Earnings Call: Q1 2014

May 9, 2013

Good afternoon. My name is Gina, and I will be your conference operator today. At this time, I would like to welcome everyone to NVIDIA Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question Thank you. Mr. Rob Chunger, Vice President of Investor Relations, you may begin your conference. Thank you. Good afternoon, everyone, and welcome to NVIDIA's conference call on Q1 of fiscal 2014 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'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 May 15, 2013, the webcast will be available for replay until our conference call to discuss our financial results for our Q2 of fiscal 2014. 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 ks for the fiscal year ended January 27, 2013, and 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, May 9, 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 Pette Research. During this call, we will discuss non GAAP financial measures. You will find a reconciliation of these non GAAP financial measures to GAAP financial measures in our financial release, which is posted on our website. With that, let's begin. Our results this quarter came in at the upper end of our guidance, driven by strong sales of higher end products for PC gaming. We made good progress on our key strategies as the Kepler GPU architecture, which delivers outstanding performance and energy efficiency, drove strong GeForce demand with PC gamers and began to flow through our Quadro and Tesla businesses in new products. The PC gaming software market, which is forecasted to grow from $17,000,000,000 in 2012 to over $20,000,000,000 by 2015 continues to be fueled by new great content. Q1 saw the continued growth of free to play games and the release of 3 hot titles, Crisis 3, Tomb Raider and BioShock Ultimate. To enable our customers to experience these games at their visual best, we launched GeForce GTX Titan. Our best indicator of future success customer demand. And since its launch in February, Titan continues to sell out as fast as it's delivered. It packs into a form factor 7,000,000,000 transistors using the same Kepler architecture that powers the world's fastest supercomputer, the Titan at Oak Ridge National Laboratory. Strong press reviews have reinforced the value of Titan. Anantech described it this way, it's simply in a league of its own right now. Titan delivers the kind of awe inspiring performance we have come to expect from NVIDIA's most powerful video cards. And Eurogamer said, Titan is a unique remarkable product, a serious statement of intent from NVIDIA on the future of rendering technology. This quarter, we also brought Kepler fully into the enterprise workstation market, launching 4 new Quadro K Series professional graphics products. They deliver up to 50% faster visualization performance and twice the compute horsepower of previous generation Quadro products. The Quadro K Series is now available from key OEM workstation suppliers, including Dell, HP, Lenovo and Fujitsu and is supported in key professional software applications. As they roll out this year to customers worldwide, we expect Quadro to drive unprecedented performance and power efficiency for the design, manufacturing and media and entertainment industries. As you know, one of our key strategies is to extend the GPU beyond the PC. At our recent GPU Technology Conference, we introduced Grid for the enterprise market, taking Kepler beyond the PC into the data center. In the short time since we began taking Grid to market this quarter, we've engaged over 100 Grid VGX and Grid VCA trial customers and signed many of the top Adobe, Autodesk and SOLIDWORKS resellers to take Grid VCA to market. The world's 1st visual computing appliance, NVIDIA Grid VCA is a powerful GPU based system. It runs complex applications such as those from Adobe Autodesk and Dassault systems and sends their graphics output over the network to be displayed on a client computer. This remote GPU acceleration gives users the same rich graphics experience they would get from a powerful dedicated workstation under their desk. We believe Grid VCA represents a potential $3,000,000,000 market opportunity. With an estimated base of 10,000,000 users of Adobe, Autodesk and SOLIDWORKS software, design firms and other creative businesses can now give their teams access to graphics intensive applications with uncompromised performance flexibility and for the first time ever mobility. This quarter, we also continued our work to bring world class visual computing to new mobile computing devices. In a key announcement, we introduced our first integrated Tegra LTE Processor, Tegra 4i, which delivers 3 times higher performance than the competing Qualcomm S400 solutions. Computer graphics in mobile matters more than ever, as evidenced by the growing importance of visual fidelity in the many new phones and tablets launched over the past year. To that end, Tegra 4i has 5 times the number of GPU cores as Tegra 3, enabling high quality console quality gaming experiences and full 1080p HD displays. In addition, it integrates an optimized version of the NVIDIA i500 software defined radio 4 gs CAT 3M4 multimode LTE modem. At our Investor Day, you saw Tega 4i making phone calls on the AT and T network, streaming high definition movies across LTE at a maximum 100 megabits per second and running the latest high end Android games. We've made significant headway in certifying our lineup of LTE modem based solutions. The I500 I500 discrete LTE modem and the single chip TEGR4i integrated LTE applications processor. We expect we continue to expect LTE data certification by early Q3 and Tegra 4i certification in Q4. In addition, this quarter we're working closely with our customers in preparing new TEGRA 4 devices for launch in the second half of the year and several will be announced over the coming weeks. Looking to the Q2 of the fiscal year, we anticipate continued strength in consumer gaming, particularly in the higher end of our GeForce product line. Quadro and Tesla will benefit as Kepler based products continue to drive in the professional graphics and high performance computing segments. And our grid enterprise products will engage the market, where our focus remains on growing our GRID VGX trial customers and ramping channel sales for our GRID VCA product. We anticipate announcements of new TEGR 4 devices starting in the Q2 and we look forward to bringing our Project Shield open platform gaming device to market with great anticipation. As we discussed during the recent Investor Day, while the company continues to be very focused on prudent investments leading to profitable growth, It is also committed to regular return of capital to shareholders. Karen will provide an update on this topic in her section. To summarize, our investments in Kepler are opening up new markets. We're driving share among gamers, strengthening our workstation and supercomputing segments and extending our GPUs into servers and data centers. As mainstream PCs continue to be disrupted by tablets, we're using TEGRA to leverage our world class GPU assets to lead that disruption. And with Tegra 4 devices and Tegra 4i certification on the way, we're gearing up to return to growth in the second half of the year. With that, let me turn the call over to Karen. Thanks, Rob. Hello, everyone. You have my full summary in the CFO commentary. Want to highlight for you some key areas before we take your questions. Revenue. 1st quarter revenue was 955,000,000 dollars at the high end of our outlook. GPU revenue was down 5.6% from Q1 and up 8.1% from a year earlier. By comparison, the consumer PC market declined roughly 15% over the same time period. We believe our outperformance stems from the success of our growth and targeted investment strategies. Rob talked about one of our key target markets for growth, gaming. Revenue from our gaming GPUs was up 24% year over year. GTX Titan, our highest performance single GPU, which retails for $1,000 was launched 3 months ago and continues to sell out as fast as it becomes available. Our investments are directed not only at advancing the GPU, but also at extending its reach. Our focus on CUDA and general purpose computing are continuing to gain traction in the marketplace, as evidenced by our Tesla revenue growth of 55% year over year. In the TEGRA Processor segment, revenue was down 50.5% from the previous quarter and down 22.2% year over year. As mentioned on our Q4 earnings call and reiterated at last month's Analyst Day, we made a strategic decision to push out schedule for TEGRA 4 by about a quarter, enabling us to pull in the introduction of TEGRA 4i, our first mobile processor with an integrated modem. This allowed us to engage the LTE phone market 6 months earlier with an integrated processor that is significantly differentiated. The revenue decline over both periods reflects this impact. Sales volume of TEGR3 Processors declined as customers began to ramp down production of TEGRA 3 based smartphones and tablets. We expect this to continue into the next quarter as customers start to announce TEGRA 4 design with further new designs and falling ramp starting in the second half of the year. Our Q2 revenue guidance reflects this, with revenue expected to be up about 2% quarter over quarter. We expect the GPU segment to do better than this and the Tegra Processor segment to be lower due to the volume for Tegra 4 starting in Q3. Gross Margins. We achieved record gross margins this quarter, now in the 54% range, up 1.4 percentage points sequentially and up 4.2 percentage points year over year. There are always puts and takes, but this improvement reflects a rich mix of higher margin products as well as the underlying value of our GPUs in the marketplace and our focus on costs. For Q2, we expect margins to remain within the same 54 percentage range as Q1 with a high mix of our higher margin products. OpEx. OpEx this quarter was in line with our outlook. Our investments support our growth strategies, which are to lead in visual computing, extend the GPU beyond PC and with TEGRA leverage our visual computing assets into the fast growing market for new computing devices. For Q2, we expect GAAP OpEx to be approximately $448,000,000 and non GAAP OpEx to be approximately 408 $1,000,000 Non GAAP OpEx excludes stock based compensation and certain other charges related to acquisitions and the aggregate of approximately $40,000,000 The increase in our expectations for Q2 OpEx is primarily related to hiring for our strategic initiatives and due to the tape out and related engineering costs for new products we are bringing up this quarter. We are very focused on managing OpEx to balance the strategic objectives of increasing TAM, growing revenue and doing so profitably. For the fiscal year, we expect GAAP OpEx to be approximately $1,760,000,000 with non GAAP OpEx of $396,000,000 in Q1 $408,000,000 in Q2. This results in $804,000,000 for the first half of the year, in line with our expectations of approximately $1,600,000,000 for the year. EPS. GAAP EPS of $0.13 per share and non GAAP of $0.18 per share was an increase of 30% and 12.5% respectively over the prior year and above street consensus estimates for GAAP of $0.10 per share. Revenue was certainly a component, increasing 3.2% year over year, with growth largely attributable to our gross margin improvement, demonstrating the underlying lift that is possible in our business. Turning to the balance sheet. Our cash position remains very strong. Cash at the end of the quarter was 3,710,000,000 dollars We generated $175,700,000 in cash from operations and 110,000,000 in free cash flow. As announced at our recent Analyst Day, we plan to return in excess of $1,000,000,000 this fiscal year in the form of share repurchases and quarterly dividend payments. During the Q1, we returned 146 point $3,000,000 to shareholders by repurchasing $100,000,000 of shares, retiring $8,000,000 of shares and paying 46 $3,000,000 of dividends at $0.75 per share. This represents a total return of 188% on GAAP net income and 133% return on free cash flow. As part of this capital return program, NVIDIA plans to continue its quarterly dividend at 0.75 $0.075 per share, excuse me, for that error earlier and expects to enter into a 750,000,000 dollars structured share repurchase this fiscal year. The broadening of our capital return program under scores our confidence and the traction of our strategies in the market and our long term cash flow outlook. Returning cash in the form of repurchasing shares also underscores our belief that buying our shares at current prices is an attractive use of capital. As we look beyond the current fiscal year, we expect quarterly dividends to remain a key component of our strategy, which the Board plans to review annually for potential increases. In addition, we expect to continue the use of share repurchases as a means of capital return to our shareholders with the amount function of certain factors such as market conditions, our share price, level and availability of domestic cash and ability to access all share cash in a tax efficient manner among other things. Thank you. Rob? That concludes our prepared remarks. We'll now take questions. Your first question comes from the line of Glenn Young with Citi. Thanks for letting me ask your question. In the prepared CFO commentary online, you talked about Haswell being an impact to notebook strength that we're seeing now. I wonder if you could just elaborate on that as we enter into the July quarter Haswell for notebook will be launched sometime in the quarter. Do you expect therefore that that business will improve? And how does that set you up therefore for the second half of the year? I think Karen's comments were related to the fact that as people gear up for Haswell, they tend to be leaner on inventory. We're expecting to be quite successful in Haswell and we're expecting to gain share on Haswell and continue our leadership in the GP business. Okay. Jason, fair enough. And then maybe just as a follow-up. I'm just trying to get a sense, Citigroup has this thesis to be fair and so I know we're wrong that the growth in high end tablets and smartphones may in fact be slowing and the market is reverting more to low end. I wonder in the work that you do in the market, do you see that? And to the extent that you do, how do you think NVIDIA best serves that market? Did you guys hear the first part? Something cut out. High level is low in tablet. Sorry. The first part was just referencing the potential that the high end smartphone and tablet market may be slowing in favor of low end. Well, it's slowing, but it's a very large market. And so if you if we were the dominant player in that segment in those segments today, then our business would be slowing. But we're a new entrant in these markets. And so, my sense is that the market is quite large and it gives us a lot of opportunities. I think at the high end or the mid range or the low end, Android is really quite disruptive and it's going to continue to become more popular over time. People who enjoy Android phones are going to want to enjoy Android tablets and Android this and that. And the reason for that is of course once you get your content in the cloud and once you have all of your applications on from the Google Play Store, you're going to want to avoid more of those applications and all the devices that you own. And so my sense is that there's still great opportunities to continue to grow the Android market and it's going to reflect the Android phone shares over time. And so my belief is that the opportunities are quite exciting for us still. Good point. Thanks, Jen. Yeah. Thanks a lot. Your next audio question comes from the line of Vivek Arya with Bank of America Merrill Lynch. Question on the discrete graphics market. If I were to make the assumption that PCs decline over the next few years, is it fair to think that the discrete graphics market has peaked and that will also decline from the next year onwards? Because if I look at the last 5 years, the discrete market has stayed flattish in the $1,000,000,000 or so range with sort of periodic share shifts between yourself and ATI. But now if PC start declining, then would the discrete graphics market also start declining substantially? Well, first of all, I would correct some assumptions. The discrete GPU market has been growing for us 12% CAGR over the last 4, 5 years. We see no reason why it's going to stop. And the reason for that is because we're making the GPU more useful over time. 4 years ago, no one spoke of using GPUs for general purpose computing. 