NVIDIA Corporation

Good afternoon. My name is Jason and I will be your conference operator today. At this time, I would like to welcome everyone to NVIDIA's third quarter 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 third quarter of fiscal 2021. With me on the call today from NVIDIA are Jensen Wang, 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 fourth quarter of fiscal 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 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, November 18, 2020, 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.

Thank you, Simona. Q3 was another exceptional quarter with record revenue of $4.73 billion, up 57% year on year, up 22% sequentially, and well above our outlook. Our new NVIDIA Ampere GPU architecture is ramping with excellent demand across our major market platforms. Q3 was also a landmark quarter, both for us and the industry as a whole. as we announced plans to acquire Arm from SoftBank for $40 billion. We are incredibly excited about the combined company's opportunities, and we are working through the regulatory approval process. For today, we will focus our remarks on our quarterly performance. Starting with gaming. Revenue was a record $2.27 billion, up 37% year-on-year, up 37% sequentially, and ahead of our high expectations. Driving strong growth was our new NVIDIA Ampere architecture-based GeForce RTX 30 series of gaming GPUs. The GeForce RTX 3070, 3080, and 3090 GPUs offer up to two times the performance and two times the power efficiency over the previous Turing-based generation. Our second generation NVIDIA RTX combines ray tracing and AI to deliver the greatest ever generational leap in performance. First announced on September 1st and ranging in price from $499, To $1,499, these GPUs have generated amazing reviews and overwhelming demand. PC World called them staggeringly powerful, while Newegg cited more traffic than Black Friday. Many of our retail and e-tail partners sold out instantly. The RTX 30 series drove our biggest ever launch. While we had anticipated strong demand, it exceeded even our bullish expectations. Given industry-wide capacity constraints and long cycle times, it may take a few more months for product availability to catch up with demand. In addition to the NVIDIA Ampere GPU architecture, we announced powerful new tools for gamers, as well as for tens of millions of live streamers, broadcasters, esports professionals, artists, and creators. NVIDIA Reflex is a new technology that improves reaction time in games, reducing system latency by up to 50%. NVIDIA Reflex is being integrated into popular esports games such as Apex Legends, Call of Duty Warzone, Fortnite, and Valorant. NVIDIA Broadcast is a universal plug-in for video conferencing and live streaming applications that enhances the quality of microphones, speakers, and webcams with NVIDIA AI effects, such as audio noise removal, virtual background effects, and webcam audio frame. With it, remote workers and live streamers can turn any room into a broadcast studio. Blockbuster games continue to adopt NVIDIA's RTX, ray tracing, and AI technology. Epic Games announced that Fortnite, which has more than 350 million players worldwide, is adding NVIDIA RTX real-time ray tracing, NVIDIA DLSS AI Super Resolution, and NVIDIA Reflex, making the game more beautiful and even more responsive. Other major new titles featuring RTX this holiday season include Watch Dogs Legends, Call of Duty, Black Ops Cold War, and much anticipated Cyberpunk 2077. Gaming laptop demand was also strong. With double-digit year-on-year growth for the 11th quarter in a row, NVIDIA GeForce laptops support the most demanding applications for creatives and designers, while doubling as a powerful gaming rig by night. We also had record gaming console revenue on strong demand for the Nintendo Switch. And we continue to grow our cloud gaming service, GeForce Now, which has doubled in the past seven months to reach over 5 million registered users. GeForce Now is unique as an open platform that connects to popular game stores, including Steam, Epic Games, and Ubisoft Connect, allowing gamers access to the titles they already own. 750 games are currently available on GFN. the most of any cloud gaming platform, including 75 free-to-play games with more games added every Thursday. GFN supports many popular clients, including PCs, Macs, and Chromebooks. Stay tuned for more devices to come in the near future. In addition, GFN's reach continues to expand through our telco partners in a growing list of countries, including Japan, Korea, Taiwan, Russia, and Saudi Arabia. We are also