NVIDIA Corporation: Q1 2019 (Fiscal) 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended April 29, 2018 (First Quarter of Fiscal Year 2019). NVIDIA Corporation operates in two primary reportable segments: the GPU business (Gaming, Professional Visualization, Datacenter, and Automotive) and the Tegra Processor business (Autonomous vehicles, gaming consoles, and mobile devices). The company adopted the new revenue recognition accounting standard (ASC 606) on January 29, 2018, using the modified retrospective approach, which resulted in a $7 million increase to opening retained earnings but had no significant impact on the current quarter's results.
Key Financial Metrics
| Metric | Q1 2019 (Ended Apr 29, 2018) | Q1 2018 (Ended Apr 30, 2017) |
|---|---|---|
| Revenue | $3,207 million | $1,937 million |
| Gross Profit | $2,068 million | $1,150 million |
| Gross Margin | 64.5% | 59.4% |
| Operating Income | $1,295 million | $554 million |
| Net Income | $1,244 million | $507 million |
| Diluted EPS | $1.98 | $0.79 |
| Operating Cash Flow | $1,445 million | $282 million |
| Cash & Marketable Securities | $7,300 million | $N/A (Balance Sheet: $7,108 million prior quarter) |
| Long-Term Debt | $1,986 million | $N/A (Balance Sheet: $1,985 million prior quarter) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 66% year-over-year (YoY) and 10% sequentially. The GPU segment drove this growth with a 77% YoY increase, while the Tegra Processor segment grew 33% YoY.
- Margin Expansion: Gross margin improved by 510 basis points YoY to 64.5%, attributed to a favorable product mix shift, particularly in high-end GeForce gaming GPUs and Datacenter products.
- Profitability: Net income surged 145% YoY to $1.244 billion, fueled by revenue growth and margin expansion. Operating expenses increased 30% YoY due to higher headcount and stock-based compensation.
- Segment Performance:
- Gaming: Revenue up 68% YoY, driven by eSports and Battle Royale genre momentum.
- Datacenter: Revenue up 71% YoY, led by strong sales of the Volta architecture (Tesla V100) and DGX systems.
- Automotive: Revenue up 4% YoY.
- OEM & IP: Revenue up significantly, including $289 million related to cryptocurrency mining GPUs.
- Customer Concentration: Two customers accounted for approximately 20% of total revenue in Q1 2019. No single customer exceeded 10% in the prior year.
Guidance, Outlook, and Risks
- Capital Return: Management intends to return $1.25 billion to shareholders in Fiscal Year 2019 via dividends and share repurchases. In Q1, the company repurchased 3 million shares for $655 million and paid $91 million in dividends.
- Debt Status: The company has $14 million of 1.00% Convertible Senior Notes outstanding (due 2018), which are convertible at the holders' option. Long-term debt consists of $1 billion in 2.20% Notes (2021) and $1 billion in 3.20% Notes (2026).
- Liquidity: The company holds $7.30 billion in cash, cash equivalents, and marketable securities. Management believes existing cash and operating cash flows are sufficient for the next 12 months.
- Legal Proceedings:
- Polaris Innovations: Patent infringement litigation regarding DRAM control patents in the U.S. and Germany. The U.S. case is stayed pending Inter Partes Review (IPR) resolution.
- ZiiLabs: Patent infringement litigation regarding GPU patents in the U.S. and an ITC investigation. Cases are currently stayed pending ITC resolution.
- Accruals: No accruals have been recorded for these contingencies as losses are not considered probable.
- Taxation: The effective tax rate was 5.1% in Q1 2019, down from 5.5% in the prior year, primarily due to the U.S. statutory tax rate reduction to 21% under the Tax Cuts and Jobs Act (TCJA).
Investor Verification Checklist
- Verify the sustainability of the 68% YoY growth in the Gaming segment and the 71% growth in Datacenter, specifically regarding the demand for Volta architecture and cryptocurrency mining hardware.
- Monitor the resolution of the ZiiLabs and Polaris patent litigations, as adverse outcomes could result in significant damages or injunctions.
- Review the impact of the new revenue recognition standard (ASC 606) on future deferred revenue and performance obligations ($243 million remaining as of April 29, 2018).
- Assess the company's exposure to foreign currency fluctuations, given that 79% of revenue is generated outside the U.S. and Other Americas.
- Track the conversion activity of the remaining $14 million in Convertible Notes due in December 2018.