- PC gaming (both desktops and notebooks) grew at a robust rate in the quarter as gamers continued to buy high-end GPUs to play the latest PC games.
- Accounting for 80% of the market, Nvidia remains the dominant player in professional GPUs.
- With IBM, Dell and HP now selling Nvidia GPUs in their high-volume servers, the company expects large-scale data centers to be a significant source of growth.
Having released an abbreviated earnings report three days ago, after mistakenly distributing a draft release to 100 employees, Nvidia (NASDAQ:NVDA) reported its complete Q1 2015 results yesterday. Revenues ($1.1 billion) increased 16% annually and earnings per share improved from 13 cents in Q1 2013 to 23 cents in Q1 2014, exceeding both the company guidance as well as consensus estimate. Growth in the quarter was driven by Nvidia's strong performance in PC gaming, higher Tegra revenue and continued progress in the data center and cloud.
Quick Snapshot of Q1 2015 Earnings
Nvidia witnessed growth across business segments. Generating $898 million in revenue, its GPU business increased 14% annually, mainly driven by 57% growth in high-end GeForce GTX GPUs in both desktops and notebooks. While the overall notebooks segment remained weak, Nvidia witnessed strong demand from the high-end notebook market. The company reported increasing sales for Quadro workstation GPUs as well as Tesla chips for data center systems and supercomputers. Sales of GRID, Nvidia's cloud solution, were up strongly compared to Q1 2013. Nvidia's Tegra business reported a 35% increase, expanding for the third consecutive quarter. Gross margins increased from 54.3% in Q1 2014 to 54.8% in Q1 2015 on account of a richer mix of high-end desktop and notebook GPUs as a percentage of revenue for both desktop PCs and notebooks.
The primary reason why Nvidia has managed to outpace the PC market is that it does not, and has not ever, addressed the bottom 70% of the market. Its main focus has been on those vertical segments within a broader computing market where visual computing matters the most, including gaming, PC gaming, professional visualization and design, high-performance computing, and big data analytics.
Our price estimate of $17.17 for Nvidia is at a marginal discount to the current market price. We are in the process of updating our valuation for the Q1 2015 earnings.
Tesla & GRID To Drive Growth In Data Centers
The release of the Kepler-based GPUs last year has fueled Nvidia's growth in professional graphics and translated into higher market share and margins for the company. Accounting for 80% of the market, Nvidia remains the dominant player in professional GPUs. The company claims to have started its fiscal 2015 with a 64% share of the PC discrete graphics market, 81% of workstation graphics units and Tesla in pilot projects at 44% of all HPC sites. 
Nvidia's data center strategy has two key components - Tesla GPU computing and GRID virtualization. It expects both platforms to accelerate its growth in the future. Tesla and GRID generate increasing revenue from compute acceleration opportunities, VDI deployments and streaming gaming, which has helped Nvidia expand its footprint in data centers.
In December 2013, Nvidia announced that IBM will include Tesla accelerators in its next generation supercomputers and will be developing accelerated versions of IBM enterprise software applications with Nvidia CUDA GPUs. IBM dominates the commercial end of the Supercomuting market. According to IDC, 32% of all HPC computing systems are IBM implementations. 
Nvidia claims that the GRID trials continue to grow rapidly with nearly 600 enterprises worldwide evaluating the GPU server platform, up over 35% compared to the previous quarter. Many of the trials announced are turning into sizable pilots and many of those are in big blue chip and government accounts. Recently, VMware announced support for GRID to enable GPU-accelerated enterprise virtualization.
High performance computing has driven Tesla so far and Nvidia expects big data analytics to further add to the growth momentum in the future. With IBM, Dell and HP now selling Nvidia GPUs in their high-volume servers, the company expects large-scale data centers to be a significant source of growth.
High-End PC Gaming Remains An Important Growth Driver
While the overall notebooks market declined in Q1 2015, the demand for Nvidia's advanced graphics chips for higher end notebooks grew. PC gaming (both desktops and notebooks) grew at a robust rate in the quarter as gamers continued to buy high-end GPUs to play the latest PC games.
PC gaming represents almost 40% of the worldwide gaming market, which is higher than consoles, phones, tablets or any other individual gaming segment.  The PC platform is the only open-platform for gaming and GeForce is very strong in that segment. In its earnings call, Nvidia announced that its has over 30 million subscribers to the GeForce experience, which it believes provides the best PC gaming experience.
Notebook gaming has grown at a CAGR of 51% in the last three years and the company believes that the launch of new games this year will further drive growth for its GPUs. In February 2014, Nvidia launched the GeForce GTX 750 series, the most power efficient GPU which starts at $99 and targets the entry PC gamer. The company claims that the GPU has received a great response so far and is witnessing strong demand in all regions. It will launch a new GPU (the GeForce GTX TITAN Z.) for the high end of the PC gaming market in the current quarter.
Q2 2015 Outlook
Revenues Of $1.1 billion, plus or minus 2% (seasonality in the consumer PC industry and strength in data center, CoD solutions, and mobility).
- GAAP and non-GAAP gross margin of 53.7% and 54%, respectively.
- GAAP and non-GAAP operating expenses of $457 million and $414 million, respectively.
- Both GAAP and non-GAAP tax rates to be around 20%, plus or minus 1%.
Disclosure: No positions.