NVIDIA late last week reported financial results for the second quarter of its fiscal 2004 ended July 27, 2003. The company experienced moderate growth in revenues and profits, but its margins declined dramatically.

For the second quarter of fiscal 2004, revenue increased to $459.8 million, compared to $427.3 million for the second quarter of fiscal 2003, an increase of 8%. Net income for the second quarter of fiscal 2004 was $24.2 million, or $0.14 per diluted share, compared to net income of $5.3 million, or $0.03 per diluted share, for the second quarter of fiscal 2003.

Revenue for the six months ended July 27, 2003 was $864.8 million, compared to revenue of $1.01 billion for the six months ended July 28, 2002. Net income for the six months ended July 27, 2003 was $43.9 million, or $0.26 per diluted share, compared to net income of $88.5 million, or $0.51 per diluted share, for the six months ended July 28, 2002.

As always, here are the most important and interesting facts said by NVIDIA’s executives during the second quarter of fiscal 2004 conference call.

Quarter Highlights, Financials:

• Gross margin is lower quarter-over-quarter and now is 28.3%.
• Net inventory level is now $217.86 million and represents 60 days of sales. NVIDIA did not comment on its inventory level target, but I reckon that the last quarter’s target was 45-50 days of sales. The executives said that they expect the inventory level to be flat or slightly up in the Q3.
• Inventory level of the GeForce FX-class products rises, whereas inventory level of older products declines.
• Operating expenses increased to $105.3 million (from $100 million) primarily because of additional R&D expenses.

Quarter Highlights, Products:

• NVIDIA said that it saw the rise in demand for desktop GPUs and XBOX logic during the second quarter.
• The company said that the sales of platform products declined.  
• NVIDIA accomplished its goal and shipped roughly 3 million of the GeForce FX-class graphics processors during the second quarter of the fiscal 2004.
• XBOX sales were slightly less than 19% of Q2 2004 revenues.
• Memory and other components accounted for $27 million.
• Costs targets for the GeForce FX product line were still not achieved. This continues to drive NVIDIA’s gross-margins down.

Third Quarter of Fiscal 2004 Expectations:

• Revenue is expected to uptick 5% to 6%.
• Sales of XBOX core-logic and desktop GPUs are expected to grow.
• Gross margins to be flat or down due to cost issues with the GeForce FX product line.
• Operating expenses are expected to increase because of additional R&D expenses.
• NVIDIA believes the sales of the nForce product line are about to grow.
• The company will release some new chipsets products in the Q3. Note that nForce chipset roadmap is aligned with AMD K8-family roadmap.
• NVIDIA puts strong hopes on sales of Media Center PCs.

On Cost and Yield Issues of the GeForce FX family of GPUs:

• NVIDIA claims that the yields of the GeForce FX GPUs product line are not an issue.
• The management said that they only pay TSMC for functional dies, but will still benefit from the yield improvement (Editor: this two statements seem to contradict each other).
• The company told analysts that the cost of manufacturing the 0.13 micron chips is high.
• NVIDIA blames cycle times for its low margins.
• The company is working on the improvement of its margins.

Future Products:

• No updates to say about chipsets for Intel processors.
• No updates on GPU manufacturing at IBM.
• “Now it is not a time to talk about next generation products”, NVIDIA’s CEO said.