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(Image courtesy of Nvidia).

Nvidia Sees Sales Declines Finally Slowing Down

Nvidia said on Thursday said that its overall sales surged more than 15%, income improved 40% and profit margins jumped to 60% from the first quarter to the second quarter of the 2020 fiscal year, signaling that the Santa Clara, California-based firm has started to get around the stalled growth of its Turing GPUs in gaming computers, Volta GPUs in data centers and Tegra SoCs in consoles.

The Silicon Valley company’s sales grew 16% sequentially in the second quarter of fiscal 2020, slightly ahead of the average estimate on Wall Street. Profit margins recovered 1.4% over the same period amid the sudden turnaround in demand for graphics cards in high-performance personal computers and in data centers serving as accelerators for artificial intelligence. Income improved by 40%, beating analyst expectations.

Nvidia has been suffering from a prolonged dip in demand. Sales have been in double-digit year-over-year declines in recent months, falling 24% in the November-to-January quarter, another 31% in the February-to-April quarter and 17% in the May-to-July quarter, said chief financial officer Collete Kress. But the company has started to show signs of recovery: Kress sees sales growing to about $2.9 billion in the third quarter.

That would represent a year-over-year decline of only 9%, she said.

Nvidia has been hurting since the second half of last year. Shipments of graphics processors usually used in gaming computers declined steeply, causing sales to slow down and flooding the market with excess inventory that pushed prices down. Demand also dropped off for chips used in data centers as many of its largest cloud customers—more commonly called hyperscalers—curbed purchases to get through the surplus inventory left over from the first half of 2018.

The Silicon Valley chip designer has crumpled under the pressure. Profits in the second quarter of 2019 came out to $1.1 billion or $1.76 per share, but declined sharply to $552 million, or 90 cents per share, in the second quarter of 2020. Operating costs at the world's largest producer of graphics processors closed in on a billion dollars, up 19% from $818 million a year earlier. The company's profit margins of 59.8% have slumped by 3.5% versus last year's second quarter.

Nvidia has started to turn things around. Unsold inventory improved to $1.2 billion at the end of the second quarter, down from $1.42 billion in the previous quarter. The company's revenue of $2.58 billion last quarter decreased from last year's second quarter haul of $3.12 billion but was slightly ahead of analyst estimates of $2.55 billion. Nvidia said its gross margin would be between 62% and 63% in the third quarter, up from 60.4% a year ago as demand picks up.

"Essentially our business is normalized," Kress said on a conference call to discuss the results. Nvidia's shares have jumped more than 7% since the company reported earnings on Thursday.

Demand in its biggest business, which sells its GeForce GPUs for gaming computers and Tegra SoCs for game consoles including Nintendo's Switch, has been sagging since late last year. The company's gaming revenue totaled $1.31 billion, down 27% since the second quarter of 2019 despite growth of 24% since the first quarter of 2020, Nvidia said. The broader slowdown in its business overpowered its strong gains during the May-to-July quarter, Kress said.

Nvidia has also been trying to suppress market share gains by AMD, which at the end of the second quarter rolled out Radeon GPUs for gaming computers based on the 7-nanometer node, a more advanced process than the 12-nanometers used in Nvidia's GeForce GPUs. Nvidia lost customers to AMD in the first quarter of 2019, with its market share contracting from 81.2% to 77.3% and AMD's growing from 18.8% to 22.7%, according to market researcher Jon Peddie. 

The company has been shoring up its stronghold by upgrading its flagship GeForce GPUs, which are beloved by gamers for generating the highest resolution graphics. Last month, the company launched its Super RTX GPUs, which unlike AMD's Radeon GPUs use ray tracing technology to render more realistic video games. The new graphics cards, based on Nvidia's Turing architecture, offer up to 25% more performance at the same price as its first RTX GPUs.

"It's relatively clear now that the future of gaming will include ray tracing," said Jensen Huang, Nvidia's chief executive officer and founder, said on the analyst conference call. He added that more and more personal computer games are taking advantage of the ray tracing technology inside its Super RTX GPUs, which he believes "to be super well positioned through all of next year." He said "real-time ray tracing is going to drive a reinvigoration of gaming graphics."

The company's data center segment has also been facing challenges. Nvidia's cloud customers, particularly in China, are putting the brakes on buying server chips so that they can get through inventory amassed last year. Public cloud providers, includingGoogle, Amazon  and Microsoft in the United States and Baidu, Tencent and Alibaba in China, build colossal data centers and rent out access to them over internet as an alternative to traditional corporate infrastructure.

Demand has been dampened since the second half of last year. Sales targeting data centers, its second-biggest business, slumped 14% year-over-year to $655 million. But server processor sales showed 3% quarter-over-quarter growth as enterprises start spending more on Nvidia's Volta GPUs for training AI and Turing GPUs for inferencing. Huang said he sees "broad-based growth" in its data center business despite slower demand from a few cloud customers.

"My expectation is that this is going to continue to be a big, big growth opportunity for us," Huang said.

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