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NVIDIA (NVDA) Q3 Earnings & Revenues Top Estimates, Shares Up

Zacks

Continuing its earnings streak for the 10th straight quarter, NVIDIA Corporation NVDA reported splendid third-quarter fiscal 2018 results, wherein it not only marked a strong year-over-year improvement, but also way came ahead of the Zacks Consensus Estimate. The company also beat its estimates in every aspect.

This California-based graphic chip behemoth posted earnings of $1.33 per share on non-GAAP basis, up nearly 60.2% year over year. Non-GAAP earnings also came ahead of the Zacks Consensus Estimates of 94 cents per share. The year-over year robust bottom-line performance mainly stemmed from significant revenue growth along with gross margin and operating margin expansion

Aided by these factors, shares of NVIDIA advanced nearly 3.2% in yesterday’s after-hours trade. Moreover, the stock has been clocking solid returns for the last one year and has soared 134.5%, outperforming the industry's gain of 63.3%.


Revenues

Revenues not only surged 31.5% year over year to $2.636 billion, but also comfortably surpassed the Zacks Consensus Estimate of $2.364 billion, as well as management’s projection of $2.35 billion (+/-2%). The year-over-year jump is primarily attributable to growth across all the platforms, that is, the GPUs gaming platform, Professional Visualization, datacenter and Tegra automotive platforms. Further, NVIDIA continued to gain strength in the artificial intelligence (AI) space, which positively impacted the quarter’s revenues.

Revenues from the GPU business jumped 31% year over year to $2.22 billion, driven by strength in GeForce GPUs Gaming revenues and datacenter. Increasing demand for cryptocurrencies owing from increased adoption of Bitcoin and newer technologies like Ethereum also helped in lifting demand for GPU, consequently contributing to the company’s GPU sales growth. Moreover, Nintendo Switch which was launched in March this year, contributed to overall growth.

Revenues from Gaming GPU were up 25% on a year-over-year basis to $1.56 billion. Strong growth was primarily due to demand across all regions and form factors.

The company’s sustained focus on introducing fast and innovative products, as well as entering into agreements with leading PC game makers, has been driving its Gaming GPU business. During the quarter, NVIDIA announced the new high end graphic card, GeForce GTX 1070 1070 Ti. Available from Nov 2, the card was released to take down the performance of AMD’s $400 Radeon Vega 56. We believe this will take the gaming experience to a new level. Hence, the launch of this product will enable NVIDIA to increase its customer base and help in garnering additional revenues.

NVIDIA’s latest collaboration with Square Enix to unveil Final Fantasy XV Windows Edition for PC in Gamescom 2017 is aimed at bringing an enhanced gaming experience to PCs. This deal is a positive for NVIDIA, as it will help the company gain market share among gaming content developers. Moreover, during the quarter, it joined forces with Activision ATVI to bring Destiny 2 online-game to the PC for the first time.

Additionally, revenues from datacenter came in at $501 million, registering a year-over-year increase of over 2 times, mainly fueled by strong adoption of artificial intelligence (AI), deep learning, high-performance computing (HPC), and strong traction of the new Volta architecture.

The company’s Volta-based V100 accelerator was the most notable launch. The Volta V100 GPU provides 10 times more deep learning power to the company’s year-old predecessor, Pascal generation GPUs. During the quarter, Alibaba, Baidu (BIDU) and Tencent announced that they are adopting NVIDIA Volta GPUs in there datacenters and cloud server, joining Amazon, Facebook, Alphabet’s GOOGL Google and Microsoft MSFT.

Demand for NVIDIA’s HGX AI supercomputer also remained high as more organizations are keen on building AI-enabled applications. The company stated that Huawei, Inspur and Lenovo will be using its Volta HGX architecture to build AI systems for datacenters. During the quarter, NVIDIA launched TensorRT programmable inference acceleration platform, thereby improving the performance and reducing the cost of AI inferencing in order. Notably more than 1,200 companies are already using this inference platform, including Amazon, Microsoft, Facebook, Google, Alibaba, Baidu, Hi Vision and Tencent.

Tegra processor revenues came in at $419 million, which increased 74% on a year-over-year basis. The increase was primarily due to better-than-expected growth in Tegra development services.

Automotive revenues for the quarter came in at $144 million, reflecting an increase of 13% year over year. The company continued with entering into new partnerships based on its DRIVE PX AI platform.

The company also unveiled a new AI supercomputer chip designed for self-driving cars called Pegasus at its GPU Technology Conference (GTC) in Europe, during the quarter. This new technology, Pegasus helps to drive fully autonomous robotaxis which can handle the concept of Level 5 self-driving vehicles and uses NVIDIA’s DRIVE PX 2 platform, trained on deep neural networks. Per the company, the new system is capable of delivering 320 trillion operations per second (TOPS) of performance, which is more than 10 times as compared with its predecessor.

Moving to Professional Visualization, revenues from Quadro increased 15% year over year and came in at $239 million. The increase was mainly due to elevated demand in real-time rendering tools and mobile workstations.

Margins

NVIDIA’s non-GAAP gross margin expanded 50 basis points (bps) from the year-ago quarter to 59.7%, which is exceeded the management’s guidance range of 58.8% (+/-50 bps).

In dollar terms, non-GAAP gross profit came in at $1.575 billion, reflecting an increase of 32.8% from the year-ago quarter, primarily on the back of strength in GeForce GPU gaming platform and a higher revenue base

Non-GAAP operating expenses flared up nearly 19.2% from the year-ago quarter to $570 million due to higher investment in growth areas, including Gaming, AI and self-driving cars. Non-GAAP operating expenses were in line with the company’s projection of approximately $570 million. As a percentage of revenues, operating expenses, however, decreased to 21.6% from 23.9% witnessed in the year-ago quarter.

NVIDIA’s non-GAAP operating margin was up from 35.3% to 38.1% during the reported quarter, reflecting growth in its GeForce GTX GPU business and lower operating expenses as a percentage of revenues. In dollar terms, non-GAAP operating income jumped from $708 million to $1.005 billion.

Non-GAAP net income during the quarter came in at $833 million as compared with $570 million reported in the year-ago quarter.

Balance Sheet & Cash Flow

NVIDIA exited the quarter with cash, cash equivalents and marketable securities of $6.320 billion compared with $5.877 billion in the previous quarter. NVIDIA’s total debt was $2.008 billion. Free cash flow during the quarter came in at $1.088 billion, while cash flow from operations was $1.157 billion.

During the first nine months of the fiscal, the company paid a cash dividend of $250 million and repurchased shares worth $909 million. NVIDIA also announced an increase of 7% to 15 cents per share in quarterly dividend, payable on Dec 15, 2017.

Guidance

For fourth-quarter fiscal 2018, NVIDIA expects revenues of approximately $2.65 billion (+/-2%), which is much higher than the Zacks Consensus Estimate of $2.44 billion.

Non-GAAP gross margin is projected to be 60% (+/-50 bps). Non-GAAP operating expenses are expected to be approximately $600 million. Non-GAAP tax rate is likely to be 17.5% (+/-1%).

For fiscal 2018, the company continues to expect returning $1.25 billion to its shareholders in the form of cash dividends and share repurchases.

Our Take

NVIDIA posted impressive fiscal third-quarter results and provided encouraging fiscal fourth-quarter revenue guidance. Also, the company registered year-over-year growth on both counts, primarily due to growth across all its four platforms. Also, better-than-expected demand for its gaming chips used in PCs helped the company post encouraging results.

Moreover, we believe that NVIDIA’s innovative product pipeline and strength in gaming and high-end notebook GPUs keep it well positioned. We also believe that the higher adoption of NVIDIA’s Tegra processors could act as a catalyst, moving ahead.

Meanwhile, the secular decline in the PC market has affected many chip makers. NVIDIA’s dependence on the PC market continues, and therefore is being marred by adverse conditions. The preliminary data released by Gartner depicts that PC shipments in the third quarter were down 3.6% year over year to 67 million units. This also marks the 12th straight quarter of year-over-year fall — the longest duration of decline in the history of PC industry.

Gartner stated that shortage of key components, including DRAM, SSD and LCD panels, has been flaring up PC prices, in turn thwarting the overall demand. Per Gartner, DRAM shortages worsened during the third quarter when compared with the first half of 2017.

Additionally, competition from the likes of Intel and QUALCOMM Inc. remains a near-term headwind.

NVIDIA currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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