輝達 (NVDA) 2009 Q1 法說會逐字稿

Ladies and gentlemen, good afternoon, thank you for holding.

As a reminder, today's conference is being recorded May 8, 2008.

I would now like to turn the conference over to Mr.

Michael Hara, Vice President, Investor Relations.

Thank you, sir.

You may begin.

Good afternoon and welcome to NVIDIA's conference call for the first fiscal quarter ended April 27th, 2008.

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

During today's call, we will discuss some non-GAAP financial measures about net income, diluted net income per share and gross margin when talking about our results.

You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our financial release, which was posted on the Investor Relations page of the Web site at www.NVIDIA.com.

Unless otherwise noted, all references to market research and market share numbers throughout the call come from Mercury Research or John [Petty] 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, it will be included in both our live transmission as well as any future use of the recording.

Also, shareholders can listen to a live webcast of today's call via the Investor Relations page of our website.

The webcast will be available for replay until Company's conference call to discuss its financial results for its second-quarter fiscal 2009.

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

These forward-looking statements are subject to a number of significant risks and uncertainties, including statements as to the importance of and uses of the GPU in CUDA, our financial outlook and projection, the impact, performance and availability of and demand for our products and technologies; the impact of [PPL]; our growth and strategies and the future of computing.

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

For a complete discussion of factors that could affect the Company's future financial results and business, please refer to the Company's Form 10-K for the period ended January 27, 2008, 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 8, 2008.

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

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

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

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

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

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

Good afternoon and thank you for joining us.

Today we reported revenue of $1.15 billion for our first quarter.

Compared to last year, our revenue grew 37% and GAAP net income increased 34%.

Year over year, our GPU revenue grew 55% and CPU revenue grew 31%.

PSB revenue grew 44%.

Our overall GPU units grew 42% while ASPs grew 10% year over year, a trend reflecting the growing importance of the GPU.

We gained share in virtually every graphics category year over year -- in desktop GPU, notebook GPU and notebook integrated graphics.

For the performance segment, which is a reflection of technology leadership, we estimated our segment share is 90%.

Overall, our graphics market share grew from 30% to 33% year over year.

However, if we accounted for double attached, which happens when a PC has both integrated graphics and GPU, our market share is approximately 42%.

Double attach happens because integrated graphics chipsets are often the same price as discrete chip sets.

The market buys an integrated graphics motherboard but then turns it off when the GPU is added.

Our first quarter reflects the growing importance of GPU as our computing experience becomes increasingly visually rich.

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

I will return in a moment to talk about how we will continue to lead the visual computing revolution and shape the computer industry.

Today, we will be discussing both GAAP and non-GAAP results for the first quarter of fiscal year 2009.

The difference between GAAP and non-GAAP is stock-based compensation and its tax effect.

As Jen-Hsun stated, revenue for the first quarter was $1.15 billion, which is up 37% year to year and down 4% quarter to quarter.

Our revenue was in line with our expectations.

For the first quarter, GPU revenue, which includes desktop, notebook and memory, grew 45% year to year but declined by 8% from the fourth quarter.

The components of GPU had significant growth year to year.

Desktop GPUs grew 44% year to year, notebook grew 99%, and memory declined 36%.

Quarter to quarter, both desktop and notebook declined by about 8%, and memory was down 22%.

MCP grew 31% year to year and declined 4% quarter to quarter.

The star for the first quarter was the Professional Solutions business, which includes workstation products.

It grew 44% year to year and 21% quarter to quarter.

The Consumer business declined by 24% quarter to quarter and 37% year to year.

All in all, most of the revenue was in line with our expectations at the beginning of the quarter.

ASPs held relatively flat quarter to quarter.

Gross margin was disappointing.

We didn't manage our product transitions as well as we would have liked, and this resulted in a decline in gross margin to 44.6%.

We can do better.

The issues in gross margin were focused primarily in product transition issues in the GPU business.

Therefore, margin for the GPU business segment declined by almost 2 full percentage points quarter to quarter.

Again, it was not an ASP issue, as ASPs held relatively flat.

We had hoped and expected to make progress in improving yields for the new products.

This did not happen.

Margin and the professional solutions business remained very good.

Margin and MCP were down because of the movement to the integrated chipsets, but that was expected.

GAAP operating expenses were $312 million, which is up 8.6% quarter to quarter and in line with our expectations.

Most of increase was in R&D as we absorbed several acquisitions that we made recently.

Headcount grew by 373 during the quarter, and our ending headcount was 5358.

Year to year, the headcount is up by 1284.

Depreciation in the quarter was $41.4 million, up by around $4.5 million from the previous quarter.

Capital expenditures were $202.2 million, which included a purchase of property in Santa Clara for approximately $150 million.

Cash flow from operations was $143 million for the quarter.

Stock-based compensation was $42 million for the quarter, up from $34 million in Q4, as we had stock options issued for the new hires and the semi-annual grants, and the volatility portion of the binomial calculation has increased, based on what is happening in the stock market.

Other income dropped by $7 million quarter to quarter.

This was a combination of several factors.

The impact of the continuing weakness of the dollar on our foreign currency-denominated liabilities resulted in foreign exchange losses of approximately $4 million in the quarter.

Also, the lower cash balance and the lower interest rates drove down the interest income.

As we expected, the tax rate was 17% for the quarter.

The lack of a renewal of the R&D tax credit will cause our tax rate to remain at this level until the renewal is passed.

When it is passed, we would expect the tax rate to drop to the 13% to 14% level.

The end result was that GAAP EPS was $0.30 per share and non-GAAP was $0.36 per share.

On the balance sheet, ending cash was $1.62 billion.

We completed three acquisitions for cash during the quarter as well as paying the $150 million for the property and $124 million for stock repurchases.

