What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-27 compared with 2021-11-22 · 163 added, 172 removed, 115 unchanged (74% of the section changed)

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Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections.

Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management.

This Quarterly Report on Form 10-Q contains forward-looking statements which are based on our management’s beliefs and assumptions and on information currently available to our management.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements.

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.

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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, GeForce NOW, Mellanox, NVIDIA AI Enterprise, NVIDIA Clara, NVIDIA DRIVE Orin, NVIDIA Jetson AGX Orin, NVIDIA Omniverse, NVIDIA ReOpt, NVIDIA RTX, NVIDIA Triton Inference Server and Quadro, are trademarks and/or registered trademarks of NVIDIA Corporation in the United States and/or other countries.

NVIDIA, the NVIDIA logo, GeForce, GeForce NOW, Mellanox, NVIDIA AI Enterprise, NVIDIA DGX, NVIDIA DRIVE Orin, NVIDIA Grace, NVIDIA Hopper, NVIDIA Omniverse, NVIDIA OVX, NVIDIA RTX, NVIDIA Spectrum and Quadro, are trademarks and/or registered trademarks of NVIDIA Corporation in the United States and/or other countries.

MAXQ® is the registered trademark of Maxim Integrated Products, Inc.

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

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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.

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Recent Developments, Future Objectives and Challenges

Pending Acquisition of Arm Limited

On September 13, 2020, we entered into the Purchase Agreement with Arm and SoftBank 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 177.5 million shares of our common

stock, which had an aggregate value of $21.5 billion as of the date of the Purchase Agreement, and was valued at $56.2 billion as of November 18, 2021.

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 targets are achieved, SoftBank can elect to receive either up to an additional $5 billion in cash or up to an additional 41.3 million shares of our common stock, which was valued at $13.1 billion as of November 18, 2021.

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

The Signing Consideration 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, both with a 20-year term.

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.

The Purchase Agreement can be terminated by either party if the transaction has not closed by September 2022, subject to certain qualifications.

If the transaction does not close due to failure to receive regulatory approval, and all other covenants have been met, we will not be refunded $1.25 billion of the advanced consideration for the acquisition we paid at signing.

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 seeking regulatory approval in the United States, the United Kingdom, the European Union, China and other jurisdictions.

Regulators at the FTC have expressed concerns regarding the transaction, and we are engaged in discussions with the FTC regarding remedies to address those concerns.

The transaction has been under the review of China’s antitrust authority, pending the formal case initiation.

Regulators in the United Kingdom and the European Union declined to approve the transaction in Phase 1 of their review processes, expressed numerous concerns, began a more in-depth Phase 2 review on the transaction’s impact on competition, and, in the United Kingdom, a Phase 2 review of the impact on the United Kingdom’s national security interests.

Although regulators and some Arm licensees have expressed concerns or objected to the transaction, we continue to believe in the merits and benefits of the acquisition to Arm, its licensees, and the industry.

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

GPUs have many use cases including their intended marketed use case.

GPUs can be used for cryptocurrency mining, though we do not have visibility into how much of our GPU usage is for cryptocurrency mining nor the future demand for GPUs to mine cryptocurrency.

Volatility in the cryptocurrency market, including new compute technologies, price changes in cryptocurrencies, changes in government cryptocurrency policies and regulations, and new cryptocurrency standards can impact cryptocurrency demand, and further 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 decrease the usage of GPUs for Ethereum mining and may also create increased aftermarket resale of our GPUs, impact retail prices for our GPUs, increase returns of our products in the distribution channel, and may reduce demand for our new GPUs.

We have introduced Lite Hash Rate, or LHR, GeForce GPUs with limited Ethereum mining capability.

During the third quarter of fiscal year 2022, nearly all our desktop Ampere architecture GeForce GPU shipments were LHR in our effort to direct GeForce to gamers.

There have been aftermarket attempts to increase the Ethereum mining capability of our LHR cards.

Additionally, consumer and enterprise behavior during the COVID-19 pandemic 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.

Termination of the Arm Share Purchase Agreement

On February 8, 2022, NVIDIA and SoftBank announced the termination of the Share Purchase Agreement whereby NVIDIA would have acquired Arm from SoftBank.

The parties agreed to terminate because of significant regulatory challenges preventing the completion of the transaction.

We recorded an acquisition termination cost of $1.35 billion in the first quarter of fiscal year 2023 reflecting the write-off of the prepayment provided at signing in September 2020.

Demand for our products is based on many factors, including our product introductions and transitions, time to market, competitor product releases and announcements, competing technologies, and changes in macroeconomic conditions, including rising inflation, all of which can impact the timing and volume of our revenue.

Product transitions are complex and can negatively impact our revenue as we manage shipments of prior architecture products and channel partners prepare and adjust to support new products.

