輝達 (NVDA) 2007 Q1 法說會逐字稿

Good afternoon and thank you for holding.

I would now like to turn the call over to Mr. Michael Hara, NVIDIA's Vice President of Investor Relations.

Thank you, sir.

You may begin your conference.

Thank you.

Good afternoon and welcome to NVIDIA's conference call for the first fiscal quarter ended April 30, 2006.

On the call today for NVIDIA are Jen-Hsun Huang, NVIDIA's President and Chief Executive Officer, and Marv Burkett, NVIDIA's Chief Financial Officer.

Before we begin today's call, I would like to take care of some general administrative items.

Your lines have been placed on a listen-only mode until the question-and-answer segment of today's call.

During this call we will discuss some non-GAAP measures about net income, net income per share and gross margin and other line items from our consolidated statements of income when talking about our results.

You can assign the full reconciliation of these measures to GAAP in our financial release, which is posted on the Investor Relations page of our website at www.NVIDIA.com.

This call is being recorded.

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Please be aware that if you decide to ask a question, it will be included in both our live transmission, as well as any future use of the recording.

Also, shareholders can listen to a live webcast of today's call and view our financial release at the NVIDIA Investor Relations website.

The webcast will be available for replay until the Company's conference call to discuss its financial results for the second quarter of fiscal 2007.

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During the course of this conference call, we may make forward-looking statements based on current expectations.

Forward-looking statements, including statements as to our second-quarter 2007 outlook, growth, growth drivers, market share, investments, competitive positions, design wins, customer demands, new and forthcoming products, and products and technologies pertaining to future events are subject to a number of significant risks and uncertainties.

The Company's actual results may differ materially from results discussed in any forward-looking statements.

For a complete discussion of factors that could affect the Company's future financial results and business, please refer to the Company's Form 10-K and annual report for the fiscal year ended January 29, 2006, quarterly reports on Form 10-Q and the reports on Form 8-K filed with the Securities and Exchange Commission.

All forward-looking statements are made as of the date hereof based on information available to us today, and the Company assumes no obligation to update any such statements.

The content of the webcast contains time-sensitive information that is accurate only as of May 11, 2006.

Consistent with the requirements under Regulation FD, we will be providing public guidance directly in the conference call and will be unable to provide significantly more information in off-line conversations or during the quarter.

Therefore, questions around our financial expectations should be asked during this call.

At the end of our remarks, there will be time for your questions.

In order to allow more people to ask questions, please limit yourself to one question.

After our response, we will allow one follow-up question.

I would now like to hand the call over to Jen-Hsun.

Thanks, Mike.

Good afternoon and welcome to NVIDIA's first-quarter conference call.

Today we're pleased to report record revenue of 681.8 million and net income of $0.23 per share for our first quarter.

Year-over-year first-quarter revenue grew 17% and net income grew 41%.

We experienced growth in each of our businesses -- GPU, MCP, handheld GPU and Consumer Electronics -- resulting in record revenue for the first quarter.

We also entered multiple new product cycles during the quarter, continuing our leadership in each of the markets we serve.

As we move further into the new fiscal year, the growth drivers we outlined at our Analyst Day in March, which included the adoption of Microsoft Vista, high-definition video, and the launch of Sony PlayStation 3, will continue to accelerate and give us the opportunity for another strong year of growth.

Let me highlight some of our first-quarter fiscal 2007 results and achievements.

Non-GAAP gross margin reached a company high of 42.5%, an increase of 230 basis points sequentially from the fourth quarter of fiscal 2006, and 650 basis points year-over-year.

GAAP gross margin was 42.4% for the first quarter of fiscal 2007.

We shipped eight new GeForce 7 series GPUs for desktop and notebook PCs and now offer a complete top to bottom family of GeForce 7 GPUs.

NVIDIA grew share in the Performance DX9 and combined DX9 desktop GPU segments from 79% to 83% and from 57% to 60% respectively from the fourth quarter of calendar 2005 to the first quarter of calendar 2006 as reported in Mercury Research's first-quarter PC Graphics report of 2006.

The NVIDIA nForce MCP productline achieved record revenue for its seventh consecutive quarter. nForce MCPs increased their share of the AMD 64 segment from 35% to 42% from the fourth quarter of calendar 2005 to the first quarter of calendar 2006 as reported in Mercury Research's first-quarter worldwide chipset report 2006.

We continued to advance our leadership position in multi-GPU technology.

The Company shipped its first Quad SLI system for desktop PCs, enabling four GPUs per system.

We also brought our SLI technology to notebook PC enthusiasts.

NVIDIA demonstrated the world's first GPU-Powered Game Physics Solution at the Games Developers Conference with Havok, the game industry's leading supplier of cross-platform physics engine middleware.

Life-like physics will bring a new dimension of realism and interactivity to games.

We shipped our first integrated graphics processor, IGP core-logic solution, for AMD-based notebook PCs -- the GeForce Go 6100 GPU and nForce Go 430 MCP.

