Nvidia Records Loss as Company Redeems Underwater Options

Updated from 5:17 p.m. EST

Graphics chipmaker Nvidia (NVDA) posted a sizeable loss in earnings in its third quarter, reflecting its decision to swap out underwater stock options. It also issued what has become standard guidance from chipmakers, predicting flat revenue growth in the quarter underway.

The company lost $48.6 million, or 32 cents per share, a steep drop-off from its year-ago profit of 24 cents a share. The results reflect a charge of $61.8 million because the company swapped underwater employee stock options for fully vested shares of common stock.

After the bell, shares dropped sharply, losing $1.02 or 7%, to $13.56. Earlier, on a day when most chipmakers finished in the red, Nvidia finished down $1.63 or 10.1%.

Third quarter sales reached $430 million, up 18% from last year's levels and in line with expectations. Xbox revenues fell $40 million from the prior quarter, as expected and in line with lowered guidance from Microsoft. But the company said growth in its core products more than made up the difference, driven by its mobile, platform and mainstream desktop segments.

Nvidia's gross margins in the October quarter were 25%, a slide from earlier in the year. Margins reached nearly 36% in the April quarter. "It was kind of a blah quarter," summed up Michael McConnell of Pacific Crest Securities. "I would have liked to see a bit higher gross margins, given that Xbox had fallen in the quarter. It's obviously a very low-margin product."

Nvidia expects gross margins to rise to between 26% and 30% in the quarter underway.

On the plus side, he noted, inventories have come down. Inventories fell from 79 days in the July quarter to 58 days in the October quarter. "They're pricing inventories pretty aggressively in the channel to work them down. I think that's good -- it sounds like inventory levels are tracking true to actual demand. But a lot of their success in the fourth quarter will be contingent on PC sell-through."

On the call, Nvidia noted that sales in October had been fairly good. "It does sounds like things are heating up, but they're lower than seasonally typical at this time of year," McConnell said.

McConnell has a neutral rating on the stock; his firm does no banking for it.

On its post-close conference call, Nvidia predicted flattish growth in revenues, with mobile and platform processors likely to continue to see relatively higher unit growth. Earnings are also expected to be relatively flat.

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