Nvidia’s Q1’16 Earnings Review: The Company Is Confident Of Renewed Growth Momentum In The Second Half Of Fiscal 2016
Leading GPU processor developer, Nvidia (NASDAQ:NVDA) reported a mixed set of Q1 2016 results as revenues for the quarter missed consensus estimates by $10 million and non-GAAP earnings per share ($0.33) beat analyst estimates by $0.07. Additionally, the company’s Q2 2016 guidance was much below Wall Street expectations.
At $1.15 billion, Nvidia’s Q1 2016 revenue increased 4% year on year but declined 8% quarter on quarter. The company saw continued strength in gaming, high-performance and cloud computing, as well as automotive applications. That said, the end of life for some Tegra original equipment manufacturer (OEM) designs, as well as continued weakness in PC OEM sales led to a 38% year-on-year decline in the company’s OEM and IP platform revenues. The weakness in PC OEMs can be attributed to foreign exchange rates and delays in purchasing leading up to the launch of Windows 10 later this year. Nvidia expects the above factors to impact its PC OEM sales in the current quarter as well.
Nvidia’s GAAP gross margins for Q1 2016 stood at a record 56.7%, above company guidance and up 80 basis points from the previous quarter, as it benefited from a richer product mix. GAAP earnings per diluted share of $0.24 was flat year-on-year. Nvidia increased its quarterly cash dividend by 15%, to $0.0975 per share, and announced its intent to increase capital returns to shareholders to $800 million in fiscal year 2016 (from $600 million) through cash dividends and share repurchases.
Despite the weak Q2 2016 guidance, Nvidia is hopeful that things will turn around in the second half of fiscal 2016. The company claims that the overall dynamics of its business remain intact and strong. Its strategy of creating specialized application-specific platforms continues to gain traction. These specilized applications include: 1) gaming; 2) enterprise computing; 3) high-performance and cloud computing; and, 4) automotive infotainment and control. The four segments contributed to more than 80% of its Q1 2016 revenue, up from 68% a year ago. The company has secured a well defined and strong position in each of these growth markets, often in the face of strong competition.
Our price estimate of $23 for Nvidia is slightly above the current market price. We are in the process of updating our model for the Q1 2016 earnings release.
See our complete analysis for Nvidia
Nvidia To Exit The Mobile Chip Market
Just a day before its Q1 2016 earnings release, Nvidia announced its decision to wind down its Icera modem operations in the second quarter of fiscal 2016. The company is open to a sale of the technology or operations, and estimates $100 million to $125 million in restructuring charges primarily during fiscal 2016. These charges will consist of severance and other employee termination benefits, tax expense items, and other costs associated with the wind-down if Nvidia is unable to sell the Icera operations. The company does not expect any material change to its revenue associated with the wind-down of Icera. The Icera wind-down or sale is expected to benefit Nvidia’s non-GAAP operating expenses in the second half of the year. The company plans to re-invest the money it had been using for modems and put it into deep learning, self-driving cars, and gaming, all high growth markets. (Read: Nvidia To Sell Its Icera Business & Exit The Mobile Chip Market)
4K, Virtual Reality & Windows 10 Launch To Drive Future Growth In Gaming
At $587 million, Nvidia’s Q1 2016 gaming revenue increased 25% year on year, driven by the strength of its Maxwell GPU architecture. Maxwell is Nvidia’s 10th generation GPU architecture, offering 2X the performance power of the Kepler architecture, which the company had touted as the most energy-efficient GPU ever built by it. The launch of TITAN X at the Game Developers Conference earlier this year also helped drive growth in gaming in Q1 2016. TITAN X is touted as the world’s fastest GPU. Having outstanding capabilities to drive 4K games and virtual reality titles, it delivers twice the performance and double the power efficiency of its predecessor. [1]
Nvidia strongly believes that PC gaming is a growing market, and expects the segment to see continued growth in the current quarter as well. Nvidia expects multiple drivers, including 4K, which quadruples the number of pixels to process, virtual reality, and the launch of Windows 10, to drive growth in gaming in the second half of fiscal 2016.
Q1 2016 Was A Record Quarter For Nvidia’s Automotive Segment
Nvidia’s Automotive revenue had a record quarter at $77 million in Q1 2016, growing 121% year over year, as the company’s design wins in digital clusters and infotainment continued to ramp over multiple automotive OEMs. During the quarter, Nvidia also announced the availability of its DRIVE PX deep learning development platform, which provides researchers with the computing platform and software tools to develop algorithms for self-driving cars. The company has started shipping DRIVE PX to developers around the world.
The automotive segment is the fastest growing sub-segment and offers higher gross margins (compared to devices). Automotive electronics is a large market and it is going through a transition as cars have increased computing capability in both the drive train and the dashboard. Increasingly, dashboard functionality within cars (infotainment system, digital cluster and automatic driver assistance) are being computerized. Strategy Analytics expects the market for Advanced Driver Assistance Systems will generate around $15 billion in 2016, with a CAGR of 23%. [2]
GPU Accelerated Data Center and Deep Learning Technology Provide An Exciting Opportunity For Nvidia
In Q1 2016, Nvidia’s HPC and cloud revenue stood at $79 million, up 57% year on year, with continued strength in the HPC market and among cloud service providers. The company’s GPU business for accelerated data centers grew more than 50% year over year in Q1 2016. It expects the deep learning application to further accelerate growth in the segment.
In the enterprise data center, NVIDIA’s GRID graphics virtualization platform continues to hit key milestones. The company now has over 250 enterprise customers with production deployments, up from just over 30 customers a year ago. In March 2015, VMware, the virtualization market leader, shipped the latest versions of Horizon and vSphere with full support for NVIDIA GRID vGPU technology. More than 400 customers have signed on through the GRID Early Access program.
The Tesla product portfolio continues to benefit from widespread Internet, interest in deep learning. A growing number of companies are now using Tesla GPUs for deep learning, including the world’s leading cloud service providers, like Baidu, Facebook, Flickr, Microsoft, and Twitter, as well as a broad range of startups. During Q1 2016, Nvidia claims to have hit a milestone for CUDA, its parallel computing platform, which has now been downloaded 3 million times since its 2006 launch, with 1 million downloads in the past 18 months alone.
Q2 2016 Outlook
– Revenue of $1.01 billion, +/- 2%.
– GAAP and non-GAAP gross margins of 55.7% and 56% respectively, +/- 50 basis points.
– GAAP and non-GAAP operating expenses of approximately $474 million and $425 million respectively.
– GAAP and non-GAAP tax rates of 23% and 21% respectively, +/- 1%.
View Interactive Institutional Research (Powered by Trefis):
- Nvidia’s Q1 2016 Earnings Call Transcript, Seeking Alpha, May 7, 2015 [↩]
- Nvidia’s CEO Discusses F4 Q2014 Results – Earnings Call Transcript, Seeking Alpha, February 12, 2014 [↩]