GPUs have use cases in addition to their designed and marketed use case, such as for digital currency mining, including blockchain-based platforms such as Ethereum.

It is difficult for us to estimate with any reasonable degree of precision the past or current impact of cryptocurrency mining, or forecast the future impact of cryptocurrency mining, on demand for our products.

Volatility in the cryptocurrency market, including new compute technologies, price changes in cryptocurrencies, government cryptocurrency policies and regulations, new cryptocurrency standards, and changes in the method of verifying blockchain transactions, have impacted and can in the future impact cryptocurrency mining and demand for our products and can further impact 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 decrease the usage of GPUs for Ethereum mining as well as create increased aftermarket resales of our GPUs, impact retail prices for our GPUs, increase returns of our products in the distribution channel, and may reduce demand for our new GPUs.

We have introduced Lite Hash Rate, or LHR, GeForce GPUs with limited Ethereum mining capability and provided CMP products in an effort to address demand from gamers and direct miners to CMP.

Beginning in the second quarter of fiscal year 2022, most desktop NVIDIA Ampere architecture GeForce GPU shipments were LHR in our effort to direct GeForce to gamers.

Attempts in the aftermarket to improve the hash rate capabilities of our LHR cards have been successful and our gaming cards may become more attractive to miners, increasing demand for our gaming GPUs and limiting our ability to supply our gaming cards to non-mining customers.

We cannot predict whether our strategy of using LHR cards and CMP will achieve our desired outcome.

Additionally, consumer and enterprise behavior during the COVID-19 pandemic has made it more difficult for us to estimate future demand and may have changed pre-pandemic behaviors.

These challenges may be more pronounced or volatile in the future on both a global and regional basis and may continue in the future when the effects of the pandemic subside.

Restrictions that may be imposed or reinstated as the pandemic continues may negatively impact customer demand for our products.

Recent lockdown measures due to COVID-19 containment efforts in China, as well as the war in Ukraine, have impacted end customer sales in China and EMEA, respectively, and we expect this impact to continue into the second quarter of fiscal year 2023.

During the first quarter of fiscal year 2023, we paused all direct sales in Russia.

Direct sales to Russia in fiscal year 2022 were immaterial.

Our revenue to partners that sell into Russia may be negatively impacted due to the war in Ukraine and we estimate that in fiscal year 2022, Russia accounted for approximately 2% of total end customer sales and 4% of Gaming end customer sales.

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.

This could lead to a significant mismatch between supply and demand, giving rise to product shortages or excess inventory, and make our demand forecast more uncertain.

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 ability to properly forecast demand.

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

We expect to remain supply-constrained into fiscal year 2023.

We have placed non-cancellable inventory orders for certain

products in advance of our normal lead times, paid premiums and provided deposits to secure normal and incremental future supply and capacity and may need to continue to do so in the future.

Ordering product in advance of our normal lead times to secure supply in a constrained environment may trigger excess inventory or other charges if there is a partial or complete reduction in long term demand for our products or if such demand is served by our competitors.

Given our long lead times on inventory purchasing, demand may be perishable or may disappear.

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.

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.

During the third quarter of fiscal year 2022, our Gaming, Data Center and Professional Visualization market platforms have benefited from stronger demand as people continue to work, learn, and play from home.

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, rising inflation, logistical services and component supply may have a material net negative impact on our business and financial results.

Our manufacturing lead times are very long and in some cases extend twelve months or longer, which requires us to make estimates of customers’ future demand.

These conditions could lead to a significant mismatch between supply and demand, giving rise to product shortages or excess inventory, and make our demand forecast more uncertain.

To shorten shipment lead times and deliver more quickly to our customers, we may build finished products and maintain inventory for anticipated demand that does not materialize.

During fiscal year 2022, we made substantial strides in broadening our supply base to scale our company and better serve customer demand.

Recent COVID-19-related disruptions and lockdowns in China have created and are expected to continue to create supply and logistics constraints.

The war in Ukraine has further strained global supply chains and could result in a shortage of key materials that our suppliers, including our foundry partners, require to satisfy our needs.

We expect continued supply constraints for some of our products, such as Networking, through the end of the second quarter of fiscal year 2023 and potentially beyond.

We have placed orders for certain supply in advance of our historical lead times, paid premiums and provided deposits to secure future supply and capacity, and may need to continue to do so in the future.

Placing orders in advance of our historical lead times to secure supply and services in a constrained environment may result in excess inventory, cancellation penalties or other charges if there is a partial or complete reduction in long-term demand for our products.

These actions may also increase our product costs, in addition to increased overall costs as a result of rising inflation.

