The Business of Tech: NVIDIA Q3’08

Here’s something for you to chew on during a Monday morning: NVIDIA’s Q3’08 financial results. NVIDIA’s quarters end a bit later than everyone else, so while AMD reported its Q3 data a couple of weeks ago, NVIDIA only posted its results a couple of days ago.

Q2 as you may recall was a bust for NVIDIA, with their first loss in quite some time due to a combination of problems regarding product prices and the costs of replacing defective mobile products. Not a great deal has changed in a single quarter, and Wall Street’s Q3 projections were rather pessimistic as a result.

With that said, for Q3 NVIDIA managed to get back into the black, posting a profit of $61.7 million, on revenue of $897.7 million. This is a marked decline from last year, where in the same quarter they pulled in $1.12 billion in revenue, alongside $235 million in profit. The silver lining to this however is that those pessimistic projections called for around half as much profit as NVIDIA actually posted, which ultimately made this a good quarter for NVIDIA. The company has been on solid enough ground that there hasn’t been a question of whether they’d continue turning a profit after Q2, but how much alongside what kind of revenue has been the question, and now we have the answers.

One interesting item from NVIDIA’s statement was that their gross margin is up, nearly 3%, from 39.1% to 41.9%. As NVIDIA has continued to take a soaking on the GTX 200 series, a more rational outcome would have been for those GPUs to drag the gross margin down; instead and in spite of that it’s up. Clearly NVIDIA is still finding a way to make money on what’s an expensive chip to make, and barring further price cuts things should further improve as they finish transitioning their GPUs to 55nm. Their “performance segment “ (which we take to mean the sub-$200 GF9 parts) is now entirely at 55nm, for example.

As we mentioned earlier, much of Q3 was driven by the same things as Q2; poor pricing and lost sales are the primary reasons that NVIDIA’s revenue and profit have dipped so much. But one significant thing has changed this quarter, and it has been NVIDIA’s ace that allowed them to beat the estimates: Apple. Getting the GeForce 9400M and 9600M into Apple’s laptops is a big deal for NVIDIA, as while those products aren’t particularly profitable, Apple’s fortune in the laptop market means that NVIDIA will be shipping a lot of them. Care should be taken not to read too much into this, but it’s a positive note on what’s otherwise a rough time.

And that rough time will be continuing into Q4. You know there’s a recession going on when Q3 revenue is expected to exceed Q4, which is exactly what is happening. NVIDIA is not counting on the usual Christmas spending that gives tech companies strong 4th quarters, which puts them in line with the rest of the tech industry where everyone is finally starting to feel the full brunt of the sputtering economy. NVIDIA’s own predictions would put Q4 revenue at around $850 million, making Q4 much like Q3: Shrinking revenue, with a decent but not fancy profit.

Finally, Rambus would like to remind everyone that they’re still trying to shake down NVIDIA for money (and the timing is not coincidental). Near the end of Q2 they filed suit against NVIDIA, and now they’re filing a complaint against NVIDIA with the US International Trade Commission. The complaints and the requested remedy are the same: Rambus wants an injunction barring NVIDIA and its partners from importing or selling infringing products (i.e. just about everything NVIDIA makes). Injunctions are often used to drive a company back to the bargaining table, so it’s very unlikely we’ll see one, but it bears mentioning. Given how slow the ITC is (it’ll take 30 days just to decide if they want to investigate) it’s not a matter that’s going to be resolved any time soon.

We’ll close with a quick mention of AMD and where things stand. The economic problems we mentioned earlier are just as applicable to AMD’s graphics division as they are NVIDIA, so there’s little expectation that either company will pull away from the other. If you ever wanted an example of equality in the graphics market, this is pretty much it; in the consumer space both are roughly tied in performance, and in the financial space both are slightly profitable. NVIDIA does blow away AMD in graphics revenue but this is largely due to better stratification by NVIDIA – they have a much better position in the high performance computing market than AMD’s graphics division does. It wouldn’t be too surprising to see someone blink and lower their prices again, with similar products and similar profits, neither one is well positioned to do much else in a single quarter beyond playing with prices.