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Nvidia's Backing Its 'Big Game' Talks

NEW YORK ( TheStreet) -- Each time Nvidia (NVDA - Get Report) is discussed it's always in the context of the company's ability to change its chip strategy.

The Street doubts Nvidia can successfully transition itself from a PC-dependent graphics chip company to one that can compete on the big stage with Qualcomm (QCOM) and Broadcom (BRCM) in the realm of mobile devices.

However, management has shown it has a "chip on its shoulder" in more ways than one. The company has made clear it doesn't appreciate the bets that have been placed against it. In fact, during the company's fiscal fourth-quarter earnings report in February, during which Nvidia posted increases of 16% and 36% in revenue and profits, respectively, CEO Jen-Hsun Huang said, "My expectation is that we'll gain market share this year or we'll continue to gain market share this year."

Companies don't often go out of their way to raise expectations and put undue pressure on themselves without knowing they can back it up. Nevertheless, in such a highly competitive chip market -- where rivals want nothing more than to put each other out of business -- Nvidia investors were eager to learn what the next quarter would bring. The company didn't disappoint.

Amid all of the PC-related doom, which continues to weigh on rivals including Intel (INTC), Nvidia delivered as solid a performance as could have been expected, beating estimates on revenue and earnings per share. For that matter, on a year-over-year basis, there wasn't much to complain about. Not only did revenue advance 3% year over year to $955 million, but Nvidia's GAAP EPS of 13 cents was 30% higher year over year.

As noted, despite the 13% decline in global PC demand that was reported by IDC, the fact that Nvidia's graphics processing unit, or GPU, posted an 8% increase in revenue was impressive. Not only has the company been "talking a big game" but consumers seem to be buying into Nvidia's industry-leading graphic chips, which are predominantly used in gaming.

Management also backed up its prediction in profitability. Non-GAAP gross margins advanced more than 4% year over year to 54.6%. On a GAAP basis, the percentage move was the same, though slightly lower in absolute by 30 basis points. The better-than-expected performance was partly attributable to lower Tegra sales, which means that management is eating up the costs associated with developing Nvidia's mobile strategy.
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