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NVIDIA Corporation (NASDAQ:NVDA)

F1Q08 Earnings Call

May 10, 2007 5:00 pm ET

Executives

Michael Hara - VP of IR

Jen-Hsun Huang - President and CEO

Marv Burkett - CFO

Analysts

Michael McConnell - Pacific Crest

Glen Yeung - Citigroup

Nick Aberle - Caris and Company

Chris Caso - FBR

Daniel Ernst - Hudson Square Research

Arnab Chanda - Lehman Brothers

Tayyib Shah - Longbow Research

Gurinder Kalra - Bear Stearns

Simona Jankowski - Goldman Sachs

Shawn Webster - JP Morgan

Devan Moodley - Scotia Capital

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, Mathew. Good afternoon and welcome to NVIDIA's conference call for the First Fiscal Quarter ended April 29, 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 when 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. Unless otherwise noted, all references to research numbers throughout the call come from Mercury Research.

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 on the Investor Relations page of our website www.nvidia.com. The webcast will be available for replay until the company's conference call to discuss its financial results for the second 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, our second quarter, our products and technologies, our strategies, growth and growth drivers, market share, the uses for GPUs, the impact of new applications pertaining 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 for the fiscal year ended January 28, 2007 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.

Content of the webcast contains time-sensitive information that is accurate only as of May 10th, 2007.

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

At the end of our 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 revenue of $844.3 million for the first quarter, compared to last year, revenue grew 24%. Non-GAAP gross margin improved 290 basis points to a company record of 45.4%. And non-GAAP net income increased 48% over last year. GAAP gross margin also reached a company record of 45% and GAAP net income increased 44% from a year ago.

Our first quarter results reflect the growing importance of GPUs in our computing experience. Our Quadro GPU is at the center of the rapid adoption of digital techniques in the nearly every industry from design, to styling, to simulation.

Our GeForce GPU benefits from the increasing importance of graphics processing in the fastest growing applications like Second Life, Google Earth, Blu-ray and HD-DVD and massive online games, like the incredibly popular World of Warcraft.

The creation and enjoyment of rich digital content creates growth in GPUs. Each of our product lines benefit from this trend and trend-in a strong year-over-year performance. Desktop GPU grew 13%, notebook GPU grew 71%, MCP grew 25%, Professional Solutions grew 39% and mobile devices grew 49%.

Let me highlight some of our recent business achievements. We captured a number one position in desktop graphics and increased our lead in five categories. Total standalone GPU, the performance segment, modern DirectX 9 and beyond GPUs and standalone notebook GPU.

Our GeForce GPU remains the unambiguous leader for the performance segment, maintaining a segment share of over 64% for 30 consecutive months, since the GeForce 6 became the segment leader.

In April, we launched the industry's first top-to-bottom family of DirectX 10 GPUs, adding GeForce 8600, 8500 and 8300 to our already successful GeForce 8800. We delivered PureVideo HD, the industry's first full HD Blu-ray and HD processing solution for desktop and notebook computers from Acer, Alienware, Dell, HP, Sony and Toshiba.

We expanded the reach of SLI with the launch of the new nForce 650i SLI for Intel processors. With a much lower price point, we have significantly increased our addressable core logic market.

We recently shipped the new GeForce 7050 motherboard GPU, directly attached to the motherboard, GeForce 7050 brings NVIDIA's valuable grand of GPUs to the lowest cost segments.

We launched the Quadro FX 4600 and FX 5600. Our first Professional Solutions based on the workstation enhanced versions of the G80 unified architecture. This new family of professional GPUs will enable capabilities, not possible before, and that we believe will drive a new cycle of growth.

We extended our Quadro Plex family with it's latest number, the Quadro Plex Model IV, which when coupled with a workstation or server, enables previously unseen levels of digital computing density.

And lastly our Gelato 2.1 film quality render is now available, with a 100,000 downloads so far, we are delighted that digital artists in a broad range of industries are incorporating Gelato into their creative and design pipeline.

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 drivers for Q2 and beyond.

Marv Burkett

Thanks Jen-Hsun. Today we are recording both GAAP and non-GAAP P&Ls for Q1 of fiscal year '08. The only difference between the GAAP and non-GAAP is equity-based compensation and its tax effect.

Revenue for the first quarter as Jen-Hsun mentioned was $844.3 million, up 24% year-over-year and down 4% from Q4. We entered the quarter expecting a decrease in both MCP and memory revenue, and both of those happened. However, the MCP decrease was more than we expected because of the weakness of AMD processors in the channel.

Offsetting that, we had better than expected sales, support, desktop GPUs, and Professional Solutions. Desktop GPUs grew about 8% quarter-to-quarter, led by the new GeForce 8X products what we introduced during the quarter. In fact, GeForce 8X products totaled more than $180 million in the quarter.

In Professional Solutions, we grew by 11% quarter-to-quarter, and achieved a record revenue of more than $140 million. MCP declined by 31% from the fourth quarter. PortalPlayer products accounted for $11 million in the quarter, and all other product areas were relatively flat.

I would like to mention here that we now view our company in four business segments. These segments are GPUs, which includes desktop, notebook and memory products; PSB which is the Professional Solutions Business, which previously had only workstations but now includes Gelato Film Renderer and GPU computing products.

