In some respects, it's hard to fault those analysts that became cautious on Nvidia (NVDA - Get Report) in recent months. The GPU giant's shares went into earnings trading at 31 times a pre-earnings fiscal 2019 (ends in January 2019) consensus of $3.32, and there were signs of a PC graphics card inventory build following several months of very strong sales. Considering how some past Nvidia revenue surges have been followed by sharp pullbacks, those suggesting that investors take profits didn't sound too irrational.
Nonetheless, Nvidia's fiscal first quarter (April quarter) emphatically put to rest worries about a major growth slowdown, at least for the near-term. Amid fears of toughening competition, the company's two big growth engines are still chugging along without a hiccup.
Nvidia reported Q1 revenue of $1.94 billion (up 48% annually) and adjusted EPS of $0.85 (up 85%), beating consensus analyst estimates of $1.91 billion and $0.67. And it guided for fiscal Q2 revenue of $1.95 billion, plus or minus 2%. That implies 37% growth at the midpoint -- 43% excluding the loss of $66 million in quarterly IP licensing revenue, due to the March expiration of an Intel (INTC - Get Report) licensing deal -- and is above a $1.9 billion consensus.
On Tuesday evening shares were up 10.5% to $113.76 in after-hours trading. They're within $5 of a high of $120.92, set in February.
The most eye-popping figure in Nvidia's CFO commentary: Datacenter revenue, which covers Tesla server GPUs and GRID GPUs for cloud gaming and server-hosted PCs, rose 186% to $409 million. That blew away a $319 million consensus, with growth nearly matching fiscal Q4's 205% clip.
Strong Tesla demand from cloud giants such as Alphabet/Google (GOOGL - Get Report) , Microsoft (MSFT - Get Report) , Amazon (AMZN - Get Report) and Alibaba (BABA - Get Report) -- both for using Tesla cards to help deliver AI-powered consumer services, and to sell access to servers on their cloud infrastructures that feature Tesla cards -- was clearly a factor. But in the wake of last year's launch of Tesla GPUs based on the company's new Pascal architecture, Nvidia also benefited from broader Tesla demand for high-performance computing (HPC) system deployments, and from rising GRID adoption in verticals such as education and automotive.
HPC revenue doubled in Q1, with Nvidia claiming strong deal activity both for standalone Tesla cards and its DGX-1 system, which can pack eight Tesla P100 accelerators (used to train neural networks). GE, Audi and Japan's Riken research institution were cited as clients. GRID revenue was said to have more than tripled, with Intuit and Honda listed as buyers.
On the AI front, Tesla remains close to an industry standard, at least when it comes to the demanding task of training neural networks (it has a little more competition when it comes to doing inferencing work on live data). On the call, Nvidia talked up the value of Tesla's large developer ecosystem, underpinned by its CUDA development platform, as a differentiator, as well as its unmatched support among cloud service providers. Intel and AMD are both set to ship new rival products in the coming months.
Nvidia's mainstay gaming product business turned in revenue of $1.03 billion (53% of total revenue). Though missing a $1.11 billion consensus -- the graphics card inventory correction may have weighed -- that was still good for 49% growth, following 66% growth in Q4. The launch of Nvidia's GeForce 1080 Ti and Titan Xp high-end desktop GPUs provided additional fuel for a Pascal upgrade cycle that started last spring. Healthy demand for Pascal-based gaming notebook GPUs and a strong reception for Nintendo's Switch handheld console, which features Nvidia's Tegra X1 SoC, also didn't hurt.
On the earnings call, Nvidia talked up the impact of trends such as 4K gaming and eSports in growing its gaming addressable market. It also cited the popularity of newer demanding titles such as Battlefield 1, and suggested the upcoming arrival of Destiny 2 and Star Wars Battlefront 2 will help. AMD's (AMD - Get Report) upcoming Vega GPU launch could spell tougher high-end competition in a couple of months. At the same time, the 1080 Ti and Titan Xp launches, along with Nvidia's strong support among gaming enthusiasts, could limit Vega's impact.
Automotive revenue, driven by rising sales of Tegra SoCs for infotainment systems, grew 24% to $140 million. In time, Nvidia's Drive PX 2 board for autonomous driving systems should also provide a lift, given design wins with Tesla Motors, Mercedes-Benz, Audi and others. Nvidia predicts Drive PX 2- based systems will support Level 3 autonomy by year's end, and Level 4 autonomy by the end of 2018.
Professional visualization revenue, driven by Nvidia's Quadro GPUs, rose 8% to $205 million. OEM and IP revenue, hurt by the end of the Intel licensing deal -- Nvidia only recorded $43 million in Intel revenue in Q1 -- fell 10% to $156 million. Excluding Intel revenue, the segment's sales rose 6%.
Financially, it was mostly business as usual for Nvidia. Adjusted gross margin rose 100 basis points annually to 59.6%, and was close to a 59.7% guidance midpoint. Q2 GM guidance is at 58.6%. Operating expenses rose 17% to $517 million, mostly thanks to R&D spending. The fact revenue growth (48%) was well above opex growth contributed to an 85% increase in EPS, as did a relatively low 16% adjusted tax rate. With shares generally above $100 during the quarter, Nvidia refrained from conducting buybacks.
Wednesday will also be a big news day for Nvidia: The company kicks off its GTC developer conference with a keynote from CEO Jen-Hsun Huang at 12 p.m. ET -- Huang hinted on the call that new products will be announced. And the company's Investor Day meeting starts at 3 p.m. Tuesday's numbers certainly did a good of setting the table for Wednesday's announcements.