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Sales Surge at Nvidia

Updated from 5:04 p.m. EST

Nvidia (NVDA - Get Report) boosted its sales 41% in the third quarter, blowing past Wall Street estimates.

The Santa Clara, Calif., graphics-chip maker said revenue in the three months ended Oct. 29 totaled $820.6 million, compared with $583.4 million at the same time last year.

Analysts polled by Thomson Financial were expecting Nvidia to report $753.6 million in third-quarter sales.

For the quarter, Nvidia earned $106.5 million, or 27 cents a share. Excluding stock-option compensation, EPS was 39 cents.

The average analyst expectation, which excludes stock-compensation expenses, called for EPS of 35 cents.

Shares of Nvidia, which closed Thursday's regular session at their 52-week high, gained 3.2%, or $1.13, to $36.42 in extended trading.

CEO Jen-Hsun Huang described the third quarter as one of the best in company history. "For the third consecutive quarter, we delivered record revenue as we continued to gain share in each of our core businesses," Huang said in a statement.

Graphics processors for desktop and notebook PCs -- the largest part of the company's business -- each experienced strong sales, with sequential growth up 13% and 46%, respectively.

Nvidia management said the company garnered a 52% share of the market for notebook graphics processors, making Nvidia the No. 1 player in the sector for the first time.

And the new GeForce 8800 graphics processor that Nvidia introduced Wednesday will allow the company to continue its strong sales growth in the months ahead, executives said in a postearnings conference call.

Huang said the G80 architecture at the heart of the new chip required more than $400 million to develop, representing the company's most ambitious undertaking ever.

More importantly, the G80 gives Nvidia a nice lead over rival ATI Technologies , which was recently acquired by Advanced Micro Devices (AMD) and is not expected to have a comparable product until 2007.

Management was less forthcoming about its other piece of big news, the recently announced plans to acquire PortalPlayer (PLAY) for $357 million in cash.

In their first public comments on the deal, Nvidia executives said the acquisition is expected to have a slightly negative effect on financials in the first year but would hopefully prove "wonderfully accretive" in the second year.

But management declined to provide more specific financial guidance, citing the fact that the deal has not closed and still requires shareholder approval. PortalPlayer's shares declined on the day the deal was announced, owing to the modest premium that Nvidia was offering for the company.

PortalPlayer, which makes chips used in mobile gadgets such as Apple Computer's (AAPL - Get Report) video iPod, could help bolster Nvidia's presence in the consumer electronics market.

The combination of Nvidia's graphics technology and PortalPlayer's applications processors will position the company to take advantage of what Huang labeled the "second PC revolution," in which he predicted that handheld gadgets will provide all the power and functionality of today's desktop machines.

During the most recently completed quarter, Nvidia's sales of graphics chips for handheld products, such as cell phones, were down slightly, while consumer electronic shipments for game consoles were flat.

Nvidia said its gross margin during the third quarter was 40.6% vs. 39.1% a year ago and was negatively affected by high sales growth of low-margin businesses such as memory and chipsets.

Management reiterated its commitment to achieving a 45% gross margin goal.

The company did not release a balance sheet because of its ongoing internal review of past stock-option accounting practices.

Nvidia is among more than 100 companies under scrutiny for the practice of backdating stock options. Earlier this month, Nvidia said it would restate three years' worth of financial reports and incur noncash charges of "less than $150 million" because of improperly recorded stock-option grants.

The company also said Thursday that net income during the second quarter ended July 30 was $86.8 million, or 22 cents a share -- a figure it was not able to provide when it reported results in August because of the investigation by its internal audit committee.

Also Thursday, CFO Marvin Burkett said that Nvidia hoped to wrap up the internal review by the end of the month, but that the company's outside auditors were still working on unresolved items.

Looking ahead, Nvidia projected a 5% sequential increase in sales during the fourth quarter, thanks to its new products. That translates to roughly $861 million in revenue vs. the average analyst expectation of $800 million.

Gross margins should increase by one percentage point sequentially, while operating expenses will be up 3% to 5% from the third quarter, due primarily to rising staff numbers.

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