What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-18 compared with 2020-08-19 · 137 added, 133 removed, 144 unchanged (65% of the section changed)

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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 refere nces to “NVIDIA,” “we,” “us,” “our” or the “Company” mean NVIDIA Corporation and its subsidiaries.

NVIDIA, the NVIDIA logo, GeForce, DRIVE AGX Orin, GeForce NOW, GeForce RTX SUPER, NVIDIA A100, NVIDIA CUDA, NVIDIA DGX A100, NVIDIA DRIVE, NVIDIA GRID, NVIDIA Jarvis, NVIDIA Merlin, NVIDIA RTX, Mellanox, Quadro, Quadro RTX, Quadro View and Tegra are trademarks and/or registered trademarks of NVIDIA Corporation in the United States and/or other countries.

All references to “NVIDIA,” “we,” “us,” “our” or the “Company” mean NVIDIA Corporation and its subsidiaries.

NVIDIA, the NVIDIA logo, GeForce, DRIVE AGX Orin, GeForce NOW, GeForce RTX SUPER, NVIDIA A100, NVIDIA Broadcast, NVIDIA CloudXR, NVIDIA CUDA, NVIDIA DLSS, NVIDIA DGX A100, NVIDIA DGX SuperPOD, NVIDIA DRIVE, NVIDIA EGX, NVIDIA GRID, NVIDIA Jarvis, NVIDIA Jetson, NVIDIA Maxine, NVIDIA Merlin, NVIDIA Omniverse, NVIDIA Omniverse Machinima, NVIDIA Reflex, NVIDIA RTX, Mellanox, Quadro, Quadro RTX, Quadro View and Tegra are trademarks and/or registered trademarks of NVIDIA Corporation in the United States and/or other countries.

Other company and product names may be trademarks of the respective companies with which they are associated.

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Recent Developments, Future Objectives and Challenges

The coronavirus identified in late calendar year 2019 (COVID-19) continues to be a worldwide pandemic.

Government authorities around the world have implemented measures to try to contain the disease, such as travel bans and restrictions, quarantines, shelter-in-place orders and shutdowns.

Pending Acquisition of Arm Limited

On September 13, 2020, we entered into a Purchase Agreement with Arm and SoftBank for us to acquire, from SoftBank, all of the allotted and issued ordinary shares of Arm in a transaction valued at $40 billion.

We paid $2 billion in Signing Consideration and will pay upon closing of the acquisition $10 billion in cash and issue to SoftBank 44.3 million shares of our common stock with an aggregate value of $21.5 billion.

The transaction includes a potential earn out, which is contingent on the achievement of certain financial performance targets by Arm during the fiscal year ending March 31, 2022.

If the financial performance targets are achieved, Softbank can elect to receive either up to $5 billion in cash or up to 10.3 million shares of our common stock.

We will issue up to $1.5 billion in restricted stock units to Arm employees after closing.

The $2 billion paid upon signing was allocated between advanced consideration for the acquisition of $1.36 billion and the prepayment of intellectual property licenses from Arm of $0.17 billion and royalties of $0.47 billion.

The closing of the acquisition is subject to customary closing conditions, including receipt of specified governmental and regulatory consents and approvals and expiration of any related mandatory waiting period, and Arm's implementation of the reorganization and distribution of Arm’s IoT Services Group and certain other assets and liabilities.

If the Purchase Agreement is terminated under certain circumstances, we will be refunded $1.25 billion of the Signing Consideration.

The $2 billion payment upon signing was allocated on a fair value basis and any refund of the Signing Consideration will use stated values in the Purchase Agreement.

We believe the closing of the acquisition will likely occur in the first quarter of calendar year 2022.

The worldwide COVID-19 pandemic is prompting governments and businesses to take unprecedented measures including restrictions on travel, temporary business closures, quarantines and shelter-in-place orders.

It has significantly impacted global economic activity and caused volatility and disruption in global financial markets.

Since March 2020, most of our employees have been working remotely and we have temporarily prohibited most business travel.

Our employees and partners are performing above and beyond to keep our supply chain functioning normally.

Many industries we serve are adversely impacted, including higher education research, energy, manufacturing, automotive, architecture, engineering, and media.

Each industry is recovering, albeit at different rates.

Professional Visualization revenue was negatively affected as corporate customers delayed spending on workstations.

Automotive production is well below pre-COVID-19 levels.

The full extent and duration of COVID-19 is uncertain.

