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NVIDIA Corporation (NASDAQ:NVDA)

F4Q07 Earnings Call

February 13, 2007 5:00 pm ET

Executives

Michael Hara - Vice President, Investor Relations

Jen-Hsun Huang - President, Chief Executive Officer

Marvin D. Burkett - Chief Financial Officer

Analysts

Mark Edelstone - Morgan Stanley

Gurinder Kalra - Bear Stearns

Satya Chillara - Pacific Growth Equities

Krishna Shankar - JMP Securities

Devan Moodley - Scotia Capital

Arnab Chanda - Lehman Brothers

Naser Iqbal - Salman Partners

Simona Jankowski - Goldman Sachs

David Wu - Global Crown Capital

Doug Freedman - American Technology Research

Shawn Webster - JP Morgan

Presentation

Operator

Good afternoon and thank you for holding. I would now like to turn the call over to Mr. Michael Hara, NVIDIA's Vice President of Investor Relations. Thank you. Sir, you may begin your conference.

Michael Hara

Thank you, Operator. Good afternoon, and thank you for holding. Good afternoon and welcome to NVIDIA's conference call for the fourth fiscal quarter ended January 28, 2007. 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 today's call, I would like to take care of some general administrative items.

Your lines have been placed on a listen-only mode until the question-and-answer segment of today’s call. During this call, we will discuss some non-GAAP measures about net income, net income per share and gross margin, and other line items from our consolidated statements of income in talking about our results.

You can find a full reconciliation of these measures to GAAP in our financial release, which is posted on the investor relations page of our website at www.nvidia.com.

This call is being recorded. If you have any objections, you may disconnect at this time. Please beware that if you decide to ask a question, it will be included in both our live transmission as well as any future use of the recording. Also, shareholders can listen to a live webcast of today's call and view our financial release at the NVIDIA investor relations website. The webcast will be available for replay until the company's conference call to discuss its financial results for its first quarter fiscal 2008.

During the course of this conference call, we may make forward-looking statements based on current expectations. Forward-looking statements, including statements as to our outlook, the use of non-GAAP measures, the benefit and impact of acquisitions, our products and technologies, design wins, key objectives, growth and growth drivers, market share, Windows Vista, the X-10 and HD Blu-ray DVD, pertain to future events and are subject to a number of significant risks and uncertainties. The company's actual results may differ materially from results discussed in any forward-looking statements.

For a complete discussion of factors that could affect the company's future financial results and business, please refer to the company's Form 10-K/A for the fiscal year ended January 29, 2006, quarterly reports on Forms 10-Q and 10-Q/A, and the reports on Form 8-K filed with the Securities and Exchange Commission.

All forward-looking statements are made as of the date hereof based on information available to us today and, except as required by law, the company assumes no obligation to update any such statements.

The content of the webcast contains time-sensitive information that is accurate only as of February 15, 2007.

Consistent with the requirements under Regulation FD, we will provide public guidance directly on 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 remarks, there will be time for your questions. In order to allow more people to ask questions, please limit yourself to one question. After our response, we will allow one follow-up question.

I will now hand the call over to Jen-Hsun.

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Jen-Hsun Huang

Thanks, Mike. Good afternoon, and thank you for joining us.

Today we are pleased to report record revenue of $878.9 million for our fourth quarter. This is our fourth consecutive record quarter. Year over year, fourth quarter revenue grew 39%. For the year, we delivered record revenue of $3.07 billion, an increase of 29% over the previous year.

Let me highlight some of our fourth quarter and fiscal year 2007 results and achievements. As a note, all share numbers quoted are from Mercury Research unless otherwise noted.

Non-GAAP annual gross margin for the year reached a company-high of 43.2%, an increase of 490 basis points year over year. GAAP annual gross margin was 42.4%. Non-GAAP gross margin for the fourth quarter reached a company-high of 44.2%, an increase of 130 basis points sequentially from the third quarter of fiscal 2007 and 400 basis points year over year. GAAP gross margin was 43.9%.

Non-GAAP net income was $577.9 million, an increase of 91% year over year. GAAP net income was a record $448.8 million.

We launched multiple industry-defining products during the year: the revolutionary GeForce 8800, the industry's most powerful GPU and the first DX10 unified shader GPU; nForce 400 family, the industry's first single-chip motherboard GPU chipset; PureVideo HD, the industry's first solution for full HD Blu-ray processing; Quadro Plex, the world's first ultra high-density visual computing system; and the revolutionary CUDA architecture for GPU computing.

We maintained our number one position in desktop GPUs. The desktop GPU business delivered a record year, with $1.24 billion in revenue, growing 11% year over year.

Our share in the performance segment grew to over 85%, up from 79% a year earlier.

We captured the number one notebook GPU position, with our share increasing to 58%, up 20% from the previous year. Notebook GPU revenue grew 122% year over year.

Our overall PC graphics share increased from 18% a year ago to 29% today.

The nForce MCP product line achieved record revenue for its tenth consecutive quarter. Revenue grew over 16% sequentially from the third quarter and 89% year over year.

The Quadro professional product line achieved a record revenue, an increase of 24% from the fourth quarter fiscal 2006.

The handheld GPU product line delivered $108 million in revenue, an increase of 85% from the previous year.

Sony launched the PlayStation 3 with our RSX GPU.

