ANALYSIS: Nvidia's Results Show Record Growth & Potential Weaknesses
2/14/2013 by: Theo Valich
Nvidia Corporation reported its fiscal fourth quarter and full year earnings results after the markets closed on Wednesday. The stock value actually dipped as the company lowered revenue estimates going forward but we believe the financial markets are failing to understand the model and are tying the Nvidia down to weakness in the PC market at the time when the company is outpacing the industry growth in "hot" markets such as mobile and embedded.
First off, the company changed the way how they report their results. The GPU segment now includes GeForce, Tesla, Quadro, GRID (Cloud Service), Chipset business. Tegra Processor now includes Tegra, Baseband & Radio Frequency, Project SHIELD (Gaming Console), Automotive, Legacy Game Console (PlayStation 3) and Other Associated Revenue. Third pillar is named "All Other", and includes licensing business such as the Intel Cross License.
Record Year Behind: Nvidia Passes the $4 Billion Revenue Milestone, More Money in U.S.
Given that Nvidia does not operate on a calendar year, the company reports results for the fiscal quarters and fiscal years. Their fiscal year ends on January 31, and the new fiscal year begins on February 1st, bringing solid separation between them and their closest rivals. For the fourth fiscal quarter (Nov 1-Jan 31), Nvidia reported $1.11 billion, a significant increase compared to $953.19 million in FQ4 2012. The net income grew to $173.97 million (EPS: $0.28), almost a 50% increase from the last year ($116.03 million, EPS: $0.19).
Whole year results are impressive though; for the fiscal 2013, Nvidia reported revenue of $4.28 billion, which is the first time the company broke the four billion mark. 12 months ago (FY 2012), Nvidia had missed the mark by less than $3 million ($3,997.9 million). However, the annual net income was $562.5 million (EPS: $0.90), down from $581.1 million achieved last year. At the same time, operating expenses increased from $1.40 to $1.57 billion, as the company faced increased number of tapeouts, chip manufacturing cost as well as more reference designs the company designed for their clients, which is something Nvidia hasn’t done in the past. At the same time, the gross margin (GM) grew modestly from 51.4% to 52.0%.
The cash pile however, grew by a significant amount. Nvidia ended last year with $3.13 billion in the bank (the company has no debt), out of which 39% was located in United States. The company announced that their cash position now stands at $3.73 billion, with 48% of all cash located in the U.S. This is a direct result of significant growth achieved on the domestic market, fueled by Google Nexus 7 design win, as well as Microsoft Surface RT tablet win. Those two, initially domestic-only products funneled significant amount of cash into the company on the domestic field, as the company did not want to extract the money out of U.S., being subject to 16% corporate tax rate (plus / minus one percent).
Breakdown by Business: GeForce Grows 7%, Tegra Grows 90%, Intel License Business Stable
For the fourth quarter, Nvidia reported GeForce BU revenue of $832.51 million, which was down from the third quarter ($894.21 million), but also significantly higher than 12 months ago, when the company reported just $777.40 million.
In the fourth quarter, Tegra BU brought in $208.39 million, which was down from the third quarter ($243.90 million), and significantly up from 12 months ago, when Tegra brought home $109.79 million. In their highlights, executives highlighted the fact that Tegra grew by 90%.
In the "All Other" section, Nvidia reported $66 million income from Intel Cross-License deal, making it for $264 million annual income. This revenue comes as a result of $1.5 billion settlement where Nvidia dropped the anti-trust lawsuit against Intel, and the Chipzilla licensed Nvidia technology for $264 million a year.
Almost 50% of Nvidia's Stock Value is Cash: Stock Buybacks, Modest Dividends
At the time of writing (currently, subject to continuous change during open market and post-market trading) Nvidia stock (NVDA) was trading for $12.73, 2.91% up from the results announcement. Given that the company has 3.73 billion dollars in the bank, doing a simple calculation (3,728,000,000 / 624,850,000), we get that the cash value of each stock is $5.96. Thus, the value of the company business is just $4.23 billion.
One of interesting notes from the call and the results themselves is another stock buyback. While the investors may not be happy at a low share price, Nvidia's management utilized the price to its full extent, reducing the GAAP profits from their Non-GAAP statements with multiple stock buybacks and more importantly (for those interested), dividends to their investors. In the fourth fiscal quarter, the company reduced its net profit by $147 million, by issuing $47 million back to their prospective shareholders, and $100 million stock buyback. This reduced the percentage of outstanding institutionalized shares to 74%. Several years ago, 82% of the company was institutionalized, meaning the company is slowly increasing its independence.
Naturally, the stock buyback might just be a card play to have more shares "in house" before any future acquisitions appear on the horizon.
FY 2014 - Calendar 2013 Outlook and Focus Products
For the upcoming year, the company reduced the guidance for its first fiscal quarter. The company expects to see $940 million, which is marginally higher than $924.88 million achieved last year. Gross Margins are expected to hold steady at 53.2% (non-GAAP) and 52.9% (GAAP). Naturally, the goal of any company is to increase the GM as much as possible.
There are seven growth opportunities the company will focus on during the FY 2014:
Time will tell will Nvidia keep its growth levels or not. But the perception of Nvidia as a PC-dependent company will tail off during calendar 2013, as PC's start to take over the whole household (read: Intel Media, Apple iTV).
- Tegra 4 - Even though the launch passed with less-than-expected performance, the company expects the performance offered by this five-core ARM processor with 72 GPU cores should bring the design wins the company can live off. Alternatively, there's always Project SHIELD. Tegra 4 will focus on capturing as much tablet design wins as possible as the company believes the T40 (Tegra 4) cannot compete against single-chip solutions in the wide smartphone arena. The growing Superphone niche might yield with couple of design wins, though.
- i500 Baseband multimode - With the acquisition of Icera, Nvidia finally solved the problem of not having a baseband chip on offer. The HTC One phone was coming with Nvidia Tegra 3 processor and Intel or Qualcomm baseband (depending on a country). The signs of independence showed when SHARP unveiled their Tegra 3 based smartphone which featured both the SoC and Baseband from Nvidia. By looking at a specsheet, the i500 multimode LTE chip with software radio and other interesting technologies from advanced LTE companies such as D2 Technologies packs some serious horsepower. The question remains will the 28nm process node be sufficient to lower the power consumption to the levels acceptable not just to Ultrabooks, notebooks and tablets, but to smartphones as well?
- Project Grey - Even though not a lot has been said about the Project Grey, this is Nvidia's main card for the demanding automotive market. We spoke with multiple automotive OEM's and to them the "Tegra 3+" (T37A) is ideal part for upcoming "connected cars". Project Grey is nothing else but improved Tegra 3 SoC with an Icera baseband modem in a single package. We've heard that the clocks for the Cortex-A9 cores steadily grew and reached the levels achieved by Cortex-A15 cores inside the Tegra 4. Besides the lucrative automotive market, Project Grey targets the wave of $99 Android smartphones which are going to storm the market at the 2013 Mobile World Congress in Barcelona, Spain.
- GPU Market Share - Not much to add here. As we revealed here, Nvidia should have GeForce GTX Titan launching shortly, followed by the launch of GeForce 700 Series. This series can be called "Kepler Plus" or "Kepler Refresh", as the company is re-spinning its silicon and putting further improvements. Chips such as GK114 (powering the GTX 780) consume even less power than the GK104 (GTX 680), even though we do not expect to see the GTX 790 - Titan will probably keep their place. Thus, we can expect GK11x parts to overtake the whole line-up, GeForce, Quadro or Tesla.
Given the fact that AMD is rumored not to have Sea Islands GPU until the tail end of (calendar) 2013, the battle will be between Intel's (delayed) Haswell, and AMD and Nvidia.
- GRID - Nvidia's cloud gaming service offers the concept from two sides: for starters, putting a GRID application on your computer enables you to play games in full quality that your PC allows. Combined with GFE (GeForce Experience) app optimizations, it enables the level of fidelity that mobile devices won't be able to offer for years to come. On the high-end, a set of dedicated virtualizing graphics cards sitting in a server will probably have its audience, but unless you're looking to sell your cloud gaming company to a big TV manufacturer even though if you know your concept doesn't work, you'll be looking at acquiring tens to hundreds of thousands of GRID GPUs.
- Project SHIELD - This mobile console might be the biggest surprise or a biggest liability of 2013. The project comes as a result of years of designing hardware for failed handheld projects, such as Zune HD and Kin with Microsoft, 3DSi with Nintendo, etc... be that as it may, Project Thor and its final product, the SHIELD console will raise a lot of eyebrows when the device appears on the market. This just may be the "it" product needed to turn on the adoption of high quality mobile gaming.
- Tesla GPU Compute - Tesla is showing continuous growth, even with Intel pressuring the company with at-cost or below-cost Xeon Phi supercomputing deals. The line-up is now consisted out of dual-GPU K10 and single-monster GPU K20, with product refreshes coming. However, the real deal comes in 2014, and their customers know that. Thus, fiscal 2014 is all about capturing more market share with attractive pricing and service plans. For example, Amazon purchased over 10,000 K10 boards for approximately $1,500 a piece, which is over $1,000 discount over the price. But in order to get such price, you have to get Nvidia's insurance plan of $500/year, which guarantees overnight replacement of failed products, no questions asked. Thus, Nvidia offers very attractive products, with the question being how to increase availability of the parts.
Nvidia, Nvidia Corporation, NVDA, Jen-Hsun Huang, Project GRID, Tegra, Tegra 4, Icera, Icera i500, GeForce Experience, GFE, Gross Margin, GM, Nvidia Margin, Net Income, Income, Profit, OpEx,CapEx, EPS, Intel, Tesla, Project Gray, Project Denver, Project Boulder,
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