What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-26 compared with 2020-11-18 · 150 added, 180 removed, 101 unchanged (77% of the section changed)

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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.

Other statements in this Form 10-Q regarding the potential future impact of the COVID-19 pandemic on the Company’s business and results of operations are forward-looking statements.

Other statements in this Quarterly Report on Form 10-Q regarding the potential future impact of the COVID-19 pandemic on the Company’s business and results of operations are 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.

We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021 in greater detail under the heading “Risk Factors” of such reports.

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.

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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.

NVIDIA, the NVIDIA logo, GeForce, GeForce NOW, GeForce RTX, Maxine, Mellanox, NVIDIA DRIVE, NVIDIA DRIVE Hyperion, NVIDIA DRIVE Orin, NVIDIA Grace, NVIDIA GRID, NVIDIA Jetson, NVIDIA Omniverse, NVIDIA RTX, Quadro and Quadro RTX 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.

Features, pricing, availability, and specifications are subject to change without notice.

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, 2020 and “Item 1A.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the risk factors set forth in Item 1A.

“Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended January 31, 2021 and Part II, 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.

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NVIDIA pioneered accelerated computing to help solve the most challenging computational problems.

Starting with a focus on PC graphics, we extended our focus in recent years to the revolutionary field of AI.

Fueled by the sustained demand for exceptional 3D graphics and the scale of the gaming market, NVIDIA leveraged its GPU architecture to create platforms for virtual reality, HPC, and AI.

Through fiscal year 2020, our reportable segments were GPU and Tegra Processor.

Starting with the first quarter of fiscal year 2021, our reportable segments have changed to "Graphics" and "Compute & Networking".

Our Graphics segment includes GeForce GPUs for gaming and PCs, the GeForce NOW game streaming service and related infrastructure, and solutions for gaming platforms;

Quadro GPUs for enterprise design;

GRID software for cloud-based visual and virtual computing;

and automotive platforms for infotainment systems.

Our Compute & Networking segment includes Data Center platforms and systems for AI, HPC, and accelerated computing;

Mellanox networking and interconnect solutions;

DRIVE for autonomous vehicles;

and Jetson for robotics and other embedded platforms.

All prior period comparisons presented reflect our new reportable segments.

Our market platforms – Gaming, Professional Visualization, Data Center, Automotive, OEM and Other – remain unchanged.

Since our original focus on PC graphics, we have expanded to several other large and important computationally intensive fields.

Fueled by the sustained demand for exceptional 3D graphics and the scale of the gaming market, NVIDIA has leveraged its GPU architecture to create platforms for scientific computing, AI, data science, autonomous vehicles, or AV, robotics, and augmented and virtual reality, or AR and VR.

Our two operating segments are "Graphics" and "Compute & Networking," as described in Note 15 of the Notes to Condensed Consolidated Financial Statements.

Headquartered in Santa Clara, California, NVIDIA was incorporated in California in April 1993 and reincorporated in Delaware in April 1998.

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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.

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

We paid the 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, which had an aggregate value of $21.5 billion as of the date of the Purchase Agreement.

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.

If the financial performance targets are achieved, Softbank can elect to receive either up to an additional $5 billion in cash or up to an additional 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.

The closing of the acquisition is subject to customary closing conditions, including receipt of specified governmental and regulatory consents and approvals and the 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.

We are engaged with regulators in the United States, the United Kingdom, the European Union, China and other jurisdictions.

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.

The Signing Consideration 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.

Demand for our products is based on many factors, including our product introductions and transitions, competitor announcements, and competing technologies, all of which can impact the timing and amount of our revenue.

For example, our GPUs for gaming are capable of digital currency mining.

Demand and use of GPUs for cryptocurrency has fluctuated in the past and is likely to continue to change quickly.

Volatility in the cryptocurrency market, including changes in the prices of cryptocurrencies, can impact demand for our products and our ability to estimate demand for our products.

Changes to cryptocurrency standards and processes including, but not limited to, the pending Ethereum 2.0 standard may also create increased aftermarket resales of our GPUs and may reduce demand for our new GPUs.

During the first quarter of fiscal year 2022, we believe Gaming benefited from cryptocurrency mining demand, although it is hard to determine to what extent.

Additionally, consumer behavior during the COVID-19 pandemic, such as increased demand for our Gaming, Data Center and notebook workstation products, has made it more difficult for us to estimate future demand, and these challenges may be more pronounced or volatile in the future on both a global and regional basis if and when the effects of the pandemic subside.