MCPs, which is the same as it has been, and finally CPB, which is Consumer Products Business, which includes Mobile and that includes the former PortalPlayer business, Xbox, Sony and embedded products. Those four segments we will report in our Qs and Ks.

We will continue to give information on some of the product areas within each segment. For gross margin, we reported GAAP gross margin of 45% and non-GAAP gross margin of 45.4%. For the first time, we crossed over the 45% mark. Obviously, we are pleased with this operational execution.

During the quarter, our gross margin benefited from the increase in workstation revenue, but margins for the new GeForce 8 products were also excellent.

I'm proud to highlight the fact that we've improved gross margin for 11 consecutive quarters. And during this time, non-GAAP gross margin has increased by 1470 basis points.

Non-GAAP operating expenses in the quarter were $204 million, which is relatively flat with Q4. We incurred a full quota of PortalPlayer expenses instead for the one month that was incurred in Q4. And this added about $10 million. But we did a good job of holding the line in other operating expenses.

Headcount for the quarter was relatively flat with Q4. Depreciation in the quarter was $32 million and capital expenditures were $38 million. Tax rate for the quarter was 14%, as we had anticipated. This resulted in a diluted earnings per share of $0.33 for GAAP and $0.42 for non-GAAP.

On the balance sheet, we exited the quarter with more than $1.3 billion in cash, even though we repurchased a $125 million in stock during the quarter at an average price of $31.58. The operating cash flow for the quarter was over $300 million.

Accounts receivable declined by $47 million to $472 million and remained very current with DSO at 50.8 days. Inventory declined by $22 million to $333 million, and daily sales and inventory remained constant at 65 days. There was an increase in GeForce 8X products and a decrease in the older products. Even current liability showed a small decline quarter-to-quarter.

Now for the outlook; Q2 is usually the slowest quarter of the year for the PC industry. Even so, we believe revenue in Q2 will be flat to slightly up. We will have growth in notebook GPUs, and we believe MCP revenue will recover from the first quarter. These two factors should cover any seasonal weakness in the PC business.

For gross margin, we will work very hard to have flat to slightly increasing gross margins. Operating expenses should grow approximately 3% quarter-to-quarter, and the tax rate should hold at 14%.

With that I will turn it back to Jen.

Jen-Hsun Huang

Thanks, Marv. During the first quarter, we enhanced our leadership position in our core GPU and MCP product lines. Although Q2 is typically the weakest seasonal quarter for the industry, we are expecting our strong growth in notebook GPUs and MCP's plus share gains in desktop GPU to offset seasonality.

The GeForce desktop and notebook GPU product lines both achieved record revenue in the first quarter. The continued ramp of the GeForce 8 family extends our long history of leadership and innovation, execution and time-to-market.

Because of the technical discontinuities created by Windows Vista in HD DVD and Blu-ray, our customers want to deploy new platforms that meet the needs of these technically demanding requirements.

With our top-to-bottom GeForce 8 family now shipping, we believe we're well positioned to increase our overall share of desktop GPUs. Coinciding with yesterday's official launch of Santa Rosa, we rolled out our GeForce 8 family of notebook GPUs. The new GeForce 8M Series notebook GPUs are the worlds' first to support DirectX 10, and fully accelerate decoding of 1080p Full HD movies.

Playing HD videos on a notebook is a technical challenge sort by NVIDIA's, PureVideo HD technology. PureVideo HD performs a 100% of HD video decoding. Freeing the CPU for tasks and significantly reducing battery consumption, heat and noise.

We expect our notebook business to take a step function up, as our numerous Santa Rosa designs continues to become a greater part of the overall notebook mix throughout the year.

Although our Motherboard GPU business was affected by the significant drop in AMD's CPU sales in Q1, we do expect AMD to regain share in Q2. Going forward, we intend and expect to continue our leadership position in the AMD processor market.

In the performance segment, we will leverage the significant position of SLI. And in main stream segment the GeForce brand of Motherboard GPUs and our single chip architecture gives us a competitive advantage.

HP values this advantage and recently announced their choice of our new GeForce 6000 Motherboard GPU to power their high volume consumer lines of PC's. Our nForce 6 family of discrete core-logic for Intel Processors continues to ramp.

The nForce 680i and 650i are the highest performance motherboards for the Core 2 processors. They are also the only SLI motherboards for Intel Processors. In this quarter, we will sample our first GeForce Motherboard GPU for the Intel market, which we expect to open up a significant growth opportunity for us.

Overall, we are cautiously optimistic about Q2 and expect our MCP business to grow despite industry seasonal declines. GPU computing continues to gather momentum. In February, we launched a public beta of CUDA SDK and quickly served 1000 of downloads.

Researchers, scientist and engineers are using CUDA and GAD-based GPUs to accelerate a wide range of problems from seismic analysis to medical image reconstruction, and seeing dramatic improvements ranging from 10 to 100 times acceleration over the fastest CPU alone.

We are also taking CUDA and GPU computing into the classroom. Universities around the world have recognized that traditional microprocessors scaling has hit a wall. Without a fundamental change to today's processor architecture, computing performance can no longer scale with Moore's Law.

Parallel computing is generally believed to be the path to perform scaling. We are excited to announce that the Computer Science Department at the University of Illinois is pioneering a new class dedicated to GPU computing, to prepare students for the parallel computing revolution. Students will learn parallel computing on GAD and CUDA.

