NVIDIA Corporation

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. 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 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 in video'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 in business, please refer to the disclosure in today's earnings release, our most recent Form 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, 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 four quarters into Ampere Architecture product cycle for gaming. and it continues to be our best ever. At Computex in June, we announced two 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 ray tracing, NVIDIA DLSS AI rendering, reflex, and broadcast. Laptop demand was also very strong. OEMs adopted Ampere architecture GPUs in 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 GPUs to gamers, students, and creators on the go. Ampere architecture-powered laptops feature our third generation Max-Q power optimization technology that enables ultra-thin designs, such as the new Alienware X15, the world's most powerful sub-16mm 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 esports will soon approach a half a billion people. while the number of those who live stream 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, Red Dead Redemption 2, one of the top-rated games of all time, popular titles like Rainbow Six Siege and Rust, 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 was also the first big quarter of the Ampere architecture ramp for pro-visualization. Key verticals driving Q2 demand include automotive, public sector, and healthcare. At SIGGRAPH last week, we announced an expansion of NVIDIA Omniverse, our 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. 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 startup AutoX unveiled its latest autonomous driving platform for rubber taxis 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 systems 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 startup, Embark, is building on NVIDIA Drive. The system is being developed for trucks for four major OEMs, Freightliner, Navistar International, Picard, and Volvo, representing the vast majority of the Class 8 OEMs. or largest-size 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 four times the inference performance of the T4. 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 workloads. 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 eight 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 One supercomputer in the UK 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 multi-user, 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 remote 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 include 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 announcements 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 enterprise simplify and accelerate their AI deployment. The NVIDIA ecosystem keeps getting stronger. NVIDIA Inception, our acceleration platform for AI startups, just surpassed 8,500 members. With cumulative funding of over $60 billion and members in 90 countries, Inception is one of the largest AI startup 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 four times in the past four years. Let me give you a quick update on Arm. In nearly one 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 would deliver for Arm. for the UK 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 are accelerated computing opportunities. We've announced accelerated platforms for Amazon Graviton, Ampere Computing, MediaTek, and Mara Valve, spanning cloud computing, AI, cloud gaming, supercomputing, edge AI, to Chrome PCs. We plan to invest in the UK. and we have with the Cambridge One supercomputer, and through ARM, making UK 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. 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 on continued growth in high-end Ampere-architectured products, partially offset by a mix shift within data center. Q2 GAAP EPS was $1.94, up 276% from a year earlier. Non-GAAP EPS was $1.04, up 89% from a year earlier, adjusting for the four-to-one stock split effecting 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 three other market platforms. Gaining 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 rates 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 24th, the New Street Big Ideas in Semiconductors Conference on September 9th, the Citi Global Tech Conference on September 13th, the Piper-Sandler Global Technology Conference on September 14th, and the Evercore ISI Auto Tech and AI Forum on September 21st. Our earnings call to discuss the third quarter results is scheduled for Wednesday, November 17th. We will now open the call for questions. Operator, would you please poll for questions?