Earnings Call: Q1 2016

May 7, 2015

Good afternoon. My name is George, 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 As a reminder, this call is being recorded, Thursday, May 7, 2015. I will now turn the call over to Mr. Arnab Chanda, Head of Investor Relations at NVIDIA. Mr. Chanda, you may begin your conference. Thank you. Good afternoon, everyone, and welcome to NVIDIA's conference call for the Q1 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. I'd like to remind you that today's call is being webcast live on NVIDIA's Investor Relations Web It is also being recorded. You can hear a replay by telephone until 14th May 2015. The webcast will be available for replay up until next quarter's conference call to discuss Q2 financial results. The content of today's call is NVIDIA's property. It cannot be reproduced or transcribed without our prior written consent. During the course of this call, we may make forward looking statements based on current expectations. These forward looking statements are subject to a number of significant risks and please refer to the disclosure in today's earnings release, our most recent please refer to the disclosure in today's earnings release, our most recent Form 10 ks and the reports that we may file Form 8 ks with the Securities and Exchange Commission. All our statements are made as of today, 7th May, 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. 1st quarter revenue increased 4% year over year to $1,150,000,000 dollars Growth was driven by the strength in gaming, high performance computing and cloud and automotive. Viewed from a segment perspective, GPU revenue was $940,000,000 up 5% year over year. Tegra processor revenue was $145,000,000 up 4% year over year. NVIDIA's business performed within expectations within the quarter, our strategy of creating specialized platforms for gaming, enterprise, high performance computing and cloud and automotive continues to gain traction and we continue to reshape our organization to focus on them. In Q1, these 4 growth platforms contributed to more than 80% of revenue, up from 68% a year ago. Gaming revenue was 587 dollars up 25% year over year, powered by the strength of our Maxwell GPU architecture. Helping our performance was the launch of Titan X, the world's fastest GPU. Titan X introduced at the Game Developers Conference sets a new standard with the outstanding capabilities to drive 4 ks games and virtual reality titles. It delivers twice the performance and double the power efficiency of its a and high quality games and uses Google voice search. It's powered by our Tegra X1 Processor. The gaming market continues to expand. In the second half, we look forward to multiple drivers, including 4 ks, which quadruples the number of pixels to process, virtual reality and the launch of Windows 10. Enterprise revenue was 190,000,000 dollars down 4% year over year due to the weakness in European currencies. We continue to maintain strong market leadership with our Quadro products. During the quarter, we shared our vision for physically based rendering, which allows for the accurate simulation of real life materials and their interaction with light. In the enterprise data center, NVIDIA's grid graphics virtualization platform continues to hit key milestones. We now have over 250 enterprise customer with production deployments, up from just over 30 customers a year ago. In March, VMware, the virtualization market leader, shipped the latest versions of Horizon and vSphere with full support for NVIDIA, Grid, vGPU technology. More than 400 customers have signed on through the Grid early access program. HPC and cloud revenue was 79,000,000 dollars up 57% year on year with continued strength in the HPC market and among cloud service providers. Tesla products continue to benefit from widespread Internet interest in deep learning. One indication of our traction was the success in March of the GPU Technology Conference or GTC where we drew a record 4,000 attendees. 2 of the world's most renowned deep learning experts, Google's Jeff Dean and Baidu's Andrew Ng delivered keynotes at the event. A growing number of companies are now using Tesla GPUs for deep learning, including the world's leading cloud service providers like Baidu, Facebook, Flickr, Microsoft and Twitter, as well as a broad range of startups. Another indication of our traction is the success of our library for developers who implement deep neural networks. Since its March release, it has been downloaded by more than 5,000 deep learning developers. During the quarter, we also hit a milestone for CUDA, our parallel computing platform. It's now been downloaded 3,000,000 times since its 2,006 launch with 1,000,000 downloads in the past 18 months alone. Automotive revenue had a record quarter at 77,000,000 dollars growing 121 percent year over year. Our design wins in digital clusters and infotainment continue to ramp over multiple automotive OEMs. At GTC, 25 global automakers and Tier 1 suppliers were represented, including developers and researchers from such companies as Audi, BMW, Delphi and Electrovic. Their enthusiasm reflects the interest, increasing importance of visual computing for automotive and our position as a key technology provider for this market. We also announced the availability of our DRIVE PX deep learning development platform. It will provide researchers with computing platform and software tools to develop algorithms for self driving cars. We have started shipping Drive PX to developers around the world. The OEM and IP platform had revenue of $218,000,000 down 38 percent year over year. This reflected a combination of end of life Fortegra OEM designs as well as continued weakness in PC OEM sales. The weakness in PC OEMs has been broadly reported and attributed to foreign exchange rates and delays in purchasing leading up to the launch of Windows 10. Regarding IP, our pace is progressing against Samsung and our case is progressing against Samsung and Qualcomm. Last month, NVIDIA received a favorable pretrial claim construction ruling in the case. The case is set to be heard at the International Trade Commission beginning next month. Moving to gross margins. GAAP gross margins was a record 56.7%, above our outlook for the quarter and up 80 basis points from the previous quarter. Non GAAP