The graphics chipmaker NVIDIA (NVDA 1.56%) reported better-than-expected revenue and earnings for the fiscal second quarter on Thursday afternoon. The improved results were driven by sequential growth in every segment, including gaming, professional visualization, data center, and automotive.
The slowdown in NVIDIA's gaming and data center segments (its two largest sources of revenue) toward the end of 2018 was the main reason the stock took a dive last fall. Although both segments were still down year over year in this latest report, it was encouraging to see growth in sequential quarterly sales of 24% and 3%, respectively.
In the earnings call, management had plenty to say about trends in gaming, including guidance for an increased gross margin short term, which hints at a stronger second half of 2019 for Team Green.
NVIDIA GeForce RTX 2080 Super graphics processor. Image source: NVIDIA.
The gaming business is looking much better
There have been some questions about the strength of NVIDIA's gaming segment this year. Along with taking a hit over the cryptocurrency bubble popping last year, chipmaking rival Advanced Micro Devices (AMD 2.33%) turned up the heat with its transition to 7-nanometer chips.
NVIDIA's short term response has been its RTX ray-tracing technology, but AMD has been striking deals to supply the next generation of game consoles from Microsoft and Sony with its graphics processors, and those consoles are expected to offer ray-tracing graphics. So, long-term, it isn't clear how much of an advantage NVIDIA's RTX cards really provide.
An encouraging sign is that NVIDIA's gaming revenue has grown sequentially over the last two quarters. Gaming revenue was up 24% over the first quarter to $1.313 billion. That marked an acceleration in growth over the previous quarter.
Image source: NVIDIA.
The sequential boost had a few causes. One was a production ramp for Nintendo's Switch Lite, launching in September, for which NVIDIA is supplying custom processors. Also, NVIDIA said that demand for gaming laptops remains robust, with more than 100 new models ramping up production for the back-to-school season and into the fall. Additionally, management called out the successful launch of the new line of Turing RTX graphics cards called RTX Super. RTX Super delivers up to 24% improvement in performance.
How will RTX Super compete with AMD's 7-nanometer gaming cards through the fall? Apparently very well, based on NVIDIA's guidance. Even with the new offerings launching from AMD in the short term, NVIDIA guided for a significant sequential increase in non-GAAP (adjusted) gross margin for the fiscal third quarter, partly due to expected higher sales of high-end graphics cards such as RTX Super. Management is calling for adjusted gross margin to improve to a range of 62% to 62.5%, up from 60.1% in the recent quarter.
NVIDIA characterized the momentum with its RTX cards as "snowballing" because of the growing list of games that will incorporate NVIDIA's ray-tracing technology. This is clearly NVIDIA's main advantage in the short term against AMD, and it might be stronger than some investors realize.
Returning to growth
Other segments (especially data center) are looking better for the rest of the year, too. While spending on the data center segment is still down compared to last year, CFO Colette Kress said, "The engineering focus on artificial intelligence is growing."
NVIDIA's third-quarter revenue guidance of $2.90 billion is lighter than the $2.97 billion analysts expected. But it seems the company is likely through the worst of the slump and is gradually returning to growth mode. Investors liked what they saw last quarter, as the stock is up 7% in Friday afternoon trading.
