NVIDIA Corporation (NVDA) Earnings Call Transcript & Summary

Good afternoon. My name is Mel, and I will be your conference operator today. At this time, I would like to welcome everyone to the NVIDIA's second quarter earnings call. [Operator Instructions] Thank you. Simona Jankowski, you may begin your conference.

Thank you. Good afternoon, everyone, and welcome to NVIDIA's conference call for the second quarter of fiscal 2022. 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 2022. 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 Form 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 18, 2021, 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. Q2 was another strong quarter, with revenue of $6.5 billion and year-on-year growth of 68%. We set records for total revenue as well as for gaming, data center and professional visualization. Starting with gaming, revenue was $3.1 billion, was up 11% sequentially and up 85% from a year earlier. Demand remained exceptionally strong, outpacing supply. We are now 4 quarters into Ampere architecture product cycle for gaming and it continues to be our best ever. At Computex in June, we announced 2 powerful new GPUs for gamers and creators, the GeForce RTX 3080 Ti and RTX 3070 Ti, delivering 50% faster performance than their prior generation, with acclaimed features such as real-time retracing, NVIDIA DLSS AI rendering, reflex and broadcast. Laptop demand was also very strong. OEMs adopted Ampere architecture GPUs and a record number of designs from the top-of-the-line gaming laptops to those to Main Street price points as low as $799 that bring the power of GeForce CPUs to gamers, students and creators on-the-go. Ampere architecture powered laptops feature our third-generation Max-Q power optimization technology that enables ultrathin designs, such as the new Alienware x15, the world's most powerful sub-16-millimeter gaming laptop. NVIDIA RTX technology has reset computer graphics and spurred our biggest ever refresh cycle. Ampere has been our fastest ramping gaming GPU architecture on Steam and the combination of Turing and Ampere RTX GPUs have only upgraded about 20% of our installed base. 80% have yet to upgrade to RTX. And the audience for global e-sports will soon approach 0.5 billion people, while the number of those who livestream games is expected to reach over 700 million. The number of PC gamers on Steam is up almost 20% over the past year. More than 60 RTX games now support NVIDIA's RTX ray tracing or DLSS, including today's biggest game franchises such as Minecraft, Fortnite and Cyberpunk. New RTX games this quarter include Red Dead Redemption 2, one of the top-rated games of all time. Popular titles like Rainbow Six Siege and [indiscernible] and Minecraft RTX in China with over 400 million players. To competitive gamers, NVIDIA Reflex, which includes latency is now supported by 20 games. Let me say a few words on cryptocurrency mining. In an effort to address the needs of miners and direct GeForce to gamers, we increased the supply of cryptocurrency mining processors or CMP, and introduced low hash rate GeForce GPUs with limited Ethereum mining capability. Over 80% of our Ampere architecture-based GeForce shipments in the quarter were low hash rate GPUs. The combination of crypto to gaming revenue is difficult to quantify. CMP revenue, which is recognized in OEM, was $266 million, lower than our original $400 million estimate on reduced mining profitability, and we expect a minimal contribution from CMP going forward. GeForce now reached a new milestone this quarter surpassing 1,000 PC games, more than any other cloud gaming service. The premium tier is available for a subscription of $10 per month, giving gamers access to RTX class performance, even on an underpowered PC, Mac, Chromebook, iOS or Android device. Moving to pro visualization. Q2 revenue was a record $519 million, up 40% sequentially and up 156% year-on-year. Strong sequential revenue growth was led by desktop workstations, driven by demand to outfit design offices at home, as remote work becomes the norm across industries. This is also the first big quarter of the Ampere architecture ramp for pro visualization. Key verticals driving Q2 demand include automotive, public sector and health care. At SIGGRAPH last week, we announced an expansion of NVIDIA Omniverse, our simulation and collaboration platform that provides the foundation of the metaverse. Through our new integrations with Blender, the world's leading open source 3D animation tool and Adobe, we're opening the Omniverse platform to millions of additional users. We are also collaborating with Apple and Pixar to bring advanced physics capabilities to Pixar's Universal Scene Description framework, embracing open standards to provide 3D workflows to billions of devices. Omniverse Enterprise software is in the early access stage and will be generally available later this year on a subscription basis from NVIDIA's partners, including Dell, HP, Lenovo and many others. Over 500 companies are evaluating Omniverse Enterprise, including BMW, Volvo and Lockheed Martin, and more than 50,000 individual creators have downloaded Omniverse since it entered open beta in December. Moving to automotive, our Q2 revenue was $152 million, down 1% sequentially and up 3% year-on-year. Sequential revenue declines in infotainment were largely offset by growth in self-driving. Looking further out, we have substantial design wins set to ramp that we expect will drive a major inflection in revenue in the coming years. This quarter, we announced several additional wins. Self-driving start-up, AutoX, unveiled its latest autonomous driving platform for RoboTaxis powered by NVIDIA DRIVE. The performance and safe capabilities of the software-defined NVIDIA DRIVE platform has enabled AutoX to become one of the first companies in the world to provide full self-driving mobility services without the need for a safety driver. In autonomous trucking, DRIVE ecosystem partner Plus signed a deal with Amazon to provide at least 1,000 self-driving system to Amazon's fleet of delivery vehicles. These systems are powered by NVIDIA DRIVE for high-performance, energy-efficient and centralized AI compute. An autonomous trucking start-up, Embark, is building on NVIDIA DRIVE. The system is being developed for trucks for 4 major OEMs: Freightliner, Navistar International, PACCAR and Volvo, representing the vast majority of the Class 8 or largest sized trucks in the U.S. The NVIDIA DRIVE platform is being rapidly adopted across the transportation industry from passenger-owned vehicles to RoboTaxi, to trucking and delivery vehicles. We believe everything that moves will be autonomous someday. Moving to data center. Revenue of $2.4 billion grew 16% sequentially and 35% from the year ago quarter, the year ago quarter, which was our first quarter to include Mellanox. Growth was driven by both hyperscale customers and vertical industries, each of which had record revenues. Our flagship A100 continued to ramp across hyperscale and cloud computing customers, with Microsoft Azure announcing general availability in June following AWS and Google Cloud Platform's general availability in prior quarters. Vertical industry demand was strong, with sequential growth led by financial services, supercomputing and telecom customers. We also had exceptional growth in inference, which reached a record more than doubling year-on-year. Revenue from inference-focused processors includes the new A30 GPU, which provides 4x the inference performance of the G4. Customers are also turning to NVIDIA GPUs to take AI to production and shifting from CPUs to GPUs driven by the stringent performance, latency and cost requirements of deploying and scaling deep learning AI workload. NVIDIA networking products posted solid results. We see momentum across regions driven by our technology leadership, with upgrades to high-speed products, such as ConnectX-6 as well as new customer wins across cloud service providers enterprise and high-performance computing. We extended our leadership in supercomputing, the latest top 500 list shows that NVIDIA technologies power 342 of the world's top 500 supercomputers, including 70% of all new systems and 8 of the top 10. To help companies harness the new industrial, high-performance computing revolution, we deliver a turnkey AI data center solution with the NVIDIA DGX SuperPOD, the same technology that powers our new Cambridge-1 supercomputer in the U.K. and a number of others in the top 500. We expanded our AI software and subscription offerings, making it easier for enterprises to adopt AI from the initial development stage through to deployment and operations. We announced NVIDIA Base Command, our Software-as-a-Service offering for operating and managing large-scale, multiuser and multi-team AI development workloads on DGX SuperPOD. Base Command is the operating and management system software for distributed training clusters. We also announced general availability of NVIDIA Fleet Command, our managed Edge AI Software-as-a-Service offering. Fleet Command helps companies solve the problem of securely deploying and managing AI applications across thousands of locations, combining the efficiency and simplicity of central management with the cost, performance and data sovereignty benefits of real-time processing at the edge. Early adopters of Fleet Command includes some of the world's leading retail manufacturing and logistics companies and the specialty software companies that work with them. The new NVIDIA Base Command and Fleet Command software and subscription offerings followed last quarter's announcement of the NVIDIA AI Enterprise software suite, which is in early access with general availability expected soon. Our enterprise software strategy is supported by the NVIDIA certified system program with server OEMs, which are bringing to market over 55 systems ready to run on NVIDIA's AI software out of the box to help enterprises simplify and accelerate their AI deployment. The NVIDIA ecosystem keeps getting stronger. NVIDIA Inception, our acceleration platform for AI start-ups just surpassed 8,500 members. With cumulative funding of over $60 billion and members in 90 countries, Inception is one of the largest AI start-up ecosystems in the world. CUDA now has been downloaded 27 million times since it launched 15 years ago, with 7 million in the last year alone. TensorRT for inference has been downloaded nearly 2.5 million times across more than 27,000 companies. And the total number of developers in the NVIDIA ecosystem now exceeds 2.6 million, up 4x in the past 4 years. Let me give you a quick update on Arm. In nearly 1 year since we initially agreed to combine with Arm, we have gotten to know the company, its business and its people much better. We believe more than ever in the power of our combination and the benefits it will deliver for Arm, for the U.K. and for its customers across the world in the era of AI. Arm has great potential. We love their business model and commit to keep its open licensing approach. And with NVIDIA's scale and capabilities, Arm will make more IP and sooner for their mobile and embedded customers, while expanding into data center, IoT and other new markets. NVIDIA accelerates computing, which starts with the CPU, whatever new markets are opened with the CPU and our accelerated computing opportunities. We've announced accelerated platforms for Amazon Graviton, Ampere Computing, MediaTek and Marvell, spanning cloud computing, AI, cloud gaming, supercomputing, edge AI to Chrome PCs. We plan to invest in the U.K., and we have with the Cambridge-1 supercomputer, and through Arm, making U.K. a global center in science, technology and AI. We are working through the regulatory process, although some Arm licensees have expressed concerns and objected to the transaction and discussions with regulators are taking longer than initially thought. We are confident in the deal and that regulators should recognize the benefit of the acquisition to Arm, its licensees and the industry. Moving to the rest of the P&L. GAAP gross margin of 64.8% for the second quarter was up 600 basis points from a year earlier, reflecting the absence of certain Mellanox acquisition related costs. GAAP gross margins was up 70 basis points sequentially. Non-GAAP gross margins was 66.7%, up 70 basis points from a year earlier and up 50 basis points sequentially, reflecting higher ASPs within desktop GeForce GPUs of continued growth in high-end Ampere architectured products, partially offset by a mix shift within data center. Q2 GAAP EPS was $0.94, up 276% from a year earlier. Non-GAAP EPS was $1.04, up 89% from a year earlier, adjusting for the 4-to-1 stock split effective this quarter. Q2 cash flow from operations was a record $2.7 billion. Let me turn to the outlook for the third quarter of fiscal 2022. We expect another strong quarter, with sequential growth driven largely by accelerating demand in data center. In addition, we expect sequential growth in each of our 3 markets -- in each of our 3 other market platforms. Gaming demand is continuing to exceed supply as we expect channel inventories to remain below target levels as we exit Q3. The contribution of CMP to our revenue outlook is minimal. Revenue is expected to be $6.8 billion, plus or minus 2%. GAAP and non-GAAP gross margins are expected to be 65.2% and 67%, respectively, plus or minus 50 basis points. GAAP and non-GAAP operating expenses are expected to be approximately $1.96 billion and $1.37 billion, respectively. GAAP and non-GAAP other income and expenses are both expected to be an expense of approximately $60 million, excluding gains and losses on equity securities. GAAP and non-GAAP tax risks are supposed to be expected 11%, plus or minus 1%, excluding discrete items. Capital expenditures are expected to be approximately $200 million to $225 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 following virtual events: the BMO Technology Summit on August 24; the New Street Big Ideas in Semiconductor's Conference on September 9; the Citi Global Tech Conference on September 13; the Piper Sandler Global Technology Conference on September 14; and the Evercore ISI Auto, Tech & AI Forum on September 21. Our earnings call to discuss the third quarter results is scheduled for Wednesday, November 17. We will now open the call up for questions. Operator, would you please poll for questions?

