輝達 (NVDA) 2013 Q3 法說會逐字稿

Good afternoon.

My name is Andrica, and I will be your conference operator today.

At this time, I would like to welcome everyone to the NVIDIA third-quarter earnings conference call.

All lines have been placed on mute to prevent any back ground noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

I would now like to turn the call over to your host, Mr. Rob Csongor, Vice President of Investor Relations.

Sir, you may begin your conference.

Thank you.

Good afternoon, and welcome to NVIDIA's conference call on third quarter of fiscal 2013 results.

With me on the call today from NVIDIA are Jen-Hsun Huang, President and Chief Executive Officer; and Karen Burns, Interim 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'd 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 November 16, 2012, and the webcast will be available for replay until our conference call to discuss our financial results for our fourth quarter of fiscal 2013.

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

During the course of this 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 quarter ended July 29, 2012; 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, November 8, 2012, 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.

During this call, we will discuss non-GAAP financial measures.

You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our financial release, which is posted on our website.

With that, let's begin.

We are pleased to report that NVIDIA achieved record revenue and record gross margin in the third quarter, driven by strong demand for our energy efficient Kepler GPUs and Tegra 3, the world's only 4-plus-1 mobile quad core processor.

Our strategies to reinvent our Company are driving growth.

They are -- first, create the most energy efficient processors; second, invent mobile and cloud computing technologies that will grow us beyond the PC; and third, create solutions for special-purpose PC markets, where we can make a significant contribution such as gaming, design, media and entertainment, and GPU-accelerated computing.

This quarter, we not only grew our PC business, we also significantly increased our business beyond the PC in tablets, quad-core phones, data centers, and automobiles.

NVIDIA processors rolled out in Q3 in a range of new devices and settings, from Google's Nexus 7 tablet and Microsoft's Surface, to Oak Ridge National Laboratory's new supercomputer and Tesla's latest electric sedan, which was just named car of the year by Automobile Magazine.

Three years ago, non-PC revenues were 7% of total revenues.

This quarter they grew to a record 30%.

Our notebook GPU business recorded a second-consecutive record quarter.

In the premium segment, we increased market share with Kepler as part of the Ivy Bridge design cycle.

Consumers are also now starting to realize that a great tablet is better than a cheap PC.

Because of Tegra, Android, and Windows RT, the entry-level PC market is now a new opportunity for us.

Our desktop GPU business increased again this quarter.

With improved supply now available, we delivered Kepler into the volume PC gaming market.

With a majority of gamers using graphics cards that are below the recommended specifications of the wave of new games coming out, Kepler is a great upgrade for the millions of PC gamers around the world looking to play Assassin's Creed 3, Far Cry 3, or Call of Duty Black Ops 2 this Christmas holiday.

Our Professional Solutions Business was up, driven by a record quarter for Tesla.

In Q3, we shipped more than 18,000 NVIDIA Tesla K20 GPU accelerators to Oak Ridge National Laboratories for their new Titan supercomputer.

With 50 million CUDA cores working together, these new Kepler-based GPUs deliver 90% of Titan's 20 petaflops of peak processing performance, making Titan the fastest open-science supercomputer in the world.

While the Quadro business was roughly flat quarter to quarter, it was down from last year, consistent with softness in the global workstation market.

Our strategies to grow better than the market include new Kepler Quadro products to refresh Romley-based workstations in the latter part of the year, as well as new capabilities like Maximus, enabling both modeling and simulation in one workstation.

In addition, this quarter we also announced the industry's first cloud-based GPU that delivers workstation graphics capabilities to any screen.

Built on the Kepler architecture, the cloud-based NVIDIA VGX K2 GPU will allow engineers and design professionals to work anywhere, on virtually any device, and still have access to the computing and graphics performance of a GPU-powered workstation.

Tegra had another record quarter, driven primarily by the emergence of Tegra 3 as the applications processor of choice for many of the world's most popular tablets.

According to Strategy Analytics data, market share for Android tablets grew in Q3 to 41% from Q2's 29%.

Tegra 3 is now powering a number of Android tablets, including the highly successful $199 Google Nexus 7. It also began powering Windows PCs with the launch of Windows RT devices.

These include Microsoft's revolutionary Surface, Lenovo's IdeaPad Yoga 11, and the Asus Vivo Tab.

Additionally, new Tegra 3 smartphones were released in important markets.

Of note, AT&T announced that they will be launching the new HTC One X plus, the first Tegra 3 LTE phone to ship in the US market.