In estimating demand and evaluating trends, we make multiple assumptions, any of which may prove to be incorrect.

Our products are manufactured based on estimates of customers’ future demand and our manufacturing lead times are very long.

We sell many of our products through a channel model, and our channel customers sell to retailers, distributors, and/or end customers.

As a result, the decisions made by our channel partners, retailers, and distributors in response to changing market conditions and the changing demand for our products could impact our financial results.

To have shorter shipment lead times and quicker delivery schedules for our customers, we may build inventory for anticipated periods of growth which do not occur, may build inventory anticipating demand that does not materialize, or may build inventory to serve what we believe is pent-up demand.

We expect to remain supply-constrained into the second half of the fiscal year, primarily in gaming.

We may need to place non-cancellable inventory orders significantly in advance of our normal lead times, pay premiums or provide deposits to secure normal and incremental future supply.

The worldwide COVID-19 pandemic has caused 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.

Some regions are easing COVID-19 related restrictions;

however, most of our employees continue to work remotely and we continue to temporarily prohibit most business travel.

The COVID-19 pandemic continues to evolve and affect our business and financial results.

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.

In Professional Visualization, notebook workstations continue to benefit from work-from-home trends and desktop workstations have started to recover as employees return onsite in certain markets.

As our own offices begin to reopen, we expect to incur incremental expenses as we resume onsite services and related in-office costs.

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.

Refer to Part II, Item 1A of this Quarterly Report on Form 10-Q for additional information under the heading “Risk Factors.”

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.

Third Quarter of Fiscal Year 2021 Summary

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

First Quarter of Fiscal Year 2022 Summary

Three Months Ended

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

May 2, 2021 January 31, 2021 April 26, 2020 Quarter-over-Quarter Change Year-over-Year Change

($ in millions, except per share data)

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Net income per diluted share $ 3.03 $ 2.31 $ 1.47 31 % 106 %

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.

We specialize in markets where our computing platforms can provide tremendous acceleration for applications.

These platforms incorporate processors, interconnects, software, algorithms, systems, and services to deliver unique value.

Our platforms address four large markets where our expertise is critical:

Gaming, Data Center, Professional Visualization, and Automotive.

Revenue for the first quarter of fiscal year 2022 was $5.66 billion, up 84% from a year earlier.

Revenue was up 13% sequentially with growth in all market platforms.

Gaming revenue was up 106% from a year ago and up 11% sequentially, reflecting higher sales in GeForce GPUs, as well as in game-console SOCs.

We continued to benefit from strong sales of our GeForce RTX 30 Series based on the NVIDIA Ampere architecture.

We believe Gaming also benefited from cryptocurrency mining demand, although it is hard to determine to what extent.

Data Center revenue was up 79% from a year ago and up 8% sequentially.

The year-on-year revenue growth was driven primarily by the Mellanox acquisition and the ramp of NVIDIA Ampere GPU architecture products into vertical industries and hyperscale customers.

Sequentially, growth in Data Center came from both compute and networking products, primarily driven by hyperscale customers.

Professional Visualization revenue was up 21% from both a year earlier and sequentially.

The year-on-year increase was driven by sales of notebook workstation GPUs.

The sequential growth reflects sales of GPUs for both desktop and notebook workstations.

Automotive revenue was down 1% from a year earlier and up 6% sequentially.

OEM and Other revenue was up 137% from a year ago and up 114% sequentially, primarily reflecting the addition of CMP, which generated revenue of $155 million.

Gross margin was down 100 basis points from a year earlier due to amortization of intangible assets related to the Mellanox acquisition and a shift in the mix of Data Center products, partially offset by a lower contribution from Automotive products.

Gross margin was up 100 basis points sequentially due to a more favorable mix within Data Center and the addition of CMP products.

Operating expenses were up 63% from a year earlier, which did not include Mellanox, and up 1% sequentially.

In addition to Mellanox, the year-on-year increase was primarily driven by compensation-related costs, including employee growth and infrastructure costs.

Sequential costs were relatively flat, with increased expenses from growth in employees offset by the additional week in the fourth quarter of fiscal year 2021.

Income from operations was $1.96 billion, up 100% from a year earlier and up 30% sequentially.

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Net income per diluted share was $3.03, up 106% from a year earlier and up 31% 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.

Cash, cash equivalents and marketable securities at the end of the first quarter were $12.67 billion, down from $16.35 billion a year earlier and up from $11.56 billion in the prior quarter.

The year-on-year decrease primarily reflects payment for Mellanox acquisition, while the sequential increase primarily reflects growth in operating income.

