NVIDIA Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 17, 2021

There are 10 speakers on the call.

Operator

Good afternoon. My name is Mel, and I will be your conference operator today. At this time, I would like to welcome everyone to the NVIDIA Second Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. Simona Gencosdi, you may begin your conference.

Speaker 1

Thank you. Good afternoon, everyone, and welcome to NVIDIA's conference call for Q2 of fiscal 2022. With me today from NVIDIA are Jensan Huang, President and Chief Executive Officer and Colette Kress, Executive Vice President and Chief Financial Officer. I'd like to remind you that our call is being webcast live on NVIDIA's Investor Relations website. The webcast will be available for replay until the conference call to discuss our financial results for the Q3 of fiscal 2020 The content of today's call is NVIDIA's property.

Speaker 1

It can be reproduced or transcribed without our prior written consent. During this call, we may make forward looking statements based on current expectations. These are subject to a number of significant risks and uncertainties, and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, Please refer to the disclosure in today's earnings release, our most recent Form 10 ks and 10 Q and the That we may file on Form 8 ks with the Securities and Exchange Commission. All our statements are made as of today, August 18, 2021, based on information currently available to us.

Speaker 1

Except as required by law, we assume no obligation to update any such statements. During this call, we will discuss non GAAP financial measures. You can find a reconciliation of these non GAAP financial measures to GAAP financial measures and our CFO commentary, which is posted on our website. With that, let me turn the call over to Colette.

Speaker 2

Thanks, Simona. Q2 was another strong quarter with revenue of $6,500,000,000 and year on year growth of 68%. We set records for total revenue as well as for gaming, data center and professional visualization. Starting with gaming, revenue was $3,100,000,000 was up 11% sequentially and up 85% from a year earlier. Demand remained exceptionally strong outpacing supply.

Speaker 2

We are now 4 quarters into Ampere Architecture product cycle for gaming and it continues to be our best effort. At Computex in June, we announced 2 powerful new GPUs for gamers and creators, the GeForce RTX 3080 Ti And RTX 3070 Ti delivering 50% faster performance than their prior generation With acclaimed features such as real time ray tracing, NVIDIA DLSS, AI rendering, Reflex and Broadcast. Laptop demand was also very strong. OEMs adopted Ampere architecture GPUs in a record number of designs From the top of the line gaming laptops to those to mainstream price points as low as $7.99 that bring the power GeForce CPUs to gamers, students and creators on the go. Ampere architecture powered laptops feature our 3rd generation Next Q power optimization technology that enables ultra thin designs such as the new Alienware X15, NVIDIA RTX Technology has reset computer graphics and spurred our biggest ever refresh cycle.

Speaker 2

Ampere has been our fastest Ramping gaming GPU architecture on Steam and the combination of Turing and Ampea RTX GPUs Have only upgraded about 20% of our installed base. 80% have yet to upgrade To RTX. And the audience for global esports will soon approach a half a 1000000000 people, while the number of those who live stream Games is expected to reach over $700,000,000 The number of PC gamers on Steam is up almost 20% over the past year. More than 60 RTX games now support NVIDIA's RTX Ray Tracing or DLSS, including today's biggest game franchises such as Minecraft, Fortnite and Cyberpunk. New RTX games this quarter include Red Dead Redemption 2, one of the top rated games of all time.

Speaker 2

Popular titles like Rainbow 6 Siege and Rust and Minecraft RTX in China with over 400,000,000 players. The competitive gamers NVIDIA Reflex, Which includes latency is now supported by 20 games. Let me say a few words on cryptocurrency mining. In an effort to address the needs of miners and direct GeForce to gamers, we increased the supply of cryptocurrency mining processors or GMP and introduced low hash rate GeForce GPUs with limited Ethereum mining capability. Over 80% of our Ampere architecture based GeForce shipments in the quarter were low hash rate GPUs.

Speaker 2

The combination of crypto to gaming revenue is difficult to quantify. CMP revenue, Which is recognized in OEM was $266,000,000 lower than our original $400,000,000 estimate On reduced mining profitability and we expect a minimal contribution from CMP going forward. GeForce NOW reached a new milestone this quarter surpassing 1,000 PC games more than any other cloud gaming service. The premium tier is available for a subscription of $10 per month, giving gamers access to RTX class performance even on an underpowered PC, Mac, Chromebook, iOS or Android device. Moving to pro visualization.

Speaker 2

Q2 revenue was a record 519 driven by demand to outfit design offices at home as remote work becomes the norm across industries. This is also the 1st big quarter of the Ampere architecture ramp for pro visualization. Key verticals driving Q2 demand include automotive, public sector and healthcare. At SIGGRAPH Last week, we announced an expansion of NVIDIA Omniverse, our simulation and collaboration platform that provides the foundation Of the metaverse. Through new integrations with Blender, the world's leading open source 3 d animation tool and Adobe, We're opening the Omniverse platform to millions of additional users.

