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NVIDIA Corporation (NASDAQ:NVDA)

Q4 2006 Earnings Conference Call

February 16th 2006, 5:00 PM.

Executives:

Michael Hara, Vice President of Investor Relations

Jen-Hsun Huang, President and Chief Executive Officer

Marvin Burkett, Chief Financial Officer

Analysts:

Mark Edelstone, Morgan Stanley

Simona Jankowski, Goldman Sachs

Michael McConnell, Pacific Crest Securities

Sidney Ho, Merrill Lynch

Satya Chillara, American Technology Research

Dan Morris, CIBC World Markets

Krishna Shankar, JMP Securities

Hans Mosesmann, Moors & Cabot

Shawn Webster, JP Morgan

Brian Alger, Pacific Growth Equities

Devan Moodley, Scotia Capital

Robert Dennison, UBS

Arnab Chanda, Lehman Brothers

Naser Iqbal, Salman Partners

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, VP of Investor Relations

Thanks Brian. Good afternoon and welcome to NVIDIA's Conference Call for the Fourth Fiscal Quarter ended January 29, 2006. On the call today from NVIDIA are Jen-Hsun Huang, NVIDIA's President and Chief Executive Officer, and Marvin 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. This call is being recorded. If you have any objections, you may disconnect at this time. Please be aware 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 the first quarter fiscal 2007. This conference call is the property of NVIDIA. Any redistribution, retransmission, or rebroadcast of this call or any portion of it without the expressed written consent of NVIDIA is strictly prohibited, and may result in civil and criminal penalties.

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 first quarter 2007 outlook, growth, growth drivers, investments, partnerships, acquisition of ULi, competitive position, GS3 platform, customer demand, and products and technologies 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 statement. 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 annual report for the fiscal year ended January 30th, 2005, quarterly reports on Form 10-Q, 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. The Company's assumes no obligation to update any such statements. The content of the webcast contains time sensitive information that is accurate only as of February 16, 2006. Consistent with requirements under Regulation FD, we will be providing public guidance directly in the conference call, and we will be unable to provide significantly more information in off-line 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 out one follow-up question. Before I hand the call over Jen-Hsun, I would like to take this opportunity to remind the financial community about our Analyst Day which is scheduled for March 23, 2006. If you're interested in attending the Analyst Day please visit the Investor Relations portion of our website, www.nvidia.com to register. I will now hand the call over to Jen-Hsun.

Jen-Hsun Huang, President and Chief Executive Officer

Thanks Michael. Good afternoon, and welcome to NVIDIA's fourth quarter conference call. Today we are pleased to report record revenue of 633.6 million, and net income of $0.53 per share for our fourth quarter. Year-over-year fourth quarter revenue grew at 12%, and net income grew 104%. For the fiscal year we achieved record revenue of 2.38 billion, an increased our net income 202% year-over-year. We also recorded our seventh consecutive year of profitability since going public in 1999.

As we entered this year we had launched the GeForce 6 Series, nForce4 MCP, and SLLI with terrific market reception. Our objective during the year was to strengthen our technology leadership position of our GPU and MCP businesses, extend the reach of SLI with a broad range of compatible products, applications and games for enthusiasts, drive gross margin to historical levels, and build new products and market initiatives that will be the platform of our continued growth.

Let me share with you some of highlights and achievements for the year. Our core business grew 26% year-over-year, and more than offset the $146 million decline from Xbox revenue from the prior year. The desktop and notebook segments of our GPU business grew more than 18% year-over-year, outgrowing the PC industry average. We entered the year with clear momentum, led by our top to bottom GeForce 6 family and SLI. With the launch of the new GeForce 7800 GTX and 7300 GS in the second half, we strengthened our position and continued to capture desktop GPU share. And the first half of fiscal 2006 was also important phase for our notebook GPU. With the GeForce 7 family delivering the best performance and performance per watt advantage, our notebook design win success for spring 2006 was the best in the Company's history. We're now beginning to recognize the revenue growth from that design win cycle.

Our MPC revenue more than doubled from last year, and has surpassed the $100 million per quarter mark. The business is still accelerating. Our strategy is to create the number one brand of core logic for high-performance computing, then leverage our leadership position to cover every single market segment certified in any new processors. In the most recent Maximum PC Magazine nForce was named the best core logic for both AMD, as well as Intel platforms. The growth our Quadro Professional Solutions business is a reflection of the digital revolution sweeping nearly every industry, from industrial designed to industrial styling, to film, high-definition broadcast, medical image and many more, medical imaging and many more. For fiscal 2006 our professional business grew 40% year-over-year. The Quadro brand has become the benchmark of performance and compatibility for the professional industry.

Our handheld GPUs are setting the bar for multimedia experiences that is possible on a handheld device. The confluence of broadband, high-density, flash storage and high-resolution displays is making it possible for us to deliver a spectacular multimedia experience on handheld devices. Our GoForce handheld GPUs are now shipping in the new Motorola 3G RAZR V3x and the new Sony Ericsson Walkman phones. The RAZR V3x won the best 3G handset 2006 award this week at the 3GSM conference. SLI has defined the enthusiast category, and is now a must have feature for gamers. SLI even has its own fan club with over 6,000 members around the world, who share their experiences building and using SLI systems. More than 3 million SLI motherboards and 9 million SLI GPUs have shipped to date.

