19 January 2009

NVDA: Revenue Estimates Cut Dramatically for 2009-4Q

On 13 January 2009, NVIDIA Corporation (NASDAQ: NVDA) slashed its Revenue guidance for the fourth quarter, which will end on 25 January 2009.

Many companies would have submitted a Form 8-K, Current Report, to the SEC, in conjunction with the release of material information of this magnitude. If NVIDIA has done so, the 8-K has not yet made its way to the SEC web site.

NVIDIA will announce its fourth quarter and fiscal 2009 results on 10 February 2009.

The latest guidance means we need to make major revisions to our look-ahead model, posted on 24 December 2008, for NVIDIA's fourth-quarter Income Statement. GCFR estimates are derived from trends in the historical results and guidance provided by company management.

NVIDIA, 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).

Guidance for the fourth quarter was discussed on 6 November 2008 during NVIDIA's conference call that reviewed the results of the October quarter. Chief Financial Officer Marv Burkett, according to a SeekingAlpha transcript, indicated that fourth quarter Revenue could be down by 5 percent, plus or minus some wide, but unspecified, range. It wasn't clear whether Burkett meant a 5 percent drop from the previous quarter in the sequence or a 5 percent drop from the year-earlier quarter. However, the subsequent 10-Q stated "We expect revenue to decline slightly during the fourth quarter of fiscal year 2009 as compared to the third quarter of fiscal year 2009."

According to the 13 January announcement,

"Total revenue for the fourth quarter of fiscal 2009 is now expected to decline 40 percent to 50 percent sequentially as a result of further weakness in end-user demand and inventory reductions by NVIDIA's channel partners in the global PC supply chain."

[Note the similarity to wording used by Intel on 7 January 2009:

"Revenue will be lower than the company’s previous expectation, provided on Nov. 12, 2008, as a result of further weakness in end demand and inventory reductions by its customers in the global PC supply chain."

emphasis added.]

Since NVIDIA's Revenue was $898 million in the October 2008 quarter, and management is now suggesting a 40 to 50 percent decline, Revenue in the January 2009 quarter will probably be between $449 and $539 million. In the rest of this post, we will assume, for convenience, that Revenue in the January quarter will be $500 million.

Our previous target was $835 million, which illustrates vividly just how awful this quarter is for semiconductor firms. [A Gartner survey showed that the number of PC shipments grew during the fourth quarter at the most anemic pace since 2002.

With sales reduced so much, it seems unlikely that October's 41 percent Gross Margin will be achieved in the fourth quarter. Consider Intel, for example: its Revenue fell 19.5 percent from September to December, and its Gross Margin declined from 58.9 percent to 53.1 percent.

On this basis, our new target for NVIDIA's Gross Margin in the January quarter is 37 percent. In other words, we expect to see a Cost of Goods Sold (CGS) of (1 - 0.37) * $500 million = $315 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. We think they can get to $290 million, which we have allocated as $210 million for R&D and the remaining $80 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 negative $106 million. Operating Income was $263 million in the comparable year-earlier value.

For Interest and other non-operating income, our estimate is $10 million. This would bring the pre-tax loss to $96 million.

There's no way to know how much of an income tax benefit NVIDIA might get on the large operating loss. Our assumption, built on previous guidance when the company expected to make money, is 13 percent. This rate would yield a Net Income of negative $83 million (minus $0.15 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.


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