We completed the acquisition of PortalPlayer, a leading supplier of software and SOC application processors for mobile devices like Apple's iPods.

NVIDIA was named the most respected public company by the members of the Fabless Semiconductor Association.

Finally, with AMD's acquisition of ATI, NVIDIA became the only independent GPU company in the world.

We are pleased with our record year -- particularly, we are very pleased with our strategic position going into fiscal 2008.

Let me turn the call over to Marv to discuss our financial results in more detail. I will return in a moment to address our growth opportunities.

Marvin D. Burkett

Thanks, Jen-Hsun. Today, we are reporting both GAAP and non-GAAP P&Ls for our Q4 and fiscal year '07.

As Jen-Hsun said, revenue for the fourth quarter was $879 million, which is up 7.1% or $58 million from the third quarter. Revenue for the fiscal year was $3.07 billion, which is up 29% year over year.

In the fourth quarter, growth was led by MCP products, which increased by 16% quarter to quarter and, as Jen-Hsun said, was a record for the tenth consecutive quarter. Total MCP revenue grew 88% for the whole fiscal year.

Professional solutions products grew by 14% sequentially and also set a record for revenue.

In the desktop GPU business, the GeForce 8800 products grew by more than $50 million but were offset by weakness in some of the GeForce 7 products, particularly in the channel.

Memory grew by $10 million quarter to quarter.

Our consumer electronics revenue increased 40% sequentially, driven by significantly higher contributions of royalty payments, which more than offset a decline in MRE.

ASPs were slightly down in desktop GPUs, and relatively flat everywhere else.

We closed the purchase of PortalPlayer on January 5th, but the revenue contribution from Portal was not significant, approximately $1 million.

For gross margin in the quarter, we reported non-GAAP gross margin of 44.2% and GAAP gross margin of 43.9%. Our 45% target is getting close. GPUs, MCPs and handheld business units all improved gross margin quarter to quarter. As a company, we continue to work hard on improvement.

Operating expenses for the quarter were $247 million on a GAAP basis and $203 million on a non-GAAP. The non-GAAP eliminated stock-based compensation of $34 million before tax effect and it eliminated $13.4 million of in-process R&D associated with the PortalPlayer acquisition.

The $203 million included one month of PortalPlayer expenses, which totaled approximately $5 million, and it also included legal and accounting fees associated with the restatement of approximately $4 million, the restatement which was filed in December.

Including PortalPlayer, we added 456 new employees during the quarter and exited the year with 4,083 employees. For the year, we added over 1,300 new employees.

Depreciation in the quarter was $30 million.

The tax rate for the fiscal year and for the fourth quarter included the benefit of Congress passing the R&D tax credit retroactive to the beginning of calendar year 2006. This resulted in lowering both our GAAP and non-GAAP tax rates. It lowered the GAAP tax rate by 7 percentage points to slightly over 9% for the year and obviously a negative tax rate of 8% for the fourth quarter.

For non-GAAP, it lowered our fiscal year '07 rate by 6 percentage points to 10% and resulted in a negative tax rate of 3% for the quarter.

All of this resulted in GAAP net income for the quarter of $164 million, or $0.41 per diluted share, and a non-GAAP net income of $206 million, or $0.53 per diluted share.

On the balance sheet, we exited the year with $1.12 billion in cash and marketable securities, which was down $56 million from the prior quarter. This is after paying approximately $160 million net of cash and marketable securities for the acquisition of PortalPlayer and repurchasing $100 million worth of stock.

For the year, we repurchased $276 million worth of shares at an average cost of $26.80.

As a company, we generated more than $500 million in operating cash flow during the year.

Accounts receivable grew by $79 million quarter to quarter, as Q4 was back-end loaded. Our receivables are current and DSO was at 53.7 days.

Inventory declined by $19 million and resulted in days sales of inventory of 65 days. We grew inventory of the GeForce 8 family and decreased the inventory of older products.

Accounts Payable decreased by $52 million quarter to quarter.

Now for the outlook for Q1 fiscal year '08: for revenue, we expect a normal seasonal decline associated with the PC business of approximately 5%. Although we believe our market and competitive position in each of our business units continues to be very strong, there are no significant industry growth drivers to offset seasonality. Although we are enthusiastic about Vista's impact on our business, we will be cautious in the first quarter.

We expect a decline in memory from the Q4 levels.

We expect a revenue contribution from PortalPlayer of less than $10 million in the quarter.

For gross margin, we will continue to work hard to keep them flat to perhaps slightly improving.

On operating expenses, we have to absorb a full quarter of PortalPlayer, which will cause an increase of approximately $10 million from Q4. However, we believe that even with the additional expense, we may be able to keep operating expenses flat with Q4 as we focus on expense controls and restrict headcount additions.

We will get a small benefit in tax rate for the first quarter of fiscal year '08, as we are projecting a tax rate of 14% for both GAAP and non-GAAP.

With that, I will turn it back to Jen-Hsun.

Jen-Hsun Huang

Thanks, Marv. As we look ahead at fiscal 2008, we are very excited of our numerous growth drivers impacting each of our product lines. Let me discuss each of them in detail.

First, our GeForce desktop and notebook GPU business: GeForce 8800 is the world's first DX10 unified shader architecture GPU. It also incorporates PureVideo HD, the highest visual quality video processor for PCs and the only full HD video processing solution for HD and Blu-ray DVD. The GeForce 8800 is now available from virtually every PC OEM system builder worldwide and in most e-tail and retail outlet.

Since October, we shipped nearly 400,000 GeForce 8800s. Our focus for desktop GPU is to leverage our leadership position with GeForce 8 into the mainstream market.

We are ramping production on our GeForce 8 family of notebook GPUs, the industry's first DX10 and high-definition video GPU for notebooks. GeForce 8 will be the only DX10 GPU shipping in the upcoming Santa Rosa notebook launch. We expect our share of notebook GPUs to take another step up after this spring transition.

We are looking forward to an exciting year for our GPU business. Vista has shipped. This is the first operating system to present as a standard the power of the GPU to all applications -- applications from Office to Web 2.0 applications can now incorporate beautiful 3D effects because hundreds of millions of PCs will have Vista.

With Vista, DX10 and HD Blu-ray DVD at the height of technologies for PC this year, 3D graphics will become an ever-central part of our computing experience and the GPU will be more important than ever.

Our nForce MCP business: driven by the broadest product line of AMD-based chipsets supporting 8P commercial servers to consumer desktops and notebooks, we have become the number one supplier of MCPs for AMD-based PCs.

We ended the calendar year as the industry's second-largest supplier of chipsets, having more than tripled our share from just two years ago. OEMs have embraced our unique strategy of offering single-chip MCPs designed specifically to reduce space and power consumption, while offering outstanding quality and performance.

Our motherboard GPU product line is favored by PC manufacturers around the world. These customers prominently feature our GeForce brand to differentiate their PCs from basic integrated graphics. Our “Graphics by NVIDIA” logo is proudly on display on new Windows Vista PCs on retail shelves all around the world.

In Q4, we announced our new nForce 680i SLI for Intel CPUs. Our new product line was received enthusiastically by customers and reviewers around the world and quickly became the top-selling, high-end motherboard in multiple e-tail and retail chains.

The NVIDIA nForce brand is unambiguously recognized as the best chipset for performance PCs and dominates the top 10 rankings in the majority of industry motherboard reviews worldwide.

For fiscal 2008, our key growth objectives are to deliver exciting new motherboard GPU products for the Intel CPU segment and maintain our leadership position on [inaudible] platforms. We believe that Intel-based customers will demand the NVIDIA GeForce-branded motherboard GPUs and we expect an enthusiastic response to our launch later this year.

Now our Quadro professional solutions group business: NVIDIA's Quadro professional business had an outstanding year. Annual revenue grew 21% versus fiscal 2006. NVIDIA Quadro is recognized as the standard for professional graphic solutions needed to solve the world's most complex visual computing challenges in the manufacturing, entertainment, medical, science and aerospace industries.

This year, we introduced Quadro Plex, an entirely new category of visual computing solutions. Quadro Plex brings the level of graphics scalability and processing density that was simply not possible before.

In Q4, we began feeding the industry with our GeForce 8 GPU enabled with CUDA, a revolutionary technology and compiler that for the first time allows programmers to write “C” language applications for GPUs. GeForce 8 and CUDA will enable a new class of high-performance computing we call GPU computing. With a CUDA-enabled GPU, the PC will enable engineers and scientists to harness the awesome power of programmable GPUs to solve mathematically intensive problems that were previously cost-prohibitive.

Based on the early response we are getting from programmers, scientists and engineers, it is apparent that we are delivering an enabling technology that will profoundly change a number of computing industries. We believe GPU computing will usher in an era of the personal super-computer and will dramatically accelerate the adoption of new methods from computational chemistry to computational finance to computational genomics.

This is an exciting new application to the programmable GPU. We look forward to telling you more about GPU computing throughout the coming year.

Our GoForce mobile application processor and GPU business: in fiscal year 2007, our mobile business grew revenue to $108 million, an increase of over 85%. The mobile group enjoyed tremendous success in Europe this summer with the successful rollout of the world's largest DVB-H trial.

The Samsung P910 device delivered World Cup content to well over half-a-million consumers. Our mobile TV success continues in the APAC region with two exciting new handsets coming from Japan this month: the Kyocera W51K and W52K both support the ISDB-T Japanese mobile TV standard.

We completed the PortalPlayer acquisition on January 5th and it marks our entry into the SOC application processor business. Up to now, our mobile strategy has been to focus on establishing ourselves in the mobile market as the leader of multimedia technologies, leveraging our deep expertise in graphics, video and image processing.

With PortalPlayer's expertise in building extremely low-power application processors for personal media players, we are now positioned to deliver amazing SOCs that combine our world-class application processors and GPUs.

Our objective in the mobile business group is to build a new class of application processors that will power next generation devices like Apple's iPhone, the Blackberry Pearl and other exciting smartphones and PNPs over the horizon, and help drive what I believe will be the next computer revolution: where the mobile device is no longer just a phone, but becomes our most personal computer.

We would be happy to take your questions now.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from Mark Edelstone with Morgan Stanley.

Jen-Hsun Huang

Hello, Mark?

Michael Hara

No Mark.

Mark Edelstone - Morgan Stanley

-- over the next six months or so, and then I have a follow-up on the application processor.

