Nvidia revenue halved, but optimized servers to China offset earlier $400 million warnings

Nvidia Corp. shares ticked higher in Wednesday’s extended session after the chipmaker said modified servers to China are mostly making up for an expected $400 million shortfall due to a US ban on certain technology sales and announced it is making progress to help customers do the same to help reduce high inventory levels.

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

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

Revenue fell to $5.93 billion from $7.1 billion in the year-ago quarter as gaming sales slumped. Analysts had forecast 71 cents a share on revenue of $5.78 billion.

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

“We raised concerns about the $400 million A100 because we were unsure about the ability to roll out the A800 to our customers and through our supply chain,” said Jensen Huang, founder and CEO of Nvidia , analysts on a call. “The company has made remarkable efforts to weather this situation and ensure our business and customers have not been impacted. But A800 hardware certainly ensures that it always means a clear check for export control.”

Nvidia’s gaming revenue fell 51% year over year to $1.57 billion. Analysts had forecast gaming revenue of $1.42 billion.

Nvidia had forecast at the end of August Third-quarter revenue was between $5.78 billion and $6.02 billion, down about $1 billion what the streets awaited at the time. That was before it was thought possible $400 million in lost sales in Chinawhich Nvidia intends to correct through the sale a version of its A100 data center chip called the A800 to China, which inhibits the use of AI and supercomputing and thus meets US sales restrictions.

“These restrictions impacted revenue in the third quarter and were largely offset by sales of alternative products to China,” said Colette Kress, Nvidia’s chief financial officer, when speaking to analysts. “However, demand in China remains generally weak. We expect that to continue in the current quarter.”

Another concern for analysts was Nvidia’s high inventory levels in the channel as the company rolls out 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 demand from China, the company said. That follows last quarter, when the company announced it would take a $1.32 billion inventory fee to lower demand expectations. But that’s mostly for unsold inventory on the books; Analysts are concerned about the stuff already sold.

Going forward, Nvidia will need to reduce inventory in the channel or products already sold to retailers and “sitting on the shelves” to make room for its new products. For example, New cards from Nvidia went on sale on October 12thand the mid-range RTX 4080 was released just before the result, and at the recommended retail price and higher was already sold out,

“There is too much inventory in the channel for our gaming products, desktops, notebooks as well as too much inventory for our pro visualization products,” Kress told MarketWatch in an interview after the analyst call. “That’s why we work together [customers] to get that sold. We made progress this quarter to bring these inventories back to normal.”

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

Read: Nvidia’s move to save data center sales in China, gaming card market in jeopardy to turn a profit

On the call, Kress said the company began shipping its H100 Hopper data center product in the third quarter and that base systems from Dell Technologies Inc. DELL,
-2.76%,
Hewlett-Packard Enterprise Co. HPE,
-1.81%,
Lenovo 992,
-1.79%,
and Super Micro Computer Inc. SMCI,
-5.43%
will be available starting this month.

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

For the fourth quarter, Nvidia was forecasting revenue of $5.88 billion to $6.12 billion, while analysts polled by FactSet were, on average, forecasting earnings of 76 cents a share on revenue of $6.07 billion.

“This is another classic ‘Tale of Two Cities’ story,” Maribel Lopez, senior analyst at Lopez Research, told MarketWatch in comments via email. “Gaming and PCs and China down. On the other hand, the data center is holding up in the face of austerity and China.

“Meanwhile, there’s a long line of AI workloads that will create a return to growth, but it may take several quarters,” Lopez said. “The problem for Nvidia is short-term, the next few quarters will be tough. Investors need to take a longer view, much like Intel requires.”

PC sales record their sharpest decline Since data was collected in the 1990s after a two-year spike, spending on video games and equipment has also returned to Earth. At the same time, falling cryptocurrency prices have made crypto mining less profitable; Nvidia cards have been used extensively to mine Ethereum ETHUSD,
-0.90%
and other digital assets.

Nvidia has lowered its forecasts throughout the year, sometimes twice within a quarter.

earlier in August, Nvidia warned of a loss of sales of 1.4 billion US dollars due to weak gaming sales. That was in addition to the $500 million that Nvidia pulled from its second-quarter revenue guidance because of the COVID lockdowns in China and the war in Ukraine.

Analysts then adjusted their estimates and settled on a consensus of $5.78 billion for the upcoming quarter very close to $5.57 billion AMD has reported for its third quarter. The last time AMD surpassed Nvidia in quarterly revenue was the third quarter of 2014, when AMD reported revenue of $1.43 billion and Nvidia reported $1.23 billion, according to data from FactSet.

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

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