Earnings Call: Q2 2014

Aug 8, 2013

Evening. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Navidea First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. And at this time, I'd like to turn the conference over to Mr. Chris Evinton, Senior Director 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'll 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 August 15, 2013 and the webcast will be available for replay until our conference call to discuss our financial results for our Q3 of fiscal 2014. The content of today's 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 the 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 businesses, please refer to the disclosure in today's earnings release, our Form 10 Q for the fiscal period ended April 28, 2013, and the reports we may file from time to time on Form 8 ks filed with the Securities and Exchange Commission. All our statements are made as of today, August 8, 2013 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 John Peddy Research. During this call, we will discuss non GAAP financial measures. You can find a reconciliation of these non GAAP financial measures to GAAP in our financial release, which is posted on our website. With that said, let's begin. Our focus on visual computing enabled us to ride out a rough PC market this quarter and is setting us up for growth in new markets. Revenue came in at the middle of our outlook, driven by strength in GPU offset by Tegra. PC Gaming performed particularly well enriching our product mix, growing our share of GPU revenue and driving margins to another record high. The PC market is evolving as entry level laptops face pressure from tablets, yet sales of specialty PCs like gaming systems and workstations continue to grow. The disparity reflects how consumers use these different classes of PCs. Many consumers look to a PC as a general purpose device they can use for browsing, email, social media and video, but much of this can be better served by a tablet. In contrast, gamers are preparing their systems systems for a strong roster of games coming this fall, including blockbuster franchises such as Call of Duty: Ghosts, Grand Theft Auto V and Assassin's Creed 4. In a similar vein, for digital artists and designers, the workstation is the tool of their trade. They depend on increasing processing paths to deliver results for their clients and the use of specialty PCs could become even more widespread with the growth of new applications like 3 d printing. Open platforms such as PC and Android are outgrowing the walled gardens of the traditional console market. They benefit from more innovation. Nearly half the developers surveyed at GDC recently were working on PC games compared to only 11% on next gen consoles. PC game revenues are expected to reach around $20,000,000,000 annually by 2015, whereas the total for both Playstations will be less than 10,000,000,000 dollars and Xbox is only around half that. In mobile, games generate 80% of the revenues on Google's marketplace and 2 thirds of the time spent on a tablet is spent playing games. It's this innovation and energy that we're leveraging with Shield. It started shipping July 31 and the critical reception has been excellent. VentureBeat described it as a game geek's dream device. A writer at Forbes said it got him excited about gaming again and CNET called it a high quality device with stellar performance. Because Shield is an open platform, it can access anything available to an Android tablet. That means there were literally hundreds of thousands of games available for Shield the day it launched. It's a web browser and a way to update Facebook. It excels as a Netflix movie player and as an Internet radio or Pandora music player. Thanks to the effort we put into the loudspeaker and acoustic design. Shield is the best way to play games, Android games and a key element of our strategy to generate a virtuous circle in open gaming. It links to GeForce on PCs, so gamers can play PC games from their couch. One day, it will be an excellent client for grid gaming. We've paired it with Tegra Zone a curated collection of games all tested on Tegra and many of them optimized for Tegra. Tegra Zone has been installed over 7,500,000 times already and that number increases around 10% a quarter. The model we're building for games is familiar from music and movies. You can buy a song from Amazon and download it to your device or stream it directly from a service like Spotify or even buy it and host it in the cloud at Google. Similarly, a gamer can download Games2Shield Play, play a game online and soon stream it from Grid. Our content group helps develop to differentiate their games on our platforms and this creates synergy across devices. Games optimized for Shield will also look great on Tegra 4 devices like the HP Slatebook X2 or the Teshiva X Sight Pro both of which shipped this quarter. Games optimized Grid gaming. In this way, Shield, GeForce and Grid each benefit the other and gamers benefit from a dynamic ecosystem. Q2 is a trough quarter for Tegra and you'll see more Tegra 4 devices but you'll see more Tegra 4 devices launched through the balance of this year. Meanwhile qualification of our modems both the standalone baseband I500 and the integrated application processor TEGRA 4i is proceeding as expected. And we're making steady progress towards certification at a number of carriers. We previewed our next generation mobile processor Project Logan last month. Logan includes our 1st mobile Kepler GPU delivering what the technical press described as unambiguous mobile GPU leadership. Licensing our GPU cores as we announced this quarter allows us to generate revenue from markets previously inaccessible such as vertically integrated smartphone OEMs. The mobile Kepler inside Logan has around 3 times the performance per watt of the iPad 4 GPU yet performs like a new desktop desktop part. We showed it running Epic Games' next generation game engine, Unreal Engine 4 and running Aira, the face demo that as recently as of Investor Day in April was restricted to high end gaming PCs. Forbes suggested that NVIDIA's Logan could be a mobile graphics disruptor. Gizmodo said that if you get a new phone in 2014 with crazy battery life and an amazing on screen performance, the Kepler GPU will be the reason. Other press were similarly enthusiastic. Last year, we made the decision to pull in TEGRA 4i and Logan. This made us late to market with TEGRA 4. However, with Project Logan, we're early and well positioned to capture key wins. Moving on to our GPU Server business. Tesla had an excellent quarter, very nearly its best ever. Notably, this quarter's revenue was driven by application based deals. That is customers using off the shelf applications are turning to Tesla GPUs to accelerate them. This validates our continued investment in software. For example, last week's acquisition of PGI, the leading developer of compilers for high performance computing. Also, since this revenue passes through OEMs, it requires much less sales and support resources from us and offers a more efficient route to scale for that business. In professional visualization, Quadro displayed a strong sequential and year over year growth. We launched the Quadro K6000 to complete lineup of Kepler top to bottom. Prospects look good for future growth. 80% of Quadro sales are driven by manufacturing and recent PMI and ortho manufacturing data has been very encouraging. Grid is showing increased traction in the ecosystem. We announced this quarter that Grid is now supported natively within Zen Desktop 7, so enterprises considering Citrix VAR partners working on active grid opportunities. Our focus on gaming visualization and compute generated growth in a turbulent market, leveraging our IP into new markets and applying GPUs to the cloud will accelerate that growth in future. With that, I'd like to hand over to Karen. Thanks, Chris. Hello, everyone. I want to highlight some key points before we open up for Q and A. Overall results for the Q2 exceeded our original expectations, driven by strong demand in the high end segments of our GPU business across desktop, workstation and server. Gross margins are now in the 56% range with Q2 being a 4th consecutive record quarter. The performance of our GPU business and intense focus on costs delivered EPS of $0.16 on a GAAP basis and $0.23 on a non GAAP basis. These were $0.04 above Street consensus estimates of $0.12 for GAAP and $0.19 for non GAAP. Revenue for the quarter of 977,000,000 dollars was at the midpoint of our outlook. The GPU business was very strong with a 9% increase quarter over quarter and up 8% over the prior year. Growth was fueled by the release of new Kepler based GPUs for high end and desktop and with Kepler based GPUs now available top to bottom for workstation and server. Revenue for the TEGRA processor business was down 49% sequentially and 71% year over year. We had expected a drop as discussed last quarter with the ramp down of TEGRA 3 products and ahead of TEGRA 4 shipments. Nonetheless, we are disappointed with the size of the decline. Due to current dynamics in the mobile space, we believe it will be challenging for Tega revenue to remain flat year over year as originally expected. That said, we anticipate Tega revenue to be up significantly in Q3 from Q2 as we start to shift Tega IV based design wins and Shield, our NVIDIA branded gaming and entertainment portables. And we expect further growth in Q4 as more TEGRA 4 OEM products come to market. Our revenue guidance for Q3 reflects these new expectations. We expect revenue to be up approximately 7% from the prior quarter with stable growth in the GPU business and significant growth in PEGRA processor. We again achieved record gross margins this quarter. The large increases you are seeing quarter over quarter and year over year reflect our strong market position Q3, we expect gross margins to maintain at current levels. OpEx this quarter of $401,000,000 was below our outlook at $7,000,000 below the midpoint. Some of this investment shifted to Q3. For Q3, we expect OpEx of approximately $460,000,000 for GAAP $418,000,000 for non GAAP. Our OpEx investments remain tightly aligned to our key growth strategies. For Visual Computing, we are extending the technical leadership of our GPUs, growing GPU for accelerated computing and engaging the market with our grid GPU servers for enterprise DDI. Grid servers are in production by Cisco, Dell, HP and IBM. For Tegra SoC, we are leveraging our core GPU investments to bring our visual computing leadership to date, we have established a proven market position for TEGRA that we will build on. Largely with TEGRA II, we generated $360,000,000 in revenue in fiscal 2012 from smartphones and tablets alone. Largely with TEGRA III, we grew revenue 50 percent to $540,000,000 from these devices in fiscal 20 13. With TEGRA 4, we are expanding our reach to other large markets where visual computing matters, such as audit navigation systems, TV set top boxes and new desktop form factors like all in ones and smart monitors. With non GAAP OpEx of $797,000,000 in the first half of the year and 4.18,000,000 dollars expected in Q3. We are tracking at the high end of our full year expectations of approximately 1 point $6,000,000,000 We aim to reduce this amount as we remain intensely focused on operating costs. Turning to the balance sheet. Our overall position remains very strong. In the first half of the fiscal year, we generated $275,000,000 in cash from operations and $122,000,000 in free cash flow. Cash at the end of the quarter was $2,900,000,000 a reduction of 7 $78,000,000 from Q1. This relates to our capital return allocation to shareholders of $793,000,000 dollars consisting of $43,000,000 in dividend payments and $750,000,000 for share repurchases. In Q2, we executed an accelerated share repurchase agreement to repurchase 750,000,000 of shares. To date, we have received 40,000,000 shares under this agreement, reducing our outstanding common stocks. And we expect to receive additional shares when the contract ends in Q3. In addition, year to date, we have returned $190,000,000 to shareholders, including $100,000,000 in share repurchases and $90,000,000 in quarterly dividend payments. With this capital allocation strategy, along with our quarterly dividend payments in the second half, we are on track to return capital to shareholders in excess of $1,000,000,000 Thank you. Chris? Thanks, Karen. That concludes our prepared remarks. We'll now take questions. Please limit yourself to one question and one follow-up. Lisa? And our first question will come from the line of Christopher Rolland. Hi, guys. How are you? Can you guys talk about initial sales or at least shipments of Shield so far? Is it above, below or in line with your estimates? Thanks. Hi, Chris. Yes, thanks a lot. Shield is doing great. The early reviews are fantastic. You probably read some of the reviews online. People really love that it's well made device. It feels exquisite and the performance is fantastic. It's an open platform and it does all the things that you would expect an Android device to do and more. And people are really loving playing with the beta version of our PC streaming and to be able to enjoy GeForce games that looks fantastic on a PC on a small device like that while you're sitting on a couch is pretty amazing. Sales have been great. Everything that we've shipped so far has sold out. And but we're just starting to ramp production. We've shipped out to our partners only several 1,000 units. And so it's still quite early to tell, but we're expecting to do quite well with Shield. Okay, great. And also on the TEGRA segment, maybe you can give us a little bit more detail there. How should we think about console royalties, I guess, pachinko, auto versus your regular mobile sort of breakdown? And I guess, Shield is going to be in there too for next quarter. What might that look like this quarter as well as next? Thank you. Well, this was our TEGRA trough quarter. And we had talked about that before the transition between TEGRA 3 and TEGRA 4, because we pulled in 2 very important projects, Tegra 4i with our integrated 4 gs modem and Logan, which incorporated our mobile Kepler GPU. As a result of that, TEGRA 4 was a little later than our typical cycle. And so we had a gap out and we expect the Q2 to be the trough. We expect next quarter to be up substantially. And as Karen mentioned earlier, however, there were some disappointments this year. Some projects that we worked on that we had spent a lot of effort on didn't pan out as we expected. And it's relatively well known now. But nonetheless, it didn't meet our expectations. But overall, I would say that Integra IV is going to ramp up very nicely this coming quarter. There's tablets from ASUS, Toshiba and HP. There's Shield that's ramping up and there are new devices that are going into production that are quite exciting. I think relative to your other question of auto, we had said earlier auto is about $100,000,000 for the year or so roughly. And last year was 50% and we're expecting next year to be another 100% growth year. Auto as you know design cycles are quite long. And so the product life is also quite long, but it takes some time to ramp up. Great. Thanks guys. And just one last thing. You had mentioned something about game console royalties. We're not accounting for much game console royalties. Okay, great. Thank you guys. Yes. Thanks a lot. And our next question will come from the line of Ambrishah Srivathava with BMO. Hi. This is Gabriel Ho calling in for Ambrish. Thanks for taking my question. Actually, can you give us more details on the licensing initiative for the graphics technology? And also when should we expect that to revenues? And more importantly, help us understand the thinking behind that. What kind of customer pull were you seeing versus the means to diversify yourself? Sure. Well, we are a specialist in visual computing. This is our core business. And over the years, we've enhanced and extended our business model from just chips to now chips and systems such as grid to system components such as GTX cards and quadri cards and TEF cards to now including GPU IP. And so we're an end to end provider of GPU technologies to all of the applications that relate to visual computing. And the way that we go to market has everything to do with how the customers would enjoy incorporating our technology into their products. In some customers, they would like to buy our chip and put it on their own motherboard. In some with some customers, they would like to buy our system components with our software and we integrate it into their servers or workstations. Some customers would like to buy in retail adding cards of GeForce and some customers prefer to build their own chips, their own systems and take it to market themselves. And so in those vertically integrated opportunities, we've historically not had an opportunity to serve them with our technology. And now with our mobile Kepler GPU that we revealed at SIGGRAPH, it took us some 3 years to mobilize the world's most advanced GPU. Now the world's most advanced GPU is in a mobile format. It's the world's 1st CUDA GPU in the market available for mobile and it takes a huge advance in energy efficiency. And now with this Kepler GPU, we could license our technology in a GPU core format to customers who would like to incorporate it into their own products and address their own vertically integrated market with it. And so that's basically the idea. Thanks. As a follow-up, just want to get an idea as you know 2 of the 3 major game consoles are being launched in the second half the year. How should we think about the PC gaming business? Or how what's your view on that? Well, game consoles are fantastic and I'm looking forward to buying 1 myself. But today, just like in movies and music, you game on every computing platform. And the fastest growing platforms in the world today are open platforms. PC is the fastest growing and it's now become the largest, some $20,000,000,000 worth of global software sales. Obviously, China is very, very large, but the United States is large as well, Russia and Korea and you name it. PC gaming has become very large. The business models are vibrant, whether it's multiplayer online games, AAA titles or now free to play games. You could see that PC games are just really vibrant. The fastest growing, so that's the largest, the fastest growing and now the 2nd largest is mobile. One of the reasons why we really feel that we can make a contribution in mobile is because video games is such a large part of the mobile experience. And in fact, it's the largest download of the world's largest digital store, Google Play. It is video games is what people spend the most time actually doing on a tablet. And video games and great computer graphics go hand in hand. This is an area where we can add a lot of value. And so these two platforms are the largest and now the fastest growing. And I don't think there's anything that game consoles will do at this point that would disrupt that. People just have too many PCs and there are too many people with tablets and mobile devices. And people like to game wherever they happen to be, not just while they're sitting in front of their TV, sitting in front of the family room. Next, Lisa. Next question please. Yes, sir. And our next question will come from the line of Blayne Curtis with Barclays. I wanted to follow-up on the TEGR revenue. If you could just talk about the delta, were looking at flat and now it's expected to be down. Juan, I was wondering if you could just dial in if you could give any sort of magnitude on how much you expect it to decline now? And then you had some ramps that didn't pan out in the first half, but are you still looking at the same pipeline of stuff ramping in the second half for you? Thanks. What was the first part of that question? And Blaine said it so fast. If you could dial in any you expect it to decline, do you have any range that you could provide as to how much it would decline? Relative to last year? Yes. Oh, relative to last year. The decline comes from so coming into the year, we had pretty high expectations on one particular platform and there's no sense naming it, but it's a very important platform that also derived from it a lot of design wins. And because this particular platform just didn't do as well as we or frankly anybody in the industry had hoped, we don't expect as much returns on that investment as we originally hoped. Our guess is that it's going to be down a couple of $100,000,000 or so, maybe somewhere between $200,000,000 or $300,000,000 overall. And we don't expect it in the short term to come back. But not all of the other platforms that we're talking about obviously are not affected by this one particular design win and all of its associated design wins. Okay. Thanks for that. And then on the GPU side, you expected growth into Q3. Is that both desktop and notebooks? And if you can just talk about the Haswell refresh, your notebooks were down a little bit in Q2 or the June quarter or July quarter. If you could talk about are you expecting to see notebooks see a bit of a rebound with Haswell? Thanks. I think that our notebook was down very, very low single digit year over year and it was down single digits from Q2 in the last quarter. And so it's slightly down. The overall notebook PC marketplace, of course, is not as vibrant as people have hoped. But you know that we're not really in the mainstream PC market. We're really in the specialty PC market, whether it's gaming PC or workstation PCs or high performance computing PCs or premium consumer PCs or PCs that are used for video editing and digital content creation. That's primarily our target. The notebook part of it, of course, the consumer part of it is not vibrant. And we're not expecting it to in our guidance, we're not expecting big growth from it. Our GPU our growth from GPU is primarily attributed to gaming, to workstations, the Quadro workstation GPU and the Tesla GPU. And that's relative to October with that comment? I'm sorry, Gwen? My question was when you look into October, you talked about broad growth. Is both desktops and notebooks growing into October? Yes. That's the quarter for Q3. That's where the growth we're expecting. I think that's your question. Sorry, if I'm being difficult. I'm just trying to figure out, I think you're answering it, but when you mentioned all the drivers Rob into October you left out notebook. So I just wanted to clarify, do you also expect notebooks to see a bit of a rebound in October? We're not expecting much growth from notebook. Okay. Thank you. Thanks, Lisa. And our next question is going to come from the line of Patrick Wang with Evercore. Hi Patrick. Thanks for taking my questions. Sticking on GPU, could you talk about the pricing around GPUs now? And how will share trend in the second half in your view? PC ASPs are up. And but they've been on an upward trend for some time. And that's one of the reasons why because they're shifting towards premium products or specialty products like gaming and workstations and high performance computing, what we call GeForce, Quadro and Tesla, because of that because of the growth of those segments, it improves ASP and it improves gross margins. We haven't seen share movements substantially for some time and we're not expecting much later on this year. Got it. Thanks for that. And then maybe can you discuss the buyback plan you're looking for in 3Q and 4Q? Well, we haven't announced any new buyback plan, but we certainly have a commitment to capital return for the long term. The contracts that we're under right now does not end until the end of Q3. Is there any dollar amount we should think about for each quarter? Well, we it was an accelerated share repurchase. So we're just waiting for the contract to complete. You want to just tell him what the whole thing is for the year. Maybe he hasn't seen some of this stuff. The The $750,000,000 is what we're going to repurchase. And the bulk of it, the majority of it, the 40,000,000 shares, we have received and we're expecting an incremental amount in Q3. So, it's effectively a share repurchase in Q3 as well. Okay. Will that be complete in Q3, I guess is my question? It will be that Sounds good. Thank you. Our next question will come from the line of Kevin Cassidy with Stifel Nicolaus. Kathleen calling in for Kevin. Thank you very much for taking my call. Could you provide some extra color on the acceptance grid hardware area? We're seeing a number of software announcements. I was wondering how the hardware may be coming along in terms of Salem potentials? Thanks. Thanks, Dean. Grid, just as a background for everybody, Grid is our data center GPU server initiative. And grid has several attributes. 1, of course, could be used for high performance computing. 1 could be used for big data analysis, whether it's image recognition or image processing or audio processing or video processing, you know that more and more people are uploading just an enormous amount of multimedia data onto the web. And the 3rd initiative is virtualization, enterprise virtualization. And one of the most challenging parts of enterprise virtualization is called VDI. And so these are the major applications of Grid. All of our OEMs have now completed all of their server and data center certifications and are now in production Cisco, Dell, HP and IBM. And there are trials going around all over the world where we see we have visibility into some of them and we track about 150 all over the world in Japan and Europe and United States and China. And this quarter, we had just started shipping early samples. So we'll see how it turns out. But these are this is our first true enterprise computing application, our first true enterprise computing product. And so we're quite excited about the prospects. NVIDIA design? Or how is the interest shaping up in this area? There are 3 ways to access Grid. 1 is buy it from our OEMs. And so that's Cisco and Dell and HP and IBM. And there's some over almost 30 different server platforms that are now available in the marketplace with NVIDIA GPUs in it. The second way is to build their own data centers and they would buy GPUs directly from us. And so these are data centers that they're not announced yet, but they're just large data centers that want to build their own data centers. And the third way is for small and medium businesses who would like to build whose customers are single application customers or don't have an IT department are not big enough to be served by large IT companies, in which case they'll buy a fully integrated appliance from us. The last, which is the grid VCA appliance is not in volume production yet is sampling in North America, but the first two are in production. That's helpful. Thank you very much. Thanks, team. Our next question will come from the line of Chris Caso with Susquehanna. Okay. We're going to move on Can you hear me? Hello? Yes. There we go. Sorry. Go ahead. Sorry about that. Just the first question about OpEx and the I guess you said that some OpEx was pushed forward into this quarter, but your comments also suggested that the OpEx I guess you're going to take some actions to reduce the OpEx going forward. Could you expand on that a bit? Actually all Karen said was that we're going to target the 1 point $6,000,000,000 that we had we've said before. Okay. So I mean, I guess going forward even as we look over the longer term, I know you're making a lot of investments in the business at this point. Just some general guidance about the level of OpEx spending we should expect going forward? I don't think the plan is to reduce OpEx below the current levels. We're investing in 3 very, very important initiatives. 1 is Grid. Grid puts our GPUs in data centers, which powers cloud computing. I can't imagine a more important initiative. The second is Tegra, which is going after the Android and Arm computing revolution. Computing devices are cropping up everywhere. Of course, it's already we know that it's disrupted smartphones. It's in the process of disrupting computing with tablets. But it will its disruption will propagate out to consumer electronics to gaming to TVs to automobiles to just about anything with a computing device. And wherever there's a computer, there's an opportunity that some of them would require GPUs. And what TEGRA is about that initiative is about is addressing those opportunities. And wherever we can address those opportunities, what TEGRA is the effort of TEGRA, the focus of TEGRA spins off because of that intense focus on energy efficiency and targeting mobile devices and small computing devices, it spins off GPU cores that we can now use as core IP. And so our investment is really around these three areas: grid, Tegra and our core IP initiatives. And I think these are 3 very large and very important growth initiatives that are very important to invest in. And so we're not expecting to reduce OpEx. What Karen is saying is that we're constantly focused on making sure that there are no waste in the company. And we are the largest visual computing company in the world and our investments are leveraged from visual computing and leveraged from our GPUs. But these are still large investments as you know. Okay, great. And as a follow-up, I just want to make sure that I understood the comments earlier with regard to the TEGRA expectations for the year. I guess I think what you said was $200,000,000 to $300,000,000 in Integra revenues overall. If you could just clarify that make sure that I got it right and It's actually backwards. I think last year we had done something along the lines of $750,000,000 Integra In overall, Integra from smartphones to tablets to automobile to embedded entertainment, whether it's Windows on ARM or excuse me WinRT or Android, okay? So that's all of that was under Tegra and last year was about $750,000,000 This year, we're expecting it to be somewhere between $200,000,000 to $300,000,000 less than that. And even though the second half is going to be a big increase from the first half, We're not expecting the increase in the second half to make up for the full year last year. Was that clear, Chris? Okay. And we'll go ahead and move to our next question and that is from Betsy Van Hees with Wedbush Securities. Thank you for my question. You guys have done a really great job of growing gross margin quarter over quarter. And then I believe you guided it for 56% in this quarter. Are we going to continue to see as we look forward the continued strides in gross margin? Or are we kind of plateauing out here? That's my first question. Thanks. Hi, Betsy. There are several drivers for gross margins. One is Quadro, our professional visualization products is quite rich in gross margins because it's mostly a software product. Our value proposition in Quadro is very heavily related to all of the middleware and tools and all of the algorithm technologies that we incorporate into software packages all over the world that are processed by Quadra. Tesla is rich in gross margins, because again it's very much a computing platform product, it's not a chip product. And it's about the programming model, it's about the programming language, it's about compilers and tools and libraries and all about all of the computational mathematicians that work with our supercomputing centers and research centers around the world to solve the world's most complex science problems. What also helps our gross drives our gross margins is GRID. GRID again is a heavily software product. The GPU hypervisor, all of compatibility that's integrated into all of the hypervisors and enterprise infrastructures around the world. The value proposition that it delivers. It's just a very much a software product. And of course, in the future, if we were successful with our core GPU core IP strategy, that would be a big lift on gross margins. And so we have products that are very software intensive, very IP intensive and therefore very margin rich. But we also have OEM products where we have to compete against other chip providers and our margins are much more compressed there. And so it just depends on where which one of these parts of our businesses grow faster. I'm not exactly sure whether I'd be happier if the gross margins were to be richer and richer or whether our revenues were to outpace our gross margin growth. But we have the vehicles now from IP to chips to very value rich, software rich system components and systems to be able to drive our growth. And yet we can be singularly focused on visual computing. We can be singularly focused and being the world's best GPU provider and serve these markets that are growing quickly. Thanks, gentlemen. That was very, very helpful. And as we look at the guidance and we look at the GPU business Integra and the licensing, is it fair to say that the GPU business is going to be in line with the midpoint of your guidance? And then you are going to have a significant growth in Tegra, but that's going to be offset because of some of the decline in the video game consoles. Is that how we should be looking at the quarter? I think that's a good approximation. Our GPU product line basically is midpoint of margins. And so if you see Quadra growth faster than top line, if you see Tesla growth faster than top line, if you see Grid growth faster than top line, then I would expect our gross margins to increase. If you see TEGRA growth faster than top line, then you would see our gross margins come under some pressure. And if they both grow at similar rates, then our gross margins would stay flat. Okay. Thanks. And I know I said that was my last question, but I do have one more. And that's, I know you guys don't give forward guidance just the quarter, but as we look at the January quarter, what's typical seasonality in the January quarter? I know things have changed a lot in the dynamics of the PC market, but how do you think we should be looking at seasonality for the January quarter? I think there are seasonality factors, but I think that there are product cycle factors that are greater than the seasonality factor. And although don't take this as a guidance for the January quarter, but we're just in the process of ramping TEGRA 4 into all the devices that have been announced and devices that have not yet been announced. We're ramping Shield and the holiday season of course is a factor there and Shield is a brand new product for us. And we're ramping Logan. And so we were late to market with TEGRA 4 and it was a bit of a scramble. But I think the decisions were really, really good. We wanted to bring forward our modem technology so that we can start to engage the market and start the long process of certification. We also wanted to pull forward very importantly our mobile Kepler GPU. It was a 3 year endeavor to take the world's most advanced GPU and mobilizing it. And the results are just really quite spectacular. It's kind of amazing to see the graphics that you see in a high end PC or even a supercomputer for that matter running in a little mobile processor. And the architecture and the efficiency is so exquisite that the energy efficiency is really, really it's a big discontinuity. I mean, we're going to we've already demonstrated some 3 times better energy efficiency. And as you know, energy efficiency if in a constrained energy environment like a mobile device, the energy the most energy efficient processor is also the most high performance processor. And so I'm super excited about Logan and now we can get into the marketplace well ahead of the competition. And so those factors along with the work that we're doing in GPUs are likely to play a role. And so we'll see how it turns out. Thanks, Jensen. Really appreciate it. Thank you. Yes. Thanks, Betsy. And our next question will come from the line of James Schneider with Goldman Sachs. Good afternoon. Thanks for taking my question. I wanted to ask about the qualification at the carriers for the LTE modem. You talked you're still on track for AT and T qualification by the end of this year. I was wondering if you could maybe give us some help to understand whether you might expect that the TEGRA 4i product or the LTE modem might ship on other carriers before AT and T? Let's see. First of all, our modem qualification comes in 2 different parts and they're related and but not the same. First is the data service, which is important for all of our modem excuse me, all of our tablet products. And so data modem cert is well ahead of the voice and we're in the process of doing that as we speak. And then there's the voice that goes with TEGRA 4i. That happens the certification completes near the end of the year. And so we're not expecting the reason why we do AT and T is because it's the most rigorous. And if we get through AT and T, you're pretty much set on just about vastly the Western world's open markets. And so that's the reason why we are focused on AT and T first. Thanks. That's helpful. And then just as a quick follow-up. On the gross margins you saw in Q2, was more of the improvements due to the mix up of the Quadro and Tesla businesses? Or was more of that due to the increase in mix within the desktop GPU business? All 3. Yes. All 3. Yes. You with Chris mentioned that Tesla had an almost record quarter. And most of that was from not one singular open markets and smaller installations and clusters being purchased to run off the shelf applications. And so there's now just a current of business that appears to have developed around the world. And that's really healthy for gross margins. And whenever we do well in high end gaming or in gaming, it helps our gross margins. You know that GeForce has 2 parts. There's the GeForce for OEMs and there GeForce GTX for gaming. Usually when I say gaming, I just mean GeForce GTX, which happens to be most of our the upper half of our GPU business, GeForce business. That's helpful. Thank you. Our next question comes from the line of Craig Ellis with B. Riley. Thanks for taking the question. Jensen, just to clarify the question that Chris had asked. You had mentioned that you expect operating expense to stay at current levels. When you refer to current levels, were you referring to the levels that you'll be at with fiscal Q3 guidance or levels that you were at with the result that you had in fiscal 2Q? This coming quarter plusminus. Okay. So annualized if that's where OpEx is then you'd be on something closer to a 1.84 $1,000,000,000 annual OpEx run rate, correct? No, that's not correct. We go ahead, Karen. So I mentioned we're at $700,000,000 just under $800,000,000 for the first half. And then if you add the 4 2018 guidance and then on a path for Q4, if you do some trajectory Okay. Got it. And then switching gears to the product side, Jensen, a lot of discussion on Grid and Shield as they get started to ramp for revenues. When you look out at the ramps that you have planned for those separate products, when do they start becoming material relative to total company revenues? For example, when would either of them start to move into that 3% to 5% of company sales range? I would really love to see Grid be able to contribute at a level like Tesla next year. And no Tesla contributes materially. I think that Shield is just hard to say. We didn't set we have high expectations from a personal level, but we didn't set high expectations from a financial level. We think it's just a really special and quite a distinguished product. And the more PC is to a PC. This is a gaming Android device to a PC is to a PC. This is a gaming Android device to a Android device. And it's a specialized Android device just as our GeForce PCs are really a specialized gaming specialized PC for gaming. And I think the logic is relatively similar. We can deploy the company's DNA expertise in graphics and gaming into Shield. And so people understand it when NVIDIA brings a gaming product to market. They've known and grown up with GeForce for many of our I even meet many engineers at NVIDIA who grew up on NVIDIA's GPUs. And they know our gaming brands very well and they know what we can do in this field. And so I think it could be a really interesting outcome. But we're modest with it right now and we're just really grateful that everybody loves it so much. So with the growth that you're seeing in the grid initiative Right. Yes. So we follow-up with you afterwards. We've got another couple minutes left and let's get one more question if possible. Sure, Chris. Thanks. Thanks, Luca. Yes. And our next question will come from the line of David Wong with Wells Fargo. Thanks very much. Your notebook GPU sequential trend for July October, is this purely a reflection of the overall notebook market? Or have you had any significant socket losses that would result in the market numbers showing a falling notebook GPU share for NVIDIA? Our sequential and annual notebook decline is slower dramatically slower than the overall notebook decline. Okay, great. And do you expect TEGRA 4 sales might ramp to a peak equal or greater than TEGRA 3? Or should we expect a lower crest for TEGRA 4? That's a tough question, because two factors. One factor is it's hard to say exactly where Shield is going to be. And we're just expecting it we're just trying to be modest at the moment. 2, the separation between Tegra 4 and TEGRA 3 or TEGRA 3 and TEGRA 4 is well over a year. The separation between TEGRA 4 and TEGRA Next is as you know relatively short because Logan is already sampling. The sacrifice that we made on TEGRA 4 to bring in Logan was really a good decision, because we wanted to introduce the mobile world to the most advanced GPU in the world and what NVIDIA's core DNA is all about. And it's at a time when the market is really craving a great GPU. The next generation Tegra or Logan has a lot more than a great GPU in it. And there are many other surprises that we have in store that I'm just super excited about. But at the very minimum, it contains the most advanced GPU in the world, binary compatible, architecturally compatible, but at a power envelope that's 100 times lower. And it's the most efficient GPU that's ever been built for mobile. And any energy or performance comparison is against anything that's available or around the horizon. It's just off the charts. And so we're going to take Logan to market as fast as we can. And so those two factors, Shield and Logan, are kind of makes that your question a little hard to answer. Great. Thanks very much. The net of it is good news. Okay, good. Thanks. Thanks, everyone. We look forward to talking to you next time on our Q3 earnings call. Anyone we haven't caught up with now, we'll catch up with you immediately after call. Thank you. And this does conclude today's conference call. You may now disconnect.