輝達 (NVDA) 2009 Q4 法說會逐字稿

Good afternoon.

Thank you for holding.

I would now like to turn the call over to Michael Hara, Vice President, Investor Relations.

Thank you.

Sir, you may begin.

Thanks, Will.

Good afternoon, and welcome to NVIDIA's conference call for the fourth quarter ended January 25, 2009.

Today's call is being recorded.

If you have any questions, please disconnect at this time -- or I'm sorry -- if you have any objections.

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, I'd like to remind you that you can find copies of our SEC filings, our earnings release, and a replay of this webcast on the Investor Relations page of our website at www.NVIDIA.com.

The webcast will be available for replay until our conference call to discuss our financial results for the first quarter of fiscal 2010.

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

During this call, we will discuss some non-GAAP financial measures and diluted net income per share, tax rate 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 is posted on our website.

Unless otherwise noted, all references to research market and marketshare numbers throughout the call come from Mercury Research or Jon Peddie Research.

The content of today's conference call is NVIDIA's property and cannot be reproduced or transcribed without our prior written consent.

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 of our financial outlook and projections; the important impact to performance and availability of and demand and usage for our products and technologies; our competitive position and marketshare; our cash conservation efforts; and our growth priorities, initiatives, innovations, advancements and strategies.

Our actual results may differ materially from results discussed in any forward-looking statements.

For a complete discussion of factors that could affect our future financial results and business, please refer to our Form 10-Q for the fiscal period ended October 26, 2008 and 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, we assume no obligation to update any such statements.

The content of the webcast contains time-sensitive information that is accurate only as of February 10, 2009.

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

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

At the end of our prepared 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.

With that, I will turn the call over to Jen-Hsun.

Thanks, Mike.

Good afternoon, and thank you for joining us today.

Fiscal 2009 ended in an extraordinary fashion.

We reported revenue for the year of $3.4 billion and a GAAP loss of $0.05 per share.

The environment is clearly difficult and uncertain, so our first priority is to set an operating expense level that balances cash conservation, while allowing us to continue to invest in initiatives that are of great importance to the market and in which we lead the industry.

We have initiatives in all areas to reduce operating expenses.

Our stretch goal is to reduce operating expense by $35 million from the current level of $300 million per quarter by the end of Q2.

Although fiscal 2009 was extremely difficult, it was also one of our best years for innovation.

We made important advances in many areas.

In graphics processing, after a stumble in Q2, we have regained our performance leadership position with the GeForce GTX 295, GTX 285 and the GTX 260.

We introduced, PhysX, the industry's first GPU accelerated PhysX processing.

Major studios including Electronic Arts, THQ, and Take 2 have standardized on PhysX.

DriverHeaven noted that there are real visual benefits to be had from enabling PhysX in games such as Mirror's Edge.

Bid Tech said that the PhysX content enhances the gaming experience, giving a tangible benefit to being an NVIDIA card owner.

Gamers have been stunned by our 3D Vision full HD stereoscopic solution.

3D Vision is the first-ever high-resolution stereo 3D solution for the home.

Bjorn3D said that once you have it, you will never give it up.

PC Magazine described it as a mind-blowing innovation.

In Q4, we recaptured marketshare in the Performance segment.

We intend to continue share gains by offering the highest performance products, while differentiating with our advantages in PhysX, CUDA and 3D Vision.

We shipped Tesla for revenues this year, and officially started the era of GPU computing, where our CUDA parallel processing architecture can accelerate compute-intensive applications by 100 times over a CPU alone.

CUDA has well over 25,000 developers around the world.

With CUDA, we're able to speed up general-purpose compute-intensive applications, like we do for 3D graphics processing.

Developers are finding major speed-ups for algorithms ranging from nanomolecular dynamics to image processing, medical image reconstruction, and derivatives modeling for financial risk analysis.

Over 100 universities around the world, including DMIT, The University of Illinois at Urbana-Champaign, and The National Taiwan University, now teach parallel computing with CUDA.

ASUS, Bull, Cray, Dell, HP and Lenovo now offer high-performance computing solutions with Tesla.

There are now over 1,000 customers around the world, including Motorola, Chevron, GE Healthcare, and even General Mills, the consumer products company.

Tesla has become the first GPU used in super computing and now powers Japan's Tsubame, the 29th fastest supercomputer in the world.

And Wipro Technologies, responding to market demand, now offers CUDA programming services.

Aside from the thousands of researchers who have used CUDA to accelerate their time-to-discovery, popular off-the-shelf software packages, such as ANSIS, LabVIEW, and Mathematica are now CUDA-accelerated.

Symcor sells check scanners that use CUDA for image recognition to detect fraud.

CyComp uses CUDA in their derivatives pricing software.

And medical equipment is now -- is available from Techniscan that uses CUDA to enhance early detection of breast cancer, reducing the analysis from a three-hour process to just 16 minutes, making single-visit diagnosis possible for the first time.

We launched a Tesla personal supercomputer and enabled a 4 teraflop supercomputer at the price of a typical workstation.

We estimate 15 million scientists and engineers worldwide can benefit from this breakthrough.

HPC, High Performance Computing Wire, described it as the biggest news of the Supercomputing '08 show.

Cray, with a CX1, was the first to ship a Tesla personal supercomputer.

One of our major initiatives last year was to capture a significant position in mobile computing by introducing innovative and market-defining products.

Notebook is the fastest-growing segment of the PC market, and one that we can offer a great deal of value.

Through low-power architecture innovation, our GPUs can simultaneously increase notebook performance, while extending battery life.

We announced Ion, a high-performance GPU that also incorporates all system, networking and IO functions into a single chip.

Steve Jobs called it an incredible chip.

Ion is at the core of every MacBook from the Air to the Pro.

The Ion platform is now shipping, or will be soon, from virtually every major PC OEM.

At CES, we launched Ion for Intel's Atom CPU.

Even coupled with the smallest x86 CPU in the world, the performance is astounding.

Techgage described the Ion PC as a potent little computer with almost limitless possibilities, and gave it a Best of CES award.

It was also awarded the Best Enabling Technology by LAPTOP Magazine.

And Computer Reseller News described it as one of the top 10 biggest chip stories of 2008.

We also made great progress with Tegra, our ultra-low-power mobile computing processor.

Tegra is a single-chip mobile computer that delivers a full Internet experience, while consuming one-twentieth the power of even the lowest power x86 PCs.

Tegra enables a new class of mobile Internet computing devices that allow for many days of use, as opposed to the several hours of battery life for a notebook PC.

Tegra has been designed into personal media players, personal navigation devices, Smartphones, and mobile Internet computers, and we'll see revenue ramping in the second half of this year.

We have three major strategic objectives this year -- lead the industry in graphics processing, revolutionize computing with CUDA and Tesla, and establish NVIDIA as a low-power innovator by creating breakthrough products for mobile computing.

I am pleased with the excellent achievements we made in each of these important areas.

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

I will return in a moment to talk of our future opportunities.

Thanks, Jen-Hsun.

My comments today will cover both the full year and the fourth quarter of fiscal year 2009 that ended January 25, 2009, including comments on both GAAP and non-GAAP results.

A full reconciliation between GAAP and non-GAAP is included in our press release and on our website.

Revenue for the fourth quarter was $481.1 million, which is down 46% from Q3, and is down 60% year-over-year.

Revenue for the full year was $3.4 billion, which is down from the prior year by 16%.

The weakness in demand for the fourth quarter was across-the-board.

Compared to Q3, the GPU business was down 47%; the professional service business was down 44%; and the MCP business was down 51%.

There were no safehavens.

Within the GPU business, desktop was down 34%, as we believe we regained some marketshare, particularly in the high-end, but the overall Ion market was very soft.

Notebook was down 63%, reflecting the buying trend toward low-end systems with integrated graphics.

Memory was down to $7.2 million for the quarter from $22.3 million from prior quarter.

All of this was in the environment of the channel depleting inventory.

Therefore, our sell-in was less than the channel's sell-out.

We believe current channel inventory is only slightly more than one month, down from almost three months last quarter.

ASP's across-the-board were relatively unchanged from the prior quarter, so the decline in revenue was primarily a reflection of the decline in unit volume.

Gross margin for the quarter was 29.4% on a GAAP basis.

Included in the GAAP results were several items worth mentioning.

For the quarter, we took new inventory reserves of slightly more than $50 million.

Normally, we take reserves of $5 million to $10 million.

These additional reserves reflect the reduced demand in the marketplace.

These additional reserves cost us almost 10 percentage points in gross margin for the quarter.

Without these reserves, gross margins still would have declined quarter-to-quarter, but more in line with the market movement toward the low-end SKUs.

Also included in the GAAP results is a small, initial insurance reimbursement for the weak die packaging material set warranty issue that we recognized in Q2.

Since our estimate for the cost of this warranty issue is unchanged, most of the insurance proceeds were recognized as a reduction of cost of goods sold for GAAP purposes.

Stock-based compensation allocated to cost of goods sold was approximately $2 million for the quarter.

Operating expenses included a non-recurring charge of $18.9 million associated with the termination of a development contract related to a new campus construction project that we have put on hold.

Without this charge, operating expenses would have been below our guidance.

As Jen-Hsun said, we have initiated many cost reduction efforts, and even in Q4, some of them began to take effect.

Without stock-based compensation and the non-recurring charge, operating expenses were down from the third quarter.

