Shares of graphics specialist NVIDIA (NVDA 5.73%) were absolutely crushed Monday -- they're down by nearly 15% as of writing -- after the company warned that its business performance for the fourth quarter of its 2019 fiscal year fell dramatically short of expectations.
Indeed, the company had expected to generate revenue of $2.7 billion for the quarter -- a figure that was already down year over year and fell short of Wall Street's expectations when it was first announced -- but now NVIDIA is telling shareholders to expect revenue of just $2.2 billion for the quarter. The company's gross margin percentage is also set to decline to 56%, give or take 100 basis points, as a result of "approximately $120 million in charges for excess DRAM and other components associated with the updated revenue guidance and current market conditions."
Let's take a closer look at what drove the company to so dramatically slash its guidance.
Image source: NVIDIA.
Not all fun and games
The first thing that went wrong for the graphics specialist was that sales of its gaming-oriented graphics processors fell short. NVIDIA previously warned that gaming revenue during the quarter would be affected by the fact that the company had stopped shipping midrange desktop graphics processors in a bid to bring channel inventory levels back down to more sensible levels after the so-called "cryptocurrency hangover."
According to NVIDIA, the "reduction in that inventory and its impact on the business have proceeded largely inline with management's expectations."
Unfortunately, the bad news doesn't end there. The company said in its guidance update that "deteriorating macroeconomic conditions, particularly in China, impacted consumer demand for NVIDIA gaming GPUs."
The company also said that "sales of certain high-end GPUs using NVIDIA's new Turing architecture were lower than expected," claiming that "some customers may have delayed their purchase while waiting for lower price points and further demonstrations of RTX technology in actual games." (A key selling point of the Turing-based cards is that they have specialized circuitry embedded in them -- which NVIDIA calls RTX technology -- to perform a type of realistic rendering called ray tracing.)
Data center woes
It's not only NVIDIA's gaming business that's getting hammered -- the company's lucrative data center GPU business also missed the company's own mark. NVIDIA said that "[a] number of deals in the company's forecast did not close in the last month of the quarter as customers shifted to a more cautious approach."
This isn't surprising considering that chip giant Intel (INTC -10.14%), which commands the lion's share of the data center CPU market, signaled a slowdown in data center chip buying. Intel and NVIDIA sell to many of the same customers, so it's not surprising to see NVIDIA being affected by the same slowdown that affected Intel. For what it's worth, Intel expects that data center spending will pick back up in the second half of 2019 after a muted first half as major cloud service providers digest previously purchased capacity.
Investor takeaway
The sheer magnitude of NVIDIA's miss is not encouraging, especially as it's a miss relative to what were already relatively muted expectations. The company will report its full earnings results on Feb. 14 and will also provide financial guidance for the subsequent quarter. We'll know more about the trajectory of the business when those results and guidance arrive.
Check out the latest NVIDIA earnings call transcript.
