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NVIDIA Corporation's Got Game: Leverage Leads to Earnings Growth

By Tim Beyers - Nov 9, 2015 at 12:30PM

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Earnings jump with revenue growing faster than expenses as gaming success funds efforts to diversify.

Source: NVIDIA 

NVIDIA(NVDA -1.50%)stock jumped over 11% last week after the company reported significant growth in key third quarter figures. The company also announced plans to boost its quarterly dividend by 18% and return $1 billion to shareholders in fiscal 2017. Here's a closer look at NVIDIA's overall performance in the third quarter:

MetricFQ3 2016 ActualsFQ3 2015 ActualsYOY Growth
Revenue  $1,305 million  $1,225 million  6.5%
Non-GAAP income from operations  $308 million  $264 million  16.7%
Adjusted EPS  $0.46  $0.39  17.9%
Cash from operations   $255 million  $216 million  18.1%

Sources: S&P Capital IQ and NVIDIA press release 

Commenting on the results, CEO Jen-Hsun Huang said in a press release:

Our record revenue highlights NVIDIA's position at the center of forces that are reshaping our industry. Virtual reality, deep learning, cloud computing, and autonomous driving are developing with incredible speed, and we are playing an important role in all of them. We continue to make great headway in our strategy of creating specialized visual computing platforms targeted at important growth markets. The opportunities ahead of us have never been more promising.

What went right: NVIDIA is enjoying leverage in its business with net income, per-share earnings, and cash from operations all growing faster than revenue. Operating expenses ticked up just 6% -- or 4% on a non-GAAP basis -- over the same period, while gross margin improved by 100 basis points. Careful management is allowing NVIDIA to profit even as it works to diversify.

The results stand in sharp contrast to heavyweight chipmaker Intel, which reported essentially zero revenue growth over the past year. Earnings per share (down 3%) and operating income (down 8%) declined over the same period as the company's ties to PC sales remain an anchor. 

What went wrong: Not much went wrong, yet there are plenty of things that could keep NVIDIA from diversifying as quickly as Huang might like. Take the data center business. While NVIDIA highlighted a fast new GRID 2.0 chip for virtualized graphics and support from the Microsoft Azure cloud computing platform in its earnings release, Intel reported a 12% jump in actual data center revenue. The chipmaker's $4.1 billion in data center-related sales in the third quarter was more than three times NVIDIA's haul.

What's next: Looking ahead, NVIDIA told investors to expect $1.3 billion "plus or minus 2%" in fourth quarter revenue. Gross margin is expected to come in between 56.7% and 57% over the same period, with a margin of error of 50 basis points. NVIDIA is also planning for $25 million to $35 million in restructuring charges and $20 million to $30 million in capex spedning to finish out the year.

In the meantime, investors should focus on announcements and improvements in the gaming sector. For as much as NVIDIA is doing to diversify, gaming is still core to the business. In August, the company announced a new GeForce graphics card for competitive gamers. The very next month, NVIDIA announced plans to put desktop gaming features in laptops. These kinds of products are the likely catalysts for growth in the coming quarters.

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NVIDIA Corporation Stock Quote
NVIDIA Corporation
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Microsoft Corporation Stock Quote
Microsoft Corporation
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Intel Corporation
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