Business, Graphics

Nvidia Reports Fiscal 2Q 2012 Earnings Surpassing Expectations

Nvidia [NASDAQ:NVDA] today reported that they had managed to take in $1.02B in revenue which reflected a 5.7% increase sequentially as compared to the previous quarter. On the $1.02B in revenue, Nvidia reported $151.6M in net income which resulted in an EPS of $0.25 per diluted share. This represented an increase in EPS of $0.03 per diluted share or $135.2M and a stark contrast to the same quarter a year ago where Nvidia actually reported a net loss of $141M or $0.25 loss per diluted share.

Nvidia also reported a GAAP gross margin of 51.7% which was up from the previous quarter of 50.4%, showing a solid 1.3% increase in gross margin. We believe that Nvidia CEO Jen Hsun Huang even stated during the earnings call that this was actually a company record for gross margin and that they expected themselves to stay at those levels into the following quarter. Once again, this is a stark contrast to the figures that Nvidia had reported in the same quarter a year ago of only 16.6%. This indicates that the company is back at a healthy level of growth and is selling profitable product.

Based on the figures, Nvidia actually saw record GPU revenues with a market share increase of 9% in the discrete notebook GPU sector even with weaker than anticipated PC sales. These were primarily driven by stronger GPU attachment rates as a result of the transition to Sandy Bridge. They also saw stronger GPU attachment rates outside of the US as compared to the rest of the world which on average had significantly higher GPU attachment rates than the US. Even so, the GPU business was relatively flat in terms of profitability despite the continued quarter over quarter decline in revenue. Desktop graphics were also seasonably down which contributed to the flat figure.

Interestingly enough, 2Q was the first full quarter where Nvidia saw Intel licensing revenue which helped improve the bottom line. Their professional business was up 4.2% as Quadro business increased sequentially as the enterprise IT sector saw it fit to begin to upgrade graphics with the continued introduction of more Fermi based products. In addition to the professional graphics business, Nvidia?s consumer business division was up 36.8% from the previous quarter mostly from an increase in licensing to Sony and steady growth of Tegra products. Nvidia claims that they expect Tegra growth to remain flat even though they claim to be preparing the release of Kal-El which they are expecting to release in a productized form in calendar 4Q 2011 (fiscal 4Q 2012) for the holiday season. It appears as though Nvidia?s fast growth of the Tegra chipset has finally steadied and that they don?t necessarily expect much growth in terms of revenue at least for the next quarter. There is a strong likelihood that Kal-El will drive Nvidia?s ASPs up in the 4Q and has a good chance of improving Nvidia?s Tegra revenues to offset the tapering off licensing fees that they collect from Sony for the PS3.

In addition to their business units, Nvidia managed to decrease their inventories to $361.9M, down 5% from $381M, in the previous quarter. This marks an indication that there is likely quite a bit of demand for Nvidia products and that Nvidia is able to properly gauge their production to fit demand as they state that they are quite satisfied with their levels of inventory.

Nvidia?s forecast for the fiscal 3Q 2012 (calendar 3Q 2011), states that they expect revenue growth between 4 to 5%, indicating that the company expects continued growth in most sectors in a nearly identical pace to the current quarter. They mentioned that they expected growth in their enterprise business, Quadro and TESLA business as well as growth in their GeForce business but that they expected Tegra business to be ?steady as she goes? in the words of CEO Jen Hsun Huang. The truth of the matter is that Nvidia has some new design wins as well as some outstanding design wins that will allow Nvidia to continue to ship Nvidia Tegra chips, but the added competition from Texas Instruments and Qualcomm with their dual core processors indicates that Nvidia will likely not see much growth in terms of market share nor revenue until they introduce their already delayed quad core Kal-El chip later this year. This is in stark contrast to their competitors that are not expecting their quad core variants for another year or so.

Their competitors? timing is likely due in part of the planned release of Windows 8 which will have an ARM version. That version of Windows 8 Qualcomm states that they are proud to be a partner with Microsoft on and it appears that Nvidia also working closely with Microsoft on this and is excited to see it grow. This quick product refresh cycle may prove to be in Nvidia?s benefit as they struggle to remain competitive in a business that moves even faster than the GPU business. Not to mention a business with a much broader audience and potential customer base. They also are expecting to improve their Tegra embedded business as their customers, like Audi, are moving more and more to a Tegra homogenous solution. Nvidia stated in their earnings call that Audi planned to move towards 100% Nvidia Tegra in their automobiles in the near future.

Nvidia also claimed that they were much readier for the transition to the 28nm process node than they were when they switched to 40nm which caused a lot of companies, Nvidia included, a lot of supply chain and yield problems. With all of the rumors of Kepler delays there has been a lot of questioning whether or not Nvidia truly has their finger down on the 28nm manufacturing process. Time will tell whether or not they or AMD really have the 28nm TSMC manufacturing process down to a science, because last time it hurt Nvidia greatly with their first generation Fermi products.

With all of this bullish news and quite rosy outlook from a company that is still considered one in the PC business, the markets have reacted in quite a good way. Nvidia shares were up $1.07 to $13.41 or 8.67% today in regular trading and added another $1.59 or 11.86% to hit $15.00 even. That represents an increase of over 20% in a single day?s trading; needless to say? investors appeared to be quite pleased with Nvidia?s outstanding performance and expectations.