Finance 2.0

Nvidia’s 10Q report for FY09 is now available. The report and other filings can be found under SEC filings in the investor relations section of their website. Alternatively there is a direct link to this quarters report here.

I suggest downloading it so you can use it to follow my analysis. The page numbers I will refer to will be the PDF page index not the page numbers printed at the bottom of each page.

The 10Q is an important document because it tells us how the business is really performing. Nvidia made a loss this quarter because of a one time charge. Simply looking at the figures we see they made a loss and without extra information we cannot tell what the future holds. A one time loss should be treated like a one time gain. If you got a £1000 tax rebate in April you’d be stupid to expect one each week for the rest of the year.

Lets start with a quick recap of the basic earnings on page 6.

Nvidia Q2 FY2009 Earnings

Revenue was lower at $890M down $43M.
Cost of revenue was up $231M.
Gross profit was down $274M.
Research and development was up $55M.
Operating Expenses was up $66M.
Operating income was lower at -$155M down $339M.

Cost of revenue was up due to the $196M write-down consequently affecting gross profit.

If we take out this one time charge we can see the real operating figures for the company and build a better comparison.

Revenue: $890M down $43M.
Cost of revenue: $546M up $35M.
Gross Profit: $345M down $78M.
Research and development: $212M up $55M.
Operating Expenses: $305M up $66M.
Operating income: $41M down $143M.

We can now see that Nvidia is still profitable albeit it barely in comparison to previous earnings. It may not be fair to make such a direct comparison as things related to the write-down may have caused extra operating costs. Still we cannot deny that Nvidia is having a rough patch.

There are several factors that I believe are causing Nvidia to have a tough time.

• ATI released new products which performed better than expected.
• ATI have priced their products very aggressively to try and capture market share.
• Most Nvidia products from this quarter were produced on a 65nm process. ATI products are on 55nm
• meaning they use less silicon and more can be produced per wafer. This means larger margins.
• The new Nvidia GTX 2xx series cards are very expensive to produce, hence their very expensive price on release. The ATI cards caused Nvidia to drop prices thus lowering income per chip by around $150.
• They celebrated before they got to the finish line. They thought they were untouchable and now ATI have caught up again.

That’s quite a list of things chipping away at profits but it is also a list of things that when fixed will return this company to normal. A look at AMD’s 10Q shows that their graphics divison cannot even make an operating profit despite having had the manufacturing advantage for a long time now.

The shift to 55nm from 65nm decreases product size by approximately 33% which in turn increases the amount of products you can get from a wafer by 50%. This is a vital transision for Nvidia and they shouldn’t stop there. Manufacturing advantages can makeup for a poor product, just look at Intel’s graphics divison.

The most interesting part of the 10-Q is the breakdown of earnings into segments this is available on page 33.

Nvidia Q2 FY2009 Earnings Breakdown

Graphics is still taking huge revenue despite all the negativity. The writedowns are reflected by negative income but the actual figures are not so bad when you look closely. However there is a another notable strength. Professional solutions are really pulling some weight for Nvidia. Professional solutions are Quadro and Tesla based cards. Nvidia’s combined graphics chip related revenue is still huge.

The weak spot of the company is chipsets. Hopefully Nvidia will leave the chipset business or at least make it more profitable by scaling down the size of designs. The Intel SLI bridge may help them focus of the profit side rather than the revenue side of things.

CPB had a bad quarter (Tegra/Mobile). This however is the one to watch. This could make or break nvidias future as a real player in the markets. It is a market they’ll have to themselves which is what is important here. Nvidia are good at execution of products so there is every reason to believe their chips will be in more and more mobiles in the future.