None of our marketable securities required any valuation adjustments.

Our accounts receivable ended at $652 million, down $15 million from the prior quarter, and DSO was 51 days, up from 50 days in the fourth quarter.

There are no issues of delinquent receivables.

Inventories were $420 million, up $62 million from Q4, as we built inventory of new products, both announced and unannounced.

The older inventory declined as we had expected.

The result is that days sales in inventory ended the quarter at 60 days, which is more than the last two quarters' DSI of less than 50 days.

These inventory levels are in line with our DSI targets.

Net property, plant and equipment increased by $162 million, which included $150 million for the property purchased that I mentioned earlier.

Both accounts payable and accrued liabilities decreased for the quarter, and the total decrease was $91 million.

On the outlook, Q2's revenue was historically the most difficult to forecast.

In the past, we have been surprised both favorably, as in last year, and unfavorably, as in five years ago.

Having said that, we have no reason to believe that Q2 will be anything other than seasonal.

Seasonal to us means a decline of 5%, plus or minus.

As I stated previously, we were disappointed in our gross margin for Q1, and we intend to correct some of the issues.

Therefore, I would expect that gross margin will increase and while the exact magnitude may be difficult to predict, something in the 100-basis point range is not unreasonable.

Operating expenses stepped up in Q1 as a consequence of the acquisitions, new hires and other reasons.

As I've said before, we intend to moderate any increases going forward.

Therefore, operating expenses for Q2 should be flat to very slightly up.

We will still be hiring, but the rate will moderate, and other expenses will decrease.

The result should be flat to slightly up.

Other income should recover in Q2 unless the dollar continues to weaken.

If it is stable, other income will be up in Q2.

The tax rate should stay at 17% until the R&D tax credit is renewed.

I don't expect that to happen in Q2.

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

Thanks, Marv.

The transition from G80 to G92 was challenging and dragged our margins.

Every few generations, because of how our new products are aligned with process nodes, a new GPU is both faster and cheaper.

As a result, it is difficult to move the stack down to layer the new GPU on top of the stack.

This was the case in the G80 to G92 transition.

G92 was both lower cost and higher performance than G80.

So therefore, repositioning G80 while ramping G92 aggressively forced us to sell our G80s at lower margins.

Going forward, although we still have some G80 inventory to work through, we believe we are in an excellent competitive position.

We are also launching new and exciting products in Q2, and the move across the board to 55-nanometer is expected to help margins.

At our analyst day in April, I outlined NVIDIA's basic strategies -- one, focus on visual computing and be the unambiguous world leader; two, continue to create GPU, software or system architecture innovations that deliver the wonderful user experiences that we are famous for; and three, make the GPU evermore programmable and more useful for general-purpose computing.

Our strategy is driving growth in several ways.

Our innovations are growing TAM and driving share in the visual computing-centric markets like gaming PCs and workstations.

We are also seeing increasing ASPs as more of the total system spend is shifting to the GPU.

We're seeing this trend all over the world.

We call this the optimized PC designed movement, where OEMs are rebalancing the system spend to optimize performance for applications that are increasingly visual.

As GPUs become more programmable and general-purpose, and are now used to enhance photo and video processing, we are starting to see growth from broad adoption of GPUs in mainstream consumer PCs.

Consumers now use their PCs to create and enjoy their home movies and photos, they use their PCs to watch high-definition movies, gather with friends and hangout in an online virtual world or enjoy some crazy videos on YouTube.

As the homebase of your iPod, many are using the PC to convert movies into a format that can be played on their iPod's.

This is called transcoding.

We call this new generation of consumer PCs lifestyle PCs.

This segment of the PC market is one of the fastest-growing, as we can see by the success of Apple and Adobe.

This new PC segment is a growth segment for GPUs.

The GPU's ability to manipulate images, video and graphics dramatically enhances the computing experience and as we've recently demonstrated at our analyst day, the GPU can speed up transcoding, one of the most processor-intensive applications, by nearly 20 times.

The marketplace is clearly bifurcating into generic PCs, and those that are built for specific needs of the users.

PC manufacturers worldwide are no longer designing PCs based simply on the speeds and feeds, but with a total user experience in mind.

As for large segments in the marketplace is like CAD workstations, gaming PCs, video editing, video photo editing workstations for creative professionals, media centers and now lifestyle PCs, the visual experience is front and center and cannot be compromised.

Globally, we see the movement towards usage-optimized PC design taking hold and increasing momentum.

Here are some quotes from the press around the world.

Here in the United States, Popular Science -- but in some cases the GPU makes a big difference.

3D video games are a given, but intensive graphics are creeping into many other applications.

Computer Resellers News in India -- Are graphics chips the better CPUs?

More and more experts support this thesis.

Many system builders supposedly recognize the trend already and would assemble PCs with better GPUs because the CPU is losing its importance, while the meaning of the GPU is increasing continuously.

[Dlasti Dinta], Poland -- when creating optimal PC set, it's totally pointless to equip your computer with expensive CPU and add integrated or slow graphics solutions.

You should do the other way around.

Install expensive dual-core CPU and support it with more expensive GPU.

(inaudible) -- my daughters should be happy about me speaking French -- France -- it is true that since the PC has existed, only the processors seem to be important, to the point of often giving its name to the computer.

But we're now in the era of the visual PC.

All applications, starting with Windows Vista in the [aero] interface exploit an intensive way the graphics capabilities of the machines, no longer using the CPU, but the GPU.

The growth of GPUs reflect these market dynamics and the new conventional wisdom.

As I mentioned earlier, our desktop and notebook GPU units grew 42% year over year, and our GPU ASPs increased 10% from a year ago.

In addition to visual computing driving our GPU growth, we have a new growth driver with the invention of CUDA.

It is important to understand that CUDA is not in just any GPU.

