UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[x] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 30, 201729, 2018
OR
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[_] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 0-23985
NVIDIA CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware | 94-3177549 |
(State or Other Jurisdiction of | (I.R.S. Employer |
Incorporation or Organization) | Identification No.) |
27012788 San Tomas Expressway
Santa Clara, California 9505095051
(408) 486-2000
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
N/A
(Former name, former address and former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | Emerging growth company o |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of common stock, $0.001 par value, outstanding as of August 18, 2017,10, 2018, was 600608 million.
NVIDIA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED July 30, 201729, 2018
TABLE OF CONTENTS
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| Financial Statements (Unaudited) | |
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| a) Condensed Consolidated Statements of Income for the three and six months ended July 30, 201729, 2018 and July 31, 201630, 2017 | |
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| b) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 30, 201729, 2018 and July 31, 201630, 2017 | |
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| c) Condensed Consolidated Balance Sheets as of July 30, 201729, 2018 and January 29, 201728, 2018 | |
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| d) Condensed Consolidated Statements of Cash Flows for the six months ended July 30, 201729, 2018 and July 31, 201630, 2017 | |
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| e) Notes to Condensed Consolidated Financial Statements | |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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| Quantitative and Qualitative Disclosures About Market Risk | |
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| Controls and Procedures | |
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| Legal Proceedings | |
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| Risk Factors | |
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| Unregistered Sales of Equity Securities and Use of Proceeds | |
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| Exhibits | |
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WHERE YOU CAN FIND MORE INFORMATION
Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We also use the following social media channels as a means of disclosing information about the company, our products, our planned financial and other announcements and attendance at upcoming investor and industry conferences, and other matters and for complying with our disclosure obligations under Regulation FD:
NVIDIA Twitter Account (https://twitter.com/NVIDIA)
NVIDIA Company Blog (http://blogs.nvidia.com/) blogs.nvidia.com)
NVIDIA Facebook Page (https://www.facebook.com/NVIDIA)
NVIDIA LinkedIn Page (http://www.linkedin.com/company/nvidia)
NVIDIA Instagram Page (https://www.instagram.com/nvidia/)
In addition, investors and others can use the Pulse news reader to subscribe to the NVIDIA Daily News feed and can view NVIDIA videos on YouTube.
The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts and the blog, in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this quarterly report on Form 10-Q. These channels may be updated from time to time on NVIDIA's investor relations website.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
| | | Three Months Ended | | Six Months Ended | Three Months Ended | | Six Months Ended |
| July 30, | | July 31, | | July 30, | | July 31, | July 29, | | July 30, | | July 29, | | July 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | | | | | | | | |
Revenue | $ | 2,230 |
| | $ | 1,428 |
| | $ | 4,167 |
| | $ | 2,733 |
| $ | 3,123 |
| | $ | 2,230 |
| | $ | 6,330 |
| | $ | 4,167 |
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Cost of revenue | 928 |
| | 602 |
| | 1,715 |
| | 1,156 |
| 1,148 |
| | 928 |
| | 2,287 |
| | 1,715 |
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Gross profit | 1,302 |
| | 826 |
| | 2,452 |
| | 1,577 |
| 1,975 |
| | 1,302 |
| | 4,043 |
| | 2,452 |
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Operating expenses | |
| | | | | | | |
| | | | | | |
Research and development | 416 |
| | 350 |
| | 827 |
| | 697 |
| 581 |
| | 416 |
| | 1,124 |
| | 827 |
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Sales, general and administrative | 198 |
| | 157 |
| | 383 |
| | 316 |
| 237 |
| | 198 |
| | 467 |
| | 383 |
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Restructuring and other charges | — |
| | 2 |
| | — |
| | 3 |
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Total operating expenses | 614 |
| | 509 |
| | 1,210 |
| | 1,016 |
| 818 |
| | 614 |
| | 1,591 |
| | 1,210 |
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Income from operations | 688 |
| | 317 |
| | 1,242 |
| | 561 |
| 1,157 |
| | 688 |
| | 2,452 |
| | 1,242 |
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Interest income | 15 |
| | 12 |
| | 31 |
| | 23 |
| 32 |
| | 15 |
| | 57 |
| | 31 |
|
Interest expense | (15 | ) | | (12 | ) | | (31 | ) | | (23 | ) | (14 | ) | | (15 | ) | | (29 | ) | | (31 | ) |
Other, net | (4 | ) | | — |
| | (21 | ) | | (3 | ) | 5 |
| | (4 | ) | | 11 |
| | (21 | ) |
Total other income (expense) | (4 | ) | | — |
| | (21 | ) | | (3 | ) | 23 |
| | (4 | ) | | 39 |
| | (21 | ) |
Income before income tax expense | 684 |
| | 317 |
| | 1,221 |
| | 558 |
| |
Income before income tax | | 1,180 |
| | 684 |
| | 2,491 |
| | 1,221 |
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Income tax expense | 101 |
| | 56 |
| | 130 |
| | 89 |
| 79 |
| | 101 |
| | 146 |
| | 130 |
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Net income | $ | 583 |
| | $ | 261 |
| | $ | 1,091 |
| | $ | 469 |
| $ | 1,101 |
| | $ | 583 |
| | $ | 2,345 |
| | $ | 1,091 |
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Net income per share: | | | | | | | | | | | | | | |
Basic | $ | 0.98 |
| | $ | 0.49 |
| | $ | 1.83 |
| | $ | 0.88 |
| $ | 1.81 |
| | $ | 0.98 |
| | $ | 3.86 |
| | $ | 1.83 |
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Diluted | $ | 0.92 |
| | $ | 0.41 |
| | $ | 1.71 |
| | $ | 0.76 |
| $ | 1.76 |
| | $ | 0.92 |
| | $ | 3.74 |
| | $ | 1.71 |
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Weighted average shares used in per share computation: | | | | | | | | | | | | | | |
Basic | 597 |
| | 534 |
| | 595 |
| | 536 |
| 607 |
| | 597 |
| | 607 |
| | 595 |
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Diluted | 633 |
| | 634 |
| | 637 |
| | 620 |
| 626 |
| | 633 |
| | 627 |
| | 637 |
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Cash dividends declared and paid per common share | $ | 0.140 |
| | $ | 0.115 |
| | $ | 0.280 |
| | $ | 0.230 |
| $ | 0.150 |
| | $ | 0.140 |
| | $ | 0.300 |
| | $ | 0.280 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
| | | Three Months Ended | | Six Months Ended | Three Months Ended | | Six Months Ended |
| July 30, | | July 31, | | July 30, | | July 31, | July 29, | | July 30, | | July 29, | | July 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | | | | |
Net income | $ | 583 |
| | $ | 261 |
| | $ | 1,091 |
| | $ | 469 |
| $ | 1,101 |
| | $ | 583 |
| | $ | 2,345 |
| | $ | 1,091 |
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Other comprehensive income, net of tax: | | | | | | | | |
Other comprehensive income (loss), net of tax | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | |
Net unrealized gain | 3 |
| | 5 |
| | 5 |
| | 11 |
| 6 |
| | 3 |
| | 3 |
| | 5 |
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Reclassification adjustments for net realized gain included in net income | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | 1 |
| | — |
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Net change in unrealized gain | 3 |
| | 5 |
| | 5 |
| | 11 |
| 6 |
| | 3 |
| | 4 |
| | 5 |
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Cash flow hedges: | | | | | | | | | | | | | | |
Net unrealized loss | (1 | ) | | (3 | ) | | (2 | ) | | (4 | ) | (4 | ) | | (1 | ) | | (8 | ) | | (2 | ) |
Reclassification adjustments for net realized loss included in net income | 1 |
| | — |
| | 1 |
| | — |
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Reclassification adjustments for net realized gain (loss) included in net income | | (2 | ) | | 1 |
| | (1 | ) | | 1 |
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Net change in unrealized loss | — |
| | (3 | ) | | (1 | ) | | (4 | ) | (6 | ) | | — |
| | (9 | ) | | (1 | ) |
Other comprehensive income, net of tax | 3 |
| | 2 |
| | 4 |
| | 7 |
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Other comprehensive income (loss), net of tax | | — |
| | 3 |
| | (5 | ) | | 4 |
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Total comprehensive income | $ | 586 |
| | $ | 263 |
| | $ | 1,095 |
| | $ | 476 |
| $ | 1,101 |
| | $ | 586 |
| | $ | 2,340 |
| | $ | 1,095 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
| | | July 30, | | January 29, | July 29, | | January 28, |
| 2017 | | 2017 | 2018 | | 2018 |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 1,988 |
| | $ | 1,766 |
| $ | 718 |
| | $ | 4,002 |
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Marketable securities | 3,889 |
| | 5,032 |
| 7,225 |
| | 3,106 |
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Accounts receivable, net | 1,213 |
| | 826 |
| 1,662 |
| | 1,265 |
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Inventories | 855 |
| | 794 |
| 1,090 |
| | 796 |
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Prepaid expenses and other current assets | 125 |
| | 118 |
| 136 |
| | 86 |
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Total current assets | 8,070 |
| | 8,536 |
| 10,831 |
| | 9,255 |
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Property and equipment, net | 578 |
| | 521 |
| 1,162 |
| | 997 |
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Goodwill | 618 |
| | 618 |
| 618 |
| | 618 |
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Intangible assets, net | 76 |
| | 104 |
| 51 |
| | 52 |
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Other assets | 60 |
| | 62 |
| 220 |
| | 319 |
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Total assets | $ | 9,402 |
| | $ | 9,841 |
| $ | 12,882 |
| | $ | 11,241 |
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LIABILITIES, CONVERTIBLE DEBT CONVERSION OBLIGATION AND SHAREHOLDERS’ EQUITY | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | | | |
Accounts payable | $ | 431 |
| | $ | 485 |
| $ | 800 |
| | $ | 596 |
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Accrued and other current liabilities | 517 |
| | 507 |
| 648 |
| | 542 |
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Convertible short-term debt | 84 |
| | 796 |
| 14 |
| | 15 |
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Total current liabilities | 1,032 |
| | 1,788 |
| 1,462 |
| | 1,153 |
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Long-term debt | 1,984 |
| | 1,983 |
| 1,987 |
| | 1,985 |
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Other long-term liabilities | 408 |
| | 271 |
| 638 |
| | 632 |
|
Capital lease obligations, long-term | 3 |
| | 6 |
| |
Total liabilities | 3,427 |
| | 4,048 |
| 4,087 |
| | 3,770 |
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Commitments and contingencies - see Note 12 |
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Convertible debt conversion obligation | 2 |
| | 31 |
| |
Commitments and contingencies - see Note 13 | |
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| |
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Shareholders’ equity: | | | | | | |
Preferred stock | — |
| | — |
| — |
| | — |
|
Common stock | 1 |
| | 1 |
| 1 |
| | 1 |
|
Additional paid-in capital | 5,048 |
| | 4,708 |
| 5,681 |
| | 5,351 |
|
Treasury stock, at cost | (6,070 | ) | | (5,039 | ) | (7,821 | ) | | (6,650 | ) |
Accumulated other comprehensive loss | (12 | ) | | (16 | ) | (23 | ) | | (18 | ) |
Retained earnings | 7,006 |
| | 6,108 |
| 10,957 |
| | 8,787 |
|
Total shareholders' equity | 5,973 |
| | 5,762 |
| 8,795 |
| | 7,471 |
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Total liabilities, convertible debt conversion obligation and shareholders' equity | $ | 9,402 |
| | $ | 9,841 |
| |
Total liabilities and shareholders' equity | | $ | 12,882 |
| | $ | 11,241 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
NVIDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
| | | Six Months Ended | Six Months Ended |
| July 30, | | July 31, | July 29, | | July 30, |
| 2017 | | 2016 | 2018 | | 2017 |
Cash flows from operating activities: | | | | | | |
Net income | $ | 1,091 |
| | $ | 469 |
| $ | 2,345 |
| | $ | 1,091 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
| |
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| |
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Stock-based compensation expense | | 262 |
| | 158 |
|
Depreciation and amortization | 96 |
| | 92 |
| 116 |
| | 96 |
|
Stock-based compensation expense | 158 |
| | 111 |
| |
Deferred income taxes | 115 |
| | 77 |
| 113 |
| | 115 |
|
Amortization of debt discount | 2 |
| | 14 |
| |
Loss on early debt conversions | 17 |
| | — |
| — |
| | 17 |
|
Net loss (gain) on sale and disposal of long-lived assets and investments | 1 |
| | (3 | ) | |
Other | 8 |
| | 7 |
| (22 | ) | | 11 |
|
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | (387 | ) | | (138 | ) | (386 | ) | | (387 | ) |
Inventories | (61 | ) | | (104 | ) | (295 | ) | | (61 | ) |
Prepaid expenses and other assets | (15 | ) | | (17 | ) | (44 | ) | | (15 | ) |
Accounts payable | (63 | ) | | 131 |
| 172 |
| | (63 | ) |
Accrued and other current liabilities | 9 |
| | (85 | ) | 96 |
| | 9 |
|
Other long-term liabilities | 16 |
| | (35 | ) | 1 |
| | 16 |
|
Net cash provided by operating activities | 987 |
| | 519 |
| 2,358 |
| | 987 |
|
Cash flows from investing activities: | | | | | | |
Proceeds from maturities of marketable securities | | 2,957 |
| | 450 |
|
Proceeds from sales of marketable securities | 726 |
| | 901 |
| 77 |
| | 726 |
|
Proceeds from maturities of marketable securities | 450 |
| | 506 |
| |
Proceeds from sale of long-lived assets and investments | — |
| | 6 |
| |
Purchases of marketable securities | (36 | ) | | (1,415 | ) | (7,136 | ) | | (36 | ) |
Purchases of property and equipment and intangible assets | (108 | ) | | (87 | ) | (247 | ) | | (108 | ) |
Investment in non-affiliates | (16 | ) | | (4 | ) | (7 | ) | | (16 | ) |
Net cash provided by (used in) investing activities | 1,016 |
| | (93 | ) | (4,356 | ) | | 1,016 |
|
Cash flows from financing activities: | | | | | | |
Payments related to repurchases of common stock | (758 | ) | | (509 | ) | (655 | ) | | (758 | ) |
Repayment of Convertible Notes | (741 | ) | | — |
| (2 | ) | | (741 | ) |
Dividends paid | (166 | ) | | (124 | ) | (182 | ) | | (166 | ) |
Proceeds related to employee stock plans | 76 |
| | 91 |
| 69 |
| | 76 |
|
Payments related to tax on restricted stock units | (190 | ) | | (51 | ) | (515 | ) | | (190 | ) |
Other | (2 | ) | | (3 | ) | (1 | ) | | (2 | ) |
Net cash used in financing activities | (1,781 | ) | | (596 | ) | (1,286 | ) | | (1,781 | ) |
Change in cash and cash equivalents | 222 |
| | (170 | ) | (3,284 | ) | | 222 |
|
Cash and cash equivalents at beginning of period | 1,766 |
| | 596 |
| 4,002 |
| | 1,766 |
|
Cash and cash equivalents at end of period | $ | 1,988 |
| | $ | 426 |
| $ | 718 |
| | $ | 1,988 |
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| | | | | | |
Other non-cash investing activity: | | | | | | |
Assets acquired by assuming related liabilities | $ | 32 |
| | $ | 15 |
| $ | 52 |
| | $ | 32 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission, or SEC, Regulation S-X. The January 29, 201728, 2018 consolidated balance sheet was derived from our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2017,28, 2018, as filed with the SEC, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments, consisting only of normal recurring adjustments except as otherwise noted, considered necessary for a fair statement of results of operations and financial position have been included. The results for the interim periods presented are not necessarily indicative of the results expected for any future period. The following information should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2017.28, 2018.
Significant Accounting Policies
ForExcept for the accounting policy for revenue recognition, which was updated as a descriptionresult of adopting a new accounting standard related to revenue recognition, there have been no material changes to our significant accounting policies seein Note 1 - Organization and Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2017. There have been no material changes28, 2018.
Revenue Recognition
We derive our revenue from product sales, including hardware and systems, license and development arrangements, and software licensing. We determine revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, we satisfy a performance obligation.
Product Sales Revenue
Revenue from product sales is recognized upon transfer of control of promised products to customers in an amount that reflects the consideration we expect to receive in exchange for those products. Revenue is recognized net of allowances for returns, customer programs and any taxes collected from customers.
For products sold with a right of return, we record a reduction to revenue by establishing a sales return allowance for estimated product returns at the time revenue is recognized, based primarily on historical return rates. However, if product returns for a fiscal period are anticipated to exceed historical return rates, we may determine that additional sales return allowances are required to properly reflect our estimated exposure for product returns.
Our customer programs involve rebates, which are designed to serve as sales incentives to resellers of our products in various target markets, and marketing development funds, or MDFs, which represent monies paid to our partners that are earmarked for market segment development and are designed to support our partners’ activities while also promoting NVIDIA products. We account for customer programs as a reduction to revenue and accrue for potential rebates and MDFs based on the amount we expect to be claimed by customers.
License and Development Arrangements
Our license and development arrangements with customers typically require significant accounting policies sincecustomization of our intellectual property components. As a result, we recognize the filingrevenue from the license and the revenue from the development services as a single performance obligation over the period in which the development services are performed. We measure progress to completion based on actual cost incurred to date as a percentage of the Annual Reportestimated total cost required to complete each project. If a loss on Form 10-K.an arrangement becomes probable during a period, we record a provision for such loss in that period.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Software Licensing
Our software licenses provide our customers with a right to use the software when it is made available to the customer. Customers may purchase either perpetual licenses or subscriptions to licenses, which differ mainly in the duration over which the customer benefits from the software. Software licenses are frequently sold along with post contract customer support, or PCS. For such arrangements, we allocate revenue to the software license and PCS on a relative standalone selling price basis by maximizing the use of observable inputs to determine the standalone selling price for each performance obligation. Revenue from software licenses is recognized up front when the software is made available to the customer. PCS revenue is recognized ratably over the service period, or as services are performed.
Fiscal Year
We operate on a 52- or 53-week year, ending on the last Sunday in January. Fiscal years 20182019 and 20172018 are both 52-week years. The second quarterquarters of fiscal years 20182019 and 20172018 were both 13-week quarters.
Reclassifications
Certain prior fiscal year balances have been reclassified to conform to the current fiscal year presentation.
Principles of Consolidation
Our condensed consolidated financial statements include the accounts of NVIDIA Corporation and our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from thoseour estimates. On an on-goingongoing basis, we evaluate our estimates, including those related to revenue recognition, cash equivalents and marketable securities, accounts receivable, inventories, income taxes, goodwill, stock-based compensation, litigation, investigation and settlement costs, restructuring and other charges, and other contingencies. These estimates are based on historical facts and various other assumptions that we believe are reasonable.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Adoption of New and Recently Issued Accounting Pronouncements
Recently Adopted Accounting PronouncementPronouncements
In October 2016, theThe Financial Accounting Standards Board, or FASB, issued an accounting standards update which requiresthat creates a single source of revenue guidance under U.S. GAAP for all companies, in all industries. We adopted this guidance on January 29, 2018 using the modified retrospective approach. Refer to Note 2 of these Notes to Condensed Consolidated Financial Statements for additional information.
In January 2016, the FASB issued an accounting standards update to amend certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. We are now required to recognize changes in the fair value of our equity investments through net income tax consequences of an intra-entity transfer of an asset,rather than other than inventory, when the transfer occurs.comprehensive income. We elected to early adoptadopted this new guidance in the first quarter of fiscal year 2018, which required us to reflect any adjustments as of January 30, 2017. Upon2019 and applied it prospectively. The adoption of this guidance we recordeddid not have a cumulative-effect adjustment as of the first day of fiscal year 2018 to decrease retained earnings by $28 million, with a corresponding decrease to prepaid taxes that had not been previously recognized in income tax expense.
significant impact on our consolidated financial statements.
Recent Accounting PronouncementsPronouncement Not Yet Adopted
In February 2016 and July 2018, the FASB issued an accounting standards updateupdates regarding the accounting for leases by which we will begin recognizing lease assets and liabilities on the balance sheet for leases with a lease termterms of more than 12 months. The update will require additional disclosures regarding key information about leasing arrangements. Under existing guidance, operating leasesFASB also recently provided a practical expedient transition method to adopt the new lease accounting requirements. We are not recorded asevaluating the impact of adopting the new lease assetsaccounting standards on our consolidated financial statements, systems and processes in conjunction with our review of lease liabilities on the balance sheet.agreements. The updateupdates will be effective for us beginning in ourthe first quarter of fiscal year 2020, with early adoption permitted.2020. We are currently evaluating the impact of the adoption of this accounting guidance on our consolidated financial statements. However, we expect the adoption of this accounting guidance to result in an increase in lease assets and a corresponding increase in lease liabilities on our Consolidated Balance Sheets.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 2 - New Revenue Accounting Standard
Method and Impact of Adoption
On January 29, 2018, we adopted the new revenue accounting standard using the modified retrospective method and applied it to contracts that were not completed as of that date. Upon adoption, we recognized the cumulative effect of the new standard as a $7 million increase to opening retained earnings, net of tax. Comparative information for prior periods has not been adjusted. The FASB issued an accounting standards update that creates a single sourceimpact of revenue guidance under U.S. GAAPthe new standard on our consolidated financial statements for all companies, in all industries. We expect to adopt this guidance beginning in ourthe second quarter and first quarterhalf of fiscal year 2019 usingwas not significant.
Deferred Revenue and Performance Obligations
Deferred revenue is comprised mainly of customer advances and deferrals related to license and development arrangements and PCS related to software licensing. The following table shows the modified retrospective approach. While we are still finalizing our analysis to quantifychanges in deferred revenue during the adoption impactfirst half of the provisions of the new standard, we do not expect it to have a material impact on our consolidated financial statements.fiscal year 2019:
|
| | | |
| July 29, |
| 2018 |
| (In millions) |
Balance as of January 28, 2018 | $ | 68 |
|
Adjustment to retained earnings upon adoption of new revenue standard | (5 | ) |
Balance as of January 29, 2018 | 63 |
|
Deferred revenue added during the period | 194 |
|
Revenue recognized during the period | (153 | ) |
Balance as of July 29, 2018 | $ | 104 |
|
Revenue related to remaining performance obligations represents the amount of contracted license and development arrangements and PCS that has not been recognized. As of July 29, 2018, the amount of our remaining performance obligations that have not been recognized as revenue was $235 million, of which we expect to recognize approximately 50% as revenue over the next twelve months and the remainder thereafter. This amount excludes the value of remaining performance obligations for contracts with an original expected length of one year or less.
Refer to Note 15 of these Notes to Condensed Consolidated Financial Statements for additional information, including disaggregated revenue disclosures.
Note 23 - Stock-Based Compensation
Our stock-based compensation expense is associated with stock options, restricted stock units, or RSUs, performance stock units that are based on our corporate financial performance targets, or PSUs, performance stock units that are based on market conditions, or market-based PSUs, and our employee stock purchase plan, or ESPP.
Our Condensed Consolidated Statements of Income include stock-based compensation expense, net of amounts capitalized asallocated to inventory, as follows:
| | | Three Months Ended | | Six Months Ended | Three Months Ended | | Six Months Ended |
| July 30, 2017 | | July 31, 2016 | | July 30, 2017 | | July 31, 2016 | July 29, 2018 | | July 30, 2017 | | July 29, 2018 | | July 30, 2017 |
| (In millions) | (In millions) |
Cost of revenue | $ | 4 |
| | $ | 4 |
| | $ | 8 |
| | $ | 8 |
| $ | 8 |
| | $ | 4 |
| | $ | 16 |
| | $ | 8 |
|
Research and development | 44 |
| | 30 |
| | 85 |
| | 59 |
| 76 |
| | 44 |
| | 150 |
| | 85 |
|
Sales, general and administrative | 33 |
| | 24 |
| | 65 |
| | 44 |
| 48 |
| | 33 |
| | 96 |
| | 65 |
|
Total | $ | 81 |
| | $ | 58 |
| | $ | 158 |
| | $ | 111 |
| $ | 132 |
| | $ | 81 |
| | $ | 262 |
| | $ | 158 |
|
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Equity Award Activity
The following is a summary of equity award transactions under our equity incentive plans:
|
| | | | | | | | | | | | | |
| RSUs, PSUs, and Market-based PSUs Outstanding | | Options Outstanding |
| Number of Shares | | Weighted Average Grant-Date Fair Value Per Share | | Number of Shares | | Weighted Average Exercise Price Per Share |
| (In millions, except per share data) |
Balances, January 29, 2017 | 27 |
| | $ | 32.84 |
| | 7 |
| | $ | 14.47 |
|
Granted (1) (2) | 3 |
| | $ | 106.65 |
| | — |
| | $ | — |
|
Exercised | — |
| | $ | — |
| | (1 | ) | | $ | 14.51 |
|
Vested | (5 | ) | | $ | 21.06 |
| | — |
| | $ | — |
|
Balances, July 30, 2017 | 25 |
| | $ | 42.54 |
| | 6 |
| | $ | 14.46 |
|
|
| | | | | | |
| RSUs, PSUs, and Market-based PSUs Outstanding |
| Number of Shares | | Weighted Average Grant-Date Fair Value Per Share |
| (In millions, except per share data) |
Balances, January 28, 2018 | 22 |
| | $ | 66.72 |
|
Granted (1) (2) | 1 |
| | $ | 240.22 |
|
Vested restricted stock | (5 | ) | | $ | 39.64 |
|
Canceled and forfeited | — |
| | $ | — |
|
Balances, July 29, 2018 | 18 |
| | $ | 84.56 |
|
| |
(1) | Includes the number of PSUs that will be issued and eligible to vest if the corporate financial performance maximum target level for fiscal year 2018 is achieved. Depending on the actual level of achievement of the corporate performance target at the end of fiscal year 2018, the PSUs issued could be up to 0.6 million shares. |
| |
(2) | Includes market-based PSUsgranted that will be issued and eligible to vest if the maximum targetcorporate financial performance goal for fiscal year 2019 is achieved. Depending on the actual level of the corporate performance achievement at the end of fiscal year 2019, the PSUs issued could be up to 0.3 million shares. |
| |
(2) | Includes the number of market-based PSUs granted that will be issued and eligible to vest if the maximum goal for total shareholder return, or TSR, over the 3-year measurement period is achieved. Depending on the ranking of our TSR compared to the respective TSRsthose of the companies comprising the Standard & Poor’s 500 Index during a 3-year measurementthat period, the market-based PSUs issued could be up to 0.1 million45 thousand shares. |
Of the total fair value of equity awards granted during the second quarter and first half of fiscal year 2019, we estimated that the stock-based compensation expense related to equity awards that are not expected to vest was $12 million and $31 million, respectively. Of the total fair value of equity awards granted during the second quarter and first half of fiscal year 2018, we estimated that the stock-based compensation expense related to equity awards that are not expected to vest was $10 million and $39 million, respectively. Of the total fair value of equity awards granted during the second quarter and first half of fiscal year 2017, we estimated that the stock-based compensation expense related to equity awards that are not expected to vest was $5 million and $17 million, respectively.
The following summarizes the aggregate unearned stock-based compensation expense and estimated weighted average amortization period as of July 30, 201729, 2018 and January 29, 2017:28, 2018:
| | | July 30, | | January 29, | July 29, | | January 28, |
| 2017 | | 2017 | 2018 | | 2018 |
| (In millions) | (In millions) |
Aggregate unearned stock-based compensation expense | $ | 697 |
| | $ | 627 |
| $ | 1,048 |
| | $ | 1,091 |
|
| | | | | | |
Estimated weighted average remaining amortization period | (In years) | (In years) |
Stock options | 0.1 |
| | 0.5 |
| |
RSUs, PSUs, and market-based PSUs | 2.4 |
| | 2.6 |
| 2.1 |
| | 2.3 |
|
ESPP | 0.6 |
| | 0.6 |
| 0.9 |
| | 0.7 |
|
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 34 – Net Income Per Share
The following is a reconciliation of the denominator of the basic and diluted net income per share computations for the periods presented:
| | | Three Months Ended | | Six Months Ended | Three Months Ended | | Six Months Ended |
| July 30, | | July 31, | | July 30, | | July 31, | July 29, | | July 30, | | July 29, | | July 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| (In millions, except per share data) | (In millions, except per share data) |
Numerator: | | | | | | | | | | | | | | |
Net income | $ | 583 |
| | $ | 261 |
| | $ | 1,091 |
| | $ | 469 |
| $ | 1,101 |
| | $ | 583 |
| | $ | 2,345 |
| | $ | 1,091 |
|
Denominator: | | | | | | | | | | | | | | |
Basic weighted average shares | 597 |
| | 534 |
| | 595 |
| | 536 |
| 607 |
| | 597 |
| | 607 |
| | 595 |
|
Dilutive impact of outstanding securities: | | | | | | | | | | | | | | |
Equity awards | 26 |
| | 26 |
| | 26 |
| | 23 |
| 18 |
| | 26 |
| | 19 |
| | 26 |
|
1% Convertible Senior Notes | 4 |
| | 43 |
| | 9 |
| | 37 |
| |
Warrants issued with the 1% Convertible Senior Notes | 6 |
| | 31 |
| | 7 |
| | 24 |
| |
1.00% Convertible Senior Notes | | 1 |
| | 4 |
| | 1 |
| | 9 |
|
Warrants issued with the 1.00% Convertible Senior Notes | | — |
| | 6 |
| | — |
| | 7 |
|
Diluted weighted average shares | 633 |
| | 634 |
| | 637 |
| | 620 |
| 626 |
| | 633 |
| | 627 |
| | 637 |
|
Net income per share: | | | | | | | | | | | | | | |
Basic (1) | $ | 0.98 |
| | $ | 0.49 |
| | $ | 1.83 |
| | $ | 0.88 |
| $ | 1.81 |
| | $ | 0.98 |
| | $ | 3.86 |
| | $ | 1.83 |
|
Diluted (2) | $ | 0.92 |
| | $ | 0.41 |
| | $ | 1.71 |
| | $ | 0.76 |
| $ | 1.76 |
| | $ | 0.92 |
| | $ | 3.74 |
| | $ | 1.71 |
|
Equity awards excluded from diluted net income per share because their effect would have been anti-dilutive | — |
| | — |
| | 1 |
| | 2 |
| — |
| | — |
| | 1 |
| | 1 |
|
| |
(1) | Calculated as net income divided by basic weighted average shares. |
| |
(2) | Calculated as net income divided by diluted weighted average shares. |
The 1.00% Convertible Senior Notes Due 2018, or the Convertible Notes, are included in the calculation of diluted net income per share. The Convertible Notes have a dilutive impact on net income per share if our average stock price for the reporting period exceeds the adjusted conversion price of $20.0480$20.02 per share. The warrants associated with our Convertible Notes, or the Warrants, outstanding are also included in the calculation of diluted net income per share. The Warrants have a dilutive impact on net income per share if our average stock price for the quarter exceeds the adjusted strike priceAs of $26.9876 per share. All outstanding WarrantsJuly 29, 2018, there were terminated during the second quarter of fiscal year 2018.
For the second quarter and first half of fiscal year 2018, our average stock price was $144.57 and $124.89, respectively, which exceeded both the adjusted conversion price and the adjusted strike price, causing the Convertible Notes and the Warrants to have a dilutive impact for these periods.
The denominator for diluted net income per share does not include any effect from the convertible note hedge transactions, or the Note Hedges, that we entered into concurrently with the issuance of the Convertible Notes, as this effect would be anti-dilutive. In the event of conversion of the Convertible Notes, the shares delivered to us under the Note Hedges will offset the dilutive effect of the shares that we would issue under the Convertible Notes.
In the fourth quarter of fiscal year 2017, we entered into an agreement to terminate 63 million Warrants and, in consideration, we delivered a total of 48 million shares of common stock to the counterparty bank. In the second quarter of fiscal year 2018, we entered into a second agreement to terminate the remaining 12 million Warrants outstanding and, in consideration, we delivered a total of 10 million shares of common stock to the counterparty bank.
no warrants outstanding.
Please referRefer to Note 1112 of these Notes to Condensed Consolidated Financial Statements for additional discussion regarding the Convertible Notes and Note Hedges, and Warrants.Hedges.NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 45 – Income Taxes
We recognized income tax expense of $79 million and $146 million for the second quarter and first half of fiscal year 2019, respectively, and $101 million and $130 million for the second quarter and first half of fiscal year 2018, respectively, and $56 million and $89 million for the second quarter and first half of fiscal year 2017, respectively. Income tax expense as a percentage of income before income tax for the second quarter and first half of fiscal year 20182019 was 6.7% and 5.9%, respectively, and 14.8% and 10.7%, respectively, and 17.6% and 15.9% for the second quarter and first half of fiscal year 2017,2018, respectively.
The decrease in our effective tax rate for the second quarter and first half of fiscal year 20182019 as compared to the same periods in the prior fiscal year was primarily reflectsdue to a decrease in the recognitionU.S. statutory tax rate from 35% to 21% as a result of U.S. tax reform, partially offset by a decrease in the impact of tax benefits related tofrom stock-based compensation and a proportional decrease in the amount of earnings subject to United States tax.
compensation.
Our effective tax rates for the first half of fiscal years 2019 and 2018 of 5.9% and 2017 of 10.7% and 15.9%, respectively, were lower than the U.S. federal statutory raterates of 35%21% and 33.9%, for fiscal years 2019 and 2018, respectively, due primarily to higher income earned in jurisdictions where the tax rate isthat are subject to taxes lower than the U.S. federal statutory tax rate, tax benefits related to stock-based compensation, and the benefit of the U.S. federal research tax credit.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In December 2017, the SEC issued guidance that allows companies to record provisional amounts for the tax effects of the Tax Cuts and Job Acts, or TCJA, during a measurement period not to exceed one year. The TCJA was effective in the fourth quarter of fiscal year 2018 and we have recorded provisional amounts based on reasonable estimates for those tax effects. For the second quarter of fiscal year 2019, we have not recorded any adjustments to our provisional amounts. We will continue our analysis of these provisional amounts, which are still subject to change during the measurement period based on further guidance on accounting interpretations from the FASB and application of the law from the U.S. Department of Treasury, including proposed regulations relating to the one-time transition tax issued on August 1, 2018.
The TCJA subjects a U.S. corporation to tax on its global intangible low-taxed income, or GILTI. Under U.S. GAAP, we can make an accounting policy election to either treat taxes due on the GILTI as a current period expense or factor such amounts into our measurement of deferred taxes. Given the complexity of the GILTI provisions, we are still evaluating its effects and have not yet determined our accounting policy. We expect to complete our analysis within the measurement period. For the second quarter of fiscal year 2019, because we are still evaluating the effects of the GILTI provisions, we have included tax expense related to GILTI for current-year operations in our estimated annual effective tax rate and have not provided for GILTI on deferred items.
For the first half of fiscal year 2018,2019, there have been no material changes to our tax years that remain subject to examination by major tax jurisdictions. Additionally, there have been no material changes to our unrecognized tax benefits and any related interest or penalties since the fiscal year ended January 29, 2017.
28, 2018.
While we believe that we have adequately provided for all uncertain tax positions, or tax positions where we believe it is not more-likely-than-not that the position will be sustained upon review, amounts asserted by tax authorities could be greater or less than our accrued position. Accordingly, our provisions on federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved with the respective tax authorities. As of July 30, 2017,29, 2018, we do not believe that our estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.
On August 1, 2018, the Internal Revenue Service and the Department of the Treasury issued proposed regulations relating to the one-time transition tax provision of the TCJA. Any required adjustment must be recorded during the measurement period as determined in accordance with the SEC guidance. While we are currently evaluating the potential impact of the regulations, we expect to record a discrete tax benefit in the third quarter of fiscal year 2019 related to our provisional U.S. tax reform transition tax amount.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 56 - Marketable Securities
All of ourOur cash equivalents and marketable securities are classified as “available-for-sale” debt securities. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of shareholders’ equity, net of tax, and net realized gains and losses recorded in total other income (expense) on the Condensed Consolidated Statements of Income.
We performed an impairment review of our investment portfolio as of July 30, 2017. Based on our quarterly impairment review, we concluded that our investments were appropriately valued and that no other-than-temporary impairment charges were necessary on our portfolio of available-for-sale investments as of July 30, 2017.
The following is a summary of cash equivalents and marketable securities as of July 30, 201729, 2018 and January 29, 2017:
28, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| July 30, 2017 |
| Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Estimated Fair Value | | Reported as |
| | | | | Cash Equivalents | | Marketable Securities |
| (In millions) |
Corporate debt securities | $ | 1,664 |
| | $ | 1 |
| | $ | (5 | ) | | $ | 1,660 |
| | $ | — |
| | $ | 1,660 |
|
Debt securities of United States government agencies | 1,030 |
| | — |
| | (4 | ) | | 1,026 |
| | — |
| | 1,026 |
|
Debt securities issued by the United States Treasury | 658 |
| | — |
| | (2 | ) | | 656 |
| | — |
| | 656 |
|
Asset-backed securities | 330 |
| | — |
| | (1 | ) | | 329 |
| | — |
| | 329 |
|
Mortgage-backed securities issued by United States government-sponsored enterprises | 153 |
| | 2 |
| | (1 | ) | | 154 |
| | — |
| | 154 |
|
Foreign government bonds | 64 |
| | — |
| | — |
| | 64 |
| | — |
| | 64 |
|
Money market funds | 1,663 |
| | — |
| | — |
| | 1,663 |
| | 1,663 |
| | — |
|
Total | $ | 5,562 |
| | $ | 3 |
| | $ | (13 | ) | | $ | 5,552 |
| | $ | 1,663 |
| | $ | 3,889 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| January 29, 2017 |
| Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Estimated Fair Value | | Reported as |
| | | | | Cash Equivalents | | Marketable Securities |
| (In millions) |
Corporate debt securities | $ | 2,397 |
| | $ | 1 |
| | $ | (10 | ) | | $ | 2,388 |
| | $ | 33 |
| | $ | 2,355 |
|
Debt securities of United States government agencies | 1,193 |
| | — |
| | (5 | ) | | 1,188 |
| | 27 |
| | 1,161 |
|
Debt securities issued by the United States Treasury | 852 |
| | — |
| | (2 | ) | | 850 |
| | 55 |
| | 795 |
|
Asset-backed securities | 490 |
| | — |
| | (1 | ) | | 489 |
| | — |
| | 489 |
|
Mortgage-backed securities issued by United States government-sponsored enterprises | 161 |
| | 2 |
| | (1 | ) | | 162 |
| | — |
| | 162 |
|
Foreign government bonds | 70 |
| | — |
| | — |
| | 70 |
| | — |
| | 70 |
|
Money market funds | 321 |
| | — |
| | — |
| | 321 |
| | 321 |
| | — |
|
Total | $ | 5,484 |
| | $ | 3 |
| | $ | (19 | ) | | $ | 5,468 |
| | $ | 436 |
| | $ | 5,032 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| July 29, 2018 |
| Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Estimated Fair Value | | Reported as |
| | | | | Cash Equivalents | | Marketable Securities |
| (In millions) |
Corporate debt securities | $ | 2,491 |
| | $ | 1 |
| | $ | (8 | ) | | $ | 2,484 |
| | $ | — |
| | $ | 2,484 |
|
Debt securities issued by the United States Treasury | 2,412 |
| | — |
| | (2 | ) | | 2,410 |
| | — |
| | 2,410 |
|
Debt securities of United States government agencies | 1,993 |
| | — |
| | (6 | ) | | 1,987 |
| | — |
| | 1,987 |
|
Money market funds | 483 |
| | — |
| | — |
| | 483 |
| | 483 |
| | — |
|
Asset-backed securities | 206 |
| | — |
| | (2 | ) | | 204 |
| | — |
| | 204 |
|
Mortgage-backed securities issued by United States government-sponsored enterprises | 107 |
| | 2 |
| | (1 | ) | | 108 |
| | — |
| | 108 |
|
Foreign government bonds | 32 |
| | — |
| | — |
| | 32 |
| | — |
| | 32 |
|
Total | $ | 7,724 |
| | $ | 3 |
| | $ | (19 | ) | | $ | 7,708 |
| | $ | 483 |
| | $ | 7,225 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| January 28, 2018 |
| Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Estimated Fair Value | | Reported as |
| | | | | Cash Equivalents | | Marketable Securities |
| (In millions) |
Money market funds | $ | 3,789 |
| | $ | — |
| | $ | — |
| | $ | 3,789 |
| | $ | 3,789 |
| | $ | — |
|
Corporate debt securities | 1,304 |
| | — |
| | (9 | ) | | 1,295 |
| | — |
| | 1,295 |
|
Debt securities of United States government agencies | 822 |
| | — |
| | (7 | ) | | 815 |
| | — |
| | 815 |
|
Debt securities issued by the United States Treasury | 577 |
| | — |
| | (4 | ) | | 573 |
| | — |
| | 573 |
|
Asset-backed securities | 254 |
| | — |
| | (2 | ) | | 252 |
| | — |
| | 252 |
|
Mortgage-backed securities issued by United States government-sponsored enterprises | 128 |
| | 2 |
| | — |
| | 130 |
| | — |
| | 130 |
|
Foreign government bonds | 42 |
| | — |
| | (1 | ) | | 41 |
| | — |
| | 41 |
|
Total | $ | 6,916 |
| | $ | 2 |
| | $ | (23 | ) | | $ | 6,895 |
| | $ | 3,789 |
| | $ | 3,106 |
|
The following table provides the breakdown of unrealized losses as of July 30, 2017,29, 2018, aggregated by investment category and length of time that individual securities have been in a continuous loss position:
| | | Less than 12 Months | | 12 Months or Greater | | Total | Less than 12 Months | | 12 Months or Greater | | Total |
| Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses |
| (In millions) | (In millions) |
Corporate debt securities | $ | 1,243 |
| | $ | (4 | ) | | $ | 86 |
| | $ | (1 | ) | | $ | 1,329 |
| | $ | (5 | ) | |
Debt securities issued by United States government agencies | 881 |
| | (3 | ) | | 100 |
| | (1 | ) | | 981 |
| | (4 | ) | $ | 925 |
| | $ | (1 | ) | | $ | 559 |
| | $ | (5 | ) | | $ | 1,484 |
| | $ | (6 | ) |
Debt securities issued by the United States Treasury | 645 |
| | (2 | ) | | — |
| | — |
| | 645 |
| | (2 | ) | 754 |
| | — |
| | 410 |
| | (2 | ) | | 1,164 |
| | (2 | ) |
Corporate debt securities | | 310 |
| | (1 | ) | | 742 |
| | (7 | ) | | 1,052 |
| | (8 | ) |
Asset-backed securities | 304 |
| | (1 | ) | | — |
| | — |
| | 304 |
| | (1 | ) | 49 |
| | (1 | ) | | 155 |
| | (1 | ) | | 204 |
| | (2 | ) |
Mortgage-backed securities issued by United States government-sponsored enterprises | 40 |
| | — |
| | 36 |
| | (1 | ) | | 76 |
| | (1 | ) | 15 |
| | — |
| | 31 |
| | (1 | ) | | 46 |
| | (1 | ) |
Foreign government bonds | | — |
| | — |
| | 31 |
| | — |
| | 31 |
| | — |
|
| $ | 3,113 |
| | $ | (10 | ) | | $ | 222 |
| | $ | (3 | ) | | $ | 3,335 |
| | $ | (13 | ) | $ | 2,053 |
| | $ | (3 | ) | | $ | 1,928 |
| | $ | (16 | ) | | $ | 3,981 |
| | $ | (19 | ) |
The gross unrealized losses related to fixed income securities were primarily due to changes in interest rates. We have determined that the gross unrealized losses on investment securities as of July 30, 2017rates, which we believe are temporary in nature. Currently, weWe have the intent and ability to hold our investments with impairment indicators until maturity. Net realized gains and losses were not significant forFor the second quarter and first half of fiscal years 2019 and 2018, there were no other-than-temporary impairment losses and 2017.
net realized gains were not significant.
The amortized cost and estimated fair value of cash equivalents and marketable securities which are primarily debt instruments, are classified as available-for-sale as of July 30, 201729, 2018 and January 29, 2017 and28, 2018 are shown below by contractual maturity:
maturity.
| | | July 30, 2017 | | January 29, 2017 | July 29, 2018 | | January 28, 2018 |
| Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value | Amortized Cost | | Estimated Fair Value | | Amortized Cost | | Estimated Fair Value |
| (In millions) | (In millions) |
Less than 1 year | $ | 3,086 |
| | $ | 3,085 |
| | $ | 2,209 |
| | $ | 2,209 |
| $ | 5,991 |
| | $ | 5,981 |
| | $ | 5,381 |
| | $ | 5,375 |
|
Due in 1 - 5 years | 2,423 |
| | 2,414 |
| | 3,210 |
| | 3,194 |
| 1,705 |
| | 1,699 |
| | 1,500 |
| | 1,485 |
|
Mortgage-backed securities issued by United States government-sponsored enterprises not due at a single maturity date | 53 |
| | 53 |
| | 65 |
| | 65 |
| 28 |
| | 28 |
| | 35 |
| | 35 |
|
Total | $ | 5,562 |
| | $ | 5,552 |
| | $ | 5,484 |
| | $ | 5,468 |
| $ | 7,724 |
| | $ | 7,708 |
| | $ | 6,916 |
| | $ | 6,895 |
|
Note 67 – Fair Value of Financial Assets and Liabilities
The fair values of our financial assets and liabilities are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets. We review the fair value hierarchy classification on a quarterly basis. There were no significant transfers between Levels 1 and 2 financial assets and liabilities for the second quarter of fiscal year 2018. We did not have any investments classified as2019. Level 3 as of July 30, 2017.
financial assets and liabilities are based on unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| | | | | Fair Value at | | | Fair Value at |
| Pricing Category | | July 30, 2017 | | January 29, 2017 | Pricing Category | | July 29, 2018 | | January 28, 2018 |
| | (In millions) | | (In millions) |
Assets | | | | | | | | |
Cash equivalents and marketable securities: | Cash equivalents and marketable securities: | | | | Cash equivalents and marketable securities: | | | |
Corporate debt securities | Level 2 | | $ | 1,660 |
| | $ | 2,388 |
| Level 2 | | $ | 2,484 |
| | $ | 1,295 |
|
Debt securities issued by the United States Treasury | | Level 2 | | $ | 2,410 |
| | $ | 573 |
|
Debt securities of United States government agencies | Level 2 | | $ | 1,026 |
| | $ | 1,188 |
| Level 2 | | $ | 1,987 |
| | $ | 815 |
|
Debt securities issued by the United States Treasury | Level 2 | | $ | 656 |
| | $ | 850 |
| |
Money market funds | | Level 1 | | $ | 483 |
| | $ | 3,789 |
|
Asset-backed securities | Level 2 | | $ | 329 |
| | $ | 489 |
| Level 2 | | $ | 204 |
| | $ | 252 |
|
Mortgage-backed securities issued by United States government-sponsored enterprises | Level 2 | | $ | 154 |
| | $ | 162 |
| Level 2 | | $ | 108 |
| | $ | 130 |
|
Foreign government bonds | Level 2 | | $ | 64 |
| | $ | 70 |
| Level 2 | | $ | 32 |
| | $ | 41 |
|
Money market funds | Level 1 | | $ | 1,663 |
| | $ | 321 |
| |
| | | | | | | | |
Liabilities | | | | | | | | |
Current liability: | | | | | | | | |
1.00% Convertible Senior Notes (1) | Level 2 | | $ | 693 |
| | $ | 4,474 |
| Level 2 | | $ | 175 |
| | $ | 189 |
|
Other noncurrent liabilities: | | | | | | | | |
2.20% Notes Due 2021 (1) | Level 2 | | $ | 996 |
| | $ | 975 |
| Level 2 | | $ | 970 |
| | $ | 982 |
|
3.20% Notes Due 2026 (1) | Level 2 | | $ | 1,000 |
| | $ | 961 |
| Level 2 | | $ | 970 |
| | $ | 986 |
|
Interest rate swap (2) | Level 2 | | $ | 5 |
| | $ | 2 |
| |
| |
(1) | The remaining 1.00% Convertible Notes, 2.20% Notes Due 2021, and 3.20% Notes Due 2026These liabilities are carried on our Condensed Consolidated Balance Sheets at their original issuance value, net of unamortized debt discount and issuance costs, and are not marked to fair value each period. SeeRefer to Note 1112 of these Notes to Condensed Consolidated Financial Statements for additional information. |
| |
(2) | Please refer to Note 9 of these Notes to Condensed Consolidated Financial Statements for a discussion regarding our interest rate swap. |
Note 78 - Amortizable Intangible Assets
The components of our amortizable intangible assets are as follows:
| | | July 30, 2017 | | January 29, 2017 | July 29, 2018 | | January 28, 2018 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| (In millions) | (In millions) | | (In millions) |
Acquisition-related intangible assets | $ | 193 |
| | $ | (175 | ) | | $ | 18 |
| | $ | 193 |
| | $ | (167 | ) | | $ | 26 |
| $ | 195 |
| | $ | (184 | ) | | $ | 11 |
| | $ | 195 |
| | $ | (180 | ) | | $ | 15 |
|
Patents and licensed technology | 469 |
| | (411 | ) | | 58 |
| | 468 |
| | (390 | ) | | 78 |
| 485 |
| | (445 | ) | | 40 |
| | 469 |
| | (432 | ) | | 37 |
|
Total intangible assets | $ | 662 |
| | $ | (586 | ) | | $ | 76 |
| | $ | 661 |
| | $ | (557 | ) | | $ | 104 |
| $ | 680 |
| | $ | (629 | ) | | $ | 51 |
| | $ | 664 |
| | $ | (612 | ) | | $ | 52 |
|
The increase in gross carrying amount of intangible assets is due to purchases of licensed technology during the first half of fiscal year 2019. Amortization expense associated with intangible assets was $6 million and $17 million for the second quarter and first half of fiscal year 2019, respectively, and $14 million and $29 million for the second quarter and first half of fiscal year 2018, respectively, and $18 million and $35 million for the second quarter and first half of fiscal year 2017, respectively. Future amortization expense related to the net carrying amount of intangible assets as of July 30, 201729, 2018 is estimated to be $25$12 million for the remainder of fiscal year 2018, $26 million in fiscal year 2019, $16$20 million in fiscal year 2020, $8$11 million in fiscal year 2021, $4 million in fiscal year 2022, $3 million in fiscal year 2023, and $1 million in fiscal year 2022 and beyond.2024.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 89 - Balance Sheet Components
Certain balance sheet components are as follows:
| | | July 30, | | January 29, | July 29, | | January 28, |
| 2017 | | 2017 | 2018 | | 2018 |
Inventories: | (In millions) | (In millions) |
Raw materials | $ | 294 |
| | $ | 252 |
| $ | 421 |
| | $ | 227 |
|
Work in-process | 209 |
| | 176 |
| 266 |
| | 192 |
|
Finished goods | 352 |
| | 366 |
| 403 |
| | 377 |
|
Total inventories | $ | 855 |
| | $ | 794 |
| $ | 1,090 |
| | $ | 796 |
|
As of July 30, 2017,29, 2018, we had outstanding inventory purchase obligations totaling $1.04$1.91 billion.
| | | July 30, | | January 29, | July 29, | | January 28, |
| 2017 | | 2017 | 2018 | | 2018 |
Accrued and Other Current Liabilities: | (In millions) | (In millions) |
Customer related liabilities (1) | $ | 218 |
| | $ | 197 |
| |
Customer program accruals | | $ | 248 |
| | $ | 181 |
|
Accrued payroll and related expenses | 120 |
| | 137 |
| 170 |
| | 172 |
|
Deferred revenue (2)(1) | 74 |
| | 85 |
| 77 |
| | 53 |
|
Taxes payable | | 39 |
| | 33 |
|
Coupon interest on debt obligations | 20 |
| | 21 |
| 20 |
| | 20 |
|
Accrued royalties | | 19 |
| | 17 |
|
Warranty accrual (2) | | 16 |
| | 15 |
|
Professional service fees | 15 |
| | 13 |
| 15 |
| | 15 |
|
Warranty accrual (3) | 14 |
| | 8 |
| |
Taxes payable | 12 |
| | 4 |
| |
Accrued royalties | 11 |
| | 7 |
| |
Accrued restructuring and other charges (4) | 10 |
| | 13 |
| |
Leases payable | 5 |
| | 4 |
| |
Contributions payable | 4 |
| | 4 |
| |
Other | 14 |
| | 14 |
| 44 |
| | 36 |
|
Total accrued and other current liabilities | $ | 517 |
| | $ | 507 |
| $ | 648 |
| | $ | 542 |
|
| |
(1) | Customer related liabilities include accrued customer programs, such as rebates and marketing development funds. |
| |
(2) | Deferred revenue primarily includes customer advances and deferrals related to license and service arrangements.development arrangements and PCS. |
| |
(3)(2) | Please referRefer to Note 1011 of these Notes to Condensed Consolidated Financial Statements for a discussion regarding warranties. |
|
| | | | | | | |
| July 29, | | January 28, |
| 2018 | | 2018 |
Other Long-Term Liabilities: | (In millions) |
Income tax payable (1) | $ | 544 |
| | $ | 559 |
|
Deferred revenue (2) | 27 |
| | 15 |
|
Deferred income tax liability | 21 |
| | 18 |
|
Employee benefits liability | 18 |
| | 12 |
|
Deferred rent | 14 |
| | 9 |
|
Other | 14 |
| | 19 |
|
Total other long-term liabilities | $ | 638 |
| | $ | 632 |
|
| |
(1) | As of July 29, 2018, represents the long-term portion of the one-time transition tax payable of $337 million, as well as unrecognized tax benefits of $191 million and related interest and penalties of $16 million. |
| |
(4)(2) | Please referDeferred revenue primarily includes deferrals related to Note 15 of these Notes to Condensed Consolidated Financial Statements for a discussion regarding restructuringlicense and other charges. development arrangements and PCS. |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
| | | | | | | |
| July 30, | | January 29, |
| 2017 | | 2017 |
Other Long-Term Liabilities: | (In millions) |
Deferred income tax liability | $ | 252 |
| | $ | 141 |
|
Income tax payable | 105 |
| | 96 |
|
Contributions payable | 12 |
| | 9 |
|
Employee benefits liability | 11 |
| | 10 |
|
Deferred rent | 8 |
| | 6 |
|
Licenses payable | 7 |
| | 1 |
|
Deferred revenue | 6 |
| | 4 |
|
Other | 7 |
| | 4 |
|
Total other long-term liabilities | $ | 408 |
| | $ | 271 |
|
Note 910 - Derivative Financial Instruments
In fiscal year 2016, we entered into an interest rate swap for a portion of the operating lease financing arrangement for our new headquarters building that entitles us to pay amounts based on a fixed interest rate in exchange for receipt of amounts based on variable interest rates. The objective of this interest rate swap is to mitigate variability in the benchmark interest rate on the first $200 million of existing operating lease financing payments. This interest rate swap is designated as a cash flow hedge, will have settlements beginning in the second quarter of fiscal year 2019, and will terminate in the fourth quarter of fiscal year 2023. Gains or losses on this swap are recorded in accumulated other comprehensive income (loss) and will subsequently be recorded in earnings at the point when the related operating lease financing expense begins to affect earnings or if ineffectiveness of the swap should occur.
We enter into foreign currency forward contracts to mitigate the impact of foreign currency exchange rate movements on our operating expenses. We designate these contracts as cash flow hedges and assess the effectiveness of the hedge relationships on a spot to spot basis. Gains or losses on the contracts are recorded in accumulated other comprehensive
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
income (loss)or loss and reclassified to operating expense when the related operating expenses are recognized in earnings or ineffectiveness should occur. The fair value of the contracts was not significant as of July 30, 2017 was not significant.
29, 2018 and January 28, 2018.
We also enter into foreign currency forward contracts to mitigate the impact of foreign currency movements on monetary assets and liabilities that are denominated in currencies other than our reporting currency.U.S. dollar. These foreign currency forward contracts were not designated for hedge accounting treatment. Therefore, the change in fair value of these contracts is recorded as a component of totalin other income (expense)or expense and offsets the change in fair value of the hedged foreign currency denominated monetary assets and liabilities, which is also recorded in total other income (expense).
or expense.
The table below presents the notional value of our foreign currency forward contracts:contracts outstanding as of July 29, 2018 and January 28, 2018:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 30, 2017 | | July 31, 2016 | | July 30, 2017 | | July 31, 2016 |
| (In millions) |
Designated as cash flow hedges | $ | 89 |
| | $ | 61 |
| | $ | 163 |
| | $ | 96 |
|
Not designated for hedge accounting | $ | 69 |
| | $ | 13 |
| | $ | 120 |
| | $ | 13 |
|
Under the master netting agreements with the respective counterparties to our foreign currency forward contracts, we are allowed to net settle transactions with the same counterparty, subject to applicable requirements. However, we present our derivative assets and liabilities at their gross fair values on our Condensed Consolidated Balance Sheets. We are not required to pledge, and are not entitled to receive, cash collateral related to these derivative instruments.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
| | | | | | | |
| July 29, 2018 | | January 28, 2018 |
| (In millions) |
Designated as cash flow hedges | $ | 396 |
| | $ | 104 |
|
Not designated for hedge accounting | $ | 92 |
| | $ | 94 |
|
As of July 30, 2017, the maturities of the29, 2018, all designated foreign currency forward contracts were three months or less. We expect to realize allmature within eighteen months. The expected realized gains and losses deferred into accumulated other comprehensive income (loss) related to foreign currency forward contracts within the next twelve months.months was not significant.
We formally assess, both at inception and on an ongoing basis, whether derivative financial instruments designated for hedge accounting treatment are highly effective. ForDuring the second quarter and first half of fiscal years 2019 and 2018, and 2017, allthe impact of derivative financial instruments designated for hedge accounting treatment on other comprehensive income or loss was not significant and all such instruments were determined to be highly effective andeffective. Therefore, there were no gains or losses associated with ineffectiveness.
The net change in unrealized gains (losses) on derivative financial instruments designated for hedge accounting treatment was not significant for the second quarter and first half of fiscal years 2018 and 2017.
Note 1011 - Guarantees
U.S. GAAP requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, U.S. GAAP requires disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities.
Accrual for Product Warranty Liabilities
We record a reduction to revenue for estimated product returns at the time revenue is recognized primarily based on historical return rates. Cost of revenue includes the estimated cost of product warranties. Under limited circumstances, we may offer an extended limited warranty to customers for certain products. Additionally, we accrue for known warranty and indemnification issues if a loss is probable and can be reasonably estimated.
The estimated product returns and estimated product warranty liabilities was $16 million and $15 million as of July 30, 201729, 2018 and January 29, 2017 were as follows:
|
| | | | | | | |
| July 30, | | January 29, |
| 2017 | | 2017 |
| (In millions) |
Balance at beginning of period | $ | 8 |
| | $ | 11 |
|
Additions | 8 |
| | 2 |
|
Deductions | (2 | ) | | (5 | ) |
Balance at end of period | $ | 14 |
| | $ | 8 |
|
28, 2018, respectively.
In connection with certain agreements that we have entered into in the past, we have provided indemnities to cover the indemnified party for matters such as tax, product, and employee liabilities. We have included intellectual property indemnification provisions in our technology related agreements with third parties. Maximum potential future payments cannot be estimated because many of these agreements do not have a maximum stated liability. We have not recorded any liability in our Condensed Consolidated Financial Statements for such indemnifications.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 1112 - Debt
Convertible Debt
1.00% Convertible Senior Notes Due 2018
During the second quarter of fiscal year 2018, we paid cash to settle an aggregate of $136 million in principal amount of the Convertible Notes and had $86 million in principal amount outstanding as of July 30, 2017. We also issued 5 million shares of our common stock for the excess conversion value and recognized a loss of $3 million on early conversions of the Convertible Notes. Based on the closing price of our common stock of $164.39 on the last trading day of the second quarter of fiscal year 2018, the if-converted value of the remaining outstanding Convertible Notes as of July 30, 2017 exceeded their principal amount by approximately $619 million. As of July 30, 2017, the conversion rate was 49.8804 shares of common stock per $1,000 principal amount of the Convertible Notes after adjusting for dividend increases (equivalent to an adjusted conversion price of $20.0480 per share of common stock).
Through the second quarter of fiscal year 2018, we settled an aggregate of $1.41 billion in principal amount of the Convertible Notes. Subsequently, we received additional conversion notices for an aggregate of $62 million in principal amount of the Convertible Notes. Settlements of these conversion requests are expected to be completed in the third quarter of fiscal year 2018. The actual number of shares issuable upon conversion will be determined based upon the terms of the Convertible Notes, and we expect to receive an equal number of shares of our common stock under the terms of the Note Hedges.
Holders may convert all or any portion of their Convertible Notes at their option at any time prior to August 1, 2018 under certain circumstances. For example, during any fiscal quarter, if the last reported sale price of the common stock for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day, the Convertible Notes become convertible at the holders' option. As this condition was met, the Convertible Notes first became convertible at the holders' option beginning on the first day of fiscal year 2017 and continue to be convertible at the holders’ option through October 29, 2017.
We separately accounted for the liability and equity components of the Convertible Notes at issuance, since our conversion obligation in excess of the aggregate principal could be fully or partially settled in cash. The liability component was assigned by estimating the fair value of a similar debt without the conversion feature. The difference between the net cash proceeds and the liability component was assigned as the equity component. The initial liability component of the Convertible Notes was valued at $1.35 billion and the initial carrying value of the equity component recorded in additional paid-in-capital was valued at $126 million. This equity component, together with the $23 million purchaser's discount to the par value of the Convertible Notes, represented the initial aggregate unamortized debt discount of $148 million. The debt discount is amortized as interest expense over the contractual term of the Convertible Notes using the effective interest method and an interest rate of 3.15%.
As of July 30, 2017, the carrying value of the Convertible Notes was classified as a current liability and the difference between the principal amount and the carrying value of the Convertible Notes was classified as convertible debt conversion obligation in the mezzanine equity section of our Condensed Consolidated Balance Sheet.
The following table presents the carrying value of the Convertible Notes:
|
| | | | | | | |
| July 30, | | January 29, |
| 2017 | | 2017 |
| (In millions) |
1.00% Convertible Senior Notes | $ | 86 |
| | $ | 827 |
|
Unamortized debt discount (1) | (2 | ) | | (31 | ) |
Net carrying amount | $ | 84 |
| | $ | 796 |
|
(1) As of July 30, 2017, the remaining period over which the unamortized debt discount will be amortized is 1.3 years.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents interest expense for the contractual interest and the accretion of debt discount and issuance costs related to the Convertible Notes:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | July 30, | | July 31, | | July 30, | | July 31, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (In millions) |
Contractual coupon interest expense | | $ | — |
| | $ | 4 |
| | $ | — |
| | $ | 8 |
|
Amortization of debt discount | | 1 |
| | 7 |
| | 2 |
| | 14 |
|
Total interest expense related to Convertible Notes | | $ | 1 |
| | $ | 11 |
| | $ | 2 |
| | $ | 22 |
|
Note Hedges and Warrants
Concurrently with the issuance of the Convertible Notes, we entered into the Note Hedges. The Note Hedges have an adjusted strike price of $20.0480 per share and allow us to receive shares of our common stock and/or cash related to the excess conversion value that we would deliver and/or pay, respectively, to the holders of the Convertible Notes upon conversion. During the second quarter of fiscal year 2018, we had received 5 million shares of our common stock from the exercise of a portion of the Note Hedges related to the settlement of $136 million in principal amount of the Convertible Notes. Subsequently, we expect to receive additional shares of our common stock related to at least an additional $62 million in principal amount that is expected to settle during the third quarter of fiscal year 2018.
In addition, concurrent with the offering of the Convertible Notes and the purchase of the Note Hedges, we entered into a separate warrant transaction.
In the fourth quarter of fiscal year 2017, we entered into an agreement to terminate 63 million Warrants and, in consideration, we delivered a total of 48 million shares of common stock to the counterparty bank. In the second quarter of fiscal year 2018, we entered into a second agreement to terminate the remaining 12 million Warrants outstanding and, in consideration, we delivered a total of 10 million shares of common stock to the counterparty bank.
Long-Term Debt
2.20% Notes Due 2021 and 3.20% Notes Due 2026
In the third quarter of fiscal year 2017, we issued $1.00 billion of the 2.20% Notes Due 2021, and $1.00 billion of the 3.20% Notes Due 2026, (collectively,or collectively, the Notes).Notes. Interest on the Notes is payable inon March 16 and September 16 of each year, beginning inon March 16, 2017. Upon 30 days' notice to holders of the Notes, we may redeem the Notes for cash prior to maturity, at redemption prices that include accrued and unpaid interest, if any, and a make-whole premium. However, no make-whole premium will be paid for redemptions of the Notes Due 2021 on or after August 16, 2021, or for redemptions of the Notes Due 2026 on or after June 16, 2026. The net proceeds from the Notes were $1.98 billion, after deducting debt discount and issuance costs.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Notes are our unsecured senior obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated indebtedness. The Notes are structurally subordinated to the liabilities of our subsidiaries and are effectively subordinated to any secured indebtedness to the extent of the value of the assets securing such indebtedness. All existing and future liabilities of our subsidiaries will be effectively senior to the Notes.
The carrying value of the Notes and the associated interest rates were as follows:
|
| | | | | | | | | | | | |
| | Expected Remaining Term (years) | | Effective Interest Rate | | July 29, 2018 | | January 28, 2018 |
| | | | | | (In millions) |
2.20% Notes Due 2021 | | 3.1 | | 2.38% | | $ | 1,000 |
| | $ | 1,000 |
|
3.20% Notes Due 2026 | | 8.1 | | 3.31% | | 1,000 |
| | 1,000 |
|
Unamortized debt discount and issuance costs | | | | | | (13 | ) | | (15 | ) |
Net carrying amount | | | | | | $ | 1,987 |
| | $ | 1,985 |
|
Convertible Debt
1.00% Convertible Senior Notes Due 2018
In fiscal year 2014, we issued $1.50 billion of 1.00% Convertible Senior Notes due 2018. Through the second quarter of fiscal year 2019, we had settled an aggregate of $1.49 billion of the Convertible Notes. The Convertible Notes will mature on December 1, 2018 and we had $14 million in principal amount outstanding as of July 29, 2018. Effective August 1, 2018, holders may convert all or any portion of their Convertible Notes before the close of business on the second scheduled trading day immediately preceding the maturity date of December 1, 2018 regardless of conversion conditions.
During the second quarter of fiscal year 2019, we paid cash to settle an insignificant amount of the Convertible Notes. Subsequently, we received additional conversion notices for an aggregate of $11 million in principal amount of the Convertible Notes which are expected to be settled in the third quarter of fiscal year 2019. During the second quarter of fiscal year 2019, we also issued one thousand shares of our common stock for the excess conversion value and the related loss on early conversions was not significant. Based on the closing price of our common stock of $252.02 on the last trading day of the second quarter of fiscal year 2019, the if-converted value of the remaining outstanding Convertible Notes exceeded their principal amount by approximately $162 million. As of July 29, 2018, the conversion rate was 49.94 shares of common stock per $1,000 principal amount of the Convertible Notes.
Note Hedges
Concurrently with the issuance of the Convertible Notes, we entered into the Note Hedges. The Note Hedges have an adjusted strike price of $20.02 per share and allow us to receive shares of our common stock and/or cash related to the excess conversion value that we would deliver and/or pay, respectively, to the holders of the Convertible Notes upon conversion. Through July 29, 2018, we had received 56 million shares of our common stock from the exercise of a portion of the Note Hedges related to the settlement of $1.49 billion in principal amount of the Convertible Notes.
Revolving Credit Facility
We have a Credit Agreement under which we may borrow up to $575 million for general corporate purposes and can obtain revolving loan commitments up to $425 million. As of July 29, 2018, we had not borrowed any amounts under this agreement.
Commercial Paper
We have a $575 million commercial paper program to support general corporate purposes. As of July 29, 2018, we had not issued any commercial paper.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The carrying value of our long-term debt and the associated interest rates were as follows:
|
| | | | | | | | | | | | |
| | Expected Remaining Term (years) | | Effective Interest Rate | | July 30, 2017 | | January 29, 2017 |
| | | | | | (In millions) |
2.20% Notes Due 2021 | | 4.1 | | 2.38% | | $ | 1,000 |
| | $ | 1,000 |
|
3.20% Notes Due 2026 | | 9.1 | | 3.31% | | 1,000 |
| | 1,000 |
|
Unamortized debt discount and issuance costs | | | | | | (16 | ) | | (17 | ) |
Net carrying amount | | | | | | $ | 1,984 |
| | $ | 1,983 |
|
Note 1213 - Commitments and Contingencies
Operating Lease Financing Arrangement
In fiscal year 2016, we began to construct a new headquarters building in Santa Clara, California, which is currently targeted for completion in the third quarter of fiscal year 2018. We are financing this construction under an off-balance sheet, build-to-suit operating lease arrangement. As a part of this arrangement, we leased the real property we own where the building will be constructed under a 99 year ground lease to a syndicate of banks and concurrently leased back the building under a real property lease.
Under the real property lease, we pay rent, taxes, maintenance costs, utilities, insurance and other property related costs. The lease has an initial 7.5 year term expiring in December 2022, consisting of an approximately 2.5 year construction period followed by a 5 year lease term. We have the option to renew this lease for up to three additional 5 year periods, subject to approval by the banks.
We have been overseeing the construction of the headquarters building. The banks committed to fund up to $380 million of costs relating to construction. Advances have been made periodically to reimburse us for construction costs we incur. Once construction is complete, the lease balance will remain static at the completed cost for the remaining duration of the lease term. During construction, accrued interest is capitalized into the lease balance. Following construction, we will pay rent in the form of interest. We have guaranteed the obligations under the lease held by our subsidiary.
During the term of the lease, we may elect to purchase the headquarters building for the amount of the banks’ investment in the building and any accrued but unpaid rent. At the end of the lease term, we may elect to buy the building for the outstanding balance on the maturity date or arrange for the cash sale of the building to an unaffiliated third party. The aggregate guarantee made by us under the lease is no more than 87.5% of the costs incurred in connection with the construction of the building. However, under certain default circumstances, the lease guarantee may be 100% of the banks’ investment in the building plus any and all accrued but unpaid interest and all other rent due and payable under the operative agreements.
The operative agreements are subject to customary default provisions, including, for example, those relating to payment and performance defaults, and events of bankruptcy. We are also subject to the financial covenant to maintain a maximum total leverage ratio not to exceed 3.5 to 1.0. If certain events of default occur and are continuing under the operative agreements, the banks may accelerate repayment of their investment under the lease.
Litigation
Polaris Innovations Limited
On May 16, 2016, Polaris Innovations Limited, or Polaris, a non-practicing entity and wholly-owned subsidiary of Quarterhill Inc. (formerly WiLAN Inc.), filed a complaint against NVIDIA for patent infringement in the United States District Court for the Western District of Texas allegingTexas. Polaris alleges that NVIDIA has infringed and is continuing to infringe six U.S. patents relating to the control of dynamic random-access memory, (DRAM).or DRAM. The complaint seeks unspecified monetary damages, enhanced damages, interest, fees, expenses, and costs against NVIDIA. On September 14, 2016, NVIDIA answered the Polaris Complaint and asserted various defenses including non-infringement and invalidity of the six Polaris patents.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On December 5, 2016, the Texas Court granted NVIDIA’s motion to transfer and ordered the case transferred to the Northern District of California.
Between December 7, 2016 and July 25, 2017, NVIDIA filed multiple petitions for inter partes review, or IPR, at the United States Patent and Trademark Office, or USPTO, challenging the validity of each of the patents asserted by Polaris in the U.S. litigation. The USPTO instituted IPRs for four U.S. patents and declined to institute IPRs on two U.S. patents. The USPTO issued a Final Written Decision on the IPR relating to one of the patents on June 19, 2018, finding claims 1-23 and 28 unpatentable but that claims 24-27 were not proved unpatentable.
On June 15, 2017, the California Court granted NVIDIA’s motion to stay the district court litigation pending resolution of the petitions for IPR. The California Court has not set a trial date.
On December 7, 2016, NVIDIA filed a petition for inter partes review with the United States Patent and Trademark Office (USPTO) challenging the validity of U.S. Patent No. 7,886,122, which is asserted by Polaris in that California district court litigation. On December 19, 2016, NVIDIA filed an inter partes review request with the USPTO challenging the validity of U.S. Patent No. 7,124,325, another patent asserted by Polaris. On May 5, 2017, NVIDIA filed an inter partes review request with the USPTO challenging the validity of U.S. Patent No. 8,161,344, another patent asserted by Polaris. On May 30, 2017, NVIDIA filed an inter partes review request with the USPTO challenging the validity of U.S. Patent No. 6,532,505, another patent asserted by Polaris. On June 22, 2017, the USPTO instituted inter partes review of U.S Patent No. 7,886,122. On June 23, 2017, the USPTO denied institution of inter partes review of U.S. Patent No. 7,124,325. On July 25, 2017, NVIDIA filed inter partes requests with the USPTO challenging the validity of U.S. Patent No. 8,207,976, another patent asserted by Polaris. Also on July 25, 2017, NVIDIA filed inter partes requests with the USPTO for U.S. Patent No. 8,161,344 challenging the validity of further claims and an additional inter partes request for U.S. Patent No. 7,124,325. All of the patents that Polaris has asserted in the U.S. litigation are now subject to requests for inter partes review, with institution decisions forthcoming.
On May 9, 2017, NVIDIA filed a Motion to Stay the California action pending final resolution of the inter partes review of U.S. Patents Nos. 7,886,122; 7,124,325; and 8,161,344. On June 15, 2017, the Motion to Stay was granted. The action has now been stayed until December 14, 2017 pending the institution of the inter partes review of these patents.
On December 30, 2016, NVIDIA received notice that Polaris had filed a complaint against NVIDIA for patent infringement in the Regional Court of Düsseldorf, Germany. The German casePolaris alleges infringementthat NVIDIA has infringed and is continuing to infringe three patents relating to control of European Patent No. EP1428225 and German Patent Nos. DE 10223167 and DE 1020066043668.DRAM. On July 14, 2017, NVIDIA filed defenses to the infringement allegations including non-infringement with respect to each of the three asserted patents.
An oral hearing has beenis scheduled for February 21, 2019.
OnBetween March 31, 2017 and June 12, 2017, NVIDIA filed nullity actions with the German Patent Court acknowledged receipt of nullity actions filed by NVIDIA challenging the validity of EP1428225each of the patents asserted by Polaris in the German litigation.
ZiiLabs 1 Patents Lawsuit
On October 2, 2017, ZiiLabs Inc., Ltd., or ZiiLabs, a non-practicing entity, filed a complaint in the United States District Court for the District of Delaware alleging that NVIDIA has infringed and DE 1020066043668.is continuing to infringe four U.S. patents relating to GPUs, or the ZiiLabs 1 Patents. ZiiLabs is a Bermuda corporation and a wholly-owned subsidiary of Creative Technology Asia Limited, a Hong Kong company which is itself is a wholly-owned subsidiary of Creative Technology Ltd., a publicly traded Singapore company. The complaint seeks unspecified monetary damages, enhanced damages, interest, costs, and fees against NVIDIA and an injunction against further direct or direct infringement of the ZiiLabs 1 Patents. On June 12,November 27, 2017, NVIDIA was notifiedanswered the ZiiLabs complaint and asserted various defenses including non-infringement and invalidity of the ZiiLabs 1 Patents.
On January 10, 2018, ZiiLabs filed a first amended complaint asserting infringement of a fifth U.S. patent.
On February 22, 2018, the Delaware Court stayed the ZiiLabs 1 case pending the resolution of the ITC investigation over the ZiiLabs 2 patents.
ZiiLabs 2 Patents Lawsuits
On December 27, 2017, ZiiLabs filed a second complaint in the United States District Court for the District of Delaware alleging that NVIDIA has infringed four additional U.S. patents, or the ZiiLabs 2 Patents. The second complaint also seeks unspecified monetary damages, enhanced damages, interest, costs, and fees against NVIDIA and an injunction against further direct or direct infringement of the ZiiLabs 2 Patents.
On February 22, 2018, the Delaware Court stayed the district court action on the ZiiLabs 2 patents pending the resolution of the ITC Investigation over the ZiiLabs 2 patents.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On December 29, 2017, ZiiLabs filed a request with the U.S. International Trade Commission, or USITC, to commence an Investigation pursuant to Section 337 of the Tariff Act of 1930 relating to the unlawful importation of certain graphics processors and products containing the same. ZiiLabs alleges that the nullity actions against EP1428225unlawful importation results from the infringement of the ZiiLabs 2 Patents by products from respondents NVIDIA, ASUSTeK Computer Inc., ASUS Computer International, EVGA Corporation, Gigabyte Technology Co., Ltd., G.B.T. Inc., Micro-Star International Co., Ltd., MSI Computer Corp., Nintendo Co., Ltd., Nintendo of America Inc., PNY Technologies Inc., Zotac International (MCO) Ltd., and DE 1020066043668 were served on PolarisZotac USA Inc.
On February 28, 2018, NVIDIA and that Polaris has filed a formal response opposing each nullity complaint.the other respondents answered the ITC complaint and asserted various defenses including non-infringement and invalidity of the four asserted ZiiLabs 2 patents.
On May 10, 2018, the Administrative Law Judge presiding over the investigation issued an Initial Determination terminating the investigation with respect to one of the patents. On July 14, 2017,17, 2018, the German Patent Court acknowledged receipt of a nullity action filed by NVIDIA challenging the validity of DE 10223167. Polaris has not yet responded toUSITC affirmed this action.
decision on modified grounds.
Accounting for Loss Contingencies
While there can be no assurance of favorable outcomes, we believe the claims made by the other partyparties in the above ongoing matters are without merit and we intend to vigorously defend the actions. As of July 30, 2017,29, 2018, we have not recorded any accrual for contingent liabilities associated with the legal proceedings described above based on our belief that liabilities, while possible, are not probable. Further, any possible loss or range of loss in these matters cannot be reasonably estimated at this time. We are engaged in other legal actions not described above arising in the ordinary course of its business and, while there can be no assurance of favorable outcomes, we believe that the ultimate outcome of these actions will not have a material adverse effect on our operating results, liquidity or financial position.
Note 1314 - Shareholders’ Equity
Capital Return Program
Beginning August 2004, our Board of Directors authorized us subject to certain specifications, to repurchase shares of our common stock.
During the first half of fiscal year 2019, we repurchased a total of 3 million shares for $655 million. During the second quarter and first half of fiscal year 2018,2019, we repurchased a total of 5 million shares for $758also paid $91 million and made$182 million, respectively, in cash dividend paymentsdividends to our shareholders of $84 million and $166 million, respectively.
shareholders.
Through July 30, 2017,29, 2018, we have repurchased an aggregate of 250254 million shares under our share repurchase program for a total cost of $5.35 billion since the inception of the program.$6.16 billion. All shares delivered from these repurchases have been placed into treasury stock. As of July 30, 2017,29, 2018, we were authorized, subject to certain specifications, to repurchase additional shares of our common stock up to $1.97$1.16 billion through December 2020.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Convertible Preferred Stock
As of July 30, 201729, 2018 and January 29, 2017,28, 2018, there were no shares of preferred stock outstanding.
Common Stock
We are authorized to issue up to 2.00 billion shares of our common stock at $0.001 per share par value.
Note 1415 - Segment Information
Our Chief Executive Officer, who is considered to be our chief operating decision maker, or CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. Our operating segments are equivalent to our reportable segments.
We report our business in two primary reportable segments - the GPU business and the Tegra Processor business - based on a single underlying graphics architecture.
OurWhile our GPU and CUDA architecture is unified, our GPU product brands are aimed at specialized markets including GeForce for gamers; Quadro for designers; Tesla and DGX for artificial intelligence, or AI, data scientists and big data researchers; and GRID for cloud-based visual computing users. Our Tegra brand integrates an entire computer onto a single chip, and incorporates GPUs and multi-core CPUs to drive supercomputing for autonomous robots, drones, and cars, as well as for consoles and mobile gaming and entertainment devices, as well as autonomous robots, drones and cars.devices.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
We have aUnder the single unifying architecture for our GPU and Tegra Processors. This architecture unification leveragesProcessors, we leverage our visual computing expertise by charging the operating expenses of certain core engineering functions to the GPU business, while charging the Tegra Processor business for the incremental cost of the teams working directly for that business. In instances where the operating expenses of certain functions benefit both reportable segments, our CODM assigns 100% of those expenses to the reportable segment that benefits the most.
The “All Other” category presented below represents the revenue and expenses that our CODM does not assign to either the GPU business or the Tegra Processor business for purposes of making operating decisions or assessing financial performance. The revenue includes primarily patent licensing revenue and the expenses include stock-based compensation expense, unallocated cost of revenuecorporate infrastructure and operating expenses,support costs, acquisition-related costs, legal settlement costs, contributions, restructuring and other charges, contributions, legal settlement costs,product warranty charge, and other non-recurring charges and benefits that our CODM deems to be enterprise in nature.
Our CODM does not review any information regarding total assets on a reportable segment basis. Reportable segments do not record intersegment revenue, and, accordingly, there is none to be reported. The accounting policies for segment reporting are the same as for NVIDIA as a whole. The table below presents details of our reportable segments and the “All Other” category.
|
| | | | | | | | | | | | | | | |
| GPU | | Tegra Processor | | All Other | | Consolidated |
| (In millions) |
Three Months Ended July 29, 2018 | | | | | | | |
Revenue | $ | 2,656 |
| | $ | 467 |
| | $ | — |
| | $ | 3,123 |
|
Depreciation and amortization expense | $ | 43 |
| | $ | 12 |
| | $ | 3 |
| | $ | 58 |
|
Operating income (loss) | $ | 1,259 |
| | $ | 97 |
| | $ | (199 | ) | | $ | 1,157 |
|
| | | | | | | |
Three Months Ended July 30, 2017 | |
| | |
| | |
| | |
|
Revenue | $ | 1,897 |
| | $ | 333 |
| | $ | — |
| | $ | 2,230 |
|
Depreciation and amortization expense | $ | 29 |
| | $ | 9 |
| | $ | 11 |
| | $ | 49 |
|
Operating income (loss) | $ | 761 |
| | $ | 71 |
| | $ | (144 | ) | | $ | 688 |
|
| | | | | | | |
Six Months Ended July 29, 2018 | | | | | | | |
Revenue | $ | 5,421 |
| | $ | 909 |
| | $ | — |
| | $ | 6,330 |
|
Depreciation and amortization expense | $ | 83 |
| | $ | 22 |
| | $ | 11 |
| | $ | 116 |
|
Operating income (loss) | $ | 2,653 |
| | $ | 194 |
| | $ | (395 | ) | | $ | 2,452 |
|
| | | | | | | |
Six Months Ended July 30, 2017 | | | | | | | |
Revenue | $ | 3,459 |
| | $ | 665 |
| | $ | 43 |
| | $ | 4,167 |
|
Depreciation and amortization expense | $ | 57 |
| | $ | 18 |
| | $ | 21 |
| | $ | 96 |
|
Operating income (loss) | $ | 1,363 |
| | $ | 118 |
| | $ | (239 | ) | | $ | 1,242 |
|
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| GPU | | Tegra Processor | | All Other | | Consolidated |
| (In millions) |
Three Months Ended July 30, 2017 | | | | | | | |
Revenue | $ | 1,897 |
| | $ | 333 |
| | $ | — |
| | $ | 2,230 |
|
Depreciation and amortization expense | $ | 29 |
| | $ | 9 |
| | $ | 11 |
| | $ | 49 |
|
Operating income (loss) | $ | 761 |
| | $ | 71 |
| | $ | (144 | ) | | $ | 688 |
|
| | | | | | | |
Three Months Ended July 31, 2016 | |
| | |
| | |
| | |
|
Revenue | $ | 1,196 |
| | $ | 166 |
| | $ | 66 |
| | $ | 1,428 |
|
Depreciation and amortization expense | $ | 29 |
| | $ | 7 |
| | $ | 11 |
| | $ | 47 |
|
Operating income (loss) | $ | 379 |
| | $ | (14 | ) | | $ | (48 | ) | | $ | 317 |
|
| | | | | | | |
Six Months Ended July 30, 2017 | | | | | | | |
Revenue | $ | 3,459 |
| | $ | 665 |
| | $ | 43 |
| | $ | 4,167 |
|
Depreciation and amortization expense | $ | 57 |
| | $ | 18 |
| | $ | 21 |
| | $ | 96 |
|
Operating income (loss) | $ | 1,363 |
| | $ | 118 |
| | $ | (239 | ) | | $ | 1,242 |
|
| | | | | | | |
Six Months Ended July 31, 2016 | | | | | | | |
Revenue | $ | 2,275 |
| | $ | 326 |
| | $ | 132 |
| | $ | 2,733 |
|
Depreciation and amortization expense | $ | 57 |
| | $ | 14 |
| | $ | 21 |
| | $ | 92 |
|
Operating income (loss) | $ | 727 |
| | $ | (52 | ) | | $ | (114 | ) | | $ | 561 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 30, 2017 | | July 31, 2016 | | July 30, 2017 | | July 31, 2016 |
| (In millions) |
Reconciling items included in "All Other" category: | | | | | | | |
Unallocated revenue | $ | — |
| | $ | 66 |
| | $ | 43 |
| | $ | 132 |
|
Stock-based compensation expense | (81 | ) | | (58 | ) | | (158 | ) | | (111 | ) |
Unallocated cost of revenue and operating expenses | (59 | ) | | (49 | ) | | (114 | ) | | (104 | ) |
Acquisition-related costs | (4 | ) | | (4 | ) | | (8 | ) | | (8 | ) |
Restructuring and other charges | — |
| | (2 | ) | | — |
| | (3 | ) |
Contributions | — |
| | (1 | ) | | (2 | ) | | (4 | ) |
Legal settlement costs | — |
| | — |
| | — |
| | (16 | ) |
Total | $ | (144 | ) | | $ | (48 | ) | | $ | (239 | ) | | $ | (114 | ) |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 29, 2018 | | July 30, 2017 | | July 29, 2018 | | July 30, 2017 |
| (In millions) |
Reconciling items included in "All Other" category: | | | | | | | |
Unallocated revenue | $ | — |
| | $ | — |
| | $ | — |
| | $ | 43 |
|
Stock-based compensation expense | (132 | ) | | (81 | ) | | (262 | ) | | (158 | ) |
Unallocated cost of revenue and operating expenses | (65 | ) | | (59 | ) | | (129 | ) | | (114 | ) |
Acquisition-related costs | (2 | ) | | (4 | ) | | (4 | ) | | (8 | ) |
Contributions | — |
| | — |
| | — |
| | (2 | ) |
Total | $ | (199 | ) | | $ | (144 | ) | | $ | (395 | ) | | $ | (239 | ) |
Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if our customers’ revenue is attributable to end customers that are located in a different location. The following table summarizes information pertaining to our revenue from customers based on the invoicing address by geographic regions:
| | | Three Months Ended | | Six Months Ended | Three Months Ended | | Six Months Ended |
| July 30, | | July 31, | | July 30, | | July 31, | July 29, | | July 30, | | July 29, | | July 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| (In millions) | (In millions) |
Revenue: | | | | | | | | | | | | | | |
Taiwan | $ | 674 |
| | $ | 505 |
| | $ | 1,277 |
| | $ | 949 |
| $ | 843 |
| | $ | 674 |
| | $ | 1,810 |
| | $ | 1,277 |
|
China | 481 |
| | 256 |
| | 810 |
| | 504 |
| 760 |
| | 481 |
| | 1,514 |
| | 810 |
|
Other Asia Pacific | 420 |
| | 191 |
| | 797 |
| | 351 |
| 676 |
| | 420 |
| | 1,259 |
| | 797 |
|
United States | 278 |
| | 206 |
| | 631 |
| | 400 |
| 413 |
| | 278 |
| | 847 |
| | 631 |
|
Europe | | 234 |
| | 178 |
| | 469 |
| | 360 |
|
Other Americas | 199 |
| | 103 |
| | 292 |
| | 206 |
| 197 |
| | 199 |
| | 431 |
| | 292 |
|
Europe | 178 |
| | 167 |
| | 360 |
| | 323 |
| |
Total revenue | $ | 2,230 |
| | $ | 1,428 |
| | $ | 4,167 |
| | $ | 2,733 |
| $ | 3,123 |
| | $ | 2,230 |
| | $ | 6,330 |
| | $ | 4,167 |
|
The following table summarizes information pertaining to our revenue by each of the specialized markets we serve:
| | | Three Months Ended | | Six Months Ended | Three Months Ended | | Six Months Ended |
| July 30, | | July 31, | | July 30, | | July 31, | July 29, | | July 30, | | July 29, | | July 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| (In millions) | (In millions) |
Revenue: | | | | | | | | | | | | | | |
Gaming | $ | 1,186 |
| | $ | 781 |
| | $ | 2,213 |
| | $ | 1,468 |
| $ | 1,805 |
| | $ | 1,186 |
| | $ | 3,528 |
| | $ | 2,213 |
|
Professional Visualization | 235 |
| | 214 |
| | 440 |
| | 403 |
| 281 |
| | 235 |
| | 532 |
| | 440 |
|
Datacenter | 416 |
| | 151 |
| | 825 |
| | 294 |
| 760 |
| | 416 |
| | 1,461 |
| | 825 |
|
Automotive | 142 |
| | 119 |
| | 282 |
| | 232 |
| 161 |
| | 142 |
| | 306 |
| | 282 |
|
OEM & IP | 251 |
| | 163 |
| | 407 |
| | 336 |
| 116 |
| | 251 |
| | 503 |
| | 407 |
|
Total revenue | $ | 2,230 |
| | $ | 1,428 |
| | $ | 4,167 |
| | $ | 2,733 |
| $ | 3,123 |
| | $ | 2,230 |
| | $ | 6,330 |
| | $ | 4,167 |
|
No customer represented 10% or more of total revenue for the second quarter and first half of fiscal years 2019 and 2018.
Accounts receivable from significant customers, those representing more than 10% or more of total accounts receivable, for the respective periods, is summarized as follows:
|
| | | | | | |
| | July 30, | | January 29, |
| | 2017 | | 2017 |
Accounts Receivable: | | | | |
Customer A | | 14 | % | | 19 | % |
Note 15 - Restructuring and Other Charges
In fiscal year 2016, we began the wind-downaggregated approximately 26% of our Icera operations. No restructuring charges were recorded during the second quarteraccounts receivable balance from two customers as of July 29, 2018, and first halfapproximately 28% of fiscal yearour accounts receivable balance from two customers as of January 28, 2018.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table provides a summary of the restructuring activities and related liabilities recorded in accrued liabilities on our Condensed Consolidated Balance Sheets as of July 30, 2017 and January 29, 2017:
|
| | | | | | | |
| July 30, | | January 29, |
| 2017 | | 2017 |
| (In millions) |
Balance at beginning of period | $ | 13 |
| | $ | 23 |
|
Restructuring and other charges | — |
| | 3 |
|
Cash payments | (3 | ) | | (13 | ) |
Balance at end of period | $ | 10 |
| | $ | 13 |
|
The majority of the remaining balance of $10 million as of July 30, 2017 is expected to be paid during the next twelve months.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
All references to “NVIDIA,” “we,” “us,” “our” or the “Company” mean NVIDIA Corporation and its subsidiaries, except where it is made clear that the term means only the parent company.
NVIDIA, the NVIDIA logo, GeForce, Quadro, Tegra, Tesla, Turing, Jetson, G-SYNC, Jetson, NVIDIA DGX, NVIDIA DRIVE, NVIDIA DRIVE Constellation, NVIDIA DRIVE Sim, NVIDIA GRID, NVIDIA VRWorks, OptiX,HGX, NVIDIA Holodeck, NVIDIA Isaac NVIDIA NVSwitch, NVIDIA RTX, NVSwitch, Pascal, TensorRT and PascalXavier are trademarks and/or registered trademarks of NVIDIA Corporation in the United States and other countries. MAXQ® is the registered trademark of Maxim Integrated Products, Inc. Other company and product names may be trademarks of the respective companies with which they are associated.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Item 6. Selected Financial Data” of our Annual Report on Form 10-K for the fiscal year ended January 29, 201728, 2018 and “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q and our Condensed Consolidated Financial Statements and related Notes thereto, as well as other cautionary statements and risks described elsewhere in this Quarterly Report on Form 10-Q, before deciding to purchase or sell shares of our common stock.
Overview
Our Company and Our Businesses
Starting with a focus on PC graphics, NVIDIA invented the GPU to solve some of the most complex problems in computer science. We have extended our emphasisfocus in recent years to the revolutionary field of AI. Fueled by the sustained demand for better 3D graphics and the scale of the gaming market, NVIDIA delivers value to its customers through PC, mobilehas evolved the GPU into a computer brain at the intersection of virtual reality, high performance computing, or HPC, and cloud architectures. Vertical integration enables us to bring together hardware, system software, programmable algorithms, libraries, systems and services to create unique value for the markets we serve. We specialize in markets in which GPU-based visual computing and accelerated computing platforms can provide enhanced throughput for applications.
artificial intelligence, or AI.
Our two reportable segments - GPU and Tegra Processor - are based on a single underlying graphics architecture. From our proprietary processors, we have created specialized platforms that target theaddress four large markets where our expertise is critical: Gaming, Professional Visualization, Datacenter, and Automotive.
OurWhile our GPU and CUDA architecture is unified, our GPU product brands are aimed at specialized markets including GeForce for gamers; Quadro for designers; Tesla and DGX for AI data scientists and big data researchers; and GRID for cloud-based visual computing users. Our Tegra brand integrates an entire computer onto a single chip, and incorporates GPUs and multi-core CPUs to drive supercomputing for autonomous robots, drones, and cars, as well as for consoles and mobile gaming and entertainment devices, as well as autonomous robots, drones and cars.
devices.
Headquartered in Santa Clara, California, NVIDIA was incorporated in California in April 1993 and reincorporated in Delaware in April 1998.
Recent Developments, Future Objectives and Challenges
Second Quarter of Fiscal Year 20182019 Summary
| | | Three Months Ended | | | | | Three Months Ended | | | | |
| July 30, 2017 | | April 30, 2017 | | July 31, 2016 | | Q/Q | | Y/Y | July 29, 2018 | | April 29, 2018 | | July 30, 2017 | | Quarter-over-Quarter Change | | Year-over-Year Change |
| ($ in millions, except per share data) | ($ in millions, except per share data) | | | | |
Revenue | $ | 2,230 |
| | $ | 1,937 |
| | $ | 1,428 |
| | 15 | % | | 56 | % | $ | 3,123 |
| | $ | 3,207 |
| | $ | 2,230 |
| | (3 | )% | | 40 | % |
Gross margin | 58.4 | % | | 59.4 | % | | 57.9 | % | | (100) bps |
| | 50 bps |
| 63.3 | % | | 64.5 | % | | 58.4 | % | | (120) bps |
| | 490 bps |
|
Operating expenses | $ | 614 |
| | $ | 596 |
| | $ | 509 |
| | 3 | % | | 21 | % | $ | 818 |
| | $ | 773 |
| | $ | 614 |
| | 6 | % | | 33 | % |
Income from operations | $ | 688 |
| | $ | 554 |
| | $ | 317 |
| | 24 | % | | 117 | % | $ | 1,157 |
| | $ | 1,295 |
| | $ | 688 |
| | (11 | )% | | 68 | % |
Net income | $ | 583 |
| | $ | 507 |
| | $ | 261 |
| | 15 | % | | 123 | % | $ | 1,101 |
| | $ | 1,244 |
| | $ | 583 |
| | (11 | )% | | 89 | % |
Net income per diluted share | $ | 0.92 |
| | $ | 0.79 |
| | $ | 0.41 |
| | 16 | % | | 124 | % | $ | 1.76 |
| | $ | 1.98 |
| | $ | 0.92 |
| | (11 | )% | | 91 | % |
Revenue for the second quarter of fiscal year 20182019 increased 56%40% year over year and 15%decreased 3% sequentially. Growth was driven by GPUs forEach of our market platforms - gaming, professional visualization, datacenter, and professional visualization, as well as Tegra processors.
automotive - produced sequential and year-over-year growth.
GPU business revenue was $1.90$2.66 billion, up 59%40% from a year earlier and down 4% sequentially, led by gaming, professional visualization, and datacenter, offsetting a substantial decline in cryptocurrency GPUs. Gaming revenue was $1.80 billion, up 52% from a year ago and up 5% sequentially. Gaming GPU growth was fueled by Pascal-based GPUs for desktops and by high-performance notebooks based on our Max-Q technology. Professional visualization revenue was $281 million, up 20% from a year earlier and up 21% sequentially, led by strength across all platforms, including datacenter, gaming, and professional visualization, along with PC OEM sales. GeForce GPU gaming results were led by continued strong adoption of Pascal-based GeForce GTX gaming platforms. Datacenter revenue (including Tesla, NVIDIA GRID and DGX) was $416 million, up 175% year on year and up 2%12% sequentially. Datacenter revenue reflects initial shipments of our newest Volta GPU architecture and V100 platform. Datacenter growth was fueled by strong demand by hyperscale and cloud customers for deep learning training and accelerated GPU computing, as well as demand for HPC, DGX AI supercomputing and GRID virtualization platforms. Professional visualization revenue grew 10% year over year and up 15% sequentially to $235 million, led by high-end mobile platforms. Our PC OEM revenue includes GPUs designed for mainstream desktops, notebooks, and cryptocurrency mining. The recent rise in cryptocurrency prices resulted in increased demand in OEM GPU sales.
Tegra processor business revenue, which included gaming development platforms and services, was $333$760 million, up 101%83% from a year ago and flat sequentially. up 8% sequentially, led by strong sales of our Volta architecture products, including NVIDIA Tesla V100 and DGX systems. OEM and IP revenue was $116 million, down 54% from a year ago and down 70% sequentially, driven by lower demand for GPUs for cryptocurrency mining. Cryptocurrency-related revenue included in OEM was $18 million, and we expect it to be negligible going forward.
Tegra processorProcessor business revenue - which includes system-on-a-chip (SOCs)Automotive, SOC modules for the Nintendo Switch gaming console, and development services. Also includedother embedded Tegra platforms - was automotive$467 million, up 40% from a year ago and up 6% sequentially. Automotive revenue of $142$161 million which was up 19%13% from a year earlier and up 1%11% sequentially, incorporating infotainment modules, production DRIVE PX platforms, and development agreements for self-driving cars.
Revenue from our patent license agreement with Intel concluded in the first quarter of fiscal year 2018, when it was $43 million.
automotive companies.
Gross margin for the second quarter of fiscal year 20182019 was 58.4%, reflecting a sequential decrease associated with the absence of licensing revenue63.3%. Gross margin is normalizing to our core business and includes only minor benefits from Intel.
cryptocurrency mining demand.
Operating expenses for the second quarter of fiscal year 20182019 were $614$818 million, up 21%33% from a year earlier and up 3%6% sequentially, reflecting increased headcount and related costs for our growth initiatives - gaming, artificial intelligence,AI, and autonomous driving.
Income from operations for the second quarter of fiscal year 20182019 was $688 million,$1.16 billion, up 117%68% from a year earlier and up 24%down 11% sequentially. Net income and net income per diluted share for the second quarter of fiscal year 20182019 were $583 million$1.10 billion and $0.92,$1.76, respectively, up 123%89% and 124%91%, respectively, from a year earlier, fueled by strong revenue growth and improved gross and operating margins.
During the first half of fiscal year 2018,2019, we paid $758returned $837 million to shareholders through a combination of $655 million in share repurchases and $166$182 million in cash dividends. For fiscal year 2018,2019, we intend to return $1.25 billion to shareholders through ongoing quarterly cash dividends and share repurchases.
Cash, cash equivalents and marketable securities were $5.88$7.94 billion as of July 30, 2017,29, 2018, compared with $6.21$7.30 billion at the end of the prior quarter. The sequential decreaseincrease was primarily related to share repurchases made under our capital return program.second quarter operating income, partially offset by changes in working capital.
GPU Business
During the second quarter of fiscal year 2019, we marked the launch of the Summit supercomputer at Oak Ridge National Laboratory, powered by NVIDIA Volta Tensor Core GPUs; introduced NVIDIA HGX-2, a unified computing platform for both AI and high performance computing; announced that five of the world’s seven fastest supercomputers are powered by
NVIDIA GPUs; introduced the NVIDIA HGX-2 platform for both AI and HPC; and launched AIRI Mini with Pure Storage and ONTAP AI with NetApp for implementing and scaling deep learning. We also announced a number of Max-Q GeForce gaming notebook designs offered by major OEMs, enabling high-end performance for thin and light notebooks; disclosed that next-generation NVIDIA G-SYNC HDR displays are being shipped, enabling stutter-free gaming; and announced NVIDIA’s role in VirtualLink, a consortium establishing an industry standard to enable next-gen VR headsets to connect with PCs using a single, high-bandwidth USB Type-C connector. In August 2018, we introduced Max-Q, a design approach to make gaming laptops thinner, quieter,unveiled our first Turing-based GPUs -- NVIDIA Quadro RTX 8000, RTX 6000 and faster. For our datacenter platform,RTX 5000 -- which we announcedbelieve will revolutionize the work of millions of designers and began shipping NVIDIA Tesla V100 GPU accelerators, the first GPU based on the new Volta architecture; unveiled a new lineup of NVIDIA DGX AI supercomputers;artists; and disclosed that the world’s 13 most energy-efficient supercomputers on the Green 500 list run on NVIDIA Tesla accelerators. For our professional visualization platform, we introduced Project Holodeck, a photorealistic, collaborative VR environment; launched external GPU support for creative professionals; and released the NVIDIA Optix 5.0 and NVIDIA VRWorks 360 Video software development kits.
RTX Server, a ray-tracing global illumination rendering server for render farms.
During the first quarter of fiscal year 2018,2019, we announced GeForce GTX 1080 TiNVIDIA RTX, a computer graphics technology that produces movie-quality images in real time. We also unveiled advances to our deep learning computing platform - including NVIDIA Tesla V100 GPUs with 32GB memory, NVIDIA NVSwitch GPU interconnect fabric, NVIDIA DGX-2, and TITAN Xp for our gaming platform. For our datacenter platform,TensorRT 4, the latest version of the TensorRT AI inference accelerator software. In addition, we announced GPU acceleration for Kubernetes to facilitate enterprise inference deployment on multi-cloud GPU clusters and the Quadro GV100 GPU with Microsoft that it is bringing NVIDIA Tesla P100RTX technology, making real-time ray tracing possible on professional design and P40 GPUs to the Azure cloud; announced that NVIDIA Tesla accelerators designed for datacenter AI capabilities were added to Google Cloud, Tencent Cloud, IBM Cloud, and Baidu Cloud; announced that the Tokyo Institute of Technology will use NVIDIA’s accelerated computing platform in their AI supercomputer, TSUBAME3.0; announced that Fujitsu is using 24 NVIDIA DGX-1 AI systems to build a new AI supercomputer for the RIKEN research center in Japan; announced together with Facebook the Caffe2 deep learning framework and Big Basin servers with Tesla P100 GPUs; and announced plans to train 100,000 developers this year through the NVIDIA Deep Learning Institute.
content creation applications.
Tegra Processor Business
During the second quarter of fiscal year 2018,2019, we announced that ToyotaDaimler and Bosch have selected NVIDIANVIDIA’s DRIVE PX for its next-generation autonomous cars; Volvoplatform to bring automated and Autoliv selected DRIVE PX for self-driving cars targeteddriverless vehicles to hit the market by 2021; ZF and HELLA, two leading automotive suppliers, announced a system based on DRIVE PXcity streets, with pilot testing set to deliver the highest NCAP safety ratings for cars; and Baidu announced that its Project Apollo open-source self-driving platform for the China market will use DRIVE PX. We also introduced the NVIDIA Isaac robot simulator for training intelligent machinesbegin next year in simulated real-world conditions before deployment; and announced the NVIDIA Metropolis platform, used by more than 50 partners to make cities safer and smarter by applying deep learning to surveillance video streams.
Silicon Valley.
During the first quarter of fiscal year 2018,2019, we announcedintroduced the NVIDIA DRIVE Constellation server with Bosch, oneDRIVE Sim software, a complete system to safely test drive autonomous vehicles over billions of the world’s largest auto suppliers, plans to create a new Bosch-branded AI self-driving car computer. We also announced a collaboration with PACCAR, one of the world's largest truck makers with brands including Peterbilt, Kenworthmiles in virtual reality by leveraging NVIDIA GPUs and DAF, to develop solutions for autonomous trucks. We also announced NVIDIA Jetson TX2, a high-performance, low-power computer platform for delivering AI at the edge, with deep learning and computer vision capabilities for robots, drones and smart cameras.
DRIVE Pegasus.
Financial Information by Business Segment and Geographic Data
Please referRefer to Note 1415 of the Notes to Condensed Consolidated Financial Statements for disclosure regarding segment information.
Results of Operations
The following table sets forth, for the periods indicated, certain items in our Condensed Consolidated Statements of Income expressed as a percentage of revenue.
| | | Three Months Ended | | Six Months Ended | Three Months Ended | | Six Months Ended |
| July 30, 2017 | | July 31, 2016 | | July 30, 2017 | | July 31, 2016 | July 29, 2018 | | July 30, 2017 | | July 29, 2018 | | July 30, 2017 |
Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of revenue | 41.6 |
| | 42.1 |
| | 41.2 |
| | 42.3 |
| 36.7 |
| | 41.6 |
| | 36.1 |
| | 41.2 |
|
Gross profit | 58.4 |
| | 57.9 |
| | 58.8 |
| | 57.7 |
| 63.3 |
| | 58.4 |
| | 63.9 |
| | 58.8 |
|
Operating expenses | | | | | | | | | | | | | | |
Research and development | 18.7 |
| | 24.5 |
| | 19.8 |
| | 25.5 |
| 18.6 |
| | 18.7 |
| | 17.8 |
| | 19.8 |
|
Sales, general and administrative | 8.9 |
| | 11.0 |
| | 9.2 |
| | 11.6 |
| 7.7 |
| | 8.9 |
| | 7.4 |
| | 9.2 |
|
Restructuring and other charges | — |
| | 0.1 |
| | — |
| | 0.1 |
| |
Total operating expenses | 27.6 |
| | 35.6 |
| | 29.0 |
| | 37.2 |
| 26.3 |
| | 27.6 |
| | 25.2 |
| | 29.0 |
|
Income from operations | 30.9 |
| | 22.2 |
| | 29.8 |
| | 20.5 |
| 37.0 |
| | 30.9 |
| | 38.7 |
| | 29.8 |
|
Interest income | 0.7 |
| | 0.8 |
| | 0.7 |
| | 0.8 |
| 1.0 |
| | 0.7 |
| | 0.9 |
| | 0.7 |
|
Interest expense | (0.7 | ) | | (0.8 | ) | | (0.7 | ) | | (0.8 | ) | (0.4 | ) | | (0.7 | ) | | (0.5 | ) | | (0.7 | ) |
Other, net | (0.2 | ) | | — |
| | (0.5 | ) | | (0.1 | ) | 0.2 |
| | (0.2 | ) | | 0.2 |
| | (0.5 | ) |
Total other income (expense) | (0.2 | ) | | — |
| | (0.5 | ) | | (0.1 | ) | 0.8 |
| | (0.2 | ) | | 0.6 |
| | (0.5 | ) |
Income before income tax expense | 30.7 |
| | 22.2 |
| | 29.3 |
| | 20.4 |
| |
Income before income tax | | 37.8 |
| | 30.7 |
| | 39.3 |
| | 29.3 |
|
Income tax expense | 4.5 |
| | 3.9 |
| | 3.1 |
| | 3.3 |
| 2.5 |
| | 4.5 |
| | 2.3 |
| | 3.1 |
|
Net income | 26.2 | % | | 18.3 | % | | 26.2 | % | | 17.1 | % | 35.3 | % | | 26.2 | % | | 37.0 | % | | 26.2 | % |
Revenue
Revenue by Reportable Segments
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 30, 2017 | | July 31, 2016 | | $ Change | | % Change | | July 30, 2017 | | July 31, 2016 | | $ Change | | % Change |
| ($ in millions) |
GPU | $ | 1,897 |
| | $ | 1,196 |
| | $ | 701 |
| | 59 | % | | $ | 3,459 |
| | $ | 2,275 |
| | $ | 1,184 |
| | 52 | % |
Tegra Processor | 333 |
| | 166 |
| | 167 |
| | 101 | % | | 665 |
| | 326 |
| | 339 |
| | 104 | % |
All Other | — |
| | 66 |
| | (66 | ) | | (100 | )% | | 43 |
| | 132 |
| | (89 | ) | | (67 | )% |
Total | $ | 2,230 |
| | $ | 1,428 |
| | $ | 802 |
| | 56 | % | | $ | 4,167 |
| | $ | 2,733 |
| | $ | 1,434 |
| | 52 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 29, 2018 | | July 30, 2017 | | $ Change | | % Change | | July 29, 2018 | | July 30, 2017 | | $ Change | | % Change |
| ($ in millions) |
GPU | $ | 2,656 |
| | $ | 1,897 |
| | $ | 759 |
| | 40 | % | | $ | 5,421 |
| | $ | 3,459 |
| | $ | 1,962 |
| | 57 | % |
Tegra Processor | 467 |
| | 333 |
| | 134 |
| | 40 | % | | 909 |
| | 665 |
| | 244 |
| | 37 | % |
All Other | — |
| | — |
| | — |
| | — | % | | — |
| | 43 |
| | (43 | ) | | (100 | )% |
Total | $ | 3,123 |
| | $ | 2,230 |
| | $ | 893 |
| | 40 | % | | $ | 6,330 |
| | $ | 4,167 |
| | $ | 2,163 |
| | 52 | % |
GPU BusinessBusiness.. GPU business revenue increased by 59%40% for the second quarter of fiscal year 20182019 compared to the second quarter of fiscal year 2017.2018. This increase was due primarily to increased revenue from50% growth in sales of GeForce GPU products for gaming, which increased over 30%, reflecting continued strong demanddriven by Pascal-based GPUs for desktops and by high-performance notebooks based on our Pascal-based GPU products.Max-Q technology. Datacenter revenue, including Tesla, GRID and DGX, increased 175%83%, reflecting strong demand for hyperscalesales of our Volta architecture products, including NVIDIA Tesla V100 and cloud customers for deep learning training and accelerated GPU computing as well as demand for DGX AI supercomputing and GRID virtualization platforms.systems. Revenue from Quadro GPUs for professional visualization increased 10%20% due primarily to higher sales of high-endacross desktop and mobile workstation products. Our PC OEM revenue increaseddecreased by approximately 200% due primarily to strongalmost 60% driven by lower demand for GPU products targeted for use in cryptocurrency mining.
GPU business revenue increased by 52% in57% for the first half of fiscal year 20182019 compared to the first half of fiscal year 2017.2018. This increase was due primarily to increased revenue fromalmost 60% growth in sales of GeForce GPU products for gaming, which increased over 30%, reflecting continued strong demanddriven by Pascal-based GPUs for desktops and by high-performance notebooks based on our Pascal-based GPU products.Max-Q technology. Datacenter revenue, including Tesla, GRID and DGX, increased 180%77%, reflecting strong demand for hyperscalesales of our Volta architecture, including NVIDIA Tesla V100 and cloud customers for deep learning training and accelerated GPU computing as well as demand for DGX AI supercomputing and GRID virtualization platforms.systems. Revenue from Quadro GPUs for professional visualization increased 9%21% due primarily to higher sales in bothacross desktop and mobile workstation products. Revenue from GeForce GPU products for mainstreamOur PC OEMsOEM revenue increased by over 90%almost 50% due primarily to strong demand forsales of GPU products targeted for use in cryptocurrency mining.
mining in the first quarter of fiscal year 2019.
Tegra Processor Business. Tegra Processor business revenue increased by 101%40% for the second quarter of fiscal year 20182019 compared to the second quarter of fiscal year 2017.2018. This was driven by an increase of over 800%75% in revenue from SOC modules for gaming development platforms and development services, and an increase of 19%13% in automotive revenue, primarily from DRIVE PX platforms and development agreements with automotive companies, as well as from infotainment modules.
Tegra Processor business revenue increased by 104% in37% for the first half of fiscal year 20182019 compared to the first half of fiscal year 2017.2018. This was driven by an increase of over 850%80% in revenue from SOC modules for gaming development platforms and development services, and an increase of over 20%9% in sales of Tegra products serving automotive systems,revenue, primarily from DRIVE PX platforms and development agreements with automotive companies, as well as from infotainment modules compared to last year.
modules.
All Other.Our patent license agreement with Intel concluded in the first quarter of fiscal year 2018. For
Concentration of Revenue
Revenue from sales to customers outside of the United States and Other Americas accounted for 80% of total revenue for both the second quarter and first half of fiscal year 2018, we recognized related revenue of $43 million, down from $132 million for the first half of fiscal year 2017.
Concentration of Revenue
2019. Revenue from sales to customers outside of the United States and Other Americas accounted for 79% and 78% of total revenue for the second quarter and first half of fiscal year 2018, respectively. Revenue from sales to customers outside of the United States and Other Americas accounted for 78% of total revenue for both the second quarter and first half of fiscal year 2017. Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if the revenue is attributable to end customers in a different location.
No customer represented 10% or more of total revenue for the second quarter and first half of fiscal years 2019 and 2018.
Gross Margin
Our overall gross margin increased to 58.4%63.3% and 63.9% for the second quarter of fiscal year 2018 from 57.9% for the second quarter of fiscal year 2017, and increased to 58.8% for the first half of fiscal year 2018 from 57.7% for the first half of fiscal year 2017. These increases were2019, respectively, primarily due to the growth ina favorable mix shift within our GPU business revenue from our Datacenter platforms, increased sales of GeForce GTX products for gaming, and improved gross margins in our Tegra Processor business. These increases were partially offset by the absence of licensing revenue from Intel.segment.
Inventory provision costsprovisions totaled $13$21 million and $5$13 million for the second quarter of fiscal years 20182019 and 2017, respectively, unfavorably impacting our gross margin by 0.6% and 0.3%,2018, respectively. Sales of inventory that was previously written-off or written-down totaled $9$12 million and $12$9 million for the second quarter of fiscal years 20182019 and 2017, respectively, favorably impacting our gross margin by 0.4% and 0.9%,2018, respectively. As a result, the overall net effect on our gross margin from charges for inventory provision costswas an unfavorable impact of 0.3% and sales of items previously written-off or written-down was a 0.2% unfavorable impact for the second quarter of fiscal yearyears 2019 and 2018, and a 0.5% favorable impact for the second quarter of fiscal year 2017.respectively.
Inventory provision costsprovisions totaled $16$54 million and $27$16 million for the first half of fiscal years 20182019 and 2017, respectively, unfavorably impacting our gross margin by 0.4% and 1.0%,2018, respectively. Sales of inventory that was previously written-off or written-down totaled $22$16 million and $20$22 million for the first half of fiscal years 20182019 and 2017, respectively, favorably impacting our gross margin by 0.5% and 0.7%,2018, respectively. As a result, the overall net effect on our gross margin from charges for inventory provision costs and saleswas an unfavorable impact of items previously written-off or written-down was a 0.2% favorable impact0.6% for the first half of fiscal year 20182019 and a 0.3% unfavorablefavorable impact of 0.2% for the first half of fiscal year 2017.
2018.
A discussion of our gross margin results for each of our reportable segments is as follows:
GPU BusinessBusiness.. The gross margin of our GPU business increased during the second quarter and first half of fiscal year 20182019 compared to the second quarter and first half of fiscal year 2017. GPU margins increased2018, primarily due to strong sales of high-end GeForce gaming GPUs and revenue growth in Datacenter driven by strong demand for Tesla products by hyperscale and cloud customers for deep learning training and accelerated GPU computing as well as demand for DGX AI supercomputing and GRID virtualization platforms and strong sales of our GeForce GTX gaming products.Datacenter.
Tegra Processor BusinessBusiness.. The gross margin of our Tegra Processor business was flat during the second quarter of fiscal year 2019 compared to the second quarter of fiscal year 2018. Gross margin of our Tegra Processor business increased during the first half of fiscal year 2019 compared to the first half of fiscal year 2018, primarily due to a favorable mix shift.
Operating Expenses
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 29, 2018 | | July 30, 2017 | | $ Change | | % Change | | July 29, 2018 | | July 30, 2017 | | $ Change | | % Change |
| ($ in millions) | | ($ in millions) |
Research and development expenses | $ | 581 |
| | $ | 416 |
| | $ | 165 |
| | 40 | % | | $ | 1,124 |
| | $ | 827 |
| | $ | 297 |
| | 36 | % |
% of net revenue | 19 | % | | 19 | % | | | | | | 18 | % | | 20 | % | | | | |
Sales, general and administrative expenses | 237 |
| | 198 |
| | 39 |
| | 20 | % | | 467 |
| | 383 |
| | 84 |
| | 22 | % |
% of net revenue | 8 | % | | 9 | % | | | | | | 7 | % | | 9 | % | | | | |
Total operating expenses | $ | 818 |
| | $ | 614 |
| | $ | 204 |
| | 33 | % | | $ | 1,591 |
| | $ | 1,210 |
| | $ | 381 |
| | 31 | % |
Research and Development
Research and development expenses increased by 40% and 36% during the second quarter and first half of fiscal year 20182019, compared to the second quarter and first half of fiscal year 2017. The increase in Tegra margins was due primarily to strong sales of Tegra products serving automotive systems.
Operating Expenses
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 30, 2017 | | July 31, 2016 | | $ Change | | % Change | | July 30, 2017 | | July 31, 2016 | | $ Change | | % Change |
| ($ in millions) |
Research and development expenses | $ | 416 |
| | $ | 350 |
| | $ | 66 |
| | 19 | % | | $ | 827 |
| | $ | 697 |
| | $ | 130 |
| | 19 | % |
Sales, general and administrative expenses | 198 |
| | 157 |
| | 41 |
| | 26 | % | | 383 |
| | 316 |
| | 67 |
| | 21 | % |
Restructuring and other charges | — |
| | 2 |
| | (2 | ) | | (100 | )% | | — |
| | 3 |
| | (3 | ) | | (100 | )% |
Total operating expenses | $ | 614 |
| | $ | 509 |
| | $ | 105 |
| | 21 | % | | $ | 1,210 |
| | $ | 1,016 |
| | $ | 194 |
| | 19 | % |
Research and development expenses as a percentage of net revenue | 19 | % | | 25 | % | | |
| | |
| | 20 | % | | 26 | % | | | | |
Sales, general and administrative expenses as a percentage of net revenue | 9 | % | | 11 | % | | |
| | |
| | 9 | % | | 12 | % | | | | |
Restructuring and other charges as a percentage of net revenue | — | % | | — | % | | | | | | — | % | | — | % | | | | |
Research and Development
Research and development expenses increased by 19% during the second quarter and first half of fiscal year 2018, compared to the second quarter and first half of fiscal year 2017, driven primarily by employee additions and increases in employee compensation and other related costs, including stock-based compensation expense.
Sales, General and Administrative
Sales, general and administrative expenses increased by 26%20% and 22% during the second quarter and first half of fiscal year 20182019, compared to the second quarter and first half of fiscal year 2017,2018, driven primarily by employee additions and increases in employee compensation and other related costs, including stock-based compensation expense.
Sales, general and administrative expenses increased by 21% during the first half of fiscal year 2018 compared to the first half of fiscal year 2017, driven primarily by employee additions and increases in employee compensation and other related costs, including stock-based compensation expense. Offsetting these increases was a decrease in outside professional fees of $11 million resulting from the resolution of our intellectual property disputes with Samsung and Qualcomm.
Restructuring and Other Charges
In the second quarter of fiscal year 2016, we began the wind-down of our Icera operations. No restructuring charges were recorded during the second quarter and first half of fiscal year 2018. Please refer to Note 15 of the Notes to Condensed Consolidated Financial Statements for further discussion.
Total Other Income (Expense)
Interest Income and Interest Expense
Interest income consists of interest earned on cash, cash equivalents and marketable securities. Interest income was $15$32 million and $12$15 million during the second quarter of fiscal years 20182019 and 2017,2018, respectively, and $31$57 million and $23$31 million during the first half of fiscal years 20182019 and 2017,2018, respectively. The increase in interest income was primarily due to higher average cash balances invested in interest bearing securities, as well as higher purchased yields.
Interest expense is primarily comprised of coupon interest and debt discount amortization related to the 2.20% Notes Due 2021 and 3.20% Notes Due 2026 issued in September 2016, and the 1.00% Convertible Notes Due 2018, or the Convertible Notes, issued in December 2013. Interest expense was $15$14 million and $12$15 million during the second quarter of fiscal years 20182019 and 2017,2018, respectively, and $31$29 million and $23$31 million during the first half of fiscal years 2019 and 2018, and 2017, respectively.
Other, Net
Other, net, consists primarily of realized or unrealized gains and losses from the sale of marketable securities, sales or impairments ofnon-affiliated investments, in non-affiliated companies, losses on early debt conversions of the Convertible Notes, and the impact of changes in foreign currency rates. Other, net, was an expense of $4 millionnot significant during the second quarter or the first half of fiscal year 2019. Other, net, was not significant during the second quarter of
fiscal year 2018 and $21 million of expense during the first half of fiscal year 2018, consisting primarily of $3 million and $17 million of losses recognized from early conversions of the Convertible Notes during the first half of fiscal year 2018.
Income Taxes
We recognized income tax expense of $79 million and $146 million for the second quarter and first half of fiscal year 2018, respectively. Other, net, was not significant during the second quarter or first half of fiscal year 2017.
Income Taxes
We recognized income tax expense of2019, respectively, and $101 million and $130 million for the second quarter and first half of fiscal year 2018, respectively, and $56 million and $89 million for the second quarter and first half of fiscal year 2017, respectively. Income tax expense as a percentage of income before income tax for the second quarter and first half of fiscal year 2019 was 6.7% and 5.9%, respectively, and 14.8% and 10.7% for the second quarter and first half of fiscal year 2018, respectively, and 17.6% and 15.9%respectively.
The decrease in our effective tax rate for the second quarter and first half of fiscal year 2017, respectively.
The decrease in our effective tax rate in the second quarter and first half of fiscal year 20182019 as compared to the same periods in the prior fiscal year was primarily reflectsdue to a decrease in the recognitionU.S. statutory tax rate from 35% to 21% as a result of U.S. tax reform, partially offset by a decrease in the impact of tax benefits related tofrom stock-based compensation and a proportional decrease in the amount of earnings subject to United States tax.compensation.
Please referRefer to Note 45 of the Notes to Condensed Consolidated Financial Statements for further information.
Liquidity and Capital Resources
|
| | | | | | | |
| July 30, 2017 | | January 29, 2017 |
| (In millions) |
Cash and cash equivalents | $ | 1,988 |
| | $ | 1,766 |
|
Marketable securities | 3,889 |
| | 5,032 |
|
Cash, cash equivalents and marketable securities | $ | 5,877 |
| | $ | 6,798 |
|
|
| | | | | | | |
| July 29, 2018 | | January 28, 2018 |
| (In millions) |
Cash and cash equivalents | $ | 718 |
| | $ | 4,002 |
|
Marketable securities | 7,225 |
| | 3,106 |
|
Cash, cash equivalents and marketable securities | $ | 7,943 |
| | $ | 7,108 |
|
| | | Six Months Ended | Six Months Ended |
| July 30, 2017 | | July 31, 2016 | July 29, 2018 | | July 30, 2017 |
| (In millions) | (In millions) |
Net cash provided by operating activities | $ | 987 |
| | $ | 519 |
| $ | 2,358 |
| | $ | 987 |
|
Net cash provided by (used in) investing activities | $ | 1,016 |
| | $ | (93 | ) | $ | (4,356 | ) | | $ | 1,016 |
|
Net cash used in financing activities | $ | (1,781 | ) | | $ | (596 | ) | $ | (1,286 | ) | | $ | (1,781 | ) |
As of July 30, 2017,29, 2018, we had $5.88$7.94 billion in cash, cash equivalents and marketable securities, a decreasean increase of $921$835 million from the end of fiscal year 2017.2018. Our portfolio of cash equivalents and marketable securities is managed on our behalf by several financial institutions.internally. Our portfolio managers are required to follow our investment policy which requires the purchase of high grade investment securities, the diversification of asset types, and certain limits on our portfolio duration.
Cash provided by operating activities increased in the first half of fiscal year 20182019 compared to the first half of fiscal year 2017, primarily2018, due to higher net income partially offset byand changes in working capital.
Cash provided byused in investing activities increased in the first half of fiscal year 20182019 compared to the first half of fiscal year 2017, primarily2018, due to lowerhigher purchases of marketable securities, partially offset by higher maturities of marketable securities.
Cash used in financing activities increaseddecreased in the first half of fiscal year 20182019 compared to the first half of fiscal year 2017, primarily2018, due to lower repayments of Convertible Notes, partially offset by higher share repurchases andtax payments related to employee stock plans.
Liquidity
Our primary sources of liquidity are our cash and cash equivalents, our marketable securities, and the cash generated by our operations. As of July 30, 2017 and January 29, 2017, we had $5.88 billion and $6.80 billion, respectively, in cash, cash equivalents and marketable securities. Our marketable securities consist principally of debt securities of corporations and United Statesissued by the U.S. government and its agencies, highly rated corporations and financial institutions, asset-backed securities,issuers, mortgage-backed securities issued by government-sponsored enterprises, money market funds and foreign government bonds.entities. These investmentsmarketable securities are denominated in United States dollars. Our investment policy requiresRefer to Note 6 of the purchaseNotes to Condensed Consolidated Financial Statements for additional information.
As a result of high grade investmentthe Tax Cuts and Job Acts that was signed into law in December 2017, substantially all of our cash, cash equivalents and marketable securities andheld outside of the diversification of asset types and includes certain limits on our portfolio duration,United States as specified in our investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument. As of July 30, 2017, we were29, 2018 are available for use in compliance with our investment policy. As of July 30, 2017, our investments in government agencies and government-sponsored enterprises represented 33% of our total investment portfolio, while the financial sector accounted for 18% of our total investment portfolio. All of our investments are in A/A3 or better rated securities.
Please referUnited States without incurring additional U.S. federal income taxes. Refer to Note 5 of the Notes to Condensed Consolidated Financial Statements for additional information.
Our cash balances are held in numerous locations throughout the world, including substantial amounts held outside of the United States. Most of the amounts held outside the United States may be repatriated to the United States. However, if we repatriate foreign earnings for cash requirements in the United States, we would incur U.S. federal income tax at a rate of 35% less utilization of any net operating loss carryforwards, and further offset by any applicable research and foreign tax credits, plus any state income taxes on such income. Repatriation of some foreign balances may be restricted by local laws.
Capital Return to Shareholders
Dividend payments and share repurchases must be made from cash held inDuring the United States.first half of fiscal year 2019, we repurchased a total of 3 million shares for $655 million. During the second quarter and first half of fiscal year 2018,2019, we repurchased a total of 5 million shares for $758also paid $91 million and made$182 million, respectively, in cash dividend paymentsdividends to our shareholders of $84 million and $166 million, respectively.
shareholders.
For fiscal year 2018,2019, we intend to return $1.25 billion to shareholders through ongoing quarterly cash dividends and share repurchases.
Our cash dividend program and the payment of future cash dividends under that program are subject to continued capital availability and our Board's continuing determination that the dividend program and the declaration of dividends thereunder are in the best interests of our shareholdersshareholders. Refer to Note 14 of the Notes to Condensed Consolidated Financial Statements for additional information.
Notes Due 2021 and are in compliance with all lawsNotes Due 2026
In fiscal year 2017, we issued $1.00 billion of the 2.20% Notes Due 2021 and agreements$1.00 billion of NVIDIA applicable to the declaration3.20% Notes Due 2026, collectively, the Notes. The net proceeds from the Notes were $1.98 billion, after deducting debt discounts and payment of cash dividends.
issuance costs.
Convertible Notes
In December 2013,As of July 29, 2018, we issued $1.50 billionhad $14 million of Convertible Notes that mature in December 2018 unless repurchased or converted prior to such date. The Convertible Notes first became convertible at the holders’ option beginning on the first day of fiscal year 2017. We have utilized U.S. cash to settle an aggregate of $1.41 billion in principal amount of the Convertible Notes through the second quarter of fiscal year 2018 andoutstanding. Subsequently, we have received additional conversion notices for an aggregate of $62$11 million in principal amount of the Convertible Notes, which are expected to be settled in the third quarter of fiscal year 2018. Please refer2019. Refer to Note 1112 of the Notes to the Condensed Consolidated Financial Statements for further discussion.
Revolving Credit Facility
We have a Credit Agreement under which we may borrow up to $575 million for general corporate purposes and can obtain revolving loan commitments up to $425 million. As of July 29, 2018, we had not borrowed any amounts under this agreement.
Commercial Paper
We have a $575 million commercial paper program to support general corporate purposes. As of July 29, 2018, we had not issued any commercial paper.
Operating Capital and Capital Expenditure Requirements
In the second quarter of fiscal year 2019, we began construction on a 750,000 square foot building on our Santa Clara campus, which is currently targeted for completion in fiscal year 2022. We believe that our existing cash balances and anticipated cash flows from operations will be sufficient to meet our operating requirements for at least the next twelve months.
Off-Balance Sheet Arrangements
We are constructing a new headquarters building in Santa Clara, California, which is currently targeted for completion in the third quarter of fiscal year 2018. We are financing this construction under an off-balance sheet, build-to-suit operating lease arrangement. The banks have committed to fund up to $380 million of costs relating to construction. Once construction is complete, the lease balance will remain static at the completed cost for the remaining duration of the lease term. During construction, accrued interest will be capitalized into the lease balance. Following construction, we will pay rent in the form of interest. The lease has an initial 7.5 year term expiring in December 2022, consisting of an approximately 2.5 year construction period followed by a 5 year lease term. We have the option to renew this lease for up to three additional 5 year periods, subject to approval by the banks. During the term of the lease, we may elect to purchase the headquarters building for the amount of the banks’ investment in the building and any accrued but unpaid rent. At the end of the lease term, we may elect to buy the building for the outstanding balance on the maturity date or arrange for the cash sale of the building to an unaffiliated third party. The aggregate guarantee made by us under the lease is no more than 87.5% of the costs incurred in connection with the construction of the building. Please refer to Note 12 of the Notes to Condensed Consolidated Financial Statements for a discussion regarding our operating lease financing arrangement.
Contractual Obligations
As of July 30, 2017,29, 2018, we had outstanding inventory purchase obligations totaling $1.04 billion. Exceptno material off-balance sheet arrangements as described above with respect to the Convertible Notes and the Notes, theredefined by applicable SEC regulations.
Contractual Obligations
There were no other material changes in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 29, 2017.28, 2018.
Please seeRefer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in our Annual Report on Form 10-K for the fiscal year ended January 29, 201728, 2018 for a description of our contractual obligations.
Adoption of New and Recently Issued Accounting Pronouncements
Please seeRefer to Note 1 of the Notes to Condensed Consolidated Financial Statements for a discussion of adoption of new and recently issued accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment and Interest Rate Risk
Financial market risks related to investment and interest rate risk are described in our 2017 Annual Report on Form 10-K.10-K for the fiscal year ended January 28, 2018. As of July 30, 2017,29, 2018, there have been no material changes to the financial market risks described as of January 29, 2017.28, 2018.
Foreign Exchange Rate Risk
The impact of foreign currency transactions related to foreign exchange rate risk is described in our 2017 Annual Report on Form 10-K.10-K for the fiscal year ended January 28, 2018. As of July 30, 2017,29, 2018, there have been no material changes to the foreign exchange rate risks described as of January 29, 2017.28, 2018.
Please seeRefer to Note 910 of the Notes to Condensed Consolidated Financial Statements for additional information.
ITEM 4. CONTROLS AND PROCEDURES
Controls and Procedures
Disclosure Controls and Procedures
Based on their evaluation as of July 30, 201729, 2018, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) were effective to provide reasonable assurance.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the second quarter of fiscal year 20182019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within NVIDIA have been detected.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Please seeRefer to Part I, Item 1, Note 1213 of the Notes to Condensed Consolidated Financial Statements for a discussion of significant developments in our legal proceedings since January 29, 2017. Please also see28, 2018. Also refer to Item 3, “Legal Proceedings” in our Annual Report on Form 10-K for the fiscal year ended January 29, 201728, 2018 for a prior discussion of our legal proceedings.
ITEM 1A. RISK FACTORS
Please referRefer to the description of the risk factors associated with our business previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 29, 2017.28, 2018. There have been no material changes from the risk factors previously described under Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 29, 2017.
28, 2018.
Before you buy our common stock, you should know that making such an investment involves some risks including, but not limited to, the risks described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 29, 2017.28, 2018. Additionally, any one of those risks could harm our business, financial condition and results of operations, which could cause our stock price to decline. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
Beginning August 2004, our Board of Directors authorized us subject to certain specifications, to repurchase shares of our common stock. In November 2016, the Board authorized an additional $2.00 billion under our repurchase program and extended it through December 2020.
Through July 30, 2017,Since the inception of our share repurchase program, we have repurchased an aggregate of 250254 million shares under our share repurchase program for a total cost of $5.35$6.16 billion since the inception of the program.through July 29, 2018. All shares delivered from these repurchases have been placed into treasury stock. As of July 30, 2017,29, 2018, we were authorized subject to certain specifications, to repurchase additional shares of our common stock up to $1.97$1.16 billion through December 2020. For fiscal year 2018, we intend to return $1.25 billion to our shareholders through ongoing quarterly cash dividends and share repurchases.
The repurchases can be made in the open market, in privately negotiated transactions, or in structured share repurchase programs, and can be made in one or more larger repurchases, in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, subject to market conditions, applicable legal requirements, and other factors.repurchases. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. As part of our share repurchase program, we have entered into, and we may continue to enter into, structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement.
The following table presents details of ourWe had no share repurchase transactions during the second quarter of fiscal year 2018:
|
| | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (In millions) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program (In millions) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (In billions) |
May 1, 2017 - May 28, 2017 | | — | | $ | — |
| | — | | $ | 2.73 |
|
May 29, 2017 - June 25, 2017 | | 3 | | $ | 151.11 |
| | 3 | | $ | 2.27 |
|
June 26, 2017 - July 30, 2017
| | 2 | | $ | 150.13 |
| | 2 | | $ | 1.97 |
|
Total | | 5 | | | | 5 | | |
2019.
Transactions Related to our Convertible Notes and Note Hedges
During the second quarter of fiscal year 2018,2019, we issued an aggregate of 5 millionone thousand shares of our common stock upon settlement of Convertible Notes submitted for conversion. In connection with these conversions, we exercised a portion of our Note Hedges to acquire an equal number of shares of our common stock. The counterparty to the Note Hedges may be deemed an “affiliated purchaser” and may have purchased the shares of our common stock deliverable to us upon this exercise of our option.
During Subsequently, we received additional conversion notices for an aggregate of $11 million in principal amount of the Convertible Notes, which are expected to be settled in the third quarter of fiscal year 2018, we expect to settle at least an aggregate of $62 million in principal amount, and issue shares of our common stock for the excess conversion value, related to the Convertible Notes that were submitted for conversion.2019. The actual number of shares issuable upon conversion will be determined based upon the terms of the Convertible Notes, and weNotes. We expect to receive an equal number of shares of our common stock under the terms of the Note Hedges. Please referRefer to Note 1112 of the Notes to Condensed Consolidated Financial Statements for further discussion regarding the Convertible Notes and the Note Hedges.
Restricted Stock Unit Share Withholding
We also withhold common stock shares associated with net share settlements to cover tax withholding obligations upon the vesting of restricted stock unit awards under our employee equity incentive program. During the second quarter of fiscal year 2019, we withheld approximately 0.3 million shares at a total cost of $66 million through net share settlements. During the first half of fiscal year 2018,2019, we withheld approximately 22.1 million shares at a total cost of $190$515 million through net share settlements. Please referRefer to Note 23 of the Notes to Condensed Consolidated Financial Statements for further discussion regarding our equity incentive plans.
ITEM 6. EXHIBITS
|
| | | | | | | | | | |
Exhibit No. | | Exhibit Description | | Schedule /Form | | File Number | | Exhibit | | Filing Date |
10.1 | | | | 8-K | | 000-23985 | | 10.1 | | June 5, 2017 |
31.1* | | | | | | | | | | |
31.2* | | | | | | | | | | |
32.1#* | | | | | | | | | | |
32.2#* | | | | | | | | | | |
101.INS* | | XBRL Instance Document | | | | | | | | |
101.SCH* | | XBRL Taxonomy Extension Schema Document | | | | | | | | |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | |
101.LAB* | | XBRL Taxonomy Extension Labels Linkbase Document | | | | | | | | |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | |
|
| | | | | | | | | | |
Exhibit No. | | Exhibit Description | | Schedule /Form | | File Number | | Exhibit | | Filing Date |
10.1+ | | | | 8-K | | 000-23985 | | 10.1 | | 5/21/2018 |
10.2+ | | | | 8-K | | 000-23985 | | 10.2 | | 5/21/2018 |
31.1* | | | | | | | | | | |
31.2* | | | | | | | | | | |
32.1#* | | | | | | | | | | |
32.2#* | | | | | | | | | | |
101.INS* | | XBRL Instance Document | | | | | | | | |
101.SCH* | | XBRL Taxonomy Extension Schema Document | | | | | | | | |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | |
101.LAB* | | XBRL Taxonomy Extension Labels Linkbase Document | | | | | | | | |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | |
* Filed herewith
+ Management contract or compensatory plan or arrangement
# In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management's Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
Copies of above exhibits not contained herein are available to any shareholder upon written request to:
Investor Relations: NVIDIA Corporation, 27012788 San Tomas Expressway, Santa Clara, CA 95050.95051.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 23, 201716, 2018
|
| | | |
| NVIDIA Corporation |
By: | /s/ Colette M. Kress | |
| | |
| Colette M. Kress |
| Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) |