輝達 (NVDA) 2011 Q4 法說會逐字稿

Good afternoon. My name is Phillip and I will be your conference operator today. At this time, I would like to welcome everyone to the NVIDIA earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)Thank you. Mr. Hara, you may begin your conference.

Thank you, Phillip. Good afternoon and welcome to NVIDIA's conference call for the fourth quarter of fiscal 2011. With me on the call today are -- from NVIDIA are Jen-Hsun Huang, President and Chief Executive Officer; and David White, Chief Financial Officer. After our prepared remarks we will open the call to a question-and-answer session. Please limit yourself to one initial question with one follow-up question.

Before we begin, I would like to remind you that today's call is being webcast live on NVIDIA's investor relations website and is also being recorded. A replay of the conference call will be available via telephone until February 23, 2011 and the webcast will be available for replay until our conference call to discuss our financial results for our first-quarter fiscal 2012. The content of today's conference call is NVIDIA's property and 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-Q for the fiscal period ended October 31, 2010, and the reports we may file from time to time on Form 8-K filed with the Securities and Exchange Commission. All our statements are made as of today, February 16, 2011, based on information available to us 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.

I would also like to remind everyone about our upcoming financial analyst day March 8 taking place at our headquarters in Santa Clara. If you are interested attending you can register on our investor relations website. With that let's begin.

Last month, NVIDIA and TSMC shipped our one billionth GeForce GPU. This milestone was less than 12 years in the making and over that period of time, the complexity of the GPU has increased more than 1,000 times. Having advanced from being a fixed-function graphics accelerator to one of the most powerful programmable computing devices in the world, the GPU is enabling enormous progress in computers ranging from smartphones and tablets to PCs to game and game consoles to workstations and super computers and in that time, the GPU has become the defining technology for every platform that uses it. Our new $1.5 billion cross-licensing agreement with Intel underscores the growing importance of the GPU to the future of personal computing, as well as to the expanding markets for mobile and cloud computing.

Heading into the year, we have one of the best line ups of GPUs in the Company's history. The GTX 580 remains in the top spot as the fastest DX11 GPU for enthusiast gamers. We extended our DX11 technology leadership with the launch OGTX 570 and the GTX 560 Ti, heralded by reviewers as category leaders for the $349 and $249 core game and price segments. Our GTX product stack is the gamers choice and the results show. For the second consecutive quarter our desktop standalone GPU share grew, increasing from 59% in Q3 to 61% in Q4, with higher share gains in the performance and enthusiast segments. And aside from our expectation to continue to gain share, there are several big events this year that can be catalysts for growth.

First, Intel Sandy Bridge is the best gamer GPU in a long time and with the SLI motherboards from Intel, ASUS, Gigabyte and others, along with the new GTX 560 Ti, it offers gamers a perfect opportunity to upgrade their PC. Second, great games drive GeForce GTX sales, and this year we expect to see a number of highly-anticipated games, such as Crysis 2, Battlefield 3, Duke Nukem Forever, Portal 3 and Diablo III. And third, 3D vision is all about enjoying games at a whole new level, driven by a great new 3D vision licensed product, such as Acer's new 27-inch 3D vision panel and Dell's XPS seven inch 3D Vision notebook, we expect the 3D vision to grow 200% this year. NVIDIA's 3D Vision content ecosystem is the largest in the industry, with support for over 500 video games, Blu-ray movies, and our new 3D web portal, 3Dvisionlive.com ,which offers a wealth of streaming video and photographs.

In notebooks we announced a number of -- a record number of design wins for the Intel Sandy Bridge platform, more than 200 new notebook models will feature our new GeForce 500M series GPUs . Adding GeForce is one of the best ways for OEMs to differentiate PCs with premium capabilities versus the basic platforms based on Intel's graphics. Unlike basic graphics integrated in the Sandy Bridge CPUs, GeForce GPUs provide advanced features and increased compatibility for the latest PC games, including those based on DX11.

Tesla achieved over $100 million in revenue in fiscal 2011. It's becoming conventional wisdom in technical computing that parallel processing delivers the highest performance, as well as most energy efficient and cost effective. The world's greenest petaflop supercomputers are built with Tesla GPUs. The green 500 list of the world's most energy-efficient supercomputers revealed that Subomi 2.0 from the Tokyo Institute of Technology was ranked number two and was the only petaflop system in the top ten. Three other Tesla-based systems made the top ten, along with systems in 11th, 12th and 13th spot. During the quarter, HP, Dell, and IBM all entered production with our Tesla powered servers. With the sales and market of the world's largest enterprise sales force engaged we look forward to accelerating the adoption of Tesla. Technical computing servers enterprised in the cloud represent a multi-billion dollar growth opportunity for Tesla.

