NVIDIA Corporation

Good afternoon. My name is Mariama 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 or hash key. Thank you. I will now turn the call over to Simona Jankowski, NVIDIA Vice President of Investor Relations and Strategic Finance, to begin the conference.

Thank you. Good afternoon, everyone, and welcome to NVIDIA's conference call for the fourth quarter of fiscal 2021. With me on the call today from NVIDIA are Jensen 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 through replay and through the conference call to discuss our financial results for the first quarter of fiscal 2022. 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 report that we may file on Form 8-K with the Securities and Exchange Commission. All our statements are made as of today, February 24, 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, GAAP financial measures, in our CFO commentary, which is posted on our website. With that, let me turn the call over to Collette.

Thanks, Simona. Q4 was another record quarter, with revenue exceeding $5 billion. and year-on-year growth accelerating to 61%. Full-year revenue was also a record at $16.7 billion, up 53%. Our gaming business has reached record revenue of $2.5 billion in Q4, up 10% sequentially, and up 67% from a year earlier. Full-year gaming revenue was a record at $7.8 billion, up 41%. Demand is incredible for our new GeForce RTX 30 series products based on the NVIDIA Ampere GPU architecture. In early December, we launched the GeForce RTX 3060 Ti, which joined the previously launched RTX 3090, 3080, and 3070. The entire 30 series lineup has been hard to keep in stock, and we exited Q4 with channel inventories even lower than when we started. Although we are increasing supply, channel inventories will likely remain low throughout Q1. GeForce RTX 30 series graphics cards were a holiday sensation. due not just to their amazing performance, but also to their rich features, including our second-generation RTX ray-tacing technology and DLSS, AI-powered performance accelerator, which massively boosts frame rates in graphically demanding titles. Three dozen games now support RTX, including the top battle royale game, Fortnite. the top role-playing game, Cyberpunk 2077, the top massively multiplayer online game, World of Warcraft, and the best-selling game of all time, Minecraft. RTX has clearly set the new standard in gaming. Building on this momentum, at CES in January, we introduced a wave of Ampere architecture gaming products, including our biggest ever laptop launch, powered by GeForce RTX 3060, 3070, and 3080 laptop GPUs, and with our third generation Max-Q technology. These new, thin, and lightweight gaming laptops increase performance and energy efficiency by up to 2x from the prior generation. RTX 3060 laptops start $999 and are faster than the previous generation laptops, which sold for $2,500. The incredible performance, design, and price points of these new laptops will delight the growing universe of gamers and creators, as well as students and professionals. The gaming laptop market has grown sevenfold in the past seven years, and momentum is building. With top OEMs bringing to market a record 70-plus laptop models based on the GeForce RTX 30 series. GeForce laptops as a whole are the fastest growing and one of the largest gaming platforms. Also at CES, we announced the GeForce RTX 3060 GPU, priced at $329, extending the 30 series desktop liner further into the mainstream. We expect strong demand when it launches this Friday, as 60 class GPUs have traditionally been our most popular products. Starting with the 3060, we're taking an important step to maximize the supply of GeForce GPUs for gamers. Users are constantly discovering new applications for our powerful programmable GPUs, and cryptocurrency mining is one of them. With rising Ethereum prices, there are indications that miners are behind GPUs. We would like GeForce GPUs to end up with gamers. So we have created a new special software drivers that will detect the Ethereum mining algorithm, cutting in half the mining efficiency of the GeForce RTX 3060. We suspect the significant increase in the Ethereum network hash rate observed over the past few months was driven by a combination of previously installed mining capacity that was reactivated, as well as new sales of GPUs and ASICs. Since our GPUs are sold to graphics card manufacturers and then on to distribution, we don't have the ability to accurately track or quantify their end use. Analyst estimates suggest that crypto mining contributed 100 to 300 million to our Q4 revenue, or a relatively small portion of our gaining revenue in Q4. Cryptocurrencies have recently started to be accepted by companies and financial institutions and show increased signs of staying power. To address industrial Ethereum mining demand, last week we announced a new line of NVIDIA CMPs, or crypto mining processors. Shipments will start in March. CMPs lack display outputs and have other optimizations that improve crypto mining power efficiency. CMP products will let us gain some visibility into the contribution of crypto mining to our overall revenue. For Q1, we estimate that CMP will contribute approximately $15 million. We plan to sell these products to industrial miners. We will quantify their contribution each quarter for transparency. Over the past year, it has become clear that we've entered a new era in which gaming is an integral part of global culture. The number of concurrent users on Steam has more than doubled since 2018 and continues to hit new records. In 2020 alone, more than 100 billion hours of gaming content was seen on YouTube, and half a billion people watched esports. Increasingly, we aren't just gaming. We're also watching sports, attending concerts, creating content, and connecting with our friends in virtual environments. Additionally, we are excited about the new experiences like VR. Significantly more content is now available, including arguably the first VR killer app, Beat Saber. There's now almost two million VR users on Steam. And with these powerful structural shifts, we expect our gaming business to remain on a robust growth trajectory. The GeForce RTX 30 series GPUs have kicked off a powerful upgrade cycle, and we estimate only around 15% of GeForce gamers own an RTX-class GPU, which is needed to experience the beautiful ray-traced graphics of modern games. Moreover, the universe of gamers is rapidly expanding, and the reach of GeForce has extended beyond gamers to some 45 million creators. In addition, gaming revenue continues to benefit from a favorable mix shift as gamers and creators keep moving to higher-end GPUs. We expect another great year for GeForce. Earlier this month, we celebrated the one-year anniversary of the GeForce Now cloud gaming platform, which is now over 6 million numbers strong. GeForce Now offers 800 PCs from over 300 publishers, more than any other cloud gaming service, including 80 of the most played free-to-play games. Starting with support for Windows PCs, Macs, and Android devices, we added support in recent months to Chromebooks, iPhones, and iPads. GFN has grown globally with more than 65 countries on our service and more added regularly by our GeForce Now Alliance partners. Moving to ProVis, Q4 revenue was at $307 million, up 30% sequentially and down 10% year on year and ahead of our expectations. Full year revenue was 1.1 billion, was down 13%. Strong sequential growth was driven primarily by a recovery in desktop workstations as some customers returned to the office and enterprises resumed purchases that had been deferred by the pandemic. Notebook GPUs grew sequentially to a record as enterprises continued to support remote workforce initiatives. Looking ahead, the reopening of businesses will benefit desktop workstations, but longer-term workforce trends will likely shift or mix to notebook GPUs and cloud offerings. Healthcare was a standout vertical in the quarter, with significant orders from GE, Siemens, and Oxford Nanopore Technologies. Public sector and automotive also sowed strength. Omniverse, our real-time 3D collaboration and simulation platform, is now in open beta. Over 500 creators and professionals have tested Omniverse through our early access program. Omniverse is one of our most important and exciting platforms. We are delighted by its initial acceptance and look forward to sharing more details on its long-term growth opportunity in the coming months. Moving to automotive. Q4 revenue was $145 million, up 16% sequentially and down 11% year-on-year. Full-year revenue of $536 million declined 23%. Sequential growth was driven by continued recovering the global automotive production volumes and growth in AI cockpit revenue. The year-on-year decline reflects the expected ramp-down of legacy entertainment. NVIDIA has emerged as the industry's leading end-to-end full-stack technology provider for self-driving and AI-enabled vehicles. Oren, the SOC that self-driving platform is built on, delivers an unrivaled 254 trillions of operations per second of performance on industry-leading power efficiency, helping to revolutionize the transportation industry. Our technology leadership is driven a robust, rapidly growing set of opportunities. We have great momentum with an expanding list of electric vehicle OEMs, including NIO, SAIC, Viato, and XPeng, which are all using the NVIDIA Drive platform to power their next generation of vehicles. We look forward to growing with them as they continue to scale. Our software-defined platforms is the only solution that spans from the data center for training deep neural nets and running physically accurate simulations to a full stack in car solutions, scaling from ADAS to level five fully autonomous functionality. Autonomous vehicle companies are harnessing this technology. Zoox recently unveiled its level five bi-directional robo taxi powered by NVIDIA. Enride launched its next-generation cabless autonomous truck using NVIDIA DRIVOREN. And earlier this year, Mercedes announced a 56-inch wide MBUX hyperscreen powered by NVIDIA AI cockpit technology. This win builds on our momentum with Mercedes' first-generation MBUX system, which is now in 1.8 million cars. We are in the early innings of a significant opportunity. We have built a multi-billion dollar design wind pipeline for our self-driving AI cockpit solutions, which will drive a material inflection in revenue over the next few years. Our transformational partnership with Mercedes, announced last June, demonstrates the power of our evolving business model as we expand our addressable market and layer in software revenue. We are exceptionally well-positioned to capitalize on the significant opportunity that lies ahead. Moving to data center. Revenue was $1.9 billion, which exceeded our expectations, was comparable to last quarter, and up 97% from the year-ago period, which did not include Mellanox. Data center compute revenue was up 45% year-on-year. Full-year data center revenue rose 125% to a record $6.7 billion, including almost 70% growth from data center compute. From a sequential perspective, the data center computes stronger than expected double-digit growth more than offset the anticipated decline in Mellanox revenue, which included a large non-recurring network sale to a single OEM in Q3. Compute growth was led by vertical industries, where OEM partners continued ramping up their A100-based servers, and our own DGX system sales were strong. Vertical industries were well over 50% of data center revenue across compute and networking, with particular strength in supercomputing, financial services, higher education, and consumer internet verticals. Additionally, hyperscale customers continue to deploy the A100, driving both sequential growth and exceptionally strong year-on-year growth in data center compute. The A100 has been adopted by all major cloud customers globally and is being deployed by hyperscale customers for internal workloads. Still, we are in the early stages of adoption and