Shares of NVIDIA Corp. NVDA went up 10.6% in after-hours trading after the company reported better-than-expected second-quarter fiscal 2016 results.
The company reported adjusted earnings (including stock-based compensation but excluding interest expense related to amortization, other acquisition-related costs and other one-time items) on a proportionate tax basis of 26 cents per share, which beat the Zacks Consensus Estimate of 11 cents.
Revenues
Revenues not only increased 4.5% year over year to $1.15 billion but also surpassed the Zacks Consensus Estimate of $1.02 billion. The year-over-year increase was primarily due to better-than-expected growth in GTX gaming platform, data center, high-performance computing, cloud and automotive platforms.
Revenues from GeForce GPUs for desktop and notebooks increased 9% year over year to $959 million, driven by robust demand in high-end Maxwell GPUs coupled with strength in high-performance computing and cloud, and automotive. Also, continued strength in PC gaming impacted the quarter’s revenues.
Tegra processor revenues on the other hand decreased 19% from the year-ago quarter and came in at $128 million, primarily due to lower-than-expected growth in Tegra OEM smartphones and tablets. Revenues from gaming came in at $661 million, up 59% year over year, primarily due to strength in high-end Maxwell GPUs.
Margins
NVIDIA’s adjusted gross margin (including stock-based compensation but excluding other one-time items) expanded 17 basis points (bps) from the year-ago quarter to 56.3%. In dollar terms, gross profit came in at $649 million, up 4.9% from the year-ago quarter, primarily due to strength in GeForce GTX gaming platform and higher revenue base.
Adjusted operating expenses increased 4% from the year-ago quarter to $465 million, as the company continued to invest in sales, general and administrative activities. Also, litigation against Samsung and Qualcomm augmented the quarter’s expenses. As a percentage of revenues, operating expenses however decreased 20 bps from the year-ago quarter to 40.3%.
NVIDIA’s adjusted operating margin was up 37 bps from the year-ago quarter to 15.9%, reflecting growth in its GPU business and higher revenues base. In dollar terms, adjusted operating income increased from $172 million to $184 million.
The company’s adjusted net income (including stock-based compensation but excluding interest expense related to amortization, other acquisition-related costs and other one-time items) on a proportionate tax basis came in at approximately $140 million, up 1.7% from the year-ago quarter.
Balance Sheet & Cash Flow
NVIDIA exited the quarter with cash, cash equivalents and marketable securities of $4.51 billion compared with $4.79 billion in the previous quarter. Free cash flow in the quarter came in at $139 million, while cash flow from operations was $163 million. NVIDIA’s long-term debt stood at $1.39 billion. During the quarter, the company paid quarterly dividend totaling $52 million. The company also returned $400 million in accelerated share repurchase program.
Guidance
For the third quarter of fiscal 2016, NVIDIA expects revenues of approximately $1.18 billion (+/-2%), primarily due to growth in gaming, data center, cloud and auto infotainment businesses. The Zacks Consensus Estimate is pegged at $1.127 billion.
Non-GAAP gross margin is expected to be approximately 56.5% (+/-50 bps). Non-GAAP operating expenses are expected to be approximately $435 million. Non-GAAP tax rate is expected to be 20% (+/-1%).
Recommendation
NVIDIA posted better-than-expected second-quarter fiscal 2016 results and provided encouraging third-quarter revenue guidance. Also, revenues increased year-over-year primarily due to growth in GTX gaming platform, data center, high-performance computing, cloud and automotive platforms.
Furthermore, we believe that NVIDIA’s innovative product pipeline and strength in gaming and high-end notebook GPUs keep it well positioned. We also believe that higher adoption of NVIDIA’s Tegra processors could act as a catalyst, going forward.
Nonetheless, the continuous decline in PC sales is a cause of concern for NVIDIA’s GPU segment. Competition from the likes of Intel INTC and QUALCOMM Inc. QCOM also remains a near-term headwind.
NVIDIA has a Zacks Rank #4 (Sell).
Investors may consider Amazon.com Inc. AMZN, which sports a Zacks Rank #1 (Strong Buy).
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