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NVIDIA’s Profitability Sets New Record in Fiscal 4Q18

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Feb. 20 2018, Updated 9:02 a.m. ET

NVIDIA’s profitability

In the preceding parts of this series, we’ve discussed how NVIDIA’s (NVDA) and Advanced Micro Devices’ (AMD) revenues grew significantly due to better-than-expected GPU (graphics processing unit) demand from cryptocurrency miners. Although GPU prices rose significantly, AMD and NVDA did not reap the benefit as the prices were raised by third-party suppliers.

NVIDIA and AMD only design GPUs. They are manufactured by third-party foundries like Samsung (SSNLF). As NVIDIA shifted from TSMC’s (TSM) 14 nm (nanometer) node to Samsung’s 10 nm node with its Volta, it reaped the cost benefits arising from the smaller node. Moreover, it improved its product mix by focusing more on data center and AI (artificial intelligence) GPUs, which command higher prices.

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Gross margin

All this moved NVIDIA’s non-GAAP (generally accepted accounting principal) gross margin above 60% for the first time to its all-time high of 62.1% in fiscal 4Q18.

NVIDIA is thus getting closer to its rival Intel’s (INTC) gross margin of 65%. On the other hand, AMD is still stuck on the 14 nm node, and so its gross margin remained unchanged at 35% during the same quarter.

Notably, NVIDIA expects to improve its gross margin to 63% in fiscal 1Q19.

Operating expenses

NVIDIA’s non-GAAP operating expenses rose 17.4% YoY (year-over-year) to $607 million in fiscal 4Q18 as it continues to invest in future platforms of Gaming, AI, and automotive. Although its operating expenses increased in dollar terms, its revenue rose faster, reducing its operating expense ratio from 26.7% in fiscal 1Q18 to 21% in fiscal 4Q18.

NVIDIA’s operating expense ratio is lower than AMD’s ratio of ~28% and Intel’s ratio of ~30%. This shows that NVIDIA has higher operational efficiency than its peers.

For fiscal 1Q19, NVIDIA expects its operating expense to rise 21% YoY to $645 million, equating to 22% of its revenue. It expects its operating expense to grow at a similar pace throughout fiscal 2019.

Operating margin

NVIDIA’s richer product mix and higher revenue growth pushed its non-GAAP operating margin to a new high of 41.3%. This is the first time the company crossed the 40% benchmark. Its operating margin was way above Intel’s margin of 34.5% and AMD’s margin of 7%. In dollar terms, NVIDIA’s operating income rose 88.7% YoY and 19.6% sequentially to $1.2 billion.

NVIDIA expects its operating margin to reduce to 40.8% in fiscal 1Q19 as its operating expenses increase faster than its revenues. On the other hand, AMD expects to increase its operating margin to 7.9% in fiscal 1Q18 as it shifts its mix toward high-margin products.

The two companies could also benefit from the recent US tax reforms. We’ll discuss this further in the next part of this series.

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