輝達 (NVDA) 2008 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.

Good afternoon and welcome to NVIDIA's conference call for the first fiscal quarter ended April 29, 2007.

On the call today from 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.

(OPERATOR INSTRUCTIONS).

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

You can find a 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.

Unless otherwise noted, all references to research numbers throughout the call come from Mercury Research.

This call is being recorded.

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

Please be aware that if you decide to ask a question, you may 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 on the Investor Relations page of the website at www.NVIDIA.com.

A webcast will be available for a replay until the Company's conference call to discuss its financial results for the second quarter of fiscal 2008.

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 outlook, our second quarter, our products and technologies, our strategies, growth and gross drivers, marketshare, the uses for GPUs, the impact of new applications pertain to future events and are subject to a number of significant risks and uncertainties.

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

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 for the fiscal year ended January 28, 2007, 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 May 10, 2007.

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 expectation 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.

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

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

Good afternoon, and thank you for joining us.

Today we are pleased report revenue of $844.3 million for the first quarter.

Compared to last year revenue grew 24%, non-GAAP gross margin improved 290 basis points to a Company record of 45.4%.

And non-GAAP net income increased 48% over last year.

GAAP gross margin also reached a Company record of 45%, and GAAP net income increased 44% from a year ago.

Our first quarter results reflect the growing importance of GPUs in our computing experience.

Our Quadro GPU is at the center of the rapid adoption of digital techniques in nearly every industry, from design to styling to stimulation.

Our GeForce GPU benefits from the increasing importance of graphics processing in the fastest-growing applications like Second Life, Google Earth, Blu-ray, and HD DVD, and massive online games like the -- incredibly popular War of the Worlds game.

The creation and enjoyment of rich digital content creates growth engines in GPUs.

Each of our productlines benefit from this trend, and turned in a strong year-over-year performance.

Desktop GPU grew at 13%.

Notebook GPU grew 71%.

MCP grew 25%.

Professional solutions grew 39%, and mobile devices grew 49%.

Let me highlight some of our recent business achievements.

We captured the number one position desktop graphics and increased our lead in five categories, total stand-alone GPU, the performance segment, modern DirectX 9 and [beyond] GPUs, and stand-alone notebook GPU.

Our GeForce GPU remains the unambiguous leader for the performance segment, maintaining a segment share of over 64% for 30 consecutive months since the GeForce 6 became the segment leader.

In April we launched the industry's first top to bottom family of DirectX 10 GPUs.

Adding GeForce 8600, 8500, and 8300 to our already successful GeForce 8800.

We delivered PureVideo HD, the industry's first full HD Blu-ray and HD processing solution for desktop and notebook computers from Acer, Alienware, Dell, HP, Sony and Toshiba.

We expanded the reach of SLI with the launch of the new nForce 650i SLI for Intel processors.

With a much lower price point we have significantly increased our addressable core logic market.

We recently shipped the new GeForce 7050 motherboard GPU.

Directly attached to the motherboard GeForce 7050 brings in NVIDIA's valuable brand of GPUs to the lowest cost segments.

We launched the Quadro FX 4600 and FX 5600.

Our first professional solutions based on the workstation enhanced versions of the G80 unified architecture, this new family of professional GPUs will enable capabilities not possible before, and that we believe will drive a new cycle of growth.

We extended our Quadro Plex family with its latest member, the Quadro Plex Model IV, which when coupled with a workstation or server enables previously unseen levels of visual computing density.

And lastly, our Gelato 2.1 film-quality render is now available.

With 100,000 downloads so far, we're delighted that have digital artists in a broad range in industries are incorporating Gelato into their creative and design pipeline.

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

I will return in a moment to address our growth drivers for Q2 and beyond.

Today we're reporting both GAAP and non-GAAP P&Ls for Q1 of fiscal year '08.

The only difference between the GAAP and non-GAAP is equity-based compensation and its tax effect.

Revenues for the first quarter, as Jen-Hsun mentioned, was $844.3 million, up 24% year-over-year, and down 4% from Q4.

We entered the quarter expecting a decrease in both MCP and memory revenue, and both of those happened.

However, the MCP decrease was more than we expected because of the weakness of AMD processors in the channel.

Offsetting that we had better than expected sales of both desktop GPUs and professional solutions.

Desktop GPUs grew by 8% quarter to quarter, led by the new GeForce 8X products that we introduced during the quarter.

In fact, GeForce 8X products totaled more than $180 million in the quarter.

In professional solutions we grew by 11% quarter to quarter, and achieved a record revenue of more than $140 million.

MCP declined by 31% from the fourth quarter.

PortalPlayer products accounted for $11 million in the quarter, and all other product areas were relatively flat.

I would like to mention here that we now view our Company in four business segments.

These segment are GPUs, which includes desktop, notebook and memory products.