Most leading computer science universities are already doing research on GPU in computing and discovering very exiting results. We anticipate many more leading universities around the world to offer parallel computing courses based on GPUs.

At 3GSM we unveiled NVIDIA's first application processor, the GeForce 6100. The 6100 is a full computer on a chip, and enables 480p resolution video playback and the longest battery life on playing digital music and video compared to current application processor technologies.

The 6100 is designed for next generation personal media players and multimedia smartphones. Designs based on 6100 are expected to ship later this year. Also at 3GSM, we demonstrated the worlds' first implementation of the Chronos' OpenKODE multimedia API for mobile devices.

OpenKODE is an open industry standard that combines a set of API's for handling multimedia tasks like 3D graphics, video, music and imaging. Application developers can now expect a comprehensive setup multimedia services from any mobile device that supports OpenKODE. Standards accelerates the innovation of everyone in the ecosystem. The availability of a stable, robust and open standard will allow application developers to create exciting applications, while accelerating the rate of innovation of application processor technologies that support OpenKODE.

Let me stop here and we would be happy to take your questions now.

Question-and-Answer Session

Operator

(Operator Instructions). We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line Michael McConnell.

Michael McConnell - Pacific Crest

Jen-Hsun, wanted to know, with ETI coming out with the new product line here shortly and there has been a lot of concern about the pricing on the new product line? Can you address that and gist your confidence looking through the remainder of the year that the company can maintain share, even may be continue to take share in the Discreet segment?

Jen-Hsun Huang

Hi, Michael. Well, first of all we take competition seriously all the time, and this is an industry that has seen a lot of competition over the years and I am not expecting any changes from that. We have competed with AMD or I guess ATI, now with AMD for quite some time.

We have a pretty good understanding of what our 600 is, and at the moment we have three products in the Enthusiast segment, the GeForce 8800 Ultra, GTX and GTS.

GTS is the most affordable version of our Enthusiast product and that's likely the product that the R600 will be positioned against.

We've sold as you know several hundred thousand of those already and our momentum is very, very high. And my expectation is that it will continue to be high.

But more importantly, in addition to our position in the Enthusiast market, we are ramping really hard, the rest of the performance segment, which starts with GeForce 8600 and below that is 8500 and below that is 8300. So, my expectations that we are planning far ahead with respect to our time-to-market and most importantly, the architecture advantage that we have on GeForce 8 over what we know about the R600. So, we are cautious, obviously, with respect to competition. This is a company that knows how to compete, but our expectations are that we'll be quite successful.

Michael McConnell - Pacific Crest

But in the Discreet segment, how much is price [affected] weapon particularly in the mid range and high end historically?

Jen-Hsun Huang

We have competitive price in many segments, those trying to explain. In the Enthusiast segment, we have three products and they have one. And, our lowest end of the Enthusiast segment is a better product than their highest end. And the price, I believe, you'll discover to be very competitive. But price for the Enthusiast is just one factor, the most important factor is you want to buy a great product. Otherwise why would you be an Enthusiast?

Michael McConnell - Pacific Crest

And then, if you look at the MCP business with respect to the AMD platform, some of these design wins have started. Are you expecting to maintain your MCP share on AMD platforms as we move through the back-to-school season?

Jen-Hsun Huang

We've won a lot of design wins since sinter combination and our expectation is that we are going to continue to win our fair share of design wins. I don't know where our market share will be, but my sense is that we'll continue to be very successful in that platform. And the reason for that is because we have to offer products to the marketplace that is very uniquely ours. And bring up very, very specific perspective on products and SLI you can get on a non-NVIDIA Core-Logic. And so if you enjoy SLI, if you want a motherboard that works best with 'GeForce, and concerning the market share of GeForce, my sense is that we will continue to be very successful there.

With respect to the motherboard GPU segment, our single-chip architecture, the value of the GeForce brand, and the fact that our high-definition video technology is far superior with PureVideo HD. My sense is that all of those things and combinations can give us an advantage. But there is a lot of execution to do between now and then. The bottom line end of the day is you've got to execute well.

Michael McConnell - Pacific Crest

Thank you very much.

Jen-Hsun Huang

Yeah. Thanks Michael.

Operator

Your next question comes from the line of Glen Yeung.

Glen Yeung - Citigroup

Surprised that you guided operating expenses up for the next quarter. Can you just give us a sense as to what comprises that increase and can you give us a thought for the fiscal year, how do you think that will trend?

Marv Burkett

No. We've hired a lot of people and as you move through the year, the expense goes up. So we would least expect to continue to hire people. I think we will hire a lot more in Q2 than we did in Q1 and that's anticipated in that expense level. 3% is, I call it, a nominal quarterly increase. I don't expect that sort of trend line to change as we go through the year. Meaning that 'not thinking about expenses going up more than 3% or so quarter-to-quarter. We're going to have to take a look at it, when we get beyond that. But I would expect operating expenses to trend up over the year, but at a very nominal rate.

Glen Yeung - Citigroup

Okay. And then --

Jen-Hsun Huang

And Glen, let me just add something. I absolutely agree with Marvin. What we're trying to do here is invest in some really important growth opportunities. You know that, we are now the only branded GPU supplier for the Intel processor market and that's an extraordinary opportunity, we have attacked it as hard as we can. We have some exciting products that we're trying to bring to market as quickly as we can. Hopefully, this quarter we will start to sample one.

The second area of growth for us is, GPU computing, I have been talking about that for some time. And if you have [account the] web, you're going to discover some really exciting findings about what people are doing with that technology. Using GPUs for computing is a very important growth direction for our company.

And the third is application processors. We're investing very aggressively on application processors. We believe the future of mobile devices will become increasingly computer-like and these computing devices require computer technology companies, who are terrific at building these things becoming aggressive. And I find this opportunity very, very exciting for us and we're investing very aggressively on that. So, these three areas of investment are very important to us. And leads to the expense increasing that Marv talked about.

Glen Yeung - Citigroup

Okay. That makes sense, and maybe just have a follow-up to that. You obviously had good cash growth over the course of the last few quarters. And even this incremental expenditure, it looks like your (inaudible), you really keep growing cash. I wonder if you have any thoughts about how that may be used, whether that's going to increase buyback, dividend or liquidating it?

Marv Burkett

Yeah, no. Glen, we expect to continue to generate significant cash. I don't know that it will be $300 million a quarter, but we would expect to generate significant cash to be the remainder of the share. And we are going to have to decide whether we want to do nothing or whether do we want to do something like we've been doing, which is a quarterly stock buyback or do something different.

At this stage, the Board has not decided that. So we will be looking into it and we'll be letting everyone know what we've decided to do about that. We did purchase $125 million worth of stock in the fourth quarter. We don't have very much left in the authorization. Remember there was a $700 million stock purchase, via authorization from the Board. There is not very much left in that.

So we are going to have to be addressing that very issue.

Glen Yeung - Citigroup

Okay. Thanks I appreciate that.

Operator

Your next question comes from the line of Nick Aberle.

Marv Burkett

Hello.

Nick Aberle - Caris and Company

Can you hear me?

Marv Burkett

Yes.

Nick Aberle - Caris and Company

Okay. Hey guys. So the question was with respect to Discreet Desktop GPU. We've seen ATI/AMD have numerous delays in their products over the last couple of years. The products are becoming a lot harder to design, do you think that there is scope for the actual product cycle, design cycle for these products to actually link in here over the next couple of years?

Jen-Hsun Huang

Well, it is the fact that the GPU is one of the most complex devices built anywhere in the world. It is probably the most complex device, hundreds of people work on it for many years, and the investment of building a new generation of GPU architecture is many hundreds of millions of dollars. And so it's not an undertaking for the faint of heart, and it's not an undertaking for anyone who is not absolutely passionate and world class at doing this.

And we had the benefit of a really, really great team or multiple teams and a company's system that's created around building extra ordinary GPUs. We are really, really proud of our execution and it's a system that has served us well, and frankly it's a system that the industry recognized to be absolutely superior.

Now having said that, we do know that each generation of GPUs is getting harder and harder to do, but we have absolutely no intentions of slowing down the rate of innovation, and we have absolutely no intentions of extending the product lifecycle of our products.

Nick Aberle - Caris and Company

Got you. And then secondly, you referred to new Intel-based MCP products sampling in this quarter. Are you referring to single-dye IGP and can you talk at all about what your expectations are for ramping that product, that OEM starting in Q2 or Q3?

Jen-Hsun Huang

Yes it is the single-chip GeForce for the motherboard for the Intel processor. And it is the first time in our company's history, we have taken the GeForce architecture to a motherboard GPU product for Intel processors and we are very excited about that.

And we already have design wins from OEM's, and we are working our butt off to meet their schedule requirements. And so I am excited about the prospects of it, and we'll talk about our business forecast as we get closer.

Nick Aberle - Caris and Company

Thanks guys. Good luck.

Jen-Hsun Huang

Yes, thanks a lot Nick.

Operator

Your next question comes from the line of Chris Caso.

Chris Caso - FBR

Thank you. Wonder if you could talk a little bit about the MCP business, and you talked about your expectations for that rebounding into the next quarter. Could you just give us a little more color there, and what gives you confidence in that, what are you seeing in terms of order rates and your outlook for the market?

Jen-Hsun Huang

What we experienced with the MCP business was exactly what AMD experienced in the channel. And over the last quarter I think a lot of that has been discussed and much of it documented. And so obviously where there is an Athlon CPU there would be an nForce chipset that goes with it. And their market share is relatively high, so we would experienced quite a bit of the same thing that they did.

We are seeing the sell-through of AMD processors picking up significantly in this channel, and I am sure many of you see that as well. And it reflects the fact that they've replenished the channel with Athlon processors. It is now price positioned in the right place and it's a great product. There is no reason why it went so, and so we are expecting the pick up again.

Chris Caso - FBR

Hey, great. As a follow-up on that, with respect to the notebook business you guys have talked in the past about your expectations for gaining notebook share this year. Could you also talk a bit about penetration rates of GPUs and the notebooks, and specifically with Santa Rosa platform? Can you kind of quantify what you think may happen with regard to GPU penetration into the notebook market?

Jen-Hsun Huang

We started, I think it was about five quarters -- if we go five to six quarters back, I think our market share was about 20%. We left last quarter -- at this time we are about 60% I would say. So, from 20 somewhat percent, five to six quarters ago to about 50% now and our expectation is that we ought to go out of this year by either 70% or higher. That's compounded by the fact that the notebook business is growing faster than the desktop business and so, our expectation is that the notebook business ought to do well for us.

Chris Caso - FBR

I guess, just specifically with regard to the GPU business in notebook, do you expect that to grow faster than, say notebook units as a whole as a result of this?

