Rule Ai:nvidia Is Ready

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Investors are increasingly worried that the surge in semiconductor demand during the new crown pandemic will subside, which is one of the signs of the alternation of prosperity and depression in the industry. However, NVIDIA's performance growth in the first quarter of fiscal 2023 shows that the demand is still strong. Lao Huang said on the conference call that despite the continuous impact of geopolitics and supply chain crisis, "NVIDIA's technical influence and market opportunities remain unchanged". The effectiveness of in-depth learning in realizing intelligent automation is promoting all walks of life to adopt NVIDIA products for Artificial Intelligence Computing**

The financial report as of may1,2022 shows that NVIDIA's total revenue in the first quarter of the new fiscal year reached a record $8.29 billion, an increase of 46% year-on-year and 8% month on month.

Among them, the performance of the four major product lines: Games, data centers, professional vision, automobiles and robots are different. There is no doubt that NVIDIA has changed from a niche graphics card manufacturer to a chip manufacturing giant, and its GPU, DPU, CPU, software and systems are in a leading position in the market.

At the same time, NVIDIA's gross profit margin index is improving. The gross profit margin of this quarter was basically the same as that of the previous quarter, about 66%. CFO Colette Kress said, "we have been able to offset the pressure from rising costs and the supply chain. The gross profit margin in the second quarter is expected to remain at the current level." In addition, "with the increase of new products and the proportion of software in revenue, we will have the opportunity to increase our gross profit margin in the long term in the future."

In terms of financial report data alone, NVIDIA is a bright spot among a number of depressed technology companies. On the other hand, its business performance also reflects the new changes in the market: AI is being widely used in the new scenarios of automatic driving and digital twinning

When NVIDIA was mentioned in the past, people first thought of the "Huang Renxun's law" that doubled Moore's law, the graphics cards of game and mining players, and the 14 second virtual version of Huang Renxun under the concept of meta universe.

However, the financial and business data show that NVIDIA is stronger than expected, which makes it more resilient to deal with the uncertainty of the external market. Around 2016, it was GPU's parallel computing architecture that "happened" to meet the computing needs of deep learning in the era of artificial intelligence, making NVIDIA the darling of the times. Now, NVIDIA's AI layout is all-round "step by step". In the world of accelerated computing and artificial intelligence, NVIDIA has completed the comprehensive deployment of hardware, software, platform and application layer.

01. Data center surpasses the game again

Let's first look at two relatively mature business lines: Games and data centers, which still performed well this quarter.

According to the financial report, the revenue of the game product line climbed 31% to US $3.62 billion; At the same time, the revenue of data center chips increased by 83% year-on-year to US $3.75 billion, contributing the most revenue in this quarter.

The game product line is divided into hardware and software. In terms of hardware, the growth of game business is still driven by NVIDIA's "the best game graphics card'30'Series in history". Since its launch in the autumn of 2020, geforce RTX 30 series graphics card has won a huge market. Its high-end real-time rendering images have made the revenue growth of game notebooks and game consoles continue to be strong. This spring, with the update of NVIDIA RTX 30 series lineup, more than 180 notebook models now use RTX 30 series GPU and energy-saving lightweight max-q technology, up from 140 models in the same period last year.

Of course, it is not only gamers but also fast-growing content creators that drive the growth of NVIDIA's game business. CFO Kress estimates that the entire creator economy is a ten million level market, with about 80million individual creators and companies.

It is worth noting that the mining of cryptocurrency industry is weakening the pull of game graphics cards. Although it is difficult to grasp the exact market share, as CFO Kress said, one side of the evidence is: the slowdown in the growth rate of the Ethernet hash rate (a computing power, the number of hash operations that can be performed per second) may reflect the reduction in "mining" activities using GPU**

Recently, the sharp drop in the price of graphics cards and the sharp drop in cryptocurrency also reflect the increasingly sluggish demand of mining machine owners for graphics cards. In addition, in March 2021, NVIDIA specially developed a chip CMP (cryptocurrency mining processor) for mining, and the demand for mining with game graphics cards has been separated.