The core-logic solution is the industry's first high-definition IGP to provide hardware accelerated H.264 high definition video playback.

The Professional Solutions group introduced 11 new desktop and notebook workstation solutions, designed to improve workstation graphics performance and representing the most extensive line of professional graphic solutions in the industry.

NVIDIA and Intel announced a collaboration to bring high-performance 3-D gaming and multimedia platform to handheld devices.

The collaboration combines the NVIDIA GoForce family of handheld GPUs with Intel's newest processor family code-named Monahan's, which is based on third generation Intel XScale architecture to develop a powerful development platform to content developers.

We successfully completed our acquisition of ULi Electronics, a leading developer of core-logic technology.

And finally, we acquired Hybrid Graphics, the leading developer of embedded 2-D and 3-D graphics software for handheld devices.

The acquisition will enable customers of both companies to deploy rich graphic solutions for the entire worldwide handheld market.

Let me turn the call over to Marv to discuss our financial results in more detail.

I will return to discuss our progress and outlook.

Thank you.

I would like to begin with some comments about the P&L for the first quarter of fiscal year 2007 and then move to the balance sheet.

I will end with a few comments about the outlook for Q2.

On the P&L, as Jen-Hsun stated earlier, revenue for the quarter was 681.8 million, which is up 7.6% from the fourth quarter.

The growth of almost $50 million was led by the GPU business, which grew 21 million quarter to quarter.

Within the GPU business, notebook grew by 34% and achieved record revenue.

Desktop also grew slightly, in spite of a seasonally down first quarter for the PC industry.

MCP grew only 4%, which was less than we anticipated but still achieved record revenue for the seventh consecutive quarter.

Handheld GPUs grew almost 20% and also achieved record revenue.

Memory and other also grew $12 million in the quarter.

All of our business segments had some growth quarter to quarter.

Year-over-year our overall revenue grew by 17% led by MCP and GPU businesses.

MCP grew 65% year-over-year and GPUs grew by 10%.

Our handheld business almost quadrupled year-over-year but from a very low base last year.

Xbox contributed 44 million in revenue in last year's Q1; therefore, our core business grew 24% year-to-year.

For gross margins we achieved 42.5% on a non-GAAP basis, which exceeded even our expectations.

The introduction and success of several new GeForce 7 products contributed significantly to the improvement.

The GeForce 7 family contributed approximately 245 million in revenue for the quarter at excellent gross margins.

This resulted in a notice increase in gross margin for our GPU business.

We also had very good margin improvements in our handheld GPU business, and it is now close to breakeven on an operating income level.

Operating expenses were higher than we anticipated.

There were many factors that contributed to this, and I will outline a few.

Going into the quarter, we had not anticipated the acquisition of Hybrid or the hiring of a significant number of employees from 3Dlabs.

These two contributed approximately 2 million of expense in the quarter.

Also during the quarter, there were significant option exercises by employees.

This causes an expense for the company for FICA and other taxes that must be paid upon the exercise.

This added about 4 million of unanticipated expense for the quarter.

We will get this back later in the year when these employees max out on FICA.

Exclusive of these items, operating expenses were still higher than we anticipated as we were able to hire aggressively in other areas.

We added 438 employees during the quarter.

Approximately 200 of these were from ULi and another 70 were from Hybrid and 3Dlabs.

When you put that together with our normal hiring, the result was a significant increase in headcount.

Headcount at the end of the quarter was 3175.

The GAAP tax rate for the quarter was 17% as we were not able to include the benefit of the R&D tax credit until it is renewed by Congress.

When it does get renewed, our tax rate will go down.

Our non-GAAP tax rate was 16%, and that was also negatively impacted by the lack of an R&D tax credit.

GAAP net income for the first quarter of fiscal 2007 includes stock-based compensation expense of 23.0 million as a result of our adoption of SFAS 123R during the quarter.

Our non-GAAP results adjust our GAAP results to exclude SFAS 123R stock-based compensation and related tax differences.

The net result was GAAP earnings of $90.7 million or $0.23 per share on a fully diluted basis.

The shares outstanding reflect the stock split which occurred on April 6 and also reflect the new accounting for dilution under 123R.

Under the non-GAAP, earnings were $0.29 per share with the shares outstanding accounting under APB 25, which is consistent with the prior year.

On the balance sheet, cash was up to 955 million and reflects that we spent approximately 90 million for the acquisitions of ULi and Hybrid.

We also repurchased 50 million of stock during the quarter.

Operating cash flow in the quarter was 50 million.

Accounts Receivable was up by 73 million and reflects that the quarter was back-end loaded due to the new product ramps, all of which are now in full production.

The aging of the receivables remains very good.

Inventory was up 92 million as we started the production of several new GeForce 7 products.

The increase in inventory can be accounted for by the new products.

Depreciation during the quarter was 24 million and capital additions were 21 million.

On the outlook, Q2 is the most difficult quarter to forecast.