Headcount for the quarter and the year ended at 5,420, which is up 127 from the third quarter and up 435 for the year.

We essentially have a hiring freeze in place, with only the most critical positions being filled.

The tax rate for the quarter was a credit of 13.3%, and for the year, it was a credit of 30%.

GAAP net loss for the quarter was $147.7 million and non-GAAP was a loss of $94.4 million.

GAAP net loss for the year was $30 million and for non-GAAP, it was a net income of $303 million.

On the balance sheet -- we ended the quarter with $1.26 billion in cash, cash equivalents and marketable securities.

This is down approximately $49 million from the prior quarter.

Operating activities in the quarter used only about $20 million in cash, which reflects good asset management in light of the significant decline in revenue.

Accounts Receivable declined by $289 million quarter-to-quarter, reflecting the comparable revenue decline.

The Days Sales Outstanding declined slightly quarter-to-quarter, and so far, Receivables appear to be in good shape.

Inventories grew by $14 million quarter-to-quarter, even after the additional inventory reserves.

Obviously, the significant decline in revenue left us with a lot of inventory.

We believe the inventory is good; there's just a lot of it.

As a result, we have significantly reduced our manufacturing demands.

We expect to deplete significant amounts of inventory going forward.

Depreciation and amortization in the quarter was $50 million, flat with Q3.

And capital expenditures were $43 million, down from $109 million last quarter.

We have a focus on reducing capital expenditures and want them to be less than depreciation and amortization on a quarterly basis.

Accounts Payable declined by $168 million, as we scaled back production levels.

As for an outlook, in this environment, it's almost impossible to give a reasonable and confident forecast.

We were very wrong last quarter.

In retrospect, October was the last decent month.

And unfortunately, it was not in our quarter.

But based on the fact that sell-out for the channel exceeded our sell-in and the very low inventory levels in the channel, we do not see further declines in revenue.

Today, we can't say confidently when and by how much revenue will increase; we can only say that we currently don't see further declines and our outlook is for flat to slightly up revenue for the first quarter.

As for gross margins, we currently do not expect significant inventory write-offs in Q1, and margins should return to the mid-30s.

The one thing we can control is our operating expenses.

And as Jen-Hsun said, we're instituting many actions to contain and reduce OpEx.

Normally, in Q1, operating expenses would be up $15 million or more from Q4, merely because of the FICO we have to pay in the beginning of the year and the reduced amount of time-off that employees take in Q1 relative to Q4.

Because of the actions we have already taken, and further actions that we are implementing, we believe OpEx for the first quarter will be flat to slightly down from the Q4 level, and that these actions will lead to further reductions in Q2 and Q3.

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

Thanks, Marv.

The GPU is the new soul of the PC.

In high-performance computing, our GPUs are accelerating time-to-discovery, in many cases, 100 times.

It would take Moore's Law nearly 10 years to improve the performance of a computer 100 times.

This speed-up is truly revolutionary.

For gamers, our GPU not only renders a beautiful and immersive world, but with PhysX, we also simulate the physical properties of the world to bring more dynamics of realism.

We are delighting visual content creators around the world, as our CUDA GPUs make it possible for them to manipulate high-resolution images with great ease, and reduce video editing process from hours to minutes.

And for mobile computers, our GPU brings a level of performance that is surprising, while enhancing battery life at the same time.

Whether for gamers or digital artists or researchers, and from workstations to supercomputers, to game PCs to notebook PCs, the GPU is making the critical difference.

The GPU is the new soul of the PC.

The word is spreading fast.

Wired Magazine recently wrote -- like a wisecracking sidekick who winds up stealing the movie from too-bland lead actor.

Graphics processing units are edging more general purpose, central-processing units out of the limelight.

USA today wrote -- separate graphics chips, sometimes called discrete graphics, can vastly improve a PC's performance by crunching images separately, instead of relying on the main processor to do it.

And CNET News said -- when you start looking at a PC today, the central processor means less and less.

The GPU is simply becoming a better way for PC makers to differentiate.

As the inventor of the GPU, our objective this year is to continue to expand the use and proliferate the adoption of GPUs.

From notebook PCs to netbooks to supercomputing workstations to servers, we have great opportunities ahead to grow our business.

We are in the position to take share with GeForce as we continue to highlight our advantages with CUDA, PhysX, and 3D Vision.

Tesla is now shipping and interest around the world continues to build.

We will ship Tegra this year.

Both Tesla and Tegra take us into new growth markets and will increase our [TAMT].

And with Ion, we are going to revolutionize the small and affordable notebook PC market, giving us growth into the fastest growing PC segment.

During the year, we also have operational challenges we must address.

To get gross margins improving again, we must tackle our inventory management.

This is one of our top priorities and we will surely address it.

