02 June 2010

NVDA: FInancial Gauge 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.  The company reported a net loss of $0.37 per share in the comparable quarter of the previous year.

In our earlier review of NVIDIA's Income Statement, we compared the actual results to our "look-ahead" estimates.  Reported earnings were $0.02 per share better than the $0.21 per share we had forecast.

We have now updated the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value for NVIDIA.  This post reports on the metrics and the associated financial gauge scores.  The metrics were calculated using data from NVIDIA's current and historical financial statements, including the latest 10-Q report.

NVIDIA creates 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.

In summary, NVIDIA's latest quarterly results produced the following changes to the GCFR gauge scores:

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.  Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.

Cash Management02 May 201031 Jan 201026 Apr 20095-Yr Avg
Current Ratio3.
Debt/CFO (years)
Inventory/CGS (days)55.763.487.168.8
Finished Goods/Inventory54.7%56.3%63.2%55.7%
Days of Sales Outstanding (days)39.038.463.750.7
Working Capital/Revenue42.2%43.0%52.7%43.0%
Cash Conversion Cycle Time (days)43.045.881.361.7
Gauge Score (0 to 25)1819612

NVIDIA holds nearly $1.8 billion in Cash and Short-term Investments (up from $1.3 billion one year earlier).  Working Capital reached a record high at just under $2.0 billion, with Current Assets a strong (perhaps overly so) 3.6 times Current Liabilities.

The company doesn't have any significant Short-term or Long-term Debt.  NVIDIA does have about $25 million in long-term capital lease obligations.

The decrease in the Cash Conversion Cycle Time signals significantly better cash flow efficiency.  This improvement is due, in large part, to the dramatic decline in Days of Inventory held, as measured by Cost of Goods Sold (CGS).  The proportion of Finished Goods in the Inventory is also down.  These lean inventory indicators have contributed to the Cash Management gauge score the last two quarters.

The Days of Sales Outstanding inched up because Accounts Receivable increased from $375 million to $530 million at the end of the last quarter.  This could be due to a sales surge at the end of the quarter, with customer payments expected early in the current quarter.

Growth02 May 201031 Jan 201026 Apr 20095-Yr Avg
Revenue growth24.8%-2.9%-33.4%17.8%
Operating Profit growth16.2%11.9%13.3%21.4%
CFO growth38.2%95.6%-78.0%150.5%
Net Income growthN/AN/AN/A25.4%
Gauge Score (0 to 25)206112
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.

Revenue of $1.0 billion in the latest quarter was 50.8 percent more than in the comparable year-earlier quarter.   Strong Revenue growth in the last two quarters pushed up the trailing-year growth rate to a robust 25 percent.

Revenue in the last year was 105 percent of Assets, up significantly from 84 percent last year.  However, this ratio was over 130 percent as recently as 2008.

The CFO growth rate has been boosted by rising cash earnings and also by special charges that sapped the year-earlier amount.  CFO in the latest quarter was slightly, but disappointingly, negative.

Net Income in the last four quarters is $271 million, certainly better performances than the $408 million lost in the previous four quarters.  Like Cash Flow, the earlier figure for Net Income was undermined by special charges.

Profitability02 May 201031 Jan 201026 Apr 20095-Yr Avg
Operating Expenses/Revenue89.1%95.2%104.8%88.6%
Free Cash Flow/Invested Capital25.1%38.6%1.9%50.4%
Accrual Ratio13.1%-1.0%-12.9%3.9%
Gauge Score (0 to 25)2212415

NVIDIA's Operating margin has improved greatly from last year, when it was unprofitable.

The earnings and cash flow returns on Invested Capital are back to healthy levels.

The increase in the Accrual Ratio is worth watching.  It raises a question about whether Cash Flow from Operations has been strong enough to account for, and sustain, the reported earnings growth.  In the latest quarter, CFO was negative $5 million, whereas reported Net Income was plus $138 million.  CFO in the latest quarter was hurt by large increases in Inventory and Accounts Receivable.  These rises may be temporary byproduct of accelerating sales; the figures, as discussed under Cash Management, are not unreasonable given the higher level of Revenue the company is now achieving.

Value02 May 201031 Jan 201026 Apr 20095-Yr Avg
P/E vs. S&P 500 P/E 1.9N/AN/A1.5
Enterprise Value/Cash Flow (EV/CFO)22.214.920.018.3
Gauge Score (0 to 25)3479
Share Price ($)$15.71$15.39$11.48-

NVIDIA shares rose to nearly $19 at the end of 2009, but they gave a large chunk of the increase back in 2010.  At the end of May, the price was a little over $13 per share.

Although earnings and cash flow have improved, the trailing year metrics appears pricey to the Value gauge using the 2 May share price. 

If we recalculate the metrics using the latest share price, the trailing-year P/E is trimmed to 29 and the trailing-year Price/Sales Ratio is cut to 2.1.  The Value gauge score picks up three more points.

Overall02 May 201031 Jan 201026 Apr 20095-Yr Avg
Gauge Score (0 to 100)53392148

The recent revival in NVIDIA's performance has been recognized by the increases in the Growth and Profitability gauges.  The Overall Gauge score moved up nicely, but it was limited by the Value gauge.  If the earnings growth seen the last couple of quarters is sustained, and if the negative Cash Flow from Operations in the latest quarter proves to be temporary, the Value gauge could start to catch up.

Full disclosure: Long NVDA at time of writing.

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