Inc. and Sony Ericsson Mobile Communications AB launched 3G models of their RAZR and Walkman portable phones, respectively, that are both powered by our GoForce GPUs.



Our GoForce handheld GPUs are now shipping in the new Motorola 3G RAZR V3X and the new Sony Ericsson Walkman phones. Our strategy is to build a new class of low power GPUs for multimedia rich devices like 3G cell phones, smart phones, and portable media players. We believe that there will be an increase in demand for mobile video products that deliver compelling and tangible improvements to the overall end user experience of these new services, and we believe that we are well positioned to increase our share of the handheld segment in the upcoming year.



Consumer Electronics Business

 

In April 2005, we finalized our definitive agreement with SCE to jointly develop a custom GPU incorporating our next-generation GeForce GPU and SCE’s system solutions in SCE’s PlayStation3. Our collaboration with SCE includes license fees and royalties for the PlayStation3 and all derivatives, including next-generation digital consumer electronics devices.  In addition, we are licensing software development tools for creating shaders and advanced graphics capabilities to SCE. During fiscal 2006, we recognized $49.0 million of revenue from our contractual arrangements with SCE to jointly develop a custom GPU incorporating our next-generation GeForce GPU and SCE’s system solutions in SCE’s PlayStation3. Depending on the ultimate success of this next-generation platform, we expect to generate, starting in fiscal 2007, revenue ranging from $50 million to $100 million annually from license fees and royalties over the next five years with the possibility of additional royalties for several years thereafter. We have successfully reached many development milestones and we believe that we are on target to achieve the goals set by SCE.

 

During the first quarter of fiscal 2006, Microsoft indicated that it would not order any more Xbox-related products from us after our second fiscal quarter. As a result, the second quarter of fiscal 2006 was the last quarter during which we recognized revenue from the sale of our Xbox-related products to Microsoft.



Gross Margin Improvement



We continue to remain intensely focused on improving our gross margin. Beginning in fiscal 2005, we implemented profit improvement initiatives across our company which were designed to improve business and operational processes. During the fourth quarter of fiscal 2006, our gross margin was 40.2%, which represents an increase of 600 basis points from our gross margin of 34.2% for the fourth quarter of fiscal 2005. Our gross margin was 38.3% for fiscal 2006, which represents an increase of 600 basis points from our gross margin of 32.3% for fiscal 2005. We believe that we can continue to improve our gross margin during fiscal 2007.

Since inception, we have used stock options and our employee stock purchase program as fundamental components of our employee compensation packages. To date we generally have not recognized compensation cost for employee stock options or shares sold pursuant to our employee stock purchase