輝達 (NVDA) 2007 Q2 法說會逐字稿

I will now 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 July 30, 2006 -- pardon me -- the second.

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.

This call is being recorded.

If you have any objections, you may disconnect at this time.

Please be aware that if you decide ask a question, it will be included in both our live transmission as well as 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 third fiscal quarter 2007.

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 third quarter 2007 outlook, the option review by our audit committee and possible adjustments to our preliminary results for the second quarter of fiscal 2007, our outlook for the third quarter of fiscal 2007, the audit committee review, any expenses that may be recorded as a result of the audit committee's review, the release of our complete financial results for the second quarter of fiscal 2007, growth, growth drivers, market share, Windows Vista, design wins, strategic focus, customers and partners, new and forthcoming products, and products and technologies, pertain to future events and 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 cause affect the Company's financial 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, except as required by law, 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 August 10, 2006.

Consistent with requirements under Regulation FD, we will be providing public guidance directly in the conference call, and will be able 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 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'm sure everyone has seen our press release earlier today announcing that the audit committee of the Board of Directors is conducting a voluntary review of the Company's stock option practices covering the time from the Company's Initial Public Offering in 1999 to the fiscal current year.

As a result of the ongoing review, we had to limit the scope of our financial information that we released today.

In addition, on this call we will not be able to provide any specifics about our gross margin or operating expenses for the second quarter or year-to-date, as we cannot determine those amounts in accordance with GAAP until the review is complete.

In today's call we will provide some information and guidance about general trends for these metrics, but cannot provide any greater detail than what we state on the call.

We will, of course, make every effort to provide you with more detailed information soon.

NVIDIA does not expect to be in a position to announce additional financial results for the second quarter until the audit committee has completed its review.

At this time the Company does not expect to be in a position to file its Form 10-Q for the second fiscal quarter by the September 8, 2006 filing deadline, with a permitted extension to September 13, 2006.

The Company is focused on resolving these issues as quickly as possible, and plans to file its Form 10-Q and any required financial statements following the completion of the review.

I will now hand the call over to Jen-Hsun.

Thanks, Mike.

Good afternoon and thank you for joining us.

Today we're pleased to report record revenue of 687.5 million for our second quarter.

Year-over-year, second-quarter revenue grew 20%.

Our growth was driven by strong performance from numerous product groups, desktop GPU, notebook GPU, MCP, professional solutions, and handheld GPU, resulting in record revenue for the second quarter, which is a seasonally-slow quarter.

Let me review the highlights and achievements of each of our business units during the quarter.

Our desktop GPU business delivered a strong Q2.

We maintained a leading share of over 50%.

Our year-on-year revenue grew 13% and our market share grew 5%.

Demand for our GeForce 7600 and 7900 series GPUs with SLI continues to be strong.

NVIDIA is dedicated to delivering the highest performance and best gaming experience to PC gamers.

With the launch of our revolutionary graphics card, the GeForce 7950 GX2, we once again raised the bar on PC gaming.

With 7950 GX2, gamers can now enjoy the latest games at an incredible resolution of 2560x1600.

That is the resolution of cinematic film, 13 times the resolution of television, and brings the 16x9 panoramic experience of cinema to gaming.

We call this next-level experience extreme high-definition gaming.

It is really something to witness.

The 7950 GX2 is the fastest graphics card available today.

It was launched by over 20 leading enthusiast OEMs, including Dell's flagship XPS 700.

We continued to expand the SLI platform by delivering SLI-enabled GPUs, from Quad SLI 7950 GX2, and down into the mainstream of our product line.

We have shipped over 20 million SLI GPUs to date.

The popularity of NVIDIA's SLI has been further validated by the recent publication release by Guru3D of a comprehensive review of multi-GPU platforms.

This review was performed by some of the most respected hardware review sites over several weeks of testing.

NVIDIA's SLI platform was found to be the clear winner in performance, game compatibility and software stability.

In the performance segment, where price/performance ratio is critical, we continued to gain momentum.

We fully transitioned from our highly-popular GeForce 6600 to the GeForce 7600, which delivers almost 100% performance improvement at the same price point.

In Q2, our performance segment shipments grew nearly 50%.

We expect the GeForce 7600 will break sales records set by the 6600.

NVIDIA's focus on the stringent power, performance and video requirements of the notebook segment has delivered solid results in Q2.

