The NVIDIA (NVDA) analyst call on Thursday was characterized by a relatively short presentation and long question and answer session. Analysts pressed a variety of concerns while management explained their view of the technology space and their strategy for increasing revenue and profits. [See also call details at Nvidia Q1 fiscal 2012 analyst call news summary.]
The explaining was necessary because revenues were $962.0 million, up 8.5% sequentially from $886.4 million, but down 4% from $1.002 billion in the year-earlier quarter. GAAP net income was $135.2 million, down 21% sequentially from $171.7 million, and down 2% from $137.6 million year-earlier. GAAP EPS (earnings per share) were $0.22, down 24% sequentially from $0.29, and down 4% from $0.23 year-earlier. Those numbers include a $40 million payment from Intel for intellectual property (really, to keep NVIDIA a strong ally against AMD); take that out, and the y/y comparisons look worse, while Q1 last year was nothing to shout about either.
So what are the issues? NVIDIA is exiting the motherboard chip set business, which originally became necessary because of a dispute with Intel. AMD has cut heavily into NVIDIA's former dominance in the discrete GPU (graphics) chip and card business. NVIDIA's supercomputer graphics business actually shrank a bit, though management argued it would expand down the road.
That leaves the savior of the moment, Tegra, a chip that runs cell phones and tablets. The newest one is Tegra 2, which everyone admits is a big improvement over the original Tegra. Tegra chips generated $122 million in the quarter, which is a lot of money, until you compare it with losses from the humble chip set business, or the bulk of NVIDIA's revenue, or smartphone chip revenue of some competitors.
NVIDIA claims they are going to take market share in the discrete graphics chips for notebook computers segment. Their only real competitor, AMD, says the same thing. But the good thing about discrete GPU chip competition is there are just those two players. The competition between them is intense, but at least it is somewhat predictable.
In smartphones and tablet computers, however, almost everyone is licensing the core processor design from ARM and adding graphics, Wi-Fi, and cellular modems as best they can. The competition is multifold. Qualcomm was the pack leader two years ago, and still outsells NVIDIA heavily. TI is very competive and believes it now is closer to the heart of Google (maker of the Android smartphone operating system) than NVIDIA, 2010's sweetheart. Apple makes its own ARM based processor for the iPhone and iPad. If they all disappeared there would be Marvell, which dominates the hard drive chip sector and has slots in a number of phones, including the new OPhones in China. There are other players in Korea, Japan, and China. Then there are the non-ARM entries, mainly for tablets but eventually for smartphones, from AMD and Intel.
And anyone can license the intellectual property to make a smartphone chip. In other words, there could be more players in 2012, not less.
Which is too many players. Consolidation will take place, probaby around 2013 when smartphones have completed replacing the bulk of not-so-smart cell phones. While the competition so far has been on technology, with points for speed, usability, and low-power consumption, at some point price will become an important issue. Profit margins will be squeezed.
I certainly believe NVIDIA is as competitive as any of the other companies I named. But there are going to be losers. There will have to be losers. It is next to impossible to predict who they will be.
Given that, investors might want to think about going lower down the food chain, to the companies that make semiconductor manufacturing equipment like Applied Materials or printed circuit boards for smartphones like TTM Technologies.
Of the companies named above, I currently own stock in Applied Materials, TTM Technologies, Marvell, and AMD. In the past I owned stock in NVIDIA.
See also NVIDIA