NVIDIA Corporation (NASDAQ:NVDA) went into its Q1 earnings announcement with lowered expectations. In April CEO Jen-Hsun Huang announced that a delay in a new version of the company’s Tegra mobile chip would cause the division’s sales to be flat this year. This combined with the declining PC market, which NVIDIA relies on for its discrete GPU sales, led analysts to expect flat EPS year-over-year and a small 1.7% revenue increase.
NVIDIA shows resilience
Another interesting point from the earnings release is the gross margin. The company managed to increase the gross margin by 4.2 percentage points year-over-year, rising from 50.1% to 54.3%. Huang had this to say:
The success of Kepler-based GPUs within and beyond the PC helped drive another quarter of record margins. Kepler is capturing share among gamers, strengthening our workstation and supercomputing segments, and will fuel new growth opportunities for our GRID server graphics solutions. With Tegra 4 devices and Tegra 4i certification on the way, we’re gearing up to return to growth in the second half.
Tegra 4i
NVIDIA Corporation (NASDAQ:NVDA) chose to delay the release of the Tegra 4 mobile processor, which will replace the Tegra 3, in order to focus on the Tegra 4i. The Tegra 4i will be the first mobile chip from NVIDIA which offers an integrated LTE modem. QUALCOMM, Inc. (NASDAQ:QCOM), the leader in mobile processors, already has a processor with integrated LTE on the market. The alternative to integrated LTE is a separate LTE modem, but this often leads to poor battery life. Integrating the processor with the modem allows for higher power efficiency, which is especially important for smart phones.
QUALCOMM, Inc. (NASDAQ:QCOM) currently dominates the market for LTE chipsets with around a two-thirds market share, but the size of the LTE market is set to expand dramatically over the next few years as 3G becomes a thing of the past. This gives NVIDIA Corporation (NASDAQ:NVDA) ample opportunity to grab part of the market.
What NVIDIA brings to the table is expertise in graphics. After the Tegra 4 will come the Tegra 5, and this chip will feature a mobile version of the company’s Kepler GPU found in discrete graphics cards. Earlier this year the company showed off Battlefield 3, a demanding PC game, running on the Tegra 5. This was compared to the graphics capabilities of the latest iPad in the video below:
NVIDIA Corporation (NASDAQ:NVDA) is attempting to bring PC-quality graphics to tablets, and it will be a huge leap forward. QUALCOMM, Inc. (NASDAQ:QCOM) will likely be lightyears behind in the graphics department, and this should give NVIDIA an advantage in high-end tablets.
Dividends, buybacks, and cash
Earlier this year NVIDIA announced a massive $1 billion plan to return money to shareholders. In addition to its $0.075 per share quarterly dividend, which should total around $200 million for the year, the company began buying back shares and expects to spend the full $1 billion this year. The company has plenty of cash to accomplish this, with $3.7 billion on the books at the end of the quarter. This cash represents about 43% of the market capitalization.
The dividend yields about 2.15%, not as high as some other tech stocks but respectable nonetheless.
The bottom line
NVIDIA Corporation (NASDAQ:NVDA) generates around $1 per share of free cash flow annually, and with about $6 per share in cash and a share price around $14 the stock is cheap even without the prospect of significant growth. But starting with the launch of Tegra 4i, and later Tegra 5, the mobile division should begin to grow again. And if NVIDIA can capture significant share from Qualcomm then the company could see exceptional growth going forward. Tablets could be transformed into real gaming machines, on par with consoles, and if that happens NVIDIA will be at the forefront.
The article An Earnings Beat and a Bright Future originally appeared on Fool.com and is written by Timothy Green.
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