In a previous article, we examined NVIDIA's (NASDAQ: NVDA) Income Statement for the third quarter of fiscal 2010 and compared the entries on each line to our "look-ahead" estimates. Earnings in this period, which ended on 25 October 2009, increased from $0.11 to $0.19 per share. On a non-GAAP basis, Net Income fell from $0.20 per share to $0.19.
Using the financial statements in the earnings announcement and the more detailed 10-Q , we have now updated our usual set of Cash Management, Growth, Profitability and Value metrics. This post reports on the metrics and the associated financial gauge scores.
NVIDIA Corporation designs powerful Graphics Processing Units that rapidly perform the intensive calculations required to produce hyper-realistic images for computers and video games. Some background information about NVIDIA and the business environment in which it is currently operating can be found in the look-ahead.
In summary, NVIDIA's latest quarterly results produced the following changes to the GCFR gauge scores:
- Cash Management: 15 of 25 (up from 7 in July)
- Growth: 2 of 25 (up from 0)
- Profitability: 10 of 25 (up from 6)
- Value: 9 of 25 (up from 5)
- Overall: 39 of 100 (up from 20)
| Cash Management | Oct 2009 | Jul 2009 | Oct 2008 | 5-Yr Avg |
| Current Ratio | 2.7 | 2.4 | 2.5 | 3.1 |
| LTD/Equity | 1.0% | 1.1% | 0.0% | 0.2% |
| Debt/CFO (years) | 0.1 | 0.1 | 0.0 | 0.0 |
| Inventory/CGS (days) | 78.3 | 83.7 | 62.9 | 70.3 |
| Finished Goods/Inventory | 51.8% | 57.2% | 63.3% | 55.5% |
| Days of Sales Outstanding (days) | 51.2 | 58.6 | 55.6 | 51.1 |
| Working Capital/Invested Capital | 180.4% | 158.3% | 124.8% | 178.0% |
| Cash Conversion Cycle Time (days) | 62.9 | 75.0 | 56.5 | 63.6 |
| Gauge Score (0 to 25) | 15 | 7 | 7 | 13 |
NVIDIA has considerable liquidity, including $1.6 billion in Cash and Short-term Investments (up from $1.3 billion one year earlier). Working Capital remained unchanged at $1.5 billion, with Current Assets a strong 2.7 times Current Liabilities at the end of the latest quarter.
If NVIDIA has short-term or Long-term Debt securities outstanding in meaningful amounts, we're not aware of it. The company does have about $25 million in long-term capital lease obligations.
Days of Inventory held, as measured by Cost of Goods Sold (CGS), has declined in the last two quarters. Inventory levels soared in the October 2008 and January 2009 quarters when semiconductor sales slumped badly. (Note: NVIDIA's Inventory value has varied so widely in the last year that we had to change the way calculate the Inventory metrics to get meaningful results. The figures shown above are, therefore, not identical to ones reported after previous quarters.)
The Days of Sales Outstanding, which is based on the Accounts Receivable, has returned to normal levels after surging last year. Receivables peaked at $679 million in July 2008, but have been $300 million to $400 million more recently. We had earlier suspected that slow sales compelled NVIDIA to relax the payment terms applied to its customers; whether true or not, our concern has abated. From the 10-Q,Two customers accounted for approximately 27% of our accounts receivable balance at October 25, 2009 and approximately 38% of our accounts receivable balance from three customers at January 25, 2009.
| Growth | Oct 2009 | Jul 2009 | Oct 2008 | 5-Yr Avg |
| Revenue growth | -31.9% | -35.4% | 9.9% | 9.9% |
| Revenue/Assets | 79.4% | 77.7% | 116.4% | 118.0% |
| Operating Profit growth | 6.4% | 4.8% | 41.8% | 17.8% |
| CFO growth | -23.6% | -65.8% | -57.7% | 164.7% |
| Net Income growth | N/A | N/A | -46.8% | 21.8% |
| Gauge Score (0 to 25) | 2 | 0 | 3 | 13 |
Although NVIDIA has bounced back sharply from the abyss at the turn of the year, Revenue, Cash Flow and Net Income in the last four quarters are all much weaker than during the previous four quarters. Special charges in the last year certainly haven't helped.
If NVIDIA can maintain recent momentum, comparisons will soon become more favorable.
| Profitability | Oct 2009 | Jul 2009 | Oct 2008 | 5-Yr Avg |
| Operating Expenses/Revenue | 104.6% | 106.1% | 86.2% | 88.8% |
| ROIC | -11.5% | -16.9% | 58.1% | 50.0% |
| Free Cash Flow/Invested Capital | 30.1% | 12.1% | 9.6% | 63.0% |
| Accrual Ratio | -13.8% | -15.0% | 12.5% | 0.5% |
| Gauge Score (0 to 25) | 10 | 6 | 9 | 15 |
Even if we exclude $279 million in special operating charges, NVIDIA's Operating Expenses in the last four quarters still exceeded Revenue by 4.6 percent.
However, positive Free Cash Flow, about $300 million in the last year, is an encouraging result. Although Cash Flow from Operations is down almost 25 percent, NVIDIA has been able to slash Capital Spending even more.
Since special charges decimated Net Income earlier this year, Cash Flow looks better in comparison. This is reflected in the Accrual Ratio's drop over the last four quarters.
| Value | Oct 2009 | Jul 2009 | Oct 2008 | 5-Yr Avg |
| P/E | N/A | N/A | 13.2 | 25.8 |
| P/E vs. S&P 500 P/E | N/A | N/A | 0.9 | 1.6 |
| PEG | N/A | N/A | 0.3 | N/A |
| Price/Revenue | 2.4 | 2.5 | 1.2 | 3.0 |
| Enterprise Value/Cash Flow (EV/CFO) | 13.2 | 18.7 | 7.0 | 17.2 |
| Gauge Score (0 to 25) | 9 | 5 | 25 | 10 |
At the end of January, NVIDIA shares sold for $7.95. The price rose to $12.93 by the end of July before slipping under $12 at the end of October. Given the lack of profits, it was inevitable that the share price increase would cause the contrarian Value gauge to fall over the last year. The valuation metrics involve Revenue and Cash Flow are the only ones relevant given the lack of trailing-year GAAP profits.
NVIDIA shares were trading at $13 the last time we checked.
| Overall | Oct 2009 | Jul 2009 | Oct 2008 | 5-Yr Avg |
| Gauge Score (0 to 100) | 39 | 20 | 57 | 50 |
The recent revival in NVIDIA's performance was noted by each of our gauges, although the Growth reading is still dismal for the reasons discussed above. The Overall score nearly doubled, but remains in weak-to-fair territory.
NVIDIA claims to be making great progress in finding new applications for GPUs, which would broaden its customer base. The company has been able to take advantage of improved IT market conditions in the last three quarters, although we've seen reports that inventory adjustments throughout the supply chain contributed to the these conditions.
We are going to remain skeptical until the company can get through several quarters with positive earnings and without $100+ million special charges. We do worry that NVIDIA is facing off against formidable and innovative competitors and that product quality issues from last year will have longer-term effects on the company's brand.
Full disclosure: Long NVDA at time of writing.
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