What Nvidia’s 1Q FY 2012 Earnings Really Mean
5/16/2011 by: Anshel Sag
On May 12th, nVidia reported that they had achieved $135 million net income on $962M of net revenue, resulting in an EPS of $0.22 down $0.01 from the same quarter a year ago. Revenue increased 8.5% from the previous quarter from $886.4M. This is still a decrease, though, from 1Q of fiscal 2011 (calendar 2010) - when the company achieved $1B revenue and $137M net income. Those unfamiliar with the situation would wonder why nVidia's fiscal 4Q 2011 net income was $171M even though their gross margins and revenue were lower. This was a result of a payment by Intel as part of a 1.5 billion USD settlement where Intel makes annual payments to the company. The payment was what artificially padded nVidia's Earnings figures.
Comparison of nVidia Quarterly Earnings with the last quarter (QoQ) and 12 months ago (YoY)
The good thing, though is that their gross margin has improved by 2% over the last quarter and almost 5% from the same quarter a year ago. nVidia's 50.4% gross margin will leave many investors optimistic about the company’s future especially considering their surprising (but expected) success in the mobile SOC (System On Chip) market. nVidia's ability to become Google’s reference platform for Android 2.3 and 3.x (codename: Ventana) was partly what facilitated this, but nevertheless has yielded them quite a bit of growth in their consumer products division.
Key to a lot of OEM design wins for Tegra: Ventana Android Development Kit
The company managed to increase their consumer products division’s revenue to $122.6M from $68.8M, up 78.2% from the previous quarter. This signifies the drastic in the SoC market thanks to their Tegra 2 chip. The worrying bit, though, is that the revenue slipped in their professional solutions division by almost 1% which has traditionally been their most profitable division and has saved their profitability for more than one quarter in the past. Nevertheless, the green team still managed an overall increase of total revenue of 8.5% over the previous quarter. This appears to be a promising start for nVidia in a quarter dominated by Tegra growth.
It is likely that consumer products division won't attain nearly the percentage of revenue as their GPU division, but it is possible that their consumer products division could surpass their professional solutions division. The only way that this can be accomplished, though, is if tablet and smartphone shipments pick up. Many indications have been that Android tablet shipments have been somewhat weak, but that may be a result of the lack of a properly functioning OS.
The thing is that nVidia needs to work on improving the marketing and perception of Android tablets and nVidia as a whole because it appears that many of the manufacturers are doing a very poor job of marketing their own products. So, if anything, if nVidia wants to sell more chips they need to facilitate the sale of tablets that use their chips. Kind of what they’ve already been doing with their GPU business with a MBA case study called The Way It's Meant To Be Played. Simply put, the green team has been sitting on the sidelines waiting for Google and the OEMs to push their products in a way that helps them sell more. Companies like Motorola had weak campaigns and those were mostly done by Verizon in order to sell devices. At the same time, nVidia nearly destroyed it's GPU marketing budget and shifted everything to Tegra, something nVidia's board partners argued quite loudly to us. However, unlike brilliant "Intel Inside", you don't see "Powered by nVidia Tegra" logo anywhere. In fact, you'll rarely see anything else but a mention "dual-core CPU at 1GHz", without any mention of GeForce graphics, for instance - just look at the presentation for the upcoming Motorola Droid X2.
2011 is going to be the deciding year for Android tablet devices and if they don’t figure out the way that they are going to market themselves, they will get stomped all over by Apple (not that they aren’t already). The truth of the matter is that consumers simply will begin to consider Android tablets to be second class tablets if the Android OEMs and Google don’t figure out a way to market them appropriately like they did the Android phones.
The acquisition of Icera also fits into the plan that many of the carriers, OEMs, and Google have in regards to internet connectivity. At the given moment, 3G connectivity isn’t nearly as much of an important factor, but it likely will be in the future and having it built into Nvidia’s SoC would give them an edge in their designs since they would be able to save OEMs money when building their BOMs and would also improve the battery life of the devices as well by reducing the number of ICs. The company finally has something to battle Qualcomm's and Texas Instruments complete system offering (Snapdragon+Baseband, OMAP+Baseband).
Considering that it is the first quarter of the year and is generally slow, we may have to see how the following quarters will develop. If nVidia can maintain their velocity in the market with Tegra 2 and Kal-El (T30, Tegra 3D) towards the latter half of the year, they can expect to finish fiscal year 2012 on a high-note. This is also taking into consideration nVidia’s expectations for 2Q 2012 which mention revenue expecting to grow by 4-6% sequentially and gross margin to increase approximately 1%. The company bases their assesment on tomorrow's introduction of GeForce GTX 560, a new $199 board that will replace best-selling GeForce GTX 460.
Today, NVDA stock closed at $17.70 which is down about 11% from before the earnings report on the 12th. So, while some investors were initially not too pleased with performance, many analysts are upgrading Nvidia’s price target up past $20 to $22 in some cases. Hopefully we can see the company waking up and giving the Android device market a boost with some of their marketing expertise.
nVidia, NVDA, SOC, Google, GOOG, Android 3.0, Android 3.1, Tegra 2, Tegra 250, Tablet, Smartphone, Superphone, GPU, OEM, Motorola, Verizon, Droid, Icera, Apple, iPad, iPad 2, Kal-El, Kepler, GTX 560
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