Earnings Call: Q3 2016

Nov 5, 2015

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the NVIDIA Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. As a reminder, this call is being recorded Thursday, November 5, 2015. I will now turn the call over to Arnab Chandra, Vice President of Investor at NVIDIA. You may begin your conference. Thank you. Good afternoon, everyone, and welcome to NVIDIA's conference call for the Q3 of fiscal 2016. With me on the call today from NVIDIA are Jensen Huang, President and Chief Executive Officer and Colette Kress, Executive Vice President and Chief Financial Officer. Officer. I'd like to remind you that today's call is being webcast live on NVIDIA's Investor Relations website. It is also being recorded. You can hear a replay by telephone until the 12th November, 2015. The webcast will be available for replay up until next quarter's conference call to discuss Q4 financial results. The content of today's call is NVIDIA's property. It cannot be reproduced or transcribed without 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 most recent Forms 10 ks and 10 Q and the reports that we may file on Form 8 ks with the Securities and Exchange Commission. All our statements are made as of today, 5th November, 2015, based on information currently available to us. Except as required by law, we assume no obligation to update any such statements. 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 CFO commentary, which is posted on our website. With that, let me turn the call over to Colette. Thanks, Arnab. 3rd quarter revenue was a record $1,305,000,000 up 7% from a year earlier, up 13% sequentially and substantially above our outlook of $1,180,000,000 Growth was driven by record revenue for gaming, particularly for our GTX platform and automotive infotainment systems. From a reporting segment perspective, GPU revenue was $1,110,000,000 up 12% from a year earlier. Tegra processor revenue was 100 Our strategy remains focused on creating platforms for gaming, professional visualization, data center and automotive. Our progress is the result of product innovation, our strong position in growing markets and disciplined execution. In Q3, our 4 market platforms contributed 85% of our revenue, up from 71% a year earlier. First, let's start with our gaming platform. Gaming revenue rose 44% year on year to $761,000,000 Growth is being fueled by a number of factors, among them, the significant increase in graphics production value, the rise of esports, the anticipation of blockbuster games for the holiday season and the emergence of new technologies like VR for richer, more immersive gameplay. Professional gaming competitions or e sports are well on their way to becoming a global entertainment category with an audience of 188,000,000 viewers. There were 30,000,000 viewers alone for last month's League of Legends World Championship. The launch of great gaming titles drives gaming platform sales. We are excited by the strong pipeline of AAA games ready for the holiday season, including Star Wars Battlefront, Call of Duty, Black Ops 3, Rainbow 6 and Fallout 4. Meanwhile, we are looking forward to the launch of virtual reality with the approaching availability of VR headsets from Oculus, HTC and others as well as new VR games such as EVE Valkyrie. During the quarter, we enabled a new category of high capable enthusiast class gaming notebooks with the launch of GTX 980. For the first time notebooks are able to deliver the same gaming experience as desktops and have the processing power to drive frame rates needed for VR. Our long term bet on Android gaming is Shield. During the quarter, we extended the reach of Shield Android TV, the market's most advanced 4 ks smart TV console in 2 key European markets. We launched GeForce NOW, which provides Netflix light service for streaming games from the cloud to your shield device. Moving to professional visualization. At incorporate photo realistic visualization of product and building designs. And with DesignWorks VR, developers can easily provide the amazing experience for such areas as theme park design, product design, telepresence and surgical training. In data center, inclusive of Tesla and Grid, revenue rose 13% sequentially to $82,000,000 reflecting demand in deep learning, high performance computing and graphic virtualization. Revenue declined 8% year on year due to lumpiness from large deep learning projects. Most of the world's leading web services companies have adopted Tesla for deep learning to power next generation services. In addition to using our GPUs for training servers on massive datasets, companies like Baidu are using them for inference for such work as real time voice commercial use in such areas as weather forecasting and commercial use in such areas as weather forecasting and seismic processing. We continue to make progress as well with our grid virtualization platform, which enables companies to deliver graphic rich applications to employees on any device anywhere. At VMworld in San Francisco, we launched Grid 2.0 with twice the user density and application performance of its predecessor and support for both Linux and Blade servers. A dozen Fortune 100 companies are completing 125 OEM offered servers are qualified to run it. Also reflecting momentum for NVIDIA data center offerings, Microsoft Azure announced that it has integrated NVIDIA grid into its rapidly growing cloud service in response to customer demand for GPU acceleration in the cloud. Finally, automotive revenue rose 51% year on year to a record $79,000,000 At last month's International Auto Show in Frankfurt, Mercedes Benz, Audi, Porsche, Bentley and Honda all showcased a range of production vehicles and concept cars with NVIDIA powered digital cockpits. And our partner, Tesla Motors, just introduced its Falcon Winged Model X. Like the Model S, the Model X is equipped X. Technologies using NVIDIA DRIVE PX. These include car manufacturers, Tier 1 OEMs, startups and research institutions. DRiVE PX is an advanced autonomous driving platform that fuses data from cameras, lidars, radar and ultrasonic sensors to determine the path forward using deep learning techniques. We look forward to sharing more details about this work at CES 20 16. Our OEM and IP business was $192,000,000 up 11% sequentially driven by seasonal demand for notebooks. Now turning to the rest of the income statement. GAAP gross margin was 56.3%, non GAAP gross margin was 56.5%, line with our outlook. GAAP and non GAAP gross margin increased from a year ago reflecting our strong gaming revenue. GAAP gross margin increased sequentially as the previous quarter included a charge related to the NVIDIA Shield Tablet recall. Non GAAP gross margin was nearly flat sequentially. GAAP operating expenses for the 3rd quarter were 489,000,000 dollars inclusive of $8,000,000 of restructuring and other charges. Non GAAP operating expenses including litigation charges were 430,000,000 dollars slightly lower than our outlook. We continue to focus on operating efficiencies and we manage investment growth while growing operating margins. GAAP operating income for the 3rd quarter was $245,000,000 up 15% from $213,000,000 a year earlier, reflecting strong revenue growth. Non GAAP operating income was $308,000,000 up 17 percent from $264,000,000 a year earlier. GAAP net income was 246 $1,000,000 GAAP earnings per diluted share were 0.44 dollars including 0 point 0 $1 of restructuring and other charges as well as a benefit of 0 point dollars Non GAAP earnings per diluted share were $0.46 an increase of 18% year over year. Now turning to some key balance sheet items. In Q3, our cash and marketable securities balance was $4,730,000,000 During the Q3, we paid $53,000,000 in cash dividends and we closed our accelerated repurchasing agreement with an additional 4,600,000 shares returned. As a result, we have returned to shareholders an aggregate of $604,000,000 fiscal year to date of our full year intent to return $800,000,000 As part of our ongoing commitment to deliver shareholder value through capital return, we have announced an 18% increase to our quarterly cash dividend to 0 point one 14 to all shareholders of record on November 20. In addition, we are