Michael Hara
We are very excited about Q1. Fermi is in production, and we plan to launch many new GPU products in the coming months, but we will save the details for later.
David White
The core GPU business had another strong quarter. Within that, our desktop GPU business was up 19%, notebook was up 27%, and workstation graphics was up 25% in the quarter. Demand was strong, but we were again constrained by supply across the board.
Gross margin improved sequentially as a result of several factors: cost reductions due to yield improvements and reduced waste, favorable mix from our professional business, better mix within the PC GPU business, and increased revenues. Inventories at the end of the quarter were up 19% to $330.7 million. Inventory days on hand were 60 at the end of the quarter. Inventory in the channel remains low at around five weeks.
Alex Gauna – JMP Securities
Thanks very much. I was wondering if you could clarify a little bit on your supply constraints facing for the first quarter. I am assuming that means that you are going to see seasonality in legacy products and you can't get enough of the new to offset it or maybe wrap some color around that, please?
Jen-Hsun Huang
Seasonality question, you know, we – the seasonality in the PC industry, Q1 is generally a down quarter, and if you take a look at – if you look at what most companies have guided, they have guided down sequentially. We are guiding flat, and if we had a sufficient supply to support the ramps of the products that we are going into production with right now, we would guide further up. You know, our company is currently in a growth phase. There are new products in many new markets, as well as going into a new product generation. So there is a lot different reasons why we are expecting to grow and our suppliers are working as hard as they can for us and their yields are improving. However, we remain constrained.
Suji DeSilva – Kaufman Brothers
Thanks. Can you guys help us understand what the impact was on the quarter from the constraints and perhaps on the guidance as well just to give a sense? I just wanted to understand where the 40 nm constraints come off at this point.
Jen-Hsun Huang
Well, it is hard to figure out exactly how much was constraint volume, you know, it is probably on the order of a couple of hundred million dollars. But, the big picture is that 40 nm supply is constrained for the world. You know the market snapped back a lot more quickly than people expected in the beginning of the year and it surely appears that Windows 7 is doing very well and I think that surely appears on top of that that GPU adoption is increasing. You know, people are – we have always believed that as you know, that we think that more and more people are enjoying their PC experience with GPUs and more and more PC manufacturers recognize the benefits of adding GPUs to their system. And so we are seeing a pretty strong demand across the board, whether it is desktop PCs or notebooks PCs, and we are seeing an increased demand in our workstation business, and on top of that, we are in the process of ramping a new architecture called Fermi that everybody is really excited about. And you know, Fermi is going to sweep across GeForce and our Quadro business and across our Tesla business. And so, we just have a lot of growth drivers going right now, and we could surely use some more supply.
Suji DeSilva – Kaufman Brothers
Great. And then one other question on MCP, I know you are going to fold that into GPU going forward, but can you help us understand what your [inaudible] of that product by itself or should we not, should we think of it as more being surely folded into the GPU in terms of forward revenues?
Jen-Hsun Huang
There is a – let me make a comment and then I will have David make some comments. The first thing is that our MCP business was down quarter to quarter and we are expecting it to grow quarter to quarter for Q1 and we are in the process of ramping what has been internally code-named MCP-89, a 40 nm chipset, and we are really excited about that. And so next year, the chipset business is going to do nicely for us.
Dan Morris – Oppenheimer & Co.
Okay, great. And as a follow-up, could you just talk about the pricing environment in GPU and you know, what happens in the second half, assuming that the 40 nm capacity issues remain?
Jen-Hsun Huang
Well, you are asking a question for a state of supply that we are all hoping for, which is when they abate. My sense is that supply will remain constrained for at least the first half of the year, and as we ramp further new products into the marketplace, you know, I surely hope that the supply situation will be there to sort it. In terms of pricing, you know, we increasingly are shifting our focus towards products and markets where we have a great differentiation. And if you look at the products that we offer today in mass market, GeForce for example, increasingly, CUDA brings unique capabilities to it. We are the only supplier of 3-D stereo in the PC market and 3-D Vision only works with GeForce and so we are increasingly developing capabilities that are very differentiated on top of our processor brands. And so hopefully, those differentiations will be valued in the marketplace and accordingly reward us with a price medium over time.
Jen-Hsun Huang
If you look at the moving parts, it kind of boils down to the – Fermi is going to be a growth driver for us. We have, you know, we are in mass production now of Fermi and Fermi not only ships into the GeForce market and brings incredible new capabilities to that market, Fermi also grows into two other markets. One is Tesla and OEMs are lined up and designing servers and high performance supercomputers dedicated to Tesla, supercomputers are being built around the world waiting for the new Tesla. And so, this Fermi architecture grows into new markets, it also creates new types of products for our Quadro family and so those are new growth drivers. So the Fermi architecture is really important to us.
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And then lastly, Tegra is a brand-new product line for us. And so those are all growth drivers and then I think I said last time and I think this time I would reinforce that statement that the MCP product line will do well this year, although it is our last chipset for Intel processors. You know, we are expecting MCP-89 to be far, far superior to what you can see get on an Avondale or any integrated CPU from Intel today and so I think we are going to see it do quite nicely.