CES was the coming-out party for our Tegra 2 customers. Motorola, LG, Acer, ASUS and Toshiba all announced their flagship smartphones and tablets to tremendous industry claim at CES. The Motorola Zoom with Android 3.0 won overall best-of-show and the Atrix won best-of-show in the smartphone category, and LG began shipments of Optimus in [Creta] in January. At CES, we also unveiled our long-term processor initiative, code named project Denver, to developed custom CPU cores based on the ARM architecture. This initiative is focused on an [embidious] CPU running the ARM instruction set, which is fully integrated on the same chip as NVIDIA GPU. It will target personal servers and supercomputers.

In addition to Audi, which we have enjoyed a deep partnership since 2004, we announced two new partnerships at CES with BMW North America and Tesla Motors that will put in video processors and navigation in vehicle information systems across all next generation BMW cars worldwide, and the Tesla Roadster model S respectively.And this week at the Mobile World Congress, Samsung joined our marquis list of customers announcing their Galaxy Tab 10.1 and their plans for a next-generation Tegra 2 superphone. LG also officially announced the new Optimus Pad, which is the G-Slate for T-Mobile.

Our highlight at MWC was a demonstration of Kal-El, the world's first mobile quad-core processor. Kal-El, our next generation SOC, which features a new 12-core integrated GPU, provides five times the performance of Tegra 2. We are beginning to sample Kal to strategic partners and based on our competition announcement this week we believe we're at least a year ahead of them. We are targeting to deliver Kal in tablets and smartphones later this year. Our strategy with Tegra is to utilize our deep expertise in IP and computing to create processors for the mobile computing revolution. We designed Tegra to be the most advanced processor for mobile applications and to target the tablet segment, which is expected to be approximately 208 million units by 2014, and the smartphone segment, which is growing at a compounded 19% annual growth rate to approximately 600 million units in five years as estimated by the Gartner Group. And now with Microsoft's announcement, Tegra be a direct -- Tegra can directly access the Windows PC market.

Heading into Q1, our primary focus is to continue to wrap both our GeForce on Sandy Bridge and Tegra 2 customers into production. More importantly, our results are beginning to tell the bigger story about NVIDIA's transformation. Even as we are extending our leadership in visual computing, our investments in Tegra, Tesla, and Project Denver put us at the center of the two most disruptive revolutions happening with mobile and cloud computing. We have never been more optimistic about our growth opportunities.

With that, let me turn the call over to

Thanks, Mike. Revenue for the fourth quarter was $886.4 million, up 5% sequentially. Gross margin of 48.1% was a record for the second consecutive quarter. It was at the high end of our range, primarily as a result of richer GPU product mix and we had -- than we had expected at the beginning of the quarter. GAAP OpEx was $247 million. This includes the Intel settlement of $57 million. Without it our R&D and SG&A costs would have been a combined $304 million, in line with our estimates. Combined these results generated a GAAP net income of $171.4 million, or $0.29 per diluted share.

Revenue by business segment was as follows. Our GPU business was up 5.5%. Our MCP revenue was down significantly as we entered into the final stage -- phase of that business, but this was more than offset by strong growth in desktop and notebook discrete. Our professional business was down slightly. Quadra was down, but this was almost completely offset by strong growth in Tesla, and our consumer business was up despite a seasonally down console business thanks to a strong Tegra customer ramps.

Turning to the balance sheet, our focus on inventory reduction continued to make progress, as we were able to reduce it by another 8.5% to $345.5 million. Channel inventory was at or below expectations. These results, together with receipt of our first payment from Intel, allowed us to report cash balances of approximately $2.5 billion. Our outlook for the first quarter of fiscal 2012 is as follows; revenue is expected to be up 6% to 8% from the fourth quarter, GAAP gross margin is expected to be 48.5% to 49.5%, GAAP operating expenses are expected to be approximately $327 million, GAAP tax rate is expected to be between 16% and 18%.

That includes our prepared remarks and with that we'll now take questions.

(Operator Instructions)Your first question is from the line of Uche Orji.

Thank you very much. Maybe let me just start off by asking you what's going on with desktop GPU ASPs. They were up significantly from the way we were looking at it. Is this a combination of seasonality or (inaudible) and is this (inaudible)?That's my first question.

Well, it's fairly mixed. We launched three new products at the top of our product line up, as Mike talked about in his comments, and those are all higher ASPs for the Company so they drove not only ASPs for us but they also drove margin for us.