Michael Hara

Mark, your question got cut out in the first part. Can you repeat it, please?

Mark Edelstone - Morgan Stanley

Sorry, I just wanted to see if Jen-Hsun could talk a little bit about the rollout of the rest of the [GeForce 8000] family here over the next several quarters.

Jen-Hsun Huang

You know, the core of our business starts from first building in the basic architecture itself, and it usually starts at the [enthusiast] [inaudible]. The GeForce 8800 has beaten the competition to market by well over six months and counting. It is the core by which we build our notebook GPU family, the rest of our desktop GPU family, our professional graphics solutions, our GPU computing products, as well as our motherboard GPU products, what other people call integrated graphics.

It is the core to a lot of other businesses that we are in today. The GeForce 8800 has ramped up very nicely, as you know, Mark, and at the moment, every single one of the businesses I just mentioned are in the process of taking that GeForce 8 core and driving it deep into their business.

We are not ready to announce any products today but I can assure you that every single one of those businesses have GeForce 8 throughout their product and are either ramping already or on the verge of ramping production.

Mark Edelstone - Morgan Stanley

So can you just give us a sense as to when you would expect to see the crossover so that the GeForce 8 family overall becomes your highest unit volume product?

Marvin D. Burkett

Unit volume, Mark?

Jen-Hsun Huang

Unit volume or revenue?

Mark Edelstone - Morgan Stanley

Well, whichever one you’d like to address would be fine.

Jen-Hsun Huang

I think in terms of units, it is going to take well into the latter part of the year, if not early next year, and the reason for that is because the GeForce 7 is such an incredibly efficient architecture and it is the lowest cost Vista premium solution that we know.

My sense is that we are going to continue to see quite a bit of success in GeForce 7 for people who would like to put together the lowest cost Vista premium machine, and so the volumes of the GeForce 7 family are going to continue well through this year and probably well through next year. The unit volume should be pretty high there.

In terms of the revenue crossover, I will let Marvin guess at it, but my guess is that it is probably going to be late Q3, Q4 timeframe.

Mark Edelstone - Morgan Stanley

Okay, great, and then just lastly, I saw your 6100 in Barcelona here this week and just wanted to see if you could provide some additional thoughts on how long it takes you to really get the application processor strategy going to where you would like it, and what you see as the potential here for that business over the next several years?

Jen-Hsun Huang

Yes, we introduced our first application processor today, or this week, and this application processor, I hope you will agree, is just absolutely amazing. It was really the core reason why we acquired PortalPlayer. They have a really, really talented team that arguably built the world's first computer on a chip. It was the reason why the Apple engineers used it to build the iPod, which is really a computer with an operating system and a file system and connectivity and was dedicated to media processing. Their obsession about low-power design has really enabled them to build some amazing products.

They had this application processor in the back room and what you are seeing now, the 6100, is the first of its kind. Our companies are now, our two engineering groups are now completely combined and the roadmap has been integrated. We brought the company on board on January 5th and in a very short period of time, we have realigned our strategies and now we are going to go build application processors that combine their expertise of building SOCs and our expertise of building GPUs.

My hope is that this year, we will introduce an amazing product towards the end of the year and next year, I hope that we get a lot of business traction as a result of that.

This is by far the single largest new [team] that our company has grown into. It is hard to say exactly how big this [inaudible] is going to be, but you know, application processors, it is probably close to $4 billion to $6 billion in size already. This particular marketplace is quickly transitioning to multimedia and graphics processing because of all the smartphones and portable media players and the combining of these two types of devices that we are seeing out there.

My sense is that we are going to be right in the epicenter of a lot of exciting new devices pretty soon. This is a very, very exciting development for our company.

Mark Edelstone - Morgan Stanley

Thanks a lot, guys.

Operator

Your next question comes from Gurinder Kalra with Bear Stearns.

Gurinder Kalra - Bear Stearns

Hi, a couple of questions: firstly, can you update us on your roadmap as far as Intel-based chipsets are concerned? Where do you see volume ramp of that as we look through the year?

Jen-Hsun Huang

We have not really announced any of our products yet. I think the market has been very vocal about inviting us, if you will, to come and participate in this marketplace and the reason for that is because even in the Intel market, there needs to be a branded motherboard GPU alternative for the consumer segments and the multimedia rich type segments where graphics are really important.

Now, with Vista Premium coming out and all the applications that are coming out in 3D, it is really important to make sure that your GPU software and architecture is as prolific as possible, and so we know that the market has a significant demand for our product. We are just racing as fast as we can to get there.

I do not have anything to announce to you today but we have a lot of focus inside the company to develop products for that segment.

Gurinder Kalra - Bear Stearns

Thanks. My second question is with AMD talking about Fusion and with there being talk that Intel is looking to do something on the Discrete GPU lines, how do you suppose you are going to counteract that effort? Is there any talk that you might be looking to do something on the microprocessor front?

Jen-Hsun Huang

You know, we have all kinds of plans for developing products in the future. I do not really see the benefit of telling the market, or the competition particularly, what we are building several years out. I do not know why they are, to tell you the truth, unless they are panicked about something or feel somewhat apologetic about something else.

I think we have to keep all of our product roadmaps to ourselves.

