09 November 2009

NVDA: Income Statement Analysis for the October 2009 Quarter

NVIDIA (NASDAQ: NVDA) earned $0.19 per share in the third quarter of fiscal 2010, which ended on 25 October 2009, up from $0.11 in the same quarter of last year.

On a non-GAAP ("pro forma" or "ex-items") basis, earnings fell from $0.20 to $0.19 per share.  The net difference between GAAP and non-GAAP Net Income in the latest quarter was only $2.75 million.  However, this small figure masks a couple of substantial items that nearly canceled each other.

This post examines the Income Statement for the quarter in the earnings announcement, and it compares the entries on each line to our "look-ahead" estimates.  Our target for NVIDIA's Net Income in the latest quarter was only $0.05 per share.

Commentary published by the Chief Financial Officer helped us interpret NVIDIA's results.

In a second article, we will report NVIDIA's scores as measured by the GCFR financial gauges. The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

NVIDIA Corporation designs powerful Graphics Processing Units that rapidly perform the intensive calculations required to produce hyper-realistic images for computers and video games.  Some background information about NVIDIA and the business environment in which it is currently operating can be found in the look-ahead.

Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the 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.

Revenue might only have been 0.6 percent more than in the third quarter of last year, but it was a surprising 16 percent greater than in the immediately preceding (i.e., July 2009) quarter.  Heeding the guidance that NVIDIA provided last August, we had assumed third quarter Revenue would be only 6 percent higher than Revenue in the second quarter.

The business segment that sells Graphics Processing Units for use in desktop and portable personal computers contributed more than half of NVIDIA's Revenue in the October 2009 quarter.  Revenue from  both types of GPUs surged 25 percent quarter-on-quarter, and Revenue only from GPUs for notebook computers soared an amazing 41 percent sequentially.

Supply constraints limited the Revenue growth rates from being even higher.

The Cost of Goods Sold (i.e., Cost of Revenue) was 56.6 percent of Revenue in the quarter, which translates into a Gross Margin of 43.4 percent.  The Gross Margin significantly exceeded the upper end of the 36-to-38 percent range NVIDIA predicted in their guidance after the July quarter.  We had assumed the margin would be in the middle of the range.

NVIDIA attributed margin improvements to:
  • Significantly higher unit sales of GPUs;
  • Improved 55nm yields as well as other manufacturing cost reductions; and
  • More favorable product mix, particularly within our discreet GPU business.
Research and Development expenses were slightly less than our $200 million estimate.  R&D expenses were down about 6.6 percent from last year's third quarter.

Sales, General, and Administrative expenses were also lower than last year, but they were $6 million above our estimate.  We could have better allocated operating expenses across the various categories.

Operating Income, which we define as the difference between Revenue and the operating expenses identified above, was 90 percent greater than last year.  As mentioned above, the Gross Margin was higher and expenses were lower this year.

NVIDIA's Operating Income exceeded our much-too-conservative target by more than 300 percent.

Non-operating interest and other income was not especially substantial. 

Despite a hefty $110 million pretax profit in the recent quarter, NVIDIA must have saved up credits from earlier periods to limit the current income tax rate to a mere 2.4 percent.  This resulted in Net Income of $108 million ($0.19/share) in the quarter, easily beating last year's $0.11 per share and our estimate of $0.05.

In conclusion, NVIDIA has now had three consecutive quarters of Revenue growth and Gross Margin expansion.  In the first two of these quarters -- April and July -- NVIDIA recorded special charges that led to large losses on the bottom line.  The October quarter, on the other hand, had far better-than-expected operating performance, no special charges, and barely any income taxes.  NVIDIA must now keep product momentum intact, resolve supply constraints, and avoid the pratfalls that in earlier times hurt the company's reputation and pocketbook.

Full disclosure: Long NVDA at time of writing.

1 comment:

  1. While the difference between GAAP and non-GAAP EPS is negligible, keep in mind that the non-GAAP EPS benefited from a one-time $25M insurance gain, and the GAAP EPS benefited from the removal of stock options. For 'real' revenue and EPS comparisons, $25M should be removed from the non-GAAP results, and as you can see that really throws off the numbers.