NVIDIA Corporation

Good afternoon. My name is Sadie, and I'll be your conference operator today. At this time, I would like to welcome everyone to the NVIDIA's third quarter earnings call. All lines have been placed and mute to prevent any background noise. After this speaker's presentation, 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. Simone Natanowski, you may begin your conference. Thank you.

Good afternoon, everyone, and welcome to NVIDIA's conference call for the third quarter of fiscal 2022. With me 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 and fiscal year 2022. The content of today's call is invidious 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 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 17, 2021, based on information currently available to us. Except if required by law, we are seeing no obligation to update any such statements. During this call, we will discuss non-GAAP financial measures. You can find the 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. Q3 was an outstanding quarter, with revenue of $7.1 billion and year-on-year growth of 50%. We set records for total revenue, as well as for gaming, data center, and professional visualization. Starting with gaming, revenue of $3.2 billion was up 5% sequentially and up 42% from a year earlier. Demand was strong across the board. While we continue to increase desktop GPU supply, we believe channel inventories remain low. Laptop GPUs also posted strong year-on-year growth led by increased demand for high-end RTX laptops. NVIDIA RTX technology is driving our biggest effort refresh cycle with gamers and continues to expand our base with creators. RTX introduced groundbreaking real-time ray tracing and AI-enabled super resolution capabilities, which are getting adopted at an accelerating pace. More than 200 games and applications now support NVIDIA RTX, including 125 with NVIDIA DLSS. This quarter alone, 45 new games shipped with DLSS. And NVIDIA Reflex latency reducing technology is in top esports titles, including Valorant, Fortnite, Apex Legends, and Overwatch. In addition, the Reflex ecosystem continues to grow, with Reflex technology now integrated in almost 50 gaming peripherals. NVIDIA Studio for Creators keeps expanding. Last month at the Adobe MAX Creativity Conference, Adobe announced two powerful AI features for Adobe Lightroom and Lightroom Classics, accelerated by NVIDIA RTX GPUs. In addition, several of our partners launched new studio systems, including Microsoft, HP, and ASUS. We estimate that a quarter of our installed base has adopted RTX GPUs. Looking ahead, we expect continued upgrades as well as growth from NVIDIA GeForce users given rapidly expanding RTX support and the growing popularity of gaming esports, content creation, and streaming. Our GPUs are capable of crypto mining, but we don't have visibility into how much this impacts our overall GPU demand. In Q3, nearly all of our Ampere architecture gaming desktop GPU shipments were light hash grade to help steer GeForce supply to gamers. Crypto mining processor revenue was $105 million which is included in our OEM and other. Our cloud gaming service, GeForce Now, has two major achievements this quarter. First, Electronic Arts brought more of its fifth games to the service. And second, we announced a new GeForce Now RTX 3080 membership tier priced at less than $100 for six months. GeForce Now membership has more than doubled in this last year, to over 14 million gamers that are streaming content from 30 data centers in more than 80 countries. Moving to pro-visualization. Q3 revenue of $577 million was up 11% sequentially and up 144% from the year-ago quarter. The sequential rise was led by mobile workstations, with desktop workstations also growing, as enterprise deployed systems to support hybrid work environments. Building on the strong initial ramp in Q2 and pure architecture sales continue to grow. Leading verticals including media and entertainment, healthcare, public sector, and automotive. Last week, we announced general availability of Omniverse Enterprise, a platform for simulating physically accurate 3D worlds and digital twins. Initial market reception to Omniverse has been incredible. Professionals at over 700 companies are evaluating the platform, including BMW, Ericsson, Lockheed Martin, and Sony Pictures. More than 70,000 individual creators have downloaded Omniverse since the open beta launch in December. There are approximately 40 million 3D designers in the global market. Moving to automotive, Q3 revenue of $135 million declined 11% sequentially and increased 8% from the year-ago quarter. The sequential decline was primarily driven by AI cockpit revenue, which has negatively been impacted by automotive manufacturers' supply concerns. We announced that self-driving truck startup Kodiak Robotics, automaker Lotus, Autonomous bus manufacturers Keepcraft and EV startup WM Motor have adopted the NVIDIA Drive Orin platform for their next-generation vehicles. They join a large and rapidly growing list of companies adopting and developing on NVIDIA Drive, including auto OEMs, Tier 1 suppliers, NEVs, trucking companies, robotaxis, and software startups. Moving to data center, record revenue of $2.9 billion grew 24% sequentially and 55% from the year-ago quarter, with record revenue across both hyperscale and vertical industries. Strong growth is led by hyperscale customers fueled by continued rapid adoption of Ampere Architecture Tensor Core GPUs for both internal and external workloads. Hyperscale compute revenue doubled year on year, driven by the scale out of natural language processing and recommendator models and cloud computing. Vertical industry growth was also strong, led by consumer internet and broader cloud providers. For example, Oracle Cloud deployed NVIDIA GPUs for its launch of AI services, such as text analysis, speech recognition, computer vision, and anomaly detection. We continue to achieve exceptional growth in inference, which again outpaced our overall data center growth. We have transitioned our lineup of inference-focused processes to the Ampere architecture, such as the A30 GPU. We also released the latest version of our Triton Inference Server software, enabling compute-intensive inference workloads such as large language models, to scale across multiple GPUs and nodes with real-time performance. Over 25,000 companies worldwide use NVIDIA AI inference. A great new example is Microsoft Teams, which has nearly 250 million monthly active users. It uses NVIDIA AI to convert speech-to-text real-time during video calls in 28 languages in a cost-effective way. We reached three milestones to help drive more mainstream enterprise adoption of NVIDIA AI. First, we announced the general availability of NVIDIA AI Enterprise, our comprehensive software suite of AI tools and frameworks that enables the hundreds of thousands of companies running NVIDIA running vSphere to virtualize AI workloads on NVIDIA-certified systems. Second, VMware announced a future update to vSphere with Tanzu that is fully optimized for NVIDIA AI. When it's combined with NVIDIA AI Enterprise, enterprises can efficiently manage cloud-native AI development and deployment on mainstream platforms data center servers, and clouds with existing IT tools. And third, we expanded our Launchpad program globally with Equinix as our first digital infrastructure partner. NVIDIA Launchpad is now available in nine locations worldwide, providing enterprises with immediate access to NVIDIA software and infrastructure to help them prototype and test data science and AI workloads. Launchpad features NVIDIA-certified systems and NVIDIA DGX systems running the entire NVIDIA AI software stack. In networking, revenue was impacted as demand outstripped supply. We saw momentum toward higher speed and new generation products, including ConnectX 5 and 6. We announced the NVIDIA Quantum 2 400 gigabit per second end-to-end networking platform consisting of the Quantum 2 switch, the ConnectX 7 network adapter, and the Bluefield 3 ECU. The NVIDIA Quantum 2 switch is available from a wide range of leading infrastructure and system vendors around the world. Earlier this week, the latest top 500 list of supercomputers showed continued momentum for our full stack computing approach. NVIDIA technologies accelerate over 70% of the systems on the list, including over 90% of all new systems and 23 of the top 25 most energy efficient systems. Turning to GTC, last week we hosted our GPU technology conference, which had over 270 000 registered attendees jensen's keynote has been viewed 25 million times over the past eight days while our spring gtc focused on new chips and systems this edition focused on software demonstrating our full competing staff let me cover some of the highlights our vision for omniverse came to life at gdc we significantly expanded its ecosystem and announced new capabilities. Omniverse Replicator is an engine for producing data to train robots. Replicator augments real-world data with massive, diverse, and physically accurate synthetic data sets to help accelerate development of high-quality, high-performance AI across computing domains. NVIDIA Omniverse Avatar is our platform for generating interactive AI avatars. It connects several core NVIDIA SDKs, including speech AI, computer vision, natural language understanding, recommendation engines, and simulation. Applications including automated customer service, virtual collaboration, and content creation. Replicator and avatar join several other announced features and capabilities for Omniverse, including AI, AR, VR, and simulation-based technologies. We introduced 65 new and updated software development kits, bringing our total to more than 150, serving industries from gaming and design to AI, cybersecurity, 5G, and robotics. One of the SDKs is our first core licensed AI model, NVIDIA Reva. for building conversational AI applications. Companies using Riva during the open beta include RingCentral for video conference live captioning and PingAnne for customer service chatbots. NVIDIA Riva Enterprise will be commercially available early next year for large speed. We introduced the NVIDIA's NEMO Megatron framework, optimized for training large language models on NVIDIA DGX SuperPOD infrastructure. This combination brings together production-ready, enterprise-grade hardware and software to help vertical industries develop language and industry-specific chatbots, personal assistants, content generation, and summarization. Early adopters include CD, JD.com, and VinBrain. We unveiled Bluefield DOCA 1.2, the latest version of our DPU programming later. with new cybersecurity capabilities. DOCA is to our DPUs as CUDA is to our GPUs. It enables developers to build applications and services on top of our Bluefield DPUs. Our new capabilities make Bluefield the ideal platform for the industry to build their own zero trust security platforms. The leading cybersecurity companies are working with us to provision their next-generation firewall service on Bluefield, including Check Point, Juniper, Covenant, F5, Palo Alto Networks, and VM1. And we released Clara Holoscale, an edge AI computing platform for medical instruments to improve decision-making tools in areas such as robo-assisted surgery, interventional radiology, and radiation therapy planning. Other new or expanded SDKs or libraries unveiled at GDC include REopt for AI-optimized logistics, Quantum for quantum computing, Morpheus for cybersecurity, Modulus for physical-based machine learning, and Cunet Numeric, a data center-scale math library to bring accelerated computing to the large and growing Python ecosystem. All in, NVIDIA's computing platform continues to expand as a broadening set of SDKs enable more and more GPU-accelerated applications in industry use cases. CUDA has been downloaded 30 million times, and our developer ecosystem is now nearing 3 million strong. The applications they develop on top of our SDKs and the cloud edge computing platform are helping to transform multi-trillion dollar industries from healthcare to transportation to services, manufacturing, logistics, and retail. In automotive, we announced NVIDIA Drive concierge and Drive chauffeur. AI software platforms that enhance a vehicle's performance, features, and safety. Drive Concierge, built on Omniverse Avatar, functions as an AI-based in-vehicle personal assistant, but enables automatic parking summoning capabilities. It also enhances safety by monitoring the driver throughout the duration of the trip. Drive chauffeur offers autonomous capabilities, relieving the driver of constantly having to control the car. It will also perform address-to-address driving when combined with drive-type carrying a prop one. For robotics, we announced Jetson AGX Orin, the world's smallest, most powerful, and energy-efficient AI supercomputer for robotics, autonomous machines, and embedded computing at the edge. Built on our Ampere architecture, Jetson AGX Orin provides 6x the processing power of its predecessor and delivers 200 trillion operations per second, similar to a GPU-enabled server that fits into the palm of your hand. Jetson AGX Orin will be available in the first quarter of the calendar 2022. Finally, we revealed plans to build Earth 2, the world's most powerful AI supercomputer dedicated to confronting climate change. The system would be the climate change counterpart to Cambridge One, the UK's most powerful AI supercomputer that we built for health care research. Earth 2 harnesses all the technologies we've invented up to this moment. Let me discuss ARM. I'll provide you a brief update on our proposed acquisition of Arm. Arm with NVIDIA is a great opportunity for the industry and customers. With NVIDIA's scale, capabilities, and robust understanding of data center computing, acceleration, and AI, we can assist Arm in expanding their reach into data center, IoT, and PCs, and advance Arm's IP for decades to come. The combination of our companies can enhance competition in the industry as we work together on further building the world of AI. Regulators at the USFTC have expressed concerns regarding the transaction, and we are engaged in discussions with them regarding remedies to address those concerns. The transaction has been under review by China's antitrust authority pending the formal case initiation. Regulators in the UK and the EU have declined to action in phase one of the reviews on competition concerns. In the UK, they have also voiced national security concerns. We have begun the phase two process in the EU and UK jurisdictions. Despite these concerns and those raised by some armed licensees, we continue to believe in the merits and the benefits of the acquisition to ARM, to its licensees, and the industry. We believe these concerns and those raised by some ARM licensees. We continue to believe in the merits and benefits of the ARM acquisition. Moving to the rest of the P&L. GAAP gross margin for the third quarter was up 260 basis points from a year earlier, primarily due to higher end myths within desktop notebook G4 CPUs. The year-on-year increase also benefited from a reduced impact of acquisition-related costs. GAAP gross margin was up 40 basis points sequentially, driven by growth in our data center and peer architecture products, which is particularly offset by a mix in gaming. Non-gaming gross margin was up 150 basis points from a year earlier and up 30 basis points sequentially. Q3 GAAP EPS was $0.97. 83% from a year earlier, non-GAAP EPS was $1.17, up 60% from a year ago, adjusting for our stock split. Q3 cash flow from operations was $1.5 billion, up from $1.3 billion a year earlier and down from $2.7 billion in the prior quarter. The year-on-year increase primarily reflects higher operating income, particularly offset by prepayment for long-term supply agreements. Let me turn to the outlook for the fourth quarter of fiscal 2022. We expect sequential growth to be driven by data center and gaming, more than offsetting a decline in C&P. Revenue is expected to be $7.4 billion, plus or minus 2%. GAAP and non-GAAP gross margins are expected to be 65.3% and 67%, respectively, plus or minus 50 basis points. GAAP and non-GAAP operating expenses are expected to be approximately 2.02 billion and 1.43 billion, respectively. GAAP and non-GAAP other income and expenses are both expected to be an expense of approximately excluding gains and losses on non-accredited investments. GAAP and non-GAAP tax rates are both expected to be 11%, plus or minus 1%, excluding discrete items. Capital expenditures are expected to be approximately $250 million to $275 million. Further financial details are included in the CFO commentary. Other information is also available on our IR website. In closing, let me highlight upcoming events for the financial community. You will be attending the Credit Suisse 25th Annual Technology Conference in person on November 30th. You will also be at the Wells Fargo 5th Annual TMT Summit virtually on December 1st, the UBS Global TMT Virtual Conference on December 6th, and the Deutsche Bank virtual auto tech conference on December 9th. Our earnings call to discuss our fourth quarter and fiscal year 2022 results is scheduled for Wednesday, February 16th. With that, we will now open the call for questions. Operator, will you please call for these questions?