Okay, all right. One other question I wanted to ask you, at Mobile World Congress it seemed like everyone is racing -- and this is for Mike -- and it's a race to launch quad-core. And first of all, congratulations on the success you've had with Tegra 2. But the question I have on quad-core is first of all, do you -- is there enough application now to take advantage of the level of power that you're bringing in as of the end of this year? And then secondly, do you need 28-nanometer to make this profitably? Can you talk about the economics of that, that's my second question. Thanks.

Hi, Uche, I'll let Jen-Hsun answer that question, how's that?

Sure.

Hi, Uche.

Hi, Jen.

Let's see, quad-core. It is the case that several of our competitors announced quad-core products that will be sampled next year and potentially go into production the year after. At Mobile World Congress, we demonstrated Kal-El and there were quite a few systems on hand for demonstrating all aspects of Kal-El, whether it was extreme high-definition video, has the ability to support very high-definition displays. The overall horsepower and computational capability of Kal-El is about five times the performance of Tegra 2 and has some really exciting new technologies for extremely low-powered operations, even though we have four CPUs inside our Kal-El processor. These are all of the breakthroughs that we demonstrated at Mobile World Congress. Whereas some of the competitors seem panicked to announce something on their PowerPoint slides, we tend to announce a product when we're actually sampling to customers. And in the case of Kal-El, we're now sampling to our strategic partners and our intention is to go to production this year.

With respect to the importance of quad-core, obviously, quad-core is incredibly important, otherwise it wouldn't be on all of the suppliers roadmaps. We were the first in the world to announce and ship dual-core. During that time a lot of people asked us about that and now it's quad-core. If you think about the tablet for mobile device applications, you'll realize that very quickly you're multi-tasking. You're multi-tasking whether you're streaming music or while you're reading a book or you're playing a game and you're being connected to other players in a multi-player environment, or you're doing physics processing while you're playing a game.

One of the most delightful parts of the games that people like these days, whether it's Angry Bird or others, is just the realistic physics that it does and the way that the bricks and the buildings fall apart are physically real. And you're going to see more and more of that type of capability over time. And so whether its multi-tasking, whether its image processing for very high-quality camera effects, browsing, multi-tasking, those type of applications are all very, very intensive uses -- users of multi-CPU cores.

And the last thing is it's actually logical and completely intuitive if you think about it, but four CPU cores working less hard consumes less energy than one CPU core or two CPU cores working their butt off and that's the reason why, if you look at the PC industry, what people have said about the PC hitting the brick wall and hitting the power wall, remember when CPUs were cranking at extreme-high frequencies, those are just bad ideas. Brute-forcing CPU design and over-clocking it and causing it to run extremely fast is just not a very good idea. It makes a lot more sense to run at the national frequency of the semiconductor process and utilize all kinds of parallelism ideas. In the case of CPUs, we have four cores in the case, in the GPU, we have 12 cores. Using parallel is the most efficient and also the highest performance approach to computing that we know.

Fantastic. In a sense of economics, will it be indicated by 28-nanometers?

Well, 28-nanometer's not available yet, so it's not an option this year. On the other hand, 40-nanometers is actually more economical than 28-nanometer this year and we'll likely expect it to be so until about first half, maybe even the mid point of next year. So the 40-nanometers absolutely is the right approach because it's most mature and we can go into very, very high production, very, very quickly because the yields are so great.

And your next question is from the line of Ambrish Srivastava.

Hi, this is Emily calling in for Ambriesh. Thank you for taking my call. For the Tegra business, can you comment on the mix of that between smartphones and tablets today, where you see that as we exit the year?

Well, it's hard to tell because it depends on how many smartphones and tablets our partners sell and so it's really, really hard to tell. One of the things that we all have to recognize is the market for tablets is much, much larger than we all expected, and every single time an analyst comes out with another projection for the size of the tablet market it gets bigger, and I think there's a couple of reasons for that. They're just wonderfully delightful to use. They're easy to carry around and you see more and more people now carrying around tablets instead of -- surely instead of -- I've never seen anybody carry a netbook around, but you've see more and more people carry tablets around than tablet -- than notebooks. And also, even if you have a PC, you don't mind buying a tablet to supplement it. If you already have a PC, it's not likely you buy another PC, but you surely would buy a tablet to supplement it.

So I think it's an easy purchase. It's easy to use, and it's delightful to use and so I think people are surprised by the size of the tablet market. My sense is that we're going to continue to be surprised by the size of the tablet market, certainly as more and more capabilities come out. One of the things that we're really excited about is that these tablets are now completely flash accelerated and so you can go to any website, you could any application off the web that you expect to. So those kind of new usage capabilities and the freedom to explore capabilities is something that we're quite excited about. And so it's just -- it's hard for us to tell right now. The thing that I can tell you is that our design wins are all Tier 1s. This is -- these are the marquee names of the mobile industry and the computing industry, and I have a great deal of faith in their ability to create exciting products and taking them to market. So we'll just have to wait and see how it turns out.