You know, ultimately the thing that I do know is this: we are really good at building the technologies that you guys know we are great at building and we are focused as a company to differentiate by building products that consumers want to buy. My sense is that if the market wants to buy those products, we are going to know well in advance and we will build the right products for the marketplace.

So I do not see any particular reason why -- well, I guess just no comment.

Gurinder Kalra - Bear Stearns

All right. Thanks very much.

Operator

Your next question comes from Satya Chillara with Pacific Growth Equities.

Satya Chillara - Pacific Growth Equities

Hi, good afternoon. Jen-Hsun, can you talk about the cell-phone traction in fiscal '08? It seems in the last analyst day, you were pretty bullish on the cell-phone traction, with 2G as well as the 3G and so on. So where do you see the revenues growing from about a $100 million level to -- what kind of revenue growth do you expect here?

Jen-Hsun Huang

Yes, I still remain incredibly bullish about our mobile efforts.

In terms of 2.5G, we absolutely achieved our objective of capturing the design wins we wanted to capture. Unfortunately, a lot of our focus was on Motorola and, as you saw in some of the reports already, some of the phones that we were designed into were not as successful as we would like.

Net net, we ended up at $108 million for the year and grew 85% year-over-year. I am pretty sure, based on all the design wins that we have now, that this coming year is going to be more than $108 million. The question is how much more.

Secondarily, our focus now is we are going to continue to invest in GPUs but our primary focus is going to be in taking the GPU and the application processor components and putting them into an SOC. Our customers are all asking us for that and, based on the type of vision that the phone industry has conveyed to all of us, and some of the exciting new phones that are being talked about, the type of technology is very clear. Graphics processing is going to be important -- 3D graphics processing, so that you could do the type of user interfaces like Vista except doing it on the phone, is very exciting, and video processing and encoding.

There are all kinds of new capabilities that the phone manufacturers want to bring to the marketplace next year. So I think we are strategically extremely well-positioned. We just need to go execute and turn those design wins into business.

Satya Chillara - Pacific Growth Equities

Okay, so as a follow-up, in terms of Intel’s low-end strategy, is that a single-chip strategy? Or only with single-chip would you enter the market? What is your thinking and strategy in terms of the Intel low-end strategy?

Jen-Hsun Huang

We started this trend of building a single-chip motherboard GPU, and it is the core logic -- all the connectivity, all of the graphics, all of the platform technologies, all integrated into one chip. The marketplace really, really likes it and the reason for that is because computers want to be smaller than ever and we want to drive the power down. The fewer chips you have in the system, the lower the cost, the lower the space requirement, the lower the power. From our perspective, fewer chips allow us to improve our margins. Technically, it is extremely complicated in the sense that you have to get mixed signal technology and IO technology and all of your connectivity technology on the same process, which tends to be very [inaudible] for GPUs, you know, all under the same process.

Technologically, it is a great challenge, but I think we happen to be one of those companies that really know how to pull it altogether, and so we are going to continue to take advantage of that leadership position.

Satya Chillara - Pacific Growth Equities

Thanks.

Operator

Your next question comes from Jason [Fellum] with Thomas Weisel Partners. Jason, your line is open.

Michael Hara

Operator, go ahead and go to the next question.

Operator

Your next question comes from Krishna Shankar with JMP Securities.

Krishna Shankar - JMP Securities

Yes, I was wondering if you can, Jen-Hsun, talk about the attach rate of discrete graphics for Vista and what you are seeing in terms of initial Vista demand and of the demand for the more Premium version of the operating system versus Basic, which will really drive requirements for your 8800 GPU.

Jen-Hsun Huang

I can tell you what logic would compel and what we believe, and in terms of real experiences, it is really hard to tell yet because Vista really just started shipping.

But what logic would compel is that Vista is the first operating system that is fully based on the programmability and the shading capability and the graphics rendering processing capability of a GPU, and it exposes this capability to not just the user interface but it exposes this capability to all applications. The compelling logic is that if the GPU is much more taxed and all of the applications use more 3D graphics capability, you would think that the GPU would be more relevant.

I think that there is no question as you use Vista, the experience is just far better with the GPU than when it is not. It is snappier and that is just the user interface, right? And so all of the operating system, all of the applications that use 3D graphics have not really even been exposed to this yet.

We know that there are many applications that are being developed where 3D graphics are going to make the application richer, many Web 2.0 applications, and we see many from Microsoft already that really exploits the capability of 3D. Even iTunes renders the album covers in 3D now.

There are all kinds of applications that are coming that take advantage of 3D graphics, so logic would certainly compel us to believe that GPUs will be more prevalently used. We believe that to be the case and so we are cautious in the first quarter as we go into it, but our belief is that GPUs will become more important than ever before.

Krishna Shankar - JMP Securities

Do you see the trend for notebooks also, where obviously Intel would be, the Centrino platform, they have 70% of that market. Do you see the trend reversing to where you see [an alternative] for discrete notebook solutions, and also MCPs for the notebook market?

Jen-Hsun Huang

Well, the way we see it is that the notebook is really a form factor issue, and so we are going to go to the marketplace. If the form factor allows for a discrete GPU, we would offer the market a discrete GPU. But if the market would like a motherboard GPU, what is commonly called an integrated graphics chip, if motherboard GPU is the way they would like to power Vista, we are delighted by that as well and in fact, if you see our core logic business, the MCP business, it has grown dramatically year over year. A lot of that growth is because of motherboard graphics.

