Business, Graphics, Hardware

NVIDIA Fiscal 1Q 2013 Analyzed: Earnings Beating Estimates

NVIDIA [NASDAQ:NVDA] today reported earnings for the first quarter of the fiscal year 2013 and the second quarter of the calendar year 2012. In their earnings report, NVIDIA reported that their GAAP profit was $60.4 million on $923.9 million in revenue. This represents a decrease from the previous quarter ending January 29th, 2012 which reported $953.2 million in revenue and $116 million in profit. Compared to the same quarter a year ago, NVIDIA was still down from $962 million in revenue and $135.2 million in profit. Even though both NVIDIA’s profit and revenue were both down, they were still able to beat Wall Street’s estimates.

NVIDIA reported that their decrease in profitability of 48 percent quarter over quarter and 55 percent over the same quarter a year ago was primarily due in part to the fact that 28nm supply constraints at TSMC and not being able to deliver on customer demand. NVIDIA expects this situation to resolve itself towards the end of the year (similar to what we’ve heard from Qualcomm about TSMC 28nm). Since NVIDIA has launched Kepler, they have already launched three graphics cards in rapid succession starting with the initial GTX 680, followed by the GTX 690 and finally by the GTX 670 which launched yesterday. Most reviews of these cards, including our own, have been extremely positive and have pointed towards a nearly unanimous conclusion that NVIDIA’s Kepler GPUs are revolutionary in nearly every manner. Their currently Kepler GPUs are capable of delivering significantly increased graphical power at basically 75 percent the power of the previous generation. Also, with Ivy Bridge laptops ramping this quarter in conjunction with Windows 8 later this year, NVIDIA is likely to continue to see their mobile GPU business continue to be strong through the year as their Kepler GPUs prove invaluable for a low-power high-performance computing platform.

With rumors of a dual-GPU Kepler TESLA part already beginning to leak out in the run up to NVIDIA’s GTC next week, there is no doubt that this second quarter should be better for NVIDA. If anything because their Kepler based TESLA and Quadro GPUs are going to fetch them a higher margin than their desktop gaming and notebook parts. Because of this, even though NVIDIA is likely to still have issues with 28nm production at TSMC, they are still likely to improve their profitability due to TESLA and Quadro orders. This is especially true when you consider that their professional graphics business unit was down 4.2 percent from the prior quarter at $212.6 million. This is likely due in part to the fact that many customers have held off on some orders eagerly awaiting Kepler based professional parts. This is especially true considering the seasonal nature of their professional graphics division.

In NVIDIA’s consumer products business, which includes their Tegra business as well as their Icera based products and console revenue, they reported an increase of 20.8 percent over the previous quarter at $132.6 million. NVIDIA reports that the increase was largely attributable to their Tegra based business, with the production ramp of devices based on their Tegra 3 processors offsetting a decrease in their embedded, entertainment and automotive parts of the business segment. While this does make Tegra 3 sound extremely successful, we are a little hesitant to consider their Tegra business a huge success. Tegra 3 already has quite a bit of competition from companies like Samsung who have already begun to ship their quad core phones and even Qualcomm who is still shipping dual-core devices. NVIDIA’s flagship Tegra 3 product, the HTC One X should improve NVIDIA’s Tegra 3 shipments globally if HTC’s One X gains broad adoption outside of the US. In their earnings call, NVIDIA CEO Jensen Huang downplayed the significance of LTE in markets outside of the US.

The reason why we say this is because inside of the US, all HTC One X phones actually ship with Qualcomm’s MSM8960 which is a dual core device but has an integrated LTE baseband. This enables the device to deliver superior battery life even on LTE, which in the past has been an issue with LTE based devices. With the MSM8960’s integrated LTE baseband, NVIDIA may find itself struggling to capture smartphone design wins as rapidly as they would have anticipated. With NVIDIA’s Icera acquisition last year, NVIDIA has positioned themselves to start shipping LTE baseband chips and work themselves towards integrated LTE baseband which is likely to be a year or more out. Without an integrated baseband and what we would consider weak graphics, Tegra 3 may not pan out to be the success they were anticipating. With Windows 8 on ARM on a shaky footing for 2012, we expect to see Tegra 3 based Windows 8 tablets to affect 2013 earnings more than 2012. Also, since NVIDIA’s Tegra 3 is manufactured on TSMC’s 40nm process, they may find themselves gaining some more shipments purely due in part to the fact that Qualcomm cannot ship enough 28nm Snapdragon S4 chips to customers and NVIDIA can.

The following year is looking to be a mixed bag for NVIDIA’s Tegra business especially since we don’t expect the Tegra business to many any significant increases as a percentage of revenue. Currently, Tegra makes up only 14 percent of the company’s overall revenue. This is a problem for NVIDIA if they want their mobile business to be taken seriously because realistically they need to increase Tegra’s share of revenue in the company’s mix if they are to be a successful company in this ever increasingly mobile world. With the release of Windows 8 on ARM and new smartphone launches, we are likely to see more Tegra shipments, but there currently aren’t any major features of Tegra 3 that really set it apart from its competitors other than the fact that it is a quad core (4+1). With many Android applications still being single threaded, there is little chance that most users will see a noticeable increase in performance when comparing dual core and quad core devices in anything outside of multitasking. We really want to see NVIDIA’s Tegra business take off and give Qualcomm and Samsung more competition (where is TI??), which they have, but we are still not seeing the revenue that we’d like to see from this business unit. That said, we still expect Tegra to grow over the course of the year as more and more tablets will demand quad core processors for heavy multitasking.

NVIDIA also reported that their operating expenditures were up slightly to $390.5 million, from their outlook for the fiscal 1Q 2013 and up $22.8 million from the prior quarter of $367.7 million. Their increases in operating expenditures were primarily due to planned hiring and related infrastructure spending. If NVIDIA is not seeing increased opex due to additional tape-outs then there is a good chance that NVIDIA is sticking mostly with TSMC for their 28nm production through the rest of the year. NVIDIA’s gross margin was also down to 50.1 percent but expects to rebound back to 51.5 percent in the next quarter with more high-end parts shipping.

NVIDIA also increased their earnings guidance for fiscal 2Q 2013, calendar 3Q 2012 with their projections for revenue to be between $990 million and $1.05 billion. This, in combination with NVIDIA beating analysts’ expectatio
ns of their disappointing fiscal 2Q 2013 earnings has propelled the stock into a gigantic jump in the share’s price to $13.50 an increase of 8.7 percent ($1.08) in current trading.