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NVIDIA Corporation reported financial results for the first quarter of its fiscal 2004. Due to the weak market as well as several other factors, NVIDIA’s revenue for the period declined more than 30% compared to the same period last year. The company still remained profitable what is definitely a good news for shareholders, nevertheless, its gross-margins decreased since NVIDIA did not meet the cost-targets for the GeForce FX product line.

For the first quarter of fiscal 2004, NVIDIA’s revenue was roughly $405 million, compared to $582.9 million for the first quarter of fiscal 2003. Net income for the first quarter of fiscal 2004 was $19.7 million, or $0.12 per diluted share, compared to net income of $83.2 million, or $0.47 per diluted share, for the first quarter of fiscal 2003.

During the conference call representatives from NVIDIA Corporation, namely, NVIDIA’s CEO and president Jen-Hsun Huang, Michael Hara (Vice President of Investor Relations and Communications) and Marvin Burkett (Chief Financial Officer) said quite a number of interesting things about the company’s business during the quarter as well as their expectations about the future.

Quarter Highlights, Financials:

  • Gross margin is lower quarter-over-quarter and now is 31.3% (35.7% after the settlement with Microsoft last quarter) despite of the high margins with nForce and XBOX products.
  • Net inventory level is now $166 million (primarily because of new products) and represents 54 days of sales. NVIDIA inventory level target is 45-50 days of sales.
  • The quarter was strong for mobile graphics processors, nForce platform products, professional series of Quadro GPUs. Seasonal slowness drove the number of standalone GPUs shipped down.

Quarter Highlights, Products:

  • The whole line of the GeForce FX graphics processing units is now in production.
  • NVIDIA actually shipped more than 1.5 million of GeForce FX-series if graphics processors during the quarter despite of analysts’ expectations.
  • nForce chipsets’ sales were 80% up from the previous quarter. Now NVIDIA’s market share in chipsets with integrated graphics market is 7% (3% last quarter).
  • Revenues from XGPU and MCPX declined by $43 million quarter-over-quarter.
  • XBOX intended chips’ sales now account for less than 10% of revenue.
  • Memory sales increased moderately to $28 million.
  • Costs targets for the GeForce FX product line were not achieved and are expected to be only by the end of the Q2 of fiscal 2004 (please keep in mind that this is a forward-looking statement with all consequences). This presumably drives NVIDIA’s gross-margins down.

Second Quarter of Fiscal 2004 Expectations:

  • Revenue is expected to uptick 12% to 18%.
  • Sales of XBOX core-logic, GPUs and platform products are expected to grow.
  • Gross margins to decrease 1-2% due to yield issues with the GeForce FX product line.
  • Operating expenses to be up 5% to 10% since the company acquired new emulation equipment and software this quarter for the next-generation products (it means that they were a bit up already in the first quarter). Moreover, NVIDIA will also spend some money on additional marketing.
  • NVIDIA will ship more than 3 million of the GeForce FX graphics processors by the end of Q2. If the GeForce FX graphics processor will account for larger part of NVIDIA’s revenue, gross margins of the company will be lower because of the fact that these graphics processors cost the corporation more than it was originally estimated.

Current Products:

  • The yield of the GeForce FX GPUs product line is lower than expected.
  • The NV30 aka the GeForce FX 5800 was not a successful product for NVIDIA, the CEO said.
  • NVIDIA will ramp up the GeForce FX production for the next two quarters.
  • The company will launch its code-named NV35 graphics processor next week. The GPU will return leadership position for the company.
  • NVIDIA is actually delighted with initial shipments of the GeForce FX product line.

Future Products:

  • The NV35 graphics chip is in production since January and quite a big number of the processors were made already in February 2003. The first silicon of the code-named NV35 was perfect, what leads us to conclude that it is mostly based on already approved technologies. Note that recent increase of net inventory level might be because of large stock of expensive products. The yield issue of the NV30 was addressed in NV35.
  • The NV35-based products will be shipped really shortly after the formal announcement of the chip, according to the CEO, Mr. Jen-Hsun Huang.
  • NVIDIA expects more than hundreds of thousands NV35 units to be shipped by Christmas 2003.
  • IBM will manufacture several of the next-generation GPUs from NVIDIA.
  • East Fishkill, New York, facility will manufacture the first next-generation GeForce FX products in Fall 2003, not in Summer 2003, as NVIDIA originally said.
  • At this point NVIDIA has no particular plans for integrated core-logic for mobile computers.

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