It is the seasonally lowest quarter of the year for the PC industry.

In addition, our visibility is limited until later in the quarter.

Our expectations for PCs are not substantially different from other companies in the industry.

Normally in Q2 our desktop business declines along with the PC industry, and this has to be offset with growth in other areas.

For Q2 this fiscal year we believe we can achieve growth in the notebook and MCP businesses and believe this can offset any other declines.

Because of our new products, we anticipate that our desktop business will be relatively flat.

Overall we expect flat revenue.

I would like to point out that with flat revenue in Q2, our core businesses would growth 35% year-over-year because last year's Q2 included 69.9 million of Xbox revenue.

For gross margin, our results for the first quarter exceeded our expectations, and we will work very hard to hold gross margins at this level for the second quarter.

We believe the actual gross margin will be a function of mix and any decline would come from significant revenue growth and lower margin businesses.

Consistent with the relatively flat sales, we expect relatively flat gross margin on both a GAAP and a non-GAAP basis.

Operating expenses, both GAAP and non-GAAP, will grow only slightly, even though we will have the additional headcount for the entire quarter because of some benefit from the nonrecurring costs that were in Q1.

If the R&D tax credit is renewed, we should expect to see the GAAP tax rate reduced in the second quarter.

Thanks and I will turn it back to Jen-Hsun.

During the quarter, we enhanced our leadership position in the market.

In Q1 we successfully delivered our entire family of desktop and notebook GeForce 7 GPUs to our OEM and general partners.

Our new GeForce 7900 GTX has captured design wins with nearly every major OEM offering enthusiast and performance PCs.

Our calendar Q1 marketshare of the performance GPU segment increased from 70% to 83% year-over-year.

SLI has become a standard feature in performance PCs.

Over four million SLI-enabled nForce MCPs and over 10 million SLI-enabled GeForce GPUs have been shipped, creating a large system of interoperable SLI components for gamers.

According to the valve steam engine, which reports users system configuration, we have over 98% share of the multi-GPU market.

At E3 this week, Dell demonstrated their Next Generation flagship PC powered by Intel's [Condro] microprocessor and our Next Generation nForce and GeForce technology.

Also at E3, [NUWare] unveiled the world's first GeForce 7900 SLI notebook.

Over 22 system builders around the world now offer SLI notebooks.

We look forward to their transition to the GeForce 7900.

In the mainstream segment, we have been focused on increasing our share.

Whereas we had virtually no OEM -- no mainstream PC OEM wins last year, we're ramping design wins at Dell, HP, Gateway, Acer, Legend, Samsung, Medion, Packard Bell, TCO and others.

The result of our design win success is starting to reflect in our segment share.

Our calendar Q1 combined desktop DX9 GPU share increased from 54% to 60% year-over-year.

We are gaining share in the notebook segment as well.

The production ramp of our Napa design win refresh is underway.

The notebook GPU productline achieved record revenue for Q1.

And as our OEM designs continue to roll out their new notebooks, we expect our revenue and share growth to continue throughout the year.

The DX9 generation of GPUs is important to achieve the best experience with the new Microsoft Vista user interface called Aeroglass.

Enabled by programmable shaders, Aeroglass will feature transparencies, textures, lighting and shadows, making the windows and objects on your PC look virtually real.

John Petty Research recently produced a research piece discussing the impact of Vista Premiums Aeroglass on the market.

Quoting the report, "Over 600 million PCs shipped in the last three years and are still in service.

These are the ones that are most logical to upgrade with the new Vista operating system.

Because of the low graphics performance of integrated graphics chips found in most of the PCs, they would not be able to take advantage of the richness and benefits of Vista's new Aeroglass GUI, and graphics-based operating system would be unusable on most of them."

It will take a performance level add-in board to pull out the richness built into Vista.

When users see a system running Vista on a PC with integrated graphics and then Vista on a PC with a powerful graphics add-in card in it, there will be no discussion, they will go for the better looking system if they can possibly afford it."

Those were quotes from the John Petty report.

In the coming months, we will witness the launch of the Next Generation high-definition video formats.

The introduction of Blu-ray disc and HD DVD will bring high-definition movies to our homes.

The BD/HD associations have announced that nearly 100 movie titles will be available in these new HD formats by the end of the year.

As a standard for PlayStation 3, millions of Blu-ray players will be available this year.

With six times the resolution of today's DVD, Blu-ray disc and HD DVD is a major advance in resolution and quality from the seven-year-old DVD format.

The image processing requirement is nearly 30 times that of DVD and will require a special video processor to achieve full performance.

Our investment in our PureVideo dedicated videoprocessors and algorithms will help us bring the HD experience to PC and media center users.

We believe we have won every major OEM, HD DVD and Blu-ray design win to date.

Blu-ray and HD DVD equip desktops and notebook PCs that incorporate our GeForce 7 GPU and PureVideo video playback technology are going to deliver incredible high-definition movies.