CUDA is a C programmable general-purpose computing mode, available only in our GPUs, from GeForce 8 and beyond.

In the CUDA mode our GPUs transform and reconfigure Shader processors into a many-core parallel computing processor.

For example, the GeForce 9800 GT has 128 processor [cores].

CUDA enables a new parallel computing model that the industry calls heterogeneous multi-core computing, where the vastly different architectures of the CPU and GPU are used in a collaborative way to achieve huge speed-ups in computing.

CUDA has raised the attention of programmers and researchers all over the world.

Since its launch, over 60,000 downloads of the compiler, over 10,000 per month, have been downloaded by software developers, scientists, students, game developers and researchers around the world that have started programming with CUDA.

We recently released beta version of CUDA 2.0 and for the Mac.

We're constantly seeing reports of astounding application speed-ups.

We're routinely seeing 20 to 200 times speed-up over multi-core CPU alone.

Chevron has shown excellent performance using GPUs for computing in oil and gas expiration.

Jack Collins, from the National Cancer Institute, recently reported excellent results on AutoDock, a key application in cancer drug discovery.

Gauda and Nascentric announced EDA tools using GPU for computing optical proximity correction, or OPC, and [spice] modeling for design.

CEA, the French Atomic Energy Authority, and Bull, released news of a design win in supercomputing using NVIDIA GPUs.

Last week we announced our sponsorship of Stanford University's new Pervasive Parallelism Lab, PPL.

The PPL will develop new techniques, tools and training materials to allow software engineers to harness the parallelism of the heterogeneous multi-core computing.

Stanford now joins the growing list of prestigious research programs including the Universal Parallel Computing Research Center, UPCRC, both at Berkeley and the University of Illinois, Urbana-Champaign, each designed to accelerate developments in mainstream parallel computing.

We see computer scientists all over the world jumping into heterogeneous multi-core computing research.

As the world-leading supplier of GPUs, we are in truly exciting times.

The new sensibility of OEMs, optimizing PCs for visually rich applications, is driving GPU adoption and spend.

And with CUDA, we have transformed our GPU into a general-purpose parallel processor at precisely the time when the CPU performance improvement is slowing and the industry is moving full force to parallel computing.

We believe the GPU will be the most important processor of this new era and will be a major driving force of visual computing and parallel computing revolution.

We're happy to take your questions now.

(OPERATOR INSTRUCTIONS) Quinn Bolton, Needham & Company.

Just wondering, on the gross margin, it sounds like it's just some transitional issues.

But you had mentioned some new products that you built up in inventory and as you look forward into the July and future quarters.

Can you talk about, as you roll out these new products, is the architecture similar, different?

What can we be expecting about gross margin with some of these new products that you're building up in inventory?

We are not ready to announce the new products yet, but the gross margins of the new products are better than the gross margins of existing products.

So think about it as [smaller] transitions that as you introduced on your products, they tend to carry the higher than corporate gross margins?

Yes.

Then as you look into the second quarter, can you just talk about linearity of orders that you've seen over the past month or two that gives you the sense that Q2 looks seasonal at this point?

Well, I guess I'm trying to figure out -- we haven't seen Q2 yet.

We're still going through Q2.

And Q2 has -- is a seasonal quarter for the industry, on the one hand.

On the other hand, this is also the quarter that we sometimes, out of the last several years, we have many times announced new products during Q2 as we go into the back-to-school season.

So you know the back-to-school season starts, I guess, around late May and June and ramps pretty hard into July, and our fiscal quarter ends at the end of July, and so includes July.

So that tends to balance each other, so it's kind of hard to exactly tell how Q2 will turn out because it just happens to be a seasonal quarter.

But we have the benefit of new products, and we have the benefit of back to school, typically.

So we'll report on Q2 when we're done with it.

Lastly, any comments on how you feel inventory in the channel is, especially on some of the older products ahead of these product transitions you just mentioned?

Do you feel pretty comfortable with where inventory is?

The products that we're going to announce in Q2 -- there are no products.

We're done with our product transitions in Q1, and so the products in Q2 will layer into the existing product line.

Arnab Chanda, Deutsche Bank Securities.

When do you expect significant revenues from your Tesla product and the application processor product?

I would think significant, I guess, later this year.

But those design wins tend to be a lot longer.

Our Tesla, because they go into servers and supercomputers and scientific computing applications or deskside workstations, so they tend to have a longer design cycle.

We're seeing a lot of enthusiasm out there, but it just takes a little longer.

Then, as you know, application processors definitely take longer.

Their design cycles are consistent designing the device itself, and so we're really enthusiastic about both of them, and they have been wonderful investments for us and I think you're going to pay off wonderfully.

So we'll just have to wait until the end of the year.

One other question about the CUDA platform.

Could you help us understand what portion of the computing market, if you include both PC as well as high-performance computing, is open to the heterogeneous computing model that you are sort of recommending, and what -- maybe it's difficult to give an exact number, but how should we think about how big that market can be?

I happen to think that within the next five to ten years, no longer than ten years, and probably around five years, that heterogeneous multi-core computing will be the way of computing for all computers, whether it's video processing or image processing or whether it's in the area of games, obviously, for graphics.

But more importantly, in the future, for simulation, physics simulation, artificial intelligence simulation, you've been hearing about how the expense of creating content continues to go up.

The reason for that is because these worlds are more and more expansive and it's hard for artists to create the entire world.

So, just like movies, movies uses simulators for cloth simulation.

Otherwise, they would have to animate all of the clothes that the actors wear, or hair simulation or, in large crowds, they use crowd simulators, which is basically a form of artificial intelligence.

So we're going to see more and more simulations as a way of creating content in online games, in virtual worlds, in video games and, of course, in the area of mainstream users.

You know that video games [isn't] really a mainstream application anymore, but in the area of photos and videos, you're going to see a lot of computational techniques starting later this year from some very important applications.

So I ought not to preannounce some of their exciting products, but consumer applications, lifestyle applications are going to start showing, using GPUs in some really, really exciting ways.

So I think heterogeneous computing is the future.

It is obvious that it is using the right tool to do the right job, and there's no reason why heterogeneous computing can't be available to everybody.

We've shipped 60 million CUDA GPUs already and we're on track to ship 100, 150 million GPUs a year, and in a couple, two, three years, that's several hundred million PCs will have heterogeneous computing in it.

So I think it's a foregone conclusion that heterogeneous computing is here.

The question now is, what are the exciting applications that are going to come?

Now, just one more comment.

In the last 20 years that I've been in the computer industry, the CPU or the computer has improved in performance a staggering 1000 times.

It's a staggering 1000 times.

And that's clearly one of the most aggressive improvements in performance of any technology or anything that humanity has ever seen.

Yet CUDA, in the hands of all these 60,000 software engineers around the world -- and it's easy for you to find applications and reports of CUDA applications written -- people are seeing 20, 50, 100, 200, 300 times speed-up.

In just one year we've helped the computer improve its performance by 100 times.

That kind of a step-up and that kind of a discontinuity in performance, computing performance, just has never happened.

So that's the reason why Stanford and Berkeley and UI/U-C and just about every supercomputing center on the planet and scientists all over the world and software engineers in all the major software companies that you and I both know are all looking into heterogeneous multi-core computing.

I think this is clearly the future.

Last question, Jen-Hsun.

Maybe a little difficult to answer in a public forum, but in the past, you haven't been too shy.

Your best friends in Santa Clara -- have any of their actions, public talk, et cetera, affected either pricing or any success or future potential of the chipset business?

I think any dialogue around GPUs is welcome for me.

I would love to have Good Morning America cover GPUs.

If any city -- Santa Clara, Toronto, Austin -- any city who would like to have a dialogue around the importance of heterogeneous computing, GPUs and what we can do as an industry to advance computing, is a welcome conversation.

So I think all of that conversation around GPUs and graphics is all good for us.

I welcome all of it.

Gary Mobley, Piper Jaffray.

I had a couple of questions relating to balance sheet items.

Are there any troublesome production lead times still out there?

And your inventory turns are still above the historical norm of five to six.

I'm just curious whether we might see a continued rise in the NVIDIA-held inventory.

Our day sales in inventory are 60, and that's where I'd hope to get it, because when it's down at 50 or below, that's too little inventory.

So, once you have it at 60, the real issue is -- what is in the inventory?

Is it old stuff that's moving slowly, or is it new stuff where you don't have enough of it?

I would say at this stage that I'm very comfortable with inventory, both the profile and the amount of it.

Are we going to build inventory?

Yes, I think we'll build inventory as we go into Q3 and Q4, and with the expectation that revenue usually increases significantly in Q3 and Q4.

So I wouldn't have any trouble at all with building inventory in Q2, providing it's the right inventory.

Production lead times -- are there any issues still there?

We're still growing as a company, so production lead times continue to be a challenge for us.

But our fab partners are working hard for us, and they are doing their best for us.

But you heard me say that our GPUs -- and GPU', just so you know, are the most complex -- recognize now, the most complex processors the world makes.

We ship 100 million a year, so we make it look easy.

But it is the largest pieces of silicon that anybody makes, period.

So, when I said that we grew our GPU units 50% year over year -- 42% year over year, that's a very large number.

I know that none of the foundries grew 42% year over year, and I know that the PC industry didn't grow 42% year over year.

So you can just imagine our wafer starts.

So our fab partners are really working hard for us.

I would love to grow another 50% year over year, and there's certainly every opportunity for us to do that, and our fab partners just have to all pitch in and help us get there.

Lastly, could you provide some comment on the consumer business, sort of the ebbs and flows going on there with the different components of that revenue?

And might we see some stabilization in this business going forward?

I think stabilization and consumer businesses are, that's probably a -- what do they call it, an oxymoron?

Jumbo shrimp?

That's the nature of the consumer business.

And the thing that I do know is this, that PS3s are doing great.

The Blu-ray HD war is over.

The PS3 is benefiting from both second-generation titles, they're benefiting from first-party titles that are coming out in the near future.

That's going to be pretty hot; and, they have Blu-ray.

If you don't know this, you should go get one.

It's pretty affordable.

PS3 is the world's best Blu-ray player, period, flat out.

It's just a fabulous Blu-ray player.

So I think PS3s are going to do great.

They're in the process of transitioning to a new process node, and so we're looking forward to how they ramp into the holiday season.

James Schneider, Goldman Sachs.

Could you maybe, within the desktop GPU segment, comment on your expectations for Q2 in terms of pricing and whether or not you've seen any incremental pricing actions by some of your competitors there?

It's hard to exactly predict what happens in the short-term, but I know what the general trends are.

The general trends are, the GPU is benefiting from an industry-wide recognition that visual computing is important.

The GPU is doing more and more things because it's more and more programmable.

And with CUDA we've made the GPU a completely general-purpose parallel processor.

So these things will cause it to be adopted more, and therefore that will increase units.

It will increase its TAM.

Places that you would have never thought a GPU would go would include a GPU.

And, it would also increase its ASP because it's more and more useful.

So we're seeing all of those mega trends.

So I think that, with respect to Q2, we know we're announcing new products, and so that's always helpful.

But I can't control what the competition does.

Secondly, on the R&D spending, Marv, do you expect that you can hold that to roughly flattish levels from Q2 and then through the rest of the year?

Or, do you expect that would tick up a little bit as we move into the back half?

Well, I think if we continue to [hire] it's going to tick up in the back half.

We have a very strong focus on trying to hold it as flat as possible in Q2.

I think at the analyst day I said the same thing, so our focus now is holding it flat for Q2.

We'll see how successful we are.

I would think it will tick up slightly, as I said before.

I think we'll moderate the growth throughout the rest of the year.

Glen Yeung, Citigroup.

Hi, this is Peter Karazeris for Glen Yeung.

In the guidance for gross margin being up 100 basis points next quarter, can you get me some sense of how much of that is your thinking on the improvement from manufacturing, and how much of it would be coming from product mix?

Well, 100 basis points should be -- no.

We can do a lot better in terms of the manufacturing side, so I think that we don't need significant uplift in other areas in order to achieve the 100 basis point increase.

What we do need is really superb execution internally.

We're going to have to work very hard for that to happen.

So the 100 is really driven by -- it's correct for me to say it's driven primarily by the improvement in manufacturing?

Any mix would be upside to that?

Is that correct?

Yes, probably.

We'll see.

And SG&A -- should I assume that more closely tracks revenue?

You've kind of given us some detail around R&D spend, but should I be thinking that SG&A, then, next quarter could be down a bit with the revenue, and then it comes up in the second half of the year?

Our OpEx is not closely tied to revenue.

It's closely tied to the number of people we have and the projects we have going on.

So if revenue goes up or declines, our SG&A doesn't track right along with it.

We don't give everybody a salary reduction.

No, I think they're independent movements.

Tayyib Shah, Longbow Research.

Jen-Hsun, you are going to revenues in line with historical seasonality for PC space.

With the 9000 series ramping, it puts you in a strong competitive position in the desktop space.

Do you expect to gain some share in the back-to-school season?

And if so, shouldn't you be guiding above historical seasonality?

Did I mention Q2?

(multiple speakers) I think we've got to treat Q2 with respect.

I think you're right that we have a very strong, a very good competitive position.

We have fabulous products, top to bottom.

And we're also announcing several new initiatives that you guys heard about at analyst day.

One of the things is, the modern benchmark is out.

We have been using -- the benchmark that the industry has been using has been around since 2006.

And in graphics years, that's -- wow, that's a long time.

So the new benchmark is out.

It's called 3D Mark vantage, and it's a modern benchmark.

Because our GPUs, our modern GPUs are designed for modern applications, you would think that our position on the 3G Mark vantage should be extraordinary, and it is.

So that's one thing, and that's in the process of rolling out.

The market doesn't really know it yet, and I think you could see some early websites, go see some -- you might just be able to Google it and find some reviews, and you'll see that the reviews are really fabulous, with GeForce 8 and GeForce 9.

So that's one.

The second thing is we're going to announce this quarter probably the highest-volume parallel computing application or software in the world, and that's physics processing.

It's used in almost every modern game, and it's one of the most computationally intensive things that you can do in a game and it now runs on CUDA, on GeForce GPUs.

Then we're going to add on top of that -- hopefully, we'll go into production later on in the quarter -- our transcoding.

It is probably the killer app today with the number of iPods that are being sold and iPhones that are being sold.

People are downloading a lot of videos onto their portable media players, and the transcoding of videos take forever.

You have to start it up at night and give up your PC and go to bed and hope that it's done before you wake up.

So we're going to accelerate the transcoding of movies to what is called super real-time.

It's much, much faster than it takes for you to watch it.

So I think transcoding is just going to -- people are going to be nuts over the work that we're doing in this area.

So not only do we have a fabulous position with our GPU lineup, but we're adding three major things to it this quarter.

And I think that that can't but help.

But having said all that, I think we ought to show Q2 its due respect.

And then the share shift in the notebook space -- is that going to play out in the July quarter and then return the Company to a normal seasonal trend in October quarter?

Or, are we likely to see a drag from notebook share shift in the October quarter as well?

It will certainly play out in Q2.

You'll see that share shift start to take place in Q2.

There will be a little bit of drag in Q3.

But the major portion of it is in Q2.

I think it's all important to keep it all in perspective.

I think, first of all, the notebook GPU business is a lot smaller than the desktop GPU business and the market share that we lost is mostly in the entry-level segment.

And so it's a small percentage of a small percentage.

So I'd just put it in perspective.

I think, in the final analysis, we like to have all the business in the world, but sometimes the profitability doesn't suggest that it would be the most prudent thing to do.

So we're going to keep fighting for our share.

But I'd urge you to keep that in perspective.

Mike McConnell, Pacific Crest Securities.

Marv, if we look at the -- I'm just a little surprised at the commentary on the margin guidance, just with respect to the entire benefit being from manufacturing.

I guess, if I look at your Q1, you did have some favorable mix in the sense that workstation being up 21%; that's a 70% gross margin business.

And then your memory was down 20%, yet you were kind of light on margins, as you've kind of alluded to.

So as we kind of move into July, is there going to be another element that's going to be really helping the margin?

Because I can't imagine that we're going to have the same favorable mix on those two product segments carrying into July.

Then, as we kind of -- is it just a matter of getting -- you've kind of gotten through the excess inventory and the GeForce 8X family, and now you're going to have new products as well ramping.

So the GPU margins should also improve, on top of that manufacturing improvements?

Any color there would be helpful.

Yes.

Jen-Hsun outlined this.

The G80 to G92 transition has been difficult for us and has certainly impacted the GPU margins.

As I mentioned, the overall GPU margins were down 2 percentage points quarter to quarter.

Now, that's a combination of both of those factors.

But what I was referring to is that you're going to get the benefit of one of those because you don't have to repeat them.

The other one of the manufacturing improvements that we have to do is going to drive the other portion of it.

