NVDA Hidden Rev Value in DGX Systems

Investment Analysis Clubs Saul’s Investing Discussions
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An Nvidia commissioned economic impact report for DGX-1 was completed by Forrester earlier this year. I just stumbled upon it and it had some insights I wanted to share including a previously unknown (to me and from what I can tell, most of the investing community) revenue stream for Nvidia.

A quick rehash on the Nvidia DGX-1. Last year Nvidia announced this product that is essentially a supercomputer server featuring 8 Tesla V100 GPUs and all the supporting hardware and software equipment including NVlink interconnects and CPUs. All in a box. Because of the infrastructure it acts like one big really fast gpu (1PetaFlops or 1,000 TFLOPs) that can plug in and get a company up and running AI data science with ease. It can also scale in hyper scale data centers. It is the building block for super computers coming online around the world including Nvidia’s own Saturn V. This year Nvidia launched the DGX-2 with 16 V100s and updated NVSwitch with greater bandwidth among other upgrades. And also the HGX-1 and 2 which is the basic infrastructure for the GPUs and a roadmap for a hyper scale companies and OEMs to make their own DGX style box. Nvidia in their recent ER said that DGX is selling in the “hundreds of million in annual sales”.

https://www.nvidia.com/en-us/data-center/dgx-1/

This is competitive advantage in a box for all data forward companies, which in today’s world is pretty much everybody. The Forrester report makes this apparent if you want to skim through it.

https://www.e4company.com/imgs/dwnld/20/Forrester%20Consulti…

Through their interviews with companies that have deployed DGX-1, Forrester estimates an ROI of 294%.

Time to implement a new DGX system is reduced by 2 months vs legacy.

Time to complete model training is reduced by 3 days on average.

Data scientists have more time to experiment and develop new data products and don’t have to spend time on mainaning and updating the infrastructure. NVDAs software means they don’t need to spend time programming to make models work on the equipment. They already work!

Here in lies the hidden revenue stream that this report reveals.

The company would purchase a support contract from NVIDIA for $67,050 per year commencing with the purchase of the DGX-1 units.

A DGX-1 cost about $149,000. But the companies buy a 3 year service contract worth $67,050/yr. That’s an additional $201,050 per DGX-1. That is contractual recurring revenue that if the sales of DGX are in the hundreds of million annually would mean this is a revenue stream worth potentially hundreds of millions annually. According to Forrester the companies are very happy with Nvidia’s service and it saves money compared to the way their legacy support system worked. What is it for DGX-2? Do they have other major products that have similar service contracts? Could this be a major contributor to Data Center or other segment revenue going forward?

This has not been discussed much with Nvidia, either by the company or in analysis. To me, this is a huge revelation. I’d like to find out more.

Darth

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Seems to relate to a link that I shared some months back here on the board:

https://discussion.fool.com/nvda-going-for-recurring-revenue-339…

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Great post Darth. And NVDA is just a hardware company… :smiley:

I’m adding more with the recent price drops we’ve had lately.

Bill Jurasz

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"Here in lies the hidden revenue stream that this report reveals.

The company would purchase a support contract from NVIDIA for $67,050 per year commencing with the purchase of the DGX-1 units.

A DGX-1 cost about $149,000. But the companies buy a 3 year service contract worth $67,050/yr. That’s an additional $201,050 per DGX-1. That is contractual recurring revenue that if the sales of DGX are in the hundreds of million annually would mean this is a revenue stream worth potentially hundreds of millions annually. According to Forrester the companies are very happy with Nvidia’s service and it saves money compared to the way their legacy support system worked. What is it for DGX-2? Do they have other major products that have similar service contracts? Could this be a major contributor to Data Center or other segment revenue going forward?

This has not been discussed much with Nvidia, either by the company or in analysis. To me, this is a huge revelation. I’d like to find out more."

If this revenue stream becomes viable and large enough, would NVDA have to list it under Deferred Revenues? Taking a quick look at their last two releases, NVDA doesn’t have a Deferred Revenues line in their Liabilities. If I’ve got it right, seeing Deferred Revenues get added to their sheet would potentially indicate this program is gaining traction.

Do I have that correct? If so, something to watch out for.

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The following is from Nvidia’s most recent SEC 10-Q.

Software licenses are frequently sold along with post contract customer support, or PCS. For such arrangements, we allocate revenue to the software license and PCS on a relative standalone selling price basis by maximizing the use of observable inputs to determine the standalone selling price for each performance obligation. Revenue from software licenses is recognized up front when the software is made available to the customer. PCS revenue is recognized ratably over the service period, or as services are performed.

Deferred revenue is comprised mainly of customer advances and deferrals related to license and development arrangements and PCS related to software licensing. The following table shows the changes in deferred revenue during the first half of fiscal year 2019:

Balance Jan 29 2018: $63M

Deferred Rev Added: $194M

Revenue Recognized: $153M

Ending Def Balance: $104M

Revenue related to remaining performance obligations represents the amount of contracted license and development arrangements and PCS that has not been recognized. As of July 29, 2018 , the amount of our remaining performance obligations that have not been recognized as revenue was $235 million , of which we expect to recognize approximately 50% as revenue over the next twelve months and the remainder thereafter. This amount excludes the value of remaining performance obligations for contracts with an original expected length of one year or less.

http://secfilings.nasdaq.com/filingFrameset.asp?FilingID=129…

It’s possible that the PCS is the service contract. If that’s correct then deferred revenue is the combination of software licensing and PCS. And they added $194M from Jan 29-July 29.

It appears that they sell a service contract for the DGX workstation, a desktop version of the DGX. The station is $69,000 and the contract is $10,000/yr. 1 year minimum is apparently required.

Some more info to ponder.

Darth

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NVDA doesn’t have a Deferred Revenues line in their Liabilities.

Seems you missed it! It’s there:

http://secfilings.nasdaq.com/filingFrameset.asp?FilingID=129…

Denny Schlesinger

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Thanks to Darth and Denny for the Deferred Revenue lesson. I looked at the Condensed Balance Sheet in their release and 10Q, but didn’t catch the deferred info down in the notes. Most of the companies we discuss on this board (most unprofitable I might add) have deferred revenues clearly outlined in their releases. That’s obviously not the case with NVDA. A good learning moment and apparently something to pay attention to.

Thanks again.

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From the Q1 10-Q. Deferred revenue added was $86M during Q1. Subtracting that from the Q2 10-Q add of $194M(from the same start date), that means that Q2 added $108M in deferred revenue. That’s a 26% sequential gain in deferred revenue adds.

I know, I know $108M for a company that has $3B+/qtr in revenue is not huge, but this is a new discovery and I’m trying to work out what it means for the future.

Darth

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Most of the companies we discuss on this board (most unprofitable I might add) have deferred revenues clearly outlined in their releases. That’s obviously not the case with NVDA.

It depends on how important the item is. Big shows up on Condensed Balance Sheet, little not so. :wink:

Denny Schlesinger

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I know, I know $108M for a company that has $3B+/qtr in revenue is not huge, but this is a new discovery and I’m trying to work out what it means for the future.

Mr. Market likes steady, secure revenue. Semiconductors are cyclical. Deferred revenue softens the cycles.

Denny Schlesinger

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Hold on. The Forrester report uses a “composite company” that purchases 3 DGX-1. The total Nvidia Support cost for all 3 is calculated out at $67,050/yr. So you’re looking at about $22K per DGX per year. So re doing the math that’s $149K + $67K for a total of $216K or roughly 1.5x the sticker price over 3 years. That makes more sense to me. The other number seemed really high and it was.

Darth