NVIDIA Corporation

Good afternoon. My name is Emma, and I will 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 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, again, press the star one. 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 2023. 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 fourth quarter and fiscal 2023. 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 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 16, 2022, 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. Q3 revenue was $5.93 billion, down 12% sequentially and down 17% year-on-year. We delivered record data center and automotive revenue. while our gaming and pro-visualization platforms declined as we worked through channel inventory corrections and challenging external conditions. Starting with data center, revenue of 3.83 billion was up 1% sequentially and 31% year-on-year. This reflects very solid performance in the face of macroeconomic challenges, new export controls, and lingering supply chain disruptions. Year on year, growth was driven primarily by leading U.S. cloud providers and a broadening set of consumer internet companies for workloads such as large language models, recommendation systems, and generative AI. As the number and scale of public cloud computing and internet service companies deploying NVIDIA AI grows, our traditional hyperscale definition will need to be expanded to convey the different end market use cases. We will align our data center customer commentary going forward accordingly. Other vertical industries such as automotive and energy also contributed to growth with key workloads relating to autonomous driving, high performance computing, simulations, and analytics. During the quarter, the US government announced new restrictions impacting exports of our A100 and H100 based products to China and any product destined for certain systems or entities in China. These restrictions impacted third quarter revenue, largely offset by sales of alternative products into China. That said, demand in China more broadly remains soft, and we expect that to continue in the current quarter. We started shipping our flagship H100 data center GPU based on the new Hopper architecture in Q3. H100-based systems are available starting this month from leading server makers, including Dell, Hewlett Packard Enterprise, Lenovo, and Supermicro. Early next year, the first H100-based cloud instances will be available on Amazon Web Services, Google Cloud, Microsoft Azure, and Oracle Cloud Infrastructure. H100 delivered the highest performance and workload versatility for both AI training and inference in the latest MLPerf industry benchmarks. H100 also delivers incredible value compared to the previous generation for equivalent AI performance. It offers 3x lower total cost of ownership while using 5x fewer server nodes and 3.5x less energy. Earlier today, we announced a multi-year collaboration with Microsoft to build an advanced cloud-based AI supercomputer to help enterprises train, deploy, and scale AI, including large state-of-the-art models. Microsoft Azure will incorporate our complete AI stack, adding tens and thousands of A100 and H100 GPUs, Quantum II 400 gigabit per second InfiniBand networking, and the NVIDIA AI Enterprise software suite to its platform. Oracle and NVIDIA are also working together to offer AI training and inference at scale to thousands of enterprises. This includes bringing to Oracle Cloud Infrastructure the full NVIDIA accelerated computing stack and adding tens of thousands of NVIDIA GPUs, including the A100 and H100. Cloud-based high-performance computing company Rescale is adopting NVIDIA AI Enterprise and other software to address the industrial scientific community's rising demand for AI in the cloud. NVIDIA AI will bring new capability to Rescale's high-performance computing as a service offerings, which includes simulation and engineering software used across industries. Networking posted strong growth driven by hyperscale customers and easing supply constraints. Our new Quantum 2 40 gigabit per second InfiniBand and Spectrum Ethernet networking platforms are building momentum. We achieved an important milestone this quarter with VMware, whose leading server virtualization platform, vSphere, has been re-architected over the last two years to run on DPUs and now supports our Bluefield DPUs. Our joint enterprise AI platform is available first on Dell PowerEdge servers. The Bluefield DPU design wind pipeline is growing, and the number of infrastructure software partners is expanding, including Arista, Check Point, Juniper, Palo Alto Networks, and Red Hat. The latest top 500 list of supercomputers released this week at Supercomputing 22 has the highest ever number of NVIDIA-powered systems including 72% of the total and 90% of new systems on the list. Moreover, NVIDIA powers 23 of the top 30 of the green 500 list, demonstrating the energy efficiency of accelerated computing. The number one most energy efficient system is the Flatiron Institute's Henry, which is the first top 500 system featuring our H100 GPUs. At GTC, we announced the NVIDIA Omniverse Computing System, or OVX, reference designs featuring the new L40 GPU based on the Ada Lovelace architecture. These systems are designed to build and operate 3D virtual worlds using NVIDIA Omniverse Enterprise. NVIDIA OVX systems will be available from Innsbruck, Lenovo, and Supermicro by early 2023. Lockheed Martin and Jaguar Land Rover will be among the first customers to receive OVX systems. We are further expanding our AI software and services offerings with NVIDIA and BioNimo large language model services, which are both entering early access this month. These enable developers to easily adapt large language models and deploy customized AI applications for content generation, text summarization, chat box, code development, protein structure, and biomolecular property predictions. Moving to gaming, revenue of $1.57 billion was down 23% sequentially and down 51% from a year ago, reflecting lower sell-in to partners to help align channel inventory levels with current demand expectations. We believe channel inventories are on track to approach normal levels as we exit Q4. Sell-through for our gaming products was relatively solid in the Americas and EMEA, but softer in Asia-Pac as macroeconomic conditions and COVID lockdowns in China continued to weigh on consumer demand. Our new Ada Lovelace GPU architecture had an exceptional launch, the first Ada GPU The GeForce RTX 4090 became available in mid-October and had tremendous demand and positive feedback from the gaming community. We sold out quickly in many locations and are working hard to keep up with demand. The next member of the Ada family, RTX 4080, is available today. The RTX 40 series GPUs features DLSS 3, the neural rendering technology that uses AI to generate entire frames for faster gameplay. Our third-generation RTX technology has raised the bar for computer graphics and helped supercharge gaming. For example, the 15-year-old classic game portal, now reimagined with full ray tracing and DLSS 3, has made it on Steam's top 100 most wish-listed games. The total number of RTX games in application now exceeds 350. There is tremendous energy in the gaming community that we believe will continue to fuel strong fundamentals over the long term. The number of simultaneous users on Steam just hit a record of 30 million, surpassing the prior peak of 28 million in January. Activision's Call of Duty Modern Warfare 2 set a record for the franchise with more than $800 million in opening weekend sales, topping the combined box office openings of movie blockbusters Top Gun Maverick and Doctor Strange in the Multiverse of Madness. And this month's League of Legends World Championship in San Francisco sold out in minutes, with 18,000 esports fans packed at the arena where the Golden State Warriors play. We continue to expand the GeForce Now cloud gaming service. In Q3, we added over 85 games to the library, bringing the total to over 1,400. We also launched GeForce Now on the new gaming devices, including Logitech, CloudG Handheld, Cloud Gaming Chromebooks, and Razer 5G Edge. Moving to ProViz. Revenue of $200 million was down 60% sequentially and down 65% from a year ago, reflecting lower sell-in to partners to help align channel inventory levels with the current demand expectations. These dynamics are expected to continue in Q4. Despite near-term challenges, we believe our long-term opportunities remain intact, fueled by AI, simulation, computationally intensive design and engineering workloads. At GTC, we announced NVIDIA Omniverse Cloud Services, our first software and infrastructure as a service offering, enabling artists, developers, and enterprise teams to design, publish, and operate metaverse applications from anywhere on any device. Omniverse Cloud Services runs on Omniverse Cloud Computer, a computing system comprised of NVIDIA OVX for graphics and physics simulation. NVIDIA HDX for AI workloads, and the NVIDIA Graphics Delivery Network, a global scale distributed data center network for delivering low latency metaverse graphics on the edge. Leaders in some of the world's largest industries continue to adopt Omniverse. Home improvement retailer Lowe's is using it to help design, build, and operate digital twins for their stores. Charter Communications, an advanced analytics company, Heavy AI, are creating Omniverse-powered digital twins to optimize Charter's wireless network. And Deutsche Bahn, operator of German's National Railway, is using Omniverse to create digital twins of its rail network and train AI models to monitor the network, increasing safety and reliability. Moving to automotive. Revenue of 251 million increased 14% sequentially and 86% from a year ago. Growth was driven by an increase in AI automotive solutions as our customers drive Oren-based production ramps continue to scale. Automotive has great momentum and it's on its way to be our next multi-billion dollar platform. Volvo Cars unveiled the all new flagship Volvo EX90 SUV powered by the NVIDIA Drive platform. This is the first model to use Volvo's software-defined architecture with a centralized core computer containing both Drive Orin and Drive Xavier, along with 30 sensors. Other recently announced design wins and new model introductions include Pozon, Auto, Neo, Polestar, and XPeng. At GTC, we also announced that NVIDIA Drive Thor Superchip, the successor to Orin in our automotive SOC roadmap, Drive Thor delivers up to 2,000 teraflops of performance and leverages technologies introduced in our Grace, Hopper, and Ada architectures. It is capable of running both the automated drive and in-vehicle infotainment systems, simultaneously offering a leap of performance while reducing costs and energy consumption. DriveThor will be available for automakers 2025 models, with Geely-owned automaker Zeker as the first announced customer. Moving to the rest of the P&L, GAAP gross margins was 53.6%, and non-GAAP gross margins was 56.1%. Gross margins reflects $702 million and inventory charges largely related to lower data center demand in China, partially offset by a warranty benefit of approximately $70 million. Year-on-year GAAP operating expenses were up 31% and non-GAAP operating expenses were up 30%, primarily due to higher compensation expenses related to headcount growth and salary increases and higher data center infrastructure expenses. Sequentially, both GAAP and non-GAAP operating expense growth was in the single-digit percent, and we plan to keep it relatively flat at these levels over the coming quarters. We returned $3.75 billion to shareholders in the form of share repurchases and cash dividends. At the end of Q3, we had approximately $8.3 billion remaining under our share repurchase authorization through December of 2023. Let me turn to the outlook for the fourth quarter of fiscal 2023. We expect our data center revenue to reflect early production shipments of the H100, offset by continued softness in China. In gaming, we expect to resume sequential growth with our revenue still below end demand as we continue to work through the channel inventory correction. And in automotive, we expect the continued ramp of our Oren design wins all in we expect model modest sequential growth driven by automotive gaming and data center revenue is expected to be six billion plus or minus two percent gap and non-gap gross margins are expected to be 63.2 and 66 percent respectively plus or minus 50 basis points gap operating expenses are expected to be approximately 2.56 billion non-GAAP operating expenses are expected to be approximately 1.78 billion. GAAP and non-GAAP other income and expenses are expected to be an income of approximately 40 million, excluding gains and losses on non-affiliated investments. GAAP and non-GAAP tax rates are expected to be 9%, plus or minus 1%, excluding any discrete items. Capital expenditures are expected to be approximately $500 million to $550 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 attending the Credit Suisse Conference in Phoenix on November 30th, the Arate Virtual Tech Conference on December 5th, and the JP Morgan Forum on January 5th in Las Vegas. Our earnings call to discuss the results of our fourth quarter and fiscal 2023 are scheduled for Wednesday, February 22nd. We will now open the call for questions. Operator, could you please pull for questions?