NVIDIA Corporation (NVDA) Q4 2011 Earnings Report, Transcript and Summary

Good afternoon, my name is Philip, and I will be your conference operator today. At this time, I would like to welcome everyone to the NVIDIA Earnings Conference Call. [Operator Instructions] Mr. Hara, you may begin your conference.

Thank you, Philip. Good afternoon, and welcome to NVIDIA's conference call for the fourth quarter of fiscal 2011. With me on the call today are from NVIDIA are Jen-Hsun Huang, President, Chief Executive Officer; and David White, Chief Financial Officer. After our prepared remarks, we will open up the call to question-and-answer session. Please limit yourself to one initial question with one follow-up question. Before we begin, I would like to remind you that today's call is being webcast live on NVIDIA's Investor Relations website and is also being recorded. A replay of the conference call will be available via telephone until February 23, 2011, and the webcast will be available for replay until our conference call to discuss our financial results for our first quarter fiscal 2012. The content of today's conference call is NVIDIA's property and cannot be reproduced or transcribed without our prior written consent. During the course of this call, we may make forward-looking statements based on current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties, and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release, our Form 10-Q for the fiscal period ended October 31, 2010, and the reports we may file from time to time on Form 8-K filed with the Securities and Exchange Commission. All our statements are made as of today, February 16, 2011, based on information available to us as of today and that 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 Jon Peddie Research. I would also like to remind everyone about our upcoming financial analyst day on March 8, taking place at our headquarters in Santa Clara. If you are interested in attending, you can register on our Investor Relations website. With that, let's begin. Last month, NVIDIA and TSMC shipped our 1 billionth GeForce GPU. This milestone is less than 12 years in the making, and over that period of time, the complexity of the GPU has increased more than 1,000x. Having advanced from being a fixed-function graphics accelerator to one of the most powerful programmable computing devices in the world, the GPU is enabling enormous progress in computers ranging from smartphones and tablets to PCs and game consoles to work stations and supercomputers. And in that time, the GPU has become the defining technology for every platform that uses it. Our new $1.5 billion cross-licensing agreement with Intel underscores the growing importance of the GPU to the future of personal computing as well as to the expanding markets for mobile and cloud computing. Heading into the year, we have one of the best lineups of GPUs in the company's history. The GTX 580 remains in the top spot as the fastest DX11 GPU for enthusiast gamers. We extended our DX11 technology leadership with the launch of the GTX 570 and the GTX 560 Ti, heralded by reviewers as category leaders for the $349 and $249 core gamer price segments. Our GTX product stack is the gamers' choice and the results show. For the second consecutive quarter, our desktop standalone GPU share grew, increasing from 59% in Q3 to 61% in Q4, with higher share gains in the performance and enthusiasts segments. And aside from our expectation to continue to gain share, there are several big events this year that can be catalysts for growth. First, Intel's Sandy Bridge is the best gamer CPU in a long time. And with the SLI motherboards from Intel, ASUS, Gigabyte and others, along with the new GTX 560 Ti, it offers gamers a perfect opportunity to upgrade their PC. Second, great games drive GeForce GTX sales. And this year, we expect to see a number highly anticipated games such as Crysis 2, Battlefield 3, Duke Nukem Forever, Portal 2 and Diablo III. And third, 3D Vision is all about enjoying games at a whole new level. Driven by great new 3D Vision licensed products such as Acer's new 27-inch 3D Vision panel and Dell's XPS 17-inch 3D Vision notebook, we expect the 3D Vision to grow 200% this year. NVIDIA's 3D Vision content ecosystem is the largest in the industry, with support for over 500 video games, Blu-ray movies and our new 3D Web portal, 3dvisionlive.com, which offers a wealth of streaming video and photographs. In notebooks, we announced a record number of design wins for the Intel Sandy Bridge platform. More than 200 new notebook models will feature our new GeForce 500M Series GPUs. Adding GeForce is one of the best ways for OEMs to differentiate PCs with premium capabilities versus the basic platforms based on Intel's graphics. Unlike basic graphics integrated into Sandy Bridge CPUs, GeForce GPUs provide advanced features and increased compatibility for latest PC games, including those based on DX11. Tesla achieved over $100 million in revenue in fiscal 2011. It’s becoming conventional wisdom in technical computing that parallel processing delivers the highest performance as well as being the most energy efficient and cost-effective. The world's greatest petaflops and supercomputers are built with Tesla GPUs. The Green500 list for the world's most energy-efficient supercomputers revealed that Tsubame 2.0 from the Tokyo Institute of Technology was ranked number two and was the only petaflop system in the top 10. Three other Tesla-based systems made the top 10 along with the systems in 11th, 12th and 13th spots. During the quarter, HP, Dell and IBM all entered into production with their Tesla-powered servers. With the sales and market of the world's largest enterprise sales force engaged, we look forward to accelerating the adoption of Tesla. Technical computing servers enterprised in the cloud represents a multibillion dollar growth opportunity for Tesla. CES was the coming-out party for our Tegra 2 customers. Motorola, LG, Acer, ASUS and Toshiba all announced their flagship smartphones and tablets with tremendous industry acclaim at CES. The MOTOROLA XOOM with Android 3.0 won overall Best of Show. And the ATRIX won Best of Show in the smartphone category. And LG began shipment of the Optimus 2X in Korea in January. At CES, we also unveiled our long-term processor initiative, codenamed Project Denver, to develop custom CPU cores based on the ARM architecture. This initiative is focused on NVIDIA's CPU running the ARM instruction set, which will be fully integrated in the same chip as the NVIDIA GPU. It will target personal computers, servers and supercomputers. In addition to Audi, which we have enjoyed a deep partnership since 2004, we announced two new partnerships at CES with BMW North America and Tesla Motors that will put NVIDIA processors in navigation and vehicle information systems across all next-generation BMW cars worldwide and the Tesla Roadster and Model S, respectively. In this week at the Mobile World Congress, Samsung joined our marquee list of customers announcing their Galaxy Tab 10.1 and their plans for a next-generation Tegra 2 superphone. LG also officially announced the new Optimus pad, which will be the G-Slate for T-Mobile. A highlight at MWC was the demonstration of Kal-El, the world's first mobile quad core processor. Kal-El, our next-generation Tegra SOC, which features a new 12-core NVIDIA GPU, provides 5x the performance of Tegra 2. We're beginning to sample Kal-El to strategic partners. And based on our competition announcements, we believe we are at least a year ahead of them. We are targeting to deliver Kal-El in tablets and smartphones later this year. Our strategy with Tegra is to utilize our deep expertise in IP and computing to create processors for the mobile computing revolution. We designed Tegra to be the most advanced processor for mobile applications and to target the tablet segment, which is expected to be approximately 208 million units by 2014 and the smartphone segment, which is growing at a compounded 19% annual growth rate to approximately 600 million units in five years as estimated by the Gartner Group. And now with Microsoft's announcements, Tegra can directly access the Windows PC market. Heading into Q1, our primary focus is to continue to ramp both our GeForce on Sandy Bridge and Tegra 2 customers into production. More importantly, our results are beginning to tell the bigger story about NVIDIA's transformation. Even as we are expanding our leadership in digital computing, our investments in Tegra, Tesla and Project Denver put us at the center of the two most disruptive revolutions happening with mobile and cloud computing. We have never been more optimistic about our growth opportunities. With that, let me turn the call over to David.

