Along with its earnings, the company also disclosed that it was conducting an internal review of the recording of certain reserves and the timing of recording certain expenses in the fourth quarter of 2000 and first three quarters of fiscal 2001.
The internal review was spurred by an inquiry from the Securities and Exchange Commission on Jan. 14 and is related to the SEC's previously announced investigation of alleged insider trading by some Nvidia engineers. Nvidia has since provided e-mails and other material to the SEC covering the period from December 1999 to March 2000.
Shares of Nvidia were heavily traded Friday, falling $4.81, or about 7.7 percent, to close at $57.35.
On a conference call with analysts, Huang said the company was cooperating fully with the inquiry, adding that it would take appropriate action if necessary. The company's audit board, consisting of directors who have no regular working relationship with Nvidia, will conduct the internal review, he said.
Neither Huang nor Nvidia Chief Financial Officer Christina Hoberg would be involved with the review, the company said.
The accounting worries overshadowed a strong quarter. The company reported fourth-quarter pro forma earnings of $75.5 million, or 43 cents a share, on sales of $499.9 million, up 129 percent from a year ago. Net income including charges was 41 cents a share. Both tallies easily topped First Call earnings estimates of 34 cents a share.
On a conference call, Hoberg raised Nvidia's outlook for fiscal 2003, calling for sales of $2.3 billion to $2.5 billion and earnings of $1.70 to $1.75 a share. Nevertheless, analysts said the SEC inquiry would plague the company.
"Unfortunately, Nvidia brought up the 'A' word (accounting), which these days complicates matters quite a bit," said Goldman Sachs analyst Terry Ragsdale.
Accounting worries have been pushed to the fore by the collapse of energy trader Enron, with brokerages such as Goldman Sachs holding conference calls on "forensic accounting." In recent days, press and analyst reports have flagged potential accounting problems at Cisco Systems, IBM, and a host of telecommunications companies such as Qwest Communications International.
According to analysts, the SEC inquiry could cast a pall over Nvidia's financial performance and a promising line of products. Nvidia makes a broad range of chips that enhance video, audio and communications quality in numerous computing platforms including game consoles, workstations, Internet-enabled appliances, Apple Macintoshes and mobile PCs.
"We expect a cloud to remain over the stock until the investigation is completed and the results revealed, although we believe the company's ability to execute flawlessly and gain share in the graphics market will remain undaunted," Robertson Stephens analyst Eric Rothdeutsch said in a research note.
Analysts said that if it weren't for the accounting worries, Nvidia would continue to be a Wall Street darling. The company is cashing in on the popularity of Microsoft's Xbox, which accounted for 17 percent of Nvidia's fourth-quarter sales. Sales involving Xbox were $86 million in the fourth quarter, up 58 percent from $54.7 million in the third quarter.
Huang added that the company hopes to build on its recent successes in graphics chips by targeting new markets. "We had a record number of new products," he said.
Nvidia launched its new GeForce4 chip, which will split the PC market in two by targeting mid- and high-level users. Apple will be among the first PC makers to use the chip. Nvidia also launched its GeoForce Titanium chip line and touted plans to tackle the laptop market.
"We do not think that the problems Nvidia faces with the SEC, disconcerting as they are over the near term, should outweigh what we expect the company to achieve over the coming year," said Joe Osha, an analyst at Merrill Lynch.
Adding up all the moving parts, analysts were still upbeat about Nvidia's prospects. Some analysts even noted that the SEC inquiry could be an opportunity for investors, even though an investigation could take a couple of months.
"It's easy to shoot now and ask questions later," Goldman's Ragsdale said. "But that's a cop-out, and we do think this is a very interesting investment opportunity in the stock."