PSB, which is the professional solutions business, which previously had only workstations, but now includes Gelato film renderer and GPU computing products.

MCPs which is the same as it has been.

And finally, CPB, which is consumer products business, which includes mobile, and that includes the formal PortalPlayer business, Xbox, Sony and embedded products.

Those four segments we will report in our Qs and Ks.

We will continue to give information on some of the product areas within a segment.

For gross margin we recorded GAAP gross margin of 45%, and non-GAAP gross margin of 45.4%.

For the first time we crossed over the 45% mark.

Obviously, we are pleased with this operational execution.

During the quarter our gross margin benefited from the increase in workstation revenue, but margins for the new GeForce 8 products were also excellent.

I'm proud to highlight the fact that we have improved gross margin for 11 consecutive quarters.

And during this time non-GAAP gross margin has increased by 1470 basis points.

Non-GAAP operating expenses in the quarter were $204 million, which is relatively flat with Q4.

We incurred a full quarter PortalPlayer expenses, instead for the one month that was incurred in Q4.

This added about $10 million.

But we did a good job of holding the line in other operating expenses.

Headcount for the quarter was relatively flat with Q4.

Depreciation in the quarter was $32 million, and capital expenditures were $38 million.

The tax rate for the quarter was 14% as we had anticipated.

This resulted in a diluted earnings per share of $0.33 for GAAP and $0.42 for non-GAAP.

On the balance sheet we exited the quarter was more than $1.3 billion in cash, even though we repurchased $125 million in stock during the quarter at an average price of $31.58.

The operating cash flow for the quarter was over $300 million.

Accounts receivable declined by $47 million to $472 million, and remained very current with DSO at 50.8 days.

Inventory declined by $22 million to $333 million, and days sales in inventory remained constant at 65 days.

There was an increase in GeForce 8X products and a decrease in the older products.

Even current liabilities showed a small decline quarter to quarter.

Now for the outlook.

Q2 is usually the slowest quarter of the year for the PC industry.

Even so, we believe revenue in Q2 will be flat to slightly up.

We will have growth in notebook GPUs, and we believe MCP revenue will recover from the first quarter.

These two factors should cover any seasonal weakness in the PC business.

For gross margin we will work very hard to have flat to slightly increasing gross margins.

Operating expenses should grow approximately 3% quarter to quarter, and the tax rate should hold at 14%.

With that, I will turn it back to Jen-Hsun.

During the first quarter we enhanced our leadership position in our core GPU and MCP productlines.

Although Q2 is typically the weakest seasonal quarter for the industry, we are expecting our strong growth in notebook GPUs and MCPs plus share gains in desktop GPU to offset seasonality.

The GeForce desktop and notebook GPU productlines both achieved record revenue in the first quarter.

The continued ramp of the GeForce 8 family extends our long history of leadership in innovation, execution and time to market.

Because of the technical discontinuities created by Windows Vista, and HDDVD and Blu-ray, our customers want to deploy new platforms that meet the needs of these technically demanding requirements.

With our top to bottom GeForce 8 family now shipping, we believe we are well positioned to increase our overall share of desktop GPUs.

Coinciding with yesterday's official launch of Santa Rosa, we rolled out our GeForce 8 family of notebook GPUs.

The new GeForce 8 M Series notebook GPUs are the world's first to support DirectX 10m and fully accelerate decoding of 10 ADP full HD movies.

Playing HD videos on a notebook is a technically challenging -- is a technical challenge solved by NVIDIA's PureVideo HD technology.

PureVideo HD performs 100% of the HD video decoding, freeing the CPU for other tasks and significantly reducing battery consumption, heat and noise.

We expect our notebook business to take a step function up as our numerous Santa Rosa designs continue to become a greater part of the overall notebook mix throughout the year.

Although our motherboard GPU business was affected by the significant drop in AMD CPU sales in Q1, we do expect AMD to regain share in Q2.

Going forward we intend and expect to continue our leadership position in the AMD processor market.

In the performance segment we will leverage the significant position of SLI.

In the mainstream segment the GeForce brand of motherboard GPUs and our single chip architecture gives us a competitive advantage.

HP values this advantage and recently announced their choice of our new GeForce 6000 motherboard GPU to power their high-volume consumer lines of PCs.

Our nForce 6 family of discrete core logic for Intel processors continues to ramp.

The nForce 680i and 650i are the highest performance motherboards for the Core 2 processors.

They are also the only SLI motherboards for Intel processors.

In this quarter we will sample our first GeForce motherboard GPU for the Intel market, which we expect to open up a significant growth opportunity for us.

Overall, we are cautiously optimistic about Q2, and expect our MCP business to grow despite industry seasonal declines.

GPU computing continues to gather momentum.

In February we launched the public data of CUDA SDK, and quickly served thousands of downloads.