Increased costs for wafers, components, logistics, and other supply chain expenses, driven in part by inflation, have negatively impacted and may continue to impact our gross margin.

Given our long lead times on inventory purchasing, we may order components before our product design is finalized and changes to the product design or to end demand, which may be perishable or may disappear, could trigger excess inventory.

Our supply deliveries and production may be non-linear within a quarter or year which could cause changes to expected revenue or cash flows.

The COVID-19 pandemic continued during fiscal year 2023.

Most of our employees continue to work remotely and we have paused most business travel.

Our Professional Visualization market platform benefited from demand for workstations as enterprises support hybrid work environments.

Recent COVID-19-related disruptions in China are creating supply and logistics constraints and impacting end customer sales.

As our 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 limited availability of supply chain, logistical services and component supply may have a material net negative impact on our business and financial results.

We believe our existing balances of cash, cash equivalents and marketable securities, along with commercial paper 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.

Third Quarter of Fiscal Year 2022 Summary

First Quarter of Fiscal Year 2023 Summary

Three Months Ended

October 31, 2021 August 1, 2021 October 25, 2020 Quarter-over-Quarter Change Year-over-Year Change

May 1, 2022 January 30, 2022 May 2, 2021 Quarter-over-Quarter Change Year-over-Year Change

($ in millions, except per share data)

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Gaming, Data Center, Professional Visualization, and Automotive.

Revenue for the third quarter of fiscal year 2022 was $7.10 billion, up 50% from a year earlier.

Gaming revenue was up 42% from a year ago and up 5% sequentially, reflecting higher sales of GeForce GPUs.

We benefited from strong demand for our NVIDIA Ampere architecture products leading into the holiday season.

Nearly all our desktop Ampere architecture GeForce GPU shipments are LHR in our effort to direct GeForce to gamers.

Data Center revenue was up 55% from a year ago and up 24% sequentially, driven by sales of NVIDIA Ampere architecture products to hyperscale customers for cloud computing and workloads such as natural language processing and deep recommender models, as well as to vertical industries.

Professional Visualization revenue was up 144% from a year earlier and up 11% sequentially, driven by NVIDIA Ampere architecture products, with growth in desktop and notebook workstation GPUs as enterprises deploy systems to support hybrid work environments.

Automotive revenue was up 8% from a year earlier and down 11% sequentially.

The year-on-year growth was due to the ramp of self-driving programs, while the sequential decline was related to automotive makers’ supply constraints.

OEM and Other revenue was up 21% from a year ago and down 43% sequentially.

The year-on-year growth reflects CMP revenue of $105 million this quarter.

The sequential decline primarily reflects lower CMP revenue.

GAAP gross margin for the third quarter was up 260 basis points from a year earlier, primarily due to a higher-end mix within desktop and notebook GeForce GPUs.

The year-on-year increase also benefited from a reduced impact of acquisition-related costs.

Sequentially, gross margin was up 40 basis points primarily due to growth in Data Center, partially offset by a mix shift in Gaming.

Operating expenses for the third quarter were up 25% from a year earlier and up 11% sequentially.

The year-on-year increase was primarily driven by compensation-related costs relating to employee growth and higher infrastructure costs.

The sequential increase was primarily driven by development materials and employee growth.

Income from operations was $2.67 billion, up 91% from a year earlier and up 9% sequentially.

Net income was $2.46 billion.

Net income per diluted share was $0.97, up 83% from a year earlier and up 3% sequentially.

Cash, cash equivalents and marketable securities were $19.30 billion, up from $10.14 billion a year earlier and down from $19.65 billion in the prior quarter.

The year-on-year increase reflects $5 billion of debt issuance proceeds and operating cash flow generation.

The sequential decrease primarily reflects prepayments for long-term supply, $1 billion of debt maturity and business acquisitions.

We paid $100 million in quarterly cash dividends in the third quarter.

Revenue for the first quarter of fiscal year 2023 was $8.29 billion, up 46% from a year ago and up 8% sequentially.

Gaming revenue was up 31% from a year ago and up 6% sequentially.

The year-on-year increase reflects higher sales of GeForce GPUs based on our NVIDIA Ampere architecture.

The sequential increase was driven by higher sales of GeForce GPUs for laptops and SOCs for game consoles.

Our GPUs are capable of cryptocurrency mining, though we have limited visibility into how much this impacts our overall GPU demand.

Volatility in the cryptocurrency market – such as the recent declines in cryptocurrency prices or changes in method of verifying transactions, including proof of work or proof of stake - can impact demand for our products and our ability to accurately estimate it.

Most desktop NVIDIA Ampere architecture GeForce GPU shipments were Lite Hash Rate to help direct GeForce GPUs to gamers.

Data Center revenue was up 83% from a year ago and up 15% sequentially.

These increases were primarily driven by sales of NVIDIA Ampere architecture GPUs and DGX systems used across both training and inference.

Growth was led by cloud computing and hyperscale customers for workloads such as natural language processing and deep recommenders.

Professional Visualization revenue was up 67% from a year ago and down 3% sequentially.

The year-on-year increase was driven by sales of NVIDIA Ampere architecture products with growth in workstations as enterprises supported hybrid work environments.

The sequential decrease was due to lower sales of desktop workstation GPUs, partially offset by higher sales of notebook workstations GPUs.

Automotive revenue was down 10% from a year ago and up 10% sequentially.

The year-on-year decrease was due to automakers’ supply constraints and the decline of legacy cockpit revenue.

The sequential increase was driven by AI cockpit revenue.

OEM and Other revenue was down 52% from a year ago and down 18% sequentially.

The year-on-year decrease was due to a decline in CMP revenue, which was nominal in the quarter compared with $155 million from a year ago.

The sequential decrease was driven by lower entry level notebook GPU sales.

GAAP gross margin was up 140 basis points from a year ago, primarily due to a higher-end mix of GeForce GPUs within Gaming and the reduced impact of acquisition-related costs.

Sequentially, GAAP gross margin was up 10 basis points due to increased contribution of, and favorable product mix changes within, Data Center, partially offset by higher sales of SOCs for game consoles.

GAAP operating expenses were up 113% from a year ago and up 76% sequentially and include a $1.35 billion acquisition termination charge related to the Arm transaction.

These increases were also driven by employee growth, compensation-related costs and engineering development costs.

We have been successful in hiring this year and expect to slow hiring in the second half of fiscal year 2023 as we integrate our new employees.

Income from operations was $1.87 billion, down 4% from a year ago and down 37% sequentially.

Net income was a $1.62 billion.

Net income per diluted share was $0.64, down 16% from a year ago and down 46% sequentially.

Cash, cash equivalents and marketable securities were $20.34 billion, up from $12.67 billion a year ago and down from $21.21 billion a quarter ago.

The year-on-year increase reflects operating cash flow generation and $5.00 billion of debt issuance proceeds.

The sequential decrease reflects share repurchases and advanced payments on supply agreements.

During the first quarter of fiscal year 2023, we returned $2.10 billion to shareholders in the form of share repurchases and cash dividends.

On May 23, 2022, our board of directors increased and extended our share repurchase program to repurchase additional common stock up to a total of $15 billion through December 2023.

Market Platform Highlights

At our recent GTC conference, we announced general availability of NVIDIA Omniverse Enterprise;

65 new and updated software development kits, including NVIDIA Riva, Modulus, ReOpt, Morpheus, cuNumeric, and Clara Holoscan;

tools for developing and deploying large language models, including NVIDIA NeMo Megatron;

new capabilities in the open source NVIDIA Triton Inference Server software;

the NVIDIA Quantum-2 400Gbps switch and end-to-end networking platform;

and NVIDIA Jetson AGX Orin for edge AI and autonomous machines.

Additionally, in our Gaming platform during the third quarter of fiscal year 2022, we announced RTX capabilities coming to blockbuster titles;

announced new RTX-accelerated AI features in Adobe applications;

and introduced a new high-performance membership tier to GeForce NOW.

In our Data Center platform, we announced plans to build Earth-2, an AI supercomputer dedicated to addressing the global climate change crisis;

announced the availability of NVIDIA AI Enterprise;

expanded NVIDIA LaunchPad;

and announced further collaboration with VMware to develop an AI-ready enterprise platform based on VMware vSphere with Tanzu.

In our Professional Visualization platform, we announced the general availability of NVIDIA Omniverse Enterprise.

In our Automotive platform, we announced that NVIDIA DRIVE Orin is being used by autonomous truck company Kodiak Robotics, automaker Lotus, autonomous driving-solutions provider QCraft and EV startup WM Motor.

In our Data Center market platform, we announced the NVIDIA Hopper GPU architecture and its first products based on the architecture including the NVIDIA H100 Tensor Core GPU and the fourth-generation NVIDIA DGX system.

Additionally, we announced the NVIDIA Grace CPU Superchip;

unveiled the NVIDIA Spectrum-4 end-to-end 400Gbps networking platform;

and announced NVIDIA OVX server reference design for digital twins and other Omniverse applications.

In our Gaming market platform, we introduced the GeForce RTX 3090 Ti enthusiast-class desktop GPU;

announced that there are now over 180 laptop models featuring RTX 30-series GPUs and our energy efficient, thin & light Max-Q technologies;

announced that 15 new game titles added support for NVIDIA RTX features, bringing the total to over 250 games and applications;

and expanded the GeForce NOW cloud gaming service library with over 100 games, bringing the total to over 1,300.