Our Gaming and Data Center market platforms have benefited from stronger demand as people continue to work, learn, and play from home.

In Professional Visualization, stronger demand for mobile workstations due to work from home trends was partially offset by lower demand for desktop workstations.

In Automotive, customers' production volumes have largely returned to pre-COVID levels.

In our supply chain, stronger demand globally has limited the availability of capacity and components.

As the COVID-19 pandemic continues, the timing and overall demand from customers and the availability of supply chain, logistical services and component supply may have a material net negative impact on our business and financial results.

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The Company believes its existing balances of cash, cash equivalents and marketable securities, along with commercial paper and other short-term liquidity arrangements, will be sufficient to satisfy its working capital needs, capital asset purchases, dividends, debt repayments and other liquidity requirements associated with its existing operations.

Second Quarter of Fiscal Year 2021 Summary

Third Quarter of Fiscal Year 2021 Summary

Three Months Ended

July 26, 2020 April 26, 2020 July 28, 2019 Quarter-over-Quarter Change Year-over-Year Change

October 25, 2020 July 26, 2020 October 27, 2019 Quarter-over-Quarter Change Year-over-Year Change

($ in millions, except per share data)

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Net income per diluted share $ 2.12 $ 0.99 $ 1.45 114 % 46 %

Revenue for the second quarter of fiscal year 2021 was $3.87 billion, up 50% from a year earlier and up 26% sequentially.

Results for the second quarter include the acquisition of Mellanox on April 27, 2020, the first day of the quarter.

Mellanox contributed approximately 14% of total company revenue.

Graphics segment revenue for the second quarter was $2.09 billion, up 16% from a year earlier and up 9% sequentially.

Compute & Networking segment revenue, which includes Mellanox, was $1.78 billion, up 130% from a year ago and up 52% sequentially.

From a market-platform perspective, Gaming revenue was $1.65 billion, up 26% from a year ago and up 24% sequentially.

The year-on-year increase reflects higher sales of gaming GPUs.

The sequential increase reflects higher sales from gaming GPUs and game console SOCs.

Professional Visualization revenue was $203 million, down 30% from a year earlier and down 34% sequentially.

Data Center revenue, which includes Mellanox, was $1.75 billion, up 167% from a year ago and up 54% sequentially.

Mellanox contributed approximately 14% of total company revenue and just over 30% of Data Center revenue for the second quarter.

In addition to Mellanox, the year-on-year and sequential increases were driven by the ramp of Ampere GPU architecture products.

Automotive revenue was $111 million, down 47% from a year earlier and down 28% sequentially.

OEM and Other revenue was $146 million, up 32% from a year ago and up 6% sequentially, primarily due to higher demand for entry-level laptop GPUs.

Gross margin for the second quarter of fiscal year 2021 was 58.8%, down 100 basis points from a year earlier and down 630 basis points sequentially, reflecting charges related to the Mellanox acquisition.

These include a non-recurring inventory step-up expense of $161 million and intangible asset amortization of $84 million that is expected to be recurring.

Operating expenses for the second quarter of fiscal year 2021 were $1.62 billion, up 67% from a year earlier and up 58% sequentially, primarily driven by our Mellanox acquisition, as well as hiring additional employees.

Income from operations for the second quarter of fiscal year 2021 was $651 million, up 14% from a year earlier and down 33% sequentially.

Net income for the second quarter of fiscal year 2021 was $622 million.

Net income per diluted share for the second quarter of fiscal year 2021 was $0.99, up 10% from a year earlier and down 33% sequentially.

Cash, cash equivalents and marketable securities at the end of the second quarter were $10.98 billion, up from $8.47 billion a year earlier and down from $16.35 billion in the prior quarter.

The year-on-year increase primarily reflects the issuance of the $5 billion of notes in March 2020, offset by acquisitions.

The sequential decrease reflects the Mellanox acquisition during the second quarter.

We paid $99 million in quarterly cash dividends in the second quarter.

Revenue for the third quarter of fiscal year 2021 was $4.73 billion, up 57% from a year earlier and up 22% sequentially.

Graphics segment revenue was $2.79 billion, up 25% from a year earlier and up 34% sequentially.

Compute & Networking segment revenue was $1.94 billion, up 146% from a year ago and up 9% sequentially.

From a market-platform perspective, Gaming revenue was $2.27 billion, up 37% both from a year ago and sequentially.

The increases reflect higher sales across desktop and notebook gaming GPUs, and game console SOCs.

