(Source: NVIDIA)
The theme is familiar for semiconductor investors: the slowdown in high-end device sales has hurt

Q3 2013 was a difficult time for companies in the tech space.  Back in 2010 and 2011 PC makers grappled with growing fears of erosion from mobile devices, but for those in the mobile sector it was a golden era.  If you had ambitious mobile product on the market, you were virtually guaranteed big earnings and growth -- just ask HTC Corp. (TPE:2498).

I. NVIDIA Posts Modest Profit in Tough Market

Today being mobile is no longer a guarantee of growth, as growth of profit-driving sales of high end smartphones and tablets slows.  Even as traditional PC players struggle to try to become more mobile, mobile component/device makers like Apple, Inc. (AAPL), Samsung Electronics Comp., Ltd. (KSC:005930), and Qualcomm, Inc. (QCOM) are struggling to maintain growth.

Amid that backdrop expectations for NVIDIA Corp.'s (NVDA) fiscal Q4 2014 (which falls roughly in line with calendar Q3 2013, running from August-October) were low.

Traditionally NVIDIA's sales have been driven by the sale of GPUs to the PC market, where it vies with Advanced Micro Devices, Inc. (AMD) for dominance (and to a lesser extent Intel Corp.'s (INTC) integrated GPUs).  But today NVIDIA's sales are also driven by its Tegra line of system-on-a-chip processors for smartphones and tablets.  Hence analysts were expected weak growth on account of the company's sensitivity to mobile slowdown.

Instead NVIDIA delivered a modest surprise.

NVIDIA earnings

Excluding one-time costs, profit (non-GAAP income) was $0.26 USD/share ($153.8M USD).  Net profit (GAAP net income) was $0.20 USD/share ($118.7M USD).  While that's just a little over half of what NVIDIA made a year ago ($0.33 USD/share; $209.1M USD in Q3 2012), it's marginally better than the $0.25 USD/share that analysts in Bloomberg poll were expecting.

The chipmaker might have done even better were it not for a large (+17.6%) rise in operating expenses, with expenses rising from $344.8M USD a year ago to $405.4M USD in Q3.

NVIDIA saw sales (revenue) fall 12.5 percent on a YoY (year to year) basis to $1.054B USD, down from $1.204B USD a year ago.  That was roughly in line with the $1.052B USD predicted in the Thomson Reuters I/B/E/S analyst poll, and the $1.05B USD predicted in Bloomberg's analyst poll.

GeForce 700 Born to Perform
Desktop GPU sales drove NVIDIA to a slight profit surprise. [Image Source: NVIDIA]

Betsy Van Hees, an analyst at Wedbush Securities in San Francisco, told Bloomberg, "We did see a nice bounce back in Tegra [although] expectations were pretty low."

NVIDIA did its best to excited investors in this adverse atmosphere announcing it would be bumpings it quarterly shareholder profit-sharing dividend from $0.075 USD/share in Q3 (roughly $44.4M USD shared with investors) to $0.085 USD/share in Q4 2013.

It also wrapped up a $750M USD round of share repurchasing on Oct. 22, with the repurchase of 14.6M USD in shares in the final phase.  In total NVIDIA in total purchased 51.5 million shares, allowing investors to liquefy their holdings.  NVIDIA has announced it will repurchase $1B USD more in shares in 2014 and 2015 -- roughly a tenth of outstanding shares.

II. New CFO Appointed, GPU Compute Gains, and GeForce 780 Ti Sets Single-GPU Bar

Fiscal Q3 2014 was a quarter full of new developments and new directions for NVIDIA.

In September NVIDIA announced the appointment of a new chief financial officer Colette Kress, a former 13-year veteran of Microsoft Corp. (MSFT) who served as CFO of Microsoft's Servers and Tools business unit, and most recently served as CFO of Cisco Systems, Inc.'s (CSCO) Business Tech. and Operations Finance unit.  NVIDIA had been without an official CFO for more than two years after David White stepped down in May 2011, although Karen Burns filled in as interim CFO.

Colette Kress
NVIDIA finally has a CFO -- Microsoft veteran Colette Kress [Image Source: NVIDIA]

Oft-outspoken CEO Jen-Hsun Huang emphasize the pivotal role of GPU sales to datacenters for GPU computing -- an application NVIDIA pioneered -- as a driver of growth in a tough PC and mobile component market.  In Q3 NVIDIA partnered with VMware, Inc. (VMW) to provide better virtualization support (using NVIDIA's "GRID" technologies) for GPU computing.  NVIDIA also paired with, Inc.'s (AMZN) Elastic Compute Cloud (EC2) to deploy a GPU-equipped cloud GPU compute rental offering, the G2 cloud.

Jen-Hsun Huang
NVIDIA CEO Jen-Hsun Huang [Image Source: Int'l Business Times]

Comments Mr. Huang:

Visual computing is increasingly important to more and more markets.  It's creating demand for GPUs and opening up large opportunities. The proof can be seen in the proliferation of Tegra into new verticals like automotive and set-top boxes, in our all-time high Quadro and Tesla revenues, and in the record number of customer trials for our GRID datacenter initiative. At a time when many are struggling with the decline in the mainstream PC market, our visual computing leadership has positioned us well to grow with the accelerating adoption of GPUs in the cloud and the world of connected devices.

On the desktop front NVIDIA launched its new flagship Kepler GPU at the end of the quarter, the $699 USD MSRP NVIDIA GeForce GTX 780 Ti.  The new card packs all 15 streaming multiprocessing units (SMPs) and a higher clock speed.  The new GK110 architecture card has seized the single-GPU performance crown, thanks to the extra SMP (versus the GeForce Titan's 14 GK110 SMPs) and a slight clock bump.  It only trails the GeForce Titan in video RAM (3 GB versus 6 GB) and FP compute capabilities (1/24 v. 1/3 for FP32) allowing Titan cards to still eke out wins in some double-precision compute applications (as shown by AnandTech's benchmarking).

GeForce 780 Ti

NVIDIA also announced "G-SYNC", an upcoming display technology that allows a more seamless link between the graphics card and screen, which have traditional suffered "tearing" and other forms of artifacting due to the fact that computer hardware tends to render games at different, highly variable framerates whereas displays are forced to try to squeeze that data into certain specific frame rates (typically 60 Hz, 120 Hz, or 240 Hz).
GSYNC card

G-Sync will be sold as a HDMI/Display Port compatible PCIe card for use with certain compatible Kepler GPUs, and will also be integrated on-board into upcoming premium Kepler GPUs.

III. The Mobile Front -- Waiting For Tegra 5 to Arrive

NVIDIA also saw strong sales of its SHIELD mobile game console/streaming gaming device, which runs Google Inc.'s (GOOG) Android 4.3 "Jelly Bean" operating system.


It also announced a new first party Tegra 4 Android tablet on the budget end -- the $199 Tegra Note 7, a tablet that is designed by XOLO, the original design manufacturer (ODM) subsidiary of Taiwan's Gigabyte Technology Comp., Ltd. (TPE:2376).

Tegra Tab
The Tegra Note

Tegra 4 saw some major third party design wins, most notably the Microsoft Corp.'s (MSFT) $449 USD Surface 2, which runs Microsoft's fresh Windows 8.1 RT operating system, and the Mi3 flagship phone from Xiaomi Kejì (Xiaomi Tech.), which features an impressive spec which also includes a 5-inch 1080p full HD display with 441ppi, 2GB RAM, and up to 64GB of storage.  Xiaomi is a relatively unknown name to U.S. consumers for an obvious reason -- it only sells smartphones in Taiwan and China.  However, the phonemaker is a fast rising power in the Android ecosystem, as China's fifth largest phonemaker.

While NVIDIA's Tegra 4 SoC is thought to be very efficient as far as ARM Cortex-A15-based designs go, it is sunk in terms of battery life by its lack of an on-die LTE modem.  NVIDIA's biggest competitor, Qualcomm has had on-die LTE modems since the Snapdragon S4 release, and that's a key reason why third parties have largely opted for Snapdragon 600/800 SoCs over NVIDIA's Tegra 4, which requires the purchase and integration of a separate LTE modem.

Tegra 4
Tegra 4's processor die (left) and GPU die (right) [Image Source: NVIDIA]

NVIDIA will add an LTE modem for its Tegra 4i chip, but that's a cut-down version of the Tegra 4 bases on Cortex-A9 cores, so will be unlikely to compete with the Snapdragon 600/800 in the high-end market. 

Tegra 4i
Tegra 4i uses a single die for both the cores and chipset modem. [Image Source: NVIDIA]

NVIDIA will have to wait for Tegra 5 (Logan) to have a high-performance SoC with on-die LTE.  Tegra 5 is expected to start shipping in Q2 2014, and will also add new Kepler architecture GPU cores.  The latter is a very important point to emphasize, as Tegra 4 is (somewhat incredibly) still dragging along the GeForce ULP architecture with NV40 vertex processing units, which has basically the same vertex processing units as 2004's GeForce 6800.

But even if NVIDIA improves its chips, it shares a common challenge with Qualcomm in that the tablet/smartphone market's two largest superpowers, Samsung and Apple, primarily use in-house chip designs (Samsung has used some Qualcomm ARM Snapdragon and Intel x86 Atom processors in its mobile devices)

IV. Stock is Flat as Outlook Offsets Q3 Performance

If NVIDIA's share repurchasing, dividend increase, and slightly better than expected Q3 2014 earnings cheered investors, the chipmaker's Q4 2014 outlook concerned them.

NVIDIA predicted Q4 revenue would stay flat, with sales between $1.03B to $1.07B USD.  Bloomberg analyst survey indicated an expectation of $1.08B USD, while the Thomson Reuters survey saw a similar $1.0853B USD outlook.  Operating expenses are expected to rise by about $5M USD for the quarter.

The chipmaker is still seeing strong profitability from its discrete GPU card sales.  While customers are often switching today from notebooks to tablets for casual use, gaming desktops -- the niche that NVIDIA primarily targets -- has seen less cannibalization from mobile devices.

Some think that NVIDIA should refocus on just the PC GPU market. [Image Source: NVIDIA]

Comments new CFO Colette Kress in the earnings call, "We still believe strong growth in terms of the overall gaming side of that will continue as we go into Q4. But overall, the PC market, and our low-end PC (graphics chips) are probably expected to continue what we have been seeing in Q3."

Some believe that NVIDIA's Tegra mobile business -- while a revenue driver -- is sucking development money and margins out of NVIDIA's core PC GPU business.  Wang and Needham's Rajvindra Gill suggests that NVIDIA should spin off or sell Tegra, commenting, "What they should do is try to spin out Tegra or sell the business related to phones and tablets.  Become a much higher margin company and continue to return capital to shareholders."

That criticism seems a bit premature as the best Tegra revenue and profitability may not arrive until NVIDIA gets mobile chips with LTE modems and better GPUs on-die -- something which should occur next year.  But expect this to be a noisy point of criticism for the next couple quarters, as NVIDIA continues to post weak profits and margins.

Sources: NVIDIA, Bloomberg, Reuters

"It's okay. The scenarios aren't that clear. But it's good looking. [Steve Jobs] does good design, and [the iPad] is absolutely a good example of that." -- Bill Gates on the Apple iPad

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