N-helpful NVIDIA

What is the purpose of an earnings warning? Is it:

(A) To warn shareholders to expect a disappointment.
(B) To help analysts prepare better earnings estimates.
(C) To obscure the truth.

If you answered (C), then print out a resume and head to NVIDIA (Nasdaq: NVDA  ) , Fool. There might just be a job open for you in the investor-relations department.

Press release or math quiz?
On Tuesday, NVIDIA issued a laconic statement suggesting that investors dial back their expectations for Q4's results (due out Feb. 10.) How much disappointment we need to expect, however, remains in doubt. According to management, "Total revenue for the fourth quarter of fiscal 2009 is now expected to decline 40 percent to 50 percent sequentially as a result of further weakness in end-user demand and inventory reductions by NVIDIA's channel partners in the global PC supply chain."

This jibes with weak analyst expectations for NVIDIA's archrival AMD (NYSE: AMD  ) , whose results are also expected out next week. It bodes ill for Intel's (Nasdaq: INTC  ) earnings, due out after close of trading today. But it doesn't really tell us what to expect from NVIDIA, other than a massive decline in revenue. So just what does a 40% to 50% decline in sales mean? Putting my calculator through its paces, I figure we're looking at Q4 sales of $449 million at worst, $539 million at best.

Searching back through NVIDIA's historical data, the most recent period in which the company posted numbers like these was 2004, a year when sales ranged from as low as $456 million to as high as $516 million. Gross margin on these sales ranged from 29.3% to 32.3%, with the average quarter reaping about a 31% gross margin, and NVIDIA netting just less than 3% in profit on its revenue. The company has since improved margins, but because of a loss of economies of scale from falling revenue, it's hard to imagine that margins won't suffer. Still, even assuming its trailing-12-month profit margin of 9% holds up, we'll still only see NVIDIA pull off $46 million or so in profit in the best-case revenue scenario. That's quite a steep drop from last year's $257 million showing.

Foolish takeaway
Wall Street analysts are positing anywhere from as much as a $0.15 per share in profit next month to as little as a $0.23-per-share loss, so it seems my guess is as good as theirs. But don't be surprised if we're all wrong, and the actual loss is greater than anyone suspects. Last quarter, NVIDIA told us it was "poised to recapture lost [market] share." But with revenue expectations being dialed back this week, it seems that NVIDIA failed to do anything of the sort -- just as its earnings warning failed to tell us much at all.

Want to know more about NVIDIA's issues? Read:

Fool contributor Rich Smith does not own shares of any company named above. Why do we tell you this? Because The Motley Fool has a disclosure policy.

Intel is a Motley Fool Inside Value selection. NVIDIA is a Motley Fool Stock Advisor pick. The Fool owns shares of Intel.


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  • Report this Comment On January 17, 2009, at 3:34 PM, Aggiemedic01 wrote:

    I think their warnings give a much better look at what's in store than this suggests, but looking at historical net margins doesn't seem particularly helpful. I'd expect R&D and SG&A expense to be relatively consistent with previous quarters - they said as much in last quarters conference call. They are coming up on the end of multi-year projects and there's no point scaling back now. What's more, they have the cash to keep up their research efforts. I'm hoping to see SG&A fall, but my guess is that's just wishful thinking.

    Running the numbers from there, with revenue between $449 and $539 million with operating margins between 35-40% (a touch optimistic) and fixed operating expenses of about $302 million. I add back $4 of "other income" (the same as the last quarter) and end up with net loss between $65 and $141 million or $0.12-$0.26 per share (537 shares outstanding). That gives a full year loss of $15 million, or $0.03 per share compared to $797 million last year.

    That makes for a dreadful quarter (and year) AND I think that may be a touch on the optimistic side. But then, what were you expecting. Not much judging by their share price. Nvidia sells consumer facing products (mostly) at a higher price point than ATI/AMD.

    But all of this makes things sound worse than I think they are. Retailers have likely reduced inventory, so the following quarters shouldn't be as bad despite continuing softness in their end markets, and the full year results include an (unusual for Nvidia) $200 million 'oops' that isn't likely to be repeated. Next year, we can expect sales to continue to be lower (but not this low) and operating expenses to be in the $300 million/quarter range as they look to the future. Next year's results will be bad too. BUT this outlook is largely priced into their shares, they have more than a billion in cash and no debt (you need to if your going to lose more than $141 million per quarter in this market) and they have a product pipeline with tremendous potential.

    I'm hoping this quarter's disaster continues to hide Nvidia's true value until I can buy some at a lower price.

  • Report this Comment On February 11, 2009, at 5:12 PM, phwting wrote:

    Nvidia have at least four problem areas to work through

    1- faulty chips that will come back to haunt them.

    http://www.theinquirer.net/inquirer/news/374/1036374/nv-shou...

    ...

    How widespread is the problem? We told you about G84 and G86s as well as G92 and G94s. From the materials side, it appears that all non-R and non-F lot numbered parts made on the 65nm and 55nm processes are defective. The flaw is a downright idiotic choice of multiple materials coupled with poor chip design and inadequate testing. It is a case of errors compounding errors. They are all defective.

    ...

    2- AMD 4850 price war forcing Nvidia to lower prices on it's gtx 9800+.

    http://news.cnet.com/8301-17938_105-10154740-1.html

    ...

    While both of these cards debuted this past summer, their prices have dropped slightly since then, creating an affordable little sweet spot for mainstream PC-gaming performance. If you shop at retailers like NewEgg.com and TheNerds.com that tend to have more aggressive pricing, the formerly $200 Radeon HD 4850 card is now available for about $180, and the GeForce GTX 9800+ is down from $225 to around $165.

    ...

    3-TSMC delay 40nm transition

    http://www.fudzilla.com/index.php?option=com_content&tas...

    ...

    This delay will affect Nvidia more than ATI as with 55nm products, especially in entry level and mainstream ATI holds the price / performance crown and it doesn't really have to rush to a new process. On the other hand, if Nvidia wants the performance crown back, it has to go to 40nm and try to make new and smart chips as soon as possible.

    ...

    4- Intel integerated graphics and memory controller in a multi-chip package. No need for an external 'Northbridge', 'Southbridge', or graphics in low cost pc's.

    http://www.theinquirer.net/inquirer/news/928/1050928/intel-i...

    ...

    Moving to Westmere, the integrated graphics and memory controller will now all be packed into the processor in a multi-chip package. The graphics and memory controller will be a 45nm chip in a package with the 32nm processor core die.

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