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(Image courtesy of Nvidia).

Nvidia Sees Half a Billion Dollars of Revenue Disappear

Nvidia slashed its fourth-quarter forecast by half a billion dollars to reflect reduced demand for the company's graphics chips in gaming, its biggest business, and data centers, its highest-growth business. On Monday, the company said that it would report revenues of $2.2 billion in fourth quarter of the 2019 fiscal year. Back in November, Nvidia projected sales of $2.7 billion. 

The company said that the global economy has started to deteriorate, dampening demand for graphics chips used in gaming, particularly in China. Chips based on Nvidia's new Turing architecture are also selling worse than anticipated. Potential customers may be holding out for cheaper prices, the company said. Data center sales also slumped, with cloud computing firms delaying orders due to economic uncertainty, the company said.

"The foundation of our business is strong and more evident than ever—the accelerated computing model Nvidia pioneered is the best path forward to serve the world's insatiable computing needs," Jensen Huang, the company's CEO, explained in a letter sent to shareholders Monday. But the current quarter has been "extraordinary, unusually turbulent and disappointing," he said.

Over the last month, other major chip makers have blamed their financial woes on slowing demand in China. Texas Instruments, the largest supplier of analog semiconductors, said that unresolved trade tensions between the United States and China could determine the depth and duration of the downturn. Intel said that uncertainty caused by the conflict had hammered its sales last quarter.

Nvidia is stumbling for the first time in a long time. It was one of the first major chip companies to pivot into artificial intelligence. Nvidia's graphics chips are the current gold standard for training algorithms to identify objects or understand human speech. From 2016 to 2018, Nvidia's sales nearly doubled to $9.71 billion. Profits soared from $0.61 billion to $3.05 billion over the same three years.

But the company's growth started to slow in the third quarter last year. In November, chief financial officer Colette Kress said that the slowdown would continue into the fourth quarter when it would report revenue between $2.65 billion and $2.75 billion. That would fall short of $2.9 billion in last year's fiscal fourth quarter. Nvidia's new forecast would be a year-over-year revenue decline of about 25 percent.

The problem is one of supply and demand. The Santa Clara, California-based company was holding $1.42 billion of inventory at the end of the third quarter, up 30 percent from its second-quarter total of $1.09 billion, as demand plummeted for gaming chips based on its Pascal graphics architecture. In November, the company said that it had stopped selling them to prevent flooding the market.

"We expected pricing in the marketplace to decline," Huang said on the company's third quarter conference call in November. "It declined slower than we expected, and while it was declining, we were expecting sales volume and demand to grow." He added: “We decided not to sell any more for the upcoming quarter to give the market an opportunity to sell through the inventory it has.”

On Monday, Nvidia also marked down its projected profit margins—the selling price of its products minus production costs—from 62.3 percent to 55 percent. The company orders batches of graphics chips from TSMC, which produces the processors according to its blueprints. But as demand decreases, the average cost of manufacturing each graphics chip increases, resulting in less profit per chip.

"This quarter has been a gut punch," Huang said in the letter to shareholders. 

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