Nvidia Slides Despite Solid Guidance - TheStreet

Updated from May 22 EDT

The Xbox is marking the sweet spot for

Nvidia

(NVDA) - Get Report

, though perhaps not as sweet as investors would like.

The maker of chips for video-game consoles posted stronger-than-expected first-quarter earnings Wednesday and nudged its guidance higher for fiscal 2003. The company attributed its gains to the launch of a new product cycle and continued demand for

Microsoft's

(MSFT) - Get Report

Xbox game system.

Still, the stock dropped modestly in postclose trading as investors worried about an inventory buildup and shrugged off disappointment that the guidance wasn't more aggressive. After rising $1.37 to $37.94 during regular trading Wednesday, the stock slumped 67 cents in after-hours action.

Up Sharply

Nvidia posted first-quarter earnings of 47 cents a share, a penny ahead of the Wall Street estimate and up sharply from the year-ago 26 cents. Revenue more than doubled to $582.9 million from $240.9 million a year earlier, beating the $575 million estimate. Gross margin hit 35.5%.

"During the quarter we entered a new product cycle, and delivered a number of groundbreaking products in each of our core markets," Nvidia CEO Jen-Hsun Huang said in a prepared statement, highlighting the company's new nForce platform chips. "We continue to gain market share ... we are confident that we can continue our progress in each product area we serve going forward."

The company also boosted earnings guidance a bit for the second quarter and the year. Nvidia expects to earn 44 cents to 47 cents a share for the second quarter and $1.82 to $1.88 a share for the year; the consensus is 44 cents for the quarter and $1.80 for fiscal 2003. Nvidia expects to post 2003 revenue of $2.3 billion to $2.5 billion, again toward the higher end of estimates. The company said the estimates reflect flat gross margins in the near term as the company's arbitration with Microsoft moves along.

Strong as the numbers were, some analysts worried about the first quarter's ballooning inventory, up $40 million to $254 million units from the fiscal fourth quarter of 2002. Huang shrugged off those worries, saying that the PC and video-game development cycle typically requires a ramp-up by July. That's when PC and game box makers prepare production ahead of an expected boost in back-to-school and holiday season sales.

Clearing the Decks

Nvidia also said it filed its restated financial reports with the

Securities and Exchange Commission

. The company said late last month that it would restate earnings over the last three years after an extensive in-house review that came at the request of the SEC. At the time Nvidia also named an interim financial chief as its full-time CFO took a leave of absence.

The company has weathered other storms this year in addition to the SEC probe. Earlier this year it disclosed that it was in arbitration with Microsoft over pricing disputes on its chips for the Xbox, which accounted for 22% of sales.

In response to an analyst's question, Huang said Xbox demand has neither "increased nor declined" since Microsoft lowered prices in Europe, Japan and the U.S. Huang also played down conflicts between the two business partners. "We have a great relationship with Microsoft," Huang told analysts, "although we do have a fine-print dispute over pricing."

The speedy conclusion of the internal probe April 29 helped the company regain investors' confidence, boosting its shares. Whether investors will stay on board now will be a subject for Wall Street to consider Thursday.

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