NVIDIA Corporation (NVDA) Q4 2010 Earnings Report, Transcript and Summary

(Call Starts Abruptly) Before we begin, I would like to remind you that today’s call is being webcast live on NVIDIA's Investor Relations website and is also being recorded. A replay of the conference call will be available via telephone until February 24, 2010 and the webcast will be available for replay until our conference call to discuss our financial results for our fiscal quarter of fiscal 2011. 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 finance results and business, please refer to the disclosure in today’s earnings release, our Form 10-Q for the fiscal period ended October 25, 2009, and the reports on Form 8-K filed with the Securities and Exchange Commission. All of our statements are made as of today, February 17, 2010, based on information available to us today and except as required by law, we assume no obligation to update any such statements. Unless otherwise noted, all references to research market 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 was posted on our website. One final note; we have announced the date of our Financial Analyst Day, which is set for April 7. With that, let us begin. GPU demand increased throughout the quarter, with GeForce and Quadro revenues growing to combined 22% quarter…

Thanks, Mike. Q4 was another good quarter, driven by an improving PC market and better mix. Revenue was $982.5 million, above guidance, and up 9% sequentially, marking the fourth consecutive quarter of strong results. GAAP gross margin was 44.7%, significantly higher than guidance. GAAP OpEx was $304.4 million, in line with guidance and GAAP net income was $131.1 million or $0.23 per diluted share. The core GPU business had another strong quarter. Within that, our desktop GPU business was up 19%, notebook was up 27%, and workstation graphics was up 25% in the quarter. Demand was strong, but we were again constrained by supply across the board. Gross margin improved sequentially as a result of several factors: cost reductions due to yield improvements and reduced waste, favorable mix from our professional business, better mix within the PC GPU business, and increased revenues. Inventories at the end of the quarter were up 19% to $330.7 million. Inventory days on hand were 60 at the end of the quarter. Inventory in the channel remains low at around five weeks. Cash and cash equivalents, marketable securities at the end of the quarter were approximately $1.73 billion, up approximately $94 million from the third quarter. Our outlook for the first quarter of fiscal 2011; revenue is expected to be flat, constrained by supply; GAAP gross margin is expected to be in the range of 44% to 45%; GAAP operating expenses are expected to be flat. That concludes our prepared remarks. And with that, we will now take questions.

Thank you. (Operator instructions) And our first question comes from the line of Alex Gauna with JMP Securities. Please go ahead with your question. Alex Gauna – JMP Securities: Thanks very much. I was wondering if you could clarify a little bit on your supply constraints facing for the first quarter. I am assuming that means that you are going to see seasonality in legacy products and you can't get enough of the new to offset it or maybe wrap some color around that, please?

Seasonality question, you know, we – the seasonality in the PC industry, Q1 is generally a down quarter, and if you take a look at – if you look at what most companies have guided, they have guided down sequentially. We are guiding flat, and if we had a sufficient supply to support the ramps of the products that we are going into production with right now, we would guide further up. You know, our company is currently in a growth phase. There are new products in many new markets, as well as going into a new product generation. So there is a lot different reasons why we are expecting to grow and our suppliers are working as hard as they can for us and their yields are improving. However, we remain constrained. Alex Gauna – JMP Securities: Okay, if I could get a follow-up on your Optimus technology, when are you expecting that to ramp in force in the market and where do you see the earliest adoption occurring?

Optimus is going to show up in notebooks and it is designed for notebooks and you should expect to see it starting to ship in the April timeframe, I think will be the first laptop, and then it will just start ramping, about 50 models or so and we are getting new models as we speak and we will ramp throughout the year. Alex Gauna – JMP Securities: Okay, thanks very much. Congratulations, nice quarter.

Yes, thanks a lot, Alex.

Our next question comes from the line of Suji DeSilva with Kaufman Brothers. Please proceed with your question. Suji DeSilva – Kaufman Brothers: Thanks. Can you guys help us understand what the impact was on the quarter from the constraints and perhaps on the guidance as well just to give a sense? I just wanted to understand where the 40 nm constraints come off at this point.

: Suji DeSilva – Kaufman Brothers: Great. And then one other question on MCP, I know you are going to fold that into GPU going forward, but can you help us understand what your [inaudible] of that product by itself or should we not, should we think of it as more being surely folded into the GPU in terms of forward revenues?

