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NVIDIA - second quarter results ahead of expectations

George Salmon | 16 August 2019 | A A A
NVIDIA - second quarter results ahead of expectations

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NVIDIA's second quarter revenues and profits are ahead of prior analyst expectations. The shares rose 5.6% in after-market trading.

The next dividend instalment of $0.16 per share is due on 20 September, while the company has paused its share repurchase program until after the Mellanox acquisition has completed, which should be before the end of this year.

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Our view

NVIDIA has been at the forefront of gaming and graphics technology since its formation in 1993. Gaming still accounts for 56.9% of sales, and industry wide revenues are expected to grow 9.3% a year in the five years to 2021. NVIDIA should be in line for a healthy proportion of that growth.

But the power of NVIDIA's chips mean they are increasingly in demand outside the world of consoles and joysticks.

The 'Professional Visualisation' division supports digital design and engineering work in architecture, oil & gas and medical imaging. Meanwhile NVIDIA's GPUs help provide the processing power behind artificial intelligence and machine learning through the 'Datacentres' business.

It might come as something of a surprise, but NVIDIA also has a stake in the potentially transformative self-driving car market. Its DRIVE platform can "perceive and understand in real-time what's happening around the vehicle...and plan a safe path forward".

If growing end markets is one attraction, the group's neat business model another.

The group outsources all of its manufacturing and without the costs, capital and risk associated with owning manufacturing facilities, NVIDIA's delivered impressive gross margins. This helps fund M&A, like the $6.9bn acquisition of Mellanox, which should boost data centre architecture for high performance computing and AI.

High gross margins also help fund the $2.4bn research & development budget. Recent innovations have included real time ray tracing, which could revolutionise gaming graphics with ultra-realistic imagery.

With net cash on the balance sheet and hefty operating cash flows, it's difficult to see NVIDIA as anything other than a very high quality business. Unusually for a US tech company, the group's willing to return surplus cash to shareholders - some $1.95bn last year. That's mostly through share buyback's, but there's a 0.5% prospective dividend yield on offer too.

The group's strengths are reflected in a rating of 23.4 times expected earnings. Investors should also bear in mind that in such rapidly changing industries, winds change swiftly.

For example, NVIDIA benefitted from a massive surge in demand from cryptocurrency miners in 2017 and 2018 - totalling around $579m of sales. That's since dried up, making for some tough comparisons. Going forward, the group says business levels are normalising, but we'd not rule out further ups and downs from here.

Longer-term however, it's hard not to be impressed by a business at the cutting edge of some pioneering industries.

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Second quarter results

Quarterly revenue was $2.6bn, down 17% on the equivalent quarter last year, mainly due to lower cryptocurrency demand. That fell through to profits, as a lower gross margin of 60.1% and an 8% increase in operating expenses saw net income fall 37% to $762m.

The Gaming business saw revenue fall 27% year-on-year to $1.3bn. However this was up 24% on Q1, in part due to the launch of the latest cards in the RTX SUPER series and increased production of the Nintendo Switch console.

Trends were similar in the Data Centres business. Revenue of $655m is 3% higher than Q1 as the group continues to expand its AI led offering. However, revenue is down 14% year-on-year. The Automotive and Pro Visualisation divisions both delivered year-on-year growth, up 26% to $209m and up 9% to $291m respectively.

Looking ahead, the group expects revenue to be around $2.9bn, a gain on Q2, but still down about 9% on last year. Gross margins of around 62.5% are expected.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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