NVIDIA Corporation 10-Q Summary: Quarter Ended May 2, 2010
Business Context and Reporting Period
This Form 10-Q covers the first quarter of fiscal year 2011, ended May 2, 2010. NVIDIA Corporation designs graphics processing units (GPUs) for the gaming, professional visualization, and high-performance computing markets, as well as system-on-a-chip solutions for mobile devices. The company operates through three primary segments: GPU Business, Professional Solutions Business (PSB), and Consumer Products Business (CPB).
Key Financial Metrics
| Metric | Q1 FY2011 (May 2, 2010) | Q1 FY2010 (April 26, 2009) |
|---|---|---|
| Revenue | $1,001.8 million | $664.2 million |
| Gross Profit | $456.4 million | $189.7 million |
| Gross Margin | 45.6% | 28.6% |
| Operating Income | $147.4 million | ($231.0 million) Loss |
| Net Income | $137.6 million | ($201.3 million) Loss |
| Diluted EPS | $0.23 | ($0.37) |
| Cash & Equivalents | $447.3 million | $512.3 million (End of Q1 FY2010) |
| Marketable Securities | $1,317.6 million | $1,281.0 million (End of FY2010) |
| Total Liquidity | $1,764.9 million | $1,728.2 million (End of FY2010) |
Debt: The company reported no long-term debt obligations other than capital lease obligations of $24.1 million. Total current liabilities were $765.3 million.
Cash Flow: Net cash used in operating activities was $5.4 million, compared to $142.1 million provided in the prior year quarter. This decrease was driven by increased working capital requirements (accounts receivable and inventory).
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 51% year-over-year, driven by a 43% increase in the GPU segment, a 79% increase in the PSB segment, and a 192% increase in the CPB segment.
- Profitability Turnaround: The company returned to profitability with $137.6 million in net income, reversing a $201.3 million net loss in the same period last year. This improvement is largely attributable to the absence of a $140.2 million non-recurring stock option purchase charge recorded in Q1 FY2010.
- Margin Expansion: Gross margin improved significantly from 28.6% to 45.6%, driven by better yields on 40nm products, manufacturing cost reductions, and a favorable product mix.
- Expense Reduction: Operating expenses decreased 27% to $309.0 million, primarily due to the absence of the prior year's stock option tender offer charges.
Guidance, Outlook, and Risks
Guidance: Management expects a seasonal revenue decrease of 3% to 5% in the second quarter of fiscal 2011 compared to the first quarter. Gross margin is expected to be in the range of 46% to 47% for the second quarter. Operating expenses are expected to be flat compared to the first quarter.
Management Commentary: The company highlighted the successful launch of the Fermi architecture (GeForce GTX 480/470) and record revenue for Tesla high-performance computing products. However, revenue in Q1 was somewhat limited by supply constraints related to 40nm wafer foundry capacity.
Risks and Contingencies:
- Product Defects: The company continues to accrue liabilities for a weak die/packaging material set in previous generation notebook products. As of May 2, 2010, an accrued liability of $47.6 million remained for warranty and repair costs.
- Litigation: Significant ongoing litigation includes patent disputes with Rambus Corporation (ITC investigation pending final determination), a license agreement dispute with Intel Corporation, and class action lawsuits related to the product defects mentioned above.
- Supply Chain: The company relies on third-party foundries (primarily TSMC) for manufacturing. Supply constraints for 40nm products are expected to continue impacting revenue in Q2.
Key Facts for Investor Verification
- Supply Constraints: Verify the extent of 40nm wafer supply limitations and their specific impact on Q2 revenue guidance.
- Product Defect Liability: Monitor the remaining warranty accrual ($47.6 million) and any updates on the associated class action litigation.
- Rambus Litigation: Track the ITC's final determination regarding patent infringement, which could result in an exclusion order or require royalty payments (estimated impact up to 0.9% of gross margin).
- Stock Repurchase Program: The company has $1.24 billion remaining in its authorized repurchase program but did not repurchase any shares during the quarter.
- Customer Concentration: Two customers accounted for approximately 28% of total revenue in Q1 FY2011.