Jen-Hsun Huang
And in terms of Q2, the benefit of Q2 is it is going to benefit from quite a few growth drivers that are firing at the same time. We have got new GeForce products, new Quadro products, new Tesla products and Tegra products and 3-D Vision products all cranking. So this is – we are just beginning now of a new product cycle and this new product cycle is driven by a revolutionary architecture called Fermi. And so we are really excited about that and can’t wait to get to it.
Doug Freedman – Broadpoint AmTech
And then my last one is really, the Fermi architecture, how quickly do you guys think you are going to be able to take that architecture to the full product line? What is sort of the – what expectation should we have as far as getting those into the mainstream and if my understanding is correct, you are going to launch that at the high end.
Jen-Hsun Huang
You know, all of that just depends on 40 nm supply and we are trying to finesse it the best we possibly can. You know, for the entry-level products, the truth is that the new architectures, the very, very entry-level GPUs are probably not extremely well appreciated anyhow. And so, you know, the reasons why people buy the new architectures tend to be early adopters and they tend to the game enthusiasts or workstation designers or creative artists or – there are very specific reasons why it really enhances their experience. Our current generation GPUs are fabulous and all the things that mainstream consumers would use their computer for. You know, all of the high-definition videos, even plays 3-D Blu-Ray. We are the only GPU that processes 3-D Blu-Ray completely in the GPU. All of them have CUDA and they are all compatible with the Fermi architecture, and now, all of them have Optimus. Right? So I think the mainstream GPUs are really fabulous and has been enhanced recently with some really great features and so my sense is that they are going to continue to do quite nicely in the marketplace. And then we will just transition as fast as we can.
Nicholas Aberle – Caris & Company
Good afternoon. My question is, so given the scenario where 40 nm supply is constrained throughout all of 2010; my guess is you guys have to make some pretty tough decisions on how to allocate the supply that you do have. Given you guys are transitioning GPU, desktop, and notebook over to 40 nm, Tegra 2 is 40 nm, Tesla 2 is 40 nm; how do you guys make those decisions as we roll through the year?
Jen-Hsun Huang
Well, I said that supply was going to be constrained; I didn't say supply was going to be constant. We are expecting a big year, but frankly, if we had more supply, we would have a bigger year. And so, we just have to keep working at it. You know, [inaudible] is doing a fabulous job improving their yields and if you just look at from August when we first started ramping to now, the yield improvements have been done and the execution that their teams have gone through is just fabulous. This is a really extraordinary company and what they have done with 40 nm yields over the last several months is really fabulous. And so, if the trend continues, things are going to look a lot better and so we are hoping for it to continue, we are working hard together to make it improve and so I am hoping that supply will abate, I think that was the work I used earlier, sooner than later, because we can certainly use the wafers to drive our growth.
Jen-Hsun Huang
Let me answer it in pieces. First of all, I don't think this is our record. And secondarily, it is not at the internal targets. You know, our business is increasingly moving from a great shift business to much more of a software rich business. If you look at our Quadro business, it is nearly all software. You know, the enormous R&D that we invest in Quadro and in the technology we create for Quadro is all software, because for anyone else, it is still built on NVIDIA GPUs. So you see the same thing with GeForce now. The work that we did in 3-D Vision, tons of software. The work that we did with 3-D Blu-Ray, tons of software. You know, so the work that we do with CUDA, the work we do with Physx, tons of software. So I think increasingly, that is going to become the nature of our business.
Tesla is just all software, right, software tools and software compilers, libraries and I mean these are the profilers and debuggers. I mean, it has become increasingly a software-oriented type business and that is where our differentiation really is and that is where NVIDIA has historically been really, really excellent. And so in order for us to differentiate the basic commodity platform and turn it into an extraordinary experience for gamers or scientists or digital creators or for clouds or for netbooks or for tablets, it is increasingly a software business. And so that is where a lot of our differentiation becomes and I think if you think about our business from that perspective, our gross margin of the 44 points or the 44.7% that we had this quarter should be far from our expectations.
Arnab Chanda – Roth Capital Partners
Okay. And then one question about your – products, so if you look at Tegra, you have talked a lot about the tablet potential there. Where do you see taking that business? You think that will be confined to tablets or are you expecting to take them to smartphones and then, with Fermi, is there a possibility with ASP growth that you could offset normal seasonality when it starts to launch significantly in the second quarter?
Jen-Hsun Huang
I think Fermi will vary substantially offset any seasonality; that is my expectation. Because Q2 is going to be the quarter when Fermi is hitting the pull stride, and it won’t just be one Fermi product, there will be a couple of Fermi products to span many different price ranges, but also the Fermi products will span GeForce and Quadro and Tesla. And so we are going to be ramping now on Fermi architecture products through Q2 and we are building a lot of it. So I am really excited about the upcoming launch of Fermi and I think it will more than offset the seasonality that we usually see in Q2.
