NVIDIA Corporation (NVDA) Q2 2008 Earnings Report, Transcript and Summary

Thanks, Frank. Good afternoon and welcome to [Gap in audio] 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 financial measures about net income, diluted net income per share and gross margin in talking about our results. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures 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 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 via the investor relations page of our website at www.nvidia.com. The webcast will be available for replay until the company's conference call to discuss its financial results for its third 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, seasonality, the impact, features, performance and availability of our products and technologies, our strategies, growth and growth drivers, market share and the importance of and uses for GPUs pertain to future events and are subject to a number of significant risks and uncertainties. The company's actual results may differ materially from results discussed in any forward-looking statements. For a complete discussion of factors that could affect the company's future financial results and business, please refer to the company's Form 10-Q for the period ended April 29, 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. Except as required by law, the company assumes no obligation to update any such statements. The content of the webcast contains time-sensitive information that is accurate only as of August 9, 2007. Consistent with the requirements under Regulation FD, we will be 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 would now hand the call over to Jen-Hsun. It’s up 240%:

[Gap in audio] revenue, record net income and record gross margin. For our second quarter, revenue grew 36% from last year to a record $935 million, and non-GAAP net income increased 77% year over year. Non-GAAP gross margin improved to a record 45.6%, an increase of 290 basis points from a year ago. GAAP net income nearly doubled year over year, and GAAP gross margin improved by 280 basis points from a year ago to a record 45.3%. We achieved a record quarter despite Q2 being historically the seasonally slowest quarter of the year. Let me highlight some of our achievements for Q2. The GeForce desktop and notebook product lines each achieved record revenue. The desktop GPU product line grew 37% year over year, and the notebook GPU product line grew 129% from last year. We continued to capture leading share in five categories. Total standalone GPU share grew to 66% from 48% a year ago. Total standalone desktop GPU share grew to 65% from 51% a year ago. Total standalone notebook GPU share grew to 68% from 37% a year ago. Our DirectX 9 generation share was 64% and DirectX 10 generation share was 75%. During the quarter, we launched a new family of GeForce 8M series GPUs in support of the production ramp of nearly every notebook PC OEM in the world including Acer, Apple, ASUS, Dell, HP, Lenovo, Samsung, Sony and Toshiba. The global notebook PC segment continues to grow significantly faster than the overall PC market. We believe Q3 growth will continue its strong momentum. In June, we launched Tesla, our entry into the high-performance computing industry. HPC Wire, the most recognized and accessed news and information site covering the entire ecosystem of high-performance computing, named Tesla as one of the most significant launches in the HPC industry in the first half of 2007. The Tesla family consists of the C870 GPU computing processor, the D870 desk-sized supercomputer and the S870 1U computing server. nForce 65i SLI powers the new maximum PC Dream Machine 2007. This is the third consecutive year nForce has been selected as its motherboard of choice by the number-one magazine for home computing enthusiasts. Maximum PC chose nForce 65i SLI because of its performance, its overclock ability with quad-core CPUs and SLI support. We introduced an entirely new line of notebook workstation GPU's based on G8X architecture, the NVIDIA Quadro FX 1600M, 570M and 360M. Let me now turn the call over to Marv to discuss our financial results in more detail. I will return in a moment to discuss our business and growth drivers for Q3 and beyond.

