Earnings Call: Q4 2013

Feb 13, 2013

Afternoon. My name is Andrika, and I will be your conference operator today. At this time, I would like to welcome everyone to the NVIDIA 4th Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you. I would now like to turn the call over to your host, Mr. Rob Chunger. Sir, you may begin your conference. Thank you. Good afternoon, and welcome to NVIDIA's conference call on annual and Q4 of fiscal 2013 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 20, 2013, and the webcast will be available for replay until our conference call to discuss our financial results for our Q1 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 Q for quarterly period ended October 28, 2012 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, February 13, 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 Petty 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. With that, let's begin. We are pleased to report a record year for the company. Despite significant headwinds, we achieved record annual revenues and gross margins for fiscal year 2013. Excluding chipset revenue, which we exited, we grew our GPU business 8% last year and for the 3rd consecutive year. Increased overall GPU market share from 53% to 65% and our notebook share by almost 20 percentage points from 47% to 66%. Tegra, Tesla and notebook GPUs all achieved record revenue. We invested in new growth products that are now sampling, including TEGRA 4, I500 4 gs LTE modem, Project Shield and Grid, while controlling OpEx at target for the year. This year, we transitioned Kepler across our GPU businesses. Gaming was a key area Massively Multiplayer Games or MMOs continued to drive a robust PC gaming market. Worldwide MMO revenues grew 21% last year to $13,000,000,000 according to market research firm, Newzoo. And GeForce is the gamer's choice of GPU by a margin of almost 2:one according to gamers on Steam. Our notebook share is near a record high. Kepler is also starting to ship into Quadro with revenues up 10% this quarter. With Tesla, we are leveraging GPUs beyond graphics into massively parallel processing in supercomputers. Just 3 years after we entered the market, 50 of the world's top 500 fastest computers are now powered by NVIDIA GPUs, including the fastest and the most energy efficient. We introduced NVIDIA Grid Visual Computing Appliances. Grid is a first of its kind graphics system that serves graphics intensive applications to many users at once. 1 of the major applications is cloud gaming. More than a dozen cloud gaming trials are up and running around the world and others will be announced by more telcos as the year progresses. At CES, we announced TEGRA 4, the world's fastest mobile processor. It is the first 4 +1 quad core A15 processor with an extra energy saving core and 72 graphics cores compared with Tegra 3's 12 cores. It delivers the world's fastest web browsing performance and new always on high dynamic range computational photography. At this point in time, we already have more design wins with TEGRA 4 than we had in total with TEGRA 3. We see significant new growth opportunities in the LTE connected device market, which is projected to be 150,000,000 units in 2013 and growing at 50% a year. We are now sampling our I500 4 gs LTE multiband multimode voice and data modem. More efficient and 40% the size of conventional modems, I500 delivers 4x the processing capability of its predecessor. This is the first result of our Icera acquisition. Icera is the 1st company to successfully create and commercialize a software defined radio modem and has been building modems since 2006. And we announced Project Shield, an NVIDIA branded open platform gaming device, a pure Android device connected to the Google Play Store and Tegra Zone, Project Shield is able to play any Android application and game and can also stream PC games from a nearby GeForce GTX PC. Powered by a TEGRA 4 Processor, Project Shield integrates a 5 inches retinal display, a console grade game controller and a first mobile tuned port based reflex speakers. We believe Shield will be attractive to modern gamers who want to play on open platforms and have great gaming experiences, while untethered to their TVs or PCs. Shield will enhance the strategic position of TEGRA. Besides highlighting the capabilities of TEGRA, SHIELD will attract great games to TEGRA Zone, which can then be enjoyed on every TEGRA powered device. TEGRAZONE has already been downloaded 6,000,000 times. Looking forward, our company is shifting gears to accelerate. Our GPU business remains strong while we extend our visual computing technology leadership. TEGR4 is ramping into production for mobile devices this year, while growing into embedded devices such as cars and gaming devices. We will engage the LTE connected devices market aggressively this year. And we will add new system products incorporating our processors and software, the NVIDIA GRID graphics appliance and Shield Android gaming device. We are excited by the investments we're making into these very large markets, where our expertise in visual computing can make unique contributions. With that, let me turn the call over to Karen. Thanks, Rob. NVIDIA had record revenue for the year of $4,300,000,000 up 7% from fiscal 2012. At the start of the year, we set out a number of financial objectives. It's satisfying to note that we achieved many of them. Among these goals were the following: gain share in our GPU business. Driven by the introduction of our new Kepler architecture, we gained share in both desktop and notebook and delivered record revenue for our notebook products, Grow TEGRA revenue at least 50%. Revenue for TEGRA products sold into smartphones and tablets increased by $181,000,000 