Last week, NVIDIA's (NVDA 0.80%) first-quarter earnings received a warm reception as investors sent shares higher to the tune of 4.5% on Friday. That's despite a large and expected drop in Tegra sales, which is reassuring -- investors aren't losing sight of the big picture.
Tegra revenue came in at $103.1 million, down 22.2% year over year and 50.5% sequentially. This was a transitional quarter for the company, as mobile customers transition from last year's Tegra 3 and prepare to ramp up Tegra 4 devices. NVIDIA made the strategic choice to push the Tegra 4 schedule out by approximately a quarter in order to focus its efforts on getting the Tegra 4i out the door sooner. NVIDIA's first integrated LTE chipset is expected to be certified by AT&T by the fourth quarter.
NVIDIA sacrificed three months with the Tegra 4 to save six months with the Tegra 4i. That was a tough but necessary decision in order to tap the integrated LTE market and put pressure on Qualcomm (QCOM 0.85%) in the mid-range smartphone market. The company claims that the 4i will deliver three times better performance than Qualcomm's Snapdragon S400, which is Qualcomm's newest mid-range processor.
It's also possible that the decision to push out Tegra 4 may have led to losing the spot in Google's second-generation Nexus 7 that's expected to be unveiled this week at the search giant's I/O developer conference. NVIDIA powered the first of Google's ASUS-built tablets, which has delivered hefty volumes, but Qualcomm appears to have scored the spot this time around.
For the most part, NVIDIA doesn't see much opportunity in the high-end smartphone market. CEO Jen-Hsun Huang noted that the high-end segment remains dominated by two players, both of which utilize their own applications processors. That refers to Apple and Samsung and their A-chips and Exynos processors. Qualcomm has been winning more share within Samsung devices, but NVIDIA thinks it can steal more share from Qualcomm in the mid-range.
NVIDIA has done a good job setting investor expectations. Tegra should bottom out in the current quarter before ramping up during the latter half of the year on the Tegra 4. Making strategic sacrifices to accelerate the mid-range Tegra 4i ramp is also the right thing to do. Not only is the high-end dominated by Apple and Samsung, that segment is also seeing growth decelerate as it approaches saturation. Apple underperformance of the broader smartphone market (7% unit growth versus 36% market growth) in the first quarter is evidence of that.
NVIDIA has made the right strategic call with Tegra; now it needs to execute on design wins later this year.
