NVIDIA Corp (NVDA) — Q1 2023 Earnings Call Transcript

Thank you. Good afternoon, everyone, and welcome to NVIDIA's conference call for the First Quarter of Fiscal 2023. With me today from NVIDIA are Jensen 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. The webcast will be available for replay until the conference call to discuss our financial results for the second quarter of fiscal 2023. The content 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, May 25, 2022, 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 delivered a strong quarter driven by record revenue in both Data Center and Gaming, with strong fundamentals and execution against a challenging macro backdrop. Total revenue of $8.3 billion was a record, up 8% sequentially and up 46% year-on-year. Data Center has become our largest market platform, and we see continued strong momentum going forward. Starting with Gaming. Revenue of $3.6 billion rose 6% sequentially and 31% year-on-year, powered by the GeForce RTX 30 Series product cycle. Since launching in the fall of 2020, the RTX 30 Series has been our best Gaming product cycle ever. The gaming industry has grown tremendously with 100 million new PC gamers added in the past two years according to Newzoo. And NVIDIA RTX has set a new standard for the industry with demand from both first-time GPU buyers as well as those upgrading their PCs to experience the 250-plus RTX-optimized games and apps, which have doubled from last year. We estimate that almost a third of the GeForce Gaming GPU installed base is now on RTX. RTX has brought tremendous energy into the gaming world and has helped drive a sustained expansion in our higher-end platforms and installed base with significant runway still ahead. Overall, end demand remained solid though mixed by region, and demand in the Americas remained strong. However, we started seeing softness in parts of Europe related to the war in Ukraine and parts of China due to the COVID lockdowns. As we expect some ongoing impact as we prepare for a new architectural transition later in the year, we are projecting Gaming revenue to decline sequentially in Q2. Channel inventory has nearly normalized, and we expect it to remain around these levels in Q2. The extent to which cryptocurrency mining contributed to Gaming demand is difficult for us to quantify with any reasonable degree of precision. The reduced pace of increase in Ethereum network hash rate likely reflects lower mining activity on GPUs. We expect a diminishing contribution going forward. Laptop Gaming revenue posted strong sequential and year-on-year growth, driven by the ramp of the NVIDIA RTX 30 Series lineup. With this year's spring refresh and ahead of the upcoming back-to-school season, there are now over 180 laptop models featuring RTX 30 Series GPUs and our energy-efficient thin and light Max-Q technologies, up from 140 at this time last year. Driving this growth are not just gamers, but also the fast-growing category of content creators for whom we offer dedicated NVIDIA studio drivers. We've also developed applications and tools to empower artists from Omniverse for advanced 3D collaboration to broadcast for live streaming to Canvas for painting landscapes with AI. The creator economy is estimated at $100 billion and powered by 80 million individual creators and broadcasters. We continued to build out our GeForce NOW cloud gaming service. Gamers can now access RTX 3080 class streaming, our new top-tier offering with subscription plans of $19.99 a month. We added over 100 games to the GeForce NOW library, bringing the total to over 1,300 games. And last week, we launched Fortnite on GeForce NOW with touch controls for mobile devices, streaming through the Safari web browser on iOS and the GeForce NOW Android app. Moving to Pro Visualization, Q1 revenue was $622 million, down sequentially 3% and up 67% from a year ago. Demand remains strong as enterprises continued to build out their employees' remote office infrastructure to support hybrid work. Sequential growth in the mobile workstation GPUs was offset by lower desktop revenue. Strong year-on-year growth was supported by the NVIDIA RTX Ampere architecture product cycle. Top use cases include digital content creation at customers such as Sony Pictures Animation and medical imaging at customers such as Medtronic. In just its second quarter of general availability, our Omniverse enterprise software is being adopted by some of the world's largest companies. Amazon is using Omniverse to create digital twins to better optimize warehouse design and flow and to train more intelligent robots. Kroger is using Omniverse to optimize store efficiency with digital twin store simulation. And PepsiCo is using Omniverse digital twins to improve the efficiency and environmental sustainability of the supply chain. Omniverse is also expanding our GPU sales pipeline, driving higher end and multiple GPU configurations. The Omniverse ecosystem continues to rapidly expand with third-party developers in robotics, industrial automation, 3D design and rendering ecosystems developing connections to Omniverse. Moving to automotive, Q1 revenue of $138 million increased 10% sequentially and declined 10% from the year-ago quarter. Our DRIVE Orin SoC is now in production and kicks off a major product cycle with auto customers ramping in Q2 and beyond. Orin has great traction in the marketplace with over 35 customer wins from automakers, truck makers, and robotaxi companies. In Q1, BYD, China's largest EV maker and Lucid, an award-winning EV pioneer were the latest to announce that they are building their next-generation fleets on DRIVE Orin. Our automotive design win pipeline now exceeds $11 billion over the next six years, up from $8 billion just a year ago. Moving to Data Center, record revenue of $3.8 billion grew 15% sequentially and accelerated to 83% growth year-on-year. Revenue from hyperscale and cloud computing customers more than doubled year-on-year, driven by strong demand for both external and internal workloads. Customers remain supply-constrained in their infrastructure needs and continue to add capacity as they try to keep pace with demand. Revenue from vertical industries grew a strong double-digit percentage from last year. Top verticals driving growth this quarter include consumer Internet companies, financial services, and telecom. Overall, Data Center growth was driven primarily by strong adoption of our A100 GPU for both training and inference, with large volume deployments by hyperscale customers and broadening adoption across the vertical industries. Top workloads include recommender systems, conversational AI, large language models, and cloud graphics. Networking revenue accelerated on strong broad-based demand for our next-generation 25, 50, and 100-gig ethernet adapters. Customers are choosing NVIDIA's networking products for their leading performance and robust software functionality. In addition, networking revenue is benefiting from growing demand for DGX super pods and cross-selling opportunities. Customers are increasingly combining our compute and networking products to build essentially modern AI factories with data as the raw material input and intelligence as the output. Our networking products are still supply-constrained, though we expect continued improvement throughout the rest of the year. One of the biggest workloads driving adoption of NVIDIA AI is natural language processing, which has been revolutionized by transformer-based models. Recent industry breakthroughs traced to transformers include large language models like GPT-3, NVIDIA Megatron BERT for drug discovery, and DeepMind AlphaFold for protein structure prediction. Transformers allow self-supervised learning without the need for human-labeled data. They enable unprecedented levels of accuracy for tasks such as text generation, translation, summarization, and answering questions. To do that, transformers use enormous training datasets and very large networks well into the hundreds of billions of parameters. To run these giant models without sacrificing low inference times, customers like Microsoft are increasingly deploying NVIDIA AI, including our NVIDIA Ampere architecture-based GPUs and full software stack. In addition, we are seeing a rising wave of customer innovation using large language models driven by increased demand for NVIDIA AI and GPU instances in the cloud. At GTC, we announced our next-generation Data Center GPU, the H100 based on the new Hopper architecture. Packed with 80 billion transistors, H100 is the world's largest, most powerful accelerator, offering an order of magnitude leap in performance over the A100. We believe H100 is hitting the market at the perfect time. H100 is ideal for advancing large language models and deep recommender systems, the two largest scale AI workloads today. We are working with leading server makers and hyperscale customers to qualify and ramp H100, as well as the new DGX H100 AI supercomputing system which will ramp in volume late in the calendar year. Building on the H100 product side, we are on track to launch our first-ever Data Center CPU, Grace, in the first half of 2023. Grace is the ideal CPU for AI factories. This week at COMPUTEX, we announced that dozens of server models based on Grace will be brought to market by the first wave of system builders, including ASUS, Foxconn, Gigabyte, QCT, Supermicro, and Wiwynn. These servers will be powered by the NVIDIA Grace CPU Super Chip, which features two CPUs and the Grace Hopper Super Chip, which pairs an NVIDIA Hopper GPU with an NVIDIA Grace CPU in an integrated model. We've introduced new reference designs based on Grace for the massive new workloads of next-generation data centers: CGX for cloud graphics and gaming, OVX for digital twins or Omniverse, and HGX for HPC and AI. These server designs are all optimized for NVIDIA's rich accelerated computing software stacks and can be qualified as part of our NVIDIA certified systems lineup. The enabler for the Grace Hopper and Grace Super Chips is our ultra-energy-efficient, low-latency, high-speed memory coherent interconnect NVLink, which scales from die to die, chip to chip, and system to system. With NVLink, we can configure Grace and Hopper to address a broad range of workloads. Future NVIDIA chips, including CPUs, GPUs, DPUs, NICs, and SoCs will integrate NVLink just like Grace Hopper, based on our world-class SERDES technology. We're making NVLink open to customers and partners to implement custom chips that connect to NVIDIA's platforms. In networking, we're kicking off a major product cycle with the introduction of Spectrum-4, the world's first 400-gigabit per second end-to-end Ethernet networking platform, including the Spectrum-4 Switch, ConnectX-7 SmartNIC, Bluefield-3 DPU, and the DOCA software. Built for AI and video, Spectrum 4 arrives as data centers are growing exponentially and demanding extreme performance, advanced security, and powerful features to enable high-performance advanced virtualization and simulation at scale. Across our businesses, we are launching multiple new GPU, CPU, DPU, and SOC quarters over the coming quarters, with a ramp in supply to support customer demand. Moving to the rest of the P&L, GAAP gross margin for the first quarter was 65.5% and non-GAAP gross margin was up 67.1%, up 90 basis points from a year ago, and up 10 basis points sequentially. We have been able to offset rising costs and supply chain pressures. We expect to maintain gross margins at current levels in Q2. Going forward, as new products ramp and software becomes a larger percentage of revenue, we have opportunities to increase gross margins longer term. GAAP operating margin was 22.5%, impacted by a $1.35 billion acquisition termination charge related to the ARM transaction. Non-GAAP operating margin was 47.7%. We are closely managing our operating expenses to balance the current macro environment with our growth opportunities, and we've been very successful in hiring so far this year and are now slowing to integrate these new employees. This also enables us to focus our budget on taking care of our existing employees as inflation persists. We are still on track to grow our non-GAAP operating expenses in the high 20s range this year. We expect sequential increases to level off after Q2 as the first half of the year includes a significant amount of expenses related to the bring-up of multiple new products, which should not reoccur in the second half. During Q1, we repurchased $2 billion of our stock. Our Board of Directors increased and extended our share repurchase program to repurchase an additional common stock up to a total of $15 billion through December 2023. Let me now turn to the outlook for the second quarter of fiscal 2023. Our outlook assumes an estimated impact of approximately $500 million relating to Russia and China COVID lockdowns. We estimate the impact of lower sell-through in Russia and China to affect our Q2 Gaming sell-in by $400 million. Furthermore, we estimate the absence of sales to Russia to have a $100 million impact on Q2 in Data Center. We expect strong sequential growth in Data Center and Automotive to be more than offset by the sequential decline in Gaming. Revenue is expected to be $8.1 billion, plus or minus 2%. GAAP and non-GAAP gross margins are expected to be 65.1% and 67.1%, respectively, plus or minus 50 basis points. GAAP operating expenses are expected to be $2.46 billion. Non-GAAP operating expenses are expected to be $1.75 billion. GAAP and non-GAAP other income and expenses are expected to be an expense of approximately $40 million, excluding gains and losses on non-affiliated investments. GAAP and non-GAAP tax rates are expected to be 12.5% plus or minus 1%, excluding discrete items. And capital expenditures are expected to be approximately $400 million to $450 million. Further financial details are included in the CFO commentary and other information available on our IR website. In closing, let me highlight the upcoming events for the financial community. We will be attending the BofA Securities Technology Conference in person on June 7, where Jensen will participate in a keynote fireside chat. Our earnings call to discuss the results of our second quarter of fiscal 2023 is scheduled for Wednesday, August 24.

Yes, good afternoon. Thank you for taking the question. I'd love to get an update on how you're thinking about the Gaming cycle from here. The business has essentially doubled over the last two years. And now we've got some crosswinds with crypto falling off, channel potentially clearing ahead of a new product cycle. You talked about macro challenges. But at the same time, only a third of the installed base has RTX, and we're moving out from under supply. So, I'd love to hear your thoughts from here once we get beyond kind of the challenges around COVID lockdown in the July quarter? How are you thinking about Gaming trends?

Yes, C.J., thanks for the question. You captured a lot of the dynamics well in your question. The underlying dynamics of the Gaming industry are really solid, net of the situation with COVID lockdown in China and Russia. The rest of the market is fairly robust, and we expect the Gaming dynamics to be intact. There are several things that are driving the Gaming industry. In the last two years alone, 100 million new gamers came into the PC industry. The format has expanded tremendously. And the ways that people are using their PCs to connect with friends, to be an influencer, as a platform for themselves, using it for broadcasts. So, many people are now using their home PCs as their second workstation, if you will, second studio, because they're also working from home. It is our primary way of communicating these days. The need for GeForce PCs has never been greater. And so I think the fundamental dynamics are really good. While it’s hard to predict exactly when COVID and the war in Russia will be behind us, the governing dynamics of the Gaming industry remains great.

Thank you very much. Good morning. Jensen, I wanted to ask a bit of a question on the Data Center business. In this upcoming cycle with H100, there are some I/O upgrades that are happening in servers that I think are going to be a fairly strong driver for you, in addition to what's going on with Hopper and the huge performance leaps that are there. I wanted to ask a longer-term question. Do you envision the business continuing to be sort of card-driven attached to third-party servers, or do you think revenue shifts dramatically, or in a small way, over time, to be more sort of vertically integrated, with all of the chips together on NVLink? And how is the industry responding to that potential move? Thanks.

I appreciate the question. The first point you made is significant. The next generation of servers currently being prepared are all Gen 5, which offer much higher I/O performance than previous versions. You can expect a substantial refresh as new networking cards from our company and others become available. Gen 5 naturally encourages new platform updates, and we are well-positioned to ramp up with the Gen 5 generation using Hopper. There are various system configurations to consider. If you take a step back and examine the systems necessary for data processing, scientific computing, machine learning, and training inference in the cloud for hyperscale, on-prem for enterprise computing, and at the edge, you'll find that each workload and deployment location requires a different system architecture. There isn’t a one-size-fits-all solution, which is why it’s excellent that we support PCI Express. We pioneered chip-to-chip interconnect technology about seven years ago, ahead of anyone else. Now in our fourth generation of NVLink, we can connect two chips next to each other, two dies, or two modules across multiple systems. Our coherent chip-to-chip link, NVLink, allows us to efficiently mix and match chips. I believe we will see more configurations develop over time. Our capability to support every workload through a universal accelerator—which handles everything from data processing to data analytics to high-performance computing—has enabled us to meet all these market segments. System integration will take many forms.

Hi, guys. Thanks for taking my questions. I wanted to follow up regarding your expectations for the second quarter. Colette, I know you said the $500 million was a $400 million hit to Gaming and a $100 million hit to Data. Does that mean Gaming will be down more than the actual Russia and lockdown hit? How do I think about the relative sequential performance of the businesses in light of these constraints?

Sure. Let me start first with what that means to Gaming for Q2. We do expect Gaming to decline. We still believe our end demand remains very strong. Ampere has just been a great architecture, and there are many areas where we continue to see strength and growth in both our sell-through and what we expect to see added to the channel as well. But in total, Q2 Gaming will decline from last quarter, probably in the teens. As we try and navigate through some of these lockdowns in China. So overall, the demand for Gaming is still strong, and we still expect top line growth year-over-year in Q2.

Hi, thanks for taking my question. If you listen to the networking OEMs this earnings season, it seems that there was a lot of talk about increased spending by enterprises on their data centers. You also mentioned your year-over-year growth in cloud versus enterprise spending. I wonder if you could discuss what you are seeing sequentially? Are you seeing a sequential inflection in the enterprise? And can you talk about the attach rate of software for enterprise versus data centers? Which software are you seeing the most interest in? Is it Omniverse? Is it natural language processing, or is there a combination of drivers for the various software packages you have? Thank you.

Yeah. Thanks, Mark. We had a record Data Center business last quarter. We expect to have another record quarter this quarter and are enthusiastic about the second half. AI and data-driven machine learning techniques empower companies to automate intelligence, which is strategic for all companies. The effectiveness of AI is evident across industries, as many companies have adopted our technologies. Our networking business is also highly supply constrained, but demand remains strong. We're doing our best to improve our supply situation, and we'll see increases from Q4 to Q1 and into Q2 and Q3. Regarding software, there are all kinds of machine learning models, computer vision, speech AI, natural language understanding, and robotics applications. One visible example is self-driving cars, but recently, we've seen exciting breakthroughs with transformer models in natural language understanding and beyond. Omniverse also plays a critical role in simulating robotics and AI interactions with the physical world. We have 10% of the top 100 global companies using Omniverse, with significant downloads and evaluations happening.

Thanks. Just wanted to clarify, Colette, if your Q2 outlook includes any destocking benefits from the new products that you're planning to launch this year? And for you, Jensen, you're still guiding Data Center to a very strong year-on-year growth, despite all the headwinds. Are you worried at all about the headlines around a slowdown in the macro economy? Is there any cyclical impact on Data Center growth that we should keep in mind for the second half of the year?

Yes. Vivek, let me first answer regarding the new products for Q2. Most of the ramp for our new architectures will occur in the second half of the year. For example, Hopper will probably be here in Q3 but will start ramping closer to the end of the calendar year. Therefore, think of our product launches ramping mainly in the second half. I'll turn it over to Jensen for the rest.

Thanks. Our Data Center demand remains strong, particularly in hyperscale and cloud computing. A100's performance and capabilities make it a unique accelerator. We see significant growth across many AI-related models that require high computation. This reflects in both public cloud demand and enterprise adoption as companies increasingly recognize the importance of AI. We're seeing a growth in business for all verticals as well, further driving demand for our Data Center offerings.

Thank you very much. I had a question about the $500 million impact for this quarter regarding whether it's more supply related or demand related. Most others in semiconductors are citing that the China issues are mainly logistics problems but Colette, you mentioned lower sell-through in Gaming. That suggests a more demand-oriented issue, which raises concerns about potential declines in the future. Can you clarify if it's largely supply or demand?

Thanks, Tim, for the question. Let me clarify regarding China and Russia. The current China lockdowns have implications for both supply and demand. We have experienced challenges concerning logistics throughout the country, which were already under pressure. From a demand perspective, it has impacted Gaming as large cities undergo lockdowns and focus on essential needs. We do believe that as things normalize post-COVID, demand will return. However, in the case of Russia, we’re not selling to Russia, which we announced last quarter. Historically, Russia accounted for about 2% of our total revenues.

Hi. Thank you very much, Colette and Jensen. I appreciate that you indicated that demand is healthy. I had a question on the second half, relating to both Data Center and Gaming. Previously, you mentioned visibility regarding Data Center has never been better. If we take out the Russia impact, is that still true? All the orders you've received remain intact, and do you anticipate strong momentum? For Gaming, do you expect the second half to show year-over-year growth based on the guidance for Q2? It appears it could be up sequentially, but may not return to year-over-year growth in Q3.

Yes, Ambrish, thanks for your question. On first principles, our visibility of Data Centers should indeed be significantly better from a couple of years ago. The use of AI has accelerated across industries; companies are increasingly adopting our technologies. Concurrently, the factor of providing different system configurations, having a portfolio that supports a broad range of workloads, is now more prevalent than ever. We expect to see solid continuous demand within the Data Center segment. Regarding Gaming, it's essential to consider macroeconomic conditions and how our gaming segment responds. We'll navigate through the complexities of current conditions and continue to monitor trends as they evolve.

Hi, good afternoon. Thanks for allowing me to ask a question. It's good to see the team navigating the dynamic supply chain environment. Despite some demand impact from Russia, you still maintained strong sequential growth in Data Center. As we think about the second half of the year, cloud spending remains strong, H100 is set to ramp up, and Mellanox appears to be receiving more supply. Even with uncertainty around Gaming, do you expect continued sequential growth in Data Center for the remainder of the year?

The answer is yes. We see strong demand in Data Center, from hyperscale to vertical industries. With ongoing initiatives, including the Hopper and new networking architectures, we expect to maintain solid performance. Our projections for upcoming quarters look very promising. We're enthusiastic about continuous sequential growth in Data Center.

Yes, thank you. I wanted to discuss the purchase obligations, which seem to have increased again this quarter. Was that due to longer-dated obligations or a higher magnitude of obligations? Also, regarding supply constraints mentioned earlier, could you elaborate on which parts of the business are still constrained?

Yes. Our purchase obligations and prepayments aim to ensure long-term supply commitments. Many obligations pertain to long-lead items crucial for our Data Center business. In terms of supply constraints, networking remains an area with high demand, but we are working on improving our situation.

Yes, thanks for fitting me in. Although most of my questions on Gaming and Data Center have been answered, I wanted to ask about the Auto segment. While it’s still modest, you express confidence in the business, predicting significant sequential growth this quarter. Could you help us understand the trajectory of that business in the coming quarters? You previously indicated it should start to inflect higher in the second half of the year.

Several data points indicate potential growth. We have just started shipping Orin as a robotics processor designed for software-defined autonomous systems. We have 35 automotive and logistics companies adopting Orin, and our design win pipeline exceeds $11 billion. The trajectory looks promising, suggesting that Orin could evolve into a multibillion-dollar business in the coming years. Thanks, everyone. The full impact and duration of the war in Ukraine and COVID lockdowns in China are difficult to predict. However, the impact of our technology and market opportunities remain unchanged. The effectiveness of deep learning AI continues to stand. Researchers are creating transformer models that are revolutionizing applications from robotics to drug discovery. We're focused on four major initiatives: ramping our next generation of AI infrastructure chips and platforms, ramping our first CPU, ramping Orin, our new robotics processor, and adding new value to our ecosystem with NVIDIA AI and NVIDIA Omniverse. These initiatives will greatly advance AI and extend this impactful technology to scientists and companies in every industry. We look forward to updating you on our progress next quarter. Thank you.