We continued to gain share in the AMD server, workstation, desktop and notebook segments.

Our share of the AMD platform increased 6% to 42%.

On Tuesday this week HP announced the HP Pavilion [DV2000] and Compaq Presario D3000 thin and light notebooks with the GeForce Go 6150 and nForce Go 430, marking NVIDIA's entry into notebook integrated chipset business.

We are preparing our Next Generation nForce 500 series MCP for the upcoming launches of both the Intel [Condro] microprocessor and AMD Socket AM2 interconnect.

We will be introducing some new and exciting technologies in the 500 family that will raise the performance bar for the industry.

The digital media revolution is also driving the growth of our handheld GPU business.

Downloaded video like episodic TV shows, broadcast digital TV for sports and news, and high-resolution graphics for rich user interfaces and games are driving the demand for handheld GPUs.

Our target segments are 3G phones, smart phones and portable entertainment devices.

We believe that the graphics and multimedia capability of our handheld GPUs has put us in the perfect position to benefit from the increasing multimedia demands of smart phones, which was only 17 million units in 2004 and growing to 100 million units in 2006.

The increasing availability of digital media content for 3G has driven demand of our handheld GPUs.

Our share of the 3G market grew from 7% in 2005 to 12% this year in a market that has grown from 72 million handsets last year to an estimated 210 million in 2007.

Our newest handheld GoForce 5500 GPU has been designed into DVD.H phones in North America, Europe and ISDB-T phones in Japan.

These are phones that are capable of receiving digital television.

Two out of the first three DVD.H television service launches in the world are based on phones powered by NVIDIA's handheld GPU.

Because of our dedicated H.264 and WMD processors, we are able to deliver the highest image quality at a power level that will enable several hours of enjoyment.

And at E3, Sony announced that the highly anticipated PlayStation 3 will be available in Japan on November 11, followed by simultaneous availability in North America, Europe and Australia one week later on November 17.

Sony committed to ship 4 million PS3s by December 31st and another two million units by March 31, 2007.

There are a number of positive industry dynamics taking place this year, and we believe our product roadmaps and technology leadership uniquely positions us to drive these trends and produce another year of strong growth.

Thank you and we would be happy to take your questions now.

(OPERATOR INSTRUCTIONS).

Tayyib Shah, Longbow Research.

Congratulations on the quarter.

Can you talk about what was happening in the MCP business?

It seems like the share gains in the AMD platform were kind of lackluster.

Is that likely to change in the fiscal second quarter?

First of all, thank you.

Our market share of the MCP business was below our expectation as well.

There's a variety of theories, and I think this one makes the most sense.

We experienced that earlier in the quarter there were some obsolete inventory that were sold by one of our competitors in Asia.

These were extremely low-cost products, and they were based with integrated graphics with AGP.

And so I think that that reduced the overall market for our products.

But it did increase the demand for GPUs because the integrated graphics in those products were simply too obsolete.

So we experienced an increase in demand of entry-level AGP GPUs as a result of that.

My sense is that is not going to continue, but that is our estimation of what happened in Q1.

And then if I can ask about the margins, can you talk about the opportunity for your 7300 productline in the value segment replacing your 6200 products, how rapid that transition is going to be, and what does that do for your overall margins?

Well, the easy answer is that it improves our margins.

Because the margins on those types of products are better in the GeForce 7 family than they are in the GeForce 6 family.

How rapid we can make that transition, I don't think is much a matter of production as it is market acceptance.

Randy Abrams, Credit Suisse.

I wanted to see if you could pull up on the revenue guidance.

I think you mentioned flat desktops and then up notebooks and chipsets.

To get to flat overall, is that implying that some of the smaller business like handset and other declined?

Maybe you can clarify that a little more.

Yes, I don't think that you should take into that that we expect a decline in handsets.

Remember the memory and other was a fairly large number in Q1.

We don't know what is going to happen to that in Q2.

If that number did not go down and desktop did not go down, I think that we could achieve revenue growth.

But there is just a lot of unknowns along those lines.

And maybe the follow-up question just on the inventory.

Maybe you wanted to go into again I think you mentioned new product ramping, but I want to kind of understand just the driver of building inventory if the revenue trajectory is roughly flat in the coming quarter?

Is there some motivation from tighter supply from foundry or back-end to build inventory at this stage?

You know, the way to think about that, Randy, is Q1 was our product transition quarter.

We transition down our GeForce 6 family, and we ramped up our GeForce 7 family.

Typically in the beginning of a product ramp, we want to be prepared to make available as much of our products to the marketplace as possible and give our OEMs in the channel the opportunity to fill their pipelines.

And so that -- this is pretty typical stuff, and it is reflective of how we make product transitions.

The most important thing is just to make sure that we have enough 7900s, 7600s and 7300s for the marketplace.

Mark Edelstone, Morgan Stanley.

Nice job on the gross margins, guys.

Just a couple of quick ones first.

