Nvidia Corporation's CEO Discusses F4Q13 Results - Earnings Call Transcript

February 13, 2013

Nvidia Corporation (NASDAQ:NVDA) F4Q13 Earnings Conference Call February 13, 2013 5:00 PM ET

Executives

Rob Csongor - Investor Relations
Karen Burns - Interim Chief Financial Officer and Vice President
Jen-Hsun Huang - Co-Founder, Chief Executive Officer, President and Director

Analysts


Betsy Van Hees – Wedbush Securities
Stephen Eliscu – UBS
Chris Caso – Susquehanna Financial Group
Doug Freedman - RBC Capital Markets
Blayne Curtis – Barclays Capital
Kevin Cassidy – Stifel Nicolaus
Shawn Webster - Macquarie
Jim Schneider – Goldman Sachs
Patrick Wang - Evercore Partners

Operator

Good afternoon. My name is Enrika and I will be your conference operator today. At this time, I would like to welcome everyone to the NVIDIA Fourth Quarter Earnings Conference Call. (Operator Instructions) I would now like to turn the call over to your host, Mr. Rob Csongor. Sir, you may begin your conference.

Rob Csongor

Thank you. Good afternoon, and welcome to NVIDIA's Conference Call on the Annual and Fourth Quarter of Fiscal 2013 Results. With me on the call today from NVIDIA are Jen-Hsun Huang, President and Chief Executive Officer; and Karen Burns, Interim Chief Financial Officer. After our prepared remarks, we will open up the call to a question-and-answer session. Please limit yourself to one initial question with one follow-up.

Before we begin, I'd like to remind you that today's call is being webcast live on NVIDIA's Investor Relations website and is also being recorded. A replay of the conference call will be available via telephone until February 28, 2013, and the webcast will be available for replay until our conference call to discuss our financial results for our first quarter of fiscal 2014. 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

All our statements are made as of today, February 13, 2013, based on information available to us as of today and except as required by law, we assume no obligation to update any such statements. Unless otherwise noted, all references to market research and market share numbers throughout the call come from Mercury Research or 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.

With that let's begin. We are pleased to report a record year for the company. Despite significant headwinds, we achieved record annual revenues and gross margins for fiscal year 2013. Excluding chipset revenue, which we exited, we grew our GPU business 8% last year and for the third consecutive year. We increased overall GPU market share from 53% to 65% and our notebook share by almost 20 percentage points from 47% to 66%.

Tegra, Tesla, and notebook GPUs all achieved record revenue. We invested in new growth products that are now sampling, including Tegra 4, i500 4G LTE modem, Project Shield, [NGRID], while controlling OpEx at target for the year. This year we transitioned Kepler across our GPU businesses. Gaming was a key area to benefit. Massively multiplayer games or MMOs continued to drive a robust PC gaming market. Worldwide MMO revenues grew 21% last year to $13 billion according to market research firm Newzoo. And GeForce is the gamers choice of GPU by a margin of almost 2:1 according to gamers on steam.

Our notebook share is a near a record high. Kepler is also starting to ship into Quadro with revenues up 10% this quarter. With Tesla, we are leveraging GPUs beyond graphics into massively parallel processing in supercomputers. Just three years after we entered the market, 50 of the world's top 500 fastest computers are now powered by Nvidia GPUs, including the fastest and most energy efficient. We introduced Nvidia GRID visual computing appliances. GRID is a first of its kind graphics system that serves graphics intensive applications to many concurrent users at once.

One of the major applications is cloud gaming. More than a dozen cloud gaming trials are up and running around the world and others will be announced by more TELCOs as the year progresses. At CES, we announced Tegra 4, the world's fastest mobile processor. It is the first four plus one quad-core A15 processor with an extra energy saving core and 72 graphics cores, compared with Tegra 3’s 12 cores. It delivers the world’s fastest web browsing performance and new, always-on, high dynamic range computational photography. At this point in time, we already have more design wins with Tegra 4 than we had in total with Tegra 3.

We see significant new growth opportunities in the LTE connected device market which is projected to be 150 million units in 2013 and growing at 50% a year. We are now sampling our i500 4G LTE multi-band multi-mode voice and data modem. More efficient and 40% the size of conventional modems, i500 delivers four times the processing capability of its predecessor. This is the first result of our Icera acquisition. Icera is the first company to successfully create and commercialize a software-defined radio modem and has been building modems since 2006.

And we announced Project Shield, an Nvidia branded open platform gaming device. A pure Android device connected to the Google Play store and Tegra Zone, Project Shield is able to play any Android application and game and can also stream PC games from a nearby GeForce GTX PC. Powered by a Tegra 4 processor, Project Shield integrates a five inch retinal display, a console grade game controller and a first mobile tuned port bass reflex speakers. We believe Shield will be attractive to modern gamers who want to play on open platforms and have great gaming experiences, while untethered to their TVs or PCs. Shield will enhance the strategic position of Tegra. Besides highlighting the capabilities of Tegra, Shield will attract great games to Tegra Zone which can then be enjoyed on every Tegra powered device. Tegra Zone has already been downloaded 6 million times.

Looking forward, our company is shifting gears to accelerate. Our GPU business remains strong while we extend our visual computing technology leadership. Tegra 4 is ramping into production for mobile devices this year while growing into embedded devices such as cars and gaming devices. We will engage the LTE connected devices market aggressively this year and we will add new system products incorporating our processors and software, the Nvidia Grid graphics appliances and Shield Android gaming device. We are excited by the investments we’re making into these very large markets where our expertise in visual computing can make any contributions.

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

Karen Burns

Thanks Rob. Nvidia had record revenue for the year of $4.3 billion, up 7% from fiscal 2012. At the start of the year, we set out a number of financial objectives. It’s satisfying to note that we achieved many of them. Among these goals were the following. Game share and our GPU business. Driven by the introduction of our new Kepler architecture, we gained share in both desktop and notebook and delivered record revenue for our notebook products. Gross Tegra revenue at least 50%. Revenue for Tegra products sold into smartphones and tablets increased by $181 million to a record $541 million, up 50% year on year.

Grow Quadro and Tesla revenue. Revenue for Tesla products increased 37% year on year as we shipped our first Kepler products, Tesla K10 in Q3 and Tesla K20 in Q4. Quadro revenue was down roughly 6% year on year. In October we shipped Quadro K5000, our first Kepler based Quadro product in limited volume. This year, we will launch Kepler for Quadro in volume top to bottom into the professional market. We expect Kepler for both Quadro and Tesla to do very well.

Exit the year with gross margin of approximately 52%. We exceeded our targeted exiting Q4 with a gross margin of 52.9% and non-GAAP of 53.2%. We had record gross margin for the full year with GAAP gross margin at 52%, up 60 basis points from the previous year and non-GAAP gross margin up 52.3%, up 40 basis points. Manage our OpEx investments at approximately $1.56 billion on a GAAP basis and $1.4 billion for GAAP OpEx was $1.58 billion, up $20 million from our original expectations. This was due to a $20 million expense for a corporate donation made in the second quarter.

On a non-GAAP basis, which excluded this $20 million charge as well as stock-based compensation and acquisition related cost, we successfully managed to our target of $1.4 billion. Before moving on, I would like to provide more background on OpEx as we continue to invest in our key growth strategy.

Our OpEx is comprised primarily of employee related costs. This includes compensation and benefits as well as other related expenses and supporting costs, largely infrastructure for facilities and IT equipment. GAAP and non-GAAP OpEx were both at 12% from fiscal 2012. Also the year-on-year OpEx increase for GAAP, 86% related to the these employee related costs. 12% to contribution expense or corporate donation, and 2% related to all other costs. With non-GAAP OpEx excluding the contribution expense as well as stock-based comp an acquisition related costs which were flat year-over-year, 98% of the increase came from employee and supporting infrastructure cost. The remaining 2% related to all other operating expenses.

We are investing in the new products and major growth opportunities Rob talked about. i500, Project Grey, N Shield and Nvidia GRID. We added about 840 new staff in fiscal 2013, giving us a total of nearly 8000 employees at the end of the year. Of our new staff, 88% joined our engineering team, 12% joined our operations and SG&A organization. We also invested in an annual pay increase for existing employees and began a 410(k) match in Q4. We believe our focused investment and our growth strategies and our core businesses are critical to our future growth.

Now on to revenue by business segment for the full fiscal year. Beginning this quarter, we changed our financial reporting segments to reflect the way we are now managing our business. We now have two primary reporting segments. GPU and Tegra processor. This new segmentation recognizes that we have two fundamental technologies, GPUs and SSDs, which we leverage across several markets under different brands. Revenue for the GPU business, which includes GeForce, Quadro and Tesla based GPUs, was at 2% year-on-year.

This increase was achieved despite $173 million decline in chipset products which we discontinued. Excluding chipset product revenue, our GPU business grew 8%, representing our third consecutive year of GPU growth. Revenue for the Tegra processor business was up almost 30% from the previous year. Driven by the 50% increase in revenue for Tegra's sales shipped into smartphones and tablets including Win RT devices referenced earlier. Full details of our new reporting segment as well as historical revenue segmentation can be found in my CFO commentary posted on our website.

Now I would like to talk briefly about the fourth quarter. Apart from our tax rate, Q4 results were in line with our expectations at the beginning of the quarter. Revenue was $1.11 billion, down 8% sequentially and up 16% year-on-year. Gross remained at record levels. GAAP gross margin was 52.9%, non-GAAP was 53.2%. Operating expenses were $402 million for GAAP and $360 million for non-GAAP. GAAP and non-GAAP tax rates were both below our expectations at roughly 7% in Q4, as we benefited from the extension of the U.S. research tax credit. Extension of this credit was enacted during our fourth quarter, bringing our effective tax rate down for the year to roughly 15% for GAAP and non-GAAP, in line with our outlook with the inclusion of this credit.

Turning to the balance sheet. Our position remained strong in the quarter and throughout the year. Cash increased each quarter reaching a record $3.73 billion at Q4, up 9% sequentially and up 19% on fiscal 2012. In Q4, we initiated quarterly cash dividends and extended our share repurchase program. We returned $147 million of cash to shareholders in the quarter, with $100 million of stock repurchased and $47 million in dividends paid.

Accounts receivable at Q4 was up $9 million over the prior quarter on slightly less shipment linearity. Conversely, inventory was down $9 million from the prior quarter at $420 million.

Regarding the first quarter outlook for fiscal 2014, our expectations for GAAP are as follows. Revenue is expected to be $940 million, plus or minus 2%. We expect revenue for the first quarter to be less in Q4, reflecting lower GPU sales in line with expectations for the PC industry and lower Tegra sales as customer devices based on Tegra 3 ramp down ahead of Tegra 4 production.

We expect gross margin of approximately 52.9%, flat from Q4, OpEx of approximately $430 million and a tax rate of approximately 16% plus or minus 1%. We expect the same for the annual effective tax rate for fiscal 2014.

For non-GAAP, we expect the following differences from a GAAP outlook. Gross margin of approximately 53.2%, flat from Q4, and OpEx of approximately $395 million. This excludes stock-based compensation and certain charges related to acquisitions an aggregate of approximately $35 million. The increase in OpEx for Q1 over the fourth quarter is primarily due to the employee related costs, including planned hiring for our key growth businesses with the addition of a large FICA tax reset that occurs each first quarter.

Depreciation and amortization are expected to be in the range of $59 million to $61 million and capital expenditures of $55 million to $65 million.

Diluted shares are expected to be approximately $619 million. Lastly, we will pay our next quarterly cash dividend of $0.075 per share in the first quarter fiscal 2014. On an annual basis, this is equivalent to $0.30 per share and approximates an annual yield of about 2.4% based on yesterday’s closing price of $12.43.

That concludes our prepared remarks. We will now take questions.

Question-and-Answer Session

Operator

(Operator instructions). And your first question does come from Betsy Van Hees Wedbush Securities.

Betsy Van Hees – Wedbush Securities

I was wondering if you could help us understand in terms of the guidance from the revenue which business segment. Is it going to be equally down as a percentage basis? Or is one going to be down more than the other in any of your reporting segments?

Karen Burns

So as I mentioned, we expect that our GPU business will be down very much in line with the PC industry and as you know Intel, AMD and other companies have already disclosed. And then the other component will be Tegra related which will be larger and that again is the transition effect from T3 to Tegra 4.

Betsy Van Hees – Wedbush Securities

Okay. Thanks very much. And so my follow up question has to do with OpEx. So, not this pretty big jump up in the GAAP OpEx, $430 million from your $402 million and then your $384 million in the prior quarter. So as we’re looking at the July and October, are we going to see OpEx sort of flattening out, or are we going to continue to have these incremental increases. And I was wondering if you could help us a little bit with the OpEx?

Karen Burns

Sure. So as you saw last year, we had a similar jump and we have it every first quarter. And as I explained, it's really the FICA tax reset that hits us pretty hard in the first quarter. And just like in fiscal 2013, OpEx levels are up for the rest of the year. So we expect a similar type of impact this year.

Operator

Your next question comes from Stephen Eliscu with UBS.

Stephen Eliscu – UBS

Last year, just more specifically you gave us full year guidance for both OpEx and the percentage growth on Tegra, which was very helpful in terms of thinking about where Nvidia was coming around in fiscal '13. Slide 12 in your presentation talks about your growth drivers. Can you give us a sense as to what Tegra will grow the OpEx number and just review some of those other growth drivers. So we have a sense as to where you will end out for the full year.

Jen-Hsun Huang

Well, Steve, first of all thank you. I think we haven’t decided yet whether to guide to full year or not. At the moment we have decided to guide a quarter out. And to tell you the truth, I am not sure how helpful it will be to all of you, that we guided the whole year. And so I think at the moment we are still thinking throughout. But some of the comments that you heard related to -- in Rob's comment, were specific Tegra. As this point we have more design wins than we had at this point with Tegra 3. You also heard we are now sampling our 4G LTE modem, and this is a pretty large market. It's still early in the modem, overall model market. It's about $150 million units large projected this year. Growing about 50% per year. The overall connected device market is probably about 1 billion -- north of a 1 billion units.

So there is a lot of LTE 4G modems that need to be shipped. And this is really the first year where we have the ability to engage the market. So we are really super excited about it. We are going to engage it very very hard. And we are sampling modems around the world now. And so those are good growth indicators for Tegra 4. In the first quarter, always we ramp down Tegra 3 as we ramp up Tegra 4. And hopefully in the future as we get more and more into lower end devices where the lifecycle is a little longer, this transitional effect would be less pronounced. But this is something we expected and is something that will transition into Tegra 4 as fast as we can.

Stephen Eliscu – UBS

And as far as feedback, as far as the guidance, the first time you provided it was probably a bit premature. But when you provided it a year ago for fiscal '13, it was extremely helpful. So we appreciate that. Just as a follow-up question here, we have heard about one of your primary competitors in the ARM processor talk about cleaning clocks of Tegra. Can you give us a sense as to, given some of the slippages that the trade press has reported with Tegra 4, that how -- to give us confidence that indeed you will be able to maintain performance leadership when we see Tegra 4 come out.

Jen-Hsun Huang

Well, I guess, I won't comment on his comment. And I don’t know how he could possibly know the performance of Tegra 4. No one outside the company knows the performance of Tegra 4. So that’s number one. I will refrain my going any further, I would like to. But with respect to Tegra 4, I guess you're just going to have to wait just a little longer, not much longer and you will see performance evaluations of Tegra 4 and I think you’ll be quite pleased with them. Tegra 4 is many times higher performance than Tegra 3 in many areas and it’s designed to be very high performance. There’s a lot of confidence in why we can deliver that performance leadership. We said that about Tegra 3 and I think we delivered on that. This is an area that we’re quite good at.

So whether it’s CPU performance or GPU performance or camera performance, these are three areas that we’ve made big breakthroughs on. But the two areas that are super important to our customers have to do with the battery life that we can sustain despite the fact that our performance is really high and it has to do with two very unique features. One is our four plus one energy saving core. We invented this technology and we’re still the only company in the world shipping this technology and none of our competitors have this technology as of yet, although some of them are talking about it in the future.

Second is a technology that’s related to modulating the backlight on a per pixel per frame level. That is something that’s very unique to Tegra and it saves hundreds of Miliwatts because as you can imagine how much a display backlight consumes. It’s getting higher and higher because the resolutions are getting higher and the displays are getting brighter and people expect more from their display. This is a technology that is quite unique to us and with Tegra 4 we have our second generation of that. And so we’ve introduced not only performance capabilities but as well as battery saving capabilities and new functionalities like our camera. And so I’m looking forward to the reviewers which ultimately the reviewers will tell us how their processor compares to ours. But based on everything we know about that, I think our position of Tegra 4 is going to be pretty extraordinary.

Operator

Your next question comes from Chris Caso with Susquehanna Financial Group.

Chris Caso – Susquehanna Financial Group

I wonder if you could give a little more color about the Quadro business. I think in your last quarter comments you were expecting some weakness in that business and it looked like from the commentary that that grew in the quarter despite some limited quantities of the K5000. Can you talk about that a little bit and what your expectations are that for the April quarter?

Jen-Hsun Huang

I’ll let Karen talk about the April quarter, but what I’ll do is I’ll talk to you about the dynamics of that business. We’re gaining share in that business because our positioning in graphics is getting stronger than ever. Our technology leadership position is pulling ahead whereas graphics is important and it continues to be. We’ve introduced new ways of rendering graphics, ray tracing and other computational graphics capabilities. We’ve added simulation technology made possible by GPU computing so that you can simulate and visualize at the same time. So the capabilities that we’ve provided is increasing.

We’re just transitioning Kepler into our entire enterprise product line and Kepler as you know is just a wonderful GPU. It’s the best GPU we’ve ever built. It’s the best GPU the industry has ever built and we’re in the process of transitioning that into Quadro. That’s been offset. There are some offsetting dynamics related to the weakness of the enterprise market in some areas around the world. There were some delays related to the next generation workstation motherboard from Intel. But I think there are people working through all those issues and I think the dynamics will play out.

Karen Burns

So to answer the second part of your question. So for this quarter Q4, we saw nice a strength in Quadro. Quarter-over-quarter Quadro was up about 11%. So as Jen-Hsun mentioned, we have great plans with Kepler and our market opportunities. For next quarter Q1, we are expecting relatively flat, as Jen-Hsun mentioned, again, there is some offsetting forces and we are being a little bit conservative perhaps. But we had a really strong quarter in Q4.

Chris Caso – Susquehanna Financial Group

Okay. Great. As a follow-up, could you help us calibrate our expectations for the PC graphics business as we go through the year? I understand you don’t provide full year guidance right now but what you guy had told us in the past is that your growth in PC graphics is not necessarily mirroring what's happening in the PC market. There is gaming products cycles, your own product cycles there. Could you give us some color on that and in addition, what your expectations for market share? Particularly notebook side this year, where you have gained some market share last year.

Jen-Hsun Huang

My expectation is that we will gain market share this year, or we will continue to gain market this year. With respect to PC graphics. PC graphics has two components to it, right. And I am excluding the Tesla GPU computing product line, I am excluding the workstation product line, Quadro. The PC graphics, the consumer product line has really two components. The larger component, well there is three components. So there is the OEM graphics, where the OEMs use our GPUs to differentiate their notebooks or differentiate their PCs. They add our GPUs and because it's clearly additive, and so the performance is so much better.

Now they could provide the same basic platform with a premium skew. The dynamic hasn’t really changed and my guess is that an OEMs desire to create premium products will continue to be there. The larger dynamic, the larger market for PC graphics, is related to PC gaming. We have always said that PC gaming is vibrant. We have said that PC gaming is in fact growing. And the reason for that is because the PC platform is open. And it allows for a lot of innovation, not only for technology but also for business models. One of the most important new growth dynamic has to do with free to play. Free to play is really a wonderful business model. And it's a business model that doesn’t serve as well a proprietary and a close platform model where it's royalty bearing.

And so these free to play platforms are fabulous for PCs. And it attracts new gamers. It costs nothing to try it and unless you really enjoy the game, that’s when you really get in and buy up virtual goods. Where you can differentiate your outfit, your costume, differentiate your weapons, play new levels. And so the more you enjoy the game, the more your welcome to spend in the game. And I think that that kind of business model really tailors nicely to PCs. It's also much more associated with MMOs, massively multi-player online games. And so those dynamics continue to help drive our PC graphics business, the gaming graphics business.

So for the year, I think that these dynamics will remain true, that the MMO and the free to play business models are going to continue to drive and help grow the PC graphics business.

Operator

Your next question comes from Doug Freedman with RBC Capital Markets.

Doug Freedman - RBC Capital Markets

Jen-Hsun, when we look at the business model and the OpEx growth, last year we grew OpEx at a rate above the revenue growth and you are able to offset it with gross margin leverage. Looking forward, if I run the numbers, it looks like we are going to see about 15% OpEx growth year on year even if you hold Q1 level pretty stable for the balance of the year. How should we think about that going forward? Should we think about revenue leverage here or is there a gross margin leverage potential to hold on to the earnings column?

Jen-Hsun Huang

Doug, appreciate the question. I think first of all we have to recognize that we’re investing into a once in a lifetime and very large market opportunities. We weren’t the first modem company in the world, but we need a modem, a 4G LTE modem to address the very large LTE connected devices market and if we’re able to deliver that, we’re in a pretty special place. And the reason for that is because we have a great application processor. We have a great application processor roadmap because we have the technology and capability to sustain it. One of the most important capabilities in the mobile market is the ability to have software.

There are so many different operating systems and Microsoft does a great deal in the PC industry that’s not afforded to in the rest of the embedded markets. And this is a market where in the connected device marketplace where there is Android and Chrome and WinRT and Linux and QNX and all these different operating systems require a world class system software team. And so if we have those two things and we combine it with LTE which we’re now sampling. The combination of these three things could put us in a very special place. So we want to go after that large and fast growing LTE marketplace and the investments necessary. So the answer to your question is revenue leverage. We’re looking forward to revenue leverage.

Now, our GPU business of course is still growing as well and there’s opportunities to grow there. The last year we grew 8% if you excluded the chipset business that we exited and this year we added a new type of GPU product. We incorporated our GPUs into a first of its kind graphics appliance. It’s a graphics computing system. It’s dedicated to doing graphics and we described a few applications for the Nvidia GRID and I think that this type of computing appliance, this graphics appliance is – for a GPU is very similar to a router as a router is for networking chips or a network attached storage is for starter chip.

At some point, when you want to share these resources with a larger workgroup or with a lot of different people, these graphics appliances, these computing appliances are really a perfect fit and we see a lot of people wanting to go to SAS, but they can’t do it with graphics intensive applications. And now with the Nvidia Grid, they can finally do that. So I’m excited about the GPU growth opportunities still, but one of the areas where we’re investing very heavily and that’s the reason why you saw the investments from the last couple of years is really to put us in a place where we can engage the LTE market and this year we will aggressively do that.

Doug Freedman - RBC Capital Markets

And just as my follow up. I have a good understanding of where the growth is going to come from on the Tegra 4. Clearly it sounds like with the LTE modem you want to grow in the handset side of the market to take advantage of that. When you look at all the other investments that you’re making as you just ran through a pretty healthy list there of new products that you’ve introduced recently, what’s number two and three on the list as far as revenue contribution?

Jen-Hsun Huang

Well, I really listed two just now. I listed LTE and that’s – when I say LTE I mean Tegra LTE. You have to invest in Tegra and you have to invest in LTE in order to engage that LTE connected device market. There is no standalone modem business anymore and in many of these new 4G connected device marketplace, an integrated approach is necessary and that’s the reason why we bought Icera and that’s the reason why we’re investing in LTE. So that’s really one investment. You have to do it all together or you don’t do it at all. And so that’s one of the reasons why all of the standalone modem companies really have gotten out and that’s the reason why most of the standalone application processor companies have gone now. Because unless you have the combination of these three things, something like a Tegra application processor or a 4G modem and a software stack, you really can't play, you can't play the big games.

And I think we are rather uniquely positioned to be a great challenger here and the number two is GRID. That particular investment is really about taking our GPU and taking it out of the box. If you take the GPU out of the box, then you can grow independent of the box. And the GRID is going to make it possible for us to put our GPUs, if you will, on a network and whether it's a Mac network or a PC network, or an Android network, or whatever devices you have got networked on to it. So those were two investments that I have described and both have exciting growth opportunities ahead.

Operator

Your next question comes from Blayne Curtis with Barclays Capital.

Blayne Curtis – Barclays Capital

[Inaudible]

Jen-Hsun Huang

I am sorry, that was really difficult for us to understand. Could you try to say that again if you are calling in on a landline? Just try that one more time.

Blayne Curtis – Barclays Capital

I am travelling. I was wondering if you could provide some color as to (inaudible) of what you see tablet (inaudible) a bigger driver for you as well as (inaudible)?

Jen-Hsun Huang

Okay. I am going take a swing at that. I think you asked what is likely to be a larger growth driver for us. Is it tablets or phones and number two, is it Android or Win RT. And so that’s a good question and let me see if I can try to dissect that. First of all, you know on a yearly basis, although the quarters have been a little choppy, on an annual basis most of our growth, not all of our growth but the vast majority of our growth has come from tablets. Whereas people were rather skeptical about Android tablets, we really stuck with it. And we stuck with it because we believed not in whether a tablet, an Android tablet is going to be used or not, were successful or not, we believed in the Google Cloud. We believed that people will buy books and music and games and movies and store their photographs up in the cloud.

And when you put all your personal content in the cloud, you want to enjoy it on your phone, you want to enjoy when you are home in a larger format. And in which case an Android Tablet. We also believe that you would want to enjoy playing the games with a device that's designed dedicated to play games and that’s the reason why built Shield. And so I think the tablet market has turned out to exceed most people's expectations. And we grew a lot in Android tablets this last year and my expectation is that there will be more Android tablets build this next year. And so the first thing is, yes, I believe in tablet. I believe in tablets wholeheartedly and it's an area, it's a segment of the marketplace that we are going to continue to invest and be quite successful in.

WinRT, I believe it is essential. Strategically essential for Microsoft to be on all of the major processor in the world. Surely the highest volume processor in the world. As a software company and an operating system company it's a market they can't afford to ignore. And so Win RT is surely going to be an important area for them. Now whether people see Win RT as a consumer tablet or as a PC is yet to be determined. But at the very minimum, if you are extrapolated forward by a few years, it's hard to imagine how Win RT can possibly, won't possibly be a wonderful PC. We know exactly what it feels like on top of the Tegra 4 and it rocks, it's fantastic. And so WinRT, I think will be successful as well. Microsoft will have no choice but to continue to invest in it and it’s a great company.

They’ll do something great with it with respect to tab. So that’s Android and WinRT. I already commented on tablets, smartphones, super phones. This is an area that we will likely need to have an LTE modem in order to be successful and that’s the reason why we work so hard to accelerate our LTE modem to market. We’re working around the clock and this is – with an LTE modem, the Tegra processor and our software capability, we will be able to address a much larger phone opportunity going forward. And so we’ll have some phone success this year, but we’re not expecting to have a whole lot of phone design wins until we engage the market with LTE.

Operator

Your next question comes from Kevin Cassidy with Stifel Nicolaus.

Kevin Cassidy – Stifel Nicolaus

A question. I wonder if you could give us more of a timeline on the GRID development and when we could see significant revenue for that product. What are some of the obstacles in front of you still?

Jen-Hsun Huang

Thanks a lot, Kevin. I think GRID the architecture comes in three flavors. One and the one that we developed first is GRID for enterprise VDI. We’ve been working with Citrix, VMWare and Microsoft for quite a long time and that particular application by installing our graphics card, the GRID VGX graphics cards into a industry standard OEM server, you could deploy it in enterprises and accelerate the VDI installations that you have. And so if you had a Citrix desktop it would just be much snappier. We could also address markets where the current VDI solutions aren’t sufficiently good enough because the graphics performance isn’t good enough, it doesn’t run certain applications like workstations. So we could expand the market for VDI. Our three partnerships are going fabulously. Everybody is very excited about that and that is likely the first area of growth this year for GRID.

The second component of growth has to do with Cloud gaming. We have about six partners and we’re evaluating new ones who are middleware partners who service TELCOs and MSOs around the world to provide Cloud gaming to these TELCOs and MSOs. They would like to provide gaming as one of the channels of cable television. And so it’s another way for them to monetize a subscriber base they already have. It’s another way for TELCOs to provide content that could be enjoyed over the LTE networks. And so you could imagine that this is creating new content, adding content inventory to their subscriber bases, something that of course every TELCO and every MSO would more than love to do. And so we have six partners partnering with us around the world.

The trials are going on at 12 TELCOs around the world and there are more coming online as we speak. So that evaluation will take longer because the quality of service has to be proven and these large networks have to be tested. And so that’s the second that we’ve started. I’m not expecting large revenue contribution this year, but it’s really, really important that we do proof of concepts and trials at every TELCO this year. And so that’s our primary focus. And the third has to do with SAS. As you know, most of the software companies would like to move to a SAS model, from whether it’s monetization or just being able to access new customers more quickly, not having to install a heavyweight application in somebody’s network is one of the fastest ways to capture new subscribers or new customers, new licensees.

And so being able to just literally put a heavyweight application like an Adobe or AutoDesk or SolidWorks application, workstation application, there’s a little icon that you double click and boom, you’re in that application because the application is being served on a network. It's a real benefit to them. And so this is a new market as well for us. Obviously created the first of its kind of device. It's a graphics, it's a GPU. It's a massive collection of GPUs in a computing device. And so we are very good at GPUs of course and all the software is in-house. But we are re-cultivating that marketplace and we will see how it goes. And so I wish I had crisp answers on these -- on GRID. But this is a first of its kind device and we have enthusiastic partners. Because it provides a benefit to all those in the ecosystem and as soon as we can, we will report on the actual business component of it.

Kevin Cassidy – Stifel Nicolaus

Thanks for those details. Have you seen any competition or any other alternative solutions for this type of application?

Jen-Hsun Huang

Well, GRID is first of its kind and my expectation is that it will be the only one of its kind for a while. And the reason for that is because in order to crate GRID, we have to create a new architecture for a GPU, create a new system architecture. Create a new system software architecture to virtualize, to share, to connect, to remotely render on to devices of all kinds. And so this is -- we own the entire stack and so it's easy for us to do it. I don’t really know how other people, somebody else would independently cut across that many layers of the architecture and system, and systems software to achieve it. But at the moment everything I know and what I see in the horizon, GRID is really the only one in the market.

Operator

Your next question comes from Shawn Webster with Macquarie.

Shawn Webster - Macquarie

I was wondering if you could help me understand the gross margins. You did a very job keeping them stable in a down revenue environment but it seems like you had a pretty healthy mix up in high margin areas like workstations. And even going into Q1, where you are expecting flattish gross margins, again it sounds like workstations again will be kind of flattish or you will see declines elsewhere. Are you seeing gross margin decline elsewhere or maybe price declines, just help me understand that. Thank you.

Karen Burns

I’m sorry. I missed the first part of your question. Can you just -- the first part please?

Shawn Webster - Macquarie

I am trying to figure out the flat gross margins, where you have what seems like a positive mix effect happening underneath your revenues to workstation.

Karen Burns

For this quarter, or next?

Shawn Webster - Macquarie

For both Q4 as well as your guidance for Q1.

Karen Burns

Okay. So the mix is quite -- as I explained in the commentary, it's really stable. Yes, Quadro was up but there is always some offset. Quadro was up in Q4 but probably one of the larger areas is the memory. When memory moves around, that can basically drive our margins a bit. But overall the blend is pretty stable and that’s just how it is. The next quarter we are expecting about the same.

Shawn Webster - Macquarie

Okay. As it relates to the desktop segment, you had pretty good share gains this year. Can you talk about what some of the dynamics are on the channel currently? As far as like how inventories are looking and maybe what your expectations are in terms of market share for the full year.

Jen-Hsun Huang

Well, inventory levels turn out to be slightly up when the revenues are down are you could imagine. And so we are expecting next quarter, this coming quarter to be seasonal as well as consistent with the overall PC market. And so inventory will likely be slightly -- will be up a tad. But we watch it very, very closely. You know the channel is very important to us and all the partners and the flow through is important to us. And in a way to control and manage your gross margins, it's vital. It's vital not to have too much inventory, as you know. And so that we watched that like a hawk and that’s one of the reasons why our gross margins and well managed as improving.

As far as the year goes, our position in graphics is as good as it's ever been and my expectation is that our position in graphics will improve this year. Shield will help GeForce. The ability to stream remotely your PC game and to be able to enjoy it on your Shield is quite a magical new experience and the enthusiasm from our GeForce customers around the world is really quite spectacular. We’ve had more press written about Shield than just about anything in the history of our company. And so I think the enthusiasm is quite high and Shield is intended to be – one of its intentions is to be a companion device for GeForce. And so that’s going to enhance our GeForce position. So throughout the year my expectations are our position will continue to improve. But with respect to market share we’ll just have to report that when we get there.

Operator

Your next question comes from Jim Schneider with Goldman Sachs.

Jim Schneider – Goldman Sachs

I was wondering if you look at your pipeline in Tegra 4 (inaudible) throughout the year, should we expect any kind of meaningful increase in Tegra as we head into the July quarter? Is this going to be more back half loaded in Q3 and Q4?

Jen-Hsun Huang

I’m sorry but it’s impossible to hear you at all.

Jim Schneider – Goldman Sachs

I’m just wondering, in terms of the design win ramp you see for Tegra 4 this year, do you think that will be an increase in any, like the July quarter or do you expect that all to come in the back half of the year?

Jen-Hsun Huang

We ship Tegra 4 starting in Q2. We’re ramping production now and we have full production release. And so we’re ramping production. Q2 is when we ship to customers. Q2 is also when we ship the Tegra 4 based Shield device. And so we also start shipping in Q2. Although it’s in the latter part of Q2, it’s going to be in Q2.

Jim Schneider – Goldman Sachs

Follow up. When we look at your R&D spending throughout the year when you talked about modest decreases as we head into the end of the year, could you talk about any new initiatives, whether that’s for GRID, for shield or (inaudible) that will provide that increase as we head through the year?

Rob Csongor

Jim, this is Rob. Did you ask are there any new initiatives on OpEx other than GRID? Is that what you asked?

Jim Schneider – Goldman Sachs

Is there any cause for the repeat through the year? Yes.

Jen-Hsun Huang

There are three things that are new businesses if you will, not new businesses but additions to our businesses this year. The first addition is LTE modems. LTE modems by itself is not a new business, but LTE modem will allow Tegra to enter into new markets where LTE is necessary. We already have many LTE design wins on i500 and our expectation is this is going to be quite a good trend for us. So that’s one additional part of our business. The second additional part of our business is using our own Tegra processor and utilizing our own proprietary technologies and software and such to build an Android device. We call that Shield. The third addition to our business is GRID which is a GPU. It’s a network attached GPU. It’s not a new business. It’s a GPU business. It’s packed with GPUs and it serves our existing marketplace partnered with our existing partners. It’s sold into the same ecosystems. And so we have three things this year. Tegra LTE, number one. Number two, Shield; and number three is our GRID graphics appliance. Hey, Jim, I hope we answered your question. We will follow up with you and make sure we got that. I think we have time for one more.

Operator

Your next question comes from Patrick Wang with Evercore Partners.

Patrick Wang - Evercore Partners

Just a few questions. First off, I was hoping you could talk a little bit more about your design traction on your modem business. So you talked about i500, the Icera acquisition is definitely a key part of that. Just curious as you know, if you could help us maybe understand maybe the shape of the growth this year in perhaps deciding, is it something that’s grows to 100 million this year, is it something that is a lot bigger than that. I mean 150 million for the year, it's a big [tam]. So just wanted to think about that right away.

Jen-Hsun Huang

Well, let's see. The first thing is, it's important to note that the previous generation of our LTE modem, the i410, is the first and currently still the only Win RT LTE modem certified by AT&T. It is currently shipping in the Asus Vivo tablet. And if you get a chance to try this, it's really wonderful. It stands to reason that there are many other Win RT Tegra 4 tablets in development. And we would transition them to the i500 modem. We don’t sell the modem separately. It's sold as a kit. It's sold with Tegra 4. And so it's hard to break it out per say. But more and more of our business will include LTE because we had no LTE penetration in the past and this year we are going to be shipping LTE modem. So I don’t exactly how much -- we are trying to make it as much possible. But at this point we are not guiding the whole year.

Patrick Wang - Evercore Partners

And then just for my follow up. I was curious, when we take a look at the full year, you have got a lot of great stuff happening on Tegra outside of just handsets. So you have got tablet traction, you have got Shield, you have got automotive that did well last quarter. When we look at it full year here, I mean you guys did a great job hitting 50% growth last year. Could you care to maybe give us some help in terms of ballpark, how much growth we should be thinking about in this year in fiscal '14, given the transition and the fact that we are kind of starting off a little bit light as we enter the April quarter.

Jen-Hsun Huang

Well, the way we enter the April quarter is I guess similar during every transition and I am hoping that overtime as our -- although we have had this transition now for all three generations, each one of the transition, the peaks have become much higher. And the revenue at the whole business has much become much larger. And so our position in the market place is growing. Our footprint is growing and our position is more strategic to the marketplace than ever. But we haven’t decided to guide the whole year. We are going to go through this transition one more time and we will start shipping in Q2. But we haven’t decided to guide for the full year. What you recognize are the same things we observe as well. Whereas before we really only had Android tablets, now we have a much larger Android tablet market. We have Win RT PCs, we have Shield, and we have automotive. And so Tegra is not just the smartphone and of course we have Tegra LT which will be great for connected tablets as well as smartphones.

And so we have more than just Android application processors now. We have much more than that, but it's hard to say exactly how much for the year and we are just going to go do as best we can.

Okay. I think that will do it for today. We are going to have to wrap it up. Thank you everyone. We look forward to talking to you next quarter at our Q1 results. Thank you.

Operator

This does conclude today's conference call. You may now disconnect.