NVIDIA Corp (NVDA) — Q2 2023 Earnings Call Transcript

Conference call for the second 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 third 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, August 24, 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. This was a challenging quarter. Total revenue of $6.7 billion was down 19% sequentially and up 3% year-on-year, below the $8.1 billion outlook we provided on our last earnings call. As we indicated in our pre-announcement press release on August 8, we experienced a shortfall to our expectations driven primarily by weaker Gaming revenue. Today, we will share with you more details on our Q2 results and Q3 outlook. Starting with Gaming. Revenue of $2.04 billion was down 44% sequentially and down 33% year-on-year, reflecting challenging market conditions. As discussed in May, we expected a sequential decline in Gaming revenue due to softness in Europe related to the war in Ukraine and COVID lockdowns in China. The decline in Gaming GPU revenue was sharper than anticipated, driven by both lower units and lower ASPs. Macroeconomic headwinds across the world drove a sudden slowdown in consumer demand. We implemented programs with our Gaming channel partners to adjust pricing in the channel and to price position current high-end desktop GPUs as we prepare for a new architecture launch. As noted last quarter, we expected cryptocurrency mining to make a diminishing contribution to gaming demand. We are unable to accurately quantify the extent to which reduced crypto mining contributed to the decline in gaming demand. While Gaming navigates significant short-term macroeconomic challenges, we believe the long-term fundamentals in Gaming remain strong. NVIDIA RTX has redefined computer graphics and is now supported by almost 300 games and applications. NVIDIA’s GeForce GPUs are the most coveted brand by gamers, representing 15 of the top 15 most popular GPUs on Steam. Gaming has emerged from the pandemic as an even more popular form of entertainment and social connectivity. Estimated GeForce sell-through is up over 70% since before the pandemic, and peak concurrent users on Steam are also up more than 70% over the same time period. GeForce NOW registered members now exceed 20 million. This quarter, we added 80 more titles, including the hugely popular Genshin Impact, bringing our total to over 1,350. Moving to Professional Visualization. Revenue of $496 million was down 20% sequentially and down 4% from a year ago. A sequential increase in mobile revenue was more than offset by lower desktop revenue, particularly at the high end. As macroeconomic headwinds intensified, enterprise demand slowed and OEMs worked to reduce inventory. We expect these trends to persist in Q3. While ProViz is undergoing a near-term adjustment after doubling last year, we believe we have expanded the market opportunity over the last couple of years with AI and Omniverse workloads. We believe hybrid work is here to stay, and with it, the need for collaborative 3D design enabled by professional graphic workstations, both at home and in the office as well as in the cloud. In June, we announced a partnership with Siemens to enable the industrial levers and AI-powered digital twins, connecting Siemens Xcelerator platform to NVIDIA Omniverse. This connection opens Siemens to the vast ecosystem of NVIDIA Omniverse and NVIDIA to Siemens' ecosystem of the world’s largest industries. Earlier this month at SIGGRAPH, the premier computer graphics conference, we announced advancements to several foundational technologies of the metaverse, defined as the 3D version of the Internet. First, NVIDIA Omniverse Avatar Cloud Engine will enable businesses to create and deploy assistants and avatars, transforming interactions across a range of industries. We also unveiled 11 new Omniverse connectors, bringing the total number of connectors to the Omniverse USD ecosystem to 112. And finally, we released SDKs for the new field of neural graphics, which intertwine AI and graphics to help automate the creation of virtual worlds. Moving to Automotive. Revenue of $220 million increased 59% sequentially and 45% from the year-ago quarter. Strong growth was driven by auto AI solutions, which include AI cockpit and self-driving revenue, with particular strength in self-driving as new energy vehicle design wins ramp into volume. We believe Q2 was an inflection point for our automotive revenue as NVIDIA Orin has great momentum. During the quarter, we announced rollout plans of new vehicles from OEM partners, NIO, Li Auto, JIDU, and Human Horizons as well as Pony.ai’s line of self-driving trucks and robotaxis, all built on NVIDIA DRIVE. Looking forward, we expect our $11 billion automotive design win pipeline to translate to continued growth. Moving to Data Center. Revenue of $3.81 billion grew 1% sequentially and 61% year-on-year. Although a record, this was somewhat short of our expectations as we were impacted by supply chain disruptions. Revenue from hyperscale customers nearly doubled year-on-year. Sequentially, sales to North America hyperscale and cloud computing customers increased but were more than offset by lower sales to China hyperscale customers affected by domestic economic conditions. Vertical industries grew both sequentially and year-on-year. Key workloads driving growth include natural language processing, recommender systems, autonomous vehicle fleet, data processing and training, and cloud graphics. Let me share a couple of customer examples. Pinterest transitioned to 100 times larger recommender models by moving its inference from CPUs to NVIDIA GPUs. Its