There is a – let me make a comment and then I will have David make some comments. The first thing is that our MCP business was down quarter to quarter and we are expecting it to grow quarter to quarter for Q1 and we are in the process of ramping what has been internally code-named MCP-89, a 40 nm chipset, and we are really excited about that. And so next year, the chipset business is going to do nicely for us. On top of that, we have created two new technologies that over time, will supplement the MCP business that we are transitioning out of. One of them is called the ION. You know, ION will do for netbooks what GeForce does for PCs. And we today have the – I think Acer announced today – well, I am pretty sure Acer announced today at the Mobile World Conference our first second-generation ION design win. And so my sense is that over time, the netbook market will segment just as the PC market has and there will be basic netbooks, based on Atom, and then there will be netbooks that are premium netbooks that are designed to deliver the best possible experience and those people are calling ION netbooks. And so, we can capture 10% or 25% of that marketplace, a market that is currently [inaudible] and also the fastest-growing segment in the PC industry, ION should be a nice business for us. And then the second technology Mike was talking about earlier called Optimus is really a game-changer for us and it solves the single largest issue that has kept GPUs from growing further into the notebook marketplace and that is power dissipation or battery life. And so Optimus allows us now to automatically completely invisibly from the user to switch off to completely zero-power state and consume absolutely no power when it is not in use and whenever the user uses an application that can benefit from a GPU, we instantly turn on and the user never knows the difference. And so you now have the best of battery life as well as the benefits of a GPU, the performance of a GPU, you know, without any compromise. And so those two technologies I think not only will help us grow our opportunities in the marketplace, and hopefully make up more than plenty of the MCP business that will decline a couple of years from now. Suji DeSilva – Kaufman Brothers: Okay, thanks, Jen-Hsun.

Thanks, Suji.

Our next question comes from the line of Rick Schafer with Oppenheimer & Co. Please proceed with your questions. Dan Morris – Oppenheimer & Co.: Guys, this is Dan Morris calling in for Rick. Thanks for taking my questions. Just on the gross margins, you know, you have expanded it pretty nicely over the last two quarters. As I look at some of your new products especially Tesla and Tegra, you guys are ramping over the next few quarters, it seems like you have a nice tailwind mix. Could you just talk to us a little bit about expectations for gross margins and further opportunities for margin expansion?

Well, the only thing I would add, Dan, is we don’t typically give guidance out past the first quarter, but as we have talked about previously, you know, we expect our Quadro, our Tesla, and our Tegra business to become a greater part of our mix over time as those businesses ramp. Those three businesses all carry a gross margin that is above even our current corporate weighted average. And so, as those products ramp and become a richer part of our mix, we would expect to see further lift in our gross margins. And you know, we have indicated in the past that we expect Tegra to, you know, ramp substantially in the second half of the year. We would reiterate our belief of that and hopefully with that, you know, we would see some margin expansion with it. Dan Morris – Oppenheimer & Co.: Okay, great. And as a follow-up, could you just talk about the pricing environment in GPU and you know, what happens in the second half, assuming that the 40 nm capacity issues remain?

Well, you are asking a question for a state of supply that we are all hoping for, which is when they abate. My sense is that supply will remain constrained for at least the first half of the year, and as we ramp further new products into the marketplace, you know, I surely hope that the supply situation will be there to sort it. In terms of pricing, you know, we increasingly are shifting our focus towards products and markets where we have a great differentiation. And if you look at the products that we offer today in mass market, GeForce for example, increasingly, CUDA brings unique capabilities to it. We are the only supplier of 3-D stereo in the PC market and 3-D Vision only works with GeForce and so we are increasingly developing capabilities that are very differentiated on top of our processor brands. And so hopefully, those differentiations will be valued in the marketplace and accordingly reward us with a price medium over time. Dan Morris – Oppenheimer & Co.: All right. Thanks, guys.

Yes, thanks a lot, Dan.

Our next question comes from the line of Craig Berger with FBR Capital. Please proceed with your questions. Craig Berger – FBR Capital: Hey, guys. Nice job on the results. Can you talk a little bit about attach rates for GPUs, both in desktop and notebook, where were they, where are they, where do you think they can go?

Well, I don't think this quarter the GPU attach rate changed substantially. And so, I will review the numbers again but my last look at the numbers, it was relatively stable. If anything, on the notebook side, it increased slightly in my recollection. And so, yes, there we go. Okay. So Chris just showed me some numbers on the desktop side, they were flat and on the notebook side, they were up about five points. And so, my guess is that people are increasingly recognizing the importance of the GPU, and there are so many things that you do now that the GPU adds value to. And the videogame market is obviously still very large, the online game market is very, very large and people who are enjoying high-definition movies on their PC or just want snappy graphics where two processors simply does a better job than one, you know, for their PCs, they are increasingly recognizing the benefits of GPUs. The other thing is that in the consumer market, the GPU attach rate is just much higher and the consumer segment is really the fastest-growing segment right now. And so our sense is that the GPU attach rate is going to continue to grow. The separation between the integrated graphics, whether it is on a chipset or on a CPU, integrated is integrated. That comparison to a discrete GPU is in fact the technology is growing further and further apart. The GPU is in fact becoming more and more advanced relative to integrated graphics versus previous years. And so my sense is that this trend is going to continue. Craig Berger – FBR Capital: I must thank you for preempting my follow-up. So I will ask another one, which is, I guess for David. How do you see operating expenses tracking over the rest of this year, just generally, should it be sloping up, are you guys going to be increasing your investment levels, any color there would be great for the models?

Well, we guided flat, obviously, and I think as we talked about last quarter, you know, our Q4 just ended was a 14-week quarter. And so, we had more expenses in that quarter than what we would typically carry. We got it flat because as you recall last year, we had a number of temporary cost reduction measures in place which we are restoring, some of those are which related to wage reductions and so forth that a lot of our employees were carrying. So those tended to offset one another, and as you see, we got a flat in Q1. I would expect that we would be roughly flat in the first half of the year and we will just have to wait and see how revenue shapes up for the second half to give any further guidance beyond that. Craig Berger – FBR Capital: Let me ask one more question, which is, do you think your customers are building inventory, meaning, is any of the revenue strength you guys are seeing temporary inventory build and does that hamper second half's revenue seasonality? Thank you so much.

If you look at our channel inventory, which is where we sell a lot of our vast majority of our desktop GeForce business, that channel inventory has been roughly stable throughout the year. It has been teetering in the three to four week range. We had a one-week uptick in that in the fourth quarter. This is probably the first sign we have seen of any uptick in channel inventory now this year. But we still consider that pretty modest, you know, certainly well below where it has been historically and as a result of even those low levels, we continue to have stock-out situations, which we try to obviously avoid. So right now, I don't think we have got really any indicators that would tell us that we have got an inventory build going on, either in the channel or even at the OEM companies that we sell to. So, at some point, we know that supply will catch up with demand and you know, I think we just have to be very alert to make sure that we see the early indicators of that and we can respond as early as we can.

Let me just make a comment on top of that – everything David said was right. At the highest level, the last couple of years, we have invested in R&D pretty aggressively. And we invested in R&D so that we could drive our top-line growth. And so, if there is anything at all, and because as we go into this year, we have so many new products, whether it is Tegra or the Fermi architecture, or the Tesla product line, or some exciting new product lines that we are planning for Quadro, all of these growth opportunities are a result of the R&D investment that we have made. And so if there is anything at all, we would just love to have the supply to support the growth. And so, we are looking forward to that. Craig Berger – FBR Capital: Thank you.

Our next question comes from the line of Daniel Berenbaum with Auriga USA. Please proceed with your question. Daniel Berenbaum – Auriga USA: Hi, good afternoon, and thanks for taking the call. Jen-Hsun, I want to make sure I understood a comment that you made a little bit earlier when you were talking about the supply constraints, you were saying that the order of the supply constraints, if you didn't have the supply constraints, you could have done another couple of hundred million dollars in revenue. First question, did I hear that correctly and second of all, can you help us understand a little bit is that really just focused in GPU where you could have had that extra revenue and can you help us give us any color on who is not getting parts, you know, is it notebook, is it the channel, can you give us a little bit of granularity there, if I did understand that correctly?

Well, I was trying not to give you an exact number, and I probably shouldn’t have given you a number at all. Because we really don't know when supply – we knew that during the quarter, channel inventory was too low. When David says that channel inventory was five weeks, five weeks average in fact means gap outs in many regions around the world. And you can only measure channel inventory really in the final analysis to what the average is, but we know that certain regions are much harder than other regions and it is hard to keep them from stocking out. And the second thing is OEMs, without exception, notebook OEMs were handing out the whole quarter and we worked quite hard to keep them from gapping out throughout the quarter, and we weren’t successful most of the time. And so, there were challenges in fulfilling the demand that we did have throughout the quarter. Daniel Berenbaum – Auriga USA: Am I correct in assuming that you were talking about really GPU, there were no shortages in chipset or in Tegra or in Quadro?

Well, Tegra and Quadro, Tegra’s production ramp is rather modest right now, and Quadro’s volume relative to GeForce is small, although the revenues are high, the actual units are relatively small. And so, frontal analysis, whenever you have a gap-out situation over in your highest line products, and in our case, it would be GeForce. Daniel Berenbaum – Auriga USA: Okay. And just a follow on that, is this giving you any pricing power, you know, was there any contribution to the gross margin, obviously, if you are posting a good gross margin number. Are you getting some pricing power because of this?

Well, we certainly haven’t raised prices on the marketplace. This is the benefit of being this constrained that you could make adjustments on product mix. But those adjustments are still rather hard to do because customers are lined up and we have made commitments to customers with respect to the parts that we would ship them. And so, to the best of our ability, we try to honor those commitments. And so supply constraints are – it makes the market a little bit less disruptive from a pricing perspective, because people are mostly focused on fulfilling demand. And this helps us with some amount of modest mix benefits. But overall, we haven't raised prices on the customers. Daniel Berenbaum – Auriga USA: Okay, great. Thanks very much.

Our next question comes from the line of Glen Yeung with Citigroup. Please proceed with your question. Glen Yeung – Citigroup: Thanks. You know, when you take into account all the moving pieces at NVIDIA for this upcoming year, you know, think about the MCP business versus think about Tegra for example. When I look at what would be a seasonal year, if we assumed it would be a seasonal year for PCs, should we expect above, below, or average seasonal growth for NVIDIA?

Right now, we are constrained at least to the first half, right? So, seasonality, I don't think is going to have a significant bearing on what revenue we are going to put up on the top-line. Our top-line is going to be more dictated by allocation than it is by the normal end-user seasonality. The second half is anyone's guess. Glen Yeung – Citigroup: Yes, okay.

If you look at the moving parts, it kind of boils down to the – Fermi is going to be a growth driver for us. We have, you know, we are in mass production now of Fermi and Fermi not only ships into the GeForce market and brings incredible new capabilities to that market, Fermi also grows into two other markets. One is Tesla and OEMs are lined up and designing servers and high performance supercomputers dedicated to Tesla, supercomputers are being built around the world waiting for the new Tesla. And so, this Fermi architecture grows into new markets, it also creates new types of products for our Quadro family and so those are new growth drivers. So the Fermi architecture is really important to us. The second is 3-D Vision. You know, 3-D is going to be really big and is going to redefine, as Mike says, what a gaming notebook is going to be, just as gaming PC is going to be, just as SLI did a few years ago, defined what a gaming PC is, 3-D Vision will now. And so you have already seen the Asus Tech notebook, Acer has a product now, Dell just announced their product today, and we are expecting 3-D Vision to be adopted by nearly every PC OEM in the world. They will also be adopted by the workstation market. So 3-D Vision is going to be important. And then lastly, Tegra is a brand-new product line for us. And so those are all growth drivers and then I think I said last time and I think this time I would reinforce that statement that the MCP product line will do well this year, although it is our last chipset for Intel processors. You know, we are expecting MCP-89 to be far, far superior to what you can see get on an Avondale or any integrated CPU from Intel today and so I think we are going to see it do quite nicely. Glen Yeung – Citigroup: Thanks for that, Jen-Hsun. One point of clarification and one other question. On the clarification perspective, you mentioned that you obviously see a supply constraint and yet you were able to build inventory yourself. Is that because you are forgoing sales this quarter in order to build the right inventory for next quarter and then the question is, just on the workstation side of the house, notwithstanding your point made on Fermi just now, how sustainable do think the workstation strength that you are seeing is as you look beyond the current quarter?

