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InterVideo, Inc. (OTC:IVII)

Q1 2006 Earnings Conference Call

May 9th 2006, 5:00 PM.

Executives:

Steve Ro, President and CEO

Randall Bambrough, CFO

Pia Kristiansen, The Blueshirt Group

Mike Ling, VP of Sales and Marketing

Analysts:

Mark Harding, Maxim Group

Martin Clarke with Cowen & Co.

Operator

Ladies and gentlemen, thank you for standing by and welcome to InterVideo’s First Quarter 2006 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following today’s presentation, instructions will be given for the question-and-answer session. If anyone needs assistance at anytime during the conference call, please press the “*” followed by the “0” and an operator will assist you. As a reminder, this conference is being recorded today, Tuesday, May 9th, 2006. I would now turn the conference over to Pia Kristiansen, The Blueshirt Group, please go ahead.

Pia Kristiansen, The Blueshirt Group

Good afternoon and welcome everyone to the InterVideo first quarter 2006 Earnings Results Conference Call. Joining me on the call today is Steve Ro, President and CEO; and Randy Bambrough, CFO. Today’s earnings call will contain forward-looking statements including without limitations statements relating to our business outlook, revenue, earnings per share, gross margins, and other future financial performance and projections regarding the market for our products. These forward-looking statements are subject to risks and uncertainties and actual results could differ materially due to several factors including but not limited to the impact on our business operations and financial conditions and the integration of our majority-owned subsidiary of Ulead Systems, unanticipated developments or events concerning the financial condition, assets, operation, business or prospects of the company.

The ability to forecast customer behavior and recognize a response to emerging trends, changing preferences, or competitive factors, the market acceptance of our new product and product enhancements, the uncertainty of litigation and the resolution of any claims regarding alleged infringement of third-parties and intellectual property right, the ability to maintain our external relationship with PC OEMs and other risks and uncertainties. Please consult InterVideo’s financial report on Form 10-K and Form 10-Q for other factors that could cause actual results to differ. All forward-looking statements are made as of the date hereof and InterVideo disclaims any responsibilities to update or revive any forward-looking statements provided in this conference call. In addition, InterVideo will present non-GAAP financial information in today’s conference call. The reconciliation from GAAP to non-GAAP financial measures is included in our earnings release and is available on the company’s website. At this time, I would like to turn the call over to Steve Ro.

Steve Ro, President and CEO

Thank you. Welcome and thank you for joining us today as we report the first quarter 2006 financial results. For the first quarter, InterVideo reported revenue of $31.3 million on a GAAP basis. Net income for the first quarter was 1.1 million or $0.07 per diluted share. On the non-GAAP basis, excluding amortization and other items, net income for the first quarter of 2006 was $1.2 million or $0.08 per share. Both revenue and earnings are above the guidance we previously provided. Randy will discuss the financial results for the quarter in more detail.

We are pleased to begin 2006 with strong first quarter results. We continued our peaceful diversification strategy of our revenue beyond our WinDVD and ended the quarter with 48% of the revenue derived from other products such as InstantON, WinDVD Creator, Video Studio, and DVD Movie Factory. DVD continue to contributed strongly in this April.

We are very excited about the results, we are repeating to our BD and the Blu-Ray solution. Shortly after the quarter close, we announced that WinDVD HD was bundled with Toshiba Qosmio, the industry’s first HD DVD Notebook. We are in discussion with other OEMs and expect to announce additional agreements in the near future. Additionally, WinDVD HD and BD --- their initial feedback is quite positive. Now, Randy will provide a detailed financial review and outlook.

Randall Bambrough, Chief Financial Officer

Thanks all of you for joining us today as we are here with financial results for the first quarter. For the first quarter 2006, InterVideo reported revenue of $31.3 million, compared to $21.9 million reported in the first quarter of 2005. GAAP net income for the first quarter 2006 was $1.1 million or $0.07 per diluted share compared to net income of 2.7 million or $0.17 per diluted share reported in the first quarter 2005. On a non-GAAP basis, excluding acquisition related intangible amortization of $323,000, $1 million for stock-based compensation, Ulead lawsuit accrual of 300,000 and other items of $239,000, net of minority interest in 1.6 million one-time realization of a foreign currency gain for the settlement and convergent to equity of an intercompany alone, and the overall tax effect on these excluded items, net income was 1.2 million or $0.08 per diluted share.

We had strong revenue diversification during the quarter in sales from products other than WinDVD such as WinDVD Creator, InterVideo DVD Copy, InstantOn, our newly products such as Videostudio, DVD Factory and PhotoImpact represented 57% total revenue in the first quarter of 2006. Web and retail sales decreased as a percentage of sales in the prior quarter and netted 21% of revenue during the first quarter, up from 15% in the same quarter a year ago.

Gross margins for the first quarter were 51% down from the fourth quarter margin of 66% and 58% for the first quarter of 2005. The decrease is primarily attributable to the Microsoft royalty revenue, which is sold at cost. This Microsoft royalty revenue will continue in the future and continue to have affect on gross margins.

Moving onto operations for the quarter. R&D spending was $6.6 million or 21% of revenue for the first quarter, up from 18% in the previous quarter, and up from 14% in the previous year. And as expected, we have higher than usual R&D expenses during the first quarter, mainly due to higher compensation and related benefits. Included in that category was a charge of approximately $460,000 of stock-based compensation expense resulting from the adoption of FAS 123(R). We had additional hiring during the quarter to support our development of new technologies, which is HD DVD and BD in the pursuit of new mobile and wireless opportunities. We expect R&D spending to be in the 19% to 20% range on a pro forma basis for Q2, as we continue to increase our engineering headcount for new initiatives.

Sales and marketing expenses in the first quarter were 4.9 million, and included a charge of approximately 160,000, stock-based compensation expenses resulting for the adoption of FAS 123(R). In percentage terms, sales and marketing was 16% of revenue, down from 18% in the fourth quarter, and up from 13% in the first quarter of 2005. This was at the low end of our expected rate of 16% to 17%. We expect sales and marketing to be in the 15% to 16% range during Q2 on a pro forma basis. G&A expenses were $5.6 million or 18% of revenues during the first quarter, up from 17% in the fourth quarter and 13% in the prior year. This was slightly above our expected range of 16% to 17%, principally due to stock-based compensation of approximately $380,000, resulting from the adoption of FAS 123(R) and higher accounting and legal fees. For the second quarter 2006, we expect G&A to be in the 13% to 14% on a pro forma basis.

Turning to the balance sheet, we closed the quarter with $82 million in cash, cash equivalents, and short-term investments, up from $75 million last quarter. Deferred revenue increased slightly to $4.1 million from $3.9 million in the prior quarter. Days sales outstanding declined to 26 days from 38 days in the prior quarter. Accounts receivable was $9.1 million compared to $12.9 million in the prior quarter.

InterVideo estimates its revenue for the second quarter of 2006 to be in the range of $30 million to $34 million and the loss per share on a GAAP basis to be in the range of $0.01 to $0.05. On a non-GAAP basis, InterVideo estimates earnings per share excluding amortization of intangible assets of $323,000, quarterly stock-based compensation expense of approximately $1.3 million, and a non-recurring tax project of approximately $400,000 to be in the $0.07 to $0.11 per share range. We thank you for joining us today on our call. With that, I will turn the call to the operator for questions and answers.

Question-and-Answer Session

Operator

At this junction, we have no questions. Please go ahead. We have a question on line.

A - Steve Ro

We are through; we are supposed to be going to questions and answers?

Operator

Yes sir, we have a question on line from Mark Harding from Maxim Group. One moment please.

Q - Mark Harding

Thanks, nice quarter guys. Just wondering if you could comment a little bit on the Mobile space. You guys have agreements with Alpine, Samsung, Texas Instruments and China Mobile, just wondering if there were any new updates to discuss, the new adoption in the next 12 to 18 months?

A – Randall Bambrough

Mike, Steve.

A - Steve Ro

Hello. Can you repeat the question I cannot hear it clearly.

Q - Mark Harding

Okay, I am sorry, I was just asking if you could comment a little bit on the personal Mobile space. I guess at the end of last quarter you had agreements with Alpine, Samsung, Texas Instruments, China Mobile. I was wondering if you could just give any updates on that, just follows how you see adoption rates over the next 12 to 18 months?

Operator

Sir, were you able to hear his question?

A - Steve Ro

I couldn’t hear anything.

Operator

Let me see....just a moment. Mr. Harding, would it be possible to repeat your question.

Q - Mark Harding

Okay, I was wondering if you could comment on the progress of Alpine, Samsung, Texas Instruments and China Mobile, also whether or not you see any other sort of qualitatively any other agreements on the near-term horizon, and if you could also discuss as to how’s your view on adoption of those in the next 12 to 18 months?

A - Steve Ro

Randy, could you help me because I can’t hear your voice, the outside maybe a little bit noisy, Randy can I have it please.

A - Randall Bambrough

Yes, his question was about the adoption, what’s going on in the Mobile space, he asked about TI, Alpine, you know some of the deals that we have announced and what -- is they’re qualitatively or there are some others that are out there and -- where do we see over the next 12 to 18 months in the wireless sort of the embedded space?

