NVIDIA Corporation: Q3 2018 (Fiscal) 10-Q Summary
Business Context and Reporting Period
This report covers the third quarter of NVIDIA's fiscal year 2018, ended October 29, 2017. NVIDIA designs graphics processing units (GPUs) for gaming, professional visualization, datacenter, and automotive markets, as well as Tegra processors for mobile and autonomous systems. The company operates as a large accelerated filer.
Key Financial Metrics
| Metric | Q3 2018 (3 Months) | Q3 2017 (3 Months) | YTD 2018 (9 Months) | YTD 2017 (9 Months) |
|---|---|---|---|---|
| Revenue | $2,636 million | $2,004 million | $6,803 million | $4,737 million |
| Gross Profit | $1,569 million | $1,183 million | $4,021 million | $2,760 million |
| Gross Margin | 59.5% | 59.0% | 59.1% | 58.3% |
| Operating Income | $895 million | $639 million | $2,137 million | $1,201 million |
| Net Income | $838 million | $542 million | $1,928 million | $1,012 million |
| Diluted EPS | $1.33 | $0.83 | $3.05 | $1.59 |
| Cash & Equivalents | $2,802 million | $1,766 million (Jan 2017) | N/A | |
| Marketable Securities | $3,518 million | $5,032 million (Jan 2017) | ||
| Total Liquidity | $6,320 million | $6,798 million (Jan 2017) | N/A | |
| Long-Term Debt | $1,985 million | $1,983 million (Jan 2017) | ||
| Operating Cash Flow (9mo) | N/A | $2,144 million | $951 million |
Material Changes vs. Prior Period
- Revenue Growth: Q3 revenue increased 32% year-over-year (YoY) and 18% sequentially. YTD revenue grew 44% YoY.
- Segment Performance:
- GPU Business: Revenue rose 31% YoY to $2.22 billion, driven by gaming (GeForce), datacenter (Tesla/DGX), and professional visualization. Datacenter revenue specifically surged 109% YoY due to AI and deep learning demand.
- Tegra Processor: Revenue jumped 74% YoY to $419 million, fueled by Nintendo Switch gaming platforms and automotive infotainment.
- All Other: Revenue declined due to the conclusion of the Intel patent license agreement in Q1 2018.
- Profitability: Net income increased 55% YoY. Gross margin expanded to 59.5% due to favorable product mix (high-margin datacenter and gaming GPUs).
- Expenses: Operating expenses rose 24% YoY to $674 million, primarily due to increased headcount and stock-based compensation to support growth in AI and autonomous driving.
- Tax Rate: The effective tax rate decreased to 6.5% in Q3 (from 12.8% prior year) due to stock-based compensation tax benefits and lower U.S. earnings exposure.
Guidance, Outlook, and Risks
- Capital Return: Management intends to return $1.25 billion to shareholders in fiscal 2018 and another $1.25 billion in fiscal 2019 via dividends and share repurchases. The quarterly dividend was increased to $0.15 per share.
- Debt Management: The company is actively settling its 1.00% Convertible Senior Notes. As of period end, $24 million remained outstanding, with an additional $8 million expected to settle in Q4. Long-term debt consists of $1 billion in 2.20% Notes (2021) and $1 billion in 3.20% Notes (2026).
- Legal Proceedings: Ongoing patent litigation with Polaris Innovations Limited regarding DRAM control patents. The U.S. case is stayed pending inter partes review; a German case hearing is scheduled for 2019. No accruals have been recorded as losses are not deemed probable.
- Off-Balance Sheet: NVIDIA plans to purchase its Santa Clara campus building for approximately $350 million in Q4 2018, terminating the current operating lease financing arrangement.
Investor Verification Checklist
- Datacenter Sustainability: Verify the durability of the 109% YoY growth in datacenter revenue driven by AI training and hyperscale cloud adoption.
- Cryptocurrency Impact: Assess the extent to which PC OEM revenue growth (up 90% YoY) is driven by cryptocurrency mining demand versus organic gaming demand.
- Convertible Note Settlement: Monitor the dilution impact and cash flow implications of the remaining Convertible Notes settlements in Q4 2018.
- Legal Exposure: Track the outcome of the Polaris patent litigation, specifically the inter partes review decisions and the German court proceedings.
- Inventory Levels: Review inventory balances ($857 million) against the $1.16 billion in outstanding purchase obligations to ensure supply chain alignment with demand.