NVIDIA F3Q10 (Qtr End 10/25/09) Earnings Call Transcript

Transcripts

NVIDIA Corporation (NASDAQ:NVDA) F3Q10 Earnings Call November 5, 2009 5:00 PM ET

Executives

Michael Hara - Investor Relations
David White - Chief Financial Officer
Jen-Hsun Huang - President, Chief Executive Officer and Director

Analysts

Doug Freedman - Broadpoint Amtech
Ross Seymore - Deutsche Bank
James Schneider - Goldman Sachs
Uche Orji - UBS
Glen Yeung - Citigroup
Hans Mosesmann - Raymond James
Daniel Berenbaum - Auriga USA
David Wu - Global Crown Capital
Joanne Feeney - FTN Capital
Tim Luke - Barclays Capital
Analyst for Craig Berger - Friedman, Billings, Ramsay
Analyst for Raj Seth - Cowen & Company

Operator

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

Michael Hara

Thank you. Good afternoon and welcome to NVIDIA's conference call for the third quarter of fiscal 2010. With me on the call today from NVIDIA are Jen-Hsun Huang, President and Chief Executive Officer; and David White, Chief Financial Officer.

After our prepared remarks, we will open the call up to a question-and-answer session. Please limit yourself to one initial question with one follow-up.

Before we begin, I would like to remind you today’s call is being webcast live on NVIDIA's investor relations website and is also being recorded. A replay of the conference call will be available via telephone until November 12, 2009 and the webcast will be available for replay until our conference call to discuss our financial results for our fourth quarter of fiscal 2010.

The content of today’s conference call is NVIDIA's property and cannot be reproduced or transcribed without our prior written consent.

During the course of this call, we may make forward-looking statements based on current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties and our actual results may differ materially. For a discussion of factors that could affect our future results and business, please refer to the disclosure in today’s earnings release, on our Form 10-Q for the fiscal period ended July 26, 2009, and the reports on Form 8-K filed with the Securities and Exchange Commission. All of our looking statements are made as of today, November 5, 2009, based on information available to us today and except as required by law, we assume no obligation to update any such statements.

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

During this call, we will discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our financial release, which is posted on our website.

We are making a few changes to our format moving forward. As you may have noted, we posted David’s financial overview on our website prior to today’s call. In addition, I will be providing the corporate overview and Jen-Hsun will be available for the question and answer portion.

With that, let’s begin.

We continued to make good progress in the third quarter. GPU demand continued to steadily increase, driven by a health market environment and new applications that require GPUs. Our unprecedented investments in parallel computing are creating change and opportunity and are the foundation of our growth in the coming year. We believe we are in the midst of a giant leap in computer graphics. The GPU continues to advance the most parallel of applications, 3D graphics, and it is now poised to revolutionize a wide range of industries by making parallel computing mainstream.

Consumers needs have changed and the GPU is key to meeting them. The Internet is today’s killer app and social media, video, and digital photography have seen massive growth.

These are highly parallel tasks that are much better suited to a GPU than a CPU. From handhelds to data centers, today’s most important computing problems are parallel.

For handheld devices, parallel computing on GPUs delivers rich media and enables an uncompromised Internet experienced. The first TEGRA devices, Microsoft Zune HD and the Samsung M1, started shipping in Q3.

PC gamers are aggressive adopters of new technology. Just as SLI permanently changed the meaning of high definition gaming, PhysX and 3D stereo are bringing an even more profound change, making games surprising and magical again.

Because of the extraordinary impact PhysX has on game playing experience, it has the potential to be a defining feature of gaming PCs, just as SLI is today.

Parallel computing also provides 3D stereo for movies and photos and remarkable speed ups for photo and video editing. In the future, even PCs that already have a graphics controller integrated with the CPU will require a GPU for compute.

Professional users will greatly benefit from the combination of computational graphics and parallel computing. Even for pure graphics applications, parallel computing is being used to make images more realistic by simulating the real world from PhysX to photons. Movie production houses that worked on Terminator Salvation and Star Trek ran color grading and image processing 20 times faster using parallel computing on NVIDIA GPUs.

Our leadership position and innovative software, parallel programming language, development environment, libraries for PhysX, ray tracing, scene management, and many other aspects of a visual computing solution will not only solidify our market share, it will expand the size of the business.

