‘Sudden Slowdown’ in Demand Sent Nvidia’s Gaming Revenue Plunging
The COVID-19-induced gaming boom isn't immune to the recent macroeconomic headwinds that harmed other discretionary consumer tech sectors, as was evident in Nvidia’s results for fiscal Q2 ended July 31. “This was a challenging quarter,” said Chief Financial Officer Colette Kress on a Wednesday earnings call.
Total Nvidia Q2 revenue of $6.7 billion was down 19% sequentially and up 3% year on year, below the $8.1 billion guidance Nvidia provided on its fiscal Q1 earnings call May 25, said Kress. Gaming revenue of $2.04 billion was down 44% sequentially and 33% lower than in the year-earlier quarter, “reflecting challenging market conditions,” she said.
Nvidia entered Q2 expecting a sequential decline in gaming revenue “due to softness in Europe related to the war in Ukraine and COVID lockdowns in China,” said Kress. But the decline in graphics processing unit revenue for gaming “was sharper than anticipated,” and lower unit sales and lower average selling prices were to blame, she said. “Macroeconomic headwinds across the world drove a sudden slowdown in consumer demand.”
The company last quarter had expected cryptocurrency mining “to make a diminishing contribution to gaming demand,” said Kress. “We are unable to accurately quantify the extent to which reduced crypto mining contributed to the decline in gaming demand.” As the gaming sector “navigates significant short-term macroeconomic challenges,” Nvidia believes “the long-term fundamentals in gaming remain strong,” she said: “Gaming has emerged from the pandemic an even more popular form of entertainment and social connectivity.” Estimated sell-through of Nvidia’s GeForce GPUs is up by more than 70% since before the pandemic, she said.
Nvidia adjusted pricing in the channel during the quarter to “price-position current high-end desktop GPUs as we prepare for a new architecture launch,” said Kress. Gaming revenue for fiscal Q3 ending Oct. 31 is expected to decline sequentially, “as OEMs and channel partners reduce inventory levels to align with current levels of demand and prepare for our new product generation,” she said. The company expects to exit Q3 with total revenue of $5.9 billion, plus or minus 2%, she said. At the midpoint of the guidance, that would be a 12% sequential decline and a 17% year-over-year decrease.
“We do have gaming growth drivers to consider for the future,” said Kress. Those include “our new gaming product introductions that are around the corner, as well as new segments of the market that we plan to reach with our gaming technology,” she said.
Nvidia’s gaming sell-through is coming off “the highs in the beginning of the year,” as macro conditions “turned sharply worse,” but sell-through is “still very solid,” said CEO Jensen Huang. “Our first strategy is to reduce sell-in in the next couple of quarters to correct channel inventory,” he said. “Because we were building for such a vibrant market, we found ourselves with excess inventory.” Management believes that by the Jan. 31 end of its 2023 fiscal year, “we’ll be in good shape going into next year,” he said.
Despite the downward ASP pressure in Q2, “the overall trend long term” in the gaming business is for ASPs to start “drifting up,” said Huang. “My first game console was $99,” but the average game console lately sells for about $599, he said. “GeForce essentially is a game console inside your PC, and we’ve always believed that the ASP of GeForce should drift towards the average selling price of a game console.”