NVIDIA's gaming revenue fell over 30% in Q2, and its Q3 guidance significantly missed expectations, with shares reversing earlier gains post-market | Earnings Watch

On Wednesday, August 24, after the U.S. stock market closed,$NVIDIA (NVDA.US)$reported its fiscal 2023 second-quarter results for the period ending July 31 this year.

The earnings report shows that second-quarter revenue reached $6.7 billion, up 3% year-over-year but down 19% quarter-over-quarter, generally in line with analysts' expectations. Diluted earnings per share under GAAP for the quarter were $0.26, a decrease of 72% from the same period last year and a drop of 59% from the previous quarter; adjusted earnings per share were $0.51, down 51% year-over-year and 63% quarter-over-quarter, roughly in line with market expectations of $0.50.

Breaking it down, NVIDIA’s data center revenue for the second quarter was $3.81 billion, up 61% year-over-year with a modest 1% sequential increase; gaming revenue for the quarter came in at $2.04 billion, reflecting a 33% decline year-over-year and a sharper drop of 44% quarter-over-quarter.Professional visualization revenue during the reporting period amounted to $496 million, showing a 4% year-over-year decline and a 20% sequential drop; automotive revenue contributed $220 million, increasing by 45% year-over-year and surging 59% quarter-over-quarter.

The significant year-over-year growth in data center revenue can be primarily attributed to 'hyperscale' customers (i.e., large cloud providers). The gaming segment underperformed expectations mainly due to declining sales of gaming products centered around PC graphics cards. Regarding challenges in the gaming business, NVIDIA stated that it would work with retailers to adjust prices in response to the 'challenging market conditions' facing the industry. NVIDIA expects these current difficulties to persist into this quarter.

So far this year, NVIDIA's stock price has fallen more than 42%. After the pandemic began, the company had been highly sought after by the market as remote work and online learning drove demand for electronics and their key components: graphics cards and chips.

However, NVIDIA now seems to have fallen out of favor with investors. Earlier this month, when preliminary data for the second fiscal quarter was released, NVIDIA's results fell short of market expectations: gaming revenue significantly missed forecasts, reaching $2.04 billion, down 44% sequentially and 33% year-over-year; data center revenue stood at $3.81 billion, up 1% sequentially and 61% year-over-year.At the time, NVIDIA warned that its sales were declining, and the company’s weak forecast for the third quarter suggested that PC-related demand might be worse than expected.

NVIDIA's guidance released alongside the earnings report indicates that third-quarter revenue is expected to reach $5.9 billion ±2%, far below analyst expectations of $6.92 billion; the adjusted gross margin for the third quarter is projected to be 65.0% ±0.5 percentage points.

NVIDIA shares initially extended gains from 1.9% to 4.1% in after-hours trading but quickly reversed course and turned negative.

Additionally, it's worth noting that like many peers relying on outsourced manufacturing, NVIDIA is navigating a rapid transition from supply shortages (which forced customers to make advance payments to secure needed products) to swelling inventories of unsold goods.NVIDIA is now burdened with prepayments for materials and product manufacturing at a time when its own demand is declining, while its internal inventory of finished chips is increasing.

During the reporting period, the company's inventory reached $3.89 billion, up from $2.11 billion in the same period last year. Total inventory purchases and long-term supply obligations amounted to $9.22 billion, nearly double what they were a year ago. NVIDIA stated that prepaid supply agreements totaled $3.14 billion.

NVIDIA founder and CEO Jensen Huang stated:

We are transforming our supply chain amidst a challenging macro environment, and we will get through this. Accelerated computing and artificial intelligence represent groundbreaking work for our company and are reshaping the industry ecosystem. Vehicles are becoming a technology-driven sector and are expected to become our next billion-dollar business. Advances in AI are driving our data center operations while accelerating breakthroughs across fields ranging from drug discovery to climate science to robotics. I look forward to next month’s GTC conference, where we will share new advancements in RTX, along with breakthroughs in AI and the metaverse—the next phase of the internet’s evolution.

In the second quarter of fiscal year 2023, NVIDIA returned $3.44 billion to shareholders through stock repurchases and cash dividends, compared to $2.1 billion in the first quarter. As of December 2023, the company had $11.93 billion remaining under its stock repurchase authorization. NVIDIA plans to continue its stock buyback program throughout the current fiscal year.

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