Nvidia forecasts sharp drop in third

© Reuters. FILE PHOTO: The Gold foreign exchange trend latest newslogo of Nvidia Corporation is seen during the annual Computex computer exhibition in Taipei, Taiwan May 30, 2017. REUTERS/Tyrone Siu/

By Eva Mathews and Jane Lanhee Lee

(Reuters) -Graphics chip designer Nvidia (NASDAQ:NVDA) Corp on Wednesday forecast a sharp drop in revenue in the current quarter on the back of a weaker gaming industry, knocking its shares down about 5% in after-hours trading.

The company said it expected third quarter revenue of $5.90 billion, down 17% on year, but said the declines would be partially offset by growth in the data center and automotive business.

Analysts, however, raised concerns it may face more bad news as former growth areas slow.

"We think Nvidia may see further downside from the crypto-mining and data center end markets," said Kinngai Chan, Summit Insights Group analyst.

Nvidia graphics chips called GPUs have been used for crypto currency mining and sales have taken a hit as the crypto market has crumbled.

Analysts have been concerned about a slowdown in data center growth, which has supported chip sales.

Nvidia Chief Executive Jensen Huang said on an earnings call that Chinese cloud service providers' infrastructure investment had slowed a lot in the second quarter, but this had been offset by strong growth in the United States.

The company's second quarter revenue of $6.70 billion was significantly lower than the $8.10 billion Nvidia forecast in May.

Its gaming division posted revenue of $2.04 billion, down 33% year on year. Data center revenue held up at $3.81 billion, up 61% year on year.

The gaming industry has been showing signs of weakness as consumers pull back from discretionary purchases such as video-gaming gear amid decades-high inflation.

Nvidia said it took a $1.34 billion charge in the second quarter as it wrote down inventory built up when it thought the gaming and data center markets would be much stronger.

"I know the demand is strong, but we expected the demand to be even stronger," Huang told Reuters about the write down of data center inventory.

Huang told analysts on the call that the company also faced supply chain challenges that prevented it from selling more systems to data centers.

"We're seeing a great deal of demand for GPUs in the cloud," Huang said on the call. "We were challenged this quarter with a fair amount of supply chain challenges."

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