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Profit Jumps at Nvidia

Sales rise 37%.

Updated from 5:15 p.m. EST

SAN FRANCISCO --

Nvidia

(NVDA) - Get NVIDIA Corporation Report

grew its bottom line by 57% in the fourth quarter, as the company continued to experience strong demand for its PC graphics chips.

And despite widespread fears that an economic downturn could crimp consumer spending on electronics, Nvidia said it expects sales in the current quarter to be better than seasonal.

"The whole

graphics processing market is growing. And the whole GPU market is growing because the computing experience is more visual than ever," Nvidia CEO Jen-Hsun Huang said in a post-earnings conference call Wednesday.

The trend is benefitting Nvidia in the market for high-end desktop PCs in particular, where the company's line of GeForce graphics cards is selling briskly, the company said.

Nvidia said its business selling add-in graphics cards for PCs was up 80% year-over-year in the fourth quarter.

Shares of Nvidia were up 31 cents at $27.33 in extended trading Wednesday.

Overall sales in the three months ended Jan. 27 totaled $1.2 billion, up 37% year-over-year and slightly ahead of the average analyst expectation of $1.18 billion.

Nvidia posted net income of $256.9 million, or 42 cents a share, vs. $163.5 million, or 41 cents a share at this time last year.

Excluding stock compensation expenses and a charge for acquisition-related in-process research and development costs, Nvidia said it earned 49 cents a share.

Analysts were looking for 47 cents a share, excluding the stock compensation expense. Acquisition-related charges are also generally excluded from analyst estimates.

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The Santa Clara, Calif., chipmaker achieved a gross margin of 45.7% in the fourth quarter, up from 41% a year ago, but down from 46.2% in the third quarter.

Nvidia blamed the sequential profit margin decline on production problems with its new GeForce 8800GT, which it said it hoped to resolve in the current quarter.

"We had some manufacturing challenges in the beginning. We caught it, fixed it and we're going to see far better yields going forward. But it affected our costs in the quarter," said Huang.

The company said it expects gross margin to be flat to slightly up in the current quarter.

In contrast to its strong position in desktop PCs, Nvidia has had a tougher time in the notebook PC market, where the company's sales increased 1% sequentially in the fourth quarter.

Huang acknowledged that rival

Advanced Micro Devices

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, which acquired Canadian graphics chipmaker ATI in 2006, has compelling products for what he deemed low-end notebooks.

But he said Nvidia's strong investments in innovation and research and development will allow it to succeed in the high-end notebook segment.

Nvidia also recently closed a pair of acquisitions, which contributed to the 22% increase in headcount year over year.

Finance chief Marvin Burkett said the acquisitions will mean that operating expenses will increase 8% to 10% sequentially in the current quarter.

Burkett said sales of graphics processors typically decline about 5% sequentially in the current quarter.

But given the recent demand for high-end desktop graphics chips, he said he expected a better-than-seasonal first quarter, with sales down only "slightly."

The average analyst expectation calls for revenue of $1.11 billion, which represents a 5.9% decline from the average fourth quarter revenue estimate.

The Street is looking for 41 cents in EPS in the current quarter.