It is worth mentioning that just last month, NVIDIA was fined $5.5 million by the SEC for failing to report the significant boost to its revenue from cryptocurrency mining in the two quarters of fiscal 2018.

Let's look at the data center product line. In the first quarter, it once again exceeded the revenue of the game product line. In addition to nearly doubling year-on-year growth, the revenue of the data center increased by 15% month on month. Among them, the revenue from very large-scale and cloud computing customers more than doubled year-on-year.

This still benefits from AI training and reasoning requirements for GPU (A100) and DGX systems under NVIDIA ampere architecture. Almost all image processing or other algorithm processing can be fully accelerated on A100. At the same time, cloud computing, large-scale customers for workloads such as naturallanguageprocessing and in-depth recommendation, and applications in vertical industries have led the growth of data centers.

A trend behind the growth is that customers are increasingly combining NVIDIA's computing products and network products to build a "modern artificial intelligence factory", with data as raw material input and intelligence as output.

In fact, Mr. Huang has repeatedly mentioned this vision over the years. In the earnings call, he said that the visibility of the data center in this field is much better than before. Artificial intelligence and data-driven machine learning technology are used to write software and extract insight from a large amount of data owned by the company, which is undoubtedly of strategic significance to the company. NVIDIA technology enables most companies to apply their own data to extract insight, automate many predictions they must make, and complete them quickly. This trend is sweeping almost every industry.

Lao Huang is also full of confidence in the business growth of the data center in the next quarter, because the scenarios of using the data center are very broad. He said that the data center has expanded from cloud and super large scale to all industries, from AI training to reasoning, and has entered the industrial deployment of artificial intelligence, which is needed by almost every industry.

In addition, the data shows that since NVIDIA deployed the three core strategy (GPU, CPU and DPU cooperation) last year, the business growth of the data center began to accelerate.

02. Relatively stable "professional vision" & "Cars and robots" ready to go

Following the strong demand in the last quarter, the professional visual product line continued to maintain its momentum. The revenue in the first quarter reached US $622million. Although it decreased by 3% month on month, it increased by 67% year on year.

NVIDIA's professional visual product line is mainly for enterprises, and its revenue growth is due to the continuous promotion of remote office or mixed office by many enterprises, which need to configure 3D design and artificial intelligence for employees; Accordingly, employees use their home PCs as "second workstations". However, the quarterly growth of "mobile workstation" GPU was offset by the decline in desktop revenue, so there was no growth month on month.

In the long run, the growth of professional visual product line still benefits from the product cycle of NVIDIA RTX ampere architecture, which is mainly used in digital content production (such as Sony film animation) and medical imaging (such as Medtronic). It is worth noting that in the first quarter, NVIDIA also released a new ampere architecture RTX GPU for workstations, which allows more people to use AI and ray tracing technology. However, this series of updates will only be reflected in the revenue after mass production.

In the professional visual product line, as the most outstanding product of Lao Huang's "endorsement", NVIDIA Omniverse is not as flashy as a multi-element universe concept product, but actually walks out of the path of industrial production: Digital twins. Through "copy and paste" in the virtual world, such digitalization can help enterprises achieve cost reduction and efficiency increase.

The revenue of this enterprise oriented Omniverse enterprise is also recorded in the professional visual product line. At present, Omniverse enterprise software is being adopted by large companies in many industries. For example, Amazon is using Omniverse enterprise to build Ai enabled digital twins for its warehouses, so as to optimize warehouse design and train more intelligent robot solutions.

The development of software like this can play a role in expanding the market for NVIDIA. Just like Huang's famous saying, "chips are enablers but chips don't create markets. software create markets." As the Omniverse ecosystem is used by more people, third-party developers in the fields of robotics, industrial automation, 3D design and rendering have developed connections with Omniverse, which drives the sales of GPU and drives more high-end and diverse GPU configurations.

In order to further lower the threshold of Omniverse use and expand the use ecology, NVIDIA also announced the launch of Omniverse cloud service this quarter, so that millions of MAC and chromebook users can instantly access NVIDIA Omniverse, so as to realize large-scale 3D scene collaborative editing at any place. However, the service will be launched next year.

