NVIDIA Corporation (NVDA) Earnings Call Transcript & Summary

Welcome to the 2020 Annual Meeting for NVIDIA Corporation. Our host for today's call is Simona Jankowski, Vice President of Investor Relations. [Operator Instructions] I will now turn the call over to your host, Simona Jankowski. You may begin.

Good morning and welcome to NVIDIA's 2020 Annual Meeting of Stockholders. I'm Simona Jankowski, Vice President of Investor Relations. We are excited to host the fully virtual annual meeting again this year. Other members of NVIDIA's management who are present with me today are Jen-Hsun Huang, President, Chief Executive Officer and Director; Colette Kress, Executive Vice President and Chief Financial Officer; and Tim Teter, Executive Vice President, General Counsel and Secretary. I would also like to introduce the outside members of our Board of Directors who are in attendance: Rob Burgess, Tench Coxe, Persis Drell, Dawn Hudson, Harvey Jones, Mike McCaffery, Steve Neal, Mark Perry, Brooke Seawell and Mark Stevens. Finally, I would like to introduce Tim Carey from PricewaterhouseCoopers, our independent registered public accounting firm. Jen-Hsun would like to provide an update on our business. We will conduct the formal portion of the meeting, and then we will set aside some time for questions before we wrap up the meeting at approximately 11:30 a.m. Pacific. During the course of this meeting, we may make forward-looking statements based on current expectations. These forward-looking statements 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 reports we may file from time to time with the Securities and Exchange Commission, including our annual report on Form 10-K and our quarterly report on Form 10-Q. All our statements are made as of June 9, 2020, based on information available to us as of today. And except as required by law, we assume no obligation to update any such statements. I would now like to turn the meeting over to, Jen-Hsun. Jen-Hsun?