Design work of the RSX has been completed, and we have for some time the production silicon. The PlayStation 3 demonstration at CES 2006 were a preview of the awesome power of the platform and what consumers can expect this year. We announced our intent to acquire ULi Electronics, originally Acer Laboratories, one of the PC industry's most highly regarded core logic developers. The acquisition represents our ongoing investment in our platform strategies, platform solution strategy, and is expected to strengthen our sales marketing and customer engineering presence in Taiwan and China.

Lastly, gross margins surpassed 40%, increasing 1,260 basis points from our low point only nine quarters ago. We made many fundamental investments and changes in our business, and by doing so have built a new financial model for the graphics industry to follow. We have now reset our gross margin target to the mid-40s. Let me also highlights some of our fourth quarter fiscal 2006 results. Desktop GPU segment share increased to 51%, according to Mercury Research fourth quarter 2005 PC graphics report. We started production of nForce 4 SLI SE and nForce 4 Ultra for the Intel platforms. This is our first discrete chipset targeted at mainstream Intel-based motherboards.

NForce's quarterly revenue increased 83% year-over-year, and has achieved record revenue for six consecutive quarters. Dell and NVIDIA showcased the first-ever Quad SLI PC, the Dimension XPS Renegade at the Consumer Electronics Show 2006, and earned the best the CES 2006 award for gaming. The Quadro workstation product line increased its revenue 42% from the fourth quarter of fiscal 2005, and again achieved record revenues.

NVIDIA introduced three new notebook GPUs, the GeForce Go 7800, the GeForce Go 7600, and the GeForce Go 7400 with leading Tier 1 and system builders worldwide. NVIDIA announced that Quadro Professional Graphics will offer Adobe users direct GPU acceleration capabilities that dramatically increase application performance, and video editing workflow for Adobe Product Studio. As a member of the Adobe OpenHD Alliance, NVIDIA is working with Adobe in the industry to develop tools and technology that enhance the productivity of HD video creation. And finally this week at the 3GSM conference in Spain, we unveiled a GoForce 5500 handheld GPU, the industry's first handheld GPU to enable DVD quality video, full H.264 processing for fluid digital television, high fidelity surround sound, rapid multishot photography, and console-class 3D graphics. Phones based on the GoForce 5500 handheld GPU are expected to be available from key handset set manufactures before the 2006 holiday season.

Let me turn the call over to Marv to discuss our financial results in more detail. I will return to discuss our progress and outlook.

Marvin Burkett, Chief Financial Officer

I would like to start with some comments about the P&L for the fourth quarter and then move onto the balance sheet. Finally, I will give an outlook for Q1. On the P&L revenue for the quarter was 633.6 million, which is up 8.6%, or $50 million from the third quarter, and up 12% from the prior year. The largest increase was in the MCT where sales grew 27% quarter over quarter. We also had increases in workstation and handheld products.

Year-over-year MCPs sales were up 83%, which more than offset the lost Xbox revenue. Gross margins continued to increase, and in the quarter reached for 40.2%, which is the highest since Q3 of fiscal year 2000. Again, there was no single factor that led to this improvement. There was a broad range of process improvements, and we improved margins in several product areas. Year-over-year gross margins improved by 600 basis points.

Operating expenses were 142.6 million, relatively flat with Q3 when you consider that Q3 included a settlement cost charge of 14.2 million. We got the benefit of the vacations and holidays that are usually taken in the fourth quarter, but we continued to hire. We added 143 employees in the fourth quarter, and our year ending headcount was 2,737. Depreciation and amortization was 23.8 million, as compared to 24.5 in Q3, and was 98 million for the year. Capital expenditures were 23.4 million in the quarter and $80 million for the year. The tax rate was 16% for the quarter and for the year. We repatriated approximately 420 million of foreign earnings under the American Jobs Creation Act, but the increased tax expense associated with this was offset by the taxes we had previously see provided on these foreign earnings.

Also in the quarter we repurchased $50 million of stock at an average cost of $36.89. The net result was earnings of 98 million or $0.53 per share in the quarter and 303 million or $1.65 for the year on the balance sheet, cash jumped up to 950 million, as we had operating cash flow in the quarter of 236 million. In addition to the earnings and depreciation, we reduced accounts receivable by 34 million, and reduced inventory by 30 million. The accounts receivable was reduced by a combination of good collections and more linearity of our shipments during the quarter. DSO in the quarter was 45.7 days, down from 54.9 in the previous quarter.

The inventory reduction was the result of significant reductions in older products, offset by an increase in new yet to be announced products. Days sales and inventory for the quarter was 61 days, down from 73 last quarter. Accounts Payable was flat quarter to quarter. On the outlook, the first quarter for the PC industry is usually slightly down from the fourth quarter. For us we believe this seasonal weakness will be more than offset by growth in MCP products and in our notebook GPU business. Also we had previously anticipated that Q1 would show a reduction in the non-recurring engineering associated with Sony. However, because of follow on contracts, we do not anticipate any reduction.

We expect to complete the acquisition of ULi in the near future, and this may add as much as 10 million in revenue for the quarter. When you put all of this together, we expect revenue will increase 3 to 6% in the quarter. We continue to work on improving gross margins, and this work is far from complete. We believe we can continue to improve margins in the first quarter, and the magnitude of that improvement could be as much as 50 to 100 basis points. We do not anticipate any Sony royalties in the first quarter.