A – Steve Ro

Okay, the automotive business right now is really tied up with the PMP together, and then we are still connect the TI department, we have a very, very strong relationship not only just TI also on the VAR and then in terms of the Alpine, we see this business to continue growing and deploying to allow of their model, we believe that we now result and now it’s going to be ship on the Q4 2006. Now, we also work with other potential automotive multi-media segment, both are in Asia side.

Q - Mark Harding

And then just for the Samsung, I am sorry if I didn’t catch it if you commented on that, as far as some of the handsets manufacturers.

A - Randall Bambrough

He asks about Samsung and some of the handset manufacturers.

A – Steve Ro

Yes, the power of this kind of, in building the designing phase is, we cannot disclose so much of their development yes, this is relate to the PMP and DMA of those kind of device.

A - Randall Bambrough

This is the same way we are talking to nearly everyone, so I think that’s the best we can say on that.

A – Steve Ro

And we believe in the coming years and coming quarters, you will see a lot of the mobile TV, you’ll have time to all the handsets makers, this is the second that we have very, very strong belief, and we have a very good potential for this market.

Q - Mark Harding

Okay, so do you think that’s probably they are going to be sort of more in 2007 story?

A – Randall Bambrough

Yes, I think 2007 is when we start to see it, we were expecting some at the end of this yearend and really 2007 is when we would expect to see some good increases in that particular area. And then really see some big increases out in 2008.

Q - Mark Harding

Okay, let’s see if you can give us just a little bit on the WinDVD side, I was wondering if you had any sort of insight into how you see the rest of the year and you have in terms of the ramp. I mean they are just being pushed out, just beginning of ’07, do you anticipate any sort of weakness there and…?

A – Steve Ro

Which weakness did you say?

Q - Mark Harding

Because of they being pushed out, do you have -- would you anticipate any ways of abnormal seasonality towards the end of the year?

A – Steve Ro

That’s a possibility out there, I don’t know that anyone really knows that this number was – what’s going to take place there. So, obviously, if it pushes out then, pushes PC, shipments up and that has an effect on us, but we don’t have a clear. I guess we have no clear picture on this and neither any one as to what’s exactly going to happen on that front.

Q - Mark Harding

Okay, fair enough, thank you.

Operator

Our next question comes from Martin Clarke with Cowen & Company, please go ahead.

Q - Martin Clarke

Hi guys, I was just wondering if the impact from the royalties on gross margin are going to be similar to Q1 over the rest of the year, should we expect a low 50’s, gross margin continuing forward?

A – Randall Bambrough

Well we don’t forecast gross margins because there is number of variables that have made it very difficult for us to do that but clearly it’s going to really be a reflection on how much of the Microsoft revenue, but so we got a number of things going on without that, and what percentage that is as a percentage of the total going forward plus, as we get more revenue from some of our other products, they all have associated higher gross margins. So, we can’t forecast -- when I forecast what it is overall, but I think there are some couple of things going on simultaneously, that potentially help it, being offset by the Microsoft revenue.

Q - Martin Clarke

Okay and I was wondering if they were any updates on the IP litigation?

A – Randall Bambrough

No, we try to make it. Our principle is not to comment much, we can just say that it’s that they were basically on hold at the moment.

Q - Martin Clarke

Okay

A – Randall Bambrough

This is not yet publicly available to anyone, so we are in a stay position right at the moment. That all I can say on the IP front.

Q - Martin Clarke

Okay and then I was wondering if there’s any more color on sort of the –on rest of Ulead and how that’s all coming together?

A – Randall Bambrough

Yes, Mike do you want to address that one. Of course it was regarding you related how what the progress is like there.

A - Mike Ling

Okay yes, in terms of the product development, right now we have a first WinDVD HD shipping just like what Steve has announced, Toshiba, and in terms of the integration -- in terms of the R&D side and marketing side, and we are expecting some future profit in the company, and we see the market has been kind of the -- in sales and marketing (indiscernible) together.

Q - Martin Clarke

Okay, thank you.

Operator

And Mr. Bambrough, we have no further questions. Please continue.

Randall Bambrough, Chief Financial Officer

There are no further questions you say?

Operator

Yes sir.

Randall Bambrough, Chief Financial Officer

Alright, well we like to thank everyone for joining us for our Q1 2006 conference call, and we look forward to giving you a report on our Q2 2006 results in a few months. Thank you.

Operator

Thank you. Ladies and gentlemen this does conclude the InterVideo’s first quarter 2006 financial results conference call. If you would like to listen to a replay of today’s conference please dial 303-590-3000 with pass code 11059876#, or 1-800-405-2236 pass code 11059876#. Once again, if you would like to listen to a replay of today’s conference, please dial 303-590-3000 or 1-800-405-2236, pass code 11059876#. We now disconnect, thank you for using AT&T teleconferencing.

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