A long time ago, graphics specialist NVIDIA (NVDA 1.59%) had very large ambitions in the market for mobile processors. The company had invested rather heavily in developing applications processors for both the high-end of the mobile device market as well as in trying to build lower-cost chips that integrated both an applications processor and a cellular baseband.
However, as followers of the company are likely aware, the company has largely withdrawn from trying to compete in the market for mobile applications processors.
These days, the major market NVIDIA is targeting with its Tegra processor business is automotive applications. For example, Tesla Motors' (TSLA 0.62%) recently launched Model X car uses an NVIDIA Tegra 3 processor to power its infotainment system.
In this article I'd like to provide an update on how the company's Tegra processor business is doing.
How did it fare last quarter? Over the last nine months?
NVIDIA reported that its Tegra processor revenue was $129 million in its most recent quarter, representing a 23% decline from the $168 million that it saw in the year-ago period.
In its form 10-Q filing for the quarter, the company said the decline was driven by a more than 80% plunge in sales of Tegra processors into smartphones and tablets. This, the company noted, was offset by a more than 50% surge in chips sold into the automotive market in addition to "increases in revenue from development services and sales of SHIELD devices."
If we zoom out and look at the performance of this business over the last nine months, sales are down 14% year over year. The drivers of the revenue decline over that period look very similar to what happened in the most recent quarter; sales of chips into tablets and phones dropped by "almost 90%" while automotive-oriented chip sales grew by "over 75%." SHIELD device revenue and revenue from "development services" also grew.
In terms of profitability, the segment lost $65 million last quarter, widening the loss by $12 million from the year-ago period. Over the last nine months, the segment burned through $164 million, with losses actually narrowing slightly from the $169 million seen a year ago.
How close is this business to profitability?
NVIDIA doesn't explicitly break out operating expenses and gross profit margins for this business, but I think a gross profit margin percentage estimate of 35% seems reasonable based on the following chart from the company's last financial analyst day:
Source: NVIDIA.
If the business lost $164 million on revenues of $402 million then, working under the assumption of gross margins of around 35%, year-to-date operating expenses appear to be approximately $305 million. Assuming quarterly operating expenses don't vary too much within a given year, then this would imply annualized operating expenses of around $406 million.
Under these assumptions (which I caution readers not to place undue reliance on because there is a fair amount of guesswork here), it looks like this segment should hit breakeven at a little under $1.2 billion in revenue. The Tegra processor business would roughly need to double from current levels (assuming current conditions) to just break even if this analysis is correct.
What can NVIDIA do to speed this along?
Although the opportunity in in-vehicle infotainment platforms might be large enough to allow NVIDIA to break even/generate profit at the current margin and operating expense run rates, I think the company will need to do two things to speed this along.
The first is cost-cutting. NVIDIA recently wound down its Icera modem operations, which should contribute to lower operating costs here for the whole of fiscal 2017 from fiscal 2016 (the wind-down was scheduled to happen in the second quarter of fiscal 2016).
I suspect there are probably a number of other things NVIDIA can do to try to cut costs here without compromising its fundamental competitiveness in the automotive infotainment market. For example, I don't think NVIDIA needs to continue developing its own custom CPU cores to be viable in this market.
Next, the path to profitability in this business would be much shorter if the company were to see gross profit margin expansion. A few quarters ago, CEO Jen-Hsun Huang said that "the way to increase [NVIDIA's] gross margins is to continue to innovate and increase the amount of value-added that we bring."
He noted that the company's gaming graphics processor business was in the 30% range 10 years ago, but as the company made these platforms "more and more software rich," margins expanded. Huang indicated that he expects the company to do this in the automotive platform business.
If the company is successful in growing gross profit margins here, this would certainly bring down the kind of revenue NVIDIA needs to break even in its Tegra processor business.
Still a ways to go for Tegra
There seems to be a lot of investor enthusiasm around Tegra and the opportunity in automotive, but at the end of the day it's still the collective stand-alone GPU business that brings in the profits.
Indeed, the company's large and high-margin gaming GPU business continues to grow nicely, which -- in my book -- makes it the most exciting of the company's various business units.
Tegra is interesting because it's a very fast growing business and I think it's easier to sell a "story" around Tegra, particularly since it's not too hard to associate it with other "hot" topics like self-driving cars. However, until this business starts pulling its own weight financially, I can't help but find the core GPU business more interesting than I do Tegra.
