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Earnings Results: Nvidia sales forecast falls about $1 billion short of expectations, stock falls

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Nvidia Corp. executives on late Wednesday forecast another revenue shortfall in the current quarter, after confirming an earlier warning by showing a sharp reduction in profit, while the chip maker assured analysts it was working its way through inventory prior to the release of its new chip architecture.

For the fiscal third, or current, quarter, Nvidia 
NVDA,
+0.24%

forecast revenue of $5.78 billion to $6.02 billion, while analysts surveyed by FactSet, on average, have forecast earnings of 85 cents a share on revenue of $6.91 billion.

“We expect gaming and pro visualization revenue to decline sequentially and OEM and channel partners reduce inventory levels to line with current levels of demand and prepare for our new products generation,” Colette Kress, Nvidia’s chief financial officer, told analysts on a conference call. “We expect that decline to be partially offset by sequential growth in automotive.”

That puts Nvidia on track to report quarterly sales below that of Advanced Micro Devices Inc.
AMD,
+0.26%

for the first time since the third quarter of 2014. In its recent earnings report, AMD forecast third-quarter sales of $6.5 billion to $6.9 billion. Throughout the call, Nvidia executives stressed that supply-chain problems, and not demand, were the main culprits lowering the outlook.

“We are navigating our supply-chain transitions in a challenging macro environment and we will get through this,” Jensen Huang, Nvidia’s founder and chief executive, said in a statement, before the company addressed inventory issues.

“Our supply arrived a little bit late in the quarter for some of our key products that we needed to get out,” Kress told analysts. “And putting that together caused some disruption in our logistics and distribution.”

Nvidia also booked a $1.22 billion inventory charge for data-center and gaming products, given its revised expectations. The company said about $570 million of the charge is for inventory on hand and about $650 million of it is for inventory purchase obligations “in excess of our current demand projections.”

“We reduced selling to let channel inventory correct and we’ve implemented programs with our partners to position the products in the channel in preparation for our next generation,” Huang told analysts on the call. “All of this, we anticipate we’re working towards a path to being in good shape going into next year. So that’s what our game plan is.”

Kress told MarketWatch in an interview that the company did not disclose the inventory split between data-center and gaming products, because the company values both segments differently

“We wanted folks to understand that prior-architecture chips and things that we looked at when we reassessed our estimates for demand going forward, and the inventory that we both had on hand and procured for, we took an adjustment,” Kress told MarketWatch.

Trimming inventory is crucial as Nvidia is scheduled to release its next-generation “Lovelace” chip architecture this fall, to replace its “Ampere” architecture that was released in 2020.

Nvidia reported second-quarter net income of $656 million, or 26 cents a share, compared with $2.37 billion, or 94 cents a share, in the year-ago period. Adjusted earnings, which exclude stock-based compensation expenses and other items, were 51 cents a share, compared with $1.04 a share in the year-ago period.

Revenue rose to $6.7 billion from $6.51 billion in the year-ago quarter.

Analysts had forecast 50 cents a share on revenue of $6.7 billion. Earlier in the month, Nvidia warned of a $1.4 billion revenue shortfall because of weak gaming sales. That’s on top of the $500 million Nvidia pulled from its second-quarter revenue forecast because of the COVID lockdowns in China and the war in Ukraine.

PC sales have pulled back considerably after a two-year surge, and spending on videogames and gear for them has also come back to earth. At the same time, drops in cryptocurrency prices have made mining less profitable; Nvidia cards have been used extensively to mine for Ethereum 
ETHUSD,
-1.23%

 and other crypto.

Data-center sales rose 61% to $3.81 billion, while gaming sales declined 33% to $2.04 billion from a year ago.

“The decline in gaming revenue was sharper than anticipated, driven by both lower units and lower ASP’s,” said Kress. “Macroeconomic headwinds across the world drove a sudden slowdown in consumer demand.”

“As noted last quarter, we had expected cryptocurrency mining to make a diminishing contribution to gaming demand, and we are unable to accurately quantify the extent to which reduced crypto mining contributed to the decline in gaming demand,” Kress told analysts.

Analysts had forecast $2.02 billion in gaming sales and $3.81 billion in data-center sales, after updates following the earlier warning.

Shares declined 4% after hours, following a 0.2% rise in the regular session to close at $172.22.

Over the year, Nvidia shares have dropped 42%. In comparison, the PHLX Semiconductor Index 
SOX,
+0.07%

is down 28% year to date, the S&P 500 index 
SPX,
+0.29%

is down 13%, and the Nasdaq Composite Index 
COMP,
+0.41%

is off 21%. 

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