Researchers, scientists and engineers are using CUDA and G80-based GPUs to accelerate a wide range of problems from seismic analysis to medical image reconstruction, and seeing dramatic improvements ranging from 10 to 100 times acceleration over the fastest CPU alone.

We're also taking CUDA and GPU computing into the classroom.

Universities around the world have recognized that traditional microprocessor scaling has hit a wall.

Without a fundamental change in today's processor architectures, computing performance can no longer scale with Moore's Law.

Kernal computing is generally believed to be the path to performance scaling.

We are excited to announce that the Computer Science Department at the University of Illinois is pioneering a new class dedicated to GPU computing to prepare students for the parallel computing revolution.

Students will learn parallel computing on G80 and CUDA.

Mostly leading computer science universities are already doing research on GPU computing, and discovering very exciting results.

We anticipate many more leading universities around the world to offer parallel computing courses based on GPUs.

At 3GSM we unveiled NVIDIA's first application processor, the GoForce 6100.

The 6100 is a full computer on a chip, and enables 480p resolution video playback, and the longest battery life when playing digital music and video compared to current application processor technologies.

The 6100 is designed for next generation personal media players and multimedia smart phones.

Designs based on the 6100 are expected to ship later this year.

Also at 3GSM we demonstrated the world's first implementation of the Chronos Open Code multimedia API for mobile devices.

Open Code is an open industry standard that combines a set of APIs for handling multimedia tasks, like 3D graphics, video, music and imaging.

Application developers can now expect a comprehensive set of multimedia services from any mobile device that supports Open Code.

Standards accelerate the innovation of everyone in the ecosystem.

The availability of a stable robust and open standard will allow application developers to create exciting applications, while accelerating the rate of innovation of application processor technologies that supports Open Code.

Let me stop here, and we would be happy to take your questions now.

(OPERATOR INSTRUCTIONS).

Michael McConnell.

I wanted to know with API coming out with the new productline here shortly, and there has been a lot of concern about the pricing on the new productline, can you address that?

And just your confidence looking through the remainder of the year that the Company can maintain share, even maybe continue to take share in the discrete segment?

First of all, we take competition seriously all the time.

And this is an industry that has seen a lot of competition over the years, and I'm not expecting any changes from that.

We have competed with AMD, or I guess ATI now with AMD, for quite some time.

We know -- we have a pretty good understanding of what R600 is.

And at the moment we have three products in the enthusiast segment, the GeForce 8800 Ultra, GTX and GTS.

GTS is the most affordable version of our enthusiast product.

And that is likely the product that the R600 will be positioned against.

We have sold, as you know, several hundred thousand of those already, and our momentum is very, very high.

And my expectation is that it will continue to be high.

But more importantly, in addition to our position in the enthusiast market, we're ramping really hard the rest of the performance segment, which starts with GeForce 8600.

And below that is 8500, and below that is 8300.

My expectation is that we're planning far ahead with respect to our time to market.

And most importantly the architecture advantage that we have on GeForce 8 over what we know about the R600.

So we are cautious obviously with respect to competition.

This is a Company that knows how to compete.

But our expectations are we will the quite successful.

In the discrete segment, how much is price an effective weapon, particularly in the midrange and high end historically?

We have price competitive products in many segments, as I was trying to explain.

In the enthusiast segment we have three products and they have one.

And our lowest end of the enthusiast segment is a better product than their highest end.

And the price I believe you will discover it to be very competitive.

But price for the enthusiast is just one factor.

I mean the most important factor is you want to buy a great product.

Otherwise why would you be an enthusiast?

As we look at the MCP with respect to the AMD platform, some of these design wins have started.

Are you expecting to maintain your MCP share on AMD's platforms as we kind of move through the back to school season?

We have won a lot of design wins since their combination, and our expectation is that we are going to continue winning our fair share of design wins.

I don't know where our marketshare will be, but my sense is that we will continue to be very successful on that platform.

And the reason for that is because we have to offer products to the marketplace that is very uniquely ours, and bring a very, very specific perspective on products.

And SLI you can't get on a non-NVIDIA core logic.

And so if you enjoy SLI, if you want a motherboard that works best with GeForce, and considering the marketshare of GeForce, my sense is that we will continue to be very successful there.

With respect to the motherboard GPU segment our single chip architecture, the value of the GeForce brand, and the fact that our high-definition video technology is far superior with PureVideo HD, my sense is that all those things in combination is going to give us an advantage.

But there's a lot of execution to do between now and then.

The bottom line is at the end of the day is you have to execute well.

Glen Yeung.

I'm surprised that you guys' operating expense is up for the next quarter.

Could you just give us a sense as to what comprises that increase, and maybe give us a thought for the fiscal year how you think OpEx will tend?

We hired a lot of people, and as you move through the year, the expense goes up.

So we expect to continue to hire people.

I think we will hire a lot more in Q2 than we did in Q1, and that is anticipated in that expense level.

3% is -- I would call that a nominal quarterly increase.

