Nvidia’s Q4’15 Earnings Preview: Gaming, Tegra & Data Centers In Focus

It) has been a great year for GPU processor developer, Nvidia (NASDAQ:NVDA). (Fiscal years end with January.)  The company witnessed a marginal decline in its top line in 2013 as strength in its high-end  products (including its GeForce GPUs and Quadro, Tesla and Tegra processors) was partially offset by a decline in the desktop PC and notebook markets. However, Nvidia regained its growth momentum last year, and its revenue and net income for the first nine months increased by approximately 15% and 50%, respectively, over the prior year period. The company’s focus on addressing the top 30% of the market (mainly those vertical segments where visual computing matters the most) is clearly paying off and has helped it outpace the PC market (where it has always had a significant exposure). The company claims that PC OEMs now represent less than 25% of its GPU business and much less than 25% of its overall business.

Nvidia will report its Q4 2015 earnings on February 11th, and expects revenue to be relatively flat sequentially (in line with seasonal trends).

Our price estimate of $20 for Nvidia is slightly below the current market price. We will update our model after the Q4 2015 earnings release.

See our complete analysis for Nvidia

Transition To Maxwell Drives Growth In High End PC Gaming; PC Gaming Is A Growing Market

Nvidia completed the product transition to Maxwell based GPUs (desktop, notebook and workstation) in Q3 2015. Maxwell is Nvidia’s 10th generation GPU architecture, offering 2X the performance power of the Kepler architecture, which the company had touted as the most energy-efficient GPU ever built by it. Nvidia claims that Maxwell received enthusiastic reception in Q3 2015, with both the desktop version and the notebook version of the processors winning extraordinary support from reviewers. There are approximately 10 million gamers with GeForce GPUs installed in their systems that can benefit from a Maxwell upgrade, the company believes that it will continue to see growth in the PC gaming platform in the future as well.

PC gaming represents almost 40% of the worldwide gaming market, which is higher than consoles, phones, tablets or any other individual gaming segment.  ((Nvidia’s CEO Discusses F3Q 2014 Results – Earnings Call Transcript, Seeking Alpha, November 7, 2013)) The gaming business is expanding globally, which along with a brand new architecture helped Nvidia report a 30% growth in PC gaming revenue in Q3 2015. The company claims to be seeing great strength in developing countries, especially Asia. GeForce sits at the center of the PC gaming ecosystem, powering close to 100 million gaming PCs around the world. 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 unit volume, as well as ASPs, as the production value of games continue to grow.

Large-Scale Data Centers To Be A Significant Source Of Future Growth

The release of the Kepler-based GPUs in 2013 fueled Nvidia’s growth in professional graphics and translated into higher market share and margins for the company. Accounting for approximately 80% of the market, Nvidia remains the dominant player in professional GPUs. In its Q4 2014 earnings call, the company mentioned that it started its fiscal 2015 with a 64% share of the PC discrete graphics market, 81% of workstation graphics units and Tesla in pilot projects at 44% of all High Performance Computing (HPC) sites. ^[1]

Nvidia launched the new Quadro product platform in August 2014. The new line up provides up to two times the improvement in application performance and data handling capability. The Quadro professional solutions, including processors based on the new Maxwell GPU architecture, are seeing a fast ramp up in the market and are being shipped by all of Nvidia’s major OEM partners.

IBM unveiled its first Open Power based system featuring Tesla GPU accelerators, which can significantly enhance Java, Big Data and technical computing applications. IBM announced plans to accelerate their enterprise applications using Tesla GPUs, including their nearly pervasive IBM DV2 with Blue database software. According to IDC, 32% of all HPC computing systems are IBM implementations. ^[1]

Nvidia’s GRID graphics virtualization continues to gain momentum, with around 1,000 enterprises worldwide evaluating the GPU server platform though the tri-grid online demonstration. The company launched a program with VMware for early customer access to GRID virtualized GPUs  in August 2014. The program is drawing wide global interest, and some of the early customers include: the aircraft maker Airbus, the international construction group CH2M Hill, healthcare provider MetroHealth, Villanova University and Halliburton.

Automotive Segment Is The Fastest Growing Tegra Devision

Nvidia’s Tegra processor sales grew 51% year on year in Q3 2015, led by auto infotainment systems, mobile devices, embedded systems and the onset of the Shield tablet sales. Auto infotainment systems revenue nearly doubled year over year with revenue up 11% sequentially.

Though the mobile device segment is the largest sub-segment in the Tegra division, the automotive segment is the fastest growing and offers higher gross margins (compared to devices). Automotive electronics is a large market and it is going through a transition  as cars have increased computing capability in both the drive train and the dashboard. Increasingly,  dashboard functionality within cars (infotainment system, digital cluster and automatic driver assistance) are being computerized. Strategy Analytics expects the market for Advanced Driver Assistance Systems to be worth around $15 billion by 2016, with a CAGR of 23%. ^[2]

Nvidia  has been working on building its automotive computing platform for over a decade and is in a strong position to take advantage of this growth. At present, there are more than 6 million cars using NVIDIA processors on the road, and the company expects another 25 million processors to be integrated into vehicles over the next 5 years. ^[3]

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1. Nvidia’s CEO Discusses F4Q2014 Results – Earnings Call Transcript, Seeking Alpha, February 12, 2014 [↩] [↩]
2. as cited in Nvidia’s CEO Discusses F4Q2014 Results – Earnings Call Transcript, Seeking Alpha, February 12, 2014 [↩]
3. Nvidia Powers New Honda Infotainment System, Nvidia Newsroom, October 1, 2014 [↩]