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Shares of NVIDIA (NVDA) ended the past trading week on a bad note. On Friday, shares fell almost 4%. The manufacturer of graphics chips reported its third quarter results for its fiscal 2013 on Thursday after the close.

Third Quarter Results

NVIDIA reported third quarter revenues of $1.20 billion, up 12.9% on the year before. Revenues were up 15.3% compared to second quarter. Revenues came in just ahead of analysts consensus of $1.19 billion.

NVIDIA reported gross margins of 52.9%, up 70 basis points on the year before and up 110 basis points compared to the second quarter.

The company reported a net income of $209.1 million, up 17.3% on the year before. Diluted earnings per share rose to $0.33 per share, beating analysts consensus of $0.30. Non-GAAP net income came in at $245.5 million, or $0.39 per diluted share.

NVIDIA decided to increase its rate at which it is returning cash to shareholders. The company extends its existing $2.7 billion share repurchase program and initiates a quarterly dividend of $0.075 per share.

CEO Jen-Hsun Huang commented on the results, "Investments in our new growth strategies paid off this quarter in record revenues and margins. Kepler GPUs are winning across the special-purpose PC markets we serve, from gaming to design to supercomputing. And Tegra is powering some of the most innovative tablets, phones and cars in the market."

Detailed Information

NVIDIA had a solid quarter in its PC graphics chip business. NVIDIA has taken market share from other rivals in the troubled industry, including from Advanced Micro Devices (AMD) which has suffered in recent times. NVIDIA's Kepler GPUs are winners in the specific areas of gaming and supercomputing in the personal computer market.

Consumer product revenues were up 28% to $243.9 million driven by the Tegra business. Tegra graphics are used in tablets including in Microsoft's (MSFT) Surface tablet and Google's (GOOG) Nexus 7. NVIDIA has leveraged its graphics expertise more and more towards mobile devices. While the tablet segment is growing very rapidly it faces intense competition from Qualcomm (QCOM) which reported decent quarterly results earlier this week.

NVIDIA warns for a softer fourth quarter given the seasonality of its business. The majority of the builds have already been shipped ahead of the holidays.

Outlook

For the fourth quarter of its fiscal 2012, NVIDIA expects to generate revenues between $1.025 and $1.175 billion. GAAP gross margins are expected to come in unchanged at 52.9%. Analysts expected NVIDIA to guide for fourth quarter sales of $1.21 billion.

The company guides for GAAP operating expenses of $400 million for the final quarter of the year, compared to $384.4 million in the third quarter. Fourth quarter earnings are guided around $0.24 per share, below analysts consensus of $0.29 per share.

Valuation

NVIDIA ended its third quarter with $3.43 billion in cash, equivalents and marketable securities. The company operates without the assumption of debt, for a comfortable net cash position.

For the first nine months of 2012, NVIDIA generated revenues of $3.17 billion. The company reported a net profit of $388.6 million, or $0.62 per diluted share. Full year revenues are expected to come in around $4.3 billion, with annual earnings coming in around $540 million, or $0.85 per share.

The market currently values NVIDIA at $7.55 billion. This values the operating assets of the firm at roughly $4.12 billion. As such, operating assets are valued at roughly 1.0 times annual revenues and 7-8 times annual earnings.

During the quarter, NVIDIA initiated a quarterly dividend of $0.075 per share, for an annual dividend yield of 2.5%.

Investment Thesis

Year to date, shares of NVIDIA have fallen some 12%. Shares rose from $14 in January to peaks of $17 in February before falling back to $12 in the summer. After a rebound to $15 in August, shares are currently exchanging hands just above the $12 mark.

After peaking around $37 in 2007, shares fell to lows of $7 a year later. From that point in time, shares have recovered to $25 at the start of 2011, before losing half of their value again. Between 2008 and 2012, NVIDIA has increased annual revenues from $3.4 billion to an expected $4.3 billion this year. The company has consistently improved its profitability over this time period.

NVIDIA reported a decent third quarter and the soft outlook for the current quarter implies that some sales might have been pushed forward into the third quarter. NVIDIA remains heavily reliant on the PC market, but fortunately it focuses on strong performing segments in the personal computer industry. The company's exposure to the tablet market is promising, but it makes up only a fifth of total revenues and it faces stiff competition in the segment.

It is a positive sign that NVIDIA has decided to return cash to shareholders, by initiating a 2.5% dividend yield. Yet the positive announcements are overshadowed by a cautious outlook for the final quarter. I think expectations for the final quarter have simply risen too much. In comparison, fourth quarter revenues in 2011 were 10% below the level in the third quarter of the year, indicating that the current outlook is not shocking at all.

I remain cautiously optimistic.

Source: Nvidia - Dividend Announcement Limits The Impact Of A Soft Outlook