Speaker 2

We are also collaborating with Apple and Pixar to bring advanced Physics capabilities to Pixar's universal scene description framework, embracing open standards to provide 3 d workflows to billions of devices. Omniverse Enterprise software is in the early access stage and will be generally available later this year on a subscription basis from NVIDIA's partners, including Dell, HP, Lenovo and many others. Over 500 companies are evaluating Omniverse Enterprise, including BMW, Volvo and Lockheed Martin. And more than 50,000 individual creators have downloaded Omniverse since it entered open beta in December. Moving to automotive.

Speaker 2

Our Q2 revenue was $152,000,000 down 1% sequentially and up 3% year on year. Sequential revenue declines in infotainment were largely offset by growth in self driving. Looking further out, we have substantial design wins set to ramp that we expect will drive a major inflection in revenue in the coming years. This quarter, we announced several additional wins. Self driving startup AutoX unveiled its latest autonomous driving platform for robot Powered by NVIDIA DRIVE.

Speaker 2

The performance and safe capabilities of the software defined NVIDIA DRIVE platform Has enabled AutoX to become one of the first companies in the world to provide full self driving mobility services Without the need for a safety driver, in autonomous trucking, Drive ecosystem partner Plus Signed a deal with Amazon to provide at least 1,000 self driving system to Amazon's fleet of delivery These systems are powered by NVIDIA DRIVE for high performance, energy efficient and centralized AI compute. An autonomous trucking startup, Embark, is building on NVIDIA DRIVE. The system is being developed for trucks for 4 major OEMs, Freightliner, Navistar International, Pacar and Volvo, representing the vast majority of the Class 8 or largest size trucks in the U. S. The NVIDIA DRIVE platform is being rapidly adopted Across the transportation industry from passenger owned vehicles to robo taxi to trucking and delivery vehicles, We believe everything that moves will be autonomous someday.

Speaker 2

Moving to data center. Revenue of $2,400,000,000 grew 16% sequentially and 35% from the year ago quarter. The year ago quarter, which was our Q1 to include Mellanox. Growth was driven by Both hyperscale customers and vertical industries, each of which has record revenues. Our flagship A100 Continue to ramp across hyperscale and cloud computing customers with Microsoft Azure announcing general availability in June Following AWS and Google Cloud Platforms general availability in prior quarters, vertical industry demand was strong With sequential growth led by financial services, supercomputing and telecom customers, We also had exceptional growth in inference, which reached a record more than doubling year on year.

Speaker 2

Revenue from inference focused processors includes the new A30 GPU, which provides 4 times the inference performance of the T4. Customers are also turning to NVIDIA GPUs to take AI to production and shifting from CPUs to GPUs, Driven by the stringent performance, latency and cost requirements of deploying and scaling deep learning AI workloads. NVIDIA networking products posted solid results. We see momentum across regions driven by our technology leadership With upgrades to high speed products such as Connector 6 as well as new customer wins across Cloud Service Providers, Enterprise and High Performance Computing. We extended our leadership In supercomputing, the latest top 500 list shows that NVIDIA Technologies power 342 of the world's top 500 supercomputers, including 70% of all new systems and 8 of the top 10 To help companies harness the new industrial high performance computing revolution, we deliver a turnkey AI data center solution with the NVIDIA DGX SuperPOD, the same technology that powers our new Cambridge 1 supercomputer in the UK and a number of others in the top 500.

Speaker 2

We expanded our AI software and subscription offerings, Making it easier for enterprises to adopt AI from the initial development stage through to deployment and operations, We announced NVIDIA Base Command, our software as a service offering for operating and managing large scale Multi user and multi team AI development workloads on DGX SuperPOD. Base Command is the Operating and management system software for distributed training clusters. We also announced general availability of NVIDIA Fleet Command, our managed edge AI software as a service offering. Fleet Command helps companies Solve the problem of securely deploying and managing AI applications across thousands of remote locations, Combining the efficiency and simplicity of central management with the cost performance and data sovereignty Benefits of real time processing at the edge. Early adopters of Fleet Command include some of the world's leading retail, Manufacturing and logistics companies and the specialty software companies that work with them.

Speaker 2

The new NVIDIA Base Command And Fleet Command software and subscription authorings followed last quarter's announcements of the NVIDIA AI Enterprise Software Suite, which is in early access With general availability expected soon, our enterprise software strategy is supported by the NVIDIA Certified system program with server OEMs, which are bringing to market over 55 systems Ready to run on NVIDIA's AI software out of the box to help enterprise simplify and accelerate their AI deployment. The NVIDIA ecosystem keeps getting stronger. NVIDIA inception, our acceleration platform for AI startups Just surpassed 8,500 members. With cumulative funding of over 60,000,000,000 and members in 90 countries, Inception is one of the largest AI startup ecosystems in the world. CUDAK now has been downloaded 27,000,000 times since it launched 15 years ago, with 7,000,000 in the last year alone.

Speaker 2

TensorRT for inference has been downloaded nearly 2,500,000 tons across more than 27,000 companies. And the total number of developers in the NVIDIA ecosystem now exceeds 2,600,000, Up 4 times in the past 4 years. Let me give you a quick update on ARM. In nearly 1 year since we initially agreed to combine the VARN, we have gotten to know the company, its business and its people Much better. We believe more than ever in the power of our combination and the benefits it would deliver for ARM, For the U.

