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NVIDIA Rises on Q3 Earnings & Revenue Beat, Guides Well

Shares of NVIDIA Corp.NVDA went up 9.9% in after-hours trading yesterday, after the company reported better-than-expected third-quarter fiscal 2016 results.

The company reported adjusted earnings (including stock-based compensation but excluding interest expense related to amortization, other acquisition-related costs and other one-time items) on a proportionate tax basis of 40 cents per share, which beat the Zacks Consensus Estimate of 25 cents.

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Revenues

Revenues not only increased 6.5% year over year to $1.31 billion but also surpassed the Zacks Consensus Estimate of $1.18 billion. The year-over-year increase was primarily due to better-than-expected growth in GTX gaming platform, high-performance computing, cloud and automotive platforms.

Revenues from GeForce GPUs for desktop and notebooks increased 12% year over year to $1.11 billion, driven by robust demand in high-end Maxwell GPUs coupled with strength in high-performance computing and cloud, and automotive. Revenues from Gaming GPU increased 40% on a year-over-year basis.

Tegra processor revenues on the other hand decreased 23% from the year-ago quarter and came in at $129 million, primarily due to lower-than-expected growth in Tegra OEM smartphones and tablets.

Margins

NVIDIA's adjusted gross margin (including stock-based compensation but excluding other one-time items) expanded 107 basis points (bps) from the year-ago quarter to 56.3%. In dollar terms, gross profit came in at $734 million, up 8.6% from the year-ago quarter, primarily due to strength in gaming platform and a higher revenue base.

Adjusted operating expenses increased 5.3% from the year-ago quarter to $477 million, as the company continued to invest in sales, general and administrative activities. Also, litigation against Samsung and Qualcomm augmented the quarter's expenses. As a percentage of revenues, operating expenses however decreased 43 bps from the year-ago quarter to 36.6%.

NVIDIA's adjusted operating margin was up 149 bps from the year-ago quarter to 19.7%, reflecting growth in its GeForce GTX GPU business and a higher revenues base. In dollar terms, adjusted operating income increased from $223 million to $257 million.

The company's adjusted net income (including stock-based compensation but excluding interest expense related to amortization, other acquisition-related costs and other one-time items) on a proportionate tax basis came in at approximately $246 million, up 31.4% from the year-ago quarter.

Balance Sheet & Cash Flow

NVIDIA exited the quarter with cash, cash equivalents and marketable securities of $4.73 billion compared with $4.51 billion in the previous quarter. Free cash flow in the quarter came in at $239 million, while cash flow from operations was $255 million. NVIDIA's long-term debt stood at $1.41 billion. During the quarter, the company paid quarterly dividend totaling $53 million. NVIDIA also announced an 18% increase in its quarterly dividend to 11.5 cents per share. The company also returned $604 million as part of the accelerated share repurchase program for the first nine months of fiscal 2016.

Moreover, the company stated that it expects to return around $1 billion to shareholders through dividends and share repurchase.

Guidance

For the fourth quarter of fiscal 2016, NVIDIA expects revenues of approximately $1.30 billion (+/-2%). The Zacks Consensus Estimate is pegged at $1.223 billion.

Non-GAAP gross margin is expected to be approximately 57% (+/-50 bps). Non-GAAP operating expenses are expected to be approximately $445 million. Non-GAAP tax rate is expected to be 20% (+/-1%).

Recommendation

NVIDIA posted better-than-expected third-quarter fiscal 2016 results and provided encouraging fourth-quarter revenue guidance. Also, revenues increased year over year, primarily due to growth in GTX gaming platform, high-performance computing, cloud and automotive platforms.

Furthermore, 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 higher adoption of NVIDIA's Tegra processors could act as a catalyst, going forward.

Nonetheless, the continuous decline in PC sales is a cause of concern for NVIDIA's GPU segment. Competition from the likes of Intel INTC and QUALCOMM Inc. QCOM also remains a near-term headwind.

NVIDIA has a Zacks Rank #3 (Hold).

Investors may consider Amazon.com Inc. AMZN from the broader tech space, carrying a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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