I don't expect that sort of trendline to change as we go through the year.

Meaning that I'm not thinking about expenses going up more than 3% or so quarter to quarter.

We're going to have to take a look at it when we get beyond that, but I would expect operating expenses to trend up over the year, but at a very nominal rate.

And then --.

Let me just add something.

I think the -- I absolutely agree with Marvin.

What we're trying to do here is invest in some really important growth opportunities.

You know that we are now the only branded GPU supplier for the Intel processor market.

And that is an extraordinary opportunity.

We ought to attach that as hard as we can.

We have some exciting products that we're trying to bring to market as quickly as we can.

Hopefully this quarter we will start to sample one.

The second area of growth for us is GPU computing.

I have been talking about that for some time.

And if you comb the Web you're going to discover some really exciting findings about what people are doing with that technology.

Using GPUs for computing is a very important growth direction for our Company.

The third is application processors.

We are investing very aggressively in application processors.

We believe the future of mobile devices will become increasingly computer-like, and these computing devices require computer companies -- computer technology companies who are terrific at building these things to come and address it.

And I find this opportunity very, very exciting for us, and we are investing very aggressively on that.

So these three areas of investment are very important to us and leads to the expense increasing that Marv talked about.

That makes sense.

Maybe just as a follow-up to that, you obviously had good cash growth over the course of the last two quarters.

And even with this incremental expenditure, it looks like you're probably on a trajectory to keep growing cash.

I wonder if you have any thoughts about how that may be used, whether that is an increase by (inaudible)?

We expect to continue to generate significant cash.

I don't know that it will be $300 million a quarter, but we would expect to generate significant cash through the remainder of this year.

And we're going to have to decide do we want to do nothing or do we want to do something like we have been doing, which is quarterly stock buyback, or do something different.

At this stage the Board has not decided that.

So we will be looking into it.

And we will be letting everyone know what we decide to do about that.

We did purchased $125 million worth of stock in the fourth quarter.

We don't have very much left in the authorization.

Remember there was a $700 million stock purchase authorization from the Board.

There's not very much left in that.

So we're going to have to be addressing that very issue.

Nick Aberle.

The question was with respect to discrete desktop GPU, we have seen ATI/AMD have numerous delays in their products over the last couple of years.

The products are becoming a lot harder to design.

Do you think that their scope for an actual product cycle, design cycle for these products to actually lengthen here over the next couple of years?

It is a fact that the GPU is one of the most complex devices built anywhere in the world.

That it is probably the most complex device.

Hundreds of people work on it for many years.

And the investment of building a new generation of GPU architectures is many hundreds of millions of dollars.

And so it is not an undertaking for the faint of heart.

And it is not an undertaking for anyone who is not absolutely passionate and world-class at doing this thing.

We have the benefit of a really, really great team, or multiple teams, and a Company system that is created around building extraordinary GPUs.

We're really, really proud of our execution.

And it is a system that has served us well.

And frankly it is a system that the industry recognized to be absolutely superior.

Having said that, we do know that each generation of GPUs is getting harder and harder to do.

But we have absolutely no intentions of slowing down the rate of innovation, and we have absolutely no intentions of extending the lifecycle of -- the product lifecycle of our products.

Secondly, you referred to new Intel-based MCP product sampling in this quarter.

Are you referring to single-die IGP?

And can you talk at all about what your expectations are for ramping that product at OEMs starting in Q2 or Q3?

It is the single chip GeForce [for the] motherboard for the Intel processor.

And it is the first time in our Company's history we have taken the GeForce architecture to a motherboard GPU product for Intel processors, and we're very excited about that.

We already have design wins from OEMs.

And we are working our but off to meet their schedule requirements.

I'm excited about the prospects of it.

And we will talk about our business forecast for it as we get closer.

Chris Caso.

I wonder if you could talk a little bit about the MCP business?

And you talked about your expectations for that rebounding into the next quarter.

Can you just give a little more color there, and gives you confident in that?

What are you seeing in terms of order rates and (inaudible) in the market?

What we experienced with the MCP business was exactly what AMD experienced in the channel.

And over the last quarter, and I think a lot of that has been discussed and much of it documented.

And so obviously where there is an Athlon CPU there would be an nForce chipset that goes with it.

And our marketshare is relatively high, so we would experience quite a bit of the same thing that they did.

We are seeing the sell-through of AMD processors picking up significantly in the channel.

And I'm sure many of you see that as well.

And it is just -- it reflects the fact that they have replenished the channel with Athlon processors.

It is now price positioned in the right place, and it is a great product.

There is no reason why it wouldn't sell.

And so we're expecting in the pick up again.

As a follow-up on that, with respect to the notebook business you guys have talked in the past about your expectations for gaining notebook share this year.

Could you also talk a bit about the penetration rates of GPUs in the notebooks?