We will also be highly discriminating on spending, so as to conserve cash while allowing us to continue to invest and realizing our vision for the era of the GPU.

These are surely challenging times, but we are also more excited than ever about the prospects of the GPU and the importance of our work.

We are delighted to take questions now.

(Operator Instructions).

Patrick Wang, Wedbush Morgan Securities.

First off, can you help us understand what makes you feel confident about your revenue guidance and that you're not looking for a sequential decline in the upcoming quarter?

Well, I guess I'll comment and I'll let Marv comment.

We track sell-outs rigorously in the marketplace.

And you have now heard this from nearly every computer company in the world, just about every electronics company in the world, that for whatever reason, October was a reasonable month but November fell off a cliff.

November was the beginning of our quarter.

And so we experienced three consecutive difficult months.

As we monitor our sell-outs, we saw that -- that very effect, that the end markets just got weaker starting in November.

And since then, it has more or less flattened out, if not slightly increased a bit.

And because we know what we're selling into our customers and because we know what they're selling out, we have a pretty good sense that inventory levels are depleting very quickly.

So that's how we get a sense of where we are in the business and we believe we've hit a trough.

But the important thing is that we don't know what we don't know.

And there's a lot of people in the world who don't know what they don't know right now.

And I don't think we stand alone here.

But that's our best estimate of our business, and therefore, our best guidance that we can offer you.

Yes, I would emphasize exactly what Jen-Hsun said.

The sell-out, while it is weak, was definitely not as weak as our revenue in the quarter.

So, the depletion of inventory in the channel, coupled with the fact that we did not have a decent -- October was not in our quarter, says that unless demand continues to fall significantly from here, that our prospects are better than they were last quarter.

Okay.

No, that's helpful.

Thanks so much.

And then as a follow-up, just given the fact that we -- we're hearing chatter about new SKUs coming from you guys and your competitors and your friends over there in Santa Clara there and Sunnyvale.

Any sense of a pricing war here or anything in terms of competitive pricing or advantages here?

Well, I don't think either company is holding any punches at the moment.

So I'm not expecting the future competitive position to be more competitive than now.

There are plenty of opportunities for us to be competitive with each other and it's a very competitive market.

And there are always new SKUs coming out.

There's a -- they have new products and we have new products.

We're not in the business of announcing future products.

We have quite a strong position right now in the Performance segment again.

And so we have no reason to announce future products.

The competition is obviously different, so they're talking about future prospects all the time right now.

It just serves to freeze their market.

And so I think that announcing their next generation product long before it can ship is not a smart thing to do right now.

Okay.

Thanks so much, guys.

Daniel Ernst, Hudson Square Research.

Thanks for taking my call.

Two related questions on the downturn here.

How much of the current revenue weakness is the overall market decline versus a down-speccing of machines in the market where they're either going to a lower spec GPU or settling with the upgraded one -- so one is a sort of demand for PC overall going down, and the other is what they're speccing on that machine.

And then related to that, as we look across this economic downturn, which none of us know how long it is, but the longer it is, do we run a greater risk of -- at least, for the mainstream part of the market, the integrated graphics chip improving to the point where it's good enough.

So, if the downturn is one or two years, but in one or two years' time, that the integrated catches up to be good enough for the mainstream part of the market.

Thanks.

Yes.

Both fair questions, Daniel.

Our ASP's were generally flat this quarter.

And so from that you could argue that people are not buying down, per se.

There is a very significant factor that is happening in the notebook segment, however.

There's the surge of the netbook market.

And you could characterize the netbook market as low-end.

And if I were to just, for the stake of my description right now, describe the market as high, mid, and low, our participation in the notebook market has been by and large about the upper half of mid and most of high.

And we have no participation historically in the lower part of mid and the low-end market.

All of a sudden, the Atom processor has driven a dramatic surge of network -- netbook PCs.

Some people call it netbook PCs, but the fact of the matter is they're inexpensive PCs.

And during difficult times, many people who still need to have a PC or would like to have a PC, now has a very inexpensive version to buy.

And so the demand for Atom PCs in these netbooks, if you will, has really, really surged.

I think what's going to happen is that the low-end part of the marketplace is going to cannibalize the midrange part of the market.

People who want performance still will go for performance; the netbook will heartily serve their needs.

But for a lot of people in the midrange part of the marketplace, the netbook is clearly, clearly going to disrupt that.

And so our strategy is Ion.

We announced Ion for the ADAM processor at CES.

And the reception has been extraordinary.

And the reason for that is because Atom, with the Ion processor, creates a full-feature notebook.

It's fully capable of DX10, 3D graphics, high-definition video, Blu-ray disk.

Just about anything you want to do on your computer is possible with the Atom processor in an Ion.

