Nvidia (NVDA) on Wednesday, after the closing bell, once again reported very strong results with its fiscal second quarter 2022 results.
On the top line, record revenue of $6.507 billion (+68% YoY) outpaced the $6.325 billion consensus with Gaming, Data Center and Professional Visualization all seeing record quarterly revenues. On the bottom line, adjusted earnings per share of $1.04 (+89% YoY) exceeded expectations of $1.02 per share.
On the margin front, Nvidia's adjusted gross margin came in at 66.7%, representing an expansion of 600 basis points over the prior year (70bps sequentially). This result was also better than the 66.3% consensus forecasts.
"Nvidia's pioneering work in accelerated computing continues to advance graphics, scientific computing and AI," Nvidia's founder and CEO Jensen Huang said on the release.
Operating Segments & Platforms
By reportable segments, Graphics revenue was $3.907 billion (+87% YoY; +13% QoQ) while Compute & Networking revenue was $2.6 billion (+46% YoY; +18% QoQ)
By platform, Gaming revenue was $3.061 billion (+85% YoY; +11% QoQ), higher than the $2.975 billion consensus, "reflecting higher sales in GeForce GPUs and game-console SOCs." The team specifically called out the strength of the Ampere-based GeForce RTXT 30 Series and noted that over 80% of the Ampere based GeForce GPU shipments were "Low Hash Rate" versions meaning these were not sold to those with a desire to mine crypto.
As members will recall, Nvidia previously released a Cryptocurrency Mining Processors (CMP) specifically designed for mining that cannot be repurposed for gaming, which reduces the risk of a flood of reselling in secondary markets should crypto mining become less profitable; results for CMP sales are included in the OEM segment, so we'll provide a bit more color on the crypto dynamic below.
Back to gaming, to give a sense of demand, management noted on the call that despite the record quarter, the company remains supply constrained. Despite this dynamic, the company is confident that there is enough supply to meet second half growth objectives and believes that it will be able to achieve next year's growth plans.
Moving on, Nvidia reported Data Center revenue of $2.366 billion (+35% YoY, +16% QoQ), outpacing expectations of $2.271 billion (note that the year ago period was the first quarter to include Mellanox). Annually, sales benefited from the ramp of Amper-based products into vertical industries and hyperscale customers, both of which saw record revenues.
The flagship A100 continued to ramp across hyperscale and cloud computing customers, with Microsoft (MSFT) Azure announcing general availability in June following AWS and Google (GOOGL) Cloud Platform's general availability in prior quarters, said management on the call.
Vertical industry demand was strong, with sequential growth led by financial services, supercomputing and telecom customers, added management, noting the company also had exceptional growth in inference, which reached a record more than doubling year-on-year.
As for Mellanox, the team called out strong growth thanks to three factors. First, disaggregated computing (a single application running on multiple servers at the same time) - which provides the ability to scale with ease. Second, to compete in today's world almost every company in the world has to be a high-performance computing company. And third, it's the Data Center software. Huang called the software key to providing the ability to "orchestrate and run the Data Center with just a few people."
These three dynamics are all happening at the same time and all rely on Mellanox, which as Huang noted, "has the world's lowest latency and the highest bandwidth and performance networking on the planet."
Professional Visualization revenue came in at $519 million (+156% YoY; +40% QoQ) and beat expectations of $364 million. The growth here was "driven by the ramp of Nvidia Ampere architecture GPUs, with growth led by desktop workstation GPUs." On the call, added CFO Colette Kress, "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."
Of course, we would be remiss if we discussed the professional visualization segment with no mention of the metaverse. On this front, management spent a good deal of time discussing Nvidia's Omniverse offering, a "simulation and collaboration platform that provides the foundation of the metaverse."
"Through 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," said Kress. "We are also collaborating with Apple (AAPL) 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."
Over 500 companies are evaluating Omniverse Enterprise, added Kress, including BMW and Volvo, and more than 50,000 individual creators have downloaded Omniverse since it entered open beta in December.
The bottom line here is that while many companies will be responsible for building out the metaverse, which Huang described as "essentially an overlay of the internet. An overlay of the physical world," Nvidia is positioning itself to be the brick and mortar of this future digital world.
How big is this opportunity?
While it is still very early days, Huang is thinking big, very big.
"You'll be able to go into the Omniverse worlds using virtual reality and so you worm hole into the virtual world using VR. You could have an AI or an object portal into our world using augmented reality. So you could have a beautiful piece of art that you somehow purchased and belongs to you because of NFTs and it's only enjoyed in the virtual world and you can load into the physical world with AI. So I'm fairly sure that at this point Omniverse and the metaverse ... is going to be a new economy that is larger than our current economy. And we'll have to enjoy a lot of our time in the future in the Omniverse in the metaverse and we'll do a lot of work there and have a lot of robots doing a lot of work on our behalf and we will share the results. So Omniverse to us is an extension of our AI strategy. It's an extension of our high-performance computing strategy and it makes it possible for companies and industries to be able to create digital tools that simulate the physical version before they deploy it and while they operate it."
What members should take from this is Nvidia is building out its software offering and that's a key factor for the long-term value proposition as hardware, even hardware as incredible as what Nvidia creates, is inherently cyclical. But the growth of software revenues such as Omniverse should help reduce some of the volatility and support the stock's multiple.
Automotive revenue of $152 million (+37 YoY; -1% QoQ), missed expectations of $164 million. Annual growth was aided by the "recovery in automotive demand which was impacted by the pandemic in the prior year."
Lastly, OEM and other revenue was $409 million (+180% YoY; +25% QoQ), short vs. expectations of $463 million and primarily reflecting growth in CMP, which generated $266 million, below management's expectation for $400 million in CMP sales in the quarter.
Now, while the CMP revenues missed management's expectations and appear to be entirely at fault for the miss in this segment, we actually think this will be taken as a positive by investors. As members will recall, cryptos' contribution to revenue has been a concern for many. That's not only because of its inherent volatility, but also because the contribution has made it more difficult to judge the strength of the underlying business. If there is one thing that market participants hate more than anything, it is uncertainty. So, combine the miss here with the strong results in gaming and fact that over 80% of the Ampere based GeForce GPU shipments were "Low Hash Rate" versions, we believe the takeaway is simple: Nvidia's strong gaming results are due to incredible demand from loyal gamers, not fickle miners. Looking ahead, management also expects minimal contribution from CMP going forward.
Similar to last quarter, the strong results were compounded by equally strong guidance. For the fiscal third quarter, management expects revenue to be $6.8 billion +/-2%, exceeding the $6.57 billion consensus estimate. As for margins, management expects adjusted gross margins for fiscal third quarter 2022 to be about 67.0 +/- 50bps, outpacing the 65.8% consensus heading into the print. Adjusted operating expenses are expected to be approximately $1.37 billion and capital expenditures are expected to be between approximately $200 million and $225 million "including principal payments on property and equipment." Elsewhere, adjusted other expenses are expected to be approximately $60 million, and the adjusted tax rate is expected to be about 11% +/- 1 percentage point. Lastly, while management does not provide earnings guidance, the outlook implies earnings of $1.08 per share, above the $1.05 per share consensus coming into the print.
Regarding the ARM acquisition, while the commentary was limited, Kress said that in nearly one year since Nvidia 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." Kress added, "We plan to invest in the U.K. and we have with the Cambridge-1 super computer 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 benefits of the acquisition to ARM, its licensees, and the industry. "
All in, it was another strong print from Nvidia met with equally strong guidance. Despite the supply constraints, management appears to be navigating effectively and we believe the commentary on the crypto mining dynamic will be viewed favorably by investors that have been looking for increased visibility into the strength of the core underlying gaming business.
Given the supply constraints and management noting on the call that 80% of the gamer installed base has not even upgraded to RTX yet, not to mention that the "audience for global esports will soon approach 0.5 billion people," Nvidia has plenty of runway ahead of it and that's even before we start talking about when we'll get a real glimpse of the metaverse that Nvidia clearly has huge plans to be a core part of.
Lastly, we encourage everyone to read the Nvidia conference call, but we will leave members with Huang's closing remarks:
"We had an excellent quarter fueled by surging demand for Nvidia computing. Our pioneer work in accelerated compute continues to advance graphic, scientific computing and AI. Enabled by Nvidia accelerated computing, developers are creating the most impactful technology of our time. From natural language understanding and recommender systems to autonomous vehicles and logistic centers, to digital biology and quantum science research, to a metaverse world that obeys the laws of physics. This quarter we announced Nvidia base command and fleet command to develop, deploy, scale, and orchestrate the AI workload that run on the Nvidia AI enterprise software suite. With our new enterprise software, a wide range of Nvidia-powered systems and global network of systems and integration partners we can accelerate the world's largest industries as they race to benefit from the transformative power of AI.
We are thrilled to have launched Nvidia Omniverse, a simulation platform nearly five years in the making that runs physically realistic virtual worlds and connects to other digital platforms. We imagine engineers, designers, and even autonomous machines connecting to Omniverse to create digital twin, simulated worlds that help train robots, operate autonomous factories, simulate fleets of autonomous vehicles, and even predict human impact on Earth's climate. The future will have artificial intelligence augmenting our own, and the metaverse augmenting our physical world. It will be populated by real and AI visitors and open new opportunities for artists, designers, scientists, and even businesses, a whole new digital economy will emerge. Omniverse is a platform for building the metaverse vision.
We're doing some of our best work and most impactful work in our history. And I want to thank all of Nvidia's employees for their amazing work and the exciting future we are inventing together. Thank you. See you next time."