ability to deploy a higher-quality model at high throughput and low latency resulted in a 16% increase in engagement, a critical metric for the company, which has over 400 million users and 300 billion images. And Tesla recently upgraded its supercomputer to use over 7,000 A100 GPUs for autopilot training. From a product perspective, networking led growth this quarter with strong demand from our high-speed Ethernet adapters and design win momentum toward next-generation adapters, including the ConnectX-6 and ConnectX-7. We also see growing interest from cloud service providers for our new Spectrum-4 400-gigabit-per-second Ethernet networking platform. Additionally, we are ramping into the upcoming launches of our next-generation platforms. The Hopper architecture flagship H100 data center GPU is in production. Grace is our first CPU. Top computer makers, including Dell, HPE, Inspur, Lenovo, and Supermicro are adopting the new NVIDIA Grace CPU Superchip and Grace Hopper Superchip to build the next generation of supercomputers. 72% of the systems on the latest top 500 list of the world’s fastest supercomputers are powered by NVIDIA, including 31 of 39 new systems. NVIDIA’s Selene supercomputer ranks at number 8 in the top 500 and is the world’s fastest enterprise supercomputer. Moreover, 22 of the top 30 systems on the Green 500 list of the most energy-efficient supercomputers are powered by NVIDIA. Significant advances in software technologies are key to our platform performance. In the past two years, our A100-based platform has delivered 6 times more performance as measured by the MLPerf industry benchmark, largely through new software technologies and optimizations. Last month, we announced an update to the NeMo Megatron framework that can speed up the training of large language models by up to 30%, improving a multi-hundred million dollar AI infrastructure by 30% translates to significant value for customers. LLM are one of the most important neural networks today, ranging in size from tens of billions to over 1 trillion parameters. Learning from text, they can be used for real-time content generation, text summarization, customer service chatbots, and question answering for conversational AI interfaces. Currently, these capabilities are available to early access customers to run on NVIDIA DGX SuperPOD and NVIDIA DGX Foundry as well as in Microsoft Azure cloud with other platforms available soon. We are working with the industry leaders in large language models, a very active and exciting space of AI. Moving to the rest of the P&L. GAAP gross margin was 43.5%, and non-GAAP gross margin was 45.9%. Gross margin includes $1.22 billion in charges for inventory and related reserves based on revised expectations of future demand and $122 million for warranty reserves. These charges incurred in the quarter reflect purchase commitments that we made during the time of severe component shortages and our current expectation of ongoing macro uncertainty. We believe our long-term gross margin profile is intact. GAAP operating expenses were up 36% from a year ago and down 32% sequentially as Q1 included a $1.35 billion acquisition termination charge related to the Arm transaction. Non-GAAP operating expenses were up 38% from a year ago and up 9% sequentially. These increases were driven primarily by employee growth costs, as well as increases in salaries to support our employees during this high inflationary environment and engineering development of new products coming to market. We have slowed operating expense growth, balancing investments for long-term revenue growth while managing near-term profitability. Our full year non-GAAP OpEx is expected to grow over 30%. During the first half of fiscal 2023, we returned $5.5 billion to shareholders in the form of share repurchases and cash dividends. We plan to continue share repurchases. We have nearly $12 billion remaining under our authorization through December of 2023. Let me turn to the outlook for the third quarter of fiscal ‘23. We expect Gaming and ProViz revenue to decline sequentially as OEMs and channel partners reduce inventory levels to align with current levels of demand and prepare for our new product generation. We expect that decline to be partially offset by sequential growth in data center and automotive. Revenue is expected to be $5.9 billion plus or minus 2%. GAAP and non-GAAP gross margins are expected to be 62.4% and 65%, respectively, plus or minus 50 basis points. GAAP operating expenses are expected to be approximately $2.59 billion. Non-GAAP operating expenses are expected to be approximately $1.82 billion. GAAP and non-GAAP other income and expenses are expected to be an expense of approximately $10 million, excluding gains and losses on non-affiliated investments. GAAP and non-GAAP tax rates are expected to be 9.5%, plus or minus 1%, excluding any discrete items. Capital expenditures are expected to be approximately $550 million to $600 million. Further financial details are included in the CFO commentary and other information available on our IR website. In closing, let me highlight upcoming events for the financial community. We will be attending the Jefferies Conference in Chicago on August 30th and the Goldman Sachs Conference in San Francisco on September 12th. And we will be holding a financial analyst Q&A with management following Jensen’s GTC keynote on September 20th. Our earnings call to discuss the results of our third quarter of fiscal 2023 is scheduled for Wednesday, November 16th. We will now open the call for questions. Operator, can you assist? Would you please poll for questions?

I think the question we all have is what is normalized revenues for gaming for you guys? Obviously, this is a challenge for you as well. But curious how you’re thinking about it today. Is the fiscal ‘20 recovery post the first half ‘19 correction an appropriate framework, or was that inflated by crypto as well? And I guess, as part of that, how do we think about the cascading in of the new product cycle? And is there potential for future reserves needed to be taken if gaming does not meet your new updated outlook? Thanks so much.

Well, let me start first there and see if I can assist in terms of how to think about after we get through our completion just now of Q2 and what we have provided here for guidance for Q3. Across those two quarters, the Q2 of ‘23, the Q3 of ‘23, we have likely undershipped gaming to our end demand significantly. We expect that sell-through or essentially our end demand for those combined two quarters of Q2 and Q3 to be approximately $5 billion. Now, on top of this, keep in mind that we do have gaming growth drivers to consider for the future. These can include our new gaming product introductions that are around the corner as well as new segments of the market that we plan to reach with our gaming technology to just name a couple. I’ll turn it over to Jensen to talk a little bit more about that. Now, regarding any further types of write-downs on this perspective, we did a thorough assessment with this quarter, not only just looking at what we needed for this quarter but what we need for the long term. Keep in mind, our inventory provisions and write-downs that we took into account had to reflect some of the purchasing that we did a supply back more than a year ago when we were still in extreme supply shortages in almost all of our products. And so, this was an opportunity for us to resize given the macroeconomic conditions, what we needed in terms of supply. So, our expectations were higher, and we took this opportunity to write them down to what our current expectations are. I’ll turn it over to Jensen to see if he wants to add more.

Yes, thanks, Colette. C.J., our sell-through levels have dipped from the peaks at the start of the year, but they remain very strong. In fact, sell-through has grown by 70% since before COVID-19. It is evident that the fundamentals of gaming are robust, and this medium is thriving. Additionally, our gaming PCs are being utilized by influencers, content creators, V-loggers, VTubers, and many others in various innovative ways to engage with video games. Our strategy is to reduce sell-in this quarter and next quarter to allow channel inventory to correct. We have moved away from the highs, and the macro conditions have worsened significantly. Therefore, our primary approach is to decrease sell-in over the next couple of quarters to fix channel inventory. Additionally, we have implemented programs to price position our current products in anticipation of next-generation products. Ampere is the most popular GPU we have ever developed, ranking among the top 15 gaming GPUs on Steam. It remains one of the best GPUs globally and is expected to continue being successful for a while. However, we also have exciting new next-generation products on the way, which will complement the existing ones. To summarize, we are reducing sell-in to correct channel inventory and have established programs with our partners to price position products in the channel in readiness for the next generation. We believe these actions will lead us to a strong position as we enter next year.

Actually, I just wanted to clarify, Jensen. So, should we assume that a gaming sell-in will kind of stay at these levels into your Q1 or Q2, or depending on new product launch, it might recover? So just wanted to make sure our baseline assumption is set there. And then, my question is actually similar on the data center. Sales are pretty strong right now, but there is a concern that data center CapEx could be the next shoe to drop in this rolling correction in semiconductors. I’m curious, what’s your sense of utilization of your data center shipments? And what is the risk that there could be a correction in the data center given some of the macro caution expressed by some of the hyperscaler and enterprise customers?

Thanks, Vivek. The sell-through of GeForce is solid. The demand in the gaming market is robust, although it has decreased from the high levels we saw at the start of the year. Because we were preparing for such a strong market, we now have excess inventory. Our strategy is to sell at prices significantly below current sell-through levels in the marketplace to allow the channel to adjust. We plan to do this for a couple of quarters. We are confident that by the end of the year, we will be in a good position for the following year. The key point is that our sell-in rate is much lower than the current market sell-through. The sell-through has been solid, increasing 70% since before COVID, indicating that the gaming market remains very vibrant. On the second question regarding data center end markets, we have heard that there is a general shortage of GPU supply in the cloud. Demand for GPU rentals significantly surpasses the current supply. This makes sense to us, especially since the number of applications for GPUs in the cloud has increased substantially. For instance, in managing and collecting data from the autonomous vehicle fleet and utilizing that data to train AI models or to create high-definition maps, the cloud's use of GPUs for this specific application has risen significantly. Additionally, deep learning-based recommender systems have shown remarkable effectiveness, aiding internet service providers in improving user engagement and increasing click-through rates. This type of recommender system is expected to drive a considerable amount of data processing and machine learning in the cloud. Over the last several years, a significant model known as transformers has emerged, which we have discussed multiple times. This transformer model, particularly when scaled up, demonstrates impressive and effective capabilities for learning skills with few or no examples. It can perform tasks that it has not been specifically trained for because it encodes knowledge from vast amounts of data. This large language model innovation is utilized in areas such as conversational chat, Q&A summarization, text and image generation. Notably, it is also applied in the life sciences to comprehend chemistry. Our work in this field, named MegaMolBART, focuses on understanding proteins and DNA to interpret these extensive spatial and temporal data types. The significance of this area is substantial, and it is essential to pay attention to large language models. A paper from Stanford referred to them as foundation models that can facilitate the training of various AI systems.

I wanted to follow up on the data center question that Vivek just asked from a couple of angles. I guess, Colette, the first angle being, in the release, you guys talked about pulling high $200 million of revenue into the July quarter from October, but also with supply chain challenges, maybe some deliveries that were meant for July got pushed back into October. So if you could talk a little bit more about those dynamics and just clarify for us that the October sequentially up data center guidance is actually clean of any pull-ins. And Jensen, the second part, the moving pieces, networking stronger in data center, U.S. hyperscale stronger, China hyperscale weaker. If you could kind of walk us through the trends that you’re seeing into the October and January quarters. And in those sort of those breakouts and when clarify for us when you think H-100 will really start to drive revenue.

Great. Thanks for the question. And it’s kind of a little bit of an add-on to some of the statements that Jensen was discussing regarding our supply chain and what we’re seeing today. Our supply chain during the quarter really was quite difficult, was quite challenging to work through. Our platforms, including HDX, networking chips, cables, switches, were very important to the customers. It’s not just about us selling the GPUs. So even though customers order components themselves, they’re looking from us what we may refer to as kits, kits that go with those GPUs for them to stand up their data centers. We also experienced supply disruptions internally with our logistics and our component availability. Some of our supply arrived very late in the quarter. We had very little time from a logistics and availability to get those things out. Customers were impacted as well by the availability of key third-party other components that we weren’t offering, which were slowing down some of their deployments. So what we did in our Q2 orders that couldn’t be delivered in Q3, given that some of these supply constraints existed, and we had Q3 demand where we did have supply in Q2. So we worked with customers to optimize that supply and demand, and that’s what we’ve disclosed to you.

Let me address the questions regarding the North American and Chinese hyperscalers. This year, Chinese hyperscalers and internet companies significantly reduced their infrastructure investments, particularly starting in Q2. This slowdown cannot persist indefinitely. The growth of new technologies in software, the increasing number of cloud users, and the expansion of cloud services indicate ongoing investment potential. I fully anticipate that investment will rebound. The North American market is critical for us and has shown substantial revenue growth year-over-year among North American hyperscalers, which contrasts with the declines seen in China and highlights the slowdown there. However, I believe this situation won't last forever and expect a recovery. With respect to Hopper, we’re in full production now. And we’re racing to get Hopper 2; all of the CSPs are dying to get them. And it goes with our HGX, which is multiple Hoppers on a system tray; it’s really a supercomputer in a motherboard, if you will. And it goes along with our networking gear and switch gear. And so there’s the enormous amounts of resources applied from all of the CSPs around the world and ourselves to get Hopper. We expect to ship substantial Hoppers in Q4.

I had a question regarding the $1.22 billion inventory charge, maybe for Colette, on this one specifically. In the CFO commentary, I think you stated that the inventory charge is related to weaker demand in both data center and gaming. I think the gaming side is pretty clear based on your comments so far. Curious what’s changed on the data center side? Is it mostly the Chinese hyperscalers that Jensen just spoke to? Or is there something else going on in terms of how you’re thinking about demand in data center over the next couple of quarters? And related to this, curious if the delay in Sapphire Rapids at Intel is having an impact on your business in the near to medium term?

Thanks for the question. So our inventory charges, as we commented, we’re taking a thorough look at not only this last quarter as well as the quarter that we’re guiding, but looking over the long term of what we need for demand and then what we had in terms of supply. Remember, we had purchased this very early on in the year as we needed to, to drive the commitment of the supply that we already have. And so what is happening here for the data center, we had great, high expectations. We still have very strong solid growth projection for data center as well. We’re going to take this opportunity from some of the prior architecture pieces to write down those given what we see as just a change in terms of our expectations going forward. So you are correct. There are also pieces in there for gaming. We have written down some silicon and chips as the macroeconomic conditions and you get ready for our future product launches take into account, but there are also components, services, and capacity in some of the other drivers that are incorporated in those write-downs.

Our Hopper is compatible with previous generation CPUs, and it will also support next-generation GPUs, CPUs, Sapphire Rapids, Genoa, and Graviton. We conduct certification and testing with all CPUs because cloud service providers require it, and they plan to implement NVIDIA accelerators and Hoppers with a wide range of CPUs. The delay has been disruptive, causing many engineers to adapt quickly. It would have been easier if the next-generation CPUs had performed more reliably. However, Hopper will be used in environments with cloud service providers, linking our PCI Express connectors to both older and current generation CPUs. No one is pleased about the delay. The new CPUs will lead to a refresh of infrastructure and new servers, which I am very excited about. Nonetheless, we will be able to effectively enter the market with Hopper supporting existing infrastructure.

Yes. A lot of this has been discussed already, but Colette, I want to reflect on the numbers a bit more. Based on the guidance provided, I believe we're looking at a more than 30 percent sequential decline in gaming and Professional Visualization, while expecting low to mid-single-digit growth in Data Center and Auto. Is that the correct perspective? Additionally, with Hopper on the way, I anticipate many questions regarding the slowdown in year-over-year growth in Data Center. Do you think that once Hopper becomes fully available, around fiscal Q4, we will see Data Center growth reaccelerate as that product cycle develops?

Yes. Thanks for the question. And that’s a pretty good understanding of our guidance. And we do expect, yes, gaming to decrease, not in the dollar amount that it decreased between Q1 and Q2. So that may be of our two areas of the decline, our gaming and ProViz, that may be about 3/4 of it associated with that gaming. And then Professional Visualization would probably be about 1/4 of the two areas that will decline. Our Data Center yes, we do expect it to grow. It may grow about what we just saw between Q1 and Q2. We’ll continue to look at it. There may be some more opportunity there. And automotive, very similar to our thoughts at the very beginning of the quarter, we are expecting continued growth through each of the quarters of this fiscal year. We felt that Q2 was an inflection point. So we’ll continue to grow into Q3 and hopefully Q4 going forward. I’ll turn it over to Jensen to see his thoughts in terms of Hopper, what Hopper brings to us in Q4 and expectations.

The first thing I’d mention, Aaron, is that we are currently selling much lower than market demand and significantly below market sell-through. The reasoning behind this is to allow the inventory levels, including channel and OEM inventories, to adjust. This sets the stage for our next generation products. Our next generation includes Hopper for computing, as well as a next generation for computer graphics that will soon be released. Hopper represents a substantial advancement as it is engineered to support a new type of AI model known as Transformers. It features a Transformer engine with specific numerical formats and pipelines that enable exceptional performance on Transformer models, including large language models and computer vision models. I fully anticipate that Hopper 2 will serve as a key driver for future growth. The significance of this new Transformer model cannot be overstated; its influence across fields such as robotics, computer vision, language processing, biology, chemistry, and drug design is truly impressive. I’m sure you’ve been hearing about this breakthrough in AI, and Hopper was specifically developed for this.

Colette, can you talk about networking versus compute? Were they both supply constrained in the July quarter? And are they both sequentially growing in the October quarter?

So, within our Q2 results, we have been continuing to improve our supply for networking. We have a lot of important products that the CSP needs, many of our customers’ needs, and we have been working to really improve that supply. And we were able to set very strong growth in terms of networking, both sequentially and year-over-year. And as we move into the next quarter, we’re going to have to see which is going to be a larger growth. We’re just going to have to take a lot once we finish that quarter. But our supply for compute is here. But as we’ve discussed, sometimes it’s important that they have many of our other components that we provide in networking at the same time that we are providing the GPUs. So sometimes those are very important for us to deliver together. So we always have to keep that in mind. So it’s not always supply constrained, but there are certain parts of it that are.

Great. I wanted to ask why did the supply constraints hit you guys so hard this quarter? I mean you’ve done such a great job in the last couple of years outgrowing really everybody in a very challenging supply chain environment. It hasn’t tripped you up at all. And it seems like now it’s kind of hitting you fairly hard at a time when, in other cases, it’s kind of easing. So I’m just kind of curious, what is it about the timing and how long does it sort of take? Or is that a Hopper issue? Is it related to other components? As you talked about, how long does it take to clear those issues up?

Let me start and see if Jensen wants to add on to it. Our execution has absolutely been phenomenal. When you think about the challenges of we’re almost putting together a full data center for our customers and getting it shipped out. So we’re no different in the same way that the CSPs are challenging. We’re setting up their data centers as we’re such an integral part of that. And so networking has been short of supply. These are the same supply issues that some of our CSPs are having. So our supply arrived a little bit late in the quarter for some of our key products that we needed to get out. And putting that together caused some disruption in our logistics and distribution. We were pleased in terms of reaching the leverage of networking that we did, but we did have some challenges this quarter.

I wanted to go back to that data center inventory charge. You listed data center first when you talked primarily related to data center and gaming. Can you give us a feeling for how much of that charge was data center versus gaming? And then to follow up on that, it did sound like to me that it was mostly Ampere and not Hopper change in expectations. Can you verify that or clarify it? And just talk about what’s happened with your expectations for Hopper? Have they gone up or down? Or has there been any change at all relevant to that inventory charge?

Yes, Stacy. Regarding our inventory charges that we had, when you think about what we have in supply, whether it be chips, components, or memory. Remember, a lot of these things can be used interchangeably across the two. Additionally, the value of our inventory for data center is much different than the value of what we have for gaming from an overall cost perspective. So we’re creating capacity opportunity, putting together all of those systems in terms of data center. It is prior architectures. Absolutely, this is not a question regarding anything of our future products coming to market. Nothing on the inventory provision has to do with that. So we took this as looking at the macroeconomic conditions, as we’ve discussed. Our expectations, our plans were higher. They’re still quite solid that we see in demand both for gaming as well as solid for data center, and that will continue. But we did have to just take a rightsizing of that note.

Hopper was created for transformers, which are becoming increasingly significant. The importance of large language models has been surprising to many. Their growth has led to excitement, innovation, and the emergence of new ideas, companies, start-ups, and industries, all surpassing expectations. No one could have foreseen the impact of transformers as they evolved into much larger models. There is now a considerable amount of literature about earlier, smaller language models from a few years ago compared to those with hundreds of billions and even trillions of parameters, showcasing remarkable effectiveness. It's incredible that AI, which wasn't specifically trained for a particular skill, can perform that skill successfully with minimal or no prior examples, which is truly beyond expectations. The success of Hopper indicates the strong demand for large training systems that it is set to address. If this serves as an indicator, Hopper is poised for significant success.

I have a question on gross margins, Colette. The 65% non-GAAP number you’re guiding to, does that include or assume any additional write-offs on the inventory front? And then just to expand on that, your mix is probably a tailwind to gross margins given that gaming is down significantly and data center is up a little bit. And I’m just wondering, are there any other offsets? Because I would have thought gross margins could actually be better than your longer-term model because of the mixed tailwinds?

Yes. Thanks for the question. So our gross margins outside of the inventory charges in Q2 as well as going into Q3 is really about our sales mix that we have and probably also to understand that our sales mix in the next quarter for GPUs is not in the high end. And so that has impacted our gross margin as we move into Q3. You are correct. We do expect that data center will assist in our gross margins, but we also have growth plans in auto. Auto is below our company average, and so that will tend to offset some of those upper bound things that we will see in terms of data center. From time to time, there’s always a small amount of scraps that we will have in our gross margin estimates. So nothing material is planned. But there are small scraps that may occur from quarter to quarter that are included in our gross margins.

Colette, I had a clarification and then a question. So my clarification is whether October gross margins are benefiting at all from the sale of previously written down inventory. And then my question is whether you can give us the enterprise cloud split in data center because it sounds like the mix shifted more towards enterprise in July. And I think investors might want to see that as risky in the face of enterprise clearly slowing. So I’m wondering if you can give us that.

Okay. No. No, there is nothing in our Q3 regarding those inventory provisions that we took in terms of earning that back, in terms of our Q3. Regarding our split between our hyperscalers and data centers and what we refer to as our vertical industries, they always tend to be about the same, 50% for one, 50% for the others. They’re still in about that range. We had discussed that our China hyperscalers did not drive growth in terms of sequentially here. And so that did influence in terms of the hyperscalers, but still we are approximately in that 50%, 50%.

On the weakness in ProViz, this is an enterprise-focused business, right? Granted, it’s a somewhat narrow vertical market, but it does sort of play into the market concerns that consumer is weak now, enterprise is the next shoe to drop. So is the decline in ProViz attributed to enterprise spending weakness? Or is there some other dynamic? And why or why not is this not a leading indicator for your enterprise and vertical industry segments within your data center business?

Our Pro Visualization business has experienced significant growth in a short period. We faced supply challenges while trying to meet the industry's demand for the new RTX workstations. We have been supporting both mobile and desktop markets effectively. Last year, we doubled the size of ProViz. Currently, OEMs are focused on managing their inventory levels, and we need to ensure they can clear that inventory. However, similar to the gaming discussion, the demand remains strong. We need to adjust the inventory, but we still see long-term opportunities that we have created for the market.

