Nvidia CEO Explains Margin Problems

The big issue in Nvidia’s (NVDA) results for the fiscal first quarter ended April 27 turned out to be gross margins. As CFO Marv Burkett noted in an interview with Tech Trader Daily this afternoon, gross margin in the quarter came in about 100 basis points below expectations.

Burkett notes that revenue and expenses were right in line with guidance. The margin issue, he says, related to a product transition, as the company ramped down an old graphics process, the G80, and replaced it with a new one, the G92. He noted that there were two issues in that transition. One, the company had built up some inventory of G80s and need to get rid of them, in some cases below cost. And two, the manufacturing yields on the G92 “were not what they wanted them to be.”

At this point, the G80 inventory is gone; the job now is to fix the yield issue on the newer part. Burkett says the company thinks it can do that, and thus forecast that gross margins for the July quarter would recover the 100 basis points they lost in April. “It’s just a matter product engineering,” he says.

Burkett says that, despite Street concerns, there isn’t any unusual inventory levels in the the channel; he says inventory got too low in Q3 and Q4, and built back up in Q1, but not to an excessive level. Burkett also denied that they company had lost any significant market share in the quarter to its chief rival, the ATI division of Advanced Micro Devices (AMD). He says there was “very little change either way."

As I noted earlier, the company is guiding to a 5% sequential drop in revenue, in line with seasonal trends. But Burkett also notes that the July quarter can be hard to predict. While May and June are in PC makers’ second fiscal quarter, a seasonally slow period, he notes that July is a time when they start ramping up for the back-to-school selling season. Last year, he notes, the company had told the Street to expect revenues to be flat to down slightly; instead, the company grew 10% sequentially. “It becomes very difficult for us to forecast,” he says.

One other note. Nvidia’s cash position in the quarter dropped almost $188 million, to $1.6 billion. He explained that there were three reasons for that. One, the company made three acquisitions in the quarter. Two, it bought back about $125 million in stock. And three, Nvidia spent about $150 million for land and buildings adjacent to its corporate headquarters in Santa Clara. Burkett noted that the company has bought back $1.1 billion on its current $1.7 billion stock repurchase plan, and expect to continue to buy back shares.

In after hours trading, NVDA is down 65 cents, at $21.30.