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Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-03-18 · 179 added, 200 removed, 132 unchanged (74% of the section changed)

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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, AV, robotics, AR and VR.

Our two operating segments are "Graphics" and "Compute & Networking." Refer to Note 17 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information.

Our two operating segments are "Compute & Networking" and "Graphics." Refer to Note 17 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information.

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

Recent Developments, Future Objectives and Challenges

Supply, Products Transitions, and New Products and Business Models

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

At the end of fiscal year 2023, purchase obligations and prepaid supply agreements represented more than half of our total supply.

Inventory provisions for excess inventory and purchase obligations totaled $2.17 billion in fiscal year 2023.

We may incur inventory provisions if our inventory or supply commitments are misaligned with demand for our products.

Product transitions are complex as we often ship both new and legacy architecture products simultaneously and we and our channel partners prepare to ship and support new products.

We are currently transitioning the architecture of our Data Center, Professional Visualization, and Gaming products.

Qualification time for new products, customers anticipating product transitions and channel partners reducing channel inventory of legacy architectures ahead of new product introductions can create reductions or volatility in our revenue.

While we have managed prior product transitions and have previously sold multiple product architectures at the same time, these transitions are difficult and prior trends may not continue.

We build technology and products for use cases and applications that may be new or may not yet exist.

Examples include our Omniverse platform and third-party large language models and generative models.

Our demand estimates for these use cases and applications can be incorrect and create volatility in our revenue or supply levels, and we may not be able to generate any revenue from these use cases and applications.

NVIDIA AI Cloud Service Offerings

We will offer enterprise customers NVIDIA AI cloud services directly and through our network of partners.

Examples of these services include NVIDIA DGX Cloud, which is cloud-based infrastructure and software for training AI models, and customizable pretrained AI models.

NVIDIA has partnered with leading cloud service providers to host these services in their data centers.

We entered into multi-year cloud service agreements in the second half of fiscal year 2023 to these offerings and our research and development activities.

NVIDIA AI cloud services may not be successful and will take time, resources and investment.

We also offer or plan to offer standalone software solutions for AI including NVIDIA AI Enterprise, NVIDIA Omniverse, NVIDIA DRIVE for automotive, and several other software solutions.

These new business models or strategies may not be successful and we may fail to sell any meaningful standalone software or as-a-service solutions.

We may incur significant costs and may not achieve any significant revenue from these offerings.

During the third quarter of fiscal year 2023, the USG announced new license requirements that, with certain exceptions, impact exports to China (including Hong Kong and Macau) and Russia of our A100 and H100 integrated circuits, DGX or any other systems or boards which incorporate A100 or H100 integrated circuits and our A100X.

We are required to transition certain operations out of China (including Hong Kong), including research and development and supply and distribution operations.

We have engaged with customers in China to provide alternative products not subject to the new license requirements, such as our new A800 offering.

Management of these new license and other requirements is complicated and time consuming.

Our results and competitive position may be harmed if customers in China do not want to purchase our alternative product offerings, if customers purchase product from competitors, or if customers develop their own internal solution, if the USG does not grant licenses in a timely manner or denies licenses to significant customers, or if we incur significant transition costs.

During fiscal year 2023, we reopened our offices worldwide.

We incurred incremental expenses and related in-office costs as we ramped onsite services.

Restrictions may be imposed or reinstated as the pandemic resurfaces, such as lockdown measures due to COVID-19 containment efforts in China.

During fiscal year 2023, end customer sales for our products in China have been negatively impacted by lockdowns and this impact may continue if lockdowns return.

COVID-19-related disruptions have created and may continue to create supply chain and logistics constraints.

Challenges in estimating demand could become more pronounced or volatile in the future on both a global and regional basis.

In fiscal year 2023, we stopped direct sales to Russia and later in the year, we closed business operations in Russia.

Direct sales to Russia in fiscal year 2022 were immaterial.

Our revenue to partners that sell into Russia may have been negatively impacted due to the war in Ukraine.

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 intend to record in operating expenses a $1.36 billion charge 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, 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 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, and new cryptocurrency standards can impact and have impacted in the past 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 LHR GeForce GPUs with limited Ethereum mining capability and increased the supply of CMP in an effort to address demand from gamers and direct miners to CMP.

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

If attempts in the aftermarket to improve the hash rate capabilities of our LHR cards are successful, our gaming cards may become more attractive to miners, and therefore limit our ability to supply our 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, and these challenges may be more pronounced or volatile in the future on both a global and regional basis.