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

On May 21, 2021, our Board of Directors declared a four-for-one split of our common stock payable in the form of a stock dividend, with the additional shares expected to be distributed on July 19, 2021.

The stock dividend is conditioned on obtaining stockholder approval at our 2021 Annual Meeting of Stockholders on June 3, 2021 to increase the number of authorized shares of common stock from 2 billion to 4 billion.

Market Platform Highlights

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.

During the first quarter of fiscal year 2022, in our Gaming platform, we launched GeForce RTX 3060 laptop GPU systems;

announced GeForce 3050 Ti and 3050 laptop GPUs;

accelerated RTX momentum with now over 60 games;

announced plans to integrate NVIDIA DLSS into the Unity game engine;

announced that NVIDIA Reflex is incorporated in more games;

and announced that GeForce NOW has over 10 million members.

In our Data Center platform, we launched new NVIDIA A30 and A10 GPUs for mainstream AI, data analytics and graphics;

debuted a new class of NVIDIA-Certified Systems with leading server OEMs;

announced the NVIDIA AI Enterprise software suite;

hosted our largest-ever GPU Technology Conference, where we unveiled NVIDIA Grace, our first Arm-based data center CPU;

introduced the NVIDIA Morpheus AI and NVIDIA TAO application frameworks;

and announced the availability of NVIDIA Jarvis and NVIDIA Maxine.

In our Professional Visualization platform, we unveiled NVIDIA RTX GPUs for next-generation notebook and desktop workstations;

and launched NVIDIA Omniverse Enterprise.

In our Automotive platform, we announced that the NVIDIA DRIVE platform powers MBUX Hyperscreen, the AI cockpit in Mercedes-Benz’s new EQS sedan, and that Volvo Cars will use NVIDIA DRIVE Orin to power the autonomous driving computer in its next-generation cars, beginning with the XC90 in 2022;

announced that NVIDIA DRIVE will be powering intelligent new energy vehicles from R-Auto, IM Motors, Faraday Future and VinFast, and robotaxis including Cruise and Amazon Zoox;

announced NVIDIA DRIVE Hyperion 8;

and unveiled the NVIDIA DRIVE Atlan next-generation SOC.

Financial Information by Business Segment and Geographic Data

Refer to Note 15 of the Notes to Condensed Consolidated Financial Statements for disclosure regarding segment information.

Critical Accounting Policies and Estimates

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.

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.

Our management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.

The Audit Committee has reviewed our disclosures relating to our critical accounting policies and estimates in this Quarterly Report on Form 10-Q.

Due to the Mellanox acquisition, we added the following critical accounting policy:

Business Combinations

The application of acquisition accounting to a business acquisition requires that we identify the individual assets acquired and liabilities assumed and estimate the fair value of each.

The fair value of assets acquired and liabilities assumed in a business acquisition are recognized at the acquisition date, with the purchase price exceeding the fair values being recognized as goodwill.

Determining fair value of identifiable assets, particularly intangibles, liabilities acquired and contingent obligations assumed requires management to make estimates.

In certain circumstances, the allocations of the purchase price are based upon preliminary estimates and assumptions and subject to revision when we receive final information, including appraisals and other analysis.

Accordingly, the measurement period for such purchase price allocations will end when the information, or the facts and circumstances, becomes available, but will not exceed twelve months.

We will recognize measurement-period adjustments during the period of resolution, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date.

Goodwill and intangible assets often represent a significant portion of the assets acquired in a business combination.

We recognize the fair value of an acquired intangible apart from goodwill whenever the intangible arises from contractual or other legal rights, or when it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability.

Intangible assets consist primarily of technology, customer relationships, order backlog and trade name acquired in a business combination and IPR&D.

We generally assess the estimated fair values of acquired intangibles using a combination of valuation techniques.

To estimate fair value, we are required to make certain estimates and assumptions, including future economic and market conditions, revenue growth, technology migration curve, and risk-adjusted discount rates.

Our estimates require significant judgment and are based on historical data, various internal estimates, and external sources.

Our assessment of IPR&D also includes consideration of the risk of the projects not achieving technological feasibility.

There have been no other material changes in our critical accounting policies and estimates since our Annual Report on Form 10-K for the fiscal year ended January 26, 2020.

Refer to Note 1 “Basis of Presentation” to the condensed consolidated financial statements for additional details.

In addition, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended January 26, 2020 for a more complete discussion of our critical accounting policies and estimates.

Results of Operations

The following table sets forth, for the periods indicated, certain items in our Condensed Consolidated Statements of Income expressed as a percentage of revenue.

Three Months Ended Nine Months Ended

2020 October 27,

2019 October 25,

2020 October 27,

Three Months Ended

2021 April 26,

Revenue 100.0 % 100.0 %

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Other income (expense), net

(1.1) 1.1 (0.7) 1.3

Income before income tax 36.1 31.9

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Revenue by Reportable Segments

Three Months Ended Nine Months Ended

2020 October 27,

Change October 25,

2020 October 27,

Three Months Ended

2021 April 26,

($ in millions)

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Total $ 5,661 $ 3,080 $ 2,581 84 %

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.

Graphics - Graphics segment revenue increased 81% in the first quarter of fiscal year 2022 compared to the first quarter of fiscal year 2021, reflecting growth in GeForce GPUs which benefited from continued strong sales of our GeForce RTX 30 Series based on the NVIDIA Ampere architecture.

Additionally, revenue increased from higher sales of Quadro/NVIDIA RTX workstations and game console SOCs.

We believe this segment also benefited from cryptocurrency mining demand, although it is hard to determine to what extent.

Compute & Networking - Compute & Networking segment revenue increased 88% for the first quarter of fiscal year 2022 compared to the first quarter of fiscal year 2021, reflecting the addition of Mellanox, which we acquired on April 27, 2020.

Revenue also increased due to the ramp of NVIDIA Ampere GPU architecture products into vertical industries and hyperscale customers and the addition of CMP revenue.

Concentration of Revenue

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 from sales to customers outside of the United States accounted for 86% and 84% of total revenue for the first quarter of fiscal years 2022 and 2021, respectively.

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 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.

No customer represented 10% or more of total revenue for the first quarter of fiscal years 2022 or 2021.

Our overall gross margin decreased to 64.1% for the first quarter of fiscal year 2022 from 65.1% for the first quarter of fiscal year 2021, reflecting amortization of intangible assets related to the Mellanox acquisition and a shift in the mix of Data Center products, partially offset by a lower contribution from Automotive products.

Inventory provisions totaled $58 million and $36 million for the first quarter of fiscal years 2022 and 2021, respectively.

Sales of inventory that was previously written-off or -down totaled $21 million and $39 million for the first quarter of fiscal years 2022 and 2021, respectively.

As a result, the overall net effect on our gross margin was an unfavorable impact of 0.6% and a favorable impact of 0.1% in the first quarter of fiscal years 2022 and 2021, respectively.

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

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.

Graphics - The gross margin of our Graphics segment increased during the first quarter of fiscal year 2022 compared to the first quarter of fiscal year 2021, primarily due to reduced contribution from lower margin products.

Compute & Networking - The gross margin of our Compute & Networking segment decreased during the first quarter of fiscal year 2022 compared to the first quarter of fiscal year 2021, primarily due to a shift in the mix of Data Center products, partially offset by a lower contribution from Automotive solutions.

Operating Expenses

Three Months Ended Nine Months Ended

2020 October 27,

Change October 25,

2020 October 27,

Three Months Ended

2021 April 26,

($ in millions)

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Research and Development

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.

Research and development expenses increased by 57% during the first quarter of fiscal year 2022 compared to the first quarter of fiscal year 2021, driven primarily by the acquisition of Mellanox.

The increase also reflects the impact of employee additions and higher employee compensation, including stock-based compensation and infrastructure costs.

Sales, General and Administrative

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.

Sales, general and administrative expenses increased by 77% during the first quarter of fiscal year 2022 compared to the first quarter of fiscal year 2021, driven primarily by the Mellanox acquisition.

The increase also reflects the impact of employee additions and higher employee compensation, including stock-based compensation, and costs related to the pending acquisition of Arm.

Other Income (Expense), Net

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

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.

Interest income was $6 million and $31 million during the first quarter of fiscal years 2022 and 2021, 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 $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.

Interest expense was $53 million and $25 million during the first quarter of fiscal years 2022 and 2021, respectively.

Other, net, consists primarily of realized or unrealized gains and losses from non-affiliated investments, mark to market adjustment of our publicly-traded equity security investment and the impact of changes in foreign currency rates.

Other, net, was an income of $135 million during the first quarter of fiscal year 2022 and not significant during the first quarter

of fiscal year 2021.

The increase was primarily due to a $124 million unrealized gain from an equity investment in a company that commenced public trading.

Refer to Note 8 of the Notes to Condensed Consolidated Financial Statements for additional information.

We recognized an income tax expense of $132 million and $64 million for the first quarter of fiscal years 2022 and 2021, respectively.

The income tax expense as a percentage of income before income tax was 6.5% and 6.6% for the first quarter of fiscal years 2022 and 2021, respectively.

The slight decrease in our effective tax rate for the first quarter of fiscal year 2022 as compared to the first quarter of fiscal year 2021 was primarily due to a change in the jurisdiction of earnings, partially offset by a decrease in the impact of tax benefits from the U.S.

federal research tax credit.

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

Liquidity and Capital Resources

October 25, 2020 January 26, 2020

May 2, 2021 January 31, 2021

(In millions)

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Cash, cash equivalents and marketable securities $ 12,667 $ 11,561

Nine Months Ended

October 25, 2020 October 27, 2019

Three Months Ended

May 2, 2021 April 26, 2020

(In millions)

Net cash provided by operating activities $ 1,874 $ 909

Net cash provided by (used in) investing activities $ (16,546) $ 6,296

Net cash used in investing activities $ (1,272) $ (1,055)

Net cash provided by (used in) financing activities $ (471) $ 4,744

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.

As of May 2, 2021, we had $12.67 billion in cash, cash equivalents and marketable securities, an increase of $1.11 billion from the end of fiscal year 2021.

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.

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.

Cash provided by operating activities increased in the first quarter of fiscal year 2022 compared to the first quarter of fiscal year 2021, due to higher net income and non-cash adjustments, partially offset by changes in working capital.

Changes in working capital include increases in outstanding trade receivables due to higher revenue and corresponding shipment linearity.

Cash used in investing activities increased in the first quarter of fiscal year 2022 compared to cash used in the first quarter of fiscal year 2021, which primarily reflects higher purchases of marketable securities, and higher purchases of property and equipment and intangible assets, offset by higher sales and maturities of marketable securities.

Cash used in financing activities increased in the first quarter of fiscal year 2022 compared to cash provided in the first quarter of fiscal year 2021, which primarily reflects the debt issued in the first quarter of fiscal year 2021 and higher 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 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 foreign government entities, and certificates of deposits.

As of May 2, 2021, we had $12.67 billion in cash, cash equivalents, and marketable securities.

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

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

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 $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.

We believe that we have sufficient liquidity to meet our operating requirements for at least the next 12 months, including our proposed acquisition of Arm.

We continuously evaluate our liquidity and

capital resources, including our access to external capital, to ensure we can adequately and efficiently finance our capital requirements beyond 12 months.

We have approximately $1.5 billion of cash, cash equivalents, and marketable securities held outside the U.S.

for which we have not accrued any related foreign or state taxes if we repatriate these amounts to the U.S.

Other than that, substantially all of our cash, cash equivalents and marketable securities held outside of the U.S.

as of May 2, 2021 are available for use in the U.S.

without incurring additional U.S.

federal income taxes.

Capital Return to Shareholders

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 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.

In the first quarter of fiscal year 2022, we paid $99 million in quarterly cash dividends.

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

As of May 2, 2021, 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 quarter of fiscal year 2022.

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 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.

The net proceeds from the September 2016 Notes were $1.98 billion, after deducting debt discounts and issuance costs.

We have outstanding $1.50 billion of Notes Due 2030, $1.00 billion of Notes Due 2040, $2.00 billion of Notes Due 2050, and $500 million of Notes due 2060, or collectively, the March 2020 Notes.

We have outstanding $1.00 billion of Notes due 2021 and $1.00 billion of Notes due 2026, or collectively, the September 2016 Notes.

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

As of May 2, 2021, we had not borrowed any amounts under this agreement.

The Credit Agreement expires October 2021.

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

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

Off-Balance Sheet Arrangements

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

As of May 2, 2021, we had not issued any commercial paper.

Contractual Obligations

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.

We are currently under examination by the Internal Revenue Service for our fiscal years 2018 and 2019.

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

Other than the contractual obligations described above, there were no material changes outside the ordinary course of business in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 26, 2020.

There were no material changes outside the ordinary course of business in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021.

Refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021 for a description of our contractual obligations.

For a description of our long-term debt, purchase obligations, and operating lease obligations, refer to Note 12, Note 13, and Note 3 of the Notes to Condensed Consolidated Financial Statements, respectively.

For a description of our operating lease obligations, long-term debt, and purchase obligations, refer to Note 3, Note 12, and Note 13 of the Notes to Condensed Consolidated Financial Statements, respectively.

Adoption of New and Recently Issued Accounting Pronouncements

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What changed 10-Q

Item 2. Management’s Discussion and Analysis