Our notebook GPU revenue grew over 50% year-over-year and, while the notebook segment was seasonally down Q2, our notebook GPU revenue was up 12% quarter-to-quarter.

Year-over-year, two of our key notebook segments realized substantial increases in volume shipments -- the performance segment's up 80%, and mainstream segment's up 172%.

During the quarter we launched SLI for high-end gaming notebooks, bringing the best of PC gaming experiences to notebooks.

We also introduced PureVideo HD, the industry's only complete solution for enjoying high-definition Blu-ray and HD movie experiences on PCs.

PureVideo HD is a complete solution that consists of the video processor in GeForce 7, complex video processing algorithms, Blu-ray disc and high-definition movie player, and content protection technologies.

The GeForce 7 series with PureVideo HD powered the first HD DVD and Blu-ray notebooks from Toshiba, Sony, and Acer in Q2.

Overall, there were approximately 20 new notebooks launched in Q2 based on NVIDIA's GeForce 7 series notebook GPUs.

As a result, our share in the notebook GPU segment grew, from 24% to 37%, from the first quarter to the second quarter of calendar 2006, as reported by Mercury Research.

We expect our share gains to continue as new notebooks based on GeForce 7 series GPUs continue to ramp.

Looking forward, we're excited about the upcoming launch of Microsoft's Vista operating system.

Microsoft Vista will bring focus on 3-D performance to the mass market.

We believe that Vista's demand on 3-D graphics performance will drive an increased adoption of discrete GPUs.

OEMs will start over the next two quarters to offer desktop and notebook PCs that are Vista-ready, as consumers will want to be sure their new PCs will fully support the new operating system.

Our MCP business achieved record revenue for its eighth consecutive quarter and grew revenue over 80% year-over-year.

Driven by substantial increases in server and notebook design wins, we increased share of the AMD64 segment, from 42% in calendar Q1 to 52% in calendar Q2, as reported by Mercury Research.

With the upcoming transition to AMD Rev F CPU, we have captured design wins with all the leading server and workstation OEMs and ODMS, which we believe will double our AMD server segment share as we exit the fiscal year.

It was a record quarter for notebook chipsets, with revenues growing substantially over Q1.

We believe we are in a position to capture approximately 60% of the AMD Rev F CPU notebook segment business.

We are thrilled that HP has incorporated our mobile nForce and GeForce products in their best-selling 15-inch and 17-inch consumer notebooks.

We now ship our integrated GPUs to top PC OEMs, including HP, Gateway eMachines, Lenovo, Acer, Packard Bell, Fujitsu-Siemens, and we expect that list of OEMs to continue to grow.

During the quarter we introduced and shipped our new nForce 590 SLI enthusiast platform for AMD's latest AM2 CPU.

Several weeks later, we introduced nForce 590 SLI support for Intel's new Core 2 Duo CPU. nForce SLI is offered in flagship PCs for both AMD and Intel processors from leading companies like Dell, Alienware, Falcon Northwest, Voodoo, and many others.

Maximum PC selected our SLI platform for their Intel Core 2 Duo-based Dream PC.

We continue to execute our nForce commercial PC strategy and are pleased to include Lenovo's business PC group among our latest customers.

We now have over 80 PC OEMs and system builders who now offer our NVIDIA Business Platform in their business PC product lines.

VeriTest, a highly-respected third-party testing service, reported that PCs built with NVIDIA's Business Platform offer excellent stability on par with those purchased by top global enterprises.

The NVIDIA Business Platform is the only stable image enterprise-class PC platform that supports both AMD and Intel CPUs.

We believe as enterprises adopt AMD and Intel processors interchangeably, our unique position will be an important advantage for us.

NVIDIA's Quadro professional business achieved a record quarter.

Quadro revenues was up 27% year-over-year and 17% quarter-over-quarter.

Business wasn't strong in all segments, especially in mobile workstation and high-end Quadro.

We launched an entire spectrum of new products in Q2.

Our new products address professional segments, from business desktop, to HD video content creation and broadcast, to the most demanding CAD and visual simulation applications.

The new Quadro line offers industry-leading performance and quality for each segment, culminating with the flagship 1 GB Quadro FX 5500, the most powerful workstation GPU in the world.

