Nvidia’s profit halved, but servers made to China offset previous $400m warning

Shares of Nvidia Corp rose in an extended session on Wednesday after the chipmaker said servers shifted to China paid off an expected $400 million shortfall due to a US ban on certain technology sales and announced progress in reducing high customer inventories.

Nvidia NVDA,
shares rose 2% after hours to close at $159.10, down 4.5% in the regular session.

Nvidia reported third-quarter net income of $680 million, or 27 cents a share, compared with $2.46 billion, or 97 cents a share, in the year-earlier period. Adjusted earnings, which exclude stock-based compensation expense and other items, were 58 cents, compared with $1.17 per share in the year-earlier period.

Revenue fell to $5.93 billion from $7.1 billion in the year-ago quarter as game sales declined. Analysts had forecast 71 cents a share on revenue of $5.78 billion.

Data center sales rose 31% to $3.83 billion from Advanced Micro Devices Inc.’s AMD.
Data center sales surged 45% to $1.6 billion, and Intel’s INTC,
It decreased by 27% to 4.2 billion dollars. Analysts had forecast Nvidia data center sales of $3.72 billion.

“We raised concerns about $400 million of A100s because we weren’t sure we could implement the A800 to our customers and through our supply chain,” Nvidia founder and CEO Jensen Huang said on a call with analysts. “The company has done remarkable work to rectify this situation and make sure our business and customers are not affected. But the A800 equipment is certainly always a clear test for export control.”

Nvidia’s gaming sales fell 51% to $1.57 billion from a year ago. Analysts had predicted game sales of $1.42 billion.

In late August, Nvidia forecast third-quarter sales of $5.78 billion to $6.02 billion, about $1 billion below the Street’s expectations at the time. That was before it estimated $400 million in lost Chinese sales, which Nvidia hopes to make up by selling a version of its A100 data center chip called the A800 to China, which blocks the use of artificial intelligence and supercomputing and thus meets U.S. sales restrictions.

“These restrictions impacted third-quarter earnings primarily through sales of alternative products to China,” Nvidia Chief Financial Officer Colette Kress said in a telephone call with analysts. “That said, demand in China remains broadly soft. We expect this to continue in the current quarter as well.”

Another concern for analysts was Nvidia’s high inventory levels in the channel as the company releases new gaming and data center products. The company said third-quarter gross margin fell to 56.1% from 67% in the previous quarter, largely due to a $702 million inventory charge due to weak Chinese demand. This comes after the company announced last quarter that it took a $1.32 billion inventory charge to help reduce demand expectations. But that’s mostly for unsold inventory on the books; Analysts are worried about oversold goods.

Going forward, Nvidia needs to reduce in-channel inventory, or products already sold to retailers and “sitting on shelves,” to make way for new products. For example, Nvidia’s new cards went on sale on October 12th, and the mid-range RTX 4080 was released before earnings and was already selling for suggested retail price and more.

“There’s a lot of inventory in the channel for our gaming products, desktop, notebook, as well as a lot of inventory for our pro-visualization products,” Kress told MarketWatch in an interview after the analysts’ call. “That’s why we work [customers] to sell it. We have made progress this quarter to bring these inventory levels down to normal levels.”

“When their inventory levels are low, everyone is happy and we can continue to sell them more,” Kress said.

Read: Nvidia’s China data center sales, gaming card market in question on earnings

During the call, Kress said the company began shipping the H100 Hopper data center product in the third quarter, and that Dell Technologies Inc. DELL’s base systems,
Hewlett-Packard Enterprise Co. HPE,
Lenovo 992,
and Super Micro Computer Inc. SMCI,
will be available from this month.

“Early next year, the first H100 primary cloud instances will be available on Amazon AMZN,
Web Services local cloud, Microsoft MSFT,
Azure and Oracle ORCL,
cloud infrastructure,” Kress said.

For the fourth quarter, Nvidia forecast revenue of $5.88 billion to $6.12 billion, while analysts polled by FactSet had on average forecast earnings of 76 cents a share on revenue of $6.07 billion.

“This is another classic ‘Tale of Two Cities’ story,” Maribel Lopez, senior analyst at Lopez Research, told MarketWatch in emailed comments. “Gaming and computers and China went down. On the other hand, the data center faces disruptions and China.

“Meanwhile, there is a long tail of AI workloads that are generating a return to growth, but that may take several quarters,” Lopez said. “The challenge for Nvidia is short-term, the next few quarters are going to be rough. Investors will need to take a longer view, similar to what is required of Intel.”

After two years of growth, PC sales have seen their sharpest decline since data collection began in the 1990s and spending on video games and hardware returned to the world. At the same time, falling cryptocurrency prices have made cryptocurrency mining less profitable; Nvidia cards have been widely used for mining Ethereum ETHUSD,
and other digital assets.

Nvidia cuts its outlook all year, sometimes twice a quarter.

In early August, Nvidia warned of a $1.4 billion revenue shortfall due to weak game sales. That was above the $500 million that Nvidia pulled from its second-quarter revenue forecast due to the COVID lockdowns in China and the war in Ukraine.

Analysts then revised their estimates to a consensus of $5.78 billion for the quarter, coming in very close to AMD’s $5.57 billion reported for the third quarter. The last time AMD beat Nvidia in quarterly revenue was in the third quarter of 2014, when AMD reported sales of $1.43 billion and Nvidia reported $1.23 billion, according to FactSet data.

Nvidia shares are down 46% for the year. In comparison, the PHLX Semiconductor Index SOX,
down 32% year to date, the S&P 500 index SPX,
down 17% and the Nasdaq Composite Index COMP,
29% off.

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