Highlights From Nvidia's (NVDA) Q3 Conference Call: Sees Tegra 3 More Successful Than Tegra 2

Nvidia Corp (NASDAQ: NVDA) reported Q3 EPS of $0.35, $0.09 better than the analyst estimate of $0.26. Revenue for the quarter came in at $1.07 billion versus the consensus estimate of $1.06 billion.

Highlights from NVDA's Q3 Conference Call:

Rob Csongor:

• We're pleased to report a strong third quarter. Our results reflect solid growth in desktop and professional GPUs, as well as our mobile processors while we executed on key growth drivers for next year. Desktop consumer graphics revenue rose beyond usual seasonal increases due to strong global demand from PC gamers.

• We believe this surge of PC gaming demand will drive increased demand for nVIDIA's GeForce products despite the soft consumer PC market. We expect a multi-year PC gaming cycle as the PC becomes increasingly more powerful than 5 to 6-year-old gaming consoles.

• While sell-out attach rates remain stable, nVIDIA discrete graphics notebook revenues were lower in Q3 reflecting a market share drop of 4%. We believe this is due primarily to some Intel loss of shares in CPUs and our absence from Apple notebooks in this design cycle.

• Consumer Products business delivered solid growth in the quarter. nVIDIA, and its partners added three more Tegra-based superphones to the eight already available. The LG Optimus EX, LG Optimus Q2 and Motorola Electrify. Also added 13 new tablets for a total of 23 currently available, including the ASUS slider, Sony tablet S, Sony tablet P, Toshiba Thrive 7-inch, the Acer Iconia A100, Sharp Galapagos e-reader, Dell Streak 10, Lenovo ThinkPad and Samsung's Galaxy Tab 8.9.

Karen Burns:

• Non-GAAP gross margin of 52.5% was a record for the fifth consecutive quarter. Gross margin exceeded our expectations for the quarter, primarily as a result of strong demand in the high-end segments of our desktop-GPU products, and record sales in our Quadro professional graphics products.

• Our strong balance sheet position at the end of the quarter reflects the overall strength in our businesses, strong demand and shipment linearity, strong collections, and management of inventory.

• Our outlook for the fourth quarter of fiscal 2012 is as follows: Closing on a strong third quarter, we expect revenue to be relatively flat, plus or minus 2%. We expect gross margins to be flat to up 0.5 percentage points from our record levels achieved in Q3 on both a GAAP and non-GAAP basis.

• For fourth quarter operating expenses we expect GAAP to be approximately $372 million and non-GAAP at approximately $330 million. The increase is primarily related to planned hiring in our strategic investment areas, as well as engineering costs related to new products as we bring them into production. We expect the tax rate to be between 14% and 16% on a GAAP and non-GAAP basis excluding any discrete tax events that may occur during the quarter.

• Looking ahead, the company’s GeForce desktop segment should be up nicely driven by hit games. The company’s notebook segment should experience flat to slightly down growth. Tesla is expected to be flat, and mobile is expected to be flat.

• Channel inventory is in good shape. In fact, for most of our high end products, the ones that the PC gamers buy, are particularly low at the moment, and so that reflects the demand that we're seeing. With respect to Thailand, the projection that we gave reflects how we view the marketplace as of now.

• With respect to our Tegra 2 versus Tegra 3, Tegra 2 will continue to ship into the marketplace. Three new phones were introduced just this week – or just this last quarter. And we're expecting to see those phones continue to ship. Tegra 3 is going to come into the marketplace in tablets ranging from 7-inch all the way to 10-inch. And the reason why Tegra III is such a – both very high performance, as well as super affordable is because the battery life is made possible by the technologies that are inside Tegra 3 that we talked about.

• The company believes that they lost the Motorola contract due to pricing and that they had their own internal rhythm and OMAP4 was right in between Tegra 2 and Tegra 3.

• We're actively doing the CFO search. We're working on it very hard. However, because we have such a great team on board, and they're doing such a great job it gives me the luxury of looking for someone who is very seasoned, who understands the technology industry and someone who – somebody completely world-class.

• The reason why we expect Tegra 3 to be more successful than Tegra 2 is one, we have much, much more experience in building these mobile devices than we did before. And there's not a single mobile – there is not a single cell phone company that I know who looks at us and say, "Do you know anything about building phones?" I think everybody is well past that. They think not only do we know how to build phones, we're fabulous at building phones with them. And so I think that the velocity of engagement is much greater than it used to be both on our side, as well as on their side.

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