NVIDIA Expects Gaming Revenue To Drop Further As Partners Reduce Inventory

NVIDIA

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Chipmaker NVIDIA Corporation officially reported its earnings results for the second quarter of its fiscal year 2023 earlier today on market close. The results matched the company's preliminary earnings that shook the market and sent several stocks tumbling down, as NVIDIA confirmed $6.7 billion in revenue for a 19% sequential drop and a small 3% annual growth. NVIDIA's chief financial officer Ms. Colette Kress explained that the drop to lower sales of her company's gaming products, in what she described as a tough macroeconomic environment. The company's chief, Mr. Jensen Huang asserted that his company was working to address the supply issues, as he remained confident in the strength of his company's artificial intelligence platforms.

NVIDIA's Gaming Revenue Drops 44% Sequentially and 33% Annually Confirming Major Miss Outlined Earlier This Month

The one silver lining that can be drawn from the latest earnings report is that NVIDIA's revenue forecasting was on the dot earlier this month. Back then it had reported that it expected Q2 FY2023 earnings results to report $6..7 billion in revenue overall and $2.04 billion in revenue from Gaming, and today's results saw the company match these figures in the official release.

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A similar trend was present for the Datacenter division, which stood separate from Gaming's misfortunes and managed to rake in $3.1 billion, remaining flat quarterly but growing 61% annually to become NVIDIA's largest division by revenue. The Datacenter results were unsurprising and had been forecasted by several analysts prior to the earnings results due to a wider slowdown in the sector.

Gaming remained the focal point of the earnings results, with Ms. Kress explaining the reasons behind the slump that comes just as NVIDIA prepares to launch its next generation of products. In her commentary, the executive outlined that the massive revenue drop was due to lower GPU sales at NVIDIA's channel partners, as macroeconomic headwinds reduced purchasing power Her next set of comments was more telling and indicated that the problems for Gaming might not be over yet.

Nvidia's financial results for the second fiscal quarter of 2023. Image: NVIDIA Corporation

Ms. Kress added that her company's GPUs can mine cryptocurrency, but NVIDIA is not able to accurately determine the effects of mining on their demand. The cryptocurrency market has faced a bloodbath throughout this year which has resulted in used GPUs flooding the market and depressing prices - a deadly combination with the already low purchasing powers amidst record inflation.

She outlined that changes in mining itself and price fluctuations has hurt NVIDIA's GPU demand before, and it might continue to do so in the near future. with NVIDIA being unable to accurately estimate this impact for the current drop in Gaming revenue.

Her complete remarks also cautioned that the depressed GPU sales might persist during the current quarter and were as follows:

Gaming revenue was down 33% from a year ago and down 44% sequentially. These decreases were primarily attributable to lower sell-in of Gaming products, reflecting reduced channel partner sales due to macroeconomic headwinds. In addition to reducing sell-in, we implemented pricing programs with channel partners to address challenging market conditions that are expected to persist into the third quarter.

Our GPUs are capable of cryptocurrency mining, though we have limited visibility into how much this impacts our overall GPU demand. Volatility in the cryptocurrency market – such as declines in cryptocurrency prices or changes in method of verifying transactions, including proof of work or proof of stake – has in the past impacted, and can in the future impact, demand for our products and our ability to accurately estimate it. As noted last quarter, we had expected cryptocurrency mining to make a diminishing contribution to Gaming demand. We are unable to accurately quantify the extent to which reduced cryptocurrency mining contributed to the decline in Gaming demand.

As part of his remarks, NVIDIA's CEO stated that:

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“We are navigating our supply chain transitions in a challenging macro environment and we will get through this. Accelerated computing and AI, the pioneering work of our company, are transforming industries. Automotive is becoming a tech industry and is on track to be our next billion-dollar business. Advances in AI are driving our Data Center business while accelerating breakthroughs in fields from drug discovery to climate science to robotics. I look forward to next month’s GTC conference, where we will share new advances in RTX, as well as breakthroughs in AI and the metaverse, the next evolution of the internet. Join us,

Finally, NVIDIA further expects Gaming revenue to drop this quarter as its partners reduce their inventories in the wake of upcoming product launches. Its Datacenter revenue was bolstered by sales in North America, but reduced spending in China prevented further growth, with the firm expecting Datacenter to grow sequentially during the third fiscal quarter of 2023. Revenue for the current quarter is guided to stand at $5.9 billion.

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