pleased to announce our intention in fiscal 2017 to return approximately $1,000,000,000 to shareholders through ongoing quarterly cash dividends and share repurchases. Now turning to the outlook for the Q4 of fiscal 2016. We remain excited about our business will lift it further. GPU accelerated data centers are expanding in both high performance computing and cloud, driven by the acceptance of deep learning techniques and the transition to autonomous driving is well underway. We have excellent positions in each of these growth markets. We expect revenue for the Q4 of 2016 to be $1,300,000,000 plus or minus 2%. Our non GAAP and GAAP gross margins are expected to be 56.7 percent 57%, respectively, plus or minus 50 basis points. GAAP operating expenses are expected to be approximately $503,000,000 Non GAAP operating expenses are expected to be approximately $445,000,000 For fiscal 2016, we expect non GAAP operating anticipated to be in the range of $70,000,000 to $80,000,000 as we defend our intellectual property. GAAP and non GAAP tax rates for the Q4 of fiscal 2016 are both expected to be 20% plus or minus 1%. The above GAAP outlook excludes restructuring charges, which are expected to be in the range of $25,000,000 to $35,000,000 as we finalize the wind down of the Icera operations in the Q4 of fiscal 2016. Further financial details including the CFO commentary and revenue by market platforms are available on our IR website. With that, we will now open the call for questions. Operator, will you please poll for questions? Thank you. The first question which comes from the line of Vivek Arya with Bank of America. Please go ahead. Thanks for the question and congratulations on the great results. For my first question, the last two quarters, you have substantially exceeded your original outlook and PC gaming has been an important part of that. And I'm wondering, the strength that you're seeing or the upside surprise that you have seen in both these quarters, has that come more from units? Has that come more from better mix or ASPs or share gains? And more importantly, how sustainable is this kind of upside trajectory? Yes, Vivek. First of all, thanks. Well, I think that we've been consistent that our PC gaming business is driven by several factors. The first factor is the great AAA titles that are coming out with ever increasingly graphics production value. The second is just the number of eSports players that are growing around the world. And it's a very social phenomenon. The more of your friends are joining esports, the more you have to join esports so that you could hang out with your friends. The third is the developing countries. One of the things about PC gaming and overall gaming is that you really need to have broadband access anymore so that you can download these amazing games. And so as broadband adoption continues to grow in the developing countries, the PC is really the best way to get into gaming. It's a platform that you need for your daily lives anyways and surely most young people need it it for school. And so that's been helpful. All of those factors have increased both I think it's probably fair to say that we're not fully penetrated. And our expectation is that as we look into next year, all of the great games that are coming out, whether it's Call of Duty that's coming out or Star Wars that's coming out or Assassin's Creed or Tomb Raider. And surely, everybody's quite excited about VR coming out in the beginning of next year. So I think there's several growth drivers that are still quite powerful and our expectation is that this is going to be a large market going forward. Great. Thanks, Jensen. And for my follow-up question, not too cable, but when I look at your Q4 guidance, it's strong, better than expectations, but it sort of implies flattish trends and what is usually a seasonally stronger quarter. If you could just give us some color on what segments just directionally do you think would be up or down versus Q3? Thank you. Well, the guidance that we provide is the guidance that we think is best and balanced. And we'll see how the quarter plays out. But the growth drivers in our business overall gaming is a growth driver and we just mentioned some of the dynamics that are underlying it. Data centers is a growth driver for us and I'm sure we'll be talking more about that during the conference call. And then 3rd, the automotive business is a growth driver for us. And so we have several growth drivers and but at this point, our guidance is the best we have to offer. Okay. Thank you, judge. Yes. Thanks. The next question comes from the line of Mark Lipacis with Jefferies. Please go ahead. Hi, thanks for taking my questions. First question on the virtual reality as a driver. It seems that you have fairly low expectations for 2016. When you see the Oculus VR demos, I really leave with the sense that they could transform business processes for many different industries and it seems like a lot of potential. So I'm just trying to reconcile that kind of reaction that I've noticed versus your kind of it seems like lower key expectations for virtual reality as a driver. So if you could help reconcile that, that'd be great. Well, first of all, Mark, we are over the top excited about virtual reality. There's nobody at NVIDIA who is low key about it. There's no question that when you enjoy the Oculus headset with a GeForce GTX 980 or a GeForce GTX Titan, the experience is unbelievable. And recently we even produced a whole family of notebooks that are able to enjoy VR directly from the notebook. So we're super excited about VR. The sense of presence that you have in enjoying VR headsets, whether it's from Oculus or Valve's Vive, it's really fantastic. We also see the applications of VR is quite sweeping. It could of course, we're quite enthusiastic about games and the games that we've seen are really amazing. But it's used for industrial design, architectural design. It's used for whether it's medical imaging, even scientific computing. We're seeing entertainment, large scale entertainment, large format entertainment. And so we're seeing all kinds of applications from places all over the world. We're tracking over 2 50 companies now that are working with us on VR and it ranges everywhere from video games to entertainment to professional graphics as I've mentioned. Our approach is to provide a platform by which the entire VR industry can be built upon. And so we call it our DesignWorks VR for our enterprise products, our professional products and GameWorks VR for our consumer products. And by using by connecting to our APIs and connecting to our SDK, the performance and the experience is just phenomenal. Now maybe your question is much more related to financial. And I guess our approach there is to be enthusiastic about the work that we're doing to support the entire industry as it moves into VR. We're engaged deeply with the industry in doing so. I think that we've built the premier platform for VR for both PC gaming as well as professional graphics. And as far as financial is concerned, realize that the shipments hasn't really started yet. And I think it's prudent to wait and see. But my expectation long term is that VR is going to be a very powerful growth driver for us. I mean that is almost undeniable at this point based on everything that we've seen and all the effort that's going into it. Thanks. That's very helpful color, Jensen. Thank you for that. A follow-up question, if I may, on the gaming software, the PC gaming software, there's a strong product cycle you've mentioned in a number of times. Is there a risk that you have that this helps is partially helping to drive gaming GPU sales now and then there's some kind of a let up later on in, say, 2 or 3 quarters from now? How should we think about that? Is there a correlation between gaming software launches and lumpy shipments of gaming GPUs? Thank you. Yes. It's I guess in the end it's hard to predict. There's only a few things that I that we do know. The first principles of what we know are that the gaming market overall is growing. The number of esports players is continuing to grow. The number of countries developing countries that are now able to bring more people into gaming is growing. Just amazing. If you just look at Star Wars and Assassin's Creed and Call of Duty and Tomb Raider, I mean, they're almost cinematic. And so, our expectation is that these factors combined is going to continue to drive the gaming market forward. And so we'll see from quarter to quarter how they do. But at the moment, the everywhere in the world we're just seeing gaming to be quite vibrant. Thank you. Yes. Thanks a lot, Mark. The next question comes from the line of Stephen Chen with UBS. Please go ahead. Great. Thanks for taking my questions. First one, Jen, if I could, on the automotive market. I guess, first of all, at your last Analyst Day, you guys mentioned a sort of an aggregate backlog number for an estimate on the rough value of the design wins over a number of years looking out. I was wondering if you could potentially provide an update on how that number may have changed over the last several quarters? And related to that, just given the nice pipeline you guys have building up, can you talk about what sense of urgency your customers are telling you guys in terms of how quickly you need to get TEGRA into some of these systems, whether it's infotainment or ADAS type products? And what that translates to in terms of the revenues coming on for TEGRA? Yes. Thanks a lot, Stephen. I guess, first of all, the our automotive business is growing quite robustly. And year over year, it's grown over 50%. And our expectation is that it's going to continue to grow through next year and a couple of years after that. Meanwhile, there are 2 very important dynamics that are happening in the car industry that is favorable for us. One dynamic has to do with the central car computer. It is very clear now that your future car will be software defined that there will likely be multiple operating systems. These operating systems will control graphics rich experiences that this centralized computer will be built like a data center so that it can be secure, it can be robust, it could be mission critical. And software is going to play just a huge role in it. And so when the car becomes more and more computerized, more than just digital, more than just electronic, but it's computerized and that it's software rich, it plays into our hands because we're such a great software company. I mean, we know system software incredibly well. And software capability is one of our major differentiating advantages. It's one of the reasons why we're able to do what we do. The second dynamic is that, whereas the 1st generation of driver assistance was made possible with radars and the 2nd generation included cameras. The 1st generation of autonomous driving is about to come. Autonomous driving hasn't really made its way into the market yet and we're seeing the early versions of that. But architectures that enable fully autonomous driving is yet to come. And this is an area where we really have a great deal of capability. It's going to require a sensor fusion. It's going to require enormous amount of software. It's going to require artificial intelligence, and it's going to require the ability to support an open computing platform that NVIDIA is built upon. If you look at our accelerated computing platform, it's programmed by so many people in the world. And this is a real advantage because car companies need the ability to develop their own artificial intelligence network so that they can ultimately own their driving experience. And so this is something that I think the second the new era of autonomous cars and autonomous vehicles is a great opportunity for us. So those two dynamics are going to be fundamental to the future gentlemen. And as my follow-up question, I was wondering if you could help parse out some of the drivers within the Tesla and Grid product families, Just between high performance computing, cloud data center and traditional corporate enterprise type customers that are currently buying your Tesla and Grid products. Can you talk about the near medium term demand trends across these different verticals? Thanks. Yes. I appreciate that question. PC gaming, of course, is a very powerful growth driver for us. Our automotive business is a growth driver for us. And I fully expect our data center business to be a growth driver for us. We've simplified our data center strategy over the course of last several quarters. Whereas we used to have multiple data center strategies, we now have basically 1 data center platform with multiple applications that drive it on top. The data center platform accelerated data center platform is called Tesla. On top of it, we have multiple software stacks. The most the first software stack that we created was for high performance computing for scientists to be able to do things like weather simulations dynamic simulations and quantum chemistry simulations to material simulations. So, HPC, high performance computing was our first stack. We also talked about Grid. Grid is our enterprise virtualization stack. We have GeForce Now which is our cloud gaming stack. And one of the things that's super important in the future is the work that we're going to do in hyperscale data centers that allowed cloud data centers to do their work around artificial intelligence and to take the pressure off of the enormous amount of new traffic that is going that is swamping and flooding data centers from users generating their own video. Basically, people are kind of everybody's going to become a broadcaster. And there are PC gamers that are already broadcasting on a daily basis and Twitch is the name by which we all know it by. But you're going to see YouTube Live. YouTube Live is doing incredibly well. And then you're going to see applications like Meerkat and Periscope and there are more coming that basically lets almost everybody become a broadcaster. You're going to have billions of people broadcasting to billions of other people. And all of those videos today needs to be somehow processed and our GPUs are really fantastic at that. And so we have multiple ways to multiple applications if you will that sit on top of our data center platform. Now the dynamics that I've mentioned some. One of the most important dynamics around data centers is Moore's Law needs a boost. We know now that Moore's Law is under some amount of pressure and it's not growing as fast as the industry needs it to. So Moore's Law needs a boost and that's really what Tesla is about. Tesla is an accelerated computing platform that boosts the microprocessor. And so that's one dynamic. The second dynamic is what I mentioned. The global race to AI, the global race to AI, there's not one data center on the planet. There's not one cloud service on the planet. Frankly, there's not one application company on the planet that we know of that's not trying to figure out how AI can completely revolutionize the applications that they provide. And then of course accelerating the cloud and making it possible for cloud to offer smart services and graphics bridge services like the announcement that we recently did with Microsoft Azure. Azure now provides the NVIDIA grid to power graphics accelerated applications as a service and we're super excited about that. So those dynamics are happening all in real time and it's contributed to our Thanks, Justin. And congrats on the strong results. Yes. Okay. Thanks, Justin. Congrats on the strong results. Yes. Thanks a lot, Stephen. The next question comes from the line of Hans Mosesmann with Raymond James. Please go ahead. Thank you. Congrats guys. Hey, gentlemen, can you give us a quick rundown on the competitive dynamic in the data center, particularly with GRID if there is any kind of competition? And the reason I bring it up is that the Intel, Alterra combo perhaps is a way to kind of fight what you guys are doing there? Thanks. Hans, first of all, thank you. Well, I think it's very clear at this point that boosting Moore's Law is an essential path forward, that relying on CPUs alone for the entire workload of a data center is unrealistic and frankly unnecessary. There are no supercomputing centers that I know of that are not considering accelerated computing. And the reason for that is because just relying on traditional methods unfortunately doesn't allow you to scale your data center in an efficient way anymore. There are no hyperscale data centers that I know of that aren't somehow overwhelmed and flooded by the user generated video content or the need to move to machine learning and artificial intelligence to provide smarter services. And so these dynamics are putting a lot of pressure on data centers And it's one of the reasons why there's so much talk about new approaches for improving the throughput of these data centers, whether it's supercomputing data centers or hyperscale data centers across the board. And I think that's an enormous opportunity for us. This is an area that we've invested almost 10 years in. And as you know, I've been talking about accelerated data centers now for, well, 10 years. And this is an area that we're seeing a lot of momentum. And as other people pursue other ideas, I think it's just an acknowledgment that this is really a good path forward. I think that in your question you also specifically asked about FPGAs. And FPGAs we use FPGAs at NVIDIA and we use FPGAs to do simulations and emulations of our products. FPGAs have been around a long time and they have they're perfect for certain applications. The challenge for, I guess, the trade off is an FPGA is like it's designed. It's designed and configured on an array of transistors and gates, whereas a GPU is a full custom processor that is designed completely by hand, whereas one FPGA is designed probably by a handful of engineers, a GPU is designed by thousands of engineers. And a GPU performing a task could be 100 times the frequency, 100 times the performance of that of a FPGA. And it stands to reason that it's a result of hand craftsmanship and a processor that's designed to go very fast. An FPGA, however, can do specific tasks quite well. If you only want to do 1 or 2 things, you can surely limit the functionality and make an FPGA quite efficient. However, our perspective is that a data center doesn't do 1 or 2 things. A data center runs thousands of applications. A data center has video, has imaging, it has voice, it does machine learning. The algorithms are changing every day. Today, the algorithms are convolution neural nets. Tomorrow, it has memory. After that, it's recursive. And so the type of neural nets just keep growing and the algorithms just keep on moving forward. And so our belief is that the vast array of applications and the evolution of the algorithms really makes a So we'll see how it plays out. But at the moment, we're seeing a lot we're enjoying a lot of enthusiasm accelerated computing. Okay. Thanks for the rundown. Yes. Thanks a lot Hans. The next question comes from the line of Kevin Cassidy with Stifel. Please go ahead. Thanks for taking my question. I'm just wondering on GeForce NOW, how is that revenue going to be recorded as you start getting subscribers? And is that going to go under Grid? Or is that going to go under Shield? And can you talk a little more about what gross margins are expected for that? Well, it's not very much right now. So it's not much to talk about. But I think that the way to think about it is this, Shield and GeForce NOW is our long term bet on the future of gaming. When we look out in the future, I think there are 2 dynamics that I think are unquestionable. One dynamic is that Android is going to become more important in operating system. Don't forget gaming is about computer gaming. Gaming is made possible because it's built on top of a computer architecture and Android is the most popular operating system in the world. And so it's undeniable that it will become a major force in gaming someday and Shield is our bet in that. The second is that cloud services, application as a service and therefore video games as an application as a service will eventually come. It took many years for Netflix to eventually become mainstream and my expectation is that it'll take several years for GeForce NOW to become popular all over the world. And so those two dynamics, I think, are largely unquestionable. The question is not so much if, the question is simply when. And then maybe the next question is who? Who is best equipped to be able to bring this future into the world? And we feel that as the world leader in visual computing and as one of the major platform leaders in video games today that this is an area that we can really make a great contribution. It's a modest investment for us and we're thoughtful about the level that we invested to make sure that it times with long term the opportunity. Okay. But if we were to recognize the revenues just to put it back into the original question, if we were to recognize the revenues, it would go into gaming. Okay, great. And maybe if I could just ask one other quick question about the split in the PC gaming business between notebook and I've seen a lot of reviews of the new gaming notebooks and seems all top 10 are based on GeForce. And between notebooks and your cards, what's the revenue split now? Well, the revenue split is largely still PC desktops. I appreciate you bringing up the notebook work that we did. Maxwell, the GPU architecture that we created and the craftsmanship of the GPUs we make are so incredible that it's finally possible for a notebook to be able to deliver the same level of performance as a desktop. And our timing was timed so that GTX 980 are just amazing. I mean they are so many times more powerful than a game console. It fits in a space smaller than a game console and it can drive VR. Everything you want to do, every game you want to play is possible on that thin laptop. And so the enthusiasm behind our launch with GTX 980 has been really, really fantastic and I appreciate you recognizing it. Congratulations. Yes. Thanks a lot. The next question comes from the line of Ambrish Srivastava with BMO. Please go ahead. Hi. Thank you. Two questions. One is back on the professional side, Jensen. If I look at Quadro and Tesla, what reverses the year over year decline that we have seen the last couple of quarters? Is that as it relates to Tesla, is it just a matter of timing of when the HPC systems get launched? And the second follow-up was for Euclid on the IP side and expenses for IP. What is the under it's not debatable that you guys have a very unique IP portfolio. But I'm wondering given the reversal, the initial reversal you had on the lawsuit against Qualcomm and Samsung, why should the expenses be continuing to be higher on that front? Thank you. Sure. Thanks for the questions, Ambrish. Let me take it in reverse order. So first on IP, it's not over. We the administrative law judge has opined that of the 3 patents that he had to rule on that 2 were not infringed and 1 was infringed, but he opined invalid. Of course, we disagree with that. And we have submitted our rebuttal. And now all of that has to go to the commission, commission, which is ultimately where the ruling happens. The next phase is for the commission to decide whether they want to review, and we hope they do and it's not uncommon that they do. And then in February timeframe, the commission would determine their judgment. And it is not uncommon at all to have the commission disagree with the administrative law judge. And so I think it's far from over and therefore, I guess it's not over. But I think the higher level point is this. The higher level point is that our IP is very important to us. That invention as the world leader in our field is fundamental and core to our future. We have to invent the future. We are the world leader after all. And from time to time, we may decide that as a one off and strategically decide that we would defend our IP. And this is what we have done in this case. But it's not our business model. We don't litigate for a business model. We don't depend on licensing for our business model. And I hope that all of you on the call today don't invest in our company as a result of IP royalties. What I hope that you see is that we are quite a unique company and we are a world leader in the space that we endeavor, that visual computing is more important than ever and applies to more industries than ever and that our business model is really about selling products into vertical markets that are really exciting and quite vibrant and growing. And so I hope that you decide to invest on the basis of the products, the business model and our special position in the marketplace. On the two questions related to Tesla and Quadro, as you know Quadro is about design and it's about workstations, it's about manufacturing, it's about things that people make. And we are a very, very, very significant leader in this market. We make a great deal of contributions to this market, but it's also a mature market. And so the way that our strategy for growing Quadro is very, very simple. We have to reinvent it and we have to reinvent it by bringing new capabilities to it and we have 2 that we're quite excited about. 1 is a new technology called Iray and Iray is a brand new way of generating images that is photo realistic and physically accurate. It's almost like inventing the font of desktop publishing. What you see is what you will get. And it's just really quite amazing. And so I think Iray is going to rejuvenate the way that people do computer graphics and it will create I hope that it will increase the size of the market, make it easier for people to design products and it will increase our ASPs quite significantly. Number 2, VR. We've already mentioned before that from design to architectural design to medical imaging to scientific computing, we're seeing that to large scale entertainments, we're seeing that VR is going to be very important. So those 2, we hope will drive the future growth of Quadro and get it back on a growth track. As for Tesla, we grew 13% quarter over quarter. We declined year over year. Frankly, it didn't meet my expectation either. And however, the fundamental dynamics, the reasons don't really matter here or but the fundamental dynamics are incredibly sound and the groundswell around the fundamental dynamics is unquestionable. Moore's Law needs a boost. AI, every company on the planet is racing towards the future of AI and cloud computing needs to be accelerated with graphics as Microsoft Azure has demonstrated. And so my expectation is that we'll grow sequentially again and that the fundamental dynamics around Tesla is just really, really positive. Thanks for all the details, yes. Good luck. Yes. Thanks Ambrish. The next question comes from the line of Deepan Nag. Please go ahead. Yes. Thanks a lot for taking my question. On virtual reality, so the recommended specs from Oculus or something like a GTX 970, But I think a lot of third parties and I think even you guys have mentioned that it actually requires much more in order to get a pretty reasonable experience. So could you kind of help us understand what we should be expecting in terms of the average setup for, let's call it, an early adopter of Oculus? Should we expect 2 kind of GTX 970? Should we expect a Meet 980, a Titan? Anything would be helpful there. And also, if you kind of walk us through the economic fall through for NVIDIA in terms of what kind of revenues you would expect to see or ASPs NVIDIA would recognize for, let's say, a $300 card? And what kind of gross profit dollar fall through we could see from that as well? Thanks a lot. Yes, I appreciate that. So I would say that the 970 is the minimum requirement. It is the minimum requirement. And I think Oculus has done a good job setting the minimum requirement. And I think a minimum requirement simply means that anything below it is not going to be a great experience. We're seeing just more and more content coming and usually the content gets richer, content doesn't usually move backwards. And so the production value is going to continue to grow. If you buy into a 970, it'll give you limited amount of growth over time. But if you buy into a 980 or GTX Titan, you just have a lot more opportunities to continue to enjoy that platform for a longer period of time as content gets richer. And so in terms of the economics, our gross margins are higher on $970,000,000 and above. It's higher than our corporate average. And so we appreciate the adoption and the growth in that segment of the marketplace. But ultimately, our focus is to help enable the entire ecosystem of hundreds of companies who are working on Doctor to be able to deliver this experience to the marketplace fulfills the promise of Doctor. We're just intensely concerned that if we don't do a great job that we ruin a great thing. This is really, really a great thing. And the folks at Oculus and the folks at Valve, the folks at HTC, ourselves and the 230 companies that are out there working on VR, we all want to deliver just a fantastic experience. And that's our focus at the moment. And our recommendation, if anybody were to walk up to me and ask me for a recommendation, I would tell them that a GTX 980 Ti would be the baseline. And in my own case, I'll probably have a pair of Titans, which who doesn't need a pair of Titans? Well, that'd be really nice for all of us. So then on that kind of same theme, if I think about the competitive dynamics into next year, so you've I think, pretty obviously taking a significant leadership advantage, especially at that enthusiast portion versus AMD. As we go into VR, kind of when you talk to the game developer community, what kinds of things are you doing in order to maintain that advantage? And what kinds of things can we see in PASCAL that could actually allow you to extend that advantage? Yes, sure. Well, first of all, we respect our competitors. I mean, we take our competition seriously. You know that as a company, we compete pretty intensely and this is a company that has seen a lot of competition over the years. And so we take competition seriously. We respect the capabilities of our competition. However, I think it's also very, very clear that our business and our business model and our strategy is completely different than our business and our business model and our strategy is completely different than AMD and the PC graphics chip company we used to be a long time ago. And our company is just on a different trajectory. Our approach to building products is different. Our approach going to market is different. Our so so as much as we are always alert and paranoid about and we don't take our position for granted and we are thoughtful about competition. We have our own work to do and we have our own platform to do and we have our own ecosystem to go and care for and nurture and push forward. And so I think that I appreciate the question, but I can't imagine a more different company to tell you the truth. Great. Thanks a lot. The next question comes from the line of Ross Seymore with Deutsche Bank. Please go ahead. Thank you. Congrats on a solid quarter. This is G for Ross Seymore. Just going back to the guidance, given that there's a slate of AAA rated games coming out this quarter, I guess, why what's the reason behind the conservatism behind the expectations for gaming? Or is that growth expected to be offset by other segments? Yes. Well, our guidance is the best guidance we think we should provide at this moment and we'll see how the market plays out. We're not in control of the market as you know. But I think at the foundational level, we have multiple growth drivers and some of them on someday exceeds our expectations and some of them don't exceed our expectation. But that's one of the benefits of our business model today. That's one of the benefits of our strategy today. We have multiple growth drivers in the company. PC gaming is a growth driver. Artificial intelligence is a growth driver, VR is a growth driver, autonomous driving cars is autonomous cars is a growth driver. And I really don't know of that many companies in the world that is there I believe that those drivers are, I believe that those drivers are fundamentally sound and powerful. However, we'll see how they turn out at the end of the quarter and I remain optimistic. And so we're enthusiastic about the guidance we provided and optimistic that we'll do a good job on it. And then we'll just have to see how it turns out. Thank you. And for my follow-up, it looks like some of the segment revenue segmentations the end markets was changed a little bit this quarter, with the new classification as Quadro and Data Center or Pro visualization and data center versus enterprise and HPC cloud? What was behind the change? And is it related to the unifying of the data center strategy? Yes, that's right. That's exactly right. The reason we decided classify it a little differently is because I changed the architecture of it. We used to have several different product lines and each one of the product lines were planned differently and they were specified differently and so on and so forth. We've decided to unify all of our data center product lines and abstracted out the software from it. And so from this one unified platform Tesla, Tesla is our accelerated computing platform And on top of it, our software stacks that allows us to solve a problem for a particular marketplace. So for example, we have our entire software stack for HPC. We have a rich software stack for enterprise virtualization, we call Grid. We have a software stack that is incredible for providing cloud gaming around the world. That's called GeForce NOW. And then we're going to have a software stack for hyperscale. And so each one of these software stacks are built on top of one common architecture, one common platform called Tesla Accelerated Computing. And so as a result, we decided to unify all of that and report it simply as data centers. And quite frankly, I think it'll just be easier to understand. Okay. Thank you. The next question comes from the line of Harlan Sur with JPMorgan. Please go ahead. Thank you for taking my question and solid job on the quarterly execution. On the strong growth in the gaming segment, blockbuster games, esports, big drivers, but there appears to be another potential driver and that is the shift from console to PC gaming here in the U. S. I think, Jensen, you've always characterized the U. S. As a console centric market, but this seems to be changing pretty rapidly with high schoolers and some of the older demographics here in the U. S. I don't know what the stats are, thus far I think it's been a pretty big untapped market. So how much of this penetration is contributing to the growth in your gaming business? Well, Harlan, first of all, thank you. I think that there is no question that the U. S, even the U. S. Is seeing growth in PC gaming. And the fundamental reason is really quite singular, esports. Esports is, it may be the new social platform. It is the new digital playground. You go hang out with your friends. It's the new virtual arcade. This is how you hang out with your friends. Not only do you play, if you're not playing you're watching, but at all times, you're talking to your friends. This is how you hang out. And so this is a big deal. This isn't something you can do easily on mobile. This isn't something you can do easily on TV. This particular platform really benefits from having a PC. And so, esports is probably if I had to tag it on one thing, esports would probably be it. The growth of esports, as you know, not only is the gamers enjoying esports growing faster than anybody would have expected. And I think the reason for that is because it's a social platform. And therefore, it grows not linearly, but arguably exponentially. And in the case of eSports, there's also viewership and now all kinds of businesses are cropping up to help people enjoy watching eSports and sharing the moment with other people. So this is I think this is real and it's quite exciting. The next question comes from the line of Joe Moore with Morgan Stanley. Please go ahead. Great. Thank you. In terms of the buyback for next year, can you talk about your domestic cash position and would you need to do anything synthetic to achieve that buyback? Yes. Thanks Joe for the question. We have an outlook for our capital return program next year to return $1,000,000,000 as well as the increase in the dividend that will be in effect there. We continue to look at our overall total cash balance and also our U. S. Cash balance. We still receive cash flow from both the combination of our international operations the whole amount. But if some need comes, we have several options for us to think about how we would fund that and we'll look at that at that time if necessary. Great. Thank you. And then I was under the impression from our conversations during the quarter that there was a 14 week quarter in January. Is that the case? And if so, does that have any impact on the fiscal year. So we have incorporated our best estimates at this time for the Q4 incorporating that extra week. The next question comes from the line of Alex Gana with JMP Securities. Please go ahead. Hey, powerful quarter. Jensen, I know you touched upon the challenges in the data center for Moore's Law and that driving opportunity for you. But what are your own big picture thoughts on the implications of Moore's Law for your core GPU business? And then associated with that, if I think about the increasing challenges of Moore's Law as well as the power of some of the big OEMs and it can be either on the hardware or on the cloud side and many of them are both, How does that not mean you need to have some sort of licensing business or strategic partnership business in order to move your technology forward? Thanks. Yes, Alex. First of all, thanks for the question. Well, semiconductors and chips is really important to us. And on balance, it's a lot easier if the world would just get better without anybody having to work for it, I. E. Moore as well. And so if every year, our transistor just got faster and they've got more of it and they got cheaper and so on and so forth all at the same time, it surely would make for an easier ride. However, accelerated computing is a very different beast. The way that accelerated computing works and some people have characterized NVIDIA's growth and performance to Moore's Law Squared. And I don't think it's much far off from that actually. And the reason for that has to do with the fact that we change our we can innovate, change, improve our GPU underneath, the software stack on top, the algorithms that we innovate on top of that and then also targeting specific applications. One of the things that most people don't realize is that we're not a general purpose processor. We only target a few specific applications. And the specific applications as you know that we focus on is visual computing and this particular field computing, images, video, parallel applications, which artificial intelligence falls into. These applications are just right down the strike zone and right in the bull's eye of accelerated computing. It just had maybe it happened by serendipity, but we hope that we have a large part to do with it that the accelerator that we created made it possible for these applications to move forward and they as a result moved forward more quickly and became large markets. And so I would say that the answer to your question is that we don't just do chips. And the value proposition of our platform is really about chips, about software, about algorithms and applications that we select. And that combination is really, really powerful. Now your second question has to do with IP licensing. I would say that 5 years ago, as a technology component company, a PC graphics chip company, where our path to market is only through OEMs. Our path to market is only through OEMs. And our path to market is only through OEMs that our industry where our products are industry standard with, I. E, Wintel or PC or so on and so forth. That's no longer true. We now have 4 vertical markets by which we engage the market ourselves whereby we can innovate whereby we can innovate without dependency on somebody else. And so whether it's accelerated data centers, which has a specialized platform, gaming where we go to market ourselves and we have a specialized platform there. These markets are really, really large. And so the reinvention of our company put us in very large markets that are growing quite robustly. And so I think that our primary focus today is through product sales. And so we changed our business model that way, if you will, instead of remaining a components company and moving, if you will, backwards into licensing. We company and moving, if you will, backwards into licensing. We decided to move forward into market vertically and creating specialized platforms. The next question