Third-quarter was not as expected

Previously, we learned that NVIDIA’s (NVDA) CEO, Jensen Huang, expected the decline in the company’s GPU (graphics processing unit) prices in the second quarter to trigger demand from gamers who were not able to buy GPUs during the holiday season due to high prices and supply shortages. NVIDIA’s gaming revenue rose 4.8% sequentially to $1.8 billion in the second quarter of fiscal 2019, which ended in July.

But this growth fell short of expectations. NVIDIA’s gaming revenue fell 2% sequentially to $1.76 billion in the third quarter of fiscal 2019, which ended in September—lower than the analysts’ estimate of $1.91 billion. The company had to bear an additional charge of $57 million for older products.

NVIDIA’s Q3 2019 Inventory Rose to Unexpected Levels

The decline in gaming revenue could be because the share of crypto-related sales in gaming revenue was more than what NVIDIA had expected. Another reason for the decline could be that gamers delayed their purchases in anticipation of NVIDIA’s next-generation gaming GPU.

Impact of the crypto trend on NVIDIA’s inventory

The level of the revenue decline was unexpected, and so was the magnitude of the increase in NVIDIA’s inventory levels. Many miners sold their GPUs in the secondary market, flooding the channel with secondhand Pascal gaming GPUs. NVIDIA’s inventory rose 30% sequentially to $1.4 billion in the third quarter of fiscal 2019, which equated to over 12 weeks’ worth of inventory. Even Advanced Micro Devices (AMD) was affected by excess inventory.

For the sales of new GPUs to pick up, old GPUs need to be sold off. The excess Pascal inventory resulted in lower sales of new Turing-based gaming GPUs.

NVIDIA’s strategy to tackle high inventory

NVIDIA has stalled shipments of its midrange GPUs to give the channel time to clear out old inventory. GPU sellers have resorted to price cuts to boost sales volumes. NVIDIA’s CFO, Colette Kress, believes that it will take one to two quarters for inventory levels to normalize. Huang is more optimistic and expects inventory levels to correct by the end of the fourth quarter.

Apart from excess inventory, technical problems also slowed the pickup of Turing-based gaming GPUs. We’ll look into this next.

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