And specifically with the Santa Rosa platform, can you quantify what you think may happen with regard to GPU penetration into the notebook market?

We started, I think it was about five quarters -- if we go five, six quarters back, I think our marketshare was about 20%.

We left last quarter or this quarter -- at this time we are about 60%, I would say.

So from 20 some odd percent five, six quarters ago to about 50% now.

And our expectation is that we ought to go out of this year either 70% or higher.

That is compounded by the fact that the notebook business is growing faster then the desktop business.

And so our expectations is that the notebook business ought to do well for us.

Specifically with regard to the GPU business and notebook do you expect that to grow faster than say notebook units as a whole as a result of Vista and --?

We're not really sure yet.

We're going to have to play it by ear.

I think that there's a couple of dynamics that really help.

One dynamic is obviously the adoption of Vista.

Almost every single notebook that is going out now will go out with Vista.

And with a GPU the experience is better.

I think people know that.

And the adoption of GPUs have been really robust for that reason.

There is a second and equally important reason, that has to do with Blu-ray and HDDVD.

Boy, if you are buying a new notebook, you are going to what HD on it.

You're going to want Blu-ray Disc on it.

And the GeForce 8M family is the only GPU on the market, or in the foreseeable future, that has 100% of the video processing done on a GPU.

So that you could watch movies for the longest possible time.

And so I think those two dynamics are really important.

As the drive cost of HDDVD and Blu-ray Disc comes down, you're going to continue to see increased demand for GPUs for that reason as well.

Daniel Ernst.

Two questions if I might.

First, on the 6100 application processor, the design wins you've got lined up, would you characterize any of those or collectively as material or high-volume?

And then the second question is more kind of big picture looking at your press release where you referenced in a kind of a market of 10 billion GPUs over the next ten years.

Maybe talk about what that model looks like for NVIDIA and Blue Sky, what is NVIDIA's marketshare?

What does that do to ASPs as these become more mainstream?

And what does that do to your long-term gross margin target?

We don't talk about future customers, and I certainly wouldn't characterize them as material or not.

And so when we get closer, we will talk about the business prospects of 6100.

But frankly we're just really excited about the fact that this is our first application processor.

We are excited about the customers that we are engaging.

And I can't wait to buy the product that we're in.

With respect to the future GPU business prospect, although history may not be the trend, one of the things to realize is that this is probably the only semiconductor segment that I know of anyways, and probably that you know of, over the last ten years has increased in ASPs.

We have increased ASPS of our products over the last ten years, year by year.

And my sense is that we have a good shot at continuing to do that.

The reason for that is because more and more of the computing experience that consumers want are more determined by the GPU.

Whether it is graphics or video, or in the future interesting image processing or computing type of applications that requires the capabilities of the GPU.

So I think the GPU is becoming increasingly important.

And the ASPs and the size of the marketplace reflect that.

I don't really know how big our marketshare will be.

But I do know this, there are very few companies, and I can say -- or I could say there are no other companies who is investing more in GPU technology than we are, is more talented at building this product than we are, and is more focused at doing it than we are.

Maybe if I could just drop down on that ASP (inaudible) relative to a long-term view, but I guess I meant more on a blended basis, as you are in mobile phones or in cards, you know, PMD dashboards, and where it is not the same thing as being in SLI desktop or workstations.

I am looking at more on a blended basis over the very long run.

I guess it is still hard to say.

And the reason for that is because we have GPUs that are going in the servers, and we have GPUs going into power walls, and we have GPUs going into broadcast stations.

So GPUs are being used in just a whole lot more applications in the enterprise.

And on the other hand, the number of GPUs that are going into portable devices is obviously going to go up as well.

It is kind of hard to say.

But I guess -- I don't even really know how important it is.

All I know is just whatever prediction I give you is likely to be smaller than that or likely to be a lot bigger than that.

Fair enough.

Thanks.

Arnab Chanda.

A couple of questions.

First of all, you talked to -- Jen-Hsun, you talked about your notebook share, and you are like you want to get it to the 70% range.

Clearly your performance leadership in desktop is well demonstrated.

It seems like your share there is around 60.

And there's a lot of share that you could theoretically capture in value in mainstream.

Do you think that is something you're interested to do, or is it something that where you're happy with your position, with your performance, and you're going to go with that for now?

We never decline profitable business.

And so the lower end products also are obviously more cost-effective to build.

But our focus is this, we just need to make sure that we focused on the customers.

And if they would like us to serve them, building notebooks or whatever.

It could be a multimedia extender to connect a PC to a TV.

It could be a dashboard car navigation system.

It doesn't really matter.

If we could add value, and the customer needs us to help them, we're delighted to do it.

One other question.

Historically if you look at the MCP segment you have pretty good share with AMD.

Intel historically just to take 70% of its own business and leave 30% for five people to fight over.

Do you think that -- what do you think is a realistic share for non-Intel the way the business is going?

