輝達 (NVDA) 2015 Q2 法說會逐字稿

Good afternoon. My name is Colin and I will be your conference operator today. At this time, I would like to welcome everyone to the NVIDIA financial results conference call.

(Operator Instructions)

I would now turn the call over to Mr. Chris Evenden, Senior Director for Investor Relations with NVIDIA. Sir, you may begin your conference.

Thanks, Colin. Good afternoon, everyone, and welcome to NVIDIA's conference call for the second quarter of FY15. With me on the call today from NVIDIA are Jen-Hsun Huang, President and Chief Executive Officer; and Colette Kress, Executive Vice President and Chief Financial Officer. After our prepared remarks we'll open up the call to a question-and-answer session. Please limit yourself to one initial question with one follow-up.

Before we get 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 August 14, 2014. And the webcast will be available for replay until our conference call to discuss our financial results for the third quarter of FY15. The content of today's conference call is NVIDIA's property and can not be reproduced or transcribed without our prior written consent. Beginning in September, we will start to use our Company blog and Twitter to inform investors about our participation in upcoming investor and Industry conferences. The next conference for NVIDIA will be the Oppenheimer conference next week on August 12.

During the course of the call we may make forward look 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 April 27, 2014 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, August 7, 2014, 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 Mercury Research or Jon Peddie 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.

So let's begin. Our revenue was $1.1 billion, up 13% year on year and in line with our outlook. Gross margin was a record 56.1% and we delivered EPS up 38% year on year. The quarter's gross margins and overall profitability were better than we had anticipated, driven by strength in our PC gaming GPUs and in data center and cloud platforms.

PC gaming continued to deliver year-on-year growth in an expanding industry. GeForce sits at the center of the PC gaming ecosystem, now powering close to 100 million gaming PCs around the world. Our new entry-level GeForce GTX GPU delivers the performance of the latest generation consoles, making the GeForce gaming PC the largest target for developers of latest-generation games.

There's no better place to look for evidence of the strength of PC gaming than eSports. Last month's Dota 2 tournament in Seattle was televised on ESPN and carried total prize money of over $10 million. More than the British Open Golf championship. The number of players playing League of Legends rose to about 67 million per month and they accumulated over 1 billion hours of playtime. There's a strong pipeline of AAA games launching on PC this fall, including new versions of Assassin's Creed, Far Cry and Call of Duty.

In the workstation market, Adobe continued to push the use of GPUs with addition of acceleration to Adobe Illustrator CC. Illustrator has millions of users worldwide. They could get up to a 10X performance boost by adding Quadro, making the experience silky smooth.

Tesla had a record quarter and demonstrated continued momentum in big data analytics and machine learning with some high-volume purchases from consumer web companies for image and voice processing. Tesla sales for high-performance computing also grew and several OEMs announced they will ship Tesla-based servers combined with ARM 64 SoCs. ARM 64 server processors were initially targeted at micro web service. But GPUs expand their market opportunity by providing the muscle to tackle HPC workloads. NVIDIA Tesla GPUs now power the world's 15 most energy-efficient supercomputers, as listed in the Green500 list. Tesla also powers the fastest computer in the US, the fastest in Europe and the world's fastest enterprise supercomputer.

GRID sales continue to ramp in Q2. Also during the quarter we launched GRID Test Drive to help enterprise IT professionals experience the benefits that GRID can bring to their virtual desktop infrastructures. The service has attracted more than 10,000 users in its first eight weeks. Companies are realizing quantifiable benefits by adopting GRID to virtualize demanding PC and workstation applications.

GRID enable Turkish Aerospace to rapidly scale its design team. Roger Williams University is providing students across its vast campus to architecture and engineering applications 24 by 7. Daewoo Shipbuilding is doubling the number of engineers who can collaborate live on their cloud-based system.

Moving now to mobile computing, this quarter we saw some major developments. We launched the next member of the Shield family, the Shield Tablet. Powered Tegra K1, the Shield Tablet is the highest performance tablet on the market. From top to bottom, processor, tablet, software and peripherals, the Shield Tablet is designed to be the ultimate tablet for gamers.

To understand market for the Shield Tablet, consider that Newzoo, a research company, estimates there are 1.6 billion gamers in the world today. Many of them are looking to buy a tablet, an idea supported by the fact that 90% of Google Play revenue is generated by gaming. Press reaction has been great. Gizmodo described it as a gaming beast, but so much more. AnandTech said that it's incredibly important to get the controller right for gaming devices and NVIDIA has nailed it. SlashGear said that it's the new high-water mark for a well-rounded tablet, four star.

There are 400-plus games optimized today for touch and controller on Tegra and more and more are leveraging the power of Tegra K1. For example, the Shield Tablet comes with Frozenbyte's Trine 2, a hit game on PlayStation 4. Portal and Half-Life 2, both from Valve Software have been optimized for Tegra K1. Half-Life 2 is the highest-rated PC game in history, having won over 50 Game of the Year awards and multiple Game of the Decade awards.

An interesting new development is cross-platform multiplayer. War Thunder to be launched on the Shield this fall by Gaijin Entertainment, will offer massively multiplayer combat across Tegra, PC and PlayStation 4. As with GeForce on Windows, our strategy with Shield is to build best game platform on Android, now one of the largest gaming platforms in the world. The Shield Tablet is one more important element of our gaming strategy.

Google used its annual developer conference, Google I/O to announce the Android extension package for its next version of its operating system, Android L. It brings, in the Company's words, desktop-class gaming to Android. They leveraged Tegra K1 to demonstrate its capabilities, with epic state-of-the-art unreal engine 4. Tegra K1 also runs many other desktop-class engines, including Source, Unity, CryEngine and Intertech. Supporting these game engines makes it much easier for developers to bring games to Android on Tegra K1. Android TV was also launched at I/O and Google gave every attendee a development platform based on Tegra.

Finally, Google used I/O to launch Android also, and demonstrated it with a Tegra-powered infotainment system in an Audi S3. Our automotive business grew more than 70% year on year. Volkswagen and absolutely upcoming Passat will use Tegra to power its infotainment system, following on from the Golf, which is already shipping with Tegra.

The new TT, which features two Tegra chips, has started production in Europe and Audi has upgraded the A7's infotainment system to include Tegra, evidence of the faster cycles possible with the use of our visual computing module. Separately, BMW has started shipping the i3 and announced its i8, both powered by Tegra.

Xiaomi's MiPad, with the Tegra K1, started shipping in Q2, with the first 50,000 units selling out in four minutes. We expect the first Tegra K1 Chromebooks to start shipping this quarter and IDC expects the Chromebook market to triple over the next three years.

In conclusion, our investments in differentiated platforms are delivering success in gaming, HPC, professional visualization and design and in automotive markets. We've leveraged our visual computing IP to set the stage for accelerated growth. With that, I'll hand over to Colette.

Thanks, Chris. Hello, everyone. Let me provide some details on second quarter of FY15. Revenue of $1.1 billion grew 13% year over year. Growth was driven by Tegra processor sales, GeForce GPUs for gaming, Tesla and GRID for data center and cloud workload.

Revenue from GeForce GPUs for gaming desktops and notebooks grew 10%, fueled by continued strength in the gaming market, including the recent released GeForce GTX 750 and GTX 750 Ti, Maxwell based GPUs. Tesla and GRID for data center and high-performance computing increased significantly from VDI deployment and large project wins with cloud service providers, as well as high-end education and government customers.

Quadro revenue increased, with particularly strong growth in mobile workstations. Tegra processor sales grew 200% from a year ago, led by mobile devices and automobile infotainment systems. Revenue from Tegra processors for automobiles grew 74% year over year. All key platforms for growth, gaming, data center and cloud and mobile, showed strong growth this quarter. Our transformation into visual computing systems and solutions allows us to realize the continued success in consumer PC and mobile gaming, as well as realize the growth in cloud data centers, supercomputers, professional design and automobiles.

The GPU business declined 2% consequentially, as we executed well during the seasonal decline of consumer desktop GPUs. We believe we out-performed the market for consumer PCs, led by our overall performance and ecosystem supporting PC gaming. Quadro, Tesla and GRID all grew sequentially as well.

Moving to gross margin. GAAP gross margin was 56.1%, up 130 basis points sequentially. Non-GAAP gross margin was 56.4%, up 130 basis points sequentially. These margins were both records and better than our outlook. The increases reflected continued strength in our GPU margins for PC platforms, data center and cloud, and partially offset by the increased volume in Tegra processors. Compared to our outlook, the higher gross margin levels were driven by strong, absolute average selling prices for consumer GPUs and aided by our record quarter for Tesla and data center solutions.

GAAP operating expenses for the second quarter were $456 million, in line with our outlook and essentially flat from the prior quarter's $453 million. Non-GAAP operating expenses were $411 million, flat from the prior quarter. With continued management of our investments, through alignment to a single unified architecture, we've reduced a third consecutive quarter of flat operating expenses.

Operating expenses grew slightly year over year due to employee additions, employee compensation increases and related costs, partially offset by lower engineering development costs. GAAP operating income was $163 million, up 55% from the prior year's second quarter, reflecting strong revenue growth from higher-margin GPUs and contained operating expenses.

GAAP net income was $128 million, up 33% from a year earlier, driven by increased operating profit from strong revenue and margins. GAAP diluted earnings per share of $0.22 increased 38% from $0.16 per diluted share in the year-ago quarter, reflecting net income growth and share repurchases.

Now, turning to some key balance sheet items. During the second quarter, we paid $47 million in cash dividends and received 6.8 million shares under the $500 million structured repurchase agreement we entered into in the first quarter. During the first quarter, we had paid $47 million in cash dividends and received 20.6 million shares under the agreement. As a result, during the first half we have returned $594 million of the $1 billion we intend to return to shareholders in FY15.

Accounts receivable at the end of the quarter were $470 million, up $74 million from the prior quarter. The increase was primarily due to less linear second-quarter shipments compared to the first quarter.

DSO at the quarter-end was 39 days, up from 33 days in the prior quarter and flat from the second quarter of FY14. Inventory at the end of the quarter was $387 million, down $6 million from the prior quarter. The sequential decrease includes the ramping of Tegra processor products and products based on new GPU architectures, which were more than offset by decreases in products based on our previous-generation architectures. DSI at the quarter-end was 73 days, up from 72 days in the prior quarter.

Cash flow from operating activities was $96 million, down from $151 million in the prior quarter and flat from $96 million a year earlier. The sequential decrease was primarily due to higher levels of account receivables and lower payables than the prior quarter.

Compared to the year-ago quarter, the operating cash flow reflected higher net income from improved gross profit and contained operating expenses, offset by lower payables outstanding. Free cash flow was $74 million in the second quarter, depreciation and amortization expense amounted to $56 million. Capital expenditures were $23 million, lower than our outlook of $40 million.

Now turning to the outlook for the third quarter FY15. Following our $1.1 billion in the second quarter, we expect revenue for the third quarter to be $1.2 billion, plus or minus 2%. The sequential revenue growth of 9% is reflective of our continued strength in gaming for PC and mobile platforms, data center and cloud solutions and automobiles.

We expect our consumer GPU business to be up seasonally in the third quarter. Our Tegra business is also expected to grow sequentially. Our GAAP and non-GAAP gross margins are expected to be 55.2% and 55.5%, respectively, plus or minus 50 basis points.

The gross margin outlook reflects higher expected Tegra processor revenue, which has overall lower margins than our Company total, a greater mix of devices versus SoCs with Tegra, compared to the second quarter, and expected growth in volumes of consumer GPUs.

GAAP operating expenses are expected to be approximately $463 million. Non-GAAP operating expenses are expected to be approximately $416 million, nearly flat with expense levels for Q2. Our operating expenses in the third quarter will reflect an onset of our annual compensation increases and expenses associated with our higher revenue. We will continue to manage through our fourth consecutive quarter of maintaining operating expense levels.

GAAP and non-GAAP tax rates for the third quarter and annual 2015 are both expected to be 19%, plus or minus 1%. This estimate is a percentage point lower than our previous outlook, and is consistent with our tax rate in the second quarter, excluding any discrete tax events. With that, I'm going to turn it back to Chris, and we'll open up for questions.

Thanks. That concludes our prepared remarks. We will take questions. Please limit yourself to one question and one follow-up. Colin, over to you please.

Thank you.

(Operator Instructions)

James Covello, Goldman Sachs.

Congrats on the strong results. This is Gabriela Borges on behalf of Jim. I was hoping you could talk about relative to guidance you mentioned a number business lines that are doing well right now. Maybe you could talk about which one of those you would highlight, in terms of main issues driving the strength in the quarter? Thanks.

In terms of how we did versus the quarter in Q2 versus our guidance? Is that the statement?

Sorry, within the guidance for the October quarter.

Correct. In terms of where we think the growth will stem from, from a revenue perspective, again, it is usually a seasonally up-tick in terms of our overall consumer GPUs that are therefore for gaming as we get ready for the second half of the year on the high gaming season.

So that we do expect to be a significant contributor to our overall revenue growth sequentially of 9%. Additionally, we also expect our overall Tegra business to also grow sequentially, associated with both our SOCs, particularly for auto will increase, and also what we expect for our devices as well.

That's helpful, thank you. As a follow-up, if I may, on the gross margin guidance. Maybe give us a sense of what you think longer-term as what level is sustainable with some of the tailwinds that you have from richer mix shift over the next few quarters or so. Thank you very much.

So we talked quite a bit about what will contribute to our gross margins going forward. We do expect in any one quarter to see seasonal increases or potentially large projects completed in some of our enterprise businesses.

It's really a nature of the overall mix over a longer-term period of time, which will influence our gross margins long term. When you think about our overall enterprise businesses from Tesla, GRID and overall Quadro, which carries slightly higher gross margins than the overall Company average. Depending on the seasonality of some of those businesses, as well as large projects that we may complete, you will see our gross margins be very strong.

Our overall consumer GPUs, we've done a very solid job in keeping our overall gross margins with solid ASPs, and that should contribute as well in the quarters which we have strong growth. Thirdly, when you think about our overall Tegra business, it is a case in terms of volumes.

We do know these are lower overall gross margins than our Company average. Depending on when those volumes hit, it can also affect the overall Company's gross margin.

At this time, it is hard to say in precise, every single quarter, in terms of what we think that guidance will be. But those are generally the factors that will influence our gross margin ranges going forward.

Vivek Arya, Bank of America Merrill Lynch.

Thank you for taking my question. I think you had mentioned about 10% growth in gaming revenues. I'm curious, how much of that growth is coming from unit growth versus just stronger ASPs or share gains from AMD?

Hi, Vivek, this is Jen-Hsun. If you take a look at the overall gaming market, it is surely growing. Depending on which one of the analysts you follow, the vast majority of them see that global gaming market as growing about 10%, a little bit over 10%.

If you take a look at the largest gaming franchise today, they're mostly associated with massively online battle arena games, called MOBA games. Whether it is League of Legends or Dota 2, the two combined has nearly 100 million gamers. Each day there is some 10 million gamers playing these two games.

The size of the eSports competitive sports associated with these two games is becoming quite a large industry in itself. China is still growing; Southeast Asia is extremely underexposed. Those markets are growing.

I think that it's fair to say that the gaming market, overall, is still growing. ASP is increasing. The reason why ASP is increasing is because the production value of games are increasing.

The latest-generation game consoles are now out. The entry-level, GTX, GeForce GTX, with a street price of about $100, is consistent and is comparable in performance to a next-generation game console.

If the market shifts to even that level, our ASP has quite a lot of room to still grow. As the production value of games continue to grow, I think we are going to see our ASPs grow.

I would say that the dynamics of the gaming industry, PC gaming industry, is really quite healthy, both in more and more players playing and ASPs increasing because of production value. When you think about it in terms of our own platform, there's almost -- I would say there's about 100 million GeForce gamers around the world. They're active gamers around the world.

Yet we know there are several hundred million gamers all together. PC gaming is becoming more and more popular for the reasons that I have mentioned already, and others. My sense is that we still have quite a bit of penetration to go. These are dynamics that are helping us.

Got it. Thanks, Jen-Hsun, very helpful. As my follow-up, there has been a lot of discussion or concern about the royalty payments from Intel since they are a very important part of your EPS and domestic cash.

I do realize the agreement runs for a few years, but when do you need to start to renegotiate? Do you think the new agreement will be flat, up or down from what you have right now? Thank you.

It's hard to predict the future, but there are some things that we know. NVIDIA invents more in modern computer graphics than just about all of the world's companies combined.

We invented the GPU, we invented GPGPU, we invented the ability for GPUs to be virtualized so that you can put it in the cloud. That's one of the reasons why our cloud computing business is growing so fast now.

We're going to continue to focus in this one specialized field of computing that's becoming more and more important. I don't know of too many technology companies in the world today who doesn't rely on technologies that we've invented.

Technology licensing is an important part of our business. Long before there was Intel licensing our technology, there were other companies licensing our technology. We've had licensing revenues as a component of our business now for 15-plus years. My expectation is that licensing revenues will continue to be an important part of our income for quite some time to come.

There is a second component that's really important which is, whereas we -- historically, we're able to license to mostly PC companies, we can now license to mobile and cloud companies. Those are new opportunities for us.

Lastly, we no longer just license IP as in patents. We have productized our design into a core. That core could be licensed. That makes it easier for companies who would like to innovate and build their own products to be able to license our technology. We have now more ways to engage customers in IP licensing.

We're serious about this business. We're actively working on these matters. They take time. But I am very confident that licensing will continue to be an important part of our business going forward.

Harlan Sur, JPMorgan Chase.

Good afternoon. Thank you for taking my question. Congrats on the solid quarterly execution.

Thanks a lot, Harlan.

The Q3 guidance you provided as revenue growth of 14% on a year-over-year basis. Your GPU business, in particular, that grew double-digits year over year in Q1 and took a bit of a pause in Q2. I'm assuming weaker consumer PCs.

Question is, are you looking for the GPU business to return to double-digits year-over-year growth in Q3? If you are, if you could highlight some of the drivers?

Yes, thanks a lot, Harlan. First of all, Q2 is seasonally slower than all of the other quarters. Considering the performance that we had, it was actually quite extraordinary. Our expectation is that Q3 will return to its traditional seasonal growth era.

There is a couple of other dynamics that is going on now. There is some really big titles coming this fall. I don't remember a time when PC gaming is going to benefit from the huge titles that are coming out this fall at the pace that it is. Partly the reason for that is because this is the first year, first major year, first full year of next-generation game consoles. These new large-franchise titles like Call of Duty and Assassin's Creed are going to hit the market.

Ultimately, what drives our business -- some seasonality, of course Christmas matters, of course back to school matters, of course Chinese New Year matters. Ultimately, what really drives our business are huge games. This fall, we are going to see some really, really huge titles.

Our position in the marketplace is fantastic. GeForce is really the best gaming platform for PCs today. It's not even close anymore. I think that because of the technology, we know that Kepler has been a fantastic platform for us. Maxwell is even better than that.

All of the software and all of the application technology that we've put around GeForce has really changed its profile for gamers. Not only can you play great games now, you could use our GeForce Experience which has been installed some 40 million times. There are 40 million PCs around the world that now has GeForce Experience inside.

You could record, completely in the background, without affecting your game play and stream it to Twitch, which as you probably know very well at this point, is the largest realtime video platform in the world. A lot of those gamers are streaming using GeForce. The number of concurrent viewers is really quite amazing.

GeForce, as a gaming platform, has really reached a level that is pretty substantial. My expectation is that this holiday season, this fall is going to be pretty big.

Okay, thanks for that, Jen-Hsun. Colette, on the OpEx front, obviously the team is certainly delivering to its target of $1.65 billion in OpEx this year.

It seems clear that the team is going to continue to drive an OpEx profile that is below your revenue run rate. Any way to help us quantify OpEx growth versus revenue growth from a longer-term perspective?

I think we are looking quite nicely at how we've executed over the last three quarters. It's definitely been through a lot of work, thinking about how much better we can execute as a Company with our overall business groups. And working on reallocating investments across.

And to look farther, there is continued day-to-day conversations about where those growth opportunities are in the top line. And are we the best-positioned at this time with our investments for those? Right now, I'd like to get through the rest of the fiscal year. I think we'll reassess. What does that look like going forward?

I don't have anything at this time to give on a longer-term perspective. I thank you for recognizing the great work on growing the top line and maintaining a very consistent OpEx space to improve the profitability.

Okay. Thank you.

Thanks, Harlan.

Ross Seymore, Deutsche Bank Securities.

Your primary competitor had some issues with channel inventory on their side. It doesn't appear to be impacting you guys at all. Jen-Hsun, could you give us some color, a little commentary on what you see going on in the channel right now for the GPU business, please?

You're going to have to ask them for commentary about their channel inventory. In our case, we have seen spot shortages around the world.

We are really, really super focused on making sure that GeForce is the world's best gaming platform for PCs. It doesn't mean alone that it has to be -- just being the world's best GPU is not enough.

We're surely the best GPU, but being the GPU is just the first bar, if you will, for being a great gaming platform. For us today, GeForce, all of the technology that we put into GameWorks, all the work that we do with game developers around the world, GeForce Experience, which as I mentioned earlier has been installed some 40 million times, has really turned GeForce into one of the largest gaming platforms in the world.

If you're a gamer and you have GeForce in your system, you can be assured you are going to have a great experience. We're incredibly dedicated to the user experience. We're incredibly dedicated to making sure that every single game works perfectly and works marvelously as it can be in your PC.

The amount of dedication that we put into this platform, this living, breathing platform that's evolving and changing, literally every day, is something that we've really mastered. And is something that has taken us well over a decade to do. I think people are starting to recognize that.

As the PC market continues to become the most important gaming platform, because of its open nature. You don't pay royalties to proprietary platforms. The install base is really quite large now, as you could imagine.

For most people, outside of the United States, where disposable income is still rather challenging, a PC is necessary for most of them. Everything else is a luxury.

The fact that GeForce is extended inside a PC, on a platform that you already know you need, makes it quite a unique gaming platform. I think the comments that we've made over the years, and as you've followed us over the years, we have been consistently dedicated to this game platform. I think it's starting to pay off now.

Great, thanks for that. One is my follow-up for Colette. On the cash return side, you guys are nicely ahead of the $1 billion run rate. That's working out well.

Just wondered, is the ASR now complete? If so, in the back half of the year, to get up to that $1 billion number, is the plan to be much more of an organic day-by-day buyback plan? Or is there something more that you have in the plan for us?

In the end of Q2, yes, we had completed the outstanding ASR that we began shortly after our Q1 earnings release. In the second half of the year, we are committed to meeting the full-year plan for $1 billion.

Breaking that down, the dividend payments are still in the second half of the year, a part of the remaining balance to go. And then the amount of repurchasing as well.

We're still assessing what that best method is, overall, to do that. We'll have something for you at the next earnings call, definitely, on how we executed within that quarter.

Great, thank you.

Blayne Curtis, Barclays Capital.

Good afternoon. Thanks for taking the question and nice results. I was wondering -- a couple questions. One, if you could quantify -- you mentioned gaming up 10%. How much is that of the overall GPU business? Then if you could talk about if overall ASPs were up in the July quarter as well?

It's a very good percentage of our overall consumer GPU business. We've talked about that, remember our professional workstation GPUs are also in the overall GPU business, as well as what we have for the overall data center with Tesla, and our overall cloud in terms of GRID. As a percentage of our overall consumer, it is a significant proportion of our overall consumer GPU.

Okay. And then if you could just -- the ASP trends overall in July and then your expectations into October, are you looking for another step-up in ASPs? Thanks.

The ASPs are definitely a lot of different factors, in terms of how certain things sell in to the channel with certain OEMs, or in terms of any overall add-in market. It's real hard for us to blend that next perfectly over that.

We believe what we've seen right now is extremely stable, if not from year over year, overall increases in our overall average ASPs over that period of time. We'll get to see what that looks like as we go into the gaming season in the second half of the year. You are correct that our overall gaming portfolio GPUs do carry overall higher than the average, across our overall consumer GPUs.

Yes, Blayne, you know what? Just to add to that, one of the things that surely everyone is noticing now is that our business is really moving away from being a components business to being much more of a platform business that's obviously built on top of a processor.

Our ASPs for data centers and for the cloud computing platforms are much, much higher than our ASPs for PCs. Not only because the processors themselves are much more complex, because it has to be shared by many people. It's virtualized.

It's designed for data center and so the robustness for it, the reliability of it, the quality of it, has to be at a level that is able to sustain 24/7 operations.

Mostly, the reason is because the software stacked on top of it is really complex. Most of our data center business, most of our cloud computing business is really a software business anymore.

It's really about GPU virtualization; it's really about high performance computing; it's really about the ability to serve accelerated cloud computing. Our ASP profile is going to have to start changing over time. Tracking PC sales and then multiplying that by some ASP is not a logical way to think about our business anymore. Because of cloud computing platforms; because increasingly, our business is really a platform business. I hope that's helpful.

Thanks for that.

Yes. Thanks a lot, Blayne.

Matt Ramsay, Canaccord Genuity.

Yes, thank you very much for taking my question. In the prepared remarks there was some mention, and Jen-Hsun, you just mentioned it as well, of the longer-term growth in the data center for cloud computing in HPC around your GPU and the platform.

I would be interested, it seemed like there was some developments relatively recently around your partnerships with other ARM 64-bit vendors versus your own internally-developed solution. Maybe you could give us an update about what the strategy is going forward for attacking that market?

Is the general-purpose compute engine that sits next to your GPU and those applications of paramount importance to you? Or does your GPU really drive the value? Thanks.

Thanks a lot, Matt. First of all, I think I have said this before and I continue to believe it, and more so every day, that data center and accelerated cloud computing will likely be the largest opportunity that the Company is following today.

Our ASPs there are many, many, many times higher than our ASPs in average. The gross margins are obviously a lot higher, primarily because it's a software business.

Now, at the center of that platform strategy is recognizing that data centers, Internet service providers, cloud service providers, even countries who have their own supercomputing interests, have rather different opinions about what kind of CPUs they use. They don't all want exactly the same instruction set architecture.

What we've done with Tesla is -- and what we've done with our GPUs, GRID and Tesla, is established a bit of an ISO-neutral attitude about what data centers can and can not use. We believe that people ought to use whatever instruction set architecture they would like to use.

We've created the ability to support X86. We support Power with our announcements with IBM, a very deep and quite a broad strategic alliance to bring accelerated computing to the Power platform.

Also ARM, of course we care about ARM. ARM is one of the most pervasive CPU ISOs in the world. It is very accessible. It's available to anybody who would like to build CPUs around them.

Our first philosophy is focus on building a platform for accelerated cloud computing, accelerated computing. Our second is to be ISO-neutral, so that Tesla could be a platform that any service provider, any data center, can build around.

Third, if it makes sense for us to build CPUs for those platforms ourselves, we'll consider doing so. It kind of goes in that particular order, if that's helpful.

That's really helpful perspective, thank you. As my follow-up, for Colette, there's been a lot of conversation on the call here about the progress on capital returns.

Maybe you could give us -- one question is an update on the domestic cash balance. And then going forward, after the $1 billion is completed through the year, you could give an update on your longer-term philosophy about capital returns relative to that domestic cash position. Thanks.

Okay. Thanks for the question. We've been pretty clear that when you look at our overall cash balance and our overall cash flow, a good percentage of our cash flow extends from our international operations, and the overall revenue that we receive from a good percentage of our business.

From time to time, we'll have a little bit of peak in the US, in terms of some of the providers that we do business with in the US. I would say more than the majority, or a significant amount of the earnings, are earned overseas.

Overall cash balance, about November a year ago we infused with the overall convertible debt, which added $1.5 billion. Right now, outside of the Intel payments as well, that come once a year, it's pretty steady. It may grow a little bit from time to time, but I'd say it's right now at about a steady level.

Secondly, when talking about our overall capital return from a long-term perspective, we are really trying to look at our overall growth this year. We've executed strongly to the $1 billion that we put out for the fiscal year. We're just about halfway through that right now. We'll continue to look what is the appropriate levels for long term.

As you know, we're executing to return more than 100% of our free cash flow that you've seen in this quarter and the last quarter. Over the last three years, we've probably been executing, on average, anywhere from about 70% to 80% of our free cash flow.

So stay tuned. Let us get through this year in terms of the $1 billion, and we will look in terms of what the future will lie after we look at the overall cash balance and the options that we can do.

Joseph Moore, Morgan Stanley. Once again, Mr. Moore, your line is live. Please proceed with your question.

We might have to come back to Joe.

David Wong, Wells Fargo.

Thanks very much. To push a bit further on a couple of the earlier questions. Your GPU segments are growing at the higher ASP segments. So year over year, GPU sales grew 2% but ASPs also rose a fair amount, didn't they? Did your unit shipments for GPUs overall actually decline on a year-over-year basis in June?

I would think so. I would think that it declined a little. The reason, of course, has to do with the fact the consumer PC market overall declined. You know very well that our consumer PC business is a component system. Those component ASPs are rather low and the margins are lower.

Although we care about that business very much, components business and volume business does provide scale. It leverages our R&D anyhow. We surely appreciate the business.

In the final analysis, the consumer PC market was down. I think that the consumer PC market is expected to be more stable now. We'll see how it turns out.

Okay, great. My other question, what portion of total Tegra sales is Tegra for automotive at the moment? Did your current level of R&D spending have meaningful spending on Tegra for Smartphones and tablets? Or is the Tegra R&D primarily on automotive products?

Our Tegra strategy is really centered around several areas. One is automotive, as you've mentioned. A business that has grown to be quite sizable. I think Colette mentioned earlier that it grew 70% year over year.

We're expecting the growth to continue for the next several years. The pipeline of projects that we know that we're already working on that will go into production, is relatively well understood now.

The second is gaming. Android is the world's largest computing platform. And gaming we have shortened to computer gaming. With a great computing platform like Windows, we were able to build a new franchise called GeForce on top of it.

Our strategy with Shield is exactly the same as that, to leverage the Android platform, which is now the world's largest computing platform, and build a gaming platform out of it. We call that shield.

The mobile platform is now extended beyond phones and has gone into tablets, as you know, of course, but recently, also into television. This fall, I'm looking forward to seeing some exciting products for Android TVs and hopefully NVIDIA can be part of some of those.

Our focus is primarily there. The vast majority of our focus, automotive, consoles, if you will, Android TV consoles, gaming.

And, wherever we can, wherever it makes sense, continue to engage with OEMs like Xiaomi and others, who are building exciting devices where Tegra could be a differentiator for them. That's basically our strategy and where we are focusing our R&D.

Great, thanks.

Rajvindra Gill, Needham & Company.

Thank you and congrats on the good results. Given the changing mix of your business, could you talk a little bit about seasonality in the fiscal fourth quarter? How do you see that relative to historical patterns?

We are talking about fiscal third quarter. I appreciate it, Raji.

(Laughter) I understand. I'm trying to get a sense of how the patterns are changing, given the mix of the business, the changing trends of the business.

I appreciate that. I was just kidding. Consumer business is still a large part of our business. GeForce is -- for PC gaming, is a large part of our business. For the foreseeable future, I expect it to be a large part of our business.

Consumer business is important to us because consumers drive a lot of computing technology today. Obviously the volumes are much, much higher. It's important to have high-volume business to drive the flywheel of R&D.

I appreciate the seasonality. GeForce is going to benefit from that in the third and fourth quarter. But increasingly over time, and one of the things you're highlighting here, is that our data center business, our cloud computing business, our high-performance computing business, are not affected by those kind of seasonality. People buy those platforms when they need those platforms.

The dynamic trends of those businesses are several. One, the more mobile devices in the world, the more pictures people take, the more videos they upload, the more they talk into their phones for search, the more of those applications, those consumer applications are going to be accelerated by GPU in the cloud. Those are great opportunities for us.

I think it's pretty clear now the dynamic trends of consumer-generated media as it's sent through the cloud, shared and processed and otherwise, is growing, I guess, at least exponentially. I think that that's one of the dynamics, major dynamics, driving our GPU success in the cloud.

The second has to do with the fact that more and more of companies are using high-performance computing to drive their business. Some companies call it big data analytics; some you hear them refer to machine learning to understand what is happening to the dynamics of their business. High performance computing is more and more important in enterprise than ever.

Those two dynamic trends, then maybe if I could add the last one, is enterprise virtualization. Our GPUs on GRID, makes it possible for you to virtualize your enterprise beyond the walls of the data center and all the way out to the fringe where the clients are. We can virtualize very, very computer-intensive PC applications for the very first time.

These three dynamics are really important to the future of our data center and cloud business. As those continue to grow, our business will become increasingly less seasonal, if you will.

That's helpful. As my follow-up, to your point about the enterprise and the virtualization that you're seeing there, your design engagements with GRID are accelerating pretty rapidly. That appears to continue as enterprises begin to realize the leverage that they can get from cloud-based visual computing.

You talked in the past about the install base being around over 500 million units. Can you talk a little bit about how, systematically, you're going to be able to convert that install base to a virtualized platform?

Yes, good question. The most important partners, number one, starts with the hypervisor companies. The companies that build the core of virtualization. Of course, VMware is a very important part of that, Microsoft is, Citrix is.

I think it was at GTC, I guess it's in May, VMware waltzed on stage with me to announce that they were adopting GRID, integrating GRID into ESX and enabling virtual GPUs for their hypervisor stack. I'm anxiously waiting for them to go to beta. Let's watch this space. I think that has probably the single greatest near-term turbo-charger to the GRID business.

Beyond that, the ecosystem partners that we'll go to market with are all the OEMs. They have the largest sales forces in the world and they're engaging enterprises from financial services, to government, to education, to industry. Those sales forces are being trained on a constant basis and enabling OEMs to be able to take GRID to market is a very big part of the overall strategy.

We now have every single OEM in the world supporting us. There's some 70, 80 servers that have been certified and qualified for GRID. OEMs from HP and Dell and IBM and Cisco and Hitachi and Fujitsu, every OEM in every corner of the world has been enthusiastic supporters of GRID. Partnering with VMware and partnering with Citrix and partnering with Microsoft over time, that's how we're going to convert and virtualize all of the enterprises around the world.

Doug Freedman, RBC Capital Markets.

Great. Thanks for taking my question and congratulations on the strong results. If I could, Jen-Hsun, dig into GRID just a little bit more. In the past you guys gave out a number for the number of engagements that you were tracking that, I believe, last quarter it was 600. Just to have a like for like, what is that number this quarter?

We stopped mentioning it because the numbers are getting kind of large. Maybe we just got kind of bored talking about it. But it's almost a thousand, Doug. I appreciate you asking.

Terrific, that's great to hear. If I could, one of the areas that I believe one of your competitors hit a speed bump on was the fact that GPUs were being used for cryptocurrency algorithms. Is this a market that you view as something that NVIDIA should be servicing? Are you targeting your products at it? Is it something that we should take into our thinking?

Yes, there's several things about that event that's really interesting. First, the fact that you could run an arbitrary and newly-developed cryptocurrency algorithm on a GPU says something about the programmability of a GPU now.

That's one of the things that, of course, cryptography is very important. Of course encryption and decryption for security long-term will be very important. GPUs will increasingly become important in the development of those algorithms.

However, we really didn't benefit very much from people who were doing, I guess, bitcoin mining. The reason for that is because if it's just one application, if it is somebody that's using that one application, they don't really care about the gaming experience. They didn't buy the platform for gaming. They didn't buy the platform for workstations or design.

I would say that NVIDIA GPUs are not the most performance per dollar efficient in the market. As a component, if you will, as a commodity component, we're not the most competitive in that way. Maybe that was a blessing, maybe it wasn't.

I think in the final analysis, I don't think we were particularly the best choice for somebody who would like to bitcoin mine. When they were done they re-sold the graphic cards in the marketplace. I guess, in a lot of ways, I'm happy that that didn't happen to us.

Okay, great. I appreciate the color there. My last one for you is really having to do with the structure of the Company. You've been reliant on a single source for your foundry since inception.

You're pretty much at a scale now that might make you say, we really should have a second source supplier here. Is there some sort of a catalyst that makes you, or some level at which you feel you really do need to bring on a second supplier of wafers?

We look at every foundry that's available in the world. There aren't that many that is competitive enough to be able to earn our business. We competitively look at every single opportunity, every single time.

We have been fortunate to have partnered with TSMC for a very long time. They are a fantastic, fantastic partner; they continue to be. Quite frankly, we have been well-served by that partnership.

We look at the competitive landscape on a note-by-note basis. We have our eyes wide open. We keep all of our partners as competitive as they can be.

Congratulations again. Thanks, guys.

Thanks a lot, Doug. We appreciate that.

Thanks, Doug. Thanks, everyone. We look forward to talking to you next time on our Q3 earnings call. Thanks, Colin.

Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation. You are now free to disconnect your lines.