Note: More details to come; changes are highlighted. Except where highlighted no other sections of this report have been updated.
Reason for Report: Flash Update: 1Q19 Earnings
Prev. Ed.: Apr 11, 2018; Estimate Revision
FLASH UPDATE [Earnings update in progress; to follow]
Maintaining its earnings streak for the 12th straight quarter, NVIDIA reported splendid 1Q19 results, wherein it marked strong y/y improvement.
Despite this, shares of NVIDIA lost nearly 3% in after-hour trade as the company foresees decelerated demand for crypto-specific GPUs in the quarters ahead, making investors slightly cautious.
The company provided crypto-specific revenues data from the first time which came in at $289 million. However, for the current quarter, it predicts revenues from this business to take a hit and be about one-third of the first-quarter level.
Revenues
Revenues not only surged 66% y/y to $3.21 billion but also comfortably surpassed the management’s projection of $2.90 billion (+/-2%). The y/y improvement was primarily backed by growth across all platforms — GPUs for gaming, Professional Visualization, datacenter and Tegra automotive. Further, NVIDIA continued to gain traction in the artificial intelligence (AI) space which proved conducive to quarterly revenues.
Revenues at the GPU business jumped 77% y/y to $2.77 billion on strength in GeForce GPUs for Gaming and datacenter. Strong demand for cryptocurrencies stemmed from increased adoption of Bitcoin and latest digital currencies like Ethereum also helped bump up demand for GPU, thereby driving GPU sales. Moreover, the Nintendo (NTDOY - Research Report) Switch, which was launched in March 2017, contributed to overall growth.
Tegra processor revenues totaled $442 million, up 33% on a y/y basis. The increase was primarily buoyed by better-than-expected growth in Tegra development services.
Revenues at Gaming GPU were up 68% on a y/y basis to $1.72 billion on the back of demand across all regions and form factors.
The company’s continued focus on introducing fast and innovative products as well as agreements with leading PC game makers has been driving the Gaming GPU business. During the reported quarter, NVIDIA unveiled real-time ray tracing technology, NVIDIA RTX which is likely to take gaming experience to a whole new level. Hence, the product launch will help NVIDIA expand its customer base and in turn drive additional revenues.
During the CES 2018 event, the company rolled out a hardware “big format gaming displays, or BFGDs” in collaboration with HP Inc., Asus and Acer to reach phenomenal gaming experience to an enormous screen of 65 inches.
According to the company, BFGDs put together “a high-end 65-inch, 4K 120Hz HDR display with NVIDIA G-SYNC technology together with NVIDIA SHIELD, the world’s most advanced streaming device.” NVIDIA says that the combination of these technologies will give users a "buttery-smooth gaming experience" as well as enable them to stream their favorite streaming applications such as Netflix, Gaming Video, YouTube and Hulu.
Meanwhile, revenues from datacenter increased 71% y/y to $701 million, mainly fueled by strong adoption of AI, deep learning, high-performance computing (HPC) and strong traction of the new Volta architecture.
The company’s Volta-based V100 accelerator hogged the maximum limelight. The Volta architecture GPU provides 5 times more deep learning power to the company’s GPU predecessor, Pascal. NVIDIA’s Volta GPUs saw strong adoption across the globe over the past year and per the company, every major cloud provider and server maker including Alibaba, Baidu, Tencent, Amazon, Facebook, Alphabet and Microsoft are using this.
Demand for NVIDIA’s AI supercomputer remained high as more organizations are keen on building AI-enabled applications.
Growing traction of AI among other vertical industries like transportation, energy, manufacturing, smart cities, and healthcare is also benefiting NVIDIA. Notably, more than 1,200 companies are using this inference platform, including Amazon, Microsoft, Facebook, Google, Alibaba, Baidu, Hi Vision and Tencent.
Automotive revenues in the reported quarter totaled $145 million, reflecting an increase of 4% y/y.
At CES 2018, the company announced a number of contracts in the self-driving space with the likes of Uber, Volkswagen, Aurora, Baidu and ZF Friedrichshafen AG. During the fiscal first-quarter conference call, NVIDIA noted that over “370 companies and research institutions” are using its Drive platform.
Moving to Professional Visualization, revenues increased 22% y/y to $251 million on elevated demand for real-time rendering tools like AR and VR.
Margins
NVIDIA’s non-GAAP gross margin expanded 510 basis points (bps) from the year-ago quarter to 64.7%, which exceeded management’s guidance of 63% (+/-50 bps).
In dollar terms, non-GAAP gross profit came in at $2.08 billion, reflecting an increase of 79.9% from the year-ago quarter, primarily on the back of strength in value-added platforms.
Non-GAAP operating expenses swelled around 25.3% from the year-earlier quarter to $648 million due to higher investment in growth areas, including gaming, AI and self-driving cars. Non-GAAP operating expenses were slightly higher than the company’s projection of $645 million. As a percentage of revenues, operating expenses, however, contracted to 20.2% from 26.7% in the year-ago quarter.
Consequently, NVIDIA’s non-GAAP operating margin was up from 32.9% to 44.5% in the quarter under review. In dollar terms, non-GAAP operating income jumped from $637 million to $1.43 billion.
Non-GAAP net income during the quarter came in at $1.29 billion as compared with $533 million a year ago. On per share basis, the company’s non-GAAP earnings came at $2.05 compared with 85 cents posted in the year-ago quarter. Quarterly earnings also surpassed the Zacks Consensus Estimate of $1.65.
Balance Sheet & Cash Flow
NVIDIA exited 1Q19 with cash, cash equivalents and marketable securities of $7.30 billion compared with $7.11 billion in the previous quarter. NVIDIA’s long-term debt was $1.99 billion. Free cash flow during the quarter came in at $1.33 billion, while cash flow from operations was $1.45 billion. During the quarter, the company returned approximately $746 million in the form of share repurchases and dividend payouts.
Guidance
The company issued its outlook for 2Q19. For the quarter, NVIDIA expects revenues of $3.10 billion (+/-2%).
Non-GAAP gross margin is projected at 63.5% (+/-50 bps). Non-GAAP operating expenses are expected at $685 million. Both GAAP and non-GAAP tax rates are projected at 11% (+/-1%).
For FY19, the company expects to return $1.25 billion to shareholders in the form of cash dividends and share buybacks.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON NVDA
Portfolio Manager Executive Summary [NOTE: Only highlighted material has been changed]
NVIDIA Corp. (NVDA) is a world leader in visual computing technologies and the inventor of the graphics processing unit (GPU), a high-performance processor that generates interactive graphics on workstations, personal computers, game consoles and mobile devices. NVIDIA is headquartered in Santa Clara, CA and has offices throughout Asia, Europe and the Americas.
Key factors for evaluating an investment strategy for NVIDIA are as follows:
· NVIDIA is one of the global leaders in advanced graphics-processing technology for mainstream platforms.
· NVIDIA offers diverse products in new markets such as workstations, mobile devices, integrated core logic, game consoles and wireless devices.
· It is one of the strongest contenders in the semiconductor universe.
Competitive Position: NVIDIA has a significant share in the desktop discrete graphics-processor market. It is diversifying in markets like workstation, high-performance computing, game consoles and wireless devices. In the GPU market, NVIDIA competes with Intel and Advanced Micro Devices (AMD). In the mobile processor market, which targets netbooks and other consumer devices (e.g. MIDs, smartphones), NVIDIA competes with Intel, AMD, Broadcom, Marvell, Qualcomm, Samsung and Texas Instruments.
Firms’ Opinions: Of the 25 firms in the Digest group covering the stock, 14 firms were positive, 10 firms maintained a neutral outlook while one firm had a negative stance. Target prices range from $100.00 to $305.00, with the average being $242.73. On an average, the firms expect a return of 7.3% from the stock at the current price.
Bullish (Positive or equivalent outlook) – 14 firms or 56% – These firms believe that the company’s solid product portfolio as well as the potential launch of a next-generation flagship graphics card will boost its earnings prospects and share price. They further expect NVIDIA’s success in new markets to drive growth owing to the escalating industry-wide shift from standalone to integrated solutions. The firms are particularly optimistic about strength of the platform group, which was positively impacted by the gaming segment that saw the global users count to double within a span of three-four years. The data center segment is also witnessing accelerated growth on the back of higher adoption of Volta GPUs. Additionally, the increased demand from the cryptocurrency domain has contributed to growth in GPU sales as well. The firms are also much optimistic about NVIDIA’s collaboration with Baidu and German auto supplier, ZF Friedrichshafen AG for the development of a self-driving solution, whose first customer is Chery, a Chinese car manufacturer. The company’s collaborations with Uber Technologies and Volkswagen announced in CES 2018 also show the company’s growing dominance in providing AI platforms which will power future vehicles. Additionally, the company’s launch of “big format gaming displays, or BFGDs” in collaboration with HP Inc., Asus and Acer, to bring in enormous gaming experience on a very big screen — 65 inches, is also a tailwind.
Cautious (Neutral or equivalent outlook) – 10 firms or 40% – These firms prefer to remain on the sidelines mainly due to the slowdown in the PC market. Though NVIDIA’s continuous R&D investments are a positive, the firms believe that mounting operating expenses will lead to upward margin contraction until the investments start paying off. Some of them also apprehend that slower machine-learning development rate might be disappointing. Additionally, the demand for the company’s GPUs increased due to certain segments like autonomous vehicles and cryptocurrency, which are in their preliminary phases and are being perceived as risks by certain firms.
Bearish (Negative or equivalent outlook) – 1 firm or 4% – The bearish stance on the stock stems from the lingering macroeconomic downturn affecting PC sales, slowdown in the demand for gaming consoles and NVIDIA’s shift to lower-end products. Additionally, few of the firms stated that the company’s automotive segment’s growth was not impressive enough. Additionally, decelerating demand from the cryptocurrency segment is a headwind. Moreover, competitive pressure from existing vendors like AMD and potential new entrants like Intel may impact revenues.
General outlook for NVIDIA: Despite some near-term concerns, the firms are positive on the long-term fundamentals of the company based on its dominant competitive position, solid execution and strong product positioning. Driven by Gaming and Data Center segments’ GPU sales, the top line is poised to grow smoothly. Its initiatives related to autonomous vehicles are also promising.
Apr 12, 2018
Overview [NOTE: Only highlighted material has been changed]
Santa Clara, CA-based NVIDIA Corporation offers digital media processors and related software for a wide range of visual computing platforms. The company is a worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU, which is a high-performance processor generating realistic, interactive graphics on workstations, personal computers, game consoles and mobile devices. Its processors are also used in applications for digital content creation, personal digital image editing and industrial product designing. The company sells products to original equipment manufacturers (OEM), original design manufacturers, add-in-card manufacturers, system builders and consumer electronics companies in the United States, Europe, China, Taiwan and other Asia-Pacific regions.
The GPU Business consists primarily of the GeForce line for high-end graphics in desktop and notebook PCs and generated 84% of fiscal 2017 revenues. A GPU can sit on top of a video card, or it can be integrated directly in to the motherboard. The majority of NVIDIA’s GeForce GPUs are sold on a video card. NVIDIA’s GeForce line of video cards is its flagship product line and is primarily designed for the gaming market, which requires complex graphics processing.
The Tegra Processor Business mainly takes in to account the Tegra product line. Tegra Processors generated 12% of fiscal 2017 revenue. This segment marked the entry of the first Tegra 3 phone along with the HTC One X.
From 4Q13, NVIDIA started reporting under the following segments: GPU (graphics processing unit), Tegra Processor Technologies and All Other. The All Other category primarily comprises license revenues from agreements with Intel Corp. Additional information is available on the company website:.
Key investment considerations as identified by firms are as follows:
Key Positive Arguments / Key Negative Arguments· Growth Potential: Notebook PCs, core logic chipsets and processors for handsets have solid growth potential.
· Improved Position: The company has improved its position in the integrated processor market with its new multi-year patent cross licensing agreement with Intel.
· Improved Business Fundamentals: The Microsoft Vista marketing campaign is expected to act as a catalyst to improve NVIDIA’s business fundamentals.
· Tegra X1: NVIDIA’s latest processor Tegra X1 powered by Keplar technology provides double the performance of its predecessor, the Tegra K1 and delivers vivid graphics and faster experience for GPUs. Therefore, the adoption of Tegra X1 will boost NVIDIA’s business, going forward. / · Adverse Impact on Earnings Growth: Lower-than-expected uptake by consumers could have an adverse impact on NVIDIA’s projected earnings growth.
· Effect of PC Industry: NVIDIA’s businesses appear to be dependent on the PC industry. Therefore, industry and macroeconomic slowdown could affect its revenue growth rates.
· Delay in Introduction of New Products: NVIDIA introduces new products every six months. A delay could mean missing Original Equipments Manufacturer (OEM) design windows and selling seasons for the PC market.
· Decline in Demand: A large portion of NVIDIA’s revenues comes from mobile, tablet and PC markets. Decline in any one of these will impact revenues severely.
Note: NVIDIA’s fiscal year ends on Jan 31; fiscal references differ from the calendar year.