providing technology that enables the cloud gaming services to an expanding number of partners. Following our earlier announcement with Tencent, Amazon, and Facebook are beginning to offer cloud gaming services powered by NVIDIA. Moving to ProBiz. Q3 revenue was $236 million. down 27% year-on-year and up 16% sequentially, ahead of our expectations. Sequential growth was driven by strength in notebooks, which posted record revenue, boosted by work-from-home initiatives and the shift to thin and light mobile workstations. This is particularly offset by a decline in desktop workstations, which continued to be impacted by the pandemic and drove the year-on-year decline. From an industry demand perspective, stronger verticals including healthcare, public sector, higher education and research, and financial services. We continue to win new business in a number of areas. In healthcare, we added Medtronic for visual surgical applications and Fizzle for medical imaging. In technology and media and entertainment, we gained wins for design, rendering, and broadcast applications. During the quarter, we announced that Omniverse, the world's first 3D collaboration and simulation platform, has entered open beta. Omniverse enables the tens of millions of designers, architects, and creators to collaborate real-time, on-premises, or remotely. Using the virtual and physical world, Omniverse brings together NVIDIA breakthroughs in graphics, simulation, and AI It will help enterprises address evolving requirements as workforces become increasingly distributed. Initial market response from this transformative platform has been phenomenal. Over 400 individual creators and developers in diverse industries have been evaluating Omniverse and early adopters, including Ericsson, BMW, Foster & Partners, and Lucasfilm. The pandemic is accelerating development of AR, VR, and mixed reality technologies, which will have a profound impact on how we work and play. For example, our work with NASCAR to enable a variety of AR and VR services at the edge is revolutionizing the racing experience for millions of fans across the globe. With our industry-leading real-time ray tracing graphics, AI and simulation hardware and software stacks, NVIDIA is in a unique position to enable the future of blending the physical and virtual worlds. Moving to automotive, Q3 revenue was $125 million, down 23% year-on-year and up 13% sequentially. Sequential growth was driven by a recovery in global automotive production volumes, as well as continued growth in AI cockpit revenue. The year-on-year decline was due to the expected ramp down of legacy infotainment revenue. In September, Mercedes-Benz debuted its redesign of S-Class sedan featuring an all-new NVIDIA-powered M-Box AI cockpit system with an augmented reality heads-up display, AI voice assistant, and rich interactive graphics to enable every passenger in the vehicle to enjoy personalized intelligent features. Also in September, Li Auto, a leading electric car brand in China, announced that it will develop its next generation of vehicles using the software-defined NVIDIA Drive AGX Orin platform. Orin delivers nearly seven times the performance and three times the energy efficiency of our previous generation, sfc making it uniquely capable to power next generation autonomous electric vehicles we have excellent traction with ev startups finally last week nvidia and hyundai motor group announced that the automaker's entire lineup of hyundai kia and genesis models will come standard with nvidia drive in-vehicle infotainment systems starting in 2022. this feature-rich, software-defined computing platform will allow vehicles to be perpetually upgraded with the latest AI cockpit features. Now moving to data center. Revenue was a record $1.9 billion, up 162% year-over-year and up 8% sequentially. Driving growth was a strong ramp of our A100-based platforms. Continued growth with Mellanox and record T4 shipments for inference. Let me give you a little bit of color on each. Our new NVIDIA Ampere architecture gained further adoption by cloud and hyperscale customers and started ramping into vertical industries. Over the past weeks, Amazon Web Services, Oracle Cloud Infrastructure, and Alibaba Cloud announced general availability of the A100, following Google Cloud Platform and Microsoft Azure. A100 adoption by Vertical Industries drove strong growth. As we began shipments to server OEM partners whose broad enterprise channels reach a large number of end customers. We also ramped the DGX A100 server and began shipping NVIDIA DGX SuperPOS, the first turnkey AI infrastructure. These range from 