Jen-Hsun Huang

We are not really sure yet. We are going to have to play it by ear. I think that there are a couple of dynamics that really help. One dynamic is obviously the adoption of Vista. Almost every single notebook that's going out now, will go out with Vista. And with our GPU, the experience is better. And so, I think people know that, and the adoption of GPUs have been relatively robust for that reason.

There is a second and equally important reason that has to do with Blu-ray and HD DVD. If you are buying a new notebook, you're going to want HD on it, you are going want Blu-ray disk on it, and the GeForce 8M family is the only GPU on the market or in the foreseeable future that has a 100% of the video processing done on the GPU. So that you can watch movies for the longest possible time.

And so, I think those two dynamics are really important. As the drive cost of HD DVD and Blu-ray disk comes down, you are going to continue to see increased demand for GPUs for that reason as well.

Chris Caso - FBR

Thank you.

Jen-Hsun Huang

Yes, thanks, alright.

Operator

Your next question comes from the line of Daniel Ernst.

Daniel Ernst - Hudson Square Research

Two question if I may; the first on the 6100 Application Processor and the design wins you've got lined out. Would you characterize any of those or collectively as the material or high volume?

And then second question kind of a big picture looking at your press release, where you referenced in a type of market of 10 billion GPUs over the next 10 years. Maybe talk about what that model looks like for NVIDIA and Blue Sky, what is NVIDIA's market share, what does that do to ASPs, can it become more mainstream and what was that duty of those long-term gross margin target? Thanks.

Jen-Hsun Huang

We don't talk about future customers and so I certainly won't characterize in this material or not. And so, when we get closer we'll talk about the business prospects of 6100.

But frankly we're just really excited about the fact that this is our first application processor, we're excited about the customers that we're engaging, and so I can't wait to buy the products that we're in.

With respect to the future GPU business prospect. Although history may not be a trend; one of the things to realize is that this is probably the only semiconductor segment that I know of any ways and probably that you know over the last 10 years has increased in ASP's.

We've increased the ASP's of our products over the last 10 years, year-by-year. And my sense is that we have a good share to continue to do that. And the reason for that is because more and more of the computing experience that consumers want are more determined by the GPU, whether it's graphics or Video or in the future interesting image processing or computing type of applications that requires the capabilities of the GPUs.

So, I think the GPUs are becoming increasingly important, and the ASP's and the size of the marketplace reflect that. I don't really know how big our market share will be. But, I do know this, there are very few companies, while I could say there are no other companies who is investing more in GPU technology than we are, is more talented at building this product than we are, and is more focused at doing it than we are.

Daniel Ernst - Hudson Square Research

I understood. And may be if I could just drill down on that, the ASP coming, and really it's a long term view, but I guess I meant more on a blended basis as you are in mobile phones or in cars, P&B dashboards, whereas its not the same thing as being an SLI desktop or workstation, looking at more on a blended basis over the very long run.

Jen-Hsun Huang

Yes, I guess it's still hard to say, right. And the reason for that is because, we have GPUs that are going into servers and we have GPUs going into power walls and we have GPUs going into broadcast stations. The GPUs are being used in just a whole lot more applications in the enterprise, and on the other hand the number of GPUs that are going into portable devices is obviously going to go up as well.

So, its kind of hard to say. I don't really even know how important it is. All I know is this, whatever prediction I give you is likely to be smaller than that or they are likely to be a lot bigger than.

Daniel Ernst - Hudson Square Research

Fair enough, thanks.

Operator

Your next question comes from the line Arnab Chanda.

Arnab Chanda - Lehman Brothers

Yes, it's actually Arnab Chanda. But anyway couple of questions. First of all, Jen it seems you talked about your notebook share. You are like, you want to get it to the 70% range. Clearly, your performance leadership in desktop is well demonstrated. It seems like your share there is around 60 and there is a lot of share that you could directly capture in value and mainstream. Do you think that that's something you are interested do or is it something that where you are happy with your position and with your performance? (inaudible) you are going to go with that for now.

Jen-Hsun Huang

We never declined profitable business and so the lower end products also are obviously more cost effective to build. But our focus is this, we just need to make sure that we're focused on the customers and that they would like us to serve them building notebooks or whatever. It could be a multimedia extender to connect a PC to a TV. It could be dashboard car navigation system, it doesn't really matter. If we could add value and the customer needs us to help them we're delighted to do it.

Arnab Chanda - Lehman Brothers

Okay. One other question, historically if you look at the MCP segment, you have pretty good share with AMD, Intel historically used to take 70% of its own business and leave 30, with five people to fight over. What do you think is a realistic share for non-Intel, the way the business is going? Because I am assuming you made some strategic evaluations whether you want to go into the segment or not, and its different from the past. So how big can that business be if you do think relative to what you already have with AMD?

Jen-Hsun Huang

Yeah, I would say comparing us to a historical chipset supplier is probably not the most proven way of anticipating our success in the future. No one would have predicted our success and the value that we brought to the AMD platform, not one person. 100% of the people that I talk to, told that we're going into a chipset business, tell me that we're going to a commodity business. For that matter 100% of the people I talk to about PG Graphics told me that GPU was going to be a commodity business. And a lot has changed. I think the bottom-line is you need to be able to add, you need to have imagination, you need to have the creativity to add value and bring experiences in products that are really surprising to people. And look, one of the most successful companies on the planet today is building PCs, and I think Apple does a pretty fabulous job building products and they surprise us everyday.

Arnab Chanda - Lehman Brothers

Jen-Hsun just a last question, or maybe for Marv. Historically you have confined your critics and skeptics where you gun your gross margins to. Now that we have passed 45%, would you like to reestablish another goal for yourselves or tell us in Wall Street, what you think you can get?

Marv Burkett

Higher. We are going through that. The question is what, within which timeframe, and I can envision a business, a couple of years out, that generates in the 50% gross margin. Is that going to happen this year, probably not. Who knows, but maybe not. But I can certainly envision a 50% gross margin business several years in the future.

Arnab Chanda - Lehman Brothers

Sorry just last question with that. You talked about your operating expenses growing 3% for the rest of the year. Is there a theoretical concept that you employ, if you get X% in X number of dollars in gross profit, how much you put in OpEx versus give to the shareholders?

Marv Burkett

Yes, right now our business model has OpEx at around 23% to 24%. If we can get our gross margins even higher, I will certainly share that between higher R&D and higher operating income. In the past, we generated most that we told, the operating expenses in the 23-24% range and virtually a 100% is flowed to increasing the operating income.

We have lots of ideas, lots of things that we want to do and I don't think the 100% of it should go into R&D, but probably 100% of it shouldn't go into operating income. We need the share as we go forward.

Jen-Hsun Huang

And just as an operating model, operating principle I guess. Over the course of a year, we tend to operate to a principle that we should pass more of it to the operating income line than to OpEx line. And that comes from growth in the top line and that comes from growth of our gross margins, and I think we've stayed true to that operating model. And my expectation is that we will stay true to that operating model this year.

Don't forget that it takes some extraordinary people to work on improving your gross margins. So we do have to increase that thing and increase our operational capability in order to derive greater gross margins and we know where we need to invest in the areas that we invest in, thus improving gross margins as you're seeing over the last 11 quarters. And we have many ideas that we are pursing even now.

Arnab Chanda - Lehman Brothers

It does seem like you have done some extraordinary things with the quality of people, so congratulations. Thank you.

Jen-Hsun Huang

Thank you very much. I appreciate that.

Operator

Your next question comes from the line Tayyib Shah.

Tayyib Shah - Longbow Research

Hi guys. Congratulations on the quarter. Can you update us on what's the split in the MCP revenues between Intel and AMD? And where would you expect Intel's share of your MCP revenues exiting calendar '07?

Jen-Hsun Huang

I guess, we've never broken that out before. But I think it's fair to say that Intel revenue contribution is increasing quarter-over-quarter and we expect it to increase again. And so it's significant.

Overtime, I guess we probably expect to have higher share on the AMD platform relative to Intel, but the Intel TAM is four times bigger. And so, hard to say exactly what the balance will be, but my expectation is that Intel platform will represent a sizable opportunity for us.

Tayyib Shah - Longbow Research

Okay. And then, the new 8000 series products that came out, based on the early design wins you have. Are you seeing some share gain in the desktop discrete side in the July quarter or is there something you would expect to happen in later quarters?

Jen-Hsun Huang

Trying to understand the question.

Tayyib Shah - Longbow Research

I mean, the new 8000 series product that came out, are you seeing some market share gain in that discrete desktop side because of them?

Jen-Hsun Huang

I see. I hope that we increase some market share on discrete desktop. I hope that we will, and we are going to do everything that we can to increase our share in discrete desktop. We expect to increase our share in discrete notebook and discrete notebook is obviously growing faster than discrete desktop, but nonetheless, our intention is to increase share.

Tayyib Shah - Longbow Research

Okay. Thank you.

Operator

Your next question comes from the line of Gurinder Kalra.

Gurinder Kalra - Bear Stearns

Did MCP as notebooks, as drivers, you didn't mention desktop, but I would gather with your entire GAD family being entrenched by a timing of the June-July quarter, that also should be a driver of revenues?

Marv Burkett

Yeah, I mean what makes us cautious about that is the normal seasonal weakness in the PC industry in Q2. I think our product positioning in desktop GPUs is excellent going into the second quarter. So the real issue I think is what happens from a market standpoint more than anything else. If the market is fairly robust than what you're outlining is a very possible scenario.

Gurinder Kalra - Bear Stearns

Okay thanks. I just have a follow-on question. Now, in terms of the Sony PS3, can you just tell us how that ramp is progressing and if there are any other design wins or product cycles you might be working on with Sony?

Jen-Hsun Huang

We'd rather not comment on Sony's progress. You should really ask Sony about how they are ramping. But I understand that they had a really terrifically successful European launch. And aside from that, we don't comment on future products.

Gurinder Kalra - Bear Stearns

Okay. Thanks very much.

Jen-Hsun Huang

Thank you, Gurinder.

Operator

Your next question comes from the line of Simona Jankowski.

Simona Jankowski - Goldman Sachs

Hi, thank you very much. Jen, I just wanted to follow-up first on your comment on the competitive environment, just a little bit bigger picture. Do you think that with the R600, we're going to go back to the old days of leapfrogging each other? Or do you think that you've pulled ahead investment in terms of your roadmap that you can maintain your share gains and pricing power sort of longer term?

