NVIDIA had record revenues in the first quarter. Its notebook graphics and Tegra came in slightly ahead of expections in Q1. The remainder of its businesses performed in line with expectations for the quarter. NVIDIA faced headwinds from the soft economy, high hard drive prices, and supply shortages.
Kepler. NVIDIA launched the new Kepler graphics processing unit (GPU) architecture in mid-March. Kepler is more powerful, more compact and more efficient. It also includes virtualization technology built directly into the GPU. The first Kepler product, the GeForce GTX 680, has received great reviews. Two weeks ago, NVIDIA launched the GeForce GTX 690, which uses 2 Kepler GPUs. It also received great reviews. On May 10, NVIDIA launched the GTX 670 to even better reviewsKepler is the most efficient GPU architecture NVIDIA has ever created and its expect this to result in more market share and higher margins. It is just starting to include Kepler into each of its businesses, starting with desktop. Margins are great on Kepler because it is efficient. It has higher performance, lower power and for every performance level, and it is very efficient in terms of die size. Its energy-efficiency will provide higher performance. Efficiency with respect to die size will help gross margins.
Demand for the Kepler GPUs is high, and NVIDIA is currently unable to meet all OEM and channel demand in Q2 due to shortage in 28-nanometer supply. It does not expect the shortage to resolve until later this year. It believes resolution of the supply problems with need to come from increased capacity at Taiwan Semiconductor (TSMC) and does not appear to have plans to use additional suppliers. The supply problems did not result from a less-than-bullish projection from NVIDIA as it expected a very successful Kepler launch.
Notebook GPUs. NVIDIA refreshed its notebook GPUs with the launch of the GeForce 600M series. The GeForce 600M notebook GPUs have unprecedented power efficiency. NVIDIA expects strong growth for its notebook business to continue in Q2 and Q3, driven by the Kepler design on the Ivy Bridge platform. NVIDIA expects to gain share in Ivy Bridge and expects Ivy Bridge to likely be the best node it has ever participated in. The reason is because Kepler is such an energy-efficient GPU. Consumer demand continues to be quite high and one of the most important applications for the consumer is video games, and video games still prefer to have GeForce. Adding a GeForce processor continues to be one of the best ways to differentiate product and create a premium product.
NVIDIA anticipates the attach rate (the number of complimentary goods sold for a primary product) will remain strong and consistent with the past. Attach rates should not be any different with use on Ultrabooks.
Tegra. The first Tegra phone, launched in February by HTC in Europe, was the HTC One X. Tegra 3 gives the HTC One X a long battery life, console gaming and fast web browsing. It is energy efficient and delivers high performance. Tegra 3 phones are now shipping from 22 carriers in Europe and Asia. Outside the United States, the next big superphone upgrade is quad-core and Tegra 3 is the world's first quad-core. That segment of the market is about 100 million plus units a year and is shared by two players.
Microsoft has shipped more than 1,000 Tegra Windows on ARM tablets for software developers, and that number is growing very rapidly. Forrester has predicted 375 million tablets will ship in 2016. Almost 1/3 of these will be bought directly by business and Forrester believes that most consumers will use the rest for work as well as at home.
NVIDIA is expecting further growth in Tegra as HTC's One X expands through Europe and HTC moves it into other regions. Many other Tegra 3 phones are also coming to market. It is gaining market share rapidly, because it was a very small player in the market before. Further, tablets are doing well and currently represent about half of the demand. NVIDIA believes Windows on ARM is a fantastic tablet. MSFT has been very thoughtful about the segmentation of Windows for different customers with different needs. NVIDIA expects more revenue from phones than tablets in the next quarter.
NVIDIA does not have LTE at the moment, which is predominantly in the United States. It hopes to bring Tegra 3 with LTE phones to United States towards the end of the year. Software-defined radio (SDR) will allow it to deliver a much smaller and efficient and cost-efficient modem. Having a very small LTE modem will differentiate NVIDIA because it will be able to make more of integrated versions of application processors and LTE modems and bring more cost-effective solutions to the marketplace.
Tegra 3 uses a 40-nanometer process, and therefore, it's not affected by 28-nanometer supply shortage.
Evaluation of markets.
The PC gaming market is healthy and Kepler has been causing people to refresh their PCs.
Financials.
Revenue for Q1 was $924.9 million, which was at the high end of the company's outlook. Strength in revenue was driven by the Kepler GPUs and strong performances in the notebook and Tegra businesses. NVIDIA projects revenues of $990 million to $1.05 billion in Q2. It expects all three segments of its business to be up going forward, with the caveat that supply is still constrained.
GPU business declined 6.7% on the quarter because of the 28-nanometer supply shortage. This impacted the company's high-end desktop and notebook business. NVIDIA's professional business was down 4.2% from the fourth quarter, which is within normal seasonality. Its consumer business increased 20.8% due to the launch of Tegra 3 for smartphones and tablets.
GAAP gross margin for the quarter was 50.1 percent and non-GAAP gross margin was 50.4 percent. Both were at the high end of projections. However, they were 1.3 and 2.1 percentage points lower than the prior quarter, as a result of the 28-nanometer supply shortage for the Kepler products. About 30 percent of NVIDIA's business now depends on the 28-nanometer and NVIDIA would like that number to increase. It expects gross margin in Q2 to be in the range of 50.2 to 52.2 percent. Once the supply shortage is resolved, margins should improve. NVIDIA does not anticipate a price increase on wafer prices from TSMC.
GAAP OpEx was $390.5 million and non-GAAP OpEx was $348 million. Both were higher than expections. The increase from last quarter was due to planned hiring, infrastructure spending, and the FICA tax reset. The company projects OpEx of $418 million in Q2.
GAAP net income was $60.4 million for the quarter or $0.10 per diluted share. Non-GAAP net income was $97.5 million or $0.16 per diluted share. Both were in line with expectations.
The company has nothing to announce regarding share repurchases or dividends.
The full transcript of the conference call can be found on Seeking Alpha at the following link:
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