Quarter Down but Year Up

NVIDIA had an up and down year but ended strong

Yesterday NVIDIA released their latest financial results for Q4 2012 and FY2012.  There was some good and bad mixed in the results, but overall it was a very successful year for NVIDIA.

Q4 saw gross revenue top $953.2 million US with a net income of $116 million US.  This is about $53 million less in gross revenue and $62 million down in net income as compared to last quarter.  There are several reasons as to why this happened, but the majority of it appears to be due to the hard drive shortage affecting add-in sales.  Simply put, the increase in hard drive prices caused most OEMs to take a good look at the price points of the entire system, and oftentimes would cut out the add-in graphics and just use integrated.

Tegra 3 promises a 50% increase in revenue for NVIDIA this coming year.

Two other reasons for the lower than expected quarter were start of the transition to 28 nm products based on Kepler.  They are ramping up production on 28 nm and slowing down 40 nm.  Yields on 28 nm are not where they expected them to be, and there is also a shortage of wafer starts for that line.  This had a pretty minimal affect overall on Q4, but it will be one of the prime reasons why revenue looks like it will be down in Q1 2013. 

The other stated reason why there was lower gross revenue was that of Tegra 2 orders in sharp decline.  Tegra 2 was a popular choice for smart phones and tablets in 2011, but with continued competition from other SOC manufacturers, as well as NVIDIA ramping production of Tegra 3, the previous gen chip was somewhat pushed to the wayside.  NVIDIA hopes that they can regrow Tegra 2 marketshare in China with the push there for lower cost smartphones.  Tegra 2 might just fit in quite nicely, but so far the design wins are not quite there yet.

FY2012 was a strong year overall for NVIDIA though.  They say gross revenue rose to $4 billion with a net income of $581.1 million, which is over double that of FY2011.  Gross margins went from 39.8% in FY2011 to 51.4% in FY2012.  The company appears steady in how they handle business and keep costs down.  It was a good year with solid growth across all divisions.

Jen-Hsun finds your lack of faith in his company disturbing.

2013 looks to be strong for NVIDIA, but Q1 will still see some struggles.  The ramping of 28 nm will be a thorn in the side, as NVIDIA has a per-wafer agreement with TSMC.  Currently yields are poor, so the resulting cost of the wafer is high and margins are low.  There also are simply not enough available wafer starts for all the companies that order from TSMC.  Supply is very constrained, so NVIDIA is just not getting the chip counts that they need.  They expect gross revenue to be in the $900 million range, which is still down a bit further than what we would typically expect for Q1.

There are some positives going into the next year that NVIDIA is quite excited about.  Margins on Tegra 3 are much better than what was seen in Tegra 2.  The greater knowledge of both ARM processor design and TSMC’s 40 nm process has allowed NVIDIA to increase clock speeds and the complexity of these parts, all the while lowering the effective TDP of Tegra 3 vs. Tegra 2.  While in some situations battery life will be worse with Tegra 3, the majority of time regular usage will see advantages with that part as compared to the older Tegra 2.  NVIDIA has made a very aggressive investment in the mobile market and expects to see revenue from that area grow by around 50% this year.  While this is short of the $1 billion estimate that NVIDIA gave last year, going from $360 million to around $540 is still a remarkable achievement.

The professional graphics market remains very strong for NVIDIA, and is a good area for growth.  Tesla support is also growing, and NVIDIA has secured some design wins in the supercomputing world with their Fermi based products.  Kepler has attracted a lot of interest from this market as well, and we will see these products being released around the Summer quarter.

The PC market will continue to see problems from the hard drive shortage until at least the beginning of Q3.  NVIDIA still expects GPU marketshare growth through desktop, professional, and Tesla solutions.  PC gaming is very strong right now, and looks to continue that through 2013 with releases like Mass Effect 3 and Diablo III.  The release of Ivy Bridge from Intel will further increase sales of add-in GPUs with this product cycle.

Tegra 3 appears to be the first quad core mobile SOC that will be available for some time.  Mobile for NVIDIA is again an area where they expect to see significant growth throughout this next year.  While many were expecting to see NVIDIA’s competitors in this market release 28 nm versions of their SOCs, it now appears as though the lack of available wafer starts will push those plans back by quite a few months.  It now looks like a late Q4 introduction for many of these 28 nm SOCs, which should give a nice window of opportunity for NVIDIA with their 40 nm based Tegra 3.  NVIDIA will also release new SKUs which include SOCs with integrated modems attached (the Icera purchase allows this).

AMD released the first 28 nm based cards, but according to NVIDIA there just are not enough 28 nm wafer starts to meet demand from a multitude of companies.

Q1 will certainly not be a great start to the year, but once yields improve and more wafer starts become available for 28 nm then the company will start to see a good rise in margins and a lowering of costs.  NVIDIA is obviously quite bullish on Kepler and what it will represent to the market.  From all the hints running around, NVIDIA will be taking a slightly different road with the design and actual introduction of this part.  NVIDIA did share that yields for Kepler on 28 nm is much better than the first Fermi parts coming off of 40 nm.

We can certainly look forward to another very interesting year in desktop, notebook and mobile graphics.  Competition will be tough, but some very interesting products will be delivered.  NVIDIA looks to remain healthy with a wide variety of products they are offering to the respective markets.