17 February 2010

NVDA: Income Statement Analysis for the January 2010 Quarter

NVIDIA (NASDAQ: NVDA) earned $0.23 per share in the fourth quarter of fiscal 2010, which consisted of the 14 weeks (one more than normal) that ended on 31 January 2010.  NVIDIA lost $0.27 per share in the same quarter of fiscal 2009.

The results were about the same on a non-GAAP ("pro forma" or "ex-items") basis.

This post examines NVIDIA's Income Statement for the latest quarter compares the entries on each line to our "look-ahead" estimates.  NVIDIA surpassed our EPS target of $0.14 by a substantial $0.09 per share.

The principal sources for the income statement analysis were the earnings announcement, the Chief Financial Officer's commentary, and the conference call (transcript available from Seeking Alpha).

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.  Hewlett Packard (NYSE: HPQ), Dell (NASDAQ: DELL), and Apple, Inc., (NASDAQ: AAPL) integrate NVIDIA GPUs into their products.  Additional background information about NVIDIA and the business environment in which it is currently operating can be found in the look-ahead.

Pleasclick 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 of $982.5 million in the January quarter more than doubled the previous year's $481.1 million.  It exceeded our $930 million estimate by 5.6 percent.

The company stated that "demand was strong" for the GPUs used in desktop and notebook computers.  Business for Media and Communications Processors was weaker, with sales down 19 percent relative to the October quarter.  NVIDIA attributed the decline to "typical seasonality in the desktop channel, and inventory management ahead of a first quarter product transition."

NVIDIA remarked that is was constrained by limited supplies of products, including 40-nanometer devices, throughout the quarter.

For the fiscal year, Revenue fell 2.9 percent from $3.4 billion to $3.3 billion.

The Cost of Goods Sold (i.e., Cost of Revenue) was 55.3 percent of Revenue in the quarter, which translates into a Gross Margin of 44.7 percent.  The Gross Margin, which was only 29.4 percent in January 2009, significantly exceeded the upper end of the 40-to-42 percent range NVIDIA predicted in their guidance after the October quarter.  We had assumed the margin would be in the middle of the range.

NVIDIA's CFO attributed margin improvements to:
  • Cost reductions from yield improvements and reduced waste: 1.9 points
  • Favorable mix from our Professional business: 0.8 points
  • Increased revenues of $79 million: 0.5 points
  • Other mix benefits: 0.8 points.
Research and Development expenses of $216 million were only 2 percent more than in the January 2009 quarter.  Our target was $215 million.

Sales, General, and Administrative expenses of $88 million were also up 2 percent.  We had expected expenses of $90 million.

The January 2010 quarter did not include special operating charges for restructuring, asset impairments, or warranties.   This was as we expected.  The year-earlier quarter included special charges of $18.5 million.  

The various operating items combined to produce Operating Income of $134 million, compared to a loss of $175 million in fiscal 2009's fourth quarter.  The improvement can be attributed to soaring Revenue, margin expansion, and cost control.  Operating Income surpassed our $76 million estimate by 76 percent.

Non-operating items (interest and other) were consistent with previous results and our expectations.  

The effective income tax rate in the quarter was 6 percent.  We had guessed 5 percent.

All in all, bottom-line Net Income of $131 million ($0.23/share) compares favorably to the $148 million loss (minus $0.27 per share) in the same quarter of the previous year.  Our estimate was $77 million ($0.14 per share).

In summary, NVIDIA has now had four consecutive quarters of Revenue growth and Gross Margin expansion.  In the first two of these quarters -- April and July 2009 -- NVIDIA recorded special charges that led to large losses on the bottom line.  The October 2009 and January 2010 quarters, on the other hand, had better-than-expected operating performance, no special charges, and barely any income taxes.  NVIDIA must now keep product momentum intact and resolve supply constraints.

Full disclosure: Long NVDA at time of writing.

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