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 to be 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.

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.

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

We expect to remain supply-constrained into the first half of fiscal year 2023, primarily in Gaming and Networking.

We have placed non-cancellable inventory 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.

Ordering product in advance of our historical 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.

Given our current long lead times, we may order components before our product design is finalized and changes to the product design or end demand 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 2022.

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

During 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.

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

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, the availability of supply chain, logistical services and component supply, and the impact of rising inflation 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.

In February 2022, NVIDIA and SoftBank announced the termination of the Share Purchase Agreement whereby NVIDIA would have acquired Arm from SoftBank due to significant regulatory challenges preventing the completion of the transaction.

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

Fiscal Year 2023 Summary

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($ in millions, except per share data)

Revenue $ 26,914 $ 16,675 Up 61%

Gross margin 64.9 % 62.3 % Up 260 bps

Revenue $ 26,974 $ 26,914 — %

Gross margin 56.9 % 64.9 % Down 8.0 pts

Operating expenses $ 11,132 $ 7,434 Up 50%

Income from operations $ 10,041 $ 4,532 Up 122%

Net income $ 9,752 $ 4,332 Up 125%

Net income per diluted share $ 3.85 $ 1.73 Up 123%

Income from operations $ 4,224 $ 10,041 Down 58%

Net income $ 4,368 $ 9,752 Down 55%

Net income per diluted share $ 1.74 $ 3.85 Down 55%

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

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

Gaming, Data Center, Professional Visualization, and Automotive.

Revenue for fiscal year 2022 was $26.91 billion, up 61% from a year ago.

Gaming revenue was up 61% from a year ago reflecting higher sales of GeForce GPUs.

We continue to benefit from strong demand for NVIDIA Ampere architecture products, and believe the increase in Gaming revenue during fiscal year 2022 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.

Although nearly all desktop NVIDIA Ampere architecture GeForce GPU shipments are LHR to help direct GeForce GPUs to gamers, our GPUs are capable of cryptocurrency mining.

Gamers and others are therefore able to mine cryptocurrency using our GPUs, although we have limited visibility into how much this impacts our overall GPU demand.

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

We are unable to estimate with any degree of precision the impact this volatility is likely to have in the future.

Data Center revenue was up 58% from a year ago primarily driven by sales of NVIDIA Ampere architecture GPUs across both training and inference for cloud computing and AI workloads such as natural language processing and deep recommender models.

Professional Visualization revenue was up 100% from a year ago driven by the ramp of NVIDIA Ampere architecture products and strong demand for workstations as enterprises support hybrid work environments, as well as growth in workloads such as 3D design, AI and rendering.

Automotive revenue was up 6% from a year ago due to self-driving and AI cockpit solutions offset by a decline in legacy cockpit revenue.

OEM and Other revenue was up 84% from a year ago primarily driven by CMP sales.

CMP revenue was $550 million for the fiscal year and was nominal in the prior year.

Revenue for our CMP products declined significantly in the fourth quarter of fiscal year 2022.

We are unable to estimate with any degree of precision the impact that volatility in the cryptocurrency market, as discussed above, is likely to have on future CMP sales.

Gross margin for fiscal year 2022 was up 260 basis points from a year ago driven by lower Mellanox acquisition-related charges, including a non-recurring inventory step-up charge of $161 million in fiscal year 2021.

Margins also benefited from a higher-end mix within Gaming, partially offset by a mix shift within Data Center.

Operating expenses for fiscal year 2022 were up 27% from a year ago primarily driven by stock-based compensation, compensation-related costs associated with employee growth and higher infrastructure costs.

Income from operations was $10.04 billion, up 122% from a year ago.

Net income and net income per diluted share were $9.75 billion and $3.85, up 125% and 123%, respectively, from a year ago.

Cash, cash equivalents and marketable securities were $21.21 billion, up from $11.56 billion a year earlier.

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

We paid $399 million in quarterly cash dividends in fiscal year 2022.

Data Center, Gaming, Professional Visualization, and Automotive.

Revenue for fiscal year 2023 revenue was $26.97 billion, flat compared with a year ago.

Data Center revenue was up 41% from a year ago led by strong growth from hyperscale customers and also reflects purchases made by several CSP partners to support multi-year cloud service agreements for our new NVIDIA AI cloud service offerings and our research and development activities.

Gaming revenue was down 27% from a year ago reflecting lower sell-in to partners to help reduce channel inventory levels as global macro-economic conditions and COVID-19 related disruptions in China weighed on gaming demand.

Professional Visualization revenue was down 27% from a year ago reflecting a lower sell-in to partners to help reduce channel inventory levels.

Automotive revenue was up 60% from a year ago reflecting growth in sales of self-driving solutions, computing solutions for electric vehicle makers and strength in sales of AI cockpit solutions.

The increase also included growth in automotive development arrangements.

OEM and Other revenue was down 61% from a year ago driven by notebook OEM and CMP.

CMP revenue was nominal in fiscal year 2023 and $550 million in fiscal year 2022.

Gross margin for fiscal year 2023 declined from a year ago, driven by $2.17 billion of inventory charges largely relating to excess supply of NVIDIA Ampere architecture Gaming and Data Center products as compared to the demand expectations for these products, particularly for the expected demand in China.

The inventory charges were comprised of $1.04 billion for inventory on hand and $1.13 billion for inventory purchase obligations in excess of our demand expectations.

Operating expenses, which included a $1.35 billion acquisition termination charge related to the Arm transaction, were up 50% from a year ago.

The increase also reflected compensation, data center infrastructure, and engineering development costs.

Cash, cash equivalents and marketable securities were $13.30 billion.

During fiscal year 2023, we returned $10.44 billion to shareholders in the form of share repurchases and cash dividends.

As of the end of fiscal year 2023, we had $7.23 billion remaining under our share repurchase authorization through December 2023.

Market Platform Highlights

At our November 2021 GPU Technology 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;

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

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

In our Gaming platform during fiscal year 2022, we further expanded our desktop and laptop GeForce RTX 30 Series GPU line-ups;

expanded the RTX ecosystem of games and applications to over 240;

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

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

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

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

unveiled NVIDIA Grace, our first Arm-based data center CPU;

launched the NVIDIA AI Enterprise software suite;

unveiled the NVIDIA Base Command and Fleet Command AI software offerings;

and announced plans to build Earth-2, an AI supercomputer dedicated to addressing the global climate change crisis.

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

and launched NVIDIA Omniverse Enterprise for collaborative 3D design, digital twins and virtual worlds and NVIDIA Omniverse for Creators.

In our Automotive platform, we unveiled the NVIDIA DRIVE Atlan next-generation SOC;

announced design wins with Mercedes-Benz for the AI cockpit in its new EQS sedan;

with Volvo Cars for the autonomous driving computer in its next-generation cars, beginning with the XC90 in 2022;

with energy vehicles from R-Auto, IM Motors, NIO, Faraday Future, VinFast and Xpeng;

with robotaxis including Cruise, Amazon Zoox, Pony.ai and AutoX;

with autonomous trucking companies Embark, Kodiak Robotics and Plus;

formed a multi-year partnership with Jaguar Land Rover to jointly develop and deliver next-generation automated driving systems, plus AI-enabled services and experiences;

and announced that Desay, Flex, Quanta, Valeo and ZF are using the NVIDIA DRIVE Hyperion platform to manufacture safe and secure AV systems for vehicle makers.

Data Center revenue for fiscal year 2023 was $15.01 billion, up 41% from fiscal year 2022.

The strong growth in Data Center revenue was influenced by hyperscaler and cloud usage of our accelerated computing platforms and networking portfolio.

In Data Center, we announced the NVIDIA Hopper GPU architecture and began ramping the first products based on the architecture, including the NVIDIA H100 Tensor Core GPU.

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

We completed two new large language models for cloud AI services — NVIDIA NeMo LLM and NVIDIA BioNeMo LLM.

Additionally, we announced the NVIDIA Spectrum-4 end-to-end 400Gbps networking platform and began shipping Quantum-2 in December 2022.

Gaming revenue for fiscal year 2023 was $9.07 billion, down 27% from fiscal year 2022.

Gaming results were influenced by the rapid change in economic conditions causing excess inventory with our channel partners.

We introduced pricing programs for our channel partners and started undershipping GPU supply to the partners so that we could lower inventory in the channel.

As we exited fiscal year 2023, we have made meaningful progress in establishing lower inventory levels with our channel partners.

