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Executives

Michael Hara – VP, IR and Communications

Jen-Hsun Huang – Co-Founder, President and CEO

Marv Burkett – CFO

Analysts

Glen Yeung – Citigroup

James Schneider – Goldman Sachs

Mark Lipacis – Morgan Stanley

Krishna Shankar – JMP Securities

Brian Piccioni – BMO Capital Markets

Uche Orji – UBS Investment Bank

Shawn Webster – J.P. Morgan Securities

David Wu – Global Crown Capital

Doug Freedman – American Technology Research

Hans Mosesmann – Raymond James

Tim Luke – Barclays Capital

NVIDIA Corporation (NVDA) F3Q09 (Qtr End 10/26/08) Earnings Call Transcript November 6, 2008 5:00 PM ET

Operator

Good afternoon. Thank you for holding. I would now like to turn the call over to Michael Hara, Vice President, Investor Relations. Thank you, sir. You may begin.

Michael Hara

Thank you, Tim. Good afternoon and welcome to NVIDIA's conference call for the third quarter ended October 26, 2008. Today’s call is being recorded. If you have any objections, please disconnect at this time.

On the call today for NVIDIA are Jen-Hsun Huang, NVIDIA's President and Chief Executive Officer; and Marv Burkett, NVIDIA's Chief Financial Officer.

Before we begin, I would like to remind you that you can find copies of our SEC filings, our earnings release, and a reply of this webcast on the Investor Relations page of our website at www.nvidia.com. The webcast will be available for replay until our conference call to discuss our financial results for the fourth quarter of fiscal 2009. Also, shareholders can listen to a live webcast of today’s call via the Investor Relations page of our website.

During this call, we will discuss some non-GAAP financial measures about diluted net income per share, tax rate, and gross margin when talking about our results. 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.

Unless otherwise noted, all references to research market and market share numbers throughout the call come from Mercury Research or John Peddie Research.

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 conference 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, including statements about our financial outlook and projections, the importance of and uses for the GPU and CUDA, the impact, performance and availability of and demand for our products and technologies, our competitive position and our growth and strategies. Our actual results may differ materially from results discussed in any forward-looking statements.

For a complete discussion of factors that could affect our future financial results and business, please refer to our Form 10-Q for the fiscal period ended July 27, 2008 and the reports on Form 8-K filed with the Securities and Exchange Commission.

All forward-looking statements are made as of the date hereof based on information available to us today, and, except as required by law, we assume no obligation to update any such statements. The content of the webcast contains time-sensitive information that is accurate only as of November 06, 2008.

Consistent with the requirements under Regulation FD, we will be providing public guidance directly in the conference call and will be unable to provide significantly more information in offline conversations or during the quarter. Therefore, questions around our financial expectations should be asked during this call.

At the end of our prepared remarks, there will be time for your questions. In order to allow more people to ask questions, please limit yourself to one question. After our response, we will allow one follow-up question.

With that, I will hand the call over to Jen-Hsun.

Jen-Hsun Huang

Thanks Mike. Good afternoon and thank you for joining us. We reported revenue of $898 million and GAAP diluted earnings per share of $0.11, in line with our expectations. Non-GAAP diluted EPS was $0.20.

During the quarter, we accomplished several important objectives that position us to return to growth. We improved our financial performance by increasing our non-GAAP gross margins from 39.1% to 41.9%, while managing our operating expenses tightly. We transitioned our performance segment GPUs to 55nm and now have the fastest products at each price point, positioning us to recapture share.

Together with Apple, NVIDIA launched a new GeForce 9400M motherboard GPU for its new lineup of Mac notebooks. The GeForce 9400M is the industry's first processor to integrate three complex chips – the Northbridge, the IO/network processor, and a GeForce GPU into a single chip, and it delivers up to 5 times performance improvement over Intel integrated graphics in one-half the space. The MacBook and MacBook Air come standard with the 9400M. The MacBook Pro comes standard with a hybrid combination of two GeForce GPUs – where the 9400M is used for maximum battery life and a GeForce 9600M GT for high performance mode.

We announced the NVIDIA Quadro CX, the industry's first accelerator for Adobe's Creative Suite 4 content creation software. NVIDIA specifically designed and optimized the Quadro CX to enhance the performance of the CS4 product line and give creative professionals the ultimate in performance and productivity.

CUDA continues to gain momentum all over the world. There are now well over 750 research papers published on how GPU computing with CUDA can dramatically accelerate computing-intensive algorithms, such as N-body simulations for molecular dynamics and astrophysics, linear algebra, CT image reconstruction; image and video processing, such as image recognition and search, string processing for gene sequencing, and string search and so on. CUDA has received PC Magazine’s Technical Excellence Award. There are now over 50 universities around the world teaching CUDA in their computer science curriculum. And we’ve now shipped over 100 million GPUs with CUDA.