And, ZTE announced the U950 quad-core smartphone, which delivers Tegra 3 to a new price segment for the China smartphone market.

This segment is about 30 million to 40 million units large.

NVIDIA's automotive business also delivered a record quarter and continued its steady growth, as a growing number of leading auto brands choose Tegra to drive their infotainment and navigation systems.

With that, let me hand the call over to Karen.

Thanks, Rob.

We had record revenue this quarter of $1.2 billion, up 15.3% quarter over quarter and 12.9% year over year.

As in the second quarter, revenue was driven by strong demand for our Kepler GPUs in desktop and record performances by our notebook and Tegra products.

We also achieved record gross margin on both a GAAP and non-GAAP basis.

Our GAAP gross margin was 52.9%, up 1.1 percentage points sequentially, and up 0.7 points year over year.

Our non-GAAP gross margin was 53.1%, up 1.1 points sequentially, and up 0.6 points from one year earlier.

These record margins reflect the continued transition to Kepler GPUs from our previous Fermi generation and a mix more weighted to high-end segments.

GAAP OpEx was $384.4 million and non-GAAP was $344.8 million, both better than our outlook.

GAAP OpEx was down quarter over quarter due to the absence of a nonrecurring charge of $20.1 million in Q2, related to our announced charitable contribution.

Non-GAAP OpEx, which excluded this charge, was up slightly from the prior quarter, driven by planned strategic hiring and higher engineering-related costs, offset by lower compensation costs, including FICA, and reductions in discretionary expenses.

These results contributed to GAAP net income of $209.1 million, a 75.6% increase over the prior quarter, and 17.3% year over year.

That's equivalent to $0.33 per diluted share, which was up 73.7% sequentially, and 13.8% year over year.

Non-GAAP net income was $245.5 million, up 44% sequentially, and 13.1% year over year.

That's $0.39 per diluted share, which was a 44.4% increase sequentially, and 11.4% year over year.

Revenue results by business segment were as follows.

Our GPU business was up 10.7% sequentially and 14.7% year over year.

This was due to the continued launch of our new Kepler desktop products and our OEM partners launching new Ivy Bridge platforms for notebooks.

Our Professional Business was up 12.4% sequentially, due the first shipments of our new Kepler-based Tesla products, supporting the new Titan supercomputer.

Year over year, our Professional Business was down 4.2%.

The strength in Tesla, year over year, was partially offset by the weak economic conditions impacting demand for our Quadro products.

Our Consumer Business was up 35.7% sequentially and 27.6% year over year on the strength of our Tegra business.

Inventory in our desktop channel business remained stable at levels we believe are healthy.

DSO was 34 days, down 5 days from the prior quarter.

Accounts receivable and DSO decreased in the current quarter despite the increase in revenue, as a result of shipment linearity and strong collections.

DSI was 69 days, down 1 day from the prior quarter.

We increased inventories by $41.8 million from the prior quarter, largely for production builds of our Kepler GPU products in support of expected demand, offset by declines in our Fermi-based GPUs.

Our GAAP outlook for the fourth quarter is as follows -- revenue of $1.025 billion to $1.175 billion; gross margin of 52.9%, flat from the third quarter; OpEx of approximately $400 million; and a tax rate of 20%, plus or minus 1 percentage point.

For non-GAAP, we expect the following differences from our GAAP outlook -- gross margin of 53.1%, flat from Q3; and OpEx of approximately $359 million, which excludes stock-based compensation and certain other charges related to acquisitions in the aggregate of approximately $41 million.

We expect our tax rate to be approximately 19%, plus or minus 1 percentage point.

Depreciation and amortization are expected to be in the range of $58 million to $60 million and capital expenditures of $60 million to $70 million.

Diluted shares are expected to be approximately 629 million.

Lastly, we are very pleased to announce that our Board of Directors has approved the initiation of a quarterly cash dividend and has also approved the extension of our existing share repurchase program to December 31, 2014.

The quarterly dividend, of $0.075 per share, is equivalent to $0.30 per share on an annual basis and approximate an annual yield of about 2.4%, based on yesterday's closing stock price of $12.61.

We have increased our cash by $305.2 million this fiscal year, with cash, cash equivalents, and marketable securities, at the end of the current quarter, of $3.43 billion, compared to $3.13 billion at Q4 fiscal 2012.

We are committed to return cash to our shareholders and made this decision based on our strong cash position and the high confidence we have in our Business to continue generating future cash.

Thanks, Rob.

That concludes our prepared remarks.

We will now take questions.

Alex Ghana, JMP Securities.

I was wondering if you could speak to underlying fundamentals right now in the PC business.

I know that you're taking share, but to the extent that you can address how you see seasonality extending into Q1?

And, I was wondering if you could also speak to that same effect in your enterprise business?

Thank you.

Well, the -- you're right that we're gaining share.

Our fundamentals are better than ever.

Our GPU position is better than ever.

Whether it's GeForce or Quadro for workstations or Tesla for high-performance computing, we're increasing share.

Our position is better than ever.

But, the end market is uncertain.

The PC end market is uncertain, as you've seen in other businesses, so we're going to take a rather cautious approach to our outlook.

Wondering if maybe you can address with your modestly down sequential outlook, where do you think you're baking in the most conservatism, and where could be the greatest opportunity for upside surprise?

Well, if you look at year over year -- look at this quarter year over year, the business that had -- that underperformed all the other business was our Quadro business, and that's related to enterprise weakness, but it's also associated with the fact that Romley, the server platform, was delayed by some time for workstations.

It's in the process of ramping now, and we think that held back some purchases of new workstations as people waited for this new platform.

It's surely a lot better than the previous generation.

Hopefully, as Romley gets out into the marketplace with the new Kepler GPUs, we're going to see the workstation market recover.

But the end markets, whether it's notebooks or desktop, our expectation and our outlook is that it's softer than we had originally predicted.

Thanks.

Congratulations on the strong result.

Yes, thanks a lot, Alex.

Romit Shah, Nomura.

Jen-Hsun, just curious from your perspective, what's contributing to the uncertainty in the PC market?

We're not seeing anything unusual than anybody else.

The end markets are softer than this time last year.

If I -- I guess I'm surprised that you asked at all.

I think the overall market seems to indicate that the holiday season for PC sales is a little softer than expected.

And, it's global, it's not particularly related to one particular geography, but China's softer.

Europe is softer.

The US is -- seems okay.

But, the vast majority of the end markets appear to be uncertain.

The reason I ask the question is, from Intel's perspective, they've highlighted the macro, as well as the fact that some of these other devices like tablets are eating into the PC TAM, but curious from your perspective, if you see one issue being a bigger issue -- a bigger problem than the other?

Our view of the PC TAM is that it is being eaten by tablets, and the reason for that is because a great tablet is surely better than a cheap PC.

These days, the tablets are so versatile, and many of them are transformable and have hybrid tablet as well as notebook-usage models.

And, now with the Surface -- Microsoft Surface and Win RT, the distinction between a PC -- a cheap PC and a great tablet is all but disappeared.

In fact, we see -- our tablet business grew 100% year over year, so I think that the PC market, especially the cheap PC market -- but, we don't really play in the cheap PC market.

The low-end part of the PC market is all integrated, so our opportunity is to replace and go into that marketplace with the Tegra processors in the tablets that we serve.

So for us, the vast majority of uncertainty is just end-market PC.

As a follow-up, I was hoping you could give us a sense of how aggressive you plan to be with the buyback over the next two years.

We haven't decided.

I assume that you are pleased with the dividend, and we are surely pleased by that.

Our Board of Directors has extended our stock buyback plan to 2014, as Karen had said, so we will evaluate it from time to time, and we will be in the market.

Okay, thanks.

David Wong, Wells Fargo.

First, a quick administrative one.

You're guiding for GAAP operating expenses to rise sequentially in the January quarter, even though your revenues are coming down, so is there a big jump in R&D?

And, where does that come from?

Our big jump in R&D comes from, really two places.

One, we're in the process of going to market with our next-generation mobile processor, and that's -- we're really excited about that next-generation processor, and we're ramping very hard.

The second part is our 4G LTE modem.

In order for us to really gain a larger footprint in smartphones, we have to integrate 4G LTE modem into our application processor.

This is a brand-new market for us.

Although we are already shipping some quantities of discrete LTE modems, the vast majority of the marketplace is really integrated.

We have a next-generation application processor integrated with a next-generation LTE, and this quarter we hope to tape out and race it to market.

So, our OpEx is increased so we can invest in that initiative.

It's obviously a very, very large market opportunity for us, so we're quite bullish about it.

Okay, great.

And, actually related to that, can you give us some feel for what proportion of Tegra sales are tablets rather than smartphones?

And, do you expect Tegra for Windows RT tablets to be up or down in the January quarter?

We expect -- I'll go backwards.

We expect the tablet sales to be down in the January quarter because most of the tablets go into -- we ship most of the tablet processors into manufacturing for our OEMs for their holiday build.

Overall, our tablets are up 100% year over year.

Our Tegra processors, overall, is up about 50% year over year.

So, that gives you a sense that the vast majority of the Tegra growth has come from tablets, and super phones has been relatively stable.

One of the reasons why we are so interested in integrating our application processor with a 4G modem so that we can expand the reach of our application processors into more of the smartphone marketplace.

This is really a great opportunity for us because if you think about the number of companies in the world that can combine a world-class CPU, a world-class GPU, a 4G modem, and has the expertise in the complicated software stacks necessary to partner with all of the companies on the various computing devices, there aren't really that many companies.

This is a great opportunity for us, so we're investing aggressively to get 4G into our product line.

Excellent, thank you.

Harlan Sur, JPMorgan.

Maybe to start off, can you give us more color, directionally, what your three segments are going to be trending in the fourth quarter?

Let's see, I think -- we're expecting our overall business to be down, and there are really two drivers of that.

We're being cautious about the PC end markets, the entire -- we're seeing relatively similar behavior across each one of the regions.

Although our position is better than ever in GPUs and in our workstation business, the PSB business, as well as our consumer business, where the Tegra business is, we are expecting some amount of end-market softness.

The second thing, I explained to David that the tablet will be down, even though the devices that we're in are incredibly successful.

The Nexus 7 is selling super well, and the Surface and the Win RT devices are really exciting.

However, the vast majority of the builds for the holidays have to happen before the holidays.

So, we shipped more proportionately to them in Q3 than in Q4.

But overall, year over year, the tablet has doubled, and the overall Tegra business has increased 50%.

So, I think that -- we will see how the market, the end markets do, and nobody's going to know until it's done.

But if it does well, we are really well positioned to take advantage of it.

Great, thanks.

On the desktop GPU side, it looks like you had solid growth there in the third quarter.

I know that a big percentage of this business is tied to gaming.

In the US, we've seen several new, and much anticipated, game releases.

I could clearly see that as a big demand driver for the team.

The team has often talked about the gaming environment in Asia as being an even bigger driver for your GeForce products.

So, maybe you can spend a little bit of time highlighting, what are some of the trends in Asia that are responsible for -- or, what were responsible for the solid demand trends for your Kepler-based products in the second half of this year?

Yes, in fact, our GeForce business has been growing steadily and remains robust.

The driver for that, of course, is PC gaming.

The gaming marketplace is very, very large, and each one of the regions has a slightly different dynamic.

Here in the west, we're going to see a couple of really huge titles coming out.

Call of Duty's coming out this holiday season, Far Cry's coming out, and Assassin's Creed is coming out.

The anticipation is really great for those.

In China, the dynamics are rather different, completely.

On the one hand, there are no game consoles really in China, so the PC is the game console of China.

The second dynamic is their discovery of free to play, massive online, multi-player online games that are free to play, and that people can enjoy, with easy access, and play -- and pay as they go.

All they need to have is a great GeForce card, and they can enjoy just about all the games they can play.

I think the global PC gaming marketplace is quite vibrant.

And, we will take a cautious look as we -- cautious posture going into Q4, as we're uncertain about the end markets.

But, if the end markets prove to be healthy and prove to be good, we're pretty well positioned to take advantage of it.

Great, thanks, Jen-Hsun.

Hans Mosesmann, Raymond James.

This is Brian Peterson in for Hans.

Could you talk about 28-nanometer supply and if that was a limitation at all this quarter?

And, what impact that may have on your January quarter outlook?

Well, the 28-nanometer yield and 28-nanometer supply situation have both improved substantially, so we feel pretty good about the balance of supply and demand at the moment.

Brian, you still there?

Mike McConnell, Pacific Crest.

Looking at -- just backing into the number for Tegra for fiscal Q3, I come to about $165 million, is that the ballpark for Q3?

Roughly.

Okay.

Then, looking at the $30 million, call it, order backing into that, that you got from Oak Ridge, is that a one-time item, or is that expected to continue into F Q4?

One-time order, I should say.

Supercomputers are built one at a time, but there are other supercomputers that are going to be built around the world, if that's what -- Kepler is just ramping for supercomputing -- for high-performance computing.

Oak Ridge and the Titan was the first supercomputer we built into, and we've been planning on this for over one year.

That was a very significant challenge for us, and it says something that the world's largest supercomputer would have chosen the Kepler GPU to power 90% of its computation, and we're hoping that Titan is going to deliver some amazing breakthroughs in science.

This is the largest open-science supercomputer in the world.