Thanks, Mike. Revenue for the fourth quarter was $886.4 million, up 5% sequentially. Gross margin of 48.1% was a record for the second consecutive quarter. It was at the high end of our range, primarily as a result of richer GPU product mix than we had expected at the beginning of the quarter. GAAP OpEx was $247 million. This includes the Intel settlement of $57 million. Without it, our R&D and SG&A costs would have been a combined $304 million, in line with our estimates. Combined, these results generated a GAAP net income of $171.4 million (sic) [$171.7 million] or $0.29 per diluted share. Revenue by business segment was as follows: our GPU business was up 5.5%; our MCP revenue was down significantly as we entered into the final phase of that business, but this was more than offset by strong growth in desktop and notebook discrete. Our Professional business was down slightly. Quadro was down, but this was almost completely offset by strong growth in Tesla. And our Consumer business was up despite a seasonally down console business thanks to a strong Tegra customer ramps. Turning to the balance sheet. Our focus on inventory reduction continue to make progress as we were able to reduce it by another 8.5% to $345.5 million. Channel inventory was at or below expectations. These results, together with receipt of our first payment from Intel, allowed us to report cash balances of approximately $2.5 billion. Our outlook for the first quarter of fiscal 2012 is as follows: revenue is expected to be up 6% to 8% from the fourth quarter; GAAP gross margin is expected to be 48.5% to 49.5%; GAAP operating expenses are expected to be approximately $327 million; GAAP tax rate is expected to be between 16% and 18%. That includes our prepared remarks. And with that, we'll now take questions.