After many quarters of over estimating operating expenses, I truly believe operating expenses will increase in the first quarter. We will add the operating cost of the ULi acquisition, along with the revenue, and we will not get the benefit of the vacations and holidays that were taken in the fourth quarter. This, together with the headcount additions we have made, should cause operating expenses to increase by 5 to 10% from the fourth quarter. The first quarter will also be the first time we include stock option expenses in our results. We anticipate that the expense will be approximately $20 million in the quarter. The tax rate will be affected by the option expensing, but the anticipated tax rate without option expensing would be 16%, plus or minus a percent. When you include option expensing, the tax rate could be lower.

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

Jen-Hsun Huang, President and Chief Executive Officer

Fiscal 2006 was a milestone year for NVIDIA. Because of the growth initiatives that we set in motion last year, we're well-positioned to have another strong year. Let me outline our key growth drivers. Growth in desktop GPU will be driven by share gains, Microsoft Windows Vista, and the introduction HD and Blu-ray DVD. We will continue to rollout our 90 nanometer GeForce MX Family over the next few months, and expect to extend our technology and performance leadership from an already strong position.

Windows Vista represents the most significant OS transition in the history of the PC, and delivering a new experience built on top of modern GPUs, translucent glass, light compositing and animations. This experience will be available only to users on machines that have sufficient GPU processing power. According to a recent report by Jon Peddie, 50% of the computers in use can't run Vista Glsss. We expect this to increase GPU adoption. 2006 will also be the year of high-definition video. Sony PlayStation 3 will drive Blu-ray and HD video into the world. We expect Blu-ray and HD to drive increased demand for the video costs and capabilities of our next generation GPUs.

Growth in notebook GPU. The GeForce 7 delivers the best performance and performance per watt advantage. Our design win success for the spring 2006 Napa Refresh was the best in our Company's history. By at the end of the year our notebook segment share is expected to more than double. Growth in our professional solutions business will be driven by the demand for HD content creation, HD video editing and broadcast. Growth in MCP will be driven by continued share gains in AMD Server, workstation, desktop and notebook. In addition with our first ever mainstream Intel nForce 4 MCP we have expanded our addressable market. Growth driven by Sony PlayStation 3, as I mentioned previously, we have had production silicon for some time.

Growth in 3G multimedia. Our GoForce handheld GPU business continues to make great progress. Our strategy is to build a new class of ultra low power GPUs for multimedia rich devices like 3G cell phones, smart phones, and portable media players. This week with the announcement of our GoForce 5500, we're enabling DVD resolution digital TV on cell phones for the first time. According to industry researcher, Yankee Group, the market for mobile video is expected to reach $2 billion by 2008. Mario Morales of IDC recently said "high-quality multimedia services are a key revenue driver for the world's carriers and content providers." And we believe we will see significant uptake of these services in 2006. Companies like NVIDIA whose products deliver compelling and tangible improvements to the overall end-user experience of these new services are well placed to take advantage of this surge in demand.

Not only is the 5500 the most advanced handheld GPU ever built, it is our first that will scale to mainstream segments. With the 5500 architecture, we will serve both the 3G as well as the 2.5 G markets. With more growth drivers than ever this year, it is setting up to be another year of strong growth. At this point we would be happy to take your questions.

Question-and-Answer Session

Operator

Thank you sir, at this time I would like to remind everyone if you would like to ask a question, press * then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Our first question comes from the line of Mark Edelstone with Morgan Stanley. Please go ahead with your question.

Q - Mark Edelstone

Hey guys, another great quarter.

A - Marvin D. Burkett

Thanks a lot Mark.

Q - Mark Edelstone

I just have three very brief questions, if I could. One, Marv, in the other income in the quarter it was down more than I would have thought. Is there some charge that took place there? And then when you guys expect PlayStation 3 royalties to begin?

A - Marvin Burkett

Yes, there was a slight charge there. As we repatriated the cash from the foreign subsidiary under the Jobs Creation Act, we had to liquidate some investments. And based on the fact that interest rates have gone up, when you liquidated those investments you incurred a slight loss. But in the whole scheme of things it was small.

Q - Mark Edelstone

Great. And PlayStation 3 royalties, when would you expect that to first hit the P&L?

A - Jen-Hsun Huang

We haven't, we're being rather cautious about what we say about PlayStation 3 simply because PlayStation Street is not our product. It is Sony's product. And the only thing that I can help you with is that we are completed with our RSX design work, and we have production silicon in hand. At this point it is up to Sony and their aggressive march towards the marketplace.

Q - Mark Edelstone

Fair enough. Just a last question, can you give us a general sense as to where the notebook business is in terms of GPUs on a percent of revenue basis here in the fourth quarter?

A - Marvin Burkett

It is north of 5% slightly.

Q - Mark Edelstone

Thanks a lot guys. Nice job.

Operator

Our next question comes from the line of Simona Jankowski with Goldman Sachs. Please go ahead with your question.

Q - Simona Jankowski

Hi, thank you so much. First question just quickly is, can you comment on what percent of your desktop GPUs are based on the Series 7, and similarly for your notebook GPU's?

