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NVDA > SEC Filings for NVDA > Form 10-Q on 21-Aug-2013All Recent SEC Filings

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Form 10-Q for NVIDIA CORP


21-Aug-2013

Quarterly Report


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, NVIDIA GRID, GTX, ICERA, Kepler, Quadro, SHIELD, Tegra, Tesla, NVIDIA Titan, and vGPU are trademarks and/or registered trademarks of NVIDIA Corporation in the United States and other countries. 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 27, 2013 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, hold or sell shares of our common stock.

Overview

Our Company

NVIDIA is a visual computing company, connecting people through the powerful medium of computer graphics. In a world increasingly filled with visual displays, our graphics technologies let our customers interact with the world of digital ideas, information and entertainment with an efficiency that no other communication medium can provide. Visualization transcends cultural and language boundaries and enhances the quality of life whether the setting is work or pleasure and the task is mission critical or for entertainment.

We have long been known to millions around the world for creating the graphics chips used in PCs that bring video games to life. With our invention of the GPU, we introduced the world to the power of programmable shading, which defines modern computer graphics. Today, we reach well beyond PC graphics and games. Our energy-efficient processors are at the heart of products ranging from mobile devices to supercomputers. PC gamers choose our GPUs by name to enjoy immersive fantasy worlds. Our Tegra processors power smartphones, tablets and automobile infotainment systems. Professional designers use our GPUs to create visual effects in movies and design everything from audio headsets to commercial aircraft. And supercomputers take advantage of the massively parallel processing capabilities of our GPUs to accelerate a wide range of important applications, from simulations of viruses at the molecular level, to modern weather forecasting and global oil exploration.

NVIDIA's research and development in visual computing has yielded more than 5,000 patents granted or pending worldwide, and including ones covering inventions essential to modern computing.


Our businesses are based on two important technologies: the GPU and the Tegra processor. GPUs, each with billions of transistors, are the engine of visual computing and among the world's most complex processors. We have GPU product brands designed for specific users and applications: GeForce for gamers; Quadro for designers; Tesla for researchers; and GRID VGX for cloud-based server graphics modules. We recently announced the NVIDIA GRID visual computing appliance, a fully integrated system with GRID VGX graphics modules that run NVIDIA's proprietary system software. GRID is a first-of-its-kind device, designed to serve graphics-intensive applications from the cloud simultaneously to a large number of concurrent users.

The Tegra processor is a system-on-a-chip, or SOC, integrating an entire computer on a single chip. Tegra processors incorporate multi-core GPUs and CPUs together with audio, video and input/output capabilities. They can also be integrated with baseband processors for phone and data communication. Unlike power-inefficient processors built for PCs, our Tegra SOC conserves power while delivering state-of-the-art graphics and multimedia processing. Tegra runs devices like smartphones, tablets and PCs; it can also be embedded into smart devices, such as televisions, monitors, set-top boxes, gaming devices and cars. We recently announced SHIELD, the first Android device designed for gaming. SHIELD features our Tegra 4 processor, contains proprietary NVIDIA-developed software and system technologies and leverages our deep partnerships with game developers all over the world.

Headquartered in Santa Clara, California, we were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our Internet address is www.nvidia.com. The contents of our website are not a part of this Quarterly Report on Form 10-Q.

Recent Developments, Future Objectives and Challenges

GPU Business

During the second quarter of fiscal year 2014, we launched a new family of high-end Kepler-based gaming GPUs - the GeForce GTX 760, GeForce GTX 770 and GeForce GTX 780, announced an IP licensing initiative designed to bring our GPU technology to new markets and generate revenue from markets previously inaccessible to us, and announced that Citrix's XenDesktop 7 has now fully integrated our GRIDvGPU technology to share GPUs across virtual machines.

During the first quarter of fiscal year 2014, we shipped GeForce GTX Titan for gamers, launched GRID VCA - the industry's first visual computing appliance that enables businesses to deploy cloud-based, GPU-accelerated applications through any Windows, Linux or Mac client on their network, and shipped four new professional graphics products under our Quadro K Series - extending our Kepler technology into the workstation market.

Tegra Processor Business

During the second quarter of fiscal year 2014, we demonstrated the capabilities of the Kepler-based GPU in Project Logan, our next-generation mobile processor, prepared to release NVIDIA SHIELD, an open-platform gaming and entertainment portable that began shipping on July 31, 2013, and demonstrated Tegra 4i making phone calls on AT&T's network.

During the first quarter of fiscal year 2014, we announced our first fully integrated 4G LTE mobile processor - Tegra 4i.

Stock Repurchase and Cash Dividends

Our Board of Directors authorized us, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $2.7 billion through May 2013 through December 2014.

In fiscal year 2014, we plan to return in excess of $1 billion to our shareholders, in the form of share repurchases and quarterly dividend payments. In the second quarter of fiscal 2014, we executed an accelerated share repurchase agreement to repurchase $750.0 million worth of shares of our common stock. To date, we have received 36.9 million shares under this agreement and expect to receive additional shares when the contract ends in the third quarter of fiscal 2014. Please refer to Note 12 of the Notes to the Condensed Consolidated Financial Statements for further disclosure regarding this accelerated share repurchase agreement. In addition, during the first half of fiscal 2014, we returned $189.6 million to shareholders, including $100 million in share repurchases and $89.6 million in dividend payments.
Through July 28, 2013, we have received an aggregate of 144.2 million shares under our stock repurchase program for a total cost of $2.41 billion. As of July 28, 2013, we are authorized, subject to certain specifications, to repurchase additional shares of our common stock up to $285.7 million.


Financial Information by Business Segment and Geographic Data

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. During the last several years, we have operated and reported three reporting segments to our CODM: the GPU business, the Professional Solutions business, and the Consumer Products business. However, during the fourth quarter of fiscal year 2013, we began reporting two segments to reflect the way we are now managing our businesses internally which is based on whether the underlying products leverage our GPU or our Tegra Processor technologies. Comparative periods presented reflect this change.

Our GPU business leverages our GPU technology across multiple end markets. It now comprises of four primary product lines, including GeForce for desktop and notebook PCs and Macs; Quadro for professional workstations; Tesla for high-performance servers and workstations; and NVIDIA GRID for server graphics solutions. It also includes other related products, licenses and revenue supporting the GPU business, such as memory products. Our Tegra Processor business comprises product lines primarily based on our Tegra SOC and modem processor technologies. This includes Tegra for smartphones and tablets for both Android and Windows RT-based devices; automotive computers, including infotainment and navigation systems; and gaming devices such as SHIELD. It also includes other related products, licenses, and revenue supporting the Tegra Processor business such as Icera baseband processors and RF transceivers, embedded products, and licenses and other revenue associated with game consoles.
In addition to the two reporting segments discussed above, the "All Other" category represents unallocated revenue and expenses which primarily includes licensing revenue from our patent cross licensing agreement with Intel Corporation. Revenue related to this agreement is recognized ratably over the term of our agreement and is not actively managed. This category also includes corporate operating expenses that we do not allocate to our other reporting segments as such expenses are not directly related to the function or operations of our reporting segments. These expenses include certain corporate infrastructure and support costs that are deemed to be enterprise in nature. Additionally, we do not allocate stock-based compensation, amortization of acquisition-related intangible assets, other acquisition-related costs, and non-recurring expenses and benefits.
Our CODM does not review any information regarding total assets on a reporting segment basis. Reporting 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. Please refer to Note 13 of the Notes to the Condensed Consolidated Financial Statements for further disclosure regarding segment information.

Results of Operations

The following table sets forth, for the periods indicated, certain items in our
condensed consolidated statements of operations expressed as a percentage of
revenue.
                                   Three Months Ended         Six Months Ended
                                  July 28,     July 29,     July 28,     July 29,
                                    2013         2012         2013         2012
Revenue                              100.0 %      100.0 %      100.0 %      100.0 %
Cost of revenue                       44.2         48.2         44.9         49.0
Gross profit                          55.8         51.8         55.1         51.0
Operating expenses
Research and development              33.9         26.9         34.1         28.7
Sales, general and administrative     11.1         11.5         11.2         11.5
Total operating expenses              45.0         38.4         45.3         40.2
Operating income                      10.8         13.4          9.8         10.8
Interest and other income, net         0.6          0.5          0.6          0.5
Income before income tax              11.4         13.9         10.4         11.3
Income tax expense                     1.6          2.5          1.3          2.2
Net income                             9.8 %       11.4 %        9.1 %        9.1 %


Three and six months ended July 28, 2013 and July 29, 2012

Revenue

Revenue was $977.2 million for the second quarter of fiscal year 2014, compared to $1,044.3 million for the second quarter of fiscal year 2013, which represents a decrease of approximately 6.4%. Revenue for the first half of fiscal year 2014 was $1,932.0 million, compared to $1,969.1 million for the first half of fiscal year 2013, which represents a decrease of approximately 1.9%. A discussion of our revenue results for each of our operating segments is as follows:

GPU Business. GPU business revenue increased by approximately 7.5% to $858.6 million in the second quarter of fiscal year 2014, compared to $798.6 million for the second quarter of fiscal year 2013. GPU business revenue increased by approximately 7.8% to $1,644.2 million in the first half of fiscal year 2014, compared to $1,525.0 million for the first half of fiscal year 2013. Both of these increases were due primarily to an increase in sales of our high-end Kepler-based GeForce desktop products, offset by a decrease in mainstream desktop sales volume. Quadro and Tesla revenue increased as we ramped sales of our Kepler-based products. GeForce notebook revenues contributed to the increase in the first half of fiscal year 2014 as a result of strong design wins based on Intel's Ivy Bridge platform.

Tegra Processor Business. Tegra Processor business revenue decreased by approximately 70.7% to $52.6 million in the second quarter of fiscal year 2014, compared to $179.6 million for the second quarter of fiscal year 2013. Tegra Processor business revenue decreased by approximately 50.1% to $155.8 million in the first half of fiscal year 2014, compared to $312.2 million for the first half of fiscal year 2013. These decreases were anticipated and were primarily due to lower sales of our Tegra 2 and Tegra 3 processors as customers ramped down production of smartphones and tablets based on those processors. The decrease also reflects lower revenue from the sale of embedded products and lower license and royalty revenue associated with game consoles.

All Other. We recognized $66.0 million and $132.0 million in revenue from the patent cross licensing arrangement with Intel during the second quarter of fiscal years 2014 and 2013 and first half of fiscal years 2014 and 2013, respectively.

Concentration of Revenue

Revenue from sales to customers outside of the United States and Other Americas accounted for 75% of total revenue for the second quarter and first half of fiscal year 2014 and 77% of total revenue for the second quarter and first half of fiscal year 2013. 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.

Revenue from significant customers, those representing 10% or more of total revenue, was approximately 23% and 22%, respectively, of our total revenue from two customers for the second quarter and first half of fiscal 2014. Revenue from significant customers was approximately 12% and 11%, respectively, of our total revenue from one customer for the second quarter and first half of fiscal 2013.

Gross Profit and Gross Margin

Gross profit consists of total revenue, net of allowances, less cost of revenue. Cost of revenue consists primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, manufacturing support costs, including labor and overhead associated with such purchases, final test yield fallout, inventory and warranty provisions and shipping costs. Cost of revenue also includes development costs for license, service arrangements and stock-based compensation related to personnel associated with manufacturing.

Gross margin is the percentage of gross profit to revenue. Our gross margin can vary in any period depending on the mix of types of products sold. Our gross margin is significantly impacted by the mix of products we sell, which is often difficult to estimate with accuracy. Therefore, if we experience product transition challenges, if we achieve significant revenue growth in our lower margin product lines, or if we are unable to earn as much revenue as we expect from higher margin product lines, our gross margin may be negatively impacted.

Our overall gross margin was 55.8% and 51.8% for the second quarter of fiscal years 2014 and 2013, respectively and 55.1% and 51.0% for the first half of fiscal years 2014 and 2013, respectively.

We expect our gross margin for the third quarter of fiscal year 2014 to be relatively consistent with the second quarter of fiscal year 2014.


A discussion of our gross margin results for each of our operating segments is as follows:

GPU Business. The gross margin of our GPU business increased in the second quarter and first half of fiscal year 2014 from the second quarter and first half of fiscal year 2013, respectively. GPU margins increased primarily due to an increase in unit volume of our high-end Kepler-based GeForce desktop products which contributed to a richer overall mix of product sales. Additionally, the volume increase of Kepler-based Quadro and Tesla products also contributed to a richer mix of GPU sales.

Tegra Processor Business. The gross margin of our Tegra Processor business decreased in the second quarter and first half of fiscal year 2014 when compared with the second quarter and first half of fiscal year 2013, respectively, primarily due to decreases in license and royalty revenue associated with game consoles when compared to the same periods in the prior year.

Operating Expenses
                               Three Months Ended                                     Six Months Ended
                 July 28,        July 29,         $          %         July 28,        July 29,         $          %
                   2013            2012         Change    Change         2013            2012         Change    Change
                            (In millions)                                        ($ in millions)
Research and
development
expenses       $    331.7      $    281.2      $ 50.5      18.0   %  $    658.9      $    565.1      $ 93.8      16.6   %
Sales, general
and
administrative
expenses            108.3           119.9       (11.6 )    (9.7 ) %       216.9           226.5        (9.6 )    (4.3 ) %
Total
operating
expenses       $    440.0      $    401.1      $ 38.9       9.7   %  $    875.8      $    791.6      $ 84.2      10.6   %
Research and
development as
a percentage
of net revenue       33.9   %        26.9   %                              34.1   %        28.7   %
Sales, general
and
administrative
as a
percentage of
net revenue          11.1   %        11.5   %                              11.2   %        11.5   %

Research and Development

Research and development expenses were $331.7 million and $281.2 million during the second quarter of fiscal years 2014 and 2013, respectively, an increase of $50.5 million, or 18.0%. This increase was primarily due to an increase in compensation and benefits of $27.5 million, or 18%, as we continue to hire engineering talent to invest in our strategic growth initiatives. The increase in compensation, benefits, and other employee-related costs also reflects annual salary increases and a 401(k) match program that we initiated in January 2013. In addition, development expenses increased by $7.0 million, primarily related to activities to bring up our next generation Tegra and GPU products. Also contributing to the increase were facility and equipment infrastructure spend to support planned hiring for our strategic growth businesses, including a $9.5 million increase in facilities and IT support expense and a $5.0 million increase in depreciation and amortization expense for increased purchases of machinery and equipment and licenses.

Research and development expenses were $658.9 million and $565.1 million during the first half of fiscal years 2014 and 2013, respectively, an increase of $93.8 million, or 16.6%. This increase was primarily due to an increase in compensation and benefits of $53.0 million, or 17%, as we continue to hire engineering talent to invest in our strategic growth initiatives. The increase in compensation, benefits, and other employee-related costs also reflects annual salary increases and a 401(k) match program that we initiated in January 2013. In addition, development expenses increased by $12.2 million, primarily related to activities to bring up our next generation Maxwell 20nm technology, Tegra and GPU products. Also contributing to the increase were facility and equipment infrastructure spend to support planned hiring for our strategic growth businesses, including an $18.7 million increase in allocated facilities and IT support expense driven by an increase in hiring and a $7.9 million increase in depreciation and amortization expense for increased purchases of machinery and equipment and licenses.


Sales, General and Administrative

Sales, general and administrative expenses were $108.3 million and $119.9 million during the second quarter of fiscal years 2014 and 2013, respectively, a decrease of $11.6 million, or 9.7%. This decrease was primarily attributable to the absence in the second quarter of fiscal year 2014 of a charge of $20.1 million for a charitable contribution in the prior fiscal year. Offsetting this decrease was an increase of $8.7 million in compensation and benefits as we continue to invest in our strategic growth initiatives. The increase in compensation, benefits, and other employee-related costs also reflects annual salary increases and a 401(k) match program we initiated in January 2013.

Sales, general and administrative expenses were $216.9 million and $226.5 million during the first half of fiscal years 2014 and 2013, respectively, a decrease of $9.6 million, or 4.3%. This decrease was primarily attributable to the absence in the second half of fiscal year 2014 of both a charge of $20.1 million for a charitable contribution, and a charge of $3.1 million for a class action settlement in the prior fiscal year. Offsetting this decrease was an increase of $17.0 million in compensation and benefits as we continue to invest in our strategic growth initiatives. The increase in compensation, benefits, and other employee-related costs also reflects annual salary increases and a 401(k) match program that we initiated in January 2013. Facilities expense increased by $3.8 million driven by expansion into new leased office space to accommodate employee growth.

We expect operating expenses to increase in the third quarter of fiscal year 2014.

Interest Income

Interest income consists of interest earned on cash, cash equivalents and marketable securities. Interest income was $3.9 million and $5.3 million for the second quarter of fiscal years 2014 and 2013, respectively, a decrease of $1.5 million. Interest income was $8.9 million and $10.5 million for the first half of fiscal years 2014 and 2013, respectively, a decrease of $1.6 million. The decrease in interest income for these periods was primarily due to a lower average cash equivalent and marketable securities balance for the period ended July 28, 2013 as we liquidated a portion of our investment portfolio to finance the accelerated share repurchase transaction of $750.0 million we entered into on May 14, 2013.

Other Income and Expense, net

Other income and expense primarily consists of realized gains and losses on the sale of marketable securities and foreign currency translation. Other income was $2.4 million in the second quarter of fiscal year 2014 compared to $0.3 million in the second quarter of fiscal year 2013, an increase in income of $2.2 million. Other income was $2.6 million in the first half of fiscal year 2014 compared to expense of $0.7 million for the first half of fiscal year 2013, an increase in income of $3.3 million. This change was primarily driven by an increase in foreign currency translation gains in the second quarter and first half of fiscal year 2014, when compared to second quarter and first half of fiscal year 2013 as the United States dollar strengthened.

Income Taxes

We recognized income tax expense of $15.4 million and $25.5 million for the second quarter and first half of fiscal year 2014, respectively, and $26.2 million and $42.8 million for the second quarter and first half of fiscal year 2013, respectively. Income tax expense as a percentage of income before taxes, or our effective tax rate, was 13.8% and 12.8% for the second quarter and first half of fiscal year 2014, respectively, and 18.0% and 19.3% for the second quarter and first half of fiscal year 2013, respectively.

The decrease in our effective tax rate in the fiscal year 2014 periods as compared to the same periods in the prior fiscal year was primarily related to the benefit of the U.S. federal research tax credit which was re-enacted on January 2, 2013 under the American Taxpayer Relief Act, and favorable discrete events that occurred in the first half of fiscal year 2014 primarily attributable to the expiration of statute of limitation in certain non-U.S. jurisdictions.

Our effective tax rate on income before tax for the first half of fiscal year 2014 of 12.8% and the first half of fiscal year 2013 of 19.3% were lower than the United States federal statutory rate of 35% due primarily to income earned in jurisdictions where the tax rate is lower than the United States federal statutory tax, and for fiscal year 2014 due to the benefit of the U.S. federal research tax credit.

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