NVIDIA Corporation (NVDA) Q1 2012 Earnings Report, Transcript and Summary

Good afternoon. My name is Doris, and I will be your conference operator today. At this time, I would like to welcome everyone to the NVIDIA Earnings Conference Call. [Operator Instructions] I'll now turn the call over to Mr. Michael Hara, Senior Vice President of Investor Relations. Sir, you may begin your conference.

Thank you, Doris. And good afternoon, and welcome to NVIDIA's Conference Call for the First Quarter of Fiscal 2012. With me on the call today from NVIDIA are Jen-Hsun Huang, President and Chief Executive Officer; and Karen Burns, Interim Chief Financial Officer. After our prepared remarks, we will open the call to a question-and-answer session. Please limit yourself to one initial question with one follow-up. Before we begin, I would like to remind you that today's call is being webcast live on NVIDIA's investor website and is also being recorded. A replay of the conference call will be available via telephone until May 19, 2011, and the webcast will be available for replay until our conference call to discuss our financial results for our second quarter fiscal 2012. The content of today's conference call is NVIDIA's property and cannot be reproduced or transcribed without our prior written consent. During the course of this call, we may make forward-looking statements based on current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties, and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release, our Form 10-K for the fiscal period ended January 30, 2011, and the reports we may file from time to time on Form 8-K filed with the Securities and Exchange Commission. All of our statements are made as of today, May 12, 2011, based on information available to us as of today, and except as required by law, we assume no obligation to update any such statements. Unless otherwise noted, all references to market research and market share numbers throughout the call come from Mercury Research or Jon Peddie Research. With that, let's begin.…

Thanks, Mike. Revenue for the first quarter was $962 million, up 8.5% sequentially. GAAP gross margin of 50.4% was a record for the third consecutive quarter. Gross margin exceeded our expectations we had at the beginning of the quarter, primarily as a result of richer product mix within our GPU systems. GAAP OpEx was $329.6 million, in line with our estimates. Combined, these results generated a GAAP net income of $135.2 million or $0.22 per diluted share. Revenue by business segment was as follows. Our GPU business was up 3.8%. Our MCP revenue was down significantly as we entered the final phase of that business, but this was more than offset by a strong growth in notebook [indiscernible]. Demand for notebook GPUs increased significantly, as OEMs ramped production of Sandy Bridge notebooks. Our Professional business was relatively flat, gradually increased sequentially. However, our Tesla business was down relative to the prior quarter, as the fourth quarter benefited from a particular large transaction. And our Consumer business achieved record revenue, driven by our Tegra customers bringing their first Android products to the market. Turning to the balance sheet. Our inventory levels continued to be at target levels. Inventory at the end of the quarter was $381 million. Our view of the channel shows inventory within our target. Cash, cash equivalents and marketable securities at the end of the quarter were $2.73 billion, up $236 million over the prior quarter. Excluding the Icera acquisition, our outlook for the second quarter of fiscal 2012 is as follows: Revenue is expected to be up 4% to 6% from the first quarter; GAAP gross margin is expected to be between 50.5% and 51.5%. We believe this is the right level for gross margins for now. This level allows us to maintain a healthy balance between growth and profitability. GAAP operating expenses are expected to be between $332 million and $336 million. GAAP tax rate is expected to be 14% to 16%. That concludes our prepared remarks. We will now take questions.

[Operator Instructions] Your first question is from the line of Alex Gauna.[JMP Securities]

I was wondering, there's an investor concern out there that some of the first-generation tablets are perhaps mispositioned or mispriced. Can you maybe describe how your Tegra business is being driven, smart phone versus tablet? And as we look through the year, what percentage we should expect to come from nexgen platforms versus current generation?

The large part of our Tegra business comes from phones. The first generation of tablets initially came out from our carriers and with 3G, and I think that is recognized that the vast majority of tablet users are actually buying it from retail and Wi-Fi only. And without 3G, obviously, the tablets would be much more affordable. So I think that, that's one of the factors that affected the initial reviews of the early waves of tablets, but those concerns have been largely addressed at this point. And now, you can buy tablets from retail stores all over America. And the new wave of tablets are now ramping up that are even more affordable and available in retail channels with Wi-Fi configurations all over the world. And you're also starting to see a lot of differentiated platforms from devices that are likely ASUSTeK transformer, where it's a tablet in one configuration, it has a detachable keyboard in another configuration. And so those kind of devices are getting a lot of interest and available at computer channels all over the world. We're going to expect another wave of tablets that are coming out to the marketplace now. Ones that are even thinner and even lighter than the best offerings from any place, any supplier in the world and those devices are just in the process of ramping. Then there's the really exciting new build of Honeycomb called Honeycomb 3.1 that Google just demonstrated the other day at Google I/O. We are basically switching that up now, it's available, it will be available to end-users as over-the-air download in the very near future. And so you'll get music services, cloud music services, cloud video services, cloud book services, and there will be cloud magazine services and all kinds of really interesting offerings to be used on these tablets in the very near future. And so I think that the -- another wave of these tablets are now starting to show up around the world, but the first-generation of tablets with the over-the-air Honeycomb 3.1 that's coming out eminently are really, really fabulous and they're doing -- they're selling really well.

I don't want to get too far ahead as my follow-up chance, and I was wondering, in addition to 3.1 at Google I/O, Ice Cream Sandwich was center stage. And I was wondering how that does or does not intersect with your quad core Kal-El? And the complexities of what Google is trying to do and what that means for your quad core technology?

We're really excited about the work that they're doing on Ice Cream. And I can't comment too much more other than that, but we're working very closely with their teams on the Ice Cream Sandwich. And as all of these products -- they will come to the market when they're great, and I'm certainly expecting them to be great on this year.

Your next question is from the line of Romit Shah.[Nomura Securities Co.]

With respect to guidance for the second quarter, can you give us a sense, at least, directionally, how you see the 3 businesses trending? And also, what sort of contribution are we going to see from licensing in the July quarter?

Well, let me answer the first part. The GPU business, about flattish. The Professional business, about flattish. And the Consumer business, uppish. And so and as a result of that, we're able to overcome the Q2, which tends to be seasonally down. And if you look at other people's guidances in the computer industry, Q2 was seasonally down. And so you're starting to see an expansion in our core businesses, core GPU businesses, and you're also seeing growth in our Consumer business, or Consumer Mobile business, and that's making up for the decline, the expected decline of our MCP business that we talked about now for quite some time. If you looked at our MCP business, year-over-year, it declined about $150 million, and we made up for that through the growth of our core GPU business and Tegra business this quarter. We expect another decline in our MCP business next quarter, and we're expecting to make up a lot of that again with the rest of our business. The second part of the question was?

Just on licensing, how much licensing revenue are you guys going to see this quarter?

Incrementally, about $40 million more. So we have...

Just a follow-up, I know you guys haven't given official guidance for Tegra for this year, but I believe publicly, you've endorsed $400 million to $600 million as a reasonable range. Is that still on the table?

Well, we've provided guidance for the next quarter and it looks like it's going to be pretty good. And so we're looking forward to the new products coming to market with Tegra later half the year. And then also, we have the introduction of our next-generation quad core processor called Project Kal-El and so that should also contribute later in the year. So I think we're -- I would characterize the Tegra business as lifted off. And so we'll see how it goes, and will report on its progress as we go.

Your next question is from the line of James Schneider. [Goldman Sachs]

First of all, on the Icera acquisition, could you give us a little bit of color around the accretion, expectations you provided in the earlier press release? What revenue assumption you're assuming to make that accretive by the end of next year? And then can you talk about at what point you'll -- do you plan on introducing an integrated Tegra-plus modem in one chip or if you plan on doing that at all?

First, the answer to your first question is we expect the acquisition to be slightly dilutive for the remaining part of the year. With respect to revenue contributions, we obviously haven't completed the acquisition yet. And so we should probably comment on that when we're done with that. With respect to the integration, we have no current plans to integrate their modem. We think that the ability to offer both processors and either the 2 most important processors for mobile computing gives us the opportunity to leverage the momentum of Tegra and also the quite broad penetration they've already achieved with carriers all over the world to increase the momentum of both processors. We also see that in the vast majority of the projects that we're working on, whether it's tablets or super phones, the ability to keep the 2 processors separate allows us to mix and match the best processors for the devices that we're in. And so if you look at most of the super phones in the world today and most of the tablets in the world today, the application processor and the baseband processors are in fact, separate. And so the ability -- and then finally, the ability to integrate the 2, we surely have that capability. And we'll look at the market and look at when the technology makes sense to integrate to offer either the smallest footprint or the lowest cost. And we'll do so when the timing is right, and we surely have the capability to that now.