Can you give us what the NRE was in the quarter and what you expect NRE to do in Q2?

Roughly 20 to 25 million in the quarter.

Round number is 23.

That was the Sony NRE and licensing together.

Then your second question is, what do I expect it to do?

Roughly flat.

Okay.

Great.

I certainly understand all the issues here that you would look for in the current quarter.

Can you give us your sense as to what you see are the most important drivers as you look at the second half of the year, and maybe you can try to put those in the context of seasonality?

It would seem like you would actually have quite a few things that ought to give you a better than seasonal lift given some of the things you are approaching right now?

Yes, we enter Q2 -- we always enter Q2 with caution, and it is just there is a lot of markets that are taking a pause.

But we have a lot of good things going for us.

GeForce 7 is really a terrific architecture, and we continue to ramp into the marketplace with GeForce 7.

We have the benefit this year of also winning a lot of the OEM design wins that we simply did not have last year both on the desktop, as well as the notebook segments.

So we will be ramping into those OEM design wins.

We also have some pretty terrific handheld GPU products.

We have the benefits of the PlayStation 3 ramping.

They have obviously announced pretty wide availability and simultaneous worldwide launches in the November timeframe, which means that at this time point they are clearly manufacturing at full throttle.

So you have that going for us.

And then our MCP business continues to grow.

Our expectation is that this year over last year we should be in a position to grow substantially in MCP.

Two reasons, one of which is when Intel's [Condro] microprocessor does well, it creates a larger performance segment, and we have a strong presence in the performance segment as you know.

So that should help us.

Secondarily, this is our first year with -- first full year with integrated graphics both on desktop, as well as notebook computers.

So this is very exciting.

And then the last one is not insignificant, it is Blu-ray disc and high-definition video.

You know this is the first major consumer electronic transition in seven years.

If you take a look at what has been going on in the Consumer Electronics world over the last five years or so, it has really been about high-definition displays and flat displays.

Well, finally they have something that can really drive it, and that is Blu-ray disc and HD DVD.

The processing requirement for BD and HD are so high compared to DVD that you really need to have a dedicated video processor.

This is something that we have been talking about and offering to the marketplace.

Obviously with standard definition, it was kind of hard to demonstrate the value proposition.

But now with HD coming, the value of our video processor is crystal clear, and it is reflected in all the design wins we have for media centers and notebooks and PCs that are going to go out with Blu-ray and HD DVD.

So I think that we are better positioned than ever before.

We have more product drivers and market drivers than ever before.

And if we continue to execute, I think that we're going to have a pretty good year.

That is great.

Just one last follow-up if I could.

Based on those opportunities, should we expect inventories to increase again in this quarter as you basically get prepared for the second half of the year?

You know our expectation is not.

It is just that when we're ramping new products, we have to make sure that we help our OEMs and help our channel partners fill their pipeline.

So there is always that initial surge of supply to just supply everybody with GeForce 7s.

And so my expectation is that once we get through -- get going here, we're going to level out to typical ways of managing our inventory.

David Wu, Global Crown.

This is [Han Dei] calling for David Wu.

Thank you for taking my question.

I have a few questions.

Regarding you said for the gross margin upside it is primarily due to the GeForce 7 increase in sales.

I have been checking up on a few on our websites, and I have seen some shortages.

So that does not quite match the picture that you provide.

So could you please give some more clarity to that?

Well, at some level, I think it is perfectly aligned with the picture we provided.

We just went through a product transition in Q1, and we ramped down the 6800 and the various GeForce 6 products, and we ramped into the GeForce 7 products.

And the demand has been really strong.

The 7900 has been a product that we have had a hard time catching up with.

That is one of the reasons why we are building aggressively to fill the market pipeline and to meet the market demand.

I think as I said in the prepared comments that our performance segment GPU marketshare is increasing.

So it reflects the fact that the demand for GeForce 77900 is quite high and that 7600 is incredibly high.

So you have just got to take that into consideration.

The other thing to remember is that SLI takes two GPUs per PC, and so the number of gamers in the world, the number of game enthusiasts have not declined.

In fact, they have probably grown, but now they consume two GPUs per PC.

We have always felt that SLI would increase our TAM, and I think in a lot of ways it has.

Okay.

That makes a lot more sense to me now.

And another question is for your upcoming nForce 5 or the trend, the [Triton] chipset, could you please comment a little bit about their performance and the gross margin for those?

Thank you.

Well, our next generation core-logic -- our next generation MCP nForce 5 will unambiguously be the highest performance core-logic in the world and that is what he was designed to do and that is our expectation.

It is intended to bring some new exciting features to the marketplace that the market has never seen.

Give me a chance to launch that product and I will come back next quarter to report on the things that we said.

Sure.

And how about the gross margin?

You know are they going to be above, below or at the corporate level?

Above.

Jason Pflaum, Thomas Weisel Partners.

Good job, guys.