A - Marvin Burkett

Small in the fourth quarter. You're referring to the fourth quarter, I take it?

Q - Simona Jankowski

Yes, both for the desktop and for the notebooks.

A - Marvin Burkett

It is small but growing very, very rapidly. In the desktop it is probably, I don't know, 20%. In notebook it is higher than that.

Q - Simona Jankowski

And then the second one is on the Sony revenue. Did you say how much it was in the quarter? I may have missed it. And also, if you're going to beginning license revenues this current quarter?

A - Marvin Burkett

The answer to the second one, were we going to be getting license revenue, yes, absolutely. The license revenue is a fixed amount for most of, through this year. So we will get that. The amount of revenue for Sony in the fourth quarter was on the order of $20 million, which includes license as well as NRE.

Q - Simona Jankowski

Thank you so much.

Operator

Our next question comes from Michael McConnell with Pacific Crest Securities. Please go ahead.

Q - Michael McConnell

Thank you. Looking at the MCP business, could you give us an idea about what you expect that business to grow in fiscal '07 year-over-year? And what is the drive behind the exceptional growth you're seeing in that business?

A - Jen-Hsun Huang

As you know, the way I think about our MCP business is this, we're really the only Company in the world that serves every single segments of the AMD market. We're the only Company that provides SLI for the AMD platform. We are the only Company that, we're clearly the Company that is recognized with the best technology for the AMD platform. And this year, I guess this quarter was our first quarter where we entered into the integrated graphics marketplace again. And we had invested a great deal of time to create an architecture that is both high-performance but extremely low cost, because as you know integrated graphics is rather price competitive. And so this is the first time where we have now been able to address every single segment from notebook to desktop to workstation to servers. And the number of AMD CPUs that are going to be shipped in the marketplace is pretty significant next year. I think the integrated marketplace alone was predicted to be about 25 million units next year. My expectation is that we should capture a majority of that.

So how big can our core logic business be? Pretty sizable. My expectation is that it will continue to be the fastest growing business by absolute amounts, absolute dollars. And can we double it this year? Probably. I think the long-term of it of course is that we're going to continue to bring new ideas to that marketplace. But we are also going to invest more into the Intel mainstream marketplace as we recently rolled out our first mainstream product by Intel. So anyways, I think the net of it all is that this is going to be very important growth product for us. From a strategic perspective it is really important, because more and more of the capabilities of a PC really involve the core logic. And so products like SLI, capabilities like SLI really aren't possible unless you simultaneously design the core logic, the GPU, the software, as well as of all the marketing that goes behind bringing this type of capability into the marketplace. It seems like SLI and others that were in the process of developing are going to require a lot of core logic expertise.

Q - Michael McConnell

Maybe on the gross margin side and the effect of this growth that MCP has, with your targets of 45% by the end of fiscal '07, how should we think of MCP in relation to the target? Some people are concerned that this will weigh against the gross margin line. So if you could talk about that a little bit that would be great.

A - Jen-Hsun Huang

I think all businesses need to do several things simultaneously. You need to grow your top line. You need to grow your bottom line. And you need to grow you're strategic influence on the marketplace. And we have multiple business drivers in our Company, and not every single one of them can simultaneously solve all three. And in the case of core logic, it is going to contribute to the top line. Its gross margins are slightly behind our corporate average, but it is not so poor that it drags it significantly. And then lastly the strategic impact of a strong core logic I think is very important. I think overall we're still comfortable with, we still believe that we are going to hit mid 40s target, and the whole Company is working towards getting there.

Q - Michael McConnell

Thank you very much.

A - Jen-Hsun Huang

Thanks Michael.

Operator

Our next question comes from Sidney Ho with Merrill Lynch. Please go ahead.

Q - Sidney Ho

Thank you. Just to follow-up with the MCP question. You said the margins, first of all, for Q4 do you say it is up 27% quarter over quarter in terms of revenue?

A - Marvin Burkett

Yes.

Q - Sidney Ho

Okay. How much of that revenue is coming from the SLI chipsets, if you could give that?

A - Marvin Burkett

The quick answer is we don't know.

Q - Sidney Ho

Let me ask another question related to that. In terms of, well, you had pretty good growth last quarter. Margins are okay, but if you look at Q3 your offering margin for that business is around 5%. I assume that number has gone up this quarter because of higher revenue. What revenue run rate do you think that business needs to do to generate say like 15% margin?

A - Marvin Burkett

We passed it.

Q – Sidney Ho

Okay, thank you.

A - Jen-Hsun Hang

Thank you.

Operator

Our next question comes from Satya Chillara with American Technology Research. Please go ahead.

Q - Satya Chillara

Yeah, hi guys. Jen-Hsun, can you comment on the WMP business for fiscal '07, what did you guys do for your fiscal Q4?

A - Jen-Hsun Huang

Did you want to answer the second part first, and then I will answer the 2007?

A - Marvin Burkett

The WMP business for Q4 was in the $25 million range.