[Operator Instructions] Your first question is from the line of Uche Orji. [UBS]

Let me just start out by asking you, what's going on with desktop GPU ASPs? They were up significantly from the way we're looking at it. Is this a combination of seasonality or channel feel? And is this sustainable? That's my first question.

Well, it's fairly mix. I mean, we launched three new products at the top of our product lineup, as Mike talked about in his comments. And those are all higher ASPs for the company. So they drove not only ASPs for us, but they also drove margin for us.

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

Uche, I'll let Jen-Hsun answer that question. How is that?

Sure.

Uche, let's see, quad core. It is the case that several of our competitors announced quad core products that will be sampled next year and potentially go into production the year after. At Mobile World Congress, we demonstrated Kal-El, and there were quite a few systems on-hand for demonstrating all aspects of Kal-El, whether it was extreme high-definition video, it has the ability to support very high definition displays. The overall horsepower and computational capability of Kal-El is about 5x the performance of Tegra 2 and has some really exciting new technologies for extremely low-power operations even though we have four CPUs inside our Kal-El processor. These are all the breakthroughs that we have demonstrated at Mobile World Congress. Whereas some of the competitors seemed panicked to announce something on their PowerPoint slides, we tend to announce the product when we're actually sampling to customers. And in the case of Kal-El, we're now sampling to our strategic partners and our intention is to go to production this year. With respect to the importance of quad core, obviously, quad core is incredibly important otherwise it wouldn't be on all of the suppliers' road maps. We were the first in the world to announce and ship dual core. During that time, a lot of people asked us about that, and now it's quad core. If you think about the tablet or mobile device applications, you'll realize that very quickly it's multitasking. You're multitasking whether you're streaming music, while you're reading a book or you're playing game and you're being connected to other players in a multiplayer environment or you do physics processing while you're playing a game. One of the most delightful parts of the game that people like these days, whether it's Angry Bird or others, it's just the realistic physics that it does. And the way that the bricks and the buildings fall apart are physically real, and you're going to see more and more of that type of capability over time. And so whether it's multitasking, whether it's image processing for very high-quality camera effects, browsing, multitasking, those type of applications are all very, very intensive users of multi GPU cores. And the last thing is it's actually logical and completely intuitive if you think about it, but four CPU cores working less hard consumes less energy than one CPU core or two CPU cores working their butt off. And that's the reason why if you look at the PC industry, what people have said about the PC hitting the brick wall and hitting the power wall. Remember when CPUs were cranking at extreme high frequencies, those are just bad ideas. Brute forcing CPU design and overclocking it and causing it to run extremely fast is just not a very good idea. It makes a lot more sense to run at the natural frequencies of the semiconductor process and utilize all kinds of parallels and ideas. In the case of CPUs, we have four cores. In the case of a GPU, we have 12 cores. Using parallelism is the most efficient and also the highest performance approach to computing that we know.

In terms of the economics, will you get it by 28 nanometers?