In Gaming, we announced the new Ada Lovelace GPU architecture, and introduced the first products based on Ada, including the GeForce RTX 4090, RTX 4080, and RTX 4070 Ti desktop GPUs and laptop GPUs featured in over 170 laptop designs.

We introduced NVIDIA DLSS 3 for over 50 games and applications.

We brought GeForce RTX 4080-class performance to the GeForce NOW Ultimate membership tier.

Professional Visualization revenue for fiscal year 2023 was $1.54 billion, down 27% from fiscal year 2022.

Professional Visualization results were influenced by the rapid change in economic conditions causing excess inventory with our OEM partners.

In Professional Visualization, we added new NVIDIA Ampere architecture RTX GPUs for workstations.

We also announced Omniverse Avatar Cloud Engine and Omniverse Cloud and released a major update to NVIDIA Omniverse Enterprise.

Automotive revenue for fiscal year 2023 grew 60% compared to fiscal year 2022 to $903 million.

In Automotive, we started production of the NVIDIA DRIVE Orin autonomous vehicle SOC and introduced next-generation NVIDIA DRIVE Thor.

Critical Accounting Policies and Estimates

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

On an on-going basis, we evaluate our estimates, including those related to inventories, revenue recognition, income taxes, and goodwill.

On an on-going basis, we evaluate our estimates, including those related to inventories, revenue recognition, and income taxes.

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

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Inventory cost is computed on an adjusted standard basis, which approximates actual cost on an average or first-in, first-out basis.

We charge cost of sales for inventory provisions to write-down our inventory to the lower of cost or net realizable value or for obsolete or excess inventory.

Most of our inventory provisions relate to excess quantities of products or components, based on our inventory levels and future product purchase commitments compared to assumptions about future demand and market conditions.

Situations that may result in excess or obsolete inventory include changes in business and economic conditions, changes in market conditions, sudden and significant decreases in demand for our products, inventory obsolescence because of changing technology and customer requirements, new product introductions resulting in less demand for existing products or inconsistent spikes in demand due to unexpected end use cases, failure to estimate customer demand properly, ordering in advance of historical lead-times and the impact of changes in future demand, or increase in demand for competitive products, including competitive actions.

We charge cost of sales for inventory provisions to write-down our inventory to the lower of cost or net realizable value or for obsolete or excess inventory, and for excess product purchase commitments.

Situations that may result in excess or obsolete inventory or excess product purchase commitments include changes in business and economic conditions, changes in market conditions, sudden and significant decreases in demand for our products, inventory obsolescence because of changing technology and customer requirements, new product introductions resulting in less demand for existing products or inconsistent spikes in demand due to unexpected end use cases, failure to estimate customer demand properly, ordering in advance of historical lead-times and the impact of changes in future demand, or increase in demand for competitive products, including competitive actions.

Cancellation or deferral of customer purchase orders could result in our holding excess inventory.

The overall net effect on our gross margin from inventory provisions and sales of items previously written down was an unfavorable impact of 0.9% in fiscal year 2022 and insignificant in fiscal year 2021.

The overall net effect on our gross margin from inventory provisions and sales of items previously written down was an unfavorable impact of 7.5% in fiscal year 2023 and 0.9% in fiscal year 2022.

As a fabless semiconductor company, we must make commitments to purchase inventory based on forecasts of future customer demand.

In doing so, we must account for our third-party manufacturers' lead times and constraints.

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

We place non-cancellable inventory orders for certain products in advance of our historical lead times, pay premiums and provide deposits to secure future supply and capacity.

In the past, our manufacturing lead times have been long, and in some cases, extended beyond twelve months for some products.

We place non-cancellable inventory orders for certain product components in advance of our historical lead times, pay premiums and provide deposits to secure future supply and capacity.

We also adjust to other market factors, such as product offerings and pricing actions by our competitors, new product transitions, and macroeconomic conditions - all of which may impact demand for our products.

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(3) determination of the transaction price;

(4) allocation of the transaction price to the performance obligations in the contract (where revenue is

allocated on a relative standalone selling price basis by maximizing the use of observable inputs to determine the standalone selling price for each performance obligation);

(4) allocation of the transaction price to the performance obligations in the contract (where revenue is allocated on a relative standalone selling

price basis by maximizing the use of observable inputs to determine the standalone selling price for each performance obligation);

and (5) recognition of revenue when, or as, we satisfy a performance obligation.

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If we determine that payment of these amounts is unnecessary or if the recorded tax liability is less than our current assessment, we may be required to recognize an income tax benefit or additional income tax expense in our financial statements accordingly.

