NVIDIA Corporation 10-Q Summary: Fiscal Q3 2019
Business Context and Reporting Period
This report covers the quarterly period ended October 28, 2018 (Fiscal Q3 2019). NVIDIA operates in two primary reportable segments: the GPU business (Gaming, Professional Visualization, Datacenter) and the Tegra Processor business (Automotive, Gaming Consoles, Embedded AI). The company is a large accelerated filer with 610 million shares of common stock outstanding as of November 9, 2018.
Key Financial Metrics
| Metric | Q3 2019 (3 Months) | Q3 2018 (3 Months) | YTD 2019 (9 Months) | YTD 2018 (9 Months) |
|---|---|---|---|---|
| Revenue | $3,181 million | $2,636 million | $9,511 million | $6,803 million |
| Gross Profit | $1,921 million | $1,569 million | $5,964 million | $4,021 million |
| Gross Margin | 60.4% | 59.5% | 62.7% | 59.1% |
| Operating Income | $1,058 million | $895 million | $3,510 million | $2,137 million |
| Net Income | $1,230 million | $838 million | $3,575 million | $1,928 million |
| Diluted EPS | $1.97 | $1.33 | $5.71 | $3.05 |
| Operating Cash Flow (YTD) | $2,845 million (vs. $2,144 million YTD 2018) | |||
| Cash & Marketable Securities | $7,591 million (as of Oct 28, 2018) | |||
| Total Debt | $1,990 million (Long-term: $1,987M; Short-term: $3M) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 21% year-over-year (YoY) to $3.18 billion. The GPU segment drove this growth with a 25% increase, while the Tegra segment declined 3% YoY.
- Segment Performance:
- Datacenter: Revenue surged 58% YoY to $792 million, led by Volta architecture (Tesla V100, DGX systems) and the new Turing T4 Cloud GPU.
- Gaming: Revenue grew 13% YoY to $1.76 billion, fueled by Turing-based desktop GPUs and Max-Q notebooks, despite a seasonal decline in Nintendo Switch SOC modules.
- Professional Visualization: Revenue increased 28% YoY to $305 million.
- OEM & IP: Revenue dropped 23% YoY due to the absence of cryptocurrency mining demand.
- Profitability: Net income rose 47% YoY to $1.23 billion. Gross margin expanded to 60.4%, offset by a $57 million charge related to prior architecture components following the crypto mining demand drop.
- Operating Expenses: Increased 28% YoY to $863 million, primarily due to headcount growth and stock-based compensation ($140 million in Q3).
- Tax Impact: The company recorded an income tax benefit of $149 million in Q3 (vs. expense of $58 million in Q3 2018), driven by the U.S. tax reform rate reduction and a $138 million reduction in the provisional transition tax.
Guidance, Outlook, and Risks
- Capital Return: The Board authorized an additional $7.00 billion share repurchase program (total available: $7.94 billion through Dec 2022). The quarterly dividend was increased 7% to $0.16 per share. Management intends to return an additional $3.00 billion to shareholders by the end of fiscal 2020.
- Product Outlook: Continued focus on AI, Datacenter, and Gaming with the rollout of Turing architecture (GeForce RTX, Quadro RTX). Automotive segment saw first level-2 autopilot design wins (Toyota, Volvo, Isuzu).
- Risks & Contingencies:
- Legal Proceedings: Ongoing patent litigation with Polaris Innovations (DRAM control) and ZiiLabs (GPU patents). No accruals recorded as losses are not deemed probable.
- Market Concentration: 82% of revenue comes from outside the U.S. and Other Americas. No single customer represents >10% of revenue.
- Inventory: Inventory levels rose to $1.42 billion (from $796 million at year-end) due to build-up for new product launches and automotive demand.
Investor Verification Checklist
- Crypto Mining Exposure: Verify the extent of the $57 million inventory charge and the sustainability of OEM revenue without cryptocurrency mining demand.
- Datacenter Growth Sustainability: Assess the durability of the 58% Datacenter revenue growth driven by AI and HPC demand.
- Inventory Levels: Monitor the significant increase in inventory ($1.42B) relative to revenue to ensure no future write-downs are required.
- Tax Provision Finalization: Confirm the finalization of the U.S. tax reform transition tax and GILTI accounting policy in the upcoming Q4 filing.
- Legal Outcomes: Track the status of the ZiiLabs ITC investigation and Polaris patent litigation for potential future liabilities.