4 years ago, no one spoke of using GPUs to accelerate digital content creation applications. 4 years ago, no one spoke about putting GPUs in service. Now Cisco, IBM, Dell, HP, all are shipping servers with GPUs inside. They're shipping it for accelerated VDI. They're shipping it for cloud computing. You could probably from a GTC conference, Shazam and many others are starting to develop their software on GPU so that they could deal with the big data problems that are happening as a result of more and more mobile devices and the use of cloud computing. 4 years ago, none of that stuff happened. And I think our investment in making the GPU more flexible and our investment in CUDA has the GPU a really terrific parallel processing device. And so we've expanded the reach of GPUs into non PC devices. Meanwhile, PC is really one of the most important gaming platforms today. It's one of the most important gaming platforms because it's open. And if you were developing free to play games where the economics were in, the PC is really a terrific platform for that. There are many markets outside particularly in Asia, which particularly in Asia, which happens to be the fastest growing markets for us, the PC is really the preferred gaming platform and we're seeing a lot of growth there. And so there's a lot of reasons to be enthusiastic about the continued growth of GPUs. And so I would say the assumptions are needs to be corrected, number 1. Number 2, as tablets disrupt the PC, it disrupts the PC for casual PC use. You can't really use a tablet to design a car yet. And it really doesn't make sense to use a phone to create a movie. So for a lot of people on productivity and the keyboard is important and large storage is important and a mouse is important and large display is important. For a lot of us, the PC continues to be very important and those are not being disrupted by the tablet really. And where the segments of the market that's being disrupted by the tablet today, we're not really players as you know, right? The bottom half of the PC market is a non market for NVIDIA for a long time. It's probably going on at 5, 6, 7 years where we've not been in this segment of the marketplace. And that's the reason why we invested in TEGRIS so that we could participate in these new computing devices disrupting the entry level PC. A great tablet is surely better than a cheap PC. Got it. Very helpful. And as my follow-up, Jensen, just wanted to get your perspective on the competitive landscape in both the 4 gs LTE and high end processors. I think previously you made the comparison with Qualcomm's S400 I believe. How do you think your products compare with the S600, S800? And especially as I look forward, a number of arms partners are coming out with the Cortex A15 products using big little architectures etcetera. How do you see this playing out? And what do you think your competitive differentiators will be in this market? We see the phone market and the rest of the new computing devices market to be very different. Let me talk about the phone market first. The high end phone market is dominated really by 2 players, Samsung and both of them have their own application processors. We don't really think that we could add a whole lot of value there. And so our target is the next segment down. We believe that we can add value to the phone market by building an application processor that has the features and the capability of a super phone, but the price of a mainstream phone. And that's the reason why we targeted the segment that is currently Snap Dragon 400. From that perspective, you could see that Tegra 4i is incredibly well positioned. It brings a level of capabilities and features and performance that that segment has just never seen. And we launched it early in the year, a couple of months ago. We see a lot of excitement. We have customer projects going now and hopefully we can get to market as soon as possible. We pulled in the TEGRA 4i by about 6 months. That was a decision that we made. We felt that it was good for us to engage the LTE market as soon as possible. This is a market that's still doubling every year. The sooner we engage it, the better off we're going to be. And so that's the phone market. Outside of the phone market, I think it's fair to say and that you would recognize this as well that there's a lot of licensees of ARM, something like 80 licensees of ARMs. I don't even know who isn't a licensee of ARM, maybe that's a bit of a way of saying it. But yet there aren't that many people that are contenders for the performance segment. Tegra II was the highest was the world's first dual core. Tegra 3 was the world's 1st quad core with a 4 +1 architecture. And Tegra 4 is the highest performance application processor in the marketplace today. And so my sense is that performance is a combination of architecture. Obviously, the ARM processor makes a big difference, your GPU, your system architecture and also of course of software. That's an area that we can add a lot of value to. Outside of phones, where these new computing devices are becoming increasingly like your entry level personal computer performance matters. And this is an area we can add a lot of value. Your next question comes from the line of rahumik shaw with Nomura Securities. Hi, gentlemen. Just on Tegra and my question is, what sort of trajectory should we expect for the back half of the year? I think you've said previously that for the full year you guys are targeting sort of a flattish number. Is that from your sense is that still a realistic target? That's what we're expecting. If you look at last year, Integra 3 had really a couple of high profile devices. And those have a lifetime in the marketplace about a year. And because we decided to pull Integra 4i by 6 months, as a result, we slipped out Integra 4 by about 3 months. We're going to have a trough in Q2 this year. Types of devices coming to market. We have tablets, obviously, in development and we have other types of computing devices that we will also announce probably starting in late Q2 and ramping strongly in Q3 and Q4. But one of the areas that is becoming more prominent is our automotive business. It doubles every year. It's going to double this year again. And it will continue to double with the current design wins that we have in FY 2016 should peak at about $450,000,000 or so. And so this is an important business for us and we're just becoming more diversified in our TEGRA business. Okay. That's great. And then then great job on gross margins. As TEGRA ramps as a percentage of the business over the course of the year, How might that influence gross margins? On balance, TEGRA is lower than 54%. However, grid and Tesla are much higher than 54%. And so the 2 of them are both going to grow and we'll see how it shakes out. Hopefully, they both grow really fast and then the gross margins will just be where the gross margins are. Yes. All right. Thanks for taking my question. Yes. Thanks a lot, Ramin. Your next audio question comes from the line of David Wong with Wells Fargo. Thank you very much. Can you give us any view for the relative proportions of GPU revenues in desktops versus notebooks? And given the trend you're seeing, do you expect desktops to grow faster than notebooks or vice versa over the next few years for you? First of all desktop includes workstations, desktop includes gaming. And then of course, discrete graphics also includes data centers, includes servers, includes supercomputers and then there's notebook. And so did you want me to compare notebook versus all of the other discrete GPUs or specifically notebook versus low end desktop or notebook versus desktop or I mean the low end desktop business is not very large to start. Yes. Well, I'm talking about desktops for personal use, right, individuals buying desktops for gaming and other things? Well, gaming PCs are still growing. Notebooks is about flattish. And so I would continue I would expect notebook gaming PCs to continue to grow. So your revenues into GPU revenues into gaming PCs you would expect to outstrip GPU revenues into notebooks over the next few years? I would think so. I would think so. And can you give us an EPU for the relative The notebook market in general is flattish, right? The high end notebook market is about flattish. The overall notebook market is declining some. But that's because the low end part of the notebook market, which we don't participate in is being disrupted by tablets. But we're not in that market anyways. We're not in that market anyways. And you could argue that the more disruptive tablets are of the low end PC market, the better off it is for us. And I think it is. More people enjoy tablets, the better off it is. But people who build these high end gaming PCs and people who are enthusiasts and who enjoy having the most performance on their desktop or people who are building these PCs for their own video editing hobbies or the makers, people who are designing 3 d objects and then printing it at home. They print their own jewelry, they print their own, I don't know what, telephones and they need to be designed in 3 d somehow and those PCs tend to have GPUs inside. And that's a movement that's really growing fast. And so I would say that the desktop PC market that we target, that we serve is quite a vibrant market. Great. Thanks. You're welcome, David. Your next audio question comes from the line of Hans Mosesman with Raymond James. Hi, Peterson in for Hans. Just a clarification question on the certification timeline for TEGRA 4i. Is that just with 1 U. S. Carrier or is there a broader certification expected by 4Q? Well, it tends to be broader, but you have you really should start with AT and T because if you get certified at AT and T, you're pretty much certifying the superset for just about every country. If you're good at AT and T, you're pretty good at in Italy or Turkey or bunch of global markets. Okay. And as a follow-up, can you talk about the 2Q guidance in what areas of the GPU business you expect to grow sequentially? Thanks. Well, we said that I think the first question was relating to notebook. Notebook is likely to be slightly down as people are cautious when inventory is in the second half. Still, we still have to be quite vibrant for quite seasonal. But other than that everything else is growing. But overall, I think the GPU marketplace, our GPU Your next audio question comes from the line of Mike McConnell with PacificQuest Securities. I wanted to If we just look at your Q1 results and kind of compare it to your competitor, it does look like, just looking at the numbers that you did seed some share in Q1 for the first time in quite a while in the kind of traditional GPU market. So just wanted to understand I understand it's just 1 quarter, but kind of what happened in the quarter? And then kind of looking forward, more importantly, what's giving you the confidence that to take some share back from your competitor both in desktop and or notebook? In notebook, you have a pretty good sense of your share because of design wins. And unless our share could fluctuate a little bit depending on sell in versus sell out of notebooks and how various mercury research when the mercury research takes the poll, takes the snapshot. But that's one factor. And the other factor is if Intel versus AMD lose a share. On balance, our share is higher on Intel than it is on AMD as you could imagine, I mean AMD CPUs. So if Intel were to lose share to AMD, it would affect our share. But so long as Intel's share relative to AMD is stable or if Intel were to gain share, then our share would be would reflect that. Hey, Mike, this is Rob. When you said that the numbers that you saw numbers that saw the change in share, what numbers are you referring to? The mercury numbers aren't out as far as I know, right? I'm just looking at your competitors' results in Q1 for sequential growth in their GPU business comparing it to the high single digit decline you saw in your April quarter understanding that there's a time gap there in terms of one being off quarter versus one being calendar quarter? Okay. Yes, that's And then There's no evidence that we're losing shares. Okay. Well, the market data will be out soon. Yes. The date will be out soon. Let's wait for that. Okay. Fair enough. And then on the TEGRA business, how much of that 103, if you can provide it was kind of traditional mobile I guess wireless of the 103? I'm sorry? How much of Kegra is If you know the answer go ahead and answer it. Okay. Sure. Well, as Justin explained though, our Tegra processor is going into many different devices. You're going to see that go into auto and smartphones and tablets. So you really should think about the whole Tegra processor segment. We shifted it that way, so you could clearly see what our processor, the SoC is doing in the market. Now we have some residual GPU related businesses with consoles, Sony consoles, but that's really winding down. And then there are some embedded the same thing that pretty much stays pretty stable right now until again we'll take our TEGRA processor and put it into embedded products. So my preference is for you to look at TEGRA processor as a whole as where we're going to with our actual device, the processor itself. Fair to assume though that a majority is still the mobile business though I guess without $10,000,000 Yes, absolutely. Yes. Smartphone if you consider mobile to be smartphone and tablet, yes. We look at it as broader. The car is the biggest mobile device. Okay. Understood. And then just a clarification, one last thing. It said $1,600,000,000 for OpEx. That's a non GAAP number. So would the GAAP number be kind of closer to like $1,750,000,000 What would be the GAAP number? Yes. Actually, that's exactly right. I said $1,760,000,000 for GAAP. I missed that. Okay. Thank you. No problem. Your next audio question comes from the line of Greg Ellis with B. Riley. Thanks for taking the question. Nice job on the gross margins and the quarter and outlook. Jensen, maybe a more forward looking view at the market share question in notebooks. You had said that you expect to gain share in Haswell. I think last year through the year you had a nice tick up in share in the back to school season. You saw another nice tick up in share on the notebook side in the holiday selling season. Is that the pattern you expect this year? Or said differently, where and when do you see the share gain coming in this year in that business? Well, probably not as big of a change this year, because if you look at it this way, suppose Intel was 80% of the market and AMD was 20%. And on most AMD platforms, there aren't really opportunities for us. On Intel platforms, out of that 80%, if we were to have the vast majority of that, say 80% of that, that results in a market share of some 64% overall. And so that tells you something about our market share. We're on the Intel platforms, we're quite successful. On the AMD platforms, there are not really opportunities for us. Now if you if AMD were to gain share by 5%, will tick up a little bit. If AMD loses share or Intel loses share, we would lose overall share. And so at this point, I think that our market share on notebooks is relatively stable and it could be from season to season in the model to model to OEM to OEM. We may win or lose a little bit. But I think overall that's just not a factor in our overall business that much anymore. We're going to keep working hard to win share there. And but if you look at our growth prospects, gaming PC is very important. The workstation marketplace as the industries around the world continue to develop and as more economies become a design economy instead of just the manufacturing economy, our workstation business continues to grow. More and more people are using and creating with digital content. And when they create with digital content, it helps our workstation business. And then our all of our grid initiatives to take grid into accelerated VDI, accelerating Citrix applications, if you will, accelerating VMware VDI applications to grid in the cloud to grid being used for cloud computing dealing with big data. That's really where the really exciting GPU growth opportunities are. That's helpful. And then to follow-up on that point, as you look at Grid and as you look at Shield, are you at a point where you can quantify what the contribution of those two businesses would be for the business this year? And if not, do you when do you think you'll get there? For Grid and Shield, I am really hopeful that at the end of the year as we look back, when we're done with this fiscal year and we look back that both of them contributed to our earnings. Your next audio question comes from the line of Rajeev Gill with Needham and Company. A question on the on tegra. You talked about TEGRA troughing in the Q2 mainly because of the transition to 4i. Was there any inventory correction also contributing to that trough or market share loss, which contributed to that massive decline in Q1 and then also declining again in Q2 off that base? Well, first of all, last year we had a in Q1. This year we're going to have our trough in Q2. The overall market is quite doing quite well. So if we had a trough, we must have lost share and we lose share momentarily in our trough And then when we grow back, we're going to gain share. We're still a relatively small player in the overall mobile space. Our position is becoming more and more clear to people. The partners that we work with are enthusiastic about the products that we're building. But we have a trough because we decided to pull in Integra 4i. And we pulled Integra 4i by about 6 months. And as a result, we weren't able to hold on to our schedule on TEGRA 4. And so TEGRA 4 instead of ramping in Q2 like TEGRA 3 ramped in Q2 last year, TEGRA 4 is going to ramp in Q3. Right. I understand. And as we go into the second half for TEGRA, excluding grid and excluding Shield, but just looking at the Tegra business exclusively because now you're lumping everything in Tegra now, What about how many design wins, I guess, do you have on Tegra 4i that would kind of give you some confidence that you're starting to penetrate. And I would assume that would be on the handset side. And along those lines, I mean, I guess the competitive landscape isn't is more intense than it was, say, 2 years ago, particularly in China with MediaTek and Spreadtrum. So I'm just wondering if you could maybe talk about where you could grow on the handset. I know you talked about kind of where Qualcomm Snapdragon 400 plays into, but if you could elaborate on that, that would be great. Thanks a lot, Jensen. Let's see. That was a whole lot of questions lumped into 1 and I'm just teasing apart real quick. Number 1, grid is not lumped into Tegra. Grid is part of GPUs. And so let me that's just a first clarification. Tegra includes Tegra is our new computing devices business. It includes phones. It includes tablets. It includes everything Android. It includes automotive, it includes shield. Because TEGRA is a chip, it's not a business. We lump it all together for the simplicity of understanding and because we highly leverage everything. These mobile devices are becoming these computing new computing devices are becoming more and more similar. They all have ARM CPUs. They all have Android. They all have USB and HDMI and all these things that are kind of becoming universal computing platforms, whether it's a car or a television or a tablet, it's becoming very similar. And that's one of the reasons why Android is becoming so successful. It's a it really embodies all of the spirit of Linux. It's open and it's and if you want to be an Android device, devices like Tegra are going to be quite useful. So we lump all that together for simplicity. In the case of phones in the case of Tegra, there are 2 devices that we're selling now. There's Tegra 4 and then there's Tegra 4i. Tegra 4 is the high end processor and Tegra 4i has an integrated modem. Tegra 4i is much more targeted at phones. Tegra 4 is much more targeted at tablets, set top boxes, cars, clamshell devices, etcetera. And so we have a lot more TEGRA 4i. And I was talking about the positioning of Tegra 4i earlier that was really targeted at the mainstream with superphone features. And we have customer projects ongoing now. And our expectation is that the design cycle would take about 9 months to about a year, which is relatively typical for phones. And so we announced it in Q1. My expectation is that we would have phones completed in late Q2 excuse me, late Q4 and then be in production, hopefully be in shelves by Q1 of next year. Tablets and clamshells and TVs and