This is the fastest open-science supercomputer in the world.

And, it also -- it was also the first supercomputer that we delivered Kepler to.

At this point, we have supercomputers all over the world that we need to go build out.

The run rate for Kepler is about 2x the run rate of Fermi, one year ago.

So, this is -- it really shows that people understand now that GPU-accelerated supercomputing, or GPU-accelerated high-performance computing, is really the most energy efficient, and also dollar efficient, way of computation.

I think we're starting to see that we're about reaching the tipping point of accelerated computing here, and we're really excited about it.

It's been quite a journey and quite an investment.

Now, CUDA is impacting every aspect of our business; in Tesla, you could see the progress there that we just talked about.

CUDA is also making it possible for workstations and design applications to design and simulate at the same time.

CUDA is also making it possible for our PC gaming GeForce to be able to use simulation for special effects, and to materials, and dynamics in the virtual world.

So, CUDA has proven to be a real lift for our entire GPU business, and I would go so far as to say that because of CUDA, we have kept the GPU continuing to grow into more and more applications, and as a result, continue to grow the business.

Just one clarification --

Sorry, go ahead.

On your first question, just a clarification, as we disclosed in the CFO commentary, the CPB increase quarter over quarter, that's almost entirely Tegra.

So, I think your number was understated.

Okay.

Jen-Hsun, one longer-term question on Tegra.

A few of us attended ARM's Tech Conference last week, and there was a session with Samsung.

And, they were pretty straightforward that with Exynos, they are going to be looking at more of a merchant strategy, going forward.

And, they also expressed some pretty strong interest in Windows RT.

As you look at the competitive landscape next year for Tegra, just the resources that Samsung has, their own fabrication facilities, does that alter your view of the competitive landscape at all, when you think about Samsung potentially getting involved in this business segment?

Samsung is surely a formidable company, and to most customers, Samsung is just down right scary.

You've heard Asia's posture about Samsung.

So, I think that our focus (inaudible) we have to continue to stay ahead of them, technologically, and we have the capability to do so.

We're one of the few companies in the world that has the ability to do so in the area of computing.

Number two, we are a neutral and a friendly partner for all of the companies that Samsung competes against.

And, in most of these devices that you're talking about -- it's not like selling a DRAM.

It's about -- it's like collaborating to build computers, and so it's engineers working hand in hand with other engineers.

If there's concern about trade secrets, if there's concerns about confidentiality, we are one that they have no concerns about.

We're not going to win everywhere, but as you know, Tegra is a small business.

This is -- we still have an opportunity to grow well over 50% each year.

Surely, as we look into next year, between our next-generation processor, the new segments that we're in, and the fact that we're going to introduce our own 4G-integrated modem processors, I think our growth opportunity is still pretty exciting.

Great, thank you.

Daniel Amir, Lazard Capital Markets.

Couple questions here.

First of all, just from a housekeeping perspective, on the tax rate here, how should we be looking at the tax rate into next year?

And then I have one follow-up.

The tax rate is as we disclosed, as far as our best outlook.

Next year, who knows?

We just got the elections done, and we'll see what Congress does, and what our new President will be able to drive.

Okay.

Then, to follow up a bit to the previous question, where do we stand in Project Denver?

What's the latest there?

What's your thought a bit about how the ARM market will develop, and NVIDIA's position there?

Project Denver is a 64-bit processor, and it is a full-custom v8 64-bit processor with some exciting secret sauce, and we haven't revealed much about it.

There are no 64-bit processors shipping today, as you know, and V8 was just announced.

The next 64-bit was just announced.

So, I guess the only thing I can tell you, it's -- Denver's going great.

Okay, great.

Thanks.

Amrish Srivastava, BMO.

Thank you, Jen-Hsun, that was a good response.

At least you gave your perspective to Mike's question, but I wanted to follow up on that a little bit.

The analogy between the tablet market and the PC market -- and correct me if I'm wrong, in the PC market you had refreshes between you and AMD.

And, you would -- on the back of your architecture, you would win a socket, lose a socket, and that could last 1.5 years.

But, as I look at the tablet market -- so you got the market design win, Google 7, Nexus 7, and then the pen goes back to Samsung.

Is there anything different here that you can drive that can lead to more sustainability of design wins?

And, not just at Google, just kind of broadly.

Again, I wanted to just put that out there that you guys have done a good job, not sitting idly and targeting -- going after the mobile space and expanding your TAM.

Then, my quick follow-up, Jen-Hsun, if I may -- the low-end TAM you mentioned, how big is that TAM for you on the low-end PC side, that you did not address before?

Thank you.

I can tell you what our focus is.

Our focus is to build the world's best mobile computers.

And to do that, you need to have a great SOC, you need to have a great GPU, and you need to have extraordinary software capability.

There are multiple platforms --there's Android, there's Android phones, there's Win RT, there's Linux, there's Chrome, there's Windows 8 phone.

There's quite a few platforms.

We have the capacity as a Company, both technologically as well as resources, to be able to partner with many of these companies, these ecosystem owners, to build these great computers.

And you're right, we're not going to win them all; but as you can see, we win our fair share, and we're winning more and more every day.

We won about 100% more this year than we did last year, and my hope is that we will win even more next year.

Every time we expand the reach of our Company into new platforms, and this year it was Win RT, it really expanded the reach of our Company and expanded our growth.

So, we're just going to keep -- stay focused on that.

One of the attributes of our Company is technology leadership.

You can trust us, to partner deeply with us, to build these complicated devices, and I think that's a real virtue.

With respect to the size of the PC TAM, you're alluding to, and what I also believe, and now what the world is seeing, that a great tablet is every bit better than a cheap PC.

And, that is the reason why tablets are gaining the favoritism of consumers all over the world.

It's easier to use.

It's more delightful to use, and it's more useful.

The cheap-PC market represents probably [100 million] to 200 million units a year.

The vast majority of the world's PCs are affordable PCs, as you know, they're cheap PCs.

That segment is now wide open as these mobile processors that become more and more capable, and you know that disruption comes from the bottom.

The disruption comes from the bottom because the volumes are so high.

In just two years' time, this year we'll probably ship around 30 million Tegra processors, and that just happened in this -- in the blink of an eye.

And that's -- and yet, there's enormous markets ahead of it.

Once an instruction-set architecture, like the ARM CPU, reaches critical mass and the developers all focus on it, it becomes more and more valuable.

And, it becomes more useful.

And, as more companies drive and compete in this ecosystem, in this marketplace, we make the SOCs better and better; and before you know it, it disrupts the market above.

The market above is -- directly above the tablet is the cheap-PC market.

So, that's a big opportunity for us, especially now with Win RT, so I'm super excited about it.

Thank you.

Craig Ellis, Caris & Company.

This is Brett Piira, here, for Craig.

Obviously within Tegra, you are doing well in tablets.

Can you talk a little bit about the smartphone mix you have in there, and design wins that you have, compared to -- I think you've referenced 30 before?

This year for super phones, we did about as well this year as we did last year.

Last year, we had Motorola, we had LG, we had some others.

This year, we had the benefit of working with HTC; Fujitsu, the number one in Japan; ZTE.

With Wayne, our next-generation processor, we will have even more.

Each year, we are able to gain the trust and develop the reputation to work with more and more smartphone companies, so we're going to continue to expand in that segment.

For us to really grow in the smartphone marketplace, as you know, we need to really integrate a modem.

And, that's one of the reasons why -- well, that's the reason why we bought this really great company called Icera.

We have 4G LTE, now certified at AT&T, data side, and we are in the process of working on voice.

One of the reasons why our OpEx is high -- increased for next quarter, is our increased investment in our integrated-application processor in 4G from product.

If we can get that to market soon, which we hope, we'll be able to expand our smartphone opportunity quite dramatically.

And, now that we have the software stack developed with each one of the phone companies, the opportunity could be quite significant for us.

Okay, thanks.

Then on the GPU side, could you talk about the trends you're seeing within -- obviously, I think ASPs should probably be up within the GPU, but how much that was up compared to units the in the quarter?

Karen could tell you the exact numbers.

Overall, with the exception of Quadro, which was down year over year, it was down year over year not because we lost any share, not because ASP was down -- in fact, ASP was stable, gross margins was stable, our position in that marketplace is better than ever.

The workstation marketplace was just generally soft.

Two reasons that I mentioned earlier, I think the end market was soft and the delay of the Romley platform, workstation platform, caused some delayed buying in the marketplace.

But overall, the GPU marketplace was -- our GPU business was up about 15% year over year, and I think -- I would think that the ASP was up.

Yes.

Volume was fairly -- we had an increase in volume, but I think the bigger piece is we're selling more Kepler GPUs, and those are at higher ASPs than our older-generation Fermi.

So, as far as the mix in GPU, it's much richer.

So yes, ASP, higher overall.

Okay, understandable.

Thanks, guys.

Dale Pfau, Cantor Fitzgerald.

Could you talk a little about the integration of the voice stack on your Icera baseband with your applications processor?

Other companies, historically, have struggled with this.

Could you tell us where you are, and if you're still on track to introduce your Grey to the market here in -- what, the first calendar quarter, I think originally is where you were going to do it?

Backwards, Grey is on track.

We have already shipped a voice stack on our Icera modem.

We shipped it with ZTE.

And, our focus now is really move -- and that's a 3G -- 3G data modem, 3G stack.

We are now moving all of our focus to 4G and LTE.

So, it is a very significant effort, and we have been endeavoring there for some time now.

And, we're quite enthusiastic about going to market with Grey.

Thank you.

Ross Seymore, Deutsche Bank Securities.

First of all, congrats on the solid results, and especially on instituting the dividend.

That's always a positive move.

In the Consumer Business, and more specifically in the Tegra business, Jen-Hsun, how do you think about balancing the profitability versus the growth as you go forward in that?

We've been investing in Tegra, now, for a few years.

But mobile computing, as you know, is the future of computing.

There is no computing beyond mobile computing in the future.

Every computer will be mobile.

So, this isn't really a question about are we expecting to be more or less profitable in Q3 or Q4?

This is really about the future of the industry.

We, for all of the good fortune and good decisions, have found ourselves in a pretty great place in mobile computing.

And, I think that we have, now, an opportunity to integrate our 4G modem and expand deeper into the smartphone market, continue to execute our road map, and because of the enormous implications of Win RT, give us the opportunity to grow into the PC marketplace.

The future of cheap PCs is really tablets, great tablets.

There will likely be Win RT tablets.

They could be -- they may very well be Android tablets.

I could even imagine them being Chrome tablets.

These are -- and, these tablets have keyboards, of course, so they're sometimes touch tablets, sometimes they're a notebook.

But, I think we all recognize, now, that this is likely the future of the computer industry.

I think we find ourselves in a really exciting time.

Win RT just went to market.

I'm really excited about it.

We're seeing people using it all over.

And next year, I think we're going to see even more, so this is pretty exciting stuff.

I guess as my follow-up, just sticking with the Tegra side and some of the modem comments you made earlier, as far as either the voice side of LTE or the fully integrated side, is there any benchmarks, timing wise, that we can look forward to, as to when you expect those products to be available?

We're taping out products now.

We're taping out products, our integrated product now.

That's really the product that in about one year's timeframe will really matter to get us into a larger part of the smartphone market.

In the meantime, we're also ramping into the marketplace our next-generation application processor.

So, we're looking forward to a new generation of super phones that we'll be in.

And so -- but the real big opportunity is going to come with integrated 4G modem, a processor that we internally call Grey.

Great, thank you.

Raji Gil, Needham & Company.

Thanks, and congrats, as well.

A couple questions on Tegra, if I can.

You talked about developing an integrated baseband and app processor, to compete against Qualcomm I would presume, which is the dominant player there.

If you look at where Qualcomm's positioned in terms of its end customers, obviously they have Apple and are benefiting from that, how do you intend to take share away from Qualcomm in the market?

And, how do you look at the market in smartphone, which bifurcated between the high end, which is Samsung and Apple, and the low end, which is ZTE and Hauwei, how do you look at the smartphone market?

And, how do you position your products relative to the competition?

First of all, thank you very much, Raji.

First of all, we have already taken share from the mobile-processor companies.

The fact that Tegra is already a multi $100 million business, on its way to being much larger, is taking share from someone.

We are brand new to this marketplace, and we've only been in it for two years, so this is -- we're obviously -- we're clearly holding our own.

Our position is where computing is richest.

If computing and a general purpose computing platform matters, if performance matters, technology leadership matters, I think we can make a real contribution.

When you think about integrated modems, you're right that more companies are becoming vertically integrated.

That's going to affect all of us.

Samsung's desire probably, based on some questions earlier, is not to buy chips from other companies, any companies -- but, we don't have Samsung as a customer today, and nor do we have Apple, so we have nothing to lose.

But there are many other customers that I think are going to be pretty terrific to work with, and whether it's global tier ones, the global brands, whether it's LG or ZTE or HTC or Sony or Fujitsu, or -- there's a large list of global phone brands that we'd love to partner with and that we're partnering with.

There's also China.

The dynamics of China is very, very different than the dynamics of the rest of the world.

They have many different modem standards.

They have a very large number of phone companies.

And, we have the software engineering capacity to be able to partner with them and to help them build amazing phones.

