Chip-making company NVIDIA (NVDA, Financial) reported solid second-quarter 2015 results that surpassed the Street’s expectations. Both the top and bottom lines recorded impressive double-digit growths. The company’s third quarter outlook was also above the analysts’ forecast. Let’s delve a little deeper into the quarter figures and check out the chipmaker’s future prospects.
Quarter Recap
Reported earnings in the second quarter grew 38% year over year to $0.22 per share, which topped the analyst expectation of $0.20. The improvement was primarily attributed to higher revenue base and striking operating performances.
Revenue shot up 13% year over year to $1.1 billion as its core businesses (graphic processing unit or GPU and Tegra) continued to improve. The quarter’s result was in line with the analysts’ expectations and was on the higher side of the company’s own guided range. NVIDIA showed strength in the gaming, cloud, data center and mobile end-markets.
Operating expenses grew 4% to $411 million, which is mainly due to higher employee-related costs partially offset by lower engineering costs. However, the company’s success in keeping operating expenses flat for the third straight quarter indicates that an efficient cost-control program is in place.
Operating margin in the quarter was 14.8%, up 400 basis points from 10.8% in the year-ago quarter. Cost control set aside, NVIDIA benefited from improved sales of high-margin PC gaming chips.
PC Gaming Could be a Key Driver
NVIDIA’s performance in the booming PC gaming market is consistently improving and the key reason for this is growing demand for its GTX GeForce GPU chips. The company has touched a milestone of powering roughly 100 million gaming PCs globally.
During the quarter, NVIDIA observed demand for its latest entry-level GPU gaming chip because of the chip’s affordability and compatibility with next generation high-end gaming consoles. Sales of GeForce GTX GPUs grew roughly 10% fuelled by the newly launched GeForce GTX 750 and GTX 750 Ti, Maxwell-based GPUs.
As per research firm DFC Intelligence, global spending for video games will rise substantially and PC gaming could be one of the major drivers. As a result, the company now expects PC gaming revenue of $25 billion in the year, up from $22 billion expected previously.
NVIDIA also believes that there is ample room for PC gaming chip prices to move up driven by improving production values of the games. Prospective volume growth with continuous pricing strength could rope in better profitability for the company.
Data Center & Cloud End-market Provides Ample Room for Growth
During the quarter, NVIDIA recorded revenue growth from its high performance computing (HPC) Tesla and GRID chips targeting data center and cloud service providers. The quarter’s improvement was driven by improving desktop virtualization by the organizations and large project wins with cloud service providers. The company also won some high-end education and government customers for its HPC chips.
IT research firm Gartner expects global spending to slow down a bit driven by the impact of virtualization. Virtualization has helped existing data center assets to be efficient, ultimately bringing down operating costs by way of lowering spending. But Gartner thinks the spending momentum will return to growth within 2015 and 2018. Moreover, the IT firm finds that transition into private cloud environment will be one of the prime drivers for boosting consumer spending.
Higher spending in data center and cloud services areas could boost demand of Tesla and NVIDIA GRID, which would help boost the company’s GPU business and overall margin performance.
Tegra Chips Volumes Could Grow
During the quarter, sales of Tegra chips grew 200% year over year on account of higher demand for auto infotainment and mobile gaming. Particularly, revenues from automobiles grew 74%.
NVIDIA sees huge growth opportunity from the auto sector. In the call transcript, it mentioned that Volkswagen (VLKAY) will use the Tegra chips to power the infotainment system of its upcoming Passat model. Similarly, BMW and Audi are also using the chips to offer better on-road entertainment to attract buyers.
Tegra demand from mobile device manufacturers could also soar. According to Gartner, mobile gaming revenue could contribute 22% toward total video game revenue and outshine PC gaming by 2015. China’s largest mobile-maker Xiaomi has launched its latest Mi Pad featuring the Tegra K1 chips, which debuted this January.
Though Tegra chips are much economical than the GPU chips, expected volume growth can help support margin expansion.
Better-Than-Expected Third Quarter Guidance
NVIDIA expects third quarter revenue to be roughly $1.2 billion (+/- 2%), up from $1.1 billion projected by the Street. The upbeat guidance reflects continuous improvements in the core businesses. GAAP and non-GAAP gross margins would be roughly 55.2% and 55.5%, respectively, with a variance of +/- 50 basis points. Operating expenses will be $463 million on a GAAP basis and $416 million on a non-GAAP basis. Tax rate for the quarter would be 19% (+/- 1%).
The Takeaway
NVIDIA is firing on all cylinders. Its end-market performances are solid and the company seems to be in a great shape. It’s continuously launching new products to remain competitively ahead and to match the performance level of advanced gaming consoles. NVIDIA’s Tegra chips are also gaining traction. Overall, NVIDIA’s fundamentals could continue to grow making its investors happy.
