NVDA: Look Ahead to January Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for NVIDIA's earnings for fiscal year 2021's fourth quarter, which ended on January 31, 2021, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available later this month, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before getting into the details, let's take a step back and start with background information about NVIDIA.

NVIDIA develops high-speed integrated circuits and cards for demanding data-processing applications, such as gaming, data centers, visualization, artificial intelligence, and even cryptocurrency mining.  NVIDIA announced in September 2020 that it plans to acquire UK-based Arm Limited, a company that has been very successful at licensing designs for integrated circuits, from Softbank for $40 billion in cash and new NVIDIA shares. But, it's uncertain whether regulators will approve this deal and allow it to proceed.  NVIDIA was able to acquire Mellanox Technologies, a maker of high-performance computer networking products for data centers, for $7 billion in April 2020. 

Shares of NVIDIA now trade for about $566 each, giving the company a market value of $356 billion. These shares can be found in the Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.

NVIDIA recorded profits of $4 billion on revenue of $15 billion during the last year. In the quarter that ended on October 25, 2020, NVIDIA earned $2.91 per share (excluding certain items), which significantly beat the $2.58 Wall Street consensus forecast. See NVIDIA's most recent quarterly report.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

NVIDIA's management communicated their expectations for the January quarter when they last reported results in November 2020.  Note that this period is 14 weeks long.

NVIDIA’s outlook for the fourth quarter of fiscal 2021 is as follows:

•Revenue is expected to be $4.80 billion, plus or minus 2 percent.

•GAAP and non-GAAP gross margins are expected to be 62.8 percent and 65.5 percent, respectively, plus or minus 50 basis points.

•GAAP and non-GAAP operating expenses are expected to be approximately $1.64 billion and $1.18 billion, respectively.

•GAAP and non-GAAP other income and expense are both expected to be an expense of approximately $55 million.

•GAAP and non-GAAP tax rates are both expected to be 8 percent, plus or minus 1 percent, excluding any discrete items. GAAP discrete items include excess tax benefits or deficiencies related to stock-based compensation, which are expected to generate variability on a quarter-by-quarter basis.

NVIDIA expects its Revenue in the fourth quarter will be $4.7 billion and $4.9 billion.  I'm assuming the figure will be in the middle of this range.

I'm also using the 62.8 percent of Revenue midpoint for the GAAP Gross Margin.  The Cost of Goods Sold in, therefore, estimated to be be $4.8 billion * (1 - 0.628) = $1.79 billion.

Operating expenses include Research and Development and Sales, General, and Administrative costs.  Based on historical data, I'm assuming R&D will be about 2/3 of the $1.64 billion GAAP guidance figure and the other 1/3 will be SG&A.

The numbers above combine to produces an estimate for Operating Income of $1.37 billion, which is 39 percent higher than the equivalent quantity in the year-earlier quarter.

For non-operating gains and losses, I used the $55 million net expense from the guidance and the 8 percent (!) effective income tax rate.   

With these figures, the estimate for Net Income (GAAP) in the quarter is $1.2 billion ($1.92 per share).  

The following Income Statement summarizes the estimates made as discussed above. 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

#nvidia  #nvda  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis