Earnings Call: Q2 2015

Aug 7, 2014

Good afternoon. My name is Colin. 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. I would now turn the call over to Mr. Chris Evenden, Senior Director for Investor Relations with NVIDIA. Sir, you may begin your conference. Thanks, Cayan. Good afternoon, everyone, and welcome to NVIDIA's conference call for the Q2 of fiscal 2015. 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. After our prepared remarks, we'll open up the call to a question and answer session. Please limit yourself to one initial question with one follow-up. Before we begin, I'd like to remind you that today's call is being webcast live on NVIDIA's Investor Relations website and is also being recorded. A replay of the conference call will be via telephone until August 14, 2014 and the webcast will be available for replay until our conference call to discuss our financial results for our Q3 of fiscal 2015. The content of today's conference call is NVIDIA's property and cannot be reproduced or transcribed without our prior written consent. Beginning in September, we will start to use our company blog and Twitter to inform investors about our participation in upcoming investor and industry conferences. The next conference for NVIDIA will be the Oppenheimer conference next week on August 12. During the course of the call, we may make forward looking statements based on current expectations. These forward looking statements are subject to a number of significant risks and uncertainties and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release, our Form 10 Q for the fiscal period ended April 27, 2014 and the reports we may file from time to time on Form 8 ks filed with the Securities and Exchange Commission. All our statements are made as of today, August 7, 2014, based on information available to us as of today. And except as required by law, we assume no Research. During this call, we'll discuss non GAAP Research. During this call, we'll discuss non GAAP financial measures. You can find a reconciliation of these non GAAP financial measures to GAAP financial measures in our financial release, which is posted on our website. So let's begin. Revenue was $1,100,000,000 up 13% year on year and in line with our outlook. Gross margin was a record 56.1% and we delivered EPS up 38% year on year. The quarter's gross margins and overall profitability were better than we had anticipated, driven by strength in our PC gaming GPUs and in data center and cloud platforms. PC gaming continued to deliver year on year growth in an expanding industry. GeForce sits at the center of the PC gaming ecosystem, now powering close to 100,000,000 gaming PCs around the world. Our new entry level GeForce GTX GPU delivers the performance of the latest generation consoles, making the GeForce gaming PC the largest target for developers of latest generation games. There's no better place to look for evidence of the strength of PC gaming than esports. Last month's DOTA 2 tournament in Seattle was televised on ESPN and carried total prize money of over $10,000,000 more than the British Open Golf Championship. The number of players playing League of Legends rose to about 67,000,000 per month and they accumulated over 1,000,000,000 hours of play time. And there is a strong pipeline of AAA games launching on PC this fall, including new versions of Assassin's Creed, Far Cry and Call of Duty. In the workstation market, Adobe continued to push the use of GPUs with the addition of acceleration to Adobe Illustrator CC. Illustrator have millions of users worldwide. They could get up to a 10x performance boost by adding Quadrant making the experience silky smooth. Tesla had a record quarter and demonstrated continued momentum in big data analytics and machine learning with some high volume purchases from consumer web companies for image and voice processing. Tesla sales for high performance computing also grew and several OEMs announced they will ship Tesla based servers combined with ARM64 SoCs. ARM64 server processors were initially targeted at micro and web servers, but GPUs expand their market opportunity by providing the muscle to tackle HPC workloads. NVIDIA Tesla GPUs now power the world's 15 most energy efficient supercomputers as listed in the Green 500 list. Tesla also powers the fastest computer in the U. S, the fastest in Europe and the world's fastest enterprise supercomputer. Grid sales continued to ramp in Q2. And also during the quarter, we launched Grid Test Drive to help enterprise IT professionals experience the benefits that Grid can bring to their virtual desktop infrastructures. The service has attracted more than 10,000 users in its 1st 8 weeks. Companies are realizing quantifiable benefits by adopting Grid to virtualize demanding PC and workstation applications. Grid enabled Turkish Aerospace to rapidly scale its design team. Roger Williams University is providing students across its vast campus to architecture and engineering sorry, providing students access across across its vast campus to architecture and engineering applications 20 fourseven. And Dayu Shipbuilding is doubling the number of engineers who can collaborate live on their cloud based system. Moving now to mobile computing. This quarter we saw some major developments. We launched the next member of the Shield family, the Shield tablet. Powered by Tegra K1, the Shield tablet is the highest performance tablet on the market. From top to bottom, processor, tablet, software and peripherals, the Shield tablet is designed to be the ultimate tablet for gamers. To understand the market for the Shield Tablet, consider that Newzoo, a research company, estimates there are 1,600,000,000 gamers in the world today. Many of them are looking to buy a tablet, an idea supported by the fact that 90% of Google Play revenue is generated by gaming. Press reaction has been great. Gizmodo described it as a gaming beast, but so much more. And Antec said that it's incredibly important to get the controller right for gaming devices and NVIDIA has nailed it. Slashgear said that it's the new high watermark for a well rounded tablet, full