At this year's SIGGRAPH, NVIDIA set a new milestone in computer graphics by demonstrating the world's first real-time fully-interactive ray tracer. Our interactive ray tracing solution adds a new capability to our Quadro visual computing solutions, and will enable customers, like the auto industry, to preview car designs and demonstrate new cars to customers. Visual computing took center stage during the Presidential election television coverage. Every dynamic graphic was rendered live on NVIDIA Quadro. The underlying applications from our close ISP partners, Vizrt, Brainstorm, and RealityCheck used NVIDIA technologies, including CgFX or Shader FX, and NVIDIA Scene Graph to deliver what broadcast experts are calling one of the most successful election broadcasts in history.

Perceptive Pixel’s interactive touch displays were even the highlight of a skit on Saturday Night Live. CNN pushed the boundary even further with holographic projections of its newscasters from remote locations. Leveraging camera, tracking technology used in sports and film, they composited NVIDIA real-time rendered virtual sets with live video to enable effects never seen before. All of these effects and experiences were made possible by Quadro.

Visual computing is revolutionizing many aspects of our lives, from broadcasting to the PC to mobile devices and to the internet. NVIDIA is in the center of this revolution.

I will return later to highlight a number of our key initiatives later in the call. Let me now turn the call over to Marv to discuss our financial results.

Marv Burkett

Thanks, Jen-Hsun. My comments today will cover the third fiscal quarter of fiscal year ’09 that ended October 26, including comments on both GAAP and non-GAAP results. A full reconciliation between GAAP and non-GAAP is included in our press release and on our website.

As Jen-Hsun stated earlier, revenue for the quarter was $898 million, up $5 million or less than 1% from the second quarter. With all the turbulence in the financial markets in Q3, we might have expected our business to be even more impacted. That is not to say that our business wasn’t impacted, it’s myriad to say that our markets showed some resiliency in the face of disruptions in the financial markets.

Revenue in our GPU business, which includes desktop, notebook, and memory was down 8% quarter to quarter, or $42 million. Desktop was down 12% and notebook was down 4%. Within desktop, the softness was unit-related as ASPs actually increased slightly from the second quarter. As we transitioned our performance segment GPUs to 55nm, we re-established performance leadership, which helped ASPs. Within notebook, it was the reverse, as units increased but there was a slight decrease in ASPs. ASPs for the Montevina refresh are lower in general, but gross margin is still good. GPU gross margin improved in the quarter from the low levels in Q2.

MCP showed strong growth of nearly 19% quarter to quarter, or $31 million, as we’ve ramped volume production of MCP79, which is the GeForce 9300 and 9400 series. Total MCP79 revenue was more than $75 million in the quarter.

Professional solutions, including our workstation business, grew by 11%, or $20 million, quarter to quarter. The consumer business was relatively flat quarter to quarter and had growth in the Sony royalties offset by a decline in the mobile business.

For gross margin, we improved our GAAP gross margins to 41% and our non-GAAP to 41.9%. The difference between GAAP and non-GAAP is stock-based compensation of $3.6 million and $4.5 million for a royalty dispute.

Operating expenses in the quarter were $311 million, which includes $8.3 million of restructuring costs. We are pleased with our progress in restraining our OpEx. Headcount at the end of the quarter was 5,293, which is down by 260 from the end of the second quarter. Depreciation was $49.3m, up $3 million from Q2, and capital expenditures were $109 million, that includes the Transmeta license.

Within the interest and other income, there were three discrete items that caused an impairment charge totaling $8.8 million. On the tax rate, the renewal of the R&D tax credit resulted in a tax benefit for the quarter of $745,000 and a year to date tax rate of 7.7%. The result of all of this is that GAAP diluted earnings per share was $0.11 for the quarter and non-GAAP diluted earnings per share was $0.20.

On the balance sheet, cash and equivalents and marketable securities were $1.3 billion, which is down by $352 million from the second quarter. We repurchased $300 million worth of stock during the quarter. The operating cash flow was a positive $43 million for the quarter. Accounts receivable were $608 million, which is down $72 million from the second quarter, and DSO was 62 days, also an improvement from the second quarter.

Inventory grew by 92 million quarter to quarter and the DSI grew to 90 days. The growth in inventory was primarily in new GPU products and in MCP79 as we ramped volume. We believe that channel inventory decreased slightly from Q2. And 90 days of DSI is about as high as we would want, and we will work to bring down the inventory levels in Q4. Accounts payable and accrued liabilities declined by $131 million during the quarter.

On the outlook, given the economic uncertainty, it is probably unrealistic to give any outlook at all, and certainly a precise one. So I would caveat our outlook that there can be a wide range on the outcome. I also believe it is unrealistic to expect any sort of robust Christmas spending on the part of the consumer. Therefore, we believe our revenue will be down for the fourth quarter and a point estimate with a wide range of approximately 5%. The revenue line is the most difficult to forecast. We believe gross margin will be relatively flat, and operating expenses will also be relatively flat. This means that gross margin in the range of 41% and operating expenses of approximately $310 million. Other income should improve over Q3 and the tax rate for the fourth quarter should be approximately 13%.

With that, I'll turn it back over to Jen-Hsun.

Jen-Hsun Huang

We are driving several initiatives to strengthen our competitive position while expanding into new segments and markets. First, we captured lost share in the performance segment. We have superior performance and market changing differentiators like CUDA. With our efforts this quarter, we are now properly cost positioned as well. Second, increase our exposure to the notebook market by using our new motherboard GPU to bring five times better graphics performance to Intel notebook platforms, the fastest-growing segment of the PC market. Third, with the announcement of Adobe's Creative Suite 4 and our QuadroCX accelerator for CS4, we have expanded our market footprint beyond gamers and industrial designers to include the creative generation.

Gamers want performance, and with the GeForce GTX280 and 260 and the recently-announced 3-way SLI, GeForce delivers the best performance at each price point. And gamers buy new GPUs to play the latest games. The top games this fall are Crysis Warhead, Far Cry 2, Call of Duty World at War, Fallout 3, and Dead Space. Gamers will experience up to 30% faster frame rates with GeForce GTX GPUs.

Enthusiasts want the fastest machines. This fall, that machine is built on Intel's new Core i7 Bloomfield CPU and our new 3-way SLI technology. And for the first time, SLI is available on SLI-licensed Intel X58 motherboards as well as nForce. Reviewers all over the world have concluded that a 3-way SLI configuration with GeForce GTX280 is unambiguously the fastest.

Fast 3-D graphics is important, but the market wants and needs more than just more of the same, more than just graphics. We believe the industry must deliver new and surprising capabilities that delight and awe the world again. To do so, it requires revolutionary technology. With NVIDIA's CUDA parallel computing architecture inside every new GeForce, we believe we can. There are amazing software algorithms for applications like computer vision, image recognition, physical world simulations that are possible, but only if computers are 100 times faster. With CUDA, those capabilities are possible today.

In his new GPU era, the GPU does more than just graphics. Whereas the competition has just graphics, GeForce with CUDA gives you graphics plus. Graphics plus means that your GeForce has lightning fast graphics and because of CUDA you get much more. You get physics processing on the GPU. Our PhysX physics engine enables games to do realistic simulations of physical properties in a world 20 times faster than a CPU alone, like dust blowing in the wind, water running in a stream, and natural looking clouds. The PhysX engine has been adopted by game studios all over the world. It is incorporated into the number one game engine in the world, Epic’s Unreal Engine. PhysX is free to developers, and is the only physics engine that is accelerated by the 100 million GeForces in the world. A pipeline of developers and games supporting PhysX will be announced in the near future.

With graphics plus, you get image and video processing. There is a ground swell of new applications enabled by CUDA, from digital photography to the excruciating process of converting movies for your iPod. Users are performing more processing-intensive tasks than ever. Elemental Technologies announced their BadaBOOM transcoder. Pegasus, Nero, CoreCodec have announced plans or demonstrated CUDA acceleration in their video processing players. AreSoft, CyberLink and Corel have announced applications that utilize the massively-parallel array of CUDA processors in our GPUs to do sophisticated computational super resolution algorithms to magically enhanced DVDs to1080p HD resolution. The result is simply awesome and frankly surprising.

And finally, this quarter we will announce a groundbreaking product that is starting to create buzz throughout the industry. Stereoscopic 3-D glasses for GeForce. This is a product we have been working on for over three years. We are going to bring the 3-D experience that is sweeping the movie industry to PCs. We will reserve the exciting details for launch. We previewed this at NVISION, and the enthusiast press was entranced. BizTech wrote that ‘I have to say the effect is amazing. I seriously didn't want to stop playing.’ GotGame said that what they were seeing was pure undiluted awesome. Software developers are thrilled too. Mark Rein, the CEO of Epic Games stated that the Age of Empires Stereoscopic 3-D demo they showed in the NVISION keynote looked absolutely amazing. Stereoscopic 3-D is a great example of how consumers continue to demand more of graphics hardware. With our graphics plus initiative, we are moving the industry forward and bringing new and exciting innovations to delight the world again in a way that just graphics simply can't.

The fastest-growing segment of the PC market today is notebooks. Notebooks are now 55% of all PCs shipped, 140 million units this year and growing at 25%. Although visual computing is also important for notebook users, the tight space and power constraints have caused the adoptions of GPU in notebooks to lag desktop PCs. We are addressing this by creating ever more power efficient GPUs and by integrating all of the chipset functionalities into the GPU to conserve space. A couple of weeks ago, Apple was the first company to announce our new GeForce 9400M, designed for Intel processors and which integrates three chips into one for amazing space savings. It performs five times faster than current integrated graphics. Apple was the first company to announce and today, Toshiba announced new notebooks based on 9400M. Toshiba announced a gaming notebook that has three NVIDIA GPUs inside of them, the 9400M and two 9800 GTs in SLI. There is a pipeline of design wins and new design win momentum for the 9400M is extremely strong. With the 9400M and others on our roadmap, we now have exposure to the growing notebook market like we have never had before.

Another brand new market for us is the creative professionals and consumers. These are professionals who use Adobe's award-winning tools to create digital content such as movies, commercials, ads, games and Web sites; or consumers making home movies, digital photo albums, or the millions of movies that are being shared on YouTube. As the resolution of images and movies increase and as the image processing effects become ever more sophisticated, the editing experience is painful even with the fastest Quad Core CPUs. That is why Adobe and NVIDIA engineers worked so closely for the past several years to GPU accelerate all of the CS4 applications. The result is amazing. John Loiacono, Senior Vice President of Creative Solutions at Adobe, said that a critical element of CS4 was to capture the enormous power of the GPU. The difference is astounding. Performance is important to creative professionals and with the NVIDIA GPU, they are sure to be able to interact with images and videos in a much faster, smoother, more engaging way. The creative generation is significant expansion of our TAM. Adobe estimates the addressable market to be 6 million creative professionals and over 38 million creative non-professionals. To put these numbers in context, the total Quadro professional industrial design TAM today is only 4 million units. So another 44 million potential new users represents a very significant addition.

We still have much work to do to be where we would like to be, but we made great strides this quarter. We transition to 55nm, and have a great lineup with graphics plus. With our single-chip notebook GPU, we have a market-changing offering for notebooks, the fastest growing segment of the PC market. And at Adobe and Quadro CX, we have expanded our TAM by over 40 million people, 40 million new visual computing users.

We are happy to take your questions now.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from the line of Glen Yeung with Citigroup. Please proceed.

Glen Yeung – Citigroup

Thanks. I guess my first question is around your gross margin outlook; Marv, maybe a question for you. We’ve been hearing a lot about 55nm and a lot of discussion about that yields look like. I wonder if you can address that issue and also talk about what your ASP assumptions are in that gross margin outlook.

Marv Burkett

Well, we are doing just fine with 55nm. The yields are just fine. The assumption with regard to ASPs is that I think that it is exactly like we told you last quarter. We don't see major changes in ASPs in any particular segment going forward. The issue is, what is the volume of each of those segments? And I said with regard to the outlook (inaudible) probably a lot of variability in those segments. I think that Jen-Hsun would tell you that we are focused on regaining some market share in what I would call the performance and high-end portion of the desktop GPU market that would enhance ASPs. So I guess that I feel comfortable with our outlook on ASPs.

Glen Yeung – Citigroup

Okay, and maybe as a follow-up, also for you, Marv; if you look out over the next four quarters or so, you pick a time frame, what is the potential for NVIDIA to do incremental cost cutting versus what you have already announced and beyond what is just the potential, what is the intention?

Marv Burkett

Well, the intention is to hold the line on operating expenses and grow revenue. We are totally focused on our opportunities to grow revenue. We have some significant opportunities and we do not want to jeopardize those by doing something foolish in cutting operating expenses. I am happy with the job that we have done so far, but I'm not focused on further cuts in operating expenses and focused on revenue growth.

Glen Yeung – Citigroup

Okay, thanks.

Operator

Our next question comes from the line of James Schneider. Please proceed.

James Schneider – Goldman Sachs

Good afternoon and thanks for taking my question. Maybe just as a follow-up to the gross margin question, could you talk about your progress in the 55nm ramp, when you feel you will be at – fully on production of 55nm and how much 65nm inventory do you have remaining?

Jen-Hsun Huang

We have 65nm inventory remaining, but everything we are ramping now is 55nm; and everything on the high-end that we are shipping now is 55nm.

James Schneider – Goldman Sachs

Okay, fair enough. And I guess as a follow-up, in terms of the market that we have seen over the last few quarters, notwithstanding the macro weakness affecting desktop GPU demand, there seems to be a pretty precipitous share of shift between desktops and notebooks. Can you address your outlook over the next several quarters, whether you think that there is some kind of breakpoint where the rate of desktop share doesn't decline as much going forward?

Jen-Hsun Huang

The desktops – what the market shows is that desktop units are relatively flat and that the growth is coming from notebooks. It is not so much that the total units are flat and there is a shifting of units from desktop to notebooks. And so desktop units are relatively flattish and notebook growth is clearly much more significant; and our focus on the desktop is continuing to bring exciting new products and ideas to the marketplace that causes people to want to come back and buy new PCs. We have to recapture our share. We lost some market share recently and as we were transitioning and – but those things are all behind us now and we're focused on going after the share that we lost. In terms of the notebook market, we recently introduced the 9400M. This is the chip that was in the MacBook and the MacBook Air and also the MacBook Pro. And this particular chip is really amazing. It integrates three chips into one; a lot less real estate on the motherboard; much, much lower power and as a result – and it is also our first Intel processor notebook GPU, the first one we have ever built for a motherboard GPU. And so this is a very new market for us that we are growing into. You already saw the initial success that we have announced and there are many more that we would like to announce in the near future. But this is a very important growth opportunity for us. And so for the first time, we have exposure to the vast majority of the fastest-growing segment in the PC industry.

James Schneider – Goldman Sachs

Thank you.

Operator

Our next question comes from the line of Mark Lipacis with Morgan Stanley. Please proceed.

Mark Lipacis – Morgan Stanley

Thanks for taking my question. First question, perhaps for Marv; can you give us a sense of a more normalized gross margin and operating margin target that you guys have and if you care to take a stab at when you might be able to reach that?

Marv Burkett

No, I won't take a stab as to when we might be able to reach it. I don't see anything long term that is an impediment for us getting back to where we were before in the mid to higher 40% range and obviously we are focused on that. In Q2, we took a step backwards, now we have to recover. Part of that recovery is going to be regaining market share in the performance enthusiast segments, part of that recovery is going to be transitioning to 55nm and beyond. So we are focused on gross margin improvement, but I do not have a timetable of when we get back.

Mark Lipacis – Morgan Stanley

Fair enough. Second question; you are successfully transitioning into 55nm now. When would be a reasonable time to expect to see 40 nm products hit the market? Thank you.

Jen-Hsun Huang

We haven't announced any 40nm products yet.

Operator

Our next question comes from the line of Krishna Shankar with JMP Securities. Please proceed with your question.

Krishna Shankar – JMP Securities

Yes, Marv, can you give us the revenue mix in the quarter between desktop, notebook, MCPs, and professional solutions, just as approximate percentages?

Marv Burkett

Well, I think I did that because we said that the total GPU business was down quarter to quarter and the MCP business was up, so if you will take your baseline that you had last quarter and that data and put those growth rates or decline rates on them, you will come to the breakout of the revenue for the quarter. I don't have the percentage of the revenue within those, the total is up to 100%.

Krishna Shankar – JMP Securities

Okay, and then your guidance for the January quarter, are you saying basically flattish to plus or minus 5% for revenues?

Marv Burkett

No I think I said the point estimate was a decline of 5%.

Krishna Shankar – JMP Securities

Okay, all right. And then just a final question on the performance and enthusiast graphics with the new product line on 55nm, do you feel that you can continue to gain market share here in the January quarter and what is the outlook for that segment of the market, given consumer spending patterns?

Jen-Hsun Huang

We absolutely will regain market share and this is a segment where technology matters, performance matters, architecture matters, and we have the best lineup. Our challenge was never architectural leadership, our challenge was that we were caught flat footed at 65nm and our chip and board solution was just too expensive. And so, we have made that transition in Q2 and we are in Q3 and we are through that transition, and we are off and running. With respect to the robustness of the segment, historically, this segment has responded to new games. Gamers buy graphics cards to play new games, and this Christmas, we're going to have five very, very exciting new games coming out and if you are fortunate to have a GeForce GTX, your experience will be the best. And that is our focus now is to ship all these GeForces and get back to taking back share.

Krishna Shankar – JMP Securities

Great, thank you.

Jen-Hsun Huang

Yes.

Operator

Our next question comes from the line of Brian Piccioni with BMO Capital Markets. Please proceed.

Brian Piccioni – BMO Capital Markets

Thank you for taking my question. I notice that your days receivable seems to be contracting and of course one of the concerns that many people have in this environment is that that extends from customers being unable to pay. We have seen some smaller companies reporting similar-type experiences. I you making an effort to tighten your exposure to customers or is it basically business as usual?

Marv Burkett

We have always watched our receivables very, very closely, been very diligent about that credit terms and payment. So, I would say it is business as usual. We are not doing anything any differently. Our receivables, even in this environment are in very good shape, very current, no overdue receivables.

Brian Piccioni – BMO Capital Markets

I see. And you mentioned fairly sizable impairments, your interest and other income, would that be related to your portfolio management efforts or were these just other sort of charges that jumped out of nowhere?

Marv Burkett

No, it is a little bit of everything. There is some impairment on some investments that we made, there is some impairment on some of our cash investments, and there were some realized losses. But each of them individually was not significant.

Brian Piccioni – BMO Capital Markets

And just as a final comment, I guess more or less to be viewed as hopefully non-recurring.

Marv Burkett

I certainly hope so, Brian.

Brian Piccioni – BMO Capital Markets

Thank you.

Operator

Our next question comes from the line of Uche Orji with UBS Investment Bank. Please go ahead.

Uche Orji – UBS Investment Bank

Thank you very much. Marv, let me just go back to the subject of the guidance. I know you said the mid point is down 5. Just concentrating on the way most companies are guiding recently, can you give us some color as to what could drive the range? I know you are not disclosing what that range this, but give us some color as to what could drive the range, because it is really tough to understand how this minus 5 midpoint, that is coming out much better than most of the companies within the industry is guiding. So can you just give us a little bit of color as to how to handicap that range please?

Marv Burkett

Okay, you have got to understand that there are some businesses that are less impacted by the volatility out there today. Our workstation business is very solid and obviously we have had a very good quarter last quarter. And so I view that as solid going forward. I would expect another solid area to be our MCP business with the products that Jen-Hsun talked about, the 9300, 9400M products. Those will do well and could even indicate some sort of revenue growth. The big swing factor in all of this is what happens to desktop revenue. And as Jen-Hsun says, we are focused on regaining some market share in that area, but my caution tells me that it could be a weak market in the fourth quarter. So those are sort of the factors driving that outlook.

Uche Orji – UBS Investment Bank

Now that is helpful. Let me just ask you another question; were there any impacts from licensing the SLI for X58 motherboards within this quarter?

Marv Burkett

There was no revenue impact.

Uche Orji – UBS Investment Bank

Okay, and then just another question. This is for Jen-Hsun. With the three GPU notebook announced by Toshiba, how much more of this type of notebooks should we expect to see, is there any pipeline for such coming, Jen-Hsun?

Jen-Hsun Huang

You know, we probably shouldn't announce our customers’ products on their behalf, but the basic technology is combining SLI and hybrid GPU into one system. So, in one mode, the 9400M is a chipset, it's an SLI chipset and it communicates with the external dual GeForce 9800 GT GPUs; and in another mode, the 9400M is the graphics chip so that the two 9800 GTs could be shut off and conserve battery power. And so, this is the way – this technique is a way to both get very, very high-performance for gamers, while considering battery life whenever they are not playing games. So it is a really fabulous technique for delivering that discontinuity, if you will. So this is a technique that I think other people may decide to adopt.

Uche Orji – UBS Investment Bank

And then just one last question, Marv. Your inventory exiting next quarter, if you do hit the minus 5 midpoint guidance, how should we think about inventory given the jump we have seen in the current quarter, what should be a target for we should model inventory for the next quarter?

Marv Burkett

I don't know about the end of next quarter. If we achieve that target, we would see inventory coming down probably. So we still have the same target of inventory in the 60 to 75 days of DSI. That is still our target.

Uche Orji – UBS Investment Bank

Okay, good. Thank you.

Operator

Our next question comes from the line of Shawn Webster with J.P. Morgan Securities. Please proceed.

Shawn Webster – J.P. Morgan Securities

Yes, thank you. Hi guys. I would like to I just poke around on gross margins a little bit more. What percentage of your mix in Q3 was 55nm GPUs, you had mentioned the high end you are moving over aggressively. I am just trying to get a quantitative sense as to the mix now and for Q4.

Marv Burkett

Well, most of high-end were 65nm in Q3.

Jen-Hsun Huang

I would say across the board, most of our volumes were 65nm. You are talking about what we shipped.

Shawn Webster – J.P. Morgan Securities

That’s right.

Marv Burkett

Yes. What we shipped was 65nm, what we built was all 55nm. And what we are shipping now is mostly 55nm.

Shawn Webster – J.P. Morgan Securities

Okay. Is it true that the chipset gross margins right now are greater than your desktop gross margins?

Jen-Hsun Huang

Yes, they are close.

Shawn Webster – J.P. Morgan Securities

They are close?

Jen-Hsun Huang

I would say that you are probably right. But it is not a huge difference.

Shawn Webster – J.P. Morgan Securities

And thenfor backward looking for the quarter?

Marv Burkett

Yes for Q3.

Jen-Hsun Huang

Backward looking for the quarter, I would be surprised if forward looking, if it is the same way.

Marv Burkett

Yes. What Jen-Hsun is saying is he expects improvement in the GPU margins going forward and the MCP margins are going to be relatively flat.

Shawn Webster – J.P. Morgan Securities

Okay. And as it relates to the sequential change in your gross margins, is that mostly mix or is there a segment-by-segment unit cost reduction or changes in things sequentially. Can you kind of walk us through the moving pieces?

Jen-Hsun Huang

There is all of the above. In some cases you are getting transition, more 55nm, less 65nm, that helps. In other cases you are ramping up and experiencing revenue growth in a lower gross margin line, i.e., MCP. You are going to have lower revenue in a high gross margin line, Sony royalties. So, it’s all mixed together.

Shawn Webster – J.P. Morgan Securities

Okay. And what were your memory sales in Q3?

Marv Burkett

$22.3 million.

Shawn Webster – J.P. Morgan Securities

Okay. And then last one from me. When you look at your order book and your visibility right now is it the same, better or worse than this time when you set your guidance last quarter?

Jen-Hsun Huang

No visibility in either case.

Shawn Webster – J.P. Morgan Securities

Okay. So, no change there. Okay, thank you.

Marv Burkett

Thank you.

Operator

Our next question comes from the line of David Wu with Global Crown Capital. Please go ahead.

David Wu – Global Crown Capital

Yes. I was just curious that you haven’t really talked about a lot of products. But we haven’t talked about consumer products, and in particular, Tegra. Can you talk about those kind of products tend to have a good Christmas, maybe this year is different. And I was wondering when Tegra will begin to contribute to revenue? And what about design win activities, that kind of stuff?

Marv Burkett

Tegra is doing really well. And I’ve said that Tegra was not ready for production this year because the design win process tends to be longer. And I also have said that Tegra is coming out party is really spring of next year. So, I look forward to talking to you much more about that, spring of next year.

David Wu – Global Crown Capital

Okay, how is the consumer business in the meantime?

Jen-Hsun Huang

What do you mean by consumer business, David?

David Wu – Global Crown Capital

You know you folks still have some graphics business with Motorola?

Jen-Hsun Huang

Yes, it is insignificant.

David Wu – Global Crown Capital

Insignificant?

Jen-Hsun Huang

Insignificant, David. Yes.

David Wu – Global Crown Capital

Essentially, I shouldn’t worry about that at all in Q4?

Jen-Hsun Huang

Well, it has been insignificant for a long time.

David Wu – Global Crown Capital

Okay. Marv, if I look at next year, your different segment of the business, I would assume that I should get growth out of your chipset, that’s the highest probably of absolute revenue growth. And then Tegra should be behind that. In a difficult economic environment, if you execute well on GPU side, can you actually grow revenue at all?

Marv Burkett

The answer, I think is yes. But don’t forget Tesla. I mean, in terms of significant revenue growth, obviously Tegra and the MCP business; but Tesla is also in that same category.

David Wu – Global Crown Capital

That’s tens of millions of dollars?

Jen-Hsun Huang

We hope it is more than that. Here is the way I would break it down. GeForce desktop, our growth opportunity comes from capturing share back. Our MCP business, obviously greater exposure to notebook is a wonderful thing. Then Quadro is a growth business, Tesla is a growth business, and Tegra is a growth business. We know those three product lines are all going to grow next year.

David Wu – Global Crown Capital

I see. Okay. Thank you.

Marv Burkett

Thank you, David.

Operator

Our next question comes from the line of Doug Freedman with American Technology Research. Please proceed.

Doug Freedman – American Technology Research

Hi, guys. Thanks for taking my question. Last quarter you made a significant comment about the demand you were seeing in the marketplace regarding mix shift. Can you tell us if you’ve seen a continuation there, any changes and – just an update?

Marv Burkett

I don’t think I’ve seen any change. I think the – are you referring to, Doug, the – what we call the sort of disappearance of the low end of the discreet desktop?

Doug Freedman – American Technology Research

Correct.

Marv Burkett

Yes. I don’t think we’ve seen any change to that. That’s becoming in our view a mobile market.

Jen-Hsun Huang

A lot of people have called it, the carving out of the mid range, whether is the mid range PC market and mid range other markets. And what we are seeing is that the mid range PC market is either moving to lower end of its moving to notebooks. And that’s why it’s so important for us to have the 9400M Intel Notebook platform exposure because that’s a lot of the growth is in notebooks right now as you know.

Doug Freedman – American Technology Research

All right. Can you update us as far as ongoing negotiations to secure capacity at leading edge nodes going forward? I know there were some concerns about your partner committing enough capital to meet the demands of a $4 billion company. Can you discuss any progress you may have had there?

Jen-Hsun Huang

Well, I would think there was – I am hoping that we grow next year. And I think we have a good shot growing next year. But considering there is so many people are backing out of orders and reducing inventory and slow on wafer starts and thinks like that. I would think that getting capacity would be a lesser concern now than before. And 40nm is a solid node, but so as 55nm. And we’ll use as much of both as we can. And so what continue to work with TSMC and they’re our wonderful partner. We both obviously want to make sure that whatever opportunities are there in the marketplace for us that we are both doubtful about going after it. So, I think we are both on the same side of the table.

Doug Freedman – American Technology Research

And my last one, Marv, just a little bit of a housekeeping question for you. You’ve spent $300 million buying back shares, did you have an average share price to that or can you offer us some guidance on where you think the share count will be next quarter?

Marv Burkett

Price was $12.99. I thought it was a bargain at that time. Now I have no comment about the shares going forward. That would be a function of a lot of different things, options issues, people leaving, repurchasing, anything.

Doug Freedman – American Technology Research

What’s left on the repurchase authorization?

Jen-Hsun Huang

About $1.3 billion.

Doug Freedman – American Technology Research

Great. Thank you.

Marv Burkett

Thanks, Doug.

Operator

Our next question comes from the line of Hans Mosesmann with Raymond James. Please proceed.

Hans Mosesmann – Raymond James

Thanks. Jen-Hsun, how defensible is a single chipset as you guys are doing it? How long will it take for the competition to do that? It seems to me it kind of locks you in a way that it is very difficult for some of your competitors to do multi-GPU type functionality on a notebook. Thanks.

Jen-Hsun Huang

It is really, really hard to do. If you think about the current PC architecture, to deliver that functionality requires four chips. And now with the new laptops with 9400M, it only requires two chips, the CPU and the GPU. We know that Intel is working towards two chip architecture as well, the CPU and then the chipset. And as you know by now that project has delayed by a year now. And so, it is hard to do. It’s a lot of functionality to integrate into one chip. And it took us a fair amount of work to build something like that for the notebook as well. So, now we have a chassis. It sits next to an amazing processor, the Core 2 Duo; the best processor that frankly anybody in the world has ever built. And it is fast and it is low power. And so between the Core 2 Duo and 9400M, it makes a wonderful notebook. So, our intention is to introduce a few more versions of this chassis and continue to enhance the experience of notebooks going forward. And so that’s – so I am really, really excited about 9400M. This was a very, very hard project for us, and for anybody in the world to have accomplished them. And so I think this is an investment that’s going to payoff for several years.

Hans Mosesmann – Raymond James

Okay. Thanks. And as a quick follow up, is there any update on or status on the notebook GPU recall, you guys took a charge for last quarter. And is there any risk to a desktop recall on that same –

Jen-Hsun Huang

It has been relatively quite actually. And we are working with all the OEM still. And nothing has really changed. And so, I don’t know that there is anything new to report. We are working – everything was – so far, things are consistent with our model, if not a little bit better than that. And so we are just working with our OEMs and making sure that, number one, they understand the issues and that they are taking immediate and appropriate steps to improve whatever thermal management techniques are available in the notebooks; and then working with them to support the end users, if an end user where to report a problem. And so, that’s our strategy and we are focused on that. Nothing has really changed this quarter.

Hans Mosesmann – Raymond James

Okay. Thank you very much.

Jen-Hsun Huang

Yes. Thanks a lot Hans.

Operator

Our next question comes from the line of Tim Luke with Barclays Capital. Please go ahead.

Tim Luke – Barclays Capital

Thank you so much. Could you in this conference just remind us with respect to the new architecture what sort of time line you are looking at in terms of introducing that next year? And then just a follow on the prior question, what are the key milestones in terms of getting thorough clearance associated with any of the issues lingering from the recall or the issues that you had in terms of write down that you’ve already taken, I think $196 million?

Jen-Hsun Huang

Tim, I had to admit, I didn’t completely understand your English. First part of it, I am sorry about that. The second question I think I do know the answer to. We have completely transitioned out of that material set. All of our OEMs are perfectly comfortable with a new material set. And we are seeing no impediments and issues anywhere as a result of that. If anything at all, our OEMs are pleased that we stand behind our products, and that we are working with them to overcome the issue for both of us.

Tim Luke – Barclays Capital

So, you think that the $196 million is going to cover it for sure?

Marv Burkett

Well, don’t know until we are done. But our – nothing that we’ve seen so far would suggest that we should change it at this time. What was your first question?

Tim Luke – Barclays Capital

First question was in terms of the major offering initiative, you go from 65nm, 55nm, then down to 40nm, you have in terms of new products, a new architecture I believe that’s likely to come out in the middle of calendar ’09. Do you have any updates there in terms of A, the time line and, two, what some of the milestones maybe for that offering?

Jen-Hsun Huang

I see. If you told you, then the competition would know that too. So, I find myself – I want to tell you, I can wait to tell you. It’s going to be a fabulous processor. It is – we are working really hard on it. It is a very, very large undertaking. And building a new architecture of this magnitude, it’s a multi-$100 million undertaking anymore. So, it’s a big, big deal. I’m very excited about it, and I can wait to tell you about it, hopefully next year.

Tim Luke – Barclays Capital

Do you think that that is a key point in terms of share either increasing, again for you, or do you think the 40nm introduction before that maybe a turning point in terms of market share dynamics?

Jen-Hsun Huang

We lost some share recently because of our transition and our competition surprised us with a significantly lower cost and we won’t cut off guard and we shouldn’t have been. But we’ll not cut off guard now and it’s time for us to go get our market share back. We have a better architecture, and our architecture is much, much more robust in a lot of different ways, much more futures. It’s not just graphics. It has physics processing and has image processing and video processing, and I mentioned earlier that we are going to introduce really amazing new capability called Stereoscopic 3D. And so those capabilities are simply not available when you just have a graphics chip. And so our focus as a company is to expand the GPU market. We are trying to expand the GPU market by enabling the GPU to do more than just graphics. And so, we are going to continue to do that. And over the years, we have increased the size of the GPU beyond any one’s expectations. And I think that our imagination surely at the moment exceeds everybody’s expectation in the world today. And so I think that you are going to find GPUs and supercomputing clusters. You are going to find GPUs, multiple GPUs in your workstations. Some of it for graphics, some of it for computing. You are going to see GPUs used or video editing and image processing, and physics simulations. And GPUs will become more and more valuable and do more and more computation for your PC. So, I think that is our primary focus. So, I expect that we are going to continue to grow our GPU business and grow the overall GPU, Tim, because of our innovations.

Tim Luke – Barclays Capital

Thank you, guys.

Jen-Hsun Huang

Thank you.

Operator

We have no more time for questions. I will now turn the call over to Jen-Hsun. Please go ahead.

Jen-Hsun Huang

Thank you for joining us today and we look forward to reporting our progress for Q4.

Operator

Ladies and gentlemen, that does conclude the presentation for today. Thank you for joining us and we ask that you please disconnect your lines. Have a great day, everyone.

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Source: NVIDIA Corporation F3Q09 (Qtr End 10/26/08) Earnings Call Transcript
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