Because I'm assuming you make some strategic evaluations whether you want to going to the segment or not.

And is different from the past, so how good can that business be do you think relative to what you already have with AMD?

I would say comparing us to a historical chipset supplier is probably not the most prudent way of anticipating our success in the future.

No one would have predicted our success and the value that we brought to the AMD platform.

Not one person.

100% of the people that I have talked to -- told that we are going into the chipset business tells me that we're going into a commodity business.

For that matter 100% of the people I talked to about PC graphics told me that GPU was going to be a commodity business.

And a lot has changed.

I think the bottom line is you need to be able to add value.

You need to have imagination.

You need to have the creativity to add value, and bring experiences and products that are really surprising to people.

Look, one of the most successful companies on the planet today is building PCs.

And I think Apple does a pretty fabulous job building products, and they surprise us everyday.

Jen-Hsun, just a last question, or maybe for Marv, historically you have confound your critics and skeptics where you have gotten your gross margins to.

Now that we're past 45%, what do you think -- would you like to re-establish another perhaps goal for yourselves, or tell us on Wall Street what you think you can get?

Higher.

We're going through that.

The question is what -- within which time frame?

And I can envision a business a couple of years out that generates in the 50% gross margin.

Is that going to happen this year?

Probably not.

Who knows?

Maybe, maybe not.

But I can certainly envision a 50% gross margin business several years in the future.

Just last question with that.

You talked about our operating expenses growing 3% for the rest of the year.

Is there a theoretical constant that you imply, if you get X% in X number of dollars in gross profit how much you put in OpEx versus give to the shareholders?

Right now our business model has OpEx at around 23 to 24%.

If we can get our gross margins even higher, I will certainly share that between higher R&D and higher operating income.

In the past we have generated most -- we have held the operating expenses in the 23, 24% range, and virtually 100% has flowed to increasing the operating income.

We have lots of ideas, lots of things that we want to do.

I don't think 100% of it should go into R&D, but probably 100% of it shouldn't going to operating income.

We need to share it as we go forward.

Just as an operating model and an operating principle, I guess, over the course of a year we tend to operate to a principle that we should pass more of it to the operating income line than to OpEx line.

That comes from growth in the topline and that comes from growth of our gross margins.

And I think we have stayed true to that operating model.

My expectation is that we will stay true to that operating margin this year.

Don't forget that it takes extraordinary people to work on improving your gross margins.

We do have to increase staffing and increase our operational capability in order to derive greater gross margins.

And we know where we need to invest.

And the areas that we invest in typically does improve in gross margins, as you have seen over the last 11 quarters.

And we have many ideas that we're pursuing even now.

It does seem like you have done some extraordinary things with the quality of people, so congratulations.

Thank you.

Thank you very much.

I appreciate that.

Tayyib Shah.

Congratulations on the quarter.

Can you update us on what the split in the MPC revenues between Intel and AMD?

And where would you expect Intel's share of your MCP revenues exiting calendar '07?

We have never broken that out before.

But I think it is fair to say that Intel revenue contribution is increasing quarter over quarter, and we expect it to increase again.

It is significant.

Over time I guess we probably expect to have higher share on the AMD platform relative to Intel.

But the Intel TAM is four times bigger.

So hard to say exactly what the balance will be, but my expectation is that Intel platform will represent a sizable opportunity for us.

Then the new 8000 series product that came out, based on value design that you have are you seeing some share gain in the desktop discrete side in the July quarter, or is there something you would expect to happen in later quarters?

I'm not sure I understand the question.

The new 8000 series product that came out, are you seeing some marketshare gain in the discrete desktop side because of them?

I see.

I hope that we increase our marketshare on discrete desktop.

I hope that we will.

And we're going to do everything that we can to increase our share in discrete desktop.

We expect to increase our share in discrete notebook, and discrete notebook is obviously growing faster than discrete desktop.

But nonetheless our intention is to increase share.

Gurinder Kalra.

(technical difficulty) MCP as notebooks as drivers.

You didn't mention desktop, but I would gather with your entire (inaudible) family being entrenched by the time you go into the July quarter that also should be a driver of revenues?

Yes, what makes us cautious about that is the normal seasonal weakness in the PC industry in Q2.

I think our product positioning in desktop GPUs is excellent going into the second quarter.

So the really issue I think is what happens from a market standpoint more than anything else.

If the market is fairly robust then what you're outlining is a very plausible scenario.

I just have a follow-on question.

Now in terms of the Sony DS3 can you tell us how that ramp is progressing, and if there are any other design wins or product cycles you might be working on with Sony?

We would rather not comment on Sony's progress.

Those are -- you should really ask Sony about how they're ramping.

But I understand that they had a really terrifically successful European launch.

And aside from that, we don't comment on future products.

Simona Jankowski.

