Why NVIDIA Corporation's Data-Center Business Surged 193% Last Quarter

By Markets Fool.com

Last quarter, graphics processing unit (GPU) specialist NVIDIA (NASDAQ: NVDA) reported that its data-center business saw revenue grow from just $82 million in the same quarter a year ago to $240 million. That's a growth rate of 193%, making it far and away the fastest-growing segment of NVIDIA's business last quarter.

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NVIDIA's Tesla P100 data-center accelerator. Image source: NVIDIA.

That growth rate also helped to propel NVIDIA's data-center efforts from being one of its two smallest business segments in the year-ago quarter (only automotive was smaller) to being its second-largest business.

Let's take a closer look at what drove this surge and what it might mean for NVIDIA's business.

NVIDIA's CEO explains

On a conference call with analysts following the report, analyst Mark Lipacis asked NVIDIA CEO Jen-Hsun Huang to explain what drove the significant year-over-year growth in its data-center business.

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"GPU computing is more important than ever," Huang began. "There are so many different applications that require GPU computing today, and it's permeating all over enterprise."

Huang cited graphics virtualization in data centers, computational science, and deep learning applications as being areas that have taken advantage of GPU computing.

NVIDIA becoming more than a chip company

Huang made sure to point out that NVIDIA was key to blazing the trail to making GPU computing viable for these applications by investing in areas beyond just the graphics chips themselves.

"The thing that really made it possible was really the transformation of our company from a graphics processor [company] to a general-purpose processor company," Huang began.

"And then, on top of that, probably the more important part of that, is transforming [NVIDIA] from a chip company to a platform company," the executive continued.

The NVIDIA chief further elaborated that a "complicated stack of software" that NVIDIA brands GRID was a critical enabler of "application and graphics virtualization."

Beyond virtualization, Huang made clear that the company made significant software investments to enable adoption of GPUs for both numerical and deep learning applications.

Broadening the customer base

Analyst Vivek Arya pointed out on the call that NVIDIA's data-center business has historically been very "lumpy," noting that in fiscal year 2015 the business "grew 60% to 70% year over year," but that that growth rate was just "about 7%" in fiscal year 2016."

This prompted the analyst to ask, "How should we think about the diversity of customers and the diversity of applications to help us forecast how the business can grow over the next one or two years?"

"I think we're moving, if you will, our data-center business in multiple trajectories," Huang began.

"I think that the combination of those three things, the number of applications, the number of platforms and locations by which we have success, and then, of course, the number of industries that we affect, the combination of that should give us more upward trajectory in a consistent way," Huang explained.

Investment impact

The success that NVIDIA is having with its data-center efforts should appeal to investors for two main reasons. The first is that these efforts now generate significant revenue and appear as though they should continue to deliver robust growth rates in the near to medium term.

Beyond that growth, though, is the fact that the gross profit margins that NVIDIA enjoys on data-center oriented products are among the highest in its business portfolio. This means that if data-center continues to become a larger portion of NVIDIA's overall revenues, its gross profit margins, and ultimately profits, will be poised to grow as well.

Increasingly profitable revenue growth is a good thing for NVIDIA and its shareholders.

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.