NVIDIA unleashes its metaphorical can of "whoop ass"
There was a time -- back in 2010 -- when NVIDIA Corp. (NVDA) looked a bit lost. A resurgent Radeon brand, now owned by Advanced Micro Devices, Inc. (AMD), was punishing it in the discrete graphics market with the Radeon HD 5000 series devices, and analysts were scratching their heads in puzzlement at NVIDIA's focus on GPU computing.
And NVIDIA's Tegra system-on-a-chip effort was largely written off, as NVIDIA couldn't seem to figure out what it wanted to do with it -- netbooks? Mobile devices? No one could quite tell.
I. A Young Power in the Mobile Market
Fast-forward three years and NVIDIA is in a far different -- and far better -- position. GPU computing is an exploding field and NVIDIA has large purchase orders from the hottest new deployments. It's back to scoring wins in the gaming graphics market.
And most importantly Tegra has exploded, seizing a commanding stake in the mobile device system-on-a-chip (SoC) market.
In calendar/fiscal Q3 2012, NVIDIA posted large earnings and revenue surprises, delivered thanks to its SoC and GPU market gains. Revenue fell in at $1.204B USD (GAAP), pleasantly above the consensus of $1.192B USD estimated by 33 analysts surveyed by The Financial Times.
Tegra 3 drove NVIDIA to a big profit surprise.
But much like system-on-a-chip archrival Qualcomm, Inc. (QCOM), the biggest surprise lay not on the revenue, but on the net income (profit) front. NVIDIA pocketed a whopping $209M USD, ($0.33 USD/share), above the most optimistic estimate of $203M USD ($0.32 USD/share) from the analyst crowd, and even higher above the average estimate of $187M USD.
NVIDIA's at times colorful and divisive chief executive officer and president, Jen Hsun Huang crowed, "Investments in our new growth strategies paid off this quarter in record revenues and margins. Kepler GPUs are winning across the special-purpose PC markets we serve, from gaming to design to supercomputing. And Tegra is powering some of the most innovative tablets, phones and cars in the market."
The chipmaker decided to share the wealth with its shareholders, offering up a 7.5 cent dividend.
Capital expenditures for NVIDIA have grown as the company sharpens its focus on bleeding edge system-on-a-chip research. NVIDIA estimates that it will spend $50M to $60M USD next quarter on R&D and other CAPEX.
II. Gloom for Q4, But It Could be Worse
Looking ahead, while NVIDIA's Q3 results mirror Qualcomm's, its Q4 estimates are gloomier than its rivals. NVIDIA estimates that revenue will dip to between $1.025B and $1.175B USD on a slowing global economy, versus the traditional bump in the holiday season.
One possible reason why NVIDIA is more worried than Qualcomm is that much of its earnings are still driven by sales of high-end (Kepler) hardware (GPUs) for traditional consumer and enterprise systems. When the economy slumps, these sales tend to suffer the most, as users consolidate their buying power towards cheaper mobile devices. In that regard, a mix mobile/traditional chipmaker like NVIDIA will likely be hurt more by a downturn than a solely mobile-centric chipmaker like Qualcomm.
A slowing economy is expected to dent NVIDIA's Q4 earnings.
However, NVIDIA's better-than-expected earnings do represent good news in a couple of ways. First, NVIDIA and Qualcomm represent a reasonably good barometer by which to gauge the health of the mobile market. And by the looks of it, mobile is flourishing at a time when other less fortunate markets find themselves facing tough financial questions.
Second, NVIDIA enjoys a key psychological advantage over Qualcomm in that it's pumping out quad-core units of its latest and greatest Tegra 3 processor, while Qualcomm's current Snapdragon 4 offerings are mostly constrained to dual-core CPUs. That's a big reason why NVIDIA is thus far outpacing Qualcomm in design wins in the emerging Windows RT ARM-based laptop/hybrid device market.
Traditional PCs demand more power, and NVIDIA has been the most aggressive about push higher core-counts in its mobile chips. That decision will likely pay off for the company, and help it ride out the storm ahead in the discrete graphics market.
Sources: NVIDIA, FT [analyst estimates]
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