Thanks, Jen-Hsun. Before I get started, I would like to apologize for the irritating coughing you may hear in the background. That's me. I'm fighting a little case of bronchitis so I apologize for that. Today, we're reporting both GAAP and non-GAAP P&Ls for Q2 fiscal year 2008 and for the first six months of fiscal year 2008. The only difference between GAAP and non-GAAP is equity-based compensation and its tax effect. As mentioned, revenue for the second quarter was $935.3 million, which is up $91 million or 11% from the first quarter and up $248 million or 36% over the prior year. Obviously, strong revenue growth exceeded our guidance. The strength was primarily in the GPU business. While MCP grew $12 million or 8% quarter to quarter, we had expected this in our guidance. The strength in the GPU business included both desktop and notebook. In total, the GPU business grew 20% quarter to quarter. Within the GPU business, notebook grew 50% quarter to quarter, as the Santa Rosa launch was well accepted. Much of the growth in desktop was in mainstream products. Year to year, GPU revenue was up 55% and MCP was up 16%. For the quarter, GAAP gross margin was 45.3%, which is up 30 basis points quarter to quarter. Non-GAAP gross margin was 45.6%, up 20 basis points quarter to quarter. With the very high growth we experienced in mainstream GPUs, we expected margin pressure, but we were able to overcome that with continued execution of the transition to GeForce 8X products and good operational execution. Non-GAAP operating expenses in the quarter were $212.5 million, and within our guidance. The GAAP operating expenses were relatively flat quarter to quarter, as the total equity-based compensation dropped by approximately $8 million from the first quarter. We had expected this roll off due to several contributing factors, one of which is the transition from Black-Scholes to a binomial valuation model that we made several years ago. During the quarter, we continue to hire and added 299 new employees. Two-thirds of the additions were in the R&D area. The tax rate stayed constant at 14%, and this resulted in GAAP earnings of $172.7 million or $0.43 per diluted share. Non-GAAP earnings were $198.1 million or $0.51 per diluted share. On the balance sheet, we ended the quarter with $1.57 billion in cash, even though we repurchased almost $125 million in stock. The operating cash flow was over $300 million for the second quarter in a row. Accounts receivable were $508 million, which generated days sales outstanding of 50 days. The fact that the quarter was more evenly loaded than expected helped with the reduction in days sales outstanding. Inventory was down $56 million to $276 million, and resulted in days sales in inventory of 49 days. In my opinion, this inventory level is too low. Capital expenditures in the quarter were $30 million and depreciation was $32 million. Both for the quarter and year to date, capital expenditures and depreciation almost offset each other. There was not much else of significance on the balance sheet. I will also like to point out that today we announced a 3-for-2 stock split in the form of a stock dividend. On the outlook, for the quarter, we're starting from a higher base, given our Q2 performance. Still, we expect revenue growth in most areas, particularly notebook and workstations. The result is we believe revenue will grow 5% to 7%. We believe there may be some product limitations, as manufacturing capacity is somewhat limited and our inventories are low. For gross margins, we will work hard to continue to improve gross margins, and with the continued transition to GeForce 8X products and the expected increase in workstation revenue, we believe some improvement is possible. For operating expenses, with our continued hiring and salary increases, we expect OpEx to also grow in the 5% to 7% range. We believe the tax rate will hold at 14%. With that, I will turn the call back over to Jen-Hsun.

Thanks, Marv. Although Q2 is typically the weakest seasonal quarter for the industry, we experienced growth in desktop and notebook GPU and MCP. We are now heading into what are historically the two strongest quarters of the year, driven by back-to-school and holiday cycles. As we head into the seasonally strong second half, we will enjoy several dynamics that continue to enhance the importance of the GPU. First, exciting DX 10 games are launching shortly. Crysis from EA is particularly exciting and will help drive GPU upgrades. Second, HD and Blu-ray disk drives continue to come down in price, and title availability is now plenty. Third, discrete GPU technology has advanced substantially relative to integrated graphics, creating a large technology gap between our discrete GPUs and high-volume integrated graphics chips at a time when the graphics demand from modern operating systems like Vista and OS 10 continue to increase. As a result, we expect to see the overall GPU segment to grow. Lastly, we have a strong position in both desktop as well as notebook, and believe we can continue to grow share. At our analyst day in June, we announced several brand new growth areas and exciting new strategies. I would like to take this opportunity to discuss them again. First is the highly anticipated launch of our first motherboard GPU for Intel processors. Directly attached to the motherboard, our new products will bring the NVIDIA brand of GPUs to a new price point for Intel processor customers. This is a first for NVIDIA and an exciting new growth opportunity. Second, we announced an exciting new technology called Hybrid SLI. Future motherboard GPUs and discrete GPUs will collaborate to enhance capabilities, performance as well as reducing power. We call it Hybrid because this technology combines a powerful as well as an energy-efficient engine; and SLI because this is our multi-GPU technology. When GeForce N-cards are connected to GeForce motherboards, Hybrid SLI kicks in, combining their processing power to deliver an additive experience. The technology is application aware. Depending on the processing demands of each application, the discrete GPU may be completely shut down to save power. For the most powerful systems, where the combined power of dual GeForce 8800 GTX SLI can reach 400 watts, both GPUs can be powered down when the user is just doing e-mail, surfing the Web or watching a Blu-ray movie, keeping the system completely quiet and consuming the least possible energy. But when a game or other demanding GPU application is launched, the dual 8800 GTXs are powered up to deliver an immersive experience. For performance systems, Hybrid SLI will give users the benefit of energy efficiency, as well as uncompromising performance. For mainstream systems, Hybrid SLI will enhance the performance and features by combining the benefits of the motherboard and the add-in card GPU. Hybrid SLI will be available starting with our GeForce 8 series motherboard GPUs this fall. Third, we announced Tesla, a new line of high-performance computing processors based on our revolutionary G8X GPU architecture. Tesla leverages the massive computational resources inherent in our GPUs, which can be over 100 times greater than the fastest microprocessor alone. This breakthrough innovation centers around technologies that will enable programmers to access this massive computational resource. The Tesla architecture and supporting C language compiler and development environment is called CUDA. The adoption of Tesla and CUDA has far exceeded my expectations. We have known for some time that the world has a supercomputing crisis. The enthusiasm around Tesla is a reflection of this vacuum. Thousands of programmers worldwide are already creating parallel GPU programs using CUDA and Tesla. The Tesla family includes a GPU computing board, a Quadro Plex style desk-sized system and the world's first 1U GPU computing server. I believe Tesla and CUDA will represent one of the most significant technology discontinuities in the supercomputing industry since Cray introduced vector processing. We anticipate Tesla will enable fundamental new discoveries in a broad range of industries. Customers in the field of computational chemistry, neurological science, medicine and seismic processing have seen computation times reduced by as much as 5,000% using Tesla. Tesla is yet another example of the power of the GPU and its increasing impact on the computer and consumer electronics industry. NVIDIA now has three major brands, GeForce for enjoyment, Quadro for creation and now Tesla for discovery. The diversity of our brands reflect the versatility and the importance of the GPU. Let us now take your questions.

