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Nvidia Gains After Beating Estimates on Data Center Strength: 6 Key Takeaways

The GPU giant is near its all-time high after topping estimates and issuing a better-than-expected April quarter outlook.
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A jump in demand from cloud giants helped Nvidia comfortably top analyst estimates.

On Thursday afternoon, the GPU giant reported January quarter (fiscal fourth quarter) revenue of $3.11 billion (up 41% annually, following a 24% drop in the year-ago period), GAAP EPS of $1.53 and non-GAAP EPS of $1.89. Those numbers respectively beat consensus analyst estimates of $2.96 billion, $1.34 and $1.67.

Nvidia also guided for April quarter revenue of $3 billion, plus or minus 2%. Though Nvidia says it cut this outlook by $100 million to account for coronavirus-related uncertainty, it’s still above a $2.85 billion consensus.

Nvidia’s stock rose 5.2% in after-hours trading to $284.85, making new 52-week highs in the process. Shares are now within striking distance of an all-time high of $292.76 (set in Oct. 2018).

Here are some takeaways from Nvidia’s earnings report and call.

1. Server GPU Sales Soared

Driving most of the January quarter’s revenue beat: Nvidia’s Data Center segment, which covers sales of server GPUs and Nvidia’s GPU-packed DGX servers, rose 33% sequentially and 43% annually to $968 million, blowing away an $826 million consensus. The company also indicated Data Center sales will grow sequentially this quarter.

Like some other chip suppliers, Nvidia says it’s seeing strong demand from cloud giants (the proverbial hyperscalers), as cloud capital spending continues rebounding following an early-2019 slowdown. However, the company also noted it’s seeing growing sales to “vertical industry clients” deploying GPUs to handle AI/deep learning workloads, with consumer Internet companies -- many of whom, it's worth adding, are relying on public cloud infrastructures -- leading the way. CFO Colette Kress indicated that slightly less than half of the quarter’s Data Center revenue involved hyperscalers as opposed to vertical clients.

Shipments of Nvidia’s Tesla T4 GPU, which launched in late 2018 and is often used to handle AI inference (the running of trained AI models against real-world data and content), were said to have risen four-fold annually. Nvidia’s flagship Tesla V100 GPU, which is widely used to train AI models and accelerate supercomputer workloads, also saw record sales, even though it began shipping in mid-2017 and its successor is rumored to be launching soon

2. Gaming GPU Sales Were Slightly Below Expectations

Nvidia’s Gaming segment, which covers gaming GPU and console processor sales, posted revenue of $1.49 billion, slightly below a $1.52 billion consensus. Sales fell 10% sequentially, but (following a big year-ago drop caused by a channel inventory crunch) rose 56% annually.

In line with prior guidance, notebook gaming GPU and console processor sales (hurt by seasonal build patterns) fell sequentially, while desktop gaming GPU sales rose amid strong demand for Turing-architecture GPUs supporting real-time ray tracing. Notebook gaming GPU sales (boosted by growing uptake for Nvidia’s Max-Q platform for building thin-and-light gaming notebooks) still rose by a double-digit percentage annually.

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Nvidia expects Gaming revenue to drop by a low-double-digit percentage sequentially this quarter. Kress noted this outlook accounts for both seasonal pressures and the coronavirus outbreak.

3. Low-End PC GPU Sales Were Better Than Expected

Nvidia’s “OEM and Other” revenue, which covers sales of non-gaming PC GPUs as well as some other products such as its Jetson embedded computing modules, saw revenue grow 31% to $152 million, well above a $128 million consensus. Nvidia attributed this growth, which came at a time when business PC sales were strong ahead of Microsoft’s ending of Windows 7 support, to higher sales of “entry-level” GPUs.

4. Margins Continue Rising

On a non-GAAP basis, Nvidia’s gross margin (GM) came in at 65.4% -- up from the October quarter’s 64.1% and a depressed year-ago level of 56%, and above guidance of 64% to 65%. On a GAAP basis, GM was 64.9%.

Nvidia is also guiding for an April quarter non-GAAP GM of 64.9% to 65.9%. The company notes that strong Data Center sales are a margin tailwind.

5. Earnings Also Benefited from a Couple of Other Things

Nvidia’s spending growth remains restrained: Operating expenses rose 12% annually on a GAAP basis to $1.025 billion, and just 7% on a non-GAAP basis to $810 million. The company is guiding for opex to grow about 3% sequentially this quarter.

Lower-than-expected tax rates also boosted EPS. Nvidia, which previously guided for GAAP and non-GAAP tax rates of 8% to 10%, posted a 6.4% GAAP tax rate and a 6% non-GAAP rate.

6. Nvidia Is Still Talking with Chinese Regulators About the Mellanox Deal

Nvidia says its talks with China’s State Administration for Market Regulation regarding its $6.9 billion deal to buy high-speed data center interconnect provider Mellanox Technologies (announced last March) are “progressing.” The company insists it expects the deal will likely close “in the early part of calendar 2020.”

Mellanox’s stock rose 1.1% in after-hours trading to $122.10. That leaves shares $2.90 below Nvidia’s buyout price.

Nvidia is a holding in Jim Cramer's Action Alerts PLUS member club.

TheStreet’s Eric Jhonsa previously covered Nvidia’s earnings report and call through a live blog.