Jen-Hsun, I just wanted to follow up first on your comment on the competitive environment, just a little bit bigger picture.

Do you think that with the R600 we're going to go back to the old days of leapfrogging each other, or do you think that you have pulled ahead enough now in terms of your roadmap that you can maintain your share gains and pricing power longer-term?

It is really a fallacy that there is a leapfrogging.

Leapfrogging only comes from the mouths of the losing team.

I have just never internalized a notion of leapfrogging.

We have been -- in the course of the last I guess ten years, that is a lot of months and a lot of quarters.

I remember -- and by all of our own fault, executed quite badly on one particular cycle, the GeForce FX.

And of course the memory of the analysts tend to be shorter than corporate memory.

But because you guys don't watch our industry day in and day out like we do.

But in the ten years that was the cycle we lost.

And that is -- from that one cycle people interpret that there is a leapfrogging going on.

I don't think there's anything fundamental about technology that requires you to be -- to fall behind every six months.

It is not like the way the sun comes up or the moon comes up.

It doesn't do that.

Great companies and people who are good at what they do should be able to retain their leadership position for a long, long time to come.

And so that is my expectation with my team.

And that is what they have done over the years.

And they have done it for you for 30 straight months.

And my expectation is that they're going to do it for you for quite a long time to come.

Just specifically with your share gain close to 60% now on the desktop side, that is something you guys view as very defensible, and if anything, you think you can expand on that?

The marketshare is a reflection on the value of the product that you build.

And I think that -- my expectation is that we're going to continue to be very creative and imaginative, and bring products to the marketplace that the market will really, really love.

That is our job to do.

And if we don't do that, then they're going to lose our marketshare.

It is really that simple.

Thank you for that.

Then just another quick question on the market overall.

You see that in the first quarter the desktop graphic market on the (inaudible) side was actually quite a bit better than normal seasonality.

I was just wondering why you think that is?

Do you think there's maybe a slowing down of the spend?

Is integrated encroaching on the discrete side?

Is there a Vista effect?

Was it just an aberration?

Do you have any perspective at all?

And maybe how that reflects on the year?

It is possible that every idea that you came up with are the right ones.

When you were asking the questions those were some of the ideas that came to my mind as well.

Vista makes a different.

DX10 makes a difference.

The fact that it is a brand-new generation of GPUs, and markets love it when it is something really, really fresh and very, very different than before.

High-Definition video, and Blu-Ray DVD, and the introduction of our PureVideo HD that makes a difference.

And I know the enthusiasm around that in the video enthusiast market is quite high.

So it could be a combination of all of those things.

It could be a combination of the fact that supply chains are in fact getting longer.

That manufacturing done in Asia is being put on an oceangoing ship and shipped over to the various countries in time for back to school.

And so some of that stuff plays a role as well.

It is hard to say exactly.

But we saw what you saw, which was the GPU market seems to be pretty brisk right now.

Just a last question, just on your new segmentation.

Should we read into that in any way that maybe the general purpose -- the GPU computing side of your business might be more meaningful in terms of revenues earlier on than we're all expecting?

Is that one of the reasons why you are resegmenting the business now?

We hope so.

We do hope so.

And I think that the enthusiasm in the marketplace is giving us a lot of encouragement that we're going down the right path.

This is an investment that has taken us some five years to get here.

And we have been talking about parallel computing now for some time.

We have invented a great deal of technology now to get us in a situation that we're enjoying some of the fruits of our labor.

So I'm excited about the response from the marketplace, and I hope it turns into growth for our Company.

And I expect it to.

I just want to make one more comment about integrated graphics.

You are increasingly hearing me characterizing integrated graphics as just a GPU business, because it is a GPU business to us.

What we're putting -- what we put on the motherboard is one chip.

It is a single chip that sits on the motherboard, and it is just a GPU.

This GPU for us is as profitable, and certainly from an ASP perspective, higher than our low end GPU.

We are certainly very, very enthusiastic to bring GPU technology right to the motherboard.

And over time I hope, and I think you'll see this, that we are the only branded GPU company in the world that can serve both markets.

And we will serve both markets, AMD and Intel, very enthusiastic and hopefully that turns into growth for us.

Shawn Webster.

A very good job on the gross margin.

Marv, now that you have thrown out that 50% number, I'm sure it is a considered number.

Can you help us understand what levers NVIDIA can pull on to help us get from here at 45 to the 50%?

Now this is things that we have gone through before.

Mix is a huge factor in this.

The better that we do in what we call the Professional Services Business unit, which includes not only workstations but now also includes compute and other things, I think a key factor is how big that business gets, how quickly.

The quicker it gets to a very significant business the better the margins are going to do, because that is a high margin business.

But setting that aside, we still see ways to improve the margins in the rest of the business.

As Jen-Hsun just mentioned, the single chip GPU on the motherboard is a very nice margin business -- very good, higher than a lot of our other businesses right now.

