NVIDIA Earnings: 4 Key Takeaways From the Strong Artificial Intelligence-Fueled Results

Graphics chip specialist NVIDIA Corporation (NVDA -10.01%) reported strong fiscal third-quarter 2018 results after the market closed on Thursday. Revenue and adjusted earnings per share (EPS) jumped 32% and 41%, respectively, from the year-ago quarter. 

Both results breezed by analysts' estimates, suggesting that Wall Street could use a dose of artificial intelligence (AI) accelerated by NVIDIA's graphics processing units (GPUs) when developing projections. 

Shares of NVIDIA jumped 3.2% in after-hours trading on Thursday. This pop combined with robust results in the key AI-driven data center business would usually bode well for Friday's performance. The wildcard is news out on Wednesday that Intel poached Advanced Micro Devices' former graphics head, meaning NVIDIA can expect competition from the chip giant in discrete GPUs. 

Here are four key takeaways from NVIDIA's report.

Image source: NVIDIA.

Key numbers rise significantly

Data source: NVIDIA. GAAP = generally accepted accounting principles. 

Adjusted numbers are the better numbers to consider, as they are apples-to-apples comparisons. Wall Street was looking for NVIDIA to post EPS of $0.94 on revenue of $2.36 billion. So NVIDIA crushed it on both ends of the income statement. GAAP gross margin was 59.5%, up from both 59% in the year-ago quarter and 58.4% in the previous quarter. Adjusted gross margin was 59.7%, up from both 59.2% in the year-ago period and 58.6% in the second quarter.  

AI-driven data center and gaming lead platform performance 

Data source: NVIDIA. *Original equipment manufacturer and intellectual property. 

Gaming's revenue growth was driven by the continued strong adoption of the company's Pascal-based GeForce GTX platforms and the continued success of Nintendo's Switch console. During the quarter, NVIDIA released the GeForce GTX 1070 Ti GPU, designed for handling powerful graphics needs, such as for immersive virtual reality (VR). It also announced partnerships to bring its GameWorks tech to top fall games, including PlayerUnknown's Battlegrounds.

Data center's powerful growth reflects ramped shipments of products based on Volta, its newest GPU architecture. Growth "was fueled by strong demand by hyperscale and cloud customers for deep learning training and accelerated GPU computing, as well as demand for HPC [high-performance computing], DGX AI supercomputing, and GRID virtualization platforms," CFO Colette Kress said in the CFO commentary.

During the quarter, NVIDIA announced that Chinese tech giants Alibaba, Baidu, and Tencent were adopting Volta GPUs for accelerating AI across their consumer applications. Amazon, Facebook, Google, and Microsoft are also on board the Volta AI-train. NVIDIA also announced that Dell EMC, Hewlett-Packard Enterprise, IBM, and Supermicro unveiled servers based on its Tesla V100 GPU accelerators, and that Huawei, Inspur, and Lenovo will use Volta architecture to build AI systems for data centers. 

Professional visualization's growth was driven by high-end mobile platforms. Auto's growth was fueled by infotainment modules, production DRIVE PX AI platforms, and development agreements for self-driving cars. 

Cryptocurrency market growth slowed, but don't sweat this volatile space

Ethereum coins. Image source: Getty Images.

The OEM and IP category's quarter-over-quarter revenue decline reflects a drop in sales of application-specific GPUs for cryptocurrency mining. Sales got a huge boost from this application last quarter because cryptocurrency prices have skyrocketed in 2017. Kress said on the earnings call the cryptocurrency market added about $70 million in revenue to the OEM category in the quarter, versus about $150 million last quarter. Sales for this volatile market can likewise  be expected to be volatile.

Outlook remains bright 

NVIDIA's outlook for the fourth quarter is as follows:

• Revenue is expected to be $2.65 billion, plus or minus 2%. This implies year-over-year revenue growth of about 22%. Going into earnings, analyst had been projecting that NVIDIA would post revenue growth of just 12% in the quarter. 
• GAAP and adjusted gross margins are expected to be 59.7% and 60%, respectively, plus or minus 50 basis points (or 0.5%). Both numbers are slightly below the year-ago period's results of 60% and 60.2%, respectively. 

NVIDIA had a terrific quarter, and the long-term picture remains bright. Investors should, however, keep their eyes on Intel's expected entrance into the discrete GPU market.