11 November 2010

NVDA: Income Statement Analysis for the October 2010 Quarter

NVIDIA (NASDAQ: NVDA) earned $0.15 per diluted share on a GAAP basis in the October-ending third quarter of fiscal 2011, down 22 percent from $0.19 in the same three months of last year. 

The earlier period benefited from a $24 million insurance settlement.  Excluding this special item, earnings per share in the October 2009 quarter were $0.13 per share.  In other words, earnings per share on a non-GAAP basis increased from $0.13 last year to $0.15 in the most recent quarter.

This post examines NVIDIA's Income Statement for the latest quarter and compares the entries on each line to the "look-ahead" estimates.  Reported GAAP earnings were $0.01 better than the $0.14 per share we had forecast. 

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

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

NVIDIA sells powerful Graphics Processing Units that rapidly perform the huge numbers of calculations required to produce hyper-realistic images for computers and video games.

The market value of the company is currently around $7.2 billion.  In March 2010, NVIDIA extended for three years a program for repurchasing up to $2.7 billion of its common shares.

NVIDIA's operations are divided for financial reporting purposes into three businesses: GPU, Professional Solutions, and Consumer Products.  The GPU business, which had Revenue of $1.7 billion in fiscal 2010 (53 percent of the total), sells products for desktop and notebook personal computers.  NVIDIA GPUs are installed in computers made by Apple (NASDAQ: AAPL), Hewlett Packard (NYSE: HPQ), Dell (NASDAQ: DELL), and Lenovo.

Advanced Micro Devices (NYSE: AMD) is NVIDIA's most direct competitor in the marketplace for discrete GPUs and the computer graphics cards built around them.

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).  There have been published reports that the second generation of the Tegra chipset will be used in the smartphones and tablets produced by several major manufacturers.

A rivalry between NVIDIA and Intel (NASDAQ: INTC) escalated as the two chip-makers eyed each other's markets.  A licensing dispute between the two companies highlighted the friction.  NVIDIA has promoted the use of its parallel-processing GPUs for computations now performed by Intel's general-purpose microprocessors.  Intel, which already has graphics-capable chipsets integrated with its CPUs, is interested in selling devices featuring advanced graphics.

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 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 in the October quarter decreased 6.6 percent, from $903 million last year to $844 million in the most recent three months.  The latest Revenue amount was tantalizingly close to our $845 million estimate.

When compared to the July 2010 quarter, Revenue rose 4.0 percent.  In its guidance three months ago for the October quarter, the company accurately predicted it would achieve sequential Revenue growth between 3 percent and 5 percent.

The company's GPU business brought in $582 million, 69 percent of total Revenue in the quarter.  NVIDIA stated that rising memory costs and Euro weakness, which were negatives in the second quarter, "abated somewhat" in the latest three months.  New products helped the company increase its share of the GPU market for desktop computers from 55 percent in the second quarter to 59 percent in the third quarter. 

NVIDIA didn't do as well in notebook computer segment, where it lost market share. However, the company boasts newly launched devices will allow it to regain the lost share and even reach an all time high.

Although the Consumer Products business was only responsible for 6 percent of quarterly Revenue, sales increased a healthy 14 percent sequentially.  NVIDIA is pinning its Consumer hopes on the Tegra processor for smartphones and tablets, including those based on Android.

The Cost of Goods Sold (i.e., Cost of Revenue) fell from $536 million (excluding the insurance reimbursement) in October 2009 to $452 million.  The latter amount equals 53.5 percent of the quarter's Revenue, which translates into a Gross Margin of 46.5 percent.  This rate was at the bottom end of the company's 46.5 percent to 47.5 percent guidance for the Gross Margin.  The margin was adversely affected by the product mix being less favorable than anticipated.

We expected the margin to be in the middle of the guidance range.

The 46.5-percent Gross Margin was far more profitable than October 2009's non-GAAP 40.7 percent. 

Research and Development spending increased a modest 3.3 percent, from $198 million last year to $205 million in the latest quarter. R&D expenses rose from 21.9 percent of Revenue to 24.2 percent.

R&D expenses were $7 million (3.5 percent) less than the $212 million we expected.

Sales, General, and Administrative expenses were $84 million, down from $86 million in the October 2009 quarter.  As a percentage of Revenue, SG&A increased from 9.5 percent to 9.9 percent.

The reported SG&A amount was $4 million less than our $88 million estimate.

Subtracting the various operating expenses described above from Revenue yields Operating Income of $104 million, 3.6 percent less than in the same quarter of last year.

Operating Income surpassed our $97 million estimate by 7 percent. 

Non-operating items (interest and other) were not material in the aggregate.  We had expected income of $5 million, net.

The effective income tax rate was 18 percent, exactly as expected.  The tax rate in the year-earlier quarter was an extraordinarily low 2.4 percent.
GAAP Net Income was $85 million ($0.15 per share), compared to a gain of $108 million ($0.19 per share) in the year-earlier quarter.   Earnings finished a whisker ahead of our $84 million ($0.14 per share) estimate for the quarter.  Better-than-expected Operating Income was balanced by weaker-than-expected non-operating figures.

In summary, Revenue in the October 2010 quarter was lower than in last year's equivalent period, but it matched expectations.  The Gross Margin was much more lucrative than last year.  Other operating costs were lower than expected because NVIDIA became more efficient, and the cost savings enabled Operating Income to exceed our target.  Net Income beat our EPS target by $0.01.

Full disclosure: Long NVDA at time of writing.

No comments:

Post a Comment