NVIDIA Q1 Financials: Revenue Up, China Sanctions Create Complex Picture
After the powerful NVIDIA chip design house announced first-quarter financial results with revenue that beat Wall Street revenue expectations, the stock price rose. A hefty $44 billion revenue was reported. But a more detailed summary paints a much complex picture, with the U.S. sanctions on GPU sales to China being a major factor here.
While the revenue number impressed, CEO Colette Kress stated that the restrictions on its H20 chips have massively impacted $8 billion on this quarter's sales. Nevertheless, NVIDIA is guiding for $45 billion in revenue for the upcoming second fiscal quarter.
Going Deeper: The Numbers Game
In terms of analyst predictions, not all boxes were checked. On the one hand, while $44 billion in revenue was nice (above the $43.29 billion estimate), other indices of importance, namely gross margins and EPS, failed to measure up. NVIDIA's adjusted gross margin came in at 61%, which was a miss by ten percentage points. Likewise, adjusted EPS of 81 cents was below forecasts of 93 cents. The EPS shortfall, NVIDIA said, was due to the GPU sales ban, and that but for that, EPS would have been 96 cents.
NVIDIA's various business groups performed in differing fashions. The data center, a prime moneymaker, pulled in $39.1 billion. Networking sales of $4.96 billion exceeded expectations, but data center revenues came in slightly light compared to analyst forecast. Automotive income also fell short.
Continuing on, even NVIDIA's guidance of $45 billion sales in Q2 was also below analyst consensus of $45.5 billion. The company reiterated its $8 billion hit from GPU restrictions in China, also mentioning it could not ship $2.5 billion worth of products last quarter due to these rules.
The Shadow of Sanctions: Future in China
The sanctions have cast a dark shadow on NVIDIA's ability to compete in the lucrative AI market in China. In a filing, NVIDIA has raised concerns that it might "be unable to create a competitive product for China's data center market that receives approval from the USG." If this turns out to be the case, NVIDIA believes that it could be "effectively foreclosed from competing in China's data center computing/compute market."
NVIDIA's newest AI GPU architecture, Blackwell, is being adopted in undeniable numbers, and CFO Colette Kress pointed out that the Blackwell ramp is fairly broad among all categories of customers, with large cloud service providers still representing a very large percentage of data center revenue. The strong performance in the networking business was also tied to increased sales of Blackwell rack systems.
The initial knee-jerk positive reaction subsided, with NVIDIA shares spiking in after-hours, only to struggle for its life throughout the year. On a positive note, NVIDIA has proven to manage its costs well, with operating and research & development expenses coming in below analyst estimates.
A Historic Turnaround: NVIDIA Leaving China's AI Market
In a landmark development, it seems NVIDIA is now signaling the unsustainability of its operations in the Chinese AI space. The shift appears to be motivated by draconian US AI policies that are virtually forcing American tech companies out of this vital area.
The most recent remarks from the company indicate a profound change in its China strategy. This could mean there will be no new chip solutions created exclusively for the region, or it could be a much bigger decision to backlog because of continuing loss of profits and a hostile regulatory environment. The outlook for NVIDIA in China is starting to look very dim.
Competition and Policy: A Squeeze on NVIDIA
Other than its considerations on US policies, NVIDIA is facing winds of competition from several domestic players such as Huawei. The US restrictions created an unintentional opportunity for Huawei, which has filled it selling its Ascend AI chips, which are claimed to be competing well against several of NVIDIA's upper-end products, such as H100.
"We may be unable to create a competitive product for China's data center market that receives approval from the USG. In that event, we would effectively be foreclosed from competing in China's data center computing/compute market, which would have a material and adverse impact on our business." With that, NVIDIA is only allowed to sell phantom versions of its chips in China. Looking forward, the chipmaker might roll out something less powerful technology that would have widened the performance gap against local competitors like Huawei. While NVIDIA's strength sits with a strong software ecosystem, Huawei is considered a fast developer of viable alternatives.
The US administration stands firm on its policy to restrict advanced AI chips to be exported to China for national security reasons. That puts NVIDIA in a bind. There is little hope for any "regulatory compromise" in the near future.