to a record $541,000,000 up 50% year on year. Growth Quadro and Tesla revenue. Revenue for Tesla products increased 37% year on year as we shipped our 1st Kepler products, Tesla K10 in Q3 and Tesla K20 K20 in Q4. Quadro revenue was down roughly 6% year on year. In October, we shipped Quadro K5000, our first Kepler based Quadro product in limited volume. This year, we will launch Kepler for Quadro and volume top to bottom into the professional market. We expect Kepler for both Quadro and Tesla to do very well. Exit the year with gross margin of approximately 52%. We exceeded our target exiting Q4 with a gross margin of 52.9 percent and non GAAP of 53.2%. We had record gross margin for the full year with GAAP gross margin at 52%, up 60 basis points from the previous year and non GAAP gross margin up 52.3%, up 40 basis points manage our OpEx investment at approximately $1,560,000,000 on a GAAP basis and $1,400,000,000 for non GAAP. GAAP OpEx was $1,580,000,000 up $20,000,000 from our original expectation. This was due to a $20,000,000 expense for corporate donation made in the Q2. On a non GAAP basis, which excluded this $20,000,000 charge as well as stock based compensation Before moving on, I'd like to provide more background on OpEx as we continue to invest in our key growth strategy. Our OpEx is comprised primarily of employee related costs. This includes compensation and benefits as well as other related expenses and supporting costs, largely infrastructure for facilities and IT equipment. GAAP and non GAAP OpEx were both up 12% from fiscal 2012. Of the year on year OpEx increase for GAAP, 86% related to these employee related costs, 12% to a contribution expense for corporate donations and 2% related to all other costs. With non GAAP OpEx excluding the contribution expense as well as stock based comp and acquisition related costs, which were flat year over year, 98% of the increase came from employee and supporting infrastructure costs. The remaining 2% related to all other operating expenses. We are investing in the new products and major growth opportunities Rob talked about, Icera i500, Project Gray and Shield and NVIDIA Grid. We added about 840 new staff in fiscal 2013, giving us a total of nearly 8,000 employees at the end of the year. Of our new staff, 88% joined our engineering teams, 12% joined our operations and SG and A organization. We also invested in an annual pay increase for existing employees and began a 401 match in Q4. We believe our focused investment and our growth strategies and our core businesses are critical to our future growth. Now on to revenue by business segment for the full fiscal year. Beginning this quarter, we changed our financial reporting segments to reflect the way we are now managing our business. We now have 2 primary reporting segments: GPU and Tegra Processor. This new segmentation recognizes that we have 2 fundamental technologies, GPUs and SoCs, which we leverage across several markets under different brands. Revenue for the GPU business, which includes GeForce, Quadro and Tesla based GPUs, was at 2% year on year. This increase was achieved despite $173,000,000 decline in chipset products, which we discontinued. Excluding chipset product revenue, our GPU business grew 8%, representing our 3rd consecutive of GPU growth. Revenue for the TEGRA processor business was up almost 30% from the previous year, driven by the 50% increase in revenue for TEGRA sales shipped into smartphones and tablets, including WinRT devices referenced earlier. Full details of our new reporting segments as well historical revenue segmentation can be found in my CFO commentary posted on our website. Now I'd like to talk briefly about the Q4. Apart from our tax rate, Q4 results were in line with our expectations at the beginning of the quarter. Revenue was $1,110,000,000 down 8% sequentially and 16% year on year. Gross margins remained at record levels. GAAP gross margin was 52.9%, non GAAP was 53.2%. Operating expenses were $402,000,000 for GAAP and $360,000,000 for non GAAP. GAAP and non GAAP tax rates were both below our expectations at roughly 7% in Q4 as we benefited from the extension of the U. S. Research tax credit. Extension of this credit was enacted during our Q4, bringing our effective tax rates down for the year to roughly 15% for GAAP and non GAAP, in line with our outlook with the inclusion of this credit. Turning to the balance sheet. Our position remains strong in the quarter and throughout the year. Cash increased each quarter, reaching a record 3,730,000,000 dollars at Q4, up 9% sequentially and up 19% on fiscal 2012. In Q4, we initiated quarterly cash dividends and extended our share repurchase program. We returned $147,000,000 of cash to shareholders in the quarter, with $100,000,000 of stock repurchased and $47,000,000 in dividends paid. Accounts receivable at Q4 was up $9,000,000 over the prior quarter on slightly less shipment linearity. Conversely, inventory was down $9,000,000 from the prior quarter at 420,000,000 dollars Regarding the Q1 outlook for fiscal 2014, our expectations for GAAP are as follows: Revenue is expected to be $940,000,000 plus or minus 2%. We expect revenue for the Q1 to be less than Q4, reflecting lower GPU sales in line with expectations for the PC industry and lower TEGRA sales as customer devices based on TEGRA 3 ramp down ahead of TEGRA 4 production. We expect gross margin of approximately 52.9%, flat from Q4, OpEx of approximately $430,000,000 and a tax rate of approximately 16%, plus or minus 1%. We expect the same for the annual effective tax rate for fiscal 2014. For non GAAP, we expect the following differences from our GAAP outlook: gross margin of approximately 53.2%, black from 4 and OpEx of approximately $395,000,000 This excludes stock based compensation and certain charges related to acquisitions in the aggregate of approximately $35,000,000 dollars The increase in OpEx for Q1 over the 4th quarter is primarily due to the employee related costs, including planned hiring for our key growth businesses with the addition of a large FICA tax reset that occurs each 1st quarter. Depreciation and amortization are expected to be in the range of $59,000,000 to 61,000,000 dollars and capital expenditures of $55,000,000 to $65,000,000 Diluted shares are expected to be approximately $619,000,000 Lastly, we will pay our next quarterly cash dividend of $0.075 per share in the Q1 of fiscal 2014. On an annual basis, this is equivalent to $0.30 per share and approximates an annual yield of about 2.4% based on yesterday's closing price of $12.43 That concludes our prepared remarks. We will now take questions. Your first question comes from Betsy Van Hieff with Wedbush Securities. I was wondering if you could help us understand in terms of the guidance from the revenue, which business segment, is it going to be equally down as a percentage basis? Or is one going to be down more than the other in your reporting segments? So as I mentioned, we expect that our GPU business will be down very much in line with the PC industry. And as you know, Intel, AMD and other companies have already disclosed. And then the other component will be TEGRA related, which will be larger and that again is the transition effect from T4 from T3 to TEGRA 4. Okay. Thanks very much. And so my follow-up question has to do with OpEx. So that's a pretty big jump up in the GAAP OpEx 430,000,000 dollars from your $402,000,000 and then your $384,000,000 in the prior quarter. So as we're looking at the July October, are we going to see OpEx sort of flattening out or are we going to continue to have these incremental increases? And I was wondering if you could help us a little bit with the OpEx? Thank you. Sure. So as you saw last year, we had a similar jump and we have it every Q1. And as I explained, it's really the FICA tax reset that hits us pretty hard in the Q1. And just like in fiscal 20 13, OpEx levels off for the rest of the year. So we expect a similar type of impact this year. Okay. Thanks for answering my questions. Your next question comes from Steven Laskow with UBS. Yes. Thank you. Last year, just more specifically, you gave us full year guidance for both OpEx and the percentage growth on Tegra, which was very helpful in terms of thinking about where NVIDIA is going to land in fiscal 2013. Slide 12 in your presentation talks about your growth drivers. Can you give us a sense as to what Tegra will grow the OpEx number and just review some of those other growth drivers, so we have a sense as to where will end out for the full year? Well Steve, first of all thank you. I think we haven't decided yet whether to guide the full year or not. At the moment we've decided to guide a quarter out. And to tell you the truth I'm not sure how helpful it was to all of you that we guided the whole year. And so I think that at the moment still thinking through it. But some of the comments that you heard related to in Rob's comments were that specific to TEGRA at this point we have more design wins than we had at this point with TEGRA 3. You also heard that we're now sampling our 4 gs LTE modem and this is a pretty large market. It's still early in the modem overall modem market. It's about 150,000,000 units large projected this year, growing about 50% per year. The overall connected device market is probably about 1,000,000,000 north of 1,000,000,000 units. And so there's still a lot of LTE 4 gs modems that need to be shipped. And this is really the 1st year where we have the ability to engage that market. So we're really super excited about it. We're going to engage it very, very hard and we're sampling monoms around the world now. And so those are good growth indicators for TEGRA 4. The Q1 always we ramp down TEGRA 3 as we ramp up TEGRA 4. And hopefully in the future as we get more and more into lower end devices where the lifecycle is a little longer, this transitional effect would be a lot would be less pronounced. But this is something we expected and it's something that we'll transition into TEGR for as fast as we can. Well, as far as feedback, as far as the guidance, the first time you provided it, it was probably a bit premature. But when you provided it a year ago for fiscal 'thirteen, it was extremely helpful. So we appreciate that. Just as a follow-up question here, we've heard about one of your primary competitors in the ARM processor area talk about cleaning clocks of Tegra. Can you give us a sense as to given some of the slippages that the trade press has reported with TEGRA4 that how to give us that how to give us confidence that indeed you will be able to maintain performance leadership when we see TEGRA4 come out? Well, I guess I won't comment on his comment. And I don't know how he could possibly know the performance of TEGRA 4. No one outside the company knows the performance of TEGRA 4. So that's number 1. I'll refrain from going any further. I'd like to. But with respect to TEGR4, I guess you're just going to have to wait just just you'll see performance evaluations of TEGRA 4 and I think you'll be quite pleased with them. TEGRA 4 is many times higher performance than than TEGRA3 in many areas. And it's designed to be very high performance. There's a lot of confidence in why we can deliver that performance leadership. We said that about Tegra 3 and I think we delivered on that. This is an area that we're quite good at. So whether it's CPU performance or GPU performance or camera performance, these are three areas that we've made big breakthroughs on. But the two areas that are super important to our customers have to do with the battery life that we can sustain despite the fact that our performance is really high and it has to do with 2 very unique features. 