Desktop gaming sales benefited from the launch of our GeForce RTX 30 Series based on the NVIDIA Ampere architecture.

Professional Visualization revenue was $236 million, down 27% from a year earlier and up 16% sequentially.

The year-on-year decline was influenced by COVID-19, with reduced demand for desktop workstations.

The sequential increase reflects a sharp rebound in mobile workstations due to work from home trends.

Data Center revenue was $1.90 billion, up 162% from a year ago and up 8% sequentially.

Our recent acquisition of Mellanox contributed 13% of total company revenue and approximately a third of Data Center revenue.

In addition to Mellanox, the year-on-year and sequential increases were driven by the ramp of NVIDIA Ampere architecture products.

Automotive revenue was $125 million, down 23% from a year earlier and up 13% sequentially.

The year-on-year decrease reflects a decline in revenue from legacy infotainment modules and autonomous driving development agreements.

The sequential increase reflects higher sales of AI cockpit solutions.

OEM and Other revenue was $194 million, up 36% from a year ago and up 33% sequentially, primarily due to higher volume of entry-level laptop GPUs.

Gross margin was 62.6% in the third quarter, down 100 basis points from a year earlier and up 380 basis points sequentially.

The year-on-year decline reflects charges related to the Mellanox acquisition and lower margins in Gaming, partially offset by a shift in product mix with higher Data Center and lower Automotive sales.

The sequential increase was primarily driven by the absence of a non-recurring inventory step-up expense related to the Mellanox acquisition in the prior quarter.

Operating expenses were $1.56 billion, up 58% from a year earlier and down 4% sequentially.

The year-on-year increase was primarily driven by compensation-related costs, the Mellanox acquisition, infrastructure costs, and employee growth.

The sequential decrease was due to a reduction in acquisition-related costs.

Income from operations was $1.40 billion, up 51% from a year earlier and up 115% sequentially.

Net income was $1.34 billion.

Net income per diluted share was $2.12, up 46% from a year earlier and up 114% sequentially.

Cash, cash equivalents and marketable securities at the end of the third quarter were $10.14 billion, up from $9.77 billion a year earlier and down from $10.98 billion in the prior quarter.

The year-on-year increase primarily reflects the issuance of the $5 billion of notes in March 2020 and cash flow generation, partially offset by acquisitions.

The sequential decrease primarily reflects the $2 billion payment under the Purchase Agreement to acquire Arm.

We paid $99 million in quarterly cash dividends in the third quarter.

Market Platform Highlights

During the second quarter of fiscal year 2021, in our Gaming platform, we ramped 100+ new GeForce laptops across a range of price points;

announced a range of games now supporting NVIDIA RTX ray tracing and DLSS AI super resolution;

expanded GeForce NOW to Chromebooks;

and announced that Square Enix is adding its catalog to GeForce NOW.

In our Professional Visualization platform, we launched with Acer, Dell, Lenovo and Microsoft new mobile workstations for professional creators, based on NVIDIA Quadro graphics;

powered new AI features in the latest releases of Substance Alchemist and Blender;

announced that NVIDIA RTX has been implemented in the latest application releases from Foundry, Chaos Group and Redshift by Maxon;

and released NVIDIA Quadro View.

In our Data Center platform, we announced more than 50 NVIDIA A100-powered systems;

powered eight of the 10, and two-thirds of the total systems, on the latest TOP500 list of the world’s fastest supercomputers;

set 16 AI performance records on the latest MLPerf benchmarks;

made the NVIDIA A100 Tensor Core GPU available on Google Cloud;

provided CUDA GPU-acceleration for Apache Spark;

and unveiled the NVIDIA Mellanox UFM Cyber-AI Platform.

In our Automotive platform, we announced with Mercedes-Benz that the carmaker is integrating into every vehicle in its lineup, beginning in 2024, a new software-defined vehicle architecture built on the NVIDIA DRIVE AV autonomous driving software and AGX Orin AV computer.

During the first quarter of fiscal year 2021, in our Gaming platform, we launched Minecraft with RTX as an open beta on Windows 10;

announced the release of laptop models powered by NVIDIA GeForce GPUs;

expanded the RTX Studio lineup powered by new GeForce RTX SUPER GPUs;

released DLSS 2.0;

and expanded NVIDIA GeForce NOW.