In our Professional Visualization market platform, we added new NVIDIA Ampere architecture RTX GPUs for workstations and announced that Amazon Robotics is building AI-enabled digital twins of its warehouses using NVIDIA Omniverse Enterprise.

In our Automotive market platform, we started production of the NVIDIA DRIVE Orin autonomous vehicle SOC and announced wins with Lucid Motors and BYD.

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

Refer to Part II, Item 7, "Critical Accounting Policies and Estimates" of our Annual Report on Form 10-K for the fiscal year ended January 30, 2022.

There have been no material changes to 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

2021 October 25,

2020 October 31,

2021 October 25,

Three Months Ended

Revenue 100.0 % 100.0 %

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Sales, general and administrative 7.1 9.2

Acquisition termination cost 16.3 —

Total operating expenses 42.9 29.6

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Other income (expense), net

(0.5) (1.1) — (0.7)

Income before income tax 21.8 36.1

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Revenue by Reportable Segments

Three Months Ended Nine Months Ended

2021 October 25,

Change October 31,

2021 October 25,

Three Months Ended

($ in millions)

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Total $ 8,288 $ 5,661 $ 2,627 46 %

Graphics - Graphics segment revenue increased 47% in the third quarter of fiscal year 2022 compared to the third quarter of fiscal year 2021 and 69% in the first nine months of fiscal year 2022 compared to the first nine months of fiscal year 2021, reflecting strong demand for our NVIDIA Ampere architecture products.

Additionally, revenue increased from growth in desktop and mobile workstation GPUs.

Compute & Networking - Compute & Networking segment revenue increased 55% for the third quarter of fiscal year 2022 compared to the third quarter of fiscal year 2021 and 60% in the first nine months of fiscal year 2022 compared to the first nine months of fiscal year 2021.

Year-on-year growth in the third quarter was driven by sales of NVIDIA Ampere architecture products to vertical industries, and to hyperscale customers for cloud computing and workloads such as natural language processing and deep recommender models.

The increase in the first nine months of fiscal year 2022 also reflects the addition of Mellanox, which we acquired on April 27, 2020, and CMP products.

Graphics - Graphics segment revenue increased by 34% in the first quarter of fiscal year 2023 compared to the first quarter of fiscal year 2022.

We continue to benefit from increased sales of our NVIDIA Ampere architecture products.

The increase in Gaming revenue during the first quarter of fiscal year 2023 resulted from a combination of factors including:

the ramp of new RTX 30 Series GPUs;

the release of new games supporting ray tracing;

the rising popularity of gaming, eSports, content creation and streaming;

the demand for new and upgraded systems to support the increase in remote work;

and the ability of end users to engage in cryptocurrency mining.

Compute & Networking - Compute & Networking segment revenue increased by 66% for the first quarter of fiscal year 2023 compared to the first quarter of fiscal year 2022, driven primarily by sales of NVIDIA Ampere architecture products to hyperscale customers for cloud computing and workloads such as natural language processing and deep recommender models, as well as to vertical industries.

The increase also reflects an increase in sales of networking products.

CMP contributed an insignificant amount in the first quarter of fiscal year 2023 compared to $155 million in the prior year.

Concentration of Revenue

Revenue from sales to customers outside of the United States accounted for 84% and 85% of total revenue for the third quarter and first nine months of fiscal year 2022, respectively, and 81% and 80% of total revenue for the third quarter

and first nine months of fiscal year 2021, respectively.

Revenue from sales to customers outside of the United States accounted for 77% and 86% of total revenue for the first quarter of fiscal years 2023 and 2022, 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 years 2022 or 2021.

Our overall gross margin increased to 65.2% and 64.7% for the third quarter and first nine months of fiscal year 2022, respectively, from 62.6% and 62.0% for the third quarter and first nine months of fiscal year 2021, respectively.

The year-on-year increase in the third quarter was primarily due to a higher-end mix within desktop and notebook GeForce GPUs, reflecting strong demand for our Ampere architecture.

The increase in the first nine months was primarily due to a higher-end mix within desktop and notebook GeForce GPUs, partially offset by a mix shift within the Compute & Networking segment.

These increases also benefited from a reduced impact of acquisition-related costs.

Inventory provisions totaled $107 million and $15 million for the third quarter of fiscal years 2022 and 2021, respectively.

Sales of inventory that was previously written-off or -down totaled $48 million and $29 million for the third quarter of fiscal years 2022 and 2021, respectively.

As a result, the overall net effect on our gross margin was an unfavorable impact of 0.8% and a favorable impact of 0.3% in the third quarter of fiscal years 2022 and 2021, respectively.