Speaker 2

K. And for its customers across the world in the era of AI, ARM has great potential. We love their business model and Commit to keep its open licensing approach. And with NVIDIA's scale and capabilities, ARM will make more IP and sooner For their mobile and embedded customers while expanding into data center, IoT and other new markets. NVIDIA accelerates computing, which starts with the CPU.

Speaker 2

Whatever new markets are opened with the We've announced accelerated platforms for Amazon Graviton, Ampere Computing, MediaTek and Maher Adal spanning cloud computing, AI, cloud gaming, supercomputing, edge AI To Chrome PCs, we plan to invest in the U. K. And we have with the Cambridge 1 supercomputer And through ARM making U. K. A global center in science, technology and AI.

Speaker 2

We are working Through the regulatory process, although some ARM licensees have expressed concerns and objected to the transaction And the discussions with regulators are taking longer than initially thought. We are confident in the deal and that regulators should the benefits of the acquisition to ARM, its licensees and the industry. Moving to the rest of the P and L. GAAP gross margin of 64.8 percent for the 2nd quarter was up 600 basis points from a year earlier, reflecting A certain Mellanox acquisition related costs, GAAP gross margins was up 70 basis points sequentially. Non GAAP gross margins was 66.7%, up 70 basis points from a year earlier and up 50 basis points sequentially, reflecting higher ASPs within desktop GeForce GPUs on continued growth in high end Ampere Architectured Products, partially offset by a mix shift within data center.

Speaker 2

Q2 GAAP EPS was $0.94 up 2 76% from a year earlier. Non GAAP EPS was $1.04 up 89% from a year earlier, adjusting for the 4:one stock split Effective this quarter, Q2 cash flow from operations was a record 2,700,000,000 Let me turn to the outlook for the Q3 of fiscal 2022. We expect another Strong quarter. Recentio with sequential growth driven largely by accelerating demand in data centers. In addition, we expect sequential growth in each of our 3 market in each of our 3 other market platforms.

Speaker 2

Gaining demand is continuing to exceed supply as we expect channel inventories to remain below target levels as we exit Q3. The contribution of CMT to our revenue outlook is minimal. Revenue is expected to be $6,800,000,000 plus or minus 2%. GAAP and non GAAP gross margins are expected to be 65.2 percent and 67 percent respectively, plus or minus 50 basis points. GAAP and non GAAP operating respectively.

Speaker 2

GAAP and non GAAP other income and expenses are both expected to be an expense of approximately 60,000,000 Excluding gains and losses on equity securities, GAAP and non GAAP tax rates are supposed to be expected 11%, Plus or minus 1%, excluding discrete items. Capital expenditures are expected to be approximately 200,000,000 to $225,000,000 Further financial details are included in the CFO commentary and other information available on our IR website. In closing, let me highlight upcoming events for the financial community. We will be attending the following virtual events: the BMO Technology Summit on August 24th The New Street Big Ideas in Semiconductors Conference on September 9th, the Citi Global Tech Conference on September 13, The Piper Sandler Global Technology Conference on September 14 and the Evercore ISI, Auto, Tech and AI Forum on September 21. Our earnings call to discuss the 3rd quarter results is scheduled for Wednesday, November 17.

Speaker 2

We will now open the call for questions. Operator, would you please poll for questions? Thank

Operator

you. We'll pause for just a moment to compile the Q and A roster. Your first question comes from the line of Vivek Arya of Bank of America. Your line is now open. You may ask your question.

Speaker 3

Thanks for

Speaker 4

I actually had a near and longer term question on the data center. I think near term you mentioned the possibility of accelerating data center growth from the 35% rate, I was hoping if you could give us some more color around that confidence and visibility. And then longer term, you know, Jensen, we have seen a lot of announcements from NVIDIA about your enterprise software opportunity. I honestly don't know how to model that. It sounds very promising, but how should we model it?

Speaker 4

What problem are you trying to solve? Is it cannibalizing demand you might have Otherwise seen from your public cloud customers or is this incremental to growth? So just any guidance or any just insights into

Speaker 5

Yes. Thanks for the question. We are seeing accelerate as we have already recorded that we have record revenues And we're seeing accelerated growth. The acceleration in hyperscale and cloud comes from the transition of The cloud service providers in taking their AI applications, which are now heavily deep learning driven Into production. There were several things that we've spoken about in the past that really makes NVIDIA the ideal platform to scale out with.

Speaker 5

The several platforms the several elements of our platform, number 1, Ampere GPU, which is known universal GPU for AI For training, but incredibly good for infants. It's terrific in its throughput, it's terrific in its Fast response time as well, and therefore, the cost of deployment, the cost of Operating the AI application is the lowest. The second is the introduction of TensorRT, which is our optimizing compiler That makes it possible for us to compile and optimize Any AI application to our GPUs and whether it's computer vision or natural language understanding, conversational AI, Recommender systems, the type of applications that are deploying AI is really quite vast. And then lastly, this software inference server that we offer called Triton, which supports every one of our GPUs. It supports GPUs as well as GPUs.