A - Jen-Hsun Huang

My expectation is that 2007 ought to be much larger. I think, we have always felt that the handheld marketplace was going to go through a bit of a revolution when broadband, when storage, when high-resolution displays emerged as a capability on handheld devices. All of a sudden these devices have become powerful digital devices. And we know what it is capable of doing given the state of technology. So we have always felt that if the technology were to come together it would create a market for GPUs. And the GPUs when combined with the availability of multimedia content would create quite a nice market for us. We are seeing all kinds of excitement around our GPUs around the marketplace. And the design win momentum is very exciting for us. My expectation is that we're going to continue to grow with the 3G market this year. We're going to grow because more and more cell phone vendors are incorporating GPUs, so that they can process the multimedia content. We also for the first time are going to create a mainstream segment of our GPUs to go after 2.5 G. And we already have very exciting design wins behind us. I think this business is going to be one of our most exciting growth businesses. As we go into the year, we will expand our offering to include smart phones and portable media players. And as you can imagine all of these segments are very exciting growth segments.

Q - Satya Chillara

On this do you think the business, at this point do you have good visibility or is it still going to be lumpy the entire year?

A - Jen-Hsun Huang

I don't mind, I don't really mind its lumpiness as much as most people do. The lumpiness comes from the fact that cell phones tend to be lumpy businesses. It just so happens at there is 700 million cell phone sold. So that the lumpiness, well, it is still pretty lumpy actually, even at 700 million units. It is a very seasonal business. The visibility comes from these design wins. I know what designs that went in, and I know we are working with. And so the visibility from that perspective is quite good. So the design win perspective is very good. The lumpiness comes from the seasonality in the business. And my expectation is that it won't go away anytime soon. And it is also not an issue by the way. I'm not too worried about it at all.

Q -Satya Chillara

Okay great thank you.

A- Jen-Hsun Huang

Yeah, thanks.

Operator

Our next question comes from Rick Schafer of CIBC World Markets. Please go ahead.

Q - Dan Morris

Hi, this is actually Dan Morris calling for Rick. Thanks for taking my question. I meant to ask you a follow-up question on the notebook. Maybe if you could comment on what your expectations are for notebook in 2007. I think you are getting pretty good traction there. And also to what you might attribute that momentum?

A - Jen-Hsun Huang

One of the things that we know about the notebook business is that architectural efficiency is everything. This is the business where having the highest performance architecture and having the highest performance per unit energy expanded per watt, and you have heard the CPU vendors talk endlessly about per watt for this very reason. The notebook market, obviously the notebook itself has a constrained thermal budget and a constrained electrical budget, and so it is important that you have the most efficient architecture. Using brute force just simply doesn't work in the notebook market. We know that the GeForce 7 has the highest performance and the highest performance per watt of any GPUs out there. And so inherently it is going to be a better GPU for notebooks. And we are seeing the adoption of it as a result.

The second thing is this year of course you're going to have HD DVD and Blu-ray introduced later on in the year. And so that is going to increase adoption of GPUs. You're going to see the adoption of Vista later in the year. That is going to drive adoption of GPUs. So I think that this year we're going to benefit from having, number one, a far more competitive architecture. Number two, our design win momentum is already very strong. And number three, which will benefit all the GPUs suppliers, is Vista and high-definition video desktop to drive GPU adoption. And so my sense is that our notebook business is going to do quite well this year.

Operator

Our next question comes from the line of Krishna Shankar with JMP Securities. Please go ahead.

Q - Krishna Shankar

Yes. Congratulations on a good quarter. Marv, for your fiscal '06 as a whole, can you just give us an approximate breakdown of revenues between desktop discrete, desktop notebook and MCPs can you give us what revenue is there for the year fiscal '06?

A - Marvin Burkett

Why don't we do that off-line. Why don't give me a call after this and I will talk to you.

Q - Krishna Shankar

Then in terms of the high-end graphics market can you talk a little bit about the competitive landscape there? Do you folks see yourselves strengthening and widening your lead in high-end desktop graphics, or do you see the competitive environment getting a little more vigorous going forward there into calendar '06?

A - Jen-Hsun Huang

Well, let me see, GeForce 6 was, we took the crown on GeForce 6. We then introduced GeForce 7 and 7800. And I guess I don't have anything to announce today. But I think the buzz around the industry is that we have something to announce soon, which would be pretty exciting. And my expectation is that the high-end marketplace is really about technology leadership. It is really about the ability to produce the products. And it is also about SLI. And when I think that, I don't think it is a surprise to you if I told you that the majority of the world's game enthusiasts have SLI in their system. And SLI is really only available from us. And so the next generation GPU will also have SLI backwards compatible. And we are expecting performance to be obviously very good. So I think that the marketplace has really changed since the introduction of SLI. You really need to have high-end motherboards and high-end core logic like nForce SLI. You need to have high-end GPUs. And you need to be able to combine the two so that you can deliver the type of performance that enthusiasts demand.

Q - Krishna Shankar

Thank you.

A- Jen-Hsun Huang

Thank you.

Operator

Our next question is from Hans Mosesmann with Moors & Cabot. Please go ahead.

Q - Hans Mosesmann

Thank you. Gentlemen, if you could go back to performance per watt subject, what kind of advantages do you expect have, or can you quantify your advantages in the performance per watt arena, at least the notebook in calendar 2006?

A - Jen-Hsun Huang

Our per watt is something along the lines of 60% better than the competition on the high-end. On our high-end GPUs it is an extraordinary difference. The performance that we can deliver and the power envelope that we can stay within is a dramatic difference, not a small difference. It is a dramatic difference compared to the competition. In a lot of ways your performance is partly related to the design, but it is partly related to your die size, and as you know, our die size is substantially smaller than the competition's die size. And so having architectural efficiency, having lower leakage, having better performance per watt really compounds quickly on the notebook platform. And so my expectation is that our next generation high-end that, I guess we just recently announced it, should have an overwhelming advantage in the notebook market. And my sense is that the design wins will reflect that very quickly.

Q - Hans Mosesmann

Okay, thanks a lot.

A- Jen-Hsun Huang

Thanks Hans.

Operator

Our next question is from Shawn Webster with J.P. Morgan Securities. Please go ahead.

Q - Shawn Webster

Hi, thank you, yes. Could you comment on the GPU unit and pricing, what they did sequentially in Q4, and maybe some expectations for Q1?

A - Marvin Burkett

Units were relatively flat to slightly down, and ASP was relatively flat to slightly up. That is in desktop GPUs.

Q - Shawn Webster

Desktop, do you have a all in GPU unit and ASP change?

A - Marvin Burkett

No, we break it down between the various components, which is the notebook, the desktop, and the workstation. Obviously, the ASPs of those are so different that it doesn't make sense to merge them together.

Q - Shawn Webster

The GPU segment itself was it up 1 or 2%, or what was the end number for that in Q4?

A - Marvin Burkett

Almost dead flat.

Q - Shawn Webster

Dead flat. Okay. Can you talk about your gross margin trends by segment, I guess segment meeting GPU, MCP, your handheld business, what they did sequentially?

A - Marvin Burkett

Yes, I think the most dramatic increase in gross margin was in the MCP area. Gross margins were up very nicely there. The GPU business was relatively flat, but it still had very good gross margins, higher than the corporate average. And in the handheld business the gross margins are much lower. But the improvement quarter to quarter was in the MCP business.

Q - Shawn Webster

And then as far as your linearity, I think you said things were pretty linear in the quarter. Did you see any growth in orders or any kind of changes in the month of January?

A - Marvin Burkett

Yes, the month in January had Chinese New Year's at the very end. So it basically, the customer basically disappears the last week of our quarter. But we anticipated that. We always knew that that was there, so it was not unexpected.

Q - Shawn Webster

Okay thanks a lot.

A - Jen-Hsun Huang

It was actually a short Q4.

A - Marvin Burkett

Yes, it was basically a 12 week Q4.

Operator

Our next question is from Brian Alger with Pacific Growth Equity. Please go ahead.

Q - Brian Alger

Hi guys. Pretty impressive stuff. Two questions. A near-term one for Marvin, a longer-term maybe for you, Jen-Hsun. On the near-term, Marv, can you maybe talk to the specific levers that you think you're going to be able to pull on to generate that 50 to 100 basis point gross margin improvement in the next quarter? And longer-term, Jen-Hsun, can you maybe talk to the implications for the game console cycle coming around at the same time as an operating system upgrade, which I think is the first time we have seen this?

A - Marvin Burkett

I will take the gross margin. I can't emphasize this enough that gross margin improvement doesn't come from any one thing. It comes from a lot of different programs and projects that we have in place. We continue to do, and we continue to get better at them. We will benefit we think in Q1 by the new products that we're introducing that had very good gross margins. Yes, we think we'll get some benefit off of that. But we also think we'll get some benefit by the continued hard work in all of the other areas. The improvement in gross margins that we saw in Q4 for MCP is another example of that. So it is not in any one area.

A - Jen-Hsun Huang

Let me see if I can interpret your question. You are a good questioner, and it certainly makes you think. I think, at some level the game market is, between the PC and the game console, is becoming increasingly uncorrelated, if you will. And the reason for that is because, as you know very well, that the genre of games that are being played on each platform are increasingly different. The genre for PCs are increasingly oriented to massive, online players and role-playing games and related to team play, related to first person shooters, if you will. The game console is much more popular with the sports genres and the racing genres. It is a reflection of the ease-of-use, if you will of those genres on the various platforms.

The thing that we are seeing with the PC industry, and one of the things that we are very excited about, is the number of teenagers who are simply spending more time in front of your personal computer, in front of, as they are surfing the Web on myspace.com or watching videos on UTube or whatnot. They're just spending a lot more time in front of their PCs and playing large virtual world games on PCs. And so I think that, the PC is just becoming a completely alternative game platform, and a serious game platform at that. I think we're just not seeing nearly the correlation that we used to back in the good old days, some four, five years ago where a PC was viewed upon as competitive to the game console. We just don't see it that way. We see them completely different platforms for different uses at different cycles.

Q - Brian Alger

Vista?

A - Jen-Hsun Huang

Vista. And on the second topic of Vista, it is just a really nice operating system. And I think it is going to be a really terrific operating system. The user interface is totally different. And it is built as you know completely on GPUs. I have not seeing a larger volume GPU application driver than Vista before. This is going to be very exciting. I'm anxious to see how it turns out.

Q - Brian Alger

Do you think the Vista transition has greater implications on the notebook market?

A - Jen-Hsun Huang

I think it will have implications on both. I think, it is just, it is so different. It just, as you know, it just looks different, it feels different, it uses differently. It makes advances in so many different areas that we wanted to make advance. And I just think that it is going to change PCs all the way through.

Q - Brian Alger

Thanks. Good job.

A - Jen-Hsun Huang

Yeah thanks, Brian.

Operator

Our next question is from Daven Moodley from Scotia Capital. Please go ahead.

Q - Devan Moodley

Hi guys. The first question for Marv. That cash balance is pretty big relative to where it has been. Where do you think you guys, what are your plans for that?

A - Marvin Burkett

Not to give it away. It is big but we have had $1 billion in cash before. What are our plans? We continue to make acquisitions. We're acquiring ULi for cash. We will continue to do that. We will continue to acquire, hopefully, for cash. We do still have a stock buyback program in place. So we will continue to do that. Those are two uses. We have been doing that and we still are building cash, so that is good news. I would tell you beyond those two things that we expect to continue, we don't have any huge plans for what we're going to do with that cash.

Q - Devan Moodley

Just a bigger picture question, going back to Vista, maybe if I could put some numbers out there. In Q4 I think the discrete integrated split for the whole market. According to Mercury it was about one-third, two-thirds. Where do you think that is in Q4 '06? And what you think that goes based on what you have seen Vista, what you have seen of Vista just so far?

A - Jen-Hsun Huang

I guess we probably see the world as more 45, 55 by the time that you're done including all of the double attached. Sometimes people will make a motherboard out of integrated graphics, but put a graphics adapter on it. And in fact, we see a lot of that. My sense is that that is going to continue. I'm not really a market analyst, so I really can't tell you how it is going to shake out. But I can tell you that Vista uses a lot more graphics horsepower than our previous operating system did. And it requires a lot more of the programmable shading that is provided by GPUs. And the experience is just better when the GPU performance is better. I think that my sense is that it is going to bias it towards GPUs off of norm, and we will see what happens. My sense is that a 10% swing on a very, very large market makes a very large difference, as you know.

Q - Devan Moodley

Just one quick follow-up. Do you think it is a bubble or do you think it is a fundamental change that will last?

A - Jen-Hsun Huang

The definition of a bubble is I guess something that lasts a quarter. I don't think it will last a quarter. But it is really about the fact that the infrastructure itself, the OS itself can actually enhance user experience going forward. It is possible for people to build applications on top of the operating system that takes advantage of the GPU. It is actually not possible today. And so are they going to be add-ons to Vista? My guess is well I don't know for sure, but if I would be a guessing person I would say absolutely. The follow on add-on packs and aftermarket GPU add-ons and graphics add-ons are going to, are just going to be abundant because the infrastructure enables it to. The confabulators of Vista are going to come as you know. And so the gidgets of Vista are going to come. And you're going to see more and more of those kinds of things. There will be video gidgets, stock ticker price gidgets. There will be weather gidgets. There will be CNN gidgets. There will be all kinds of little gidgets that comes out. And all of it is just going to attach to your GPU, which is good. That is my assessment.

Q – Daven Moodley

Thanks.

Operator

Our next question comes from Robert Dennison with UBS. Please go ahead.

Q - Robert Dennison

Hi guys, great quarter.

A - Jen-Hsun Huang

Thank you.

Q - Robert Dennison

I wonder if I can verify, this time last year you guys suggested that Sony would…..

A - Jen-Hsun Huang

You're breaking up quite a bit.

Q - Robert Dennison

Sorry. Better?

A - Jen-Hsun Huang

Yes. Can you repeat your question again?

Q - Robert Dennison

Sure. Last year at this time you guys said that Sony would be about 50 to 100 million plus annually in licensing and royalties. Should we still look at that number? And would with NREs coming into the picture as well in the first quarter, should that number, that range be adjusted at all?

A - Marvin Burkett

My quick reaction to that is, no. Setting aside the royalties, if you just look at the license fee and NRE this year, forgetting, and I'm talking about the profitability of the NRE, not the overall revenue off the NRE, from a profit standpoint that is in the 70, $75 million for this year with no royalty. So depending on where you want to put the royalties under what magnitude, the $100 million is certainly not out of the question.

Q - Robert Dennison

Mercury Research when they did their recent report indicated that there was what they thought was a significant buildup of chipsets, particularly in the AMD segment. Can you comment on what you guys are seeing in the channel in the way of chipset inventories, MCPs there? It looks like they're saying 30% or so over shipment of chipsets relative to GPUs that shipped in the first quarter.

A - Jen-Hsun Huang

We have heard some anecdotal reports that AMD's CPU is experiencing shortages. Relative to run rates there is nothing really abnormal about what is going on. But if there some inventory buildup in the channel, what we believe is happening is that the CPU shortage is causing that. But there won't be a CPU shortage forever. Those segments, those motherboards that are being built are really purely for the motherboard segment. And I think the ecosystem for AMD processors is quite healthy. We feel pretty good about it.

Q - Robert Dennison

Okay thank you.

A - Jen-Hsun Huang

Yeah thanks a lot.

Operator

Our next question comes from Mark Edelstone with Morgan Stanley. Please go ahead.

Q - Mark Edelstone

Hi, Jen-Hsun, this is another point, our channel checks as we went through the quarter suggested that things were actually probably more constrained on SLI and some of your high-end desktop GPUs. So can you give us a sense as to what you are seeing in that regard? And then is that what caused the GPU business to be relatively flat quarter to quarter in your opinion?

