What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-31 compared with 2022-05-27 · 183 added, 137 removed, 141 unchanged (69% of the section changed)

11 unchanged sentences

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 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.

NVIDIA, the NVIDIA logo, GeForce, GeForce NOW, GeForce RTX, Mellanox, NVIDIA AI Enterprise, NVIDIA DGX, NVIDIA DRIVE, NVIDIA DRIVE Orin, NVIDIA Grace, NVIDIA HGX, NVIDIA Jetson, NVIDIA NeMO, NVIDIA Omniverse, NVIDIA QODA, NVIDIA RTX, NVIDIA Studio and Quadro, 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.

2 unchanged sentences

“Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended January 30, 2022 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.

“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 and our other filings with the SEC, before deciding to purchase or sell shares of our common stock.

Our Company and Our Businesses

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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.

Demand and Supply

Because we do not manufacture the semiconductors used for our products, we are dependent on third parties to manufacture and assemble our products.

Our manufacturing lead times are very long, which requires us to make estimates of customers’ future demand.

At the same time, we do not have a guaranteed supply of wafers, components and capacity, and our supply deliveries and production may be non-linear within a quarter or year, which has previously caused changes to expected revenue and cash flows, and which may reoccur in the future.

If our estimates of customer demand are ultimately inaccurate, as we have experienced from time to time, these conditions could lead to a significant mismatch between supply and demand.

This mismatch has resulted in product shortages and excess inventory, has varied across our market platforms, and significantly harmed our financial results.

We build finished products and maintain inventory in advance of anticipated demand.

In periods of shortages impacting the semiconductor industry and/or limited supply or capacity in our supply chain, as we have experienced in the past, the lead time on our orders for certain supply has extended to more than twelve months, compared to a historical lead time of approximately six months.

Extended lead times may continue if we experience other supply constraints caused by natural disasters or other events.

As a result, we have paid premiums and provided deposits to secure future supply and capacity, which have increased our product costs, and may need to continue to do so in the future.

Our supply, which includes inventory on hand, purchase obligations and prepaid supply agreements, has grown significantly due to current supply chain conditions and complexity of our products.

Purchase obligations and prepaid supply agreements represent approximately three quarters of our total supply.

Each of these factors has previously impacted, and can in the future impact, the timing and volume of our revenue.

Our demand predictions may not be correct, as we have experienced from time to time.

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

We are entering a timeframe when we will transition architectures for both our Gaming and Data Center products, which may impair our ability to predict demand and impact our supply mix.

We may experience, and have in the past experienced, reduced demand for current generation architectures when customers anticipate transitions.

If we are unable to execute our architectural transitions as planned for any reason, our financial results may be negatively impacted.

Our ability to sell certain products has in the past been and can in the future be impeded if components from third parties that are necessary for the finished product are not available.

Additionally, we sell most of our products through channel partners, who 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 changes in end user demand for our products have impacted and could in the future continue to impact our ability to properly forecast demand, particularly as they are based on estimates provided by various downstream parties.

In recent periods, COVID-19-related disruptions and lockdowns in China have created and may continue to create supply and logistics constraints.

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

Our GPUs are designed for the Gaming, Data Center, Professional Visualization and Automotive markets.

The use of our GPUs for use cases other than that for which they were designed and marketed, including new and unexpected use cases, has impacted and can in the future impact demand for our products, including by leading to inconsistent spikes and drops in demand.

For example, many years ago, our Gaming GPUs began to be used 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.

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, has 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 merge may decrease the usage of GPUs for Ethereum mining as well as create increased aftermarket resales of our GPUs, which could negatively impact retail prices for our GPUs, increase returns of our products in the distribution channel, and 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.

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

In addition, our new products or previously sold products may be resold online or on the unauthorized “gray market,” which also makes demand forecasting difficult.

Gray market products or reseller marketplaces compete with our distribution channels.

In the second quarter of fiscal year 2023, Gaming revenue experienced lower sell-in of our Gaming GPUs, reflecting reduced channel partner sales due to macroeconomic headwinds, including the negative impact of high inflation on consumer spending and weaker consumer purchasing power in markets whose currencies weakened relative to the U.S.

dollar, as our sales are in U.S.

Our channel partners reduced their inventory and are transitioning to a lower value mix of inventory to better align with demand as well as an architectural transition, and we implemented pricing programs with them to address challenging market conditions that we expect to persist into the third quarter of fiscal year 2023.

The sequential decline in Gaming revenue also resulted from the war in Ukraine impacting sales in Europe and lockdowns in China due to COVID-19.