Inventory provisions totaled $238 million and $96 million for the first nine months of fiscal years 2022 and 2021, respectively.

Sales of inventory that was previously written-off or -down totaled $89 million and $116 million for the first nine months of fiscal years 2022 and 2021, respectively.

As a result, the overall net effect on our gross margin was an unfavorable impact of 0.8% and a favorable impact of 0.2% in the first nine months 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 increased during the third quarter and first nine months of fiscal year 2022 compared to the third quarter and first nine months of fiscal year 2021, primarily due to a higher-end mix within desktop and notebook GeForce GPUs.

Compute & Networking - The gross margin of our Compute & Networking segment increased during the third quarter of fiscal year 2022 compared to the third quarter of fiscal year 2021 due to higher average selling prices of our compute products, partially offset by product mix.

The gross margin of our Compute & Networking segment decreased during the first nine months of fiscal year 2022 compared to the first nine months of fiscal year 2021, primarily due to a shift in product mix, partially offset by higher average selling prices of our compute products and a reduced contribution from Automotive solutions.

No customer represented 10% or more of total revenue for the first quarter of fiscal years 2023 or 2022.

Our overall gross margin increased to 65.5% for the first quarter of fiscal year 2023 from 64.1% for the first quarter of fiscal year 2022, reflecting a higher-end mix of GeForce GPUs within our Graphics segment and a reduced impact to gross margin for acquisition-related costs.

Inventory provisions totaled $90 million and $58 million for the first quarter of fiscal years 2023 and 2022, respectively.

Sales of inventory that was previously written-off or down totaled $15 million and $21 million for the first quarter of fiscal years 2023 and 2022, respectively.

As a result, the overall net effect on our gross margin was an unfavorable impact of 0.9% and 0.6% in the first quarter of fiscal years 2023 and 2022, respectively.

Graphics - The gross margin of our Graphics segment increased during the first quarter of fiscal year 2023 compared to the first quarter of fiscal year 2022, primarily due to a higher-end mix within GeForce GPUs.

Compute & Networking - The gross margin of our Compute & Networking segment decreased during the first quarter of fiscal year 2023 compared to the first quarter of fiscal year 2022, primarily due to lower contribution of prior architecture boards compared to NVIDIA Ampere architecture systems.

Operating Expenses

Three Months Ended Nine Months Ended

2021 October 25,

Change October 31,

2021 October 25,

Three Months Ended

($ in millions)

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% of net revenue 7 % 9 %

Acquisition termination cost 1,353 — 1,353 100 %

% of net revenue 16 % — %

Total operating expenses $ 3,563 $ 1,673 $ 1,890 113 %

Research and Development

Research and development expenses increased by 34% during the third quarter of fiscal year 2022 compared to the third quarter of fiscal year 2021, primarily driven by employee additions and higher employee compensation, including stock-based compensation, and infrastructure costs.

Research and development expenses increased by 37% during the first nine months of fiscal year 2022 compared to the first nine months of fiscal year 2021, primarily driven by employee additions and higher employee compensation, including stock-based compensation, infrastructure costs, and the acquisition of Mellanox.

Research and development expenses increased by 40% during the first quarter of fiscal year 2023 compared to the first quarter of fiscal year 2022, primarily driven by compensation-related costs, including for employee growth and stock-based compensation, and engineering development costs.

Sales, General and Administrative

Sales, general and administrative expenses increased by 8% during the third quarter of fiscal year 2022 compared to the third quarter of fiscal year 2021, primarily driven by employee additions and higher employee compensation, including stock-based compensation, partially offset by lower amortization of intangible assets.

Sales, general and administrative expenses increased by 12% during the first nine months of fiscal year 2022 compared to the first nine months of fiscal year 2021, primarily driven by employee additions and higher employee compensation, including stock-based compensation, the acquisition of Mellanox, partially offset by lower amortization of intangible assets.

Sales, general and administrative expenses increased by 14% during the first quarter of fiscal year 2023 compared to the first quarter of fiscal year 2022, primarily driven by compensation-related costs, associated with employee growth and stock-based compensation, partially offset by lower legal fees.

Acquisition Termination Cost

We recorded an acquisition termination cost related to the Arm transaction of $1.35 billion in the first quarter of fiscal year 2023 reflecting the write-off of the prepayment provided at signing in September 2020.

Other Income (Expense), Net

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

Interest income was $7 million for both the third quarters of fiscal years 2022 and 2021, and $20 million and $50 million during the first nine months of fiscal years 2022 and 2021, respectively.

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

Interest expense is primarily comprised of coupon interest and debt discount amortization related to our September 2016 Notes, March 2020 Notes, and June 2021 Notes.

Interest expense was $62 million and $53 million during the third quarter of fiscal years 2022 and 2021, respectively, and $175 million and $131 million during the first nine months of fiscal years 2022 and 2021, respectively.

Interest income was $18 million and $6 million for the first quarter of fiscal years 2023 and 2022, respectively.

The increase in interest income was primarily due to higher interest rates earned on our investments and higher cash balances.

Interest expense is primarily comprised of coupon interest and debt discount amortization related to our notes.

Interest expense was $68 million and $53 million during the first quarter of fiscal years 2023 and 2022, respectively.

The increase in expense reflects interest on the $5.00 billion note issued in June 2021.

Other, net, consists primarily of realized or unrealized gains and losses from investments in non-affiliated entities and the impact of changes in foreign currency rates.

Other, net, was an income of $22 million and $160 million during the third quarter and first nine months of fiscal year 2022, respectively, and not significant during the third quarter and first nine months of fiscal year 2021.

The increase during the third quarter and first nine months of fiscal year 2022 was primarily due to unrealized gains from our investments in non-affiliated entities.

Other, net, was an expense of $13 million and income of $135 million during the first quarter of fiscal years 2023 and 2022, respectively.

Changes in other, net, compared to the first quarter of fiscal year 2022 were primarily driven by mark-to-market impact from public trading equity investments and changes in value from our non-affiliated private investments.

Refer to Note 8 of the Notes to Condensed Consolidated Financial Statements for additional information regarding our investments in non-affiliated entities.

We recognized an income tax expense of $174 million and $327 million for the third quarter and first nine months of fiscal year 2022, respectively, and an income tax expense of $12 million and $64 million for the third quarter and first nine months of fiscal year 2021, respectively.

The income tax expense as a percentage of income before income tax was 6.6% and 4.6% for the third quarter and first nine months of fiscal year 2022, respectively, and 0.9% and 2.2% for the third quarter and first nine months of fiscal year 2021, respectively.

The increase in our effective tax rate for the third quarter and first nine months of fiscal year 2022 as compared to the same periods of fiscal year 2021 was primarily due to an increase in the amount of earnings subject to U.S.

tax, and a decreased impact of tax benefits from stock-based compensation and the U.S.

federal research tax credit, partially offset, for the first nine months, by the discrete benefit of the Domestication.

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

We recognized an income tax expense of $187 million and $132 million for the first quarter of fiscal years 2023 and 2022, respectively.

The income tax expense as a percentage of income before income tax was 10.3% and 6.5% for the first quarter of fiscal years 2023 and 2022, respectively.

The increase in our effective tax rate was primarily due to an increase in the amount of earnings subject to U.S.

tax, the Arm acquisition termination cost recorded in the first quarter of fiscal year 2023 which did not result in any material tax benefit, and a decreased impact of tax benefit from the U.S.

federal research tax credit, partially offset by the increased benefits from the foreign-derived intangible income deduction and stock-based compensation.

If our stock price declines, the future tax benefits from stock-based compensation may decline, resulting in an increase in tax expense.

Liquidity and Capital Resources

October 31, 2021 January 31, 2021

May 1, 2022 January 30, 2022

(In millions)

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Cash, cash equivalents and marketable securities $ 20,338 $ 21,208

Nine Months Ended

October 31, 2021 October 25, 2020

Three Months Ended

May 1, 2022 May 2, 2021

(In millions)

Net cash provided by operating activities $ 1,731 $ 1,874

Net cash used in investing activities $ (8,244) $ (16,546)

Net cash provided by financing activities $ 2,610 $ 4,146

As of October 31, 2021, we had $19.30 billion in cash, cash equivalents and marketable securities, an increase of $7.74 billion from the end of fiscal year 2021.

Net cash provided by (used in) investing activities $ 2,612 $ (1,272)

Net cash used in financing activities $ (2,446) $ (471)

As of May 1, 2022, we had $20.34 billion in cash, cash equivalents and marketable securities, a decrease of $0.87 billion from the end of fiscal year 2022.

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 nine months of fiscal year 2022 compared to the first nine months of fiscal year 2021, due to higher net income, partially offset by changes in working capital.

Changes in working capital were primarily driven by prepayments of $1.65 billion for long-term supply agreements and increases in trade receivables due to higher revenue.

Cash used in investing activities decreased in the first nine months of fiscal year 2022 compared to cash used in the first nine months of fiscal year 2021, primarily driven by the acquisition of Mellanox in the second quarter of fiscal year 2021, and higher marketable securities sales and maturities, partially offset by higher purchases of marketable securities.

Cash provided by financing activities decreased in the first nine months of fiscal year 2022 compared to cash provided in the first nine months of fiscal year 2021, which primarily reflects a debt repayment in the third quarter of fiscal year 2022 and higher tax payments on restricted stock units.

