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NVIDIA Corporation (NVDA - Analyst Report) is scheduled to announce its second quarter 2013 results on August 9, 2012. In the run up to the earnings release we noticed some movement in analysts’ estimates.

First Quarter Overview

The company reported total revenue of $924.9 million in the quarter, down 3.9% from $962.0 million in the year-ago quarter.

The Graphic Processing Unit saw revenue declining 6.7% sequentially as a result of 28 nm supply shortage, which also impacted the high-end desktop business. The Professional business dropped 4.2% sequentially, while Consumer business jumped 20.8% backed by the company’s Tegra business.

Gross margin on a GAAP basis was 50.1%, versus 51.4% in the previous quarter. Gross margin was at the top end of management’s guidance. Although the gross margin declined slightly, the company reported margin expansion in the Kepler GPUs for desktops and notebooks. On a non-GAAP basis, gross margin was 50.4%, which declined from 52.5% reported in the previous quarter.

Second Quarter Outlook

For the second quarter of fiscal 2013, revenue is expected to be in the range of $990.0 million to $1.05 billion, whereas gross margin is projected to be 51.2% (plus or minus 1 percentage point). Operating expense is expected to be $418 million.

The company also expects depreciation and amortization in the range of $55.0 million to $57.0 million and capital expenditures in the range of $35.0 million to $45.0 million. Diluted shares are expected to be roughly 628 million.

Agreement of Analysts

A look at estimate revisions in the last 30 days shows negative sentiments. Out of the 29 analysts providing estimates for the second quarter, 5 analysts revised their estimates downward over the last 30 days, while 3 moved in the opposite direction.

For fiscal 2013, 8 out of 29 analysts lowered their estimates, while only one moved in the opposite direction. For fiscal 2014, only 1 out of 29 analysts raised the estimate, while 8 analysts lowered their estimates downward over the last 30 days.

Some analysts believe that NVIDIA’s Tegra chips for smartphones and tablets are well positioned versus Texas Instrument (TI - Snapshot Report) and others. However, a negative with respect to these fast-growing markets is that the largest vendors, Samsung and Apple (AAPL - Analyst Report) make their own processors.

Analysts are also of the opinion that Tegra can ship units worth $500 million in 2012 as smartphone, non-Apple tablets and other volumes increase. This apart, the hype surrounding a Tegra-related platform has come down to a considerable extent.

Moreover, analysts are also of the opinion that NVIDIA faces long-term GPU attach rate risks as tech behemoths like Intel (INTC - Analyst Report) and Advanced Micro Devices (AMD - Analyst Report) pursue integrated architectures. Again, other analysts are also of the opinion that NVIDIA could be a major PC processor supplier if WoA is successful. Further, with growth in handheld devices, enterprise opportunities are expected to increase rapidly.

Magnitude of Estimate Revisions

The Zacks Consensus Estimates for the July and October quarters have not changed in the last 30 days. However, the Zacks Consensus Estimate for both fiscal years 2013 and 2014 dropped a couple of cents.

The Zacks Consensus Estimate for the second quarter increased by a penny to 15 cents in the past 90 days. For Fiscal 2013, it moved up by 3 cents. The Zacks Consensus Estimate for fiscal 2014 is also up 2 cents in the past 90 days to 93 cents.

Recommendation

The company delivered weak first quarter results. The expected decline in PC demand may affect the demand for NVIDIA’s graphics cards. However, growth trends in the smartphone and tablet markets are encouraging, since NVIDIA’s Tegra chips could see some resultant growth.

Moreover, the acquisition of data chip manufacturer Icera will add value to its product portfolio. The newly introduced NVIDIA PhysX technology will likely attract more gaming customers. However, NVIDIA’s performance may be tempered slightly by the weak gaming market, economic slowdown in Europe and increased competition.

Currently, NVIDIA holds a Zacks #3 Rank, implying a short-term Hold rating.

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