NVIDIA Beats Expectations, Cautiously Optimistic for 2009
Posted on | November 7, 2008 Time: 8:50 am |
Graphics chip producer NVIDIA reported earnings after the bell Thursday, and the company exceeded reduced estimates thanks to a recent design win from Apple (AAPL) and cost-cutting efforts. NVDA shares responded well in the after-hours session (up 7%) after giving up 10% in the regular trading session. Because the quarter included most of October (through 10/26), there was good information to be had on how the sales channel looked from management’s perspective.
Boilerplate Numbers
GAAP EPS came in at $0.11 per share ($67 million), while non-GAAP EPS of $0.20/sh beat expectations of $0.12; charges were taken for some impairments and costs related to a 6% workforce reduction announced in mid-September.
Revenue was $898 million, essentially flat on a sequential basis from the 2nd quarter. By segment, GPU (graphics processing units) revenue fell by 8% sequentially, or $42 million. Desktop shipments were lower but ASPs were higher; the trends were reversed for notebooks with higher shipments and slightly lower ASPs. NVIDIA has been working hard to regain lost share in desktops after leaving the door open for competitor AMD earlier in the year.
MCP revenue rose 19% sequentially, with a big assist going to Apple. The companies announced last month that NVIDIA’s new GeForce 9400m GPU would be included in the new line of MacBooks. This design win was big on two fronts; Apple is an enviable business partner with strong growth prospects, and NVIDIA is trying to justify the higher performance profile for its GPU versus Intel’s graphic chipsets.
And finally, consumer revenue (consisting of mobile and Sony’s PS3) was essentially flat on a sequential basis, and higher royalties from Sony were offset by lower mobile revenues.
Performance Highlights
Gross margins rose an impressive 280 basis points to 41.9%, as the company transitions to more cost-effective 55nm production. However, most of the current inventory and sales channels are stuffed with 65nm product, so margins are expected to remain steady in the coming months. Management feels that they are positioned to take back market share in the desktop space, stating that they have the best-performing products at each price point going into the holiday season (don’t worry, management isn’t expecting much of a Christmas boost either…)
CEO Commentary
Jen-Hsun Huang is a CEO that I like to hear each quarter in the conference call; he’s from the old school of technology CEO/founders that knows his company’s technology inside and out. He’s still a tech geek at heart (I say that with admiration), very outspoken about his vision for the company, and always good for a sound bite on the industry.
Huang didn’t provide any specific guidance for the all-important 2009, but cautiously felt that the company could grow total revenues. He see continued design wins for the 9400m, and used the conference call to announce that Toshiba would be including the GPU on its new line of notebooks.
The CEO also waxed poetic about the future potential of NVIDIAs CUDA development tools for high-level supercomputing efforts like genetic modeling, CT scanning, and video processing.
Valuation & Balance Sheet
The balance sheet remains a strong point for the fabless semiconductor firm, with just over $1.3 billion in C&CE. The company bought back an awful lot of its stock in the third quarter, retiring $300 million worth, or about 3% based on the average purchase price during the quarter. There is still over $1.2 billion remaining in the repurchase authorization as of November, enough to remove another 25% of the outstanding shares from circulation.
NVIDIA shares hold appeal for both value and growth-oriented investors. Value can be found in a P/S ratio under 1.25 and a trailing enterprise value/EBITDA of 3.7. The P/E is hard to model given the second quarter loss and unconfirmed guidance, but even when we include the $200 million expense related to product recalls in the second quarter, rolling EPS is tracking between $0.75 and $.80, which would put the P/E right around 10 times.
I continue to wave my caution flag for any stocks leveraged to the U.S. consumer, but the severity of the beating NVIDIA shares have already taken this year (down over 75%) seems too rash considering the asset-light business model, strong cash position, and the favorable secular trends of increasing demand for ever-better graphics performance in our cell phones, video games, and computers.
disclosure: author does not hold positions in the securities mentioned.
Tags: Apple > GPU > Graphics Chips > Intel > NVIDIA > PCs
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