And so this platform I think is a wonderful growth opportunity for us because it's the first time that we've really been able to enter into the lower-end segments of the marketplace.

But I think you're -- what you're thinking about, about the future of the PC industry certainly is true.

That I think -- or it's likely to happen, that the high-end marketplace will continue to be what it is, as people who want more performance can get it.

And there's a lot of different reasons to bring performance to the high-end.

But the midrange part of the marketplace could very well become an extremely large low-end part of the marketplace.

Great.

Thanks for the answer.

JoAnne Feeney, FTN.

I was hoping to get a little bit of clarity about how you guys are thinking about the current environment -- what you're assuming when you draw that conclusion about hopefully flat or slightly up.

So would we have to think that you're assuming that end market demand is going to be flat to slightly up?

Or that the channel might be rebuilding inventory this quarter and that's what could pull up your revenues?

No, JoAnne, if you just assume that the market didn't get any better, our revenue has to go up.

Because remember, they depleted significant channel inventory last quarter.

Can you give us a sense of how much of that went down in your estimation, Marv?

You're talking about their inventory?

Yes.

I think that they went from two and a half to three months worth of inventory down to between one month and one and a half months of inventory.

(multiple speakers) That's my [guess].

Okay.

And then within your inventory, in-house, can you give us a sense of how much of that inventory, what share of it is the older 65 nanometer product and what's the newer stuff?

Well, we have more 65 nanometer parts than I thought we were going to have, but that's because the revenue was less than we thought.

But I would still say the majority of the product by far is 55 nanometer.

So we're going through the 65.

It's more than I would like to have, but it's not an intolerable amount.

Tim Luke, Barclays Capital.

A couple of quick things for you, Marv.

Just firstly, following off on that inventory.

Your inventory is now like at 140 days on-hand.

Where do you think that goes directionally in the April quarter and what are you trying to target -- obviously while you've had success with moving the channel lower, the inventory on-hand seems somewhat higher in terms of just the revenue balance.

Separately, I was just wondering if you could just lay out for us some of the factors that you think may help the gross margin.

I think you're saying 35 or mid-30s going forward for April -- how do you see that going forward?

And then lastly, if I may, in planning your OpEx, which you are lowering by $35 million, how are you thinking about the revenue?

Obviously, you're not at breakeven yet.

How are you thinking about the revenue shape for the back half of the year?

And maybe that's more of a Jen-Hsun question.

Or are you just suggesting that you've got to invest, irrespective of when you see the revenue come back.

And where is that revenue?

Is it mostly in the new products?

Or how do you see desktop, for example?

Thank you.

Well, let me take the inventory issue first.

We have significantly cut back our wafer starts.

I don't think that's a surprise to anyone.

When you have this inventory level, we don't need a lot more wafers.

So, based on the inventory that we have, if you look into Q1, I see a significant inventory reduction coming.

I can't give you the magnitude of that until you give me the revenue number.

But I would say something significantly reduced in Q1.

Going forward, this inventory should last us into the Q2 and Q3 before we have to replenish at those levels.

So I think that our production buys are going to remain at a low level all the way through Q1, and it's going to take something into Q2 and Q3 with some other products and a slightly better market, before we have to reinstitute wafer buys.

The last question that you have with regard to the OpEx, is that -- I go back to the goal that Jen-Hsun has established of getting the revenue down by $35 million on a quarterly basis, as what we can do without jeopardizing future revenue.

It is not based on us being able to break even at some revenue level.

It's on the basis of what we think we can do without jeopardizing the future.

Now at $500 million, even if you cut it off -- cut it by $35 million, we would not break even.

So the issue is when does revenue start to recover and how successful are we in bringing the OpEx down by the $35 million?

And also presumably, where do you think the growth is?

Presumably, you're not spending a lot in the desktop GPU space, or are you, in terms of investment in OpEx?

Is the spending mostly on the new products?

Well, in the second half of the year, we have some areas of growth that we're relatively confident about.

And these are areas of new growth.

Tegra, our mobile computing device, mobile computing processor, will ship towards the second half of the year.

And so we're confident there will be revenue contributing and profit contributing.

Tesla continues to ramp.

We are engaged with more customers all the time, and who are looking for Tesla in their servers to dramatically accelerate their computing needs.

So we're expecting that to grow.

We're also expecting Ion to contribute greatly to our growth going forward.

Ion is, as we talked about, both a really fabulous network -- a notebook processor, but also is a terrific in the entry-level part of the PC marketplace in companion with a very low-cost microprocessor.

And so, we think that that could revolutionize the affordable PC market.

And so my sense is that we're going to continue to see growth in the Ion business.

So those are (multiple speakers) -- I'm sorry?

I was just wondering if, Marv, separately you might be able to address the gross margin issue.

Sorry.

Yes.

If you look at the gross margin, Tim, last quarter, you would have what I would call a more normal inventory reserve position.

That would have added 8 to 10 percentage points to margin.

So, all you have to do is not write off a lot of inventory and the margins will return to the level that I outlined.

Lastly, 40 nanometer -- could you confirm the timeline that you're expecting for that transition?

Thank you so much.

We have really fabulous products in the marketplace today.

And we don't announce future products.

Thank you and good luck.

Doug Freedman, Broadpoint AmTech.

Thanks, guys, for taking my question.

Sorry about the background noise.

Marv, can you go through the new product segments and give us an idea of which ones are likely to be accretive to gross margins, and which ones should you be more successful or actually going to be a headwind?

And any comment that you guys can make about the gaming PC platforms would be helpful as well.

Well, accretive gross margins -- which gross margin level are you talking about being accretive to?

The one for last quarter, it doesn't take much.

Fair point.

Well, let's take them somewhat in order.

Tesla certainly is accretive to gross margin.

I think Tegra is certainly not a drag.

It depends on what gross margin level that you're talking about.

It's not a drag.

If you're talking about the Ion platform, it's probably in the mid-30s, so if we're very successful there, it's not a huge improvement in the gross margin percentage, but certainly a significant improvement in gross margin dollars.

Which ones have I missed?

That's about it.

Does that help?

And then can you talk about the gaming platforms and what's happening in the gaming market space?

What is the gaming platforms?

PSS Sony, PS3, and Royalty incomes.

I don't know what the question is.

I mean they --

Do you want to know what the revenue was in the quarter or --?

Yes.

Yes, the revenue or what your outlook is for that market place.

Is that seeing the same type of conditions that you've seen in your market space.

Yes.

I think it -- certainly, with regard -- remember, a significant portion of the -- I'll call it the Sony royalty portion, is based on their unit production.

And so as their unit production drops, our revenue in that segment will drop.

And I think that they're projecting much lower production levels in Q1 than they had in Q4.

All right.

Thank you.

Suji De Silva, Kaufman Brothers.

On Ion, can you guys talk about what you think the pace and quantity of the ramp here, just in terms of your share, on the Intel platform, particularly?

I don't know how to characterize it for you, really, aside from the fact that we have notebook projects happening all over the world.

A lot of this just depends on the success of our customers in these platforms.

So there's still a lot of execution between now and then and lots of unknowns.

And so I'm reluctant to give you numbers that, frankly, I don't know how to project.

I do know that the design activity around our chipset is increasing.

And I do know that we've announced a really exciting product.

And so, I think if -- and the market is really resonating with it.

And I'm sure that if you follow this market, you've heard just about nothing but about Ion these days and the excitement that people have to build netbooks and low-end notebooks with it.

And so -- so, I'm enthusiastic about the prospects and I look forward to reporting on it in a couple of quarters.

But Jen-Hsun, the timing would be back-half loaded?

Or steady throughout the year?

Any comment there you could give us?

There are design wins that are being launched in just about every quarter.

There's some this quarter; there will be some next quarter for sure.

And hopefully, they'll be fully all ramped up for Q3 and Q4.

Okay, great.

And switching to your guidance in terms of the flat revenues, how do you see that and the notebook market versus the desktop market, given the different dynamics you cited for the current quarter?

We don't see significant change in any of them; [they're] relatively flat to slightly up, there's not a significant change in any of them.

We don't think that the flatness derived from any one particular segment.

Okay.

And then on the OpEx cuts -- were there any particular areas that were kind of overly hit by those?

Or was it a broad-based effort on the part of the Company to do more maybe (inaudible) [some people's at].

Is that the spirit of it, Jen-Hsun?

We affected a lot of different areas, whether it's the executives of our Company took the largest and most significant cutbacks.

And -- but many of -- almost all of our employees will make a contribution.

There is travel reductions; there's just ideas all around the world and around the Company to reduce spending wherever it can be reduced without affecting the key investments that I've highlighted.

And so this is -- it's broad-based and it's everywhere.

One last quick question -- what's the pricing decline you're assuming in your guidance versus what typical pricing would decline?

Thanks.

No change.

Okay.

Thanks, guys.

David Wu, Global Crown Capital.

Yes.

Can you talk a little bit about the -- on the breakeven, either on a pro forma basis or on a cash basis, what kind of revenues are we looking at from a breakeven standpoint on a quarterly basis?

Well, that's a very complex question, David.

You have to tell me where the revenue is, what the gross margins are, how successful we are in getting our OpEx down to that targeted level.

If we achieve the targeted level OpEx and if we have gross margin in the mid to sort of mid-30s, what kind of cash breakeven, operating cash breakeven, are we looking at or pro forma breakeven are we looking at?

Well, that's an easy calculation for you to do.

I'm not going to do it.

I mean, if you have operating expenses at the 265 level, that includes some stock-based compensation, which is non-cash.

That includes some depreciation, which is non-cash.

And so now you have [like] a gross margin on X dollars of revenue, it's an easy calculation to make.

All right.

What about if I were to look at, let's say, the revenue -- $500 million is your first quarter roughly in-demand number and the peak of last year was about -- assuming that those are all in-demands, about $900 million.

Whereabouts if you make the seasonal adjustment, where is in-demand?

If Q1 is $500 million, assuming normal seasonality, how high would that number be on your best quarter of the year?

You know, David, I think it's -- and I don't think I'm saying something that's inconsistent with what you know -- that there's nothing that we're experiencing right now that is seasonal.

Or normal.

Maybe I'll ask a different question then.

(multiple speakers) in front of it normal seasonality.

It's neither normal nor seasonal.

We don't mean to --.

Normal nor seasonal.

We don't (multiple speakers), but the environment is very difficult and uncertain.

It's very difficult and uncertain not just for us, but it's very difficult and uncertain for everybody.

Yes, I understand.

And so, our strategy is to make sure that we eliminate and be as discriminating as we can on spending, but continue to invest in the things that we know are important to the marketplace, the things that we're world-class at doing, and continue to innovate and challenge our employees to build amazing things.

Talking about innovation, there has been a number -- I guess the next round of game console design wins are coming up has been -- rumor has been awarded to different people.

How close are we actually in terms of competing for the next generation of PS4 or Xbox or Wii?

We don't -- it makes no sense to comment on rumors.

And it also would be terrible to comment on future products of our customers.

It is not our job to do that.

And so, it's just -- they're just rumors, David.

Okay, thank you.

Shawn Webster, JPMorgan.

Would you characterize the one to one and a half months of inventory as being normal or lean or still on the high end of normal?

Very lean.

Very lean?

Okay.

And so, is your visibility now about the same or better than it was when you came into the January quarter?

How do you mean that, the January quarter?

You mean our Q1?

Would you say that you're setting the guidance at flattish or up slightly now?

Would you say your visibility now is better than where it was when you came into Q4 or the same?

I don't know how you characterize that, because when we went into Q4, the market had not dropped off a cliff.

So, I should certainly hope that the visibility is better now than it was then.

Okay.

Can you give us an update on some of your new products then?

What did Tesla represent for revenues for you in Q4 and Tegra, and your outlook for 2009 -- calendar 2009?

Let's see, Tesla in Q4 -- did we break that out?

We haven't broken it out in the past.

It was millions of dollars, several million dollars.

I won't characterize it beyond that.

When it gets to be significant, Shawn, we'll break it out.

Tegra was insignificant.

Tegra hasn't shipped yet.

It's really second half of the year.

Uche Orji, UBS.

First question to you, Marv -- if I look at the guidance you've given for the current quarter, how much -- what should we expect for the workstation business within the guidance?

And if you can just explain that in the context of what is a very challenging IT spending environment.

I just want to be able to reconcile how much that will contribute to gross margin and just concerned with your guidance.

So if you can talk about what that makes you see in the workstation business, what you saw in the last quarter, and what you are implying within the guidance of the current quarter, that would be helpful.

Okay.

Now, the workstation business took a precipitous decline last quarter in Q4.

It was down about 47% Q3 to Q4.

That was surprising.

I mean, it's a -- if it was any business that would be somewhat of a safe haven from this, you would have thought it was in the workstation area.

It didn't happen.

So, what the anticipation is, is relatively no change from the Q4 levels into Q1.

So, a continued weakness, I would call it.

Right.

And that is supported by what you have in the backlog currently?

Or do you require terms business to make that flat revenue guidance?

This is very important for your gross margins, that's the reason why I'm pressing on this.

Well, we always require terms.

We are not a business or a -- our business model is not based on the significant backlog at the beginning of a quarter.

Our whole business is based on significant terms within the quarter.

Okay.

Just one more question.

If I look at the high-end GPU business, what is happening with pricing right now?

Is pricing stabilized at this point?

Because late last year, AMD did try to make a push in that market.

And so what is the outlook for pricing in that market for the current quarter?

In Q2 of last year, we did take a big step down in pricing.

We had improperly priced our products too high.

But we corrected that almost right away.

The pricing that we're seeing out there are relatively stable at the moment.

We're gaining share and we have the best products.

And if we stay focused and continue to do our work and highlight our unique advantages with CUDA and PhysX and 3D Vision, I'm confident we'll continue to gain share.

Okay.

And just one last question -- with Intel introducing some chipset product that will allow 720p -- I'm just trying to understand how you now position Ion, because 3D gaming, which is probably your key features, is not something that we've heard OEMs talk about as something consumers care about in a big way.

So, how are you going to position Ion against [that one field]?

720p is not Blu-ray compatible, as you know.

And 720p is the minimum requirement of high-def.

And so, high-definition includes all the way to 1080p, for one.

The overall performance under Windows Vista and Vista Premium and the requirements for DX10 and Windows 7 coming out, and all of the transcoding and video editing and video processing capabilities of CUDA are available on the Ion platform.

And so, if you want the best possible experience while still be extremely affordable, Ion is really your way to go.

Okay.

Thank you very much.

James Schneider, Goldman Sachs.

To follow up on the gross margin question a little bit.

In the GPU space, specifically desktops and notebooks, can you talk about some of the pressuring you might see from pricing and inventory reductions in the out-quarters going into the second half, versus whatever benefits you might get from 55 nanometer and lower cost reductions?

Well, that's difficult to say.

I mean, all of our production now is on 55 nanometer and later in the year would be even smaller geometries.

But how that impacts the gross margin is difficult to say.

I think that the individual product gross margin, in my view, is not the issue.

It's the total volume.

And so, I think we'll do fine from a gross margin standpoint.

So would you expect the GPU margins to continue to recover into the back half, after -- or early into Q2?

I think these gross margins in the GPU business will recover in Q1.

Remember, a significant portion of the -- that's, I'll call it the increased inventory write-off that we took in Q4 was in the GPU business.

So there should be significant recovery in GPU gross margins in Q1.

But no sense about beyond Q1?

No.

Okay.

And then just a follow-up.

I think, Jen-Hsun, you mentioned Ion in reference to the chipset product on notebook platforms as well as it's paired with the Intel Atom processor.

Could you talk about some of the design wins you got, specifically when paired with the Intel Atom, please?

Well, I -- we shouldn't announce any design wins until the design wins ship.

And so, when it does ship, I'd be more than delighted to address it.

I can only tell you that there is an enthusiastic support and design activities all over the world.

So we'll see when they ship.

When they do ship, hopefully, it's not too long, we'll be delighted to talk about it.

Thanks very much.

Glen Yeung, Citigroup.

Marv, I hear your point that you don't want to impair your future growth by reducing OpEx to too low a level, but one can argue, with sales down 60% year-on-year and with a pretty uncertain end market out there, the future growth is impaired anyways.

So I guess when we think about your business going forward, what would you need to see?

I mean, is there some lack of growth element out there that says, geez, you know what?

I've got to cut anyways because it's just so bad?

Well, we're always looking at things like that.

That's the job of management to look at them.

If you were to tell me that the current economic environment is going to continue for the next 10 years, then lots of people, not only us, but other companies are going to have to restructure their businesses.

If you're telling me that the economic environment will change very quickly, that's merely holding on until it comes back.

So, I don't know how long this economic environment is going to take.

But I do know the only way out of recessions and significant recessions like this is not by cutting the future.

The way out of the recession is by investing in future revenues.

So we want to continue to do that.

As long as we're not burning through significant cash, as long as we're investing in the right places, that's more significant to me.

I don't know what's going to in an economic environment.

But --

That's a fair point, Marv.

And the investments that we make, Glen.

We want to make sure that -- we've scrutinized all of our investments.

And we've asked ourselves, are we investing in areas that's going to lead us to growth?

And if it's not going to lead us to growth, there's no point investing in it.

And so we have to believe in what we believe.

And once we believe it, we're going to stay committed to it.

Now, obviously, environments change and we'll continue to reevaluate.

But based on what we see right now, we're making good decisions.

Fair enough.

I also wanted to ask about the linearity in the reported quarter and the implication that has for the start of the quarter.

Because it sounds like November was really bad.

I would guess that December was probably worse.

Was January better -- and at the beginning of February -- because of the flat guidance, I'm just thinking about the pattern of the last quarter, it would sort of suggest February must have started off not that bad.

And maybe if you could confirm or deny if that's true.

November started off bad, December was worse, and January wasn't a lot better.

It was very linear.

So, Marv, if I think about that, going down from the first of the month -- the first month to the third month, if you want to be flat, don't you have to be going up from the first month to the third month in this quarter?

And doesn't that seem like an unlikely situation?

No, I don't think so.

I think that you saw us being, I'll call it, a victim of the quarter, our quarter being November, December, January.

I think that was a negative compared to some of the other guys out there that are on a calendar quarter.

I think that the depletion of the channel inventory was a negative for us relative to what's happening in the marketplace.

And those two factors alone tell me that they weren't normal, if you want to call it that, or the run rate of consumption out there is equal to or better than our revenue for the last quarter.

Okay.

Fair enough.

Thanks a lot.

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

Please go ahead, sir.

Thank you for joining us today.

We look forward to reporting our progress for Q1.