24 December 2008

NVDA: Look Ahead to January 2009 Quarterly Results

Fiscal 2009 for NVIDIA will come to an end on 25 January. The company will announce its fourth quarter and full year results in early February.

This post explains our model of NVIDIA's Income Statement for the January quarter. We will use this baseline for identifying sales and expense items where the actual results differed from our expectations. GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

NVIDIA Corporation (NASDAQ: NVDA), based in Santa Clara, CA, builds a variety of specialized Graphics Processing Units. These devices perform computationally intense tasks required to produce realistic images for video games and other applications. This Specialized Semiconductor company, which had its initial public offering in 1999, competes with firms such as Intel Corporation (NASDAQ: INTC) and Advanced Micro Devices (NYSE: AMD).

In October, Apple, Inc., (NASDAQ: AAPL) decided to increase its use of NVIDIA's chips. Steve Jobs is reported to have said this "change speeds up processing-intensive activities—playing popular 3-D video games, for example—as much as six-fold." Apple made this choice despite indications faulty NVIDIA chips were the cause of odd video problems in MacBook Pro laptops.

Earlier this year, NVIDIA recorded a $196 million charge to cover warranty, replacement, and other costs related to faults in certain products for notebook computers. The faults are said to result from "a weak die/packaging material set" that is no longer used. It's not clear that this amount will be sufficient when lawsuits are considered. However, insurance might defray part of the bill.

NVIDIA has also had to deal with reduced sales of GPUs for desktop computers, a condition they attributed to a "miscalculation of competitive price position." Not surprisingly, NVIDIA's missteps have been reflected in the company's share price, which is now 75 percent below the 52-week high. In an effort to reverse the decline, the company added $1 billion to its stock repurchase program.

In the third quarter of fiscal 2009, which ended on 26 October 2008, the GCFR Overall Gauge of NVIDIA decreased from 65 to 53 of the 100 possible points. Our initial and updated analysis reports explained the score in some detail.

The contrarian Value gauge reacted to plunging share price by hitting its 25-point maximum score. However, the Growth and Profitability gauges were mired in low-single-digit territory.

When NVIDIA conducted a conference call to discuss October's results, according to a SeekingAlpha transcript, Chief Financial Officer Marv Burkett indicated that fourth quarter Revenue could be down by 5 percent, plus or minus some wide, but unspecified, range. He attributed the uncertainty to changing economic conditions. It wasn't clear from the transcript whether Burkett meant a 5 percent drop from the previous quarter in the sequence or a 5 percent drop from the year-earlier quarter. The difference is immense: Revenue in the October 2008 quarter was $898 million and Revenue in the January 2008 quarter was $1.203 billion.

The 10-Q makes the Revenue guidance a little clearer, although a percentage rate was omitted. The 10-Q states: "We expect revenue to decline slightly during the fourth quarter of fiscal year 2009 as compared to the third quarter of fiscal year 2009."

A reasonable start at determining a Revenue target for the January 2009 quarter is to trim five percent from the $898 million in the October 2008. This figure is $853 million. However, given the weak sales data previously made available by other semiconductor manufacturers, this might be somewhat optimistic. One analyst estimated Revenue as low as $790 million. We set our target by changing the 5 percent drop to 7 percent, which yields $835 million.

Management's guidance for Gross Margin in the January quarter is 41 percent. Although we suspect there will pressure on margin in this period of slow sales, we're going to stick with the announced percentage. In other words, we expect to see Cost of Goods Sold (CGS) is (1 - 0.41) * $835 million, which is $493 million.

NVIDIA told investors to expect the quarter's Operating Expenses, by which they mean Research and Development and Sales, General, and Administrative costs, to be about $310 million. We hope management became more aggressive about cost cutting when sales started to slow by a greater amount than initially forecast. We think they can get to $295 million, which we have allocated as $210 million for R&D and the remaining $85 million for SG&A.

The company stated that restructuring charges would be $0.8 million in the fourth quarter, and we will assume no asset impairment charges.

These figures would result in Operating Income, as we define it, of $47 million. This result is 82 percent below the comparable year-earlier value.

For Interest and other non-operating income, our estimate is $10 million.

NVIDIA estimated that its tax rate in the current quarter would be about 13 percent. This rate would yield a Net Income of $49 million ($0.09 per share), compared to $257 million ($0.42 per share) in the January 2008 quarter.

Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.


January 2009
January 2008

Op expenses

CGS (1) (493)

R&D (210)


Other (2)
Operating Income
Other income


Interest, etc. (3)
Pretax income

Income tax

Net Income

Shares outstanding

(1) Cost of Revenue
(2) Repair and replacement costs.
(3) interest and other income (expense)

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