Thanks, Ramona -- excuse me. Thanks, Simona. Before we start, I want to take the opportunity to address the heartbreaking events of the past weeks in America as we confront painful racial inequities and prejudice that exist to this day. We're deeply sorry for the pain, despair and injustice that black communities continue to endure. We stand with them. Racism must end. These tragic events force us to confront the fact that the world is not equal. It is not enough to not be a racist. We must be antiracist. Exercise our citizenship to push for legislative reforms to end police brutality and racial injustice and with social movements that protest peacefully for real change and reform. NVIDIA stands with them. Corporations must also act. NVIDIA must act. It is not enough to just be well-intended, inclusive employer and provide equal opportunities for blacks. We must purposely and systematically create opportunities for black employees, starting with me. We will elevate the urgency of increasing the black population at every level of our company and do our part to fight racism. We're fighting a 2-front war. The world is still confronting COVID-19, one of the greatest challenges in human history. In just a few months, a pathogen 1/1000 the width of a human hair has circled the globe and shaken society to its core. We owe our thanks to those in the front lines of this crisis, first responders, health care workers and service providers, who inspire us every day with their bravery and selflessness. Billions around the world are sheltering at home, doing their part to slow the spread of the virus. Many are unable to make a living or struggling to do their jobs while caring for their families. At NVIDIA, we closed our nearly 60 offices around the world. We continue to pay contractors their full wage despite reduced staffing needs in our facilities. We gave employees raises early to put a little bit more money in their hands. Paying it forward, our employees have donated more than $10 million to health communities. NVIDIA is aiming our technology, our superpower, at COVID-19. With every second -- when every second counts and much is at stake, scientists gear up with NVIDIA to jump to light speed. They're using NVIDIA's accelerated computing to sequence and image the virus, search for vaccine or treatment and build AI robots to disinfect hospitals. COVID-19 will not be the last virus, but it can be the last pandemic. We must start now to prepare for future outbreaks. Working with the international scientific community, we will develop an end-to-end computational defense system to detect threats earlier, contain the spread, speed vaccine development and continuously test and monitor. This pandemic will demand long-term structural changes to health care, transportation, retail and manufacturing, the world's largest industries. Our expertise in computing and AI will help industries rebuild. Harnessing NVIDIA's accelerated computing to save lives is the perfect example of our company's purpose: to tackle problems that ordinary computers cannot. NVIDIA stands at the intersection of 2 powerful technology forces: accelerated computing and AI. The computers we build are time machines that let scientists see the future today, rocket ships that take researchers to the furthest frontiers of science. With NVIDIA, scientists explore our universe from the quantum to the galactic scale and seek deeper understanding of humanity, from the signs of life to the mystery of intelligence. NVIDIA is accelerating -- is pioneering accelerated computing to tackle challenges ordinary computers cannot. A scientist once told me, because of NVIDIA, he could do his life's work in his lifetime. It inspires us to make the tools for the da Vincis and Einsteins of our time. Accelerated computing requires more than just a powerful chip. We achieve incredible speedups through full-stack invention, from the chip and systems to the algorithms and applications they run. Computer graphics, scientific computing, artificial intelligence, self-driving cars, robotics, these are examples of important fields where we contribute. We made significant advances in each area last year. Full GAAP revenue for the year was $10.9 billion, down 7% year-over-year. GAAP earnings per year -- per share were $4.52, down $0.32 -- 32%. We returned $390 million during the year to shareholders through quarterly cash dividends. The year began in a perfect storm of a collapsing cryptocurrency market, stalled cloud spending and a deteriorating trade environment with China. Undeterred, your company rose to the challenge and did some of our best work ever. The fourth quarter tells the story with revenue of $3.11 billion, up 41% year-over-year. And as we reported last month, we were adding to our momentum with outstanding first quarter performance. Let's take a look at some of our biggest growth opportunities. Graphics, the simulation of reality, is the driving force behind our massive R&D engine. Since invention of GPU more than 20 years ago, we dreamed to someday do graphics with real-time ray tracing. It creates photorealistic images by simulating the light behavior. After more than a decade's work, we created NVIDIA RTX, the world's first real-time ray tracing architecture. RTX is a home run. The graphics industry, including game developers, design toolmakers and film studios, have wholeheartedly embraced NVIDIA RTX. Leaders like Pixar, ILM, Sony, Epic, Adobe, Electronic Arts, Microsoft and many more have adopted real-time ray tracing. It's hard to imagine developing a major game without it now. RTX has become to the world's best-selling -- RTX has come to the world's best-selling video game, Minecraft. Before RTX, game developers painstakingly pre-rendered lighting and shadow effects to make their worlds more realistic. Pre-rendering is not possible in user-created virtual worlds like Minecraft. Only real-time ray tracing can accomplish these beautiful effects. RTX has started next-generation gaming. There has never been a better time for hundreds of millions of PC gamers to upgrade their PCs. One of the most important milestones this year is our acquisition of Mellanox, the industry-leading high-performance networking company. We welcomed Mellanox to our family on April 27, and Israel is now one of our major technology centers. The new NVIDIA has a much larger scale in cloud data centers, the epicenter of computing today. It's a nearly $100 billion segment of the computer industry and growing fast at over 40% each year. Modern data centers run workloads of incredible scale and complexity driven by machine learning and AI applications, serving millions of users simultaneously. The amount of data and computing power required is growing exponentially. These applications are so large that no single server, no matter how powerful, can process them. The CPU server used to be the basic unit of computing. But now, the new unit of computing is the entire data center. There are x factors of improvements to be had if we innovate from end to end, from computing, networking, storage to security across the entire data center and across the entire stack, from chips to servers, to networking switches and sophisticated software. With Mellanox, we can. NVIDIA's high-performance computing and Mellanox' high-performance networking go hand-in-hand. This year's GTC was our first all-digital conference, and our opening kitchen keynote has had more than 8 million views. We announced several groundbreaking advances in AI computing and applications. We announced Ampere, a new GPU architecture that unifies the 3 primary workloads of machine learning: data processing, training and inference. The NVIDIA A100 data center GPU, the first of the Ampere generation, is the largest processor the world has ever made. It is a giant generational leap over the NVIDIA Volta, which was previously the most advanced processor. Compared to Volta, the NVIDIA A100 has up to 20x the performance for processing AI neural networks. NVIDIA A100 is in full production, shipping and has won the support of the world's top cloud providers and server makers. NVIDIA DGX is a system designed in-house from the ground up for the specific purpose of leading-edge AI and data science. NVIDIA DGX A100 consists of 8 A100 GPUs and 9 Mellanox CX-6 InfiniBand data processing units. A single DGX has the equivalent performance of 150 high-end servers costing over $1 million. The DGX A100 sells for $199,000, is in full production and shipping worldwide. We announced 3 major software platforms central to modern AI and machine learning. First, Apache Spark is now NVIDIA accelerated. Spark is the de facto standard open-source software engine used by nearly 20,000 companies around the world to process large datasets. The amount of data collected by consumer Internet services is growing exponentially. With NVIDIA acceleration, data processing can be reduced from days to hours. We now accelerate the entire machine learning pipeline, from data processing, data loading to training and inference. The suite of acceleration libraries is called NVIDIA AI. Data scientists, AI developers and cloud service providers are thrilled. We announced NVIDIA Merlin, a platform that helps companies build large-scale recommender systems that predict user preferences. For example, predict products a shopper would buy, movie to watch or news of interest. Recommender systems are among the most complex AI algorithms today. With Merlin, we're simplifying this technology for companies and industries. We demonstrated a new application framework for conversational AI called NVIDIA Jarvis. Carrying on a conversation with AI demands an orchestra of different capabilities: speech recognition, natural language understanding to get our meaning, a recommender to predict an appropriate response and human-like speech synthesis. The entire process needs to be nearly instantaneous to be conversational. With Jarvis, companies can build and host custom conversational AI services. Edge AI is most -- edge AI is one of the most exciting applications we're working on: doing AI processing at the edge of the Internet, at the point of action where data is generated, in stores, warehouses, factories, airports and hospitals. Here, sensors connected to AI computers can make seemingly intelligent decisions and speed checkouts, direct forklifts, manage rush-hour traffic and adjust and save power. During the year, we announced the NVIDIA EGX edge AI platform to meet these needs. With EGX, we're bringing AI to the world's largest industries. Walmart, U.S. Postal Service, Procter & Gamble and Samsung Electronics are among the first customers. At GTC, we announced that BMW has selected NVIDIA to build its factories for the future. Running NVIDIA Isaac robotics software on NVIDIA EGX, BMW can deploy robot fleets to automate building the ultimate driving machines. The events around the world are a potent reminder that we can do more to build a better future. Our people are brilliant and strive to do work -- do good work while doing good. Our company stands at the intersection of 2 powerful tools: accelerated computing and artificial intelligence. Our mission to advance these tools for the greatest minds of our time to help them tackle the challenges the world faces has never been more vital. And our rekindled deep sense of responsibility to help build a more perfect and equal society has never been more pressing. With invention and compassion, these challenging times can also be our finest hours. NVIDIA is up to the challenge. Tim, let me now hand it over to you to start the procedural portion of the meeting. I will serve as Chairman, and Tim Teter will serve as secretary.