[Operator Instructions] First question comes from the line of Vivek Arya of Bank of America.

I actually had a near and longer-term question on the data center. I think near term, you mentioned the possibility of accelerating data center growth from the 35% rate. I was hoping if you could give us some more color around that confidence and visibility. And then longer term, Jensen, we have seen a lot of announcements from NVIDIA about your enterprise software opportunity. I honestly don't know how to model that. It sounds very promising, but how should we model it? What problem are you trying to solve? Is it cannibalizing demand you have otherwise seen from your public cloud customers? Or is this incremental to growth? So just any guidance or any just insights into how to think about NVIDIA's enterprise software opportunity longer term?

Yes, thanks for the question. We are seeing accelerated -- as we have already reported that we have record revenues in both hyperscale, cloud and industrial enterprise this last quarter. And we're seeing accelerated growth. The acceleration in hyperscale and cloud comes from the transition of the cloud service providers in taking their AI applications, which are now heavily deep learning-driven into production. There were some of the things that we've spoken about in the past that really makes NVIDIA the ideal platform to scale out with. And if my line is a little worse, let me apologize. The several platforms -- the several elements of our platform, number one, Ampere GPU, which is now a universal GPU for AI, for training but incredibly good for inference. It's terrific in its throughput, it's terrific in its fast response time as well, and therefore, the cost of deployment, the cost of operating AI applications is the lowest. The second is the introduction of TensorRT, which is our optimizing compiler that makes it possible for us to compile and optimize any AI application to our GPUs. And whether it's computer vision or natural language understanding, conversational AI, recommender systems, the type of applications that are deploying AI is really quite vast. And then lastly, this software inference server that we offer called Triton, which supports every one of our GPUs. It supports CPUs as well as GPUs. So every Internet service provider could operate their entire data center using Triton. These several things are really accelerating our growth, which is -- so the first element is the deployment, the transition of deep learning AI applications into large-scale deployment. In the enterprise, the application that is driving AI, as you know, every enterprise must be -- wants to move and race towards being a tech company and take advantage of connected cloud and connected devices and artificial intelligence to achieve it. We have an opportunity to deploy AI services out of the edge. And in order to do so, there are several things that has to happen. First, we have to create a computing platform that allows them to do training in the IT environment that they understand, which is virtualized, which is largely managed by VMware. And our collaboration with VMware, creating a new type of system that could be integrated with enterprise was -- has been quite a significant effort and it's in volume production today. The second is a server that allows the enterprise customers to deploy their AR models out to the edge. And the AI engine, the software suite that we've been developing over the last 10 years now have been integrated into this environment and allows the enterprises to basically run AI out of the box. There's 3 elements of our software products there. First is NVIDIA AI Enterprise and that puts -- that basically puts all of the state-of-the-art AI solvers and engines and libraries that we've industrialized and perfected over the years, made it available to enterprise to license. Second,is an operating system platform called Base Command that allows for distributed scale up software development in the -- for training and developing models. And then the third is Fleet Command, which is an operating system software product that lets you operate and deploy and manage the AI models out to the edge. These 3 software products, in combination with the server called NVIDIA-Certified, taken out through our network of partners, is our strategy to accelerate the adoption of AI by the enterprise customers. And so we're really enthusiastic about entering into the software business model. This is an opportunity that could represent, of course, tens of millions of servers. We believe all of them will be GPU accelerated. We believe that enterprises will be deploying and taking advantage of AI to revolutionize their industry. And using quite a traditional enterprise software licensing business model, this could represent billions of dollars of business opportunity for us.

Next question comes from the line of Stacy Rasgon of Bernstein.

I wanted to go back, Colette, to the sequential guidance. You gave a little bit of color by segment. If I look at your gaming revenues, it's kind of like 3 quarters in a row, you've been up, call it, ballpark 10% or 11%. And my understanding is that was sort of a function of your ability to bring on supply. So I guess what does the supply addition look like as you're going from Q2 into Q3? And do you think you can still maintain that kind of sequential growth? Or does it dial down? Because I also need to -- I also would play that against your other commentary suggesting that the sequential growth, and I assume on a dollar basis was driven primarily by data centers. So how do I think about the interplay within those comments of sequential growth of gaming, especially given the trajectory we've had over the last several quarters?

Yes. So let me start, and I'll let Jensen add a bit, Stacy, to your question. I guess we're providing the guidance for Q3 of $6.8 billion in revenue. Now excluding CMP, we expect our revenue to grow over $500 million sequentially. The lion's share of that sequential revenue increase will be coming from data center. We do expect gaming to be up slightly on a sequential basis. But remember, we are still supply constrained. Automotive and Pro Viz are also expected to be up slightly quarter-over-quarter. And from a CMP perspective, we'll probably just have minimal amounts in Q3. So our Q3 results don't have seasonality with them for gaming and are really about the supply that we believe we can have for Q3. I'll see if Jensen wants to add any more color.

Yes. Thanks for the question. As you know, RTX is a fundamental reset of computer graphics. This is a technology called ray tracing that has been the holy grail of computer graphics for quite a long time in 35 years. In research -- in our NVIDIA research for 10 years, we finally made it possible to do real-time ray tracing with RTX. RTX demand is quite incredible. And as you know, we have a large install base of PC gamers. They use an architecture called GTX based on programmable shaders that we invented some 20 years ago. And now we've reset the entire installed base. And Ampere is obviously just an incredible selling. It's the best-selling GPU architecture in the history of our company. And yet we've only upgraded some 20% -- less than 20% of our total installed base. So there's another 80% of the world's PC gaming market that we have yet to upgrade to RTX. Meanwhile, the number of PC gamers in the world grew substantially, still grew 20% this last year. And so I think the -- we're right at the beginning of our RTX transition. Meanwhile, computer graphics has expanded into so many different new markets. RTX, we've known -- we've always believed we'll reinvent the way that people do design. And we're seeing that happening right now as we speak, as workstations is growing faster than ever and has achieved record revenues. And at the same time, because of all of our work with cloud gaming, we now see public clouds putting the cloud graphics, whether it's workstations or PC or private gaming console up in the cloud. So we're seeing strong demand in PCs, in laptops, in workstations and mobile workstations and cloud. And so RTX is really doing great. We're -- our challenge there is that demand is just so much great in supply and then as closely we'll do supply constraints.

Your next question comes from the line of Matt Ramsay of Cowen.

Yes. Before my question, Jensen, I just wanted to say congrats on the nice award. That's a big honor. For my question, I wanted to follow on, on Stacy's question about supply and Colette, maybe you could give us a little bit of commentary around supply constraints in gaming in the different tiers or price tiers of your gaming cards. I'm just trying to get a better understanding as to how you guys are managing supply across the different price tiers? And I guess it translates into a question of are the gaming ASPs that we're seeing in the October quarter guidance -- are those what you would call sustainable going forward? Or do you feel like that mix may change as supply comes online?

So I'll start here. Thanks for the question on our overall mix as we go forward. First, our supply constraint in our gaming business is largely attributed to our desktop and notebook. That can mean a lot of different things from our components that are necessary to build so many of our products. But our mix is really important. Our mix as we are also seeing many of our gamers very interested in our higher-end, higher performance products. We will continue to see that as a driver of that overall lift, both our revenue and can lift our overall gross margins. So there's quite a few different pieces into our supply that we have to think about, but we are going to try and make the best solutions for our gamers at this time.

Next question, we have the line from C.J. Muse from Evercore.

I guess a follow-up question on the supply constraints. When do you think that will ease? And how should we think about gaming into the January quarter vis-a-vis typical seasonality, given I would assume you would continue to be supply constrained?

Colette, I can take it or you can, either one of us.

Go ahead, Jensen and I'll follow up if there's some other things.

Okay. We're supply constrained in graphics -- we're supply constrained in graphics while we're delivering record revenues in graphics. Cloud gaming is growing, cloud graphics is growing. RTX made it possible for us to address the design and the creative workstations. Historically, the rendering of ray tracing and photo-realistic images has largely been done on CPUs and for the very first time, and we could actually accelerate it with NVIDIA GPUs and with RTX GPUs. And so the workstation market is really doing great. The backdrop of that, of course, is that people are building offices in their homes. And for many of the designers and creators around the world, some 20 million of them, they have to create -- they have to build a workstation or an office at home as well as they want at work, because remote work is the new norm. And meanwhile, of course, RTX has reached all of our consumer graphics, the few hundred million installed base of PC gamers, and it's time to upgrade. And so there's a whole bunch of reasons we're achieving record revenue as well as supply constrain. We have enough supply to meet our second half company growth plans. And in next year, we expect to be able to achieve our company's growth plans for next year. Meanwhile, we have and are securing a pretty significant long-term supply commitments as we expand into all these different market initiatives that we've set ourselves up for. And so I think the -- I would expect that we will see a supply constrained environment for the vast majority of next year is my guess at the moment. But a lot of that has to do with the time of our demand is just too great. RTX is really a once-in-a-generation reset of computer -- modern computer graphics. Nothing like this has happened. It's so convenient computer graphics. And so the invention is really quite groundbreaking and you can see us in that.

Next question comes from the line of Harlan Sur of JPMorgan.

Congratulations on the strong results, outlook and execution. The Mellanox networking franchise has been a really strong and synergistic addition to the NVIDIA compute portfolio. I think kind of near to midterm, the team is benefiting from the transition to 200 and 400 gig networking connectivity and cloud and hyperscale. And then I think in addition to that, you guys are getting some good traction with the BlueField SmartNIC products. Can you just give us a sense on how the business is trending year-over-year? And do you expect continued quarter-over-quarter networking momentum into the second half of this year, especially as the cloud and hyperscalers are going to a server and CapEx spending cycle?