Earnings Results: Nvidia earnings chopped in half, but tweaked servers to China offset earlier $400 million warning

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Nvidia Corp. shares ticked higher in the extended session Wednesday after the chip maker said modified servers to China mostly made up for an expected $ 400 million shortfall due to a U.S. ban on certain tech sales, and announced it’s making progress helping customers reduce high inventories.

Nvidia NVDA, -4.54% shares rose 2% after hours, following a 4.5% decline in the regular session to close at $ 159.10.

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-ago period. Adjusted earnings, which exclude stock-based compensation expenses and other items, were 58 cents a share, compared with $ 1.17 a share in the year-ago period.

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

Data-center sales rose 31% to $ 3.83 billion, compared with Advanced Micro Devices Inc. ‘s AMD, -4.81% 45% rise in data-center sales to $ 1.6 billion, and Intel’s INTC, -3.84% 27% drop to $ 4.2 billion. Analysts had forecast Nvidia data-center sales of $ 3.72 billion.

“We raised the concern about $ 400 million of A100s because we were uncertain about whether we could execute the introduction of A800 to our customers and through our supply chain,” Jensen Huang, Nvidia’s founder and chief executive, told analysts on a call. “The company did remarkable feats to swarm this situation and make sure that our business was not affected and our customers were not affected. But A800 hardware surely ensures that it always means clear test for export control.”

Nvidia’s gaming sales dropped 51% to $ 1.57 billion from a year ago. Analysts had forecast $ 1.42 billion in gaming sales.

In late August, Nvidia had forecast third-quarter sales between $ 5.78 billion and $ 6.02 billion, which fell about $ 1 billion below what the Street was expecting at the time. That was before it estimated a possible $ 400 million in lost China sales, that Nvidia hopes to correct by selling a version of its A100 data-center chip called the A800 to China, which inhibits AI and supercomputing use and thus meets U.S. restrictions for sale.

“These restrictions impacted third-quarter revenue largely offset by sales of alternative products into China,” said Colette Kress, Nvidia’s chief financial officer, on the call with analysts. “That said, demand in China more broadly remains soft. We expect that to continue in the current quarter.”

Another concern of analysts was Nvidia’s high inventory levels in the channel as the company releases new gaming and data-center products. Third-quarter gross margins fell to 56.1% from 67% in the year ago quarter, and much of that came from a $ 702 million inventory charge on weaker China demand, the company said. That follows from last quarter, when the company announced it took a $ 1.32 billion inventory charge to help reduce on expectations of demand. But that’s mostly for unsold inventory on the books; analysts are concerned about the already-sold stuff.

Going forward, Nvidia needs to reduce inventory in the channel, or products that have already been sold to retailers and are “sitting on the shelves,” to make way for its new products. For instance, new cards from Nvidia went on sale Oct. 12, and the mid-tier RTX 4080 was released just before earnings, and was already sold out at the suggested retail price and higher,

“There’s too much inventory in the channel for our gaming products, desktop, notebook, as well as too much inventory on our pro-visualization products,” Kress told MarketWatch in an interview after the analysts’ call. “Therefore, we are working with [customers] to get that sold through. We have made progress in this quarter to reduce those inventory levels down to normal.”

“When they have lower inventory levels, everybody’s happy, and we can continue selling more to them,” Kress said.

Read: Nvidia’s gambit to salvage China data-center sales, gaming-card market questioned heading into earnings

On the call, Kress said that the company started shipping its H100 Hopper data-center product in the third quarter, and that base systems from Dell Technologies Inc. DELL, -2.76%, Hewlett-Packard Enterprise Co. HPE, -1.81%, Lenovo 992, -1.03%, and Super Micro Computer Inc . SMCI, -5.43% will be available beginning this month.

“Early next year, the first H100 base cloud instances will be available on Amazon AMZN, -1.84% Web Services local cloud, Microsoft MSFT, +0.18% Azure, and Oracle ORCL, +0.90% cloud infrastructure,” Kress said.

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

“It’s another classic ‘Tale of Two Cities’ story,” Maribel Lopez, principal analyst at Lopez Research, told MarketWatch in emailed comments. “Gaming and PCs and China down. On the flip side, data center is holding in the face of cutbacks and China.

“Meanwhile, there is a long tail of AI workloads which will create a return to growth, but it may take several quarters,” Lopez said. “The issue for Nvidia is the short term, the next several quarters will be rough. Investors will have to take a longer view, similar to what’s required with Intel.”

PC sales are seeing their steepest decline since data started being collected in the 1990s after a two-year surge, and spending on videogames and gear for them has also come back to earth. At the same time, drops in cryptocurrency prices have made crypto mining less profitable; Nvidia cards have been used extensively to mine for Ethereum  ETHUSD, +1.46%  and other digital assets.

Nvidia has been slashing its outlook all year, sometimes twice within a quarter.

Earlier in August, Nvidia warned of a $ 1.4 billion revenue shortfall because of weak gaming sales. That was on top of the $ 500 million Nvidia pulled from its second-quarter revenue forecast because of the COVID lockdowns in China and the war in Ukraine.

Following that, analysts readjusted their estimates, settling on a consensus of $ 5.78 billion for the quarter, coming very close to the $ 5.57 billion AMD reported for its third quarter. The last time AMD topped Nvidia in quarterly revenue was the third quarter of 2014, when AMD reported sales of $ 1.43 billion and Nvidia reported $ 1.23 billion, according to FactSet data.

Over the year, Nvidia shares have dropped 46%. In comparison, the PHLX Semiconductor Index  SOX, -4.26% is down 32% year to date, the S&P 500 index  SPX, -0.83% is down 17%, and the Nasdaq Composite Index COMP, -10.23% is off 29%.