Data centers are constrained by space, power, and cooling so the improvements from parallel computing and performance per cubic foot are game changing. TESLA development clusters are at 33 of the top 500 super computing sites. Oak Ridge National Labs announced in September that it plans to build the world’s most powerful super computer with our GPUs.

But GPUs in the data center represent more than just evolution. They are a discontinuity that opens up new application and grows the entire market. For example, we recently announced a reality server, a powerful combination of GPUs and software that streams interactive photorealistic 3D applications to any web connected PC, laptop, netbook or smartphone from the data center, a rendering that used to take hours and require highly skilled technical specialist can now be developed interactively by designers and artists. Reality server is an example of the future of 3D web applications.

Momentum behind parallel computing is unlike anything in the industry. We held our first GPU technology conference last month and even after closing registration early, we were over subscribed by 50%. 1500 people from over 40 countries listened, learned and shared during 200 hours of sessions. At one point, more than 35,000 people were watching online.

Also at GTC, we announced a revolutionary [inaudible] compute architectural. [inaudible] based products will become the foundation of our most powerful processors ever, targeted for both graphic and computation. We continue to invest deeply in programmability and [FIRMY] now provides the capability to write applications in C++.

We have created a development environment, code named Nexus, which integrated into Microsoft Visual Studio, the world’s first unified programming environment for a parallel computing architecture with the CPU and GPU in a co-processing configuration.

NVIDIA's growth strategy is simple and singular -- be the absolute best in the world in visual and parallel computing, to use GPUs to transform computing experiences. The GPU will be incorporated into all kinds of [inaudible] platforms beyond PCs. By focusing our R&D efforts to advance visual and parallel computing, we are creating breakthrough solutions to address some of the most important challenges in computing today.

Let me now hand the call over to David.

David White

Thanks, Mike. Q3 was a strong quarter, driven by an improving PC market and better mix. Revenue was $903.2 million, above our guidance and up 16% sequentially, making the third consecutive quarter of top line strong growth.

Gross margin was 43.4%, 41% on a non-GAAP basis, significantly higher than guidance.

GAAP operating expenses was just under $284 million, marginally above guidance and GAAP net income was $107.6 million, or $0.19 per diluted share. Non-GAAP income was also $0.19 per diluted share.

Our core GPU business was particularly strong, up almost 25% sequentially. Within that, our desktop and notebook GPU segments were up 19% and over 41% respectively quarter over quarter. While demand was strong, we were supply constrained throughout the quarter, particularly in our 40-nanometer products. 40-nanometer products for desktop and notebook constituted 19% of our total GPU revenue in the quarter.

Our professional business saw another quarter of growth, up 11% sequentially. While revenues in this business are still well below their levels of a year ago, quotation activity continues to gain momentum and is encouraging. Gross margin improved sequentially as a result of several factors -- significantly higher than anticipated unit sales of GPUs; improved 55-nanometer yields as well as other cost reductions; and more favorable product mix across businesses, and particularly better mix within the GPU business itself.

Inventories at the end of the quarter were essentially flat compared with the prior quarter. Inventory days on hand improved to 47, calculated on a non-GAAP basis, a 4-day improvement over the second quarter. Inventory in the channel remains very low at around a month. With demand outstripping supply, we don’t see OEMs in the channel building inventory.

Our outlook for the fourth quarter of fiscal 2010 is as follows -- revenue is expected to be up slightly, approximately 2% from the third quarter. While revenue for 40-nanometer products is expected to grow significantly quarter over quarter, we expect 40-nanometer products to be supply constrained throughout the quarter; GAAP gross margin is expected to be 40% to 42%, essentially flat with Q3 excluding the insurance reimbursement; GAAP operating expenses are expected to be in the range of $305 million. This is up from the third quarter due primarily to our fourth quarter comprising 14 weeks versus the usual 13 weeks, as well as costs relating to a record number of product bring-ups.

This concludes our formal remarks so at this time, we’d like to open the call up for questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Doug Freedman with Broadpoint Amtech.

Doug Freedman - Broadpoint Amtech

I guess I would start with we have seen several quarters now where you have significantly exceeded your guidance. Can you talk a little bit about the business processes that you have in place to forecast your business and whether you are finding yourself sort of short of product going forward as a result of not really getting accurate forecasts from your customers in your channel?