Great. Thanks, that's helpful. And then as a follow-up, with the incremental $40 million of licensing in Q2, I think that contributes about 180 basis points to gross margins, if I'm doing my math correctly, but you're guiding up your gross margins a little bit less than that. Can you talk about what's going on in terms of the business mix or pricing going to Q2 that would make that happen?

Well, that's our guidance for now. And Q2, obviously, there's still a lot of the quarter to do yet. And so we'll come back and report on the quarter when it's over. But that's our guidance for now.

Hey, Jim, let me add on that. To Jen-Hsun's question also, Q1, we had a nice lift from the launch of the dual GPU GTX 590. So that, we think, is what really will benefit to Q1.

Your next question is from the line of Mike McConnell.[Pacific Crest Securities]

Yes, just on that note, thinking about the gross margin guide, should we also think, Mike, with respect to the Notebook business, since that's going to be the gross driver within GPU and now, the GTX 590 was a driver in Q1, we should probably expect then a pretty significant drop in the GPU gross margins for fiscal Q2, is that what's kind of implied behind that?

No, actually, the notebook margins are actually pretty decent. Certainly, the costs are coming down and the margins are going -- are tracking back up. So as the Notebook business grows, it actually doesn't have as much of an effect as you think.

Okay, So it's mostly then just the GTX 590, like you talked about. So it's just a more of a normalization of the mix as you move into FQ2?

That's right.

And then Jen-Hsun, just kind of a longer-term one, when we think about Project Denver and a lot of people think your company is going be -- the company is going to be moving ARM potentially into traditional PCs. And we talked about, talked to the incumbents that's in the traditional PC market, they make an argument that it would be very difficult for NVIDIA in ARM because this move in traditional PCs because of the standardization, the lack of standardization, the fragmented nature of the market and the ARM ecosystem. Could you talk about those hurdles, and looking at Project Denver, how those will be overcome?

First of all, Project Denver is 2 generations away for our SoCs, our Tegra SoCs. And so there's still plenty of, a lot of time between now and the time that Project Denver will enter the market. But obviously, it has to be competitive. And the things that we do that we're really good have to matter -- and so computer graphics have to matter, parallel computing has to matter, GPU computing has to matter. And we have to build a product that really makes a difference in the marketplace. There are still a lot of ideas that we haven't introduced in Project Denver. It's probably a little bit too early. But suffice to say, that we will build a MID 2 product. You've known our company a long time, and when we introduce a product, there's usually something pretty special about it. And we expect Project Denver to carry on that tradition of delivering something innovative and special. With respect to standardization, standardization comes from compatibility with software. And the thing to keep in mind today is that the vast majority of the software developers around the world for consumer computing are increasingly evolving on ARM processors. And if you take a look at the number of devices that are being shipped today, there are far, far, far more ARM computers being shipped than there are x86 computers being shipped. And if that attracts more software developers, then there's more rich software being developed for ARM that over time, you would think that ARM becomes the most valuable platform for enjoying the software. And so that's how standardization happens, and you know how fast mobile computing and the Internet in these application stores is causing new platforms to make a difference. I mean, it was only a few years ago that these ARM-based, either iPhones or Android phones, came to the marketplace and just look at how many applications have been downloaded and how many gigabytes have been downloaded of applications. And this is just the first few years. The next few years is about to happen to us, and it's growing at exponential rates. And so I think that's what standardization is all about, and I think it's a pretty much foregone conclusion that ARM is just going to be probably the most important standard for application, for consumers, anyhow.

Your next question is from the line of Arnab Chanda.[Roth Capital Partners]

Just a couple of questions. First of all, historically, you've been basically on the digital side. Icera, has won the physical on their side and they never succeed in voice. Can you talk why you think you'll able to take that or are you going to have to start a design from scratch to migrate with that?

Arnab, as soon as we figure out what you said, I'm going to answer it. There was a -- you broke up.

Okay, sorry. I was just saying, in the Icera acquisition, historically, you've been more on the digital side. They are more of a baseband physical supply, never been in the voice market, which is a lot harder than data. What are you going to do to take them in there? Do you have to design a new chip or can you talk a little bit about that?

