Yesterday, August 12th, Nvidia reported their 2Q 2011[2010] earnings. With this report came a few concerning figures as well as a few optimistic figures along with some positive forward looking expectations. First, Nvidia reported revenue of $811.2 Million down 19% sequentially. In addition to this, Nvidia posted a GAAP operating loss of $141 Million. This came as a result of a $193.9 Million Charge as a result of the ?weak die/packaging material set? which was previously believe to be a $150 Million charge back in July of 2008. In addition to the charge, Nvidia also had to write down their large inventory of old product which further drove down their overall margins and net income. The revenue write down was likely a result of the fact that inventory increased 11% over the first quarter. A big part of that revenue, the GPU business segment was down 29.5% sequentially? which is definitely increasingly concerning even though Nvidia cited previous issues with Europe and China as the problem earlier in the call.

The good news for Nvidia was that their Quadro and Tesla business which currently consists of 26.5% of their revenue was up 13.4% over 1Q 2011[2010]. In addition to the Quadro business, the consumer division was up 46.5% over the first quarter being mostly attributable to Tegra. This is even though Nvidia has yet to announce any recent design wins.

In their outlook for 3Q 2011[2010], they expect to see revenue to increase 3 to 5% quarter over quarter and their margin to grow to 46.5-47.5%. These improvements are fairly optimistic, but we believe that Nvidia is being extremely conservative in their estimates as they have yet to reap the benefits of their expanded Fermi line of products. At this point, Nvidia is very heavily pushing their midrange line of Fermi products first and foremost with the $199 price point GTX 460. Furthermore, Jen Hsun Huang also stated that, ?The GTX 460 is the best graphics card we?ve ever built for gamers in the history of our company.?  From our indications, these cards have really put Nvidia back into the value segment and actually given their customers value for their money which previous Fermi based cards struggled to do. Because of the large die size of these Fermi products in respect to their AMD competition, we don?t necessarily expect the success of these chips to heavily impact Nvidia?s revenue until they can resolve other supply chain and market demand issues which they have stated may not be resolve into 3Q.

When it comes to segments like Tesla and Quadro, we can likely expect Nvidia to continue to dominate those markets as they?ve attained yet another record quarter for their Tesla division which we only expect to grow even more as they continue to get design wins for Tesla from system integrators like the recently announced Dell PowerEdge C410X. This is in addition to the already existing system offerings from companies like HP, IBM, and SuperMicro.

One of the places of possible concern in the future for Nvidia will continue to be for Nvidia to execute on time. The most notable place where this had occurred and hurt Nvidia was when Fermi was 6 months late and that cost them dearly in market share and lost revenue. In addition to that, they have been struggling to get their Tegra products to gain market-wide adoption as they have currently only helped their partners ship two devices, both of which came from Microsoft. While the first Windows Phone 7 device is expected to be a Tegra based phone, there is much doubt about how successful the new smartphone OS from Microsoft will really be with the increasing dominance of Qualcomm chipsets on the Android OS platform on almost all US carriers. Nvidia needs to broaden their partnerships with companies coming out with Tegra products and help create hype about them as many people are not even aware of their development or existence. Case and point the Boxee Box from D-Link coming this November. Many people are not aware of this product, yet it has a whole slew of features that Nvidia loves to tout when talking about Tegra.

In the end, this earnings report doesn?t really quite bring too many major concerns that haven?t already been brought up before by us nor does it give any great insight into the company?s 3Q or 4Q earnings as they seem to be very conservative with their estimates. We do expect Nvidia to turn a profit in 3Q, but we don?t really expect it to be a significant one simply because we don?t feel like they?ve gained enough steam in all of their business segments. They have continued to stay afloat with their professional graphics businesses and will likely continue to do so with the introduction of their Fermi based Quadro cards. If they can sell GTX 460?s at a high rate they might even post a larger profit than anticipated as they?ve relied on their professional graphics business to keep them profitable for a few quarters. On a side note, Nvidia[NVDA] was up $0.43 or 4.79% in trading today which appears to show that investors are not fazed by this somewhat unfavorable earnings report.