This new Quadro lineup is complemented by a range of solutions like Gelato, Genlock, and [FDI], that are becoming standards for advanced visualization and broadcast.

Two weeks ago, we launched the NVIDIA Quadro Plex, an entire new category of professional graphics solution.

Quadro Plex is the world's first PCI Express-based standalone external graphics subsystem, and can be connected to any workstation or server with a 16-lane PCI Express slot.

An SLI-ready workstation can support two external GPU Quadro Plexes to support an 8-GPU graphics supercomputer solution.

When integrated in a typical rack-based server, Quadro Plex offers 20 -- 25 times more graphics compute density than traditional datacenter solutions.

Quadro Plex is a whole new class of visual computing solution.

It enables thousands of engineers and designers to experience advanced personal visualization solutions previously only accessible in large visualization centers.

Applications of Quadro Plex include HD broadcast video, industrial design, visual simulation, oil and gas exploration, and medical imaging.

Our handheld GPU business achieved record shipments of GPUs in Q2.

The success was largely due to three factors.

We are leading the rollout of mobile digital TV with DVBH.

These included the Samsung P910 handsets used in Italy for the production rollout for the World Cup, and (indiscernible) in Europe, as well as the HTC Foreseer used in the first North American deployment; two, we significantly grew our number of designs at Motorola with several new phones starting to ship now; and three, we broadened our customer base to include phones developed in Japan, China, Taiwan and Korea.

We are starting to see the benefits from several key design wins at Motorola in their highly successful RAZR and SLVR lines, with the SLVR L6I and L7I, as well as the RAZR V3XX and the Moto RAZR Max.

We launched our MobileMedia Platform for handheld devices running Windows Mobile 5.0 at Computex in June.

The MobileMedia Platform is a complete development kit containing both software and hardware components that enables handheld manufacturers to rapidly design and release digital media-rich devices with Windows Mobile 5.0.

Our MobileMedia Platform continues to gain acceptance, with additional design wins added to the Samsung, HTC and [Raincom] devices announced at our launch.

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

When I return I would like to address our opportunities as they relate to the AMD announcement in July.

Thanks, Jen-Hsun.

I'd like to start by saying that since we cannot release GAAP financial statements for Q2, my comments will be limited.

I will be able to comment on revenue and some balance sheet items, but I will not be able to comment on margins, expenses, or earnings.

Revenue for the second quarter was 687.5 million, which is up 1% from the first quarter and up 20% from the prior year.

The revenue is in line or slightly above our guidance of flat.

The composition of the revenue was particularly positive.

Memory sales declined by around 21 million quarter-to-quarter, and this was more than offset by growth in workstation and MCP.

Professional products increased by 17% quarter-to-quarter and MCP also increased by 17%.

Notebook also increased by 12% quarter-to-quarter.

Desktop GPUs declined by only 5% quarter-to-quarter, as growth in the high-end GPUs offset some of the normal seasonal decline in mainstream.

The result was that the unit volume decrease in desktop GPUs, which you expect in Q2, was somewhat offset by a significant ASP increase.

So we had revenue growth in high-margin products and revenue declines in lower-margin products.

Year-to-year, our core product revenue, which excludes Xbox, PS3 and memory, grew by 34%, with notebook and MCP both growing more than 50%.

During the quarter we repurchased $125 million of stock, which equated to 5.4 million shares.

This caused cash to decline by approximately 100 million, as we also had an increase in accounts receivable.

The accounts receivable increase in Q2 is normal, as the quarter tends to be weighted towards the back of the quarter.

The accounts receivables are still in good shape with very little delinquency.

We had unit growth and inventory of new products and unit declines in older products, as we had anticipated.

This may have resulted in a slight inventory increase.

Depreciation in the quarter was 24.2 million and capital expenditures were 20.1 million.

During the quarter we added 252 employees and exited the quarter with 3427 employees worldwide.

Of the 252 additions, only 78 were in the U.S., as we continued our aggressive hiring internationally.

We believe spending for the quarter reflected a small quarter-to-quarter increase.

The outlook for the third-quarter revenue is as follows.

We expect increases in both desktop and notebook GPUs.

The notebook increase is a continuation of our Napa design wins, and the desktop increase is a reflection of the normal Q3 PC growth and the strength of our competitive offerings.

We also expect good growth in MCP -- again, from normal market improvement -- as well as from our new products.