Thanks, Jen-Hsun. We have opened the online portal for stockholders to ask questions during the meeting. [Operator Instructions] We welcome the views and comments of all stockholders but will not address questions that are unrelated to the company's business or operations, related to pending or threatened litigation or personal grievances or are derogatory or in poor taste. We may also provide a single response to multiple questions generally asking the same or similar things. You can also vote your shares online until the polls close. We will first address the matters described in the company's proxy statement dated April 29, 2020. We will then complete the balloting process. An announcement will be made regarding the voting results, and then the official portion of the meeting will be adjourned, followed by stockholder questions. I have a complete list of the stockholders of record of NVIDIA's common stock on the April 13, 2020, record date for this meeting. I also have an affidavit from Broadridge certifying that they commenced the mailing of the relevant proxy materials on April 29, 2020. I am appointing Chris Woods of American Election Services, LLC to act as the inspector of elections at this meeting. He will tally the final votes when balloting on all matters is completed. Chris has taken the customary oath of office, and we will file this oath with the records of the meeting. Our bylaws provide that the presence in person or by proxy of a majority of the shares entitled to vote at the meeting will constitute a quorum. There were approximately 615 million shares outstanding on the record date, and Chris has informed me that proxies have been received for approximately 510 million shares or approximately 83% of the shares outstanding, which constitutes a quorum for today's meeting. Each share of common stock is entitled to one vote. If you are eligible to vote and have not submitted your proxy or you want to change your vote, please do so and vote online now. You do not need to vote if you have already sent in your signed proxy or voted online or by telephone. Your votes will be counted automatically. The time is 11:22 a.m., and the polls are currently open for voting. There are 5 items for business for this meeting: First, the election of Rob Burgess, Tench Coxe, Persis Drell, Jen-Hsun Huang, Dawn Hudson, Harvey Jones, Mike McCaffery, Steve Neal, Mark Perry, Brooke Seawell and Mark Stevens to serve as directors until our 2021 Annual Meeting. Second, the approval of the compensation of our executive officers as disclosed in our 2020 Proxy Statement. Third, the ratification of PwC as our independent registered public accounting firm for the fiscal year ending January 31, 2021. Fourth, amending and restating our 2007 Equity Incentive Plan. Fifth, amending and restating our 2012 Employee Stock Purchase Plan. As the company has not received notice from any of its stockholders of any other matter to be considered at today's meeting, no other proposals will be addressed. If you have not voted and intend to vote, please do so online now as the polls will close momentarily. Proxies, votes or any changes or revocations submitted after the closing of the polls will not be accepted. [Voting]