comes from the line of Sanjay Charestia with Nomura. Please go ahead. Hi, Johnson. One question on the notebooks, gaming notebooks. You indicated that now you have the same desktop class graphics notebooks. And my question with that is with the VR coming in and notebooks graphics getting more powerful, do you see that it could shift from desktops to notebook, your product mix? And if so, do you think that that mix is less favorable or is similarly favorable to you versus desktop graphics? I actually guess I would say I don't care. I would say that I don't care. And the reason for that is these desktop these notebook GPUs are really high end and they're all GeForce platforms production value, the AAA games. I would like eSports to continue to grow. I would like developing countries to have broadband and I would like VR to be incredible. And so I would say that those are really the drivers for our business. And however a gamer would like to enjoy GeForce, we would love to welcome them. The next question comes from the line of Matt Ramsay with Canaccord Genuity. Please go ahead. Yes. Thank you very much. Jensen, you had mentioned I think earlier in call in response to a question that obviously you guys are not fully penetrated in gaming with the esports phenomenon and more broadband coming to emerging markets. Maybe you could help us understand and break down the growth between unit growth or overall installed base growth versus upgrade sales from the current installed base? And I guess what I'm trying to get at is the segment, the growth between that and what's the Lynx? And what are the real drivers to that upgrade cycle for in Lynx and what are the real drivers to that upgrade cycle for someone that's already engaged with you and in your installed base? Thanks. Yes. So of course, one of the most important drivers is the combination. It's the combination of really, really high production value games and our installed base, because our installed base are already gamers, our installed base are already GeForce customers. And when new games come out, new amazing games come out, the installed base wants to upgrade their GPUs to support it. And so if you look at our installed base and just take a look at our if you will, 1st base the mainstream GTX, Let's pick the GTX 950. GTX 950 class installed base represents probably less than a quarter of our installed base. Another way of thinking about it is that 3 quarters of our installed base really needs to get upgraded so that they can enjoy today's exciting AAA titles. And so the installed base alone is a really exciting opportunity for our growth. And that's only possible because of the amazing AAA titles. It's the Star Wars of the world that the Call of Duty's of the world, the Assassin's Creed and the Batman's that really, really causes our installed base, inspires our installed base to upgrade to new GPUs. And so that alone has really great growth opportunity. Not to mention the other factors that you started with, which was esports and developing countries having broadband and then of course what we hope to be a big driver in the coming year with VR. And so the installed base I think is a big growth driver for us. Okay? The next question comes from the line of Rajvindra Gill with Needham and Company. Please Congratulations on good results. And a lot of this has been talked about before, but just wanted to get a sense of kind of a normalized revenue growth rate, at least as much as you can discuss with some of the headwinds that you experienced this year potentially abating next year, namely the PC OEM business, maybe not might not decline as fast, or at the same rate as it did this year. So I just wanted could maybe discuss a little bit about the more of a normalized growth rate. It seems like this year, you're going to end up about 5% growth rate, given the fact that the TCs have fallen pretty significantly. So any color there would be helpful. Yes, I appreciate it. I think first of all just the recognition that our PC OEM or OEM business has largely the decline has abated. We're still We're thoughtful about the projects we work on and we care very much about working with our strategic partners. For example, some of the really amazing projects that have been announced recently, the Microsoft Surface Book, I mean, holy cow, what a great laptop. Mine should be arriving any day now. And so I'm super excited about that. I thought Pano's and the guys over at Microsoft just did a killer job on that laptop. And it was incredibly challenging and we love to work and we love building groundbreaking work. And then the other project at Google with Google Pixel C, I thought it was amazing. I mean, it's just a fantastic laptop and it's based on our latest generation Tegra. Hiroshi and the team did a great job building it and what a fantastic new tablet model. And so we're going to continue to work on these type of OEM projects. And so we have exciting ones that we're in the project in the process of working on. And so my expectation is that the PC OEM business and the Tegra OEM business is going to be here. But it's just not a huge focus of ours. Our focus focus is not the right word. It's not where we expect our growth drivers to come from. Our major growth drivers are the 4 that we talked about several times during the call. In terms of growth rate, I going to take potentially a couple of years for us to have some kind of a feeling for growth rate. Let me tell you why. In no time in the history of our company, we have a brand new business model, right? First of all, we have a brand new business model. This new business model leverages 1 architecture, but instead of going towards just serving OEMs, vertical markets ourselves. It's a platform strategy. It's an ecosystem strategy. We engage the markets directly ourselves. So this new business model transition and approach to this market is really working and accelerating. Now because we're engaging the markets directly and we're looking at some very large markets, I mean the autonomous driving market is going to be a large market. The accelerated data center market is going to be a large market. AI is going to be large. VR is going to be large. PC gaming is going to be large. And so, we're now drivers. And so I think that the TAM for the company is multiple growth drivers. And so I think that the TAM for the company is larger than any time that we've ever enjoyed. And so that's kind of the second thing. We have multiple growth drivers and they have gosh, we're just doing really exciting and important work that will shape the future of computing. I don't know at any time in the history of our company that we're working on things like AI and VR and self driving cars and cloud computing all at the same time. And so all of that leveraging one fundamental architecture, which gave us the ability to simultaneously engage these vertical markets with a very powerful singular investment behind it. And so I think our business model is very different. The vertical markets we engage are very different. And I hope that as a result, our growth will continue to surprise. The next question comes from the line of David Wong with Wells Fargo. Please go ahead. Thank you very much. In your gaming GPUs, do you have any estimate of what market share you currently control and how that's been changing over the last few quarters? Well, David, thanks for the question. We don't really control anything. Our products are purchased by our gamers freely and so it's not really a matter of control. And I mean that in a way that, look, we've got to earn the love and loyalty of our customers every single day. And whereby whereas we used to be a PC OEM company, an OEM company where that responsibility lies on our OEMs, Today, that responsibility really lies with us and we take it really, really seriously. We have 70,000,000 gamers that are connected with us. I hope that we add value to them on a continuous basis and that we earn their trust and their loyalty over time. The beauty of this model, of course, it's much, much harder. It requires much, much greater understanding of the software stack. The way that you digitally connect and engage your community has to be very different than before. Obviously, the PC OEM model is simple. The selling motion is simple. The marketing motion is simple. Everything we do today, the selling motion is much more complicated and the marketing motion is much more complicated. But the end result is that the promise that we made to them, whether it's Quadro's ability to help you realize your imagination to GeForce that helps you enjoy your game to the fullest. These promises we have the ability to deliver on a day to day basis. And so over time, I believe it allows us to create much deeper connections with our customers, which in business talk is stickiness, but we don't think of it that way. We think of it as earning the loyalty and the trust and hopefully the passion of our customers. Okay. Your next question comes from the line of Ian Ng with MKM Partners. Please go ahead. Yes, thanks. A question for Colette here. Lots of interesting opportunities and investments here. I mean, could you update us in terms of where we are in terms of identifying and implementing the operating synergies? I think at the Analyst Day, you talked about some software synergies, unifying the silicon architecture. Thanks. Thanks for the question. Yes, I think our focus over this last several years has really been focusing around one single unified architecture and investment. That's really helped us to make the appropriate investments that we need in these 4 different markets that we're going after, but allowing us also to really focus on a single architecture that allows the efficiencies that we're seeing in our operating expenses. That is still going to be our focus as we move into the current quarter Q4 and as we move forward into fiscal year 2017. As our financial performance is very important to us and improving that financial performance in the short term. So thanks for the recognition of noting our work on our investment portfolio and assuring that our investments are right sized for our top line. The next question comes from the line of Chris Rolland with FBR and Company. Please go ahead. Hey, guys. Let me echo my congrats on a really strong quarter here. So the current leader in ADAS, they are autonomous driving, I guess is where they are going with this. They're running their platform off of what's essentially like a 5 dollars microcontroller and they really talk down the importance of hardware. So, Jensen, maybe I would get if I could get your idea on what you think this hardware platform, I know the importance of software, but what this hardware platform might look like for these future generations that you're talking about? Yes, Chris, I appreciate that. If we can get a $5 microcontroller to drive And it's just a matter of software. And driving is like one of the most complicated things we do. I think humans could be replaced in just about everything we do with a $3 microcontroller. And so it seems unlikely. I agree that smart microcontrollers could be used to enhance smart cameras and do some to do computer vision. And I think that for ADAS, it is really, really good. I mean just to be serious here, I think that smart cameras, whether it's from Tier 1s or from companies in Japan or various companies around the world. ADAS, a driver better cruise control to automatic braking, to lane keeping. Those things are all important things and it improves our driver experience. But autonomous driving is just a whole different thing. Autonomous driving, nobody's figured out. And obviously, there are several companies that we know who have real cars on the market, who are doing autonomous driving and there's no pretense. Nobody's saying that all it takes is a $5 microcontroller to make that happen. It takes a lot of computing to make that possible. And so our strategy is not driver assistance. I mean, I've been consistent about that. I appreciate all of the people's work that are enhancing driver assistance, whether it's radar or ultrasonics or cameras to move driver assistance forward. Our strategy is really a computing platform for autonomous driving and it's going to take a lot of software. And it's going to take a lot of software that is going to be owned by the car companies themselves. And our strategy is to provide a platform by which we provide a lot of the capabilities of artificial intelligence, whereby they can embrace it, modify it, enhance it, so that they can make their personality of the driver experience in their own software long term. I just can't imagine how every single car company in the world will have exactly the same driver experience. The way that the car responds to you, the way that the car responds at all is something that I believe long term is going to require a lot of computing. This is an area that's just far from being done. And I think it's very complicated stuff and we don't even know what we don't know yet. But the one thing that we do know, it's going to need a lot of computing horsepower. It's going to need a lot of software. Artificial intelligence is going to be at the core of it. And I think if we succeed in doing so, we're going to make the world a much, much better place. There's a lot of people that shouldn't drive. There are a lot of people that would love to get around that they can't drive. And I think we're going to keep a lot of people out of harm's way. So I think the work is incredibly important. It's far from being over. And so there's lots to do. The last question comes from the line of Joseph Zaccaria with Oppenheimer. Please go ahead. Hey, thanks for taking the question. Congrats on the quarter. I just want to circle back on the automotive part of the business. I know you've done a lot of work with the VW Group, specifically with Audi and Porsche. I was wondering if you have seen any of the impact from the potential R and D callbacks or any sort of comments on what you're seeing out of Germany would be helpful. Thanks. The area where we work with VW and Porsche and Audi are really about advancing the state of the art in their cars. If you look at the work that we do, it's really about it's really about innovation and it's about the technology that they want to be world's first at bringing to market. This is a company this is an organization that believes the technology leadership and leaning forward, leaning into the software defined car and leaning into the computerized car and leaning into driver autonomous driving and leaning into electric vehicles is a good thing. This is a company that is very forward thinking as everybody is very well aware of. And so our work with them are really along those areas. And if anything at all, see quite a significant heightened desire to move the company forward and do something great. There are no further questions at this time. I'll now turn the call back to you. Please continue with the presentation and or closing remarks. Well, thanks everybody for joining us today. There are several things that we wanted to say. We wanted to say that our new business model transition approach to market is working and accelerating. We talked about our multiple growth market drivers, PC gaming, data center and automotive are all growing nicely. We talked about the fact that we're working at the center of some big developments that are shaping the future of computing, AI, VR, accelerated cloud computing and autonomous driving cars. These are really exciting things. And we're doing that with one singular leveraged investment around one architecture. And that allows us to bring the might of this company and the expertise that we have to help solve some of the problems that I've mentioned. NVIDIA NVIDIA is the world leader in visual computing and it's becoming more important than ever in a growing number of industries. Our strategy is to leverage this one core investment to 4 growth markets: gaming, professional visualization, data center and auto and is delivering good results and gaining momentum. And so our goal is to balance those investments our investment to capture the enormous opportunity ahead, while maintaining a keen focus on improving near term financial performance. Thank you all for joining us today. Ladies and gentlemen, that does conclude the conference call for today. We thank you for participation and ask that you please disconnect your line.