In our Professional Visualization platform, we powered Autodesk’s latest 3D visualization software with NVIDIA Quadro RTX;

accelerated Altair's engineering software with NVIDIA CUDA;

and brought Quadro professional graphics to HP's mobile workstation lineup.

In our Data Center platform, we introduced NVIDIA A100 data center GPU, the first based on the NVIDIA Ampere architecture;

launched the NVIDIA DGX A100;

introduced two products for the EGX Edge AI platform;

released NVIDIA Jarvis;

collaborated with the open-source community to bring end-to-end GPU acceleration to Apache Spark 3.0;

and announced NVIDIA Merlin.

During the third quarter of fiscal year 2021, in our Gaming platform, we unveiled GeForce RTX 30 Series GPUs;

announced that Fortnite will support NVIDA RTX real-time ray tracing and DLSS AI super-resolution;

introduced NVIDIA Reflex;

and unveiled NVIDIA Broadcast.

In our Professional Visualization platform, we brought to open beta NVIDIA Omniverse;

announced NVIDIA Omniverse Machinima;

and collaborated with Adobe to bring GPU-accelerated neural filters to Adobe Photoshop AI-powered tools.

In our Data Center platform, we shared news that Amazon Web Services and Oracle Cloud Infrastructure announced general availability of cloud computing instances based on the NVIDIA A100 GPU;

announced the NVIDIA DGX SuperPOD Solution for Enterprise;

announced that five supercomputers backed by EuroHPC will use NVIDIA’s data center accelerators or networking;

introduced the new family of NVIDIA BlueField-2 DPUs (data processing units);

announced a broad partnership with VMware to create an end-to-end enterprise platform for AI and a new architecture for data center, cloud and edge;

unveiled NVIDIA Maxine;

introduced the NVIDIA RTX A6000 and NVIDIA A40 GPUs;

extended our lead on MLPerf performance benchmarks for inference;

announced a partnership with GSK to integrate computing

platforms for imaging, genomics and AI into the drug and vaccine discovery process;

and introduced NVIDIA A100 80GB GPU, NVIDIA DGX Station A100, and NVIDIA Mellanox InfiniBand.

In our Automotive platform, we announced with Mercedes-Benz that NVIDIA is powering the next-generation MBUX AI cockpit system;

announced with Hyundai Motor Group that the Korean automaker’s entire lineup of Hyundai, Kia and Genesis models will come standard with NVIDIA DRIVE in-vehicle infotainment systems, starting in 2022;

and announced that China’s Li Auto will develop its next-generation of electric vehicles using NVIDIA DRIVE AGX Orin, a software-defined platform for autonomous vehicles.

Financial Information by Business Segment and Geographic Data

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Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S.

The preparation of these financial statements requires us to make estimates and judgments

that affect the reported amounts of assets, liabilities, revenue, cost of revenue, expenses and related disclosure of contingencies.

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, cost of revenue, expenses and related disclosure of contingencies.

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

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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

2020 July 28,

2019 July 26,

2020 July 28,

Three Months Ended Nine Months Ended

2020 October 27,

2019 October 25,

2020 October 27,

Revenue 100.0 % 100.0 % 100.0 % 100.0 %

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Interest expense (1.1) (0.4) (1.1) (0.5)

Other, net (0.1) — — —

Other income (expense), net

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Income before income tax 28.4 31.9 25.2 25.0

Income tax expense (benefit) (0.3) 2.1 0.7 1.0

Income tax expense 0.3 2.0 0.5 1.4

Net income 28.1 % 29.9 % 24.7 % 23.6 %

Revenue by Reportable Segments

Three Months Ended Six Months Ended

2020 July 28,

Change July 26,

2020 July 28,

Three Months Ended Nine Months Ended

2020 October 27,

Change October 25,

2020 October 27,

($ in millions)

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Total $ 4,726 $ 3,014 $ 1,712 57 % $ 11,672 $ 7,813 $ 3,859 49 %

Graphics - Graphics segment revenue increased 16% in the second quarter of fiscal year 2021 compared to the second quarter of fiscal year 2020, which reflects growth in GeForce GPUs for gaming, partially offset by lower sales of Quadro workstations and game console SOCs.

Graphics segment revenue increased 20% in the first half of fiscal year 2021 compared to the first half of fiscal year 2020, which reflects growth in GeForce GPUs for gaming, game console SOCs, and Quadro workstations.