The time is 11:23 a.m., and the polls are now closed. The preliminary report of the inspector of elections covering the proposals presented at this meeting is as follows: first, the proposal to elect the 11 nominees on the ballot as directors of NVIDIA is carried; second, the proposal to approve the compensation of NVIDIA's executive officers, as disclosed in NVIDIA's 2020 Proxy Statement, is carried; third, the proposal to ratify PwC as NVIDIA's independent registered public accounting firm for the fiscal year ending January 31, 2021, is carried; fourth, the proposal to amend and restate NVIDIA's 2007 Equity Incentive Plan is carried; and fifth, the proposal to amend and restate NVIDIA's 2012 Employee Stock Purchase Plan is carried. A full tally of the votes will be published in a Form 8-K, which we expect to file with the SEC within 4 business days. That concludes the formal portion of today's annual meeting, and I declare the business portion of the 2020 Annual Meeting of Stockholders adjourned. Thank you very much. With that, let me hand this meeting back over to Simona and Jen-Hsun for stockholder questions.

Thank you, Tim. First, we'll address questions and comments that have come through our stockholder forum. And then time permitting, we'll respond to those that come through the virtual meeting portal. We created the forum so that our stockholders would have the opportunity to ask us questions prior to the meeting, allowing for more effective communication. I will read aloud each question or comment except removing personal details. In some cases, we received multiple questions asking about the same or similar topics, so we have grouped those questions together to avoid repetition. The first question. "Please, I want the Board to be composed of the best. Having said that, it would be great to have more Latinos and diversity. Do you take into consideration diversity in the Board? Why does it appear that there are so few women on your Board of Directors? Maybe some of the names that appear to me to be men's names, they're women's names. Why does there continue to be a lack of diversity on these Boards, no people of color? It is sad commentary on the vision of this company."

Thank you. We've made progress in improving the diversity of our Board, but we need to do more. In 2013, we added Dawn Hudson, a longtime marketing executive and former President of Pepsi Cola North America. And Dr. Persis Drell, who was the Provost of Stanford University, joined us in 2015. Both are outstanding directors. We need to make more progress. It is not enough to just be a well-intended, inclusive employer and provide equal opportunities. We must purposefully and systematically expand diversity throughout our company and at the Board level. We will elevate the urgency of increasing a diverse population at every level of our company, including our Board. And that effort starts with me.

Thank you, Jen-Hsun. Next question. "Will you be willing to hire more workers as direct hires in the city of Santa Clara? There are many underemployed male immigrants that have been in the U.S. over 2 decades and the fact that diversity is only measured in the catch-all buckets of Asians, and these people from East Asian countries like Taiwan, Hong Kong, Macau, South Korea and Japan are greatly underrepresented. I strongly feel that the diversity reporting in Corporate America needs to be reformed."

Thank you. We will continue to hire in Santa Clara. It's our largest and fastest-growing site. We're also growing and hiring all around the world. And in all hiring, diversity and underrepresented groups are priorities, including some of those that you mentioned. Yes, blacks represent and comprise only 1% of our U.S. employee base and that percentage hasn't changed much in recent years. This level wasn't acceptable in the past and it isn't acceptable now, and we need to do better. That starts with me. I'm going to lead the charge and personally involve -- be personally involved in recruiting black employees and ensuring NVIDIA is a company where they will want to stay and grow their careers. We can't just passively support diversity inclusion. We must bend the natural course and actively and purposely create opportunities for minorities.

