With PC sales losing ground to tablets, Nvidia is betting on its graphics expertise to make high-performance processors for mobile devices. Its earnings rose more than expected in the fourth quarter with its chips appearing in popular devices from Google.
The company, whose core business is graphics chips for PCs, made inroads in tablets last year but competition from Qualcomm has Wall Street concerned it may struggle to keep its mobile business growing fast.
"Looks like some of those products didn't have as strong an end of year as some might have expected and that they're now burning inventory," Cody Acree, an analyst at Williams Financial, said in reaction to Nvidia's revenue guidance.
Chief Executive Officer Jen-Hsun Huang told analysts on a quarterly conference call he expects a dip in sales of mobile processors in the first quarter as manufacturers wind down production of devices using Nvidia's Tegra 3 chips ahead of launching new gadgets with upcoming Tegra 4 chips.
Nvidia's Tegra 3 mobile processor is used in Google's Nexus 7, one of only a handful of tablets to make inroads against Apple's iPads. The Tegra 3 chip is also used in Microsoft's Surface Windows RT tablet.
But some analysts worry Nvidia may struggle to win new business for its upcoming Tegra 4 chip as competition intensifies and Samsung Electronics, which increasingly depends on its own chips, gains market share.
Nvidia is putting the finishing touches on Long Term Evolution (LTE) technology, which Huang said is necessary to move beyond tablets and compete against Qualcomm in high-end smartphone chips.
"We're working around the clock," Huang said. "We'll have some phone success this year but we're not expecting to have a whole lot of phone design wins until we have, until we engage the market, with LTE."
Microsoft's long-awaited launch of Windows 8 in October brought touchscreen features to laptops but failed to spark a resurgence in sales that Nvidia and other PC chipmakers and manufacturers had hoped for.
Nvidia's traditional PC graphics chip business, which accounts for most of the company's revenue, grew 7 percent in the fourth quarter versus the year-ago quarter after the company gained market share.
Revenue in Nvidia's Tegra group, the bulk of which comes from Tegra sales, grew 90 percent year over year, to $208 million in the quarter.
The company also said it expects to break ground this year on a new building at its headquarters to accommodate growth.
Nvidia plans in the second quarter to start shipping a new hand-held gaming device with the upcoming Tegra 4 processor and a built-in screen. The device, referred to as Project Shield, runs Android games currently found on smartphones and tablets and can also stream video games from PCs.
Nvidia expects to sell them through brick-and-mortar and online retailers, Huang told Reuters in an interview. Asked how many he expects to sell, Huang was optimistic: "We don't know the size of the market. I feel a little bit like the first year of an iPod. Who knows"
The company said its fiscal fourth-quarter net income rose to $174 million, or 28 cents a share from $116 million, or 19 cents a share, in the same quarter last year. Analysts on average expected 24 cents, according to Thomson Reuters I/B/E/S.
The Santa Clara, California, chipmaker said fourth-quarter revenue rose to $1.107 billion from $953.2 million in the year-ago quarter.
Revenue in the current quarter, Nvidia said, would be $940 million, plus or minus 2 percent.
Analysts were expecting revenue of $1.102 for the fourth quarter ended in January and $1.067 billion for the first quarter ending in April.
Shares of Nvidia were down 1.7 percent in extended trade after closing down 0.48 percent at $12.37 on Nasdaq.