expect continued growth this year. of the A100 has been smoother and accomplished by better visibility than prior generation. Its universal AI training and inference capabilities, as well as support for a wider set of applications and outstanding performance are driving high customer utilization, a clear sign of the A100's value. Turning to Mellanox, we are seeing continued strong traction and robust momentum across our customer sets. Its revenue was up over 30% from Mellanox's Q4 revenue in calendar 2019, when it was still a standalone company. Year-on-year growth in the quarter was led by hyperscale and large customer consumer internet customers, which grew over 60% from last year, with several contributing record revenues. Consistent with our outlook, Mellanox had a sequential decline impacted by a non-recurring sales to a China OEM in Q3. We expect to return to sequential growth in Q1, driven by strong demand for our high-speed networking products, including the ramp of ConnectX adapters with CSPs and all major server OEMs in their upcoming refresh. We also see strong momentum in high-performance computing with HDR InfiniFAM products. For example, we won six of the seven supercomputers awarded over the past few months by EuroHPC. Starting next quarter, we will continue to provide color and networking as part of the data center market platform, but we will no longer break out Mellanox revenue separately. Looking forward, we are incredibly excited about the opportunities in data center. Accelerated computing is not only delivering super more laws gains in performance, but is also an energy efficient and cost effective method of computing. And virtually every industry is adopting technology with greater urgency as companies adapt to the new world of more distributed workers and customers. As industries embark on this journey, they are also increasingly focused on combating climate change. To that end, the A100 performs AI computations with 1 20th the power consumption of CPUs. It powers our Selene supercomputer, which is number one on the green 500 list of the world's most efficient supercomputers. Indeed, NVIDIA's powered machines recently captured 25 of the top 30 spots on the green 500 list. Accelerated computing is not only serving the exponential growth in demand for compute, it can also help bend the power consumption curve. With accelerated computing, NVIDIA is pioneering a path forward the computing industry. Before I move to the P&L and Outlook, let me give you an update on our proposed acquisition of Arm. In September, we announced plans to acquire Arm from SoftBank Group in a transaction that will create the premier computing company for the age of AI. At that time, we said it would take approximately 18 months to secure regulatory approvals in the US, the UK, the EU, China, and other jurisdictions. Thorough reviews are typical with a deal of this size. This process is moving forward as expected. We are in constructive dialogue with the relevant authorities and are confident that regulators will see the benefits to the entire tech ecosystem. As we have said, this combination will spur competition. Together, ARM and NVIDIA will provide greater choice to the data center ecosystem, a compelling alternative CPU architecture for the market, and further enhance ARM's offering in mobile and embedded. Our intention is to increase investment in ARM's existing roadmap, adding resources to stimulate growth in new markets. We love and intend to maintain ARM's open licensing model, a commitment guaranteed both by long-term legally binding contracts, as well as our own interest in ensuring this investment is a profitable one for us. We are on the cusp of a new age in which AI fuels industries ranging from healthcare to scientific research to the environment. With this transaction, our vision is to boost arms potential so it can thrive in this new era and grow into promising new markets. Moving to the rest of the P&L. Q4 gap gross margins were 63.1% and non-gap gross margins were 65.5%. Gap gross margins declined year on year due to amortization of developed technology acquired from Mellanox, partially offset by product mix. The sequential increase was due to higher margins for gaming GPUs and lower IP-related costs, partially offset by lower margin mix in our data center portfolio. Non-GAAP gross margins increased by 10 basis points year on year and was flat sequentially in line with our expectations. Q4 GAAP EPS was 2.31, up 51% from a year earlier. Non-GAAP EPS was $3.10, up 64% from a year ago. Q4 cash from operations was a record, 2.07 billion. With that, let me turn to the outlook for the first quarter of fiscal 2022. Revenue is expected to be 5.3 billion, plus or minus 2%, with most of the sequential growth driven by gaming. Gap and non-gap gross margins are expected to be 63.8% and 66%, respectively, plus or minus 50 basis points. GAAP and non-GAAP operating expenses are expected to be approximately $1.67 billion and $1.2 billion, respectively. For the full year, we expect to grow non-GAAP OpEx in the mid-20% range. GAAP and non-GAAP other income and expenses are both expected to be an expense of approximately $50 million. Gap and non-gap tax rates are both expected to be 10%, 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 CFL commentary and other information on our IR website. In closing, let me highlight upcoming events for the financial community. We will be virtually attending the Raymond James Institutional Investors Conference on March 1st, the Morgan Stanley Technology, Media, and Telecom Conference on March 3rd, and the Arate Virtual Semis Conference on March 3rd. In addition, we will be hosting a virtual investor day on Monday, April 12th, following the live stream of Jensen's opening keynote at our GPU technology conference. Our earnings call to discuss our first quarter and full, our first quarter is scheduled for Wednesday, May 26th. We will now open the call for questions. Operator, would you please talk for questions? Thank you.