NVDA: Financial Analysis through January 2009

NVIDIA (NASDAQ: NVDA) announced a loss that surpassed recently slashed estimates for the three months that ended on 25 January 2009.  This post provides the GCFR analysis for the period, which was the fourth quarter of the company's fiscal 2009.

To compute gauge scores, we had to make numerous estimates because the earnings report did not include a Cash Flow Statement, and the Balance Sheet omitted certain details.  When NVIDIA files a 10-K, with the required financial statements and notes, we will update the analysis accordingly.


NVIDIA Corporation, based in Santa Clara, CA, builds a variety of specialized Graphics Processing Units.  These devices perform computationally intense tasks required to produce realistic images for video games and other applications.  NVIDIA, which had its initial public offering in 1999, sells to computer manufacturers such as Apple, Inc., (NASDAQ: AAPL), and it competes with Intel Corporation (NASDAQ: INTC), Advanced Micro Devices (NYSE: AMD) and other Specialized Semiconductor developers.

In 2008, NVIDIA recorded a $196 million charge to cover warranty, replacement, and other costs related to faults in certain products for notebook computers.  The faults are said to result from "a weak die/packaging material set" that is no longer used.  It's not clear that this amount will be sufficient when lawsuits are considered.  However, insurance might defray part of the bill.

On 13 January 2009, NVIDIA slashed its Revenue guidance for the fourth quarter.  The company reported that Revenue "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."


Three months ago, the GCFR Overall Gauge of NVIDIA decreased from 65 to 53 of the 100 possible points.  Our initial and updated analysis reports on the third quarter of fiscal 2009 explained the score in some detail.

The contrarian Value gauge spiked to its 25-point maximum score in the October quarter because NVIDIA's share price had fallen so steeply.  However, the Growth and Profitability gauges were mired in low-single-digit territory.


Now, with actual and estimated data for the January 2009 quarter, our gauges display the following scores:

• Cash Management: 11 of 25 (unchanged from October)
  
• Growth: 0 of 25 (down from 1)
• Profitability: 0 of 25 (down from 3)
• Value: 10 of 25 (down from 25)
   
• Overall: 25 of 100 (down from 53)

Before examining the factors that affected each gauge, we will compare the latest quarterly Income Statement to the model we posted previously and then revised in response to much lower Revenue estimates.

Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats.  A common difference is the classification of income and expenses as Operating and Non-Operating.  The standardization is simply for convenience and to facilitate cross-company comparisons.


http://sheet.zoho.com/public/ncarvin/nvda-income-statement?mode=htm

Revenue was 46.4 percent less than in the immediately preceding October 2008 quarter, and it was 60 percent less than in the year-earlier January 2008 quarter.  These dismal figures were even worse than we expected, given the recent Revenue guidance.

The Cost of Goods Sold (i.e., Cost of Revenue) was 70.6 percent of Revenue in the quarter.  This translates into a Gross Margin of 29.4 percent, compared to a far more profitable 45.7 percent in January 2008.  Our projections for the Gross Margin began with management's 41 percent guidance, but we cut that in January to 37 percent.

Research and Development (R&D) expenses were 44 percent of Revenue, up from 16.3 percent in the year-earlier quarter.  It's not surprising that the R&D ratio would increase when sales slump because the company needs to keep its labs humming.  If not, NVIDIA wouldn't be able to maintain its competitive position.  We had expected the R&D ratio to jump to 42 percent.

Sales, General, and Administrative (SG&A) expenses were 18 percent of Revenue, an increase from last year's 7.6 percent. Our most recent target for these expenses was 16.0 percent.

The January 2009 quarter included restructuring and other charges of $18 million that we hadn't anticipated.

Operating Income was a $175 million loss, substantially more than our $106 million estimate.  One year ago, Operating Income was a $263 million gain.

Non-operating interest and other income was also down sharply, and it was worse than we expected. 

NVIDIA claimed a small income tax benefit, which trimmed the Net Loss for the quarter to $148 million (-$0.27/share).  The loss was 76 percent worse than the value we forecast instead of an expense. 

Cash Management	January 2009	3 months ago	12 months ago
Current Ratio	2.8	2.5	3.0
LTD/Equity	1.1%	0%	0%
Debt/CFO	0.4	0	0
Inventory/CGS	79.6 days	64.0 days	58.4 days
Finished Goods/Inventory	N/A	63.3%	61.2%
Days of Sales Outstanding (DSO)	52.5 days	51.1 days	52.8 days
Working Capital/Market Capitalization	32.3%	29.8%	12.8%
Cash Conversion Cycle Time (CCCT)	74.0 days	56.0 days	48.7 days
Gauge Score (0 to 25)	11	11	10

NVIDIA has considerable liquidity.  The awful fourth quarter barely made a dent in the company's Cash and Short-Term Investments, which now total $1.26 billion.   Debt remains minimal.  The dramatic Inventory increase demonstrates how much Sales were below the company's expectations.  The ratio of Working Capital to Market Capitalization is rather high, and it might eventually attract the attention of value investors.

Growth	January 2009	3 months ago	12 months ago
Revenue growth	-16.4%	9.9%	33.5%
Revenue/Assets	97%	116%	128%
CFO growth (1)	-95%	-57.9%	122%
Net Income growth	N/A%	-46.8%	78.0%
Gauge Score (0 to 25)	0	1	13

Growth rates are trailing four quarters compared to four previous quarters.
1. CFO for the January 2009 quarter was estimated.


As indicated by the zero score, contraction is a more accurate word than growth to describe NVIDIA's current circumstances.

Profitability	January 2009	3 months ago	12 months ago
Operating Expenses/Revenue	102%	91.2%	79.6%
ROIC	N/A	28.5%	91.6%
FCF/Equity (1)	-14.7%	3.4%	46.8%
Accrual Ratio	6.3%	11.3%	6.5%
Gauge Score (0 to 25)	0	3	19

1. FCF for the January 2009 quarter was estimated.


Expenses are up and returns are down.  The once-impressive ROIC figure has been erased.

Value	January 2009	3 months ago	12 months ago	5-year median
P/E	N/A	13.2	18.8	27.4
P/E to S&P 500 average P/E	N/A	89%	112%	166%
Price/Revenue	1.2	1.2	3.7	2.7
Enterprise Value/Cash Flow (EV/CFO) (1)	48.8	7.0	10.4	17.7
Gauge Score (0 to 25)	10	25	12	N/A

1. CFO for the January 2009 quarter was estimated.



NVIDIA's share price continued to fall in the November-January period, from $8.76 on 31 October 2008 to $7.95 on 31 January 2009. (We use the month-end price nearest to quarter-end date to calculate the Value metrics.)  The share price was over $30 between August 2007 and December 2007 -- not that long ago!

NVIDIA's valuation ratios can be compared with other companies in the Specialized Semiconductor industry.

Overall	January 2009	3 months ago	12 months ago
Gauge Score (0 to 100)	25	53	56

Former high-flier NVIDIA has stumbled badly, and its investors have been punished severely.   A 46 percent drop in Revenue from one quarter to the next is shocking and far worse than expectations when the quarter began.  Sales of NVIDIA's chips practically came to a halt in the fourth quarter, as a result of economic, industry, and (perhaps) competitive factors.  

Even if the marketplace loosens up, NVIDIA will still have to overcome challenges related to the sale of defective products and the need to ensure its products remain top-notch despite short product cycles and formidable competitors.