NVIDIA's Q1 Earnings & Rev Beat Ests - Analyst Blog

NVIDIA Corp. NVDA reported complete first-quarter fiscal 2015 results on May 8. The company had earlier released its first-quarter 2015 preliminary results on May 6 as a draft was unintentionally emailed to approximately 100 individuals within the company.

NVIDIA's adjusted earnings (including stock-based compensation but excluding interest expense related to amortization, other acquisition-related costs or benefits and gain on sale of investment) on a proportionate tax basis of 24 cents per share came ahead of  the Zacks Consensus Estimate of 17 cents.

On a year-over-year basis, adjusted earnings increased 70.6%. The year-over-year increase in earnings was primarily attributed to higher revenue base, encouraging operating performance.

Revenues

Revenues increased 15.5% year over year to $1.10 billion and surpassed the Zacks Consensus Estimate $1.05 billion. Moreover, revenues for the quarter were higher than the management guided range of $1.05 billion (+/-2.0%) attributable to high-end PC gaming. The year-over-year increase was primarily due to better-than-expected growth in GeForce, GTX, desktop and notebook GPU sales.

NVIDIA's GPU revenues for the quarter came in at $898.0 million, up 14.0% on a year over year basis.  Revenues from GeForce GTX GPUs for desktop and notebooks increased 57% year over year, driven by robust demand in high-end GPUs and the recently launched GeForce GTX 750 Series.

Tegra processor revenues grew 6.0% sequentially to $138.9 million aided by an increase in the sale of auto infotainment system and embedded devices. Moreover, on a year over year basis, revenues from the Tegra processor business increased 35%, primarily due to higher sale of Tegra mobile devices and auto infotainment systems.

During the quarter, NVIDIA and VMware, Inc. VMW entered into a strategic alliance to run NVIDIA GRID technology on VMware Horizon Desktop-as-a-Service (DaaS) Platform. The combination provides a visually rewarding graphics experience and low-latency technology, which in turn helps to bridge the gap between virtual and traditional desktop experiences.

It is also worth noting that NVIDIA launched Jetson TK1 during the quarter, a platform meant for automotive, robotics and embedded applications. Jetson TK1 unleashes the 192-core Tegra K1 mobile processor and provides an enhanced gaming experience for users.

NVIDIA also entered into strategic alliances with International Business Machines IBM and Google Inc. (GOOGL) to launch the Open POWER foundation and to produce GPU-accelerated editions of IBM's POWER CPU to run on NVIDIA's Power technology.
 
Margins

NVIDIA's adjusted gross margin (including stock-based compensation but excluding other one-time items) expanded 47 basis points (bps) from the year-ago quarter to 54.8%, primarily due to favorable product mix and a stable pricing environment.

Adjusted operating expenses increased 3.9% from the year-ago-quarter to $443.4 million, primarily due to additions in employees and higher employee compensation costs. As a percentage of revenues, operating expenses decreased 451 bps from the year-ago quarter to 40.2%. The decrease was due to better management of investments in research and development and capital expenditures, which led to an increase in the return on invested capital.

This resulted in an encouraging operating performance by the company. NVIDIA's operating margin was up from 9.6% in the year-ago quarter to 14.6%, reflecting growth from its GPU business and stringent cost controls. The company's adjusted net income (including stock-based compensation but excluding interest expense related to amortization, other acquisition-related costs or benefits and gain on sale of investment) on a proportionate tax basis came in at $134.2 million or 24 cents compared with $85.4 million or 14 cents per share in the year-ago quarter.

Balance Sheet & Cash Flow

NVIDIA exited the quarter with cash, cash equivalents and marketable securities of $4.35 billion, down from $4.67 billion in the previous quarter. Free cash flow in the quarter came in at $121.9 million while cash flow from operations was $151.0 million. NVIDIA's long-term debt stood at $1.36 billion. During the quarter, the company paid quarterly dividends totaling $47.0 million.

Guidance

For the second quarter of fiscal 2015, NVIDIA expects revenues of approximately $1.1 billion (+/-2.0%). The Zacks Consensus Estimate is pegged at $1.08 billion.

Non-GAAP gross margin is expected to be 54.0% while non-GAAP operating expenses are expected to be approximately $414.0 million. Non-GAAP tax rate is expected to be 20.0% (+/-1.0%)

Recommendation

The strength in gaming and high-end notebook GPUs helped NVIDIA to report better-than-expected first quarter results. Moreover, both the top and bottom lines increased on a year over year basis, primarily due to lower operating expenses as a percentage of revenues and higher growth in GeForce, GTX, desktop and notebook GPU sales.

The company also gained a significant traction in the Tegra segment due to its Tegra 4 and Tegra K1 shipments, which boosted sales at both Tegra and GPU segments.

We believe NVIDIA's innovative product pipeline that consists of the recently introduced SHIELD 2 and mobile processor Tegra K1 will boost top-line growth, going forward. Moreover, the company's recent strategic alliance with top servers will bode well over the long term and we believe that NVIDIA will gain significantly from these alliances.

Nonetheless, competition from the likes of Intel and QUALCOMM Inc. remains a near term headwind.

NVIDIA has a Zacks Rank #3 (Hold).
 

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