Just does to circle back again on the inventories a little bit, if you could just help on the composition of those inventories again and the fact that MCPs came out a little bit lighter than you expected.

Was that partly respective of the add build there as well?

Yes, I think that you need to take a look at we grew inventory round numbers 90 million quarter to quarter.

But on the new products, we grew inventory roughly 150 million.

So of the older GeForce 6 products, we decreased inventory commensurate with what we're trying to do.

We did build a little bit more MCP inventory than we anticipated because the MCP sales did not achieve what we thought.

So there's a little bit more there.

But I think that what you should understand is that in general the growth in inventory was driven by the new products.

Okay.

And then just can you give us a sense of what portion of your revenues are going through distribution this quarter?

You continued to work that down, and was that also a contributor perhaps in holding a little bit more inventory?

Yes, it does contribute as we take customers more direct.

I don't know that it was significant, though.

The two major distributors that everyone focuses on for us, [Edem] and Atlantic, were below 12% of our business together, each of them below 6%.

Okay.

And then just maybe a last question on the handset side of your business.

Obviously you saw some nice growth there this quarter and good momentum.

Can you just characterize or give us a sense for the breadth of some of the design wins that you have now painted into the second half?

Maybe just give a flavor for how many of the top tiers you maybe shipped into there?

I guess we have design wins with four to five top handset manufactures in the world.

Most of our handset design wins are focused on 3G cellphones.

Many of the new handset design wins are now being designed into digital television cellphones and smart phones.

Those are really our target markets.

We have not played much in the basic graphics GPU business in handsets, and there the reason for that is there's not much value to add.

We tend to focus all of our energy on the really rich multimedia capabilities like digital television or video playback or digital camcorder functionality or digital cameras and, of course, graphics.

So we tend to focus a lot of our efforts around those type of applications.

We're trying to play into emerging and growing market trends.

This is -- we have been talking about how we believe that your handset device is going to become one of your most important computers in your lives and increasingly becoming less perceived as just a modem or just as a handset or as a telephone.

I think that that vision is really playing out, and if you believe in that vision, then you have to believe that graphics and multimedia technologies are going to be important, and that is really our focus.

Nicholas Aberle, Caris & Co.

I just wanted to touch base a little bit more on the performance mainstream segments for discrete desktops.

Based on our analysis, it really seems like you guys have got a nice competitive advantage there, specifically on the 7600 products.

Can you talk a little bit about the strategy in that particular segment of the market and some of your expectations for marketshare gain there over the course of the year?

I guess our strategy is to build the living daylights out of it. (multiple speakers).

Yes, that -- it is a pretty sizable market, and it is an interesting segment because the volumes are large and also the ASPs are high.

But the technology requirements are pretty demanding, and the gamers want the absolute best.

The distribution channel wants to have the best brand and the one that -- the parts that they believe in and they know that they can sell.

So the 7600 family is really perfect for that.

It is a follow-on to our 6600 family.

My expectation is that we will do better with 7600 than we did with 6600.

Perfect.

And then just one more quick follow-on.

You know you guys did touch base on the impact of the delay of the Vista operating system.

More chatter about that being pushed out even further into mid-'07.

Has that changed you guys' outlook on the effects of that operating system launch at all?

You know not really.

I think that in the end in the grand scheme of things this is what -- this is the first major operating system upgrade in quite a long time.

I think it is probably close to seven years, isn't it?

This is the first operating system in the history of humanity that requires a GPU.

And as more and more applications get loaded with more and more widgets and more and more of the Vista Aeroglass capabilities, the graphics demand on your desktop is going to just continue to increase.

There has just not been a single person that has ever seen it that says I can go back.

Everything is better.

The fonts are better, the resolution is better, the way that the window glides across your desktop is just -- everything is just delightful about it.

And so my sense is that Vista Aeroglass is going to create quite a bump for GPUs for quite some time.

So we're looking forward to that.

We're disappointed as anybody that it slipped out past this year, but it does not really fundamentally change anything in the final analysis.

Perfect.

Good luck in Q2.

Quinn Bolton, Needham Inc.

Let me add my congratulations on the great margins.

I wanted to see if you just looked back historically over the various generations of GeForce processors, have you guys tended to max out at sort of a max marketshare either in the performance or the overall desktop segment?

You guys are getting pretty high, over 80% now in the performance segment, 60% of the discrete.

Historically have you gotten a lot higher than that?

I guess so.

I mean, you know I think that I am trying to think here.

Our focus really is not just share.

We have always been since the beginning of our company focused, number one, on increasing the market.

It is about bringing new ideas and new technologies and new features and capabilities to this marketplace, and it is also about expanding the reach of it.

One of the best things that we ever did was working with Microsoft and the folks up in Redmond to talk about the importance of the GPU and helping them understand how it could really transform the computing experience.

That is going to increase the market reach of GPUs.

SLI increased the TAM of GPUs.

This recent edition of a feature that we added to our GPUs called Physics, you know, is going to make your SLI system that much more valuable.