Finally, among the financial performance of the four major product lines, the automobile and robot product lines have the most potential. In the first quarter, the revenue of this product line was US $138million, a year-on-year decrease of 10%. This is due to the supply chain problems of automobile manufacturers and the decline of traditional cabin revenue. However, the business of intelligent cockpit is growing.

At present, although the revenue of automobile and robot business accounts for the smallest proportion, Lao Huang is full of confidence and regards this product line as the next growth point of NVIDIA. He said: "what we have experienced is likely to be the lowest quarter of automobile revenue", "it is quite safe to say that the drive Orin, its solutions and robot business will become our next multi billion dollar business." Orin is also regarded as one of the four pillars of NVIDIA for robot strategy and the next wave of artificial intelligence.

Orin is a robot processor, which can be used in manufacturing automobiles, robot taxis, trucks, delivery robots, logistics robots, agricultural robots and medical devices.

Its autonomous vehicle system level chip drive Orin SOC is regarded as the "brain" of software defined vehicles, which can provide 254 tops (trillions of operations) per second. With this expandable drive Orin, the car factory can customize research and development on this basis, and upgrade from l2+ level system to L5 level full autonomous vehicle system.

Such a technical route and high computing power make NVIDIA stand out from the crowd. Many large customers of Mobileye, the leader of automatic driving chip in the past, have turned to NVIDIA. Although NVIDIA only started mass production of Orin in this quarter, more than 35 automobile manufacturers have chosen to adopt this computing platform, which has brought NVIDIA more than $11billion in backlog orders.

At the GTC conference in March, NVIDIA presented its main customers

Among them, BYD, China's largest electric vehicle manufacturer, and lucid, a new force in American car making, are the companies that recently announced to build the next generation of models on drive Orin. CFO Colette Kress said at the earnings call that Orin has started a major product cycle, and automotive customers will continue to increase in the second quarter.

03. Bet on the future

For NVIDIA's opening performance in the new fiscal year, some media commented that it was "tepid".

Due to the "unpredictable" external environment, NVIDIA also lowered its revenue forecast for the second quarter of fy2023. He said that this expectation took into account the losses of about 500million US dollars caused by the conflict between Russia and Ukraine and the blockade of the epidemic in China. Among them, China and Russia have an impact on the game business of about $400million, and the data center business that stops selling to the Russian market accounts for about $100million.

In this regard, Tim arcuri, an analyst at UBS group, asked: is the impact of $500million caused by demand or supply? If the "game market is slowing down" as CFO Kress put it, it sounds more like NVIDIA's business is affected by demand, and this seems to be in line with NVIDIA's strategy of slowing down the recruitment of new employees. In other words, if the loss is affected by supply, then the market downturn is only temporary; But if it is affected by demand, the market "may never come back. This will be the beginning of autumn."

Although CFO Kress ultimately attributed the problem to the impact of the supply side, it is difficult to be convincing, with the launch of RTX 40 Series graphics cards in September, the game market will usher in a new wave of demand. Huang said that the previously announced high-performance hopper architecture is expected to be launched in the third quarter, and the products under the new architecture will also begin to climb in the second half of the year. New GPUs, CPUs and DPUs will be launched in the second half of the year. These new chips and systems may trigger a new round of upgrading demand in the industries of artificial intelligence, graphics, Omniverse, autonomous vehicle and robots. In the final analysis, the technical strength decides whether there is demand or not.

For the future, NVIDIA, which has seen the rise of the speed of light in the first wave of artificial intelligence applications, believes that the artificial intelligence system based on edge computing will become the next major computing field, and the next wave of AI will be the digital twin of artificial intelligence and the world of robots and autonomous driving. As Huang said, NVIDIA is on the way.

At present, whether it is the "Huang Renxun's law" that accelerates Moore's law, the "three core" hardware strategy, the open ecological software strategy, or the years of AI technology accumulation, NVIDIA is more stable in the external environment of black swan and gray rhino.

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