1 is our 4+1energy saving core. We invented this technology and we're still the only company in the world shipping this technology and none of our competitors have this technology as of yet although some of them are talking about it in the future. 2nd is a technology that's related to modulating the backlight on a per pixel per frame level that is something that's very unique to TEGRA and it saves 100 of milliwatts because as you can imagine how much a display backlight consumes, it's getting higher and higher because the resolutions are getting higher and the displays are getting brighter and people more from their display. This is a technology that is quite unique to us and this is where with TEGRA 4 we have our 2nd generation of that. And so we've introduced not only performance capabilities but as well as battery saving capabilities reviewers which ultimately the reviewers will tell us how their processor compares to ours. But But based on everything we know about Krait, I think our position of TEGRA4 is going to be pretty extraordinary. Great. Thank you. Your next question comes from Chris Caso with Sequana Financial. I wonder if you could give a little more color about the Quadro business. I think in your last quarter comments, you were expecting some weakness in that business and it looked like from the commentary that grew in the quarter despite some of the limited quantities of the K5000. Can you talk about that a little bit and what your expectations are that for the April quarter? I'll let Karen talk about the April quarter, but what I'll do is I'll talk to you about the dynamics of that business. We're gaining share in that business because our position in graphics is getting stronger than ever. Our technology leadership position is pulling ahead whereas graphics is important and it continues to be, we've introduced new ways of rendering graphics, ray tracing and other computational graphics capabilities. We've added simulation technology related to made possible by GPU computing so that you can simulate and visualize at the same time. So the capabilities that we provide is increasing. We're just transitioning Kepler into our entire enterprise product line. And Kepler as you know is just a wonderful GPU. It's the best GPU we've ever built, the best GPU the industry has ever built. And we're in the process of transitioning that into Quadro. That's been offset. There's some offsetting dynamics related to the weakness of the enterprise market in some areas around the world. There were some delays related to the next generation workstation motherboard from Intel. But I think people are working through all of those issues and I think QADRO. We saw some nice strength in Quadro. Quarter over quarter, Quadro was up about 11%. So as Jimson mentioned, we have great plans with Kepler and our market opportunities. For next quarter, Q1, we're forces and we're being a little bit conservative perhaps, but we had a really strong quarter in Q4. Okay, great. As a follow-up, could you help us to calibrate our expectations for the PC graphics business as we go through the year? And I understand you don't want to provide full year guidance right now, but what you guys have told us in the past is that your growth in PC graphics is not necessarily mirroring what's happening in the market. There's gaming product cycles, your own product cycles there. Could you give us some color on that? And in addition, what your expectations are for market share, particularly in notebook side this year where you've gained some market share last year? My expectation is that we'll gain market share this year as we'll continue to gain market share this year. With respect to PC graphics, PC graphics has 2 components to it. And I'm excluding the Tesla GPU computing product line, I'm excluding the workstation product line Quadro. But PC graphics, the consumer product line has really 2 components. The larger component well, there's 2 components. So there's the OEM graphics where the OEMs use our GPUs to differentiate their notebooks or differentiate their PCs. They add our GPUs and because it's clearly additive and the performance is so much better, they could provide the same basic platform with a premium SKU. The dynamic hasn't really changed and my guess is that an OEM's desire to create premium products will continue to be there. The larger dynamic, the larger market for PC graphics is related to PC gaming. We've always said that PC gaming is vibrant. We've said that PC gaming is in fact growing. And the reason for that is because the PC platform is open and it allows for a lot of innovations not only for technology but also for business models. One of the most important new growth dynamic has to do with free to play. Free to play is really a wonderful business model and it's a business model that doesn't serve as well a a proprietary and a closed platform model where royalties are where it's royalty bearing. And so these free to play platforms are fabulous for PCs and it attracts new gamers, it costs nothing to try it and unless you really enjoy the game that's when you really get in and buy up virtual goods where you can differentiate your outfit, your costume, differentiate your weapons, play new levels. And so it's the more you enjoy the game, the more you're welcome to spend in the game. And I think that that kind of a business model really tailors nicely to PCs. It's also much more associated with MMOs, massively multiplayer online games. And so these dynamics continue to help drive our PC graphics business, the gaming graphics business. For the year, I think that these dynamics will make sure that the MMO and the free to play business models are going to continue to drive and help grow the PC graphics business. Thank you. Your next question comes from Doug Freeman with RBC Capital Markets. Great. Thanks guys for taking my question. Jensen, when we look at the business model and the OpEx growth, last year you grew OpEx at a rate above the revenue growth, but you were able to offset it with gross margin leverage. Looking forward, if I run the numbers, it looks like we're going to see about 15% OpEx growth year on year, even if you hold Q1's level pretty stable for the balance of the year. How should we think about that going forward? Are you going to should we think about revenue leverage here or is there a gross margin leverage potential to hold on to the earnings power? Yes, Doug, I appreciate the question. I think first of all we just we have to recognize that we're investing into a once in a lifetime and very large, the world, but we need a modem, 4 gs LTE modem to address the very large LTE connected devices market. And if we're able to deliver that, we're in a pretty special place. And the reason for that is because we have a great application processor. We have a great application processor roadmap because we have the technology capability to sustain it. One of the most important areas one of the most important capabilities in the mobile market is the ability to have software. There are so many different operating systems and Microsoft does a great deal in the PC industry that's not afforded to in the rest of the embedded markets. And this is a market where in the connected marketplace, connected device marketplace where there's Android and Chrome and WinRT and Linux and QNX and all these different operating systems require a world class system software team. And so if we have those two things and we combine it with LTE which we're now sampling, the combination of these three things could put us in a very special place. And so we want to go after that large and fast growing LTE marketplace and the investment is necessary. So the answer to your question is revenue leverage. We're looking forward to revenue leverage. Now our GPU business of course is still growing as well and there's opportunities to grow there. The last year we grew 8% if you excluded the chipset business that we exited. And this year we added a new type of GPU product. We incorporated our GPUs into a first of its kind graphics appliance. It's a graphics computing system, it's dedicated to graphics and we've described a few applications for the NVIDIA grid. And I think that this type of a computing appliance, this graphics appliance is for GPUs very similar to a router. It is router is for networking chips or a network attached storage is for SATA chips. At some point when you want to share these resources with a larger work group or with a lot of different people, these graphics appliance these computing appliances are really a perfect fit. And we see a lot of people wanting to go to SaaS, but they can't do it with graphics intensive applications. And now with the NVIDIA grid they can finally do that. And so I'm excited about the GPU growth opportunity still, but one of the areas where we're investing very heavily and that's the reason why you saw the investments from last couple of years is really to put us in a place where we can engage the LTE market And this year we will aggressively do that. I guess as my follow-up, I have a good understanding of where the growth is going to come from on the TEGRA front. Clearly, it sounds to me like you want to with the LTE modem, you want to grow in the handset side of the market to take advantage of that. When you look at all the other investments that you're making as you just ran through a pretty healthy list there of new products that you've introduced recently, What's number 23 on the list as far as revenue contribution? Well, I really listed 2 just now. I listed LTE and that's when I say LTE, I mean TEGRA LTE. You have to invest in TEGRA and you have to invest in LTE in order to engage that LTE connected device market. There is no standalone modem business anymore and in many of these new 4 gs connected device marketplace an integrated approach is necessary. And that's the reason why we bought ISARA and that's the reason why we're investing in LTE. So that's really one investment. You have to do it all together or you don't do it at all. And so that's one of the reasons why all of the standalone modem companies really have gotten out and that's the reason why most of the standalone application processor companies have gotten out because unless you have the combination of these three things, something like a Tegra application processor, a 4 gs modem and a software stack, you really can't play the big games. And I think we're rather uniquely positioned to be a great challenger here. And then number 2 is GRIT. That particular investment is really about taking our GPU and taking it out of the box. If you take the GPU out of the box, then you can grow independent of the box and Grid is going to make it possible for us to put our GPUs if you will on a network and whether it's a Mac network or a PC network or an Android network or whatever devices you've got networked onto it. So those were 2 investments that I've described and both have exciting growth opportunities ahead. Great, thank you. Your next question comes from Blayne Curtis with Barclays Capital. Thanks for taking my question. I was wondering if you provide any color as to the makeup of that within tablets and smartphones or Windows versus Android and such? Thanks. Hey, I'm sorry. That was really, really difficult for us to understand. Could you try saying that again or if or calling in on a landline? Just try it one more time. I apologize on traveling. I was wondering if you could provide some color as to strong design interactions with Tier 4 as to make up of whether you see tablets or smartphones, the bigger driver for you as well as Windows versus Android? Okay. I'm going to take a swing at that. I think you asked what is likely to be a larger growth driver for us. Is it tablets or a larger growth driver for us. Is it tablets or phones? And number 2, is it Android or WinRT? And so that's a good question and let me see if I can try to dissect that. First of all, on a yearly basis, although the quarters have been a little choppy, on an annual basis, all of our most of our growth, not all of our growth, but the vast majority of our growth has come from tablets. Whereas people were rather skeptical about Android tablets, we really stuck with it. And we stuck with it because we believed not in whether a tablet, an Android tablet is going to be useful or not, we're successful or not. We believed in the Google Cloud. We believe that people will buy books and music and games and movies and store their photographs up in the cloud. And when you put all these all your personal content in the cloud, you want to enjoy it on your phone, you want to enjoy it when you're home in a larger format and in which case an Android tablet. We also believe you would want to enjoy playing the games with a device that's designed dedicated to play games and that's the reason why we built Shield. And so I think the tablet market has turned out to exceed most people's expectations and we grew a lot in Android tablets this last year and my expectation is that there will be more Android tablets built this next year. And so the first thing is, yes, I believe in tablets. I believe in tablets wholeheartedly and it's an area, it's a segment of the marketplace that we're going to continue to invest in and be quite successful in. WinRT, I believe it is essential, strategically essential for Microsoft to be on all of the major processors in the world, surely the highest volume processor in the world as a software company and an operating system company, it's a market they can't afford to ignore. And so WinRT is surely going to be an important area for them. Now whether people see WinRT as a consumer tablet or as a PC is yet to be determined. But at the very minimum if you extrapolate it forward by a few years, it's hard to imagine how WinRT can possibly, won't possibly be a wonderful PC. We know exactly what it feels like on top of Ategra 4 and it rocks, it's fantastic. And so WinRT, I think will be successful as well. Microsoft will have no choice but to continue to invest in it and it's a great company, they'll do something great with it. With respect to tablets, so that's Android and WinRT. I already commented on tablets, smartphones, super phones. This is an area that we will likely need to have an LTE modem in order to be successful. And that's the reason why we've worked so hard to accelerate our LTE modem to market. We're working around the clock and this is with an LTE modem, the Tegra processor and our software capability, we will be able to address a much larger phone opportunity going forward. And so we'll have some phone success this year, but we're not expecting to have a whole lot of phone design wins until we engage the market with LTE. Okay. Thank you. Your next question comes from Kevin Chastity with Stifel Nicolaus. Nicholas. I wonder if you could give us a more of a timeline on the grid development and when we could see significant revenue for that product? What are some of the obstacles in front of you still? Yes, thanks a lot Kevin. I think the grid comes in 3 flavors. Grid, the architecture comes in 3 flavors. 1, and the one that we developed first is Grid for Enterprise VDI. We've been working with Citrix, VMware and Microsoft for quite a long time. And in that particular application by installing our graphics cards, the Grid VGX graphics cards into an industry standard OEM server, you could deploy it in enterprises and accelerate the VDI installations that you have. And so if you had a Citrix desktop, it would just be much snappier. We could also address markets where the current VDI solutions aren't sufficiently good enough because the graphics performance isn't good enough, it doesn't accelerate, it doesn't run certain applications like workstations and so we could expand the market for VDI. Our 3 partnerships are going fabulously, everybody is very excited about that and that is likely the first area of growth this year for Grid. The second component of growth has to do with cloud gaming. We have about 6 partners and we're evaluating new ones who are middleware partners who service telcos and MSOs around the world to provide cloud gaming to these telcos and MSOs. They would like to provide gaming as one of the channels of cable television. And so it's another way for them to monetize a subscriber base they already have. It's another way for telcos to provide content that could be enjoyed over the LTE networks. And so you could imagine that this is creating new content, adding content inventory inventory to their subscriber base is something that of course every telco and every MSO would more than love to do. And so there we have 6 partners partnered with us around the world. The trials are going on at 12 of the telcos at 12 telcos around the world and they're more coming online as we speak. And so that evaluation will take longer because the quality of service has to be proven and there's a these large networks has to be tested. And so that's the