NVIDIA (NVDA) Q2 Earnings Top Estimates, Q3 Outlook Strong

Continuing its earnings streak for the ninth straight quarter, NVIDIA Corporation (NASDAQ:NVDA) reported splendid second-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 at every aspect.

This California-based graphic chip behemoth posted adjusted earnings (including stock-based compensation but excluding other one-time items) on a proportionate tax basis of 92 cents per share, handily beating the Zacks Consensus Estimate of 61 cents. Also, adjusted earnings increased from 44 cents reported in the year-ago quarter.

On GAAP basis, the company’s earnings jumped over two-fold, year over year, to 92 cents per share from 41 cents reported in the year-ago quarter. Moreover, NVIDIA reported earnings of $1.01 per share on non-GAAP basis, up nearly 91% from the year-ago quarter figure of 53 cents. The year-over year robust bottom-line performance was mainly stemmed by significant revenue growth.

Despite this, shares of NVIDIA declined nearly 7% in yesterday’s after-hours trade. In our opinion, investors’ sentiments were shaken owing to the slowdown in the company’s Automotive segment’s revenue growth and loss of some business due to lapse of licensing agreement with Intel Corporation (NASDAQ:INTC) .

Nonetheless, the stock has been clocking solid returns for the last one year and has gained 161.3%, outperforming the industry's gain of 34.8%.

Revenues

Revenues not only surged 56.2% year over year to $2.230 billion, but also comfortably surpassed the Zacks Consensus Estimate of $1.948 billion, as well as management’s projection of $1.95 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. Also, NVIDIA continued to gain strength in the artificial intelligence (AI) space, which positively impacted the quarter’s revenues.

Revenues from the GPU business jumped 59% year over year to $1.9 billion, driven by strength in GeForce GPUs Gaming revenues and datacenter.

Revenues from Gaming GPU were up 52% on a year-over-year basis to $1.19 billion. Per the company, the strong growth “reflects the vibrant gaming ecosystem, underpinned by continued excitement over our recent launch GPUs and other technologies, great games, and growing interest in e-sports.”

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 last quarter, it introduced Max-Q design standard, which will help in making thinner, quieter and faster gaming laptops. Moreover, during the fiscal second quarter, it joined forces with Activision (NASDAQ:ATVI) and Bungie to bring Destiny 2 online-game to the PC for the first time.

Furthermore, the company’s Volta-based V100 accelerator was the most notable launch in the quarter. The Volta V100 GPU provides 10 times more deep learning power to the company’s year-old predecessor, Pascal generation GPUs. During the fiscal second quarter, NVIDIA shipped a number of V100 GPU production units and per the company, it is currently supporting the industry's two most common AI frameworks – Alphabet’s (NASDAQ:GOOGL) Google TensorFlow and Facebook's (NASDAQ:FB) Caffe.

Increasing demand for cryptocurrencies owing from increased adoption of Bitcoin and newer technologies like Ethereum also helped in lifting demand for GPU, thereby contributing to the company’s GPU sales growth.

In addition, revenues from datacenter came in at $416 million, registering a year-over-year increase of over 2.5 times, mainly fueled by strong adoption of artificial intelligence (AI), deep learning, high-performance computing (HPC), and GRID technologies.

Notably, in the reported quarter, the company entered into a wide range of partnerships based on its AI technology, including Baidu (NASDAQ:BIDU) , Foxconn, Inventec, Quanta, and Wistron. Demand for NVIDIA’s DGX AI supercomputer also remained high as more organizations are keen on building AI-enabled applications. The company has shipped the system to over 300 customers, so far, and more than 1,000 are in the pipeline. Notably, per NVIDIA, Facebook is using its 128 DGX system.

The company continued to witness solid momentum in its GRID graphics virtualization business. During the fiscal second quarter, the company won several contracts, but the deal with Amazon’s (NASDAQ:AMZN) Amazon Web Services was the most remarkable. Per the company, AWS’s G3 instances now run on NVIDIA Tesla (NASDAQ:TSLA) GPUs.

Tegra processor revenues came in at $333 million, which doubled on a year-over-year basis. The increase was primarily due to better-than-expected growth in Tegra development services. Nevertheless, a sluggish automotive business growth somewhat remains a drag on this segment’s growth.

Automotive revenues for the quarter came in at $142 million, reflecting an increase of 19% year over year. However, the growth rate was much lower than previous quarter’s growth rate of around 25%. Nonetheless, the company continued with entering into new partnerships based on its DRIVE PX AI platform.

Moving to Professional Visualization, revenues from Quadro increased 10% year over year and came in at $235 million. The increase was mainly due to elevated demand in real-time rendering tools and mobile workstations.

Margins

NVIDIA’s non-GAAP gross margin (including stock-based compensation but excluding other one-time items) expanded 50 basis points (bps) from the year-ago quarter to 58.6%, which is in line with management’s guidance range of 58.6% (+/-50 bps).

In dollar terms, non-GAAP gross profit came in at $1.306 billion, reflecting an increase of 57.3% from the year-ago quarter, primarily on the back of strength in GeForce GPU gaming platform and a higher revenue base However, this was partially offset by loss of business from lapse of Intel’s licensing agreement.

Non-GAAP operating expenses flared up nearly 19% from the year-ago quarter to $533 million due to increased hiring to support growth initiatives. Non-GAAP operating expenses were somewhat in line with the company’s projection of approximately $530 million. As a percentage of revenues, operating expenses, however, decreased to 23.9% from 36.2% witnessed in the year-ago quarter.

NVIDIA’s non-GAAP operating margin was up from 26.8% to 34.7% 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 $382 million to $773 million.

Balance Sheet & Cash Flow

NVIDIA exited the quarter with cash, cash equivalents and marketable securities of $5.877 billion compared with $6.206 billion in the previous quarter. NVIDIA’s total debt was $1.984 billion. Free cash flow in the first half of fiscal 2018 came in at $879 million, while cash flow from operations was $987 million.

During the first two quarters of the fiscal, the company paid a cash dividend of $166 million and repurchased shares worth $758 million. NVIDIA also announced a quarterly dividend of 14 cents per share, payable on Sep 18, 2017.

Guidance

For third-quarter fiscal 2018, NVIDIA expects revenues of approximately $2.35 billion (+/-2%), which is much higher than the Zacks Consensus Estimate of $2.14 billion.

Non-GAAP gross margin is projected to be 58.8% (+/-50 bps). Non-GAAP operating expenses are expected to be approximately $570 million. Capital expenditures are estimated to be roughly in the range of $65–$75 million. Non-GAAP tax rate is likely to be 17% (+/-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 second-quarter results and provided encouraging fiscal third-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.

On the flip side, 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 depicted that PC shipments in the second quarter declined 4.3% year over year to 61.1 million units. This decline marked the 11th straight quarter of year-over-year fall, the longest in the history of the PC industry.

Also, Gartner’s forward-looking statements make us a shade cautious about the prospects of the PC industry. The research firm agreed that the recent surge in DRAM prices and short supply of SSD will lead to an escalation in PC prices.

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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