stop. There are 400 plus games optimized today for touch and controller on Tegra and more and more are leveraging the power of Tegra K1. For example, the Shield Tablet comes with Frozenbyte's Trine 2, a hit game on PlayStation 4. And Portal and Half Life 2, both from Valve Software have been optimized to Tegra K1. Half Life 2 is the highest rated PC game in history, having won over 50 Game of the Year Awards and Multiple Game of the Decade Awards. An interesting new development is cross platform multiplayer. War Thunder to be launched on Shield this fall by Gaijin Entertainment will offer massively multiplayer combat across Tegra, PC and PlayStation 4. As with GeForce on Windows, our strategy with Shield is to build the best game platform on Android, now one of the largest gaming platforms in the Google the company's words, desktop class gaming to Android and they leveraged Tegra K1 to demonstrate its capabilities with Epic's state of the art Unreal Engine 4. Tegra K1 also runs many other desktop class engines, including Source, Unity, CryEngine and IdTek. Supporting these game engines makes it much easier for developers to bring games to Android on TEGRA K1. Android TV was also launched at IO and Google gave every attendee a development platform based on TEGRA. Finally, Google used IO to launch Android Auto and demonstrated it with the Tegra powered infotainment system in an Audi S3. Our automotive business grew more than 70% year on year. Volkswagen announced that the upcoming Passat will use Tegra to power its infotainment system, following on from the Gulf, which is already shipping with Tegra. The new TT, which features 2 Tegra chips, has started production in Europe and Audi has upgraded the A7's entertainment system to include Tegra, evidence of the fastest cycles possible with the use of our visual computing module. Separately, BMW has started shipping the I3 and announced its I8, both powered by Tegra. Xiaomi's Mi Pad with the Tegra K1 started shipping in Q2 with the first 50,000 units selling out in 4 minutes. We expect the first Tegra K1 Chromebooks to start shipping this quarter and IDC expects the Chromebook market to triple over the next 3 years. In conclusion, our investments in differentiated platforms are delivering success in gaming, HPC, professional visualization and design and in automotive markets. We've leveraged our Visual Computing IP to set the stage for accelerated growth. And with that, I'll hand over to Colette. Thanks, Chris. Hello, everyone. Let me provide some details on the Q2 of fiscal 2015. Revenue of $1,100,000,000 grew 13% year over year. Growth was driven by sales, GeForce GPUs for gaming, Tesla and Grid for data center and cloud workloads. Revenue from GeForce GPUs for gaming desktops and notebooks grew 10%, fueled by continued strength in the gaming market, including the recent release GeForce GTX 750 and GTX 750 Ti Maxwell based GPUs. Tesla and Grid for data center and high performance computing increased significantly from VDI deployments and large project wins with cloud service providers as well as high end education and government customers. Quadro revenue increased with particularly strong growth in mobile workstations. Tegra processor sales grew 200 percent from a year ago, led by mobile devices and automobile infotainment systems. Revenue from Tegra Processors for automobiles grew 74% year over year. All key platforms for growth, gaming, data center and cloud and mobile showed strong growth this quarter. Our transformation into visual computing systems and solutions allows us to realize the continued success in consumer PC and mobile gaming as well as realized the growth in cloud data centers, supercomputers, professional design and automobiles. The GPU business declined 2% sequentially as we executed well during the seasonal decline of consumer desktop GPUs. We believe we outperformed the market for consumer PCs, led by our overall performance and ecosystem supporting PC gaming. Quadro, Tesla and Grid all grew sequentially as well. Moving to gross margins. GAAP gross margin was 56 point 1%, up 130 basis points sequentially. Non GAAP gross margin was 56.4%, up 130 basis points sequentially. These margins were both records and better than our outlook. The increases reflected continued strength in our GPU margins for PC platforms, data center and cloud and partially offset by the increased volume in Tegra Processors. Compared to our outlook, the higher gross margin levels were driven by strong absolute average selling prices for consumer GPUs and aided by a record quarter for Tesla and data center solutions. GAAP operating expenses for the 2nd quarter were $456,000,000 in line with our outlook and essentially flat from the prior quarter's $453,000,000 Non GAAP operating expenses were $411,000,000 flat from the prior quarter. With continued management of our investments through alignment to a single unified architecture, we produced a 3rd consecutive quarter of flat operating expenses. Operating expenses grew slightly year over year due to employee additions, employee compensation increases and related costs, partially offset by lower engineering development costs. GAAP operating income was $163,000,000 up 55% from the prior year's 2nd quarter, reflecting strong revenue growth from higher margin GPUs and contained operating expenses. GAAP net income was $128,000,000 up 33% from a year earlier, driven by increased operating profit from strong revenue and margins. GAAP diluted earnings per share of $0.22 increased 38% from 0 point 1 six dollars per diluted share in the year ago quarter, reflecting net income growth and share repurchases. Now turning to some key balance sheet items. During the Q2, we paid $47,000,000 in cash dividends and received 6,800,000 shares under the 500,000,000 dollars structured repurchase agreement we entered into in the Q1. During the Q1, we had paid 47,000,000 in cash dividends and received 20,600,000 shares under the agreement. As a result, during the first half, we have returned $594,000,000 of the $1,000,000,000 we intend to return to shareholders in fiscal 2015. Accounts receivable at the end of the quarter were $470,000,000 up $74,000,000 from the prior quarter. The increase was primarily due to less linear second quarter shipments compared to the Q1. DSO at the quarter end was 39 days, up from 33 days in the prior quarter and flat from the Q2 of fiscal 2014. Inventory at the end of the quarter was $387,000,000 down $6,000,000 from the prior quarter. The sequential decrease includes the ramping of Tegra processor products and products based on new GPU architectures, which were more than offset by decreases in products based on our previous generation architectures. DSI at the quarter end was 73 days, up from 72 days in the prior quarter. Cash flow from operating activities was $96,000,000 down from 100 and $51,000,000 in the prior quarter and flat from $96,000,000 a year earlier. Was primarily due to higher levels of account receivable and lower payables than the prior quarter. Compared to the year ago quarter, the operating cash flow reflected higher net income from improved gross profit and contained operating expenses, offset by lower payables outstanding. Cash flow was $74,000,000 in the 2nd quarter. Depreciation and amortization expense amounted to 56,000,000 dollars Capital expenditures were $23,000,000 lower than our outlook of $40,000,000 Now turning to the outlook for the Q3 of fiscal 20 $200,000,000 plus or minus 2%. The sequential revenue growth of 9% is reflective of our continued strength in gaming for PC and mobile platforms, data center and cloud solutions and automobiles. We expect our consumer GPU business to be up seasonally in the 3rd quarter. Our TEGRA business is also expected to grow sequentially. Our GAAP and non GAAP gross margins are expected to be 55.2% 55.5 percent respectively, plus or minus 50 basis points. The gross margin outlook reflects higher expected Tegra processor revenue, which has overall margins overall lower margins than our company total, a greater mix of devices versus SoCs with Tegra compared to the 2nd quarter, and expected growth in volumes of consumer GPUs. GAAP operating expenses are expected to be approximately $463,000,000 and non GAAP operating expenses are expected to be approximately $416,000,000 nearly flat with expense levels for Q2. Our operating expenses in the 3rd quarter will reflect an onset of our annual compensation increases and expenses associated with our higher revenue. We will continue to manage through our 4th consecutive quarter of maintaining operating expense levels. GAAP and non GAAP tax rates for the Q3 and annual 2015 are both expected to be 19%, plus or minus 1%. This estimate is a percentage point lower than our previous outlook and is consistent with our tax rate in the 2nd quarter, excluding any discrete tax events. With that, I'm going to turn it back to Chris and we'll open up for questions. Thanks. That concludes our prepared remarks. We'll take questions. Please limit yourself to one question and one follow-up. Colin, over to you please. Thank you. Sachs. Your line is open. Please go ahead. Good afternoon. Thanks for taking the question and congrats on the strong results. This is Gabriela Borges on behalf of Jim. I was hoping you could talk about relative to guidance, you mentioned a number of business lines that are doing well right now. Maybe you could talk about which one of those you would highlight just in terms of magnitude driving the strength in the quarter? Thanks. In terms of how we did versus the quarter in versus our guidance, is that the statement? Sorry, within the guidance for the October quarter? Correct. In terms of where we think the growth will stem from, from a revenue perspective, again, it is usually a seasonally uptick in terms of our overall consumer GPUs that are therefore for gaming as we get ready for the second half of the year on the high gaming season. So that we do expect to be a significant contributor to our overall revenue growth sequentially of 9%. Additionally, we also expect our overall TEGRA business to also grow sequentially associated with both our SOCs, particularly for auto will increase and also what we expect for our devices as well. That's helpful. Thank you. And then just as a follow-up, if I may, on the gross margin guidance. Maybe if you could just give us a sense as we think longer term as to what level is sustainable just with some of the tailwinds that you have from richer mix shift over the next few quarters or so? Thank you very much. So we talked quite a bit about what will contribute to our gross margins going forward. And we do expect in any one quarter to see seasonal increases or potentially large projects completed in some of our enterprise businesses. So it's really a nature of the overall mix over a longer term period of time, which will influence our gross margins long term. When you think about our overall enterprise businesses from Tesla, Grid and overall Quadro, which carry slightly higher gross margins than our overall company average. And depending on the seasonality of some of those businesses as well as large projects that we may complete, you will see our gross margins be very strong. Our overall consumer GPUs, we've done a very solid job in keeping our overall gross margins with solid ASPs and that should contribute as well in the quarters, which we have strong growth. Then thirdly, when you think about our overall TEGRA business, it is a case in terms of volumes and we do know that these are lower overall gross margins than our company average. So depending on when those volumes hit, it can also affect the overall company's gross margin. But at this time, it is hard to say in precise every single quarter in terms of what we think that guidance will be. But those are generally the factors that will influence our gross margin ranges going forward. And our next question comes from the line of Vivek Arya with Bank of America Merrill Lynch. Your line is open. Please go ahead. Thank you for taking my question. I think you had mentioned about 10% growth in gaming revenues. I'm curious how much of that growth is coming from unit growth versus just stronger ASPs or share gains from AMD? Hi, Vivek. This is Jensin. If you take a look at the overall gaming market, it is surely growing. Depending on which one of the analysts you follow, the vast majority of them see that global gaming market is growing about 10%, a little bit over 10%. If you take a look at the largest gaming franchise today, they're mostly associated with massively online Battle Arena games called mobile games, whether it's League of Legend or DOTA 2. The 2 combined has nearly 100,000,000 gamers. And each day there are some 10,000,000 gamers playing these 2 games. The size of the eSports competitive sports associated with these 2 games is becoming quite a large industry in itself. China is still growing. Southeast Asia is extremely underexposed and those markets are growing. And so I think that it's fair to say that the gaming market overall is still growing. ASP is increasing. And the reason why ASP is increasing is because the production value of games are increasing. The latest generation game consoles are now out. The entry level GTX, GeForce GTX with a street price of about $100 is consistent and is comparable in performance to a next generation game console. And so if the market shifts to even that level, our ASP has quite a lot of room to still grow. And so as the production value of games continue to grow, I think we're going to see our ASPs grow. And so I would say that the dynamics of the gaming industry, PC gaming industry is really quite healthy, both in more and more players playing and ASPs increasing because of production value. Now when you think about it in terms of our own platform, there's almost I would say there's about 100,000,000 GeForce gamers around the world. There are active gamers around the world. And yet we know there's several 100,000,000 gamers altogether. And PC gaming is becoming more and more popular for the reasons that I've mentioned already and others, my sense is that we still have quite a bit of penetration to go. And so these are the dynamics that are helping us. Got it. Very helpful. And then as my follow-up, there has been a lot of discussion or concern about the royalty payments from Intel since they are a very important part of your EPS and domestic cash. And I do realize the agreement runs for a few years. But when do you need to start to renegotiate? And do you think the new agreement would be flat up or down from what you have right now? Thank you. Well, it's hard to predict the future, but there are some things that we know. NVIDIA invents more in modern computer graphics than just about all of the world's companies combined. We invented the GPU. We invented GPGPU. We invented the ability for GPUs to be virtualized so that you can put it in the cloud. And that's one of the reasons why our cloud computing business is growing so fast now. We're continuing to focus in this one specialized field of computing that's becoming more and more important. I don't know of too many technology companies in the world today who doesn't rely on technologies that we've invented. Technology licensing is an important part of our business. Long before there was Intel licensing our technology, there were other companies licensing our technology. We've had licensing revenues as a component of our business now for 15 plus years. And so my expectation is that licensing revenues will continue to be an important part of our income for quite some time to come. Now there's a second component that's really important, which is whereas we historically were able to license to mostly PC companies, we can now license to mobile and cloud companies. And so those are new opportunities for us. And then core and that core could be licensed. So that makes it easier for companies who would like to innovate and build their own products to be able to license our technology. We have now more ways to engage customers in IP licensing. We're serious about this business. We're actively working on these matters. They take time, but I'm very confident that licensing will continue to be an important part of our business going forward. And our next question comes from the line of Harlan Sur with JPMorgan Chase. Your line is open. Please go ahead. Hi, good afternoon. Thank you for taking my question and congrats on the solid quarterly execution. The Q3 guidance implies revenue growth of 14% on a year over year basis. Your GPU business in particular that grew double digits year over year in Q1. It took a bit of a pause in Q2, I'm assuming just weaker consumer PCs. Question is, are you looking for the GPU business to return to double digits year over year growth in Q3? And if you are, if you could just highlight some of the drivers? Yes. Thanks a lot, Harlan. Well, first of all, Q2 is seasonally slower than all of the other quarters. And considering the performance that we had, it was actually quite extraordinary. And our expectation is that Q3 will continue will return to its traditional seasonal growth era. There's a couple of other dynamics that's going on now. There's some really big titles coming this fall. I don't remember a time when PC gaming is going to benefit from the huge titles that are coming out fall at the pace that it is. And partly the reason for that is because this is the 1st year, the 1st major year, 1st full year of next generation game consoles. And so these new large franchise titles like Call of Duty and Assassin's Creed are going to hit the market. And ultimately, what drives our business, some seasonality, of course, Christmas matters, of course, back to school matters, of course, Chinese New Year matters. But ultimately, what really drives our business are huge games. And this fall, we're going to see some really, really huge titles. Our position in the marketplace is fantastic. GeForce is really the best gaming platform for PCs today. It's not even close anymore. I think that because of the technology, we know that Kepler has been a fantastic platform for us. Maxwell is even better than that. But all of the software and all the application technology that we put around GeForce has really changed its profile for gamers. Not only can you play great games now, you could use our GeForce Experience, which has been installed some 40,000,000 times. There are 40,000,000 PCs around the world that now has GeForce Experience inside. So that you could record completely in the background without affecting your gameplay and stream it to Twitch, which as you probably know very well at this point is the largest real time video platform in the world. And a lot of those gamers are streaming using GeForce and the number of concurrent viewers is really quite amazing. And so GeForce as a gaming platform has really reached a level that is pretty substantial. And my expectation is that this holiday season, this fall is going to be pretty big. Okay. Thanks for that, gents. And then, Colette, on the OpEx front, I mean, obviously the team is certainly delivering to its target of $1,650,000,000 in OpEx this year and it seems clear that the team is going to continue to drive an OpEx profile that is below your revenue run rate. Any way to just help us quantify OpEx growth versus revenue growth from a longer term perspective? I think we're looking quite nicely at how we've executed over the last three quarters. It's definitely been through a lot of work thinking about how much better we can execute as a company with our overall business groups and working on reallocating investments across. And to look farther, there's continued day to day conversations about where those growth opportunities are in the top line and are we the best positioned at this time with our investments for those. So right now, I'd like to get through the rest of the fiscal year, and I think we'll reassess what does that look like going forward. But I don't have anything at this time to give on a longer term perspective. But I thank you for recognizing the great work on growing the top line Thanks, Alan. And our Thanks, Alan. And our next question comes from the line of Ross Seymore with Deutsche Bank Securities. Your line is open. Please go ahead. Hi, guys. Thanks for letting me ask a question. Your primary competitor had some issues with channel inventory on their side. It doesn't appear to be impacting you guys at all. But Jensen, could you give us some color, a little commentary on what you see going on in the channel right now for the GPU business, please? Yes. You're going to have to ask for commentary about their channel inventory. In our case, we've even seen spot shortages around the world. We're really, really super focused on making sure that GeForce is the world's best gaming platform for PCs. It doesn't mean that it doesn't mean alone that it has to be just being the world's best GPU is not enough. We're surely the best GPU. But being the GPU is just the first bar, if you will, for being a great gaming platform. And for us today, GeForce, all of the technology that we put into GameWorks, all the work that we do with game developers around the world, GeForce Experience, which as I mentioned earlier, has been installed some 40,000,000 times, has really turned GeForce into you can be assured you're going to have a great experience. We're you can be assured you're going to have a great experience. We're incredibly dedicated to the user experience. We're incredibly dedicated to making sure that every single game works perfectly and works marvelously, as it can be in your PC. The amount of dedication that we put into this platform, this living, breathing platform that's evolving and changing literally every day is something that we've really mastered and it's something that has taken us well over a decade to do. And I think people are starting to recognize that. And as the PC market continues to become the most important gaming platform because of its open nature. You don't pay royalties to proprietary platforms. The installed base is really quite large now as you can imagine. And for most people outside of the United States, where disposable income is still rather challenging, a PC is necessary for most of them. Everything else is a luxury. And so the fact that GeForce is extended inside a PC on a platform that you already know you need, it makes it quite a unique gaming platform. And so I think our comments that we've made over the years and as you've followed us over the years, we've been consistently dedicated to this game platform. And I think it's starting to pay off now. Great. Thanks for that. And one is my follow-up for Colette. On the cash return side, you guys are nicely ahead of the 1,000,000,000 dollars run rate. So that's working out well. Just wondered, is the ASR now complete? And if so, in the back half of the year to get up to that $1,000,000,000 number, is the plan to be much more of an organic day by day buyback plan? Or is there something more that you have in plan for us? In the end of Q2, yes, we had completed the outstanding ASR that we began shortly after our Q1 earnings release. In the second half of the year, we are committed to meeting the full year plan for $1,000,000,000 Breaking that down, the dividend payments are still in the second half of the year, a part of the remaining balance to go and then the amount of repurchasing as well. We're still assessing what that best method is overall to do that And we'll have something for you at the next earnings call definitely on how we executed within that quarter. Great. Thank you. And our next question comes from the line of Blayne Curtis with Barclays Capital. Your line is open. Please go ahead. Hey, good afternoon. Thanks for taking my question and nice results. I was wondering a couple of questions. One, if you could quantify, you mentioned gaming up 10%. How much is that of the overall GPU business? And then if you could talk about if overall ASPs were up in the July quarter as well? It's a very good percentage of our overall consumer GPU business. And we've talked about that remember our professional workstation GPUs are also in the overall GPU business as well as what we have for the overall data center with Tesla and our overall cloud in terms of grid. But as a percentage of our overall consumer, it is a significant proportion of our overall consumer GPU. Okay. And then I guess I was if you could just the ASP trends overall in July and then your expectations into October, are you looking for another step up in ASPs? Thanks. The ASPs are definitely a lot of different factors in terms of how certain things sell into the channel with certain OEMs or in terms of in the just overall add in market. So it's real hard for us to land that mix perfectly over that. We believe what we've seen right now is extremely stable, if not from year over year, overall increases in our overall average ASPs over that period of time. So we'll get to see what that looks like as we go into the gaming season in the second half of the year. But you are correct that our overall gaming portfolio GPUs do carry overall higher than the average across our overall consumer GPUs. Yes. Blaine, you know what, just to add to that, one of the things that surely everyone is noticing now is that our business is really moving away from being a components business to being much more of a platform business that's obviously built on top of a processor. Our ASPs for data centers and for the cloud computing platforms are much, much higher than our ASPs for PCs, not only because the processors themselves are much more complex, because it has to be shared by many people. It's virtualized. It's designed for data center and so the robustness for it, the reliability of it, the quality of it has to be at a level that is able to sustain 20 fourseven operations. But mostly the reason is because the software stack on top of it is really complex. Most of our data center business, most of our cloud computing business is really a software business anymore. It's really about GPU virtualization. It's really about high performance computing. It's really about the ability to serve accelerated cloud computing. And so our ASP profile is going to have to start changing over time. Tracking PC sales and then multiplying that by some ASP is not a logical way to think about our business anymore, because of cloud computing platforms, because increasingly our business is really a platform business. I hope that's helpful. Thanks for that. Yes. Thanks, Loebly. And our next question comes from the line of Matt Ramsay with Canaccord Genuity. Your line is open. Please proceed with your question. Yes. Thank you very much for taking my question. In the prepared remarks there, there was some mention and Jensen you just mentioned it as well of sort of the longer term growth in the data center for cloud computing and HPC around your GPU and the platform. I'd be interested it seemed like there were some developments relatively recently around your partnerships with other ARM 64 bit vendors maybe versus your own internally developed solution. Maybe you could give us an update about what the strategy is going forward for attacking that market? And is the is I guess the general purpose compute engine that sits next to your GPU in those applications of paramount importance to you? Or is your GPU really drive the value? Thanks. Yes. Thanks a lot, Matt. First of all, I think I've said this before and I continue to believe it and more so every day that the data center and cloud accelerated cloud computing will likely be the largest opportunity that the company is following today. Our ASPs there are many, many, many times higher than our ASPs in average. The gross margins are obviously a lot higher, primarily because it's a software business. Now at the center of that platform strategy is recognizing that data centers, Internet service providers, cloud service providers, even countries who have their own super computing interests have rather different opinions about what kind of CPUs they use. They don't all want exactly the same instruction set architecture. What we've done with Tesla is and what we've done with our GPUs, Grid and Tesla is established a bit of an ISO neutral attitude about what data centers can and cannot use. We believe that people ought to use whatever instruction set architecture they would like to use and we've created the ability to support X86. We support power with our announcements with IBM, a very deep and quite a broad strategic alliance to bring accelerated computing to the power platform. And also ARM, of course we care about ARM. ARM is one of the most pervasive CPU ISAs in the world. It is very accessible. It's available to anybody who would like to build CPUs around them. And so, we're our first philosophy is focused on building a platform for accelerated cloud computing, accelerated computing. Our second is to be ISO neutral, so that Tesla could be a platform that any service provider or any data center can build around. And then 3rd, if it makes sense for us to build CPUs for those platforms ourselves, we'll consider doing so. But it kind of goes in that particular order. That's helpful. That's really helpful perspective. Thank you. And then as my follow-up for Colette, there's been some a lot of conversation on the call here about the progress on capital returns. Maybe you could give us one question is an update on the domestic cash balance. And then I guess going forward after the $1,000,000,000 is completed through the year, maybe you could give an update on your Thanks. Okay. Thanks for the question. So, Thanks. Okay. Thanks for the question. So we've been pretty clear that when you look at our overall cash balance and our overall cash flow, a good percentage of our cash flow extends from our international operations and the overall revenue that we receive from a good percentage of our business. From time to time, we'll have a little bit of peak in the U. S. In terms of some of the providers that we do business with in the U. S. But I'd say more than the majority or significant amount of the earnings are earned overseas. So our overall cash balance about November a year ago, we infused with the overall convertible debt, which added $1,500,000,000 So right now outside of the Intel payments as well that come once a year, it's pretty steady if and it may grow a little bit from time to time, but I'd say it's just right now at about a steady level. Secondly, when talking about our overall capital return from a long term perspective, We are really trying to look at our