Driven by continued strength in the three growth areas of PC gaming (GeForce GPUs), datacenter and cloud (Tesla and GRID) and Tegra processors, Nvidia (NASDAQ:NVDA) posted strong growth in Q2 2015. At $1.1 billion, revenues increased 13% year on year, in line with company guidance. The company reported a record gross margin of 56.1% (up 130 basis points sequentially) in the quarter on account of its strength in high margin businesses of PC gaming GPUs, and datacenter and cloud platforms. Prudent fiscal management improved Nvidia’s net income by 33% year to year.
Nvidia’s Tegra processor sales grew 200% annually in Q2 2015, led by growth in mobile devices and automobile infotainment systems. Despite a 2% decline in overall GPU revenues, the company believes the business performed well considering the seasonal decline of consumer desktop GPUs in the quarter.
Nvidia remains focused on addressing the top 30% of the market, mainly those vertical segments within a broader computing market where visual computing matters the most. These include PC gaming, professional visualization and design, high-performance computing (HPC) and big data analytics. This focus has helped it outpace the PC market, where it has always had a significant exposure.
Our price estimate of $18.43 for Nvidia is only marginally higher than the current price estimate. We are in the process of updating our valuation for the company.
Increasing Acceptance of Tegra Processors Across Devices
Reporting 200% annual growth, Nvidia reported its fourth consecutive quarter of growth in Tegra revenue in Q2 2015. The company witnessed 110%, 18% and 14% sequential growth in Tegra processor revenues in Q3 2014, Q4 2014 and Q1 2015, respectively. Nvidia’s Tegra processor revenues declined significantly in the first half of fiscal 2014. Much of the decline can be attributed to the ramp down of Tegra 3 products and the company’s conscious decision to delay the launch of Tegra 4 by one quarter, in order to pull up the production of Tegra 4i chips.
Growth in Q2 2015 was driven by the three key high growth applications: mobile devices, automotive electronics and gaming.
Nvidia scored its first significant design win in March 2014 for the Icera 500 modem with Microsoft’s (NASDAQ:MSFT) 4G enabled version of the Surface 2 tablet. The addition of the Surface 2 tablet further expands the list of devices powered by Nvidia’s modem technology, including the Tegra NOTE 7 LTE tablet platform. It has wins as well in smartphones with the Tegra 4i, including the LG G2 Mini and Wiko WAX. In May 2014, Xiaomi, China’s biggest electronics company, introduced its first tablet (Mi Pad) based on Nvidia’s K1 mobile processor. Xiaomi’s Mi Pad started shipping in Q2 2015, with the first 50,000 units selling out in four minutes. Nvidia anticipates the first Tegra K1 Chromebooks to start shipping this quarter and IDC expects the Chromebook market to triple over the next three years.
Revenue from Tegra processors for automobiles grew 74% year over year and Nvidia expects the growth to continue for the next several years with Volkswagen, Audi and BMW using Tegra chips in their auto navigation systems. Nvidia launched its new mobile gaming device (the Shield Tablet) along with a wireless controller a few weeks back, with an intention to leverage growth in the Android gaming market, the world’s largest operating system platform. In addition, Nvidia aims to expand its reach to other large markets where visual computing matters, such as TV set top boxes and new desktop form factors like all-in-ones, clip-ons and smart monitors. Google showcased the Android TV at its annual developer conference, and gave every attendee a development platform based on Tegra.
High-End PC Gaming Remains an Important Growth Driver
Revenues from Nvidia’s GeForce GPUs for gaming desktops and notebooks grew 10% in Q2 2015, driven by continued strength in the gaming market, including the recently released GeForce GTX 750 and GTX 750 Ti, Maxwell-based GPUs.
PC gaming represents almost 40% of the worldwide gaming market, which is higher than consoles, phones, tablets or any other individual gaming segment. GeForce sits at the center of the PC gaming ecosystem, now powering close to 100 million gaming PCs around the world. Nvidia claims that its new entry-level GeForce GTX GPU delivers the performance of the latest generation consoles, making the GeForce gaming PC the largest target for developers of latest generation games.
Notebook gaming has grown at a CAGR of 51% in the last three years, and Nvidia believes that the launch of new games this year will further drive growth for its GPUs. The industry is expanding both in terms of volumes as well as ASPs, as the production value of games continue to grow.
Q3 2015 Outlook
- Revenue of $1.2 billion, +/- 2%. Sequential growth will be driven by continued strength in PC gaming and mobile platforms, datacenter and cloud solutions, and automobiles.
- Consumer GPU business and Tegra business to grow sequentially.
- GAAP and non-GAAP gross margins are expected to be 55.2% and 55.5% respectively, +/- 50 basis points.
- GAAP and non-GAAP operating expenses are expected to be approximately $463 million and $416 million, respectively.
- GAAP and non-GAAP tax rates of 19%, plus or minus 1%.
Disclosure: No positions.