gross margins was 56 point 9 percent, also above our outlook and up 70 basis points sequentially. Our strong margins resulted from a richer product mix. GAAP operating expenses for the Q1 were $477,000,000 non GAAP operating expenses were $425,000,000 in line with our outlook and inclusive of $16,000,000 of legal fees associated with our litigation against Samsung and Qualcomm. GAAP net income was 134,000,000 dollars down 2% from a year ago. GAAP earnings per diluted share of $0.24 was similar to a year ago. Now turning to some key balance sheet items. In Q1, our cash and marketable securities balance grew to $4,790,000,000 During the Q1, we paid $46,000,000 in cash dividends and we repurchased 2,400,000 shares. As a result, we returned aggregate of $99,000,000 to shareholders. Today, we announced a 15% increase in our quarterly cash dividend to $0.0975 per share. We have also announced our intent to increase our capital return to shareholders to $800,000,000 in fiscal year 2016 from $600,000,000 through cash dividends and share repurchases. Further, our Board of Directors has extended the previously authorized repurchase program through to December 2018 and authorized an additional $1,620,000,000 for an aggregate of $2,000,000,000 available for repurchase. We are committed to capital returns as an essential component in delivering shareholder value. Now turning to the outlook for the Q2 of fiscal 2016. We expect revenue for the Q2 of 2016 to be $1,010,000,000 plus or minus $2,000,000,000 I mean 2%. Affecting overall demand. Also, as widely reported by OEMs, a combination of seasonality and a low ahead of Windows 10 launch are impacting the PC market. The overall dynamics of our business are great. Gaming is expanding and 4 ks virtual reality and Windows 10 will lift it further. GPU accelerated data centers are expanding and deep learning is a new exciting application. And the market for car computers is expanding. We have an excellent position in each of these growth markets. Our GAAP and non GAAP gross margins are expected to be 55.7% and 56% respectively, plus or minus 50 basis points. This outlook is slightly below Q1 margins reflecting our product mix. GAAP operating expenses are expected to be approximately $474,000,000 non GAAP operating expenses are expected to be $425,000,000 flat with last quarter. We announced earlier this week that we will begin to wind down our ICERRA modem operations in the Q2 of fiscal 2016. We are open to the sale of the technology or operations. We estimate restructuring charges to our GAAP results in the range of $100,000,000 to $125,000,000 primarily during fiscal 2016. These charges will consist of severance and other employee termination benefits, tax expense items and other costs associated with the wind down if we are unable to sell the modem operations. The Icera wind down or sale is expected to benefit non GAAP operating expenses in the second half of the year and we will carefully invest in our growth initiatives of deep learning, self driving cars and gaming. We expect our fiscal year 2016 non GAAP operating expenses to be approximately flat with fiscal year 2015, excluding litigation costs. Fiscal year 2016 litigation costs are expected to be in the range of $70,000,000 to $90,000,000 as we defend our intellectual property. GAAP and non GAAP tax rates for the Q2 of fiscal year 2016 are 2016 are expected to be 23% 21%, plus or minus 1%. The above GAAP outlook amounts exclude restructuring charges associated with the wind down if the company is unable to sell the modem operations. We will now open the call for questions. Operator, will you please poll And our first question comes from the line of Blayne Curtis with Barclays. Please go ahead. Thanks for taking my questions. So, Claude, just on the outlook and I appreciate all the color by segments. It sounded like that you're still seeing weakness in the OEM segment. I was wondering if that read was right into June. And then on gross margin, in terms of the mix, what are the moving parts there? Yes, it is true that we're still seeing a decline in our PC OEM and our TEGRA OEM business, as we've reported within our Q1 results. Again, we still see this as a business that we're going to still try our hardest for the overall growth. But what we see going into Q2 is a very soft market with the PC OEMs and we do see probably a seasonal decline as we go into Q2. From a gross margin perspective on the outlook and what we see, it's really driven from a mix perspective as a decline in revenue from Q1 to Q2. And we still expect gaming to be great during that time and add value to our gross margins. But just because of the overall mix of what else is in the portfolio, we do expect it to come down to about 56. Thanks. And then just finally on ICERRA, is there any meaningful or not meaningful, but is there any revenue that would be material if you did shut it down to be cognizant of? We wouldn't expect any material change to our revenue associated with the wind down of Icera. That is correct. Okay. Thank you. Our next question comes from the line of Sanjay Jussaudia with Nomura. Please go ahead. Hi, Khaled. My question is on OEM as well. AMD recently launched some new products in the OEM category. And my question is, would you if they are willing to take this business at a really low margin, would you still be interested in this space? Or would you let it go? Have you is there a cutoff that below which you would not take this business? I think we're always going to work with the OEMs on how they want to position our products. We have probably some of the best GPUs available to them. So if we're really talking about an OEM that's looking just for a low cost, they're probably not looking for us for that type of configuration. So it's not that we would turn away business, but we are going to be trying to make sure the value of what we have in terms of the GPU would be recognized by the OEMs. Okay. And as a follow-up, could you talk about GPU pricing that you saw in the quarter? And any channel inventory update that you could provide because of these ForEx issues? Right now, we have a pretty good understanding of our channel from what we can see as we do have a good market position in terms of our cards across the world. So we watch it carefully. I would deem them right now to be in a healthy position as we exited the quarter. And there are of course the FX concerns around the world, not just in Europe. But right now again, I think we the channel is in a healthy position. Thank you. Our next question comes from the line of Hans Mosesmann with Raymond James. Please go ahead. Thanks. Hey, Khaled, can you give us some qualitative commentary on the outlook for automotive enterprise? And I think you mentioned gaming was going to be up, but if you can clarify that. Thanks. Again, we didn't give specifics in our Q2 guidance on all of the different pieces of our markets. What we want to discuss is our markets are extremely healthy. Yes, gaming, automotive, high performance computing, great leadership position, very healthy TAMs. How they'll grow specifically quarter to quarter, we'll see at the end of the quarter. But we've talked about we have a strong list of design wins for automotive. With that strong list of design wins, we can expect our revenue to grow in that area. If it grows specifically between Q1 and Q2, we'll have to see based on when the manufacturers want to pull the inventory for their lines. So that's not necessarily fully in our control. But long term, this is a growth opportunity for us as we outlined our growth platforms. On the enterprise side, again, it's really tough to say where the currency will take us within the second quarter. We can all hope that it will improve. But right now, we're just going to have to see at the end of the quarter how it actually comes out in Enterprise. Okay. Thank you. Our next question comes from the line of Rajvindra Gill with Needham. Please go ahead. Yes, thanks. If you could just call it maybe remind us how much of your sales is denominated in euro? Krista? To remind you, as we talk about in our SEC filings that most of our revenue is actually billed in USD. It doesn't mean we don't have the impact from FX rates though on our overall business. What it just means is any part of the channel, any part of the customer buying process has to think about the prices as they sit in their regions in terms of where they are. So really, we don't have a direct translation impact in terms of our overall business. And every part of the world is going to react differently based on the FX positions. Right. If we assume that there's some growth in Integra sequentially in the June quarter and the royalty stays the same as it always does at least for the time being. It would basically imply that the GPU business, including workstation, is going to be down something like 16% sequentially. And so I just wanted to try to understand that's a pretty big drop off, if that math is correct? Again, we're yes, we're probably just going to have to see at the end of the quarter. I want us to make sure we really start back with the health of many of these different markets, particularly gaming. We still expect gaming from a year over year perspective to definitely grow. How fast it will grow, we'll have to see at the end of Q2. But keep in mind, there is generally a sequential seasonal decline as we move into our Q2 that we're going to see. So we don't have a specific number at this time in terms of our overall GPU business. We have got the weakness of the currencies right now that we have to consider in that Q2 quarter and what we see in terms of low purchasing on the overall PC market generally. So I think that is what is incorporated in our guidance rather than very specific to the GPU or the Tekro business. Great. Thank you. Our next question comes from the line of Ross Seymore with Deutsche Bank. Please go ahead. Hi, this is Ji Yu calling in for Ross Seymore. Can you discuss any interest that you've seen for the ICERA business for the technology and IP? I'm sorry? What was the question? The question was regarding the interest that we may have in the ICERA business from outside. We don't. We have just started that process, so we don't have much to report at this time. Okay, got it. And thank you for giving the update on the increased return to shareholders. Can you give us an update on the level of cash onshore? And how does that factor into if there's any offshore cash that needs to be repatriated? Again, we're extremely comfortable with our decision to raise the capital return program to $800,000,000 and after much thought and consideration in terms of looking at both our onshore and our offshore cash and overall cash flow that we expect for the rest of the year. So we are comfortable with that position. And again, our total cash is about the same as where we ended at fiscal year 2015, a little bit up in Q1. And so we're going to return an additional portion of that to shareholders at this time. Our next question comes from the line of Craig Ellis with B. Riley. Please go ahead. Thank you for taking the question. The first one is just a clarification. Colette, on the expense guidance for the year, it's clear what you're expecting legal to be that $70,000,000 to $90,000,000 What was it in fiscal 2015? And when we look at the flat year on year expense ex legal, is it ex legal both years or just ex legal in fiscal 2016? Yes, Craig. When you look at the timing of when we initiated our litigation against Samsung and Qualcomm, it was relatively at the latter or the end of fiscal year 2015. So there's not a material amount in fiscal year 2015 associated with the LEO expenses. So the way that you can look at it is we've called out a potential range of what we see for fiscal year 2016 to help you going forward. And so you should just use the baseline of fiscal year 2015 as a total for the rest of the OpEx to be flat. Okay. And then the follow ups either to you or Jensin. As you see more of the GRID trials move to production and the year on year increase of 8x is pretty impressive up to 250. What's that mean for revenue? What's the revenue opportunity doing as you go from a trial to a production situation? Yes. Surely every production is a little bit different because every company is different size. But if you look at just the revenues year over year, the proportion is about the same as the number of number that goes to production. So it's grown it has also grown proportionally about the same. And do you think that's fair as a way to think about what the future prospects will be, Jensen? Or is there something different about the way new trials are going that would cause that to deviate either higher or lower? Well, my hope is that it actually increases. And the reason for that is because over time, not only will we get new customers into production, but existing customers will deploy more broadly. And so my expectation is that we should get growth on both sides of it. And once an IT department gets this, it's a network based virtualization technology. And so, of course, it's just enormously helpful that VMware has now integrated vGPU Grid into both Horizon as well as vSphere. And so from end to end, we now have Grid certified in large corporations. VMware is certified. Citrix is certified. Both of their sales force, the sales force of the OEMs are all aligned with us and we're working on engaging customers all over the world. And so the first thing that they do of course is to test all of their applications. And large companies have a lot of different applications in the works. It could be SOLIDWORKS, it could be Autodesk, AutoCAD, it could be Adobe Photoshop or Premiere or After Effects or it could be all kinds of applications that require 3 d graphics acceleration. And so once they certify that in fact qualify that in fact the applications all are perfectly compatible, which we largely expect them to be, then they start deploying them over the network. And some networks need to be shored up because this is about virtualizing the whole PC. And so it's being streamed over the corporate network. So some of the networks need to be shored up. And then of course, making sure that all of the end users are satisfied with the experiences that they have, which largely they've been more than delighted because as you could imagine having an accelerated GPU accelerated virtualization platform is going to be pretty exciting. And so far we've seen that the trials will want to enjoy it. And we hope that not only will we increase the number of customers, but the number of seats within each customer over time. Thanks for taking the questions. Yes. Thanks a lot. Our next question comes from the line of Vivek Arya with Bank of America Merrill Lynch. Please go ahead. Thank you for taking my question. Jensen, I think there is some skepticism that PC gaming so this is a longer term question that there is some skepticism that PC gaming is not really a growth market and that all the growth that you guys are seeing is really because of short term product cycle or share gains against AMD. So my question is what tangible data points can you point us to that says that the number of gamers is actually increasing and that this is really a growth market for NVIDIA? Well, let's see. How do I answer that? I think you're getting a lot of anecdotal evidence from multiple directions that suggest that PC gaming is growing. First of all, esports. You know that esports is largely PC gaming. And esports has become so large now that it's even highlighted on ESPN too ESPN. You know that the number of stadiums that have sold out as a result of e sport tournaments is growing over time. So there's a lot of anecdotal evidence that video games is growing. I think it's also pretty clear that almost every new human is a gamer. When the previous generation before me, very few are gamers. My generation, I would say, probably is 25% gamers. My kids' generation is probably 75% gamers. And the generation after that has got to be 100% gamers. And so games is no longer a niche. Game is really a pop culture now. And we expect that gaming to continue to expand. And then the last thing is last reason why I would say, we'll get multiple uplifts in gaming, It has to do with the new mediums that are coming out. 4 ks displays are becoming quite commoditized and quite affordable. And it has 4 times as many pixels to process. And so, although the imagery is much richer, you need a much more powerful GPU to drive it. We're looking forward to VR. VR is launching later this year and VR is going to be launching on multiple platforms. And in order to enjoy great VR, you need 90 frames per second in stereo and 2 eyes. And so unless you have something along the lines of a GTX 980 or Titan, at the moment, it's kind of hard to enjoy great VR. And anybody who's tried VR is generally blown away by it. And that explains the enthusiasm in the industry. So whether it's eSports or the fact that just more people are playing games that are growing up and familiar with the format and the new mediums that are coming out 4 ks and VR. And of course, Windows 10 is not it's going to really help. Windows 10 is a great operating system and has DX12 and DX12 is a fantastic new API. It's been a while since we've had a new 3 d API. So we're excited about DX12. So there's a lot of things going in gaming and that explains the reason why it just continues to grow. Got it. Very helpful. And as my follow-up, I think we sort of understand the slowdown near term. How should we think about the back half conceptually? Like how much of the slowdown right now is because of temporary factors? And how much can we expect to recover in the back half? Should it be normal seasonality in the back half? I know it's a little early to give guidance, but just conceptually how are you thinking about the back half of the year? Thank you. Yes. We yes, I appreciate that. We give guidance once a quarter, 1 quarter ahead. But if you look at the overall market, we expect seasonality. But more importantly, our position in the growth markets are really great. First of all, gaming is growing as we previously discussed. The second half of this year, you're going to see multiple growth drivers. 4 ks monitor pricing is really coming down. VR is launching in the second half and Windows 10 with DirectX 12 is launching in the second half, not to mention all the great games coming out. So I think that that's a growth driver. We continue to see that our GPU business for accelerated data centers continues to grow. It grew more than 50% year over year. We expect it to continue to grow with the enthusiasm around this new application called deep learning. We're seeing artificial intelligence work in every single country by every single computer company in every single large application is pretty unb is pretty unbounded. And lastly, we had a record quarter with our automotive business. We're growing now faster than doubling. And computing in cars, as you can imagine, is going to continue to expand. So these growth drivers, I think, are pretty fundamental to the market, and we have great positions in all three of them. Thank you. Yes. Thanks a lot. Our next question comes from Ambrish Srivastava with BMO. Please go ahead. Thank you. Two questions. One a real quick one. Colette, in the charges that you laid out from ICERA, how much is going to be cash and non cash? Thanks for the question. We're still in the super, super early stages of winding down this business and the process associated with it. So we gave a top level range in terms of looking at is on the balance sheet and the employment side. So we'll probably get into that a little bit more in the end of Q2. The way you should look at it is there's a pretty good split or pretty good mix at this point. So it's not all cash. There is a significant amount of it that is non cash. But we won't know the details of that until we end Q2. Okay. Thank you. And then a question for you Janssen. Core processors, GP GPU versus if the rumors are true Intelis is offering an astronomical valuation for what is $1,000,000,000 market that Alterra has claimed for FPGA coprocessor. So the question for you is just help just remind us where does GPGPU fit into that? And how should we think about the market? Intel's DCG revenues are 14 odd 1,000,000,000 dollars and the Tesla trajectory from what you had when you initially started the product out a few years ago, it was slow to start, but it's picked up. So 5 years out, how should we be thinking about the addressable market? And just help us just remind us where does GPGPU fit in? And how should we think about co processors from FPGA? And where are the specific needs workloads wise or whatever? However, you can help us enlighten us would be great, Janssen. Thank you. Sure. First of all CUDA, the GPGPU technology that we invented is growing more than 50% per year. The applications for CUDA ranges from deep learning to image processing to natural language processing to weather simulations, fluid dynamic simulations, molecular dynamic simulations, quantum chemistry simulations, astrophysics simulations. Gosh, ray tracing, the number of applications that I that we can spew off is pretty endless. And that's one of the reasons why nearly every single OEM in the world today has GPU accelerated servers. There's got to be some 200 different SKUs of GPU accelerated servers being offered by OEMs around the world. I don't think one of them offer an FPGA server yet. And so that's one indication. The number of applications, the number of OEMs, the number of industries that we now serve with GPGPU, with Tesla, if you will, is really quite large. And it explains why this segment, this market business for us is growing over 50% per year and is now off of a relatively large base. So that I think is the way to think about, if you will, the evidence of success. Now the reason for that, of course, is that CUDA is a processor architecture. It's an instruction set architecture. It's completely software programmable. It has the support of tools and profilers and all kinds of middlewares from around the industries. So it's a general purpose parallel computing architecture and it's completely reprogrammable. Whereas an FPGA is like a reconfigurable ASIC, which means the person who designs it, the person who reprograms it, if you will, reconfigures it, has to know how to design a chip. And there aren't that many people in the world who knows how to design chips. There's got to be a 1000 times more software programmers than there are the number of chip designers. And so one is reprogrammable, general purpose programmable. The other one is reconfigurable, if you will, and which explains the general purpose nature of Tesla. It explains the vast number of applications of it. It's taken a long time. I mean, it takes a long time to create a new computing architecture. And in fact, aside from Tesla, aside from CUDA, I actually don't know of another new type of instruction set that has come to the world. It's been a long time. I mean the world's had DSPs now for a long time. It's got CPUs for a long time. Aside from GPGPU, I don't think another general purpose programmable architecture has emerged into the world in a very long time. And the niche that we discovered was parallel processing that we believe there's a lot of problems in the world, a lot of applications in the world where you could process it massively in parallel. And that explains the reason why you could create a supercomputer like the one at Oak Ridge that has 36000000, 38000000 CUDA processor cores all processing in parallel, 38,000,000 cores all processing in parallel. And now the DOE has tasked us and IBM to partner together to build supercomputers. They're going to be 100 times that. And so the parallel computing capability and the scalability of CUDA that we invented is really quite phenomenal and it explains the reason for its success. I appreciate the question. Thanks, Edson. Our next question comes from the line of Doug Friedman with RBC. Please go ahead. Hi. Thanks for taking my question. In your recent filings, you disclosed that you're procuring wafers from Samsung. Can you offer some color on what products you're actually building at Samsung? And maybe color out if you can help us understand maybe the gross margin impact to a multi source boundary strategy? Yes. Doug, first of all, we're constantly evaluating foundry suppliers. We largely purchased from TSMC. I mean the vast majority of our wafers we buy from TSMC. And we're in 20 nanometer now. We're expecting to ramp 16. And so we're deeply engaged with TSMC for many, many nodes to come including 10. And so but we're always looking for looking at new foundry suppliers and competition keeps everybody sharp. But for all intents and purposes, GSMC is our primary partner. All right. If I could for my follow-up, when I look at your legal expenses, is there any sort of return on investment that we should look at from that level of spending? Is there some way that we can use that to derive maybe what it is that you're seeking in terms of IP income as a result of these lawsuits? Yes. I appreciate that question. We wouldn't invest $70,000,000 to $90,000,000 to defend our patents unless we expect a substantial return on that investment. This we don't go into litigation lightly. And in fact, quite frankly, I don't recall the last time that we asserted against somebody. And so I think this is something we took with great deal of consideration. And at the highest level, the way to think about it is this. We've invented more in modern computer graphics and modern visual computing than just about any company and in fact all the companies combined. We invented GPU that everybody just about everybody in mobile today, large or small in volume are utilizing in some way. We invented a programmable and we invented and the questions that was just asked of me that I appreciated was we invented GPGPUs. And these technologies are really fundamental to modern computer companies. And whether it's mobile, car computers, supercomputers, you name it, our technology is pretty vital to it. And so it's necessary for us and for all of our shareholders that we defend this from all of our employees that come here to do their life's work, so that they invent all this stuff to the shareholders that have entrusted us to make these investments. We have to go and make sure that we get the appropriate return on investment. You also know that today's technology industry, the supply chain is much more complicated, if you will, than it used to be. And at the core NVIDIA is an IP company. We don't make steel. We don't make concrete. We don't really even make wafers. We're an IP company at our core. And so we're comfortable making our innovations and our work products available, whether it's in a service or GPU or add in card or even an IP form. And so our expectation is that, 1, we have to defend it. 2, the return on that investment should be very, very high, because the exposure of the inventions that we've made in the industries that I mentioned just a moment ago are quite large. And so Thank you for taking my questions. Yes. Appreciate it. Our next question comes from the line of Alex Gana with JMP Securities. Please go ahead. Thanks for taking my question. Jensen, I'm wondering if you can share any insights into both what's happening real time and what might be happening in the back half of the year in terms of the Chrome systems, the Android systems, where you're pairing yourself with ARM based computing and your GPU capabilities? And any thoughts on if we're moving towards a day when you guys get yourself free from the constraints of the X86 monopoly? Thanks. Well, I think at the highest level, a cloud connected computer, whether it's an Android device or a Chrome device, it's going to become more and more popular simply because we're connected more often than not. And the power of cloud computing is pretty extraordinary. It's like everybody gets a supercomputer. Thin see more and more of these type of thin, delightfully small and long battery life computers. And so I think that that trend is inevitable. However, x86 is really still quite important in so many industries, whether it's in high performance computing, the energy efficiency of Intel CPUs in a data center is pretty hard to overcome. I mean they've done an incredibly good job. The workstation industry, CATIA, CATIA, Autodesk's applications, Adobe applications, so many of these applications that large companies rely on, that legacy is 35 years old. And it explains also the reason why our Quadro business is so sticky and our position there is so strong that the legacy is quite strong and people rely on that platform to run their business. And so my expectation is that X86 and Intel architecture has its place in the world. And then ARM is also going to be of course, has the opportunity to bring computing to a large number of people, especially smaller devices that are connected to cloud. So my you're talking to somebody who believes in computing and you're talking to somebody who believes that the future of computing has really just started. And so my sense is that there's a lot of great expansion to be done here. So if I'm hearing you right and you talked about this a little bit earlier when you talked about gaming. But if I'm thinking about gaming and I'm thinking out the next year or 2 for you to not be talking in a PC sense, it's really going to be a cloud driven model. You don't see any Android based systems in the works that can do any heavy big iron local client side gaming. Is that fair to say? Well, look, I think PC gaming is here to stay. And it's here to stay because there are some genres of games that are just better with keyboard and mouse. And you can play your game in your bedroom and not have to share it with anybody in the living room. On the other hand, there's 1,000,000,000 people who have not had the benefit of enjoying the type of AAA games that are largely in game consoles, which is a little bit like a cable box, if you will, a dedicated thing that people buy to now be able to enjoy it broadly in living rooms all over the world. So there I think there's still ways to expand the reach of gaming. And that's why we're Shield and that's why we're building Grid. We believe that long term video games like video, like movies will become democratized. And it would be, if you will, virtualized and put into cloud like Netflix and for us to be able to enjoy it all over the world. And so I believe that. And we've got to go lay the foundation necessary to go bring that to the world. I'm pretty excited about some of the work that we're going to reveal this year. And I think we just have to push on all of those vectors. I think all of that all of those vectors are real. PC gaming is going to keep growing. Cloud gaming will come. And Android gaming on TVs will disrupt the market. I believe in all those all three things simultaneously. Got you. All right. Thank you. Our next question comes from the line of David Wong with Wells Fargo. Please go ahead. Thanks very much. Can you give us some idea of GPU products you might have in the pipeline that might come out over the next year or 2? And what your plans are for manufacturing technology? Hi, Dave. David. I can't wait to tell you about the products that we have in the pipeline. There are more engineers at NVIDIA building the future of GPUs than just by anywhere else in the world. I mean, we're singularly focused on visual computing as you guys know. And we have found over the years to be able to focus on just one thing, which is visual computing and be able to leverage that one thing across PC, cloud and mobile and be able to address 4 very, very large markets with that one thing: gaming, enterprise, cloud and automotive. We can do this one thing and now be able to enjoy all and deliver to that capabilities to the market in all 3 major computing platforms and engage 4 vertical markets that are quite frankly very exciting. So I can't wait to tell you all about it David. You're just going to have to wait just a little longer. Okay, great. Well one other then. With the wind down of ICRs, you have many products that require modem technology. Will you need to pay significant license fees in the future to use 3rd party IP? Or are your modem needs fairly small at this point? Well, we're going to use I-five hundred, which has been qualified in largely the Western world and for the foreseeable future for the next couple of years. When the world moves to 5 gs, we hope that there is they're going to be in our assessment is that there will be multiple suppliers in the marketplace and we'll partner with them if it's necessary. But our primary focus is going to be focusing on visual computing products. Okay, great. Thanks. Thanks David. Our next question comes from the line of C. J. Muse with Evercore ISI. Please go ahead. Yes, good afternoon. Thank you for taking my question. I guess first question, as you look at PC gaming, can you talk through what normal seasonality looks like in July? And then also in terms of what you saw in this past quarter in terms of FX risk? And I guess, they're thinking through what the implications were in terms of pricing, any downward mix shift given in particular what we saw in FX and euro and ruble? Yes. So I appreciate that question. I think if you back off and look at the larger dynamic of gaming, the larger dynamic of PC gaming, the primary driver of PC gaming comes from 2 areas. 1, is amazing new games. That's number 1. Number 2 is brand new technologies, whether it's a brand new GPU, amazing new display technology and 4 ks is I would characterize as amazing new display technology and then and new technologies like VR. So new technologies are the reasons why people come to upgrade. And so new games that are just amazing and they need new GPUs or just amazing new GPUs that cause the installed base to upgrade. And so those are the two primary reasons. However, this year and starting in Q1 and surely we're experiencing some of it in Q2 as well is the currency disruption that's been broadly described. That I think has a pretty significant impact, because what it does is it just makes all the GPUs more unaffordable. And so everything just got more expensive in Europe. And so but that's something that hopefully will pass. And I'm looking forward to what happens in the second half. I mean VR is coming and you know how excited everybody is about VR. There's good reason for that. From John Carmack and Tim Sweeney and the leaders of the gaming industry, I mean, we all now recognize that VR is going to be the future gaming. And it's although we're going to continue to use monitors for many types of games and many genres of games and we'll play it on TV and such, But there will be a very large genre of games based around VR and there's no question about that now. And so I'm excited about the rollout of VR across the industry in the second half. And of course, you just can't you can't not get excited about the Edge 12 and Windows 10. I mean, it's just I think it's going to be a pretty big deal. So I think second half should be exciting and we're looking forward to it. Very helpful. I guess as my follow-up, Colette, on the OpEx side, when you look at the wind down of ICERA, what is the quarterly OpEx savings? And when should you get the full benefit of that? So we are in the early stages of, ICERA. Again, we're going to hopefully look for a buyer of it first. On the quarterly OpEx, the amount of that OpEx declining, we look for the opportunities in our growth areas for investment in the second half of the year. So essentially, we'll be about where we are right now in the second half of the year after we wind down BICERA. Great. Very helpful. Thank you. Our next question comes from the line of Srini Pajjuri with CLSA. Please go ahead. Thank you. Jen Hsun, I guess the currency issue is understandable. I'm just curious as to what sort of trends you're seeing in the U. S. And China where I think currency is less of an issue and also obviously those are 2 of your biggest markets? Well, first of all, Europe is a not insignificant market for PC gaming, whether it's Russia, which is a very large market for PC gaming. You'll be surprised how large it is. It could and Germany, China market as you know also was a little bit slow. It's China market as you know also was a little bit slow this last several months. Their economy is a little bit slower. But I think none of that is very significant compared to the FX implications. And so but we're seeing robust activity in the channel now. And as you know the exchange rate is improving. And so I'm hopeful that business will return to normal relatively soon. We'll see how it goes. Great. And then, Colette, just a follow-up on the OpEx. You said, I guess, $60,000,000 to $70,000,000 or $80,000,000 for the legal. Do you expect any seasonality? I guess, what I'm asking is, as we exit this fiscal year, do you expect the run rate on a quarterly basis to decline? Thank you. Yes. Thanks for the question. We really wanted to just provide the transparency on how important this litigation is to us and what we're doing to support that with the expenses and the range. We don't have a crystal ball of how this will go. So we know about what we're approximating for the full year. I mean there, we indicated in Q1, we spent about $16,000,000 but we'll take it day by day at this point. It's a very, very important set of cases for us and we'll keep you updated as it goes throughout the year. Thank you. Our next question At AMD's Analyst Day yesterday, they talked a lot about new technology they were going to introduce in spaces where you've been pretty dominant from a market share and technology standpoint over the last couple of years taking a lot of share