NVIDIA Corporation (NVDA)
Q2 2010 Earnings Call Transcript
August 6, 2009 5:00 p.m. ET

Executives

Michael Hara - Investor Relations
Jen-Hsun Huang - President, Chief Executive Officer and Director
David White - Chief Financial Officer

Analysts

Rick Schaeffer - Oppenheimer
Craig Berger - Friedman, Billings & Ramsay
Tim Luke - Barclays Capital
Joanne Feeney - FTN Equity Capital Markets
Patrick Wang - Wedbush Morgan
Suji DeSilva - Kaufman Brothers
David Wu - Global Crown Capital
Shawn Webster - J.P. Morgan Securities

Presentation

Operator

Good afternoon. Thank you for holding. I would now like to turn the call over to Michael Hara, Vice President, Investor Relations. Thank you, sir. You may begin.

Michael Hara – Vice President Investor Relations

Thank you. Good afternoon and welcome to NVIDIA''s conference call for the second quarter of fiscal 2010. With me on the call today from NVIDIA are Jen-Hsun Huang, NVIDIA''s President and Chief Executive Officer; and David White, Chief Financial Officer. After our prepared remarks, we will open up the call for a question-and-answer session. Please limit yourself to one initial question with one follow-up. Before we begin, I would like to remind you that today’s call is being webcast live on NVIDIA''s investor relations website and is also being recorded. A replay of the conference call will be available via telephone until August 14, 2009 and the webcast will be available for replay until our conference call to discuss our financial results for the third quarter of fiscal 2010. The content of today’s conference call is NVIDIA''s property and cannot be reproduced or transcribed without our prior written consent.

During the course of this call, we may make forward-looking statements based on current expectations. These forward-looking statements are subject to a number of significant risks and uncertainties and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today’s earnings release, our Form 10-Q for the fiscal period ended April 26, 2009, and the reports on Form 8-K filed with the Securities and Exchange Commission. All of our looking statements are made as of today, August 6, 2009, based on information available to us today and except as required by law, we assume no obligation to update any such statements. Unless otherwise noted, all references to research market and market share numbers throughout the call come from Mercury Research or Jon Petty Research. During this call, we will discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our financial release, which is posted on our website.

With that, I will turn the call over to Jen-Hsun.

Jen-Hsun Huang – Chief Executive Officer

Thanks Mike. Good afternoon everyone and thank you for joining us. We are pleased to report revenue of $777 million, representing sequential growth of 17% from Q1. We reported a GAAP net loss of $0.19, which included an additional net charge of approximately $119 million to cover costs related to the die/packaging material set issue which we previously disclosed in July 2008. Although the number of systems impacted by this remains consistent with our initial estimates, the costs of remediation and repair has been higher than originally anticipated. Non-GAAP gross margin, which excludes the additional charge and stock-based compensation, was 36.3%, an improvement of 560 basis points over last quarter. On a non-GAAP basis, net income was $0.07 per share. We reduced inventory by another $48 million, which now stands at 51 days on a non-GAAP basis. We made good progress managing down operating expenses through efficiency projects. I also want to acknowledge the sacrifices NVIDIA employees are making so that our company can continue to invest in the important initiatives that we are passionate about.

Strategically, we are focused on two major game changing ideas. First, computing is evolving from central processing on the CPU to co-processing on the CPU and GPU. To enable this new computing paradigm, we invented the CUDA parallel computing architecture that is now shipping in over 100 million GeForce, ION, Quadro and Tesla GPUs, representing a significant installed base for application developers. After three years of evangelizing, GPU computing has surely reached the tipping point. CUDA has been adopted in a wide range of applications. In consumer applications, nearly every major consumer video application has been or will be accelerated by CUDA. We estimate there are over 1200 research papers based on CUDA. We’ve highlighted 500 of them on CudaZone.com. CUDA now accelerates Amber, an important molecular dynamic simulation program used by more than 60,000 researchers in academia and pharmaceutical companies worldwide to accelerate new drug discovery. CUDA sped up Amber 50 times.

