After reporting fiscal first quarter 2023 earnings this week, Nvidia initially was hounded by negative observations about its recent performance and short-term outlook, and there may be good reason for it, as the company is feeling the supply chain effects of pandemic lockdowns in China and the ongoing Russia-Ukraine War, as well as the effects on its bottom line from its fizzled effort to acquire Arm.
But these assessments also may have missed how strongly positioned the company is for the long-term future, particularly in the segment that just became its biggest cash cow: data center.
Nvidia reported nearly $8.3 billion in revenue for the quarter, a quarterly record that beat expectations that were closer to $8.1 billion. Earnings of $1.36 per share also beat predictions of $1.29 per share, though overall Nvidia absorbed a $1.35 billion charge against its bottom line due to the collapse of its planned acquisition of Arm.
Regarding revenue, $3.75 billion of the first quarter’s take came from Nvidia’s data center business, making that segment its largest revenue producer, edging out the gaming segment, which produced $3.62 billion in revenue.
Data center revenue was up 83% year-over-year, perhaps a sign that Nvidia’s intense focus on that segment, with numerous product announcements aimed at boosting data center-based AI performance and the company line that “data centers are becoming AI factories,” is paying off.
“We had a record Data Center business this last quarter,” said Nvidia EVP and CFO Colette Kress on the earnings call, according to the Motley Fool transcript. “We expect to have another record quarter this quarter, and we're fairly enthusiastic about the second half.”
But, Kress said macro challenges are making themselves known, affecting the firm's near-term outlook. “We started seeing softness in parts of Europe related to the war in the Ukraine and parts of China due to the COVID lockdowns,” she said, as a prelude to issuing a second outlook for $8.1 billion in revenue, lower than consensus analyst expectations of around $8.5 billion.
“Our outlook assumes an estimated impact of approximately $500 million relating to Russia and China COVID lockdowns,” she added. “We estimate the impact of lower sell-through in Russia and China to affect our Q2 Gaming sell-in by $400 million. Furthermore, we estimate the absence of sales to Russia to have a $100 million impact on Q2 in Data Center,” even amid the prediction for “strong sequential growth” from that segment.
Further commenting on supply chain issues, Kress noted, “Our demand is really, really high. And it requires a lot of components aside from just our chips. Components and transceivers and connectors and cables. And just -- it's a really -- it's a complicated system, the network, and there are many physical components. And so the supply chain has been problematic.”
However, Kress said Nvidia inventory from these supplier partners has been improving from the fiscal fourth quarter of 2022 through the recent fiscal first quarter of 2023.