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NVIDIA Corporation (NVDA)
Annual Investor Day Conference Call
April 11, 2013 12:00 pm ET
Rob Csongor – Vice President-Investor Relations
Jen-Hsun Huang – Co-Founder, President and Chief Executive Officer
Jeffrey D. Fisher – Senior Vice President-GeForce Business Unit
Philip J. Carmack – Senior Vice President-Mobile Business Unit
Steve Allpress – Vice President-Mobile Communications Software
Daniel F. Vivoli – Senior Vice President
Sumit Gupta – General Manager-Tesla GPU Accelerated Computing
Karen Burns – Interim Chief Financial Officer
Shawn R. Webster – Macquarie Capital Inc.
Dean Grummels – Stifel, Nicolaus & Co., Inc.
JoAnne Feeney – Longbow Research LLC
Previous Statements by NVDA
» Nvidia Corporation's CEO Discusses F4Q13 Results - Earnings Call Transcript
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Okay, so let me just give you a flavor of what we’re going to talk about today. Of course please note our Safe Harbor. What we have in terms of the agenda is, first of all Jen-Hsun is going to talk you about the business, right. And he will run through a number of the critical things of course that matter to you guys. We are going to give you an update on our GPU business. And we have Jeff Fisher and those of you who, I think you are familiar with Jeff, Jeff has been at NVIDEA for a very long time, and he is one of our regional employees. I think I’ll focus something of course very important to you guys is our Tegra business. And presenting to you will be our Senior Vice President of the Tegra business. He started the Tegra business, Phil Carmack and he is going to run through all the material on Tegra.
We also have with us Steve Allpress, who is the Chief Technology Officer, behind the brains of our DXP processor, the heart of our modem. All right, so we are going to make sure that we cover a lot of this material for you. We are probably going to take a break there for lunch; it will be an interactive lunch. We will take about half hour, 45 minutes executives will sit with you, and you can some interaction but we want to get quickly back into it in the afternoon. We are going to give you an update on GTC, and for those of you, who are, I think increasingly you guys are aware of the importance of compute and how it’s not just about Tesla, but it’s important now increasingly across all of our businesses.
So we think it’s really important for you guys to understand what is happening at GTC, because that is where you see a lot of the early indicators of what is going to be driving our business. We are going to follow that naturally with an update on Tesla. So Sumit Gupta, Dr. Sumit Gupta is the GM of the Tesla business. There is a lot of exciting things happening there. We will follow that with financials, and we want to make sure that we have plenty of room left over at the end for Q&A. So in case we schedule this end, we’re not trying to run this until all day we purposefully try to focus in material and leave time at the end. So that you guys can ask questions, get Q&A. We’ll get all the executives back on stage. And then we will have a lot of time for your Q&A.
Okay, so with that, I am going to get off the stage, at this point please let me introduce the CEO and Co-Founder of NVIDIA, Jen-Hsun Huang.
Thank you, great to see all of you guys. This is one of my favorite events all year. We got a lot to talk about today, and so let's get right to it. Before I start and talk about our company strategies and how we are investing our resources, let me first frame what's happening and the conditions surrounding us at the moment, and I think if I just show you in the next slide that will be relatively clear almost right away.
The PC industry is down, business conditions are rather muted in the first half. The PC has declined more this last quarter than any time in the last 20 years, in fact more in the last quarter since IDC started tracking the PC industry in 1994. Obviously the computer industry is changing. The PC still represents a large part of our revenues and so impacts our business.
The second part, the second characteristic or condition is Tegra; a lot of you have questions about what's going on with Tegra? Where do you think the business is going to be like this year? And we made some decisions last year that are really important to consider. There were two things that we wanted to do last year, that we thought it was really important for our company to pull in, two investments that were really vital. One investment was our integrated modem. The LTE marketplace is growing faster than frankly any transition has happened in wireless.
And it was important for us to engage that marketplace as quickly as possible. We have all the necessary assets to be a big player in this space. And so we decided that we would sacrifice the schedule of Tegra 4 by about a quarter so that we can pull in Tegra 4i by more than two. We have production silicon now of Tegra 4i. That was a good decision. By all measures although it does sacrifice a quarter or so of revenues for Tegra 4, where we held position to win some businesses, we were very well positioned still to win a whole bunch of them, but net of it is that we were able to pull in Tegra 4i by more than two quarters.
Phil later on in his conversation with you, he is going to talk to you about the implication of Tegra 4i and how it is positioned in the marketplace, and why we are so excited about Tegra 4i, and what enabled it to achieve the price performance that it achieves, which is at the core of the Icera modem architecture.