As of January 30, 2022, we had a valuation allowance of $907 million related to state and certain other deferred tax assets that management determined are not likely to be realized due to jurisdictional projections of future taxable income, tax attributes usage limitation by certain jurisdictions, and potential utilization limitations of tax attributes acquired as a result of stock ownership changes.

To the extent realization of the deferred tax assets becomes more-likely-than-not, we would recognize such deferred tax assets as an income tax benefit during the period.

As of the end of fiscal years 2023 and 2022, we had a valuation allowance of $1.48 billion and $907 million, respectively, related to capital loss carryforwards, state, and certain other deferred tax assets that management determined not likely to be realized due, in part, to jurisdictional projections of future taxable income, including capital gains.

To the extent realization of the deferred tax assets becomes more-likely-than-not, we would recognize such deferred tax assets as income tax benefits during the period.

We recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position.

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Refer to Note 14 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information.

Goodwill is subject to our annual impairment test during the fourth quarter of our fiscal year, or earlier, if indicators of potential impairment exist, using either a qualitative or a quantitative assessment.

Our impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value.

As of January 30, 2022, the total carrying amount of goodwill was $4.35 billion and the amount of goodwill allocated to our Graphics and Compute & Networking reporting units was $361 million and $3.99 billion, respectively.

Determining the fair value of a reporting unit requires us to make judgments and involves the use of significant estimates and assumptions.

We also make judgments and assumptions in allocating assets and liabilities to each of our reporting units.

We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain.

We performed our annual goodwill assessment during the fourth quarter of fiscal year 2022 using a qualitative assessment and concluded there was no goodwill impairment.

Refer to Note 6 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information.

Change in Accounting Estimate

In February 2023, we completed an assessment of the useful lives of our property, plant, and equipment.

Based on advances in technology and usage rate, we increased the estimated useful life of a majority of the server, storage, and network equipment from three years to a range of four to five years, and assembly and test equipment from five years to seven years.

This change in accounting estimate became effective at the beginning of fiscal year 2024.

Based on the carrying amounts of a majority of our server, storage, network, and assembly and test equipment, net in use as of the end of fiscal year 2023, it is estimated this change will increase our fiscal year 2024 operating income by $133 million as a result of the reduction in depreciation expense.

Results of Operations

A discussion regarding our financial condition and results of operations for fiscal year 2023 compared to fiscal year 2022 is presented below.

A discussion regarding our financial condition and results of operations for fiscal year 2021 compared to fiscal year 2020 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021, filed with the SEC on February 26, 2021, which is available free of charge on the SEC’s website at http://www.sec.gov and at our investor relations website, http://investor.nvidia.com.

A discussion regarding our financial condition and results of operations for fiscal year 2022 compared to fiscal year 2021 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended January 30, 2022, filed with the SEC on March 18, 2022, which is available free of charge on the SEC’s website at http://www.sec.gov and at our investor relations website, http://investor.nvidia.com.

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

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Sales, general and administrative 9.1 8.0

Acquisition termination cost 5.0 —

Total operating expenses 41.3 27.6

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Other income (expense), net (0.1) (0.4)

Income before income tax expense 36.9 26.5

Income tax expense 0.7 0.5

Income before income tax 15.5 36.9

Income tax expense (benefit) (0.7) 0.7

Net income 16.2 % 36.2 %

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($ in millions)

Graphics $ 15,868 $ 9,834 $ 6,034 61 %

Compute & Networking $ 15,068 $ 11,046 $ 4,022 36 %

Graphics 11,906 15,868 (3,962) (25) %

Total $ 26,974 $ 26,914 $ 60 — %

Graphics - Graphics segment revenue increased by 61% in fiscal year 2022 compared to fiscal year 2021.

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 61% in fiscal year 2022 compared to fiscal year 2021, 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 compared to fiscal year 2021 also reflects the strong sales of networking products and that fiscal year 2022 includes a full year of networking revenue as Mellanox was acquired in April 2020.

CMP contributed $550 million in fiscal year 2022 compared to an insignificant amount in the prior year.

Compute & Networking - The year-on-year increase was led by growth from hyperscale customers and also reflects purchases made by several CSP partners to support multi-year cloud service agreements for our new NVIDIA AI cloud service offerings and our research and development activities.

The increase was also related to the growth in Automotive.

CMP contributed an insignificant amount in fiscal year 2023 compared to $550 million in fiscal year 2022.

Graphics - The year-on-year decrease primarily reflects lower sell-in to partners to help reduce channel inventory levels as global macro-economic conditions and COVID-19 related disruptions in China weighed on gaming demand.

Concentration of Revenue

Revenue from sales to customers outside of the United States accounted for 69% and 84% of total revenue for 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.

The decline in revenue outside the U.S.

was primarily driven by China and Taiwan related to Data Center and Gaming.

Revenue by geographic region is allocated to countries based on the billed location even if the revenue may be attributable to end customers in a different location.

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

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Cost of revenue consists primarily of the cost of semiconductors, including wafer fabrication, assembly, testing and packaging, board and device costs, manufacturing support costs, including labor and overhead associated with such purchases, final test yield fallout, inventory and warranty provisions, memory and component costs, tariffs, and shipping costs.

Cost of revenue also includes acquisition-related costs, development costs for license and service arrangements, IP-related costs, and stock-based compensation related to personnel associated with manufacturing.

Our overall gross margin was 64.9% and 62.3% for fiscal years 2022 and 2021, respectively.

The increase in fiscal year 2022 was primarily due to lower Mellanox acquisition-related charges, including a non-recurring inventory step-up charge of $161 million in fiscal year 2021.

The increase also benefited from a higher-end mix within Graphics, partially offset by a mix shift within Compute & Networking.

Inventory provisions totaled $354 million and $116 million for fiscal years 2022 and 2021, respectively.

Sales of inventory that was previously written-off or written-down totaled $111 million and $145 million for fiscal years 2022 and 2021, respectively.

As a result, the overall net effect on our gross margin was an unfavorable impact of 0.9% in fiscal year 2022 and insignificant in fiscal year 2021.

The gross margin of our Graphics segment increased during fiscal year 2022 when compared to fiscal year 2021, primarily due to higher-end mix within GeForce GPUs.

The gross margin of our Compute & Networking segment decreased during fiscal year 2022 when compared to fiscal year 2021, primarily due to a shift in product mix and partially offset by a reduced contribution from Automotive solutions.

Gross margin was 56.9% and 64.9% for fiscal years 2023 and 2022, respectively.

The decrease in fiscal year 2023 was primarily due to $2.17 billion of inventory provisions in fiscal year 2023, which consists of approximately $1.04 billion for inventory on hand and approximately $1.13 billion for inventory purchase obligations in excess of our current demand projections.

Inventory provisions totaled $2.17 billion and $354 million for fiscal years 2023 and 2022, respectively.

Sales of inventory that was previously written-off totaled $137 million and $111 million for fiscal years 2023 and 2022, respectively.

As a result, the overall net effect on our gross margin was an unfavorable impact of 7.5% and 0.9% in fiscal years 2023 and 2022, respectively.

Compute & Networking - The gross margin of our Compute & Networking segment decreased during fiscal year 2023 when compared to fiscal year 2022, primarily due to inventory provisions.

Graphics - The gross margin of our Graphics segment decreased during fiscal year 2023 when compared to fiscal year 2022, primarily due to inventory and related provisions and lower margins of GeForce GPUs.

Operating Expenses

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Research and development expenses $ 7,339 $ 5,268 $ 2,071 39 %

% of net revenue 19.6 % 23.5 %

% of revenue 27.2 % 19.6 %

Sales, general and administrative expenses 2,440 2,166 274 13 %

% of net revenue 8.0 % 11.6 %

% of revenue 9.1 % 8.0 %

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

% of revenue 5.0 % — %

Total operating expenses $ 11,132 $ 7,434 $ 3,698 50 %

Research and Development

Research and development expenses increased by 34% in fiscal year 2022 compared to fiscal year 2021, primarily driven by stock-based compensation, compensation-related costs associated with employee growth and higher infrastructure costs.

Sales, General and Administrative

Sales, general and administrative expenses increased by 12% in fiscal year 2022 compared to fiscal year 2021, primarily driven by stock-based compensation, compensation-related costs associated with employee growth, partially offset by lower amortization of intangibles.

% of revenue 41.3 % 27.6 %

The increase in research and development expense for fiscal year 2023 was primarily driven by increased compensation, employee growth, engineering development costs, and data center infrastructure.

The increase in sales, general and administrative expense for fiscal year 2023 was primarily driven by increased compensation and employee growth.

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

Other Income (Expense), Net

2023 January 30,

($ in millions)

Interest income $ 267 $ 29 $ 238 821 %

Interest expense (262) (236) (26) 11 %

Other, net (48) 107 (155) (145) %

Other income (expense), net $ (43) $ (100) $ 57 (57) %

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

Interest income was $29 million and $57 million in fiscal years 2022 and 2021, respectively.

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

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

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

Interest expense was $236 million and $184 million in fiscal years 2022 and 2021, respectively.

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

The increase in expense reflects interest on the $5.00 billion debt offering 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 $107 million during fiscal year 2022 and not significant during fiscal year 2021.

The increase was primarily due to unrealized gains from our investments in non-affiliated entities.

Change in other, net, compared to fiscal year 2022 was primarily driven by mark-to-market losses from publicly traded equity investments and changes in value from our non-affiliated private investments.

Refer to Note 8 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information regarding our investments in non-affiliated entities.

We recognized income tax expense of $189 million and $77 million for fiscal years 2022 and 2021, respectively.

Our annual effective tax rate was 1.9% and 1.7% for fiscal years 2022 and 2021, respectively.

The increase in our effective tax rate in fiscal year 2022 as compared to 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 the U.S.

federal research tax credit, partially offset by the benefit of the foreign-derived intangible income deduction, and the discrete benefit of the domestication of a foreign subsidiary, or the Domestication.

We recognized income tax benefit of $187 million for fiscal year 2023 and income tax expense of $189 million for fiscal year 2022.

Income tax as a percentage of income before income tax was a benefit of 4.5% for fiscal year 2023 and an expense of 1.9% for fiscal year 2022.

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

The fiscal year 2023 effective tax rate includes the mandatory capitalization and amortization of research and development expenses beginning in fiscal year 2023, which resulted in a greater FDII deduction and significantly increased current taxes, with a corresponding deferred tax benefit at the relevant statutory tax rate.

The decrease in our effective tax rate in fiscal year 2023 as compared to fiscal year 2022 was primarily due to increased tax benefits of the FDII deduction, stock-based compensation, and the U.S.

federal research tax credit, relative to lower 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 benefits of the domestication of a foreign subsidiary in fiscal year 2022, or the Domestication.

Our effective tax rate for fiscal year 2023 was lower than the U.S.

federal statutory rate of 21% due to tax benefits from the foreign-derived intangible income deduction, income earned in jurisdictions, including the British Virgin Islands and Israel, that are subject to taxes lower than the U.S.

federal statutory rate of 21% due primarily to tax benefits from the FDII deduction, tax benefits related to stock-based compensation and the U.S.

federal research tax credit.

Our effective tax rate for fiscal year 2022 was lower than the U.S.

federal statutory rate of 21% due to tax benefits from the FDII deduction, income earned in jurisdictions that are subject to taxes lower than the U.S.

federal statutory tax rate, excess tax benefits related to stock-based compensation, recognition of U.S.

federal research tax credit and the one-time benefits of the Domestication.

Our effective tax rate for fiscal year 2021 was lower than the U.S.

federal statutory rate of 21% due primarily to income earned in jurisdictions, including the British Virgin Islands, Israel, and Hong Kong, where the tax rate was lower than the U.S.

federal statutory tax rate, recognition of U.S.

federal research tax credits, and excess tax benefits related to stock-based compensation.

Refer to Note 14 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information, including the Domestication.

Refer to Note 14 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information.

Liquidity and Capital Resources

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Net cash provided by (used in) investing activities $ 7,375 $ (9,830)

Net cash provided by financing activities $ 1,865 $ 3,804

As of January 30, 2022, we had $21.21 billion in cash, cash equivalents and marketable securities, an increase of $9.65 billion from the end of fiscal year 2021.

Net cash provided by (used in) financing activities $ (11,617) $ 1,865

As of January 29, 2023, we had $13.30 billion in cash, cash equivalents and marketable securities, a decrease of $7.91 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 fiscal year 2022 compared to 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 $1.87 billion for long-term supply agreements and increases in trade receivables due to higher revenue.

Cash used in investing activities decreased in fiscal year 2022 compared to cash provided in fiscal year 2021, reflecting lower payments in acquiring businesses as compared to the acquisition of Mellanox in 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 fiscal year 2022 compared to cash provided in fiscal year 2021, which primarily reflects a debt repayment in the fiscal year 2022 and higher tax payments on restricted stock units.

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

As of January 30, 2022, we had $21.21 billion in cash, cash equivalents and marketable securities.

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.

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.

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

Changes in working capital were primarily driven by lower accounts receivable due to strong collections partially offset by timing of supplier payments and inventory deliveries.

Cash provided by investing activities increased in fiscal year 2023 compared to fiscal year 2022, primarily driven by lower purchases and higher sales and maturities of marketable securities, offset by higher capital expenditures.

Cash used in financing activities increased in fiscal year 2023 compared to fiscal year 2022, due to share repurchases and the absence of debt issuance proceeds in fiscal year 2023, offset by absence of debt repayment.

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

At the end of fiscal year 2023, we had $13.30 billion in cash, cash equivalents and marketable securities.

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

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 8 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information.

During 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 $1.4 billion related to property and equipment.

We have approximately $1.4 billion of cash, cash equivalents, and marketable securities held outside the U.S.

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

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

as of January 30, 2022 are available for use in the U.S.

During fiscal year 2024, 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 $1.10 billion to $1.30 billion related to property and equipment.

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

for which we have not accrued any related foreign or state taxes if we repatriate these amounts to the U.S., substantially all of our cash, cash equivalents and marketable securities held outside of the U.S.

at the end of fiscal year 2023 are available for use in the U.S.

without incurring additional U.S.

federal income taxes.

Following the Domestication, we

have 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 TCJA 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 result in significantly higher cash tax payments starting in fiscal year 2023.

Beginning in fiscal year 2023, the TCJA requires taxpayers to capitalize research and development expenditures and to amortize domestic expenditures over five years and foreign expenditures over fifteen years.

The adverse cash flow impact of mandatory capitalization will be reduced in future years as capitalized research and development expenditures continue to amortize.

Refer to Note 14 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for additional information.

Capital Return to Shareholders

In fiscal year 2022, we paid $399 million in quarterly cash dividends.

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

During fiscal year 2023, we returned $10.04 billion in share repurchases and $398 million in quarterly cash dividends.

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

As of January 29, 2023, we were authorized, subject to certain specifications, to repurchase additional shares of our common stock up to $7.23 billion through December 2023.

We did not repurchase any shares during fiscal year 2022.

Outstanding Indebtedness and Commercial Paper Program

As of January 30, 2022, we had outstanding:

• $1.25 billion of Notes Due 2023;

• $1.25 billion of Notes Due 2024;

• $1.00 billion of Notes Due 2026;

• $1.25 billion of Notes Due 2028;

• $1.50 billion of Notes Due 2030;

• $1.25 billion of Notes Due 2031;

• $1.00 billion of Notes Due 2040;

• $2.00 billion of Notes Due 2050;

• $500 million of Notes Due 2060.

Our aggregate debt maturities as of January 29, 2023, by year payable, are as follows:

(In millions)

Due in one year $ 1,250

Due in one to five years 2,250

Due in five to ten years 4,000

Due in greater than ten years 3,500

Unamortized debt discount and issuance costs (47)

Net carrying amount 10,953

Less short-term portion (1,250)

Total long-term portion $ 9,703

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

As of January 30, 2022, we had not issued any commercial paper.

As of the end of fiscal year 2023, we had not issued any commercial paper.

Refer to Note 12 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for further discussion.

Contractual Obligations

We have unrecognized tax benefits of $729 million, which includes related interest and penalties of $59 million recorded in non-current income tax payable as of January 30, 2022.

Material Cash Requirements and Other Obligations

For a description of our long-term debt, purchase obligations, and operating lease obligations, refer to Note 12, Note 13, and Note 3 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K, respectively.

We have unrecognized tax benefits of $1.02 billion, which includes related interest and penalties of $95 million, recorded in non-current income tax payable at the end of fiscal year 2023.

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.

1 unchanged sentence

Refer to Note 14 of the Notes to the Consolidated Financial Statements in Part IV, Item 15 of this Annual Report on Form 10-K for further information.

Climate Change

Refer to Part I, Item 1 of this Annual Report on Form 10-K for a description of Environmental, Social and Corporate Governance activities.

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 2023, we plan to build Earth-2, an AI supercomputer dedicated to predicting the impacts of climate change and increase our purchases of Renewable Energy Credits.

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-K

Item 7. Management’s Discussion and Analysis