So yes, I anticipate that we won't get the lift that we got from the PSB business unit in Q1, and we won't get perhaps the lift in some other areas.

But even taking that into consideration, we still believe that 100 basis points is reasonable.

I think, just to help amplify that, and Marv and I both talked about it.

But let me just add a fine point to our review.

Typically, when you introduce a new product, it's either more expensive, but it's much higher performance.

Or another way of saying it, it's much higher performance, but it typically is higher cost.

Or, you introduce a product that goes into the mid range or the entry segment and it's slower performance but it's definitely lower cost.

So those are the typical product transitions, typical as in out of every nine product transitions, out of every 10 transitions, nine will be that way.

But every so often, the moon and the stars and everything align, and you get a situation like the G80 to G92, where G92 is both faster and cheaper.

And it's a combination of both process improvement and also kind of the mid-life kicker syndrome in the sense that, G80 was the first implementation of our -- of that CUDA architecture.

So G92 has the benefit of learning from big brother, and we've fixed a lot of the architectural things that we left on the table.

So G92 has that added kicker.

So when you're presented with a situation where something is cheaper and higher performance, it's really tough to manage through the transition.

How much of what occurred with the G92 -- was this more of a function -- we had, obviously, some manufacturing constraints in late fiscal 2008.

Were the forecasts just overly optimistic, or was there maybe an air pocket of soft demand as we went through April?

Any comments there, please?

We were in allocation on G80 and -- holy cow -- until the day we had a bunch of inventory to sell at a lower margin.

So part of it is, the cycle times aggravate that.

Part of it is seasonality, and a large part of it is G92.

G92 was a such a good product, and you probably remember the reviews.

G92, when it came out -- the reviews were, this is the perfect product because it was affordable and it was so high performance.

So it's tough for G80 to compete against that, and especially when the manufacturing was running full steam, right when G92 came out.

It's just hard to manage those kind of transitions.

With respect to these low-end notebooks that are coming into the market, if you talk to the channel, they're somewhat concerned about potentially desktop cannibalization accelerating this year.

Intel has talked about the actually their crossover occurring this year as opposed to next year.

What does that mean for the GPU industry?

And is that even a threat at all, or do you feel comfortable with what you're doing with hybrid, the hybrid graphics technology, that over time your attach rate, the GPU attach rate in notebooks will continue to increase and this really isn't that much of a threat as some of the channel is making it out to be with their own business?

First of all, the crossover, be sure to understand what it actually says.

As far as all the data shows, and certainly we did sell 40% plus more GPUs this year than last.

So they are going somewhere.

What the data shows is that desktop PC growth is small, but notebook PC growth is fast.

Notebook PC growth is mostly an extremely low-cost notebook growth.

So what it basically tells me, and my family is probably similar as other families, where people buy one or two desktop PCs but everybody has their own laptop.

So I think that increasingly more and more families are that way.

So we're seeing that basic trend, that for every desktop PC, or you might see one plus notebooks.

Those notebooks will tend to be for personal use.

But I think the megatrend, though, that we are seeing -- so that's one trend that you are recognizing, in that the notebooks -- there are just more and more notebooks sold.

But the second thing that you're noticing is that in the markets that we serve, there is increasingly increased ASP and increased adoption of GPUs.

We are not in the vast majority of the world's PCs yet.

We still have a pretty large TAM to grow into.

So within that TAM, I expect that the ASPs of GPUs will continue to grow as the usefulness of GPUs continue to grow and that, as people recognize that their PCs are more visual than ever, they will use more GPUs.

So I think the growth opportunity is still pretty healthy out there.

(OPERATOR INSTRUCTIONS) Shawn Webster, JP Morgan.

A couple on inventory.

Did you guys write down inventory in Q1?

Well, Shawn, we always write down inventory.

Beyond normal?

No.

It was normal.

On the channel inventories, can you describe how the inventories at your OEM and channel partners are looking right now?

Is it normal, a little higher than normal?

And maybe give some color on trends there.

It's higher than normal, but I think that during this time of the year, it tends to be higher than normal, and it's sort of the opposite of saying -- corollary of [saying] seasonality.

But don't forget that this is also the time right before back to school season.

So if you recall last year about this time, it was, inventory grew the channel, and then shortly after that back to school ramps up, and then it also went into June and July and back to school.

Before you know it, it's fall.

Right.

So, higher than last quarter, but not higher than what you would normally expect this time of year?

I don't think so.

And then, as far as the guidance for Q2, the down 5% -- if I'm reading my notes correctly, it looks like you've guided over the last three years sort of flattish to slightly up for Q2.

Is the visibility you have now less than normal?

Are you trying to [branch] predict what's going on in notebook?

What is making this year a little bit different from the last several years?

First of all, in notebooks, the share loss we've talked about in notebooks doesn't represent 5% of our top line.

So, as I've already explained, you know, I don't think there's -- I feel like I'm the only person that's maybe watching CNBC, but there's no harm in a little caution in this Q2.

We are as nervous as the stock market.

I feel like maybe I just ran into another planet.

But you know, we have a great product position.

We have a great product position, and we have really exciting products coming out, and there's two major trends that are happening that's going to drive GPU growth.

One of them is visual computing, and the other one is parallel computing.

They're not related.

They're completely different things that are happening, and we find ourselves at the epicenter of both.

So I'm excited about our growth prospects.

But Q2 is Q2 and we ought to just -- if we come out at the other end of it and surprised ourselves, so be it.

But a little conservatism going into it is not a terrible thing.

Heidi Poon, Thomas Weisel Partners.

I'm wondering if you could give us an update about the motherboard GPU business in terms of where you see pricing going to in the second half.

Also, you announced, I see, a platform on the analyst day, so could you give us an update on the design activities?

Let's see -- Marv, you already mentioned about MCP business, where we grew MCP business over 30% year over year.

