The chip industry’s dreaded recession is here. Specifically, the consumer is putting the brakes on buying his new PC or smartphone. NVIDIAof (NVDA 0.07%) An empire built especially hard on GPUs (Graphics Processing Units). Sales of video games and other graphics applications were halved last quarter compared to the same period last year.
Enterprise computing, however, is a completely different story. At this point, real GPU sales are driving Nvidia’s growth, and an up-and-coming software business is starting to emerge. Will 2023 be the year he makes the leap from semiconductor business to software?
Will Nvidia Software Revenue Soar in 2023?
For clarity, Nvidia does not separate the revenue it makes from software services and the revenue it makes from selling the actual semiconductor hardware. However, it can be inferred that most of the revenue comes from the sale of GPUs and GPU-equipped computing systems for data centers. After all, Nvidia has a long history of bundling free-to-use software and chip purchases to help video game enthusiasts and developers get their new GPUs running as quickly as possible.
But Nvidia already makes more money from software sales than many investors realize. For example, many of his Nvidia chips are used for highly complex computing tasks that require advanced software programs to work. Many companies using Nvidia hardware are not software engineers. So adopting some of Nvidia’s software engineering has already happened. However, some of this software access may be a one-time purchase rather than the recurring software-as-a-service (SaaS) solutions that investors have come to love.
As proof of this, during the company’s Q3 2023 earnings call, CFO Colette Kress explained that Nvidia will begin breaking up its massive “data center” units. Not coincidentally, the “data center” is the company’s largest unit. Sales for the quarter he surpassed $3.8 billion (more than half of total sales of $5.8 billion). Kress said:
As the number and size of public cloud computing and internet services companies deploying NVIDIA AI grows, the traditional definition of hyperscale needs to be expanded to convey a variety of end-market use cases. We will adjust our data center customer comments accordingly. Other verticals such as automotive and energy also contributed to the growth with key workloads related to autonomous driving, high performance computing, simulation and analytics.
In other words, “data center” has become too generic a term to describe Nvidia’s largest revenue segment. This $3.8 billion big quarter item includes the sale of physical GPUs to data center operators, and the “renting” of GPUs via cloud services (known as Infrastructure-as-a Service (IaaS)). , engineering services, and software used in operations. those GPUs. Expect more details about what Nvidia customers are really doing with their silicon designs from the next earnings call.
We build from small beginnings, but how small?
Revenue from Nvidia’s data center unit is a bit opaque right now, but what about the other three major end markets of ‘gaming’, ‘professional visualization’ and ‘automotive’? No details are available, but it’s possible that Nvidia is already making a decent profit from its software recurring revenue.
Let’s start with GeForce Now, Nvidia’s first subscription business ( netflix (Nasdaq: NFLX), but for video games). This summer, Kress said GeForce Now has over 20 million registered users worldwide. How much revenue does it generate? Just a guess, but GeForce Now has a free tier (assuming half of the 20 million users are on it), a $9.99/month “priority” pass (9 million subscribers on average). , or $90 million in revenue). ), and an Advanced Pass for $19.99/month (1 million subscribers or $20 million in earnings).
If this is any accurate assumption, it means Nvidia could generate over $300 million in revenue on a quarterly basis. With total video game revenues of $1.57 billion in the third quarter of fiscal year 2023, video game streaming could be a small (but not significant) source of additional sales for video game GPUs. I have.
Something similar is likely to happen with the “Professional Visualization” segment, which caters to video game and film content creators, engineers, architects, and others. Revenue last quarter was just $200 million, much lower as PC sales declined. However, Nvidia’s Omniverse Cloud subscription (used for building 3D virtual worlds, games and movies, or simulating real-world locations) is wrapped up in this unit.
Omniverse is free for individuals, but basic enterprise packages start at $9,000 per year. With hundreds of companies using Omniverse today, it doesn’t take many teams to subscribe to the service to make it a big part of the “professional visualization” segment.
The “automotive” segment is even trickier. Last quarter he made $251 million in sales, and most of this sales came from selling his Nvidia computing systems (Nvidia DRIVE Orin and Thor chips) used in modern cars. You can guess. However, Nvidia has a suite of software for companies developing self-driving car technology, from the actual computing chips to the software used to accelerate development. However, many of these sales may be included in the “Data Center” segment. Find out more from the fourth quarter of fiscal year 2023 onwards.
Either way, Nvidia has a lot on their hands when it comes to software, and 2023 could be a big year. But even now, the company seems to be quietly piling up regular software sales to complement its flagship GPU design. As more companies adopt his Nvidia chips in developing their own artificial intelligence systems and his 3D applications, there is great potential for Nvidia software to continue to grow. This is a truly unique company operating in the large semiconductor industry.