We expect workstation and handheld to be relatively flat.

When you put it all together, we expect quarter-to-quarter revenue growth of 8 to 10%.

We also expect to continue our emphasis on gross margin improvements and very slight increases in operating expenses.

With that I'll turn it back over to Jen-Hsun.

Thanks, Marv.

On July 24th, AMD announced that they are acquiring ATI.

Once the acquisition is completed, NVIDIA will become the only GPU and platform technology company that supports both Intel and AMD processors.

Our company focus is to be the innovation partner for leaders of the computer and consumer electronics industry, to build high-brand, high-image, market-defining products.

GeForce is the number one GPU brand, nForce is the number one core logic Rand, Quadro is the number one professional and workstation brand, and SLI is the number one multi-GPU brand.

Each and every one of these brands is sought out by end users of both Intel and AMD processors.

AMD's pending acquisition of ATI only enhances our strategy.

The GPU is becoming increasingly important in all digital platforms.

Our strategy is to extend the utility of GPUs to all types of multimedia processing and establish the GPU as the DSP of the digital media era.

And as we want to expand the reach of GPU into all computing devices -- from PCs to servers, to phones to automobiles -- and in each of these markets we will support Intel or AMD CPUs, or (indiscernible) or PowerPC, [or cell], our strategic focus is the GPU.

We will continue to partner closely with both processor companies and we will absolutely continue to provide MCPs for AMD as well as Intel processors.

We will continue to invest around the AMD processors and continue to work with them to bring our brands to our mutual customers.

We also see increased opportunities in serving [the] Intel Core Logic segment, particularly since it is unlikely that AMD will do so.

We have many exciting growth drivers ahead of us this year.

With the leadership position of our GPU, MCP, workstation and handheld GPU, we are positioned to continue to take share.

We expect the great 3-D processing demand of Vista's new UI will increase the adoption of discrete GPUs in notebook and desktop PCs.

The ramp of Blu-ray and HD DVD will play into a significant advantage we have with PureVideo HD.

The highly-anticipated launch of PlayStation3 later this year -- and with the pending acquisition of ATI, the new PC industry dynamics puts us in a unique position.

At the core of our growth is the continuing shift in focus of the industry to build products that are multimedia-centric and consumer experience-centric, rather than the traditional focus on mix and megabytes.

As the GPU is essentially the experiential processor of digital platforms, we see tremendous growth opportunities as we extend the reach of our GPUs into all digital devices.

We'd be happy to take your questions now.

(OPERATOR INSTRUCTIONS).

Glen Yeung, Citigroup.

Thanks for taking my call today.

I have three questions, basically.

The first one is, if you look back at how revenues formed over the course of the quarter, can you talk about what linearity looked like?

When did you actually see the bottom of the business, and when did things start to get better?

Q2 is not typically a linear quarter.

It's seasonally slow in a variety of geographies, as you know.

And it's -- it typically tends to be a very slow May, and it picks up very strongly in July as people gear up for back to school.

And it's pretty much the same year-over-year from that seasonal pattern.

Some parts of our market tend to see a little bit less of that.

For example, the professional market tends to have a bit more linearity than that, because enterprises tend to buy on a continuous basis.

But it's pretty seasonal from that perspective.

I've been visiting with a bunch of board makers and box makers over the last few days, and a lot of them are telling me that the attach rates for discrete GPUs are going up pretty substantially in the third quarter.

I wonder if that's something that you're seeing consistently in your business.

And this may seem a bit odd, but I'm wondering if the delay of the 865 G chipset from Intel, which seems to be having issues with graphics quality, is helping attach rates at all for you in the October quarter.

Our belief is that as people gear up for Vista, and because the user interface of Vista is so -- it's completely built around 3-D graphics, every part of the Vista experience requires the GPU to render each and every one of the pixels.

From the transparencies, the special effects and the way that it's composited, the whole experience around Vista is really made possible by the GPUs.

So our belief is that as Vista ramp starts and -- Vista-ready PC ramp starts towards the second half of the year, the number of GPUs that will be included in PCs will increase.

So that's our -- that's our general belief.

I really don't know very much about the issues with the 865 G.

Chris Caso, Friedman Billings Ramsey.

You made some comments with regard to a substantial increase in ASP and declining units on the graphics side.