Could you remind me of your second question? Are the broader enterprise market and the verticals going to be affected by this? First, I would say we don’t know. Secondly, different from our Workstation business, our ProViz business does not have an installed base. Most of the ProViz sales are upgrades or replacements from systems that are about 3 to 5 years old, depending on the customers' upgrade cycles. Therefore, the companies purchasing ProViz systems likely already have existing systems. If they were to reduce their ProViz purchases for any reason, they could continue using what they have. As for our AI business, there isn't really an established installed base. These are entirely new solutions that businesses are adopting. The productivity and cost-saving advantages of using autonomous systems are substantial. The demand is there; everyone wants to be more productive, save money, and work faster. The challenge is that understanding and implementing AI is still evolving. We are encouraged by the growth rate and adoption of AI in enterprises. I believe our AI business and our Viz business have different characteristics for this reason. However, what Colette mentioned earlier about the ProViz businesses last quarter is accurate; OEMs are recognizing that the end market is slowing down and are taking steps to adjust their inventory.

Let me ask a question. I just had a longer-term question about once your gaming business normalizes, with the absence of crypto in a general sense and with the merge coming, et cetera, how do you view the pricing environment? I know you guys really weren’t raising prices like we saw in the MSR key premiums in the aftermarket. But generally, your mix was quite rich over the last year or two. You’re going to have lovely coming in that will obviously help the mix sequentially versus the last couple of quarters. But how do you think about it normalizing? Is that $2.5 billion per quarter sell-through rate comes, is the ASP mix across your stack about the same? Or does it go down because of the absence of that crypto tightening dynamic?

I would say that without the impact of cryptocurrency, the product mix would decline. However, the overall long-term trend shows that the average selling price is gradually increasing. To illustrate, my first game console cost $99, while current consoles are priced around $599. This increase is due to their enhanced utility, as they now serve as primary entertainment devices used over extended periods. GeForce acts like a console within your PC, and we have always believed that its average selling price should align with that of a game console, which should be approximately $500 at this point. Additionally, GeForce is available in the cloud, where it supports multiple gamers simultaneously, necessitating a more powerful version. Therefore, our cloud gaming graphics are generally higher-end. Moreover, many designers and creators are utilizing GeForce, using their PCs to produce content that often integrates with video games or leverage games for their artistic projects. Thus, for them, GeForce serves not just as a gaming tool but also as a creative workstation. Several factors are driving the increase in the average selling price of GeForce, and we have observed this trend developing over the past few years. Thanks, everyone. We’re navigating our supply chain transitions in a challenging macro environment. In Gaming, our partners and ecosystem are responding to a sudden slowdown in consumer demand and correcting channel inventory. Still, the fundamentals of gaming are strong. We’ll get through this over the next few months and go into next year with our new architecture. I look forward to telling you more about it at GTC next month. In Data Center, AI where computers are helping us write software that was impossible before is driving a computing revolution and transforming every industry. NVIDIA’s leadership in full-stack data center scale, accelerated computing has made us the ideal partner for companies racing to leverage the power of AI. Even with the current macroeconomic headwinds, demand for our data center products has never been stronger. The next wave of computing is coming. With AI and 3D graphics advances, developers will extend the Internet with virtual world overlays that connect to the physical world. This next evolution of the Internet is called the metaverse. We created Omniverse to connect the digital and physical world and be an open platform for creating and operating metaverse applications. The immediate applications for Omniverse span product design, manufacturing, and operations. Omniverse is off to a great start. Our automotive revenue is inflecting, and we expect it to be our next $1 billion business. Autonomous driving is one of the biggest challenges AI can solve, and computing opportunity for us spans the data center to the car. Autonomous driving will transform the auto industry into a tech industry. Automotive is one of the first to transform into a software-defined tech industry that all industries will be. We’re building NVIDIA AI and NVIDIA Omniverse to be the engines for the world’s enterprise to become software-defined, AI-powered technology companies. I look forward to next month’s GTC conference, where we will share new advances of RTX reinventing 3D graphics and gaming. AI’s continuing breakthroughs and building the metaverse, the next evolution of the internet. So join us. We look forward to updating you on our progress next quarter. Thank you.