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.
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.
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