Thank you. Next question. "Can Jen-Hsun Huang play a more active role in global leadership to resolve the climate crisis? Can NVIDIA do a better job of publicizing its role in reducing the climate crisis? How can NVIDIA show leadership in climate crisis remediation in the future? Can you please show directors' expertise and accomplishments vis-à-vis climate crisis amelioration or actions in that regard for NVIDIA in the write-up for each director?"

NVIDIA's single greatest superpower and our life's work is the accelerated computing technology we're pioneering. The computers we build are time machines, and they let scientists see the future today; they're rocket ships that take researchers to the furthest frontiers of design. Our most important contribution is partnering with scientists to understand climate change, create more energy-efficient energy sources, design lighter and stronger material and to use AI to monitor the power grid, to reduce the use of energy when not needed. NVIDIA's accelerated computing is super energy efficient as well. Our approach to computing requires expertise across the entire stack of computing. In one company, we have brought all these skills together. And as a result, computing can be done with 20 to 100x less energy than before. Give you one example. NVIDIA is used in 90% of the world's most energy-efficient supercomputers. This is our best way to contribute and be an active player in the world of climate crisis.

Thank you. Next question. "What is NVIDIA doing to resolve the climate crisis? How is NVIDIA working to become carbon neutral? What are the NVIDIA carbon reduction goals? And how is NVIDIA doing meeting carbon reduction targets?"

The best way for NVIDIA to address the climate crisis is to continue advancing accelerated computing. This will enable researchers to do -- more quickly discover technologies that improve sustainable energy sources, invent more energy-efficient transportation, discover lighter yet stronger material. We're all-in in advancing accelerated computing and build the time machine scientists need to invent the future. At the same time, we're striving to eliminate carbon footprint of our operation. In 2014, we committed to cut greenhouse gas emissions by 15% per employee by the end of fiscal year '20, and we did so. We recently announced a new goal to source 65% renewable energy for our offices and data centers by FY '25. Several of our global buildings are already running at 100% renewable energy. Endeavor, our new headquarter building, is certified LEED Gold. And the new building set that's rising on our Santa Clara campus, Voyager, will be certified also LEED Gold. Additionally, we're driving to reduce energy, water and waste across our entire company. We also train and offer incentive programs to help our employees reduce home energy use and commute. Our commuting programs have helped NVIDIA commuters avoid 635,000 miles in the last 2 years, and we provide rebates on solar panel installation and discount on home EV chargers.

Thank you. The next question is, "How is NVIDIA contributing to a circular economy? Are they managing disposal of products, et cetera?"

Well, first, NVIDIA improves energy efficiency of computing by up to 10x. Imagine multi-megawatt data centers consuming less power. This will be less energy used and less material used that needs to be recycled. It is a well-known -- It is well-known that Moore's Law, the exponential trend where computers get faster and lower power over time, has ended. We need a new path forward. NVIDIA's computing approach has shown tremendous effectiveness. Our greatest contribution is to get all computing-intensive applications to be accelerated.

Thank you. And I think we have time for one last question. "How has the United States' complaint of delays in reporting the coronavirus by China affected the business prospects of NVIDIA in the Asian countries? How has coronavirus affected the potential business of NVIDIA in the United States and the rest of the world in 2020 and 2021? Please give percentage estimates."

COVID-19 created challenges in supply and logistics as well as demand. Early in our Q1, our partner supply chains were disrupted. Sales of our gaming products were affected by the closure of retail outlets in China iCafes. But as the virus spread globally, work from home, learn at home and gaming surged in Etail demand. Automotive builds have declined and infotainment computing systems have declined accordingly. We expect the impact to continue for the next several quarters. While the precise magnitude of the effect of COVID-19 is difficult to predict, our Q2 outlook does account for a potential ongoing impact from coronavirus.

Thank you, Jen-Hsun. We have now reached the time limit for the 2020 Annual Meeting, and our program has now concluded. A copy of this webcast will be available online on our website through June 23, 2020. We look forward to another great year at NVIDIA. Thank you for attending and for your continued support of NVIDIA. Our 2020 Annual Meeting is now closed.

This now concludes the meeting. Thank you for joining, and have a pleasant day.