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Nvidia's Profit Falls Short

Earnings grow but don't meet Wall Street expectations.



(NVDA) - Get NVIDIA Corporation Report

grew its bottom line 33% in the first quarter, but fell short of Wall Street estimates as the company's gross profit margin eroded slightly.

Nvidia executives blamed the margin weakness on "product transition" issues, as the company struggled to produce enough of its newest graphics chips.

"We had hoped and expected to make progress improving yields for new products. This did not happen," CFO Marvin Burkett said bluntly in a post-earnings conference call on Thursday.

He predicted that gross margin would recover in the current quarter, and said that the company expects sales this quarter to be in line with seasonal trends.

After initially tumbling 8% following the release of its earnings report, shares of Nvidia recovered and were off just 0.1%, or 3 cents, at $21.92 in extended trading Thursday.

The company's stock is down roughly 19% in the past three months on concerns that increasing competition and slowing demand could derail the chipmaker's record of supercharged growth.

Advanced Micro Devices

(AMD) - Get Advanced Micro Devices, Inc. Report

, which owns the rival graphics chipmaker ATI, has released new products targeted at notebook PCs that have won critical praise. And

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(INTC) - Get Intel Corporation Report

is preparing to enter the market with a graphics processor dubbed Larabee.

Nvidia's first-quarter results reflected strength in the company's key businesses however.

Nvidia said sales of its graphics chips designed for PCs continue to outpace the growth of the overall PC market, with the company seeing a 42% jump in unit shipments compared to the year-ago period. The company's workstation PC business saw sales rise 21% sequentially.

All told, Nvidia reported revenue of $1.15 billion in the three months ended April 27, in line with analyst expectations. At this time last year, Nvidia had sales of $844 million.

The Santa Clara, Calif., company earned $176.8 million, or 30 cents a share, vs. $132.3 million, or 22 cents a share at this time last year.

Excluding stock option compensation costs, Nvidia said it earned 36 cents a share -- two cents shy of the average analyst expectation of 38 cents.

The miss owed to the pinched gross margin, which decreased to 44.6% in the first quarter from 45.7% in fourth quarter. The chipmaker had forecast that its gross margin would be flat to up slightly sequentially.

AMD's Burkett said the margin will increase one percentage point in the current quarter.

And while Nvidia's internal inventory increased roughly 17% sequentially to $420 million in the first quarter, Burkett said he was comfortable with the stockpile, and said inventory could increase in the coming months as Nvidia brings new products to market and prepares for the seasonally strong part of the year.

In the current quarter, Burkett said he has no reason to believe that sales will be anything other than seasonal, which he defined as meaning a 5% decline. That would suggest revenue of $1.09 billion -- slightly below the average analyst estimate of $1.12 billion according to Thomson Reuters.