Cash provided by operating activities decreased in the first quarter of fiscal year 2023 compared to the first quarter of fiscal year 2022, primarily due to advanced payments on supply agreements in the first quarter of fiscal year 2023 partially offset by an increase in net income adjusted for certain non-cash items, such as the Arm acquisition termination cost of $1.35 billion during the first quarter of fiscal year 2023.

Cash provided by investing activities increased in the first quarter of fiscal year 2023 compared to cash used in the first quarter of fiscal year 2022, primarily driven by higher marketable securities sales and maturities and lower purchases of marketable securities.

Cash used in financing activities increased in the first quarter of fiscal year 2023 compared to the first quarter of fiscal year 2022, which primarily reflects share repurchases in the first quarter of fiscal year 2023.

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

As of October 31, 2021, we had $19.30 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.

As of May 1, 2022, we had $20.34 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, as well as certificates of deposit issued by highly rated financial institutions.

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 for at least the next 12 months, and for the foreseeable future, including our proposed acquisition of Arm and current and future obligations to secure normal and incremental supply.

We believe that we have sufficient liquidity to meet our operating requirements for at least the next twelve months, and for the foreseeable future, including our future supply obligations and additional supply.

We continuously evaluate our liquidity and capital resources, including our access to external capital, to ensure we can finance our future capital requirements.

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

as of October 31, 2021 are available for use in the U.S.

as of May 1, 2022 are available for use in the U.S.

without incurring additional U.S.

federal income taxes.

Following the Domestication, we expect to fully utilize our accumulated U.S.

We utilized almost all of our accumulated U.S.

federal research tax credits during fiscal year 2022, resulting in higher cash tax payments starting in fiscal year 2023.

In addition, beginning in fiscal year 2023, the 2017 Tax Cuts and Jobs Act requires taxpayers to capitalize research and development expenditures and to amortize domestic expenditures over five years and foreign expenditures over fifteen years.

This will impact cash flows from operations and will result in significantly higher cash tax payments starting in fiscal year 2023.

Capital Return to Shareholders

In the first nine months of fiscal year 2022, we paid $298 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 October 31, 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 nine months of fiscal year 2022.

During the first quarter of fiscal year 2023, we returned $2.00 billion in share repurchases and $100 million in cash dividends.

On May 23, 2022, our Board of Directors increased and extended our share repurchase program to repurchase additional common stock up to a total of $15 billion through December 2023.

Outstanding Indebtedness and Commercial Paper

As of October 31, 2021, we had outstanding:

As of May 1, 2022, we had outstanding:

• $1.25 billion of Notes Due 2023;

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• $500 million of Notes Due 2060.

On August 16, 2021, we repaid the $1.00 billion of 2.20% Notes Due 2021.

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

As of October 31, 2021, we had not issued any commercial paper.

As of May 1, 2022, we had not issued any commercial paper.

Contractual Obligations

We have $163 million of long-term tax liabilities related to tax basis differences in Mellanox and unrecognized tax benefits of $638 million, which includes related interest and penalties of $60 million recorded in non-current income tax payable as of October 31, 2021.

We have unrecognized tax benefits of $800 million, which includes related interest and penalties of $67 million recorded in non-current income tax payable as of May 1, 2022.

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.

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.

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Climate Change

In the area of sustainability, we continue to address our climate impact across our product lifecycle and to assess relevant risks, including current and emerging regulations and market impacts.

We undertake efforts to reduce greenhouse gas emissions, water usage and waste in our data centers, labs and offices, including sourcing a portion of our global electricity from renewable energy.

Our investments include sustainability features when opening new offices and new construction to incorporate green building standards, such as our LEED Gold headquarters in Santa Clara, California, and energy-efficient systems and technologies in our data centers.

We focus on energy efficiency in our processor design and utilize recyclable packaging to minimize our environmental footprint.

To date, there has been no material impact to our results of operations associated with global sustainability regulations, compliance, or costs from sourcing renewable energy.

We have announced plans to build the world’s most powerful AI supercomputer, Earth-2, dedicated to predicting climate change.

To date, there has been no material impact to our results of operations associated with global sustainability regulations, compliance, costs from sourcing renewable energy or climate-related business trends.

There are no material current climate change regulations impacting us, however, we are monitoring potential regulation changes in California, the United States, the United Kingdom, the European Union and other jurisdictions.

We believe that climate change has not had a material impact to our revenue to date.

We have not experienced any significant physical effects of climate change to date on our operations and results, nor any significant impacts on the cost or availability of insurance.

In fiscal year 2024, we plan to launch Earth-2, an AI supercomputer dedicated to predicting the impacts of climate change.

Adoption of New and Recently Issued Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis