Executive Vice President & Chief Financial Officer at NVIDIA
This was a challenging quarter. Total revenue of $6.7 billion was down 19% sequentially and up 3% year-on-year, below the $8.1 billion outlook we provided on our last earnings call. As we had indicated in our pre-announcement press release on August 8, we experienced a shortfall to our expectations driven primarily by weaker Gaming revenue. Today, we will share with you more details on our Q2 results and Q3 outlook.
Starting with Gaming. Revenue of $2.04 billion was down 44% sequentially and down 33% year-on-year, reflecting challenging market conditions. As discussed in May, we expected a sequential decline in Gaming revenue due to softness in Europe related to the war in Ukraine and COVID lockdowns in China. The decline in Gaming GPU revenue was sharper than anticipated driven by both lower units and lower ASPs. Macroeconomic headwinds across the world drove a sudden slowdown in consumer demand. We implemented programs with our Gaming channel partners to adjust pricing in the channel and to price-position current high-end desktop GPUs as we prepare for a new architecture launch. As noted last quarter, we had expected cryptocurrency money to make a diminishing contribution to Gaming demand. We are unable to accurately quantify the extent to which reduced crypto money contributed to the decline in Gaming demand. While Gaming navigates significant short-term macroeconomic challenges, we believe the long-term fundamentals in Gaming remain strong.
NVIDIA RTX has redefined computer graphics and is now supported by almost 300 games and applications. NVIDIA's GeForce GPUs are the most coveted brand by gamers, representing 15 of the top 15 most popular GPUs on Steam. Gaming has emerged from the pandemic an even more popular form of entertainment and social connectivity. Estimated GeForce sell-through is up over 70% since before the pandemic, and peak concurrent users on Steam are also up more than 70% over the same time period. GeForce now registered members now exceed 20 million. This quarter, we added 80 more titles, including the hugely popular Genshin Impact, bringing our total to over 1,350.
Moving to Professional Visualization. Revenue of $496 million was down 20% sequentially and down 4% from a year ago. A sequential increase in mobile revenue was more than offset by lower desktop revenue, particularly at the high end. As macroeconomic headwinds intensified, enterprise demand slowed and OEMs worked to reduce inventory. We expect these trends to persist in Q3. While ProViz is undergoing a near-term adjustment after doubling last year, we believe we have expanded the market opportunity over the last couple of years with AI and Omniverse workloads. We believe hybrid work is here to stay, and with it, the need for collaborative 3D design enabled by professional graphic workstations, both at home and in the office as well as in the cloud.
In June, we announced a partnership with Siemens to enable the industrial levers and AI-powered digital twins, connecting Siemens' Xcelerator platform to NVIDIA Omniverse. This connection opens Siemens to the vast ecosystem of NVIDIA Omniverse and NVIDIA to Siemens' ecosystem of the world's largest industries. Earlier this month at SIGGRAPH, the Premier Computer Graphics Conference, we announced advancements to several foundational technologies of the metaverse, defined as the 3D version of the Internet. First, NVIDIA Omniverse Avatar Cloud Engine will enable businesses to create and deploy assistants and avatars, transforming interactions across a range of industries. We also unveiled 11 new Omniverse connectors, bringing the total number of connectors to the Omniverse USD ecosystem to 112. And finally, we released SDKs for the new field of neural graphics, which intertwines AI and graphics to help automate the creation of virtual worlds.
Moving to Automotive. Revenue of $220 million increased 59% sequentially and 45% from the year ago quarter. Strong growth was driven by auto AI solutions, which include AI cockpit and self-driving revenue, with particular strength in self-driving as new energy vehicle design wins ramp into volume. We believe Q2 was an inflection point for our Automotive revenue as NVIDIA Orin has great momentum. During the quarter, we announced rollout plans of new vehicles from OEM partners, NIO, Li Auto, JIDU and Human Horizons as well as Pony.ai's line of self-driving trucks and robotaxis, all built on NVIDIA DRIVE. Looking forward, we expect our $11 billion Automotive design win pipeline to translate to continued growth.
Moving to Data Center. Revenue of $3.81 billion grew 1% sequentially and 61% year-on-year. Although a record, this was somewhat short of our expectations as we were impacted by supply chain disruptions. Revenue from hyperscale customers nearly doubled year-on-year. Sequentially, sales to North America hyperscale and cloud computing customers increased but were more than offset by lower sales to China hyperscale customers affected by domestic economic conditions. Vertical industries grew both sequentially and year-on-year. Key workloads driving growth include natural language processing, recommender systems, autonomous vehicle fleet data processing and training and cloud graphics.
Let me share a couple of customer examples. Pinterest transitioned to 100 times larger recommender models by moving its inference from CPUs to NVIDIA GPUs. Its ability to deploy a higher-quality model at high throughput and low latency resulted in a 16% increase in engagement, a critical metric for the company, which has over 400 million users and 300 billion images. And Tesla recently upgraded its supercomputer to use over 7,000 A100 GPUs for autopilot training. From a product perspective, networking led growth this quarter with strong demand from our high-speed Ethernet adapters and design win momentum toward next-generation adapters, including the ConnectX-6 and ConnectX-7. We also see growing interest from cloud service providers for our new Spectrum-4 400-gigabit per second Ethernet networking platform.
Additionally, we are ramping into the upcoming launches of our next-generation platforms. The Hopper architecture flagship H100 data center GPU is in production. Grace is our first CPU. Top computer makers, including Dell, HPE, Inspur, Lenovo and Supermicro are adopting the new NVIDIA Grace CPU Superchip and Grace Hopper Superchip to build the next generation of supers. 72% of the systems on the latest top 500 list of the world's fastest supercomputers are powered by NVIDIA, including 31 of 39 new systems. NVIDIA's own Selene supercomputer ranks at number 8 in the top 500 and is the world's fastest enterprise supercomputer. Moreover, 22 of the top 30 systems on the Green500 list of the most energy-efficient supercomputers are powered by NVIDIA.
Significant advances in software technologies are key to our platform performance. In the past 2 years, our A100-based platform has delivered 6 times more performance as measured by the MLPerf industry benchmark, largely through new software technologies and optimizations. Last month, we announced an update to the NeMo Megatron framework that can speed up the training of large language models by up to 30%. Improving a multi-hundred million-dollar AI infrastructure by 30% translates to significant value for customers. LLMs are one of the most important neural networks today, ranging in size, from tens of billions, to over 1 trillion parameters.
Learning from text, they can be used for real-time content generation, tech summarization, customer service chat box and question-answering for conversational AI interfaces. Currently, these capabilities are available to early access customers to run on NVIDIA GTX SUPER products and NVIDIA DGX Foundry as well as in Microsoft Azure cloud, with other product platforms available soon. We are working with the industry leaders in large language models, a very active and exciting space of AI.
Moving to the rest of the P&L. GAAP gross margin was 43.5%, and non-GAAP gross margin was 45.9%. Gross margin includes $1.22 billion in charges for inventory and related reserves based on revised expectations of future demand and $122 million for warranty reserves. These charges incurred in the quarter reflect purchase commitments that we made during a time of severe component shortages and our current expectation of ongoing macro uncertainty. We believe our long-term gross margin profile is intact.
GAAP operating expenses were up 36% from a year ago and down 32% sequentially as Q1 included a $1.35 billion acquisition termination charge related to the Arm transaction. Non-GAAP operating expenses were up 38% from a year ago and up 9% sequentially. These increases were driven primarily by employee growth costs as well as increases in salaries to support our employees during this high inflationary environment and engineering development of new products coming to market. We have slowed operating expense growth, balancing investments for long-term revenue growth, while managing near-term profitability. Our full year non-GAAP opex is expected to grow over 30%. During the first half of fiscal 2023, we returned $5.5 billion to shareholders in the form of share repurchases and cash dividends. We plan to continue share repurchases. We have nearly $12 billion remaining under our authorization through December of 2023.
Let me turn to the outlook for the third quarter of fiscal '23. We expect Gaming and ProViz revenue to decline sequentially as OEMs and channel partners reduce inventory levels to align with current levels of demand and prepare for our new product generation. We expect that decline to be partially offset by sequential growth in Data Center and Automotive. Revenue is expected to be $5.9 billion, plus or minus 2%. GAAP and non-GAAP gross margins are expected to be 62.4% and 65%, respectively, plus or minus 50 basis points. GAAP operating expenses are expected to be approximately $2.59 billion. Non-GAAP operating expenses are expected to be approximately $1.82 billion. GAAP and non-GAAP other income and expenses are expected to be an expense of approximately $10 million, excluding gains and losses on nonaffiliated investments. GAAP and non-GAAP tax rates are expected to be 9.5%, plus or minus 1%, excluding any discrete items. Capital expenditures are expected to be approximately $550 million to $600 million. Further financial details are included in the CFO commentary and other information available on our IR website.
In closing, let me highlight upcoming events for the financial community. We will be attending the Jefferies conference in Chicago on August 30 and the Goldman Sachs conference in San Francisco on September 12. And we will be holding a financial analyst Q&A with management, following Jensen's GTC keynote, on September 20. Our earnings call to discuss the results of our third quarter of fiscal 2023 is scheduled for Wednesday, November 16.
We will now open the call for questions. Operator, can you assist? Would you please poll for questions?