3 Gems from NVIDIA Corporation's Recent Quarterly Report

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Graphics specialist NVIDIA filed its quarterly report on Form 10-Q on May 25, about two weeks after it reported its earnings results to investors. The document contained a lot of interesting stuff; here are three items that really stood out.

Tegra processors for automotive are quite low-margin

NVIDIA has largely exited the tablet and smartphone markets, refocusing its Tegra system-on-a-chip efforts toward its automotive ambitions. The bulk of this automotive revenue today comes from in-vehicle infotainment systems.

According to the filing, the company saw a year-over-year decline in the gross profit margin of its Tegra processor business. The decline was due to the fact that automotive infotainment system sales "have lower gross margins than other Tegra products."

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I take this to mean that even the tablet-bound Tegra processors which the company sold in higher volumes in the past commanded better gross profit margins than automotive-bound Tegra chips do. One thing NVIDIA will need to do in coming years is add additional value to its automotive platforms (management often correlates "software rich" with "higher margin"), to boost these gross margins.

What's driving the Tegra revenue results?

NVIDIA says in the filing that revenue from its Tegra processor business "increased by 10% for the first quarter of fiscal year 2017." The surge, interestingly enough, came from an "over 40% increase in sales of Tegra products serving automotive systems," but was "partially offset by a decline in development services" year over year.

I dug into NVIDIA's last Form 10-K filing as well as the most recent 10-Q and couldn't find much information about these "development services." The best explanation I could find for what they are was from the company's fourth-quarter earnings call from the prior fiscal year.

Here's CEO Jen-Hsun Huang on these services:

I guess I'd be reluctant to announce anything today, but there are semi-custom businesses that people need our help on. And we're open for business to help select partners develop proprietary systems that leverage the wealth of technologies that we have, whether it's in visual computing or deep learning or supercomputing, so that we can create systems and products and services that the world has never had before.

The commentary here suggests that NVIDIA's "development services" extend beyond the company's Tegra processor business. I think that at the next convenient opportunity (the next earnings call, for example), management should talk a little bit more about the financials of these "development services."

NVIDIA's gaming GPU business is growing very nicely

According to the 10-K filing, NVIDIA saw revenue from its "high-end GeForce GPU products for gaming" surge over 20% year over year. Interestingly, in its earnings release, the company said that revenue from its gaming products grew 17%year over year.

Assuming both figures are correct (and I believe they should be), this shows that NVIDIA's high-end graphics processor business is actually growing faster than the "gaming" results would suggest. I suspect that NVIDIA lumps products such as its Shield Android TV as well as its Shield tablet under "gaming," and that these product categories aren't growing as quickly as the high-end gaming graphics cards are.

The article 3 Gems from NVIDIA Corporation's Recent Quarterly Report

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