Compute & Networking - Compute & Networking segment revenue for the second quarter of fiscal year 2021 compared to the second quarter of fiscal year 2020 increased by 130% and revenue for the first half of fiscal year 2021 compared to the first half of fiscal year 2020 increased by 101%.

These increases reflect the addition of Mellanox acquired on April 27, 2020 and the ramp of Ampere GPU architecture products, partially offset by lower autonomous driving development agreement revenue.

Graphics - Graphics segment revenue for the third quarter of fiscal year 2021 compared to the third quarter of fiscal year 2020 increased by 25% and revenue for the first nine months of fiscal year 2021 compared to the first nine months of fiscal year 2020 increased by 22%.

These increases reflect growth in GeForce GPUs and game console SOCs, partially offset by lower sales of Quadro workstations.

Compute & Networking - Compute & Networking segment revenue for the third quarter of fiscal year 2021 compared to the third quarter of fiscal year 2020 increased by 146% and revenue for the first nine months of fiscal year 2021 compared to the first nine months of fiscal year 2020 increased by 117%.

These increases reflect the addition of Mellanox acquired on April 27, 2020 and the continued ramp of NVIDIA Ampere GPU architecture systems and new products, partially offset by lower autonomous driving development agreement revenue.

Concentration of Revenue

Revenue from sales to customers outside of the United States accounted for 76% and 79% of total revenue for the second quarter and first half of fiscal year 2021, respectively, and 93% of total revenue for the second quarter and first

half of fiscal year 2020.

Revenue from sales to customers outside of the United States accounted for 81% and 80% of total revenue for the third quarter and first nine months of fiscal year 2021, respectively, and 92% of total revenue for the third quarter and first nine months of fiscal year 2020.

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 year 2021.

One customer represented 11% of our total revenue for the second quarter and the first half of fiscal year 2020 and was attributable primarily to the Graphics segment.

Our overall gross margin decreased to 58.8% for the second quarter of fiscal year 2021 from 59.8% for the second quarter of fiscal year 2020, reflecting Mellanox acquisition-related costs including a non-recurring inventory step-up charge of $161 million and ongoing intangible asset amortization of $84 million, partially offset by an increase due to a shift in product mix.

Our overall gross margin increased to 61.6% for the first half of fiscal year 2021 from 59.1% for the first half of fiscal year 2020, primarily driven by a shift in product mix, partially offset by Mellanox acquisition-related costs including a non-recurring inventory step-up charge of $161 million and ongoing intangible asset amortization of $85 million.

Inventory provisions totaled $45 million and $28 million for the second quarter of fiscal years 2021 and 2020, respectively.

Sales of inventory that was previously written-off or -down totaled $49 million and $19 million for the second quarter of fiscal years 2021 and 2020, respectively.

As a result, the overall net effect on our gross margin was insignificant in the second quarter of fiscal year 2021, and an unfavorable impact of 0.4% in the second quarter of fiscal year 2020.

Inventory provisions totaled $81 million and $72 million for the first half of fiscal years 2021 and 2020, respectively.

Sales of inventory that was previously written-off or -down totaled $88 million and $31 million for the first half of fiscal years 2021 and 2020, respectively.

As a result, the overall net effect on our gross margin was insignificant in the first half of fiscal year 2021 and an unfavorable impact of 0.9% for the first half of fiscal year 2020.

No customer represented 10% or more of total revenue for the third quarter and first nine months of fiscal year 2021.

One customer represented 10% and 11% of our total revenue for the third quarter and first nine months of fiscal year 2020, respectively, and was attributable primarily to the Graphics segment.

Our overall gross margin decreased to 62.6% for the third quarter of fiscal year 2021 from 63.6% for the third quarter of fiscal year 2020, reflecting charges related to the Mellanox acquisition and lower margins in Gaming, partially offset by a shift in product mix with higher Data Center and lower Automotive sales.

Our overall gross margin increased to 62.0% for the first nine months of fiscal year 2021 from 60.8% for the first nine months of fiscal year 2020, primarily driven by Mellanox products, lower Automotive sales and lower product costs within Compute & Networking, partially offset by Mellanox acquisition-related costs including a non-recurring inventory step-up charge of $161 million and ongoing intangible asset amortization of $171 million.

Inventory provisions totaled $15 million and $42 million for the third quarter of fiscal years 2021 and 2020, respectively.

Sales of inventory that was previously written-off or -down totaled $29 million and $78 million for the third quarter of fiscal years 2021 and 2020, respectively.

