NVIDIA Corp (NVDA) — Q3 2018 Earnings Call Transcript

Thank you. Good afternoon, everyone and welcome to NVIDIA's Conference Call for the Third Quarter of Fiscal 2018. With me on the call today from NVIDIA are Jen-Hsun Huang, President and Chief Executive Officer; and Colette Kress, Executive Vice President and Chief Financial Officer. I'd like to remind you that our call is being webcast live on NVIDIA's Investor Relations website. It is also being recorded. You can hear a replay by telephone until November 16, 2017. The webcast will be available for replay up until next quarter's conference call to discuss Q4 and full year fiscal 2018 financial results. The contents of today's call is NVIDIA's property, it can't be reproduced or transcribed without our prior written consent. During this call, we may make forward-looking statements based on current expectations. These are subject to a number of significant risks and uncertainties, and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release, our most recent Forms 10-K and 10-Q and the reports that we may file on Form 8-K with the Securities and Exchange Commission. All our statements are made as of today, November 9, 2017, based on information currently available to us. Except as required by law, we assume no obligation to update any such statements. During this call, we will discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our CFO Commentary, which is posted on our website. With that, let me turn the call over to Colette.

Thanks, Simona. We had an excellent quarter with record revenue in each of our four market platforms. Every measure of profit hit record levels, reflecting the leverage of our model. Data center revenue of $501 million more than doubled from a year ago and the strong adoption of our Volta platform and early traction with our inferencing portfolio. Q3 revenue reached $2.64 billion, up 32% from a year earlier, up 18% sequentially and well above our outlook of $2.35 billion. From a reporting segment perspective, GPU revenue grew 31% from last year to $2.22 billion. Tegra processor revenue rose 74% to $419 million. Let's start with our Gaming business. Gaming revenue was $1.56 billion, up 25% year-on-year and up 32% sequentially. We saw robust demand across all regions and form factors. Our Pascal-based GPUs remained the platform of choice for gamers as evidenced by our strong demand for GeForce GTX 10-Series products. We introduced the GeForce GTX 1070 Ti which became available last week. It complements our strong holiday lineup, ranging from the entry-level GTX 1050 to flagship GTX 1080 Ti. A wave of great titles is arriving for the holidays, driving enthusiasm in the market. We collaborated with Activision to bring Destiny 2 to the PC early in the month. PlayerUnknown's Battlegrounds, popularly known as PUBG, continues to be one of the year's most successful titles. We are closely aligned with PUBG to ensure that GeForce is the best way to play the game, including bringing shadow play highlights to its 20 million players. Last weekend, Call of Duty: World War II had a strong debut. And Star Wars Battlefront 2 will be released soon. E-sports remains one of the most important secular growth drivers in the Gaming market with a fan base that now exceeds 350 million. Last weekend, the League of Legends World Championship was held in Beijing's National Stadium, The Bird's Nest where the 2008 Olympic Games were held. More than 40,000 fans attended live. Online viewers were said to break last year's record of 43 million following in 18 languages. GPU sales also benefited from continued cryptocurrency mining demand. We met some of this demand with a dedicated board in our OEM business and a portion with GeForce GTX boards, though it's difficult to quantify. We remain nimble in our approach to the cryptocurrency market. It is volatile and does not, and will not, distract us from focusing on our core Gaming market. Lastly, the Nintendo Switch console continues to gain momentum since launching in March and also contributed to growth. Moving to data center; our data center business had an outstanding quarter. Revenue of $501 million more than doubled from last year and rose 20% on the quarter and its strong traction of the new Volta architecture. Shipments of the Tesla V100 GPU began in Q2 and ramped significantly in Q3, driven primarily by demand from cloud service providers and high-performance computing.

Yes. As you know, we started ramping very strongly Volta this last quarter. And we started the ramp the quarter before. And since then, every major cloud provider from Amazon, Microsoft, Google to Baidu, Alibaba and Tencent and even recently, Oracle, has announced support for Volta and will be providing Volta for their internal use of deep learning as well as external public cloud services. We also announced that every major server computer maker in the world has now supported Volta and are in the process of taking Volta out to market. HP, Dell, IBM, Cisco, Huawei in China, Insper in China, Lenovo have all announced that they will be building families of servers around the Volta GPU. So this ramp is just the first part of supporting the build out of GPU-accelerated servers from our company for data centers all over the world as well as cloud service providers all over the world. The applications for these GPU servers have now grown to many markets. I've spoken about the primary segments of our Tesla GPUs. There are five of them that I talk about regularly. The first one is high-performance computing where the market is $11 billion or so. It is one of the faster-growing parts of the IT industry because more and more people are using high-performance computing for doing their product development or looking for insights or predicting the market or whatever it is. Today, we represent about 15% of the world's top 500 supercomputers. I've repeatedly said, and I believe this completely, and I think it's becoming increasingly true, that every single supercomputer in the future will be accelerated somehow. So this is a fairly significant growth opportunity for us.

Jen-Hsun, three months ago, you described the July quarter as a transition quarter for your data center business. And clearly, you guys have ramped very well into October. But if you can talk a little bit about the outlook for the next couple of quarters in data center? And particularly on the inferencing side. I know you guys are really excited about that opportunity. So if you can share customer feedback and what your expectations are into the next year in inferencing, that will be great.

The second is deep learning training, which is very much like high-performance computing. You need to do computing at a very large scale. You're performing trillions and trillions of iterations. The models are getting larger each year, and the amount of data that we train with is increasing. The difference between a computing platform that's fast versus not could mean the difference between building a $20 million data center or high-performance computing servers. The third segment has to do with inference, which is when you're done with developing a network, you have to put it down to the hyperscale data centers to support the billions of queries that consumers make to the Internet every day. And this is a brand-new market for us. Currently, 100% of the world's inference is done on CPUs today. We announced recently that TensorRT 3 inference acceleration platform and our Tensor Core GPU instruction set architecture we can speed up networks by a factor of 100. Imagine the workload you have, if you can speed it up using our platform by a factor of 100, that translates to significant savings. The other way to think about it is that the networks are getting larger and more complex. We have the ability to support different network types irrespective of the precision required. Our platform can help scale out hyperscale data centers or reduce costs tremendously or both. The fourth segment of our data center is offering all of that capability and making it available in the public cloud. We see a lot of startups cropping up everywhere, benefiting from AI. Many recognize this new computing model. As a result of this, there are now thousands of startups due to AI, which is really exciting for us. These cloud providers are fantastic resources, allowing them to rent solutions by the hour. We've created a registry in the cloud to containerize complicated software stacks for deep learning development. This helps developers get started easily. And finally, the last opportunity lies within vertical industries such as automotive, healthcare, and manufacturing, where we can apply AI to solve problems that were once unsolvable.

I had a question on your Gaming seasonality into Q4. It's usually up a bit. I was wondering, do you see drivers that would mitigate the usual seasonal trends given how strong it's been sequentially and year-over-year? And as a related question, do you see your Volta volumes in Q4 exceeding Q3?

I think the guidance we provided, we feel comfortable with. But if you think about Volta, it is just beginning to ramp into market opportunities. My hope is that we continue to grow. There’s a lot of reasons to be hopeful about the future growth opportunities for Volta. We’ve primed the pump with cloud service providers, and they’re racing to get Volta into cloud because customers are clamoring for it. In regards to Gaming, remember, our Gaming business is sold one at a time to millions of people. What drives our Gaming business includes the rising demand for e-sports. E-sports are vibrant; people want to win and having better gear helps. The quality of content drives our Gaming business, just look at titles like Call of Duty and Destiny 2, the production value of these games is incredible. Lastly, there's a significant social aspect, as people want to share their experiences. All these factors are helping our Gaming business, and I'm optimistic about Q4. It looks like it's going to be a great quarter.

I was hoping to speak in a near-term and a longer-term question. On the near-term, you talked about the health of demand for Volta. Curious if you're seeing any sort of restrictions on the supply side, whether it's wafers or access to high-bandwidth memory, et cetera. And then the longer-term question really revolves around CUDA. You've talked about that as being a sustainable competitive advantage for you entering the year. Now that we've moved beyond HPC and hyperscale training into more inference and GPU as a service, could you elaborate on how you're seeing that advantage evolve over the year and how you're thinking about CUDA as the AI standard?

Everything that we build is complicated. Volta is the single largest processor that humanity has ever made, at 21 billion transistors, 3D packaging, the fastest memories on the planet. It's energy-efficient and saves an enormous amount of money while getting the job done quickly. We have one architecture that is vitally important because there is so much software and tools built on top of it. Our singular focus on this architecture gives us enormous leverage. CUDA is an advantage that's growing exponentially, and I'm excited about it.

Congratulations on the strong results and the consistent execution. Jen-Hsun, in the last few months, we've seen announcements from Intel, Xilinx and others describing other approaches to the AI market. How does the customer make that decision, whether to use GPUs or an FPGA or an ASIC? What can remain a competitive differentiator over the longer term? And does your position in the trail market give you a leg up when they consider solutions for the inference part of the problem?

We have one architecture, and our commitment to our GPUs, CUDA, and all of the software stacks that run on top of our GPUs further increases our customers' investment returns. Every single application has a unique software written for our architecture, optimizing performance continually. FPGAs are useful for prototyping, but our focus is on deep learning. If we're aligned with dominating certain domains, like high-performance computing or deep learning, our platform is unbeatable. This focused strategy gives us the upper hand overall.

Colette, on the last call, you mentioned that crypto was $150 million in the OEM line in the July quarter. Can you quantify how much crypto was in the October quarter? And expectations in the January quarter directionally? Longer-term, why should we think that crypto won't impact the gaming demand in the future?

In our results, our specific crypto boards equated to about $70 million of revenue, which is comparable to the $150 million we saw last quarter.

The longer-term way to think about crypto is that it will be small, but not zero. I believe that crypto will continue to have a presence like today. There will be new currencies emerging, and the interest in mining these new currencies will continue. Thus, crypto will remain a small but not insignificant part of our business. As for its impact on gaming demand, consider the fact that we're the largest GPU computing company globally, and our GPU businesses are sizeable across data centers, high-performance computing, and gaming.

You mentioned that some of the crypto market had moved to traditional gaming. What drives that? Is there a lack of availability of specialized crypto products? Or is it just that there's a preference driven towards gaming-oriented crypto solutions?

When the digital currency market becomes large, it entices someone to build a custom ASIC for it. As a result, it leads to monopolization of the marketplace, and new cryptocurrency needs to emerge for people to mine. The ideal platform for new emerging digital currencies turns out to be a CUDA GPU. There are hundreds of millions of NVIDIA GPUs, therefore, optimizing for our GPUs becomes very viable. That's why I say the use of GPUs for crypto will be small but relevant.

Jen-Hsun, congratulations on data center annualizing $2 billion, it's a huge milestone. I wanted to follow-up on your comments regarding data center partners. Relative to the doubling seen year-on-year, what does that partner expansion mean for data center growth? Also, regarding the new products announced in the Gaming platform, the 1070 Ti and a Collector's Edition on Titan Xp, what does that mean for the gaming platform?

We have never created a product as broadly supported by the industries with nine consecutive quarters of doubling year-over-year. This is unprecedented. The reason is CPU scaling has come to an end. Yet, the growth for software development and computing problems is growing fast. AI and deep learning are solving unsolvable problems across various industries. Our focus and commitment to this singular architecture has allowed us to create a truly successful product line.

I have a question on the automotive market and the outlook there. With other segments growing quickly, auto becomes a smaller revenue percentage. Can you discuss when auto revenue could return to a similar percentage of overall revenue?

We've reduced our emphasis on infotainment to allocate hundreds of our engineers toward autonomous machine and AI platforms. I believe in the coming years, everything that moves will eventually become autonomous. Just this last quarter, we announced an extension of our DRIVE PX platform to include DRIVE PX Pegasus. This investment is expected to yield substantial returns over the next couple of years as we tap into the growing autonomous vehicle sector. Expect revenues next year from development systems with further spikes once we begin providing robotaxis. The next few years will be critical for growth, and I’m excited about our position in this market.

I have a two-part question on gross margin. Colette, you previously discussed gross margins in the mid-50s a few years ago. Now you’re hitting numbers at 60%. Can you talk about how the mix of the data center business drives gross margin? And Jen-Hsun, when considering the large transistor count processor, how are you thinking about taking costs out of that product as you ramp into gaming next year and the effects on gross margins?

We've steadily increased gross margins over the years, reflecting the evolution of our value-added platforms. The growing ecosystem and ongoing efforts to enhance our products contribute to this trend. While each quarter can have a different product mix impacting gross margins, we remain focused on enhancing them over time.

We focus on yield enhancement and a world-class technology group prepares for new nodes while ensuring we can build our products effectively. Once in production, we benefit from ramping products, but the primary focus is enhancing the software stack that runs on top of our processors. This improvement can drastically enhance customer value and boost productivity, ultimately translating to revenue growth.

Jen-Hsun, can you comment on some of the issues this week regarding Intel and their renewed interest in getting into the graphic space and their relationship at the chip level with AMD?

There's a lot of news out there. The GPU is significantly important now, and the modern GPU is a domain-specific parallel accelerator. The amount of software engineering that goes into our GPUs is substantial. Our planning cycle is about five years, while it takes three years to build a new generation of GPUs. We support our architecture with dedication, resulting in applications that see incredible value from our innovations. Our competitors may find it difficult to match our level of commitment and capability in this rapidly evolving field. We’ve had another great quarter. Gaming is one of the fastest-growing entertainment industries, and we’re well positioned for the holidays. AI is increasingly widespread in various industries and we expect our technology to lead the way in autonomous driving. We anticipate seeing robotaxis powered by our technology on the road in just a couple of years. Thank you for joining us.