Could you give us a little more color on magnitude of that, what you guys consider as substantial?

The ASP and desktop GPUs was up 16% quarter-to-quarter.

Now, obviously, that's mix-related, because the unit volume decline was primarily in the mainstream, and we did very, very well on the high-end GPUs.

And I guess -- is that tied into the inventory increase that you guys saw?

Is that part of a changing mix?

And if you can give us some indication of what you guys expect for inventory going forward.

The inventory increases in the quarter were all in the new products, the new products that we're announcing or are about to announce.

The inventory of the older products declined.

I'm referring in this case to unit volume of those inventories declined.

Going forward, we'll continue to emphasize having enough inventory.

But I think that from a dollar volume standpoint, we probably have enough.

So we will try to make sure that we don't grow inventory very much in the rest of the year.

Just as a final question, kind of speaking strategically with the AMD acquisition, what can you guys tell us about any kind of discussion or programs that you guys have running with Intel right now?

Just maybe you can kind of give us some sense of what you think that relationship might be going forward.

We have developments and collaborations going with both companies, and we will continue to invest around the AMD processors.

Now, with the new industry organization, obviously, it's unlikely that AMD will be designed in Core Logic for Intel.

And so we see that as a pretty significant opportunity for us to participate in that.

But we have so many collaborations going on with both companies, there's not really anything that we can talk about here.

Michael McConnell, Pacific Crest Securities.

If we look at the wireless business, can you talk a little bit more about what exactly is happening at Motorola, why you've been able to take some share; and if we look at the rest of the year, how that revenue line should start to shape up?

Our strategy -- there are basically two -- that's not true.

I guess there's two or four GPU companies, depending on how you count them, in the handheld space.

There are a couple of GPU companies in Korea who also build discrete GPUs for handsets.

Our strategy is different than all the other GPU suppliers, because we focus on the high-end, the multimedia-rich segments of the marketplace.

Historically we focused on 3G.

We've expanded that focus to include smart phones, and that's why we developed the multimedia -- what we call the MobileMedia kit for Windows Mobil 5.0, Windows 5.0.

And we've expanded our scope to that.

We've also expanded our scope to personal media players.

But our focus is very narrowly the multimedia-rich and the high-end portable devices, because we happen to believe that that's an area where we could add a lot of value.

We also happen to believe that that's an area that is going to grow very fast, as the majority of the world's handheld devices are going to become intelligent and they're going to become our most personable -- our personnel of computing devices.

And multimedia is going to play a huge role in that.

So we have historically focused on the high-end.

And now, those multimedia features -- whether it's digital video camcorder functionality, or digital photography, or 3-D graphics for better user interfaces -- those devices and those capabilities are becoming very, very popular.

And so we think that we're in a really terrific position to expand reach into the marketplace, including at Motorola, because of that.

If we look at operating expenses -- I know directionally, you can only talk about directionally -- should we be looking at, after a pretty big spike here in the April quarter, the rest of the year to kind of just bump along, maybe flattish?

Or are we expecting maybe it to work higher or lower?

I indicated last quarter that with seeing the spike in Q1, and that we expected to, the growth for the rest of the year would be moderate.

I think that's what you should plan on.

It's been -- I think it's moderate growth from the Q1 step function.

Hans Mosesmann, Moors & Cabot.

Jen-Hsun, can you give us commentary regarding any sales to Sony, or in terms of the royalty ramp in October and (indiscernible) quarters?

We have two types of activities with Sony.

One of them is related to engineering, so it's expanding their manufacturing capacity, as well as reducing feature sizes into -- by porting into new geometries.

So there's a very large amount of activity associated with that each and every quarter.

And I expect that activity to continue, certainly throughout this year and probably throughout next year.

The royalty component of Sony we expect to happen this quarter.

We don't know exactly how much yet, but Sony is in volume production, as you know.

And they're gearing up for their highly anticipated launch towards the later part of this year.

So we are expecting revenue contribution this quarter; we just don't know how much yet.

As a follow-up, the 8 to 10% sequential growth is incorporating no contribution or some contribution from Sony?

Small. (multiple speakers) when we say small, we're referring to royalties, not the fact that Sony would be small.

Right.

Okay, thank you.

I wanted to emphasize that there was no royalty in Q2.

Robert Dennison, UBS.

I'm pretty sure I heard on the call, Marv, you say that revenues were up in higher-margin products and revenues were down in lower-margin products.

Does that give us any sort of directionality in what we should be looking at for gross margin this quarter?

You know -- yes;

I did say that we had revenue growth in higher-margin products and revenue decline in lower-margin products.

You'll have to draw your own conclusions.

Thanks.

Sorry -- did I miss anything on handheld revenue growth rates?

Did I miss a number there?

Handheld revenue was up 12% quarter-to-quarter.

Arnab Chanda, Lehman Brothers.

Jen-Hsun, if you could explain a little bit about the -- your MCP business.

How much opportunity would you get at Intel?

Are you assuming that if this merger goes through, some of the internal demand at AMD would be fulfilled internally?

Do you think -- is that how you're planning to address the business, and do you think that business continues to grow at sort of the type of rates you've seen, or maybe at PC growth rates?

And I have a follow-up, please.

Our strategy with MCP is to focus on the segments where either the GPU, the leadership of our GPU position, or GPU technology, could play a large role in those segments.

And so you could imagine that GeForce and SLI are two such incredibly important brands in the end market that it's unreasonable to expect an end user to have to pick which microprocessor GeForce and SLI supports.

And so these gamers, they want to buy the latest in GeForce and they want to have SLI capability in their system.

We want to give them the flexibility of whichever processor they would like to choose.

And so those segments we'll continue to serve, and my expectation is that we'll continue to be very successful in those segments.

In the segments where integrated graphics, or graphics technology, is important, the segments that we will see the most success is where branded graphics and the leadership of our technology plays a large role.

And I'm hoping that the coming year, as Vista and nearly all of the office automation applications that we know of today, starts to make the migration to use 3-D graphics, that 3-D graphics will be important in a much, much larger part of the overall market.

I think that creates a lot of opportunity for us.

And so our focus is going to continue to be that -- where our brands are important, where graphics technology is important.

And if we stay focused on that, I think we'll do a fine job for you guys.

Thanks.

One sort of qualitative question.

You talked before about both operational improvements as well as royalties from Sony that could drive your margins higher, gross margins higher.

It seems like you had benefit on mix in the second quarter, if I understood you correctly.

Do you think that going forward, over the next sort of 12 months or so, those aspects that you're talking about, the operations and the royalty structure, could continue to drive those margins higher to your sort of old targets, 45% or so?

Or can you maybe give us a qualitative understanding of that?

Thanks.

We haven't changed our expectation that our gross margins should be 45%, and in fact higher in the future.

We ought to raise our expectations as soon as we get to 45%.

There are broad and numerous operational improvement activities throughout the Company, and our operation, frankly, is world-class.

And it's -- the reason why it's in the graphics industry -- it requires an extraordinary level of operational excellence -- is because the technology is, obviously, extremely complex.

These are some of the most complex semiconductor devices built anywhere, and the velocity of the business is very, very high.

And so when you have very complex devices with very high-velocity businesses, you have to be on -- you have to be on your toes, and you have to have extraordinary operational capabilities in order to reduce waste.

So that's been an area where we've put a lot of energy over the last several years, and I'm going to continue to put energy around that.

Naser Iqbal, Salman Partners.

Congratulations on the quarter and the forward guidance -- great numbers.

I only just have one question, and -- Jen-Hsun, I guess, with all the announcements that have been that happening in the semiconductor space, and based on the comments (technical difficulty), and I know you're limited as to how much you can actually say.

But what kind of comfort can we take in the announcement of what's happening with the stock options?

Can you share any other colors or comments?

The audit committee's reviews are still ongoing, and we ought to give them every benefit to complete their analysis.

So at this point I don't think there's really that much that we ought to say beyond everything that we've already said.

I appreciate that.

Congratulations on the quarter.

David Wu, Global Crown Capital.

This is Han Lee for David Wu.

Congratulations on the quarter.

Jen-Hsun, you mentioned in your speech that you want to be the GPU (inaudible) for the digital media.

So, do you have any plans again to business such as, say, TV tuners for the PC, or say, pretty high-growth, high-definition TV area?

That's a good question.

I think the -- our focus tends to be where the computing and digital technology intersects consumer applications.

That tends to be our focus.

And two very important words in there is computing technologies, and the other one, obviously, is consumer, which conveys multimedia and experiential elements to the technology.

The digital television is not really a computing device today.

It's not much more of a computer then a DVD player is.

It's not much more of a computer than a set-top box is.

And so those -- although it uses some embedded microprocessors and uses memory and such, the behavior and the nature of those devices tend to not follow those of computing devices.

And as a result of that, historically we've stayed away from it, because they don't tend to be sustainable businesses.

People have told me that flat-panel displays were exciting businesses and we ought to get into that because we know a lot about image quality.

That's true.

But, as you know, the flat-panel transceiver business has not scaled the way that GPUs have scaled.

So we tend to follow the marketplaces where the experience continues to improve, the applications continue to improve, and the reach and the usefulness of the devices continue to improve; which, certainly, personal computers is one of them, handheld devices is becoming one of them, game consoles is one of them, and I foresee many other types of digital devices in the future that will have these characteristics.

That's where our focus will be.

Thank you.

Also I have some questions about your inventory levels.

You said that inventory will again increase this quarter slightly.

So I'm wondering which kind of products is the inventory increasing.

Is it -- if it's in the higher-end graphics, or is the increase mostly in the newer MCP area?

I think what you're referring to is that I said that the inventory probably increased in Q2.

I don't anticipate that inventory will increase in Q3.

Okay. (multiple speakers) expect the ASP trend to go on in Q3?

Beg your pardon?

In Q2 your ASPs increased by 15% quarter-over-quarter.

So, what's your expectation for Q3?

I think it really is dependent upon mix, because a major portion of that increase quarter-to-quarter was the mix, the fact that we did very well in the high-end and the mainstream had a unit volume decline.

If we do very, very well in mainstream, you could even see ASP decline in Q3.

It really depends on mix more than any individual product's ASP.

One of the comments that I will make is that we made a prediction a long time ago that SLI will increase the TAM of high-end GPUs.

And, I think, for all intents and purposes, whenever you have SLI in your system, and it has the opportunity to accept two high-end graphics cards, that's a perfect example of the doubling of TAM.

And so I think that the adoption of SLI and the popularity of SLI, and the increasing popularity of SLI, is quite a boon for high-end GPU markets.

Nicholas Aberle, Caris & Co.

First question is for Marv.

I'm trying to figure out what the Q2 gross margin was.

You did imply that Q3 gross margin was going to be up from whatever that level was in Q2, correct?

No, I didn't.

I didn't imply anything.

I just said that we would continue to work very hard to improve gross margins.

Okay.

You said that OpEx would actually be slightly higher in Q3 then.

That was the --

That's correct.

Going into Q3, in terms of gross margin, I would expect that mix would revert somewhat.

Could a potential boost be the PS3 royalties and get that margin up again in Q3?

That's certainly one of the factors.

Any royalties we get is 100% margin, so that helps.

So, it really depends on the magnitude of the royalties.

It depends on a lot of factors, but certainly that helps.

Secondly, Jen-Hsun, I was wondering if you could just comment on the thought process of down the road, the convergence of CPU and GPU, and perhaps the integration of the two sometime in the future, what your take is on that and how NVIDIA plays into that scenario.

GPU is a very complex device.

If you pop the lid of some chips, you'll discover that GPU is substantially larger than a lot of CPUs.

So I guess one could argue that long-term, Moore's Law would enable some device to integrate some other device.

But frankly, that's not the way -- markets don't care about Moore's Law.

Markets don't care about most laws.

They just care about what they need.

And the reason why the GPU has been separated from the CPU historically is because the two work off of completely different rhythms.

And because of the different segmentations and the velocity of innovation, and all of those things, the GPU continues to be a standalone device for the segments in the marketplace that we serve.

And so our job isn't really to worry about which is going to integrate which; our job is to make the GPU valuable.

And that has been the historical focus of our company, to invest in helping people see how to program our GPUs, to invest in pushing the industry forward, and enabling the next level of games, or for industrial styling, or different applications of GPUs.

Focusing our energy around that has been a much more productive exercise for us.

Now, in some segments, we could imagine GPUs integrating with CPUs, or CPUs integrating with GPUs.

But we'll approach those segments as it makes sense.

Because oftentimes it's not necessarily one CPU.

It could be x86.

It could be PowerPC.

It could be cell.

It could be [ARM].

It could be something else.

And so we believe that what we ought to do is focus on the market, and focus in advancing the utility and usefulness of GPUs, and focusing on advancing the GPU technology.

And that's -- I think we've been very true to that historically.

We're true to it right now, and I think people are seeing the wisdom of it.

Devan Moodley, Scotia Capital.

Just quickly, can you give us the split for the 7000 versus the 6000 series family this quarter?

Heavily, heavily weighted towards the 7000 family.

Can you talk about sort of where you might expect, once NV80 launches, the split to be towards the end of the year?

We haven't announced G80.

I don't know what G80 is, but we sell a lot of G7Xs.

Just as sort of a general question in relation to the AMD ATI situation -- do you think it creates any input cost advantage for you guys down the road, with potentially maybe the fear from the pure play foundry guys that AMD might take some of that business in-house?

I think that there is -- I don't know if that is specifically the reason.

Our focus is to be a strategic and a meaningful partner of the partners we work with.

And so with -- TSMC is our largest-single partner, and a terrific partner, and they've done a great job for us.

Our job is to make sure that we can be as large and bring as much business as we can to this relationship.

And typically, when you bring a lot of business to a relationship, there's some benefits.

And so my sense is that that is going to continue to be a dynamic that makes sense, and that's our focus.

Last question.

Where do you guys see the PC market, in terms of growth back-half of this year, with Vista launching in Q1 '07?

What's your expectation for growth?

I think everybody is thinking through that.

Some of the smartest things that I've heard in talking to leaders of PC companies is that here in Silicon Valley in the high-tech industry, we're sitting here talking a lot about Vista, but the vast majority of America and the rest of the world aren't spending any time talking about Vista.

And there's just -- they think of the PC as the PC.

When Vista comes out, Microsoft will be incredibly energetic to promote Vista and get that in the forethought of just about everybody on the planet.

And when that happens, I think the Vista demand will drive up.

In the meantime, my sense is that the back half is all going to be about Conroe and AM2.

Conroe is a very exciting microprocessor, and it's brought a lot of enthusiasm and excitement back into the high-end segment.

And I'm excited to see that.

When there is energy in the high-end excitement and people are excited about Conroe and AM2, it's going to bring a lot of people back to buy high-end PCs.

And most of those high-end PCs will, hopefully, have SLI and, hopefully, have GeForces in them.

Simona Jankowski, Goldman Sachs.

Jen-Hsun, you touched on the collaboration with Intel on the MCP side as a result of the AMD announcement.

Can you maybe also comment if there is any opportunity or possibility for collaboration on the GPU side, whether marketing or otherwise -- maybe specifically, if you have noticed any change in the trajectory of your design wins alongside Conroe before and after the announcement, for GPUs specifically?

Thanks for the question.

I would say that we're the only GPU -- standalone GPU supplier in the world today, and we are CPU-neutral.

We could be a partner for either company.

And I think we're a much more natural partner for either company today than ever before.

And so I think -- I think you could derive from that that we're much more a natural partner today working with Intel than AMD would be working with Intel, in collaborating to build markets and otherwise.

So I do think that's a very significant advantage.

But did you see anything specific so far, any kind of inflection as far as how many people are designing a GeForce GPU alongside with a Conroe, as opposed to perhaps going down the path of a 1900 in a Conroe?

Is that something that -- where the perception has changed, or anything you've been able to track?

I guess there's probably some anecdotal stuff, but I think the high-level [bit, though], is that Conroe is all about high-end PCs.

And high-end PCs really need SLI.

And so we were in all of those design wins anyhow, and SLI only works with GeForce, so we were already in those platforms.

There's probably a lot more enthusiasm and energy in working together on Conroe platforms between Intel and our team, and I think that's a wonderful positive.

But that's a segment of the marketplace that we already are quite successful in.

Just a quick follow-up on the MCP side.

Given the different margin structure historically in AMD Core Logic versus Intel Core Logic, would you expect any meaningful change in your gross margins long-term as that mix shifts just a little bit more to Intel than AMD?

No.

I think that the difference in gross margins in the MCP business is more related to whether it's an integrated (indiscernible) chipset or discrete.

And whether it's AMD or Intel, discrete chipsets have good margins.

And integrated have lower margins.

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.

We look forward to reporting our progress for Q3.

Thank you.

This concludes the conference.

You may now disconnect.