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NVIDIA, AMD Continue Spending on Products despite Demand Slowdown

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Operating expenses

The semiconductor industry is currently facing a slowdown in demand, which is affecting revenues across the board. At such times, many chip companies reduce their operating expenses to improve profits. Intel reduced its operating expense of 5.8% YoY (year-over-year) in the first quarter by streamlining its business.

However, Advanced Micro Devices (AMD) and NVIDIA (NVDA) are increasing their operating expenses as they invest in new products and go-to-market strategies. AMD is spending on its 7 nm (nanometer) product line-up, and NVIDIA is investing in its key long-term growth platforms of graphics, AI, and self-driving cars.

In the first quarter of fiscal 2020, NVIDIA’s non-GAAP (generally accepted accounting principles) operating expenses rose 16% YoY to $753 million, or 34% of its revenue. AMD’s operating expenses rose 11.7% YoY, or 39.2% of its revenue.

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NVIDIA will continue to invest in its platforms, which will increase its operating expenses in the high-single-digit percentage this year, lower than last year’s growth of over 20%. It expects its operating expenses to increase 10.5% YoY and 1.6% sequentially to $765 million in the second quarter of fiscal 2020. Even AMD is increasing its operating expenses, but its rate of growth has slowed amid the downturn.

Operating margin

Rising operating expenses and falling revenue have affected NVIDIA’s and AMD’s operating margins. NVIDIA’s non-GAAP operating margin contracted 1,940 basis points YoY to 25.09% in the first quarter of fiscal 2020 as it was hit by the crypto bubble burst. AMD’s operating margin contracted 260 basis points YoY to 6.6% as crypto weakness was more than offset by strength in the PC and data center markets.

Both companies expect to improve their operating margins sequentially in the coming quarters by slowing their operating expense growth and increasing their revenue. However, their margins could take a hit if the US-China trade war continues for an extended period, as it will disrupt holiday season sales and data center demand, which AMD and NVIDIA are banking on for growth.

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