(multiple speakers) down 4% quarter to quarter.

I don't know of any major reasons why the MCP business would change in terms of what's characteristic, and let me tell you why.

I think the DX10 -- in order for you to be Vista premium certified, by Microsoft, you have to have DX10 capability, I think it's by August or something like that, either July or August.

So DX10 -- and the second thing is that the new benchmark is out.

It is the benchmark that the entire PC industry, the entire supply chain uses to determine the worthiness of a product.

So you need to have DX10 to have any meaningful capability on that benchmark.

So, you have to put DX10 onto every GPU.

My sense is that our leadership in DX10 is going to be pretty substantial, and so we expect to bring that onto the motherboard in the near future, and so we're excited about that.

So I think, I don't anticipate anything, except that graphics will be harder and harder to do.

Our separation relative to the rest of the industry in terms of graphics leadership, as you have been tracking and others have been tracking, is diverging, or our lead is increasing.

The rate of our lead increase is increasing, I think.

So I'm enthusiastic about the work that we're doing there.

The [VF] platform -- we're still in the design, and so it's a little bit too early to make any significant announcements.

We're not planning to have production until spring of next year.

I think it highlights that the [VF] processor is very good and it's -- it runs Vista Premium.

It tells you that if you want a Vista premium platform in a processor at less than $20, certainly, and soon, in another year or so, less than $10 with a sufficient GPU, we'll give you a great experience on Vista Premium.

So that tells you something about the future of computing.

It's just the business shift, the first signs of it, that visual computing and computing can be done quite nicely in even very cost-effective solutions.

Lastly, just a little bit more on mobile.

When you talk about having more substantial revenue in mobile by the end of the year, is that mostly related to the portable navigation (inaudible) platform or [win] that you discussed at the analyst day?

Or are there more things to explain?

We have some interesting announcements that we'd like to make, and give me an opportunity to make those announcements properly.

So just watch this spot.

I think mobile computing -- and you've seen the demonstrations of APX 2500.

Everybody I've shown it to, everybody who has seen it just amazed at what capability you can put into a chip; a full computer that can fit on a chip that is smaller than the size of a dime.

The entire computer, including the CPU and the GPU and the video encoder and decoder and high-definition video and the whole computer can fit on the surface on -- smaller than a dime and draw milliwatts.

So imagine what you could build with something like that, and give us an opportunity to announce it properly and get you excited about it.

Uche Orji, UBS Investment Bank.

A question for you, Marv.

If I look at PSB, how much of the revenue this quarter was already Tesla that was recognized for the quarter?

First of all, the PSB revenue does not include Tesla.

If I look at PSB, one would think that, given all issues that's associated with financial services and [advertising], that that may affect that revenue, but obviously that hasn't.

Can you just talk me through a little bit more what is just driving the resilience of this business?

Obviously, this has been a great business for you, both top line and margins.

Also, on the competitive front, are you seeing anything, given that [AMD] talks about reviving or driving their [5GL] brand?

I don't think it's that significant, but if you can just say anything on the competitive front, Jen-Hsun, that would be helpful.

At the highest level, the most important thing to recognize is that in every single industry they are going digital.

So, where people used to use drafting boards and paper and pencil, they are going digital.

Whether you are making comic books or designing buildings in China or designing the next airplane or car or whatever it is, everything is going digital.

So I think that that's a perfectly conventional wisdom and observation.

As more and more -- but the pipeline can go digital because technology affords it to.

We have to make technology good enough so that you can do more things in digital.

Let me give you one example.

We have to create amazing technologies in order to replace clay modeling of cars because it has to be so realistic that you no longer have to build the entire model.

That saves millions of dollars.

It cuts an enormous amount of time off the design cycle for these car designers, but it requires an enormous amount of technology.

So those kind of -- whenever we reach those plateaus, with technologies like Quadro Plex or some of the work that we're doing with (inaudible) [graph] or -- a lot of it has to do with software and multi GPU scaling and just -- they are all systems -- system or a architecture or a software solution.

When we can reach these new plateaus, all of a sudden we convert an entire pipeline, work pipeline, that an industry has, into digital.

That increases the TAM of workstations.

I think we're still very well into the early days of it, and the reason for that is because what all of these companies want to do, they want to visualize, they want to design, they want to simulate.

To simulate the dropping of a cup or a toaster or a cell phone and simulate the electromagnetic emissions of a cell phone, simulate a car crashing, and doing all that from the comforts of an engineer's desk and not have to share a supercomputer with people -- the styling, showrooms.

We're starting to see Quadros showing up in showrooms so that you can pick your own color and choose your car.

This is a new application.

I have no idea how many showrooms there are all over the world, but every car company wants to do this now, put digital displays into showrooms.

And [there are power walls] that are enormous, enormous amounts of technology.

And I've just talked about the car industry; and then further, they want to do inventory management.

They want to do training so that the mechanic can have interactive displays of the manuals, instead of out-of-date prints.

There's so many different ways that visual computing can still transform the industrial workflow.

So we are really just seeing the beginning of it.

And then, once you are done transforming the workflow, then you have to duplicate it; don't forget outsourcing.

Whenever you -- you have a German company, an auto company has a manufacturing plant in Asia and then they put one in India -- guess what?

They've got to install the same workflow in those two countries.

You could make the data virtual, but you can't make the computer virtual, yet.

So there's still that globalization factor.

So there's quite a bit of growth yet, I think, in PSB, and I'm enthusiastic about our position within it.

With respect to (inaudible) [GL], our workstation business is not called the GPU business, as you probably noticed.

You called it PSB.

It's a solutions business.

And a solutions business entails a lot more than building a chip.

