20 August 2009

NVDA: Financial Gauge Analysis for the July 2009 Quarter

In an earlier post, we examined NVIDIA's (NASDAQ: NVDA) Income Statement for the July quarter and compared the figures to our "look-ahead" estimates.  In this period, the second quarter of fiscal 2010, NVIDIA lost $0.19 per share.  The company lost $0.22 in the comparable period of 2008.

On a non-GAAP basis, Net Income fell from $0.13 per share to $0.07.  The most substantial expense excluded was a $119 million charge to resolve product faults.

NVIDIA builds Graphics Processing Units that perform the intensive computations required to produce realistic images for video games and other applications.   NVIDIA GPUs can also take on other processing chores. 

We have now mined the financial statements in NVIDIA's earnings announcement to update the metrics we use to assess Cash Management, Growth, Profitability and Value.  This post reports on these metrics and the Financial Gauge scores.

The press release included an Income Statement, a condensed Balance Sheet, but only a single statement was made about Cash Flow: "Free cash flow was a positive $117.5 million during the quarter."

Since some undisclosed details are needed to compute accurate gauge scores, we had to make certain estimates for this analysis.  We will adjust the scores after NVIDIA files a complete 10-Q report with the SEC.

In the mean time, NVIDIA's preliminary GCFR gauge scores are as follows:

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.

Cash ManagementJul 2009Apr 2009Jul 20085-Yr Avg
Current Ratio2.
Debt/CFO (years) (1)
Inventory/CGS (days)70.972.653.069.1
Finished Goods/InventoryN/A63.2%52.9%55.0%
Days of Sales Outstanding (days)66.859.449.750.2
Working Capital/Invested Capital158.3%131.1%167.0%176.4%
Cash Conversion Cycle Time (days)59.965.249.161.1
Gauge Score (0 to 25)771613
1. Based on estimated data for the July 2009 quarter.

With nearly $1.5 billion in Cash and Short-term Investments, $1.3 billion in Working Capital, and minimal debt, NVIDIA has considerable liquidity.

NVIDIA has made progress trimming its Inventory from 80 days, as measured by Cost of Goods Sold, in January to 71 days now.  But, the Inventory level is still much higher than last year.

The Days of Sales Outstanding, which is based on the Accounts Receivable, has jumped surprisingly.  We suspected this might be an artifact of declining Revenue, but we would not be surprised if NVIDIA has relaxed payment terms for its customers.

GrowthJul 2009Apr 2009Jul 20085-Yr Avg
Revenue growth-35.4%-33.4%25.5%10.7%
Operating Profit growth4.8%13.3%63.8%26.1%
CFO growth (1)
Net Income growthN/AN/A-4.6%26.5%
Gauge Score (0 to 25)01413
Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.  The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.
1. Based on estimated data for the July 2009 quarter.

Although NVIDIA has bounced back from the abyss of the January quarter, comparisons of the last four quarters with the previous four still produce ugly results.  Special charges certainly haven't helped.

ProfitabilityJul 2009Apr 2009Jul 20085-Yr Avg
Operating Expenses/Revenue106.1%104.8%82.7%89.2%
Free Cash Flow/Invested Capital (1)
Accrual Ratio (1)
Gauge Score (0 to 25)541414
1. Based on estimated data for the July 2009 quarter.

Operating Expenses in the last four quarters were 6 percent more than Revenue, and this is after we've excluded $287 million in special charges.  This is shows how far NVIDIA has been from reported profitability.

However, positive Free Cash Flow provides a ray of hope. 

Until the 10-Q is filed, the Accrual Ratio is suspect because it depends on Cash Used for Investments.  This value hasn't yet been disclosed.

ValueJul 2009Apr 2009Jul 20085-Yr Avg
P/E vs. S&P 500 P/E N/AN/A0.61.6
Enterprise Value/Cash Flow (EV/CFO) (1)
Gauge Score (0 to 25)572511
1. Based on estimated data for the July 2009 quarter.

NVIDIA's valuation ratios can be compared with other companies in the Specialized Semiconductor industry.  With earnings negative, the only relevant valuation metrics involve Revenue and Cash Flow.

At the end of January, NVIDIA shares sold for $7.95.  The price rose to $12.93 by the end of July. Given the lack of profits, it was inevitable that the share price increase would cause the contrarian Value gauge to fall.

OverallJul 2009Apr 2009Jul 20085-Yr Avg
Gauge Score (0 to 100)19217250

This year's dramatic drop in the Overall Gauge illustrates the significant change for the worse in NVIDIA's fortunes.  None of our category gauges were stirred by the results from the July quarter.

The earnings announcement lists numerous highlights illustrating new uses for NVIDIA's GPUs and other products.  The list is truly impressive, we would not be surprised to see sales and profits rebound when IT market conditions are more favorable.  However, we have to be skeptical until we see the improvements in the financial data.  After all, NVIDIA is facing off against formidable and innovative competitors.  We also worry that product quality issues from last year will have longer-term effects on the company's brand.

Full disclosure: Long NVDA at time of writing.

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