian players that you've gone after aggressively? Are there other players like [inaudible]? Can you give us a sense of that broadening of that customer base?

We haven't really deviated from our strategy that has served us well, which is to focus on brand names, and to focus on customers that are going to have good channel presence. And so we haven't gone out and done a shotgun effect here and we don't intend to. We think we know what our target market and customer as well. So in that list would be customers like Philips, a great global brand in Europe. And so, again, I sense a question a little bit, are we changing our strategy? Are we diving into China? Are we going after these strategies? The answer is no. We know what areas we're good at, we're focusing on the feature-rich elements of the market. I think it's much better for us to really focus on a roadmap that's going to regain the high end focus points of these types of players versus going after hundreds of design wins. So, the short answer is, it's the caliber of customers like SanDisk, fabulous presence worldwide at different sort of point of presence, customers like Philips. That would be the two classic examples.

Okay. And then with respect to Vista, at CES you mentioned that given the functionality and the future set of what the Windows site share on your solution does, your semiconductor content in the Vista notebook solution would be higher than that in a PMP. Can you give us some sense of the dollar opportunity there and how quickly that could ramp? You talked about perhaps a third of notebooks with Vista next year having that type of capability?

Yes, from a dollar content point of view, I think -- from a dollar content point of view is two ways to look at that. We have been very successful to leverage our existing platform, to come in and through that. So, the technology is clearly added, frankly, on the firmware angle on that solution. So, yes, we do expect and hope for the ASPs of those solutions to be higher than you would typically see in the PMP market.

In terms of timing, as I indicated, we are in locked step with Vista in that we've developed the APIs closely with our friends at Microsoft, and we rely and will rely on Vista timing and launch. We are, as I said, getting better customer input as we speak. The customers are consolidating their input. So, I really don't have a refresh to give you at this point, just that our internal development program and timing is on track. We believe that we've got the ability internally to scale those designs across quite a number of the brand-name and leading ODM opportunities out there in the market. We're taking a much more modular approach particularly working with Microsoft, and the ability to scale that quickly, unlike, for example, some of our PMP solutions, which were highly crafted and customized to different customers. We've approached this notebook market with a well proven [inaudible] solution with Microsoft, but very few points where the customers can differentiate. So, that is going to give us an opportunity [inaudible]

I see. Great. And the final question. Why is the functionality for the wireless solution, does it include things like Bluetooth, HSDPA? Can you give us a sense what you're doing with your cellular customer in terms of functionality?

Not at this point, both from a competitive point of view, frankly, and we also don't want to be tipping the hat of our customers out there. So, no. In the past, as you said, it's not a traditional handset design. It definitely, by talking about it as being in the cellular space, you obviously would more than likely have to have wide area wireless networking capabilities. But that's about all we're saying at this point.

That's great. And one final quick question. Can you give us an update on the video capabilities of the 5021 roadmap you talked about adding H.264 and high resolution video capabilities. Can you talk about the product roadmap there?

The frank answer is no. We really don't want to tip our product roadmap information out. We have and we think we've particularly gotten feedback from customers that we're doing a great job on focusing on those points you made, high level of integration and the power saving capabilities in things like video. But for competitive reasons, we're frankly not revealing that at this point. We've been investing significantly, probably over an 18-month period there. Whether this is an extension of the existing product family or whether this is a leapfrog technology, we really haven't disclosed that to the market at this point.

Great. Thank you.

And Daniel Ernst with Hudson Square Research has our next question.

Hi, yes, good evening. Thanks for taking the call. Three questions if I might. Just looking at Preface with your expectation to ship something in the fourth quarter. Without telling us what that volume is, can you just tell us whether or not customers have given you a forecast at this point in time for the scale there? And then, likewise, same question on the wireless win that you've received on the cellular side. And then last question, can you just refresh us on what the ASP trend has been year-on-year. Thank you.

Okay, I'll take 1 and 3. For the fourth quarter, you're asking for Preface revenue for the fourth quarter, and you also said we'd probably guide to that. We won't, because we only give guidance for a quarter out. But I can certainly say that with the successful introduction of Vista as planned -- and I want to put this in as the caveat there in the first quarter -- for customers that would ramp with Vista, our technology in the first quarter, we do still expect that these customers would order from us in the fourth quarter of this year. The ASP trends have been in the past couple of quarters pretty stable. We, as you see, we've been operating at a 42% gross margin in Q2, as we have in the first quarter. We do guide to some additional margin pressure throughout the rest of the year as we continue to -- expect to continue to ship the 5021 device without having the benefit of adding the follow-on technology in large volume, as you know, which would reset the price and help the margin. But in the past, the margin development or the cost development, the ASP development both have been very stable so that we were able to operate in the 42%, so our guidance model for this was always about 25% year-over-year, somewhere in the range of the 5% to 10%, depending on what quarter on a quarter-over-quarter basis, and we have been operating in this so far.

Just to clarify, I wasn't asking you to give me the forecast for Preface, but whether or not your Preface-related customers have given you a forecast at this point in time?

I think Gary mentioned, this is a very exciting time for us now in the design phase, and we are collating the customer input to get that visibility. This is -- we're closer to being able to give you real data rather than our forecast as we had earlier, as we go through this phase now. So, I don't want to be too specific on this. We've gotten very good input from the customers that we collaborate. You know these big names, Quanta, ASUSTek, now Acer and Compel. Have they given us any specific feedback yet on any particular time of orders? I think we're discussing designs today, we're discussing engineering technology, and certainly timing of that to not specific POs, but then again from just a logic perspective, if you want to start and kick that program off in January, they will have to order certainly some chips for us already in the fourth quarter of this year.

Great. Thank you.

And then you had a question on the wireless.

Yes, same question for wireless. Have you gotten to the point where the wireless customer has given you a general forecast of what they're thinking about?

No. I would characterize those two quite differently, as Olav said. He was saying we're almost in the cusp of the collection of that data. I think they are marketing and their market teams are talking, and the numbers are being bantered about. But on the wireless side, I think we're probably further off from that. It will be an important revenue opportunity, but as you said, it's going to be for the second half. But I think they're quite different in the timing of when they're going to see the rapid growth sections for that.

Thank you.

And our final question will come from Adam Benjamin with Jefferies & Company.

Thanks. This is Brian Curtis for Adam. Kind of going back to a previous question. I mean, when you launched Preface in January you kind of talked about a SAM, 6 million in '06, 16 million in '07, and 48 million in '08. I mean, now that you're engaged with four major ODMs and you're six months later, could you maybe update that SAM with your better visibility now?

Well, that's a great question and we looked at doing that, but then we sat back and said okay, we can do that or we can spend time collecting the customer input and focusing on marketing team efforts, frankly, on really driving the design win phase of that. So, the answer is no, we decided not to refresh that, per se. I think as the questions have come on this call and it's absolutely pertinent is that what are the actual forecasts coming from those customers, and that's what we put the effort into. So, we're going to hold our horses on recasting an overall market size. We've got our marketing and sales team instead focusing on collecting customer win information. As that becomes more visible to us, we'll hope to be able to share that with you in a meaningful way.

And do you anticipate -- how soon would you anticipate any competition in that market?

That's a good question. We certainly have first move advantage, I think. The work we did in the firmware side in '05 has given us a lot of momentum there. It's, again, proving out, evolving, working and evolving capabilities. Even something like Vista is very challenging. So, by being the pioneer, I think we certainly have a significant lead. But moving forward, we've already started -- there are some customers starting to appear -- and, again, much like the PMP market, that's the low end of the Preface type of technology. There is a technology on SideShow, for example, that would maybe point towards your simple two-line displays. That again doesn't play to our strengths, much like us and for the black-and-white screens on PMPs. So there are a couple of folks starting to demonstrate some very low-end, two-line display technology, but at the main point of the Preface market, certainly with all the development kits, the 180 development kits that are out there, that Microsoft is using them based on our technology, I think the pioneer status is going to serve us well.

Okay, thanks. And going back to the MP3 market, the integrated chip, as far as timing of that, is there anything you can update us?

Not directly, no. Again, we've kept that pretty close to our chest. As Olav indicated, if you sort of dive into his comments carefully, we talk about [inaudible] expenses, if you so follow the chronological order of chips, that might give you some color, but for competitive reasons, we've been very cagey on that timing.

Okay, and last question. I just want to make sure I heard it correctly. You said ASPs were stable sequentially in Q2, but you expect it to kind of return to that 5% to 10% rate?

I think what I mean that we're stable within our expectations. So we do see declines quarter-over-quarter in the 5%, sometimes 10% range. So, nothing was specific there in the second quarter.

Okay. Thanks.

And that is all the time we have for questions today. Mr. Johnson, I'd like to turn the conference back over to you for any closing remarks, sir.

Thank you. And thanks, everyone, for joining us on the call today. With that, we'll conclude this conference call. Thank you.

That does conclude today's conference. Thank you for your participation.