13 May 2010

NVDA: Income Statement Analysis for the April 2010 Quarter

NVIDIA (NASDAQ: NVDA) earned $0.23 per diluted share on a GAAP basis in fiscal 2011's first quarter, which ended on 2 May 2010.  In last year's comparable quarter, NVIDIA incurred a net loss of $0.37 per share.

Non-GAAP earnings per share rose from ($0.13) to $0.23.  The non-GAAP figure for the earlier quarter excludes special charges, after tax, of $132 million ($0.24 per share) related to stock option purchases.

This post examines NVIDIA's Income Statement for the latest quarter and compares the entries on each line to our "look-ahead" estimates.  Reported earnings were $0.02 per share better than the $0.21 per share we had forecast.

The principal sources for the income statement analysis were the earnings announcement, and the Chief Financial Officer's commentary.

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 is best known for the powerful Graphics Processing Units that rapidly perform the huge numbers of calculations required to produce hyper-realistic images for computers and video games.  Additional 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 of $1.002 billion was 50.8 percent more than Revenue of $664 million in the comparable year-earlier quarter.  We almost hit the bulls-eye with our $1.0 billion Revenue estimate, which was influenced by the company's guidance after the previous quarter.

The GPU business segment had Revenue of $780.9 million, which was 78 percent of the total Revenue in latest quarter.  Revenue for the segment was up 44 percent from last year's 541.3 million (when it was comprised of two different business segments).  

Why did GPU sales increase so strongly?

NVIDIA launched and shipped the GeForce® GTX 480 and GeForce GTX 470, the first GPUs based on the company’s Fermi™ architecture. ... “We shipped a few hundred thousand Fermi processors into strong consumer demand."

The Professional Solutions business had Revenue growth of 79 percent, from $106.2 million to $189.7 million. The CFO stated that demand for workstations "continued to recover strongly."

Revenue at NVIDIA's Consumer Products business rose from $11.9 million to $31.2 million, an increase of 160 percent.

The Cost of Goods Sold (i.e., Cost of Revenue) increased to $545 million (54.4 percent of Revenue) from $463 billion in the year-earlier quarter.  The latest results translate into a Gross Margin of 45.6 percent, far more profitable than 30.3 percent margin in last year's first quarter.

The Gross Margin exceeded the upper end of the 44-to-45 percent range NVIDIA predicted in their guidance.  We had assumed the margin would be in the middle of the range.

NVIDIA's CFO attributed margin improvements to the launch of new powerful GPUs and to renewed strength in the high-margin Professional business.

Research and Development spending increased 3 percent, from $211 million to $218 million. With Revenue up sharply, R&D expenses fell from 31.8 percent of Revenue to 21.8 percent.

R&D expenses exceeded the $215 million we expected by only $3 million, 1.4 percent.

Sales, General, and Administrative expenses of $91 million were up 14 percent from last year's $80 million. The increase was attributed to payroll taxes on employee stock options and legal expenses associated with Federal Trade Commission inquiries and other litigation.  As a percentage of Revenue, SG&A declined from 12.1 percent to 9.1 percent.

The reported SG&A expenses were just $1 million more than the $90 million we had estimated. 

As expected, the latest quarter did not include special operating charges for restructuring, asset impairments, or warranties.  The year-earlier quarter included special charges of $140 million.  

Subtracting the various operating expenses from Revenue yields Operating Income of $147 million, up from a $231 million loss in the year-earlier quarter.  The increase can be credited to higher Revenue, a much expanded Gross Margin, and avoidance of special charges.

Operating Income exceeded our $140 million target for the quarter by 5 percent. 

Non-operating items (interest and other) summed to a net gain of $3 million, compared to the $5 million we had estimated.  

The effective income tax rate in the quarter was a tiny 8.7 percent, which boosted the bottom line.  We had assumed 15 percent.

Net Income of $138 million ($0.23/share) nearly reversed the $201 million loss (minus $0.37 per share) in the same quarter of the previous year.  The latest results exceeded our $123 million ($0.21 per share) estimate by about 12 percent.  The Gross Margin was about 100 basis points more profitable than we anticipated, and income taxes were less burdensome.

Full disclosure: Long NVDA at time of writing.

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