NVIDIA said the main reason for the lower revenue estimate was lower-than-expected revenue from its gaming business of approximately $2.04 billion, down 44 percent sequentially and 33 percent year-over-year. The company explained, “This is primarily attributable to lower sales of gaming products, reflecting the possibility of lower channel partner sales due to macroeconomic headwinds.”

In a statement, Jen-Hsun Huang, chief executive officer of NVIDIA, said: “As the quarter progressed, our sales expectations for gaming products declined significantly. As we expect macroeconomic conditions to continue to impact sales, we will take joint action with our gaming industry partners to adjust channel pricing and inventory.”

Piper Sandler analyst Harst Kumar said the magnitude of Nvidia’s revenue downgrade was surprising, while the decrease in gaming revenue was not surprising.

J.P. Morgan analyst Sandeep Deshpande said in a research note, “The slowdown in Nvidia’s gaming sales probably includes chips they sell to the cryptocurrency market, which has been weak, and that’s what caused the slowdown to be so large.” NVIDIA has consistently increased its supply of cryptocurrency mining processors, which brought in $266 million in revenue in the second quarter of last year.

In its preliminary earnings report, NVIDIA acknowledged that its data center division was impacted by supply chain disruptions, with preliminary revenue coming in at $3.81 billion, again below the company’s expectations. Still, the figure was up 1 percent sequentially and 61 percent year-over-year from the previous quarter.

NVIDIA said it will write off about $1.32 billion in expenses, mainly inventory and related reserves, based on revised expectations for future demand. In other words, it has a large inventory of unused GPUs. The company said it was forced to prepay for existing production commitments because of the significance of the extremely high demand for GPUs during the height of the outbreak.

This means that the company may believe that a large portion of the existing inventory in the hands of its customers will either not be sold or will be sold at a significant discount. To help these partners out, NVIDIA is working with its partners to either accept lower prices or push up the value of these graphics cards through gaming or peripheral bundles, for example.

Colette Kress, NVIDIA’s executive vice president and chief financial officer, said in a statement, “The significant expense incurred in the second quarter reflects our previous long-term purchasing commitments made during a period of severe parts shortages and our current expectations of continued macroeconomic uncertainty.”

Interestingly, its rival AMD apparently didn’t suffer from the same pricing pressure. AMD’s revenue in its gaming division climbed 32 percent to $1.7 billion, even though the company’s gaming division includes revenue from console semi-custom processors and PC GPUs. To be fair, however, AMD’s strategy to enter the console market has shielded it from the overall downturn in the PC market, which Microsoft said in June was “deteriorating.

Kress believes that Nvidia’s long-term gross margin levels will remain unchanged. We have slowed the growth of operating expenses to manage short-term profitability while balancing investments in long-term growth,” she said. We plan to continue to repurchase shares as we expect to generate strong cash flow and future growth to accelerate.”

It is reported that Nvidia is scheduled to announce its second-quarter earnings on August 24.

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