Given the rumors that had transpired about Blackwell’s delays, it was widely expected that Nvidia’s management would provide some transparency in Q2 as to the status of Blackwell. We had tracked a few key data points in the supply chain, such as TSM’s HPC growth and Super Micro’s liquid cooling growth. Direct liquid cooling doesn’t lie as it’s intricately linked to the Blackwell launch, implying that Blackwell would indeed ship by Q4 – and Nvidia just confirmed that:
“Blackwell production ramp is scheduled to begin in the fourth quarter and continue into fiscal 2026. In the fourth quarter, we expect to ship several billion dollars in Blackwell revenue.”In the fourth quarter, we expect to ship several billion dollars in Blackwell revenue.”
Nvidia also guided for Q3 revenue of $32.5 billion, once again above consensus estimates, though it was only $700 million higher at the midpoint; despite this being one of the ‘smaller’ beats, it’s a testament to the strength of Nvidia’s demand to guide for $2.5 billion sequential growth primarily based on Hopper demand with no contribution from Blackwell.
Revenue and EPS
Revenue of $30.04 billion increased 122% YoY and 15% QoQ, with management pointing out that “customers continue to accelerate their Hopper architecture purchases while gearing up to adopt Blackwell.” This marked a $1.3 billion beat to the consensus estimate for $28.75 billion. It also was a deceleration from 262% YoY growth in Q1, as Nvidia is now facing tougher comps against the vertical ramp of Hopper last year.
For Q3, Nvidia guided for revenue of $32.5 billion, +/- 2%, ahead of the consensus estimate for $31.77 billion. This represents growth of 79.4% YoY at midpoint, compared to the estimate for 75.3% growth next quarter.
- GAAP EPS of $0.67 beat estimates by $0.06, and represented YoY growth of 168% and QoQ growth of 12%.
- Adjusted EPS of $0.68 beat estimates by $0.04, and represented YoY growth of 152% and QoQ growth of 11%.
Key Segments
Data center revenue surpassed a $100 billion annualized run rate this quarter, up from $90 billion annualized, as Nvidia reported $26.27 billion in data center revenue, up 152% YoY and 16% QoQ. Nvidia said that “Hopper demand is strong, and shipments are expected to increase in the second half of fiscal 2025,” while Blackwell is on track to ramp in Q4 with “several” billions in revenue expected that quarter.
Notably, purchase commitments and obligations for inventory and capacity rose nearly 48% QoQ to $27.8 billion, including “new commitments for Blackwell capacity and components,” another signal that Nvidia is prepared to ramp in full-force come Q4.
In the segment, compute revenue was $22.6 billion, up 162% YoY, while networking revenue was $3.67 billion, up 114% YoY. In networking, Nvidia noted that InfiniBand and Ethernet drove growth in the quarter, and the 16% QoQ growth included “a doubling of Ethernet for AI revenue.”
Nvidia’s Q3 revenue guide implies data center revenue slightly above $28 billion to $28.5 billion, which we had modeled in our pre-earnings analysis earlier this week.
- Gaming revenue increased 16% YoY and 9% QoQ to $2.88 billion, driven by increased sales of GeForce RTX 40 Series chips.
- Automotive revenue increased 37% YoY and 5% QoQ to $346 million, driven by AI cockpit and self-driving solutions.
- Pro-viz revenue increased 20% YoY and 6% QoQ to $454 million.
- OEM and other revenue increased 33% YoY and 13% QoQ to $88 million.
Margins
Margins remained strong in Q2, with Nvidia reporting gross and operating margins at the high end and above its guided ranges. However, management guided for Q3 margins to contract slightly QoQ, suggesting that Q1 was the peak for both gross and operating margins with some pressure ahead as Blackwell gears up to launch in Q4.
- GAAP gross margin was 75.1% in Q2, ahead of management’s guide for 74.8%. Adjusted gross margin was 75.7%, ahead of guidance for 75.5%.
- Per the CFO: “As our Data Center mix continues to shift to new products, we expect this trend to continue into the fourth quarter of fiscal 2025.” It’s likely she is referring to the higher cost of memory components, which we outlined in the pre-earnings analysis.
- GAAP operating margin was 62.1%, ahead of the implied guide for 60.5%, indicative of the operating leverage power that Nvidia still commands in mid-launch cycle for Hopper with the H200s shipping now. Adjusted operating margin was 66.4%, ahead of the implied guide of 65.5%.
- Per the CFO: “Sequentially, GAAP and non-GAAP operating expenses were up 12%, primarily reflecting higher compensation-related costs.”
- GAAP net margin was 55.3% down from 57.1% last quarter. This represents profits of $16.6 billion, up over $2 billion. This was a very large beat compared to the $14.3 billion guided.
The chart below shows Nvidia’s margins, with the slight sequential contraction this quarter and next quarter visible. It’s no small feat to maintain GAAP operating margin >60% for four consecutive quarters while simultaneously undergoing the semiconductor industry’s most advanced and most rapid product release cycle. However, with management guiding for full-year gross margins to be in the mid-70% range, we’ll be keeping a close eye on how margins trend in Q3 heading into Q4 as Blackwell ramps.
Cash Flows
For the first time since Hopper stole the show in early 2023 with red-hot growth, Nvidia’s cash flows declined sequentially, with cash flow margins also shrinking. Nvidia said the sequential declines were caused by higher cash taxes paid.
- Operating cash flow was $14.49 billion, up more than 128% YoY but down (5.6%) QoQ. This was the first quarter with a sequential decline in OCF since Q3 FY23.
- Operating cash flow margin was 48.2%, down from 58.9% last quarter but up from 47.0% in the year ago quarter.
- Free cash flow was $13.48 billion, up 123% YoY but down nearly (10%) QoQ.
- Free cash flow margin was 44.9%, down from 57.3% last quarter and nearly flat with 44.8% in the year ago quarter.
Nvidia had $34.8 billion in cash, equivalents and marketable securities on hand, and debt totaled $8.46 billion.
Nvidia used cash of $7.4 billion toward shareholder returns, with $246 million in dividends paid and $7.2 billion in shares repurchased in Q2. Nvidia’s board also approved an additional $50 billion to its share repurchase authorization.
Earnings Call
Blackwell Shipping on Schedule
Our firm extrapolated supply chain data to conclude that Blackwell is in production at TSM and SMCI last week in the analysis: Nvidia Stock: Blackwell Suppliers Shrug Off Delay. This was not an easy analysis to write as it meant going up against The Information, a highly regarded publication. Yet, I felt confident that I know Nvidia stock better than a reporter, so hey — why not throw my hat in the ring. From my vantage point, since I cover the universe so closely, it was becoming clear the “breaking news” was an exaggerated claim that was inaccurate and ultimately hurt a lot of investors.
The CFO printed commentary stated: “We shipped customer samples of our Blackwell architecture in the second quarter. We executed a change to the Blackwell GPU mask to improve production yield. Blackwell production ramp is scheduled to begin in the fourth quarter and continue into fiscal 2026. In the fourth quarter, we expect to ship several billion dollars in Blackwell revenue.”
During a question on Hopper, Jensen Huang confirmed Q1 will be when Blackwell is operable in data centers: “And although Blackwell will start shipping out in billions of dollars at the end of this year, the standing up of the capacity is still probably weeks and a month or so away.”
The most direct Q&A snippet regarding Blackwell’s timing was the following:
Question
Vivek Arya (Analysts)
Jensen, you mentioned in the prepared comments that there's a change in the Blackwell GPU mask. I'm curious, are there any other incremental changes in back-end packaging or anything else? And I think related, you suggested that you could ship several billion dollars of Blackwell in Q4 despite the change in the design. Is it because all these issues will be solved by then? Just help us size what is the overall impact of any changes in Blackwell timing, what that means to your kind of revenue profile and how are customers reacting to it.
Answer
Jensen Huang (Executives)
Yes. Thanks, Vivek. The change to the mask is complete. There were no functional changes necessary. And so we're sampling functional samples of Blackwell, Grace Blackwell, and a variety of system configurations as we speak. There are something like 100 different types of Blackwell-based systems that are built that were shown at Computex, and we're enabling our ecosystem to start sampling those. The functionality of Blackwell is as it is, and we expect to start production in Q4.
