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NVIDIA Corporation (NASDAQ:NVDA)

F4Q09 Earnings Call

February 10, 2009 5:00 pm ET

Executives

Michael W. Hara – Vice President of Investor Relations

Jen-Hsun Huang – President and Chief Executive Officer

Marvin D. Burkett – Chief Financial Officer

Analysts

Patrick Wang - Wedbush Morgan Securities

Daniel Ernst - Hudson Square Research

Joanne Feeney - FTN Midwest Securities Corp.

Tim Luke - Barclays Capital

Doug Freedman - Broadpoint Am Tech

Suji De Silva - Kaufman Bros.

David Wu - Global Crown Capital

Shawn Webster - J.P. Morgan

Uche Orji - UBS

James Schneider - Goldman Sachs

Glen Yeung - Citigroup

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 W. Hara

Thanks Will. Good afternoon and welcome to NVIDIA’s conference call for the fourth quarter ended January 25, 2009. Today’s call is being recorded. If you have any questions please disconnect at this time – or I’m sorry, if you have any objections.

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’d like to remind you that you can find copies of our SEC filings, our earnings release and a replay 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 first quarter of fiscal 2010. 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 and 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 Jon Peddie Research. 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 as of our financial outlook and projections; the impact, performance and availability of and demand and uses for our products and technologies; our competitive position in market share; our cash conservation efforts; and our gross, priorities, initiatives, innovations, and advancements in 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 October 26, 2008 and 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

February 10, 2009. Consistent with requirements under Regulation FD, we will provide 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 a 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’ll hand the call over to Jen-Hsun.

Jen-Hsun Huang

Thanks Mike. Good afternoon and thank you for joining us today. Fiscal 2009 ended in extraordinary fashion. We reported revenue for the year of $3.4 billion and a GAAP loss of $0.05 per share. The environment is clearly difficult and uncertain so our first priority is to set an operating expense level that balances cash conservation while allowing us to continue to invest in initiatives that are of great importance to the market and in which we lead the industry.

We have initiatives in all areas to reduce operating expenses. Our stretch goal is to reduce operating expense by $35 million from the current level of $300 million per quarter by the end of Q2.

Although fiscal 2009 was extremely difficult, it was also one of our best years for innovation. We made important advances in many areas. In graphics processing, after a stumble in Q2 we have regained our performance leadership position with the GeForce GTX 295, GTX 285 and GTX 260. We introduced PhysX, the industry’s first GPU accelerated physics processing. Major studios including Electronic Arts, THQ and Take 2 have standardized on PhysX.

DriverHeaven noted that “there are real visual benefits to be had from enabling PhysX in games such as Mirror’s Edge.” Bit-tech said that “the PhysX content enhances the gaming experience, giving a tangible benefit to being a video card owner.”

Gamers have been stunned by our 3-D vision, full HD stereoscopic solution. Three-D vision is the first ever high resolution, stereo 3-D solution for the home. Bjorn3d said that “once you have it, you will never give it up.” PC Magazine described it as “a mind blowing innovation.”

In Q4 we recaptured market share in the performance segment. We intend to continue share gains by offering the highest performance products while differentiating with our advantages in PhysX, CUDA and 3-D Vision.

We shipped Tesla for revenues this year and officially started the era of GPU computing, where our CUDA parallel processing architecture can accelerate computive intensive applications by 100 times over a CPU alone. CUDA has well over 25,000 developers around the world. With CUDA we’re able to speed up general purpose computer intensive applications like we do for 3-D graphics processing. Developers are finding major speed ups for algorithms ranging from nano-molecular dynamics to image processing; medical image reconstruction; and derivatives modeling for financial risk analysis.

Over 100 universities around the world including the MIT, the University of Illinois at Urbana-Champaign and the National Taiwan University now teach parallel computing with CUDA. ASoos, Bull, Cray, Dell, HP and Lenovo now offer high performance computing solutions with Tesla. There are now over 1,000 customers around the world including Motorola, Chevron, GE Healthcare and even General Mills the consumer products company.

Tesla has become the first GPU used in super computing and now powers Japan’s Tsubame, the 29th fastest supercomputer in the world. And Wipro Technologies responding to market demand now offers CUDA programming services.

Aside from the thousands of researchers who have used CUDA to accelerate their time to discovery, popular off the shelf software packages such as ANSYS, LANView and Mathematica are now CUDA accelerated. Symcor sells check scanners that use CUDA for image recognition to detect fraud. Scicomp uses CUDA in their derivatives pricing software. And medical equipment is now available from Technic Scan that uses CUDA to enhance early detection of breast cancer, reducing the analysis from a three hour process to just 16 minutes, making single visit diagnosis possible for the first time.