All right. And then within the GPU segment, can you comment on your expectation for ASPs on desktops and notebooks as the Sandy Bridge systems are rolled out?

Our ASPs, it depends on two factors. On the one hand, most of the notebook ASPs are going to be lower than a GTX 580 and 570 or 560 we just recently rolled out. On the other hand, the GTX 570 and 560 are still ramping and so it's hard to say exactly how it's going to play out. We're just going to have to report on the progress as we go. We're excited about the gamers market. The gamers market is -- has three catalysts this year. One, there's some really, really big titles for PC gaming coming out. Crysis 2 is just really, really exciting so I think the enthusiasts come out when there's a great new breakthrough games like Crysis 2.

The second thing is, its been a long time since the PC gamers had a basic platform upgrade opportunity. Sandy Bridge is the best CPU that's been built for PC gamers in a long, long time, and so we have SLI motherboards with Intel, we have SLI motherboards [ASUS tag], with Gigabyte, with many others so that gamers can upgrade their PCs with affordable, very low-power and very high-performance systems. And so we're -- when Sandy Bridge starts to ramp and the SLI motherboards start to ship here in the future, we're going to have to see how many people come up for the upgrade. And then lastly is 3D vision. When you can enjoy everything in 3D, it's just much more exciting and 3D vision basically doubles the resolution -- one for each eye, doubles the resolution that is needed to enjoy the game, and so that tends to drive higher ASPs. And so we're just going to have to wait and see before we can tell for sure.

Your next question is from the line of Harlan Sur.

Hi, thank you for taking my question and nice job on the quarterly execution. Within your guidance for the first quarter, can you just give us a sense directionally about the quarter-on-quarter revenue trends for your three different segments?

Well, Harlan, this is David.

Hi, David.

On the desktop side, typically we see some seasonality in there in the first quarter. That will probably be modest for the business. Our notebook business is going to grow very nicely in Q1, primarily as a result of the Sandy Bridge platforms that we'll be shipping in the quarter, and we expect, obviously, Tesla and Tegra to continue growing and helping drive our revenue growth going into the new fiscal year.

And then I think you said on your earnings release that you expect Quadro to grow again in the first quarter, as well?

Yes, that's correct.

Okay, great and then one more question, if I may. On Tegra, obviously the team has a rapid ramp ahead of them and I think the concern with anything associated with the mobile and retail spaces, how do you monitor sell-through to the end markets and to consumers and then to triangulate that with the orders that you're getting from your handset and your tablet customers. So maybe you can take us through how the team plans to keep a close eye on sell into your customers versus sell-through to the end markets? Thank you.

Well, I think the way I would look at that is, in our larger businesses like Quadro and GeForce, we put a lot of energy into monitoring sell-outs and sell-throughs and the reason is because we're such a large position in the marketplace. Tegra is a brand new product for us and we have almost zero exposure in the mobile industry, and this is really our first major push into it. And the devices that we're in are not fringe or exotic devices. They aren't transformer-type devices or new 3D displays where people aren't sure yet whether those adoptions are going to be high or not. These are straight down the middle, high-end, and where the demand is the greatest superphone devices right now. And as you see from the devices they're beautiful and they're the primary platforms for the marquee customers that we're working with. It is core to their business, these aren't fringe products.

And so I think that from that perspective, I have a relative amount of confidence then that our partners are going to do a great job marketing them and the enthusiasm in the marketplace is already really, really high and the reviews have been great, so my sense is we're going to do quite well. As we get to be a much larger player in the mobile space, we're going to have to develop those things tha -- those kind of systems that we use for the PC industry where we monitor sell-throughs and sell-outs, and so we're going to have to continue to do a better job with that. But at the moment, I think that we're going into I guess what people would consider blue ocean.

Your next question is from the line of Doug Freedman.

Great, thanks for taking my question. Last quarter you mentioned that you thought Tegra that could be above your chip set business. Would you care to comment on if that occurred or not?

It did not occur this quarter, it will occur next quarter.

Okay. Would it be possible for you to rank your product segments by gross margin so we can get a sense of where the gross margin benefits are really coming from?

So, Doug, our -- as we've talked about previously, our professional business, which includes both Quadro and Tesla, are our highest margin businesses for the Company and below that would be Tegra and our desktop notebook business below that.

Tegra, and then, I'm sorry the desktop business?

Our desktop and notebook business, which typ -- which are below our Company average.

Would desktop be above notebook?

Yes.