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

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

This is Emily calling in for Ambrish. For the Tegra business, can you comment on the mix of that between smartphones and tablets today and where you see that as we exit the year?

Well, it's hard to tell because it depends on how many smartphones and tablets our partners sell. And so it's really, really hard to tell. I mean, one of the things that we all have to recognize is the market for tablets is much, much larger than we all expected. And every single time an analyst comes out with another projection for the size of the tablet market it gets bigger, and I think there's a couple of reasons for that. They're just wonderfully delightful to use. They're easy to carry around and you see more and more people now carrying around tablets surely instead of -- I've never seen anybody carry a netbook around. But you’re seeing more and more people carry tablets around than notebooks. And also, even if you have a PC, you don't mind buying a tablet to supplement it. If you already have a PC, it's not likely you'd buy another PC. But you surely would buy a tablet to supplement it. So I think it's an easy purchase. It's easy to use and delightful to use. And so I think people are surprised by the size of the tablet market. My sense is that we're going to continue to be surprised by the size of the tablet market, certainly as more and more capabilities come out. One of the things that we're really excited about is that these tablets are now completely Flash accelerated. And so you can go to any website, you could run any application off the web that you’d expect to. And so those kinds of new usage capabilities and this freedom to explore capability is something that we're quite excited about. And so it's hard for us to tell right now. The thing that I can tell you is that our design wins are all Tier 1s. These are the marquee names of the mobile industry and computing industry and have a great deal of faith in their ability to create exciting products and taking them to market. And so we'll just have to wait and see and see how it turns out.

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

Our ASPs, it depends on two factors. On the one hand, most of the notebook ASPs are going to be lower than the GTX 580 and 570 to 560 we just recently rolled out. On the other hand, the GTX 570 and 560 are still ramping. And so it's hard to say exactly how it's going to play out. We're just going to have to report on the progress as we go. We're excited about the gamers market. The gamers market has three catalysts this year. One, there's some really, really big titles for PC gaming coming out. Crysis 2 is just really, really exciting. And so I think the enthusiasts come out when there is a great new breakthrough games like Crysis. The second thing is, it's been a long time since the PC gamers had a basic platform of great opportunity. Sandy Bridge is the best CPU that's been built for PC gamers in a long, long time. And so we have SLI motherboards with Intel. We have SLI motherboards with ASUSTeK, with Gigabyte, with many others, so that gamers can upgrade their PCs with affordable, very low power and very high-performance systems. And so when Sandy Bridge starts to ramp and the SLI motherboards start to ship here in the near future, we're going to have to see how many people come up for the upgrade. And then the lastly is 3D Vision. When you can enjoy everything in 3D, it's just much more exciting. And 3D Vision basically doubles the resolution one for each eye, doubles the resolution that is needed to enjoy a game. And so that tends to drive higher-end ASPs. And so we're just going to have to wait and see before we can tell for sure.

And your next question is from the line of Harlan Sur. [JPMorgan] Harlan Sur - JP Morgan Chase & Co: Within your guidance for the first quarter, can you just give us a sense directionally about the quarter-on-quarter revenue trends for your three different segments?

Well, Harlan, this is David. On the desktop side, typically, we see some seasonality in there in the first quarter. That will probably be modest for the business. Our notebook business is going to grow very nicely in Q1 primarily as a result of the Sandy Bridge platforms we'll be shipping in the quarter. And we expect, obviously, Tesla and Tegra to continue growing in helping drive our revenue growth going into the new fiscal year. Harlan Sur - JP Morgan Chase & Co: And then I think you said in your earnings release that you expect Quadro to grow again in the first quarter as well.

Yes, that's correct. Harlan Sur - JP Morgan Chase & Co: Okay, great. And then one more question, if I may. On Tegra, obviously, the team has a rapid ramp ahead of them and I think the concern with anything associated with the mobile and retail space is: how do you monitor sell-through to the end markets and to consumers and then to kind of triangulate that with the orders that you're getting from your handset and your tablet customers. So maybe you can take us through how the team plans to keep a close eye on sell into to your customers versus sell-through to the end markets?

Well, the way I would look at that is in our larger businesses like Quadro and GeForce, we put a lot of energy into monitoring sell-outs and sell-throughs. And the reason for that is because we're such a large position in the marketplace. Tegra is a brand new product for us, and we have almost zero exposure in the mobile industry and this is really our first major push into it. And the devices that we're in are not fringe or exotic devices. They're not Transformer-type devices or new 3D displays where people aren't sure yet whether those adoption are going to be quite high or not. These are straight-down-the-middle, high-end and where-the-demand-is-the-greatest superphone devices right now. And as you see from the devices, they're beautiful and they're the primary platforms for the marquee customers that we're working with. It is core to their business. These aren't fringe products. And so I think that from that perspective, I have a relative amount of confidence that our partners are going to do a great job marketing them. And the enthusiasm in the marketplace is already really, really high and the reviews have been great. So my sense is that we're going to do quite well. As we get to be a much larger player in the mobile space, we're going to have to develop those kind of systems that we use for the PC industry where we monitor sell-throughs and sell-outs. And so we'll have to have to continue to do a better job with that. But at the moment, I think that we're going into, I guess, what people will consider blue ocean [ph].

Your next question is from the line of Doug Freedman. [Gleacher & Company] Doug Freedman - Gleacher & Company, Inc.: Last quarter, you mentioned that you thought that Tegra could actually be above your chipset business. Would you care to comment on if that occurred or not?

It did not occur this quarter. It will occur next quarter. Doug Freedman - Gleacher & Company, Inc.: Would it be possible for you to rank your product segments by gross margin so we can sort of get a sense of where the gross margin benefits are really coming from?

So Doug, as we've talked about previously, our Professional business, which includes both Quadro and Tesla, are our highest margin businesses for the company, and below that would be Tegra and our desktop, notebook business, below that. Doug Freedman - Gleacher & Company, Inc.: Tegra and then, I'm sorry, the desktop is...

Our desktop and notebook businesses, which are below our company average. Doug Freedman - Gleacher & Company, Inc.: Would desktop be above notebook?

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

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

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

And your next question is from the line of Raj Seth. [Cowen and Company]

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

We're actually not engaged with HP. So you chose one that we're not actually...

I'm sorry, yes, forgive me. But any of your key partners.

The answer is in the mobile space. There's just a lot of system software to do. And developing multimedia and system software technology is one of the areas where we just have an enormous amount of expertise because of building sophisticated computers over the years. And if you look at the PC, the amount of systems software we had to do for it is every bit now the same in the mobile industry, if not more. And that's one of the reasons why we believe that mobile computing was going to be such a great opportunity for us. That on one hand, the modem will continue to be important. On the other hand, for certain classes of devices, whether it's the superphones or tablets, its computing capability is one of the most important things. And in order to deliver on a great computing experience, the ability to create all of the system software from video to graphic to multitasking to all of the Flash accelerations and just the enormous amount of OpenGL or whatever it is and computer vision and imaging software, all of that kind of software working together in a just a really wonderful experience is hard to pull together. And this is something that we believe we have a great deal of expertise and a great deal of capacity to do. So we do quite a large amount of it. We know our architecture best. This is an area that in terms of system software, few companies in the world has a very large capacity to do. The three companies that probably have the largest capacity in the world of system software, it's probably us, Intel and AMD because of all the computers that we built over the years. We just have more people in system software with this expertise than just about anywhere else in the world. And so I think that this is something that is of great importance and is becoming more and more important and a greater and greater bottleneck. And we talked about early reviews of Tegra 2 phones, some of the comments that people are making are its stability and the performance of these phones right off the chute. Most of the smartphones that you may have bought, with the exception of Apple's products frankly, you've had to debug into existence. And you know, we think that that's not inherent to a phone. It's just because it’s inherent to building great computers. And so I think this is an area of great differentiation for us.

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

Computing is a very large space. And although these mobile devices are starting to do more and more computing, the computing capability that we're looking at is still rather nascent. The benefit that we have is, and we described it at Mobile World Congress, the benefit that we have is that the rich and deep pipeline of intellectual property that we can bring to bear as mobile devices become more and more computing capable. We went from a company that was working on basically one and a half to two mobile chips to a company that now has five chips on the road map. And we're concurrently working on projects that go all the way out to 20 nanometers and beyond. We don't have to wait for anyone to create the computing technology for us to license. We have all the technology here for us to bring to bear and execute a really aggressive road map. And that's how we're able to year-in, year-out crank out leading edge products that as the rest of the industry is just putting it and talking about it on paper. With respect to modems, there are quite a few modem players in the world. I mean, you'd be surprised how many of them there are. I mean, Qualcomm is obviously a supplier. Infineon is a supplier. ST-Ericsson is a supplier. There are many others. And where our focus is on the segments of the marketplace where computing is really important. And we believe that there's a great deal of work that we could do here before we need to consider increasing levels of integration. And then lastly, both the computing side and the modem side are going through very rapid innovation at the moment. On the one hand, computing is going from dual core to quad core and more and more GPU performance and better and better video capability and such. And on the other hand, modems are going from 2.5G to 3G to 4G. And so all of these are moving parts. Integration is the enemy of innovation. And so it's hard to move as fast when you have to integrate everything into one chip.

And your next question is from the line of Vijay Rakesh. [Sterne Agee] Vijay Rakesh - Sterne Agee & Leach Inc.: Just wondering, when you look at your Tegra and obviously, it's ramping in a lot of multiple tablets here. What is the breakout in Q4, and how do you see that in Q1 and Q2? If you would give us some more color on that.

In Q4, we just barely started shipping the early production ramp of the first partners. In Q1, we will be in quite significant production on across many of the OEMs. It's going to be quite a big step up. Vijay Rakesh - Sterne Agee & Leach Inc.: And then just to take a step back, you had guided Tegra -- what is your guidance for your side for Tegra for the year? And are you seeing any change on the upside or downside here as you’ve gone through that for a couple of quarters and the year?

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

Your next question is from the line of Tim Luke. [Barclays Capital]

I was wondering, as you look at the revenue momentum having had a strong uptick into April as you start the Tegra ramp, do you feel that, that sort of rate of growth may be sustainable through into the July period? Or is it to some extent that you’ve have a big near-term lift associated with the initial supply into the channel? And I was wondering, Jen-Hsun, if you could have any framework associated with the expectation of the timelines that you could talk about Tegra 3?

First of all, we’ve barely shipped anything. So Tegra 2 has just barely gone into production. In terms of thinking about these things, the growth and the growth opportunities, really the only thing you can really keep in mind is the size of the opportunity and the partners that you have to address those opportunities. The size of the tablet opportunity’s obviously larger than anybody expected. And I think people are getting a firmer grip on why the tablet is such a wonderful computing device. Secondly, I think the partners that we are going to market with it are undoubtedly the best in the world. If we have to choose the best Android partners in the world to go to the market with, I think we couldn't have chosen a better list. So I think we're going to be able to address a very large market and address it with partners who could give us a global reach. With respect to future Tegras, I'm not sure if there was an exact question. But I haven't used the word Tegra 3 yet, but we demonstrated recently a processor called Kal-El, it's an internal code name for a next generation processor. We haven't figured out -- we haven't decided yet what the market name is going to be. It is intended to be in production in Q3.

And just for David, on OpEx if I may, having seen the guidance move up around the $25 million in the April quarter, do you think that the rate of growth in OpEx through the next several quarters to support the customers is likely to be in a similar range? Or do you think that the magnitude of sequential increases could be somewhat lower?

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

Your next question is from the line of Patrick Wang. [Wedbush]

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

Well, the royalty or license fee from Intel will contribute 2.5 to 3 points of gross margin starting in the second quarter. If you hold that out and you just look at our core business, gross margins there should also be increasing through the year as well, particularly as Tesla and Tegra products ramp and I think even as our desktop business, our high-end GTX 560, 70 x and 80 € products, continue to gain momentum out in the marketplace. So certainly, we see a path for our margins being well into the low 50s sometime during the year.

I mean, if I just do a little bit of math there, it should almost be conceivable that you could exit the year at something in the mid-50s. Is that just unrealistic?

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

Your next question is from the line of Kevin Cassidy. [Stifel, Nicolaus] Kevin Cassidy - Stifel, Nicolaus & Co., Inc.: Jen-Hsun, you had mentioned -- staying with this 40 nanometers, I wonder, could you tell me more about what went into that decision process? Was it time to market or is it even your customers’ requests? I guess I just wanted to understand that a little more.

Well, first of all, 28 nanometers is not available this year, not until the very end of the year. And I think for us to ship production out in Q3, we have to start wafers in early Q2, right? And so 28 nanometers is not an option. Secondarily, 40 nanometers is now in the third year of its production, and the yields are fabulous. And so that's a wonderful reason to do it. And so I think on the one hand, 28 nanometers is available, on the other hand 40 nanometers yielding fabulously. So I think it's just naturally the right answer. But going forward, the way to think about it is the general rhythm that you will see in the industry for companies that come up with new processors every year, you should expect to see two processors in the same node or so. You’ve noticed other companies that have used different ways of explaining the rhythm and some use a one process node change, one is a architecture change, the next one is a process node change. So basically, it's every other year for a new process node. And I think that rhythm is not a bad rhythm. I mean, that's basically how quickly the industry is changing process. So it stands to reason that Tegra 2 and Tegra Next or Kal-El would use the same process, and then the following ones would be a 28-nanometer deal.

Your next question is from the line of Shawn Webster. [Macquarie]

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

The answer is it's hard to predict and the reason for that is this: more and more of our company is involved in the Tegra road map. So as quickly as Tegra is growing, more of our company's overall R&D is driving into the Tegra road map. And it's because it's great for mobile devices, smartphones, tablets and because of Microsoft's announcement with Windows.Next running on ARM, all of a sudden Tegra has the ability to address front and center dead-on the core notebook PC market. And I think that the opportunity to take future generation Tegra processors directly into the notebook market is really exciting to me. And it's also a way for the PC industry to really be revolutionized, if you will, with industrial designs that are exquisite in battery life and usage models that are very, very different than today's notebook. I mean, I think it's pretty clear at this point that in the future, Windows notebooks will make today's notebooks look a little bit like refrigerators. And I think that we have the ability to completely revolutionize how people see notebook computers again, and I'm excited about that. And so how much of our engineering should really go into Tegra and related, Denver plus Tesla? The answer is a lot. And so the breakeven point could eventually become all of NVIDIA.

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

So on the MCB business, Shawn, I think we've talked previously about that business roughly running its course for the most part through the first half of this fiscal year, fiscal '12. And then in the second half of the year, it should be a pretty minor piece of our business. We've not really broken it out beyond that other than to say at least at this point, we know that Tegra will exceed it in Q1. And as far as units are concerned, our units were up in the fourth quarter, primarily on the strength of our mainstream business. But more importantly, the revenue per unit, or the ASP as someone asked earlier, was driven primarily by our mix changes. And we're happy to see that. It drives a lot of earnings potential for the company and opportunity for the company, and we don't right now see that changing materially going forward.

Your next question is from the line of James Schneider. [Goldman Sachs]

Related to Tegra 2, in Q1, could you share with us what you think your ASPs are today in that product and where do you think that they'll be? As we exit the year, do you think they'll be down or maybe even up given the mix of Kal-El?

