NVIDIA Corporation

Good afternoon. My name is David and I will be your conference operator today. At this time, I would like to welcome everyone to NVIDIA's financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. 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 2021. With me on the call today from NVIDIA are Johnson Wang, President and Chief Executive Officer, and Colette Tress, 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 SHISCO 2021. The content of today's call is NVIDIA's property. It can 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 19, 2020, based on information currently available to us. accepted 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 extraordinary quarter. The world continued to battle the COVID-19 pandemic, and most of our employees continued to work from home. But through the team's agility and dedication, we successfully combined Mellanox into NVIDIA while also delivering a very strong quarter. Revenue was $3.87 billion, up 50% year-on-year, up 26% sequentially, and well ahead of our outlook. Starting with gaming, revenue was $1.65 billion with up 26% year-on-year and up 24% sequentially, significantly ahead of our expectations. The upside was broad-based across geographic regions, products, and channels. Gaming's growth amid the pandemic highlights the emergence of a leading form of entertainment worldwide. For example, the number of daily gamers on Steam, a leading PC game online distributor, is up 25% from pre-pandemic levels. An NPD reported that U.S. consumer spending on video games grew 30% in the second calendar quarter to a record $11 billion. NVIDIA's PCs and laptops are ideal for the millions of people who are now working, learning, and gaming at home. At the outset of the pandemic, many retail outlets were closed and demand shifted to online channels. As the quarter progressed and the stores reopened, retail demand picked up, iCafes largely reopened, and online sales continued to thrive. Gaming laptop demand is very strong as students and professionals turn to GeForce-based systems to improve how they work, learn, and game from home. We've ramped over 100 new models with our OEM partners, focused on both premium and mainstream price points. In the premium laptop segment, we delivered unparalleled performance with the GeForce RTX 2080 and the 2070 Super GPUs in thin and light form factors. We also brought ray tracing to gaming laptops for the first time at price points as low as $999 with the GeForce RTX 2060. In the mainstream segment, we brought the GeForce GTX to laptop press points as low as 699. Momentum continues for our Turing architecture, which enables stunning new visual effects in games and is driving powerful upgrade cycle among gamers. Its RTX technology adds ray tracing and AI to programmable shading and has quickly redefined the new standard for computer graphics. DLSS used the AI capabilities of Turing to boost frame rates by almost 2x while generating crisp image quality. RTX support in blockbuster games continues to grow, including MegaHit, Death Stranding, the high-anticipated Cyberpunk 2077, and the upcoming release of Watch Dogs. These games join Minecraft and other major titles that support NVIDIA, RTX ray tracing, and DLSS. We're in the midst of a 21-day countdown campaign promoting a GeForce special event on September 1st, with each day highlighting a year in the history of GeForce. We don't want to spoil the surprise, but we encourage you to tune in. We are very pleased with the traction of our GeForce Now cloud gaming service, now in its second quarter of commercially availability. DSN offers the richest content to any game streaming service through partnerships with leading digital game stores, including Valve Steam, Epic Games, and Ubisoft Uplay. GeForce Now enables users with underpowered PC, maps, or Android devices to access powerful GPUs to play their libraries of PC games in the cloud, expanding the universe of gamers that we can reach with GeForce. Just yesterday, we announced that GFN is now supported on Chromebooks, further expanding our reach into tens of millions of users. In addition to NVIDIA's own service, GFN is available or coming soon to a number of telecom partners around the world, including SoftBank and KDDI in Japan, Rokoscom and Beeline in Russia, LGU Plus in South Korea, and Taiwan Global. Moving to ProBiz, in Q2, was $203 million in revenue, down 30% year-on-year and down 34% sequentially, with declines in both mobile and desktop workstations. Sales were hurt by lower enterprise demand and the closure of many offices around the world. Industries negatively impact during the quarter include automotive, architectural engineering and construction, manufacturing, media and entertainment, and oil and gas. Initiatives by enterprises to enable remote workers drove demand for virtual and cloud-based graphic solutions. Accordingly, our Q2V GPU bookings accelerated, increasing 60% year-on-year. Despite near-term challenges, we are winning new business in areas such as healthcare, including Siemens, Volks, and General Electric, and the public sector. We continue to expand our market opportunity with over 50 leading design and creative