Okay. And then when we look at some of the OpEx numbers, it looks like this quarter you're planning on OpEx growth, it looks a little bit above the revenue guidance, especially if we were to strip out the $22 million royalty payment. Can you comment on what we should think about for OpEx, both in Q1 and throughout the balance of the year given the need to support all of the Tegra programs?

Well, we're -- as I -- as we included in the CFO commentary, a lot of what's driving -- they're really -- the two largest components that driving operating expense really are the fact that our stock price has gone up and that's driving stock-based compensation, and the other piece is hiring and engineering support materials and so forth for all of the products that we're launching. We will -- some of those investments we're making and are coming in Q1 proceed revenue that we hope to realize later on in the year as we see Tesla and Tegra and our other pieces of our business ramping. As it relates to $327 million, which I think is what we guided for Q1 and how that's going to behave going forward, we won't have, for example, payroll tax for the full year and so forth, so that'll naturally go down and some other expenses will offset that. But I wouldn't expect it to be appreciably higher going through the year when you net all those things out.

And I think it's inappropriate to not include royalties as a part of our ongoing business. There's several businesses in our Company where royalties is the natural way for us to engage our customers and it does require innovation and engineering and invention for us to benefit from those royalties. So I think the two go hand in hand and I wouldn't split it out. I would expect it to be an ongoing part of our business going forward.

Your next question is from the line of Raj Seth.

Hi, thanks for taking the question. Jen-Hsun, a question on Tegra. You talked before about chip IT companies having to become much more systems aware. I'm curious, when you engage with key partners like HP, can you talk a little bit about how much system-level software integration you're doing, how much they're doing and does your engagement model differ from your competitors in any way? Thanks.

Well, we're actually not engaged with HP, so you chose one that we're not actually --

Oh, I'm sorry, yes, yes. Forgive me, but any of your key partners?

The answer is, in the mobile space there's just a lot of system software to do and it is just doing -- developing multi-media and system software technology is one of the areas where we just have an enormous amount of expertise because of building sophisticated computers over the years. And if you look at the PC, the amount of system software we have to do for it is every bit now the same in the mobile industry, if not more, and that's one of the reasons why we believed that mobile computing was going to be such a great opportunity for us. That on the one hand, the modem will continue to be important, on the other hand, for certain classes of devices, where there is the superphones or tablets, its the computing capability is one of the most important things.

And in order to deliver on a great computing experience, the ability to create all of the system software from video to graphic to multi-tasking to all of the flash accelerations and just the enormous amount of open GL and whatever it is, and computer vision and imaging software and all of that kind of software working together in a -- in just a really wonderful experience is hard to pull together and this is something that we believe we have a great deal of expertise and a great deal of capacity to do. So we do quite a large amount of it and we know our architecture best.

This is an area that in terms of system software few companies in the world have a very large capacity to do. The three companies that probably have the largest capacity in the world of systems software is probably us, Intel and AMD, because of all of the computers we've built over the years and we have more people in systems software with this expertise than [you find] anywhere else in the world. So I think that this is something that is of great importance and it's becoming more and more important and a greater and greater bottleneck.

And if your read some of the early reviews of Tegra 2 phones, some of the comments that people are making are the stability and the performance of these phones right out the chute. Most of the phones that -- smartphones that you may have bought, with the exception of Apple's products frankly, you've had to debug into existence and we think that that's not inherent to a phone. It's just because it's inherent to building great computers, so I think this is an area of great differentiation for us.

Can I ask a follow up, if I might. So this is one of the differentiators, you've got a very aggressive roadmap that you showed on Tegra. As we move forward, what are the key differentiators other than what you just talked about, in the tablet market and handset market from your perspective and over time, given the integration trends, at least in the handset market, is the lack of baseband and connectivity a material constraint or not for you in your view? Thanks.

Computing is a very large space and although these mobile devices are starting to do more and more computing, the computing capability that we're looking at is still rather nascent. The benefit that we have is -- and we described this at Mobile World Congress, the benefit that we have is the rich and deep pipeline of intellectual property that we can bring to bear as mobile devices become more and more computing capable. We put -- we went from a Company that was working on basically 1.5 to 2 mobile chips to a Company that now has 5 chips on the roadmap, and we're concurrently working on projects that go all the way out to 20-nanometer and beyond. We don't have to wait for anyone to create the computing technology for us to license. We have all of the technology here for us to bring to bear and execute a really aggressive roadmap and that's how we're able to year in and year out crank out leading-edge products that the rest of the industry is just putting it and talking about it on paper.

With respect to modems, there are quite a few modem players in the world. You'd be surprised how many of them there are. Qualcomm's obviously a supplier, infiniMap's a supplier, ST, Ericsson's a supplier, there are many others, and our focus is on the segments in the marketplace where computing is really important, and we believe that there's a great deal of work that we can do here before we need to consider increasing levels of integration. And then lastly, both the computing side and modem side are going through very rapid innovation at the moment. On the one hand, computing is getting -- going from dual-core to quad-core and more and more GPU performance and better and better video capability and such. And on the other hand, modems are going from 2.5G to 3G to 4G and so all of these are moving parts. Integration is the enemy of innovation and so it's hard to move as fast when you have to integrate everything into one chip.

Your next question is from the line of Vejay Riakesh.

Yes, hi. I was just wondering, when you look at your Tegra, obviously it's ramping in a lot of markets (inaudible). What is the break out in Q4 and how do you see that in Q1 and Q2, if you can give us some more color on that?

In Q1 -- in Q4 we just barely started shipping the early production ramp to the first partners. In Q1 we will be in quite significant production across many of the OEMs, so it's going to be quite a big step up.

Right. And just to take a step back, you had guided Tegra, what is your guidance (inaudible) for Tegra for the year and have you -- are you seeing any change on the upside or downside as you've gone through the last couple of quarters and the year?

We have not guided Tegra for the year. Probably the new piece of information about Tegra that it is Kal-El going into production this year. I don't think anybody expected us to announce that. I don't think anybody expected us to have a roadmap that was this aggressive and was a surprise to all of our competitors and was even a surprise to many of our customers. And so all of our partners are in retooling mode right now on roadmaps so they can catch up to us on Kal-El. So I'm excited about the second half of the year as the tablet market continues to develop and as we go into Kal-El. So those are -- that's the new piece of information that I think very few people realize and consider.

Your next question is from the line of Tim Luke.

Thank you so much. I was wondering, as you look at the revenue momentum, having had a strong uptick into April as you start the Tegra ramp, do you feel that that rate of growth may be sustainable through into the July period, or is it to some extent that you had a big near-term lift associated with the initial supply into the channel? And I was wondering, gentlemen, if you could have any framework associated with the expectation of the timeline for you to talk about Tegra 3? Thank you so much.

First of all, we've barely shipped anything, so Tegra 2 has just barely gone into production. In terms of thinking about these things, the growth and the growth opportunities, really the only thing you can really keep in mind is the size of the opportunity and the partners that you have to address those opportunities. The size of the tablet opportunity's obviously larger than anybody expected and I think people are getting a firmer grip on why it is that the tablet is such a wonderful computing device.

Secondly, I think the partners that we are going to market with are undoubtedly the best in the world. If we had to choose the best Android partners in the world to go to market with, I think we couldn't have chosen a [better list]. So I think we're going to be able to address a very large market and address it with partners who could give us global reach. With respect to future Tegra, I'm not sure if there was an exact question but we haven't --

Tegra 3.

I haven't used the word Tegra 3 yet, but we demonstrated recently a processor called Kal-El. It's an internal code name for the next-generation processor. We haven't figured out -- we haven't decided yet what the market name is going to be. It is intended to be in production in Q3.

Thank you, and just David on OpEx, if I may. Having seen the guidance move up around the $25 million or -- in the April quarter, do you think that the rate of growth in OpEx through the next several quarters to support the customers is likely to be in a similar range, or do you think that the magnitude of sequential increases could be somewhat lower? Thank you so much.

Tim, I think the magnitude quarter over quarter after Q1 should be much lower. You've got two step functions that impacted Q1. One was the restart of payroll taxes, which is pretty binary, and then second one is just the recent run up in our stock has caused our stock-based compensation to go up [handily], as well. And so we'll have to wait and see what happens to the stock price, but certainly the FICA won't be going and getting reset again. And I think in terms of our controllable expenses, in terms of engineering, materials and rents and all those things, people costs and so forth, I wouldn't expect it to be rising as much as it did from Q4 to Q1.

Your next question is from the line of Patrick Wang.

Thanks for taking my question. David, you're going to get a nice lift in gross margins over the course of this year due to your royalty payments. I was hoping you could talk about gross margins over time and perhaps how to think about that as your royalty steps up in the July quarter and beyond?

Well, the royalty or license fee from Intel will contribute 2.5 to 3 points of gross margin starting in the second quarter. If you hold that out and you just look at our core business, gross margins there should also be increasing through the year, as well, particularly as Tesla and Tegra products ramp and I think even as our desktop business -- our high-end GTX 560, 570 and 580 products continue to gain momentum out in the marketplace. So certainly we see a path for our margins being well into the low 50s some time during the year.

Okay. If I just do a little bit of math there, it should almost be conceivable that you could exit the year at somewhere in the mid 50s, is that just unrealistic?

We'll just have to wait and see. We've got a lot -- second half of the year has got a lot of unknowns at this point, particularly in some of our new businesses, so we certainly like to think that we'll have a very nice back end of the year and it'll contribute to margin uplift. We'll just have to wait.

Your next question is from the line of Kevin Cassidy.

Hi, thanks for taking my question. Jen, you had mentioned staying with a 40-nanometer. I wonder, could you tell me more about what went into that decision process? Was it time-to-market or is it even your customers requests? Just wanted to understand that a little more.

Well first of all, 28-nanometer is not available this year, not until the very end of the year, and I think with us going -- for us to go -- for us to ship production out in Q3 we have to start wafers in early Q2, right, and so 28-nanometers just is not an option. Secondarily, 40-nanometers is now in the third year of its production and the yields are fabulous, and so that's a wonderful reason to do it. And so I think on the one hand, 28-nanometer isn't available, and on the other hand 40-nanometers is yielding fabulously, so I think it's just naturally the right answer.

But going forward, the way to think about it is the general rhythm that you'll see in the industry for companies that comes up with new processors every year, you should expect to see two processors in the same node or so. You've notice other companies that have used different ways of explaining the rhythm, and some use one process node change, one is an architecture change and the next one is a process node change, so basically, it's every other year for a new process node and I think that rhythm is not a bad rhythm. That's basically how quickly the industry is changing process. So it stands to reason that Tegra 2 and Tegra next, or Kal-El, would use the same process and the following ones will (inaudible).

Okay, great. Thank you.

Yes, thanks a lot.

Your next question is from the line of Shawn Webster.

Hi, great, thank you. A couple questions. On Tegra, is there a breakeven run rate that you need for you to be breaking even on an operating margin basis now?

The answer is it's hard to predict and the reason for that is this. More and more of our Company is involved in the Tegra roadmap, so as quickly as Tegra is growing, more of our Company's overall R&D is driving into the Tegra roadmap, and it's because it's great for mobile devices, smartphones, tablets, and because of Microsoft's announcement with Windows Next running on ARM, all of a sudden Tegra has the ability to address front and center dead-on the core notebook PC market. And I think that the opportunity to take future-generation Tegra processors directly into the notebook market is really exciting to me. And it's also a way for the PC industry to really be revolutionized, if you will, with industrial designs that are exquisite in battery life and usage models that are very, very different than today's notebook.

I think it's pretty clear at this point that in the future, Windows notebooks will make today's notebooks look a little bit like refrigerators and I think that we have the ability to completely revolutionize how people see notebook computers again, and I'm excited about that. And so how much of our engineering should really go into Tegra and related Denver plus Tesla, the answer is a lot, and so the breakeven point could eventually become all of NVIDIA.

Okay. And switching gears, I love the superman analogy for Kal-El, by the way, but on your core GPU and chip set business, what is the size of the chip set business for you today, just to get a sense of the trajectory where we're sitting now and as we evolve for the next couple quarters? And then also, can you share with us what your GPU units did sequentially for Q4?

So on the MCP business, Shawn, I think we've talked previously about that business roughly running its course for the most part through the first half of this fiscal year, fiscal 2012, and then in the second half of the year it should be a pretty minor piece of our business. We've not really broken it out beyond that other than to say, at least at this point, we know that Tegra will exceed it in Q1. And as far as units are concerned, our units were up in the fourth quarter, primarily on main -- the strength of our mainstream business. But more importantly, the revenue per unit, the ASPs someone asked earlier was driven primarily by our mix changes and we're happy to see that, it drives a lot of earnings potential for the Company and opportunity for the Company and we don't right now see that changing materially going forward.

Your next question is from the line of James Schneider.

Good afternoon, thanks for taking my question. Related to Tegra 2, in Q1 could you share with us what you think your ASPs are today in that product and where do you think that they'll be as we exit the year? Do you think they'll be down or maybe up given the mix of Kal-El?

Let me just give you some directional input. Our ASPs for tablets, because the package is larger and the bin tends to be a little higher, our tablet margins -- or ASPs are higher than that of smartphones. Smartphones are also designed into -- depending on which tier of the customers we engage with, extremely high volume engagements or moderate volume engagements, those ASPs tend to be lower than the tablets. And Kal-El, as the world's first quad-core, is -- we command a premium when the product comes out. So those are kind of the directional levels that we haven't broken them out much for (inaudible).

Okay. And maybe as a follow up, could you address your notebook GPU share as we head through this year? Clearly, you're gaining share on the Sandy Bridge platforms, do you think it steps up in Q1 and Q2 and then plateaus as we head throughout the back half of the year, or do you think that's more of a gradual continual ramp throughout the year?

Most of us depends on how quickly Intel is going to transition Sandy Bridge relative to -- Huron River, I think, was the last platform. If Intel gets aggressive with Sandy River of course our share on Sandy River is much, much higher than that of Huron River. As you'll recall, our market -- we lost market share on Huron River and with the first firming generation, but the GTX5 -- the GTX -- or the five family, the second generation firming has been a huge success for us. From desktop to notebook we have the best stack of GPUs in the world today, and so the more aggressively Intel transitions from Sandy River to Huron River the more quickly we'll gain share. So partly it depends on that.

Your next question is from the line of Arnab Chanda. Arnab, your line is open. Excuse me, Arnab, your line is open.

Take the next call, Operator.

Your next question is from the line of Glen Yeung.

Thanks. I think somebody quoted a Gartner number for tablets in 2014. When you think about a number that big, what do you think is a realistic target for NVIDIA's market share in that business?

Well, who knows, 2014 is a long time from now. I think the -- there's a couple things that we believe in. We believe that computers are going to become thinner and thinner and easier and easier to use and touch is going to become an increasing important part of computing. And so it stands to reason that tablets or notebooks that can become tablets or tablets that can become notebooks that these are going to become, if you will, part of computing. It will become the PC, and we consider it a tablet today but if you look at some of the way people are thinking about it, I think about it as just personal computers.

This is the new personal computer, and there are just different form factors. They're smaller versions of tablets, we call them smartphones or superphones. They're larger versions of tablets, we call them notebooks. They're even super-large versions of tablets, if you will, all in one PC. And so I think that you're going to find the industrial design of personal computers has become disruptive, if you will, as a result of mobile computing components being used and mobile computing processor being used. And so I think that the space of personal computers, tablets and smartphones are going to become a little bit fuzzy over time. Even the OEMs that provide them will become fuzzy over time and it stands to reason that at this point, I think we all believe it's a very large market.

Now to be successful within that large market, it's important that you have a very little power design. It's important that you have the ARM processor. The ARM ISA has now become the de facto standard of this segment of the market and its become very disruptive. It's the only ISA now that can support all of the major operating systems -- operating systems necessary for the mobile computing space from IOS to QNX to Android to now next-generation Windows so it's clear you need to have ARM. And then after that, you need to have expertise in building computers, whether -- an SOC is basically a computer on a chip and when you are a provider of a computer on a chip and there are this many operating systems to support, you better have deep, deep expertise and not to mention capacity of systems software expertise building sophisticated computers like this.

And so I think that at the very high level, it's really exactly how we think about our strategy. This is a very large market, it is disruptive, it's disrupting the computer industry as we see it and know it right now, and this is an area where we believe we can play, add a great deal -- make a great contribution and drive our growth. And so aside from that it's kind of hard to predict exactly whether Gartner's going to be right or not. My guess is, based on where the analyst predictions have been going lately, it seems like every month they've been raising their estimates and so we don't know where it stops.

And your final question is from the line of Craig Berger.

Hi, nice job and thanks for taking my question.

Thanks a lot, Craig.

On the GPU business, A, is there an impact in the April quarter from the Intel Sandy Bridge delay or meaning is there -- is production being held up? And then, B, where is your notebook market share now, where do you expect it to go and then as part of that, do you think Sandy Bridge is going to take any overall GPU share? Thanks.

Number one, we have not experienced a disruption so far and people are still running as hard as they can. They paused but I think Intel is doing quite a good job on helping everyone recover. With respect to share, I think our share is about 40% today. My guess is that, when it's all said and done our share should be more than 60%. And then with respect to a attach rate, the PC industry still has basically two tiers; the basic PC and the premium PC.

If every PC uses basic Intel integrated graphics then everything would be the same and everything would become a VCR. But obviously, no consumer would like that because they still believe that there's an opportunity to buy a better PC and one that has higher performance or higher resolution or just more interactivity or the fact that our GPU's far, far, far more compatible with games and all of the multi-media applications, so it depends on how you want -- what you use it for. If you're a person looking for a basic PC, then integrated graphics makes sense for you. If you're looking for a premium PC and buy something a little bit better with the money you have, adding a GPU to it is really a fabulous thing. So that basic dynamic hasn't really changed with the introduction of Sandy Bridge so I'm not expecting much GPU attach differences.

Thanks, one quick follow up. You said you did about $100 million of Tesla this year. Do you care to throw out a number we should dial into our models for 2011?

It's hard to say but we should grow very nicely this year. We'll give you more guidance as we get closer to it.

And no further questions at this time. Do you have any closing remarks?

Thank you, everyone. We look forward to talking about our Q1 results.

And that does conclude today's conference call. Thank you for participating. You may now disconnect.