overall growth this year. We've executed strongly to the $1,000,000,000 that we put out for the fiscal year and we're not we're just about halfway through that right now. And so we'll continue to look what is the appropriate levels for long term. As you know, we're executing to return more than 100% of our free cash flow that you've seen in this quarter and the last quarter. So but over the last three years, we've probably been executing on average anywhere from about 70% to 80% of our free cash flow. So stay tuned. Let us get through this year in terms of the $1,000,000,000 and we'll look in terms of what the future will lie after we look at that overall cash balance and the options that we can do. And our next question comes from the line of Joseph Moore with Morgan Stanley. Your line is open. Please go ahead. All right. Moving along, our next question comes from the line of David Wong with Wells Fargo. Your line is open. Please go ahead. Thanks very much. To push a bit further on a couple of the earlier questions, your GPU segments that are growing are the higher ASP segments. So year over year GPU sales grew 2%, but ASPs also rose a fair amount didn't they? So did your unit shipments for GPUs overall actually decline on a year over year basis in June? I would think so. I would think that it declined a little. And the reason, of course, has to do with the fact that the consumer PC market overall declined. You know very well that our consumer PC business is a components business and those components ASPs are rather low and the margins are lower. And although we care about that business very much, components business and volume business does provide scale and it leverages our R and D anyhow. And so we surely appreciate the business. But in the final analysis, the consumer PC market was down. And I think that the consumer PC market is expected to be more stable now and we'll see how it turns out. Okay, great. And my other question, what portion of total TEGRA sales is TEGRA for automotive at the moment? And does your current level of R and D spending have meaningful spending on Tegra for smartphones and tablets? Or is it is your Tegra R and D primarily on automotive products? Our TEGRA strategy is really centered around several areas. 1 is automotive, as you've mentioned. This is a business that has grown to be This is a business that has grown to be quite sizable. I think Colette mentioned earlier that has it grew 70% year over year. We're expecting the growth to continue for the next several years. The pipeline of projects that we know that we're already working on that will go into production is relatively well understood now. On the second is gaming. Android is the world's largest computing platform. And gaming, we've shortened to computer gaming. And with a great computing platform like Windows, we were able to build a franchise called GeForce on top of it. Our strategy with Shield is exactly the same as that, to leverage the Android platform, which is now the world's largest computing platform and build a gaming platform out of it and we call that shield. The mobile platform is now extended beyond phones and has gone into tablets as you know of course, but recently also into television. This fall, I'm looking forward to seeing some exciting products for Android TVs and hopefully NVIDIA could be part of some of those. Our focus is primarily there. The vast majority of our focus automotive, consoles, if you will, Android TV consoles, gaming and wherever we can, wherever it makes sense for us, continue to engage with OEMs like Xiaomi and others who are building exciting devices where Tegra could be a differentiator for them. And that's basically our strategy and where we're focusing our R and D. Great. Thanks. And our next question comes from the line of Rajvindra Gill with Needham and Company. Your line is open. Please go ahead. Yes. Thank you and congrats on the good results. Just given the changing mix of your business, could you maybe talk a little bit about seasonality in the 4th quarter fiscal Q4? And how do you see that relative to kind of historical patterns? We're talking about fiscal quarter. But I appreciate it Raj. Thanks. Yes. I mean in general, I mean now that the Q4, next quarter. No, I understand. I'm trying to get a sense of kind of what the how the patterns are changing given the mix of the business, the changing trends of the business? Yes, I appreciate that. I was just kidding. Hey, look, consumer business is still a large part of our G forces is for PC gaming is a large part of our business. And for the foreseeable future, I expect it to be a large part of our business. Consumer business is important to us because consumers drive a lot of computing technology today. And obviously, the volumes are much, much higher. And it's important to have high volume business to drive the flywheel of R and D. And so I appreciate the seasonality. GeForce is going to benefit from that in the 3rd Q4. But increasingly over time and one of the things you're highlighting here is that our data center business, our cloud computing business, our high performance computing business are not affected by those kind of seasonality. People buy those platforms when they need those platforms. And the dynamic trends of those businesses are several. 1, the more mobile devices in the world, the more pictures people take, the more videos they upload, the more they talk into their phones for search, more and more of those applications, those consumer applications are going to be accelerated by GPU in the cloud. And so those are great opportunities for us. And I think it's pretty clear now the dynamic trends of consumer generated media as it's sent through the cloud shared and processed and otherwise is growing, I guess, at least exponentially. And I think that that's one of the dynamics major dynamics driving our GPU success in the cloud. And then the second has to do with the fact that more and more of companies are using high performance computing to drive their business. Some companies call it big data analytics, Some you hear them refer to machine learning to understand what is happening to the dynamics of their business. High performance computing is more and more important than in enterprise than ever. Those 2 dynamic trends and then maybe if I could just add the last one is enterprise virtualization. Our GPUs on grid makes it possible for you to virtualize your enterprise beyond the walls of the data center and all the way out to the fringe where the clients are. We could virtualize very, very compute intensive PC applications for the very first time. And so these three dynamics are really important to the future of our data center and cloud business. And as those continue to grow, our business will become increasingly less seasonal, if you will. That's helpful. And just my follow-up to your point about the enterprise and the virtualization that you're seeing there. Your design engagements with Grid are accelerating pretty rapidly. And that appears to continue as enterprises begin to realize the leverage that they can get from cloud based visual computing. You talked in the past about the installed base being around over 500,000,000 units. Can you talk a little bit about how systematically you're going to be able to kind of convert that installed base to a virtualized platform? Yes, good question. The most important partners, number 1 starts with the hypervisor companies, the companies that build the core of virtualization. Of course, VMware is a very important part of that. Microsoft is, Citrix is. We've I think it was at GTC, I guess it's in May, VMware was on stage with me to announce that they were adopting Grid, integrating Grid into ESX and enabling virtual GPUs for their hyper so so let's watch this space. I think that has probably the single greatest near term turbocharger to the grid business. Beyond that, the ecosystem partners that we will go to market with are all the OEMs. They have the largest sales forces in the world and they're engaging enterprises from financial services to government to education to industry. And those sales forces are being trained on a constant basis and enabling OEMs to be able to take grid to market is a very big part of the overall strategy. We now have every single OEM in the world supporting us. There's some seventy, eighty servers that have been certified and qualified for grid OEMs from HP and Dell and IBM and Cisco and Hitachi and Fujitsu and just every OEM in every corner of the world has been enthusiastic supporters of Grid. And partnering with VMware and partnering with Citrix and partnering with Microsoft over time, that's how we're going to convert and virtualize all of enterprises around the world. Our next question comes from the line of Doug Friedman with RBC Capital Your line is open. Please go ahead. Great. Thanks for taking my question and congratulations on the strong results. If I could, gents and dig into Grid just a little bit more. In the past, you guys gave out a number for the number of engagements that you were tracking that I believe last quarter was 600. Just to have a like for like, what is that number this quarter? We're we stopped mentioning it because the numbers are getting kind of large and maybe we just got kind of bored talking about it, but it's almost 1,000 Doug. I competitors hit a speed bump on was the fact that GPUs were being used for cryptocurrency algorithms. Is this a market that you view as something that NVIDIA should be servicing? Are you targeting your products at it? And is it something that we should take into our thinking? Yes. There are several things about that event that's really interesting. First, the fact that you could run an arbitrary and newly developed cryptocurrency algorithm on a GPU says something about the programmability of a GPU now. That's one of the things that, of course, cryptography is very important. Of course, encryption and decryption for security long term will be very important. And GPUs will increasingly become important in the development of those algorithms. However, we really did benefit very much from people who are doing, I guess, Bitcoin mining. And the reason for that is because on a if it's just one application, if it's somebody is using that one application, they don't really care about the gaming experience. They didn't buy the platform for gaming. They didn't buy the platform for workstations or design. I would say that NVIDIA GPUs are not the most performance per dollar efficient in the market. As a component, if you will, as a commodity component, we're not the most competitive in that way. And maybe that was a blessing, maybe it wasn't. But I think in the final analysis, I don't think we were particularly the best choice for somebody who would like to Bitcoin mine. When they were done, they resold the graphics cards in the marketplace. And I guess in a lot of ways, I'm kind of happy that that didn't happen to us. Okay, great. Appreciate the color there. My last one for you is really having to do with sort of the structure of the company. You've been reliant on a single source for your foundry since inception. You're pretty much at a scale now that might make you say we really should have a second source supplier here. Is there some sort of a catalyst that makes you or some level at which you feel you really do need to bring on a second supplier of wafers? Well, we look at every foundry that's available in the world and there aren't that many that is competitive enough to be able to earn our business. So we competitively look at every single opportunity, every single time. We've been fortunate to have partnered with TSMC for a very long time. They are a fantastic, fantastic partner. They continue to be. And quite frankly, we've been well served by that partnership. But we look at the competitive landscape on a node by node basis. And so we have our eyes wide open and we keep all of our partners as competitive as they can be. Great. Congratulations again. Thanks guys. Thanks a lot Doug. Appreciate that. Thanks Doug. Thanks, everyone. We look forward to talking to you next time on our Q3 earnings call. Thanks, Collin. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation. You are now free to disconnect your lines.