from them. I'm not sure if you've had a chance to look at any of the things that they said or if you have any thoughts that you could share with us on that? Well, they've been a strong competitor for as long as I remember and they remain a strong competitor. And it's just that our strategy is very different now. We used to be much more of a component supplier competing directly with other component suppliers. But increasingly, we're really a differentiated platform supplier. And so you find that the software that we the software investments that we've made over the years really, really increasingly define our product. I mean, if you think about Tesla, the amount of software that's stacked on top of Tesla from all the tools that we've created, the middleware, the libraries, the programming models, the robustness of all of it, the integration with all of the industry's software products and everybody else's software that's daunting. And so it's hardly just the GPU anymore. Grid is all about software. I mean otherwise it's just another one of our GPUs. And so Grid is largely about software, virtualization software, concurrency software, the ability to deal with very, very low latency streaming, the integration with all the tools in the world and all the other platforms in the world. So I think when we think about our products and our platforms, it's really about the differentiated value that we build on top of our GPUs, number 1. And number 2, the deep integration with the large ecosystems around the world to the point where other companies' capabilities are really going down to this platform, making this platform more valuable to customers. And so that's really what's changed about our company's strategy and why increasingly we look very different than other component suppliers. That's very helpful. Thank you. For my follow-up, if I look back to the transcript on the last call, there was kind of a view expressed that some of the issues that were impacting the other companies PC OEMs business maybe NVIDIA is a little bit more insulated from that. Is the view that the weakness in the PC space has kind of broadened out a little bit and that's why maybe we're seeing some of the follow on effect into your business? Well, I think first of all, we're one of the few companies that didn't miss the last quarter. And Q1 was relatively fine for us. What we said was that we're going to let the broad what is broadly enterprise, that's one of the factors. Enterprise does affect us. When enterprise slows down because of FX issues or delays in purchase because of Windows 10, workstations is part of Enterprise. Servers that they buy is part of Enterprise and so it affects us there. We still have a piece of our business that even though it's a rather small percentage of our business at this point, it's still non zero. Our PC OEM business is affected what's happening around the world. And so it's I would say that, yes, our Q2 was informed by all of those factors. But I would say that also our core business is really doing well. Gaming is robust and I expect gaming to continue to grow. The work that we're doing in accelerated data centers grew 50% year over year and my expectation is that it's going to be a strong business for us going forward. And the success that we're seeing in automotive and the expansion of car computers has allowed us to double our business there. So our core businesses are growing very nicely and largely independent of what is being experienced in PC OEMs globally. That's helpful. Thank you very much. Good luck. Yes. Thanks a lot, James. Our last question comes from the line of Christopher Rolland with SBR Capital. Please go ahead. Hey, guys. Thanks for the question. This is Joe on for Chris. Just to follow-up with your competitors and what are you saying or they've been saying. It looks like they're going to 14 nanometer FinFET next year. I was just wondering how you viewed this change? Do you expect anything in the industry to change because of this? And then when might you guys get back to process leadership? Well, we I'm not sure that we've ever had process leadership. We go to a new process when we're ready to go to a new process. And as you know, we could ring out new architectural efficiencies in exactly the same process technology for several generations with 28 nanometer. The difference between Kepler and Maxwell is pretty amazing. To be able to deliver twice the energy efficiency in one generation using exactly the same process is pretty exciting. And so I think there's there are many ways to skin the cat. And we surely expect and we surely expect to go and look forward to go into next generation nodes. But the GPU is a piece of the puzzle. The algorithms we put into the GPUs is a very important piece of the puzzle. The software on top of it is a piece of the puzzle and system design is a piece of the puzzle. There are just so many ways for us to deliver energy efficiency and performance. I wouldn't get too obsessed about process technology all by itself. Okay. That's helpful. Thank you. And then as a quick follow-up, I was just hoping you guys could break out what percent notebook represents within PC GPU? Within PC, our overall GPU business and how big is notebook? Yes. We don't give out that. I don't have it actually in front of me right here on this size. But we are seeing definitely a good amount of growth in terms of our notebook for gaming. And we still have a very strong position as well is in just general PC notebooks. So they're both about equal in size in terms of our total. But it's a percentage of our PC number. Okay. Thank you. Ladies and gentlemen, that does conclude the Mr. Arnott Chandel, I'll turn the call back over to you. Yes. This is Jensen. First of all, I want to thank all of you for tuning today. We're really pleased with the quarter. Our businesses are performing well. Looking beyond the broad industry headwinds of Q2, we have great growth drivers in our core platforms: naming, HPC Cloud, Enterprise and Auto. And in each market segment, as we've discussed, our position is differentiated and strong. We're excited that Visual Computing is more important than ever and I look forward to talking to you guys next time. Ladies and gentlemen, we thank you for your participation and ask that you please disconnect your lines.