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NVIDIA Corp. (NVDA - Analyst Report) reported second-quarter fiscal 2015 adjusted earnings (including stock-based compensation but excluding interest expense related to amortization, other acquisition-related costs or benefits and gain on sale of investment) on a proportionate tax basis of 25 cents per share, which came ahead of the Zacks Consensus Estimate of 19 cents.

 

 

On a year-over-year basis, adjusted earnings increased 39.9%. The year-over-year increase in earnings was primarily attributed to higher revenue base and an encouraging operating performance.

Revenues

Though revenues increased 12.9% year over year to $1.10 billion, it lagged the Zacks Consensus Estimate $1.11 billion. However, revenues for the quarter were in line with the management guided range attributable to high-end PC gaming. The year-over-year increase was primarily due to better-than-expected growth in Tegra Processor, Enterprise GRID, GeForce GPU, and Tesla sales.

Revenues from GeForce GTX GPUs for desktop and notebooks increased 10% year over year, driven by robust demand in high-end GPUs and the recently launched GeForce GTX 750 and GTX 750 Ti Series.

Tegra processor revenues grew 200% from the year-ago quarter aided by an increase in the sale of auto infotainment systems and mobile devices. Moreover, on a year-over- year basis, revenues from the Tegra processor’s automobile business increased 74%.

Recently, Google (GOOGL - Analyst Report) selected NVIDIA’s Tegra K1 processor to power its Project Tango tablet development kit, which will help developers to build applications featuring 3-D mapping and sensing capabilities.

Margins

NVIDIA’s adjusted gross margin (including stock-based compensation but excluding other one-time items) expanded 7 basis points (bps) from the year-ago quarter to 56.1%, primarily due to growth in GPUs, datacenter and the cloud platform.

Adjusted operating expenses increased 3.6% from the year-ago-quarter to $446.6 million, primarily due to additions in employees and higher employee compensation costs. As a percentage of revenues, operating expenses decreased 361 bps from the year-ago quarter to 40.5%. The decrease was due to better management of investments in research and development and capital expenditures.

This resulted in an encouraging operating performance by the company. NVIDIA’s operating margin was up from 11.9% in the year-ago quarter to 15.6%, reflecting growth in its GPU business and stringent cost controls.

The company’s adjusted net income (including stock-based compensation but excluding interest expense related to amortization, other acquisition-related costs or benefits and gain on sale of investment) on a proportionate tax basis came in at $142.8 million or 25 cents, up 39.9% from the year-ago quarter.

Balance Sheet & Cash Flow

NVIDIA exited the quarter with cash, cash equivalents and marketable securities of $4.39 billion, up from $4.35 billion in the previous quarter. Free cash flow in the quarter came in at $74.0 million while cash flow from operations was $96.0 million. NVIDIA’s long-term debt stood at $1.37 billion. During the quarter, the company paid quarterly dividends totaling $47.0 million.

Guidance

For the third quarter of fiscal 2015, NVIDIA expects revenues of approximately $1.2 billion (+/-2.0%), up sequentially, primarily due growth in the gaming business for desktop and mobile platforms, the datacenter and automobiles businesses. The Zacks Consensus Estimate is pegged at $1.16 billion.

Non-GAAP gross margin is expected to be approximately 55.5% while non-GAAP operating expenses are expected to be approximately $416.0 million. Non-GAAP tax rate is expected to be 19.0% (+/-1.0%)

Recommendation

NVIDIA reported mixed second quarter fiscal 2015 results, with the bottom line surpassing the Zacks Consensus Estimate while the top line missed the same. Both the top and bottom lines increased on a year-over-year basis, primarily due to lower operating expenses as a percentage of revenues and higher growth in Tegra Processor, Enterprise GRID, GeForce GPU, and Tesla sales.

The company also gained significant traction in the Tegra segment due to its Tegra 4 and Tegra K1 shipments.

We believe that NVIDIA’s innovative product pipeline that consists of the recently introduced SHIELD 2 and mobile processor, Tegra K1 will boost top-line growth, going forward. Moreover, the company’s recent strategic alliances bode well over the long term and it will gain significantly from these.

Nonetheless, the continuous decline in PC sales is a cause of concern for NVIDIA’s GPU segment. Competition from the likes of Intel (INTC - Analyst Report) and QUALCOMM Inc. (QCOM - Analyst Report) also remains a near-term headwind.  

NVIDIA has a Zacks Rank #2 (Buy).

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