Nvidia’s Gaming & Automotive Segment Continue To Shield It Against The PC Slowdown: Q2’16 Earnings Review
In light of the weak macro economic environment and a challenging semiconductor market, Nvidia’s (NASDAQ:NVDA) solid Q2 2016 earnings came in as a pleasant surprise. The company beat its Q2 2015 revenue guidance by a strong margin ($1.15 billion compared to its guidance of $1.01 billion, +/- 2%), driven by strong growth in gaming and automotive processors. Continued strength in the gaming and automotive platforms were offset by a slow PC Original Equipment Manufacturer (OEM) market and weakness in enterprise, high performance computing (HPC) and cloud. The PC market is expected to pick up pace with the launch of Windows 10 and Intel’s Skylake platform. The weakness in the enterprise, HPC and cloud market is more of a macro issue, and Nvidia is confident of the long-term growth potential of these segments.
Nvidia’s 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 accounted for 85% of the company’s Q2 2016 revenue, up from 68% a year ago. Nvidia has secured a well defined and strong position in each of these growth markets, in the face of strong competition.
Quick Snapshot of Q2 2016 Earnings
At $1.15 billion, Nvidia’s Q2 2016 revenue grew 4.5% annually and was flat sequentially. While GPU revenue of $959 million was up 9% year on year, Tegra processor revenue of $128 million was down 19%. At 55%, margins were slightly lower compared to Q1 2016 (56.7%) and Q2 2015 (56.1%), as the strength in GeForce GTX was offset by a lower mix of enterprise and accelerated computing GPUs.
GAAP net income and earnings per diluted share (EPS) stood at $26 million and $0.05, respectively. Nvidia’s Q2 2016 GAAP EPS was negatively impacted by a $0.19 charge for write-down of the Icera modem operations and $0.02 charge for the recent recall of its Shield tablets. Non-GAAP EPS of $0.34 grew 13% year on year. (Read Nvidia’s Q2’16 Press Release)
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New Technologies & Games Will Continue To Accelerate Nvidia’s Gaming Revenue
Nvidia’s gaming revenue of $661 million was up 59% year on year, driven by the expanding gaming market and the continued strength of its Maxwell-based GeForce GPUs for the enthusiast and performance categories. The company claims that its newly launched GTX 980 Ti has received outstanding reviews by industry experts.
The company strongly believes that PC gaming is a growing market, and expects the segment to see continued growth in the coming quarters. Key growth drivers for this market including new gaming technologies; such as 4K (which quadruples the number of pixels to process), virtual reality, and Direct X 12; the launch of Windows 10, new upcoming games, as well as eSports (a social gaming platform). In just a few years’ time, eSports has doubled to almost 100 million gamers around the world, and Nvidia believes that the platform has the capability to double again in just a few years. [1] Some of the new games up for launch this year are – Rainbow Six, Fallout 4, Black Ops 3, Star Wars, Call of Duty, Assassin’s Creed, Metal Gear Solid, etc.
Nvidia claims that the sales of PC gaming systems this year are estimated at $28 billion, with continued expansion expected in the years ahead. ((Nvidia’s Q2 2016 Earnings Call Transcript, Seeking Alpha, August 6, 2015))
Automotive Will Continue To Be The Fastest Growing Tegra Division
Q2 2016 was another strong quarter for Nvidia’s automotive segment, with revenue rising 76% year on year, to $77 million, as the company saw continuous momentum in design wins with new as well as existing customers. In addition to its infotainment cockpit business, the company is working with over 50 companies in integrating the NVIDIA DRIVE PX in their autonomous driving efforts. At present, there are 8 million cars on the road with Nvidia technology, and around 30 million more cars are in the pipeline.
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. Management indicated that Strategy Analytics expects the market for Advanced Driver Assistance Systems will generate around $15 billion in 2016, with a CAGR of 23%. [2]
Q3 2016 Outlook
– Revenue of $1.18 billion, +/- 2%.
– GAAP and non-GAAP gross margins of 56.2% and 56.5%, respectively, +/- 50 basis points.
– GAAP and non-GAAP operating expenses of $484 million and $435 million, respectively.
– GAAP and non-GAAP tax rates of 22% and 20%, respectively, +/-1%.
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Notes:- Nvidia’s Q2 2016 Earnings Call Transcript, Seeking Alpha, August 6, 2015 [↩]
- Nvidia’s CEO Discusses F4 Q2014 Results – Earnings Call Transcript, Seeking Alpha, February 12, 2014 [↩]