輝達 (NVDA) 2011 Q1 法說會逐字稿

Good afternoon.

Thank you for holding.

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

Thank you.

Sir, you may begin.

Thank you, Operator.

Good afternoon and welcome to NVIDIA's conference call for the first quarter of fiscal 2011.

With me on the call today from NVIDIA are Jen-Hsun Huang, President and Chief Executive Officer, and David White, Chief Financial Officer.

After our prepared remarks, we will open up the call to a question-and-answer session.

Please limit yourself to one initial question with one follow-up.

Before we begin, I would like to remind you that today's call is being webcast live on NVIDIA's Investor Relations website.

It is also being recorded.

A replay of the conference call will be available via telephone until May 20, 2010.

The webcast will be available for replay until our conference call to discuss our financial results for our second quarter of fiscal 2011.

The content of today's conference call is NVIDIA's property.

It cannot be reproduced or transcribed without our prior written consent.

During the course of this 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, and our actual results may differ materially.

For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release, our Form 10-K for the fiscal period ended January 31, 2010, and the reports we may file from time to time on Form 8-K filed with the SEC.

All of our statements are made as of today, May 13, 2010, based on information available to us today, as of today, and except as required by law, we assume no obligation to update any such statements.

Unless otherwise noted, all references to market research and market share numbers throughout the call come from Mercury Research or John Petty Research.

One final note -- our annual shareholder meeting is next week on May 19.

For the first time, shareholders will be able to vote and ask questions online during the meeting.

Please see our website for more information.

With that, let's begin.

We are back in the high end of the Enthusiast segment.

In April, we shipped our GeForce GTX 480 and 470 GPUs, the first products based on our next generation [QGPU] architecture code name Fermi.

The GeForce GTX 40 and 470 GPUs were designed from the ground up to excel at tessellation, the defining feature of DirectX 11.

Geometric fidelity is one of the most important new looks for the next generation graphics.

So instead of just being compatible with DX 11, we created a DX11 tessellation monster.

GTX 480 is eight times faster than the competition.

Reception for the new GeForce 400 series amongst gamers and press has been phenomenal.

Just last week, the GTX 480 was validated as the fastest GPU in the world with KIngpIn and Shamino, two world-class over-clockers used the 480 to break world records on the future Mark 3D Mark Advantage Hall of Fame.

GTX 480 is DX11 done right.

Bjorn3D stated, quote -- "The GTX 400 lineup eats tessellation and ray-tracing for breakfast, and has the advantage in every benchmarking game using those technologies.

So, for us, it's not a hard call." -- end quote.

Futurelooks.com wrote, quote -- "There is no question that the NVIDIA GTX 480 is the king of tessellation.

The GTX 400 series GPUs also provides a significant higher computational capability, which will allow gamers -- game developers to increase the level of physics realism via our PhysX API.

With our leadership position with the DX11, combined with the incredible experience that PhysX and 3D Vision provide, we expect to take back share in the Enthusiast segment."

In the first quarter, we shipped a few hundred thousand units, as yields has exceeded our expectations.

The 480 and 470 are widely available worldwide and continue to sell out on a weekly basis.

More importantly, being back in the Enthusiast segment is a positive driver of revenue and profitability growth.

We began shipments of the new GeForce 320M integrated chipset to Apple for the latest 13 inch MacBook Pro.

The 320M delivers up to an 80% performance increase over the previous GeForce 9200M integrated chipset.

In addition, the new 15-inch and 17-inch MacBook Pro both come standard with the new GeForce GT330M, the fastest graphics ever in a Mac notebook.

In addition, the 15 and 17-inch notebooks come with switchable graphics.

It's another powerful example of how switchable graphics is quickly becoming a standard requirement in notebooks.

We now have approximately 70 Optimus design wins of which 11 are in production today, and 50 are expected to be available in the market and ready for this year's back-to-school cycle.

We continue to believe that Optimus has the potential to expand the market for discreet GPUs by increasing the GPU attach rate in notebooks.

Our Quadro business continues to recover and, in fact, is ahead of where we anticipate it would be at this time.

The recession delayed upgrade in 2009, and with the significant enhancements made in both hardware and software within that timeframe, we believe it will drive a more aggressive upgrade cycle.

For example, Adobe's CS4 penetration was well behind CS3 due to the recession, creating meaningful pent-up demand for CS5.

We are anticipating that the combination of a healthy upgrade cycle and the addition of new markets will take our Quadro business to a higher level of growth.

During the first quarter, we announced that a range of NVIDIA Quadro professional graphics solutions are certified for Adobe, for Adobe Creative Suite 5 software, which provides real-time video editing and effects processing with Adobe Premier Pro-CS5.

This version of Adobe Premier Pro leverages the parallel processing architecture of NVIDIA GPUs via the new Adobe Mercury playback engine, to allow users to create compelling, multi-layer projects and preview them in real-time.

Tesla achieved record revenue, and Q1 should be the first of many record quarters to come.

Fermi has unlocked new demand for Tesla.

We are experiencing heightened activity in a number of areas such as supercomputing, energy, and finance.

The most significant leading indicator of Tesla's long-term success is the adoption of Tesla as a standard OEM SKU.

The number of OEMs including Supermicro, Apro, Tyan, Cray and Bull have already announced OEM servers with more to Tier 1's to follow.

Finally, we achieved a major milestone this quarter.

We completed and qualified our first commercially available smartphone.

Today, Microsoft is shipping the industry's first phone based on Tegra.

We are now the first PC technology company in history to cross the chasm from computing to mobile computing.

Continue to watch this space -- we have multiple Next Gen Tegra design wins in smartphones and tablets coming, which will be announced later this year.

Our core profit drivers, high-end GPUs and professional solutions are performing well.

And, with evidence from a number of key early indicators for our growth businesses discussed today, we'll continue to be optimistic about our prospects in 2010 and beyond.

With that, let me turn the call over to David.

Thanks, Mike.

Q1 was another good quarter, driven by the ongoing recovery of enterprise spending; the shipment of Fermi-based products for desktop GPU and high-performance computing; new product ramps at Apple; and a very strong notebook market.

Revenue was $1.0 billion, up 2% sequentially.

Our GAAP gross margin was 45.6%.

GAAP operating expenses were $309 million, and GAAP net income was $137.6 million or $0.23 per diluted share.

The core GPU business was flat quarter-to-quarter.

Supply constraints are finally easing; in particular, yields of our high-end Fermi-based GPUs were much higher than expected, leading to good availability of our new GeForce GTX 480 and 470 GPUs, and Tesla high-performance computing products.

Quadro grew strongly once again and is now approaching pre-recession levels.

Tesla had a record quarter, which, together with our Quadro business, contributed to higher overall gross margin in the quarter.

Cash, cash equivalents and marketable securities at the end of the quarter were $1.76 billion, up $36.7 million from the fourth quarter.

Our outlook for the second quarter of fiscal 2011 -- revenue is expected to be down seasonally, 3% to 5%; GAAP gross margin is expected to increase to 46% to 47%; GAAP operating expenses are expected to be flat; our tax rate of 12% to 14%, assuming a renewal of the US R&D tax credit, and otherwise a tax rate of 14% to 16%.

That concludes our prepared remarks and we will now take questions.

Operator?

(Operator Instructions) Tim Luke, Barclays Capital.

If I may, could you guys elaborate on your comments associated with the increased availability of capacity, particularly on the high-end nodes?

And also, your comment with respect to yields and how you believe that may begin to impact your margin profile going forward?

Thank you so much, David.

Yes, Tim.

You know our -- you'll recall that when, back in the fourth quarter and earlier times of last fiscal year, when we were ramping other products on the 40 nanometer node, we had many challenges with yields and our ability to supply to market with adequate product.

And we really hit kind of a turning point somewhere around the December/January timeframe, where we began seeing predictable improvements.

And those improvements continue throughout the first quarter.

And this being the first quarter that we launched Fermi, those wafer starts were done sometime ago, at a time when margins weren't as good as what they actually wound up being.

And so, our margin progression wound up being exceeding our expectations.

And as a result of exceeding expectations, we wound up having more die available to sell.

Now, given that Fermi only launched in the last three, four weeks of the quarter, there's only so much capacity you've got in line when you exceed expectations like that.

And we shipped everything we could get through the backend and that contributed to certainly the quarter and our margins.

And going forward, we expect Fermi to continue to be an important element of our product mix.

And as a result of that, you see our guidance of gross margin going up quarter-over-quarter as a result.

Just -- if I may, just this one follow-up, David.

Your gross margin obviously going up with the revenues slightly down.

The key catalyst for that is the Fermi ramp, is it?

Or are there other elements that you might be able to elaborate on, just on the strength of the gross margin in the coming quarter?

Well, Fermi is a substantial piece of that.

I mean, our Tesla business is still continuing to grow and so it will become a bigger piece of the mix as well.

But largely, it's Fermi, and Fermi and Tesla as well as Fermi and graphics.

Thank you.

Patrick Wang, Wedbush Morgan.

Terrific.

Thank you.

I was just hoping you guys could comment when we look at your revenue guidance here, it was down 3% to 5%.

I know that you think that's actually in line with seasonality here, but what are some of the moving parts behind that?

Because, I mean, clearly, we're starting to see -- Tegra is starting to ramp a bit here.

I just wanted to get some of your thoughts just in terms of the workstation, GeForce and maybe even some color on chipsets.

Well, our chipset business is doing well.

As Mike mentioned in his comments, we launched the 320M this last quarter.

That product we expect to be shipping for quite a period of time.

So that business is actually doing very well right now.

As it relates to the other elements in the seasonality referred to, we experience seasonality just like our competitors do in the industry.

And we think our 3% to 5% down is consistent with what we typically experience.

Now, notwithstanding that, we're expecting Fermi to be very strong this quarter as we continue to ramp that product, and actually have an opportunity to ship Fermi throughout the quarter, which we didn't obviously have the opportunity to do so last quarter.

So that mitigates it to some extent, but we, overall, we feel our guidance is relatively consistent and the mix change will be a favorable to our earnings profile.

Okay, great.

And then, I guess, just as my follow-up here, I just wanted to get your thoughts in terms of how you think market share is going to trend, given the supply dynamics?

Can you just give an update on -- what's your sense of the demand out there, as in, of course, your competitive positioning?

Well, we haven't been in the high-end segment because of Fermi being delayed for over two quarters now.

And so my expectation is that we're going to gain share.

We gained share last quarter because of our increasing share in notebooks.

Some of that could have been attributed to Optimus and looking forward, we expect Optimus to continue to gain adoption.

So we're optimistic about Optimus.

So between the desktop -- returning into the high-end and continuing to do well in the notebook segments, my sense is that our share should be rather healthy.

Okay.

And I just -- I guess, just a part of the demand, you're still seeing kind of seasonal demand here, anything out of the ordinary?

Well, for the core parts of the market, we're expecting seasonality.

However, we're growing into, with Fermi, into the high-end segments that we've not been in for a couple of quarters.

So there's quite a bit of pent-up demand that we're seeing out there.

So we're ramping as hard as we can and as fast as we can, and trying to keep up with the demands for our customers.

So we're looking forward to getting back into the high-end.

But the rest of the business that's -- that we would characterize as Main Street business, should experience seasonality.

Okay, great.

Thanks so much.

Michael McConnell, Pacific Crest Securities.

Jen-Hsun, last conference call you had talked about Fermi and that it would be hitting full stride in Q2 and that would offset seasonality.

You guys have guided now seasonal.

Has there been any change, regionally speaking, with demand?

Any impact, maybe Europe, or any impact with memory pricing that has led to guys to back off a little bit and to guide seasonal for Q2?

Well, we don't know any more or any less about what's happening out in the larger market than anybody else.

And there's obviously in the overall larger market, there is some concern about seasonality.

But we are ramping Fermi as we had talked about before.

And the success of Fermi is certainly as we expected.

So we're going to see how it plays out here.

I mean, these are a couple of the -- I mean, you're -- with respect to Q2, those are the two dynamics that you're looking at -- seasonality on the one hand; on the other hand, we're ramping new products for -- into a new segment that we've been out of for a couple of quarters.

And so we'll see how it turns out.

And then just looking at the Mercury data for the last couple of quarters, I think your units the last two quarters combined are up about 77% in the notebook discreet space.

Should we be kind of anticipating a pause here as we move into the summer?

And could you talk about what's been driving that very strong growth that you've been seeing in the notebook discreet market?

The biggest factor in the growth of discreet graphics is China.

The China market is the fastest-growing notebook PC market.

It also happens to be the market where we have the highest adoption of discreet GPUs.

We believe the reason for that is because the Chinese market is much more sensitive to reviews of products.

And they're much more -- the consumers are -- scrutinize their purchasing decisions much more than elsewhere around the world.

And they tend to be much more value-conscious.

I mean, they will go out and buy what is the best performance per dollar versus what brand OEMs that it comes from.

And so the GeForce adoption, the inclusion of GeForce, is a huge factor for the Chinese market.

And so we're seeing very good adoption in China.

The GeForce brand is also really popular in China.

And the reason for that is because the Chinese consumers spend a lot of time online and video games is a big part of how they enjoy their computers.

Video games and enjoying movies and multimedia is a big part of how people use PCs.

So that's probably the biggest factor for the growth of the discreet GPUs.

Now looking into the summer, we're expecting Optimus to be very successful.

We've shipped, at this point, only a handful of Optimus notebooks and I think there's 70 or so projects in the pipeline.

And we're expecting the vast majority of them to go into production for back-to-school.

And so Optimus has turned out to have been a very big success for us, because the value proposition is just so clear.

You get the benefit of the longest possible battery life when you're using light computing, and whenever you use it -- whenever you would like performance for your PC, Optimus instantaneously turns on the GPU and gives you amazing performance.

And so having that uncompromising benefit in the PC and the notebook for the very first time has been -- has really resonated with the marketplace.

So I'm hoping that our notebook business continues to do well and we'll see how it turns out.

Okay, thank you.

Raj Seth, Cowen and Company.

Thanks for taking the question.

Jen-Hsun, can you talk a little bit about the handset opportunity for Tegra?

David mentioned the Microsoft milestone.

I guess I'm curious within your design win base, how many designs are in the pipeline when you're winning sockets?

Why are you're winning when you're losing?

Maybe as importantly, why you're losing?

Is it mostly Snapdragon you're seeing out there?

Thanks.

We're pretty excited about Tegra, as you can imagine.

Our first generation strategy we wanted to focus on one operating system.

It was our new player in this marketplace.

And we focused all of our energy around the Microsoft Zune and Microsoft Winmobile.

And I'm delighted with what we're able to build.

It demonstrates that NVIDIA has created an architecture that's extremely low power while being very high-performance, and that we know how to build phone processors.

It's a big deal.

It took us a long time to figure it out.

And it's been a long-term investment.

And so that the Microsoft 10 and the Zune HD are the results of that first generation.

On the second generation, we were able to expand to focus a lot of our energy around Android.

And although it made sense for the first generation Androids to use available phone processors -- the follow-on generations of Android are really going to go after performance.

And iPhones are out there; the iPhone 4G is coming.

The iPad is obviously a revolutionary product.

The bar is pretty high for all of the mobile players.

So they need a processor that can keep up with the A4.

If not, be much better than what the A4 can do, because they have to take on the leader in this space.

So I think the second-generation Tegra is going to do incredibly well because Android is doing incredibly well.

So we're going to come to market with the second-generation Tegra with the third-generation Android.

And so that's our (multiple speakers) focus now, which is the -- and I think it comes together at the end of the year.

We've talked about smartphones; we've talked about tablets.

We have a very large number of designs in pipe in flight, and so we're looking forward to starting in third quarter or fourth quarter, many design wins to show up in production.

So, just to be clear, in the third and fourth quarter, back-end of this year, we begin to see NVIDIA-powered Android handsets on the market?

Or that's when they'll be a slew of design sockets available for you?

No, we've been already working on those design sockets.

Great.

And is it mostly QUALCOMM that you're competing against?

Thanks.

There's really only -- prior to Tegra, there are only two application processor companies out in the mobile space, right?

Basically, it's QUALCOMM and TI.

And they both make wonderful application processors.

Our differentiation and our contribution to this space is where multimedia, high resolution, snappy graphics is really necessary.

And the first generation smartphones had pretty low-resolution displays.

And so snappy graphics and high-performance multimedia and high resolution just wasn't as much of an issue.

But as you know, with iPad and next-generation smartphones, resolution is a huge issue.

And you need to have very snappy graphics with a 10 by 7 display, if not even bigger than that, even higher resolution than that.

You're just not going to do that with a application processor that's not designed for that.

And so that's our contribution and that our differentiation, and that's what people are seeing out in the market.

Great.

Thank you.

Ambrish Srivastava, BMO Capital Markets.

Just to make sure that I understand your guidance in the context of capacity and yield, should we assume that there are no constraints any more and all the yield issues have been resolved?

One thing -- I think the comment that David was making is that the yield has improved a lot.

And TSMC has done a fabulous job improving the yields of 40 nanometer since August of last year, when we first ramped it until now.

The yield and the number of wafers that they're able to produce compounded has really helped a lot.

And so I think that with respect to manufacturability of 40 nanometers, I think we are surely out of the woods.

I think we can now officially say that.

We are clearly out of the woods.

And I think that's all David was trying to say -- that that 40 nanometers at TSMC is now a world-class node and the manufacturability of it is very, very good.

And so we're delighted with the execution from TSMC.

They've just done a fabulous job.

With respect to overall capacity, with respect to supply, the challenge is that more and more customers are getting into 40 nanometers as well.

And so we certainly aren't swimming in 40 nanometer supply.

