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NVIDIA Corp. (NVDA - Free Report) reported third-quarter fiscal 2014 earnings of 20 cents per share which came in line with the Zacks Consensus Estimate.

However, including stock-based compensation but excluding amortization of acquisition-related intangible assets, other acquisition-related costs or benefits, a restructuring charge and related tax impacts, adjusted earnings came in at 26 cents. On a year-over-year basis, adjusted earnings declined 33%.

The year-over-year decline in earnings was primarily attributed to the revenue declines and higher operating expenses that fully offset the gross margin expansion.


Although revenues slumped 12.5% year over year to $1.05 billion, they came in line with the Zacks Consensus Estimate. The company’s year-over-year decline in revenues was primarily due to a 1.9% decline in GPU revenue and a 54.4% slump in Tegra processor revenues.

Despite these declines, NVIDIA’s GPU business increased 2.1% sequentially with Tegra revenues increasing an astounding 111.4%. Desktop GeForce GPU revenues, revenues from GeForce gaming GPUs and high-end notebook GPUs increased on a sequential basis.

The Tegra segment was aided by the shipment of Tegra 4 processors to 15 mobile device manufacturers such as Hewlett Packard (HPQ - Free Report) , Microsoft (MSFT - Free Report) , Asus, Toshiba and Acer to name a few. The company expects the Tegra processors to generate incremental revenues, going forward, due to their acceptability and demand.

During the quarter, NVIDIA launched GeForce GTX 780 Ti, its new gaming GPU, and Quadro K6000 graphics card.


NVIDIA’s adjusted gross margin (including SBC but excluding other one-time items mentioned in the beginning) expanded 258 basis points (bps) from the year-ago quarter to 55.5%, primarily due to favorable product mix.

Adjusted operating expenses as a percentage of revenues increased to 41.4% from 31.2% reported in the year-ago quarter. The increase was due to higher compensation expense.

This resulted in a dismal operating performance by the company. NVIDIA’s operating margins were down from 21.7% in the year-ago quarter to 14%. The company’s adjusted net income (including stock-based compensation but excluding amortization of acquisition-related intangible assets, other acquisition-related costs or benefits, a restructuring charge and related tax impacts) came in at $154.8 million or 26 cents compared with $246.7 million or 39 cents per share in the year-ago quarter.

Balance Sheet & Cash Flow

NVIDIA exited the quarter with cash, cash equivalents and marketable securities of $3.03 billion, up from $2.94 billion in the previous quarter. Free cash flow in the quarter came in at $124.2 million while cash flow from operations was $162.3 million.

The company also increased its quarterly dividend payment by 13% and will pay them on Dec 13, 2013. Moreover, management authorized a stock repurchase plan worth $1.286 billion ending in Jan 2016. The company also intends to increase shareholders’ value through stock repurchases and quarterly dividend payments and expects to distribute $1 billion in 2015. 


For the fourth quarter of 2014, NVIDIA expects revenues to be approximately $1.05 billion (+/-2.0%). Non-GAAP gross margin is expected to be 54.5% while non-GAAP operating expenses are expected to be approximately $410 million.


Despite the strength in gaming and high-end notebook GPUs, NVIDIA reported dismal third-quarter results primarily due to lower sales and higher-than-expected operating costs. Although the company gained a significant traction in the Tegra segment due to its Tegra 4 shipments, the year-over-year sales declines in both Tegra and GPU segments are concerns as management decided to delay the Tegra 4 launch in order to bring forward the Tegra 4i (with the integrated modem solution).

Moreover, the continuous decline in PC sales does not help the GPU segment either. Competition from the likes of Intel Corp. (INTC - Free Report) and QUALCOMM and higher operating expenses are also expected to hurt profitability in the near term.

NVIDIA has a Zacks Rank #4 (Sell).

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