29 September 2009

NVDA: Look Ahead to October 2009 Quarterly Results

The GCFR Overall Gauge of NVIDIA (NASDAQ: NVDA) was nearly unchanged at 20 of the 100 possible points after July, when the second quarter of fiscal 2010 ended.  Our income statement, financial gauge, and gauge update analyses explained in some detail how the score was attained.

NVIDIA lost $0.19 per share during the July quarter, which was a slight improvement over the loss of $0.22 in the same period of 2008.  On a non-GAAP ("pro forma" or "ex-items") basis, Net Income fell from $0.13 per share to $0.07.  The non-GAAP results exclude a warranty charge of $119 million and certain other items.

Revenue in the quarter was 13 percent less than last year, but it was a surprising 17 percent more than in the immediately preceding (April 2009) quarter.  Semiconductor sales in the spring were recovering from late 2008's awful slump.

We have now modeled NVIDIA's Income Statement for fiscal 2010's third quarter, which will end on 25 October 2009.  The intent of this exercise was to produce a baseline for identifying deviations, positive or negative, in the actual data the company will announce in November.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

First, we set the stage with some background information about NVIDIA and the business environment in which it is currently operating.  Readers that keep close tabs on the company are invited to skip ahead.

NVIDIA Corporation designs powerful Graphics Processing Units that rapidly perform the intensive calculations required to produce hyper-realistic images for computers and video games.  Hewlett Packard (NYSE: HPQ), Dell (NASDAQ: DELL), and Apple, Inc., (NASDAQ: AAPL) are manufacturers that incorporate NVIDIA GPUs in their products.

Advanced Micro Devices (NYSE: AMD) bought ATI Technologies in 2006 and became NVIDIA's most direct rival in the marketplace for high-end GPUs on video cards.  Intel (NASDAQ: INTC) also makes numerous chips that perform graphical processing. 

Financially strapped consumers and businesses have spent less on information technology in 2009 than they did last year.  Nevertheless, a ChangeWave survey determined that corporate IT spending "is continuing to improve" in the third quarter after stabilizing in the second quarter.  Semiconductor Industry Association President George Scalise "noted that industry analysts have recently become more optimistic in their forecasts."  Global sales of semiconductors, which include GPUs, increased 17 percent in the second quarter of 2009 when compared to the first quarter.  However, semiconductor sales were still 20 percent less than in the second quarter of 2008.

The Cowan LRA Model Semiconductor Forecast of global semiconductor sales in the third quarter, based on actual sales through July, is for a 9.6 percent increase over the second quarter, which would be down 17.7 percent drop from 2008's third quarter.

NVIDIA zealously promotes "GPU computing" as an alternative to general-purpose microprocessors for some tasks.  The company has developed technology making it easier to take advantage of the GPU's parallel-processing design.  NVIDIA has even discussed designing its own general-purpose x86 microprocessor.  Intel might have had this rivalry in mind when they sued NVIDIA in February 2009 over licensing.  With Larrabee, expected in 2010, Intel will have its own potent entry in the competition for general-purpose GPUs.

The market for mobile devices has not escaped NVIDIA's notice.  The company's Tegra "computer on a chip" is inside the Zune HD from Microsoft (NASDAQ: MSFT).  NVIDIA recently confirmed that it is "working closely with Google" to have Tegra support Chrome operating system for netbooks, and other reports indicate the Tegra will soon be found in smartphones.

In 2008, NVIDIA recorded a $196 million charge to cover warranty, replacement, and other costs related to faults in certain products for notebook computers.  Another $119 million charge was recorded in 2009 for this same problem.  The faults were said to result from "a weak die/packaging material set" that is no longer used. 

We are now ready to look ahead.

Our starting point was the conference call transcript at SeekingAlpha from NVIDIA's conference call with financial analysts on 6 August 2009.  The following is a summary of the guidance the company offered for the current quarter.

We expect revenue to be up 5% to 7% from the second quarter. As for gross margin, we expect GAAP gross margin to increase in the range of 36% to 38%. The primary factors for this improvement are lower overall costs, 40-nanometer volumes, and form [sic] higher gross margin products like TESLA and TEGRA as they continue to ramp.

We expect GAAP operating expenses to be in the range of $280 million. This is up from the prior quarter as a result of increased tape-out and prototype activity, as well as increased litigation expenses.

We estimate stock-based compensation expenses in the third quarter to be $23 million and deprecation and amortization and capital expenditures to be approximately flat when compared to the second quarter. Diluted shares for the third quarter are expected to be in the range of 565 million to 570 million.

Because NVIDIA's Revenue in the second quarter was $776.5 million, the first part of the guidance implies Revenue in the third (i.e., October) quarter between 1.05 * $776.5 million = $815.3 million and 1.07 * $776.5 million = $830.9 million.  We are picking $825 million as our target.

For the Gross Margin, we will use the 37-percent midpoint of the guidance range.  In other words, we expect the Cost of Goods Sold in the October quarter to equal (1 - 0.37) * $825 million, or $520 million.

NVIDIA indicated the quarter's Operating Expenses would increase to about $280 million.  We have allocated the expense as $200 million for Research and Development and $80 million for Sales, General, and Administrative costs.

If additional operating charges (for, say, restructuring, asset impairments, or warranties) are avoided, Operating Income will be about $25 million in the quarter.  Operating income was $57 million last year.

For Interest and other non-operating income, our estimate is $5 million.  This figure brings pretax income up to $30 million.

We don't have a good basis for estimating income taxes, but company suggested a minimal 5 percent rate.  This rate would result in Net Income of $29 million ($0.05 per share), compared to $62 million ($0.11 per share) in the October 2008 quarter.

Please click here to see a full-sized, normalized depiction of the projected results next to NVIDIA's quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Full disclosure:  Long NVDA, INTC, and MSFT at time of writing.  No position in any other security mentioned

1 comment:

  1. What position did you get in at? How much more upside potential? I missed the the last 6 months because I had money tied up in other investments is it worth it to get in long over 14?