Good afternoon. My name is Andrica, and I will be your conference operator today. At this time, I would like to welcome everyone to the NVIDIA fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to your host, Mr. Rob Csongor. Sir, you may begin your conference.
Thank you. Good afternoon, welcome to NVIDIA's conference call on annual and fourth quarter of fiscal 2013 results. With me on the call today from NVIDIA are Jen-Hsun Huang , President and Chief Executive Officer, and Karen Burns, Interim Chief Financial Officer. After our prepared remarks, we will open 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 20th, 2013, and the webcast will be available for replay until our conference call to discuss our financial results for our first quarter 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 the quarterly period ending October 28th, 2012, and the reports we may file from time to time on Form 8-K, filed with the Securities and Exchange Commission. All our statements are made as of today, February 13th, 2013, based on information available to us as of today, except as required by law, we assume no obligation to update any such statements.
Unless otherwise noted, all references to market research and market share numbers throughout the call come from Mercury Research or Jon Peddie Research. During this call, we will discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our financial release, which is posted on our website. 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 third consecutive year. We increased overall GPU market share from 53%-65%, and our notebook share by almost 20 percentage points from 47%-66%. Tegra, Tesla, and notebook GPUs all achieved record revenue.
We invested in new growth products that are now sampling, including Tegra 4, i500 4G 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 to benefit. Massively multiplayer games or MMOs continued to drive a robust PC gaming market. Worldwide MMO revenues grew 21% last year to $13 billion, according to market research firm Newzoo. GeForce is the gamer's choice of GPU by a margin of almost two to 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 and supercomputers.
Just three 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 concurrent users at once. One 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 four plus one 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 million units in 2013 and growing at 50% a year. We are now sampling our i500 4G LTE multi-band, multi-mode voice, and data modem. More efficient and 40% the size of conventional modems, i500 delivers four times the processing capability of its predecessor. This is the first result of our Icera acquisition. Icera is the first company to successfully create and commercialize a software-defined radio modem and has been building modems since 2006. We announced Project SHIELD, an NVIDIA-branded open platform gaming device.
A pure Android device connected to the Google Play Store and TegraZone, 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 five-inch retinal display, a console-grade game controller, and a first mobile tune port bass 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 TegraZone, which can then be enjoyed on every Tegra-powered device. TegraZone has already been downloaded six million times. Looking forward, our company is shifting gears to accelerate. Our GPU business remains strong while we extend our visual computing technology leadership.
Tegra 4 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 $4.3 billion, 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 million to a record $541 million, up 50% year-on-year. Grow Quadro and Tesla revenue. Revenue for Tesla products increased 37% year-on-year as we shipped our first Kepler products, Tesla K10 in Q3 and Tesla 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 in 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% 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 at 52.3%, up 40 basis points. Manage our OpEx investment at approximately $1.56 billion on a GAAP basis and $1.4 billion for non-GAAP. GAAP OpEx was $1.58 billion, up $20 million from our original expectations. This was due to a $20 million expense for corporate donation made in the second quarter.
On a non-GAAP basis, which excluded this $20 million charge, as well as stock-based compensation and acquisition related costs, we successfully managed to our target of $1.4 billion. 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 Grey 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&A organizations. 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.
Onto 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 two primary reporting segments, GPU and Tegra Processor. This new segmentation recognizes that we have two 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 million decline in chipset products, which we discontinued. Excluding chipset product revenue, our GPU business grew 8%, representing our third consecutive year 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 as historical revenue segmentation can be found in my CFO commentary posted on our website. I'd like to talk briefly about the fourth quarter. Apart from our tax rate, Q4 results were in line with our expectations at the beginning of the quarter. Revenue was $1.11 billion, down 8% sequentially and up 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 million for GAAP and $360 million 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 fourth quarter, 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 remained strong in the quarter and throughout the year. Cash increased each quarter, reaching a record $3.73 billion 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 million of cash to shareholders in the quarter, with $100 million of stock repurchased and $47 million in dividends paid. Accounts receivable at Q4 was up $9 million over the prior quarter on slightly less shipment linearity. Conversely, inventory was down $9 million from the prior quarter at $420 million.
Regarding the first quarter outlook for fiscal 2014, our expectations for GAAP are as follows. Revenue is expected to be $940 million ±2%. We expect revenue for the first quarter 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 ramped down ahead of Tegra 4 production. We expect gross margin of approximately 52.9%, flat from Q4, OpEx of approximately $430 million, and a tax rate of approximately 16% ±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%, flat from Q4, and OpEx of approximately $395 million. This excludes stock-based compensation and certain charges related to acquisitions in the aggregate of approximately $35 million.
The increase in OpEx for Q1 over the fourth 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 first quarter. Depreciation and amortization are expected to be in the range of $59 million-$61 million, and capital expenditures of $55 million-$65 million. Diluted shares are expected to be approximately 619 million. Lastly, we will pay our next quarterly cash dividend of $0.075 per share in the first quarter 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.
If you would like to ask any questions, please press star, then the number 1 on your telephone keypad. Again, that is star and the number 1. We will pause for just a moment to compile a Q&A roster. First question comes from Betsy Van Hees with Wedbush Morgan 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?
As I mentioned, we expect that our GPU business will be down very much in line with the PC industry. As you know, Intel, AMD, and other companies have already disclosed. The other component will be Tegra related, which will be larger, and that again is the transition effect from T3 to Tegra 4.
Okay. Thanks very much. My follow-up question has to do with OpEx. Not the pretty big jump up in the GAAP OpEx to $430 million from your $402 million, and then your $384 million in the prior quarter. As we're looking at the July and October, are we going to see OpEx sort of flattening out or are we going to continue to have these incremental increases? I was wondering if you could help us a little bit with the OpEx. Thank you.
Sure. As you saw last year, we had a similar jump, and we have it every first quarter. As I explained, it's really the FICA tax reset that hits us pretty hard in the first quarter. Just like in fiscal 2013, OpEx leveled off for the rest of the year. We expect a similar type of impact this year.
Okay. Thanks for answering my questions.
Your next question comes from Stephen Oleszkowicz of 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 was 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 you'll end out for the full year?
Well, Steve, first of all, thank you. We haven't decided yet whether to guide the full year or not. At the moment, we've decided to guide a quarter out. To tell you the truth, I'm not sure how helpful it was to all of you that we guided the whole year. I think that at the moment, we're still thinking through it. Some of the comments that you heard related in Rob's comments were that specific to Tegra, that 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 4G LTE modem, and this is a pretty large market. It's still early in the overall modem market. It's about 150 million units large projected this year, growing about 50% per year.
The overall connected device market is probably about north of a billion units. There's still a lot of LTE 4G modems that need to be shipped, and this is really the first year where we have the ability to engage that market. We're really super excited about it. We're going to engage it very hard and we're sampling modems around the world now. Those are our good growth indicators for Tegra 4. The first quarter, always we ramp down Tegra 3 as we ramp up Tegra 4. Hopefully in the future, as we get more and more into lower-end devices where the life cycle is a little longer, this transitional effect would be less pronounced. This is something we expected, and this is something that we'll transition into Tegra 4 as fast as we can.
As far as feedback, as far as the guidance, the first time you provided it was probably a bit premature, but when you provided it a year ago for fiscal 2013, it was extremely helpful. 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 Tegra 4, to give us confidence that indeed you will be able to maintain performance leadership when we see Tegra 4 come out?
I guess I won't comment on his comment. 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. That's number one. I'll refrain from going any further. I'd like to, but with respect to Tegra 4, I guess you're just going to have to wait just a little longer, not much longer, and 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 Tegra 3 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.
Whether it's CPU performance or GPU performance or camera performance, these are three areas that we've made big breakthroughs on. 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 two very unique features. One is our four plus one energy-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. Second 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 hundreds 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 expect more from their display. This is a technology that is quite unique to us, and with Tegra 4, we have our second generation of that. We've introduced not only performance capabilities, but as well as battery-saving capabilities and new functionalities like our camera. I'm looking forward to the reviewers. Ultimately, the reviewers will tell us how their processor compares to ours. Based on everything we know about Krait, I think our position of Tegra 4 is going to be pretty extraordinary.
Great. Thank you.
Your next question comes from Chris Caso with Susquehanna Financial Group.
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 for the April quarter?
I'll let Karen talk about the April quarter. 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 made possible by GPU computing so that you can simulate and visualize at the same time. The capabilities that we provide is increasing. We're just transitioning Kepler into our entire enterprise product line. Kepler, as you know, is just a wonderful GPU. It's the best GPU we've ever built. It's the best GPU the industry's ever built. 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. I think people are working through all of those issues, and I think the dynamics will play out.
Yeah. To answer your second part of your question, so for this quarter, Q4, we saw some nice strength in Quadro. Quarter-over-quarter, Quadro was up about 11%.
As Jen-Hsun mentioned, we have great plans with Kepler and our market opportunities. For next quarter, Q1, we're expecting relatively flat. As Jen-Hsun mentioned again, there's some offsetting 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? 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 PC market. There's gaming product cycles, your own product cycles are 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, or we'll continue to gain market share this year. With respect to PC graphics, PC graphics has two components to it. I'm excluding the Tesla GPU computing product line. I'm excluding the workstation product line, Quadro. PC graphics, the consumer product line, has really two components. The larger component, or there's two components, 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. That 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. 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 proprietary and a closed platform model where it's royalty-bearing. These free-to-play platforms are fabulous for PCs, and it attracts new gamers. It costs nothing to try it. 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.
The more you enjoy the game, the more you're welcome to spend in the game. 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. 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 Freedman 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, 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? Should we think about revenue leverage here, or is there a gross margin leverage potential to hold onto the earnings power?
Yeah, Doug, I appreciate the question. I think, first of all, we have to recognize that we're investing into a once-in-a-lifetime and very large market opportunities. We weren't the first modem company in the world, we need a modem, a 4G LTE modem, to address the very large LTE-connected devices market. If we're able to deliver that, we're in a pretty special place. 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 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.
This is a market where in the 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. 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. We want to go after that large and fast-growing LTE marketplace, and the investment is necessary. 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. Last year, we grew 8%, if you excluded the chipset business that we exited. 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 doing graphics, and we've described a few applications for the NVIDIA GRID. I think this type of a computing appliance, this graphics appliance, is for GPUs very similar to a 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 appliances, these computing appliances are really a perfect fit. We see a lot of people wanting to go to SaaS, but they can't do it with graphics-intensive applications. Now with the NVIDIA GRID, they can finally do that.
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 the last couple of years, is really to put us in a place where we can engage the LTE market. 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 2 and 3 on the list as far as revenue contribution?
Well, I really listed two just now. I listed LTE, and 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 4G-connected device marketplace, an integrated approach is necessary. That's the reason why we bought Icera, and that's the reason why we're investing in LTE. That's really one investment. You have to do it all together, or you don't do it at all. 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.
Unless you have the combination of these three things, something like a Tegra application processor, a 4G modem, and a software stack, you really can't play the big games. I think we're rather uniquely positioned to be a great challenger here. Number 2 is GRID. 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. 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. Those are two 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, you put the strong design for Tegra 4. I was wondering if you could provide any color as to the makeup of that, or was it tablets or phones or Windows versus Android and so on. Thanks.
Hey, I'm sorry. That was really difficult for us to understand. Could you try saying that again or calling in on a landline? Just try it one more time.
I apologize. I'm traveling. I was wondering if you could provide some color as to strong design attractions being with Tegra 4, as to the makeup of that, whether you see tablets or smartphones as the bigger driver for you, as well as Windows versus Android. Thanks.
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 phones? Number 2, is it Android or WinRT? That's a good question, 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, 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. We stuck with it because we believed not in whether an Android tablet is going to be useful or not, or 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. When you put 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 that 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. I think the tablet market has turned out to exceed most people's expectations, we grew a lot in Android tablets this last year. My expectation is that there will be more Android tablets built this next year. 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 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. 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 won't possibly be a wonderful PC. We know exactly what it feels like on top of a Tegra 4, and it rocks. It's fantastic.
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. 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 with an LTE modem, the Tegra processor, and our software capability, we will be able to address a much larger phone opportunity going forward. 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 Cassidy with Stifel Nicolaus.
A question. I wonder if you could give us 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?
Yeah, thanks a lot, Kevin. I think the Grid comes in three flavors. Grid, the architecture comes in three flavors. One, 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. 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. 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 run certain applications like workstations. We could expand the market for VDI. Our three partnerships are going fabulously. Everybody's very excited about that.
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 six 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, 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. You could imagine that this is creating new content, adding content inventory to their subscriber base is something that, of course, every telco and every MSO would more than love to do. We have six partners partnered with us around the world.
The trials are going on at 12 of the telcos, at 12 telcos around the world, there are more coming online as we speak. That evaluation will take longer because the quality of service has to be proven, and these large networks have to be tested. 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. That's our primary focus. The third has to do with SaaS. As you know, most of the software companies would like to move to a SaaS model.
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. Being able to just literally put a heavyweight application like an Adobe or an Autodesk or a SolidWorks application, a 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. 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. We're very good at GPUs, of course, and all the software is in-house.
We're cultivating that marketplace now, and we'll see how it goes. I wish I had crisp answers 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. As soon as we can, we'll report on the actual business component of it.
