NVIDIA announced its results for the three months that ended on 26 October 2008. This post provides the GCFR analysis for this period, which was the third quarter of the company's fiscal 2009.Our evaluation is incomplete because the press release did not include a Cash Flow Statement and because the Balance Sheet omitted certain details. These shortfalls will certainly be rectified in the 10-Q the company will submit to the SEC. To compute gauge scores, we estimated values for the missing data items.
When NVIDIA files a 10-Q, with more complete financial statements and notes, we will re-examine the analysis and make any necessary adjustments.
NVIDIA Corporation (NASDAQ: NVDA), 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.
The company competes with Intel Corporation (NASDAQ: INTC), Advanced Micro Devices (NYSE: AMD), and other firms. Apple, Inc., (NASDAQ: AAPL) recently decided to increase its use of NVIDIA's chips, at Intel's expense. Steve Jobs is reported to have said this "change speeds up processing-intensive activities—playing popular 3-D video games, for example—as much as six-fold."
Three months ago, NVIDIA reported a 5 percent drop in Revenue in the July 2008 quarter, relative to the July 2007 quarter. The company attributed the slowdown to reduced sales of GPUs for desktop computers and to a "miscalculation of competitive price position." NVIDIA's problems were compounded by a $196 million charge related to faults in certain products for notebook computers. This led to a $121 million loss in the July quarter. As best we can determine, this was only the second quarter NVIDIA in its current form recorded a loss.
One has to wonder if the $200 million charge for faulty products will be sufficient, especially when lawsuits are considered.Not surprisingly, NVIDIA's misteps led to major decline in the price of the company's shares. When we analyzed NVIDIA for the first time last summer, the low share price pushed our contrarian Value gauge to its peak value. The Overall gauge score registered 65 of 100 possible points.
Now, with actual and estimated data for the October 2008 quarter, our gauges display the following scores:
- Cash Management: 13 of 25 (down from 17 in July)
- Growth: 1 of 25 (down from 2)
- Profitability: 4 of 25 (down from 9)
- Value: 24 of 25 (down from 25)
- Overall: 55 of 100 (down from 65)
Before examining the factors that affected each gauge, we will review the latest quarterly Income Statement. We did not issue any projections for this quarter
Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.| ($M) | | October 2008 (actual) | October 2007 (actual) |
| Revenue | | 898 | 1,116 |
| Op expenses | | | |
| | CGS (1) | (530) | (600) |
| | R&D | (212) | (180) |
| | SG&A | (90) | (88) |
| | Other (2) | (8) | (0) |
| Operating Income | | 57 | 248 |
| Other income | | | |
| | Investments | 0 | 0 |
| | Interest, etc. (3) | 4 | 19 |
| Pretax income | | 61 | 267 |
| Income tax | | 1 | (31) |
| Net Income | | 62 | 236 |
| | | $0.11/sh | $0.38/sh |
| Shares outstanding | | 565 | 613 |
(2) Restructuring charges
(3) interest and other income (expense)
Revenue in the October 2008 quarter was 19.5 percent less than in the year-earlier quarter. Because of previous strong growth, Revenue in the most recent four quarters exceeded Revenue in the four previous quarters by 10 percent.
The Cost of Goods Sold (i.e., Cost of Revenue) was 59.0 percent of Revenue in the quarter. This translates into a Gross Margin of 41.0 percent, compared to 46.2 percent of Revenue in October 2007.
Research and Development (R&D) expenses were 23.7 percent of Revenue, up from 16.1 percent in the year-earlier quarter. It shouldn't be surprising that this ratio would increase in a period of declining sales. The company needs to keep its labs humming to avoid a further deterioration of its competitive position.
Sales, General, and Administrative (SG&A) expenses were 10.1 percent of Revenue, an increase from last year's 7.9 percent.
The October 2008 quarter included an $8.3 million restructuring charge to cover expenses associated with a "workforce reduction."
For all of these reasons, Operating Income fell 77 percent from the year-earlier figure.
Non-operating interest and other income was also down sharply, but the details behind this drop weren't addressed in the earnings announcement.
Although pre-tax income was positive, NVIDIA claimed a small income tax benefit instead of an expense. Still, Net Income fell by 74 percent.
| Cash Management | October 2008 | 3 months ago | 12 months ago |
| Current Ratio | 2.5 | 2.5 | 3.2 |
| LTD/Equity | 0% | 0% | 0% |
| Debt/CFO | N/A | N/A | N/A |
| Inventory/CGS | 64.0 days | 53.0 days | 60.0 days |
| Finished Goods/Inventory | N/A | 52.9% | 47.3% |
| Days of Sales Outstanding (DSO) | 51.1 days | 49.7 days | 48.0 days |
| Working Capital/Market Capitalization | 29.8% | 26.4% | 8.8% |
| Cash Conversion Cycle Time (CCCT) | 56.0 days | 49.1 days | 37.3 days |
| Gauge Score (0 to 25) | 13 | 17 | 15 |
| Growth | October 2008 | 3 months ago | 12 months ago |
| Revenue growth | 9.9% | 25.5% | 33.7% |
| Revenue/Assets | 116% | 125% | 126% |
| CFO growth | -56.6% | -21.6% | 112% |
| Net Income growth | -46.8% | -4.6% | 84% |
| Gauge Score (0 to 25) | 1 | 2 | 14 |
As indicated by the weak score, all of the Growth metrics are deteriorating.
| Profitability | October 2008 | 3 months ago | 12 months ago |
| Operating Expenses/Revenue | 86.2% | 82.7% | 81.1% |
| ROIC | 44.4% | 67.1% | 104% |
| FCF/Equity | 6.7% | 19.6% | 48.8% |
| Accrual Ratio | 13.7% | 10.3% | 4.7% |
| Gauge Score (0 to 25) | 4 | 9 | 15 |
Expenses are up and returns are down, although the ROIC figure is still impressive. Falling Cash Flow from Operations weakens the FCF/Equity ratio and the Accrual Ratio.
| Value | October 2008 | 3 months ago | 12 months ago | 5-year median |
| P/E | 13.2 | 11.6 | 30.8 | 27.6 |
| P/E to S&P 500 average P/E | 94% | 64% | 178% | 166% |
| Price/Revenue | 1.2 | 1.5 | 5.7 | 2.7 |
| Enterprise Value/Cash Flow (EV/CFO) | 6.8 | 5.3 | 16.1 | 18.5 |
| Gauge Score (0 to 25) | 24 | 25 | 2 | N/A |
NVIDIA's share price fell from $11.44 on 31 July to $8.76 on 31 October. The price continued to drop in October, before returning to the neighborhood of the October close. The Value gauge score above was computed with 31 October share price.
NVIDIA's valuation ratios can be compared with other companies in the Specialized Semiconductor industry.
| Overall | October 2008 | 3 months ago | 12 months ago |
| Gauge Score (0 to 100) | 55 | 65 | 39 |
Former high-flier NVIDIA has stumbled badly, and its investors have been punished severely. NVIDIA shares are selling at a significant discount to their historic norms. Our backward-looking gauge scores are, alas, blind to some of the challenges NVIDIA will have to overcome: replacing faulty devices, defending itself from lawsuits, and the ensuring that the company's products remain top-notch despite short product cycles and formidable competitors.
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