NVIDIA - Earnings Call - Q4 2012

Transcript

Speaker 3

Good afternoon. My name is Daniela, and I will be your conference moderator today. At this time, I'd like to welcome everyone to the NVIDIA Financial Results Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to your host, Rob Csongor, Vice President of Investor Relations. Sir, you may begin.

Speaker 1

Thank you. Good afternoon and welcome to NVIDIA's conference call on annual and fourth quarter of fiscal 2012 results. With me on the call today from NVIDIA are Jensen Huang, President and Chief Executive Officer, and Karen Burns, Interim Chief Financial Officer. After our prepared remarks, we will open up the call to a question and answer session. Please limit yourself to one initial question with one follow-up. Before we begin, I'd like to remind you that today's call is being webcast live on NVIDIA's Investor Relations website and is also being recorded. A replay of the conference call will be available via telephone until February 22, 2012, and the webcast will be available for replay until our conference call to discuss our financial results for our first quarter of fiscal 2013.

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-Q for the quarterly period ended October 30, 2011, and the reports we may file from time to time on Form 8-K filed with the U.S. Securities and Exchange Commission. All our statements are made as of today, February 15, 2012, 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. During this call, we will discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our financial release, which is posted on our website, or in the case of our fiscal year 2013 outlook, the reconciliation is posted on our Investor Relations website. With that, let's begin. After five consecutive quarters of sequential revenue growth, fourth quarter revenue was negatively impacted by the global disk drive shortage caused by the flooding in Thailand, which affected the mainstream GPU segment more than anticipated. Shipments by some PC OEMs were reduced, and higher disk drive prices constrained the ability of some PC OEMs to include a GPU in their systems.

Additionally, the Tegra 2 mobile business declined more rapidly than expected, ahead of devices based on the Tegra 3 processor ramping into production in the first quarter of calendar year 2012. However, despite tough economic conditions and the exiting of our chipset business, NVIDIA recorded very good results for our full fiscal year 2012. First, our overall business grew 33%, excluding the chipset business we've been exiting. Discrete GPUs, including GeForce, Quadro, and Tesla, grew sharply over the year. GPU attach rates remained strong at 53% of consumer PCs and 36% overall, according to Mercury Research data. A resurgent PC gaming market saw games like Battlefield 3 and Modern Warfare 3 record over $1 billion in sales in their first week on the shelves.

At the time of the launch of Battlefield 3, over 80% of gamers were below the recommended hardware specification to play the game, driving a significant increase in gamer GPU revenues over the year. Our professional solutions business had a record revenue year, driven by large adoption of the Fermi generation of Quadro workstation products, as well as growth in emerging design economies such as India and China. Our Tesla products were selected to power the world's fastest supercomputers, including Oak Ridge National Laboratory's upcoming Titan supercomputer. In addition, we made major strides in speeding up GPU computing application support and code porting through our OpenACC and Directives initiatives. In one of our most important achievements for the year, we established a position in the mobile market. Tegra products captured share in Tier 1 tablets and smartphones.

Over the course of the year, Tegra products shipped in 14 phones, 34 tablets, and in 18 of the top 20 carriers. We designed and shipped three generations of Android devices. With Tegra 2, we were the first to ship dual-core mobile processors, and now with Tegra 3, we are the first to ship quad-core processors. The Tegra mobile processor has grown into a multi-hundred million dollar business. Looking ahead, while we anticipate continued negative effects from the hard drive shortage, we believe gaming demand will continue to be robust, driven by the combination of our next-generation Kepler architecture and new hit games such as Mass Effect 3 and Diablo 3, both highly anticipated PC games coming in early calendar year 2012.

We believe attach rates will continue to be stable and that we are well-positioned to grow notebook share with significant new notebook wins in the upcoming Ivy Bridge design cycle. We are excited about a number of recent announcements we made in the professional space, which we believe will transform the workstation. First, yesterday, we announced that NVIDIA has joined forces with HP to introduce the world's first all-in-one workstation, the Quadro-based HP Z1 workstation. The Z1 features a 27-inch display that snaps open like the hood of a car, so users can easily swap out parts and make upgrades without any tools required. This is the first in an entirely new category of professional workstation that we believe will tap market segments where space is a premium and users are unwilling to compromise performance. Second, we announced Maximus, a breakthrough for the workstation industry.

Maximus enables for the first time a single workstation to simultaneously handle real-time visualization and compute-intensive simulation, functions which previously required separate steps or separate systems. Design and creative professionals have longed for a machine that could perform these functions simultaneously. Maximus includes a combination of Quadro and Tesla, unifying software technology and a rigorous certification process for professional applications. We believe Maximus will redefine the workflow in several segments and that workstations will increasingly ship with multiple GPUs. Meanwhile, Tesla continued to make headlines in computational science. In addition to a number of new supercomputer deployment announcements, we announced breakthroughs in research. Two of the most important supercomputers in the world were recently announced in Oak Ridge National Laboratory's Titan and the NCSA's Blue Waters, both Tesla-based.

Chinese researchers announced they had achieved a major breakthrough in the race to battle influenza by using NVIDIA Tesla GPUs to create the world's first computer simulation of the whole H1N1 influenza virus at the atomic level. With Tegra 3, we believe our mobile business is poised for renewed growth. In addition to the launch of the world's first quad-core tablet, the ASUS Transformer Prime, we announced tablets based on Tegra 3 from a number of key OEMs, including Lenovo, ZTE, Fujitsu, and Acer. We also announced together with ASUS the world's first quad-core tablet priced at $249, the ASUS 7-inch Memo ME370T. Next up are Tegra 3 phones. We're looking forward to announcing some of the first ones at Mobile World Congress.

With innovating, exciting new tablets at the high end, quad-core tablets at lower price points for consumers, the world's first quad-core smartphones coming soon, and Windows 8 devices later in the year, we remain confident that Tegra 3 will drive a new phase of growth for our mobile business. With that, let me hand the call over to Karen.

Speaker 2

Thanks, Rob. For the fiscal year 2012, revenue was $4 billion, up 12.8% from the prior year. GAAP net income grew 129.5%, resulting in earnings of $0.94 per diluted share, an increase of 118.6% over the prior fiscal year of $0.43. Non-GAAP net income grew 54.2%, resulting in earnings of $1.19 per diluted share, an increase of 46.9% over the prior fiscal year of $0.81. For the fourth quarter, revenue was $953.2 million, down 10.6% from the prior quarter. As Rob discussed, the hard disk drive shortage had more impact on our mainstream GPU segments than originally anticipated, and our Tegra 2 products declined more rapidly than expected. GAAP gross margin for the quarter was 51.4%, 0.8% lower than the prior quarter and our original expectations due to an additional charge in the quarter to settle a patent dispute with Rambus.

Non-GAAP gross margin, which excluded this charge, was 52.5%, consistent with the record gross margins we achieved in Q3. These results contributed to a GAAP net income of $116 million for the quarter, or $0.19 per diluted share, and non-GAAP net income was $158.1 million, or $0.26 per diluted share. Revenue results by business segment were as follows. Our GPU business was down 3.6% quarter on quarter due to the impact of the disk drive shortage on our mainstream GPU desktop and notebook businesses. Our professional business was down 3.6% from the record level achieved in the third quarter. Our consumer business was down 42.5% sequentially. As mentioned previously, this is primarily related to the sharp decline in our Tegra 2 products ahead of the ramp of Tegra 3, as well as a seasonal decline in our game console revenues.

For GAAP, our outlook for the first quarter is as follows: revenue at $900 to $930 million, gross margin of 49.2% plus or minus 1%, OPEX at $383 million, and a tax. Approximately 20%. For non-GAAP, we expect the following differences from our GAAP outlook: gross margin of 49.5% plus or minus 1% and OPEX at $340 million. Depreciation and amortization are expected in the range of $52 million to $56 million, and capital expenditures in the range of $35 million to $45 million. Diluted shares are expected to be 622.5 million. As for the FY13 outlook, our view of the market has changed, and the outlook we gave in Q3 should no longer be relied upon. We are updating our FY13 outlook as follows. We expect the overall PC market to experience continued headwind from the disk drive shortage. We expect our GPU business to gain share.

Our professional solutions segment is expected to have another record year. Maximus enables us to sell more than one GPU into a workstation, and new supercomputer centers around the world are anticipating the shipment of Kepler. Tegra this year was $360 million, and we expect it to grow at least 50%. We expect gross margins to exit FY 2013 at around 52%. We expect our OPEX investment in FY 2013 to be approximately $1.56 billion on a GAAP basis and $1.4 billion for non-GAAP. That concludes our prepared remarks. We will now take questions.

Speaker 3

At this time, I would like to remind everyone, in order to ask a question, please press star one on your telephone keypad. Again, that is star one to ask a question. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Joanne Feeney.

Speaker 0

Hi, folks. Can you hear me okay?

Speaker 1

Yeah, we can hear you.

Speaker 0

Terrific. Thanks a lot for taking the call. I'm just thinking you could give us a little bit more clarity on the outlook, in particular, which segments do you see driving the reduction quarter over quarter? Why are you expecting the decline in the gross margins? Is it purely volume, or is it mixed, or some of both?

Speaker 1

The top line decline for Q1 is expected to be due to the hard disk drive shortage continuing, as well as a shortage of 28nm wafers. We're ramping our Kepler generation very hard, and we could use more wafers. The gross margin decline is contributed almost entirely to the yields of 28nm being lower than expected. That is, I guess, unsurprising at this point. Because we use wafer-based pricing now, when the yield is lower, our cost is higher. We've transitioned to a wafer-based pricing for some time. Our expectation, of course, is that the yields will improve as they have in the previous generation nodes. As the yields improve, our output would increase, and our costs will decline. That's why we expect to exit the year at 52% or about.

Speaker 3

The next question comes from the line of Atif Malik with Citigroup. Mr. Malik, your line is open.

Speaker 1

Okay, let's go on to the next one.

Speaker 3

Okay. Next question comes from the line of Chris Katzfeld with Susquehanna Financial.

Speaker 0

Hi. Thank you. With regard to the Tegra business, and you gave some outlook for fiscal 2013 in general, could you give us some indication as to how that looks as you go through the year? When do the Tegra 3 wins come up? Perhaps talk about the impact of Windows on ARM. You talked about that having some potential impact later this year, if you could expand on that.

Speaker 1

We're expecting Tegra 3, as you know, Tegra 3 tablets are starting to ramp in the marketplace. This quarter, we are expecting to announce and ship Tegra 3-based superphones. Rumors of them are starting to, and excitement about it is possibly starting to leak. At Mobile World Congress is when we expect to announce these devices. We'll expect to announce and ship them this quarter. We're expecting Q1 to be a sharp uptick in Tegra sales and shipments. Our expectation is Windows 8 is later in the year. Microsoft has given their estimates about Windows 8. Our expectation is that there will be meaningful contributions from Windows 8 later in the year, starting probably in Q3.

Speaker 0

Great. Just as a follow-up with respect to kind of what you're seeing in the PC market and specifically the impact of hard drives, maybe you could give a little more color on that. Obviously, we've heard from some of your competitors on that. It sounds like the hard drive availability is getting somewhat better, depending on who you talk to. How do you see that playing out over the next two quarters or so as it impacts your business?

Speaker 1

Almost everybody has guided down. I think PC-centric semiconductor companies have guided down on average, I think about 8% Q1. I think everybody is expecting hard drive headwind to continue through Q1 and potentially through Q2. As far as what we see, Q4 started out with less shortage than people had predicted. The reason for that was because there was a lot of channel inventory, and people consumed the channel inventory. As the channel inventory dried up, prices of disk drives in the channel started to spike. As you know, channel business is a large part of the discrete GPU business. China is particularly a large region for us, where a large amount of the PCs are built in channel. They're built what we call DIY, so design it yourself or build it yourself or design it for you.

You spec the parts, and you go to an IT mall, and they build a PC right there for you. In those parts of the regions and countries where people build PCs like that, the spot price of disk drives has increased quite a bit. Our sense is that that's going to continue through Q1 and potentially through Q2.

Speaker 3

Okay. Your next question comes from the line of Atif Malik with Citigroup.

Speaker 0

Yeah, hi, guys. Sorry about that. I was just wondering, on the F13 guide, what was your guide for Tegra? Also, I mean, look at Tegra 3. What is the ballpark ASP for Tegra 3 versus Tegra 2?

Speaker 1

We did about $360 million this year in Tegra 2 sales. We're expecting at least 50% growth year over year. The vast majority of that will be based on Tegra 3. ASPs of Tegra 3 is higher than Tegra 2, and our expectation is that it would stay that way through the year.

Speaker 0

Got it. On the gross margin line, I think you guys mentioned $49, $49.5, exiting at $52. Where do you see the margin improvement coming? When do you see it coming?

Speaker 1

Our margin drag is almost nearly entirely related to 28nm. The margin improvement will come entirely from 28nm. TSMC is doing fabulously with 28nm. This year, with 28nm relative to 40nm, is surely a huge improvement. During transition years, because we have so much of our business tied to the leading edge nodes, and because when we transition GPUs, we transition so much of it at once, this year is particularly unique. The number of notebook design wins that we have and the number of 28nm GPU design wins that we have at OEMs is much, much higher than our previous generation. All of the transition of 28nm is going to be very fast. We're just going to have to continue to work with TSMC and get the yields of 28nm up as fast as possible.

We surely expect that by the end of the year, we're going to be in a pretty good place. We're in a pretty decent place now, but we just need to get the yields up.

Speaker 3

Your next question comes from the line of Kevin Cassidy with Stifel Nicolaus.

Speaker 0

Yeah, thanks for taking my question. Maybe along the lines of the 28nm yield, do you have you categorized what the problem is, and is there a fix in place? Also, just if you got all the product you needed, you know what kind of gross margins would you have come in?

Speaker 1

There's no particular problem. You know this is the first major quarter of 28nm shipments. There have been some shipments in previous quarters, but very, very small. For TSMC, this is probably the first large quarter of shipments, and we're going to continue to improve yields from here. There's nothing particularly wrong. This is just early in the learning cycle of a new node, and we'll improve it with every single ounce. Also, this isn't a problem that we can solve. You know everybody is using the same 28nm, and this affects all of us, anybody who uses 28nm. I think with everybody ramping production, there's going to be a lot more learning cycles, both from us and from other people. TSMC is in a good place now, and we just have to keep improving it.

Speaker 0

Great. Thanks. Just as a follow-up over on the professional services group, can you say what the trend towards mobile workstations is, and how does that affect your revenues for 2013?

Speaker 1

The professional solutions group includes notebook workstations. Whether it's HP workstations, mobile workstations, Dell mobile workstations, Fujitsu mobile workstations, or Lenovo mobile workstations, Quadro is a standard in all of those workstations. We are delighted when people go mobile because oftentimes they have a mobile workstation as well as a desktop workstation. This is a good trend.

Speaker 0

Great. Thanks.

Speaker 1

Yep, thanks a lot.

Speaker 3

Your next question comes from the line of Craig Ellis with Terrace and Company.

Speaker 0

Yeah, thanks for taking the questions. There were a couple mentions of notebook share gain. Can you give us a better understanding of how broadly those might exist across different OEMs? When would we expect to see those, more mid-year or more towards the holiday selling season?

Speaker 1

In the Ivy Bridge generation, also lined up with the 28nm GPU generation, this is really toe-to-toe competition between the best GPUs in the marketplace. Our Kepler generation, which we hope to tell you more about soon, won design wins at virtually every single PC OEM in the world. This is probably the best GPU we've ever built, and the performance and power efficiency is surely the best that we've ever created. As a result, our notebook penetration and notebook design win this year is expected to be very, very high.

Speaker 0

Thanks, Jensen. You're saying that we should expect to see those right away as Ivy Bridge comes out. As a follow-up on the mobile side of the business with Tegra, you've mentioned the 50% growth for this year. How would the notebook side or the smartphone superphone side of that business compare to the tablet side of the business? Are they both growing about equally, or one significantly more than the other?

Speaker 1

My guess is that this is just an estimate and just a guess at this point. My guess is that we'll ship more in phones this year as we did last year in terms of units, and in terms of ASPs, it'll probably be close.

Speaker 0

Okay. Lastly for me, and this one might be more for Karen, when the target model was initially established, I think the gross margin was 52%. It looks like it'll, from the guidance that's been provided and where we start the year, it's going to come in, I think, closer to 50.5%. What's changed since September? I doubt there's been much of a change in terms of the plan for 28nm wafer. Is it just volume, or what's the delta as we look at where the gross margin target was and where it is now?

Speaker 2

It's yield on 28nm wafer that have come in worse than we originally anticipated.

Speaker 0

Do you think that yield improvement is kind of steady through the year, or is that backend loaded more in the back half of the fiscal year?

Speaker 1

It'll be steady through the year. This yield improvement is a function of the number of cycles of learning. As we've ramped up at TSMC, the cycle of learning has really gone up. My expectation is that the yield improvement will steadily improve through the year.

Speaker 0

I'm sorry, Craig. Let's move on so we can take some other questions.

Speaker 1

Thanks a lot, Craig.

Speaker 0

Thanks.

Speaker 3

Your next question comes from the line of Hans Mosesmann with Raymond James.

Speaker 0

Hi, this is Brian Peterson stepping in for Hans. I just wanted to follow up on this 28nm issue. Just to be clear, this is specific to 28nm for GPUs for NVIDIA, or is this across the industry for TSMC?

Speaker 1

I think the rest of the industry will have to speak for themselves. My guess is that this is across the industry. You know this 28nm is still early in its maturing. There aren't that many 28nm products in the marketplace as of now, and the number of cycles of learning is not very significant, and the amount of volume is surely not very significant. At this point, we're ramping very hard, all of our 28nm products. The yield is much better than 40nm when it first came up, but it's not as good as we had expected in our previous projections. We're going to have to work hard with TSMC and support them and encourage them and wish them well and get the 28nm yield up as fast as possible.

Speaker 0

Thanks for that. Just to follow up, you indicated that you expect attach rates to remain stable going forward. How did they trend in the January quarter?

Speaker 2

We gave that guidance at 20% for Q1, if that's what you're asking.

Speaker 3

Your next question comes from the line of Sean Webster with Macquarie.

Speaker 0

Hi, this is Deepa from Sean. Thanks for taking the question. I had a question about pricing going into this quarter and then maybe into next. If you could talk about desktops, notebook GPU in particular.

Speaker 1

Pricing is expected to be stable and healthy this year. The amount of 28nm capacity in the world is not enough. I think we're expecting 28nm to be constraints for the entire year. New generations of smartphones and new generations of GPUs are going to drive the demand for 28nm capacity or drive the demand for 28nm devices. I think you're going to find that this year is going to continue to be tight. We could use more 28nm wafers. TSMC's management team is working very hard on supporting us with our demand. They're driving cycle times hard and trying to improve yield. All of that is going to improve throughout the year and very steadily throughout the year. If previous generations is an indication, TSMC will improve their performance incredibly fast.

Speaker 0

Thanks for that. Also, if you could talk about channel inventories going into this quarter, do you think there's a lot of buildup, maybe at the low end because of the HDD issue, and maybe about channel inventory in Tegra as well?

Speaker 1

Channel inventory is actually okay. The channel is being very cautious in loading up, as you can imagine. Whether it's because of currency volatility in Europe or because of a shortage of disk drives, nobody in the channel is being too heroic with respect to loading up inventory. I think you're going to find that channel inventory is relatively lean across the board, and on the high end, it's extremely short.

Speaker 3

Your next question comes from the line of Jim Schneider with Goldman Sachs.

Speaker 0

Good afternoon. Thanks for taking my question. With respect to the attach rates, I think you talked about that being driven lower by the hard drive shortages. The up price in hard drives being compensated by finding build materials share someplace else. Can you talk about as the hard drive shortage mitigates and those prices come back down, whether you expect the attach rate to go back up?

Speaker 1

The attach rate of GPUs is driven not by anything but consumer demand. I think that there are fewer PCs sold in Q4 than the industry had expected. The attach rate of those PCs that were sold was stable and relatively consistent with our model. Your premise is, I don't think it's correct. Attach rate seems to be stable. The number of PCs sold is reduced. Some people think it's cannibalization from smartphones and tablets and other devices. Disk drives surely played a role in that as well. When the disk drive supply resumes, my sense is that consumer demand will return to what they were, and GPU attach will remain stable.

Speaker 0

Okay. Understand. Thank you. In terms of the OPEX, I think the $1.56 billion you guided to for the year implies a little bit of an uptick as we move throughout the year. Can you talk about where the incremental spending is being allocated towards?

Speaker 2

Just one clarification. That's on a GAAP basis. The $1.56 billion, it's $1.4 billion on a non-GAAP.

Speaker 1

It's unchanged from our previous guidance and what we've told you guys before. The increase in investment relative to last year on an absolute basis has to do with the fact that we're investing a lot more in mobile devices. You know this last year was a big year for us. It was a big year because GPUs grew quite significantly despite the shortage of disk drives and softness in the market towards the end of the year. It was a particularly big year for us because this was the first year that we really engaged the mobile market, and our mobile position really became established. You know at this time, this last year, no one thought that we would really be successful in the mobile market as we ended up being. I think that today, we have now three generations of Android operating systems and devices behind us.

We have tens and tens of smartphones and tens of tablets. We have engagements with nearly every single tier one OEM in the world on the mobile side as well as on the computing side. I think that this was a pretty big year from that perspective. Because of that traction and because of the success we've seen, we think it really makes sense for us to double down on mobile computing and go after it in a big way. We're going to have a lot more products this year than last. You're going to see that we're going to have tablet devices as well as tablet processors as well as integrated processors with modems. This is an aggressive investment surely, but it's a very big market opportunity, as you know.

Speaker 3

Your next question comes from the line of Alex Banner with J.P. Securities.

Speaker 0

Thanks very much for taking my question. I was wondering, within the 50% growth you're expecting for Tegra, are you factoring in contribution from Windows 8? If so, how big a contribution might that be?

Speaker 1

We are expecting at least 50% growth. We are expecting Windows 8 contribution, but not nearly the vast majority of it.

Speaker 0

I was wondering, if you're going to be seeing Tegra 3 ramping in your July quarter, is the early ramp going to be enough to perhaps help the gross margin line, given that it's not going to be, if I'm understanding correctly, on the 28nm wafer?

Speaker 1

We are going to be ramping Tegra 3. We're ramping Tegra 3 now, and this quarter, Tegra 3 will make a large contribution. We're expecting Tegra to be up quarter to quarter about 50% as well. Tegra 3 is ramping significantly even into the April quarter. You're right that the gross margins for Tegra 3 are better than our 28nm gross margins in the first quarter. Hopefully, 28nm yields will improve, and by the second or third quarter timeframe, it won't make any difference.

Speaker 0

Okay. Last one, if I could, on the GPU business, excluding the professional set, you gave a mix of expecting a down PC market because of the hard disk drive constraints, but market share gains. Any ballparking on the net of that? Do you expect on a revenue basis the year to be down, flat, up? Can you say at this juncture?

Speaker 1

Our expectation is that on the net, our discrete GPU business will be up. In the Q3 timeframe, we were expecting, using industry analyst models, PC industry growth of 4% to 5%. I think our estimates now are much lower than that, so we assume something lower than that. We'll see how it turns out in the final analysis. We're assuming relatively no growth in the overall PC market. Because we're gaining share, and because we continue to grow our professional solutions segment, our discrete GPU business year over year will grow.

Speaker 3

Your next question comes from the line of Patrick Wong with Evercore.

Speaker 0

Great. Thanks for taking my question. Hey, Jensen, can you talk a little bit about the competitive dynamics you see as you go in and compete for Tegra 3 wins? I mean, we're hearing about a lot of competition on pricing and a lot of gorilla tactics out there. Can you talk about what you're seeing?

Speaker 1

We haven't met too many gorillas yet, but elephants maybe. Let's see. We compete primarily today with Qualcomm. The reason for that is because there are three major opportunities in the smartphone marketplace this year that are really exciting. In the U.S., LTE is very important. Outside of the U.S., they have the only real integrated solution today. In fact, they have the only shipping solution today, so they have a very good position on LTE in the U.S. Outside of the U.S., where LTE adoption is much further behind, the next major upgrade is quad-core. Today's dual-core phones need to be upgraded. The next major upgrade, the next major superphone, the next major big thing is quad-core. Tegra 3 is incredibly well positioned there. Outside of the U.S., in Europe particularly, in China, you're going to see quad-core Tegra 3 phones coming out throughout the year.

The third growth opportunity is the $999 or what some people call the $1,000 RMB phone. This is an affordable, very affordable smartphone with dual-core capability. The way that they describe it and the way the marketplace internalizes it is it's a phone that has the capability of an iPhone 4, but is extremely affordable. That's a great opportunity for us because Tegra 2 is a fabulous dual-core. With a 3G modem, you could achieve $1,000 RMB in China in the near future. That's a pretty exciting opportunity for us. We're just about to enter into that market opportunity. Those are the kind of the market opportunities and the competitive dynamics. It's really primarily the two of us.

I think at the highest level, the reason for that has to do with the fact that in order to be successful in the leading edge and the tier one phones, you need to have a great application processor and a great application processor roadmap. You need to have a world-class software stack because the software part of these phones has become the most complicated part. The third going forward is the ability to integrate a modem. We were fortunate to have purchased Icera last year. Our integrated roadmap is going to be pretty exciting.

Speaker 0

That's helpful. It sounds like you feel like your quad-core features are compelling enough that pricing is you're able to maintain kind of strict pricing with your customers.

Speaker 1

Yeah, we're able to get fair pricing on our Tegra 3.

Speaker 3

Your next question comes from the line of Vivek Arya with Bank of America.

Speaker 0

Thanks for taking my question. Jensen, I wanted to address this competitive issue from a different angle, which is from the handset vendor side. Increasingly, Apple and Samsung are taking more share in the market versus, say, HTC, Motorola, and others. Even though Tegra 3 could be a great product, how are you ensuring that you're engaging with the right set of customers? What real underlying drivers are going into this expectation of 50% growth for this year?

Speaker 1

We're expecting to grow at least 50% this year. It comes from three different, maybe four different sources, if I can break it down. One is Tegra 3 phones. One is Tegra 2 phones for the $1,000 R&B market, which is the fastest growing segment in smartphones today. The third is Android tablets. As you know, we finally were able to put together a tablet that is both exciting, as well as a tablet architecture that is both exciting with Tegra 3 and Ice Cream Sandwich, as well as affordable. We've been able to reach the $249 price level for retail. The fourth is Windows 8 on ARM. These four growth drivers, frankly, this last year, the only thing that really worked super well for us, even on Tegra 2, was smartphones. That contributed to $360 million in revenues.

This year, we're expecting smartphones from Tegra 3, from Tegra 2, from Tegra 3 Ice Cream Sandwich tablets, as well as Tegra 3 Windows on ARM tablets. There's a lot more opportunities for us. You're right that Samsung and Apple are very, very strong. Our strategy is actually very simple. By teaming up with the best partners in the world, we would like to bring great technology to them and partner with them to build exquisite devices and also to move faster. We as an industry have to move a lot faster and bring competitive solutions to the marketplace more rapidly. By partnering with HTC, and they are a fantastic company, not suggesting we announce any products here, but surely a partner like HTC would be fabulous for NVIDIA to partner with.

Speaker 0

Got it. If I could just perhaps push back on some of those drivers. For instance, the $1,000 R&B market, there we have seen integration with Waze Band and connectivity being an attractive feature. How do you address that? On Android tablets, yes, some things are getting better, but outside of the Kindle Fire, we have not seen sales pick up as much, or perhaps that's just my perception of the market. If you could address those two issues also. Thank you.

Speaker 1

The $1,000 RMB market has a lot of segments underneath that. At $1,000 RMB, you really need to have a world-class phone. Right now, there just isn't a very good solution for a world-class, high-performance dual-core processor with integrated 3G modem. Surely, there are $500 RMB phones, and they have low-end integrated solutions with 3G, but nothing sufficiently good at the $1,000 RMB to be able to claim that it's as good as an iPhone 4, but at a much more affordable price. That segment, where you need to have a world-class, high-performance dual-core processor like Tegra 2 and a great software stack, along with 3G modems, is, as you know, quite affordable and quite abundant. They've been around for many years. Integrating those together on a bill of material is not too difficult. That's one.

With respect to the tablets, Amazon Fire is a really interesting product, and it's a great e-reader. Our belief is that there's a marketplace for tablets that are much more general purpose. I think the ASUS Transformer Prime is a first example of a tablet that can really demonstrate differentiation, and people love it. It's, frankly, my favorite computer now, and it's a lot of other people's favorite computers. It is a tablet sometimes, it's a full notebook PC sometimes, and the performance is really terrific. I think Ice Cream Sandwich addressed a lot of the challenges that the tablet industry had, Android had last year with fragmentation. Now, with Ice Cream Sandwich, your phone is Ice Cream Sandwich, your tablet is Ice Cream Sandwich, and all the applications that come off of the marketplace can work on both.

I think the unification, it is the only operating system that allows that today. That, I think, is a great advance for the tablet market. Lastly, at $249, if we can bring a quad-core, if we can bring Tegra 3 to $249, and for those people who have seen and touched it, that tablet is going to sell like hotcakes, we believe, because it's the right price point. It's completely general purpose, and it's state-of-the-art. We have reasons to believe that this tablet market is far from over, and there's a lot of interesting opportunities and differentiation to be brought to this market yet.

Speaker 3

Your next question comes from the line of Glenn Young with Citi.

Speaker 0

Thanks. Two questions. The first one is maybe just some clarification from you, Jensen. I think I'm hearing that GPU demand is being impacted by a combination of lower PC demand from hard drive shortages, hard drive ASPs squeezing out GPUs from the bill of materials, and then a shortage of capacity from 28nm. Can you just give us a sense, maybe rank those in terms of what's most impactful to sales versus leads?

Speaker 1

28nm wafer shortage. I could use more 28nm wafers today.

Speaker 0

That's the most impactful?

Speaker 1

My estimate for the year for top line and gross margins would be 28nm.

Speaker 0

Okay.

Speaker 1

That's where all of our new GPUs are going.

Speaker 0

Right. I'm asking just specifically for the first quarter, for the April quarter, where you think the impact is greater from that shortage, from ASPs and hard drives, or from shortages of PCs because of hard drives?

Speaker 1

About the same. I mean, I haven't thought of it that way, but it's about the same. You know, from a gross margin perspective, obviously, much more from 28nm wafer.

Speaker 0

Right. Okay.

Speaker 1

Those are problems that are going to get solved for the whole industry.

Speaker 0

Right, you know.

Speaker 1

I think as the industry, as TSMC ramps more and more 28nm, their capacity would increase, their yields would increase, and their cycle times will reduce. This is a world-class company. Morris and the management team are all over it. They're doing everything in their power. If history has any indication, and it tends to be, they're going to work their way into a fabulous node here anytime. We have just started ramping in the last several months, so Q1 is kind of a bit of a transition quarter for us. I'm very confident that we'll work through the 28nm yield issues.

Speaker 0

Okay. As a follow-up, I hear you when you say at least 50% growth in Tegra, but your guidance there is nonetheless substantially lower than what your original guidance was. Can you just kind of walk through the delta here? Is it that you're pushing forward your expectation, or do you think there's some lost business that you simply can't gain back?

Speaker 1

There's one major delta from our previous guidance. About, you know, I would say a couple of quarters ago, I would have thought that on balance, Samsung was one of our largest customers, as they were last year. Looking forward, my sense is that on balance, Samsung will use their own application processors. They'll dabble outside probably, and they'll use outside application processors like ours whenever their own can't serve their needs. On balance, they're going to try to use their own. That's the big delta that I've taken off of my guidance.

Speaker 0

Okay. Thanks.

Speaker 3

Your next question comes from the line of Greg Berger with FBR Capital Markets.

Speaker 0

Good evening. Thanks for taking my questions. Jensen, with the hard drive impacting GPU shipments now, what do you think revenues would be in the first quarter if there were no shortages? Do you expect that to come back as good news and meet pent-up demand later this year?

Speaker 1

We just didn't really do that analysis. If you think along the lines of what we currently guided versus a typical Q1, and some of that, and call it we're $100 million plus short, and call some of that resulting from a 28nm yield and shortage, and some of that resulting from disk drives shortage, and call it half and half. If you were just to take a swag out of about $50 million.

Speaker 0

Okay. Just as a follow-up, can you update us on the CFO search? Can you also update us on Icera? You talked about it briefly with the roadmap. You know, when might we expect an integrated product? Also, do you expect to ship basebands into phones in calendar 2012? Thank you.

Speaker 1

Sure. We are doing a CFO search. We have many interested candidates. I haven't decided on one yet. The reason for that is because I think Karen and the financial team are doing a fabulous job. It allows me to be very choosy and to set a very, very high bar. If you do know someone, ask them to call me. We have a lot of very interested candidates. Icera is going to prove to be one of the smartest and one of the best acquisitions in our history. We will have shipping modems this year for sure, and hopefully sooner than later. Our plan is to integrate our application processor, which, as you know, is already one of the best in the world, and the Icera modem into an integrated product for the mainstream LTE market. We are doing that as quickly as we can.

That is one of the reasons why we're investing heavily in OPEX, so that we could build this class of products for a much larger marketplace and much larger market opportunity for us.

Speaker 3

Your next question comes from the line of Rajiv Gill with Needham & Company.

Speaker 0

Sorry if I might have missed it, but did you actually provide a revised annual guidance in terms of a number, an actual number range?

Speaker 1

We did provide new guidance. We did not give you a specific number. The reason for that is because it ultimately depends on your estimates of the PC market and the disk drive, how long the disk drive shortage is going to last. We're not better predictors at that than other analysts. We've taken it to a more conservative range ourselves. If you apply your estimates of that to some of the comments that Karen made earlier, you can come up with some estimates.

Speaker 0

Okay.

Speaker 1

Thank you.

Speaker 0

I guess, last question real quick. In terms of the percentage of your GPU portfolio that's on kind of 28nm, any guesstimation there? What are the projections going forward?

Speaker 1

It depends on the capacity that gets freed up. We would like to put as much of it as possible to 28nm. If we don't have enough capacity, as we currently do not have, we would keep some of our GPUs in 40nm.

Speaker 0

Thank you.

Speaker 1

It just depends on capacity.

Speaker 0

I think we have time for one more question.

Speaker 3

Okay. Your next question, your final question comes from the line of Raj Seth with Cowen & Company.

Speaker 0

Thank you. This is Simran Brar calling in for Raj Seth. I had a couple of quick ones. Firstly, given that your Tegra business has some scale now, how are you thinking about margins in that business going forward? Secondly, what are the key growth opportunities for your professional services workstation business in 2012? Is 10% to 15% sort of still the right range to think about annual growth for that business? Thank you.

Speaker 1

Thank you, Simran. Let's see. The first question with respect to Tegra, we expect our gross margins to be in the range of the corporate average, and our estimates are that it would be around that area plus or minus. Nothing dramatically different. Second is the growth opportunities for PSG. In the area of workstations, we introduced a concept called Maximus, a new, or not a concept, a platform technology called Maximus. It allows for the workstation to not only visualize, but it also allows it to compute. You could do simultaneous simulation of fluid dynamics while seeing the fluid flow over a structure like a car or a motorcycle or whatever in real time. Maximus has been received fantastically, and our hope is that more and more workstations will have not just one GPU inside for visualization, but two GPUs, one for visualization and one for simulation.

This year is also the year of Kepler. It's been two and a half years since Fermi, and supercomputers and supercomputing centers around the world are waiting anxiously for Kepler to launch so that they can upgrade their supercomputers. That's a growth opportunity for us. In the area of high-performance computing as well, we're hoping that the work that we've done to make Tesla much easier to program for, it's called OpenACC. It's a technique called Directive, making it super easy for software programmers to take advantage of GPU computing. We've worked with the industry on that. It's an open standard. We're excited about the developments of that. The response has been fabulous. Hopefully, that making GPU computing easier to program will also increase its adoption.

Those are some of the growth initiatives that we have going, and our expectation is that Quadro and Tesla, in combination with PSG, will deliver a record year again this year.

Speaker 3

Great. Thank you.

Speaker 0

Okay. Thank you, Simran. I think we're out of time for today. Thank you, everyone. We look forward to talking to you next time about our Q1 results.

Speaker 3

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