I think that there is some evidence that motherboard GPUs are just another way of accessing the capabilities of GPUs and we are going to see some continuous growth there.

Krishna Shankar - JMP Securities

Great. Thank you.

Operator

Your next question comes from Devan Moodley with Scotia Capital.

Devan Moodley - Scotia Capital

Hi, guys, just a follow-up question on Vista. If I look at the Mercury Research forecast currently for desktop discrete, they are looking for a single-digit decline in '07 but surprisingly, they are looking for almost 20% to 30% ASP growth in the desktop segment. Can you give me your perspective on what you are looking for and what would be the impact of Vista on the GF8 family tier?

Jen-Hsun Huang

I am not sure I picked up on the question.

Devan Moodley - Scotia Capital

Just ASPs, I guess -- Mercury is looking for ASPs to be up significantly this year in desktop discrete. What is your perspective of where your ASPs in that area will go?

Jen-Hsun Huang

You know, Devan, our ASP has been growing pretty steadily over the years. I think it is logical to me because more and more of our computing experience is around the visual experience, and all of the most exciting applications, or many of the most exciting applications that we know, are really, really graphics rich.

The resolution of the display is being driven by Moore's Law and the color depth. On the other dimension, each pixel is moving faster than Moore's Law in the sense that the number of objects we render on each pixel and the color fidelity of each pixel is really going up quite dramatically. It stands to reason that more and more work needs to be done on the GPU, and if that is the case -- and more of your computing experience is depending on a GPU -- if that is the case, then ASPs ought to continue to grow.

If somebody told that ASP is going to grow steadily over the next several years, I guess I am not going to be surprised by that because historical evidence would suggest that is the case.

Devan Moodley - Scotia Capital

Okay, and just a quick housekeeping question: what was CapEx for the quarter and the year?

Marvin D. Burkett

Yes, our CapEx in the quarter was roughly $70 million, $71 million. However, there are a couple of factors in there that you should be aware of.

There was roughly $37 million of what I would call the normal CapEx, which is equipment and software that we bought. There is about $14 million worth of IP intangibles from investments that we made, and there is about $20 million of a re-class from our long-term assets into that account, so I would say that the normal CapEx was $37 million.

Devan Moodley - Scotia Capital

And do you expect that to change significantly going into next year?

Marvin D. Burkett

No.

Devan Moodley - Scotia Capital

Thanks, guys.

Operator

Your next question comes from Arnab Chanda with Lehman Brothers.

Arnab Chanda - Lehman Brothers

Thank you. Just a couple of questions. First of all, if you look at your MCP business, would that grow until your new Intel chipset is launched, or was it going to be sort of seasonal in the first part of the year? And then a follow-up, please.

Jen-Hsun Huang

We are expecting seasonal dynamics in the first quarter. We do have Intel core logic that we announced, as I mentioned earlier, the 680i, and the 680i has other segments that we are introducing. We are going to grow in the Intel core logic business through Q1. I do not know whether it is going to make up for the seasonal decline but we are not counting on it at the moment.

Then later, as the year progresses and as we launch our Intel CPU-based motherboard GPUs, we are expecting quite a bit of growth from that.

Arnab Chanda - Lehman Brothers

Thanks, Jen-Hsun, and last question: the computing GPU product that -- maybe I did not quite understand it properly, but is it something that will be sort of additive to your workstation business or is it sort of a new category? What type of additional market opportunity does that get for you guys? Thank you.

Jen-Hsun Huang

The GPU computing initiative is absolutely additive, and I would argue that the industry has had a vacuum, or a super-computing crisis, for sometime. Scientists and researchers have been clamoring for more computing horsepower for quite a bit of time, and yet the technology has not existed that enables them to do some of the computational methods that they want to try. GPU computing is really going to help address that.

I frankly think that the combination between the CPU and a GPU with GPU computing capabilities will really create a new class of workstations -- one not necessarily for design but one for computation. It is almost like a personal super-computer that the researchers and the scientists will get to leverage.

This is absolutely a new class of computing and it is a new initiative for us, and our early response from the people we have spoken to, and many of them in the financial industry, are just incredibly enthusiastic, so we are very excited about it.

Arnab Chanda - Lehman Brothers

Thanks, Jen-Hsun.

Operator

Your next question comes from Naser Iqbal with Salman Partners.

Naser Iqbal - Salman Partners

Hi, guys. Marv, just really a clarification on the impact of Portal, and if I heard you correctly, that in terms of the R&D and expenses, you had a $5 million hit, a $4 million hit but a net income contribution of about $1 million. Were there any revenues for the quarter?

Marvin D. Burkett

The revenue in Q4 was roughly $1 million, so there was roughly $5 million worth of expenses and $1 million worth of revenue.

When you look into Q1, we are looking at something slightly less than $10 million in revenue and approximately $15 million in expenses.

Naser Iqbal - Salman Partners

Right, which is my follow-up, in terms of when you talked about the outlook for the quarter, that you expected that $10 million to come from Portal; but did I hear you correctly that you think your overall op-ex could be flat quarter on quarter?

