Nvidia has released preliminary financial results for the quarter which ended on July 31, 2022, its Q2 FY23 results. The purpose of Nvidia’s prelims seems to be to warn investors that it has had a significantly worse quarter than it had projected. In brief: Nvidia previously projected $8.10 billion in revenue for Q2 FY23 (guidance from May), but the company has now revised the figure to $6.70 billion. That’s about 21% off the target when taken as a whole. Of particular interest to our readers is the primary reason for this revenue miss – it reflects lower than expected gaming revenue, said Nvidia.
And the major revenue slip, but that isn’t all. In the background figures, we can see gross margin – the ‘profit’ Nvidia makes on sales before any deductions - has collapsed from 65.1% to 43.7%. Moreover, if we attribute most of the $1.4 billion shortfall to gaming, as it is implied to be, then that would indicate gaming sales slipped approximately 40%.
The revenue by market segment chart from the prelims shines light on the rebalance of Nvidia’s books, in the wake of this gaming bombshell. Gaming has long been Nvidia’s mainstay, no matter how much it talks about automotive, AI, digital twins, data center, robots and so on. In the chart above, you can see that with revenue 44% down QoQ and down 33% YoY, Gaming is now very much in the shadow of Data Center. Moreover, Data Center is still on the up, and Automotive looks like it is enjoying a surge. In summary: Nvidia’s diversification (from gaming) strategy is keeping its boat afloat.
Price Cuts Necessary
Nvidia CEO Jensen Huang made a statement to accompany these prelims. “Our gaming product sell-through projections declined significantly as the quarter progressed,” said Huang. “As we expect the macroeconomic conditions affecting sell-through to continue, we took actions with our Gaming partners to adjust channel prices and inventory.” The Nvidia CFO also chirped in to complain about the adverse financial effect of long-term purchase agreements. Nvidia made these commitments during the components shortages, which were a major story in 2021 and earlier in 2022.
What Jensen Said to Tom’s Hardware in May
At an Nvidia Q&A session in May, Tom’s Hardware's Paul Alcorn asked Jensen Huang directly about the potential for disaster with regard to pre-ordering production capacity. This question was asked in the context of very clear signs the crypto crash wasn’t a temporary blip on the radar. Huang’s answer started with an assertion that “The market for GPUs is so different now.” Supporting his statement, the Nvidia CEO said that the GPU market is triple the size compared to ahead of the last crypto crash, and it is more diverse - with double the number of workstations, a 10x larger cloud GPU business, and so on.
On the topic of prepayment and its potential pitfalls, Huang implied that prepayment had become an industry norm due to lead times. Indeed, other chip design firms will have had to compete in this prepayment market with TSMC, Samsung and others, to secure capacity during the recent crunch. It will be interesting to see the scale of output Nvidia has secured for Ada Lovelace / GeForce RTX 40 graphics cards. If Huang was right in May, and “all the different ways that we sell our graphics chips have changed a lot since the last generation of crypto,” then Nvidia should weather this storm better this time around.
Ampere Price Slashing Continues
We have been regularly reporting on graphics card pricing declines since about the start of the year. However, it must be said price cuts are getting pretty spectacular no. We spotted EVGA slashing its GeForce RTX 3090 Ti GPUs to $1,149 this weekend, a price nearly 45% below MSRP.
So it looks like Nvidia partners are really feeling some urgency to cut prices and clear stock of Ampere graphics cards ahead of the arrival of Lovelace-based 40-series cards, with their purported massive performance increases across the range.
Nvidia says that it will release its full and final Q2 FY23 results on Tuesday, August 23. At that time, the management will discuss the results in greater detail, and there will be an opportunity for analysts and investors to ask questions during an earnings call.
