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NVIDIA Corp. (NVDA - Analyst Report) reported fourth-quarter fiscal 2014 adjusted earnings (including stock-based compensation but excluding interest expense related to amortization, other acquisition-related costs or benefits, a restructuring charge and gain on sale of investment) on a proportionate tax basis of 28 cents per share, which came ahead of  the Zacks Consensus Estimate of 18 cents. On a year-over-year basis, adjusted earnings declined 5.7%. The year-over-year decline in earnings was primarily attributed to higher operating expenses.

Revenues

Revenues increased 3.4% year over year to $1.14 billion and surpassed the Zacks Consensus Estimate $1.05 billion. Moreover, revenues for the quarter were higher than the management guided range of $1.05 billion (+/-2.0%) attributable to high-end PC gaming. The year-over-year increase was primarily due to better-than expected growth in GeForce, GTX, desktop and notebook GPU sales.

NVIDIA’s GPU revenues for the quarter came in at $947.0 million, up 14.0% on a year over year basis.  Tegra processor revenues grew 18.0% sequentially to $131.0 million aided by an increase in the sale of Tegra mobile devices..

It is worth noting that, NVIDIA launched the 192-core Tegra K1 mobile processor and Tesla K40. Tegra K1 is powered by Kepler technology, which provides an enhanced gaming experience for users. With the launch of this CUDA-core Tegra K1, NVIDIA can maximize user experience by offering high performance computing (HPC) capabilities, which in turn will increase its customer base and help in garnering additional revenues.

During the quarter, NVIDIA announced that Audi vehicles will now feature the new Infotainment System, Smart Display and Digital Cockpit driven by its Tegra Visual Computing Module (VCM).

NVIDIA also entered into a strategic alliance with International Business Machines (IBM - Analyst Report) to produce GPU-accelerated editions of IBM's enterprise software running on its Power technology. The partnership is a positive for NVIDIA as it strengthens the company’s position versus Intel Corp.  (INTC - Analyst Report) through a strong ally.

Margins

NVIDIA’s adjusted gross margin (including stock-based compensation but excluding other one-time items) expanded 67 basis points (bps) from the year-ago quarter to 53.6%, primarily due to favorable product mix and a stable pricing environment.

Adjusted operating expenses as a percentage of revenues increased to 38.6% from 35.5% reported in the year-ago quarter. The increase was due to higher research and development and sales, general and administrative expenses.

This resulted in a dismal operating performance by the company. NVIDIA’s operating margin was down from 17.4% in the year-ago quarter to 15.0%. The company’s adjusted net income (including stock-based compensation but excluding interest expense related to amortization, other acquisition-related costs or benefits, a restructuring charge and gain on sale of investment) on a proportionate tax basis came in at $159.3 million or 28 cents compared with $181.9 million or 29 cents per share in the year-ago quarter.

Balance Sheet & Cash Flow

NVIDIA exited the quarter with cash, cash equivalents and marketable securities of $4.67 billion, up from $3.03 billion in the previous quarter. Free cash flow in the quarter came in at $334.4 million while cash flow from operations was $400.7 million.

During the quarter, the company repurchased $37.0 million worth of shares and paid quarterly dividends totaling $48.0 million.

Guidance

For the first quarter of 2015, NVIDIA reiterated its revenue guidance of approximately $1.05 billion (+/-2.0%). The Zacks Consensus Estimate is pegged at $1.01 billion. Non-GAAP gross margin is expected to be 54.5% while non-GAAP operating expenses are expected to be approximately $413.0 million. Non-GAAP tax rate is expected to be 20.0% (+/-1.0%)

Recommendation

The strength in gaming and high-end notebook GPUs helped NVIDIA to report better-than-expected fourth-quarter results and provide an encouraging guidance. Though the bottom line decreased on a year over year basis, primarily due to higher-than-expected operating costs, the top line improved. The company gained a significant traction in the Tegra segment due to its Tegra 4 and Tegra K1 shipments, which boosted sales at both Tegra and GPU segments.

We believe NVIDIA’s innovative product pipeline that consists of the recently introduced SHIELD and mobile processor Logan Tegra K1 will boost top-line growth, going forward.

However, the continuous decline in PC sales is a cause of concern for the company’s GPU segment. Competition from the likes of Intel and QUALCOMM Inc. (QCOM - Analyst Report) and higher operating expenses are also expected to hurt profitability in the near term.

NVIDIA has a Zacks Rank #3 (Hold).
 

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