The extent to which reduced cryptocurrency mining contributed to the decline in Gaming demand is difficult for us to reasonably quantify.

Economic conditions in China drove lower sales to China hyperscale customers, impacting our Data Center revenue, and drove lower sales of Gaming products.

We and our customers are also experiencing Data Center supply chain disruptions as our customers delay purchases pending the availability of other third party components.

These recent reductions in demand and our reduced expectations of future demand have required us to record charges for excess inventory on hand and on order, and cancellation and underutilization penalties.

Potential future demand reductions could require additional reserves.

Mismatches between our supply and demand may occur in future quarters.

On August 26, 2022, the U.S.

government, or USG, informed us that it has imposed a new license requirement, effective immediately, for any future export to China (including Hong Kong) and Russia of our A100 and forthcoming H100 integrated circuits.

DGX or any other systems which incorporate A100 or H100 integrated circuits and our A100X are also covered by the new license requirement.

The license requirement also includes any future NVIDIA integrated circuit achieving both peak performance and chip-to-chip I/O performance equal to or greater than thresholds that are roughly equivalent to the A100, as well as any system that includes those circuits.

A license is required to export technology to support or develop covered products.

The USG indicated that the new license requirement will address the risk that the covered products may be used in, or diverted to, a ‘military end use’ or ‘military end user’ in China and Russia.

We do not sell products to customers in Russia.

The new license requirement may impact our ability to complete our development of H100 in a timely manner or support existing customers of A100 and may require us to transition certain operations out of China, which could be costly and time consuming, and adversely affect our research and development and supply and distribution operations, as well as our revenue, during any such transition period.

We are engaged with the USG and are seeking exemptions for our internal development and support activities.

We are engaging with customers in China and are seeking to satisfy their planned or future purchases of our Data Center products with products not subject to the new license requirement.

To the extent that a customer requires products covered by the new license requirement, we may seek a license for the customer but have no assurance that the USG will grant any exemptions or licenses for any customer, or that the USG will act on them in a timely manner.

The new requirement may have a disproportionate impact on NVIDIA and may disadvantage NVIDIA against our competitors, who are not subject to the same restrictions.

Our outlook for our third fiscal quarter provided on August 24, 2022 included approximately $400 million in potential sales to China which may be subject to the new license requirement.

Our future revenue and profitability may be substantially reduced relative to this outlook, and our competitive position may be harmed, if customers do not want to purchase our alternative product offerings or if the USG does not grant licenses in a timely manner or denies licenses to significant customers.

Even if the USG grants the requested licenses, the new requirement may benefit our competitors, as the licensing process will make our sales and support efforts more cumbersome, less certain, and encourage customers in China to pursue alternatives to our products, including semiconductor suppliers based in China, Europe, and Israel.

As the COVID-19 pandemic continues, most of our employees continue to work remotely and we have paused most business travel.

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

Consumer and enterprise behavior during the COVID-19 pandemic, such as fluctuating demand for our Gaming, Data Center, and workstation products, has made it more difficult for us to estimate future demand and may have changed pre-pandemic behaviors.

At the same time, restrictions that may be imposed or reinstated as the pandemic continues, such as recent lockdown measures due to COVID-19 containment efforts in China, have negatively impacted end customer sales for our products in China and this impact may continue if future lockdowns are imposed.

These challenges in estimating demand are expected to 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.

Additionally, recent COVID-19-related disruptions and lockdowns in China have created and may continue to create supply chain and logistics constraints.

The timing and overall demand from customers, and the limited availability of supply chain, logistical services and component supply, as a result of COVID-19, has had and may continue to have a material net negative impact on our business and financial results.

During the first quarter of fiscal year 2023, we paused direct sales to 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 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.

First Quarter of Fiscal Year 2023 Summary

Long lived assets in Russia are immaterial.

Second Quarter of Fiscal Year 2023 Summary

Three Months Ended

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

July 31, 2022 May 1, 2022 August 1, 2021 Quarter-over-Quarter Change Year-over-Year Change

($ in millions, except per share data)

Revenue $ 6,704 $ 8,288 $ 6,507 (19) % 3 %

Gross margin 65.5 % 65.4 % 64.1 % 10 bps 140 bps

Gross margin 43.5 % 65.5 % 64.8 % (22.0) pts (21.3) pts

Operating expenses $ 2,416 $ 3,563 $ 1,771 (32) % 36 %

6 unchanged sentences

Gaming, Data Center, Professional Visualization, and Automotive.

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.

Revenue for the second quarter of fiscal year 2023 was $6.70 billion, up 3% from a year ago and down 19% sequentially.

Gaming revenue was down 33% from a year ago and down 44% sequentially.

These decreases were primarily attributable to lower sell-in of Gaming products, reflecting reduced channel partner sales due to macroeconomic headwinds.

In addition to reducing sell-in, we implemented pricing programs with channel partners to address challenging market conditions that are expected to persist into the third quarter of fiscal year 2023.

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.

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

As noted last quarter, we had expected cryptocurrency mining to make a diminishing contribution to Gaming demand.

We are unable to accurately quantify the extent to which reduced cryptocurrency mining contributed to the decline in Gaming demand.

Data Center revenue was up 61% from a year ago and up 1% 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.

The year-on-year increase was primarily driven by hyperscale customer revenue, which nearly doubled.

Sequentially, sales to North America hyperscale and cloud computing customers increased, but were more than offset by lower sales to China hyperscale customers affected by economic conditions in China.

Vertical industries grew both sequentially and year-on-year.

Key workloads driving

growth included natural language processing, deep recommenders, autonomous vehicle fleet data processing and training, and cloud graphics.

Professional Visualization revenue was down 4% from a year ago and down 20% sequentially.

The sequential increase in mobile revenue was more than offset by lower desktop revenue, particularly at the high end.

Automotive revenue was up 45% from a year ago and up 59% sequentially.

These increases were driven by revenue from self-driving and AI cockpit solutions, partially offset by a decline of legacy cockpit revenue.

OEM and Other revenue was down 66% from a year ago and down 11% 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.

The sequential decline was driven by lower notebook OEM sales, partially offset by higher Jetson sales.

CMP revenue was nominal in the current and prior quarter, and $266 million a year ago.

Gross margin decreases were primarily due to a $1.34 billion charge, comprised of $1.22 billion for inventory and related reserves and $122 million for warranty reserves.

The $1.22 billion charge for inventory and related reserves is based on revised expectations of future demand, primarily relating to Data Center and Gaming.

The charge consists of approximately $570 million for inventory on hand and approximately $650 million for inventory purchase obligations in excess of our current demand projections, and cancellation and underutilization penalties.

Operating expense includes a $1.35 billion acquisition termination charge related to the Arm transaction in the prior quarter.

Operating expenses were influenced primarily by employee growth costs, as well as increases in salaries to support our employees during this high inflationary environment, and engineering development of new products coming to market.

Cash, cash equivalents and marketable securities were $17.04 billion, down from $19.65 billion a year ago and down from $20.34 billion a quarter ago.

The year-on-year and sequential decreases reflect share repurchases offset by operating cash flow generation.

During the second quarter of fiscal year 2023, we returned $3.44 billion to shareholders in the form of share repurchases and cash dividends.

During the first half of fiscal year 2023, we returned $5.54 billion to shareholders in the form of share repurchases and cash dividends.

We have $11.93 billion remaining under our share repurchase authorization through December 2023.

We plan to continue share repurchases this fiscal year.

Market Platform Highlights

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.

In our Data Center market platform, we announced that NVIDIA Grace superchips are being used to create HGX systems by some of the world’s leading computer makers;

unveiled the NVIDIA Quantum Optimized Device Architecture;

and provided updates for the NeMo Megatron large language model framework.

In our Gaming market platform, we increased the number of GeForce RTX and NVIDIA Studio laptops to 180+ and expanded the GeForce NOW library with 80 additional games bringing the total to over 1,350.

In our Professional Visualization market platform, we expanded our partnership with Siemens to enable the industrial metaverse and increase use of AI-driven digital twin technology and announced Omniverse Avatar Cloud Engine.

In our Automotive market platform, we announced rollout plans of new model vehicles using the DRIVE Orin compute platform by partners NIO, Li Auto, JIDU, and Human Horizons, as well as Pony.ai’s use of DRIVE Orin across its line of self-driving trucks and robotaxis.

Financial Information by Business Segment and Geographic Data

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

Three Months Ended

Three Months Ended Six Months Ended

2022 August 1,

2021 July 31,

2022 August 1,

Revenue 100.0 % 100.0 % 100.0 % 100.0 %

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Other income (expense), net

(0.4) (0.7) (0.6) 0.3

Income before income tax 7.1 36.9 15.2 36.5

Income tax expense 2.3 2.3

Income tax expense (benefit) (2.7) 0.3 — 1.3

Net income 9.8 % 36.6 % 15.2 % 35.2 %

Revenue by Reportable Segments

Three Months Ended

Three Months Ended Six Months Ended

2022 August 1,

Change July 31,

2022 August 1,

($ in millions)

2 unchanged sentences

Total $ 6,704 $ 6,507 $ 197 3 % $ 14,992 $ 12,168 $ 2,824 23 %

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.

Graphics - The year over year decrease was primarily attributable to lower sell-in of desktop Gaming and Professional Visualization products in the second quarter of fiscal year 2023 reflecting reduced channel partner sales due to macroeconomic headwinds.

In addition to reducing sell-in, we implemented pricing programs in Gaming with channel partners to address challenging market conditions that are expected to persist into the third quarter of fiscal year 2023.

Revenue on a year-to-date basis was essentially flat as the declines in sales of GeForce GPUs for desktops and SOCs for game consoles were offset by increases in sales of GeForce GPUs for laptops and Professional Visualization products.

Compute & Networking - The year-on-year increases were primarily driven by hyperscale customer revenue, which nearly doubled.

Vertical industries grew year-on-year.

Key workloads driving growth included natural language processing, deep recommenders, autonomous vehicle fleet data processing and training, and cloud graphics.

CMP contributed an insignificant amount in the second quarter and first half of fiscal year 2023 compared to $266 million in second quarter and $421 million in the first half of fiscal year 2022.

Concentration of Revenue

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 from sales to customers outside of the United States accounted for 70% and 74% of total revenue for the second quarter and first half of fiscal year 2023, respectively, and 85% and 86% of total revenue for the second quarter and first half of fiscal year 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 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.

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

Data Center revenue included $287 million for orders originally scheduled for delivery primarily in the third quarter that were converted to second-quarter delivery with extended payment terms, while a number of second-quarter orders will be fulfilled in the third quarter given supply chain disruptions.

These second quarter of fiscal year 2023 revenue transactions were recognized under our pre-established revenue recognition policy that includes extended payment terms conditions.

Our overall gross margin decreased to 43.5% and 55.7% for the second quarter and first half of fiscal year 2023, respectively, from 64.8% and 64.5% for the second quarter and first half of fiscal year 2022, respectively.

These decreases were primarily due to a $1.34 billion charge in the second quarter of fiscal year 2023, comprised of $1.22 billion for inventory and related reserves, primarily relating to Data Center and Gaming, and $122 million for warranty reserves.

The inventory and related reserves consist of approximately $570 million for inventory on hand and approximately $650 million for inventory purchase obligations in excess of our current demand projections, and cancellation and underutilization penalties.

The warranty reserve is primarily due to a defect that was identified in a third-party component embedded in certain Data Center products.

Inventory provisions totaled $1.22 billion and $73 million for the second quarter of fiscal years 2023 and 2022, respectively.

Sales of inventory that was previously written-off or down totaled $23 million and $20 million for the second quarter of fiscal years 2023 and 2022, respectively.

As a result, the overall net effect on our gross margin was an unfavorable impact of 17.8% and 0.8% in the second quarter of fiscal years 2023 and 2022, respectively.

Inventory provisions totaled $1.31 billion and $131 million for the first half of fiscal years 2023 and 2022, respectively.

Sales of inventory that was previously written-off or down totaled $38 million and $41 million for the first half of fiscal years 2023 and 2022, respectively.

As a result, the overall net effect on our gross margin was an unfavorable impact of 8.5% and 0.7% in the first half of fiscal years 2023 and 2022, respectively.

Graphics - The gross margin of our Graphics segment decreased during the second quarter and first half of fiscal year 2023 compared to the second quarter and first half of fiscal year 2022, primarily due to inventory and related reserves.

In addition, we implemented pricing programs with Gaming channel partners to address challenging market conditions, which reduced gross margin.

Compute & Networking - The gross margin of our Compute & Networking segment decreased during the second quarter and first half of fiscal year 2023 compared to the second quarter and first half of fiscal year 2022, primarily due to inventory related and warranty reserves.

Operating Expenses

Three Months Ended

Three Months Ended Six Months Ended

2022 August 1,

Change July 31,

2022 August 1,

($ in millions)

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Total operating expenses $ 2,416 $ 1,771 $ 645 36 % $ 5,979 $ 3,444 $ 2,535 74 %

Research and Development

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 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

Research and development expenses increases were primarily driven by compensation-related costs, including for employee growth as well as increases in salaries to support our employees during this high inflationary environment and stock-based compensation, and engineering development costs of new products coming to market.

Sales, general and administrative expenses increases were primarily driven by compensation-related costs, including for employee growth as well as increases in salaries to support our employees during this high inflationary environment and stock-based compensation, and infrastructure costs partially offset by lower legal fees.

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

Three Months Ended Six Months Ended

2022 August 1,

Change July 31,

2022 August 1,

($ in millions)

Interest income $ 46 $ 6 $ 40 667 % $ 64 $ 13 $ 51 392 %

Interest expense (65) (60) (5) 8 % (132) (113) (19) 17 %

Other, net (5) 4 (9) (225) % (19) 138 (157) (114) %

Total $ (24) $ (50) $ 26 (52) % $ (87) $ 38 $ (125) (329) %

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

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.

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

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 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.

Changes in other, net, compared to the second quarter and first half of fiscal year 2022 were primarily driven by mark-to-market impact from publicly traded 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 $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.

We recognized an income tax benefit of $181 million and an income tax expense of $6 million for the second quarter and first half of fiscal year 2023, respectively, and an income tax expense of $20 million and $153 million for the second quarter and first half of fiscal year 2022, respectively.

Income tax as a percentage of income before income tax was a benefit of 38.0% for the second quarter of fiscal year 2023, and an expense of 0.3% for the first half of fiscal year 2023, and an expense of 0.9% and 3.4% for the second quarter and first half of fiscal year 2022, respectively.

The decrease in our effective tax rate for the second quarter and first half of fiscal year 2023 as compared to the same periods of fiscal year 2022 was primarily due to the increased tax benefit of stock-based compensation, the foreign-derived intangible income deduction, and the U.S.

federal research tax credit, relative to a reduction in expected profitability.

This is partially offset by the impact of an increase in the proportion of earnings subject to U.S.

tax in fiscal year 2023 and the one-time discrete benefit from re-valuing certain deferred tax assets in connection with the Domestication in fiscal year 2022.

Liquidity and Capital Resources

May 1, 2022 January 30, 2022

July 31, 2022 January 30, 2022

(In millions)

2 unchanged sentences

Cash, cash equivalents and marketable securities $ 17,037 $ 21,208

Three Months Ended

May 1, 2022 May 2, 2021

Six Months Ended

July 31, 2022 August 1, 2021

(In millions)

1 unchanged sentence

Net cash provided by (used in) investing activities $ 4,230 $ (3,805)

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.

Net cash provided by (used in) financing activities $ (6,208) $ 4,030

As of July 31, 2022, we had $17.04 billion in cash, cash equivalents and marketable securities, a decrease of $4.17 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 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.

Cash provided by operating activities decreased in the first half of fiscal year 2023 compared to the first half of fiscal year 2022, primarily due to advance payments on supply agreements, tax payments, and a decrease in net income adjusted for certain non-cash items, such as the Arm acquisition termination cost of $1.35 billion, partially offset by changes in working capital.

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

Cash used in financing activities decreased in the first half of fiscal year 2023 compared to the first half of fiscal year 2022, which primarily reflects share repurchases and the absence of debt issuance in the first half 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 May 1, 2022, we had $20.34 billion in cash, cash equivalents, and marketable securities.

As of July 31, 2022, we had $17.04 billion in cash, cash equivalents, and marketable securities.

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

2 unchanged sentences

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 twelve months, and for the foreseeable future, including our future supply obligations and additional 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.

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

For fiscal year 2023, we expect to use our existing cash and cash equivalents, our marketable securities, and the cash generated by our operations to fund our capital investments of approximately $1.80 billion to $2.00 billion related to property and equipment.

We have approximately $1.38 billion of cash, cash equivalents, and marketable securities held outside the U.S.

1 unchanged sentence

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

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

as of July 31, 2022 are available for use in the U.S.

without incurring additional U.S.

1 unchanged sentence

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.

federal research tax credits during fiscal year 2022, which has resulted 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.

1 unchanged sentence

Capital Return to Shareholders

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.

During the second quarter and first half of fiscal year 2023, we returned $3.35 billion and $5.34 billion, respectively, in share repurchases and $100 million and $200 million, respectively, in 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 are in the best interests of our shareholders.

Outstanding Indebtedness and Commercial Paper

As of May 1, 2022, we had outstanding:

As of July 31, 2022, we had outstanding:

• $1.25 billion of Notes Due 2023;

8 unchanged sentences

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

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

As of July 31, 2022, we had not issued any commercial paper.

Contractual Obligations

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 have unrecognized tax benefits of $834 million, which includes related interest and penalties of $72 million recorded in non-current income tax payable as of July 31, 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.

7 unchanged sentences

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

1 unchanged sentence

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