Speaker 5

So every Internet service provider could Operating their entire data center using Triton. These several things are really accelerating our growth. So the first element It's the deployment, the transition of deep learning AI applications into large scale deployment. In the enterprise, The application that is driving AI, as you know, every enterprise must be wants to move a race towards being a tech company And take advantage of connected clouds and connected devices and artificial intelligence to achieve it. They have an opportunity to deploy AI services Out of the Edge.

Speaker 5

And in order to do so, There are several things that has to happen. First, we have to create a computing platform that allows them to do training in the IT environment that They understand, which is virtualized, which is largely managed by VMware. And our collaboration with VMware are creating a new type of system To be integrated into enterprise, it was has been quite a significant effort and it's been volume production today. The second is a server that allows the enterprise customers to deploy their AI models out to the edge. And the AI engine, the software suite that we've been developing over the last 10 years Now has been integrated into this environment and allows the enterprises to basically run AI out of the box.

Speaker 5

There's 3 elements of our software product there. First is NVIDIA AI Enterprise, and And that puts that basically puts all of the state of the art AI solvers and engines and libraries that We've industrialized and perfected over the years, made it available to enterprise license. 2nd is a Operating system platform called Base Command that allows for distributed scale up Software development in the for training and developing models. And then the third is Fleet Command, which is an operating system software product that Let's you operate and deploy and manage the AI models out to the edge. These three software products in combination with the server called NVIDIA Certified, taken out through our network of partners And so we're really enthusiastic about entering into the software Business model, this is an opportunity that could represent of course tens of millions of servers.

Speaker 5

We believe all of them will be GPU accelerated. We believe that enterprises will be deploying and taking advantage of AI to revolutionize their industry And using quite a traditional enterprise software licensing business model, This could represent 1,000,000,000 of dollars of business opportunity for us.

Operator

Thank you. Next question comes from the line of Stacy Rasgon of Bernstein. Your line is now open. You may ask your question.

Speaker 5

Hi, guys. Thanks for taking my questions.

Speaker 6

I wanted to go back, Colette, the sequential guidance. You gave a little bit of color by segments. If I look at your gaming revenues, it's kind of like 3 quarters in a row you've been up, call it, ballpark 10% Or 11% and my understanding is that was sort of a function of your ability to bring on supply. I guess what does the supply addition look like as you're going from Q2 into Q3? And do

Speaker 2

you think you can still maintain

Speaker 6

That kind of sequential growth or does it dial down? Because I also need to I also would play that against your other commentary suggesting that the sequential growth and I assume on a dollar basis So how do I think about the interplay within those comments of sequential growth of gaming,

Speaker 2

Yes. So let me start and I'll let, Jensen add a bit, Stacy, to your question. Yes, we're providing the guidance for Q3 of $6,800,000,000 in revenue. Now excluding CMP, we expect our revenue to grow over $500,000,000 sequentially. The lion's share of that sequential revenue increase will be coming from data center.

Speaker 2

We do expect gaming to be up slightly on But remember, we are still supply constrained. Automotive and ProVis are also expected to be up Slightly quarter over quarter. And from a CMP perspective, we'll probably just have minimal amounts in Q3. So Our Q3 results don't have seasonality with them for gaming and are really about the supply that we believe we can have for Q3. I'll see if gentlemen wants to add any more color.

Speaker 5

Yes. Thank you. Thanks for the questions. As you know, RTX is a fundamental reset of computer graphics. This is a technology called ray tracing that has been the Holy Grail of computer graphics for quite a long time, 35 years and research in our NVIDIA research for 10 years, And finally made it possible to do real time ray tracing with RTX.

Speaker 5

RTX demand is quite incredible. And as you know, we have a large installed base of PC gamers. They use an architecture called GTS Based on programmable shaders that we invented some 20 years ago. And now we've reset the entire installed base. And Ampere It's off to just an incredible start.

Speaker 5

It's the best selling GPU architecture in the history of our company. And yet we've only upgraded some 20% less than 20% So there's another 80% of the world's PC gaming market that we have yet to Upgrade to RTS. Meanwhile, the number of PC gamers in the world grew substantially. Steam grew 20% this last year. And so I think the and we're right at the beginning of our RTX transition.

Speaker 5

Meanwhile, computer graphics has expanded into so many different new markets. RTX, we've known we've always believed we'll reinvent the way that people did design. And we're That's happening right now as we speak as workstations is growing faster than ever and has achieved record revenues. And at the same time, because of all of our work with cloud gaming, we now see public clouds putting Cloud graphics, whether it's workstations or PC or 5 gs consoles up in the cloud. So we're seeing strong demand in PCs, in laptops, And workstations and mobile workstations and cloud.

Speaker 5

And so RTX is a big really doing great. Our challenge there is that demand is so much greater than supply and as correct as we can.

Operator

Thank you. Next question comes from the line of Matt Ramsay of Cowen. Your line is now open.

Speaker 3

Yes, thank you very much. Good afternoon, everybody. Before my question, Jensen, I just wanted to say congrats on the Noyce award. That's a big honor. For my question, I wanted to follow on Stacy's question about supply.

Speaker 3

And Colette, maybe you could give us a little bit of commentary around Supply constraints in gaming in the different tiers or price tiers of your gaming cards. I'm just trying to get a Better understanding as to how you guys are managing supply across the different price tiers. And I guess it translates into a question of, Are the gaming ASPs that we're seeing in the October quarter guidance, are those what you would call sustainable going forward? Or do you feel like Yes, that mix may change as supply comes online. Thank you.

Speaker 2

So I'll start here. Thanks for the question On our overall mix as we go forward. First, our supply constraint in our gaming business is largely attributed to our desktop and notebook. That can mean a lot of different things from our components that are necessary to build so many of our products. But our mix is really Our mix as we are also seeing many of our gamers very interested in our higher end, higher performance We will continue to see that as a driver that overall lifts both our revenue and can lift our overall gross margins.

Speaker 2

So there's quite a few different pieces into our supply that we have to think about, but we are going to try and make the best

Operator

Next question, we have the line from C. J. Muse, your line is now from Evercore. Your line is now open.

Speaker 7

Yes. Thank you. Good afternoon.

Speaker 3

I guess a follow-up question on the supply constraints. When do you think that will ease? And how should we think about gaming into the January quarter visavis Typical seasonality given I would assume you would continue to be supply constrained. Thank you.

Speaker 5

I could take it or you can, either one of us.

Speaker 2

Go ahead, Jensen, and I'll follow-up if there's some other

Speaker 5

Okay. We're supply constrained in graphics and We're surprised to constrain graphics while we're delivering revenues in graphics. Cloud gaming is growing, cloud graphics is growing. RTX made it possible for us to address the design and the creative workstations. Historically, the rendering Ray tracing and photo real estate images has largely been done on CPUs and for the very first time, and you could actually accelerate the way from NVIDIA GPUs and these RTX GPUs.

Speaker 5

And so the workstation market is really doing great. The backdrop of that, of course, is that people are building offices in their homes. And for many of the designers and creators around the world, some 20,000,000 of them, they have to create They have to build a workstation or an office at home as well as the one at work because remote work is the new one. And meanwhile, of course, RTX has reset all of our consumer graphics, The few 100,000,000 installed base PC gamers and it's time to upgrade. So there's a whole bunch of reasons.

Speaker 5

We're achieving record revenues while we're supply constrained. We have enough supply to Our second half company growth conference. And Next year, we expect to be able to achieve our company's growth plans for next year. Meanwhile, we have and are securing pretty significant long term supply commitments As we expand into all these different market initiatives that we set ourselves up for. And So I would expect that we will see a supply constrained environment For the vast majority of next year is my guess at the moment.

Speaker 5

But a lot of that has to do with the fact that our demand is just so Right. RTS is really a once in a generation e set of computer modern computer graphics. Nothing like this has happened since we've been doing computer graphics. And so the invention is very quite groundbreaking and you can see its impact.

Operator

Thank you. Next question comes from the line of Harlan Sur of JPMorgan. Your line is now open.

Speaker 8

Good afternoon. Congratulations on the strong results, outlook and execution. The Mellanox networking franchise, this has been a really strong and synergistic addition The NVIDIA compute portfolio, I think kind of near to midterm, the team is benefiting from the transition to 204 100 gig networking connectivity in And then I think in addition to that, you guys are getting some good traction with the BlueField SmartLink products. Can you just give us a sense on how the business is trending year over year? And do you expect continued quarter over quarter networking momentum into the second This year, especially as the cloud and hyperscalers are going through a server and CapEx spending cycle?

Speaker 5

Yes, I really appreciate that question. Mellanox had a solid growth Quarter. And the Mellanox networking business is really growing incredibly. There are Three dynamics happening all at the same time. The first is the transition that you're talking about.

Speaker 5

You know that the world's data centers, hyperscale data centers are use this form of computing called disaggregate, which basically means that A single application is running on multiple servers at the same time. This is what makes it possible for them to scale up. The more users for an AI application or service, you just have to add more servers. And so the ease of scale out that this aggregated computing provides also puts enormous pressure on the network. And Mellanox has the world's lowest latency and the highest bandwidth and performance networking on the front.

Speaker 5

And So the ability to scale out and the ability to provision these disaggregated applications It's really much, much better with MetaMask networking. So that's number 1. Number 2, Almost every company in the world has to be a high performance computing company there. You see that the cloud service providers, one after another, are building What historically was InfiniBand and supercomputing centers. The cloud service providers have to build supercomputers themselves and the reason for that is because of artificial intelligence and training these gigantic models.

Speaker 5

The rate of growth of network sizes, AI model sizes It's doubling every 2 months. It's doubling not every year or 2 years, it's doubling every 2 months. And so you could imagine in this size, We're now talking about training AI models that are 100,000,000,000,000 parameters large. The human brain has 150 plus Trillion, Synapses, and so on Nuance. And so that gives you a sense of the scale of AI models that people are developing.

Speaker 5

And so you're going to see supercomputers that are built out of Mellanox InfiniBand And the high speed networking along with NVIDIA GPU computing in more and more cloud service providers. You're also seeing it in enterprises for use in the discovery of drugs. There's a digital biology revolution going on as the computation is stable, The large scale computing that we're able to do now and AI, better understand biology and better understand chemistry And bringing both of those fields into the field of information sciences. And so you're seeing large supercomputers being built And enterprise is not the world as well. And so the second dynamic has to do with our incredibly great networking It's an event that we're seeing that as the fact of spending in high performance computing.

Speaker 5

And the 3rd dynamic Is data centers going software? In order to orchestrate and We're on a data center with just a few people, essentially running an entire data center, hundreds of thousands of servers as if it's just one computer in front of you. That entire data center is software defined. And the amount of software that goes into that software device Data center running on today's CPUs, if the network is bad, the storage bad and now because of 0 Trust, The security step, all of that is putting enormous pressure on the available Computing capacity for applications, which is ultimately what data centers are designed to do. And so the software design data center It needs to have a place to take that infrastructure software and accelerate it, to offload it, to accelerate it and very importantly, Isolated from the application plan so that intruders can't jump into the operating system of your data center, the fabric of your data center.

Speaker 5

And so the answer to that is good deal. The ability to offload, accelerate And isolate this, the data center software infrastructure and to free up All of the CPUs to run what they're supposed to run was with the application. Just about every data center in the world is moving Towards a 0 truck model and BlueField is just incredibly well positioned. These three dynamics, disaggregated computing, which needs really strong and fast networking, every company needing high performance computing And then lastly, stockholder client data center is going 0 Trust. And so these are really important dynamics and I appreciate the opportunity To tell you on that, you can just tell how super exciting about the prospects NVIDIA's networking business and the employees that they have in building modern data centers.

Operator

Thank you. Next question comes from the line of Aaron Recker of Wells Fargo. Your line is open.

Speaker 7

Yes. Thanks for taking the question. I think you hit on a lot of my question is around the data center and that last one. So maybe I'll just ask kind of on a P and L basis. One of the things that I see in the results or more importantly the guide is you're now collecting over 67% gross margin potentially.

Speaker 7

I'm curious as we move forward, how do you think about the incremental operating gross margin upside So from here and how you're thinking about the operating margin leverage for the company from here through the P and L? Thank you.

Speaker 5

Yes, Colette, let me take that and if you could just follow-up. Go ahead. With some of the details, that would be great. I think at the highest level, I really appreciate the question. At the highest level, the important thing to realize is that artificial intelligence is the single greatest Technology course that the computer industry has ever seen and potentially the world's ever seen.

Speaker 5

The automation Automation opportunities, which drives productivity, which translates directly to cost savings of the company is enormous. And it opens up opportunities for technology and computing companies like it never happened before. Let me just give you some examples. The fact that we could apply so much technology to warehouse logistics, Retail automation, customer call center automation is really quite unprecedented. The fact that we could automate Truck driving and last mile delivery, providing an automated chauffeur, Those kind of services and benefits and products are never imaginable before.

Speaker 5

And so the size of the IT industry, if you will, the industry that computer companies like themselves are part of has expanded tremendously. And so the thing that we want to do is to invest as Smartly, but as quickly as we can to go after these large operating large business opportunities Where we can make a real impact. And in doing so, while doing so, to do so in a way that is Architecturally sensible. One of the things that is really an advantage of our company is the nature of the way that we build products, the nature of the way that we build software, Our discipline around the architecture, which allows us to be so efficient While doing while addressing climate science on the one hand, digital biology on the other, artificial intelligence And robotics and self driving cars. And of course, we already talked about computer graphics and video.

Speaker 5

Using one architecture And having the ability and having this discipline now for almost 30 years has given us incredible Operating leverage, that's where the vast majority of our operating leverage comes from, which is architectural. The technology is architectural, our products are So hopefully as we go after these large, Large market opportunities that AI has provided us, and we do so in a smart and disciplined way With great leverage through our architecture, we can continue to drive really great operating leverage for the company and for our shareholders.

Operator

Thank you. We have the next question comes from the line of John Pitzer of Credit Suisse. Your line is open.

Speaker 9

Yes, good afternoon guys. Thanks for letting me ask the question. I apologize for the short term nature of It's what I get asked most frequently. I kind of want to return to the impact of crypto or the potential impact of crypto. Is there any way to kind of gauge the effectiveness of the low hash rate GeForce?

Speaker 9

Why only 80% And not 100%. And how confident are you that the CMP business being down as reflection of crypto cooling off Versus perhaps LHR not being that effective. And I bring it up because there's a lot of blogs out there that would suggest that there are as much as you guys are trying to limit the ability Of miners to use GeForce, there are some workarounds.

Speaker 5

Go ahead.

Speaker 2

Yes. Let me start there and answer a couple of the questions about our strategy that we've put in place in this last couple of quarters. As you recall, what we put in place was for low Hash rate cards As well as putting in the CMP cards. The low Hash rate cards were to provide for more supply for For GeForce gamers that are out there, we articulated one of the metrics that we were looking is what percentage of those cards In Ampere, we were able to sell with low risk hash cards. Almost all of our cards in Ampere are low hash rates, But also we are selling other types of cards as well.

Speaker 2

But at this time as we move forward, we're much higher than 80%. But just at the end This last quarter, we were approximately 80. So yes, that is moving up. So the strategy is in And we'll continue as we move into Q3. I'll move it to Jenson here to see if he can discuss further.

Speaker 5

There's the question about the strategy of how we're steering GeForce Supply together. We moved incredibly fast this time with CMPs and with our LHR Our entire strategy is about steering GeForce plans to be understood. And we have every reason to believe that The rise in theme, which is really a measure of gamers, the rate of growth of our Team adoption of Ampere GPUs, there's some evidence that we're successful. But there are several reasons why it's just different. The first reason, of course, is the LHR, which is new and the speed at which we responded with CMTs 2nd is where at the very beginning of the Ampere and RTX cycles, As I mentioned earlier, RTX is a complete reinvention of computer graphics and Every evidence is that gamers are incredibly and game developers are incredibly excited about ray tracing.

Speaker 5

This form of computer rendering, graphics rendering is just dramatically more beautiful. And we're at the beginning of that cycle and only 20% has been upgraded so far. So we have 80% to go. In a market that is already quite large and installed base is quite large, but also growing. Last year, gamers grew 20% and just maybe by 3%.

Speaker 5

The third reason is that our demand is strong in our channel fleet. And you could see that every day with the shortage of supply As quickly as we're shipping it, it's been situations all over the world. And then lastly, we just have more growth drivers Today, because of RTS than ever, we have the biggest wave of NVIDIA Laptops. Just laptops is our fastest growing segment of And we have the largest wave of laptop coming. The demand for RTX and workstations, Whereas previously the workstation market was a slow growing market, it's now a fast growing market as it achieves record.

Speaker 5

And after more than a decade of working on cloud graphics, cloud graphics is in great demand. And so all of these segments I've seen high demand and we're while we continue to be supply limited. So I think the situations are very different and

Operator

Thank you. We have the next question comes from the line of Chris Casper of Raymond James. Your line is now open.

Speaker 6

Yes, thank you. Good evening. My question is about Split between the hyperscale and the vertical customers in the data center business and the trends you're seeing in each. I think in your prepared remarks, you said both would be up in the October quarter. But I'm interested to see if you're seeing any differing trends there, particularly in the vertical business As perhaps business conditions normalize and companies return to the office and they adjust their spending plans accordingly.

Speaker 2

Yes. Let me start out with the question and I'll let Jen and ask the tale. So far with our data With our Q2 results, our vertical industries is still quite a strong percentage. Essentially 50% of our data center business It's going to our vertical industries. Our hyperscales make up the other portion of that slightly below the 50%.

Speaker 2

And then we also have our supercomputing business with a very small percentage, but doing quite, quite well. As we move into Q3 as we discussed, we will see an acceleration of both our vertical industries and our hyperscales as we move into Q3. With that backdrop, we'll see if Jensen has additional commentary.

Speaker 5

There's a fundamental difference in hyperscale Use of HPC or AI versus the industrial use of HPC and AI. In the world of hyperscalers and Internet service providers, Making recommendations on movies and songs and articles and Search results and so on and so forth. And the difference in the improvement in accuracy that deep learning and artificial intelligence, large recommender I can provide this, there's really needle making for them. In the world of industry, The reason why artificial intelligence is transformative, recognizing Most of the things that I just mentioned earlier, it's not really a dynamic in the world of all these industries, whether it's health care or in logistics or transportation or retail. The vast majority of the reasons why in some of the physical sciences industries, whether it's energy or transportation and so for healthcare.

Speaker 5

The simulation of physics, the simulation of the world It was not achievable using traditional first principle simulation approaches. But artificial intelligence or data driven Purchase has completely shaken that up and put it on its head. And some examples, Whether it's using artificial intelligence so that you could speed up the simulation of the prediction of the protein structure The 3 d structure of proteins, which was recently achieved by a couple of very important networks, it's groundbreaking. And by understanding the protein structure, 3 d structure, we understand that we can better understand its Our function and how it would adapt to other proteins and other chemicals. And it's a fundamental Step of the process in drug discovery and that has just taken a giant leap forward.

Speaker 5

In the areas So climate science, it is now possible to consider using data driven approaches to create models That overcome does not overcome, but accelerate and make it possible for us to simulate much, much larger Simulations of multi physics geometry aware simulations, which is basically climate science. These are really important fields of work that would have been possible for another decade at least. And just as we've made possible using artificial intelligence, the realization of real time ray tracing, In every field of science, whether it's climate simulation, energy, discovery, select discovery, we're starting to see the industry Recognizing that the fusion of the first principle simulation and data driven artificial intelligence approaches It's going to get a giant leap up. And that is a second dynamic. The other dynamic for industry For the very first time, they can deploy AI model out on the edge to do a better job with Agriculture to do a better job with asset protection and warehouses, to do a better job with automated retail.

Speaker 5

AI is going to make it possible for all of these types of automation to finally be realized. And so the dynamics are all very different. That last one Because you need it to be low cost, you need it to be high performance and instantly responsive and you can't afford to stream all of the data to the cloud all the time. And so Each one of them has a slightly different one. That's my line.

Operator

Thank you. Your final question comes from the line of William Stein of Truist Securities, your line is open.

Speaker 6

Great. Thanks so much for taking my question. Justin, I'm wondering if you can talk for a moment about Omniverse. This looks like a really cool technology, but I tend to get very few questions from investors about it, but it looks to me like this could be Potentially very meaningful technology for you longer term. Can you explain perhaps what capabilities and Markets this is going after.

Speaker 6

It looks like perhaps this is going to position you very well in augmented and virtual reality, but maybe it's a sort of different Market or group of markets, it's a bit confusing to us. So if you could maybe help us understand it, I think we'd really appreciate it.

Speaker 5

Thank you. I really appreciate the question, and it's one of the most important things we're doing.

Speaker 2

The

Speaker 5

Omniverse, first of all, just what is it? It's a simulator. It's a simulator that's physically accurate and physically based. And it was made possible because of 2 fundamental technologies we invented. One of them is, Of course, RTX, the ability to physically stimulate, light behavior in the world, which is ray tracing.

Speaker 5

The second is the ability to compute or simulate the physics of simulate the artificial intelligence behavior of Agents and objects inside the world. So we have the ability now to simulate business in a realistic way and to create a new architecture that allows us And the question is what would you do with such a thing? This simulator is a simulator simulation of virtual worlds with portals, we call them connectors, portals Based on an industry standard, open standard that was pioneered by Pixar and as we mentioned earlier that We're partnering with Pixar and Apple to make it even broadly adopted more broadly adopted. It's called USB universal stream description. They're basically portals And this virtual world will simulate to be simulating a it could be a Concert for consumers, it could be a theme park for consumers.

Speaker 5

In the world of the industries, You could use it for simulating robots, so that robots could learn how to be robots inside these virtual worlds before they're Downloaded from the simulator to the real world. You can use it to stimulate factories, which is one of the early works We're done with BMW that I showed at GTC. Factory of the Future that is designed completely in Omniverse, simulated in Omniverse, Robots training Omniverse with goods and materials that are its original CAD data put into the factory, the logistics plan like an ERP system, This is a ERP system of physical grid and physical simulation, simulated Through this Omniverse world and you could plan the entire factory in Omniverse. This entire factory now becomes It's called a digital twin. In fact, it could be a factory, it could be a stadium, it could be an airport, it could be an entire city, it could be a fleet of cars.

Speaker 5

These digital twins would allow us to simulate new algorithms, New AIs, new and optimization algorithms before we deploy it into the physical world. And so what is Omniverse? Well, Omniverse is going to be an overlay, if you will, of virtual worlds Increasingly, people call the metaverse. And you've now heard several companies talk about the metaverse. We all come from different perspectives.

Speaker 5

Some of it from social perspective, some of it from a gaming perspective, some of it in our case, from an industrial and design and engineering perspective. But the Omniverse is essentially an overlay of the Internet, an overlay of the physical world and it's going to fuse Fuse all these different worlds together long term. And you'll be able to you mentioned VR and AR, you'll be able to build into The omniverse world using virtual reality, and so you wormhole into the virtual world using VR. You could I have an AI or object portal into our world using augmented reality, so you could have a beautiful piece of art That you've somehow purchased in the last few years because of NFT and it's only enjoyed in the virtual world and you can override it into your physical world I'm fairly sure that at this point that Omniverse For the metaverse, it's going to be a new economy that is larger than our current economy. And we'll have we'll enjoy a lot of our time in the future in Omniverse and the Metaverses.

Speaker 5

And we'll do a lot of our work there and we'll have a lot of robots there doing a lot of our work on us and have and we'll wait at the moment and they show us results. So Omniverse to us is an extension of our AI strategy, it's an extension of our high performance computing strategy And it makes it possible for companies and industries to be able to create digital twins that simulate their physical version

Operator

Thank you. I will now turn the call over back to Mr. Janssen Huang for closing remarks.

Speaker 5

Thank you. We had an excellent quarter Fueled by surging demand for NVIDIA Computing, our premier work in accelerated computing continues to advance graphics, scientific computing and AI, Enabled by NVIDIA accelerated computing, developers are creating the most impactful technology of our time, From natural language understanding and recommender systems to autonomous vehicles and logistics centers, Digital biology and climate science research, the metaverse world that obeys the laws of physics. This quarter, we announced NVIDIA Base Command and Fleet Command to develop, deploy, scale and orchestrate the AI workloads that run on the NVIDIA With our new enterprise software, wide range of NVIDIA powered systems And global network of systems and integration partners, we can accelerate the world's largest industries as they raise the benefit from the transformative We are thrilled to have launched NVIDIA Omniverse, a simulation platform nearly 5 years in the making That runs physically realistic virtual worlds and connects to other digital platforms. We imagine Engineers, designers and even autonomous machines connecting to Omniverse to create digital twin and even predict human impact on Earth's climate. The future will have artificial intelligence Augmenting our own and the metaverse augmenting our physical world.

Speaker 5

It will be populated by real and AI visitors And open new opportunities for artists, designers, all new digital economies will emerge. Omniverse is a platform for building the metaverse division. We're doing some of our best work And most impactful work in our history. I want to thank all of NVIDIA's employees for their amazing work and the exciting future we are inventing together. Thank you.

Speaker 5

See you next time.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
NVIDIA Q2 2022
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