And we see ways to improve the overall margins in the desktop and notebook GPU business.

I will point out again, which I've told you before, that the margins on the G-8X family are very good, even better than the G-7X family.

So we still see ways to improve the margins of those businesses.

Remember that we have been improving our gross margins.

And it is not because we're raising prices.

We're still in a very competitive market, and the competition is always there for us, and we're expecting them to be there.

There's a lot of smart operational improvement things that we have been doing over the years, and you guys have seen the benefits of those over the last 11 quarters.

And I am hoping that you will continue to see them, because we still have many ideas of ways to improve our Company.

Then in terms of turning shorter term, in terms when you look in Q2 can you characterize your visibility and backlog going in Q2 versus how it was coming in Q1, and maybe what you normally expect to see coming into Q2?

It is inherit in this business that you don't have a lot of visibility in any quarter.

And I don't think Q2 is any different than Q1 from that standpoint.

The most important thing is just to make sure that we understand the strategic position of our products.

That is the single most important area of judgment.

And we study that carefully.

The other part of it of course is all of the OEM design wins that we have in notebooks and on desktop and workstations and what not.

Those type of design wins we have a lot more visibility in.

I guess the final question, can you give us an update to the extent you can on your 65 nm transition?

All of our new designs are going to 65 and 55, and so we have already ramped 65.

I guess I'm not sure I understand the question.

Are you --?

I guess when are we going to start seeing significant volume shipments on the 55 front?

And since you brought it up the 65, I guess?

We will be in 65 certainly very significantly this year.

So what that would imply is soon.

Great.

Thanks a lot.

Good job guys.

Devan Moodley.

Just want to follow on the comments made about integrated graphics and GFX or GF8X.

How soon do you think you're going to get the G8x family into that motherboard single chip solution?

And what is your general strategy for the integrated laptop market, which is the one that is really growing?

Well because our marketshare of integrated graphics for the Intel market is, well I guess exactly 0% right now, any segment of that market is a growth opportunity for us.

I guess I would expect that NVIDIA will have DX10 and high-definition video in a motherboard GPU earlier than any other company in the world.

That will be my expectation.

So that ought to be, I hope, this year.

I want to go back to GPU computing.

You have been talking about it a lot.

You have put out some TAM numbers talking about the current market being about 10 million, thinking your new markets will go to 30.

Can you give us some context, that incremental gap between 10 and 30, how much of that is GPU computing?

How do we think about how we get there from here in terms of time?

And is that business better than corporate average margins right now?

I'm assuming it is.

I have to be honest, I'm not really sure how big that market is going to be.

My feeling is that it is going to be a lot bigger than we expect.

It is a little bit the same feeling that we had when we first started our GPU product business, and it exceeded everybody's expectations.

The reason for that is just our imaginations for how you could use a GPU has grown over the years.

And it has started from workstations and then it went into PCs, but now it is everywhere.

Now it is where ever there's a computing device and you have a large display.

Now game consoles, now handheld devices, and with devices like iPhones coming out, the visual experience is becoming increasingly important.

And devices like Apple TV has GPUs inside.

All of a sudden -- car navigation systems -- everywhere you have a large format display you're increasingly going to find GPUs behind them.

I think GPU computing is the same way.

We do know this, the number of serious problems to be solved in the world is really significant.

And the country has had, if you will, a super computing crisis.

Nobody has really invested in super computers for quite some time.

Yet we know that many of the fields, whether it is biology or genomics or finance have gone to computational techniques.

And you know that in your own firm, computational finance is a very important part of how you guys derive your competitive advantage.

Computational genomics, computational chemistry, computational entertainment, there are just some many different ways of using extraordinary amounts of computational horsepower.

And so I'm not exactly sure how big it is going to be, but my instincts are this is going to be a really, really significant market.

Well we see GPU computing revenue before the end of the year?

I really hope so.

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.

Over the past ten years we have delivered a cumulative 500 million GPUs, over 100 million of which shipped in the last year alone.

But this is just the beginning.

Over the coming years GPUs will be pervasive in handsets, automobiles, game consoles, media centers and a wide range of devices not yet conceived.

With the investments we have made we see a clear path to shipping several hundred million GPUs per year.

We have a focused and clear strategy to continue to expand the GPU's ability to enable and enhance a broad range of applications, and to extend the reach of GPUs to an ever growing range of prices.

The multiplicative effect from increasing the number of GPU applications on the number of devices with GPUs creates significant opportunities for us.

Over the next ten years we estimate over 10 billion GPUs will be needed to power PCs, mobile devices, and all these not yet invented digital devices.

As the only stand-alone GPU company in the world, we have a great responsibility and an amazing opportunity.

We look at the years ahead as the era of the GPU.

Thank you for joining us today.

And we look forward to reporting on our progress for Q2.

This concludes today's conference call.

You may now disconnect.