As a result, the overall net effect on our gross margin was a favorable impact of 0.3% and 1.2% in the third quarter of fiscal years 2021 and 2020, respectively.

Inventory provisions totaled $96 million and $114 million for the first nine months of fiscal years 2021 and 2020, respectively.

Sales of inventory that was previously written-off or -down totaled $116 million and $109 million for the first nine months of fiscal years 2021 and 2020, respectively.

As a result, the overall net effect on our gross margin was a favorable impact of 0.2% in the first nine months of fiscal year 2021 and an unfavorable impact of 0.1% for the first nine months of fiscal year 2020.

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

Graphics - The gross margin of our Graphics segment increased during the second quarter and first half of fiscal year 2021 compared to the second quarter and first half of fiscal year 2020, primarily driven by a shift in product mix.

Compute & Networking - The gross margin of our Compute & Networking segment decreased during the second quarter and first half of fiscal year 2021 compared to the second quarter and first half of fiscal year 2020, primarily driven by Mellanox acquisition-related costs, partially offset by higher data center sales.

Graphics - The gross margin of our Graphics segment decreased during the third quarter of fiscal year 2021 compared to the third quarter of fiscal year 2020, primarily driven by a shift in product mix and higher product costs.

The gross margin of our Graphics segment increased during the first nine months of fiscal year 2021 compared to the first nine months of fiscal year 2020, primarily driven by lower legacy infotainment sales and product mix within Quadro.

Compute & Networking - The gross margin of our Compute & Networking segment increased during the third quarter and first nine months of fiscal year 2021 compared to the third quarter and first nine months of fiscal year 2020, primarily driven by Mellanox products and lower product costs.

Operating Expenses

Three Months Ended Six Months Ended

2020 July 28,

Change July 26,

2020 July 28,

($ in millions) ($ in millions)

Three Months Ended Nine Months Ended

2020 October 27,

Change October 25,

2020 October 27,

($ in millions)

Research and development expenses $ 1,047 $ 712 $ 335 47 % $ 2,778 $ 2,091 $ 687 33 %

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Research and Development

Research and development expenses increased by 42% and 26% during the second quarter and first half of fiscal year 2021, compared to the second quarter and first half of fiscal year 2020, respectively, primarily driven by expenses and

stock-based compensation related to the Mellanox acquisition.

Research and development expenses increased by 47% and 33% during the third quarter and first nine months of fiscal year 2021, compared to the third quarter and first nine months of fiscal year 2020, respectively, primarily driven by expenses related to the Mellanox acquisition.

In addition to Mellanox, increases reflect employee compensation and related costs, including stock-based compensation, and infrastructure costs.

Sales, General and Administrative

Sales, general and administrative expenses increased by 136% and 74% during the second quarter and first half of fiscal year 2021, compared to the second quarter of fiscal year 2020, respectively, primarily driven by Mellanox acquisition-related expenses.

In addition to Mellanox, increases reflect employee compensation and related costs, including stock-based compensation and infrastructure costs.

Sales, general and administrative expenses increased by 86% and 78% during the third quarter and first nine months of fiscal year 2021, compared to the third quarter of fiscal year 2020, respectively, primarily driven by Mellanox acquisition-related expenses.

In addition to Mellanox, increases reflect employee compensation and related costs, including stock-based compensation.

Other Income (Expense), Net

Interest Income and Interest Expense

Interest income consists of interest earned on cash, cash equivalents and marketable securities.

Interest income was $13 million and $47 million during the second quarter of fiscal years 2021 and 2020, respectively, and $44 million and $92 million during the first half of fiscal years 2021 and 2020, respectively.

Interest income was $7 million and $45 million during the third quarter of fiscal years 2021 and 2020, respectively, and $50 million and $137 million during the first nine months of fiscal years 2021 and 2020, respectively.

The decrease in interest income was primarily due to lower interest earned on our investments.

Interest expense is primarily comprised of coupon interest and debt discount amortization related to our September 2016 Notes and March 2020 Notes.

Interest expense was $54 million and $13 million during the second quarter of fiscal years 2021 and 2020, respectively, and $78 million and $27 million during the first half of fiscal years 2021 and 2020, respectively.

We recognized an income tax benefit of $13 million and an income tax expense of $52 million for the second quarter and first half of fiscal year 2021, respectively, and an income tax expense of $54 million and $48 million for the second quarter and first half of fiscal year 2020, respectively.

The income tax benefit as a percentage of income before income tax was 2.0% for the second quarter of fiscal year 2021.

The income tax expense as a percentage of income before income tax was 3.3% for the first half of fiscal year 2021, and 8.8% and 4.9% for the second quarter and first half of fiscal year 2020, respectively.

The decrease in our effective tax rate for the second quarter and first half of fiscal year 2021 as compared to the same periods of fiscal year 2020 was primarily due to a decrease in the proportional amount of earnings subject to U.S.

tax and an increase of tax benefits from stock-based compensation and the U.S.

federal research tax credit.

Interest expense was $53 million and $13 million during the third quarter of fiscal years 2021 and 2020, respectively, and $131 million and $39 million during the first nine months of fiscal years 2021 and 2020, respectively.

We recognized an income tax expense of $12 million and $64 million for the third quarter and first nine months of fiscal year 2021, respectively, and $60 million and $109 million for the third quarter and first nine months of fiscal year 2020, respectively.

The income tax expense as a percentage of income before income tax was 0.9% and 2.2% for the third quarter and first nine months of fiscal year 2021, respectively, and 6.3% and 5.6% for the third quarter and first nine months of fiscal year 2020, respectively.

The decrease in our effective tax rate for the third quarter and first nine months of fiscal year 2021 as compared to the same periods of fiscal year 2020 was primarily due to a decrease in the proportional amount of earnings subject to United States tax and an increase of tax benefits from stock-based compensation.

Refer to Note 6 of the Notes to Condensed Consolidated Financial Statements for further information.

Liquidity and Capital Resources

July 26, 2020 January 26, 2020

October 25, 2020 January 26, 2020

(In millions)

2 unchanged sentences

Cash, cash equivalents and marketable securities $ 10,139 $ 10,897

Six Months Ended

July 26, 2020 July 28, 2019

Nine Months Ended

October 25, 2020 October 27, 2019

(In millions)

2 unchanged sentences

Net cash provided by (used in) financing activities $ 4,146 $ (609)

As of July 26, 2020, we had $10.98 billion in cash, cash equivalents and marketable securities, a decrease of $84 million from the end of fiscal year 2020.

As of October 25, 2020, we had $10.14 billion in cash, cash equivalents and marketable securities, a decrease of $758 million from the end of fiscal year 2020.

Our investment policy requires the purchase of highly rated fixed income securities, the diversification of investment types and credit exposures, and certain maturity limits on our portfolio.

Cash provided by operating activities increased in the first half of fiscal year 2021 compared to the first half of fiscal year 2020, due to higher net income, partially offset by changes in working capital.

Change in working capital was driven by an increase in inventory offset by inventory step-up expense from the Mellanox acquisition and changes in operating liabilities.

Cash used in investing activities increased in the first half of fiscal year 2021 compared to cash provided in the first half of fiscal year 2020, primarily reflects cash used for the acquisition of Mellanox, higher purchases of marketable securities, and lower maturities and sales of marketable securities.

Cash provided by financing activities increased in the first half of fiscal year 2021 compared to cash used in the first half of fiscal year 2020, primarily reflects the debt issued in the first quarter of fiscal year 2021.

In the third quarter of fiscal year 2021, we paid $2 billion as part of the proposed acquisition of Arm, which was allocated between advanced consideration for the acquisition of $1.36 billion and the prepayment of intellectual property licenses from Arm of $0.17 billion and royalties of $0.47 billion.

The cash flow allocation of the payment resulted in $1.36 billion advanced consideration included in acquisitions, net of cash acquired, $0.17 billion for the intellectual property license included in purchases related to property and equipment and intangible assets and $0.47 billion prepayment of royalties included in changes in prepaid expenses and other assets.

Cash provided by operating activities increased in the first nine months of fiscal year 2021 compared to the first nine months of fiscal year 2020, due to higher net income, partially offset by changes in working capital.

Changes in working capital include increases in outstanding trade receivables, purchases of inventory, and a prepayment of royalties to Arm.

Cash used in investing activities increased in the first nine months of fiscal year 2021 compared to cash provided in the first nine months of fiscal year 2020, which primarily reflects cash used for the acquisition of Mellanox and the advanced consideration for the proposed acquisition of Arm, higher purchases of marketable securities, higher maturities of marketable securities, higher purchases of property and equipment and intangible assets, and lower sales of marketable securities.

Cash provided by financing activities increased in the first nine months of fiscal year 2021 compared to cash used in the first nine months of fiscal year 2020, which primarily reflects the debt issued in the first quarter of fiscal year 2021 and payments related to tax on restricted stock units.

Our primary sources of liquidity are our cash and cash equivalents, our marketable securities, and the cash generated by our operations.

As of July 26, 2020, we had $10.98 billion in cash, cash equivalents and marketable securities.

As of October 25, 2020, we had $10.14 billion in cash, cash equivalents and marketable securities.

Our marketable securities consist of debt securities issued by the U.S.

government and its agencies, highly rated corporations and financial institutions, and certificates of deposits.

These marketable securities are denominated in U.S.

government and its agencies, highly rated corporations and financial institutions, and foreign government entities, and certificates of deposits.

These marketable securities are primarily denominated in U.S.

Refer to Note 7 of the Notes to Condensed Consolidated Financial Statements for additional information.

We believe that we have sufficient liquidity to meet our operating requirements and capital expenditures for at least the next twelve months.

We have approximately $857 million of cash, cash equivalents, and marketable securities that we have not accrued any related foreign or state taxes if we repatriate these amounts to the United States.

Other than that, as a result of the Tax Cuts and Jobs Act, or TCJA, substantially all of our cash, cash equivalents and marketable securities held outside of the United States as of July 26, 2020 are available for use in the United States without incurring additional U.S.

We have approximately $1.2 billion of cash, cash equivalents, and marketable securities that we have not accrued any related foreign or state taxes if we repatriate these amounts to the United States.

Other than that, as a result of the Tax Cuts and Jobs Act, or TCJA, substantially all of our cash, cash equivalents and marketable securities held outside of the

United States as of October 25, 2020 are available for use in the United States without incurring additional U.S.

federal income taxes.

Capital Return to Shareholders

In the first half of fiscal year 2021, we paid $197 million in quarterly cash dividends.

In the first nine months of fiscal year 2021, we paid $296 million in quarterly cash dividends.

Our cash dividend program and the payment of future cash dividends under that program are subject to our Board's continuing determination that the dividend program and the declaration of dividends thereunder are in the best interests of our shareholders.

As of July 26, 2020, we were authorized, subject to certain specifications, to repurchase additional shares of our common stock up to $7.24 billion through December 2022.

We did not repurchase any shares during the first half of fiscal year 2021.

As of October 25, 2020, we were authorized, subject to certain specifications, to repurchase additional shares of our common stock up to $7.24 billion through December 2022.

We did not repurchase any shares during the first nine months of fiscal year 2021.

Outstanding Indebtedness and Credit Facilities

In March 2020, we issued $1.50 billion of the 2.85% Notes Due 2030, $1.00 billion of the 3.50% Notes Due 2040, $2.00 billion of the 3.50% Notes Due 2050, and $500 million of the 3.70% Notes Due 2060, or collectively, the March 2020 Notes.

The net proceeds from the March 2020 Notes were $4.97 billion, after deducting debt discounts and estimated issuance costs.

The net proceeds from the March 2020 Notes were $4.97 billion, after deducting debt discounts and issuance costs.

In September 2016, we issued $1.00 billion of the 2.20% Notes Due 2021 and $1.00 billion of the 3.20% Notes Due 2026, or collectively, the September 2016 Notes.

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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 26, 2020, we had not borrowed any amounts under this agreement.

As of October 25, 2020, we had not borrowed any amounts under this agreement.

We have a $575 million commercial paper program to support general corporate purposes.

As of July 26, 2020, we had not issued any commercial paper.

As of October 25, 2020, we had not issued any commercial paper.

Off-Balance Sheet Arrangements

As of July 26, 2020, we had no material off-balance sheet arrangements as defined by applicable SEC regulations.

As of October 25, 2020, we had no material off-balance sheet arrangements as defined by applicable SEC regulations.

Contractual Obligations

There are $153 million of long-term tax liabilities related to tax basis differences in Mellanox and unrecognized tax benefits of $286 million, which includes related interest and penalties of $41 million recorded in non-current income tax payable as of July 26, 2020.

There are $155 million of long-term tax liabilities related to tax basis differences in Mellanox and unrecognized tax benefits of $310 million, which includes related interest and penalties of $46 million recorded in non-current income tax payable as of October 25, 2020.

We are unable to reasonably estimate the timing of any potential tax liability, interest payments, or penalties in individual years due to uncertainties in the underlying income tax positions and the timing of the effective settlement of such tax positions.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis