Shares of graphics chip company NVIDIA (NVDA 2.57%) slumped after the company reported its first quarter earnings earlier this month. NVIDIA's results were solid enough, with the company handily beating analyst estimates for earnings and just barely missing estimates for revenue, but its guidance for the second quarter left a lot to be desired.

NVIDIA expects revenue of just $1.01 billion in the second quarter, about 8.4% lower than the $1.103 billion NVIDIA reported during the second quarter of 2014. Weak demand for PCs ahead of the launch of Windows 10, along with a strong U.S. dollar, are the main drivers of this disappointing guidance.

While a decline in revenue is never a good thing, NVIDIA's weak guidance for the second quarter should be viewed as a speed bump, not a sign that something is fundamentally wrong with NVIDIA's business.

A look at the quarter
In the first quarter, NVIDIA managed to grow total revenue by 4% year over year. GPU revenue, which includes basically everything except Tegra mobile processors, rose 5% year over year to $940 million. Revenue from Tegra grew as well, up 4% year over year to $145 million.

NVIDIA also splits its revenue into categories, giving investors a better view of the components that make up NVIDIA's business:



Q1 Revenue in millions USD

Year-over-year growth


GTX GPUs for PC gaming and SHIELD devices




Quadro GPUs and GRID virtualization platform



HPC and cloud

Tesla GPUs




Tegra chips for use in automobiles



OEM and IP

GPUs and Tegra chips sold to OEMS and IP licensing



Source: NVIDIA Q1 conference call

NVIDIA's largest segment, gaming, grew strongly in the first quarter thanks in part to the launch of the high-end Titan X GPU. Competitor Advanced Micro Devices is expected to launch new high-end GPUs within the next two months, and with NVIDIA having gained considerable market share over the past few quarters as a result of having no real competition at the high-end of the market, gaming growth could slow in the second quarter.

Enterprise revenue, which includes professional graphics cards as well as NVIDIA's graphics virtualization platform, declined during the first quarter as a result of weak European currencies. This is a temporary problem, and many other companies are facing similar currency-related issues. NVIDIA's GRID virtualization platform is still growing strongly, now sporting 250 enterprise customers with production deployments, up from about 30 one year ago.

Both the HPC and cloud segment and the automotive segment continue to grow rapidly, although both are currently too small to make a real dent in NVIDIA's results. As both businesses grow, NVIDIA's dependence on the PC market will continue to decrease, hopefully smoothing out the company's lumpy revenue results.

The OEM and IP segment declined significantly during the first quarter, and a weak PC market, along with the end of life for various Tegra OEM designs, were the main drivers. Windows 10 is expected to launch this summer, and some of this decline can be attributed to consumers and organizations delaying PC purchases until that time.

What to make of second quarter guidance
The weak PC market didn't seem to negatively affect NVIDIA's gaming business during the first quarter, and CEO Jen-Hsun Huang stated during the company's conference call that he expects gaming to continue to grow. This suggests that, even with a weak PC market and currency issues, NVIDIA's gaming business is still strong.

Because of this, I don't think there's all that much to worry about. Currency issues are going to be a problem, especially for the enterprise business, and since most of NVIDIA's sales are denominated in U.S. dollars, quantifying the effect of exchange rates isn't really possible. CFO Colette Kress had this to say on the conference call:

On the enterprise side, again, it's really tough to say where the currency will take us within the second quarter. We can all hope that it will improve. But right now, we're just going to have to see at the end of the quarter how it actually comes out in enterprise.

These currency issues will eventually subside, but for now the underlying strength of NVIDIA's enterprise business is being hidden.

With NVIDIA's gaming business still growing despite major headwinds, I believe the market overreacted to NVIDIA's lackluster guidance. The problems facing NVIDIA are temporary and largely out of its control, and investors shouldn't panic over NVIDIA's results.