Graphics chip company NVIDIA (NVDA 1.40%) is set to report its second-quarter results after market close on Aug. 6. With the PC market slumping during the second quarter, analysts are expecting both revenue and earnings to decline, in line with the company's previously announced guidance.
While the numbers likely won't be pretty, NVIDIA's strong gaming business and growing enterprise business should shield it somewhat from weakness in the PC market. Here's what investors should look for when NVIDIA reports its second-quarter earnings.
What analysts are expecting
Analysts expect NVIDIA to report revenue of $1.01 billion, an 8.4% year-over-year decline. Weakness in the PC market in the lead-up to Windows 10, along with the continued strength of the U.S. dollar, are the main drivers behind this expected decline. During the first quarter, NVIDIA's OEM and IP business, which includes sales to OEMs and royalty payments, declined by 38% year over year, and an even larger decline is likely during the second quarter.
Analysts also expect NVIDIA's earnings to decline. The average analyst estimate calls for EPS of $0.10, down from $0.22 in the same period last year. The range of analyst estimates is wide, however, with a low estimate of a loss of $0.09, and a high estimate of $0.14. Given the weak PC market and currency effects, combined with the stronger parts of NVIDIA's business, it's clear that analysts aren't confident about how earnings will ultimately be affected.
The gaming business is key
While NVIDIA's total revenue will decline along with the PC market, the gaming PC market is not suffering the same decline. During the first quarter, while NVIDIA's total revenue increased by 4% year over year, gaming revenue rose by 25%, accounting for about half of the total. Gaming revenue includes GPUs, as well as gaming devices like the SHIELD Android TV console.
NVIDIA's second quarter runs through July 26, which means that it will include the launch of new graphics cards from rival Advanced Micro Devices. Unlike AMD's previous generation of GPUs, the Radeon 200 series, which disrupted the market and forced NVIDIA to slash prices, AMD's new flagship card fell short of NVIDIA's high-end GTX 980 Ti. AMD caught up to NVIDIA in terms of performance, but it failed to leapfrog its competitor.
While NVIDIA's OEM business will suffer during the second quarter, investors should keep a close eye on the growth rate of the gaming business. This will also give some insight into sales of AMD's new graphics cards, which are reportedly suffering from some supply constraints. Along with GPUs, investors should look for management to discuss the SHIELD console, which launched earlier this year. Reviews for the device have been largely positive, and it represents NVIDIA's continuing attempt to turn Android into a serious gaming platform.
Enterprise and auto growth
While gaming is the most important part of NVIDIA's business, its enterprise products have been growing rapidly. HPC and cloud revenue grew by 57% year over year during the first quarter, to $79 million, with strong demand for NVIDIA's Tesla GPUs driving the growth.
NVIDIA's graphics virtualization platform, GRID, has also been gaining traction, with more than 250 enterprise customers with production deployments at the end of the first quarter, up from just 30 one year prior. Automotive revenue is also growing fast, up 121% year over year during the first quarter, totaling $77 million.
While NVIDIA is still highly dependent on the PC, the company is actively diversifying. Investors should expect continued growth in these fast-growing businesses during the second quarter, which should help balance some of the weakness in the OEM business.
Look past the falling revenue
NVIDIA is in a much stronger position than many other companies dependent on the PC. The company's main business is gaming, and the gaming PC market is performing far better than the PC market as a whole.
The second quarter won't be great for NVIDIA; revenue and earnings will almost certainly decline significantly. But the PC market will eventually stabilize, and currency issues will eventually subside.
Meanwhile, NVIDIA's gaming and enterprise businesses should continue to grow. While revenue declines are never a good thing, investors needn't be too concerned about NVIDIA.