I mean, we are constrained here and there.

I wish we had more Fermi's.

I wish we had more GPUs of all kinds.

So there's still not enough 40 nanometer supply for the entire world.

So I expect that 40 nanometer supply will remain constrained for some time.

Sorry, Jen-Hsun, so the guidance implies that there is some supply constraints that has not allowed you to meet demand?

Or there is a balance between supply and demand, and what you're seeing is just normal seasonality and that's why the guidance?

We're seeing seasonality.

We're pretty clear that Q2's guidance is seasonality.

It's seasonality offset by the ramp of Fermi.

And so we're not going to know how it all balances out until the end of the next quarter or the end of this quarter.

But those are the two vectors, if you will -- seasonality in the mainstream market and the ramp of Fermi into GeForce, into Tesla, and into Quadro.

Okay, thanks for the patience and I also have one real quick follow-up.

Last earnings call, you had alluded to the channel inventory and how it had come back up by a week to about five weeks.

Where are we now on the channel inventory?

Thanks.

The channel inventory at the moment looks healthy.

But you have to look at it across all the geographies and you have to look at it across the segments.

The biggest lever for Q2 for us is growing into the performance segment that we've not been in for over two quarters.

And so ramping into the performance segment is just the number one most important thing that we need to do right now.

And obviously, since we've not been in it for a couple of quarters, the channel inventory for performance segment GPUs is very lean.

So we're going to be ramping into pent-up demand here for quite some time.

But there's no blended number that you'd like to share with us?

I don't have anything to share with you right now.

Okay.

Thank you.

Kevin Cassidy, Thomas Weisel.

Thanks for taking my questions.

I wonder if you can give a little more detail on the inventory?

Is it new product, product that didn't get packaged?

Or if you can just give a little more details on that?

Yes, Kevin, I think in the prior comments and in the CFO commentary, we explained it really is associated primarily with GTX 470 and 480.

We ramped that product.

We were favorably surprised with nicer yields than what we anticipated.

And given the fact that that ramp was all occurring at the end of the quarter, there was just a limited amount of capacity we had at the back-end to get everything out that we would have liked to have gotten out.

So hence, when the quarter ended, we had some inventory of Fermi die that was waiting to be packaged.

Okay.

And are you comfortable with this level?

Or do you expect it will come down next quarter or -- for a new product ramp, do you typically increase the inventories?

Well, as Jen-Hsun was saying, right now, channel inventory is very dry for product from us, particularly in that high-end of the segment.

Our inventory generally would normally be the same way on a new product ramp.

But I think it will stabilize pretty much over the quarter for us.

And at the end -- we'll see what the inventory is at the end of the second quarter.

Okay.

Thank you very much.

Shawn Webster, Macquarie.

Nice work on the gross margins, guys.

Just to close on the inventory, should we assume that channel inventory did increase globally?

And did you, David, in terms of the outlook for inventory, did you just say that you expect it to be flat or up or slightly down or --?

No, I don't think I gave an indication other than the fact that we thought that our inventory issues with Fermi in the quarter would naturally work their way out as we fulfilled demand in the channel and with other customers.

Okay.

And then (multiple speakers) --

Shawn, the easiest way to think about the inventory situation is that we ramped -- we're ramping into Fermi and we have a whole lot of ramping to do yet.

The back-end cycle time, the amount of testing that we had to do for Fermi GPUs are longer than mainstream products because they're just much, much larger GPUs.

The Fermi GPU, as you know, is some 3 billion transistors and so there's a lot of testing to do.

And it takes longer to sort it; it takes longer to assemble it; it takes longer to test it.

And then we do final system-level testing on the GPUs before we ship them.

And so that entire back-end cycle time is many weeks.

And so all of the dies that came out as we're ramping -- and you could imagine the curve on the ramp that we're ramping up right now -- a lot of the die that came out of the fab we couldn't get through the back-end before the end of the quarter.

So that's all part of inventory.

Now, of course, we're ramping into a fresh new market and a fresh new product.

There's a lot of pent-up demand.

And so we just need to keep the pressure on and just keep cranking through it.

And how much, as a percentage of your GPU revenues, was 40 nanometer this last quarter?

Quite a bit, probably -- quite a bit.

It grew quite nicely.

And when you look at Fermi coming into the mix along with our other 40 nanometer products, it grew pretty sizably this quarter.

And when you saw the yield outside, was that across your whole range of 40 nanometer?

Or was it primarily Fermi-driven?

It was across the whole 40 nanometer range.

Okay.

And then maybe one last one for me.

Can you share with us trends and pricing for your core GPU business, either units or pricing sequentially?

Well, our pricing should -- our ASP trend should be going up because we're turning back to the high-end part of the market for the first time in six months-plus.

And so I would expect our ASP to be trending up at the moment.

Okay, thank you very much.

James Schneider, Goldman Sachs.

Good afternoon and thanks for taking my question.

I was wondering if we could start off on the OpEx side for a second.

David, I think OpEx ticked up just a little bit in the quarter.

Are there any events like legal spending or any litigation that would cause OpEx to be up materially in the next couple quarters?

Or are you trying to keep that as flat as possible?

Okay.

Well, our objective is to be flat.

That's what we've consistently stated and so forth.

When you look at our expenses, there's some expenses we can control and there's some expenses we can't control.

And as you look at our operating expenses in the second quarter and the fact they are, like you said, modestly up, it really was a result of two things that were really not largely in our control -- one of which has to do with employee exercising stock options, where we have to pay payroll taxes on those as they exercise them.

The second have to do with legal expenses, which you just mentioned.

As you know, we have a case going on between ourselves and Intel right now.

That's certainly in full swing of depositions and so forth, which is driving -- and discovery, which is driving a significant amount of legal expenses.

But also, you have to add on top of the fact that the FTC has an investigation going on as well.

And that investigation is entirely outside of our control; but yet we get -- we have to support with depositions and discovery and so forth.

And so those are the two things that are really driving our expenses.

And considering that we're roughly at the peak of this, we don't see it tailing off this next quarter, which is why we guided flat.

Hey, perfect.

And then as a follow-up, could you address why accounts receivable jumped so meaningfully in the quarter?

Well, we launched two products at the very end of the quarter, Fermi being one of them, right?

And when you launch those products at the end of the quarter, you end up with receivables that you collect on the next quarter.

So it's primarily all related to launch activities.

So it was all the fact that the new products were so back-end loaded in the quarter?

We launched them at the end of the quarter and, hence, they are back-end loaded at the end of the quarter, yes.

Perfect.

Thanks so much.

Doug Freedman, Broadpoint AmTech.

Great.

Thanks for taking my question, guys.

David, can you talk a little bit about where we are in the MCP ramp-down and how you guys are going to manage that ramp-down?

Is there any cost savings that will occur as those revenues go away?

Well, certainly there's cost savings.

What we've tended to do is we tended to redeploy resources into other areas of our business where we have other needs; you know, in such areas as computing and mobile and so forth.

As it relates to the vector of MCP in terms of how it's doing and so forth, we've combined that business with GPU organizationally and also financially.

We've indicated that, over time, we expect the MCP business to go down and we expect the discreet business to go up.

And that is progressing according to plan.

But MCP is not, as I said earlier, MCP is not ramping down.

We launched our 320M product and it's doing quite well.

We expect it to continue to do well.

Okay.

If I was to move on and look at another segment of your business, the 3D Vision products seem to be broadly accepted in the market.

Can you give us an update on how that's going?

What impact that could have to revenues and margins?

Margins are about corporate average right now.

3D Vision just had a record quarter.

3D Vision will likely have another record quarter, followed by another record quarter, is my guess.

This is a -- at this point, it's pretty clear to everybody just as the future of TV is 3D, the future of PCs is 3D.

And so if you would like to have a gaming PC or a multimedia PC, and it has 3D blue ray, certainly, it should come with 3D Vision or some 3D glasses that you can enjoy it with.

So I think that this is going to become part of a [standard] offering of consumer PCs in the future.

And so this is a great growth opportunity for us and one that we're really proud of.

Yes, Doug, I would just make one comment to add to Jen-Hsun's, and that is, you've got to sell a lot of glasses to change the needle here in video.

I think the more important thing is the impact that 3D has on our graphics business and the fact that the pull that it creates for our graphics products.

I think it will have more impact there than it will necessarily the glasses, per se.

Great.

Thanks for that help.

Arnab Chanda, Roth Capital.

I have a couple of questions.

First of all, if you could talk a little bit about gross margins.

It seems like as your mix improves, your gross margins continue to go higher.

In fact, they might be close or at an all-time high.

Is that continuing to occur as the mix improves?

Or are we getting close to kind of -- sort of peak here?

And then I have one follow-up question.

Hey, Arnab.

We don't -- we haven't guided to where we think, ultimately, we think margins ought to be.

But ultimately, NVIDIA's gross margins ought to be in the mid-50s to high 50s.

That's really where we ought to go.

And the reason for that is because an increasing amount of our business is highly differentiated business, where software, middleware, and other peripherals are such a large part of it.

And as we continue to grow our Quadro business; as we continue to grow our Tesla business; as we continue to grow our Tegra business, where software is just such a large part of it, my expectation is that the gross margins will continue to reflect that.

For each one of the businesses that I just described, the gross margins are better than where we are as a corporate standard.

And two-thirds of our Company's revenues come from businesses that I've just described and -- or profits come from business that I've just described, even though it doesn't represent nearly that much of the total revenues.

And so my sense is that, over time, as those businesses grow, our margins ought to drift towards it.

And mixed with mainstream GeForce business, which will continue to be competitive, I think that an overall average just north of 50% is logical for our Company.

And so we've just got to get there.

You know that, Arnab, we've been transforming our Company step-by-step over the last three or four, five years, and moving away from just offering a fast chip to offering solutions and software that differentiates us and adds a lot more value to our customers.

3D Vision, for example, that was just discussed, is a great example of that.

It only works with GeForce and so it brings a lot more value to GeForce.

CUDA is another area of innovation and it only works with GeForce.

And so, over time, between those kinds of things and many, many examples that relate to Quadro and Tesla and Tegra, those value-added ideas that we bring to the marketplace will be valued, we'd hope.

So, I'm sorry, I'm not sure if I heard you correctly.

Did you say mid to high 50s, not 40s?

I'm kind of having a little bit of a shock here.

So I want to make sure (multiple speakers) --

That's where we should be.

And maybe another way of saying that is where we are right now should not be our peak and we don't expect it to be our peak.

And if the mix of our business continues to grow, as you were referring to earlier, then that should naturally take us above 50%.

Right?

Tesla is above 50%.

Quadro is above 50%.

And so if those businesses continue to grow, we should certainly expect our gross margins to grow.

Okay.

Well, just one follow-up question then.

It seems like, given you have all these new products ramping, shouldn't that offset seasonality?

I mean, you're still guiding seasonally when -- or is there something going on in the end market that makes you a little cautious?

If you could give us a little qualitative view on that, that would be great.

Thank you.

Well, you know Q2 is Q2 and everybody has the same feelings about the overall market at the moment as we do, I guess.

There's some amount of cautiousness and there's some amount of enthusiasm.

And so I think that for the mainstream part of our business to be seasonal and for us to drive growth through new products, I think that's sensible.

And we're comfortable with the guidance.

And if it turns out different at the end of the quarter, then we can all rejoice.

Thanks, Jen-Hsun.

Glen Yeung, Citigroup.

A couple of quarters ago, or even last quarter, you talked about the idea that you were under-shipping demand.

And now you're guiding for normal seasonal in the July quarter.

So that business that you were under-shipping, is that something that was sort of temporal, right?

It was sort of associated with the timeframe that we're at?

Or is that lost business to competition?

Or how should we think about that?

Well, the market overall was pretty supply-constrained on 40 nanometer so I don't know that we lost anything to the competition.

But I think some demand is perishable.

I mean, if you went to a PC store and you couldn't buy a PC, you bought probably something else; or maybe you waited.

But 40 nanometers was surely supply-constrained.

And we're still supply-constrained in certain segments of that, of the 40 nanometer product line.

But at the moment, we see the marketplace as being relatively balanced.

And looking into Q2, parts of the market is going to be seasonal and parts of our business is going to be high-growth.

And so we're just going to have to see how it turns out at the end of the quarter.

Okay.

As we think about the evolution of Fermi across the larger price [stacked] at NVIDIA over the course of the next few quarters, how should we think about that?

What's the pattern we should expect to see?

When does Fermi permeate the entire price tag?

We are sampling Fermi's from entry-level notebook all the way to supercomputer Fermi's.

So there are many versions that we're already sampling.

So we'll go into production with it as soon as our customers go into production.

And will gross margins be affected as that spread -- how does the pattern of that coincide with the pattern of these sampling devices?

Well, we're guiding gross margins up next quarter.

Okay.

All right, fair enough.

Great.

Thanks.

Craig Berger, Friedman Billings & Ramsey and Company.

Let's see here.

I guess one question I have is, as we look into the back half of the year, should we still be looking for normal seasonality despite the, I guess, the better than Q1?

Meaning, said differently, is Q2 kind of aligned with consumption shipments here?

Thanks.

The back half of the year, a better look at the back half of the year, I see that we will have more Fermi's in production.

I see that Tesla, our GPU for servers, is going to ramp up substantially because of OEMs going into production.

This is the first Tesla that has been designed standard into OEM servers -- into many, many OEM servers.

I see that the second half, our expectation is that enterprise consumption is going to continue to grow; so Quadro will continue to grow.

And I see that second half, our Tesla smartphone and -- oh, excuse me, Tegra smartphone and tablets will go into production.

Thank you for that.

So my sense is that the second half, couple that with seasonality, ought to be pretty good.

And so we need to make sure that we're very thoughtful about continuously to improve our yields and ramping up production.

Next question on Tegra.

It obviously was down seasonally quite a bit in the first quarter.

When do some of those design wins kick in?

Who are you really focusing on to drive second half growth?

Craig, can I just correct you?

Q1 for Tegra was not down.

The segment that it was in was down, primarily related to other non-mobile businesses that roll up into that consumer space.

But Tegra was actually up quarter-over-quarter.

Can you tell us how much?

We're really not -- I think we've indicated in the past that when Tegra becomes meaningful to where it's significant, we'll break it out.

But at this point, it's still pretty small.

I see.

Thanks for that clarification.

And then just magnitude and timing of growth, and maybe which customers you're really focusing on for the second half?

We don't announce our customers' products, so we'll talk about that when we go into production in the second half.

The thing that we would love to talk about is the products that have already gone into production.

And I'm delighted to see Microsoft's [King] get into production and all the innovative new products -- the new features that they've brought to the marketplace.

And it's a new perspective in the mobile phone market and so we're excited about that.

Last question, on the chipset side.

I know you just launched some new products.

Do you still expect that segment, even though you're not splitting it out, do you still expect that segment to be flattish this year?

And kind of when do you see the inflection point in revenues maybe beginning to fall off in that segment?

Thanks so much.

We expect the chipset business to do very nicely the next 12 months, at least.

Okay, thank you.

Thanks a lot, Craig.

Alex Guana, JMP Securities.

I know you mentioned the 330 and the Netbook Pros, and the benefits they bring.

I'm also noticing in the Windows environment, a pretty nice footprint for your Quadro product.

Is Quadro in the mobile space been a meaningful driver to date?

Is that improving?

And is either 40 nanometer or Fermi coming in that line improving the outlook for that?

Quadro has a very, very large share of the overall workstation market, both desktop and notebook.

And the notebook is a new growth area for Quadro because just as we do, like to bring our work home with us, so do people who design things.

And so whether it's video editing, which a lot of people -- a lot of video artists like to do it on their laptops, or designing tennis shoes to cars -- the ability to bring their work wherever they go is a very important capability for them.

And so we see more and more people both having their workstation on their desk at work as well as being able to take it with them in their notebook.

And in the future, we are expecting the server to be a big part of our workstation business as well.

Quadro into servers, either in the form of -- with display, or Tesla into servers as a rendering, remote rendering capability, is a new growth opportunity for us.

More and more people would like to put their work in the cloud, and be able to share that work and collaborate with people all over the world.

And so we see those two drivers to continue to grow the Quadro market.

But the notebook is a very important segment for us, and we have a very large footprint there, and it's a market that I expect to continue to grow.

And if I could follow-up, you'd mentioned -- you say you don't preannounce your customers' products, but you also highlight a good roadmap for Fermi that's sampling.

Could we see products or Fermi broaden its architecture as early as E3?

Or is more of a Computex back-to-school type of timeframe?

Fermi for E3 -- well, Fermi is the name of the architecture and it goes into three different product lines.

The first one is GeForce and that one is in large volume production now.

We're ramping that very hard and we've got a lot of ramping to do.

We've been -- because we were late with Fermi, we were out of this marketplace for some six months to maybe eight months.

And so there's a very large pent-up demand for high-end product out there.

And so we need to grow that segment, go back into that segment as hard as we can.

The second is our Tesla.

Fermi is used for GPUs in the server.

They're used for computational processors -- for supercomputers, oil and gas, seismic analysis, to financial risk calculations.

And so that has also grown -- just had a record quarter and our expectation is we'll have yet another record quarter.

And then the third segment of Fermi is Quadro.

Quadro is our workstation graphics solution.

And it's used by people who create movies, make movies, as well as design cars.

So those three products will launch in the appropriate customers in the appropriate conferences.

Okay, thanks.

Congratulations.

Nice quarter.

There are no further questions at this time.

I will now turn the call over to Michael Hara.

Please go ahead.

Thanks, everyone, for joining us.

We look forward to talking to you about next quarter's results.