David White

Doug, our process starts really at the very base line of our field sales force and we gather forecasts from the field, both the OEMs and to the extent we can, through the channels. We also at the same time try and correlate that with what market forecasters expect to be growth rates in the various end markets we participate in. And from that, we set revenue plans and from that, we set wafer start plans ultimately.

I think the challenge for probably everyone in the industry right now is that demand has been more robust than what anyone has been able to particularly foresee and given that you’ve got a 12 to 13 week lead time from the date you decide you want more volume to the date that you can ship that volume, we are being surprised by robust demand within that lead time and so it’s a good thing in some respects. I think the down side for us has been that as a result, we are -- we have been supply constrained. But we do look at a number of different inputs as it relates in terms of compiling our forecasts and trying to challenge our crystal ball, so to speak.

Doug Freedman - Broadpoint Amtech

All right. If we could move in and focus in on one segment of the business, the chipsets, it appears during the quarter you guys have made a little bit of a change in tone towards the outlook for your chipset business. Can you talk about that and can you talk a little bit about what is going on over with the AMD chipset, the downturn there you attribute to their supply constraints? Is there any thought that you might be also possibly experiencing some share loss in that piece of business?

Jen-Hsun Huang

Our primary AMD chipset today is a chipset called the MCP61. The MCP61 is the only single chip solution in the marketplace today and it enables the lowest cost solution for an AMD platform. There is really at this point nothing that I know how to do and nor do I believe anybody else can build a chipset that is as low cost at a system level as MCP61.

You know that the AMD market is primarily mainstream desktop and then you also know that for a variety of reasons, AMD CPUs lost share last quarter. And so when AMD CPUs loses share, they lose share primarily in the mainstream market and so that is basically what we experienced.

I don’t think we lost any share within the AMD CPU market. I think the AMD CPU lost share in the mainstream desktop PC market.

If the AMD CPU recovers some share relative to Intel, we’ll grow the MPC61 business again, and so my expectation is that for the foreseeable future, certainly well beyond several quarters, the MCP61 is going to be a wonderful chipset for AMD processors.

The second question is a longer term about our chipset. You know that we have a dispute with Intel and it is now impossible for us to build next generation chipsets with all the allegations that they are making in the market and with the dispute hanging over it.

We have one major generation of the current architecture post MPC79. It is a really exciting new MCP next generation and we are expecting it to be very successful. The customer feedback has been quite wonderful and while MCP79’s GPU capability already far exceeds that of Erindale, MPC89 will take it that much further and so MCP89 is our next major generation of this architecture, and so we have -- we are expecting our chipset business overall to do quite nicely through next year and beyond. The only thing that I have said and I want it to be very clear is that we have no intentions at this point of building a DMI based chipset but otherwise, we have ongoing investments as well as chipset developments in the current architecture.

Doug Freedman - Broadpoint Amtech

Great, thank you for that clarity and I will jump back in the queue for the follow-ups that I do have.

Operator

Thank you. Our next question comes from the line of Ross Seymore with Deutsche Bank.

Ross Seymore - Deutsche Bank

I guess from an end demand perspective, first and foremost, beyond the limitations on the supply side, are you seeing any sort of abnormal seasonality or inventory related impact on demand as we look into the fourth quarter?

Jen-Hsun Huang

Well, demand is really strong. We came into this quarter with very, very strong demand again. Last quarter we were supply constrained from the very first day of the quarter and it got more and more challenging as demand continued to grow. I think that Mercury Research showed that we lost market share. I think we did lose market share. We came out of the quarter not being able to fulfill several million units of demand [orders], not to mention the turns business that would have been on top of that. And so the demand on our GPUs at the moment is very, very high.

Is it because of Windows 7? It could be. You know, it’s -- I hope that it is and I hope that it is because people’s PCs are getting rather old and they could use a refresh. I hope that it is because the adoption of GPUs is higher than before. And so we are seeing very, very strong demand at the moment. I expect us to be supply constrained and the projections that we are giving you guys are a supply constrained forecast. And so I am expecting us to be supply constrained and we are going to fight really hard to make up as much as we can but demand is pretty strong out there right now.

Ross Seymore - Deutsche Bank

I guess as a follow-up, also looking at your MCP business, it was helpful you hear how you think it is going to play out but if we try to get a little more granular on that, the fact that you are not planning to do any of the DMI side of things, you are at $250 million in revenues now. When do you think it starts to impact your overall chipset business that you are making the choice or Intel is forcing the choice that you won't be supporting the new architecture? When would we start to see that on the revenue side of the equation?

Jen-Hsun Huang

My sense is that we will see our -- and I am just giving you my crystal ball, who knows -- but based on our analysis, my sense is that our chipset business at a peak probably around Q3, Q4 next year, and no ramp down from there. And it just depends on available CPUs that we can connect to, customer demand for Ion, so on and so forth -- our competitiveness relative to Erindale CPUs. You know, Erindale has integrated graphics but MCP79 already has better GPU technology and MCP89 takes that even further and because Windows 7 requires Direct Compute and OpenCL and Direct Compute are becoming increasingly important, what we call GPU computing, I think that the disparity between our MPC and Intel’s integrated graphics is growing, not shrinking and it’s growing by leaps and bounds at the moment.

And so I think those are all [played] factors but without much estimation, I think that our chipset business is likely to continue to grow for the foreseeable future, or has the opportunity to grow, certainly.

Ross Seymore - Deutsche Bank

Thank you very much.

Operator

Thank you. Our next question comes from the line of James Schneider with Goldman Sachs.

James Schneider - Goldman Sachs

I guess first of all on the gross margins, could you maybe give us some quantification about how much of that improvement was driven by improved mix with the transition to 55 and 40-nanometer and how much was driven by better product cost based on that or better mix based on more workstations or just higher end GPUs?

Jen-Hsun Huang

We don’t -- we haven’t broken that stuff out but I think that this quarter, it’s pretty clear that everything grew. We have -- if you were following us in previous quarters, you knew that 65-nanometer was an element of our gross margin drag that we had to work through and as of last quarter, we had worked that mostly out of our system and so we are freshly, we are all 55 and all 40-nanometer.

Gross margins on 55 and 40-nanometer products are similar. There’s -- 55 is fine, it’s a perfectly gross margin and so will 40 be. And so I think that in terms of our main business, core mainstream business, it would be not having any 65s or having very little 65s that plays the biggest factor.

The second thing is PSG overall growing is very high leverage for us. You know that our position in the workstation business is very high and it’s high not because we have a fast chip only -- it’s high because the workstation business is really a solutions business and we offer tools and compilers and what we call application acceleration engines like ray tracing engines and scene graphs and shader compilers and they are integrated into design tools and CAD applications all over the world, not just the ones that are available on the open market but the ones that are indigenous to the OEMs themselves.

And so Quadro FX and all of the software that we have developed over the years, of which we make enormous investments, it has assured us a position that is very, very high in that marketplace. We just add a ton of value. It’s not just a graphics chip.

And so when that market recovers and it looks like it is recovering slowly every quarter, the margin leverage is very high.

And lastly, the consumer electronics market is also -- generates royalty payments and such and its gross margins are high too. And so I would attribute our -- most of that to be the gross margin drivers.

James Schneider - Goldman Sachs

Thanks, that’s very helpful. And then I guess as a follow-up, can you talk about the TEGRA business, maybe update us on your expectations for the revenue for TEGRA next calendar year? And then give us a sense for the split of applications you expect, handsets versus the rest of the consumer electronics space? Thank you.

Jen-Hsun Huang

We have over 50 projects that we are working on at the moment to get shipping and that consists of portable media players, smartphones, what some people call tablets, what some people called pads, Internet television, and automobile. The automobile projects will ramp up starting 2012, in a couple of years. The other projects will ramp up -- we already shipped Zune and Samsung. The portable media players tend to go through shorter certification cycles, as you know. And then the others, you are going to start seeing projects ramping out into the marketplace starting in Q1 and so that’s a very important part of our business and we invested for quite a long time in this area we call mobile computing and we were just certain that some day the vast majority of us are going to demand computing everywhere.

We are going to demand Internet access everywhere and the full web experience whenever we can. And so this is an investment that I think is really, really starting to come home to roost.

We are experiencing our -- we are experiencing as an industry the second personal computing revolution and I think everybody would agree that this is -- this second personal computing revolution will likely be more important and larger than the first one. And so how would I see the near-term revenues? It’s doubling every quarter off of a small base and it is going to be a real -- it’s going to be a significant part of our business in the near-term and as soon as it becomes a sizable part of our business near-term over the next quarter or two, we will break it out and report it separately. But at the moment, it is just growing nicely.

James Schneider - Goldman Sachs

Thanks very much.

Operator

Thank you. Our next question comes from the line of Uche Orji with UBS.

Uche Orji - UBS

Thank you very much. David, let me just ask you about the impact of the extra week in Q4 on the revenue line -- I can see the impact on the expense line but should we assume that it is a linear progression such that it has an impact on the revenue line, just to make sure I can put the guidance in context?

David White

Well, I think the 14th week wasn’t as much of an impact on revenue as much as supply constraints was an impact on it, so the extra week didn’t actually buy us really anything, from a revenue standpoint.

Uche Orji - UBS

Okay, just wanted to clarify that. Jen-Hsun, on professional solutions, I mean, just knowing how important this is for your margins, you said it looks like it is recovering. When you say that, what are the metrics that lead you to conclude that? Is it book to bill? Is it inquiries from customers? And if you can also shed some light as to what end market we are seeing some recovery on the professional solutions, just so we can get a sense as to the sustainability of the growth we saw this last quarter.

Jen-Hsun Huang

Good questions. Two parts -- for our OEM business, most of that business is pulled from hubs, so we just have to monitor the hub pulls. And so whenever they deplete the hubs, we fill the hubs and so monitoring the hub pulls is a good indicator of the business rate and the hub pulls are surely up.

And the second thing is what we call differentiated solutions and there are things like digital video pipeline that we announced at NAB recently, which allows you to stream live video, high definition live video right into a compositor for graphics like you see on TV. We composite the 3D graphics and then we stream that right out into broadcast. That used to require many racks of computers and now we literally do it on using one quadro plex format, one little tiny box. So for a DVP and an SVS, which is our scaleable visual solutions, you know how cheap, how inexpensive flat panel displays have become and so many companies are starting to put multiple flat panel displays into a power wall configuration because of its resolution and productivity capability and also mostly because it has just become so inexpensive.

We created a scaleable visual solution that allows you to span a single application virtually across many, many computers and displays, or put many applications up on that power wall.

And so the thing that we see there is just the traction of the interest there and the design pipeline that is building there. And then starting the end of this coming quarter and the next quarter, we are going into a new product cycle and that new product cycle is based on [FIRMY] and we are going to bring to the market for the first time in history the ability to do raytracing interactively in every single workstation. Customers really ecstatic about that capability and I can't wait to revolutionize graphics again. And so that’s -- the short-term, it’s the pull and the design pipeline, which we track very carefully, and then shortly after that, the ramping of FIRMY GPUs.

Uche Orji - UBS

That’s great. Thank you very much. Can I just ask one last question, David? Let me just ask you about -- so if I look at the chipset business, moving the mix from more to Intel versus AMD, did that have any impact on ASPs, and by extension did that have any impact on margins? And that’s my last question.

David White

Well, yes, the MCP61, which Jen-Hsun talked about earlier, is a low-end product for us and it does have lower ASPs than the Ion does, obviously and the Ion does have higher margins, so that did help uplift margins, yes.

Uche Orji - UBS

Okay, great.

Jen-Hsun Huang

Let me just clarify -- MCP61 has lower ASP but higher gross margins. MCP79 has --

David White

-- profit, gross profit.

Jen-Hsun Huang

-- gross profit dollars, right. That’s what you meant, but I just wanted to clarify.

Uche Orji - UBS

Okay, that’s great. Thank you very much. Congrats on the good numbers, Jen-Hsun. Thank you.

Operator

Thank you. Our next question comes from the line of Glen Yeung with Citigroup.

Glen Yeung - Citigroup

I wanted to ask a question about the supply constraints that you are seeing today, across three different vectors -- one, does it give you, seem to give you better visibility now that you are getting some backlog building up? Two, is there a point at which it is going to cap your ability to grow your sales? And then three, do you think there is any impact to market share because of those constraints?

Jen-Hsun Huang

All good questions. One, I’m about to get visibility all the way through next year, it seems and so yes, when we are this constrained, customers have to work with us really carefully to make sure that their needs are well understood by us. And we are short of those needs. We came out of last quarter several million units short. That’s a lot of PCs. And we came into this quarter several million units short and my expectation is we don’t make it up. So the answer to your number two question is it surely constrains our growth. I think that we should have made -- there is probably an opportunity for us to have done somewhere between $50 million to $100 million more last quarter and certainly this quarter. And so it is certainly constraining our growth.

Is it contributing to -- would it contribute to share loss? Sure. We demonstrated that this quarter. We lost, according to Mercury Research, I think it was two or three points of market share and it was completely attributed to lack of supply.

Glen Yeung - Citigroup

Okay, that’s helpful, thanks and then just as a follow-up, when I think about your business over the next four quarters, even over the next eight quarters, it sounds like we will have a chipset business which peaks in the second half and then goes down. TEGRA, which is growing, workstation which can recover, PCs which are generally recovering -- but I wonder if you can specifically point to revenue growth as attributable to GPU compute specifically.

Jen-Hsun Huang

So let me see if I can break that down a bit -- I expect GeForce to grow next year, not only because the market will be healthier next year. There is real evidence that GPU adoption is increasing. There is -- and the enthusiasm behind FIRMY, our next generation GPU architecture, is just out of this world. I mean, it’s just way over the top. And the reason for that is this is because the first brand new architecture we have created in four years and instead of an incremental change to DX11, this is a fundamentally new architecture and the performance is fabulous. And so we are expecting to be very successful with FIRMY and all of its derivatives.

And so that is one -- the second thing is quadro, my expectation will do much, much better next year than this year by several hundred million dollars.

And number three, TESLA, which is our GPU computing product for super computing and for high performance computing and cloud computing, I believe that is going to be a growth market and there is every evidence that with all of the adoption out in the marketplace and the OEMs finally realizing that this is the architecture of the future, they are all ramping up to build heterogeneous computing or GPU computing based servers, so I expect TESLA to grow.

And then I expect TEGRA to grow a lot next year, and so -- not to mention our core logic. There is a very good bet that it is going to grow next year and obviously it will be our last generation. We will make modifications and adjustments to it and so it is hard to say whether it will ship for two years or two-and-a-half years or three years but surely it will be more than one-and-a-half years.

Glen Yeung - Citigroup

Jen-Hsun, I just need you to clarify one thing, if you might -- when you say performance of FIRMY is great, are you saying that relative to your previous architecture or also relative to the current competition?

Jen-Hsun Huang

Both.

Glen Yeung - Citigroup

Great, thanks.

Operator

Thank you. Our next question comes from the line of Hans Mosesmann with Raymond James.

Hans Mosesmann - Raymond James

A couple of questions -- regarding 40-nanometer, when does the situation get better? How are the yields coming along and what is your allocation from your foundry? Is it something that would allow you to get out of this perhaps earlier than your competition?

Jen-Hsun Huang

The yields are improving. I would say that without exception, yields are better today than it was at the beginning of last quarter. [TSMC] and Moores and his entire management team are just intensely focused on this and they are making progress every single day.

Yield enhancement [inaudible] is NVIDIA's number one strategic objective now. It is all we do. If floods my entire email. That is all I talk about. That is all I think about. That is all we meet about. And so it is of vital interest to both of us that we get 40-nanometer yields up to the levels that are absolutely world class. And I have no question whatsoever that it will and based on the work that -- and the effort that the TSMC team is putting into it, I have every confidence, complete confidence that we will get there, and soon.

Relative to the allocation, you know obviously, I don’t know what other people are allocated -- all I know is this; we’re not allocated enough.

Hans Mosesmann - Raymond James

Okay, and then a follow-up -- thanks, Jen-Hsun -- a follow-up on your commentary that you are going to make modifications to your core logic or your MCP89, I suppose. Does that mean you are going to come out with an MCP99 and what would that product look like if it is not DMI based?

Jen-Hsun Huang

Well you know, one of the things you can count on with NVIDIA is that we are always really clever and we have to be clever because we are not -- we don’t target the mainstream market. The baseline market is Intel integrated graphics. And it’s kind of like the house brand. You know, when you go to Safeway, it’s kind of like Safeway Select, it’s the house brand.

Our brand is the differentiated brand and when you put GeForce with an Intel processor, you get the differentiated product and that’s our business. It’s differentiation. And we are going to keep working hard to look for ways to architecturally enhance the PC experience and the PC platform so that our OEMs and ultimately the end users would have the benefit of a differentiated platform over the generic baseline Intel integrated graphics. And so that is our strategy and we have not run out of ideas by a long shot.

Operator

Thank you. Our next question comes from the line of Daniel Berenbaum from Auriga USA.

Daniel Berenbaum - Auriga USA

Just quickly, and I apologize, I’m in an airport, I missed some of this but did you say that there was any sell-through of previously reserved inventory in the quarter and did that help gross margin at all? And if so, do you plan on selling through -- is there more previously written down inventory which there is a chance of selling through next quarter? And then if the January quarter wasn’t going to be a 14-week quarter, what would revenue guidance have been? Thanks.

Jen-Hsun Huang

The answer to your first two question is no and no. We shipped everything we had. We shipped everything we had in Q2. We shipped everything we had in Q3 and if our customers were willing to chairs and furniture, I would have shipped that too. So we -- there was just nothing left and we were still short by a few million parts.

In terms of next quarter, our guidance would be exactly the same whether it was a 14 week or a 13 week, and that basically tells you were are completely supply constrained.

Daniel Berenbaum - Auriga USA

I guess I’m a little bit confused by that because certainly if there is an extra week, then you produce an extra week’s worth of stuff, so if you are selling it as fast as you are producing it, is there not an extra week’s worth of stuff to sell through?

Jen-Hsun Huang

Like I said, it is all supply constrained and if we have more time to build it, we certainly -- we would certainly build more but our demand is sufficiently high and we -- you probably already also know that we can only ship wafers that are outputted from the factor several weeks in advance. And so if you cut one of my weeks short but the wafers came out of TSMC, we would just rush it through the back end and ship it. And so if you cut our quarter down by three weeks, then it will surely affect our output but if you cut it back by a week, we will just increase our back-end capacity and ship more wafers that came out the week before that.

Daniel Berenbaum - Auriga USA

Okay, thanks.

Operator

Thank you. Our next question comes from the line of David Wu with Global Crown Capital.

David Wu - Global Crown Capital

Can you talk a little bit about the professional business prospects because I don’t think those are 40-nanometer parts and I assume those are more available and if John Chambers is right, supposedly these enterprise projects should be loosening up as your third quarter numbers show. How much could you grow that professional business in Q4? And I have a quick follow-up after that.

Jen-Hsun Huang

Our PSG business is demand constrained, not supply constrained, so I agree with you there. And so we will ship as much as the market -- we will replenish as much as the market pulls.

David Wu - Global Crown Capital

Okay, that’s good. Jen-Hsun, you showed -- I was at the show when FIRMY was previewed and you showed very good numbers on the computing side. Relative to your competition that is shipping products, you didn’t talk anything about the graphics side -- should I assume that the graphics performance is equally superior to the competition that is shipping right now?

Jen-Hsun Huang

We didn’t announce anything on graphics because it wasn’t graphics day. When we announce GeForce and Quadro, we are going to talk about the revolutionary graphics ideas that are designed into FIRMY and so we are looking forward to do that in the near future. And so please be patient with us -- the market is anxiously waiting and we have enthusiasts all over the world that are waiting for us to ship it. You know, every four years or so, we revolutionize the GPU with a brand new architecture. If you remember the G80, what became the GeForce 8800, was probably one of the most successful products in the history of our company and we’ve been doing incremental changes to G80 since then.

And now with FIRMY, it’s another revolutionary architecture and I’m expecting to take the GPU market up another notch.

And relative to the competition, the market has really spoken -- although it’s a fast chip, it’s not that fast and it is basically an RV770 with DX11. And I think that you could incrementally make changes for a number of years but certainly not forever and we are going to really change the marketplace going forward with FIRMY and so that’s our focus and we are trying to get it shipped as soon as possible. The demand is really, really strong for it and we will tell you about all the great graphics features when we launch.

David Wu - Global Crown Capital

The chip is a very big one. I was wondering, can you shrink it quickly?

Jen-Hsun Huang

Well, there are many derivatives of FIRMY and so each one of the processors are designed to be the right size of its market. You know, back in the good old days, everybody used to tell me that MP10 was too big and then MP20 was too big and MP40 was too big, MP30 was too big -- it’s only too big if it doesn’t do anything and if it is -- but if the performance is excellent, what consumers enjoy is something that is surprising and delightful and shocking and just the next level. And that is what we have built for them.

David Wu - Global Crown Capital

Thank you very much.

Operator

Thank you. Our next question comes from the line of Joanne Feeney with FTN Capital.

Joanne Feeney - FTN Capital

I wanted to try to get into the issue we’ve been hearing about in the market. It’s been noted that your higher end discrete graphics processor, the 270, 285, 290, that line, has been in short supply and we are wondering if you have made a strategic decision to de-emphasize that segment of the market or if you are supply constrained even at 55-nanometer, or if you have just seen demand tail off and that is why we have seen supply slow to a trickle here?

Jen-Hsun Huang

Well, the demand for GTX275 and 285 and 295 is really high. We have nothing left. We’ve just got nothing left.

Joanne Feeney - FTN Capital

So this is a supply --

Jen-Hsun Huang

We shipped everything we could last quarter and we are not trying to keep any for a rainy day and so customers are just yanking parts of our hands and so we are just trying to keep up and our focus is just to keep up with our demand across the board. And the sacrifices that we have to make sometimes in our own channel products, particularly the high end so that we can fulfill OEM demand, is a sacrifice that we have to make and we made plenty of that this quarter and we will have to make some of it next quarter.

Joanne Feeney - FTN Capital

Okay, and then if I could, a follow-up circling back to the chipset question, I just wanted to make sure I understood correctly, so your view on chipsets for next year is that you have a competitive advantage in your MPP79 and 89 that delivers graphics that is better than what Intel will even deliver on its Erindale platform and so are you thinking that PC bakers may want to have an NVIDIA chipset even alongside Erindale, or are you thinking that attach rates for discrete graphics will be rising on notebooks and that is how you plan to replace those chipset revenues?

Jen-Hsun Huang

I was just talking about chipsets and it is not -- MCP79 and MCP89 do not connect to Erindales.

Joanne Feeney - FTN Capital

So when Intel switches to Erindale, do you have a substitute or do you just not think that chipset business or the switch to Erindale is going to occur quickly enough to materially affect your chipset business over the next calendar year?

Jen-Hsun Huang

It will not switch over quickly enough. The market demand for core 2 duos are still really, really strong because core 2 duo, as you know, is the best CPU that has probably been designed by anybody on the planet in the last 10 years. The core 2 duo is not just fast but it is fast and low power and it is just exquisitely engineered. Core 2 duo is --

Joanne Feeney - FTN Capital

Okay, so it sounds like --

Jen-Hsun Huang

-- where it is today, and so core 2 duo is what we connect to -- core 2 duo, Celerons, Pentium Ds, Atoms, so on and so forth -- that is where MCP79 and 89 are targeted.

Joanne Feeney - FTN Capital

Okay, I think understand better now. So you are thinking that Intel may not transition as quickly over the next calendar year as they have in the past when they have introduced new chips?

Jen-Hsun Huang

They don’t ever transition as fast as you characterize it. They are transitioning and they transition as fast as they can and some people might want to go to Erindale and some people might want to stay with core 2 duo with an MCP79 and some people might stay with core 2 duo with an MCP89, and then some people might want Atom plus 79 and -- so the market is a big and differentiated place. Everybody doesn’t want to build exactly the same thing. And the benefit of MCP79 and 89 is it allows customers to build different types of devices.

The HP mini note that has the Ion chip in it, talk about the recognition that HP is getting. I think it’s the only box from HP that I see reviewed. I don’t remember a Lenovo notebook ever getting reviewed, with the exception of the Ion netbook that they recently shipped.

I think that the market is dying for differentiated type of products and so many OEMs will choose different strategies. I don’t think everybody wants to build exactly the same thing.

Joanne Feeney - FTN Capital

Okay, thanks.

Operator

Thank you. Our next question comes from the line of Tim Luke with Barclays Capital.