Analyst Conference Summary

conference date: May 8, 2008 @ 2:00 PM Pacific Time
for quarter ending: April 27, 2008 (1st quarter fiscal 2009)

Forward-looking statements

Overview: 37% revenue growth over year-earlier, but does not meet expectations!

Basic data (GAAP) :

Revenues were $1.15 billion, down 4% sequentially from $1.20 billion, but up 37% from $0.84 billion year-earlier.

Net income was $177 million, down 31% sequentially from $257 million, but up 34% from $132 million year-earlier.

EPS (earnings per share) were $0.30, down 29% sequentially from $0.42, but up 36% from $0.22 year-earlier.

Guidance:

Q2 revenue has been historically difficult to forecast. Nevertheless we expect normal seasonality, which is a 5% decline in revenue, plus or minus. Hopefully gross margin will increase something like 1%, with flat operating expenses.

Conference Highlights:

Revenues were mainly in line with expectations. Gross margin was dissappointing. GPU (graphics processing unit) growth is faster than PC growth. By units shipped, GPUs grew 42% from year-earlier. Many new GeForce, nForce, and Quadro products launched during the quarter.

Non-GAAP net income was $212 million or $0.36 per share. It excludes $42 million in stock-based compensation expenses and a tax benefit from them of $7 million.

Cost of revenue was $638 million. Gross profit was $515 million. R&D expense was $219 million. Sales, general and administrative expense was $93.0 million. Total operating expenses were $312 million. Leaving operating income of $203 million. Income tax expense was $36 million. Interest income was $10 million.

45% y/y growth in GPU revenue from 42% unit growth and 10% ASP (price) growth. Desktop GPUs grew 44% y/y. Notebook GPUs 99% growth. But memory declined 36%. But there was a sequential (q/q) decline of about 8% in notebook and desktop.

MCP revenue grew 31% y/y but declined 4% sequentially. PSB (professional solutions business) revenue grew 44% y/y and 21% sequentially.

Consumer business declined 24% sequentially and 37% y/y.

Gained market share in all segments. 33% graphics market share. 90% share of performance graphics.

ASPs were relatively flat sequentially.

Gross margin was disappointing, dropping to 44.6 %, due to product transition issues. Yields for new products were not as good as we planned. R&D expense grew due to acquisitions. Headcount grew 373 to 5358.

$41.4 million depecration expense. $202.2 million in capital expenses included $150 million for a new facility in Santa Clara.

$143 million cash flow from operations. Tax rate was 17% and should stay there until the R&D tax credit is renewed. $1.62 billion cash and equivalents at end of quarter, down due to acquisitions. Built inventory of new products.

Move across the board to 55nm is expected to help margins. Expect APS to continue to rise. Consumer "lifestyle" PCs increasingly need powerful GPUs.

Q&A:

New product effects on gross margins? We aren't ready to announce the products themselves, but their gross margins will be higher than the old products.

We often announce new products in Q2 as we go into the back to school season. It is a difficult to predict quarter for revenue.

Tesla and application product significant revenues? I would say later this year. The design cycles in their segments are much longer than with standard GPUs.

Believes heterogeneous multi core computing will be the way of the future. 60 million CUDA GPUs have been shipped already. This can increase computation by a factor of 100 and why scientists are so excited by it.

We had too little inventory, now we are back to a comfortable level. We will still build inventory as we go into Q2 to go into Q3 and Q4. Production lead times continue to be a challenge for us. GPUs are the most challenging piece of silicon to make.

Consumer business? PS3s are doing great and includes the world's best Blu-Ray player. We are looking forward to see how they ramp into the holiday season.

How much of guidance for improved margin is from mix, how much from manufacturing? It can all come from manufacturing.

Our SG&A does not track with revenue. It tracks with our headcount.

Physics processing for CUDA will be announced this quarter.

Most market growth is in very low-cost notebooks. But GPUs are still be adopted for both desktop and notebooks. Many desktops don't have GPUs at present.

Any inventory write down in Q1? We had normal inventory write down.

We believe our leadership in DX10 is very substantial. DX10 will be necessary for all graphics, so it will go into the motherboard. Our lead over our competitors just keeps increasing.

Everyone is amazed at APX 2500, the whole computer is smaller than a dime and draws milliwatts. Imagine what you can build with something like that, and give us a chance to make product announcements at the proper time.

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