Earnings Call: Q2 2011

Aug 12, 2010

Good afternoon. Thank you for holding. I would now like to turn the call over to Michael Hara, Vice President, Investor Relations. Thank you, sir. You may begin. Thanks, Will. Good afternoon and welcome to NVIDIA's conference call for the Q2 of fiscal 2011. With me on the call today from NVIDIA are Jensen Huang, President and Chief Executive Officer and David White, Chief Financial Officer. Before we begin, I would 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 call will be available via telephone until August 19, 2010, and the webcast will be available for replay until our conference call to discuss our financial results for our Q3 of fiscal 2011. 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 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 release, our Form 10 Q for the fiscal period in May 2, 2010 and the reports we may file from time to time on Form 8 ks filed with the Securities and Exchange Commission. All of our statements are made as of today, on information available to us as of today and except as required by law, we assume no obligation to update any such statements. Unless otherwise noted, all references to market research and market share numbers throughout the call come from Mercury Research or John Pette Research. With that, let's begin. Rapidly changing market conditions made Q2 a challenging quarter. We experienced softness in consumer PC demand in Europe and China, our largest GeForce regions. Weak consumer markets and the weak euro shifted demand away from the premium experienced PC segments that GeForce serves. At the end of Q1, we began selling our new Fermi based GeForce GTX 480 and 470 GPUs into strong demand and saw healthy in channel sellout for GeForce products across our lineup. We entered Q2 with high expectations. As the quarter progressed, rising memory costs and the weakness of the euro increased in market price of graphics adding cards. In addition, the growing economic concerns in Europe and China began to create pressure on discretionary spending. Because discrete GPU attach rates in Europe and China are among the highest in the world and our share in both these regions is also very high, factors hit our consumer business particularly hard. Today, we also announced an additional charge to cover costs resulting from a weak dyed packaging material set in certain GPU and MCP products shipped before July 2008. This is the same issue we disclosed previously. We provided more detail in the CFO commentary, which we released prior to the call. Although the end markets remain uncertain, we have exciting new products that can drive revenue and share growth. We are continuing to regain our GeForce consumer GPU leadership position across the entire product staff. The GTX 40 has claimed the top spot in the enthusiast segment. Our focus is now on the gamer sweet spot, the 100 and $99 performance segment. In July, we launched the GTX 460. GTX 460 uses our 2nd generation Fermi is unrivaled competitive position. It's dead quiet, it tips power, it runs cool and it overclocks like a monster without voltage modification. GameStar Hardware explained NVIDIA is back. The GTX 460 is fast, really fast and at the same time, enjoyably quiet, has much lower power consumption. Hard OCP also wrote in the following reports, If our earlier articles have not proved it yet, this one surely puts the final nail in the coffin. GTX 4 60 1 gig SLI real world gaming performance is superior to even AMD's fastest high end single GPU video card in a Crossfire X configuration. MononTech put it simply, NVIDIA GeForce GTX 460, the $200 King. GTX 460 is a showcase of the revolutionary Fermi architecture from the ground up for DX11. We are now ramping the rest of the Fermi GPUs from top to bottom and including notebooks and workstations. At SIGGRAPH, we launched the era of computational visualization for designers, engineers, researchers and animators with the introduction of our Fermi class quadrant GPUs and new NVIDIA 3D Vision Pro solution. Computational visualization combines the parallel computing power of the Fermi of artists can create photorealistic inventories for print ads, commercials and movies in minutes rather than hours. Car designers can simultaneously optimize the design for beauty as well as for aerodynamics. The new family of Quadro GPUs deliver performance that up to 5x faster for graphics and up to 8x faster performance for computational simulation than our previous Quadro generation. Quadro is the biggest discontinuity we've introduced since QuadroFX introduced geometry processing over 10 years ago. Our workstation partners, Our workstation partners, Dell, HP and Lenovo are all racing to engage new markets as well as upgrading a large installed base of Quadro workstations. Achieved another record quarter and continues to make further inroads into our targeted verticals. Last week DARPA announced that NVIDIA has been awarded a $25,000,000 research grant. The agency addressed what the agency calls, A crisis in computing. Today's conventional computers are starting to hit practical limits since they can only do so much computation given a certain amount of energy. For DARPA to recognize that NVIDIA should take the lead to discover architecture of the future is recognition of the impact of GPU computing and of NVIDIA's contribution to computing. Under a 4 year contract, the team plans to build a new class of exascale supercomputers that are 1,000 times more powerful than today's supercomputers using similar amounts of energy. Our team includes Cray, Oak Ridge National Laboratory and several top universities. The enthusiasm for our upcoming GPU Technology Conference in September is another example of the momentum we are seeing behind GPU Computing. Last year, we exceeded attendees' expectations. This year, we have 4 times the number of papers submitted, 3 times the sponsorship levels and are expecting twice the number registered attendees. Industry speakers will discuss the use of CUDA in fields ranging from cloud computing, computer vision, energy exploration, life sciences, medical imaging to finance. It is very clear now that parallel computing has reached the tipping point since accelerating discovery in a broad range of important industries. Finally, in one of our most important initiatives, we need to execute and help our Teva customers shift their next generation TEGRA customers shift their next generation smartphones, tablets, notebooks and cards. These devices will be the industry's first to offer TEGRA's dual core CPUs and HD resolution graphics and video. We will begin production shipments for some of our customers' key projects this quarter. We are in the home stretch. Regaining GPU leadership and share, ramping Permian based Quadro, Quadro, continued adoption of Tesla and shipping TEGRA customers, these are the immediate growth opportunities we are focused on. With let me turn the call over to David. Thanks, Mike. Revenue was 811,200,000 dollars down 19% sequentially. GAAP gross margins was 16.6%. GAAP OpEx was $309,500,000 and GAAP net loss was $141,000,000 or $0.25 per share. Reflect these results is the net charge of $193,900,000 related to the weak die packaging material set. Non GAAP net income, which excludes the net charge was $20,100,000 or 0 point 6% for the Q2 was unfavorably impacted by 2 significant events. 1st, GAAP gross profit was impacted by the aforementioned charge. 2nd, the market in our consumer GPU business resulted in excess inventory of certain primarily older generation products. As a consequence, our 2nd quarter results include charges for a large inventory write down. Excluding each of these items, gross margin would have exceeded our outlook. Inventories at at the end of the quarter were $434,200,000 up 11.9 percent over the prior quarter. Notwithstanding the inventory write down, inventory was up as a result of lower actual revenue than was planned early in the Q1 when we made wafer start commitments. Our manufacturing cycle time was approximately 4 months. We made appropriate adjustments to our build plans over the course of the second quarter, but we don't expect these corrections to have a meaningful impact on our inventory levels until the Q4. Net of the inventory write down we took in the second quarter, we believe the inventory mix in our current pipeline is aligned with current market demand. Revenue for the GPU business was down 29.5% due to reasons discussed earlier. We do not expect the market conditions to change dramatically, but we expect our competitive position to improve and regain some segment share. We launched our new GTX 460 into the $199 performance segment and has received outstanding Computing Solutions represented 26.5 percent of total revenue and was up 13.4% over the prior record quarter. Revenue for the consumer products business was up 46.5% over the Q1, substantially all the increase was attributable to TEGRA. Cash and cash equivalents and marketable securities at the end of the quarter were up 1.77 $1,000,000,000 up modestly from the Q1. Our outlook for the Q3 of fiscal 2011, revenue is expected to be up 3% to 5% GAAP gross margin is expected to increase to 46.5 percent to 47.5 percent GAAP operating expenses are expected to take questions. Thank Our first question comes from the line of Rajeev Gill with Needham and Company. Please proceed with your question. Yes, thank you. Two questions. 1 on the revenue guidance of up to 3% to 5%, maybe you could provide a little bit more color where you see that guidance given kind of the weakness in the PC supply chain? Also on the margins significantly the guidance significantly higher, What gives you confidence that you'll be able to get the margins back up to the level? Would you not expect price competition to come back into the market? Maybe just some more details on the gross margin guidance would be helpful. Thank you. So we're assuming the consumer PC market to remain uncertain and all of the growth that we talked about in Mike's previous comments are the ones that we're focused on. GeForce GTX 460 goes into a segment of the marketplace that's really about gamers. And gamers come out to buy new graphics cards when there are new great games. And this last month, we saw the launch of StarCraft 2, which is arguably one of the most important II, which is arguably one of the most important video games in the entire video game in the entire PC industry with some 12,000,000 plus gamers around the world. And StarCraft II, for all the people that are on the phone that knows about it, obviously hasn't been refreshed since 1990 8. I think that's over 12 years or something like that. And so the market has been extremely enthusiastic about it and the sell through has been really fabulous. And so I think this is a pretty good season for gaming graphics cards and GTX 460 is really the best graphics card we've ever built for gamers in the history of our company. So that's one. The second one is Quadro Fermi. Fermi based architecture Quadro is ramping into production now. And the OEMs are really enthusiastic about it. The end users