jen-hsun huang investor day

Nvidia beat earnings expectations for its first fiscal quarter ended April 28.

The world’s biggest standalone graphics chip maker reported non-GAAP (generally accepted accounting practice) revenue of $954.7 million, down 14 percent from $1.11 billion in the previous quarter and up 3.2 percent from $924.9 milllion a year ago. Non-GAAP earnings per share were 18 cents, compared to 35 cents in Q4 and 16 cents in Q1 a year ago.

Analysts had expected earnings per share of 10 cents on revenues of $940.6 million. Analysts have been worried about a steep drop in the PC business and the effect that can have on Nvidia’s core business of making graphics chips for PCs. But Nvidia has been diversifying for years into mobile devices with its Tegra line of mobile processors.

As previously mentioned, Nvidia plans to return more than $1 billion to shareholders in the form of share repurchases and dividends.

“The success of Kepler-based GPUs within and beyond the PC helped drive another quarter of record margins,” said Jen-Hsun Huang [pictured], president and chief executive officer of Nvidia. “Kepler is capturing share among gamers, strengthening our workstation and supercomputing segments, and will fuel new growth opportunities for our GRID server graphics solutions. With Tegra 4 devices and Tegra 4i certification on the way, we’re gearing up to return to growth in the second half.”

In after-hours trading, Nvidia’s stock price is up 2 percent. Looking forward to the second fiscal quarter, Nvidia expects revenue of $975 million, plus or minus 2 percent, and non-GAAP gross margins are expected to be flat at 54.6 percent.

Nvidia’s Kepler-based PC graphics chips, such as those in the GeForce GTX Titan card, are selling well. Nvidia also said it has engaged with more than 100 potential customers for its GRID VCA visual computing appliance, which helps workstation users become more mobile through cloud technology. Nvidia has also introduced its Tegra 4i chip, which combines a 4G LTE modem with a mobile processor. That could give Nvidia an advantage in mobile devices the future.

Patrick Moorhead, an analyst at Moor Insight & Strategy, said, “Nvidia’s solid earnings came on the back of higher-end Kepler-based gaming and workstation chips and cards where they have been gaining a lot of mindshare. The Tegra business was on a roll in the past few quarters driven by wins in Google Nexus 7 and Microsoft RT’s tablets, but that appears to have receded. While Tegra 4 hasn’t been benchmarked yet by reviewers, controlled bench-set [non-phone/tablet] numbers supplied by Nvidia shown that it performs pretty well, but the challenge will be bottling that into a phone. Project Shield [Nvidia’s upcoming handheld game device] could end up being the biggest surprise as it leverages trends in mobility, Android gaming, and will also pull from the console business.”

At the company’s recent investor day, Huang said that the company was investing heavily in its operations now because it has some “once in a lifetime opportunities” in mobile computing.

nvidia investor dayHuang said during the investor day that those investments are timely because the “PC business declined more in the last quarter than in the last 20 years. Obviously, the computer industry is changing.”

Nvidia has made PC graphics chips since 1993. It is the only standalone survivor in that business, and it competes against processor giants such as Intel, Advanced Micro Devices (ADM), ARM, and Imagination Technologies (including MIPS).

Huang said during the investor day that Nvidia’s Tegra business is at break-even, even as the company ratchets up the investment to more than $300 million a year. Overall, Nvidia research and development has reached $1.2 billion annually. About $880 million of that is core investment in chip design, while $10 million each is focused on new opportunities including Grid systems and the Project Shield handheld gaming system.

“We increased our operating expenses to invest in once in a lifetime opportunities,” Huang said during the investor day. “These investments are so timely and they must happen now. So our first half is rather muted. We’ll have growth in the second half. The disruption of the traditional market literally happened overnight. That’s why it’s so important for us to keep our foot on the gas.”

This year, Nvidia is investing heavily in the first half in the hopes of achieving growth in the second half, Huang said. He pulled in investments in Tegra 4i, a mobile graphics processor with built-in LTE modem. That investment, he said, “was a good decision by all measures.” That pushed out the debut of Tegra 4 by a quarter, from the first to the second quarter. As a result, Tegra sales will be flat for the year, he said.

Overall, “the exciting thing is the market opportunity ahead of us,” Huang said. The total available market for Tegra chips [with $300 million investment] is $10 billion. The opportunity for Grid computing is $10 billion, and the traditional graphics processing unit (GPU) market opportunity is $6 billion, Huang said. Huang said he thinks the computing business, if not PCs, will continue to grow.

Huang said that GPUs are Nvidia’s “crown jewels,” generating billions of dollars in revenues on the PC thanks to PC gamers and other enthusiasts. Nvidia is in the process of “mobilizing” those crown jewels in products such as Tegra. About three billion devices with graphics chips will be shipping by 2015, at a 12 percent compound annual growth rate. Nvidia is gunning for a sizable share of that.

Huang mentioned that Nvidia has more than 5,000 patents, mostly related to computer graphics. Nvidia is investing in games, enterprise, and computing devices.

With Grid computing, Nvidia is taking that business into the cloud, enabling remote graphics processing and it will lead to multiple users on a single graphics chip.  But Huang said the competition was fierce.

Huang said earlier that Nvidia will return $1 billion this fiscal year to shareholders in the form of stock buybacks and dividend payments, including $100 million in stock being repurchased this quarter. This will bring to $1.2 billion the total capital returned to shareholders since the company announced its quarterly dividend program in November.

Nvidia’s GPU business in the first fiscal quarter had revenue of $785.6 million, dow 5.6 percent sequentially and up 8.1 percent from a year ago. Nvidia saw declines in both desktop and notebook revenue. PC makers continue to closely manage inventory in advance of the Intel Haswell platform launch in June. Tegra revenue was $103.1 million in Q1, down 50.5 percent sequentially and down 22.2 percent from a year ago. The decline happened as Nvidia makes the switch from Tegra 3 to Tegra 4.