Your first question comes from Arnab Chanda – Lehman Brothers. Arnab Chanda – Lehman Brothers : Obviously the performance in the graphics business has been superlative. Do you think any of this is other than, obviously, share gain? Are you seeing a Vista effect here? If so, what do you think? Is this the beginning of it, or how long do you think that continues?

Well, this can't be all share gain. It's very clear that the size of the GPU market is larger than several quarters ago. We can only attribute that to a variety of things which we think either falls into the category of Vista, as we know that Vista is becoming better and better, and consumer PC adoption is certainly very high with Vista. We know that the experience of Vista is significantly better with the GPU in your system. We also believe that DX 10 applications and the new generation of video games are rather taxing, and it's because of the technology gap between the GPU and integrated graphics, the separation has become so large that it makes it clear that a GPU is better. Then the third reason is Blu-ray and high-definition video. I think all of these things are really playing together and helping the GPU market substantially. Arnab Chanda – Lehman Brothers : We think maybe we understand what's going on in the PC business and what kind of growth rate that would create. However, you have obviously had much better growth rates than that in the last three years, above 20%. I knew you don't want to give guidance. But for next year, what type of growth in non-PC segments, whether it's Tesla, whether it's your cell phone business, perhaps consumer or other things you haven't really talked about, how much can the add to your core business, your PC business growth?

The growth of our GPU business, whether it's discrete GPUs or motherboard GPUs, is a function of the growth rate of the PC. It's related to the share gains that we have, but it's also related to how much of the PC marketplace appreciates a GPU. NVIDIA's market share is about 30% in the overall GPU market and so there's still 60% of the PCs that can benefit from better GPUs. I think that, over time, as more and more of the computing experience is related to computer graphics and what you see on your display, and as the size of displays become larger and as the content that we see become richer, it's just evident that more and more people appreciate the GPU. So that's one factor. With respect to going forward, how we think about the market, we think about the new markets that we enter as we grow. In the second half of this year, I just mentioned that we're going to bring our GeForce brand for the first time to motherboards for Intel processors. Hard to say exactly how big that marketplace is, but I think the overall market for core logic is somewhere between $6 billion to $8 billion, of which we have a relatively small part of that. So that's a growth opportunity for us. We also look at the TAM of the application processors that we're building. We are entering into a marketplace that is in the process of transitioning from being a cell phone, a telephone, to being a mobile computer. We are targeting this discontinuity and building, effectively, a modern multimedia computer on a single chip. We call it an application processor. I think this is going to be a phenomenal opportunity for us, and one that we can add a lot of value to the industry, bringing computing expertise to the cell phone marketplace. That marketplace, it is hard to say exactly how big that's going to be, but it's many billion dollars large, as you know. Tesla is probably the hardest of all to guess, and the reason for that is because it's the product that is the most disruptive, in terms of what it can do to the marketplace. It accelerates and certainly reduces the processing time for supercomputing applications, high-performance applications, whether it's in a server configuration or a desk side configuration. So from workstations to servers, I think we have a real significant play there. So it's hard to guess exactly what it is, but I can't imagine it being too small. So the way that we think about our growth is partly related to share, partly related to the inherent growth of the PC marketplace, but mostly it's related to new markets. Arnab Chanda – Lehman Brothers : Just one last question. Maybe Marv is getting a little bored there. Do you think that 20% last-three-year growth rate should be able to be a sustainable growth rate longer term, or how do you feel about that?