For the financial market, NumeriX and Compatible announced CUDA support for their new counter party risk application and achieved an 18 times speed-up. NumeriX is used by approximately 375 financial institutions. There are broad ranging uses for CUDA including astrophysics, computational biology and chemistry, fluid dynamic simulation, electromagnetic interference, CT image reconstruction, seismic analysis, Ray Tracing and more. Another indicator of CUDA adoption is the ramp of our new TESLA GPU for computing business. There are now more than 700 GPU clusters installed around the world with new Fortune 500 customers ranging from Schlumberger and Chevron in the energy sector to BNP Paribas in banking.

And starting this fall with the launch of Microsoft’s Windows 7 and Apple’s Snow Leopard, GPU computing will go mainstream. In these new operating systems, the GPU will not only be the graphics processor but also a general purpose parallel processor accessible to any application. Our second major initiative is mobile and embedded computing. It is increasingly clear that the combination of rich applications on the Internet and ultra low power computing technology will trigger the next computing revolution. Rich applications on the Internet can be connected to tiny yet powerful computers to enable amazing new experiences. Apple’s iPhone, the poster child of such an experience, has revolutionized the phone as we know it. The Amazon Kindle has revolutionized how we enjoy books. These are surely the first of many devices to be created that will require small form factor, energy efficient yet powerful processors. Some call this cloud computing, some call it web 2.0 but all agree it will revolutionize nearly every industry.

We created TEGRA to enable the next generation of these connected devices, one that will deliver the full high definition Internet connected experience. TEGRA is the industry’s first ultra low power HD processor. TEGRA has been chosen for many next generation smartphones, smartbooks, smart pads, media players, TVs, and cars. Let me now comment on each of our four businesses -- GeForce and ION, Quadro, TESLA, and TEGRA.

GeForce and ION overall grew a combined 11% quarter to quarter. GeForce offers unique capabilities that will define the next generation visual computing experiences like CUDA, which makes video and imaging applications like CyberLink, MotionDSP and Nero many times better. We estimate there are hundreds of millions of users of these applications to create, enhance, and enjoy movies from sharing videos to Facebook to transferring TV shows onto their mobile devices to be enjoyed later. With CUDA, video is the new killer consumer application for GPU. Second, PhsyX is a CUDA software engine that does physical world simulation and brings a new level of dynamics to games. Just today idols highly anticipated Batman Arkham Asylum announced support for PhsyX. And then there is 3D Vision Stereo which is quickly becoming the next big thing, from games to movies to photography, there is a groundswell of activity that will burst into the scene in the near future.

We have announced 26 ION designs to date. We currently have 9 ION designs shipping with 17 more in Q3 and Q4. ION is about bringing great visual experience to even the smallest, lowest power and most affordable PCs. The market wants a great experience on all PCs, irrespective of its size or price. We have an exciting ION roadmap and we look forward to announcing it when ready. The GPU computing revolution has reached a tipping point. With the new operating systems, the GPU will be a general purpose parallel processor for any application. In Windows 7, GPU computing interface is called DirectX Compute and OpenCL for OS-X Snow Leopard. And although the upcoming CPUs and chipsets may include integrated graphics, these graphics controllers lack the general purpose parallel processing capabilities needed by the new operating systems. Recently Jon Peddie, a leading industry analyst, forecast the global graphics market to grow nearly 22% in 2010, based in part to the rise of the GPU as a co-processor. The report states “The continued expansion and development of heterogeneous computing and GPU compute will stimulate growth in 2010, enabled by Apple’s and Microsoft’s new operating system, new programming capabilities using OpenCL. DirectX Compute, and NVIDIA''s CUDA architecture will remove barriers to the exportation of the GPU as a serious economical and powerful co-processor in all levels of PCs.”