are clamoring for it. And so I think this is an opportunity for us to upgrade the installed base of Quadro workstations around the world with a revolutionary new architecture. Mike already talked about in his comments, pretty substantial speed ups from generation to generation. I don't think we've ever seen a 5x speed up from 1 generation to another generation. So this is a very, very big deal. And then the third thing is Tesla. We had a record quarter in Tesla this last quarter. We've got some exciting new products that we're going to ship into the marketplace imminently. And so I think this is a marketplace that is clamoring for more processing capability and we're not seeing any effect from the consumer marketplace because of it. And then the last part is Tegra. As you know, the most important and probably the fastest growing computer market today is the smartphone and the tablet market and Tegra is our entry into that. We're seeing customers trying to pry these chips out of our hands and we've to get these things shipped into production and they're really exciting new products. So those are the 4 areas where we're confident to see growth GTX 460, Fermi based Quadro, Fermi based Tesla and our Tegra SoC. With respect to gross margins, all of those products that I just mentioned are either at or above the corporate gross margins that David talked about. And if I could just follow-up I appreciate that. Just follow-up on the consumer PC, the GTX 460 really driving a lot of this growth. Given the uncertainty in Europe and China and given the fact that you're talking about attach rates for discrete graphics potentially coming down or came down this quarter and the exchange rate, what makes you confident that you can get the attach rates up or improve demand in those 2 key segments for you? There is really 2 GeForce markets. 1 GeForce market is the gamers, is the GeForce GTX market. To OEMs, they're not really sold to system builders, they're sold to end users. Most of it is sold through e tail or retail or the large the vast majority of it is sold as a retail based adding card. In a way, the way you can think about GeForce GTX is that it's the game console within the PC. And what really drives the sales of that segment of the marketplace is games. There's another part of our GeForce business, the lower end GeForce business that is sold to OEMs. The way that the OEMs think about GeForce is in those markets is that it's the ultimate, if you will, or the ultimate upgrade or the premium experience PCs. Every PC is built from either AMD or Intel CPUs and various integrated graphics. And if you wanted to create a product line with basic and competitively priced PC on the bottom and premium experience PCs on top, the best way to do that is put a high resolution display on it and then maybe you add 3 d Blu Ray to it and you add a discrete GPU to it. And that's really how the vast majority of the PC OEMs as you look around the world differentiate their premium PCs from the commodity or baseline PCs. And so if you look at that marketplace, that's what I think is uncertain and we'll continue to assume that is uncertain until it's not. We saw it probably well, we saw it before everybody else did. And the reason for that is because we're in the high end euro got weak and the various end markets got soft, the first thing that people did was shifted down price and into integrated graphics and then of course if the weakness persists, eventually the number of total number of units of PCs will decline, which is what people are starting to see now. And so, I think we're taking a relatively conservative posture with respect to the PC OEM business, but the 4 businesses that I talked about just now I think are businesses that we feel pretty good about. Our next question comes from the line of Hans Mosesmann with Raymond James. Please proceed with your question. Can you comment on how you see PCC's seasonality generally? And also can you comment on the prospects of you doing a buyback? Thanks. The second question, I'll just take very quickly. We talk about these topics at our Board meeting, every Board meeting. And so the use of cash is a topic that comes up on a regular basis. And so we'll have that conversation again at the next Board meeting and do the appropriate thing. With respect to seasonality, we're for the overall consumer PC market, we're taking a rather conservative posture about it. And we're assuming that what we saw before everybody else, this is a let's see, we started seeing weaknesses in the end market probably starting in May June timeframe, late May, early June timeframe. And it's persisted since. And I think other people are starting to see it across the board now. We're going to take a relatively conservative posture with respect to that segment of the market. The 4 businesses that we see growth in, we feel pretty good about and they're not affected by the end consumer market. The vast majority of that is enterprise business. And although the consumer GeForce business or GeForce GTX business is targeted gamers, what really drives the sales of that is great games. And it's hard to find a better game than StarCraft II to propel the upgrade of graphics cards for gamers. And then the last one, smartphone growth and tablet growth. That's the most important segment of the computer industry today. And it's a segment that we're entering for the first time starting this last quarter in a small way and start and then with this quarter hopefully in a much larger way. Thank you. Yes, thanks a lot Hans. Our next question comes from the line of Daniel Baerbaum with Auriga SA. Please proceed with your question. Yes. Hi, guys. Thanks for taking my question. Just to clarify, you talked about gross margin would have been above expectations, if not for the inventory charge. What was the inventory charge? Hans, as Hans, as any company in our business, we have inventory write offs every single quarter. And so, the question then becomes what's extraordinary and rather than be subjected to how we determine that, I think the easiest thing for us to do is just simply say that no matter how you might calculate what the exceptional piece was, it was large and excluding it, we would have exceeded our guidance. And as far as the specific amount, it all depends on how you want to make the calculation. Okay. So then just on kind of my calculations, if I back you out to kind of get to above 47% gross margin, that sort of gets me to a place where you've had a $75,000,000 inventory charge and your days of inventory would have been around 110 days. Is that the right order of magnitude, and right way to think about it? It's in the range. Okay. And then to follow-up, you had commented that we've got these new games, the StarCraft coming out. How do you think about the advent of programs like OnLive, which centralizes all of the compute and graphics functions and where I'm told that you don't need a strong GPU at the local desktop where you can stream HD graphics straight to the desktop without actually having a graphics card on your PC. How does that affect how you think about games TV as well as subscription TV and many people have subscription TV as well as premium content. The way that Unlive works is fabulous and we're wonderful partners with them. What you see in the servers is a bunch of g forces. And so, we're excited about the work that they're doing. We're excited about getting video games to a larger number of people and making video games much more accessible. So all in all, I think it's a fabulous development to have cloud based GPU computing, if you will, emerge. But the services still needs to reach a much broader audience, latency matters. And so as OnLive builds out their servers and server farms around the world over the course of the next several years or a decade, people still needs to be able to enjoy games wherever they are. And so I think that's one factor. The other factor is not all games will be available on from online, StarCraft II, for example, is not and Wow will likely not be. And so if you want to enjoy a broad range of games, having the ability to play the game on your local PC as well as being able to serve it off the cloud is a wonderful way to enjoy more games. And so we're a huge proponent of it and we work closely with them to make the services as good as possible. And in the short term, what we see is a growth opportunity in putting GPUs into the cloud. Okay, great. Thanks very much. Yes, thanks a lot, Daniel. Our next question comes from the line of Ross Seymore with Deutsche Bank Securities. Please proceed with your question. Hi, guys. Can you hear me okay? Yes. Just on the inventory charge side of things in the gross margin, is the gross margin benefiting at all in the Q3 because of written off inventory? No. We wrote off what we anticipated would not be sellable, right? And so it would be inconsistent to assume in one quarter that you're going to write it off and the next quarter you're going to sell it. So we wrote off what we believe was in excess and so our guidance doesn't include any of that selling through. And guess I heard the earlier question about you not really want to sizing things precisely, but could you give us an idea of what the average charge for inventory or write down would have been over the last few quarters just so we can kind of get a ballpark estimate about what it was this time? No, I don't think we've disclosed that. Okay. Maybe last question then a quick one. Any help on kind of the graphic side versus the chipset side? Any difference in trends in the quarter there it's dynamic is a little bit different than its dynamic is a little bit different than the overall discrete consumer PC GPUs. Our chipset business is predominantly chipsets that go into Apple Computers. And so that's one way to see its progress. Our next question comes from the line of Rick Schafer with Oppenheimer and Company. Please proceed with your question. Hey, guys. This is Sean Simmons calling in for Rick. Just had a couple of questions here. Where do you guys see the impact from the Intel and FTC settlement recently announced? Is that going to help you with your ongoing trial with Intel? The 2 different The 2 different cases are independent and not the same. The first case is obviously the U. S. Government finding Intel to have practice businesses and conducted itself in an improper way. And so whatever it is that the government does to in enforce whatever remedies that they've suggested to Intel or compelled Intel to follow are all good things to the extent that Intel becomes a much better citizen in the ecosystem and conducts business in a proper way, that's good for the entire ecosystem, ecosystem. It's good for us. It's good for AMD. It's good for customers. OEMs is ultimately good for consumers. Our with Intel is not related to that and it's strictly related to a contract dispute related to on the one hand chipset license to us and on the other hand guess, So we're looking forward to that. Okay, great. And then I guess looking at your just core GPU business, you've been talking sales comes