So, I surely see what you see, that there are vertical integration and that's -- they will continue to do that.

However, there's a very large market of hundreds of millions of phones that we can go and make a contribution to.

Very good.

One last question.

As you look to fiscal year 2014 on the Tegra side, any thoughts in terms of what the mix could be between tablets and smartphones?

And along those lines, do you see ARM-based Tegra processors in the notebook market gaining some traction in fiscal year '14 or calendar '13?

Sure.

We have several segments for Tegra -- there's Tegra Android phones; there's Tegra Android tablets; there's Tegra Win RT PCs; and there's Tegra automotive.

The car is the most mobile computer of all.

And, people know that all the cars want to incorporate computers for all kinds of reasons, whether it is infotainment, navigation, or driver assistance.

This is an area where we can add an enormous amount of value.

And next year, I think you are going to find that -- we are going to find that auto is likely to be its first $100 million year.

Win RT is likely to be much larger next year than this year.

And, Tegra tablet will continue to be quite a rich business for us, and then there's the Tegra phones.

So, if you look at it from that perspective, tablets and automotive -- the Android tablet, Win RT tablet, and automotive will represent the largest proportion of the overall Tegra business.

Then, the year after that, I hope that, with our integrated modem, Tegra could be a much larger part of the business.

Great.

That was excellent, thank you.

Okay.

With respect to PCs, tablets are the modern PCs.

I think we have time for maybe one more question.

Craig Berger, FBR Capital.

I wanted to ask on the 28-nanometer Kepler GPUs -- the pricing has been great.

The gross margins seem to have been good.

Can you help us understand what are the factors that might impact gross margins for that product?

Which way you think they'll be going as, presumably, yields improve, as wafer costs decline, and I guess, ASPs decline, how do we think about GPU margins going forward?

Also, how much is Fermi versus Kepler?

Thank you.

Pricing is stable.

Pricing is stable because our position in the market, in the markets that we serve, is better than ever.

A lot of people see our GPU business as a components business selling into PCs, but -- that is part of it, we sell GPU components to notebook OEMs, and there, the margins are much tighter.

However, the other parts -- the vast majority of our GPUs profits come from, what Rob called earlier, the special-purpose PCs.

PCs that are built for PC gaming -- gamers built it for PC gaming, this is -- our GPU architecture, our GPU stack, the software that we dedicate to games, and the work that we do with game developers all over the world, makes the GeForce architecture the best in the world for PC gaming.

The work that we do with workstations, whether it's automotive, manufacturing, digital-content creation, digital broadcast, the augmented-reality imagery that you saw on CNN for the election, where the virtual sets look so real -- it's almost like the broadcaster or the commentator was inside a pretty amazing room -- all that stuff is done using NVIDIA's Quadro GPUs.

That's very software intensive, and the vast majority of the value we deliver is software.

Then of course, high-performance computing with Tesla; tools; compilers; libraries; the computational mathematicians we have all around the world to help people optimize their software; the solution architects that are out in the field working with large customers, like Oak Ridge National Labs, so that we can help them build their supercomputers.

These businesses -- the Tesla business, the Quadro business, the GeForce PC gaming business are incredibly software intensive.

And there, our margins are very good and the pricing is stable, and the reason for that is because we add a lot of value.

My expectation is, as we continue to solidify our position in the marketplace and we continue to add value to our customers, the pricing should be stable.

Jen-Hsun, did you say how much was Fermi versus Kepler in the quarter just ended?

I didn't, but -- go ahead.

We don't really disclose that.

The point I was making before is, like Jen-Hsun said, the price is stable depending on the segment you're in.

So, if you're in a high-end segment, you have a certain ASP.

Then, the only point about Fermi is, as we move through a new generation, the older generations go further down the stack.

So, they're lower ASP.

Okay.

Then, as a follow-up question, can I ask one on the baseband efforts, it sounds like you're getting close to taping out an integrated part.

I'm assuming that's 4G LTE.

Are there specific geographies you're going to be targeting first?

Obviously, the world's a big place.

They all require different software stacks.

What's your roll-out strategy there, as you go against much larger competitors?

Thank you.

We'll start with the US.

We're nearing sampling of a discrete 4G LTE modem, and then we're taping out an integrated 4G LTE modem -- integrated 4G application processor.

That's the reason why we're increasing our investment.

Thank you.

Okay, I think that's all we have time for today.

We look forward to talking to all of you next quarter about our Q4 results.

Thank you, everyone.

This does conclude today's conference call.

You may now disconnect.