applications that are NVIDIA RTX enabled, including the latest release from Foundry, Chaos Group, and Maxon. These applications provide faster ray tracing and accelerated performance, improving creators' design work tools. The pandemic will have a lasting impact on how we work. Our revenue mix going forward will likely reflect this evolution in enterprise workforce trends with a greater focus on technologies such as NVIDIA laptops and virtual workstations that enable remote work and virtual collaboration. Moving to automotive, automotive revenue was 111 million, down 47% year on year and down 28% sequentially. This was slightly better than our outlook of a 40% sequential decline, as the impact of the pandemic was less pronounced than expected, with auto production volumes starting to recover after bottoming in April. Some of the decline was also due to the roll-off of legacy infotainment revenue, which will remain a headwind in future quarters. In June, we announced a landmark partnership with Mercedes-Benz, which starting in 2024, will launch software-defined intelligent vehicles across an entire fleet in using end-to-end NVIDIA technology. Mercedes will utilize NVIDIA's full technology stack, including the Drive AGX computer, Drive AV autonomous driving software, and NVIDIA's AI infrastructure, spanning from the car to the cloud. Centralizing and unifying computing in the car will make it easier to integrate and upgrade advanced software features as they are developed. With over-the-air updates, vehicles can receive the latest autonomous driving and intelligent cockpit features, increasing value and extending the joy of ownership with each software upgrade. This is a transformative announcement for the automotive industry, making the turning point of traditional vehicles becoming high-performance, updatable data centers on wheels. It's also a transformative announcement for NVIDIA's evolving business model as the software content of our platforms grows, positioning us to build a recurring revenue stream. Moving to data centers. Data Center is a diverse, consists of cloud service providers, public cloud providers, supercomputing centers, enterprises, telco, and industrial edge. Future revenue was a record, 1.75 billion, up 167% year on year, and up 54% sequentially. In Q2, we incorporated a full quarter of contribution from the Mellanox acquisition, which closed on April 27th, the first day of our quarter. Mellanox contributed approximately 14% of company revenue and just over 30% of data center revenue. Both compute and networking within data center set a record with accelerating year-on-year growth. The biggest news in data center this quarter was the launch of our Ampere architecture. We are very proud of the team's execution and launching and wrapping this technological marvel, especially amid the pandemic. The A100 is the largest chip ever made, with 54 billion transistors. It runs our full software stack for accelerating the most compute-intensive workloads. Our software releases include CUDA 11, the new versions of over 50 CUDAx libraries, and a new application framework for major AI workloads, such as JAGAS for conversational AI and Merlin for deep recommendator systems. The A100 delivers NVIDIA's greatest generational leap ever, boosting AI performance by 20x over its predecessor. It is also our first universal accelerator, unifying AI training and inference and powering workloads such as data analytics, scientific computing, genomics, edge video analytics, 5G services, and graphics. The first Ampere GPU, A100, has been widely adopted by all major server vendors and cloud service providers. Google Cloud Platform was the first cloud customer to bring it to market, making it the fastest GPU to come to the cloud in our history. And just this morning, Microsoft Azure announced the availability of massively scalable AI clusters, which are based on the A100 and interconnected with 200 gigabyte per second Mellanox and Cinevan networking. A100 is also getting incorporated into offerings from AWS, Alibaba Cloud, Baidu Cloud, and Tencent Cloud. And we announced that the A100 is going to market with more than 50 servers from leading vendors around the world, including Cisco, Dell, Hewlett Packard Enterprise, and Lenovo. Adoption of the A100 into leading server makers offerings is faster than any prior launch, with 30 systems expected this summer and over 20 more by the end of the year. The A100 is already winning industry recognition. In the latest A100 training benchmark, MLPerf 0.7, NVIDIA set 16 records, sweeping all categories for commercially available solutions in both per chip and at scale performance. Based on the A100, MLPerf offers the industry's first and only objective AI benchmark. Since the benchmark was introduced two years ago, NVIDIA has consistently delivered leading results and record performance for both training and infants. NVIDIA also topped the charts in the latest top 500 list of the fastest supercomputers. The ranking, released in June, shows that eight of the world's top 10 supercomputers use NVIDIA GPUs, NVIDIA's networking or both. They include the most powerful systems in the US and Europe. NVIDIA, now combined with Mellanox, powers 2 thirds of the top 500 systems on the list, compared with just less than a half for the two companies in total two years ago. In energy efficiency, systems using NVIDIA GPUs are pulling away from the pack. On average, they're nearly 2.8x more powerful efficient than systems without NVIDIA GPUs, measured by gigaflops per watt. The incredible performance and efficiency of the A100 GPU is best amplified by NVIDIA's own new Selene supercomputer, which debuted as number seven on the top 500 list and is the only top 100 system to crack the 20 gigaflops per watt barrier. Our engineers were able to assemble Selene in less than four weeks using NVIDIA's open modular DGX superpod reference architecture instead of the typical build time of months or even years. This is the system that we used to win the MLPerf benchmarks. And it is a reference design. It's available for our customers to quickly build a world-class supercomputer. We also brought GPU acceleration to data analytics, one of the largest and fastest growing enterprise workloads. We enabled end-to-end acceleration of the entire data analytics workload pipeline for the first time with NVIDIA's GPUs and software stack in the latest version of Apache Spark. released in June. Spark is the world's leading data analytics platform used by more than 500,000 data scientists and 16,000 enterprises worldwide. And we have two major milestones to share. We have now shipped a cumulative total of 1 billion CUDA GPUs. And the total number of developers in the NVIDIA ecosystem just reached 2 million. It took over a decade to reach the first million and less than two years to reach the second million. Mellanox has fantastic results across the board in its first quarter as part of NVIDIA. Mellanox revenue growth accelerated with strength across Ethernet and InfiniBand products. Our Ethernet shipments reached a new record. Major hyperscale builds drove the upside in the quarter as growth in cloud computing and AI is fueling increased demand for high performance networking. Mellanox networking was a critical part of several of our major new product introductions this quarter. These include the DGX AI system, the DGX super product clusters for Selene supercomputer, and the EGX Edge AI platform. We also launched the Mellanox ConnectX 6 Ethernet NIC, the 11th generation product of the ConnectX family, and it's designed to meet the needs of modern cloud and hyperscale data centers, where 25, 50, and 100 gigabytes per second is becoming the standard. We expanded our switch networking capabilities with the addition of QMOS Networks, a privately held network software company that we purchased in June. QMOS augments our Mellanox acquisition in building out open modern data center. The combination of NVIDIA accelerated computing, Mellanox networking, and QMOS software enables data centers that are accelerated, disaggregated, and software defined to meet the exponential growth in AI, cloud, and high-performance computing. Moving to the rest of the P&L. Q2 GAAP gross margin was 58.8%, and non-GAAP gross margin was 66%. GAAP gross margin declined year-on-year and sequentially due to costs associated with the Mellanox acquisition. Non-GAAP gross margins increased by almost six points year-on-year, reflecting a shift in product niche, with higher data center sales and lower automotive sales. Q2 GAAP operating expenses were $1.62 billion, and non-GAAP operating expenses were $1.04 billion, up 67% and 38% from a year ago, respectively. Q2 GAAP EPS was $0.99, up 10% from a year earlier. Non-GAAP EPS was $2.18, up 76% from a year ago. Q2 cash flow from operations was 1.57 billion. With that, let me turn to the outlook for the third quarter of fiscal 2021. We expect revenue to be 4.4 billion, plus or minus 2%. With that, we expect gaming to be up just over 25% sequentially, with data center to be up in the low to mid single digits sequentially. We expect both provis and auto to be at similar levels out in Q2. GAAP and non-GAAP gross margins are expected to be 62.5% and 65.5%, respectively, plus or minus 50 basis points. GAAP and non-GAAP operating expenses are expected to be approximately $1.54 billion and $1.09 billion, respectively. Full-year GAAP and non-GAAP OpEx is tracking in line with our outlook of $5.7 billion and $4.1 billion, respectively. GAAP and non-GAAP OINE are both expected to be expense of approximately $55 million. GAAP and non-GAAP tax rates are both expected to be 8%, plus or minus 1%, excluding discrete items. Capital expenditures are expected to be approximately $225 to $250 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 at the BMO Virtual Technology Summit on August 25th, Citi's 2020 Global Technology Conference on September 9th, Deutsche Bank's Technology Conference on September 14th, and the Evercore's Virtual Menlo Forum, The Future of Mobility on September 21st. We will also host a financial analyst Q&A with Jensen on October 5th as part of our next virtual GTC. Our earnings call to discuss our third quarter's results is scheduled for Wednesday, November 18th. We will now open the call for questions. Operator, would you please call for questions? Thank you.