You could either use both graphics for both GPUs for game rendering, or if a particular game has a great deal of physics, you can use one of the GPUs for Physics processing.

So the versatility and the new capability that we bring to the marketplace will just continue to increase the scope and the reach of the marketplace.

So that has always been our focus, just continue to add more value.

And then second, I might have missed it, but I was just wondering if you could make any comment sort of how the workstation business did quarter-over-quarter?

Was that another record?

We grew slightly and had a record quarter.

[Franay Lehariat], Deutsche Bank.

A question for you, Marv.

Can you please write rank your segments of MCPs, notebook graphics, desktop graphics, workstation telephones in the order of gross margin growth that you expect to see in those segments from here onward through the end of fiscal '06 or fiscal '07?

I think that was like six questions.

Okay, I will abbreviate that. (multiple speakers) -- the order of gross margin growth from here onward?

I don't even know that we even broke it down between segments -- (multiple speakers)

Okay.

Just combine loan and GPU then.

They were good questions.

It is just --

The desktop GPU business should increase gross margins because of the GeForce 7.

The margins are excellent on GeForce 7.

Beyond that, are we going to increase gross margins in workstation?

I don't know.

They are pretty high right now.

Are we going to increase gross margins in notebook?

Yes, because it is going to transition to GeForce 7.

MCP should have some gross margin left and also on the other hand has deeper market penetration, which works against gross margins.

The gross margin lift comes from a new generation of products that will be launching obviously, and then on the other hand, you have got our integrated graphics ramping into desktop and notebooks.

The handset --

So you have got a lot of things going in different directions like Jen-Hsun.

The individual complements of MCP might be growing, but if we ship more of the integrated, it will have a negative effect on the whole business unit.

Handheld gross margins have been pretty good.

Are we going to be able to sustain them?

We will see.

But I think that the question that you asked ultimately is some highlights in the fundamental dynamic for all companies who are simultaneously pushing out new technologies and new features which helps gross margins, as well as capturing more of the market, bringing that technology to more people, which tends to commoditize the technology.

So we have those two fundamental tensions in our business like everybody else.

Hopefully overall we're improving gross margins in the Company.

Our gross margin improvement in the company is not just coming from new products.

It is coming from just a corporatewide operational enhancement drive in the Company.

Our business is extremely high velocity, so it is not easy to do what we're doing.

But we have to create a lot of new idea to enhance our operational performance.

So that is where we are great at those things, coming up with great ideas.

Okay, very good.

Just a quick follow-up if I may.

I'm trying to reconcile some Vista impacts.

It seem like all the leading integrated graphics vendors including yourself, ATI and even Intel with (indiscernible) are stating that their chipsets -- integrated graphics chipsets are either already Vista Premium capable or they will be very very soon.

Despite these claims, it seems like you guys still think that the discrete graphics is going to take a bump up with Vista launch.

Can you help me reconcile these two views?

Are some of these Vista Premium capability claims just hollow or not up to mark?

Absolutely.

You ask a really good question.

I'm glad you asked it.

The way to think about it is this.

Today on non-Vista, just Windows XP, the performance experience of your Windows experience and my Windows experience is identical, and I don't even know what you have.

Everybody's Windows XP experience is identical because the graphics technology far exceeds anything that Windows XP requires.

However, the moment that Windows Premium -- Vista Premium and Aeroglass comes out, people who have GPUs will have a noticeably better experience, noticeably better experience.

I mean you would have to have fallen asleep to not notice that you have a noticeably better experience.

It is almost no different than videogames.

It is based on the same technology, so you would expect similar dynamics.

That somebody with a GPU is just going to have a better experience with that game than somebody who does not have a good graphics technology.

So you are going to have exactly the same thing.

When somebody can actually notice the difference, when a consumer can get an appreciable better experience with a GPU, those are the type of dynamics that we love.

It will encourage them to buy a better GPU.

It will encourage them to upgrade, and it will encourage them to buy a GPU from the retail market to enhance their computer.

All of that is good for us.

Rick Schafer, CIBC World Markets.

This is [Dan Morris] calling in for Rick.

First off, good quarter.

Just a little housekeeping question.

You mentioned that Hybrid and 3dfx added about 2 million to OpEx.

Could you also quantify how much you added to OpEx in the quarter and what contribution there was on the top line from the acquisition?

Just as a quick clarification that was 3dlabs. (multiple speakers).

For you and for all of us (multiple speakers).

Yes, it just brings back memories.

Yes, Hybrid and 3dlabs, the people that we picked up from there, plus the amortization associated with Hybrid cost us about $2 million in the quarter.

We acquired ULi some time in February, so we picked up roughly two months, a little over two months worth of ULi.

It contributed somewhere around 8 to 10 million in revenue and about 3 to 4 million in expenses.

Okay, great.

And then as a follow-up, there has been a lot of press recently about Physics, specifically the Physics Processor.

You have also had a few press releases and demos of your (indiscernible) and Hellgate.

I was wondering if you could talk more about your views on a discrete solution and also elaborate on some of these other announcements and Physics plans?

Sure.

I guess what I will do is I will elaborate on Physics and why it is so good.

Obviously if you take a look at most of the environment that you see in videogames and others, the environment is by and large static.

There is some movement of water or leaves, but they are contrived.

So I think that Physics and applying Physics to all of those objects in the environment and the world will just make the world look a lot more alive.

Whether it is the way you interact with it or just the way you look at it.

So Physics is going to be terrific.

The second thing is the more objects that you create, the more objects you'll have to render.

And so from a graphics perspective, that is really terrific as well.

It just creates more workload for us to have to go and overcome, and we like that.

With respect to Physics Processors, it is hard to say exactly whether there is a unique market for it.

But that is not we are too concerned about.

We wish those guys well and anybody who wants to build Physics Processors as well.

It is good for the game industry.

But from our perspective, the GPU is a completely programmable device, and it does floating point and mathematics probably faster than any processor known to man since the beginning of computing, and for us to redeploy the Physics processing is a wonderful used of the investment that has already been made.

Krishna Shankar, JMP Securities.

You have alluded to the chipset business being somewhat weaker because of some IGP chipsets having adjusted pricing.

Do you feel that the excess inventories there have been worked off and they are returning to a more normal demand/supply environment in the AMD platform market?

Or is this just the AMD platform for both Intel and AMD?

At the price that those -- the fact that it was so far below market price and, frankly, so far below cost.

I cannot imagine anybody enjoying that kind of business unless it's really just to get rid of the excess inventory.

So my sense is that it is not going to happen on a regular basis.

But we will have to keep our eyes on it.

But the important thing to realize is that we do not just offer core-logic as a company, we also are a GPU supplier.

And when those integrated graphics are sold, they tend to be very very low-end, and it creates an opportunity for us to sell our discrete GPU.

So it probably works itself out in the grand scheme of things.

But on balance we still prefer people to go to market.

Okay.

And then just a follow-up question.

You talked about the requirements for discrete graphics on Vista.

Do you see any compelling need for the desktops and notebooks, or will the power requirements of notebooks still keep the trend towards integrated graphics going there?

I think you will have compelling desire in both.

I think if you want to -- a dedicated processor at something always will do a better job than a general-purpose processor in a power environment, power sensitive environment.

So the discrete GPU will do a wonderful job for you, as well as do a good job monitoring power as we go.

So my sense is that Vista is going to be good for GPUs all the way around.

Great.

And my final question, Marv, can you give us some sense for how to model the licensing and (indiscernible) revenues going forward for PS3 in the August and November quarter?

Well, certainly for Q2 we expect that Q2 will just be a combination of NRE and license fee, and the numbers that I had gave you for outlook, we do not incorporate any expectations for royalty.

I would expect that we will receive royalty income in Q3.

The magnitude I could not give you a number right now.

So Q3 would be more of the same plus royalty.

Simona Jankowski, Goldman Sachs.

Can you tell us what percent of your GPU sales in the quarter that just ended was from the GeForce 7 family, and do you have an estimate of what percent of sales for GPUs is going to be GeForce 7 in the second quarter?

Well, I think I said in my comments that we did more than $250 million in GeForce 7 in the GPU business in Q1.

So that was well more than 50%.

Okay.

And how much do you think that will be in the second quarter?

It should be a lot more.

Okay.

It just seems that with your inventory build of 150 million of the new products, that would kind of gross up to maybe 330 millions in revenues of the new products if you kind of apply a 45% gross margin.

So would that be what you guys are looking for?

That seems like that would be a pretty aggressive number.

Well, I mean obviously it depends on the market, but there is nothing wrong with the kind of numbers that you laid out there.

The GeForce 7 is a very good product family.

Okay.

And maybe just somewhat relatedly, when you are expecting your desktop business to be roughly flat and the PC environment is likely going to be down, are you expecting that to be a function of share gains or higher blended ASPs or both?

Share gains.

Okay.

And then just lastly, so your gross margin guidance is flat.

It seems like with such a significant mix of your GeForce 7 business as a percent of the total and then the same thing happening in notebooks, what is going to be driving it down to kind at a flat gross margin in the second quarter?

Mix.

We expect MCP to do better.

Okay.

And you think that is going to be enough to offset all the other, the notebooks and the desktop GPU transition?

Yes.

So previously I had answered a question incorrectly.

I was asked whether workstation revenue was a record.

We broke 100 million again, but it was not a record.

It was down quarter to quarter by 1%.

Yes, damn close.

So it was basically flat.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers this afternoon.

I would now like to turn the call back over to Jen-Hsun Huang for closing remarks.

Thank you all for joining us today, and we look forward to reporting our progress for Q2 next time.

Ladies and gentlemen, we do appreciate your joining us today.

This does conclude our conference call, and you may now disconnect.