second that we've started. I'm not expecting large revenue contribution this year, but it's really, really important that we do proof of concepts and trials at every telco this year. And so that's our primary focus. And the third has to do with SaaS. There is as you know most of the software companies would like to move to a SaaS model. It is from whether it's monetization or just being able to access new customers more quickly, not having to install a heavyweight application in somebody's network is one of the fastest ways to capture new subscribers or new customers, new licensees. And so being able to just literally put a heavyweight application like an Adobe or Autodesk or a SOLIDWORKS application, workstation application, as a little icon that you double click and boom you're in that application because that application is being served on a network, it's a real benefit to them. And so this is a new market as well for us. Obviously, Grid is a first of its kind device. It's a graphics, it's a GPU, it's a massive collection of GPUs in a computing device. And so we're very good at GPUs of course and all the software is in house. But we're cultivating that marketplace now and we'll see how it goes. And so I wish I had crisp answers on these on grid, but this is a first of its kind device and we have enthusiastic partners because it provides a benefit to all in the ecosystem and as soon as we can we'll report on the actual business component of it. Okay, great. Thanks for those details. How about have you seen any competition or any other alternative solutions for this type of application? Well, GRID is the first of its kind and my expectation is that it will be the only one of its kind for a while. And the reason for that is because in order to create grid we have to create a new architecture for a GPU, create a new system architecture, create new system software architecture to virtualize, to share, to connect, to remotely render onto devices of all kinds. And so this is we own the entire stack and so it's easy for us to do it. I don't really know how other people, somebody else would independently cut across that many layers of the architecture and system and system software to achieve it. But at the moment everything I know and what I see in the horizon, grid is really, really the only one in the market. Okay, great. Thank you. Yes. Thanks a lot, Kevin. Your next question comes from Sean Webster with Macquarie. Good morning. I was wondering if you could help me understand the gross margins. You did a very good job keeping them stable in a down revenue environment, but it seems like you had a pretty healthy mix up in high margin areas like workstations. And even going into Q1 where you're expecting flattish gross margins again, it sounds like workstations again will be kind of flattish where you'll see declines elsewhere. Are you seeing gross margin declines elsewhere or maybe price declines? Just help me understand that. Thank you. I'm sorry. I missed the first part of your question. Can you just the first part, please? I'm trying to figure out the flat gross margins where you have what seems like a positive mix effect happening underneath your revenues to workstation? For this quarter or next? For both Q4 as well as your guidance for Q1. Okay. So the mix is quite, as I explained in the commentary, it's really stable. Yes, Quadro was up, but there's always some offset. Quadro was up in Q4, but probably one of the larger areas is memory when memory moves around that can basically drag our margins a bit. So but overall, the blend is pretty stable and that's just how it is. And next quarter, we're expecting about the same. Okay. As it relates to the desktop segment, you had pretty good share gains this year. Can you talk about what some of the dynamics are in the channel currently as far as how inventories are looking and maybe what your expectations are in terms of market share for the full year? Well inventory levels tend to be slightly up when the revenues are down as you could imagine. And so we're expecting next quarter or this coming quarter to be seasonal as well as consistent with the overall PC market. And so inventory will likely be slightly will be up a tad. But we watch it very, very and manage and manage your gross margins, it's vital. It's vital not to have too much inventory as you know. And so that we watch that like a hawk and that's one of the reasons why our gross margins are stable and well managed and improving. As far as the year goes, our position in graphics is as good as it's ever been. And my expectation is that our position in graphics will improve this year. Shield will help GeForce. The ability to stream your remotely your PC game and to be able to enjoy it on your Shield is quite a magical new experience. Experience and the enthusiasm from our GeForce customers around the world is really quite spectacular. We've had more press written about Shield than just about anything in the history of our company. And so I think the enthusiasm is quite high and Shield is intended to be one of its intentions is to be a companion device for GeForce. And so that's going to enhance our GeForce position. And so throughout the year my expectation is our position will continue to improve. But with respect to market share, we're just going to have to report that when we get there. Thank you. Yes. Thanks a lot. Your next question comes from Jim Snyder with Goldman Sachs. Good afternoon. Thanks for taking my question. I was wondering if you look at your pipeline of TEGRA IV assignments throughout the year, should we expect any kind of meaningful increase in Tegra as we head into the July quarter? Is this going to be more back half loaded in Q3, Q4? I'm sorry, but it's