20 to 140 DGX A100 systems interconnected with Mellanox's HDR InfiniBand networking and enable customers to install incredibly powerful AI supercomputers in just a few weeks' time. In fact, we have announced plans to build an 80-node DGX superpod with 400 petaflops of AI performance called Cambridge One. which will be in the UK's fastest AI supercomputer. It will be used by NVIDIA researchers for collaborative research within the UK's AI and healthcare community across academia, industry, and startups. It joins other systems in NVIDIA's complex of AI supercomputers, powered by our R&D and autonomous vehicles, conversational AI, robotics, graphics, HPC, and other domains. This includes Selene, now the world's fifth fastest supercomputer and fastest commercial supercomputer, and a new NVIDIA DGX SuperPod, which ranks first on the green 500 list of the world's most energy-efficient supercomputers. A great example of the tremendous opportunities for AI in healthcare is our new partnership with GSK for applying computational to the drug and vaccine discovery process. GSK's London-based AI Hub will utilize biomedical data, AI methods, and advanced computing platforms to unlock genetic and clinical data with increased precision and scale. In addition to this investment in NVIDIA's DGX A100 system, GSK will have access to NVIDIA's Cambridge One, the NVIDIA Clara Discovery Software, and NVIDIA Scientist. In Q3, the A100 swept the industry standard MLPerf benchmark for AI inference performance, following our sweep in the prior quarter's MLPerf benchmark for AI training. Notably, our performance led in AI inference actually extended compared with last year's benchmark. For example, In the ResNet-50 test for image recognition, our A100 GPU beat CPU-only systems by 30 times this year versus six times last year. Additionally, A100s outperformed CPUs by up to 237 times in the newly added recommendator test, which represents some of the most complex and widely used AI models on the Internet. Our winning performance in AI inference is translating to continued strong revenue growth. Alongside the continued ramp of the A100, T4 sales set a record as the NVIDIA AI inference adoption is in full throttle. We estimate that NVIDIA's installed GPU capacity for inference across the seven largest public clouds now exceeds that of the aggregate CPU capacity in the cloud, testament to the tremendous performance and TCO advantage of our GPUs. Hundreds of companies now operate AI-enabled services on NVIDIA's inference platform, including the A100 or T4 GPU and our Triton inference-serving software. For example, Tencent uses NVIDIA AI Inference to recommend video, music, news, and apps, supporting billions of queries per day. Microsoft uses NVIDIA AI inference for grammar correction in Microsoft Office, supporting half a trillion queries a year. And American Express uses it for real-time fraud detection. We also gained tremendous traction in supercomputing. We announced that NVIDIA technology, including Ampere Architecture GPUs, and HDR InfiniBand networking will power five systems awarded by EuroHPC, a European initiative to build exascale supercomputing. This includes Trineca, a university consortium in Italy, and one of the world's most important supercomputing centers, which will use NVIDIA's accelerated computing platform to build the world's fastest AI supercomputer. Chinooka supercomputer named Leonardo advances the age of exascale AI, delivering 10 exaflops of AI performance to enable AI and high-performance computing converged application use cases. It is built with nearing 14,000 NVIDIA Ampere architecture-based GPUs and Mellanox HDR 200 gigabit per second InfiniBand networking. And just the re-released top 500 list of supercomputers show that NVIDIA GPUs or networking powered nearly 70% and eight of the 10 top supercomputers on the list. Mellanox had another record quarter with double digit sequential growth well ahead of our expectations, contributing 13% of overall company revenue. The upside reflected sales to a China OEN that will not recur in Q4. As a result, we expect a meaningful sequential revenue decline for Mellanox in Q4, though still growing 30% from last year. Mellanox reached record revenue in both InfiniBand and Ethernet, driven by cloud, enterprise, and supercomputing customers. Strong demand for high-performance interconnects, where Mellanox is the leader, is being fueled by AI increasingly complex applications, which demand faster, smarter, more scalable networks. As the data center becomes the new unit of computing in the age of AI, Mellanox networking is foundational to modern scale-out architectures. At GTC in October, we unveiled the Bluefield 2 DPU, or data processing unit, a new kind of processor which offloads critical networking, storage, and security tasks from the CPU. A single Bluefield II DPU can deliver the same data center services that can consume up to 125 CPU cores. This frees up valuable CPU cores to run a wide range of other enterprise applications. In addition, it enables zero trust security features to prevent data breaches and cyber attacks, and accelerates overall performance. VMware announced that it will offload, accelerate, and isolate its industry-leading ESXi hypervisor with NVIDIA's Bluefield2 DPU, boosting vSphere and data center performance and efficiency. We also unveiled our three-year DPU roadmap, unifying Mellanox's leading network capabilities with NVIDIA's GPU and the new NVIDIA DOKA or data center on a chip architecture. Software development kit for building DPU accelerated applications. We believe that over time, DPUs will ship on millions of servers, unlocking a 10 billion total addressable market. Bluefield 2 is sampling now with major hyperscale customers and will be integrated into the enterprise server offerings of major OEMs. This was our busy period for product launches. Earlier this week at Supercomputing 20, we announced the new double-capacity A100 80-gigabyte GPUs and DGX systems for organizations to build, train, and deploy massive AI models. We also announced the new DGX station A100, a powerful workgroup server with four a 100 GPUs and a massive 320 gigabyte GPU memory for data scientists and AI researchers working in offices, research facilities, labs, or at home. All these additions to the NVIDIA Ampere architecture family of products will be available early next year. At SC20, we also announced the next generation NVIDIA Mellanox 4 gigabit per second InfiniBand architecture, giving AI developers and scientific researchers the fastest available networking performance. This doubles data throughput and adds new in-network computing engines to provide additional acceleration. Solutions based on this new architecture are expected to sample in the second quarter of calendar 2021. Moving to the rest of the P&L. Q3 gap gross margins was 62.6% and non-gap gross margin was 65.5%. Gap gross margin declined year on year, primarily due to charges related to the Mellanox acquisition, partially offset by product mix. The sequential increase was driven by the absence of non-recurring inventory step-up expense related to the Mellanox acquisition. Non-GAAP gross margins increased by 140 basis points year on year, reflecting a shift in product mix with higher data center sales, including the contribution from Mellanox. Non-GAAP gross margin was down 50 basis points sequentially, in line with our expectations, driven by product mix. Q3 GAAP operating expenses were $1.56 billion, and non-GAAP operating expenses were $1.1 billion, up 6% and 42% from a year ago, respectively. Q3 GAAP EPS was 2.12, up 46% from a year earlier, and non-GAAP EPS was 2.91, up 63% from a year ago. Q3 cash flow from operations was $1.28 billion. With that, let me turn to the outlook for the fourth quarter of fiscal 2021. As a reminder, Q4 includes a 14th week, which we expect to be incrementally an addition to revenue and operating expenses. We expect gaming to be up sequentially in what is typically a seasonally down quarter as we continue to ramp up our new RTX 30 series product. We expect data center to be down slightly versus Q3. With that, we expect computing products to grow in the mid single-digit sequentially, more than offset by sequential decline in Mellanox. We expect continued sequential growth in auto and provis, though not yet returning to year-on-year growth. And we expect a seasonal decline in OEM. Revenue is expected to be $4.8 billion, plus or minus 2%. GAAP and non-GAAP gross margins are expected to be 62.8% and 65.5%, respectively, plus or minus 50 basis points. GAAP and non-GAAP operating expenses are expected to be approximately $1.64 billion and $1.18 billion, respectively. GAAP and non-GAAP Other income and expenses are both expected to be an 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 $300 million to $325 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'll be virtually attending the Credit Suisse Technology Conference on November 30th, Wells Fargo TMT Summit December 1st, and the UBS TMT Conference on December 7th. Our earnings call to discuss the fourth quarter and full year results is scheduled for Wednesday, February 24th. We will now open the call for questions. Operator, would you please poll for questions?