Despite global uncertainty, $500m hit doesn't rattle Nvidia execs

CEO acknowledges impact of war, pandemic but says fundamentals ‘are really good’

Nvidia is expecting a $500 million hit to its global datacenter and consumer business in the second quarter due to COVID lockdowns in China and Russia's invasion of Ukraine. Despite those and other macroeconomic concerns, executives are still optimistic about future prospects.

"The full impact and duration of the war in Ukraine and COVID lockdowns in China is difficult to predict. However, the impact of our technology and our market opportunities remain unchanged," said Jensen Huang, Nvidia's CEO and co-founder, during the company's first-quarter earnings call.

Those two statements might sound a little contradictory, including to some investors, particularly following the stock selloff yesterday after concerns over Russia and China prompted Nvidia to issue lower-than-expected guidance for second-quarter revenue.

But Huang and his CFO, Colette Kress, explained that they expect demand for Nvidia's GPUs, systems, and other components to remain strong overall. It is possible investors are also starting to feel this too after digesting the news with Nvidia stock rebounding today.

Greener pastures ahead for datacenter

Huang is especially positive about Nvidia's datacenter business, which includes high-end server GPUs like the A100 as well as the networking gear Nvidia gained from its Mellanox acquisition in 2020.

As The Next Platform pointed out, with $3.7 billion in revenue in the first quarter, Nvidia's datacenter business eclipsed sales for what has traditionally been the chip designer's biggest moneymaker: gaming GPUs. This was made possible by the fact that datacenter sales grew 83 percent year-over-year while gaming revenue only grew 31 percent to $3.6 billion.

"Our datacenter demand is strong and remains strong. Hyperscale and cloud computing revenues have grown significantly. It's doubled year-over-year. And we're seeing really strong adoption of A100," Huang said.

Out of the $500 million revenue hit Nvidia expects in the second quarter, $100 million is coming out of the datacenter business due to the company halting sales in Russia, according to Kress.

But even in the face of that and other global disruptions, Huang said visibility into future demand for Nvidia's datacenter products is "vastly better than a couple of years ago."

Huang said visibility into datacenter demand has improved because the market for AI applications has "evolved" over the past few years alongside the technologies that make them possible.

This means demand for Nvidia's datacenter products has spread from so-called hyperscalers like Amazon and Facebook parent company Meta to businesses in a variety of industries, ranging from health care and retail to financial services and telecommunications.

The broadening appeal of AI also means that more companies are moving from training models on large datasets to deploying models into live applications for inference, according to Huang.

Huang expects upcoming products like the A100's successor, the Hopper-based H100 GPU, and the Arm-based Grace CPU to keep datacenter sales moving at a steady pace in the near future.

With the H100's support for PCIe Gen 5 connectivity, the chief executive is also anticipating a boost in demand for adjacent, next-generation networking products from Nvidia and other companies.

"The next generation of servers that are being teed up right now are all [PCIe] Gen 5. The I/O performance is substantially higher than what was available before. And so you're going to see a pretty large refresh as a result of that," Huang said.

Gaming biz still looks good?

While Nvidia is expecting a loss of $100 million in datacenter revenue due to halted sales in Russia, the company is expecting a larger $400 million sales hit for its gaming business due to both Russia and lower demand in China because of ongoing COVID lockdowns.

Kress said Nvidia anticipates gaming sales to drop sequentially in the second quarter as a result. But even then, the chip designer still projects gaming sales this quarter to be higher than the same period last year, and both Kress and Huang expressed optimism that demand for gaming GPUs will remain strong overall.

"The underlying dynamics of the Gaming industry is really solid, net of the situation with COVID lockdowns in China and Russia. The rest of the market is fairly robust, and we expect the gaming dynamics to be intact," Huang said on the earnings call.

Part of what's driving this confidence is the fact that more than two-thirds of people with a GeForce GPU have yet to buy the latest products powered by Nvidia's Ampere architecture that debuted in 2020, according to Kress. Nvidia also plans to introduce a new, heavily rumored architecture for gaming GPUs in the second half of the year.

But even as Nvidia projected strength, Huang expressed some lingering uncertainty as to how long and to what extent the pandemic and the war in Ukraine will impact the economy:

"The need for GeForce PCs has never been greater, and so I think that the fundamental dynamics are really good. So as we look into the second half of the year, it's hard to predict exactly when COVID and the war in Russia is going to be behind us, but nonetheless, the governing dynamics of the gaming industry is great."

Is Nvidia right? Buyers and shareholders will let the executives know. ®

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