Analyst Conference Summary


conference date: August 12, 2008 @ 2:00 PM Pacific Time
for quarter ending: July 27, 2008 (2nd quarter fiscal 2009)

Forward-looking statements

Overview: Disaster quarter.

Basic data (GAAP) :

Revenue was $893 million, down 22% sequentially from $1.15 billion and down 5% from $935 million year-earlier.

Net income was negative $121 million, down sequentially from positive $177 million and a gain of $173 million year-earlier.

EPS were negative $0.22, sequentially reversing positive $0.30, and positive $0.29 year-earlier.


Fiscal Q3 2009 revenue difficult to forecast. Less than seasonal desktop PC growth. Total revenue to grow slightly. Small improvements in gross margins until move to 55 nm; have to sell 65 nm parts first. 17% non-GAAP tax rate.

Conference Highlights:

A $196 million charge was recorded "to cover anticipated customer warranty, repair, return, replacement and associated costs arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems."

Claims the quarter saw a weakening of the global desktop PC market. Miscalculated competitive pricing position, which further hurt desktop GPU segment. Despite the meltdowns, the notebook GPU, MPU and Professional Solutions groups grew 27% combined year-over-year.

Believes they are past the problems with new products that are correctly prices and strongly positioned to compete. Will take a number of steps to regain growth momentum.

Slow economic environment caused a mix shift to lower-cost PCs with lower-cost graphics chips.

40% desktop GPU sequential revenue decline. Units declined 20%, average prices (ASPs) declined 25%.

8% sequential notebook revenue increase. ASPs were relatively flat.

Non-GAAP net income was $74.5 million or $0.13 per share. 39.1% gross margin.

Stock repurchase program was increased by $1 billion. But no stock repurchases during quarter.

Cost of revenue was $743 million. Gross profit $150 million. Operating expenses of $305 million consisted of $213 million for research and development, $92 million for sales, general and administrative. Operating loss was $155 million. Interest and other income was $9 million.

Cash and marketable securities ended at $1.66 billion. Inventories ended at $432 million. $63 million capital expenditure. Cash flow from operations positive $90 million.

5553 employees, up sequentially.

Adoption of CUDA is accelerating. 52,000 compiler copies downloaded in quarter. Tesla processors will begin shipping this quarter.


Gross margin trajectory? Our price going into June was just wrong. Our pricing is right for the fall; we expect it to be stable going forward. We are focused on improving margins by getting our costs in line. We ended up with a lot more 65nm inventory than we like. All new products are 55 nm.

Charges covering everything out there? We are not expecting more write-downs in the future. We felt we had enough data to project the failures. Did not involve all of our chips or all types of notebooks.

Motherboard GPU product ramp? We are building a lot of them. They are 1 to 1.5 years ahead of our competitor's product. We have exciting design wins we will be announcing.

Desktop GPU expectations? Depends on economy, U.S. currency. There was a shift from midrange products to entry-level products. U.S. OEMs were stronger because of weak dollar. Our European business tends to be stronger with GPU attach.

How long to work through 65 nm inventory? Into Q4, hard to tell exactly. MCP does not have as good of gross margins, and is becoming a bigger part of our business, so that could be a drag.

Tegra is doing well, but won't ship until early part of next year. CUDA will give us an advantage over competitor in games because of its ability to run game physics. Also very effective for transcoding, like moving a DVD format to the iPod. CUDA does make die size larger, but we can't just keep selling chips that make graphics faster.

Loss of OEM business due to chip problem? OEMs have been delighted by our work to resolve the problems.

Ultraportable notebook impact? We have no offerings in that space. But we do for mobile internet devices like the iPhone.

Any plans to cut headcount? Our operating expense is too high. We are focused on moderating that, but we are committed to our plans for the second half of the year.

Performance segment grew 40% y/y. Midrange market is low-end GPU market, and that really collapsed in Q2.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2008 William P. Meyers