impossible to hear you at all. Yes, Jim, you're really faint. Is there any way you can increase your volume somehow? Yes, I can try. I'm just wondering in terms of the design win ramp you see for TEGRA 4 this year, do you think that will be increasing any in the July quarter or do you expect that all to come in the back half of the year? TEGRA 4, is it in July quarter or back half of the year? We start we ship Tegra IV starting in Q2. We're ramping production now and we have full production release and so we're ramping production. Q2 is when we ship to customers. Q2 is also when we ship the TEGRA 4 based shield device And so we also start shipping in Q2. Although it's in the latter part of Q2, it's going to in Q2. That's helpful. Thanks. Follow-up, if we look at your R and D spending throughout the year, you talked about modest decline a modest increase as we head into the end of the year. But can you talk about any new initiatives, whether that's for grid or shield or any other new products that provide that decrease as we head through the year? Jim, this is Rob. Did you ask, are there any new initiatives on OpEx other than Grid? Is that what you asked? Yes. Is that what it caused further increases through the year? There are 3 things that our new businesses, if you will, not new businesses, but additions to our businesses this year. The first addition is LTE modems. LTE modems by itself is not a new business, but LTE modem will allow Tegra to enter into new markets where LTE is necessary. We already have many LTE design wins on I-five hundred and our expectation is this is going to be quite a good trend for us. So that's one additive additional part of our business. The second additional part of our business is using our own Tegra processor and utilizing our own proprietary technologies and software and such to build a Android device, we call that shield. The 3rd additional to our business addition to our business is grid, which is a GPU. It's a network attached GPU. It's not a new business, it's a GPU business. It's partnered with our existing partners, partnered with our existing partners, sold into the same ecosystems. And so we have 3 things this year. LTE TEGRA LTE, number 1, TEGRA LTE number 2, Shield and number 3 is our grid graphics appliance. More. Okay. Your next question comes from Patrick Wayne with Evercore Partners. Great. Thanks. Hey, so just two questions. First off, I was hoping you could talk a little bit more about your design traction business. You talked about I500, that Icera acquisition is definitely a key part of that. Just curious if you could help us maybe understand maybe the shape of the growth this year and perhaps the sizing. Is it something that grows to $100,000,000 this year? Is it something that's a lot bigger than that? I mean, dollars 150,000,000 used for the year, it's a big TAM. So just want to think about that the right way. Well, let's see. The first thing is it's important to note that the previous generation of our LTE modem, the I410, is the first and currently still the only WinRT LTE modem certified by AT and T. It is currently shipping in the ASUS Vivo tablet and if you get a chance to try it, it's really wonderful. It stands to reason that there are many other WinRT, Tegra 4 tablets in development and we would transition them to the I-five hundred modem. We don't sell the modem separately. It's sold as a kit. It's sold with Tegra 4. And so it's hard to break it out per se. But more and more of our business will include LTE because we had no LTE penetration in the past and this year we're going to be shipping LTE modem. So I don't know exactly how much. We're trying to make it as much as possible. But at this point, we're not guiding the whole year. Got you. And then just my just for my follow-up, I was curious, when we take a look at the full year, you've got a lot of great stuff happening on Tegra outside of, I guess, handsets. So you got tablet traction, you got shield, you got automotive that did well last quarter. When we look at full year here, I mean, you guys did a great job hitting 50% growth last year. Could you care to maybe give us some help in terms of ballpark how much growth we should be thinking about this year in fiscal 'fourteen given the transition and the fact that we're kind of starting off a little bit light as we enter the April quarter? Well, the way we enter the April quarter is I guess similar during every transition. And I'm hoping that over time as we although we've had this transition now for all three generations, each one of the transitions, the peaks have become much higher and the revenues of the whole business has become much larger. And so our position in the marketplace is growing, our footprint is growing and our position is more strategic to the marketplace than ever. But we haven't decided to guide the whole year. We're going to go through this transition one more time and we'll start shipping in Q2, but we haven't decided to guide for the full year. What you recognize are the same things we observe as well. Whereas before we really only had Android tablets. Now we have a much larger Android tablet market. We have WinRT PCs. We have Shield, and we have Automotive. And so TEGRA is not just a smartphone and of course we have Tegra LT which would be great for connected tablets as well as smartphones. And so we have more than just Android we're just going to go do as best we can. Okay, great. Thanks, we're just going to go do as best we can. Okay, great. Thanks a lot. Okay. I think that'll do it for today. We're going to have to wrap it up. Thank you, everyone. We look forward to talking to you next quarter at our Q1 results. Thank you. This does conclude today's conference call. You may now disconnect.