You want me to give you a long-range forecast. I'm not going to do that. We have some significant growth opportunities. We've executed very well. I hope and believe that we will continue to execute very well. So the real issue then is how quickly do some of these markets develop, and what is our success rate? But beyond that, I won't comment.

Your next question comes from Doug Freedman - ATR. Doug Freedman - ATR : At the analyst day, you spoke about new products in the notebook arena. I know that G80 is really just ramping in production now. But given what we've seen in the marketplace, can you talk about what your timing is for the next-generation GPU out of NVIDIA?

We don't announce products until they are actually on the shelf. But I think the NVIDIA rhythm is sustainable, and it's a rhythm that we're committed to. So the rhythm that you've seen from us over the past several years is something that we are still very committed to. Doug Freedman - ATR : Can you talk a little bit more about the front end or back end constraints that you're seeing? You mentioned that there may be some supply constraints in the October quarter. Can you talk a little bit about whether they are front or back end, or give us some clarity on what's happening there?

All of the above. Obviously, certainly in the fab areas, some of the fabs that we use are at capacity now. We would like more wafers, let's put it that way, in some of the fabs that we use. So there is a limitation there. There has been some constraints in both assembly and test as well. I think we can manage our way around most of the constraints in the back end more easily than we can around the constraints in the front end, but there are constraints on both sides. Doug Freedman - ATR : I noticed in the July quarter, the tax rate came in at less than we were modeling here. Is there an update for the tax rate going forward? Is there something that happened there?

The tax rate was 14% in Q2, consistent with Q1. We're anticipating a 14% tax rate in Q3. So tax rate is flat, 14%. Doug Freedman - ATR : The quarter-to-quarter growth in both professional and consumer?

Consumer was relatively flat quarter to quarter. Professional was down about 10%. Before somebody jumps on that one, we didn't have to push it. Revenue was good. Doug Freedman - ATR : Clearly. Congratulations on the excellent execution.

Your next question comes from David Wu – Global Crown Capital. David Wu – Global Crown Capital: Marv, I'm going to take advantage of your vocal chords. Can you talk a little bit about the strength of your Q2 results? Because the AMD unit volumes snapped back very sharply and I thought it would show up in much higher chipset volume. Instead, it showed up in your mainstream desktop volume. Can you explain the difference between the 31% drop off in your first fiscal quarter and a more moderate rebound in the second quarter on the chipset business?

Same answer that we had in the professional workstation business. We didn't have to push it. Revenue was good, and we had to satisfy the GPU customers first. So we didn't have to push it at all. David Wu – Global Crown Capital: Second question is, your guidance for Q3 appears to be below normal seasonality. I know there are issues with Taiwan foundries and some back end guys. But if you didn't have the constraint on production, would you be having less than seasonal increase in Q3?

Who knows? If we had plenty of inventory and we had no manufacturing constraints, I don't believe there's any reason we shouldn't grow at industry rates in the quarter. But who knows? We depleted inventories quite dramatically in Q2, so we're left with less of a reserve in inventory than we would like, reserve meaning inventories to be shipped. So that, combined with the manufacturing constraints, just leaves us with some caution.

Your next question comes from Nick Aberle – Caris. Nick Aberle – Caris : Nice quarter. The question had to do with just PC markets. Obviously, Q2 probably better than seasonal , looks like the back half is going to be at least seasonal. How do you guys go about monitoring inventory out at the OEMs and in the channel, just for fear of double ordering or perhaps overheating here exiting 2007?

Over the years, we have developed more rigorous channel monitoring capabilities. We monitor sell-in, we monitor sell-out at each juncture in the channel, and we monitor our customers' inventory the best we can. So based on what we're seeing right now, inventory looks pretty lean in the marketplace. We expect it to remain lean in the marketplace for some time, and so we'll just monitor as we go. Nick Aberle – Caris : With respect to the Intel IGP product, should we be thinking of that as just beginning to ramp in Q3 and then more of a sequential contribution in Q4?

I think that's a fair estimate. Nick Aberle – Caris : Very last question, just because of the constraints at foundry, are you guys going about qualifying any new foundry partners?

No, we have no plans. We have very close working relationships with our foundries and they are the best foundries in the world, and we do as rigorous of a job planning with them as just about anybody on the planet, and they have come through for us time and time again. My estimation is that they will come through for us again and everything is going to work out just fine. Nick Aberle – Caris : What would the target days of inventory be? Where do you feel comfortable, Marv?

I have always had a target of around 70 days, and I think we have been around 70 days for the most part. We have been a little bit above it in some cases, but to be down at 49 days means we have pretty lean inventory.

Your next question comes from Daniel Ernst - Hudson Square Research. Daniel Ernst - Hudson Square Research: Jen-Hsun, you mentioned that the graphics capabilities are becoming more and more appreciated by a wider audience, and I think that is a theme that a lot of us share. Can you talk about what progress you have made there, anecdotally and say in the last six months, what percentage of NVIDIA GPU buyers either embedded or after-market, would be gamers versus non-gamers? Where was that six months, a year ago? Where does it go a year from now?

The question you asked is a good one. It's hard to quantify, but let me give you some directional evidence. If you were to go back five years, the only thing that really took advantage of the GPU was videogames for consumer applications. Today, you have Google Earth, you have photo editing tools that take advantage of GPUs, you have video editing tools that take advantage of GPUs. You have the operating system that takes advantage of the GPU and all of the animation and all the special effects, and all those beautiful things that you see on your display are all rendered by the GPU. You have video processing that's done by the GPU now, because high-definition video is so taxing. To think about running it on the CPU is just not something that you would even dream about. So there are so many things now that requires a GPU. There's Second Life that requires a GPU. That's a social networking application. So the number of applications out there that reaches different areas is just really, really growing quickly. It's at a time when the GPU is getting harder and harder to build. You notice that the number of second-tier chipset companies in the world who are building DX 10 or even DX 9-level GPUs have really fallen off a cliff. When we say that it costs us $400 million to build a new generation of GPU, we actually mean that. NVIDIA's R&D and most of the company today is in R&D is running close to $1 billion a year run rate now. So I think it's safe to say that the GPU is very, very hard to build. It's one of the most complex processors ever, anywhere in the computing industry, and that explains its processing capabilities. The number of applications that take advantage of it over time is increasing. So I hope that anecdotal gives you a bit of a directional, both in number of applications and the fact that chipsets, second-tier chipset companies are finding it very, very hard to keep up with the technology creates ever more opportunities for us. Daniel Ernst - Hudson Square Research: Yes, agreed. It was a good anecdotal directional. We will have to drill down later on it. But my follow-up question would be on pricing. Can you talk about recent pricing trends, and then given commentary on yours and the industry's supply constraints, is there any pricing leverage you have here in the back half?

The GPU is probably one of the only semiconductor devices in the industries that has kept a relatively flat to slightly up ASPs over the last several years. My sense is that it reflects the importance of the GPU, the increasing number of applications that take advantage of the GPU. With respect to pricing, we're expecting to work through our tightness of supply. We are not lines down, we are not gapped out, we are not in a bad situation like that. We are just tight, and we know that the entire industry is tight, from PCBs to DRAMs to others. So my sense is that we're going to be just fine. In this environment, it is not our style and it is not our practice to raise prices. We don't do that to our customers, and we're just going to work through it.

Your next question comes from Tayyib Shah - Longbow Research. Tayyib Shah - Longbow Research: Congratulations on the quarter. You talked about how mainstream desktop GPU is driving the market-share gains, which is understandable, given the timing of your product refresh versus your competitors'. Can you talk about the impact you are seeing from AMD's product launch in the OEM channel, especially in the enterprise segment? Is that where you see them concentrating their effort? How does that affect your ability to grow your desktop market share in the near term?

Our mainstream DX 10 GPUs entered the market a solid quarter or two quarters ahead, and the momentum is clearly very strong. The market share data reflects that. We don't win everything in the marketplace, and we still see a lot of competition from our competitors. We have to fight hard for every socket and every design win that we have. So my sense is that we're going to continue to see a lot of competition, and I don't think anything is going to change, despite the environment. So we are prepared for the competition, we will deal with it the best we can and my hope is that we are in a position, because of the superiority of our products and our market position that we will be able to capture even more share, but we will see how it turns out. Tayyib Shah - Longbow Research: The follow-up question is for Marv. Can you give us an idea of what you are leaving on the table because of capacity constraints? Can you talk about the chances that eventually you may end up getting all of the supply that you want? Or the fact that what you cannot ship in the third quarter, you still capture that in the early fourth due to the holiday season window?

We are going to work very hard to eliminate any supply constraints in Q3, so we will have to see how it goes, but we think we can work our way through it. We will just have to see. The question of something left on the table in Q3 rolling into Q4, who knows. We will have to see what it is, what the problem is, and what the competition is. There are too many unknowns.

We are not gapped out, it is just tight and we know it is tight because we know our foundries are near capacity, and so we have to be much more focused, we have to be much more precise in our forecasting and planning with our partners, but all of that is happening and so we are optimistic that we are going to serve all of our customers needs and we are just communicating the industry is tight, but we are telling you something you already know.

Your next question comes from Gurinder Kalra - Bear Stearns. Gurinder Kalra - Bear Stearns : Marv, how much of the margin potential, the margin appreciation you might have expected with the G89 is already in the numbers, and how much more could it impact your margins going forward?

It is a combination of factors. A substantial portion of our current GPU revenue is in the G8x family, but we continue to make progress in reducing costs, even within that family. So there is still a ways to go. We can still do better. Are we more than 50% into the G8x family? Yes. Are we 100%? No. So we have a ways to go, but even if it were 100% we can make further cost reductions.

Just to add some flavor to that, where we have the opportunity to improve gross margins going forward remains in the same well where we found the last, nearly 18% of gross margin improvement; that is operational excellence. We still have plenty of ideas on ways that we can improve the operational efficiency of our company and eliminating waste and improving quality. There are so many things we can still do, and that is where we will focus. I think G7x was a wonderful architecture for us, and G8x is an even better architecture for us, but nonetheless I think that the well for gross margin improvements is right over operational efficiency. Gurinder Kalra - Bear Stearns : Where do you think margins are for your Tesla products as compared to your corporate average, or what you get in your professional solutions business?

Much higher. Gurinder Kalra - Bear Stearns : Any way to quantify that?

I think in the end it is going to reflect the speed by which we deliver for applications. That still remains to be seen. We are working on that now. It ranges anywhere from a lot to a ton, so we are trying to figure all of that stuff out. It is also a brand new product in a brand new market. This is something that the world has never seen before, so it is hard to precisely set the right price. But we are working with our partners and all of the customers around the world now to make sure we do something that enables rapid adoption and allows us to substantially increase our level of investment for it.

Your next question comes from Simona Jankowski - Goldman Sachs. Simona Jankowski - Goldman Sachs: Thank you. A question for Marv first. What was your pricing change in the GPU business in the quarter sequentially?

Relatively flat. Simona Jankowski - Goldman Sachs: Just on pricing or generally, we had noticed in the retail channel some price cuts in the very high end and also in some of the lower end segments. Curious if those kind of pricing actions were done by people in the channel or in retail, regardless of what you guys did as far as pricing goes? If you can give us a little bit more color on that, especially given it comes on the heels of six to eight months of pretty stable pricing.

The 8800 demand is really, really solid and it continues to be very good going into the second half of the year. We haven’t done any substantial pricing actions that I know of, but we have a lot of partners in the world and they have their own strategies and we don’t mandate our strategies on them. So maybe what you are seeing is something that is reflected from that. Simona Jankowski - Goldman Sachs: Lastly for Marv, given that a lot of the strength in the business is coming from the GPU side, is that in any way affecting the timing of when you think you would reach the 47% gross margin target?

No, I don’t think so. I want to emphasize again, don’t put too much into the fact that the MCC and the workstation group didn’t grow as much as you might have thought. We just didn’t have to push it, and so I still think that in a mix that is inherent in the business that we are going to achieve that gross margin. We will see. Simona Jankowski - Goldman Sachs: So you have some of that flexibility, I guess, to the upside in the workstation business in the next couple of quarters?

I would think so.

Sir, we have no further questions at this time. I will turn the call back to you.

NVIDIA delivered an outstanding quarter with record revenue, record gross margin and record net income. These results reflect the growing importance of the GPU, as well as great execution across the company. Our ongoing strategy to extend the reach of the GPU is paying off. There is a fast-growing universe of applications that rely on the processing capability of the GPU, from 3D design and styling tools, video and photo editing software, 3D maps and video games, to be using our interfaces with the Mac and Vista. The GPU can surely enhance the computing experience for everyone, from artists to engineers to scientists to gamers and everyday PC users. As the leading and only dedicated GPU company in the world, our opportunity has never been more exciting as the number of applications and digital devices that benefit from the GPU continues to grow. Thank you for joining us today. We look forward to reporting on our results for Q3. It’s up 240%: