22 May 2009

NVDA: Financial Analysis through April 2009 (Update)

NVIDIA (NASDAQ: NVDA) builds specialized Graphics Processing Units, which perform the intensive computations required to produce realistic images for video games and other applications.

We have already posted an analysis of NVIDIA's financial results, which included a loss of $0.37 per share, for the three months that ended 26 April 2009.  This period was the first quarter of the company's fiscal 2010.

Our earlier evaluation of the April quarter was incomplete because NVIDIA's press release did not include a Cash Flow Statement and the Balance Sheet omitted some details.  Since we didn't yet have all the data required to compute exact GCFR gauge scores, the scores we posted were based on a mix of actual and estimated data.

NVIDIA subsequently filed a 10-Q quarterly report with a complete set of financial statements, and we used the data in the 10-Q to update our evaluation.

This post reports on the update.

NVIDIA lost $201 million in the April 2009 quarter, and a significant contributor to this result was a $140 million charge due to the company's purchase of stock options (options that were significantly underwater) from its employees in March 2009.  Note 3 to the financial statements in the 10-Q explains the purchase and charge in some detail.  Employees that tendered their options received $3.00 cash for each option having an exercise price between $17.50 and $28.00 per share.  Options having an exercise price over $28 were redeemable for $2.00 in cash.

In the month of March, NVIDIA shares traded at prices between $7.47 and $11.85.  While we don't know the expiration periods for the purchased employee stock options, the options must have been worth much less in the cash market.  For comparison, the last quote we found for a $17.50 call option with a January 2011 expiration was $1.30.

NVIDIA spent $78 million in cash for these options, but charges to earnings totaled $140 million.  This charge was considered an operating expense, and it was spread across the Cost of Sales, R&D, and SG&A expenditure categories.

The 10-Q did not change our evaluation of the April quarter's Income Statement, although the 10-Q makes it harder to see the effect of special charges on operating expenses. (Click here to see our normalized depiction of NVIDIA's Income Statements for the last nine quarters.  Please note that our presentation, which we use for all analyses, can and often does differ in material respects from company-used formats.)

The additional data in the 10-Q did not move any of the GCFR gauges from the scores reported in the preliminary analysis.  The following are the latest values:
We adjusted the values for a few of the financial metrics we posted earlier to reflect the actual data in the 10-Q.  For completeness, we repeat the tables below with revised figures highlighted in red text.
Cash ManagementApril 20093 months prior12 months prior
Current Ratio2.92.83.1
LTD/Equity 1.1%1.1%0%
Debt/CFO 0.1 years0.1 years0.0 years
Inventory/CGS 72.6 days79.6 days57.2 days
Finished Goods/Inventory 63.2%70.1%53.9%
Days of Sales Outstanding (DSO)59.4 days52.5 days46.5 days
Working Capital/Invested Capital 131%119%168%
Cash Conversion Cycle Time65 days74 days48 days
Gauge Score (0 to 25)

The reduction in the proportion of Finished Goods in the Inventory is a positive, but the ratio is still too high relative to its five-year median value of 54 percent.

GrowthApril 20093 months prior12 months prior
Revenue growth-33.4%-16.4%36.4%
Revenue/Assets 84.0%96.5%133%
CFO growth -78.0%-80.4%36.9%
Net Income growth N/AN/A72.2%
Gauge Score (0 to 25)0
Growth rates are trailing four quarters compared to four previous quarters.

ProfitabilityApril 20093 months prior12 months prior
Operating Expenses/Revenue 104.8%95.6%79.6%
ROIC -11.9%9.1%70.6%
Free Cash Flow/Invested Capital 2.0%-13.6%67.8%
Accrual Ratio -12.9%-2.1%10.0%
Gauge Score (0 to 25)4517

A falling Accrual Ratio, in general, indicates better earnings quality because there is more Cash Flow behind each dollar of earnings.  In this case, NVIDIA's earnings have been depressed by substantial non-Cash expenditures. 

ValueApril 20093 months prior12 months prior
P/E N/AN/A14.4
P/E vs. S&P 500 P/E N/AN/A80%
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)7

OverallApril 20093 months prior12 months prior
Gauge Score (0 to 100)20

Full disclosure: Long NVDA at time of writing.

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