The second thing we wanted to pull in is something I will show you a little bit later on, it has to do with the fact that our crown jewels. Our GPU, the highest performance GPU's in the world can make a real contribution in mobile. It can make a real contribution in Android, it can make a real contribution in these new digital devices, and we wanted to do what we could to bring in our crown jewels, mobilize it, shrink it into a form factor that allows us to bring it to the marketplace during this very important transition to DX11. I'm going to talk to you about that a little bit later on, but the net impact of it is that Tegra 4 relative to its previous generations of Tegra 2 and Tegra 3 is off by about a quarter.
Now when you look at our shipments, you could see the peaks, each one of the peaks are about a year apart, and the reason for that is because those are the product transitions. Tegra 2 was the world's first dual-core processor, generating enormous amount of enthusiasm and excitement, shipped for about a year because it really only served one segment, and then we were off to Tegra 3, which was the world's first quad-core processor, shipped for about a year, and each time it leaves a longer tail. Each time Tegra 2 leaves a longer tail, Tegra 3 leaves a longer tail, but nonetheless because we are essentially a one chip product line at the moment. These peaks and valleys happen once a year.
Now long time ago for those who have been watching us over the years, we have the same challenge in PC graphics, we had one chip and because of the inspiration, the innovation, the creativity of the Company that one chip was always incredibly successful, and we would ramp up and then ramp down, ramp up and then ramp down. It wasn’t until we institutionalized the methodology that many analysts characterized as three chips, two seasons, and a couple of analysts in the room, I think quite remember that quite well. Three chips two seasons make it possible for us to address multiple segments in the marketplace and continue to grow as we introduce new capabilities into the marketplace.
We decided last year that we would make that one quarter sacrifice so that we could have a multi-chip family, so that we could have a multi-chip family, so we could address multiple segments in the marketplace at the same time, and that we would essentially bring this three chips two seasons to the marketplace in the mobile marketplace, so that we could start to build on our franchise business, and hopefully reduce this volatility in our business. Those were the decisions that we made last year, I’m incredibly happy that we did that. We are better positioned today than ever, but there is that lumpiness, second thing.
Third thing, we increased our OpEx this year, because we are investing into some very important opportunities, once in a life time opportunities. I’m going to dedicate vast majority of my conversation with you guys today. Understanding what opportunities that we see our strategies and why these investments are so timely must happen now once in a life time opportunity for all of us.
So the net of it all is that the first half is rather muted for a couple of reasons. But we are confident that as we go into the second half the growth will return. Net-net one of the questions that many of you have is how do we feel about the Tegra business? Net-net we think that although we've been growing very quickly in Tegra, this year we’ll be about flat. This year Tegra will be about flat, because we excluded about a quarter of Tegra 4 shipments out of the business, but net-net it will be about flat.
Okay? So that captures the current condition, now I want to switch gears and talk about the future. NVIDIA is the world leader in visual computing. We are in the graphics business. We are singularly focused on the graphics business. We're passionate about the graphics business. We are expert in the graphics business. We've contributed more to modern computer graphics than just about any company in the world. From the invention of the GPU, the invention of the programmable shader, fundamental investments and fundamental inventions have led to about 5000 fans around the world.
The look of modern graphics and then recently several years ago inventing a technology called CUDA that bought GPU computing to the world, making it possible for us not only to create beautiful graphics, but to take graphics really to a completely new plane a technology called computational graphics, and the visual effects have really, really changed, and we'll show you some of that today.
We are the world's only visual computing company, dedicated visual computing company. We’re end-to-end visual computing from the fundamental inventions of technologies to the processors that serve PCs, workstations, high-performance computing to mobile devices, modules that are incorporated into various computing devices to now systems we call a Visual Computing Appliance. The Visual Computing Appliance is a recent invention that makes it possible for us to put computer graphics on the network. It no longer has to be inside the box. Computer graphics can now leave the box. The benefit of leaving the box of course is that it doesn't matter anymore what operating system your box is, it doesn't matter how small your box is, it doesn't even matter whether you have a box. We are no longer constrained. Our growth is no longer constrained by the limitation, the physical limitations of the devices themselves.
Through our inventions, we have invented an end-to-end visual computing offering from technology all the way to systems, serving OEMs, serving gamers, all around the world. We have three target end markets; one of which is video games. Why is video game so important? Well, the reason for that is as it turns out video games is one of the most technically challenging applications in the world. It has to be beautiful. It has to be high-performance, meaning it has to be real-time from the moment that you press a button to the moment all of the processing needs to be completed. It has to be done in tens of milliseconds. Best effort is not enough, we have to get it done on time. We use a sense of interactivity. It is scientifically very challenging and the reason for that is because they are trying to simulate reality, they are trying to suspend you in an alternate reality. And if it doesn't feel real, look real, behave real, it's just not as fun.
Video games also has another characteristic that's quite unique. Of all of the challenging and heavyweight applications, few are as high volume. This market is absolutely enormous. There was a time 20 years ago when we used to have to talk about gamers, the notion of gamers. Today, I don't really know anybody know any children who is not a gamer. It's a little bit like saying, are you a movier, are you a musicer, are you a booker, are you a gamer? Yes, we play games. It's fun. It's beautiful. Gaming is a large market for us, important market for us.
Enterprise computing, the creating of the games, the designing of cars, the making of tennis shoes, the designing of planes, trains, automobiles, making movies, creating videos, translating creativity, and translating imagination to experiences is the work of enterprise computing today. Making it possible, using computer graphics to help us connect with information, using computer graphics to help us connect with imagination that is the work of workstations today, that is the work of enterprise computing today. We served every computing company in the world. Our workstation business is the standard of workstations. I don’t know any car companies or plane companies or tennis shoes companies for that matter, who don’t use Quadro at its core to design their products.
In 3D Graphics, the visualization if design is of importance to you, it is likely the case that NVIDIA graphics is at its core, and the reason for that has to do with the technology, the capabilities of our technology, but the compatibility that we have with the entire body of software work all over the world, decades now of work products have been build on top of our GPUs, on top of our processors, on top of our platform. That compatibility that assured compatibility that you can bring up the Boeing 777 database 20 years from now, on a Quadro is the reason why you rely on NVIDIA’s graphics.
Enterprise computing, third devices; volume matters, the reason why we disrupted the companies we have disrupted in the past is because of volume. Volume translates to velocity, volume translate to innovation velocity, revenue velocity translates to even more energy in your business, volume matters. The PC was the high volume business of our time, 20 years ago when we first start the company. The PC was to us at the time, we were the last PC technology company to come in to the world.
I know it's surprising, we’re the only one standing today, but yet we were the last one to show and the reason for that is because 3D graphics is the heaviest of all the technologies and it takes the longest for it to be possible on any platform because it’s just so heavyweight.
Today the high-volume devices, mobile, tablets, cars, TVs all of these visual devices add up to some 3 billion units in a couple of years, 3 billion units a year, billions and billions of these devices are being made. We don't serve all of them just as we don't serve all of the PC industry, but for us to be able to serve 20% of the PC industry and the thing that we can serve a large percentage of these devices make perfect sense to me.
Some of these devices, not all of them are going to want the world's best computer graphics. Some of these devices, not all of them are going to want the visual computing capabilities that we offer. We can make a contribution here. These are our three end markets.
Now, before I go into our strategies and address the niche markets, I think it's instructive to look at what's happened in our industry in the last 20 years. We were founded in 1993. In 1993, the PC – the idea of a home PC was just still developing, CD-ROMs haven't really become mainstream and surely haven’t become integrated into PCs. The notion of an LCD display doesn't exist. There was the CRT. The resolution at the time 10x7 and it required a really high-end work station to be 12x10, and if you go absolutely ridiculously crazy, it will be 16x12, but they were all CRTs. The size of CRTs constrained the size of our business opportunity because the physicality of it doesn’t allow it to scale, eventually LCD displays showed up and our growth took off.
A lot has changed since then and you guys know the changes that are happening but when you look at it on a scale like this and how quickly it happened, there was peace in the industry for 17 out of that 20 years and then three years ago everything changed. It doesn't matter what your market position was, it doesn't matter whether you were characterized to be so strong in your market that somebody even described you as a monopoly. You were disrupted by some fundamental computing forces and it happened literally overnight. That's why there are so many companies, caught ill prepared without a strategy, without a position to be able to address this new future. That's why it’s so important for us to not let our foot off the gas right now. The opportunities are enormous, as well as the threats.
Now the computing architecture of today radically different than 1993, but what's amazing is the opportunity. If we use processors, the white line is basically the total number of processors shift. Each year, more ARM processors are shipped than all of the x86 processors shipped since the beginning of mankind, and apparently it's still growing and there is every evidence that it absolutely makes sense, that it rather keep growing.
Although things have changed so much, the opportunities are also absolutely anonymous. We are well prepared to deal with this new future. This new future has PC still utilized by many to create content for the heaviest weighted applications, for productivity, for design, for play, but surely for consumer average computing the PC is going to get supplanted by whole bunch of other computing devices that are cropping up everywhere. We are going to be surrounded by computing devices.
Here lies the opportunity, and so today we will like to spend all of our time with you talking about growing beyond the PC. We still have enormous confidence in the future of the PCs. I am going to still going to talk to you little bit about the work that we're doing in PCs, the work that we’re doing in the core part of computing, and why it’s still so exciting, and why there is early indication that growth is going to continue. But there is some characteristics here we like to talk about today, elements of our strategy.
Visual computing is more important than ever. All of these computing devices are connected to high definition displays. The display is the computer. And if you are not sure about that look at what people are touching these days. They are touching displays, and those displays are going to become more and more beautiful over time. There are 3 billion of these high definition displays connected to devices. If the number of those – if the percentage of those devices that we serve is consistent with the number of PCs that we serve, it’s a very large market opportunity for us.
Even at its core GPU’s are still growing. Although the PC industry has been flat, although our closest competitor has been effectively flat, our business has grown at 12% CAGR. The reason for that is because of the work that we did with CUDA, the work that we do with GPU computing. We talked to you quarter-after-quarter, year-after-year about GPU computing. I appreciate the graciousness that you show us and listen to all those stories about CUDA, and why GPU computing is so important.
There is every evidence that we’re at the tipping point of GPU computing, that the GPU itself has morphed from a graphics processor to a general purpose parallel processor. We’ve extended our GPU into the network, we call it GRID. GRID to us is a little bit like a router, it’s a little bit like a storage appliance. It’s a visual computing appliance, and it was made possible by several inventions; one, remoting, to disassociate graphics from the computing device. Two, virtualization, to make it possible for multiple users, multiple tenants to use one graphics processor at one time and all of the load balancing software and system software that's necessary, so that we can all share a performance critical appliance and yet have good experience from it, good quality of service.
Tegra; people call Tegra mobile processor, I think that's fine. To me Tegra is just a computer. Tegra is not about the future and various feature in smartphones only. Smartphones are very important to us. It's a very high-volume device. And volume as I’ve told you, matters. Tegra is the future of computing. Someday, I am not sure whether it’s seven years or eight years or nine or 15, but someday every chip we make in the company will be a Tegra.
Tegra’s will become better and better and higher and higher performance on the one hand, on the other hand all of our GPUs will incorporate some processors in it. This is not about us growing into mobile devices only. This is about us inventing the future of computing altogether for ourselves, for the industry. Tegra is an essential future of our company. It is much, much more than smartphones. It is everything computing to us.
And then lastly, I recognized that we are investing, I believe we are investing smartly, I’m going to show you some of those numbers. It’s because of these investments that made it possible for us to grow at 20% CAGR when the rest of the industry is basically flat. And it’s because of these investments that made it possible for us to feel a sense of confidence about our future, and our cash generation capability that we instituted our first dividend, Q4 of last year.
And so let me now jump into these discussions in more detail. Let me illustrate to you our strategy. As you know we have three basic strategies; one, continue to investment in the future of GPUs, advance the GPU, make the GPU more useful, make it more versatile, expand the application reach, new applications go into new markets, make the GPU more programable, CUDA, GPGPU, all of it contributes to that.
The second part of our strategy, the second strategy is to take GPU out of the box and put it on the network grid. The third, to leverage our visual computing expertise into devices. Okay, basically three strategies; CUDA, GRID and Tegra, maybe the way to summarize that.
Well, as I illustrate – as I think of us illustrating this, one way to start is just conventional wisdom. Conventional wisdom and this is a question that people have asked us year in and year out, year in and year out, well probably more frequent than that. Day in and day out, day in and day out, is when will the GPU be integrated into the CPU? Well, that conversation started in 1994, in 1994 it started. And we’ve been having our conversation every single moment since then. The answer is, if we did nothing, if we didn’t invent the GPU, if we didn't invent the programmable shader, we didn't invent CUDA, we didn’t even GPGPU, we didn't do all that. If we didn’t invent DX11, then the answer is long ago. But there is so much headroom in innovation and visual computing and there is still so much headroom as we stand here. That the GPU has become so complex that the question now is, do you integrate the CPU. And the answer is yes, of course. The GPU integrated CPU turned into Tegra.
But nonetheless, conventional wisdom would say, that eventually the GPU will be integrated. We continue to innovate, we continue to see growth, fuel demand because people like new experiences, new experiences feel demand, because the GPU became more programmable, the programmability made it possible to accelerate more applications, more applications increased our market reach and field demand. That was responsible for a 12% CAGR.
And then, we invented this idea called Grid, like a net created the world's first of its kind visual computing appliance like a net app storage appliance like a router, networking appliance both streams by the way used to be inside a computer, you guys might remember this. But the world's first router was the Sun 3/280, it was a file server because of course it could route, it could take jet protocol and translate it to Apple Talk. Of course it could take Apple Talk translated to Ethernet and the reason for TCP/IP and the reason for that is because it’s just software. We created the world's first visual computing appliance, putting it out of the box. When you put it out of the box it creates brand new opportunities and I'll show you some of that today.
But nonetheless, as much as many markets need great GPUs, we have to recognize that long-term as we continue to go, at some point maybe the low-end part of the market, the basic PC marketplace don't need the capabilities that the high-end does. The average users find their PCs to be good enough, in which case integration becomes a more valuable thing for that user than capability. You extent that one step further, it’s the reason why tablets are cannibalizing PCs. Now you guys have heard me say this before.