from I guess the gamer side and how much you have to the PC OEM side? I would say that it fluctuates from time to time. I mean obviously Fermi was late and GTX 470 and GTX 480 was about 6 months late, later than we like. And so we lost share in the Q1 timeframe. We start gaining share back in Q2 and we're going to gain a lot more share back this quarter with our GeForce GTX business, which is targeted at gamers. And so it's hard to say based on the last several quarters what the percentage is. What we do know is that we're likely to grow into that marketplace and continue to take share for the remainder of the year as far as we can see right now. Okay, great. Thanks guys. Yes, thanks a lot. Our next question comes from the line of Krishna Shankar with Think Equity. Please proceed with your question. Yes. Going forward, what do you think is the attach rate of discrete GPUs now in notebooks and desktops? And how do you see that trending over the next 12 months or so, especially with the coming Sandy Bridge and Fusion platforms targeted at low to mid range PCs from both Intel and AMD? The attach rate of discrete GPUs this last quarter, I believe actually went up. The number of GPUs discrete GPUs in the marketplace was about the same. And so for the last several quarters, I don't believe I was just showing some mercury numbers, which unfortunately doesn't account for our fiscal year, our fiscal quarter versus AMD's calendar quarter. But anyways, the basic math here is still relatively the same. The discrete GPU marketplaces is the number of discrete GPU totally shipped is about the same from the last several quarters and our expectation is that remains the same in the next several quarters. Notebooks is up. Discrete GPUs for channel desktops was down. We believe that a lot of that has to do with the fact that DRAM prices have gone up, the euro had weakened and so people had skewed down. And so looking forward, my expectation is that OEMs are going to continue to want to segment their PCs. And for the mainstream segment, where the basic performance is what comes with integrated graphics, they'll continue to use integrated graphics. And for the premium segments, for the premium experience PCs, they'll want to add a discrete GPU to both differentiate that platform as well as deliver a better experience. So my expectation is that desire by the OEMs to differentiate the segment to offer a premium experience is not likely to go away. Sandy Bridge is going to increase integrated graphics performance, just as every generation they've integrated And so we'll see how it turns out, but my expectation is that we're going to end. And so we'll see how it turns out, but my expectation is that the OEMs will continue to want to segment and differentiate their platforms. And my follow on question is on Tigra. Can you give us some sense for the higher volume production here in the October quarter? Is this more Just like you said. So both Yes, just like you said. So both smartphones and web tablets? We also they won't be of equal portion right off the bat, but we'll see which devices ship first. But whatever devices ship, they're going to pretty amazing. Our next question comes from the line of Alex with JMP Securities. Please proceed with your question. Yes, thanks very much. Jensen, I believe you mentioned your confidence that you can take share back in the back half of the year, but you admittedly said that your products are skewed towards the high end. I wouldn't argue that the 460 is going to be a category killer. Can you really take share broadly with your product lineup the way it is or should we expect that we're going to see Fermi get into some of the more mainstream SKUs? We are ramping Fermi from top to bottom on desktop, on notebook, on workstations. With respect to market share, we lost we probably lost a couple of 2,000,000, 3000000 units, if you will, in market share. And that's a lot, that's a lot when you think about it that way. The vast majority, as you mentioned, above all of that is low end discrete. The price of those GPUs are low teens, anywhere from $10 to call it $12 $14 And the gross profit dollars on those devices are not extremely high. And so we know how to go win that business back. During the Q1 or so, we because we're so constrained in supply and the market was so robust, we were reluctant to be too aggressive in capturing business that we wouldn't later be able to fill. As it turns out, as the market softened in the May time frame and the June time frame that turned out to have been a bad decision. And so we're in pretty good posture now and we know how to go take share back in the low end. And so we'll take some share back in the low end, but more importantly, the most the profitable segments and the high ASP segments, we just have we have a great product line. And so that's our basic approach is to offer the best products in the segments that are targeted to gamers and for the segments that are targeted at OEMs for their premium upgrades and premium experience PCs, we have very price competitive products that we can go take share back with. In that OEM category, does that start by Q4 or does that wait more until Sandy Bridge in 2011? It starts right away. And next question comes from the line of Craig Burger with Friedman, Billings and Ramsey. Please proceed with your question. Hey, guys. Thanks for taking my question. I guess can you help us understand how big the chipset business is at this point and what the and how that should trail off over the next say year or 2? Let's see, it's less