We launched the Tesla personal supercomputer and enabled a four Teraflop supercomputer at the price of a typical workstation. We estimate 15 million scientists and engineers worldwide can benefit from this breakthrough. HPC, High Performance Computing wire described it as “the biggest news of the supercomputing ’08 show.” Cray with the CX-1 was the first to ship a Tesla personal supercomputer.

One of our major initiatives last year was to capture a significant position in mobile computing by introducing innovative and market defining products. Notebook is the fastest growing segment of the PC market and one that we can offer a great deal of value. Through low power architecture and innovation, our GPU’s can simultaneously increase notebook performance while extending battery life.

We announced Ion, a high performance GPU that also incorporates all system networking and IO functions into a single chip. Steve Jobst called it “an incredible chip.” Ion is at the core of every MAC book from the air to the pro. The Ion platform is now shipping or will be soon from virtually every major PC OEM.

At CS we launched Ion for Intel’s Atom CPU. Even coupled with the smallest X86 CPU in the world, the performance is astounding. TechGage described the Ion PC as “a potent little computer with almost limitless possibilities” and gave it a Best of CES Award. It was also awarded the Best Enabling Technology by Laptop Magazine. And Computer Reseller News described it as “one of the top ten biggest chip stories of 2008.”

We also made great progress with Tegra, our ultra low power mobile computing processor. Tegra is a single chip mobile computer that delivers a full Internet experience while consuming 1/20th the power of even the lowest power [X-80] PC’s. Tegra enables a new class of mobile Internet computing devices that allow for many days of use as opposed to the several hours of battery life for a notebook PC. Tegra has been designed into personal media players; personal navigation devices; smart phones and mobile Internet computers and we’ll see revenue ramping in the second half of this year.

We had three major strategic objectives this year; lead the industry in graphics processing, revolutionize computing with CUDA and Tesla, and establish NVIDIA as a low power innovator by creating breakthrough products for mobile computing. I am pleased with the excellent achievements we made in each of these important areas.

Let me turn the call over to Marv to discuss our financial results. I will return in a moment to talk of our future opportunities.

Marvin D. Burkett

Thanks Jen-Hsun. My comments today will cover both the full year and the fourth quarter of fiscal year 2009 that ended January 25, 2009, 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.

Revenue for the fourth quarter was $481.1 million which is down 46% from Q3 and is down 60% year-over-year. Revenue for the full year was $3.4 billion which is down from the prior year by 16%. The weakness in demand for the fourth quarter was across the board. Compared to Q3 the GPU business was down 47%; the Professional Services business was down 44%; and the NCP business was down 51%. There were no safe havens.

Within the GPU business desktop was down 34% as we believe we regained some market share particularly in the high end, but the overall high end market was very soft. Notebook was down 63%, reflecting the buying trend toward low end systems with integrated graphics. Memory was down to $7.2 million for the quarter from $22.3 million the prior quarter. All of this was in the environment of the channel depleting inventory.

Therefore, our sell-in was less than the channels sell-out. We believe current channel inventory is only slightly more than one month, down from almost three months last quarter. ASP’s across the board were relatively unchanged from the prior quarter, so the decline in revenue was primarily a reflection of the decline in unit volume.

Gross margin for the quarter was 29.4% on a GAAP basis. Included in the GAAP results were several items worth mentioning. For the quarter, we took new inventory reserves of slightly more than $50 million. Normally we take reserves of $5 to $10 million. These additional reserves reflect the reduced demand in the marketplace. These additional reserves cost us almost ten percentage points in gross margin for the quarter. Without these reserves, gross margin still would have declined quarter-to-quarter but more in line with the market movement toward the low end SKUs.

Also included in the GAAP results is a small initial insurance reimbursement for the weak, Die/Packaging material set warranty issue that we recognized in Q2. Since our estimate for the cost of this warranty issue is unchanged, most of the insurance proceeds were recognized as a reduction of cost of goods sold for GAAP purposes. Stock-based compensation allocated to cost of goods sold was approximately $2 million for the quarter.

Operating expenses included a non-recurring charge of $18.9 million associated with the termination of a development contract related to a new campus construction project that we have put on hold. Without this charge, operating expenses would have been below our guidance. As Jen-Hsun said we have initiated many cost reduction efforts and even in Q4 some of them began to take effect. Without stock-based compensation and the non-recurring charge, operating expenses were down from the third quarter.

Headcount for the quarter and the year ended at 5,420 which is up 127 from the third quarter and up 435 for the year. We essentially have a hiring freeze in place with only the most critical positions being filled.

The tax rate for the quarter was a credit of 13.3% and for the year it was a credit of 30%. GAAP net loss for the quarter was $147.7 million and non-GAAP was a loss of $94.4 million. GAAP net loss for the year was $30 million and for non-GAAP it was a net income of $303 million.

On the balance sheet we ended the quarter with $1.26 billion in cash, cash equivalents and marketable securities. This is down approximately $49 million from the prior quarter. Operating activities in the quarter used only about $20 million in cash which reflects good asset management in light of the significant decline in revenue.

Accounts receivable declined by $289 million quarter-to-quarter reflecting the comparable revenue decline. The days sales outstanding declined slightly quarter-to-quarter and so far receivables appear to be in good shape. Inventories grew by $14 million quarter-to-quarter even after the additional inventory reserves. Obviously the significant decline in revenue left us with a lot of inventory. We believe the inventory is good. There’s just a lot of it. As a result we have significantly reduced our manufacturing demands. We expect to deplete significant amounts of inventory going forward.

Depreciation and amortization in the quarter was $50 million, flat with Q3. And capital expenditures were $43 million, down from $109 million last quarter. We have a focus on reducing capital expenditures and want them to be less than depreciation and amortization on a quarterly basis. Accounts payable declined by $168 million as we scaled back production levels.

As for an outlook, in this environment it’s almost impossible to give a reasonable and competent forecast. We were very wrong last quarter. In retrospect, October was the last decent month and unfortunately it was not in our quarter. But based on the fact that sell-out for the channel exceeded our sell-in and the very low inventory levels in the channel, we do not see further declines in revenue.

Today we can’t say confidently when and by how much revenue will increase. We can only say that we currently don’t see further declines and our outlook is for flat to slightly up revenue for the first quarter. As for gross margins, we currently do not expect significant inventory write-offs in Q1 and margins should return to the mid-30’s.

The one thing we can control is our operating expenses and as Jen-Hsun said we’re instituting many actions to contain and reduce OpEx. Normally in Q1 operating expenses would be up $15 million or more from Q4, merely because of the FICA we have to pay in the beginning of the year and the reduced amount of time off that employees take in Q1 relative to Q4. Because of the actions we have already taken and further actions that we are implementing, we believe OpEx for the first quarter will be flat to slightly down from the Q4 level. And that these actions will lead to further reductions in Q2 and Q3.

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

Jen-Hsun Huang

Thanks Marv. The GPU is the new soul of the PC. In high performance computing our GPU’s are accelerating time to discovery, in many cases 100 times. It would take [Morris Long] nearly ten years to improve the performance of a computer 100 times. This speed up is truly revolutionary.

For gamers our GPU not only renders a beautiful and immersive world but with PhysX we also simulate the physical properties of the world to bring more dynamics and realism. We are delighting visual content creators around the world as our CUDA GPU’s make it possible for them to manipulate high resolution images with great ease and reduce video editing process from hours to minutes.

And for mobile computers, our GPU brings a level of performance that is surprising while enhancing battery life at the same time. Whether for gamers or digital artists or researchers, and from workstations to supercomputers to game PC’s to notebook PC’s, the GPU is making the critical difference. The GPU is the new soul of the PC.

The word is spreading fast. Wired Magazine recently wrote, “Like a wise-cracking sidekick who winds up stealing the movie from a too bland lead actor, Graphics Processing Units are edging more general purpose, central processing units out of the limelight.” USA Today wrote, “[Separate] graphics chips sometimes called discrete graphics can vastly improve a PC’s performance by crunching images separately instead of relying on the main processor to do it.” And CNET News said, “When you start looking at a PC today the central processor means less and less. The GPU is simply becoming a better way for PC makers to differentiate.”

As the inventor of the GPU, our objective this year is to continue to expand the use and proliferate the adoption of GPU’s. From notebook PC’s to net books to supercomputing workstations to servers, we have great opportunities ahead to grow our business. We are in a position to take share with GeForce as we continue to highlight our advantages with CUDA, PhysX and 3D Vision. Tesla is now shipping and interest around the world continues to build. We will ship Tegra this year.

Both Tesla and Tegra take us into new growth markets and will increase our [tamp]. And with Ion we are going to revolutionize the small and affordable notebook PC market, giving us growth into the fastest growing PC segment.

During the year we also have operational challenges we must address. To get gross margins improving again, we must tackle our inventory management. This is one of our top priorities and we will surely address it. We will also be highly discriminating on spending, so as to conserve cash flow allowing us to continue to invest and realizing our vision for the era of the GPU. These are surely challenging times but we are also more excited than ever about the prospects of the GPU and the importance of our work.

We are delighted to take questions now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Patrick Wang - Wedbush Morgan Securities.

Patrick Wang - Wedbush Morgan Securities

First off can you help us understand what makes you feel confident about the – about your revenue guidance and that you’re not looking for a sequential decline in the upcoming quarter.

Jen-Hsun Huang

Well, I guess I’ll comment and I’ll let Marv comment. You know we track sell-outs rigorously in the marketplace and you’ve now heard this from nearly every computer company in the world or in just about every electronics company in the world that for whatever reason October was a reasonable month, but November fell off a cliff. November was the beginning of our quarter and so we experienced three consecutive difficult months.

As we monitored our sell-outs we saw that very effect, that the end markets just got weaker starting in November. And since then it has more or less flattened out if not slightly increased a bit. And because we know what we’re selling into our customers and because we know what they’re selling out, we have a pretty good sense that inventory levels are depleting very quickly. And so that’s how we get a sense of where we are in the business and we believe we’ve hit a trough.

But the important thing is that we don’t know what we don’t know. And there’s a lot of people in the world who don’t know what they don’t know right now. And I don’t think we stand alone here. But that’s our best estimate of our business and therefore best guidance that we can offer you.

Marvin D. Burkett

Yes, I would emphasize exactly what Jen-Hsun said. The sell-out while it is weak was definitely not as weak as our revenue in the quarter. So the depletion of inventory in the channel, coupled with the fact that we did not have a decent – October was not in our quarter, says that unless demand continues to fall significantly from here that our prospects are better than they were last quarter.

Patrick Wang - Wedbush Morgan Securities

And then as a follow-up, just given the fact that we were hearing chatter about new SKU’s coming from you guys and your competitors or your friends over there in Santa Clara there – in Sunnyvale, any sense of a pricing war? Anything in terms of competitive pricing or advantages here?

Jen-Hsun Huang

I don’t think either company is holding any punches at the moment and so I’m not expecting the competitive position to be more competitive than now. There are plenty of opportunities for us to be competitive with each other. It’s a very competitive market. And there are always new SKU’s coming out. You know they have new products and we have new products. We’re not in the business of announcing future products. We have quite a strong position right now in the performance segment again. And so we have no reason to announce future products.

The competition is obviously different so they’re talking about future prospects all the time right now. It just serves to freeze their market. And so I think that announcing the next generation product long before it gets shipped is not a smart thing to do right now.

Operator

Your next question comes from Daniel Ernst - Hudson Square Research.

Daniel Ernst - Hudson Square Research

On the downturn here, how much of the current revenue weakness is the overall market decline versus a down specing of machines in the market, where they’re either going to a lower spec GPU or you know settling with the integrated one? So demand for PC’s overall going down and the other is what they’re specing on that machine.

And then related to that as we look across this economic downturn which none of us know how long it is, but the longer it is do we run a greater risk of the and we should for the mainstream part of the market the integrated graphics chip improving to the point where it’s good enough. So if the downturn is one or two years but in one or two years time the integrated sort of catches up to be good enough for the mainstream part of the market.

Jen-Hsun Huang

Our ASP’s were generally flat this quarter. And so from that you could argue that people are not buying down per se. There is a very significant factor that is happening in the notebook segment however. There’s the surge of the net book market and you could characterize the net book market as low end. And if I were to just for the sake of my description right now describe the market as high, mid and low our participation in the notebook market has been by and large about the upper half of mid and most of high. And we have no participation historically in the lower part of mid and the low end market.

All of a sudden the Atom processor has driven a dramatic surge of net book PC’s. Some people call it a net book PC but the fact of the matter is they’re inexpensive PC’s. And during difficult times many people who still need to have a PC or would like to have a PC now has a very inexpensive version to buy. And so the demand for Atom PC’s and these net books if you will has really really surged.

I think what’s going to happen is that the low end part of the marketplace is going to cannibalize the mid-range part of the market. And people who want performance still will go for performance. The net book will hardly serve their needs. But for a lot of people in the mid-range part of the marketplace the net book is clearly, clearly going to disrupt that.

And so our strategy is Ion. We announced Ion for the Atom processor at ZS. And the reception has been extraordinary. And the reason for that is because Atom with the Ion processor creates a full feature notebook. It’s fully capable of DX 10, 3D graphics, high definition video, Blu-ray Disc, just about anything you want to do on your computer is possible with the Atom processor and an Ion.

And so this platform I think is a wonderful growth opportunity for us because it’s the first time that we’ve really been able to enter into the lower end segment of the marketplace. But I think you’re – what you’re thinking about the future of the PC industry certainly is true. I think that’s what’s likely to happen, that the high end marketplace will continue to be what it is as people who want more performance can get it.

There’s a lot of different reasons to bring performance to the high end. But the mid-range part of the marketplace could very well become an extremely large low-end part of the marketplace.

Operator

Your next question comes from Joanne Feeney - FTN Midwest Securities Corp.

Joanne Feeney - FTN Midwest Securities Corp.

I just was hoping to get a little bit of clarity about how you guys were thinking about the current environment, what you’re assuming when you draw that conclusion about hopefully flat or slightly up. So would we have to think that you’re assuming that end market demand is going to be flat to slightly up or that the channel might be rebuilding inventory this quarter and that’s what’s going to pull up your revenues?

Marvin D. Burkett

No, Joanne, if you just assume that the market didn’t get any better our revenue has to go up because remember they depleted significant channel inventory last quarter.

Joanne Feeney - FTN Midwest Securities Corp.

Can you give us a sense of how much that went down in your estimation, Marv?

Marvin D. Burkett

You’re talking about the inventory?

Joanne Feeney - FTN Midwest Securities Corp.

Yes.

Marvin D. Burkett

I think that they went from two-and-a-half to three months worth of inventory down to between one and one-and-a-half months of inventory.

Joanne Feeney - FTN Midwest Securities Corp.

And then within your inventory in house, can you give us a sense of how much of that inventory – what share is the older 65 nanometer product and what’s the newer stuff?

Marvin D. Burkett

Well, we have more 65 nanometer parts than I thought we were going to have. But that’s because the revenue was less than we thought. But I would still say the majority of the product by far is 55 nanometer. So we’re going through the 65. It’s more than I would like to have but it’s not an intolerable amount.

Operator

Your next question comes from Tim Luke - Barclays Capital.

Tim Luke - Barclays Capital

A couple of quick things, Marv, just starting off on inventory your inventory’s now like at 140 days on hand. Where do you think that goes directionally in the April quarter and what are you trying to target? I would assume where you’ve had success with moving the channel lower the inventory’s showing somewhat higher in terms of just the revenue balance. Separately I was just wondering if you could just lay out for us some of the factors that you think may help the gross margin. I think you’re saying 35 or mid-30’s going forward for April. How do you see that going forward?

And then lastly, if I may, in planning your OpEx which you’re lowering by $35 million, how are you thinking about the revenue? Obviously you’re not at breakeven yet. How are you thinking about the revenue shape for the back half of the year? And maybe that’s more of a Jen-Hsun question. Or are you just suggesting that you’ve got to invest irrespective of when you see the revenue come back. And where is that revenue? Is it mostly in the new products or how do you see desktop for example? Thank you.

Marvin D. Burkett

Well, let me take the inventory issue first. We have significantly cut back our [wafer] starts. I don’t think that’s a surprise to anyone. When you have this inventory level we don’t need a lot more wafers. So based on the inventory that we have, if you look into Q1 I see a significant inventory reduction coming. I can’t give you the magnitude of that until you give me the revenue number. But I would say something significantly reduced in Q1.

Going forward this inventory should last us into the Q2 and Q3 before we have to replenish at those levels. So I think that our production buys are going to remain at a low level all the way through Q1 and it’s going to take something into Q2 and Q3 with some other products and a slightly better market before we have to reinstitute wafer buys.

The last question that you have with regard to the OpEx is that I go back to the goal that Jen-Hsun has established, of getting revenue down by $35 million on a quarterly basis as what we can do without jeopardizing future revenue. It is not based on us being able to breakeven at some revenue level. It’s on the basis of what we think we can do without jeopardizing the future. Now at $500 million even if you cut it by $35 million we would not breakeven. So the issue is when does revenue start to recover and how successful are we in bringing the OpEx down by the $35 million.

Tim Luke - Barclays Capital

And also presumably where do you think the gross is? Presumably you’re not spending a lot in the desktop GPU space or are you in terms of investment and OpEx? Is the spending mostly on the new products?

Jen-Hsun Huang

Well, in the second half of the year we have some areas of growth that we’re relatively confident about. And these are areas of new growth. Tegra, our mobile computing device – mobile computing processor will ship towards the second half of the year. And so we’re confident that will be revenue contributing and profit contributing.

Tesla continues to ramp. We are engaged with more customers all the time who are looking for Tesla in their servers to dramatically accelerate their computing needs. So we’re expecting that to grow. We’re also expecting Ion to contribute greatly to our growth going forward. Ion is as we talked about both a really fabulous net – a notebook processor but also is terrific in the entry level part of the PC marketplace in companion with a very low cost microprocessor.

And so we think that that could revolutionize the affordable PC market and so my sense is that we’re going to continue to see growth in the Ion business. So those are – I’m sorry?

Tim Luke - Barclays Capital

I was just wondering if Marv if separately you might be able to address the gross margin as [inaudible]?

Marvin D. Burkett

Yes, if you look at the gross margin from last quarter you would have what I would call a more normal inventory reserve position. That would have added eight to ten percentage points to margin. So all you have to do is not write off a lot of inventory and the margins return to the level that I outlined.

Tim Luke - Barclays Capital

For the nanometer could you confirm the timeline that you’re expecting for that transition? Thank you so much.

Jen-Hsun Huang

We have really fabulous products in the marketplace today and we don’t announce future products.

Operator

Your next question comes from Doug Freedman - Broadpoint Am Tech.

Doug Freedman - Broadpoint Am Tech

Marv can you go through the new product segment and give us an idea which ones are likely to be accretive to gross margins and which ones should you be more successful are actually going to be a headwind? And any comment that you guys can make about the gaming PC platforms would be helpful as well.

Marvin D. Burkett

Accretive gross margins – which gross margin level are you talking about it being accretive to? The one for last quarter doesn’t take much.

Doug Freedman - Broadpoint Am Tech

Good point.

Marvin D. Burkett

Well, let’s take them somewhat in order. Tesla certainly is accretive gross margin. You know I think Tegra is certainly not a drag. I think it depends on what gross margin level that you’re talking about. It’s not a drag. If you’re talking about the Ion platform, it’s probably in the mid-30’s. So if we’re very successful there it’s not a huge improvement in the gross margin percentage but certainly a significant improvement in gross margin dollars. Does that help?

Doug Freedman - Broadpoint Am Tech

And then can you talk about the gaming platforms and what’s happening in the gaming market space?

Jen-Hsun Huang

What is the gaming platforms?

Doug Freedman - Broadpoint Am Tech

PS Sony, PS 3 and Royal [inaudible].

Jen-Hsun Huang

I don’t know what the question is. I mean they –

Marvin D. Burkett

Do you want to know what the revenue was in the quarter or?

Doug Freedman - Broadpoint Am Tech

Yes. Yes, the revenue or what your outlook is for that marketplace if that’s seeing the same type of conditions that you’ve seen in your market space.

Jen-Hsun Huang

Yes. I think it – remember a significant portion of the I’ll call it the Sony Royalty portion is based on their unit production. And so as their unit productions drop, our revenue in that segment will drop. And I think that they’re projecting much lower production levels in Q1 than they had in Q4.

Operator

Your next question comes from Suji De Silva - Kaufman Bros.

Suji De Silva - Kaufman Bros.

On Ion can you guys talk about what you think the pace and quantity of the ramp here, just in terms of your share on the Intel platform particularly?

Jen-Hsun Huang

I don’t know how to characterize it for you really aside from the fact that we have no booked projects happening all over the world. You know a lot of it just depends on the success of our customers and these platforms. So there’s still a lot of execution between now and then and lots of unknowns. So I’m reluctant to give you numbers that frankly I don’t know how to project.

I do know that the design activity around our chip set is increasing and I do know that we’ve announced a really exciting product. So I think if and the markets are really resonating with it then I’m sure that if you follow this market you’ve heard just about nothing but about Ion these days and the excitement that people have to build net books and low-end notebooks with it. So I’m enthusiastic about the prospects and I look forward to reporting on in a couple of quarters.

Suji De Silva - Kaufman Bros.

But Jen-Hsun then the timing would be back half loaded or steady throughout the year? Any comments there?

Jen-Hsun Huang

There are design wins that are being launched in just about every quarter. There’s some this quarter. There will be some the next quarter for sure. And hopefully they’ll be all fully ramped up for Q3, Q4.

Suji De Silva - Kaufman Bros.

And switching to your guidance in terms of the flat revenues, how do you see that and the notebook market versus the desktop market given the different dynamics you cited for the current quarter?

Marvin D. Burkett

We don’t see significant change in any of them. You know if they are relatively flat to slightly up there’s not a significant change in any of them. We don’t think that the flat is derived from any one particular segment.

Suji De Silva - Kaufman Bros.

And then on the OpEx cuts were there any particular areas that were kind of overly hit by those or was it a broad-based effort on the part of the company to do more maybe with six people instead of seven people. Is that the spirit of it Jen-Hsun?

Jen-Hsun Huang

We affected a lot of different areas whether it’s the executives of our company took the largest and most significant affects. But many of our – almost all of our employees will make a contribution. There’s travel reductions; there’s just ideas all around the world and around the company to reduce spending wherever it can be reduced without affecting the key investments that I’ve highlighted. So it’s broad-based and it’s everywhere.

Suji De Silva - Kaufman Bros.

What’s the pricing decline you’re assuming in your guidance versus what typical pricing would decline? Thanks.

Marvin D. Burkett

No change.

Operator

Your next question comes from David Wu - Global Crown Capital.

David Wu - Global Crown Capital

Can you talk a little about the Marv on the breakeven either on a pro forma basis or on a cash basis? What kind of revenues are we looking at from a breakeven standpoint on a quarterly basis?

Marvin D. Burkett

Well, that’s a very complex question David. You have to tell me where the revenue is, what the gross margins are, how successful we are in getting our OpEx down to that targeted level.

David Wu - Global Crown Capital

If we achieve the targeted level OpEx and if we have gross margin in the mid to sort of mid-30’s, what kind of cash breakeven – operating cash breakeven are we looking at or pro forma breakeven are we looking at?

Marvin D. Burkett

Well, that’s an easy calculation for you to do. I’m not going to do it. If you have operating expenses at the $265 level, that includes some stock-based compensation which is non-cash; that includes some depreciation which is non-cash and so now you have a gross margin number on X dollars of revenue that’s an easy calculation to make.

David Wu - Global Crown Capital

What about if I were to look at say the revenue is $500 million is your first quarter roughly end demand number and the peak of last year was about – assuming that those are all end demand about $900 million whereabouts if you make the seasonal adjustment, where is end demand? If Q1 is $500 assuming normal seasonality, how high would that number be on your best quarter of the year?

Jen-Hsun Huang

You know, David, and I don’t think I’m saying something that’s inconsistent with what you know, there’s nothing that we’re experiencing right now that is seasonal. We don’t mean to make light of it but the environment is very difficult and uncertain. It’s very difficult and uncertain not just for us but it’s very difficult and uncertain for everybody. And so our strategy is to make sure that we eliminate and as be as discriminating as we can on spending, but continue to invest in the things that we know are important to the marketplace and things that we’re world class at doing, and continue to innovate and challenge our employees to build amazing things.

David Wu - Global Crown Capital

Talking about innovation there has been a number – I guess the next round of game console design wins are coming up or rumor has been awarded to different people. How close are we actually in terms of competing for the next generation of PS4 or Xbox or Wii?

Jen-Hsun Huang

It makes no sense to comment on rumors. And it also would be terrible to comment on future products of our customers. It is not our job to do that. And so it’s just – they’re just rumors, David.

Operator

Your next question comes from Shawn Webster - J.P. Morgan.

Shawn Webster - J.P. Morgan

Would you characterize the one to one-and-a-half months of inventory as being normal or lean or still on the high end of normal?

Marvin D. Burkett

Very lean.

Shawn Webster - J.P. Morgan

So is your visibility now about the same or better than it was when you came into the January quarter?

Marvin D. Burkett

How do you mean that, the January quarter? You mean our Q1?

Shawn Webster - J.P. Morgan

Would you say that you’re setting the guidance at flattish or up slightly now, would you say that your visibility now was better than where it was when you came into Q4 or the same?

Marvin D. Burkett

I don’t know how you characterize that because when we went into Q4 the market had not dropped off a cliff. So I should certainly hope that the visibility is better now than it was then.

Shawn Webster - J.P. Morgan

Can you give us an update on some of your new products and what did Tesla represent for revenues for you in Q4 and Tegra and your outlook for calendar 2009?

Jen-Hsun Huang

Let’s see, Tesla for Q4 did we break that out?

Marvin D. Burkett

We haven’t broken it out in the past. It was up millions of dollars, several million dollars. I won’t characterize it beyond that. When it gets to be significant Shawn we’ll break it out. Tegra was insignificant.

Jen-Hsun Huang

Tegra hasn’t shipped yet. It’s really second half of the year.

Operator

Your next question comes from Uche Orji – UBS.

Uche Orji – UBS

First question to you Marv, if I look at the guidance you’re giving for the current quarter, how much – what should we expect for the workstation business within that guidance? And if you can just explain that in the context of what is a very challenging IT spending environment. I just want to be able to reconcile how much that will contribute across margin and just reconcile it with your guidance. So if you can talk about what that makes you see in the workstation business – what you saw the last quarter and what you are implying within the guidance of the current quarter that would be helpful.

Marvin D. Burkett

Okay. Now the workstation business took a precipitous decline in last quarter Q4. It was down about 47%, Q3 to Q4. That was surprising. I mean if it was any business that would be somewhat of a safe haven from this you would have thought it was in the workstation area. Didn’t happen. So what the anticipation is relatively no change from the Q4 levels into Q1. So a continued weakness I would call it.

Uche Orji – UBS

And that is supported by what you have in the backlog currently or do you require turns business to make that flat revenue guidance? This is very important for your gross margin. That’s the reason why I’m pressing on this.

Marvin D. Burkett

Well, we always require turns. We are not a business or our business model is not based on a significant backlog at the beginning of the quarter. Our whole business is based on significant turns within the quarter.

Uche Orji – UBS

If I look at the high-end GPU business, what is happening with pricing right now? Is pricing stabilized at this point because you know late last year [A&D] did try to make a push in that market. And so what is the outlook for pricing in that market for the current quarter?

Jen-Hsun Huang

In Q2 of last year we did take a big step down in pricing. We improperly priced our products too high. But we corrected that almost right away. The pricing that we’re seeing out there is relatively stable at the moment. We’re gaining share and we have the best products and we stay focused and continue to do our work and highlight our unique advantages with CUDA and PhysX and 3D Vision. I’m confident we’ll continue to gain share.

Uche Orji – UBS

With Intel introducing some chipset product that allows them to [M&P] you know I’m just trying to understand how you now position Ion because you know 3D gaming which is probably a key feature is not something that you’ve heard [inaudible] talk about as something consumers care about in a big way. So how are you going to position Ion against that [one view]?

Jen-Hsun Huang

You know 720P is not Blu-ray compatible as you know. And 720P is the minimum requirement of high def and so high definition includes all the way to 1080P for one. The overall performance under Windows Vista and Vista Premium and the requirements for DX10 and Windows 7 coming out and you know all of the trans-coding and video editing and video processing capabilities of CUDA are available on the Ion platform. And so if you want the best possible experience while still being extremely affordable Ion is really the way to go.

Operator

Your next question comes from James Schneider - Goldman Sachs.

James Schneider - Goldman Sachs

To follow up on the gross margin question a little bit, in the GPU space specifically desktop and notebooks can you talk about some of the pressure you might see from pricing and inventory reductions in the out quarters going into the second half versus whatever benefits you might get from 55 nanometer and lower cost reductions?

Marvin D. Burkett

Wow. You know that’s difficult to say. I mean all of our production now is on 55 nanometer and you know later in the year would be even smaller geometries but how that impacts the gross margin is difficult to say. I think that the individual product gross margin in my view is not the issue. It’s the total volume. So I think we’ll do fine from a gross margin standpoint.

James Schneider - Goldman Sachs

So would you expect the GPU margins to continue to recover into the back half after or early into Q2?

Marvin D. Burkett

Well I think the gross margins to the GPU business will recover in Q1. Remember a significant portion of the I’ll call it the increased inventory write-off we took in Q4 was in the GPU business. So there should be significant recovery in GPU gross margins in Q1.

James Schneider - Goldman Sachs

But no sense about beyond Q1?

Marvin D. Burkett

No.

James Schneider - Goldman Sachs

And then just a follow-up I think Jen-Hsun you mentioned Ion in reference to the chipset product on notebook platforms as well as it’s paired with the Intel Atom processor. Could you talk about some of the design wins you’ve got specifically when paired with the Intel Atom please?

Jen-Hsun Huang

Well we shouldn’t announce any design wins until the design wins ship. And so when it does ship I’d be more than delighted to address it. I can only tell you that there’s enthusiastic support and design activities all over the world and so we’ll see when they ship. When they do ship hopefully it’s not too long we’ll be delighted to talk about it.

Operator

Your next question comes from Glen Yeung – Citigroup.

Glen Yeung – Citigroup

Marv I hear your point that you don’t want to impair your future growth by reducing OpEx to too low a level but one could argue that with sales down 60% year-on-year and you know with a pretty uncertain end market out there the future growth isn’t hurt anyway. So I guess when we think about your business going forward what would you need to see? I mean is there some lack of growth element out there that says, “Jeez, I’ve got to cut anyway because it’s just so bad.”

Marvin D. Burkett

Well, we’re always looking at things like that. That’s the job of management to look at them. You know if you were to tell me that the current economic environment is going to continue for the next ten years, then lots of people not only us but other companies are going to have to restructure their businesses. If you’re telling me that the economic environment will change very quickly that’s an early holding on till it comes back. So I don’t know how long this economic environment is going to take.

But I do know the only way out of recessions and significant recessions like this is not by cutting your future. The way out of the recession is by investing in future revenues. So we want to continue to do that. As long as we’re not burning through significant cash, and as long as we’re investing in the right places, that’s more significant to me. So I don’t know what’s going to happen in the economic environment.

Jen-Hsun Huang

And the investments that we make, Glen, we want to make sure that we’ve scrutinized all of our investments. And we’ve asked ourselves are we investing in areas that’s going to lead us to growth? And if it’s not going to lead us to growth there’s no point investing in it. And so we have to believe in what we believe. And once we believe it we’re going to stay committed to it. Obviously environments change and we’ll continue to reevaluate but based on what we see right now we’re making good decisions.

Glen Yeung – Citigroup

I also wanted to ask about the linearity in the reported quarter and the implication that has for the start of the quarter because it sounds like November was really bad, I would guess that December was probably worse. Was January better? And at the beginning of February because of the flat guidance I’m just thinking about the pattern in the last quarter, it would sort of suggest February must have started off not that bad. And maybe if you could confirm or deny if that’s true.

Marvin D. Burkett

November started off bad. December was worse and January wasn’t a lot better.

Glen Yeung – Citigroup

Marv if I think about that going down from the first month to the third month, if you want to be flat don’t you have to be going up in the first month to the third month in this quarter? And doesn’t that seem like an unlikely situation?

Marvin D. Burkett

No, I don’t think so. You know, I think that you saw us being I’ll call it a victim of the quarter, our quarter being November, December, January. I think that was a negative compared to some of the other guys out there that are on a calendar quarter. I think that the depletion of the channel inventory was a negative for us relative to what’s happening in the marketplace. And those two factors alone tell me that they weren’t normal if you want to call it that or the run rate of consumption out there is equal to or better than our revenue for the last quarter.

Operator

I will now turn the call over to Jen-Hsun. Please go ahead sir.

Jen-Hsun Huang

Thank you for joining us today. We look forward to reporting our progress for Q1.

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Source: NVIDIA Corporation F4Q09 (Qtr End 1/25/2009) Earnings Call Transcript
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