-End Quote
This was also a nice statement from Huang that we should memorialize in this earnings writeup – perhaps unrelated to the delay, but certainly a statement to capture for our Members: “Yes, next year is going to be a great year. We expect to grow our Data Center business quite significantly next year. Blackwell is going to be a complete game changer for the industry. And Blackwell is going to carry into the following year”
Direct Liquid Cooling (DLC)
DLC stocks have been hit hard lately, primarily Dell and most certainly Super Micro following the short report and the delayed filing of the 10-K. However, SMCI’s earnings report was quite clear DLC is ramping which is why we’ve persevered in our positions. An analyst asked about DLC and the potential for supply chain issues with the thermal management side. Jensen Huang’s answer in agreement with what we saw from SMCI’s report.
Note: the analyst in the Q&A points out the purchase commitments and supply obligations being bullish, we reported on this under Key Segments – this is an important takeaway from this earnings report that shows Blackwell is ramping nicely. This is what he is referring to — “Notably, purchase commitments and obligations for inventory and capacity rose nearly 48% QoQ to $27.8 billion, including “new commitments for Blackwell capacity and components,” another signal that Nvidia is prepared to ramp in full-force come Q4.”Notably, purchase commitments and obligations for inventory and capacity rose nearly 48% QoQ to $27.8 billion, including “new commitments for Blackwell capacity and components,” another signal that Nvidia is prepared to ramp in full-force come Q4.”
Question
Timothy Arcuri (Analysts)
I had a question on the shape of the revenue growth, both near and longer term. I know Colette, you did increase OpEx for the year. And if I look at the increase in your purchase commitments and your supply obligations, that's also quite bullish.
On the other hand, there are some school who've thought that not that many customers really seem ready for liquid cooling, and I do recognize that some of these racks can be air cooled. But Jensen, is that something to consider sort of on the shape of how Blackwell is going to ramp? And then I guess when you look beyond next year, which is obviously going to be a great year and you look into '26, do you worry about any other gating factors like, say, the power supply chain or, at some point, models start to get smaller? I'm just wondering if you can speak to that.
Answer
Jensen Huang (Executives)
[…] The Grace Blackwell is liquid cooled. However, the number of data centers that want to go to liquid cooled is quite significant. And the reason for that is because we can, in a liquid-cooled data center, in any power-limited data center, whatever size of data center you choose, you could install and deploy anywhere from 3 to 5x the AI throughput compared to the past. And so liquid cooling is cheaper. Our TCO is better, and liquid cooling allows you to have the benefit of this capability we call NVLink, which allows us to expand it to 72 Grace Blackwell packages, which has essentially 144 GPUs.
And so imagine 144 GPUs connected in NVLink. And we're increasingly showing you the benefits of that. And the next click is obviously very low latency, very high throughput large language model inference, and the large NVLink domain is going to be a game changer for that. And so I think people are very comfortable deploying both. And so almost every CSP we're working with are deploying some of both. And so I'm pretty confident that we'll ramp it up just fine.”
-End Quote
My note: having a hard time closing our weaker DLC positions based on what we know is coming. My main regret is not keeping some dry powder to buy at these lower levels.
Margins:
Discussion on margins felt a bit forced as Nvidia’s margins continue to beat the rest of the Mag 7. Consider that Nvidia’s GAAP operating margin this quarter was 62.1%:
Where the market is a tad concerned is gross margins, which peaked at 78.4% and will exit the year in the mid-70% range. We prepped our Members for this in the pre-earnings writeup. The CFO stated: “Your second piece is in terms of our gross margin. We provided gross margin for our Q3. We provided our gross margin on a non-GAAP at about 75%. We'll work with all the different transitions that we're going through, but we do believe we can do that 75% in Q3. We provided that we're still on track for the full year also in the mid-70s or approximately the 75%. So we're going to see some slight difference possibly in Q4, again with our transitions and the different cost structures that we have on our new product introductions.”
Conclusion:
Our pre-earnings writeup expressed concerns about the valuation going into the print. I think the selling after hours reflects the valuation.
Earnings reports are truly 50/50 – nobody can tell you what the market will do following a report. For example, we had high confidence Nvidia would beat, but there’s much more to consider than a beat.
What’s important is to have a strategy, and we do. Our strategy is to trim this position depending on how the price reacts at key levels. Our goal is to then re-allocate what we trim at lower levels. You will get trade alerts to this effect when we think the timing is right.
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Damien Robbins, Equity Analyst for the I/O Fund, contributed to this analysis.
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