![]() Trust holding Nvidia released very strong FY3Q22 earnings results after the close on Wednesday, with record sales of $7.103 billion (+50% and breezing past expectations of $6.8 billion) and adjusted earnings of $1.17 per share (+60% YoY) outpacing the $1.10 per share consensus. Additionally, gross margin of 67% (+150bos YoY) was right in line with what the street was looking for.
“The third quarter was outstanding, with record revenue,” commented CEO Jensen Huang on the release. “Demand for NVIDIA AI is surging, driven by hyperscale and cloud scale-out, and broadening adoption by more than 25,000 companies. NVIDIA RTX has reinvented computer graphics with ray tracing and AI, and is the ideal upgrade for the large, growing market of gamers and creators, as well as designers and professionals building home workstations.
Before getting into the results, let’s take a quick look at the guidance because while the headline numbers were pretty great, they almost pale in comparison to the guidance management provided. On the top line, management expects to generate revenue of $7.4 billion +/- 2%, that is ~$600 million ahead of the $6.89 billion expected coming into the print. Additionally, gross margin guidance of 67% was ahead of the 66.4% consensus. On the other side of the income statement, adjusted operating expenses are expected to be $2.02 billion while other expenses are expected to come in at ~$60 million, and capital expenditures are expected to be approximately $250 million to $275 million, slightly above the $213 million consensus, however, more than acceptable given the revenue and gross margin expectations.
Jumping into the results, by segment, Graphics revenue came in at $4.092 billion while Compute and Networking revenue came in at $3.011 billion. That said, Wall Street prefers to group revenues by platform.
With the platform stuff out of the way, let’s get to the really fun stuff — Huang’s vision of the future. In our preview note, we commented that we would on the lookout for more software commentary that can provide deeper insights into the growth of recurring software revenues, which tend to come with expanded profit margins are key to sustaining the company’s recent multiple expansion. As expected, the analysts wasted no time asking about Omniverse and what we heard was nothing short of incredible — and in our view, justifies the multiple expansion we’ve seen in recent weeks.
Most exciting in our view in terms of both the technology and the future revenue potential was Huang’s commentary around “Omniverse Avatar.” On the call, Huang commented that while many people think of robots as physical creations, he believes that the largest application of robot technology will be in the from of avatars, commenting, “we built Omniverse Avatar to make it easy for people to integrate some amazing technology from Consumer Vision speech recognition, natural language understanding, gesture recognition, facial animation synthesis, recommender systems, all of that integrated into one system and running in real in time. That avatar system is essentially a robotic system. And the way that you would do that is, for example, the 25 million-or-so retail stores, restaurants, places like airports and train stations and office buildings and such, where you're going to have intelligent avatars doing a lot of assistance? They might be doing a check out, they might be doing check in, they might be doing giving customer support. And all of that could be done with Avatars.”
Now, while that may sound incredibly ambitious — and it is — what is important to note is that Nvidia has already built most of the technology required to make this a reality in front of our very eyes, and Omniverse Avatars are really just the realization of all the company's existing software stacks. For example, some of the parts of an Omniverse Avatar include the Merlin recommender software, Megatron the large language model, Riva the speech AI, Phase eye tracking technology, the company’s slew of computer vision AI software stacks, the natural speech synthesis technology that we see every year at GTC when “I AM AI” takes us through the opening credits.
What this all amounts to is a potentially massive licensing opportunity for Nvidia with Huang stating that an Omniverse Avatar could cost say $1,000 per year (not a bad salary from an employer’s point of view). Now multiply that cost per avatar per year by say “25 million or so places where you would have a digital Avatar as customer support or checkout, smart retail, smart warehouse, smart whatever it is.” Then add in the fact that you have some 100 million cars, each of which can potentially have something like an Omniverse Avatar. Of course it doesn’t end there with Huang adding that “then, of course, behind all of that, call it a couple of hundred million digital agents, intelligent agents in robots and Avatars, at $1,000 per agent, per year, behind it are NVIDIA GPUs and PCs. NVIDIA GPUs in the cloud and NVIDIA GPUs for Omniverse servers.” Start doing the math and you realize that Jensen is targeting a recurring revenue opportunity north of $100 billion per year! No wonder, Huang called it “one of the largest opportunities we've ever seen.”
Of course, while that sounds incredible, what matters to Wall Street is when we might actually see those revenues materialize. In Huang’s view, it won’t be that far into the future, commenting, that in his view we can see these Omniverse Avatars, which don’t make mistakes, never get tired and are always on “in drive-throughs of restaurants, fast food restaurants, checkouts of restaurants in retail stores all over the world within less than 5 years.”
Now consider that potential revenue stream along with the ~90% of servers that have yet to implement GPU acceleration technology, growing adoption of gaming, rapid growth we are seeing on the pro visualization front and the fact that the automotive segment is still in its infancy, and compare that upside to the ~$26 billion analysts expect Nvidia to generate this year and you start to realize that as incredible as the growth story at Nvidia has been to date, we are still in the very early innings.
Bottom line, while we wouldn’t be surprised to see shares consolidate around current levels as better-than-expected headline numbers with strong guidance are what investors no doubt anticipated as they bid shares up more than 30% over the past month. This was an incredible quarter that should serve to solidify the gains. The outlook is as bright as ever and we expect further upside in the quarters ahead as analysts start to revise their models to factor in the recurring revenue upside in future years and attempt to quantify the addressable market Huang has laid out with his vision for the Omniverse.
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