Yes, that's a good question. I mean, that's what's really special about the Icera architecture. This is one of the worlds, if not, the world's first unified software defined radio-based baseband. I mean, in a way, they've designed baseband processors, this multi-protocol baseband processors the same way we've designed our GPUs that allows for multiple effect shading. And as a result of that, through software upgrades, they're able to provide voice capabilities. They have the full TPPCom stacked for voice -- I mean, this isn't being done from scratch. The Icera team, based in France, is one of the reputed teams in voice, and this is -- these guys have done it for years and years. And they're starting from the baseband -- of the software stack of TPPCom which is the starting point for a lot of basebands today for voice. And so -- and also, they're making, they've made incredible progress already. We haven't introduced the product yet but we expect that the path to getting there is pretty well known at this point. There's still a lot of development to be done, Arnab, and surely this is -- there's a lot of execution to do. But it's not easy, but that's kind of the exciting stuff. Icera has invested nearly $300 million between in all of their, in all their different realms of financing and have created a pretty terrific starting point for us. And so between these 2 processors now, the Tegra processor and the Icera baseband and their RF, we have 2 of the most important pieces for mobile computing and we'll start it from there.

Just a follow-up on the Tegra business. You are obviously the lead partner for Honeycomb. It sounds like for Ice Cream, maybe Ti is. Now is that going to put you at a disadvantage or maybe you're ahead in quad core and that helps you? Can you talk a little bit about what happens in the next generation?

Well, I'm not exactly sure what Ti's talking about, but they're obviously making a lot of it for nothing. But we're working very closely with Google on Ice Cream Sandwich, and it's a very important new generation of operating system based on starting from the Honeycomb base and I'm expecting it to be really terrific. And so we're working very closely with the Google team, and Tegra will be surely be wonderful for Ice Cream when it comes.

And then just last question on ARM in Windows. When -- should we expect that to happen reasonably soon? And what time should we be looking for that and is that even likely?

Arnab, for Windows, I can't report on the Windows plan. That'll have to come from Microsoft. But we're working very closely with their teams. Their -- the progress is fabulous. And you know that we have one of the best Windows software development teams in the world anywhere. And this team is not only experienced, they have a starting point of quite a bit of assets that has been created over the years. And it's also very, very large in scale. This is a software team that has the ability to support a few hundred notebook designs per cycle in OEMs all over the world. And it's the -- aside from us and AMD, that such a team does not exist. And so we are beneficial and able to bring this team to Windows on ARM. And this is one of our ways to, one of our differentiators really, for the PC OEMs and mobile companies who would like to get into the space. And so I'm expecting Windows 8 to be fabulous, and we're working very closely with Microsoft on it.

Thanks, Jen-Hsun, seems like the future you've been waiting for is getting closer and closer. Your next question is coming from the line of Vivek Arya. [BofA Merrill Lynch]

Jen-Hsun, I'm curious, what's driving the flattish trends in the Professional Solutions businesses? Is it just the timing of projects? Is it something else? And what would it take to sort of reinvigorate growth in that segment?

Frankly, I wish our Professional business was growing faster, too. And we're spending a lot of time on that particular topic ourselves. There are several reasons for that. One, the workstation industry needs to be reinvigorated with new capabilities, and that's one of the reasons why we built Fermi. Fermi, the Fermi GPU brings a level of capability and functionality to the workstation industry it never had before. And we're in the process of rolling out those capabilities into the marketplace. We call it internally the Fermi transition. By making computer graphics, not just about OpenGL, but about CUDA and computational capabilities, we could bring things like -- capabilities like photorealistic rendering, the ability to do simulation and visualization at the same time, the ability to do image processing at a much, much higher rate. And so a large group of industries from design to styling, to broadcast, to seismic analysis, whether you're in oil and gas, to imaging for medical, there's all kinds of applications where Fermi is really transformative. And so we're in the process of introducing these capabilities into the Professional markets, and that is what we call the Fermi transition. Until we do that, I think that the worst station marketplace is growing basically at the rate of GEPs. And so we need to reinvigorate that growth to new capability. So that's one. The second is the Tesla business needs to continue to get application adoption and to continue to get those applications accelerated through CUDA. And we're making excellent progress there. And the OEMs are now engaging customers all over the world with what we call proof of concepts. And there's a large number of projects in the pipeline. And so HP, Dell, IBM, SuperMicro and many others are working with large companies to get these projects certified, qualified and then ramped up. And so I think part of that has simply -- has to do with the time that it takes a large enterprise to understand the capabilities of the supercomputing workstations and supercomputers servers and then also to get it certified and rolled out into their companies. But I certainly expect that to happen.

Is that where you think something that's standing between the gross margin outlook you have in the near term versus getting to sort of the mid-50s gross margin that I think has been alluded to before from an overall company perspective?

There's no question that unless the Professional business grows, our gross margin will not grow with it. And so that's -- the NVIDIA Professional Solutions group is completely aware of this, and everybody is working hard to get growth happening. This is something that the growth is not, nothing, no competition is in the path of our growth. This is innovation that will be necessary to grow this business for us and grow this business for all of the OEMs around the world. The Workstation business is frankly waiting for us to bring the innovations that have been designed into Fermi, in CAT tools from [indiscernible] and Autodesk, medical imaging companies all over the world. And they're waiting for us to roll this out into the world. And when that -- when we do that, growth will happen for us and will happen for the OEMs. And the same thing for Tesla. When the proof-of-concept is complete and all of these projects in the pipeline are rolled out into production, it will happen, it will generate growth for us and it will generate growth for the OEMs. And so both us and all of our OEM partners and all of our software partners are all intensely focused on bringing this level of innovation to the marketplace so we can all grow.

And one last question, if I may. Do you think Tri-gate Technology is a viable technology for mobile? And could it even become table stakes next year? And if yes, how do you think you or your foundry partners are positioned to deliver it?

Well, the FinFET, which is the industry technical term for what is now a marketing term called the 3D Gate, has been on the horizon now for many semiconductor company for some time. And this has been one of the next steps in the advancement of semiconductors. There were talks of [indiscernible] technology; Is now, I guess, yesterday in the metal gate and all of those things are needed to advance semiconductor technology and many others. And so this is just one of the next-generation technologies and semiconductor companies around the world, from TSMC, to GLOBALFOUNDRIES to others, Samsung to others, obviously, has to continue to innovate in order to make semiconductor technology continue to advance, and I fully expect it to. Now in the terms of -- in case of -- your question actually has a larger question, which is how important is semiconductor technology to Mobile Advance? And the answer is a great deal. I mean, without semiconductor technology, how could we have any advance? Whether it's desktop computers or workstations or servers or cell phones, the answer is, of course, very important. But for mobile processors, by far the greatest contributor to low power and efficient performance is architecture. It is the encore. It is the SoC. It is everything that is not the CPU core as well as the CPU core and the process technology and the software technology and the operating system and everything above that. All of it has to come together to deliver on an extraordinary experience, not just the transistor. It's important, but it's just one part of the overall equation.

Your next question is from the line of Daniel Berenbaum. [Auriga USA]

I was hoping you can calibrate me a little bit on the graphic segment compared to where it was. If I look back at where your GPU plus chipset, back when you used to break it out, that peaked at around $900 million on a quarterly basis. And right now, that segment, if I back out the royalties, seems to be at about $615 million or so. Do you ever expect to get back to that $900 million or -- I mean, as chipset goes away, do you expect that segment to get back to that $700 million stand-alone GPU number? Or are we sort of asymptotically approaching something below that?

Well, maybe the easier question to answer is do we expect growth from our GPU business? And the answer is, first of all, yes. And the reason why it's yes is, as you guys may remember, we were not as fast to the DX11 generation as our competition. We lost that step there. And we paid for it early on a couple of years ago, if you recall. And so it took us a while to recover from that position with Fermi. And the first implementation of Fermi, as you recall, wasn't as graceful as we all wanted it to be. And so we had a lot of catching up to do, and we reevaluated the way that we design our chips. We reorganized our engineering, so that we could be more efficient. And we came back really, really strong with the second generation of Fermi and started to gain share again. In the notebook space, the DX11 notebook space, we've been gaining share from our low a couple of quarters ago. And we should improve this quarter, we can improve next quarter and improve even more in the quarter after that. And so I think that our GPU business has every opportunity for growth, and we're expecting it to grow and we have to in the digital computer.

Okay. And that kind of, I mean, that kind of addresses the share or point. And clearly, you guys have executed well on technology to regain market share there, but maybe comment on the market side. And I guess do you think just realistically that the market ever could be big enough with your share gains to get you back to above that $700 million level on a quarterly basis?

On an overall level of GPUs, I think the answer is it's likely that the overall GPU market is larger than it ever was. The GeForce consumer side has attached -- the GPU attach, has stabilized and the fastest growing part of GPU attach is China. It also happens to be the fastest growing segment of PCs. And so that's a positive factor. In the Workstation space, we want to reinvent and redefine the workstation and bring digital computing to a new level there with CUDA and computational computer graphics. And of course, in the servers, where we invented a technology called CUDA and used in servers for accelerating applications, numerically intensive applications. And so the server market becomes a large business opportunity for us. And we have several ideas yet that we're going to introduce to the world to increase the adoption of GPUs. And so I think that if you look at the overall GPU market, there's no question it has an opportunity to grow yet.

Okay. Great. Thanks. And if I could just follow-up on the mechanical question. Would you guys care to hazard a guess on tax rate for the remainder of the year.

For the remainder of the year, we've guided at 15%.

So that'll be the full year, 15%?

That's right.

Your next question is from the line of Uche Orji. [UBS]

First question here. This is Steve, LSQ. First question is on the Quadro business. In the past, you would look to the creative professional as one of the growth drivers. Can you give us a sense of what's happening with GPUs in the Adobe Creative Suite world? And given that you showed some pretty compelling demos in the past, why do you think the uptake is not driving that type of growth that you had talked about in the past?

Well, we think there's about 1 million or so digital video professionals that -- or creative professionals, that use video and probably another 3 million or so that are prosumers. And those 3 million prosumers, probably a whole lot of them already use GeForce. And we just have to keep evangelizing so that they understand how to get the best possible performance from it. But the million, some of them use Final Cut Pro, and that hasn't been optimized for CUDA. And a lot of them use Adobe. And some of them use Sony. And some of them use ABIT. And so GPU acceleration is being incorporated into almost all of them in the near future. And so as more and more of the different suite become GPU accelerated, my expectation, or our expectation, is that the consumers will -- the creative professionals, will incorporate. And so I think it's just a matter of time, and that I just gave you the scope of the overall market opportunity. But over time, I expect those 4 million video users, video editing users, professionals, are all going to be GPU accelerators. And that's one of the reasons why we expect Quadro and GeForce to continue to grow because it's just such a compelling benefit to use GPU acceleration and video editing.

Just following along on that in PSP, with Tesla, I know there is a prior question, but if you think about the lumpiness of the business that you referred to in the commentary suggest that we're still in the early adopter phase, what are some of the milestones you're looking towards to crossing the chasm here into the commercial space such that we get a less lumpy type of business?

Yes that's in -- and that's the perfect observation. We are still in the still early adoption phase with a foundation of industry by industry by industry by industry that is being built up. There's an overlay, if you will, of baseline business in Tesla that is just strong. It's not huge yet, but it's building. We feel it every single month, there's sell-through every single month, it's in every single geography and there's pick up every single month, just steady pick up every single month. Overlay it with some very large deals every now and then, as data centers gets built out for a high-performance computer. And today, we just really can't build out a supercomputer without GPU acceleration. Because otherwise, the computational capability is just so low relative to anything else that's been built. It's really not possible to have something like that built. And so I think that the supercomputing centers, the store, if you will, the basic baseline run rate of the business. But that's still says that the baseline run rate business from each industry still needs to be developed and we still need to continue to support applications, which we're actively doing and the industry is working with us very, very hard to make sure that their applications are accelerated by our GPUs because the benefits are just so overwhelming. And then when you see 5x to 10x acceleration of an application by porting a small part of the code, you port 10% of the code and you get to 5x, 10x acceleration, that's just really, really too compelling to ignore, especially for people who use their workstations to advance research or for advanced time to market as a positive only, and so one industry after another, we're porting those applications. And then there's the idea of -- and more and more people are seeing their workstations becoming really not just for visualization, but for simulation as well. And I think that that's going to be a large opportunity for us. There's several million workstations sold per year. When those workstations become supercomputing workstations and are used for simulation as well as visualization, I think we're going to see a really significant market opportunity for us, and that's what we're driving towards.

Last quick question here. Just now that you're going to have a baseband shortly, do you see the need to acquire connectivity or NFC or GPS that some of your competitors have?

Our focus is to make sure that we have the most important pieces of the mobile platform. The application processor and the baseband or the wireless communications processor are the 2, by far, the most important processors on the mobile platform. And the reason for that is because there's so much software to do. The rest of the connectivity devices are important, surely, no doubt, but it's available from a lot of different players. They are basically standards. The software stack is pre-standardized. And there's a great deal of interoperability. And so I think these 2 processors are, by far, the most important processors, and that's our focus.

Your next question is from the line of Glen Yeung. [Citigroup]

Somewhere in your discussion, you mentioned China and the attached rates there. There seems to be some controversy over what we're seeing in emerging markets in general and what the overall PC environment looks like. I wonder if you can just shed any light you may have on the overall PC environment.

I don't know that we have any new insight over what's happening in the emerging markets. China is very different than other emerging markets, though. The dynamics of China versus those of India or Brazil are very, very different. China has -- is the home of some of the -- of most gamers in the world, and it is the fastest growing game market. And the game market is growing incredibly fast with virtual goods on top of that. And it's just a very, very fast evolving marketplace for gamers. And they're not just playing leftover games from the West, but they're really revolutionizing new business models. And when games are free and they're as enjoyable as they are, obviously, it's going to attract a lot of new players.

And then thinking about the relationship that you have with Sandy Bridge, which in the April quarter was quite good. As Intel migrates that down the stacks of its processors, how do you think your attach rates will trend? Or another way of saying that is, did you happen to see a very strong attached rate out of the gate because there was a very high end oriented ship out of the gate?

I think that the important thing is to realize that there's more than just technology at play and -- our CPU technology at play. I mean, there's a segment in the marketplace that really prefers to have the best graphics performance and the best graphics experience. And just as there are baseline cars and premium cars, there are going to be baseline PCs and premium PCs. And in the premium PCs, the best way to create a premium PC and to deliver a premium experience that is a meaningful step up from the baseline PC is to add a GPU. Higher resolution displays and a state-of-the-art GPU with our Optimus technology is really, really the best way to create a premium experience and create a premium PC. And so I think that, that method of creating great products is not going to go away. And I think just as there are some consumers who would like to have a premium platform, given a choice, there are OEMs that would like to create premium platforms to serve that marketplace. And I think the GPU is unknown all over the world to be, by far, the best way to do that.

Can I actually just follow-up on that comment? Because I agree with you. I think we can see -- and high-end notebooks today are really premium paid for having a GPU, a discrete GPU and not in having better screen technology and not. But are you seeing a scenario now where people are to sort of maintain the wallet for the PC build are actually downscaling the CPU in favor of an architecture that favors the GPU and screen technology a bit more?

We see a lot of different architectures around the world. There are people who use Core i7s with the GeForce. There are people who use Core i5s with the GeForce, there are people who use the Pentium Dual-Core with the GeForce. And so what you just described is a characteristic of the different architectures all over the world. And that's how the PC industry differentiates, by creating the best product for certain niches of the marketplace, and there's a lot of different issues, a lot of different geographies with very, very different tastes. And so I think what you described there is exactly what happens.

Your next question is from the line of Craig Berger. [FBR Capital Markets] Craig Berger - FBR Capital Markets & Co.: On the Icera acquisition, I mean, getting in the baseband and addressing all of the global standards and countries is a pretty large undertaking. So how do you think that changes your R&D investment profile over the coming years? How many heads might you have to scale into this effort?

That's a good question. That's exactly the reason why we decided not to start an effort from scratch. Icera is -- has carrier relationships all over the world. As you know, they already sold millions of modems and growing very, very fast. And so this is a team that has relationships with Nokia and GTE and Samsung. And they have carrier relationships with AT&T and Vodafone and Orange, and so the list is pretty broad. And so that's exactly the reason why we decided to acquire Icera, a company that has invested some nearly $300 million of investment into it. Craig Berger - FBR Capital Markets & Co.: Okay. So we'll have to wait on the more specifics. Can you talk about in....

Craig, I also told you, with respect to additional investment, we expect the Icera acquisition to be slightly or very slightly diluted, which tells you how we think about the growth of the business and the additional investment that we have to make through it. Craig Berger - FBR Capital Markets & Co.: Okay. Thanks for that. Can you give us some color on the state of Tegra design wins lately and what that tells you about that business opportunity, say, 12 months from now?

Well, we're still engaged in design wins on both Tegra 2 and Tegra or Project Kal-El. We have quite a large number of Project Kal-El design wins for tablets and phones. And simultaneously, we're doing refreshes of Tegra 2 super phones, while we're also developing new, more affordable mainstream phones. And so those, all of those things are happening at the same time. We're also getting designed into more and more cars and which is an important growth opportunity starting with next year and looking at a larger and larger number of smart TV opportunities, which requires the software stack, the rich software stack, that we've developed for Tegra. So design wins are going all the time. Craig Berger - FBR Capital Markets & Co.: Last question, are you guys able to provide cash from operations? Usually, you guys have the cash flow in the report. And also, do you consider stock comp expense to be part of your core operations or not?

Well, Karen, let's -- for the cash, cash from operations. Surely, we think about stock-based compensation or the use of RSUs and stock options very, very carefully. And the reason for that is because of dilution factors and because it does have value to the employees. And then on -- and Karen, on the cash flow? I recall that was something like $180 million or so, plus or minus, something like that.

Well, for the year, it was $235 million. From operation, I have to get that from the cash flow statement. Craig Berger - FBR Capital Markets & Co.: Thanks, guys.

Yes. We'll get that, yes.

And our last question comes from the line of Chris Caso. [Susquehanna Financial Group]

I just wonder if you could clarify back on some of the opening comments with the gross margin, and I think the comment was you think that was the right range for now. Could you give a little more color on that? And then perhaps, as we go through the year, just remind us where the mix levers are with respect to those gross margins.

I think Karen wants to answer a question real quick, and then I'll get to that one.

Yes. Cash flow from operations is $199 million.

And then with respect to gross margins, at this point, we feel pretty comfortable with the gross margins where it is as it's always a balance between that, more profitability and more growth. And we think that we are in positions in the marketplace that allows us to grow quite rapidly. And so we want to get there as quickly as we can. And so this is -- there's always a fine balance, but this is a good balance for now. Some of the areas that could accelerate our gross margins further are Professional Solutions businesses, both Quadro and Tesla. If we can get those 2 businesses growing as we expect to, when it does at a much more significant rate, it will contribute to gross margin improvement in a much more significant way. And so those are 2 of the businesses that we're counting on for growth and we're working incredibly hard to get the new technologies that we've created into the marketplace and so that the market can embrace it and drive our next generation of growth for PSG. Okay?

All right. And just as a follow-up, and it sounded like with regard to the Tegra business, the majority of that revenue, I guess, for the first half of the year is coming from the cell phone space. How do you see that, well, if you could confirm that? And just as you go through the year, what you see as the mix between tablets and smart phones and tablets become a substantial part of the mix as you go in the second half.

We expect phones and tablets to both contribute to Tegra's growth. And so the exact percentages are hard to say. And they will change from quarter-to-quarter, depending on whether it's a phone cycle or a computing cycle. And so I think that, it's suffice to say, that tablets is one of the fastest growing segments of the computer industry. And whether a tablet is a notebook or a notebook is a detachable tablet or transformable tablet, it's really increasingly hard to say. And so I think the growth opportunities for tablets, obviously, is still quite significant ahead of it, and this is an area where we can make a large contribution. On the other hand, the smart phone marketplace is really just begun. There's only -- it only represents the top tier of the overall phone marketplace today. And yet, we all know that someday, every single phone will be a smart phone. Instead of just a couple of hundred million smart phones a year, it would rather represent the full billion units of phones around the world that are sold every year. Every phone in the world in the near future will have the ability to access the Internet and enjoy content and otherwise. So that's an enormous growth opportunity for us and one of the reasons why Icera's so important to us. Okay?

And that is all the time we have for questions. Now Mr. Hara, do you have any final thoughts?

Well, thanks, everyone, for joining us. We look forward to talking to you next quarter about our Q2 results. Thank you.

This does conclude today's conference call. You may now disconnect.