set top boxes and that kind of stuff, cars and that kind of stuff. We hope to announce so we hope our customers announce devices in late Q2 and we would like to be ramping quite hard by Q3. I hope that clarifies it for you. No, no, it does. And I appreciate that. But just to make sure, so 4i, you're really not going to see much revenue until obviously into Q1 of next year. So the TEGRA revenue that's going to be ramping in the second half is really going to come from either Shield or Tegra 4 in tablets or automotive or whatever it is? Mostly yes, mostly TEGRA 4 in tablets, in auto or in shield or set top boxes, right. Okay. Got it. Thanks a lot. Your next audio question comes from the line of James Schneider with Goldman Sachs. Gross margins is an area where you've done very, very well over the past couple of years. And I wanted to ask relative to the Q1 and Q2, can you break apart for us how much of the improvement was due to the enterprise mix, in other words Quadro and Tesla and things like that? And how much of that was mix in the core gaming and other GPU business? And whether you think that mix in the core gaming part of the business is sustainable as we go into the back half of the year? Our let me break it down this way. So whenever gaming whenever our gaming business improves, it helps gross margins. Whenever GTX improves, it helps gross margins. When Tesla grows, it helps gross margins. When Quadro grows, it helps gross margins relative to the corporate average. I'm talking about relative to corporate average. Average. When grid grows, it helps relative to gross margins. When notebook obviously drags the gross margins, because they tend to be more competitive business. Low end desktop PC business tends to drag gross margins, but that's not a very large business anyhow, okay? So if you just think of it at the highest level simplistically like that, every quarter is of course a little bit different. And but if you simplistically think of it that way that grid, Tesla, Quadro and GTX are good for margins. Improving those businesses are good for margins. Okay, fair enough. And then just as a follow-up, is there any way and it's kind of another market sizing or opportunity sizing thing. For this year, can you talk about roughly what contribution you expect from your nontraditional enterprise business that's things like Tesla, things like grid for enterprise to the extent that you have it? Any commentary there would be helpful that is enterprise outside Quadro? I believe that the vast majority of our enterprise growth will come outside of vast majority comes outside of Quadro. Quadro is stable and slightly growing, but the growth the really significant growth should be coming out of Tesla and grid. That's for enterprise. But any sense of how big it would be in absolute dollar terms? I would guess several $100,000,000 year over year. Great. That's very helpful. Thank you. I think we have time for one more question. Your last audio question comes from the line of Sean Webster with Macquarie. Back on the gross margin subject, good job there. I was just curious what went better than expected in the quarter relative to when you came into the quarter. Was it a pricing event? Did you get some unexpected cost reduction? Was it what were some of the moving parts versus what you expected? Well, the PC market declined 10% quarter over quarter, but we declined only 6% quarter over quarter. And that difference comes from growth in the non commodity PC space, of course. And wherever that growth is, that's non commodity PC space would tend to be Tesla and Quadro and GTX. And those growth are always good for us. And that helps gross margins. That's also where we're putting most of our energy. Most of our energy related to GPGPU related to putting our extending our GPU beyond the PC into data centers and servers. All of the work that has led to the announcement of Cisco and IBM and Dell and HP launching their GPU servers. All of that kind of growth is good. And I think we're just gearing up for grid becoming a larger and larger component of our business and that's good for our margins. I see. And on pricing for your notebook GPUs and your desktop GPUs, did those digit pricing increase sequentially? No. That pricing those kind of pricing is known quite long ago, right? We get design wins 6 months, 9 months before the quarter. And so those kind of pricing actions are done long ago. Okay. Well, going into the Q2, I think you said you expected the notebooks to be down sequentially, is that right, notebook GPU? Yes. Okay. So if I'm doing the math right, then I'm seeing double digit increases in workstation, Tesla and or your desktop business. Can you help me understand what's going to drive the big growth you're expecting in the other parts of the GPU business for Q2? Karen, did you want to answer that? Sure. Desktop, GPUs, GTX is probably one of the biggest drivers. And what is that? Is there something that you're expecting in terms of new gains driving demand? Or what's the driver of it? Well, we'd like to wait. Tell you about that. Yes, Sean, give us 90 days. Let's we'll come back and report on that. Okay. Fair enough. Thanks, guys. Okay. Thank you. All right. I think that's all we have time for today. Thanks very much everyone. Look forward to talking to you next time at our Q2 earnings call.