The inventory situation happened as a result of wafers that came in late in the quarter that we couldn't get through our backend process and then shipped to customers. And so the backend process includes [inaudible] and with the complexity of the GPUs these days, requires quite substantial battery to go along with it. And so we just couldn't get it through the backend to ship to customers. Customers were clamoring for parts all the way through the end of the quarter. So we will ship it to them as soon as we can, we just couldn't get it through the backend. Your second question is about workstations. I think the workstation market is going to continue to improve from this point forward. You know, the vast majority of the world’s industries held back on spending towards the latter part of the year before and the early part of this last year. And technology has really, really moved forward and until and unless they invest in tools, unless they invest in computing, they really can't build products. And so, the Quadro business has improved quarter on quarter. I think it was some 20% or so. You know, my guess is that – and it is still off of its historical highs. And this historical highs I think is going to ultimately be – you know will exceed that in some period of time, because back when we had the historical high about two years ago, I think a year and a half ago, with the recession, the world wasn't nearly as globalized from an industrial design standpoint. China wasn't nearly as progressed from a design perspective; it was a manufacturing powerhouse, but it now it has turned into a design powerhouse as well. And so you are going to see that projects are being worked on by teams on the same projects around the world and so there would be people in Europe working with engineers in the United States working with engineers in China and to do that, you have to use the same database and you have to use the same architecture, and so my belief is that the workstation market is going to 2.9 for the next couple of years. Glen Yeung – Citigroup: Okay, thanks.

Our next question comes from the line of James Schneider with Goldman Sachs. Please proceed with your question. James Schneider – Goldman Sachs: Good afternoon and thanks for taking my question. I guess, could you talk a little bit about your customer order patterns at this point and clearly, your supply constraint, but are customers putting as much backlog on you today as they were three months ago and so in the context of that plus the supply constraints, how should we think about what is likely to happen for Q2 in terms of revenues?

Yes, I think I can answer that, James. You know, if you look at the last three quarters, we have opened each of the last three quarters with a fairly healthy typical backlog at the start of each one. In fact, that has been at near-record levels, at least as far as I can tell. And that has helped significantly with linearity of product deliveries, linearity of collections for example et cetera, and has made our businesses a little bit more predictable than what has been as well because we have had less turns business actually generate within the quarter. And as we go into Q1, our backlog – the opening position is in relatively the same position it was at the beginning of Q4. And so, we will open Q1 with a fair amount of our business already visible to us.

And in terms of Q2, the benefit of Q2 is it is going to benefit from quite a few growth drivers that are firing at the same time. We have got new GeForce products, new Quadro products, new Tesla products and Tegra products and 3-D Vision products all cranking. So this is – we are just beginning now of a new product cycle and this new product cycle is driven by a revolutionary architecture called Fermi. And so we are really excited about that and can’t wait to get to it. James Schneider – Goldman Sachs: Thanks. That was very helpful. And then as a follow-up, just briefly, I think you talked about 40 nm products being 19% of shipments last quarter. Can you give us an update of what that was this quarter?

We have really not broken that out this time. I think we have decided that it would be just better to show the vector and the vector was up 178% quarter to quarter. James Schneider – Goldman Sachs: 40 nm?

For 40 nm, yes. James Schneider – Goldman Sachs: Great. Thanks so much.

Our next question comes from the line of Doug Freedman with Broadpoint AmTech. Please proceed with your question. Doug Freedman – Broadpoint AmTech: Great, and thanks for taking my question. Congratulations on a strong quarter. Can you guys talk a little bit about what drove the change in stock-comp reporting? Is there any sort of underlying change to the compensation structure that you are working with the employees?

You mean the fact that our non-GAAP now includes stock-based compensation, is that what you mean, Doug? Doug Freedman – Broadpoint AmTech: Correct.

There was really no change in compensation at all. In fact, if you look at the commentary and so forth, I think you would see that it is relatively flat quarter over quarter. What really kind of guided is that we would like to get closer to a GAAP reporting structure and most of the analysts and so forth now report GAAP and non-GAAP numbers and so forth and so our thought was that would just remove one more layer of noise in our story by reporting GAAP when we can report GAAP and only have to talk about non-GAAP when there is an extraordinary item that we need to discuss. Doug Freedman – Broadpoint AmTech: All right, great. And if you could talk a little bit about use of cash and what your thinking is on the buyback of your shares, we are now sort of seeing dilution creep up every quarter, you are almost back to where you were. I believe when you were at this level in the past, you talked about wanting to hold dilution down. Is that still something you are thinking about?

Yes, it is certainly something that we have discussions on and sometime this year, will probably be more – be able to talk more openly about what is the plan on dealing with it. Doug Freedman – Broadpoint AmTech: And then my last one is really, the Fermi architecture, how quickly do you guys think you are going to be able to take that architecture to the full product line? What is sort of the – what expectation should we have as far as getting those into the mainstream and if my understanding is correct, you are going to launch that at the high end.

You know, all of that just depends on 40 nm supply and we are trying to finesse it the best we possibly can. You know, for the entry-level products, the truth is that the new architectures, the very, very entry-level GPUs are probably not extremely well appreciated anyhow. And so, you know, the reasons why people buy the new architectures tend to be early adopters and they tend to the game enthusiasts or workstation designers or creative artists or – there are very specific reasons why it really enhances their experience. Our current generation GPUs are fabulous and all the things that mainstream consumers would use their computer for. You know, all of the high-definition videos, even plays 3-D Blu-Ray. We are the only GPU that processes 3-D Blu-Ray completely in the GPU. All of them have CUDA and they are all compatible with the Fermi architecture, and now, all of them have Optimus. Right? So I think the mainstream GPUs are really fabulous and has been enhanced recently with some really great features and so my sense is that they are going to continue to do quite nicely in the marketplace. And then we will just transition as fast as we can. Doug Freedman – Broadpoint AmTech: All right. And is there any change to your expectations in the ramp for Tegra during the year?

No, not much has changed. We are currently working on quite a few tablets, and these tablets are – some are tablets and some are tablets with keywords and there is all kinds of different form factors, there is five-inch versions, there are seven-inch versions, there are 10-inch versions and some are being created by computer companies, some are being created by consumer electronics companies and some are created by mobile companies. And everybody has a slightly different perspective on how they would take it to market, some really excited about that. Today, I think it is just literally today in Barcelona, Adobe and NVIDIA demonstrated the world's first interactive reader on a mobile device, a magazine reader on a mobile device. And the Wired magazine demonstrated an interactive version of Wired, and if you get a chance to see it on the web, it is just really stunning, it is just completely stunning. You know, the experience of reading a magazine that comes to life when you touch it on a Tegra tablet is just really something else. And so, now we have the full Internet on Tegra. Flash 10.1 is completely accelerated on our GPU. So the 100 million websites around the world now just work. You have multitasking, so you could read a magazine, close it, go look up something on the web, close that, and come back to read your magazine exactly where you left off and you could also enjoy digital magazines and future digital books. And so, I think this form factor is really going to do nicely and I can't wait to start ramping it. Doug Freedman – Broadpoint AmTech: Great. Thanks for taking my questions.

Yes, thanks a lot, Doug.

Our next question comes from the line of Nicholas Aberle with Caris & Company. Please proceed with your question. Nicholas Aberle – Caris & Company: Good afternoon. My question is, so given the scenario where 40 nm supply is constrained throughout all of 2010; my guess is you guys have to make some pretty tough decisions on how to allocate the supply that you do have. Given you guys are transitioning GPU, desktop, and notebook over to 40 nm, Tegra 2 is 40 nm, Tesla 2 is 40 nm; how do you guys make those decisions as we roll through the year?

Well, I said that supply was going to be constrained; I didn't say supply was going to be constant. We are expecting a big year, but frankly, if we had more supply, we would have a bigger year. And so, we just have to keep working at it. You know, [inaudible] is doing a fabulous job improving their yields and if you just look at from August when we first started ramping to now, the yield improvements have been done and the execution that their teams have gone through is just fabulous. This is a really extraordinary company and what they have done with 40 nm yields over the last several months is really fabulous. And so, if the trend continues, things are going to look a lot better and so we are hoping for it to continue, we are working hard together to make it improve and so I am hoping that supply will abate, I think that was the work I used earlier, sooner than later, because we can certainly use the wafers to drive our growth. Nicholas Aberle – Caris & Company: Got you.

Either way, we are still expecting a lot of wafers this year and improved yields and a lot more supply than obviously now. Nicholas Aberle – Caris & Company: Yes, I mean in the scenario that you guys don't get all that you want, which sounds like you are at least not going to get all that you want in the first half of the year, I mean you guys are going to make decisions on how to allocate I was just curious on how you made the decisions to allocate that?

We are making the decisions now. We made the decisions last quarter. We are making decisions this quarter. And every commitment that we make, we need to fulfill. And so we have to be thoughtful about the commitments we do make. Our customers are working very closely with us now. Everybody has just done a much, much better job, aligning forecasts, and I appreciate that and so, we are making those trade-offs. And so, I think one of the things that you give up on is you give up on any amount of inventory, and we don't have very much inventory at all in the grand scheme of things, considering the velocity of our business. So there is not much buffer and everything is metal. That is one of the challenges of being constrained, but our most important objective is to meet the commitments that we have made to our customers. Nicholas Aberle – Caris & Company: Got you. We haven't really talked about PlayStation 3 much. I just curious was that a little bit soft during the quarter, what are your expectations for PS3 this year and given there is a transition coming up; do you expect to be part of that transition?

Seasonally, they are lower I think in our fourth quarter, just the way they ramp in the holidays and so forth. So it was seasonally weaker in the fourth quarter. You know, I think it would be probably an appropriate question what they think Sony's business is going to do over the next year. So I am not sure I want to answer the balance of that question. Nicholas Aberle – Caris & Company: Thanks, guys.

Thanks a lot, Nick.

Our next question comes from the line of Arnab Chanda with Roth Capital Partners. Please proceed with your question. Arnab Chanda – Roth Capital Partners: Thank you. I have a question about gross margins. You know, Jen-Hsun, this is basically, as far as I can tell, pretty much a record gross margin, maybe even better than your record if you assume this on a non-GAAP business, exclude this dot com. It seems like your new products basically have better gross margin than your current business, as that mix improves, this should only get better. Is there a target that you would like to let us think about longer term where you think you can get to?

Let me answer it in pieces. First of all, I don't think this is our record. And secondarily, it is not at the internal targets. You know, our business is increasingly moving from a great shift business to much more of a software rich business. If you look at our Quadro business, it is nearly all software. You know, the enormous R&D that we invest in Quadro and in the technology we create for Quadro is all software, because for anyone else, it is still built on NVIDIA GPUs. So you see the same thing with GeForce now. The work that we did in 3-D Vision, tons of software. The work that we did with 3-D Blu-Ray, tons of software. You know, so the work that we do with CUDA, the work we do with Physx, tons of software. So I think increasingly, that is going to become the nature of our business. Tesla is just all software, right, software tools and software compilers, libraries and I mean these are the profilers and debuggers. I mean, it has become increasingly a software-oriented type business and that is where our differentiation really is and that is where NVIDIA has historically been really, really excellent. And so in order for us to differentiate the basic commodity platform and turn it into an extraordinary experience for gamers or scientists or digital creators or for clouds or for netbooks or for tablets, it is increasingly a software business. And so that is where a lot of our differentiation becomes and I think if you think about our business from that perspective, our gross margin of the 44 points or the 44.7% that we had this quarter should be far from our expectations. Arnab Chanda – Roth Capital Partners: Okay. And then one question about your – products, so if you look at Tegra, you have talked a lot about the tablet potential there. Where do you see taking that business? You think that will be confined to tablets or are you expecting to take them to smartphones and then, with Fermi, is there a possibility with ASP growth that you could offset normal seasonality when it starts to launch significantly in the second quarter?

I think Fermi will vary substantially offset any seasonality; that is my expectation. Because Q2 is going to be the quarter when Fermi is hitting the pull stride, and it won’t just be one Fermi product, there will be a couple of Fermi products to span many different price ranges, but also the Fermi products will span GeForce and Quadro and Tesla. And so we are going to be ramping now on Fermi architecture products through Q2 and we are building a lot of it. So I am really excited about the upcoming launch of Fermi and I think it will more than offset the seasonality that we usually see in Q2. And then the question about Tegra, you know, our focus on Tegra is initially on the markets where high resolution and snappy performance is really important. You know, what NVIDIA is really great at is multimedia and great snappy performance, high-performance computing. And so, if you want a great experience with a touch tablet and the resolution is high and it is in high-def, choosing NVIDIA, choosing Tegra is really your best choice. And so we are going to focus our energy on the marketplaces where we could add the most value and initially, those are tablets, but we are seeing a lot of over-the-top TV opportunities and engaging a few of those and you also heard that Audi has standardized on NVIDIA graphics starting this year in America and in the year 2012 everywhere around the world. And we are just expanding from there. So I think the Tegra opportunity is quite large for us, and we are just going to focus on where to start from where we have the most value first. Arnab Chanda – Roth Capital Partners: Thanks, Jen-Hsun.

Yes, thanks, Arnab.

And gentlemen, there are no further questions at this time. I will now turn the call back over to you.

Thank you, everyone. We look forward to talk you what our next quarter results.