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

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

Most of that depends on how quickly Intel is going to transition Sandy Bridge relative to Huron River, I think, was the last platform. If Intel gets aggressive with Sandy River (sic) [Sandy Bridge], of course our share on Sandy River is much, much higher than that of Huron River. As you recall, our market -- we lost market share on Huron River with the first Fermi generation. But the GTX 5, the GTX 4 to 5 family, the second generation Fermi, has been a huge success for us. From desktop to notebook, we have the best stack of GPUs in the world today. And so the more aggressively Intel transitions from Sandy River to Huron River, the more quickly we will gain share. So partly it depends on them.

Your next question is from the line of Glen Yeung. [Citi]

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

Well, who knows? 2014 is a long time from now. I think there's a couple things that we believe in. We believe that computers are going to become thinner and thinner and easier and easier to use. And touch is going to become an increasing important part of computing. And so it stands to reason that tablets or notebooks that can become tablets or tablets that can become notebooks, that these are going to become, if you will, kind of part of computing. It will become the PC. And what we consider a tablet today, but if you look at some of the way people are thinking about it, I think about it as just personal computers. This is the new personal computer, and they are just different form factors. There're smaller versions of tablets, we call them smartphones or superphones. There are larger versions of tablets, we call them notebooks. There are even super-large versions of tablets, if you will, all-in-one PCs. And so I think that you're going to find the industrial design of personal computers has become disrupted, if you will, as a result of mobile computing components being used and mobile computing processors being used. And so I think that the space of personal computers, tablets, smartphones are going to become a little bit fuzzy over time. Even the OEMs that provide them will become fuzzy over time. And it stands to reason that at this point, I think we all believe it's a very large market. Now to be successful within that large market, it's important that you have a very low power design. It's important that you have the ARM processor. The ARM ISA has now become the de facto standard of this segment of the market and it's become very disruptive. It is the only ISA now that can support all of the major operating systems necessary for the mobile computing space. From iOS to QNX to Android to now next generation Windows. So it's clear that you need to have ARM. And then after that, you need to have expertise in building computers. An SoC is basically a computer on a chip. And when you are a provider of a computer-on-a-chip and there are this many operating systems to support, you better have deep, deep expertise and not to mention capacity of system software expertise in building sophisticated computers like this. And so I think that at the very high level, it's really exactly how we think about our strategy. That this is a very large market. It is disruptive. It is disrupting the computer industry as we see it and know it right now. And this is an area where we believe we can play at a great deal -- make a great contribution and drive our growth. So aside from that, it's kind of hard to predict exactly whether Gartner is going to be right or not. My guess is based on where the analysts' predictions have been going lately, it seems like every month they've been raising their estimates. And so we don't know where it stops.

And your final question is from the line of Craig Berger. [FBR Capital Markets] Craig Berger - FBR Capital Markets & Co.: On the GPU business, a, is there an impact in the April quarter from the Intel Sandy Bridge delay, meaning, is production being held up? And then, b, where is your notebook market share now and where do you expect it to go? And then as part of that, do you think Sandy Bridge is going to take any overall GPU share?

Number one, we have not experienced a disruption so far, and people are still running as hard as they can. They paused but I think Intel is doing quite a good job of helping everyone recover. With respect to share, I think our share is about 40% today. My guess is that when it's all said and done, our share should be north of 60%. And then with respect to attach rate, the PC industry still has basically to two tiers: the basic PC and the premium PC. If every PC uses basic Intel integrated graphics then everything would be the same and everything would become a VCR. But obviously, no consumer would like that because they still believe that there's an opportunity to buy a better PC and one that has higher performance or higher resolution or just more interactivity or the fact that our GPU’s just far, far, far more compatible with games and all the multimedia applications. So it depends on how you want it -- what you use it for. If you're a person looking for a basic PC, then integrated graphics makes sense for you. And you're looking for a premium PC and buy something a little bit better with the money you have, adding a GPU to it is really a fabulous thing. And so that basic dynamic hasn't really changed with the introduction of Sandy Bridge. So I'm not expecting a much GPU attach differences. Craig Berger - FBR Capital Markets & Co.: One quick follow-up. You guys said you did about $100 million of Tesla this year. Do you care to throw out a number that we should dial into our models for 2011?

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

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

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

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