NVIDIA Corp.(NVDA - Analyst Report) reported third-quarter fiscal 2015 adjusted earnings (including stock-based compensation but excluding interest expense related to amortization, other acquisition-related costs, restructuring charges and other one-time items) on a proportionate tax basis of 33 cents per share, which comfortably surpassed the Zacks Consensus Estimate of 29 cents.

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On a year-over-year basis, adjusted earnings increased from 20 cents primarily due to higher revenue base and encouraging operating performance.

Revenues

Revenues increased 16.3% year over year to $1.23 billion and beat the Zacks Consensus Estimate $1.20 billion. The year-over-year increase was primarily due to better-than-expected growth in Tegra Processor, GeForce GPU and the launch of Maxwell GTX GPUs.

Revenues from GeForce GPUs for desktop and notebooks increased 36% year over year, driven by robust demand in high-end GPUs. Tegra processor revenues grew 51% from the year-ago quarter aided by increase in the sale of auto infotainment systems, mobile devices and SHIELD tablets.

Margins

Although NVIDIA’s adjusted gross margin (including stock-based compensation but excluding other one-time items) contracted 23 basis points (bps) from the year-ago quarter to 55.2%, in dollar terms, gross profit came in at $676 million, up 15.8% from the year-ago quarter, primarily due to growth in GPUs, data center and the cloud platform.

Adjusted operating expenses increased 3.9% from the year-ago quarter to $453.8 million, as the company continued to invest in research and development, and capital expenditures. As a percentage of revenues, operating expenses decreased 440 bps from the year-ago quarter to 37% due to better cost management.

This resulted in an encouraging operating performance by the company. NVIDIA’s operating margin was up from 14% in the year-ago quarter to 18.2%, reflecting growth in its GPU business and stringent cost controls. In dollar terms, adjusted operating income increased from $147.8 million to $222.9 million.

The company’s adjusted net income (including stock-based compensation but excluding interest expense related to amortization, other acquisition-related costs, restructuring charges and other one-time items) on a proportionate tax basis came in at $186.5 million, up 49.8% from the year-ago quarter.

Balance Sheet & Cash Flow

NVIDIA exited the quarter with cash, cash equivalents and marketable securities of $4.24 billion compared with $4.39 billion in the previous quarter. Free cash flow in the quarter came in at $175.9 million, while cash flow from operations was $215.6 million. NVIDIA’s long-term debt stood at $1.38 billion. During the quarter, the company paid quarterly dividends totaling $46 million. The company also repurchased 16.8 million shares.

Guidance

For the fourth quarter of fiscal 2015, NVIDIA expects revenues of approximately $1.2 billion (+/-2.0%), up sequentially, primarily due to growth in the gaming business for desktop and mobile platforms, the data center and auto infotainment business. The Zacks Consensus Estimate is pegged at $1.21 billion.

Non-GAAP gross margin is expected to be approximately 55.5%, while non-GAAP operating expenses are expected to be approximately $422 million. Non-GAAP tax rate is expected to be 18% (+/-1%).

Recommendation

NVIDIA reported better-than-expected third-quarter fiscal 2015 results, primarily due to lower operating expenses as a percentage of revenues and higher growth in Tegra Processor, SHIELD tablet sales, GeForce GPU and Tesla sales. The company also gained significant traction in the Tegra segment.

We believe that NVIDIA’s innovative product pipeline and strength in gaming and high-end notebook GPUs remain its strengths. Also, the stabilization in the PC market would positively impact the GPU segment. Higher adoption rate of NVIDIA’s Tegra processors should also act as a catalyst, going forward.

Nonetheless, competition from the likes of Intel (INTC - Analyst Report) and QUALCOMM Inc. (QCOM - Analyst Report) remains a near-term headwind. 

NVIDIA has a Zacks Rank #3 (Hold).

Investors may consider DST Systems (DST - Analyst Report) a better-ranked stock in the technology sector which sports a Zacks Rank #2 (Buy).

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