Nvidia’s earnings halved, but changed servers in China offset earlier $400 million warning

Shares of Nvidia Corp. rose in Wednesday’s extended session after the chipmaker said modified servers in China largely offset an expected $400 million shortfall due to a U.S. ban on some sales of technology and announced that it is making progress by helping customers reduce high inventories.

NvidiaNVDA,
-4.54%
Shares were up 2% after hours, after falling 4.5% in the regular session to close at $159.10.

Nvidia reported third-quarter net income of $680 million, or 27 cents per share, compared with $2.46 billion, or 97 cents per share, in the same period a year ago. Adjusted earnings, which exclude share-based compensation expenses and other items, were 58 cents per share, compared with $1.17 per share in the same period a year ago.

Revenue fell to $5.93 billion from $7.1 billion in the year-ago quarter on plummeting game sales. Analysts had expected 71 cents a share on revenue of $5.78 billion.

Data center sales increased 31% to $3.83 billion, compared to Advanced Micro Devices Inc.’s AMD,
-4.81%
45% increase in data center sales to $1.6 billion and Intel’s INTC,
-3.84%
27% falls to $4.2 billion. Analysts had forecast Nvidia data center sales of $3.72 billion.

“We raised concern about the $400 million A100 because we weren’t sure we could execute the introduction of the A800 to our customers and through our supply chain,” Jensen Huang, founder and chief executive officer of Nvidia, told analysts. “The company has done extraordinary feats to circumvent this situation and make sure that our business is not affected and that our customers are not affected. But the A800 hardware certainly ensures that this always means a clear export control test.

Nvidia’s game sales are down 51% to $1.57 billion from a year ago. Analysts had forecast $1.42 billion in game sales.

At the end of August, Nvidia had forecast third-quarter sales of between $5.78 billion and $6.02 billion, which fell about $1 billion below what Street expected at the time. That’s before estimating a possible $400 million loss in sales in China, which Nvidia hopes to correct by selling a version of its A100 data center chip called the A800 to China, which inhibits the use of artificial intelligence and supercomputing and thus satisfies US restrictions on sale.

“These restrictions impacted third-quarter revenue largely offset by alternative product sales in China,” Nvidia chief financial officer Colette Kress said on the analyst call. “That said, demand in China in general remains weak. We expect this to continue into the current quarter.”

Another concern from analysts was Nvidia’s high inventory levels in the channel as the company releases new gaming and data center products. Third-quarter gross margins fell to 56.1% from 67% in the year-ago quarter, and much of that came from a $702 million inventory charge on weaker Chinese demand, the company said. That follows from last quarter, when the company announced it was requesting a $1.32 billion inventory charge to help lower demand expectations. But that’s mostly for unsold inventory on books; analysts are worried about things already sold.

Moving forward, Nvidia needs to reduce inventory in the channel, or products that have already been sold to resellers and are “sitting on shelves,” to make way for its new products. For example, Nvidia’s new cards went on sale on October 12, and the mid-range RTX 4080 was released just before earnings and was already out of stock at its suggested retail price and above.

“There is too much inventory in the channel for our gaming, desktop, notebook products, as well as too much inventory for our professional display products,” Kress told MarketWatch in an interview after the analyst call. “Therefore, we are working with [customers] to sell it. We made progress this quarter to reduce inventory levels to normal.”

“When they have lower inventory levels, everyone is happy and we can continue to sell them more,” Kress said.

Laws: Nvidia’s move to save data center sales in China, playing card market questioned regarding earnings

During the call, Kress said the company began shipping its H100 Hopper data center product in the third quarter and core systems from Dell Technologies Inc. DELL,
-2.76%,
Hewlett-Packard Enterprise Co. HPE,
-1.81%,
Lenovo 992,
+1.19%,
and Super Micro Computer Inc. SMCI,
-5.43%
will be available starting this month.

“Early next year, the first H100 cloud base instances will be available on Amazon AMZN,
-1.84%
Web Services Local Cloud, Microsoft MSFT,
+0.18%
Azure and Oracle ORCL,
+0.90%
cloud infrastructure,” Kress said.

For the fourth quarter, Nvidia expects revenue of $5.88 billion to $6.12 billion, while analysts polled by FactSet, on average, expect earnings of 76 cents per share on revenue of $6.07 billion.

“It’s another classic ‘Tale of Two Cities’ story,” Maribel Lopez, principal analyst at Lopez Research, told MarketWatch in email comments. “Games, PC and China down. On the other hand, the data center is holding up despite cuts and China.

“In the meantime, there’s a long tail of AI workloads that will create a return to growth, but that could take several quarters,” Lopez said. “The problem for Nvidia is the short term, the next few quarters will be difficult. Investors will need to take a broader view, similar to what is required with Intel.”

PC sales are posting their steepest decline since data began collecting in the 1990s after a two-year surge, and spending on video games and equipment for them is also back on earth. At the same time, falling cryptocurrency prices have made cryptocurrency mining less profitable; Nvidia cards have been widely used to mine Ethereum ETHUSD,
+1.06%
and other digital assets.

Nvidia has trimmed its prospects all year, sometimes twice in a quarter.

In early August, Nvidia warned of a $1.4 billion drop in revenue due to poor game sales. This was in addition to the $500 million Nvidia withdrew from its second-quarter revenue forecast due to the COVID lockdowns in China and the war in Ukraine.

Subsequently, analysts readjusted their estimates, settling on a consensus of $5.78 billion for the quarter, very close to the $5.57 billion reported by AMD for the third quarter. The last time AMD surpassed Nvidia in quarterly revenue was in the third quarter of 2014, when AMD reported sales of $1.43 billion and Nvidia reported $1.23 billion, according to FactSet data.

Over the year, Nvidia shares are down 46%. In comparison, the PHLX Semiconductor Index SOX,
-4.26%
is down 32% year to date, the S&P 500 SPX index,
-0.83%
is down 17% and the Nasdaq Composite Index COMP,
-10.23%
it’s 29% off.

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