Okay, great. Thanks for those details. 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. The reason for that is because in order to create Grid, we had 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. We own the entire stack, 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 software to achieve it. At the moment, everything I know and what I see in the horizon, Grid is really the only one in the market.
Okay, great. Thank you.
Yeah. Thanks a lot, Kevin.
Your next question comes from Shawn Webster with Macquarie.
Thanks. 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. It seemed like you had a pretty healthy mix-up in high margin areas like workstations. Even going into Q1, where you're expecting flattish gross margins again, it sounds like workstations again will be 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.
The mix is quite, as I explained in the commentary, it's really stable. Yes, Quadro was up, but there's always some offsets. 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. 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. We're expecting next quarter or this coming quarter to be seasonal as well as consistent with the overall PC market. Inventory will likely be slightly up a tad. We watch it very, very closely. The channel is very important to us and all of our partners and the flow of goods is important to us. In order to control and manage your gross margins, it's vital not to have too much inventory, as you know. 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.
My expectation is that our position in graphics will improve this year. Shield will help GeForce. The ability to stream remotely your PC game and to be able to enjoy it on your Shield is quite a magical new experience. 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. I think the enthusiasm is quite high, and Shield, one of its intentions is to be a companion device for GeForce. That's going to enhance our GeForce position. Throughout the year, my expectation is our position will continue to improve. With respect to market share, we're just going to have to report that when we get there.
Thank you.
Yep. Thanks a lot.
Okay. Next question comes from James Schneider with Goldman Sachs.
Good afternoon. Thanks for taking my question. I was wondering, if you look at your pipeline for Tegra 4 design wins throughout the year, should we expect any kind of meaningful increase in Tegra as we head into the July quarter, or is this going to be more back half-loaded into Q3 and Q4?
I'm sorry, it's impossible to hear you at all.
Yeah, Jim, you're really faint. Is there any way you can increase your volume somehow?
Yeah, 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 coming in the July quarter or the back half of the year?
We ship Tegra 4 starting in Q2. We're ramping production now, and we have full production release. We're ramping production. Q2 is when we ship to customers. Q2 is also when we ship the Tegra 4-based Shield device. We also start shipping in Q2. Although it's in the latter part of Q2, it's going to be in Q2.
That's helpful. Thanks. Follow up, if we look at your R&D spending throughout the year, you talked about modest increases as we head into the end of the year. Can you talk about any new initiatives, whether that's for Grid or Shield, that would cause that increase as we head through the year?
Any new initiatives or
Hey, Jim, this is Rob. Did you ask, are there any new initiatives on APEX other than Grid? Is that what you asked?
Yeah. Is there what it calls further increases through the year? Yeah.
There are three things that are 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 i500, and our expectation is this is going to be quite a good trend for us. 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 an Android device. We call that Shield. The third 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 packed with GPUs, and it serves our existing marketplace, partnered with our existing partners. It's sold into the same ecosystems. We have three things this year. Tegra LTE, number one, Tegra LTE. Number two, Shield, and number three is our Grid graphics appliance.
Hey, Jim, I hope we answered your question. We'll follow up with you and make sure we got that. I think we have time for one more.
Okay. Your next question comes from Patrick Wang with Evercore Partners.
Great, thanks. Hey, just two questions. First off, I was hoping you could talk a little bit more about your design traction on your modem business here. 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 million this year? Is it something that's a lot bigger than that? I mean, 150 million units for the year, it's a big TAM, just wanted 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 Icera 410, is the first and currently still the only WinRT LTE modem certified by AT&T. It is currently shipping in the Asus VivoTab, and if you get a chance to try 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 i500 modem. We don't sell the modem separately. It's sold as a kit. It's sold with Tegra 4, it's hard to break it out per se. 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. I don't know exactly how much.
We're trying to make it as much as possible. At this point, we're not guiding the whole year.
Got you. 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. You've got tablet traction, you've got Shield, you've got automotive that did well last quarter. When we look at it full year here, 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 2014, given the transition and the fact that we're kind of starting off a little bit light as we enter the April quarter?
The way we enter the April quarter is, I guess, similar during every transition, I'm hoping that over time, 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. Our position in the marketplace is growing, our footprint is growing, and our position is more strategic to the marketplace than ever. We haven't decided to guide the whole year. We're going to go through this transition one more time, we'll start shipping in Q2, 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, we have automotive. Tegra is not just a smartphone. Of course, we have Tegra 4i, which would be great for connected tablets as well as smartphones. We have more than just Android application processors now. We have much more than that. It's hard to say exactly how much for the year, we're just going to go do as best we can.
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.