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NVDA > SEC Filings for NVDA > Form 10-Q on 20-Aug-2014All Recent SEC Filings

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Form 10-Q for NVIDIA CORP


20-Aug-2014

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, GTX, ICERA, Jetson, Kepler, Maxwell, NVIDIA, NVIDIA GRID, NVLINK, Quadro, SHIELD, Tegra, and Tesla 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 26, 2014 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

NVIDIA is a visual computing company. 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 match.
Our strategy is to be the world leader in visual computing. We target applications in each of the major computing platforms - PC, cloud, mobile - where we can create value. Our target markets are gaming, design and visualization, high performance computing, or HPC, and data center, and automotive and smart devices. We deploy business models we believe are best suited for each application, whether IP, chips, systems, or NVIDIA-branded devices and services.
Our businesses are based on two technologies with a consistent underlying graphics architecture: the GPU and the Tegra processor.
GPUs, each with billions of transistors, are the engines of visual computing and among the world's most complex processors. We have GPU product brands aimed at specific users and applications: GeForce for gamers; Quadro for designers; Tesla for researchers; and GRID for cloud-based graphics.
• In gaming, GPUs enhance the gaming experience on PCs by improving the visual quality of graphics, increasing the frame rate for smoother gameplay and improving realism by replicating the behavior of light and physical objects.


• For designers, GPUs improve productivity and introduce new capabilities. For example, an architect designing a new building in a CAD package can interact with the model in real time, the model can be more detailed, and photo realistic renderings can be generated for the client.

• Researchers can use GPUs to run their simulations faster while consuming less power, increasing the accuracy of weather forecasts, or pricing financial derivatives more quickly.

• GRID uses GPUs to deliver graphics performance remotely, from the cloud. Uses include gaming, professional applications provided as a service (SaaS) and improving Citrix and VMware installations.

The Tegra processor is a SOC integrating an entire computer on a single chip. Tegra processors incorporate GPUs and multi-core CPUs together with audio, video and input/output capabilities. They can also be integrated with baseband processors to add voice and data communication. 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. SHIELD, our Android gaming device based on Tegra, contains proprietary NVIDIA-developed software and system technologies and leverages our deep partnerships with game developers.
Headquartered in Santa Clara, California, we were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Recent Developments, Future Objectives and Challenges

GPU Business

During the second quarter of fiscal year 2015, we extended our reach in data center accelerated computing, with the world's fifteen most highly efficient supercomputers all utilizing our Tesla GPUs. We also surpassed forty million installations of our GeForce Experience client, which provides game-ready drivers, optimized play settings, and streaming and sharing of gameplay. We also invented the first GPU acceleration technology for Adobe Illustrator CC. During the first quarter of fiscal year 2015, we released our new GeForce GTX 750 and GeForce GTX 800M series products which include our NVIDIA Maxwell-based products, and disclosed the first details of our Pascal GPU architecture, which will succeed NVIDIA Maxwell. Pascal is expected to feature 3D memory and NVLink interconnect technology. NVLink is planned to be incorporated in future POWER8 CPUs from IBM. We also announced that NVIDIA GRID™ technology will be available on the VMware Horizon DaaS Platform to deliver 3D graphics on virtualized desktops and applications delivered through the cloud. In addition, we joined IBM, Google, and others to launch the OpenPOWER Foundation, an initiative to bring IBM's POWER CPU to mainstream servers. Tegra Processor Business

During the second quarter of fiscal year 2015, our Tegra K1 processor was previewed in Google's new Android L and Project Tango tablets and was one of the first processors to support Android TV. We expanded our SHIELD family of gaming devices with the launch of the SHIELD tablet, along with the SHIELD wireless controller. BMW shipped new models, including the i8 and i3, with infotainment systems powered by NVIDIA, and Volkswagen announced that in addition to the Golf, Tegra will be included in the Passat later this year in Europe.

During the first quarter of fiscal year 2015, we launched Jetson TK1, a development platform aimed at automotive, robotics, defense and embedded applications.


Capital Return to Shareholders

During the first half of fiscal year 2015, as part of our stock repurchase program, we entered into an accelerated share repurchase agreement, or ASR, with an investment bank that was completed in July 2014. Under the terms of this ASR, we paid $500.0 million to purchase shares of our common stock and received an aggregate of 27.4 million shares under this repurchase agreement of which 20.6 million shares were delivered in the first quarter and 6.8 million shares were delivered in the second quarter of fiscal year 2015. Please refer to Note 13 of the Notes to Condensed Consolidated Financial Statements for further disclosure regarding the ASR. Additionally, we paid $94.2 million in cash dividends during the first half of fiscal year 2015. As such, in the aggregate for the first half of fiscal year 2015, we returned a total of $594.2 million of our intended capital return of $1.00 billion to shareholders during fiscal year 2015. Subsequently, in August 2014, we entered into an additional ASR to purchase $310.0 million in shares of our common stock.
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. We report our business in two primary reporting segments - the GPU business and the Tegra Processor business.

Our GPU business leverages our GPU technology across multiple end markets. It comprises four primary product lines: GeForce for consumer desktop and notebook PCs; Quadro for professional workstations; Tesla for high-performance computing; and NVIDIA GRID to provide the power of NVIDIA graphics through the cloud. It also includes other related products, licenses and revenue supporting the GPU business, such as memory products.
Our Tegra Processor business comprises primarily product lines based on our Tegra SOC and modem processor technologies, including Tegra for tablets, smartphones and gaming devices; Icera baseband processors and RF transceivers; automotive computers, including infotainment and navigation systems; and gaming devices, such as SHIELD. It also includes embedded products and license and other revenue associated with game consoles.

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 patent licensing revenue and the expenses include corporate infrastructure and support costs, stock-based compensation costs, amortization of acquisition-related intangible assets, other acquisition-related costs, 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 reporting segment basis. We do not have intersegment revenue. The accounting policies for segment reporting are the same as for the Company as a whole. Please refer to Note 14 of the Notes to 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 27,      July 28,     July 27,     July 28,
                                    2014          2013         2014         2013
Revenue                            100.0    %      100.0 %      100.0 %      100.0 %
Cost of revenue                     43.9            44.2         44.5         44.9
Gross profit                        56.1            55.8         55.5         55.1
Operating expenses:
Research and development            30.6            33.9         30.4         34.1
Sales, general and administrative   10.8            11.1         10.8         11.2
Total operating expenses            41.4            45.0         41.2         45.3
Operating income                    14.7            10.8         14.3          9.8
Interest income                      0.6             0.4          0.6          0.5
Interest expense                     1.0             0.1          1.0          0.1
Other income (expense), net         (0.3 )           0.3          0.6          0.2
Income before income tax expense    14.0            11.4         14.5         10.4
Income tax expense                   2.4             1.6          2.4          1.3
Net income                          11.6    %        9.8 %       12.1 %        9.1 %

Three and six months ended July 27, 2014 and July 28, 2013

Revenue
                             Three Months Ended                               Six Months Ended
                 July 27,     July 28,        $          %       July 27,     July 28,       $          %
                   2014         2013        Change    Change       2014         2013       Change    Change
                          (In thousands)                                  (In thousands)
GPU             $   878.0    $    858.6    $  19.4        2 %   $ 1,775.3    $ 1,644.2    $ 131.1       8 %
Tegra Processor     158.8          52.6      106.2      202 %       298.3        155.8      142.5      91 %
All Other            66.0          66.0          -        - %       132.0        132.0          -       - %
Total           $ 1,102.8    $    977.2    $ 125.6       13 %   $ 2,205.6    $ 1,932.0    $ 273.6      14 %

Revenue for the second quarter of fiscal year 2015 increased 13% when compared the second quarter of fiscal year 2014. Revenue for the first half of fiscal year 2015 increased 14% when compared to the first half of fiscal year 2014. A discussion of our revenue results for each of our operating segments is as follows:

GPU Business. GPU business revenue increased by 2% in the second quarter of fiscal year 2015 compared to the second quarter of fiscal year 2014. This increase was due primarily to higher revenue from Tesla and GRID products for data center and high performance computing, driven by large project wins and VDI deployments. Quadro revenue also increased, with growth in Kepler-based products for mobile workstations. Revenue from GeForce desktop and notebook GPU products for gaming grew, reflecting a combination of continued strength in PC gaming and increased sales of our Maxwell-based GPU products. Revenue from GeForce GPU products for mainstream PC OEMs declined compared to last year.

GPU business revenue increased by 8% in the first half of fiscal year 2015 compared to the first half of fiscal year 2014. This increase was due primarily to increased revenue from sales of GeForce GPU products for gaming, reflecting a combination of continued strength in PC gaming and increased sales of our Maxwell-based GPU products. Revenue from GeForce GPU products for mainstream PC OEMs declined compared to last year. Tesla and GRID product revenues both increased, driven by large project wins and VDI deployments, and Quadro revenue increased due primarily to increased sales of our Kepler-based Quadro products.


Tegra Processor Business. Tegra Processor business revenue increased by 202% in the second quarter of fiscal year 2015 compared to the second quarter of fiscal year 2014, and by 91% in the first half of fiscal year 2015 compared to the first half of fiscal year 2014. These increases were driven by sales of Tegra products serving smartphones, tablets and automobile infotainment systems.

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 2015 and 2014, and the first half of fiscal years 2015 and 2014, respectively.

Concentration of Revenue

Revenue from sales to customers outside of the United States and Other Americas accounted for 74% of total revenue for the second quarter and 75% of total revenue for the first half of fiscal year 2015. Revenue from sales to customers outside of the United States and Other Americas accounted for 75% of total revenue for both the second quarter and the first half of fiscal year 2014. 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 21% of our total revenue from two customers for the second quarter of fiscal year 2015 and 10% of total revenue from one customer for the first half of fiscal year 2015. Revenue from significant customers was 23% and 22% of our total revenue from two customers for the second quarter and first half of fiscal year 2014, respectively.

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 56.1% and 55.8% for the second quarter of fiscal years 2015 and 2014, respectively, and 55.5% and 55.1% for the first half of fiscal years 2015 and 2014, respectively.

Charges to cost of sales for inventory provisions totaled $12.7 million and $10.5 million for the second quarter of fiscal years 2015 and 2014, respectively, unfavorably impacting our gross margin by 1.1% for both periods. Sales of inventory that was previously written-off or written-down totaled $8.8 million and $13.8 million for the second quarter of fiscal years 2015 and 2014, respectively, favorably impacting our gross margin by 0.8% and 1.4%, respectively. As a result, the overall net effect on our gross margin from charges to cost of sales for inventory provisions and sales of items previously written-off or written-down was a 0.3% unfavorable impact for the second quarter of fiscal year 2015 and a 0.3% favorable impact for the second quarter of fiscal year 2014.

Charges to cost of sales for inventory provisions totaled $22.9 million and $24.1 million for the first half of fiscal years 2015 and 2014, respectively, unfavorably impacting our gross margin by 1.0% and 1.2%, respectively. Sales of inventory that was previously written-off or written-down totaled $13.8 million and $30.9 million for the first half of fiscal years 2015 and 2014, respectively, favorably impacting our gross margin by 0.6% and 1.6%, respectively. As a result, the overall net effect on our gross margin from charges to cost of sales for inventory provisions and sales of items previously written-off or written-down was a 0.4% unfavorable impact for the first half of fiscal year 2015 and a 0.4% favorable impact for the first half 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 2015 compared to the second quarter and first half of fiscal year 2014. GPU margins increased primarily due to an increase in unit volume of our high-end GeForce GPU products, which contributed to a richer overall mix of product sales. Additionally, the volume increase of Kepler-based Quadro, Tesla and GRID 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 2015 compared to the second quarter and first half of fiscal year 2014. Tegra Processor margins decreased across most product categories and were also negatively impacted by the decline in license and royalty revenue associated with game consoles compared to the prior year.

Operating Expenses
                               Three Months Ended                                     Six Months Ended
                 July 27,        July 28,          $         %         July 27,         July 28,          $         %
                   2014            2013         Change     Change        2014             2013         Change     Change
                             (In millions)                                        ($ in millions)
Research and
development
expenses       $    337.1      $    331.7      $   5.4          2 %  $    671.4       $    658.9      $  12.5          2 %
Sales, general
and
administrative
expenses            118.7           108.3         10.4         10 %       237.3            216.9         20.4          9 %
Total
operating
expenses       $    455.8      $    440.0      $  15.8          4 %  $    908.7       $    875.8      $  32.9          4 %
Research and
development as
a percentage
of net revenue         31   %          34   %                                30   %           34   %
Sales, general
and
administrative
as a
percentage of
net revenue            11   %          11   %                                11   %           11   %

Research and Development

Research and development expenses increased by 2% during the second quarter of fiscal year 2015 compared to the second quarter of fiscal year 2014. This increase was primarily due to a $10.4 million increase resulting from employee additions, employee compensation increases and related costs. That increase was partially offset by a $4.9 million decrease in engineering development expenses.

Research and development expenses increased by 2% during the first half of fiscal year 2015 compared to the first half of fiscal year 2014. This increase was primarily due to a $24.3 million increase resulting from employee additions, employee compensation increases and related costs due to the growth in hiring of engineering talent. That increase was partially offset by a $11.5 million decrease in engineering development expenses during the first half of fiscal year 2015.

Sales, General and Administrative

Sales, general and administrative expenses increased by 10% during the second quarter of fiscal year 2015 compared to the second quarter of fiscal year 2014. This increase was primarily due to a $12.7 million increase resulting from employee additions, employee compensation increases and related costs, offset by a $2.3 million decrease in outside professional fees.

Sales, general and administrative expenses increased by 9% during the first half of fiscal year 2015 compared to the first half of fiscal year 2014. This increase was primarily due to a $24.6 million increase resulting from employee additions, employee compensation increases and related costs. Facilities costs increased $7.4 million, as we expanded our offices internationally and leased an office building within the boundaries of our main Santa Clara campus. These increases were partially offset by a $9.7 million decrease in outside professional fees as well as more favorable international taxes and government subsidies.


Interest Income and Interest Expense

Interest income consists of interest earned on cash, cash equivalents and marketable securities. Interest expense is primarily comprised of coupon interest and debt discount amortization related to the convertible notes issued in December 2013.

Interest income increased by $3.0 million and $3.6 million during the second quarter and first half of fiscal years 2015 and 2014, respectively. The increase was primarily due to higher average cash balances as we invested the proceeds from the convertible notes we issued in December 2013 in interest bearing securities.

Interest expense increased by $10.7 million and $21.3 million during the second quarter and first half of fiscal years 2015 and 2014, respectively. The increase was primarily due to coupon interest and debt discount amortization related to the convertible notes we issued in December 2013.

Other Income (Expense), net

Other income (expense), net consists primarily of realized gains and losses from the sale of marketable securities, sales of investments in non-affiliated companies, and the impact of changes in foreign currency rates.

Other income decreased by $4.0 million during the second quarter of fiscal year 2015 compared to the same period in the prior fiscal year. This decrease was due to lower realized gains from the sale of marketable securities and lower foreign currency translation gains. Other income increased by $12.9 million during the first half of fiscal year 2015 compared to the same period in the prior fiscal year due to a gain from the sale of a non-affiliated investment, offset by lower foreign currency translation gains.

Other expense increased by $3.1 million and $3.4 million during the second quarter and first half of fiscal years 2015 and 2014, respectively. This increase was due to the recognition of a $2.5 million impairment loss in a non-affiliated investment during the second quarter of fiscal year 2015. Additionally, losses from realized foreign exchange translations were greater in the first half of fiscal year 2015.

Income Taxes

We recognized income tax expense of $26.6 million and $53.4 million for the second quarter and first half of fiscal year 2015, respectively, and $15.4 million and $25.5 million for the second quarter and first half of fiscal year 2014, respectively. Income tax expense as a percentage of income before taxes, or our effective tax rate, was 17.2% and 16.8% for the second quarter and first half of fiscal year 2015, respectively, and 13.8% and 12.8% for the second quarter and first half of fiscal year 2014, respectively.

The increase in our effective tax rate in fiscal year 2015 as compared to the same period in the prior fiscal year was primarily related to the expiration of the U.S. federal research tax credit on December 31, 2013 which resulted in no tax benefit in the first half of fiscal year 2015.

Our effective tax rate on income before tax for the first half of fiscal year 2015 of 16.8% was 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 rate. Further, our effective tax rate for the first half of fiscal year 2015 of 16.8% differs from our annual projected . . .

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