NVIDIA Financials Analyzed Ahead of Tegra 3, Icera and Kepler Launches

NVIDIA is entering a key period for its performance in 2012 - the company is launching a large number of quad-core smartphones and tablets, first integrated baseband products and the rumors of the upcoming massive Kepler launch are gaining in strength.

Recently, NVIDIA reported their quarterly numbers for the fourth quarter of their fiscal 2012 which ended on January 29th. Thus, ahead of very important couple of weeks, we decided to take a look at NVIDIA financials and how are they going to cope with the string of product launches and how well the company is positioned to take a full advantage of the opportunities such as Qualcomm's delay of its quad-cores by a quarter (to first quarter 2013 i.e. CES 2013) and recent picture showing that Apple iPad 3 and iPhone 5 are powered by a dual-core A5X chip.
First and foremost, in the fourth quarter they were able to earn $953.2 million revenue, which is a decline of 10.6% from the third quarter and up 7.5% from the same quarter in the last year.

In fiscal 2012 (February 1, 2011 until January 31, 2012) NVIDIA managed to earn $4 billion in revenues, which is a 12.8% sequential increase from their fiscal 2011. Their GAAP net income (profit) came in at $581.1 million ($734.4 million Non-GAAP), which translates to GAAP earnings per share of $0.94 ($1.19 Non-GAAP), which is an increase of 118.6% (46.9% Non-GAAP) over last year.

We took the time to take an in-depth look at the comments made at the conference call following the earnings release and present the highlights in the following paragraphs.

Game console revenue
Interestingly NVIDIA reported a seasonal decline in game console revenues. A few weeks ago AMD reported strong seasonality in that regard. This leads us to believe that it's not actually driven by season, but a shift of customer interest. Sony PlayStation 3 console hasn't performed well during the holiday season 2011, while AMD enjoyed good sales results thanks to Nintendo Wii and Microsoft Xbox 360.


PlayStation 3 didn't had as much successful Holiday season as both NVIDIA and Sony expected.

There is also a rumor that AMD scored deals of the next generation versions of Wii and Xbox, while it is not certain yet whether Sony will license NVIDIA technology again. Rumors on the PS4 side talk about the new PowerPC processor as the core and PowerVR graphics, a beefed up version of the graphics chip that powers PlayStation Vita, iPad 2, iPad 3 and many other smartphones and tablets.

28nm Process and Its Woes
The 28nm manufacturing issues effects on NVIDIA were the cornerstone topic of this conference call. Financial analysts were concerned about the adverse effects of it on the margin of the company. Upcoming line of GPUs codenamed Kepler is going to be manufactured entirely on 28nm. Thus their costs go up, since each new process comes with higher cost compared to the previous one in a more mature phase. However, to stay competitive companies like NVIDIA need to leverage leading edge nodes for better chip performance.

The problem with the low 28nm yields at TSMC is that NVIDIA typically pays on a per-wafer basis, which means their margins go down when the yield is bad. This should alleviate over the course of the year as the yields improve. According to NVIDIA the yield on 28nm is lower than expected. This is not to say the yield is bad overall. The CEO said that yields are actually better than they were at the same point compared to 40nm - which we all know was a disaster for all companies on that node. NVIDIA just projected them to be higher in the last year. Jen-Hsun also pointed out that they can't solve the problem themselves. The company can only continue to work with TSMC to learn from experience as the process gets used. With a growing number of learning cycles, yield will improve gradually over the year… at least NVIDIA says so.

According to industry sources and re-iterated by Jen-Hsun, competitors using the same 28nm technology are in the same boat. NVIDIA just lined up with the comments made by AMD and Qualcomm on the yield situation. During a press briefing for the Radeon HD 7900 series, AMD explained that yields are "ok considering the process is in an early stage". AMD is a bit ahead of the curve when it comes to launching new node products (first to 55nm, 40nm and now 28nm), but their availability is not the best in all cases. The chips themselves work well and overclock well, so at least from a quality perspective the 28nm process seems to be ok.


28nm wafer with test print (ARM Cortex A-9 CPU IP) by GlobalFoundries. Taken in March 2010

Since there are a lot of companies moving to 28nm technology at the moment, NVIDIA can't get all the wafers they would like to have. As the 28nm process is ramping this should ease over the year, but all the 28nm GPU launches from both AMD and NVIDIA in the first two quarters aren't going to help the situation. According to our sources, Qualcomm is manufacturing certain SoCs at the 28nm node at both GlobalFoundries and TMSC.

However, as the GlobalFoundries capacity is constrained even with TSMC aggressively ramping 28nm technology, capacities are lower than the demand for them. Jen-Hsun Huang said that he expects 28nm capacity to be constrained throughout the year. This could lead to a bit higher prices for consumers in the end. At the very least prices are not going down in this situation.

It's becoming evident that the market could use another leading edge foundry competing with TSMC. GlobalFoundries is poised to do so, but is not quite there yet. If it were, companies like NVIDIA could choose between different offerings and competition would ensure progress on both sides. Sure there is cost associated with going to a different foundry, i.e. the chip design would need to be adapted for different design libraries. But with some smart management these could easily be recouped by a much larger sales volume. Naturally, we're not talking about 2012 since you need anywhere between 18 months and three years to execute a dual-foundry strategy. In case of NVIDIA, what is not helping is that the company is no longer considered a top notch job destination as there is a lot of restriction on the stock (we were told executive stock compensation no longer exists) and you effectively "work for salary." This lead to several highly rank executives leaving the company, but NVIDIA demonstrated the company wants to hire fresh talent, and not just in Silicon Valley. In his recent talk with NPR, Jen-Hsun discussed about the availability of Silicon Valley-type jobs worldwide.