NVIDIA Earnings Beat Expectations on Gaming Rebound; Stock Pops

NVIDIA (NVDA +0.36%) reported first-quarter earnings for fiscal 2020 after the market closed on Thursday. The graphics processing unit (GPU) specialist's revenue fell 31% year over year to $2.22 billion and earnings per share (EPS) adjusted for one-time items dropped 57% to $0.88. 

Like last quarter, results were poor overall, at least on a year-over-year basis, but this was expected. On the positive side, the bottom line easily beat Wall Street's modest expectation and the top line edged by the likewise modest consensus estimate. Analysts were looking for adjusted EPS of $0.79 on revenue of $2.20 billion. 

Shares of NVIDIA shot up more than 7% in after-hours trading after results were released, which we can attribute to earnings sprinting by expectations. The market was also probably relieved that second-quarter revenue guidance was in line with what the Street was anticipating. The stock, however, pared back its initial after-hours gain to just 2% after CFO Colette Kress made several comments about the company's outlook during the earnings call. These included:

• "The data center pause around the world will likely persist in the second quarter and visibility remains low."
• "The CPU shortage -- while improving -- will affect the initial ramp of our [gaming] laptop business."
• "We're returning to our practice of providing revenue outlook one quarter at a time." She didn't reaffirm the company's previously issued full-year guidance, which was for revenue that was flat to down slightly year over year. 

Image source: Getty Images.

The key numbers

Data source: NVIDIA. GAAP = generally accepted accounting principles. YOY = year over year.

GAAP gross margin came in at 58.4%, down from 64.5% in the year-ago quarter, but up from last quarter's 54.7%. Adjusted gross margin was 59%, down from 64.7% in the year-ago period but up from 56% in the previous quarter. 

Gaming rebounded from last quarter, but data center continued to slide  

Data source: NVIDIA. *OEM and IP = original equipment manufacturer and intellectual property. QOQ = quarter over quarter.

Many investors likely breathed a sigh of relief that gaming's results weren't as bad as they could have been. While revenue was down big from the year-ago period, it rose 11% from last quarter, suggesting that the worst is over for the company's largest business. On the earnings call, management said it's made solid progress on normalizing channel inventory and on driving demand for its new Turing GPUs, thanks to the launch of midrange cards during the quarter. 

As a refresher, on last quarter's earnings call, Kress outlined the three main reasons for gaming's recent woes:

First, post-crypto [post-cryptocurrency bust] inventory of GPUs in the channel caused us to reduce shipments in order to allow access channel inventory to sell through. We expect channel inventories to normalize in Q1... Second, deteriorating macroeconomic conditions, particularly in China, impacted consumer demand for our GPUs.

And third, sales of certain high-end GPUs using our new Turing architecture ... were lower than we expected for the launch of a new architecture. These products deliver a revolutionary leap in performance and innovation with real-time ray tracing and AI [artificial intelligence] [capabilities], but some customers may have delayed their purchase while waiting for lower price points or further demonstration of the RTX technology in actual games.

Data center revenue continued to decline from last quarter, which CEO Jensen Huang said was due to a "near-term pause in demand from hyperscale customers." This dynamic began last quarter, which the company attributed to widespread concerns about a slowing global economy. Despite the pause, Huang said that "AI adoption is accelerating in the world's largest industries, moving beyond the cloud to the edge where AI processing has to be instantaneous." He added that the company believes that its pending acquisition of Mellanox -- which is expected to close by the end of 2019 -- will "help us drive data center architecture for high performance computing and AI from the cloud to the edge." 

Professional visualization had a so-so quarter, with revenue up 6% year over year, driven by increased demand across both desktop and mobile workstation products. Kress added that the sequential decline was largely due to seasonality. Auto was the only platform that grew on both a year-over-year and sequential basis, mostly due to increased sales of AI cockpit modules.

OEM and IP's year-over-year drop was primarily due to "the absence of $289 million from CMP sales," said Kress. CMP is the company's cryptocurrency-specific GPU. These sales fell off sharply after the crypto market crashed last year. 

Guidance 

For the second quarter, NVIDIA guided for revenue of $2.55 billion, plus or minus 2%. At the midpoint, this represents a decline of 18% year over year and a 15% rise from the just-reported quarter. Wall Street had been projecting Q2 revenue of $2.54 billion, so NVIDIA's outlook came in as expected. 

On the bottom line, the Street forecasts Q2 adjusted EPS of $1.11, representing a drop of 43% year over year.   

The bottom line

NVIDIA turned in poor results for the second consecutive quarter, but earnings were notably better than expected and the worst appears to be in the rearview mirror for gaming.

Investors shouldn't expect much from fiscal 2020, as the year will be about the company trying to climb back from gaming's big hit and data center's soft demand. But there are good reasons to remain cautiously optimistic about the future. As I wrote last quarter: 

Nothing has changed with respect to the gaming market's rosy long-term growth projections or NVIDIA's position as the dominant supplier of graphics cards to gamers. Moreover, the company's growth opportunities from AI and driverless vehicles remain powerful.