than $200,000,000 a quarter and we'll do we'll remain at that rate for probably through Q1 or maybe even Q2 of next year. And then it will start trailing off, not completely to 0, because we will continue to have AMD integrated graphics solutions in the marketplace and our expectation is that we'll continue to sell those for probably through the end of next year. So that's my expectation of it. Great. It'll just start declining, call it Q2 ish and then decline towards a lot less than that by the end of the year. As a follow-up, the workstation business has ramped pretty meaningfully. Is this a sort of run rate sustainable level of business here? Or is there some catch up that's benefiting the numbers right now? And then just one last follow-up after that. Thanks. Our workstation business has been growing consistently quarter to quarter, but hasn't reached the record levels that it was at a couple of years ago. And so my expectation is that the workstation business is going to continue to grow. It's going to continue to grow for two reasons. 1, more and more people are upgrading to Windows 7 and that upgrade process will affect work stations as well. The second reason is during this time, these last couple of years, we've invested in expanding the reach of our workstation solutions. Whereas it was predominantly used for manufacturing in the past, our workstations are now used for broadcast workstations, for 3 d television streaming, for post for postproduction, for video editing, medical imaging, gosh, the computational simulations of fluid dynamics, there's all kinds of things that are we've invested in expanding the reach for workstation solution. So we're just exposed to a much larger market. And so my expectation is that our workstation business will surely The My last question is, you guys referenced macro weakness in May June. Your largest competitor did not have similar commentary and I'm wondering if there's other dynamics at play or what might drive a difference between you guys? Thanks. I think that, well, first of all, I don't completely know. I mean, we're going to see all of this stuff sort out as we see their Q3s. Note, you have to remember that our business is skewed off by a month and being skewed off by a month this last quarter is a pretty big deal as it turns out, because the market softened in the 2nd month of our quarter, which was practically the end of theirs. And so I think we're going to find out how it really sorted out probably by Q3 timeframe. But we saw market weaknesses, not just for ourselves in the end markets, we saw it for other people. And we were frankly surprised by their guidances. But so be it, we'll find out whenever we source out. Do you think the weakness is driven by demand or is it supply chain adjustments? It's end market weakness. I think that at this point, I think most of us believe that euro was weak, and that naturally would cause some skew downward. And China, reducing their stimulus to the economy have slowed down the market a bit. Now, of course, our business is we have a much larger exposure in Europe and China, because our brand is so useful and so powerful to help the local OEMs enhance their brand. And also because consumers are much more find video games and content much more appealing out in the other markets, I think that those are just incredibly important markets to us. And so our exposure is probably larger than theirs. Overall, I think that we're just going to have to wait and see how their Q3 shake out for us to really know. Our next question comes Our next question comes from the line of Glenn Young with Citigroup. Please proceed with your question. Thanks. Jen Hsing, can you discuss whether or not in your past experience in periods where the economy seems to be decelerating whether gamers are resilient to that or do they have to follow the economic conditions? Hi, Glenn. Well, I think that there is some impact surely to the economy, but there's nothing like great games. And to the extent that it's kind of hard to think about StarCraft 2 as a game. I mean, I really think of StarCraft 2 as an event. I mean, this is a once a decade refresh to 1 of StarCraft, you know, is a cultural phenomenon in many countries. They watch StarCraft competition on TV. There's a StarCraft channel. There's StarCraft teams. So in many countries, StarCraft is just a very, very big deal. And so this is a very welcome upgrade. The game is absolutely beautiful and GTX 460 is perfect for it. And so my sense is that for the 12,000,000 StarCraft players out there, there is some serious upgrading to do. And my sense is that that should far overcome any softness in the marketplace. Okay, thanks. You also sound quite confident that TEGRA will grow in the quarter. And I wonder if that prompts you to adjust your TEGRA run rate forecast? I'm not sure I understand the question. Glenn, I think we've given guidance on that in the past and I think at this point it would be early to call whether we're going to exceed that or not. So I think we hold to that. We still feel very bullish about the product obviously. Our next question comes from the line of Arnab Chandra with ROTH Capital Partners. Please proceed with your question. Thank you. I have two questions. One is, Jensen, I know you don't want to give specific guidance, but could you talk a little bit about by the time the chipset business either becomes really small or maybe even goes away, do you think Tega and Tesla would be big enough to offset that? And I have a follow-up, please. My sense is that the chipset business