Nvidia’s Q4’16 Review: Strength in Gaming, Professional Visualization, Datacenter and Automotive Drive Growth

Despite the continued PC slowdown, leading GPU manufacturer Nvidia (NASDAQ:NVDA) managed to report another quarter of strong growth in Q4 2016, beating Wall Street estimates. Q4 2016 was the third consecutive quarter in which Nvidia significantly exceeded its original guidance, and the strong performance was mainly driven by the company’s increasing strength in demand for its gaming, professional visualization, datacenter and automotive offerings. The four segments accounted for 85% of Nvidia’s Q4 2016 revenue, up from 78% a year earlier, and collectively increased  23% year-over-year. Over the years, Nvidia has managed to secure a well defined and strong position in each of the above mentioned growth markets, which we believe will help drive its growth going forward as well.

Quick Snapshot of the Q4 2016 & 2016 Earnings

Revenue reached a record $1.4 billion in Q4 2016, up 12% year on year and 7% quarter on quarter. While the Tegra processor revenue ($157 million) grew a staggering 40%, Nvidia’s GPU revenue ($1.18 billion) increased by 10%. GAAP and non-GAAP gross margins for the quarter stood at 56.5% and 57.2%, respectively. Non-GAAP earnings per share (EPS) was $0.52, an increase of 21% year-on-year.

For full year 2016, Nvidia’s revenue ($5.01 billion) increased by 7% compared to fiscal 2014. The combined revenue of the gaming, professional visualization, datacenter and automotive segments increased 26% year-on-year. Non-GAAP gross margin (56.8%) and non-GAAP EPS ($1.67) for the year was up 1% and 18% respectively, compared to fiscal 2014.

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Continued Growth Momentum in Gaming; Nvidia Confident of Increasing Its Penetration in the Market 

At $810, Nvidia’s Q4 2016 gaming revenue was up 25% year-on-year, driven by the increasing adoption of the Maxwell-based GeForce GTX processers, growing anticipation for VR and the launch of holiday blockbuster games. For the last two years, Nvidia’s gaming business has been growing at over 25% per year, and the company is confident that the strong growth momentum will continue in near-future as well. Nvidia estimates that the gaming platform, the whole gaming ecosystem and the gaming industry, is approximately $100 billion large. ^[1] The company believes that it is not fully penetrated in the market, thus there is ample scope for growth.

Nvidia claims that it continues to get strong traction with its GeForce GTX GPUs that power gaming notebooks, and that the GeForce GTX 970 GPU stands as the world’s most popular graphics card on the Steam gaming platform. The company recently launched the GTX 980 for notebooks, which has enabled a new category, enthusiast-class, VR-capable gaming notebooks. (VR is an acronym ofr Virtual Reality.)  At the 2016 Consumer Electronics Show (CES), Nvidia unveiled its GeForce GTX VR-ready program to help gamers choose the best hardware for an immersive VR experience; and Oculus, which has now opened pre-orders for the Rift headsets, has exclusively certified GeForce GTX systems as being ready for VR.

Going forward, GeForce sales will be driven by the launch of new popular gaming titles, the emergence of new technologies like virtual reality (VR) and Direct X, the rise of eSports and the expansion in developing countries.

Automotive Segment Remains On A Sharp Upward Trajectory

Nvidia Q4 2015 automotive revenue was a record $93 million, up 18% sequentially and up 68% year on year. One of the biggest stories at CES 2016 was the introduction of NVIDIA DRIVE PX 2 self-driving car platform, which utilizes artificial intelligence to address the profoundly complex challenge of autonomous driving. (Read: Nvidia’s DRIVE PX2 Platform Gives It A Giant Leap In The Autonomous Car Market) Volvo is the first automaker to use DRIVE PX 2. The company plans to use Nvidia’s DRIVE PX 2 deep learning-based computing engine to power a fleet of 100 Volvo XC90 SUVs, starting to hit the road next year.

Just a couple of weeks ago, the first autonomous shuttle, the WEpod, incorporating Nvidia’s deep learning platform, took its inaugural trip on public roads in the Netherlands, where it can be summoned with a smartphone application. Nvidia is currently collaborating with more than 70 companies that are developing self-driving car technologies. The company’s automotive platforms remain on a sharp upward trajectory. Nvidia has shipped almost 5-6 million devices for cars (with its Advanced Driver Assistance Systems) and has  an additional 20-25 million such devices to ship in its pipeline.

The Deep Learning Technology To Drive Growth in GPU-Accelerated Datacenters

Q4 2016 Quadro revenue increased 7% both year on year and quarter on quarter, as the refresh cycle of workstations continued to improve, driven by new workstation configurations in the market. Nvidia believes that the launch of VR can lead to potential growth in the enterprise segment as well, especially  in areas such as medicine, architecture, education and product design.

GPU-accelerated datacenters are expanding in both HPC and the cloud, driven by the growth of deep learning. With regard to datacenter devices, Nvidia’s Q4 2016 revenue rose 18% sequentially to a record $97 million, reflecting the extraordinary rise of deep learning and the growth in the number of high-performance computing applications that are GPU-accelerated. During Q4 2016, Nvidia launched key products for the market, and a number of its partners provided updates to their own work in this area that underscores the central role of the accelerated GPU platform. Nvidia is now engaged with nearly 3,500 companies and organization in the development of the deep learning technology.

For hyperscale datacenters, Nvidia recently announced a platform that lets web services companies accelerate machine learning. Facebook disclosed that it will use the Tesla M40 to power its next-generation computing system for machine learning applications. AliCloud, Alibaba’s cloud computing business, announced it will work with Nvidia to promote China’s first GPU-accelerated, cloud-based, high-performance computing platform.

Q1 2017 Outlook

– Revenue of $1.26 billion, +/- 2%.

– GAAP and non-GAAP gross margin of 57.2% and 57.5%, respectively, +/- 50 basis points.

– GAAP and non-GAAP operating expense of approximately $500 million and $445 million, respectively.

– GAAP and non-GAAP tax rate of 19%, +/- 1%.

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1. Nvidia’s Q4 2016 Earnings Call Transcript, Seeking Alpha, February 17, 2016 [↩]