NVIDIA "missing China," last season did not sell H20, data center revenue disappointing, this season's guidance not bright enough | Earnings Report Insights

The sales deficit in the Chinese market has become a "pain point" for NVIDIA, the leader in artificial intelligence (AI) chips.

According to the financial report, as of the end of July in the previous fiscal quarter, NVIDIA maintained double-digit total revenue growth, with revenue from the new generation Black chip increasing by 17% quarter-on-quarter, which CEO Jensen Huang regarded as a sign of "very strong demand." However, the revenue from the company's core business, data centers, continued to lag, partly due to a decrease in revenue from the H20 chip, with no H20 chips sold in China during the quarter, resulting in the release of $180 million worth of inventory reserved for the Chinese market.

Compared to the previous quarter's performance, NVIDIA's guidance for this quarter seems more concerning. Analysts believe that NVIDIA's revenue guidance for this fiscal quarter is lukewarm, raising investor concerns about a slowdown in AI spending growth.

According to CCTV News, Jensen Huang stated during his visit to China in mid-July that the U.S. government has approved the company's export license, and it will begin selling H20 chips to the Chinese market. However, based on NVIDIA's performance, the Trump administration's easing of export restrictions has yet to translate into a substantial revenue rebound, casting a shadow over NVIDIA's performance outlook in China.

In the financial report, NVIDIA did not disclose the progress of H20 exports to China. After the financial report announcement, NVIDIA indicated that it might send $2 billion to $5 billion worth of H20 chips to China.

After the financial report was released, NVIDIA's stock price initially plummeted in after-hours trading, with the decline rapidly expanding to a drop of 5%, before narrowing the loss to less than 2%.

On August 27, Eastern Time, NVIDIA announced its financial data for the second fiscal quarter of 2026 (referred to as Q2) ending July 27, 2025, as well as the performance guidance for the third fiscal quarter (referred to as Q3).

1) Key Financial Data:

Revenue: Q2 operating revenue was $46.743 billion, a year-on-year increase of 56%, with analysts expecting $46.23 billion, and NVIDIA's own guidance being $44.1 billion to $45.9 billion, compared to a year-on-year growth of 69% in the previous quarter.

EPS: Q2 adjusted earnings per share (EPS) under non-GAAP was $1.05, a year-on-year increase of 54%, with analysts expecting $1.01, and a year-on-year growth of 33% in the previous quarter. Excluding the impact of H20-related expenses, the Q2 EPS was $1.04, a quarter-on-quarter increase of 8%.

Gross Margin: Q2 adjusted gross margin was 72.7%, a year-on-year decrease of 3 percentage points, with analysts expecting 72.1%. NVIDIA's guidance was 71.5% to 72.5%, compared to 61% in the previous quarter, a year-on-year decrease of 17.9%. Excluding the impact of H20-related expenses, the gross margin was 72.3%, a quarter-on-quarter increase of 1 percentage point.

Operating Expenses: Q2 adjusted operating expenses were $3.795 billion, a year-on-year increase of 36%, with analysts expecting $4.02 billion, and NVIDIA's guidance being $4 billion, compared to a 43% increase in the previous quarter2) Segmented Business Data:

Data Center: In the second quarter, data center revenue was $41.1 billion, a year-on-year increase of 56%, slightly below analysts' expectations of $41.29 billion, and a year-on-year increase of 73% in the previous quarter.

Gaming and AI PC: In the second quarter, gaming and AI PC business revenue was $4.3 billion, a year-on-year increase of 49%, exceeding analysts' expectations of $3.82 billion, and a year-on-year increase of 42% in the previous quarter.

Professional Visualization: In the second quarter, professional visualization revenue was $601 million, a year-on-year increase of 32%, above analysts' expectations of $532 million, and a year-on-year increase of 19% in the previous quarter.

Automotive and Robotics: In the second quarter, automotive and robotics business revenue was $586 million, a year-on-year increase of 69%, slightly below analysts' expectations of $592.7 million, and a year-on-year increase of 72% in the previous quarter.

3) Performance Guidance:

Revenue: Third quarter revenue is expected to be $54 billion, with a fluctuation of 2%, ranging from $52.92 billion to $55.08 billion, with analysts' median expectation at $53.46 billion.

Gross Margin: The adjusted non-GAAP gross margin for the third quarter is expected to be 73.5%, with a fluctuation of 50 basis points, ranging from 73% to 74%, with analysts' median expectation at 73.4%.

Operating Expenses: Adjusted operating expenses for the third quarter are expected to be $4.2 billion, with full-year operating expense growth expected to be at the high end of the 30% range.

Second Quarter Revenue Slows but Still Exceeds Analysts' Expectations; H20 Inventory Release of $180 Million in China

The financial report shows that NVIDIA's second quarter revenue growth further slowed to 56%, down from a year-on-year growth rate of 69% in the previous quarter, marking the lowest growth rate in two consecutive quarters since April 30, 2023, but the slowdown was not as severe as Wall Street expected. Analysts anticipated growth of nearly 54%.

Second quarter EPS exceeded expectations with accelerated growth, increasing year-on-year growth from 33% in the first quarter to 54%, while analysts expected growth of less than 49%. The second quarter EPS was partly due to inventory reduction of H20 chips.

NVIDIA mentioned that in the second quarter, the company did not sell H20 chips to any customers from China, but previously ordered H20 chip inventory from the Chinese market was released, amounting to $180 million.

Additionally, in the second quarter, NVIDIA also sold H20 chips to a customer from a region outside of China that is not subject to U.S. export restrictions, generating approximately $650 million in sales revenue.

Data Center Computing Revenue Decreased by 1% Quarter-on-Quarter; H20 Sales Revenue Decreased by $4 Billion; Gaming Business Hits New High

By segment, NVIDIA's core business data center revenue growth further slowed, with year-on-year growth decreasing from 73% in the previous quarter to 56%, falling short of expectations for two consecutive quarters and exceeding Wall Street's anticipated slowdown.

NVIDIA Chief Financial Officer (CFO) Colette Kress commented on the data center business, stating that the strong growth in this sector is driven by the demand for NVIDIA's accelerated computing platforms, which are used for large language models (LLM), recommendation engines, and generative and agent-based AI applications.

Kress noted that NVIDIA continues to enhance revenue from its Blackwell architecture products, with revenue from these products increasing by 17% quarter-over-quarter in the second quarter, including the latest Blackwell Ultra chips. Among Blackwell's various customers, large cloud service providers contributed 50% of the data center revenue.

Kress also mentioned that in the data center business, revenue from data center computing in the second quarter grew by 50% year-over-year to $33.8 billion, but decreased by 1% quarter-over-quarter, due to a $4 billion reduction in H20 sales revenue.

Revenue from data center networking in the second quarter was $7.3 billion, a year-over-year increase of 98% and a quarter-over-quarter increase of 46%, benefiting from the growth of NVLink computing architecture in the GB200 and GB300 systems, the popularity of XDR InfiniBand products, and the adoption of Ethernet AI solutions by cloud service providers and consumer internet companies.

NVIDIA's gaming and AI PC business revenue has maintained positive growth for two consecutive quarters, with accelerated growth in the second quarter, where the year-over-year growth rate increased from 42% in the previous quarter to 49%, setting a new record for quarterly revenue in this business, exceeding the previous record of $3.8 billion by more than 13%. Kress stated that part of the gaming business revenue benefited from increased supply of Blackwell products.

Revenue growth in the automotive and robotics business slightly slowed from over 70% in the first quarter to 69%, which was also below analyst expectations.

Third Quarter Revenue Guidance Excludes H20 Exports to China; Jensen Huang States China Could Bring $50 Billion Opportunity This Year

In terms of guidance, NVIDIA's third-quarter revenue guidance median of $54 billion is higher than the analyst expectation median of $53.46 billion, but significantly lower than some analysts' expectations of up to $60 billion, falling 10% short of this optimistic forecast.

NVIDIA stated that the third-quarter revenue guidance does not assume any scenarios involving H20 chip exports to China. In other words, the guidance currently provided does not consider any revenue from H20 sales to China.

During the earnings call following the financial report, Jensen Huang stated that China could bring a $50 billion opportunity this year. He expects the Chinese market to grow at about 50% annually and expressed hope to sell updated chips to the Chinese market.

Huang discussed the competitive threat posed by ASIC chips, stating that NVIDIA now offers complex product systems, not just chips. NVIDIA's technology is present in all clouds and is more energy-efficient.

New Share Buyback Authorization of $60 Billion

NVIDIA disclosed plans to increase its buyback in the financial report.

NVIDIA stated that in the first half of fiscal year 2026, the company returned $24.3 billion to shareholders through stock buybacks and dividend distributions. As of the end of the second quarter, the remaining amount of stock buyback authorization was $14.7 billionOn August 26, this Tuesday, NVIDIA's board of directors approved an additional $60 billion in the company's stock repurchase authorization, and there is no deadline for executing this repurchase authorization