will be about half to a quarter of size in Q4 of next year. And so you roughly said it's about a quarter of its size. Would Tegra and Tesla be able to up for the difference, both in revenues and surely much, much more in terms of gross profit dollars, my sense is yes. Okay, great. And then one other question about the about your sort of Quadro and Tesla business. Do you think that is Quadro are you at a point where you basically kind of completed the penetration in the market and it's really more about Tesla for that entire product line? Or do you think there is multiple opportunities left in terms of growth in that business? Quadro has wonderful growth opportunities ahead of it. First of all, where people buy workstations and upgrade their workstations on the rhythm of the companies themselves. The automobile industry that uses CATIA or the airplane industry or the tennis shoes industry or they all upgrade on different cycles and they use different packages. And more and more industries are using digital approaches to prototype or style or simulate just like we do. In your industry, you use computational finance. In my industry, we use EDA simulations and EMI simulations. We use all kinds of simulations to predict the outcome of our product and whether it's in design or manufacturing or advertising or broadcast or medicine, more and more people are using digital approaches to predict the outcome of their products. And so I think that the market is surely expanding. The other factor that's really exciting for us and what's so great about Fermi Quadro is it's such a great discontinuity relative to anything that we've shipped before. And I don't know that we've ever shipped a product that is 5 times faster in the type of applications that it's used in from generation to generation. And so we're looking forward to upgrading the installed base in addition to the natural growth and the natural upgrade of the workstation market. So I'm really excited about Quadro and we're looking forward to seeing how it does in the marketplace. The OEMs are really excited about as well. We have HP and and Lenovo are geared up. Fujitsu SINA is all geared up to these are our workstation partners geared up to take Quadro Fermi to the market. Our next question comes from the line of James Schneider with Goldman Sachs. Please proceed with your question. Good afternoon. Thanks for taking my question. Yes. I guess to start off with the notebook GPU business for a second. Can you give us a sense if I just isolate that? You mentioned that the market itself for notebooks was up in the quarter. Was your business also up for notebooks in the quarter? And then do you expect the notebook business in Q3 to be better or worse than your guidance for the corporate in Q3? Better or what was the last part of that question? James, you're talking about the Q3 guidance? Yes, your Q3 guidance, do you expect notebooks to be up in Q3 or essentially better than your corporate guidance for Q3? Okay. So if you look at Q2 notebooks and desktop were both down. Obviously, we missed our original guidance by a fairly large amount and both of those were key contributors to that. If you look at our guidance into Q3, we're expecting both of them to be up, obviously not by a lot given that we're only guiding 3% to 5%. Okay, fair enough. And then it looks like your OpEx ticked down a little bit in the Q2. Can you give us a sense of what expenses you may have kind of cut back on in Q2? And then how we'd expect what markers you look for as business recovers? How you bring back spending incrementally? And what are the things you bring back first versus later? Well, if you look at the expenses that we worked on reducing and so forth, they cover a broad range of things. They cover things in terms of how we tape out products, how we kit prototypes for for engineering test vehicles. It covers the minutiae of things like travel and the things that are not very exciting. But we've been fairly diligent across the entire business trying to figure out how do we reduce waste, how do we economize in terms of our expenses without naturally impacting our development plans and so forth. And going forward, right now, certainly in the environment we're in today, we don't see our attention on expenses abating anytime soon. We do have continued efforts in reducing costs. We also have cost pressures going in the other direction. And so our guidance is kind of recognition of the fact that we think for the time being at least that the cost reductions that we will implement in the Q3 will offset some of the upward cost increases that are going in the other direction. Our next question comes from the line of Sean Webster with Macquarie. Please proceed with your question. Thank you. Within the cost of goods sold for that $181,000,000 how much of that was due to litigation? Is that the main trend? Is there litigation within the cost of goods sold as well? Yes. Yes. How much were those 2 combined? We don't really break them up, but let me be a little bit clear. When we talk about litigation, there's the cost of the litigation itself, but then there's also the cost of the remedies, right? And so the remedies have to do with repair costs and so forth. And so there's a piece of it associated with cost of goods that's naturally as a result of the settlement itself. And we don't break that out. Okay. And for your inventories going into Q3, do you expect them to be flat down or up? Probably modestly a modest change, only at this point. A modest change up? When I say modest, it will be either modestly up or modestly down. It's within a I'll basically say it's basically flat. Okay, got you. And how I mean I understand there is a mix effect happening in the quarter. Can you tell us what your GPU ex the MCP business, the pricing did did sequentially for Q2? No, we don't disclose that. Okay. How about the tax rate? So, tax rate is coming up. Can you share with us why that's popping up? Yes. So, if you look at our business, our taxes are basically a function of how much income we make. And as our income goes down, some of the jurisdictions which we operate and pay down, as our total overall income goes down, those taxes stay flat and hence our rate goes up and vice versa. When our income goes up, the rate goes down. Our next question comes from the line of Kevin Cassidy with Thomas Weisel and Stifel. Please proceed with your question. Hi. Just two quick questions on enterprise. Last night we heard from Cisco saying that they're seeing a slowdown in enterprise. Can you describe what's different? Maybe the product refresh is causing more demand for your products or maybe if you could describe what's happening geographically? Well, our enterprise business is a little different than an enterprise desktop or a router per se. And if you look at our workstation business, the workstations are used to create the essential products of those companies. And to the extent that those companies believe that their workstations are no longer high performance enough or capable enough to handle the level of complexity or the amount of simulation they would like to do in simulation, they'll naturally upgrade. Frankly, most of these workstations these days by buying the workstations, you're reducing the cost of development of most of your projects, because you're just able to do more of it in a digital world where virtual prototyping is just much more cost effective than real prototyping. And so it's not a clear comparison to us. And right now, we're not seeing changes in the nature of the business in various markets. We're frankly too busy right now ramping Quadro based on Fermi architecture and so the enthusiasm is quite high right now. Okay, great. And maybe if there do you see any new competition or any changes in the landscape there? The workstation market is not about a graphics chip and it's not about a graphics card. And this is something that the vast majority of our competition just no longer understands. At a time. They're trying to solve a problem and it could be that they're trying to ray trace a car so that they could see a photorealistic image of it while they're trading off various designs. It could be that the data set is just absolutely enormous and they need to have the scalability and the scalable solutions that we provide. It could be that somebody's workstations needs to be virtualized and have a Windows XP or excuse me, Windows NT on 1 or Windows or Linux on the other and both of them has to be accelerated. And the fact that we have the best software stack for both Linux as well as Windows in the world makes a huge difference. And so the list of reasons why people choose Quadro is quite deep. This is an area where we have a great deal of passion for and one in which we do extremely good job. And so the bar is pretty high and we're not seeing any significant competitive changes out there that we notice right now. And our last question comes from the line of Patrick Wang with Wedbush Morgan. Hey, Jensen, can you talk about your I guess, just a high level view of guidance? What kind of price you're baking into your gross margin guidance? What kind of pricing? Well, we have more high end exposure today than we've had in a couple of quarters. And so that's a positive thing. On the mainstream product, if we want to go gain share back, we'll sell several million more lower ASP products. And so that will have a negative trend on ASPs. And so, we'll see how they all add up, but we're relatively comfortable with the gross margin guidance that David gave earlier. Yes, the guidance contemplates that. I see. Got you. That's helpful. Okay. And then just for my follow-up, I guess in your prepared comments you stated that channel inventory levels had come down. Can you help us understand how much the product mix of that inventory and how that compares to I guess levels that are comfortable or maybe historical for you guys? So we get inventory reports out of channel on a fairly regular basis. So I can't tell you other than from an aggregate standpoint that generally the trend has been down for the last 3 months. We expect it to go down again in the Q3. But even though it is trending down, it's relatively at levels that would be consistent with historical averages in the industry over time, which have been traditionally somewhere around in the 7, 8 weeks type of level. We certainly had periods when it's been a lot lower than that. We've had periods when it's been well above that. But today, it's relatively close to the historical averages. Yes. And Patrick, if you think about channel inventory, because most of the inventory is traveling by sea for the lowest possible cost freight. Some 3 to 4 weeks of that 7 to 8 is material that is sitting in the ocean going across, right. And so what's really available in the channel is about 3 to 4 weeks or so. And so, I think if we're seeing at these levels, we all feel pretty good about it. And there are no further questions at this time. I'll now turn the call back over to you, sir. Thanks, everyone. We look forward to talking to you about our next quarter results.