A - Jen-Hsun Huang

We were relatively constrained on high-end GPUs this quarter. And the reason for that of course is that we are moderating the build of last generation GPUs in favor of next generation GPUs. So my hope is that that constraint is going to workup shortly. So that is really just, managing our transition cautiously is really what was going on there.

Q - Mark Edelstone

Can you just quantify what memory was in the quarter?

A - Marvin Burkett

Slightly short of 40 million, high 30s.

Q - Mark Edelstone

Thanks a lot guys.

A – Jen-Hsun Huang

Thanks Mark.

Operator

Our next question comes from Arnab Chanda with Lehman Brothers. Please go ahead.

Q - Arnab Chanda

Thank you, just a qualitative question for either Jen-Hsun or Marv. Could you talk a little bit about if you look at all the different segments that you have, you talked about how the chipset business could grow very strongly, as well of the WMP business. Overall, a question on revenues and margins. Do you think that that tends to accelerate your revenue growth rate into the high teens or even higher for the overall Company, including some of the effects of Vista and things like that? And also secondly, what type of influence would that have on your gross margin direction? Thank you.

A - Jen-Hsun Huang

I guess the two growth drivers that you mentioned are, tend to be lower gross margin, lower relative to our corporate standard and lower relative to our other higher gross margin businesses certainly. However, we also have very high gross margin growth coming. The PlayStation 3 growth is very high gross margin growth. Our Quadro professional services, excuse me, professional solution business is very high gross margin growth. Our GPU business continues to be high gross margin growth. And I expect our GPU to grow this year. We ought to be capturing share, and we're going to go capture share. And so there it is, we have plenty of high gross margin growth opportunities, and we have plenty of high topline growth opportunities.

Q - Arnab Chanda

Thank you.

A - Jen-Hsun Huang

Thank you.

Operator

Our next question comes from Nasar Iqbal with Salman Partners.

Q - Naser Iqbal

Hi guys, congratulations on a very excellent quarter. Just a first quick clarification, when you mentioned that the NREs and royalties were roughly 20 million, was the similar amount for Q3 roughly about 10 million?

A - Marvin Burkett

That's correct.

Q - Naser Iqbal

Then just going forward, in terms of your competitors coming out with their next generation product, and you know gen's timeframe when typically it is in the March/June timeframe. Has that changed your launch schedule? And particularly at the $200 price point, when are we going to see a Series 7 GPU on the desktop side?

A - Jen-Hsun Huang

I guess our schedules are really dictated by I guess our schedules. We try to introduce new products to the marketplace as often as we can, and try to keep the competitive pressure on. And try to keep raising the bar and passing more value on to our customers. So those are things that we just generally try to do. Our competition has a new GPU, but we know what it is and we're not intimidated by it. We have some pretty exciting stuff that we're rolling out. I don't know how many seasons now that we've had the performance leadership position. It has been quite a few as you can probably remember now. And our expectation is that we will have a performance leadership position this season. We're going to get it rolled out as quickly as we can. And my expectation is that it is going to be a pretty successful and pretty exciting new product line. In terms of the segment that you're talking about, we are driving new architecture, GeForce 7, from top to bottom. And we have announced our top to bottom lineup for mobile. The adoption of it is very exciting. And we know that we have a performance advantage. We know we have a performance per watt advantage. We also know that we have an SLI advantage. And so we're going to be aggressive to roll those things out from like top to bottom as fast as we can.

Q - Naser Iqbal

If I could just ask one top picture view. Just for the gaming market, are you seeing any kind of an advantage or any kind of a benefit from dual-core shift? It doesn't appear to be any, but do you think that could change going forward?

A - Jen-Hsun Huang

The gamers are, the priority is kind of like this. Number one, the performance has to be very good, the absolute performance. Whether it is one core or two, the absolute performance has to be good. As you know, CPU performance is a combination of the performance of the core, the frequency of it, the architecture of the overall system, the architecture of the core logic. It is a combination of a lot of different things. And so the performance is important. The second thing is price is important. Most gamers are younger, and disposable income is a little bit more challenged. And so pricing is important. The third thing of course is the brand is really important. The gamers know and trust certain brands.

One of the things that we really value is the importance of our brand GeForce and the importance of the SLI brands. SLI, particularly in the gamer marketplace, means that there is a variety of GPUs you can buy, both new as well as old. You can buy old GPUs from your friends. The variety of GPUs, or MCPs core logics with SLI capability, a variety of power supplies that has been certified, memories that have been certified, chassis have been certified. And you can piece them together, because most gamers love to build their own PC. It also suggests that compatibility between all these configurations and applications are what the gamers would expect. It will deliver wonderful scaling capability as well as compatibility. All of these in combination is what the gamer is looking for. Is dual-core, if it satisfies all of those things, is having two cores better than one? I guess so. There is no harm done anyways. Right?

Q - Naser Iqbal

Great. Thanks, and congratulations again.

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, President and Chief Executive Officer

Thank you all for joining us today. We look forward to reporting our progress next quarter.

Operator

Ladies and gentlemen, we do appreciate your joining us today. This does conclude our conference call, and you may now disconnect.

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Source: Nvidia Corporation F4Q06 (Qtr Ending Jan 29, 2006) Earnings Conference Call Transcript (NVDA)
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