Marvin D. Burkett

Yes, we think that we can, you know, obviously we had the one-time cost in Q4 for the restatement and there are some other one-time costs in Q4. I think we are very cost-conscious right now and the company does a very good job of responding to those circumstances, so I think we have a very good chance of holding op-ex flat, even though we are going to have to absorb the $10 million increase in the PortalPlayer.

Naser Iqbal - Salman Partners

Okay, great. Thanks a lot, guys.

Operator

Your next question comes from Simona Jankowski with Goldman Sachs.

Simona Jankowski - Goldman Sachs

Hi, guys, also a clarification on the guidance. Was the 5% seasonal decline, was that a comment just on the PC-facing segments of your business or was that for your overall revenue expectations?

Marvin D. Burkett

Simona, I think it was more overall, but I would classify that we expect memory to decline, and that would be probably in my view the single largest component of that 5%. But if you had to pick a point estimate, we are saying overall revenue declined 5%.

Simona Jankowski - Goldman Sachs

Terrific, and then secondly, Marv or Jen-Hsun, can you comment on how you see your channel inventories right now, both for graphics cards and also motherboards?

Jen-Hsun Huang

Channel sell-through is picking up. Q3 and Q4 were a bit choppier than -- and I think all of you guys saw that -- a bit choppier than we all expected. I think some of that had to do with AM2 gap out in the channel, but AM2s are back and there are plenty of Conroes as well, and both of those CPUs are really wonderful CPUs. When they are available in the channel, it really helps our GPU business.

We are seeing business sell-through certainly very quite brisk right now.

Simona Jankowski - Goldman Sachs

Okay, that is very helpful. As far as the actual build-up though of motherboards in the channel, is that now done and over with now that the CPUs are available? Or do we still have a bit of back-up that maybe takes a couple more weeks to get through?

Jen-Hsun Huang

It depends on what segments we are talking about. Our Intel motherboards, for example, are still ramping and we are still doing quite well with our Intel motherboard business.

I have not really checked on the AMD side of it, but now that the CPUs are back, and quite a few CPUs were taken out of the channel, as you know, so the return of the CPUs is really, really a good thing for all of us.

Simona Jankowski - Goldman Sachs

Okay, and then just a last quick one for me, if I could: on the gross margin improvement, which was very nice in the first quarter, can you can just comment on the various puts and takes within that? In other words, I know ATI, or AMD now, had commented on a tough [inaudible] environment. It did not seem to have affected you guys, given your positioning, so that is just one aspect I wanted to see if you could comment on.

Secondly, on the TSMC pricing, which seems to have been favorable in the quarter, is that a quantifiable benefit to your margins in the quarter?

Marvin D. Burkett

Let me start. In the GPU business, we improved gross margins quarter to quarter. Some of that improvement came from the fact that the workstation business grew very nicely during the quarter, so we benefited in the GPU business because of that.

MCPs, they improved the gross margin and the revenue increase. There is just a continued focus there on improving gross margins. Handheld improved gross margins, even though revenue was relatively flat. Memory went up during the quarter, which would have had a drag on gross margins.

I would say that each of the business units contributed to gross margin improvement. The increase in memory was a slight drag on it.

The TSMC issue, I do not know if you want to comment, Jen-Hsun.

Jen-Hsun Huang

It is nothing special.

Marvin D. Burkett

Yes, I do not think there was anything out of the ordinary.

Simona Jankowski - Goldman Sachs

Great, thank you very much.

Operator

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

David Wu - Global Crown Capital

Yes, Marv, on the subject of gross margin, can you talk about or remind us of what your gross margin target, the new level is, since 44% is no longer an issue anymore and 45% looks like within reach?

And I have a question for Jen-Hsun on the PortalPlayer application processor. What is the difference between their application processor and a whole ream of these ARM-based application processors out there?

Can you also comment on the likelihood you are going to see some competition from the X-86 in the form of these, what they call the ultra mobile PCs?

Marvin D. Burkett

I will start with the gross margin, David. Jen-Hsun established the target of a 45% gross margin just about a year ago and I think there were a lot of skeptics out there -- maybe even me, who knows -- but we have made a lot of progress and things have gone well.

I think that we are going to have to sit down and establish a new goal because yes, I agree: 45% is achievable. Now the question is, we cannot let up. We can improve gross margins from the [inaudible].

David Wu - Global Crown Capital

But at this point, you will not, you cannot elaborate what that might be?

Marvin D. Burkett

Well, our public target is still 45%.

David Wu - Global Crown Capital

Okay. Jen-Hsun, can you talk about the application processor for that PortalPlayer and what is different from all these other ARM-based application processors out there?

Jen-Hsun Huang

Sure. First of all, PortalPlayer's focus has always been in the personal media player market, and in that marketplace, the digital media processing is really important. Extreme low-power is extremely important.

If you get a chance to see the new 6100, and see it do decoding [VJ] resolution video and watch it do it at just barely, barely a sweat, it is really, really amazing. So their focus is building a complete computer on a chip that is capable of doing multimedia processing at extremely low-power levels. That is really where their focus was.

Relative to us, the reason why PortalPlayer is so valuable to us is because we do not have an application processor, but we do have a very deep investment in GPU technologies over the years and the combination of our graphics and video and image processing capabilities in combination with their application processor really gives us a unique position in the marketplace.

I would say their positioning in the mobile marketplace was good but challenging because of the amount of R&D they could really invest, and our positioning was good in the high-end markets, where the flagship phones really needed the multimedia capabilities we brought.

