NVIDIA Corporation 10-Q Summary: Q1 Fiscal 2020
Business Context and Reporting Period
This filing covers the quarterly period ended April 28, 2019 (First Quarter of Fiscal Year 2020). NVIDIA operates two primary reportable segments: the GPU business (Gaming, Professional Visualization, Data Center) and the Tegra Processor business (Automotive, Gaming Consoles, Embedded AI). The company is a large accelerated filer with 609 million shares of common stock outstanding as of May 10, 2019.
Key Financial Metrics
| Metric | Q1 FY2020 (Apr 28, 2019) | Q1 FY2019 (Apr 29, 2018) |
|---|---|---|
| Revenue | $2,220 million | $3,207 million |
| Gross Profit | $1,296 million | $2,068 million |
| Gross Margin | 58.4% | 64.5% |
| Operating Income | $358 million | $1,295 million |
| Net Income | $394 million | $1,244 million |
| Diluted EPS | $0.64 | $1.98 |
| Operating Cash Flow | $720 million | $1,445 million |
| Cash & Marketable Securities | $7,802 million | $7,422 million (Jan 27, 2019) |
| Long-Term Debt | $1,988 million | $1,988 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 31% year-over-year. The GPU segment fell 27% and the Tegra segment fell 55%.
- Segment Drivers:
- Gaming: Revenue dropped 39% YoY due to declines in GPU and SOC module shipments.
- Data Center: Revenue declined 10% YoY, reflecting a slowdown in hyperscale and enterprise purchases.
- OEM & Other: Revenue plummeted 74% YoY, primarily due to the absence of $289 million in cryptocurrency mining processor (CMP) sales.
- Automotive: Revenue grew 14% YoY, driven by AI cockpit modules.
- Margin Compression: Gross margin decreased 610 basis points to 58.4%, attributed to lower gaming margins and product mix shifts.
- Expense Growth: Operating expenses increased 21% YoY to $938 million, driven by employee additions, compensation increases, and costs related to the Mellanox acquisition.
- Tax Benefit: The company recorded an income tax benefit of $5 million (effective rate -1.3%) compared to an expense of $67 million in the prior year, due to reduced U.S. taxable earnings and stock-based compensation tax benefits.
Guidance, Outlook, and Risks
- Capital Return: NVIDIA intends to return $3.00 billion to shareholders by the end of Fiscal 2020. In Q1, $97 million was returned via dividends. The remaining $2.20 billion will be returned via share repurchases and dividends. No share repurchases were made in Q1.
- Mellanox Acquisition: On March 10, 2019, NVIDIA agreed to acquire Mellanox Technologies for approximately $6.9 billion ($125/share). Closing is subject to regulatory and shareholder approvals. A $350 million termination fee applies if the deal fails due to regulatory issues.
- Outlook Concerns: Management noted a shortage of Intel processors impacting the global PC market, which may affect gaming GPU laptop sales in Q2. The slowdown in Data Center purchases is expected to persist into Q2.
- Legal Proceedings:
- Securities Litigation: Consolidated class action and derivative lawsuits allege false statements regarding channel inventory and cryptocurrency mining demand. No accrual has been recorded as liability is not probable.
- Patent Litigation: Settlements reached with Polaris Innovations and ZiiLabs had an immaterial financial impact.
- Accounting Changes: Adopted new lease accounting standards (ASC 842) on Jan 28, 2019, recognizing $470 million in operating lease assets and $500 million in liabilities.
Investor Verification Checklist
- Cryptocurrency Exposure: Verify the extent of the $289 million revenue gap from CMP sales and the sustainability of the "OEM and Other" segment without crypto demand.
- Data Center Slowdown: Assess the duration and severity of the hyperscale customer purchase slowdown mentioned in management commentary.
- Mellanox Integration: Monitor regulatory approval status and potential integration costs or goodwill impairment risks associated with the $6.9 billion acquisition.
- Intel Supply Chain: Evaluate the impact of the Intel processor shortage on NVIDIA's gaming laptop GPU sales in the upcoming quarter.
- Legal Accruals: Review future developments in the securities class action litigation regarding channel inventory disclosures to determine if an accrual becomes probable.