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NVIDIA (NVDA) Q4 Earnings Top, Revenues Miss Mark, Down Y/Y

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NVIDIA (NVDA - Free Report) delivered fourth-quarter fiscal 2019 non-GAAP earnings per share of 80 cents, which topped the Zacks Consensus Estimate of 75 cents but tumbled 53% from the year-ago period as well as 57% sequentially.

Revenues declined 24% year over year and 31% sequentially to $2.21 billion and also lagged the Zacks Consensus Estimate of $2.37 billion. Excess channel inventory post-crypto coupled with recent deteriorating end-market conditions impacted results. While growth across Datacenter, Professional Visualization and Automotive segments was positive, a sharp decline in the Gaming segment was a spoiler.

Although NVIDIA expects revenues to decrease in first-quarter fiscal 2020, its anticipation of a rebound in the second half of the year led the shares to rally more than 5% in after-hours trading.

Quarterly Details

Revenues at the GPU business fell 20% year over year to $1.98 billion, reflecting deterioration in gaming GPUs. Tegra processor revenues worth $225 million slumped 50% on a year-over-year basis due to lower shipments of SOC modules for gaming platforms.

Gaming revenues were down 45% on a year-over-year basis and 46% sequentially to $954 million. Suspension of mid-range Pascal GPU shipments following tepid demand from crypto miners in order to normalize channel inventory levels was an overhang. Waning macro-economic conditions, particularly in China, weakened consumer demand for GPUs. Further, lower-than-expected sales of high-end GPUs based on the company’s new Turing architecture including the GeForce RTX 2080 and 2070, impacted results.

Meanwhile, revenues from Datacenter increased 12% year over year but declined 14% sequentially to $679 million. Growth in sales of Volta architecture products including NVIDIA Tesla V100 and DGX systems drove year-over-year improvement.

Slowdown in fourth-quarter sales was broad-based across verticals, markets and geographies. Many of its data center deals did not close in January as economic uncertainties made customers increasingly cautious. Hyperscale and cloud purchases decreased both sequentially and on a year-over-year basis. A temporary pause in cloud spending weighed on results. However, with growth in AI-related investments by cloud giants, demand is likely to pick up.

Automotive revenues in the reported quarter totaled $163 million, reflecting a 23% rise year over year and a decline of 5% sequentially. The year-over-year improvement was driven by autonomous vehicle development deals and the growing adoption of AI-based smart cockpit infotainment solutions. Decline in legacy infotainment was a dampener.

Moving to Professional Visualization, revenues improved 15% year over year but dipped 4% sequentially to $293 million. Strength across both desktop and mobile workstation products is a key driver. Management mentions that applications in fields like data science, AI and VR and the need for thin and light mobile workstations are boosting growth for this segment. During the quarter under review, the company had key wins from Boeing, Google, LinkedIn and Toyota for applications including AI and robotics.

OEM and IP revenues plunged 36% year over year and 22% sequentially to $116 million due to absence of crypto-currency mining GPU sales.

Margins

NVIDIA’s non-GAAP gross margin contracted 610 basis points (bps) from the year-ago quarter to 56%. Margins were affected by around $128 million in charges for excess DRAM and other components due to the current market conditions and lower-than-anticipated revenues.

Non-GAAP operating expenses escalated around 24% from the year-earlier quarter to $755 million due to higher R&D expenses. As percentage of revenues, operating expenses were up to 34.2% from 20.9% in the prior-year quarter.

In dollar terms, non-GAAP operating income tanked 60% year over year to $479 million. However, NVIDIA’s non-GAAP operating margin was down to 21.7% in the quarter under review from 41.3% in the year-ago quarter.

NVIDIA Corporation Price, Consensus and EPS Surprise

NVIDIA Corporation Price, Consensus and EPS Surprise | NVIDIA Corporation Quote

Balance Sheet & Cash Flow

NVIDIA exited the fiscal fourth quarter with cash, cash equivalents and marketable securities of $7.42 billion compared with $7.59 billion in the previous reported quarter. NVIDIA’s long-term debt is flat at $1.99 billion.

Cash flow from operating activities was $898 million in the fiscal fourth quarter, up from $487 million in the prior reported quarter.

Free cash flow during the fiscal fourth quarter came in at $695 million, up from $337 million in the fiscal third quarter.

The company repurchased shares worth $700 million during the fourth quarter of fiscal 2019.

Full-Year Results

Revenues in fiscal 2019 grew 21% to $11.72 billion, reflecting broad-based growth in each of the platforms, namely Gaming, Professional Visualization, Datacenter and Automotive.

GPU business revenues were $10.17 billion, up 25% while Tegra business revenues were $1.54 billion, up slightly from fiscal 2018.

In fiscal 2019, the company returned approximately $1.95 billion in the form of share repurchases ($1.58 billion) and dividend payouts ($371 million) to shareholders.

Guidance

For the first quarter of fiscal 2020, NVIDIA anticipates revenues of $2.20 billion (+/-2%). Non-GAAP gross margin is projected to be 59% (+/-50 bps). Non-GAAP operating expenses are forecast to be $755 million. GAAP and non-GAAP tax rates are envisioned at 10% (+/-1%) each.

For fiscal 2020, revenues are projected to be flat to down, slightly with growth in four end markets, compensating for the absence of crypto revenues and the excess selling for most year.

The company estimates operating expenses in high single digits this year as it continues to invest in graphics, AI and self-driving cars.

The company predicts gaming business to descend slightly. Growth in Turing and notebook gaming GPUs is an upside. The company envisions more and more games to feature ray tracing and DLSS technology. Management is optimistic about the launch of GeForce RTX 2060 at mid-range price point of $360, which garnered positive reviews and is off to a great start. The availability of 40 plus new Turing based gaming laptops also makes all hopeful.

Management mentioned four new growth catalysts for its Datacenter business, such as inference, data science and machine learning enabled by RAPIDS, rendering driven by Turing and the sale of pre-configured systems that contain the company’s GPUs to enterprises. Notably, deep learning inference workloads currently account for less than 10% of data-center revenues, representing a significant expansion of addressable market opportunity going forward.

Further, the availability of Quadro RTX is likely to boost Pro-visualization business. Quadro RTX will help designers and creative artists improve productivity by enabling them to work interactively with high resolution media and photorealistic 3D rendering.

The launch of level two plus self-driving car computer DRIVE AutoPilot is a major breakthrough for the company. The company expects this year to be important for robo-taxi pilots and the initial level two design wins. Volvo, its first design win, is likely to begin production in early 2020.

Zacks Rank and Stocks to Consider

NVIDIA currently carries a Zacks Rank #5 (Strong Sell).

A few better-ranked stocks in the broader technology sector are CommVault Systems, Inc. (CVLT - Free Report) , MeetMe, Inc. (MEET - Free Report) and Verint Systems Inc. (VRNT - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for CommVault, MeetME and Verint is projected at 15.8%, 20% and 10%, respectively.

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