In combination, now we can build some SOCs that are absolutely amazing, and that is the reason our two management teams decided to combine the companies.

David Wu - Global Crown Capital

Who do you see as competitors in that space, besides Texas Instruments?

Jen-Hsun Huang

I would say TI is a competitor. Obviously Samsung is a competitor. Samsung has been very successful there. The XScale business that Intel sold to Marvell -- these are all competitors in the marketplace.

But this is also one of the largest markets that we know of in the semiconductor industry and there are a whole lot of segments. Some of those segments just want your basic, best microprocessor. Some of those segments want the lowest, lowest cost SOC for your basic smartphone, and some of them need rich graphics and rich multimedia for consumer applications where you want to have your phone also be your e-mail device and music player and video player and such. That is where I think NVIDIA would really shine.

David Wu - Global Crown Capital

Thank you.

Operator

Your next question comes from Doug Freedman with AmTech Research.

Doug Freedman - American Technology Research

Good afternoon, guys. A quick question for you, Jen-Hsun, if you could talk about -- you have taken quite a bit of share in several of the markets now from your closest competitor that was acquired by AMD. Can you talk about what you think might be their response, and if there is anything that you can do to offset it or continue the track record that you have put up?

Jen-Hsun Huang

Well, first of all, that is a really good question and I hope I do not answer it -- not publicly, anyhow, so please do not encourage me.

You know what I would say is that our market share is in fact, although improving year over year, I think we came out of the year last year at about 18%, 19% overall graphics market share. We are at 29%. As far as I am concerned, whether it is a discrete GPU or a motherboard GPU, they are both GPUs. We believe that there are segments of the marketplace that really prefer to have a better GPU than not.

Our GPU brand, the GeForce brand, is just so strong that I think we still have a lot of opportunities. Now we are the only GPU company in the world that is completely focused, number one, but also participates in building and selling GPUs into both microprocessor markets, both the AMD market as well as the Intel market. We are the distinguishing brand of both platforms. I am excited about that.

Our job is to grow our overall GPU business from 29% to something much higher than that.

Doug Freedman - American Technology Research

All right. If I could, Marv, turn to you for a quick second, and I guess Jen-Hsun also plays a role in this: what is your view on the share buy-back? What should we be thinking about on the stock dilution level? Clearly this quarter the share count came in very close to unchanged. Any guidance you can offer on what we should think about going forward?

Marvin D. Burkett

Yes, we evaluate it every quarter. We still have authorization from the Board to do stock buy-backs. I probably do not see any reason to deviate from our practices in the current environment, but we evaluate it every quarter.

Totally separate from that, the annual dilution level on what I call a gross basis, meaning how many shares we issue, is established by the comp committee, and so we have been bringing that down for several years now. It was roughly 3% last year -- that is excluding stock buy-backs -- and I think it will be less than that in fiscal year '08, but that is exclusive of any buy-backs.

Doug Freedman - American Technology Research

Okay. Thank you.

Operator

Your next question comes from Shawn Webster with JP Morgan.

Shawn Webster - JP Morgan

Good afternoon. Thanks for squeezing me in, guys. On the chipset business, can you give us a quick update on what the mix is in terms of units and/or revenues on Intel versus AMD chipsets?

Jen-Hsun Huang

I would say that today it is vastly, it is mostly, by far AMD, and we had just entered the Intel chipset marketplace with the 680i I guess late Q3. We did well in Q3, we ramped more in Q4 and we are expecting to ramp even more in Q1 and ramp it into Q2. As Conroe continues to grow into the marketplace, we expect our 680i family to follow that.

I also think that is our core Intel chipset product right now and hopefully in the near future, we will try to add something to that with our motherboard GPUs for the Intel processor.

Shawn Webster - JP Morgan

I see. And then, for your overall GPU business in Q4, can you tell us what your units and ASPs did sequentially?

Marvin D. Burkett

Overall, units were very, very, very slightly up and ASP was very slightly down. I indicated that in my comments, that the desktop ASP declined slightly in the quarter.

Shawn Webster - JP Morgan

Okay, and then Marv, can you give us some guidance on your effective tax rate for the full year fiscal '08?

Marvin D. Burkett

Our best guess right now is 14% for both GAAP and non-GAAP, but we will evaluate that as we go through the year. We get the benefit of the R&D tax credit, which we got a full year's worth in the fourth quarter, and that is one of the drivers in being able to reduce the tax rate down to 14% for this year.

Shawn Webster - JP Morgan

That makes sense. Thanks a lot.

Operator

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers this afternoon. I would now like to turn the call back over to Jen-Hsun Huang for closing remarks.

Jen-Hsun Huang

Thank you. Our goal is to be one of the most influential and respected technology companies in the world by being the premier supplier of visual computing technologies and solutions. We believe the programmable GPU is becoming one of the most important technologies of the digital era, as it powers multimedia rich applications on a growing number of consumer devices. As the only GPU company in the world, we have dedicated ourselves to making this vision a reality.

Fiscal 2007 was a milestone year for NVIDIA. Because of the number of growth and technology initiatives that we have set in motion last year, we believe we are well-positioned to have another strong year.

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

Operator

This concludes today's conference call. You may now disconnect.

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