It's about understanding the processor, having extraordinarily deep understanding of the software and the workflow and the pipeline, having experts all over our company and all over the world, for our company, who are assisting these designers, work through their design pipeline, design problems.

And our entire ecosystem of partners, where Quadro certification and being Quadro compatible is now the way people talk -- I want Quadro-compatible workstation, or my software is Quadro compatible, or this workflow is Quadro compatible.

So, these kind of investments took us ten years to get here.

And it's just not about a graphics chip, it's not about an adding card, it's not about how big your frame buffer is.

All of that is -- it just shows that people don't understand how these designers think.

That's helpful, Jen-Hsun.

It's amazing this business can continue to defy and still shoot for strong organic growth.

Just ability to allocate capacity to keep driving this business, do you think that's any constraint in the future that, from a capacity standpoint, that could become an issue, especially if you had to balance these against your G92 series that's ramping as well?

So are there any capacity constraint issues to think about for the near-term?

I'm not sure I understood the question.

(multiple speakers) PSB business?

Is that what you're asking?

I'm asking, because the strength of the underlying growth in this business, are there -- because I remember a couple of quarters ago where you had to make some decisions in terms of allocating resources capacity to PSB, and that bounced back.

If I look forward in the future, do you think that there is enough foundry capacity to keep driving the underlying growth in this business, along with your other businesses also, especially on the (inaudible) [G92] that's ramping?

I see.

The PSB business is not a -- when I heard capacity, I was surprised by that because, in terms of total units, it's not insignificant; it's very large.

We ship more Quadro solutions in one year than all of the other workstation companies in the history of workstations ever shipped.

So it is a large number.

However, in the totality of all of our units shipped, it would never get in the way.

The only thing that, when you said capacity, that comes to mind for me, was intellectual capacity.

This is an intellectual capacity business.

And I would love to have 100% more people who understand this business and have the skill sets of the people that are in that business, instantaneously, tomorrow.

So if you find those people, let me know right away.

Tim Luke, Lehman Brothers.

Just in the April quarter, you obviously had very robust sequential strength in workstations, and I was wondering if you could give any color on how -- what had driven that sequential uptick.

And then, as you go into the July quarter, do you have any color on how you would expect some of the different segments to look?

Or do you think it's going to be fairly even in terms of the 5% seasonal decline between the core units?

Lastly, from Marv, I was wondering if you could just remind us how you've perceived normal seasonality for the back half of the year and what you think, how you think that may shape within the current macro context?

Well, I don't think there was any one particular segment of the workstation business that drove with the growth quarter to quarter.

I think it was across the board.

They did well in all kinds of areas in Q1.

So, Jen-Hsun, do you have any comment about that?

Yes.

The only thing that I would say about our workstation and our professional solutions business is it has exceeded everybody's expectations, and it's still growing.

I think that we're not following any market research in terms of the size of the market.

We are beyond market research.

I think that there's -- when you're the market leader and you've grown the market as large as it's ever been, and yet you still see headroom for growth, you just never know how big it's going to be.

Our customers don't know how big it's going to be.

Many of our salespeople don't know how big it's going to be, and you just have to go back to first principles, I think, to figure out how big it's going to be.

So I think it's not really that easy to predict what PSB will do this year or next quarter.

But we just have to look at the underlying foundations of what makes the PSB business grow and what that business is all about, and you'll see the significant opportunities ahead of it.

And you have a segment color for July; it sounds like you are saying notebooks will be slightly towards the lower end of any guidance in desktop.

Any color on notebooks or workstations for July?

Well, I think that notebook, as it makes the transition to Montevina, will probably decline more than corporate.

So we outlined a 5%.

It's probably going to decline more than that.

(multiple speakers) just to make sure that that's not because of share, there's just a transition thing.

Everybody's notebook business is, in this transition, going to be slightly down.

But in terms of stabilized share, you don't want to communicate that it's going to be off by so much.

No, it's a transition quarter.

So I think that's the color for notebook.

I think the big swing factor that you have no idea on or great difficulty in projecting, is what happens in desktop.

We have some new product in there which could be, could surprise us, both in strength, and we'll see as we go through the quarter.

I don't think that in our projections we're expecting huge growth in anything, but also not huge declines.

I guess it's more what we'd call seasonal.

What about second-half seasonality?

Well, the normal seasonality that we see after, I'll call it the 5% decline in Q2, is 10% plus growth in Q3.

That's what normally happens.

We've had many years of 20% quarter to quarter.

So it's 10% plus.

And then, you go into Q4, and it's slightly up from Q3, single digits.

(multiple speakers) you feel you wouldn't get that this time?

There's no way to know.

You know, you tell me what's going to happen to the consumer worldwide.

Fine, but as of now, you are planning for that kind of fairly broad but normal seasonal range, or how should we think about framing expectations?

We have no reason to have any different plans this year.

And margins, gross margin for the continuation of the year?

How should we think about framing expectations for that, after this weakness in the first quarter?

You think you'll see steady improvement through the calendar year?

We'll talk to you in mid-August about Q3 margins.

Lastly if I may, so you're saying channel inventory is slightly higher, and your inventory is -- you would look to build some further inventory for the sequential improvement in the calendar third quarter?

That's correct?

Correct.

Lastly if I may, the ASPs in general -- they seem to be solid this quarter.

How do you generally see the framework for ASPs through the calendar year, i.e., through this second quarter with the lower revenue?

And, how should we think about it?

Should we think about it being stable from here?

ASPs have been stable to slightly up for years now.

So if you look back over what Jen-Hsun has talked about, 10% growth in ASP year to year -- I don't know why it would change.

At this point, it's now my pleasure to turn the conference back over to Mr.

Mike Hara.

Please go ahead.

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

Ladies and gentlemen, that does conclude the conference call for today.

We do thank you for your participation and ask that you please disconnect your lines.