Did NVIDIA Corporation Deliver This Earnings Season?

By Markets Fool.com

Just days removed after its announcement that it would be shuttering its cellular baseband business, NVIDIA reported its financial results for its first fiscal quarter of 2016 and issued its outlook for the second quarter of fiscal 2016.

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The short story is that the company reported slightly below analyst expectations for the most recent quarter, but issued guidance that was materially below market expectations. As always, the devil is in the details, so let's take a closer look at these results.

Missed expectations, but business saw operating profit growth
NVIDIA reported revenue of $1.15 billion for the most recent quarter, which was a $10 million miss against consensus of $1.16 billion. On a GAAP basis, NVIDIA reported $0.24 in earnings per share, a slight miss against the consensus of $0.25 per share.

On a year-over-year basis, it looks like NVIDIA's net income was down 2% year over year, with share repurchases helping keep earnings per share flat year over year. However, in the company's CFO commentary, the company says that last year, NVIDIA had a lower effective tax rate and a "gain on an investment" that wasn't present this quarter.

To get a better picture of how the underlying business performance has changed year over year, I like to look at operating income (which excludes impacts from tax rates, non-operational income, and so on). On this front, NVIDIA brought in $151 million during its fiscal first quarter of 2015, and $176 million during its fiscal second quarter of 2016 -- a 16.56% improvement year over year.

The underlying business drivers
It's important to understand the fundamental business drivers behind NVIDIA's results. The company saw total revenues grow 4% year over year, citing strength in gaming, accelerated computing, and automotive infotainment systems.

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Total GPU revenue improved by 5% year over year, with NVIDIA saying that sales of gaming-oriented graphics processors were up a much more impressive 14%. NVIDIA said sales of its Tesla processors -- used in high performance computing applications -- "increased strongly." Offsetting that good news, however, was the fact that the company's professional workstation graphics, known as Quadro, saw a year-over-year decline.

NVIDIA reported that Tegra processor sales were up 4% year over year, and on the call noted that sales of graphics processors into the PC OEM market were weak.

Forward looking expectations
Although NVIDIA came in largely in-line during the most recent quarter, it missed its revenue guidance for the second fiscal quarter by quite a lot. Analyst consensus sat at $1.18 billion going into the report, but NVIDIA is calling for just $1.01 billion at the midpoint of its guidance. Even at the high end of its guidance range, or about $1.03 billion, NVIDIA's guidance significantly misses the mark.

What's going on?

According to CFO Colette Kress, two major factors that led to NVIDIA guiding as it did -- aside from typical seasonal trends -- were the following. Firstly, she said that thanks to "European currency weakness," demand is lower than where it likely would have been without said currency headwinds.

Next, Kress said that a "lull" in the overall PC market ahead of the launch of Windows 10 is impacting the company's revenue outlook for the coming quarter. This appears to be consistent with PC chipmaker Intel'sview of the market.

Icera wind-down quantified
Earlier this week, NVIDIA announced that it would either shut down or sell its cellular baseband business, and said it would quantify the financial impact in the earnings release.

According to the company, it will incur restructuring charges of between $100 million and $125 million "primarily during fiscal 2016." After NVIDIA gets past that, though, the company expects that either a wind-down or sale will "benefit non-GAAP operating expenses" during the second half of fiscal 2016.

NVIDIA says it will "carefully invest in its growth initiatives of deep learning, self-driving cars, and gaming," presumably with a portion of the savings associated with the removal of Icera-related operating expenses.

Capital return update
NVIDIA updated investors on its capital return program, boosting the total return for the fiscal year to $800 million, up from $600 million previously. NVIDIA also raised its quarterly dividend from $0.085 per share to $0.0975 per share.

NVIDIA also said that it's extending a previous share buyback program through December 2018 and even tacked on an additional $1.62 billion repurchase authorization, putting its total buyback authorization at a cool $2 billion.

The article Did NVIDIA Corporation Deliver This Earnings Season? originally appeared on Fool.com.

Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel and Nvidia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.