Jen-Hsun Huang

Hi Simona. It is really a fallacy that there is a leapfrogging. Leapfrogging only comes from the mouths of the losing team. I've just never internalized a notion of leapfrogging. We've been in the course for the last 10 years. That's a lot of months and a lot of quarters. I remember by all of our own fault, executed quite badly on one particular cycle, the GeForce effects. And of course, the memories of the analyst tend to be shorter than corporate memory, because you guys don't watch our industry day-in and day-out like we do. But, in the 10 years, that was the cycle we lost. And then, from that one cycle, people interpret that there is a leapfrogging going on.

I don't think, there is anything fundamental about technology that requires you to fall behind every six months. It's not like the way sun comes up or moon comes up, it doesn't do that. Great companies, and people who are good at what they do, should be able to retain their leadership position for a long, long time to come.

And so, that's my expectation with my team, and that's what they've done over the years and they have done it for you for 30 straight months. And my expectation is that they are going to do it for you for quite a long time to come.

Simona Jankowski - Goldman Sachs

So just specifically with your share being close to 60% now on the desktop side, that's something you guys do very defensively. Is there anything you think you can expand on that?

Jen-Hsun Huang

Well, the market share is a reflection on the value of the products that you build. And I think that, my expectation is that we're continuing to be very creative and imaginative and bring products to the marketplace that the market will really love. And so that's our job to do. And if don't do that, then we're going to lose our market share. It's really that simple.

Simona Jankowski - Goldman Sachs

Okay, thank you for that. And then just another quick question on the market overall. You see that in the first quarter, the desktop vast market on the display side was actually quite a bit better than normal seasonality. And I am just wondering why do you think that is? Do you think there is maybe a slowing down of the kind of integrated encroaching on the discreet side, is there a Vista effect, was it just an aberration? Do you have any perspective at all, and may be that how that reflects on the year?

Jen-Hsun Huang

What's the most possible there, that every idea that you came up with are the right ones. And when you were asking the question those were some of the ideas that came to my mind as well. Vista makes a difference, DX10 makes a difference. The fact that it's a brand new generation of GPUs and markets love it when it's something really, really fresh and very different than before.

High-definition Video and Blue-ray DVD, and the introduction of our PureVideo HD, that makes a difference and I know the enthusiasm around that and in the video enthusiast market is quite high. So it could be a combination of all of those things. It could be a combination to the fact that that supply change are [tracking] longer. The manufacturing done in Asia is being put on a ocean-going ship and shipped over to the various countries, in time for a back-to-school and so some of that stuff plays a role as well.

So it's going to be hard to say exactly Simona, but we saw what you saw, which was the GPU market seems to be pretty brisk right now.

Simona Jankowski - Goldman Sachs

Thank you so much. And just a last question, just on your new segmentation, should we read into that in any way that maybe the general purpose, the GPU computing side of your business might be more meaningful in terms of revenues earlier on than we are all expecting? Is that one of the reasons why you are re-segmenting the business now?

Marv Burkett

We hope so.

Jen-Hsun Huang

Yeah we do hope so. And I think that the enthusiasm in the market place is giving us a lot of encouragement that we're going down by path. This is an investment that has taken us some five years to get here and we've been talking about parallel computing now for some time, and we've invented a great deal of technology now to get us in the situation that we are enjoying some of the fruits of our labors.

So I'm excited about the response from the market place, and I hope it turns into growth for our company, and I expect it to.

Simona, I just want to make one more comment about integrated graphics. You are increasingly hearing me characterizing integrated graphics as just the GPU business, because it is a GPU business to us.

And what we put on the motherboard is one chip. It's a single chip that sits on the motherboard and it's just a GPU. And this GPU for us is as profitable and certainly from an ASP perspective higher than our low-end GPU. And so we are certainly very, very enthusiastic to bring GPU technology right to the motherboard.

And over time, I hope that, and I think you'll see this that we are the only branded GPU company in the world, that can serve both markets. And we'll serve both markets, AMD and Intel very enthusiastically, and, hopefully that turns into growth for us.

Simona Jankowski - Goldman Sachs

Great, thank you so much.

Jen-Hsun Huang

Yeah. Thanks Simona.

Operator

Your next question comes from line of Shawn Webster.

Shawn Webster - JP Morgan

Yeah. Good afternoon, thank you. Very good job on the gross margins. Marv, now that you've [drawn] out that 50% number, I am sure that it's a considered number. Can you help us understand what levels NVIDIA will go on to help us get from here at 45% to the 50%?

Marv Burkett

These are things that we have gone through before, Shawn. Mix is a huge factor in this. The better that we do in what we call the professional services business unit, which includes not only workstations, but now also includes computer and other things.

I think a key factor is how big that business gets how quickly. The quicker it gets to it, a very significant business the better margins are going do, because that's a high margin business.

But setting that aside, we still see ways to improve the margins in the rest of the businesses. As Jen-Hsun just mentioned, a single-chip GPU on the motherboard is a very nice margin business, very good, higher than a lot of our other businesses right now.

And we're seeing ways to improve the overall margins in the desktop and notebook GPU business. I'll point out again which I've told you before, that the margins from the G8x family are very good, even better than the G7x family. So we still see ways to improve the margins to [post] businesses.

Shawn Webster - JP Morgan

Okay, great.

Jen-Hsun Huang

And Shawn, remember that we've been improving our gross margins and it's not because we are raising prices. I mean we are still in a very competitive market, and the competition is always there for us, and we are expecting them to be there.

There is a lot of smart operational improvement things that we have been doing over the years and you guys have seen the benefits of those over the last 11 quarters, and I am hoping that you will continue to see them. Because we still have many ideas or ways to improve our company.

Shawn Webster - JP Morgan

Okay. And then [turning] to shorter term, I guess, in terms of when you're looking the Q2, can you characterize your visibility and backlog going into Q2 versus how it was coming into Q1, and may be what you'd normally expect to see coming in the Q2?

Marv Burkett

Now, it's inherent in this business, but you don't have a lot of visibility in any quarter. And I don't think Q2 was any different than Q1 from that standpoint.

Shawn Webster - JP Morgan

Okay.

Jen-Hsun Huang

The most important thing Shawn is just to make sure that we understand the strategic position of our products. That's the single most important area of judgment and we study that carefully. The other part of it of course is all of the OEM design wins that we have in notebooks and our desktop and workstations and what not. Those type of design wins we have a lot more visibility in.

Shawn Webster - JP Morgan

Okay. And then, final question. Can you give us an update to the extent you can on your 65-nanometer transition?

Jen-Hsun Huang

Well, all of our new designs are going to 65s and 55s and so we have already ramped 65. I guess I'm not sure I understand the question. Are you --

Shawn Webster - JP Morgan

When are we going to start seeing significant volume shipment on the 55 front and since you brought up the (inaudible)?

Jen-Hsun Huang

We'll be in 65 certainly very significantly this year. So, what that would imply is soon.

Shawn Webster - JP Morgan

Okay, great. Thanks a lot. Good job guys.

Jen-Hsun Huang

Yeah, thanks a lot Shawn.

Marv Burkett

Thanks Shawn.

Operator

Your next question comes from the line of Devan Moodley.

Devan Moodley - Scotia Capital

Hi guys. Just want to follow on the comments you made about integrated graphics and GFX, or GF 8X. How soon do you think you are going to get the G 8X family into that sort of motherboard single chip solution? And what is your general strategy for the innovative laptop market which is the one that's really growing?

Jen-Hsun Huang

Well, because our market share of integrated graphics for the Intel market is -- well, I guess exactly 0% right now. Any segment of that market is a good opportunity for us. I guess I would expect that NVIDIA will have DX 10 and high-definition video in a motherboard GPU earlier than any other company in the world. That would be my expectation. So that ought to be, I hope, this year.

Devan Moodley - Scotia Capital

Okay. And just I wanted to get back to you on GPU computing. You've been talking about this a lot, Jen-Hsun. You have put out some TAM numbers talking about the current market being about 10 million, thinking your new markets will go to 30. Can you give us some context that incremental GAAP between 10 and 30? How much of that is GPU computing? How do we think about, how we get there from here in terms of time, and is that business better than corporate average margins right now, I am assuming it is?

Jen-Hsun Huang

Devan, I have to be honest I'm not really sure how big that market is going to be. My feeling is that's going to be a lot bigger than we expect. And a little bit – that same feeling that we had, when we first started our GPU product business and it exceeded everybody's expectations. And the reason for that is just our imagination for how you could use the GPU has grown over the years. And it's started from workstations and then it went into PC's, but now it's everywhere. Now it's, wherever there is a computing device and you have a large display. And so now game consoles, and handheld devices, and with devices like iPhones coming out, the visual experience is becoming increasingly important and devices like Apple TV has GPUs inside. So all of a sudden -- the car navigation systems, everywhere you have a large format display, you're increasingly going to find GPUs behind them. And so I think GPU computing is the same way. We do know that the number of serious problems to be solved in the world is really significant and the country has had a, if you will, supercomputing crisis. Nobody has really invested in super computers for quite sometime. And yet, we know that many of the fields, whether its biology or genomics or finance or computational techniques. And you know that in your own firm, computational finance is a very important part of how you guys derive your competitive advantage. Computational genomics, computational chemistry, computational entertainment. I mean there is just so many different ways of using extraordinary amount of computational horsepower. And so, I am not exactly sure, how big it is going to be. But, my instincts are, this is going to be really, really significant market.

Devan Moodley - Scotia Capital

Will we see GPU computing revenue before the end of the year.

Jen-Hsun Huang

I really hope so.

Devan Moodley - Scotia Capital

Okay. Thanks.

Operator

Ladies and gentlemen, we have reached the end of 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

Over the past 10 years, we have delivered a cumulative 500 million GPUs. Over a 100 million of which were shipped in the last year alone. But, this is just the beginning. Over the coming years, GPUs will be pervasive in handsets, on mobiles, game consoles, media centers and wide range of devices not yet conceived. With the investments we have made, we see a clear path of shipping several 100 million GPUs per year. We have a focused and clear strategy to continue to expand the GPUs ability to enable and enhance a broad range of applications and to extend the reach of GPUs to an ever growing range of devices. The multiple crisis effect from increasing the number of GPU applications on the number of devices for GPUs create significant opportunities for us.

Over the next 10 years, we estimate over 10 billion GPUs will be needed to power PCs, mobile devices and all these not yet invented digital devices. As the only standalone GPU company in the world, we have a great responsibility and amazing opportunity.

We look at the years ahead as the era of the GPU. Thank you for joining us today. And we look forward to reporting on our progress for Q2.

Operator

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

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