$1.3 billion in revenues is a record quarter for NVIDIA.  The results blew past their guidance and the stock price jumped over 15%. The dark clouds over the quarterly announcement were the year-on-year drops for the Quadro, Tesla, and GRID business. Why is there a silver lining?

NVIDIA just announced record revenues but the Quadro, GRID, and Tesla businesses were down. What are the key drivers for the graphic giant's business and why is NVIDIA excited about the future of professional graphics?

The short answer comes from CEO Jensen Huang : NVIDIA has re-architected it's business structure into 5 structural units, 4 of which allow NVIDIA to address broad market segments with huge TAMs and to do so on their own terms.  The company strategy has a common GPU architecture at the base with stacks of software and specialized software platforms for customers and developers to address the specific needs of each vertical market segment.

The table below shows how the company now views it's new organization. The last company segment is OEM and IP which represents the "old" PC component business. While working with the OEM partners, with nearly $200 million in revenue, is still critical to the company results. However two aspects are important. First is the rapid drop in this business segment for the company. Second is the basic nature of the business. As CEO Jensen Huang points out, the sales approach is simple, the marketing approach is simple, and the path to the customer is limited to some extent due to the OEM partnership. 

On the other hand, The Gaming Segment, the Datacenter segment and the Automotive segment are set to be strong growth drivers for NVIDIA. 

NVIDIA QUARTERLY REVENUE TREND

Revenue by Markets

($ in millions)	Q1 FY15	Q2 FY15	Q3 FY15	Q4 FY15	Q1 FY16	Q2 FY16	Q3 FY16
Gaming	$ 468	$ 417	$ 528	$ 646	$ 587	$ 661	$ 761
Pro Visualization	191	208	206	190	181	176	190
Datacenter	57	83	90	88	88	73	82
Auto	35	40	52	56	77	71	79
PC & Tegra OEM / IP	352	355	350	271	219	173	192
Total	$ 1,103	$ 1,103	$ 1,225	$ 1,251	$ 1,151	$ 1,153	$ 1,305

Among the key drivers for NVIDIA, the VR market is one of the critical opportunities. NVIDIA is "over-the-top" excited about VR. The Occulus VR experience, among others,  delivers a sense of presence which is great for entertainment. But the applications are key to architecture, design, product design, medical imaging, and more. The DesignWorks VR was launched during this quarter. It is the company's software platform that delivers realtime, realistic and - most importantly - physically accurate images for professional designers.  Financial aspects of VR for NVIDIA means being engaged in the industry and to deliver a great platform - DesignWorks VR. The company claims that VR is an undeniable future driver for the company and yet the market is just at the start of showing financial results. 

The NVIDIA strategy for the Datacenter has simplified dramatically this year. The strategy used to consist of different product groups : Tesla, GRID, etc. Now the platform for the Datacenter is called Tesla - one common GPU platform with multiple software stacks that define the solution for vertical markets such as HPC, enterprise GPU virtualization, and gaming as a service.  Coming now is the work they are doing in hyperscale datacenters with the coming of personal video broadcasting.   The dynamics named by CEO Jensen includes the fact that Moore's Law needs a boost. Tesla is an accelerator for the datacenter which gives Moore's Law that boost.  Another dynamic is the global race to AI.  Jensen does know any datacenter, cloud service company, or application developer which is not trying to understand how AI will completely revolutionize the applications and services that they provide. Last but not least is accelerating the cloud for cloud services like Microsoft Azure to provide graphics-rich services.  This combination of market growth drivers make Datacenters an interesting vertical segment for NVIDIA's future. 

Particularly interesting is the vertical segment called Pro Visualization. Along with Datacenters, this segment has dropped year-on-year. Why is the company still excited about this space and still focused on it?  Financially, this business is based on Quadro GPUs and they deliver some of the highest growth margins for the company. Without Quadro, the company average gross margin would be significantly lower than the current mid-fifties.  From a market perspective, NVIDIA owns this market with a dominant market share. What this means to Jensen Huang is that the company needs to reinvent the market. Quadro is about design, creation, manufacturing, products, ... it's about things that people make. This market is a mature market, so the company has a strategy to reinvent the Quadro market. One strategy is iRay. iRay brings the ability to create images which are physically accurately. A second strategy is VR. This impacts professional markets across the spectrum of vertical applications. VR will be critically important. These two drivers should keep Quadro professional visualization products on a growth path. 

The Gaming Market is growing and the quality of the games is astounding. Beyond that, NVIDIA's datacenter strategy is to serve gaming experiences using their virtualized GPU platforms.   The Q3 quarterly jump in Gaming revenue looks impressive. Note that this is a typical cycle for the company. As long as they are running full-bore on production of the new gaming products, this quarter which ends on Halloween is the Christmas season boost for NVIDIA. 

NVIDIA's Auto market segment is in-car info and entertainment systems based on Tegra and it is growing rapidly as more automotive OEMs launch their models with the latest technology. Jensen discusses 2 dynamics which are favorable to NVIDIA. One is the fact that future cars will clearly be software-defined. The car will have a centralized computing ability. It will likely have multiple operating systems running. The automotive computer will be built like a data center so that it can be secure, robust and deliver mission critical computing. When a car becomes more computerized and software-rich, it favors NVIDIA's competencies for serving the automotive market. A second key factor in the future of this business will be the extension of in-car computing into autonomous driving which is a technology that leverages the capabilities of NVIDIA GPUs. The first examples are just coming. The platform to support autonomous driver have yet to be built. The company has been actively developing a software platform around their hardware to support automotive developers deliver on this technology. And car companies need this ability for future cars and autonomous vehicles. 

The PW Perspective

The Q3 results blew past expectations and drove a spike in the company valuation. The next quarter is anticipated to remain at this higher revenue level which is not an agressive forecast.  This reflects a reasonable business approach and the vision of the market has been re-oriented around the 5 market opportunities noted above.  NVIDIA does not view itself as a chip company. The strategy to build software platforms on top of power hardware allows the company to solve hard problems and deliver great experiences whether those problems and experiences are in the professional and enterprise markets or in the consumer and gaming markets. 

The company views its business as being based on multiple, diverse growth drivers. PC gaming, VR, AI, and autonomous driving cars, among other market trends, are all growth drivers for the NVIDIA business. The company views this diverse set of growth drivers as a fundamental reason for their optimism.

Below is a summary of NVIDIA's quarterly financial data

NVIDIA's outlook for the fourth quarter of fiscal 2016 is as follows:

• Revenue is expected to be $1.30 billion, plus or minus two percent.
   
• GAAP and non-GAAP gross margins are expected to be 56.7 percent and 57.0 percent, respectively, plus or minus 50 basis points.
   
• GAAP operating expenses are expected to be approximately $503 million. Non-GAAP operating expenses are expected to be approximately $445 million.
   
• GAAP and non-GAAP tax rates for the fourth quarter of fiscal 2016 are expected to be 20 percent, plus or minus one percent.
   
• The above GAAP outlook amounts exclude restructuring charges, which are expected to be in the range of $25 million to $35 million, in the fourth quarter of fiscal 2016.
   
• Capital expenditures are expected to be approximately $20 million to $30 million.
   

Third Quarter Fiscal 2016 Highlights

During the third quarter, NVIDIA achieved progress in each of its platforms.

Gaming:

• Introduced the GeForce^® GTX 950 GPU, designed to play the latest games with processing power that rivals any console. 
• Introduced NVIDIA GameWorks™ VR, a software development kit for creating gaming experiences on virtual reality-ready desktops and notebooks.
• Launched GeForce NOW™, allowing players to instantly stream titles from the cloud to their SHIELD device.
• Extended SHIELD™ Android TV into key European markets.
   

Professional Visualization:

• Enabled professional designers to bring virtual reality to applications, with the launch of NVIDIA DesignWorks™ VR.
   

Datacenter:

• Unveiled the next generation of its virtualized graphics platform, NVIDIA GRID™ 2.0, which delivers even the most graphics-intensive applications to any connected device.
• Announced that Microsoft Azure will be the first cloud-services provider to offer GRID 2.0 capabilities, as well as accelerated computing.
• Revealed that the Swiss Federal Office of Meteorology and Climatology is the first major national weather service to use a GPU-accelerated supercomputer to improve daily forecasts.
   

Auto:

• Featured in new production vehicles and concept cars with NVIDIA-powered digital cockpits from Mercedes-Benz, Audi, Porsche, Bentley and Honda at the International Auto Show in Frankfurt.
• Furthered its partnership with Tesla Motors, which introduced the Model X, equipped with an NVIDIA-powered infotainment system and digital instrument cluster.

- See more at: http://nvidianews.nvidia.com/news/nvidia-announces-financial-results-for-third-quarter-fiscal-2016#sthash.qeKFzFXX.dpuf