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Nvidia Outlook Beats Expectations but China Worries Linger

A smartphone with a displayed NVIDIA logo is placed on a computer motherboard in this illustration taken March 6, 2023. (Reuters)
A smartphone with a displayed NVIDIA logo is placed on a computer motherboard in this illustration taken March 6, 2023. (Reuters)
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Nvidia Outlook Beats Expectations but China Worries Linger

A smartphone with a displayed NVIDIA logo is placed on a computer motherboard in this illustration taken March 6, 2023. (Reuters)
A smartphone with a displayed NVIDIA logo is placed on a computer motherboard in this illustration taken March 6, 2023. (Reuters)

Chip designer Nvidia said on Tuesday it expects a steep drop in fourth-quarter sales in China - a key revenue generator - in the wake of new US rules, but forecast overall revenue above Wall Street targets as supply-chain issues ease.

Nvidia, whose graphics processing units (GPUs) dominate the market for AI, is set to take a hit from the vastly expanded US export controls on what the company can sell to China. Sales of the affected chips made up nearly a quarter of Nvidia's datacenter sales in the past few quarters.

"Export controls will have a negative effect on our China business, and we do not have good visibility into the magnitude of that impact even over the long term," Chief Financial Officer Colette Kress said during a conference call with analysts.

Kress also confirmed reports that the chip giant is developing newly compliant chips for China but those won't materially contribute to fourth- quarter revenue.

Nvidia stock, which has climbed more than 240% this year, slipped 1.5% in volatile after-hours trading.

The company also faces risks in Israel, whose military is embroiled in a conflict in Gaza and where Nvidia's networking business is headquartered. Sales from that unit, whose gear is used in AI supercomputers, rose 155% from a year ago. Kress said the networking business exceeds a $10 billion annualized run rate.

The chipmaker said a significant portion of its employees based in Israel have been called up to active military duty, and if the war continues, their absence could hurt its future operations.

Nvidia forecast adjusted gross margins of 75.5% for the fourth quarter, above analyst estimates of 72.64%, according to LSEG data. But the company's China troubles could make those margins hard to maintain.

"The company suggested the hit to sales from restrictions would be offset by other regions; however, there were scant details on this. It also begs the question, with margins so extraordinarily high currently, will these offsetting markets support such high margins?" Capital.com analyst Kyle Rodda said.

Still, Nvidia said it expects supply for its AI chips to improve as it prepays to make sure it gets factory priority. It outsources manufacturing to contract chipmakers like TSMC.

Demand for AI servers has grown rapidly. Research firm TrendForce estimates shipments to rise about 40% this year, thanks to their use in powering products like OpenAI's ChatGPT.

BOOMING PROFITS

Nvidia forecast current-quarter revenue of $20 billion, plus or minus 2%. Analysts polled by LSEG expect revenue of $17.86 billion.

Adjusted third-quarter revenue tripled to $18.12 billion, ahead of an average estimate of $16.18 billion. Data center revenue jumped 41% to $14.51 billion, while gaming revenue rose 15% to $2.86 billion.

Excluding items, the company earned $4.02 per share, beating estimates of $3.37 a share.

In response to the newest round of US export rules, Nvidia has already come up with three new products for the Chinese market.

But those China-focused chips could consume vital research resources at Nvidia and could end up banned just like its first round of China market chips, said Jacob Bourne, analyst at Insider Intelligence.

"Nvidia's move to develop specialized chips for the Chinese market, while a strategic response to export restrictions, faces challenges," Bourne said.

US officials unveiled a new batch of restrictions in October and said they will continue to update them as needed.

Last week, the company also introduced a new AI chip called the H200, which will offer superior performance to Nvidia's current top H100 processor.

The H200 includes additional high-bandwidth memory, one of the most expensive parts of the chip, which determines how much data it can crunch quickly.

Rival Advanced Micro Devices had earlier touted the quantity of high-bandwidth memory on one of its competing AI chips.

Major tech companies including Alphabet's Google, Amazon.com and most recently Microsoft have announced AI chips produced by in-house design teams in addition to purchasing Nvidia's hardware for their own data centers.

Building custom chips can cost hundreds of millions of dollars and take years, but gives the major cloud companies the ability to include features tied specifically to their AI needs.

Microsoft unveiled a duo of custom-designed computing chips earlier this month, one of which can run large language models.

Chinese tech company Huawei's AI chip is also gaining traction from local firms as US pressure makes it hard to access Nvidia chips.

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North Korean Charged in Cyberattacks on US Hospitals, NASA and Military Bases

A man who allegedly carried out cybercrimes for a North Korean military intelligence agency has been indicted in a conspiracy to hack hospitals and health care providers in several US states. - The AP
A man who allegedly carried out cybercrimes for a North Korean military intelligence agency has been indicted in a conspiracy to hack hospitals and health care providers in several US states. - The AP
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North Korean Charged in Cyberattacks on US Hospitals, NASA and Military Bases

A man who allegedly carried out cybercrimes for a North Korean military intelligence agency has been indicted in a conspiracy to hack hospitals and health care providers in several US states. - The AP
A man who allegedly carried out cybercrimes for a North Korean military intelligence agency has been indicted in a conspiracy to hack hospitals and health care providers in several US states. - The AP

A North Korean military intelligence operative has been indicted in a conspiracy to hack into American health care providers, NASA, US military bases and international entities, stealing sensitive information and installing ransomware to fund more attacks, federal prosecutors announced Thursday.

The indictment of Rim Jong Hyok by a grand jury in Kansas City, Kansas, accuses him of laundering the money through a Chinese bank and then using it to buy computer servers and fund more cyberattacks on defense, technology and government entities around the world.

The hacks on American hospitals and other health care providers disrupted the treatment of patients, officials said. He's accused of targeting 17 entities across 11 US states, including NASA and US military bases, as well as defense and energy companies in China, Taiwan and South Korea, according to The AP.

For more than three months, Rim and other members of the Andariel Unit of North Korea's Reconnaissance General Bureau had access to NASA’s computer system, extracting over 17 gigabytes of unclassified data, the indictment says. They also reached inside computer systems for defense companies in Michigan and California, as well as Randolph Air Force base in Texas and Robins Air Force base in Georgia, authorities say.

The malware enabled the state-sponsored Andariel group to send stolen information to North Korean military intelligence, furthering the country’s military and nuclear aspirations, federal prosecutors said. They've gone after details of fighter aircraft, missile defense systems, satellite communications and radar systems, a senior FBI official said.

“While North Korea uses these types of cyber crimes to circumvent international sanctions and fund its political and military ambitions, the impact of these wanton acts have a direct impact on the citizens of Kansas,” said Stephen A. Cyrus, an FBI agent based in Kansas City.

Online court records do not list an attorney for Rim, who has lived in North Korea and worked at the military intelligence agency’s offices in both Pyongyang and Sinuiju, according to court records. A reward of up to $10 million has been offered for information that could lead to him or other foreign government operatives who target critical US infrastructure.

The Justice Department has prosecuted multiple cases related to North Korean hacking, often alleging a profit-driven motive that sets the nation's cybercriminals apart from hackers in Russia and China. In 2021, for instance, the department charged three North Korean computer programmers in a broad range of hacks including a destructive attack targeting an American movie studio and the attempted theft and extortion of more than $1.3 billion from banks and companies around the world.

In this case, the FBI was alerted by a Kansas medical center that was hit in May 2021. Hackers had encrypted its files and servers, blocking access to patient files, laboratory test results and computers needed to operate hospital equipment. A Colorado health care provider was affected by the same Maui ransomware variant.

A ransom note sent to the Kansas hospital demanded Bitcoin payments valued then at about $100,000, to be sent to a cryptocurrency address.

“Otherwise all of your files will be posted in the Internet which may lead you to loss of reputation and cause the troubles for your business,” the note reads. “Please do not waste your time! You have 48 hours only! After that the Main server will double your price.”

Federal investigators said they traced blockchains to follow the money: An unnamed co-conspirator transferred the Bitcoin to a virtual currency address belonging to two Hong Kong residents before it was converted into Chinese currency and transferred to a Chinese bank. The money was then accessed from an ATM in China next to the Sino-Korean Friendship Bridge connecting China and North Korea, according to court records.

In 2022, the Justice Department said the FBI seized approximately $500,000 in ransom payments from the money laundering accounts, including the entire ransom payment from the hospital.

An arrest of Rim is unlikely, so the biggest outcome of the indictment is that it may lead to sanctions that could cripple the ability of North Korea to collect ransoms this way, which could in turn remove the motivation to conduct cyber attacks on entities like hospitals in the future, according to Allan Liska, an analyst with the cybersecurity firm Recorded Future.

“Now, unfortunately, that will force them to do more cryptocurrency theft. So it’s not going to stop their activity. But the hope is that we won’t have hospitals disrupted by ransomware attacks because they’ll know that they can’t get paid,” Liska said.

He also noted that a Chinese entity was among the victims and questioned what the country, which is an ally of North Korea, thinks of being targeted.

“China can’t be too thrilled about that,” he said.