UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

OR

NVIDIA CORPORATION

2788 San Tomas Expressway

Santa Clara, California 95051

(408) 486-2000

Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We also use the following social media channels as a means of disclosing information about the company, our products, our planned financial and other announcements and attendance at upcoming investor and industry conferences, and other matters and for complying with our disclosure obligations under Regulation FD: 

In addition, investors and others can view NVIDIA videos on YouTube.

The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts and the blog, in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this quarterly report on Form 10-Q. These channels may be updated from time to time on NVIDIA's investor relations website.

Basis of Presentation

Significant Accounting Policies

Except for the accounting policy for revenue recognition,leases, which was updated as a result of adopting a new accounting standard related to revenue recognition,leases, there have been no material changes to our significant accounting policies in Note 1 - Organization and Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2018.27, 2019.

We derivedetermine if an arrangement is or contains a lease at inception. Operating leases with lease terms of more than 12 months are included in operating lease assets, accrued and other current liabilities, and long-term operating lease liabilities on our revenue primarily from product sales, licenseconsolidated balance sheet. Operating lease assets represent our right to use an underlying asset for the lease term and development arrangements,lease liabilities represent our obligation to make lease payments over the lease term.

Operating lease assets and software licensing. We determine revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, we satisfy a performance obligation.

Fiscal Year

We operate on a 52- or 53-week year, ending on the last Sunday in January. Fiscal years 20192020 and 20182019 are both 52-week years. The first quarters of fiscal years 20192020 and 20182019 were both 13-week quarters.

Reclassifications

Certain prior fiscal year balances have been reclassified to conform to the current fiscal year presentation.

Principles of Consolidation

Our condensed consolidated financial statements include the accounts of NVIDIA Corporation and our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from our estimates. On an ongoingon-going basis, we evaluate our estimates, including those related to revenue recognition, cash equivalents and marketable securities, accounts receivable, inventories, income taxes, goodwill, stock-based compensation, litigation, investigation and settlement costs, restructuring and other charges, and

other contingencies. These estimates are based on historical facts and various other assumptions that we believe are reasonable.

Adoption of New and Recently Issued Accounting Pronouncements

Recently Adopted Accounting PronouncementsPronouncement

The Financial Accounting Standards Board, or FASB, issued an accounting standards update that creates a single source of revenue guidanceregarding the accounting for leases under U.S. GAAP for all companies, in all industries.which lease assets and liabilities are recognized on the balance sheet. We adopted this guidance on January 29, 201828, 2019 using the modified retrospective approach.optional transition method by recognizing a cumulative-effect adjustment to the consolidated balance sheet. Refer to Note 23 of these Notes to Condensed Consolidated Financial Statements for additional information.

In FebruaryJune 2016, the FASB issued ana new accounting standards update regardingstandard to replace the accountingincurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We will be required to use a forward-looking expected credit loss model for leases by which we will begin recognizing lease assetsaccounts receivable and liabilities on the balance sheet for lease terms of more than 12 months.other financial instruments, including available-for-sale debt securities. The updatestandard will be effective for us beginning in the first quarter of fiscal year 2020.2021, with early adoption permitted. We expectare currently evaluating the impact of this standard on our Consolidated Financial Statements.

The cumulative-effect adjustment upon adoption of thisthe new lease accounting guidance to resultstandard resulted in an increase inthe recognition of $470 million of operating lease assets and a corresponding increase in$500 million of operating lease liabilities on our Consolidated Balance Sheets.Sheet. The difference of $30 million represents deferred rent for leases that existed as of the date of adoption, which was an offset to the opening balance of operating lease assets.

Our stock-based compensation expense is associated with stock options, restricted stock units, or RSUs, performance stock units that are based on our corporate financial performance targets, or PSUs, performance stock units that are based on market conditions, or market-based PSUs, and our employee stock purchase plan, or ESPP.

Our Condensed Consolidated Statements of Income include stock-based compensation expense, net of amounts capitalized asallocated to inventory, as follows:

Equity Award Activity

The following is a summary of equity award transactions under our equity incentive plans:

Of the total fair value of equity awards granted during the first quartersquarter of fiscal years 2019 and 2018,year 2020, we estimated that the stock-based compensation expense related to equity awards that are not expected to vest was $18 million and $27 million, respectively.$85 million. 

The following summarizes theAs of April 28, 2019, there was $2.27 billion of aggregate unearned stock-based compensation expense and estimatedexpense. This amount is expected to be recognized over a weighted average amortization period as of April 29, 20182.7 years for RSUs, PSUs, and January 28, 2018:

The following is a reconciliation of the denominator of the basic and diluted net income per share computations for the periods presented:

We recognized an income tax expensebenefit of $67 million and $29$5 million for the first quarter of fiscal years 2019year 2020 and 2018, respectively. Incomeincome tax expense of $67 million for the first quarter of fiscal year 2019. The income tax benefit as a percentage of income before income tax was 5.1% and 5.5%1.3% for the first quarter of fiscal years 2019year 2020 and 2018, respectively.income tax expense as a percentage of income before tax was 5.1% for the first quarter of fiscal year 2019.

The decrease in our effective tax rate infor the first quarter of fiscal year 20192020 as compared to the same period in the prior fiscal year iswas primarily due to a decrease in the U.S. statutoryamount of earnings subject to United States tax, rate from 35% to 21%, partially offset by a decreaseand an increase in the impact of tax benefits from stock-based compensation.

Our effective tax rates for the first quarter of fiscal years 2020 and 2019 were (1.3)% and 2018 of 5.1% and 5.5%, respectively, and were lower than the U.S. federal statutory ratesrate of 21% and 33.9%, for fiscal years 2019 and 2018, respectively, due primarily to income earned in jurisdictions where the tax rate isthat are subject to taxes lower than the U.S. federal statutory tax rate, tax benefits related to stock-based compensation, and the benefit of the U.S. federal research tax credit.

In December 2017, the SEC issued guidance that allows companies to record provisional amounts for the tax effects of the Tax Cuts and Job Acts, or TCJA, during a measurement period not to exceed one year. The TCJA was effective in the fourth quarter of fiscal year 2018 and we have recorded provisional amounts based on reasonable estimates for those tax effects. For the first quarter of fiscal year 2019, we have not recorded any adjustments to our provisional amounts. We will continue our analysis of these provisional amounts, which are still subject to change during the measurement period, and we anticipate further guidance on accounting interpretations from the FASB and application of the law from the U.S. Department of Treasury.

While we believe that we have adequately provided for all uncertain tax positions, or tax positions where we believe it is not more-likely-than-not that the position will be sustained upon review, amounts asserted by tax authorities could be greater or less than our accrued position. Accordingly, our provisions on federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved with the respective tax authorities. As of April 29, 2018,28, 2019, we do not believe that our estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.

The gross unrealized losses are related to fixed income securities, weretemporary in nature, and driven primarily due toby changes in interest rates, which we believe are temporary in nature. Currently, werates. We have the intent and ability to hold our investments until maturity. For the first quarter of fiscal years 20192020 and 2018,2019, there were no other-than-temporary impairment losses and net realized gains were not significant.

The amortized cost and estimated fair value of cash equivalents and marketable securities as of April 29, 201828, 2019 and January 28, 201827, 2019 are shown below by contractual maturity.  

The fair values of our financial assets and liabilities are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets. We review fair value hierarchy classification on a quarterly basis. There were no significant transfers between Levels 1 and 2 financial assets and liabilities for the first quarter of fiscal year 2019.2020. Level 3 financial assets and liabilities are based on unobservable inputs to the valuation methodology and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances.

We enter into foreign currency forward contracts to mitigate the impact of foreign currency exchange rate movements on our operating expenses. We designate theseThese contracts are designated as cash flow hedges and assess the effectiveness of thefor hedge relationships on a spot to spot basis.accounting treatment. Gains or losses on the contracts are recorded in accumulated other comprehensive income or loss and reclassified to operating expense when the related operating expenses are recognized in earnings or ineffectiveness should occur. The fair value of the contracts was not significant as of April 29, 201828, 2019 and January 28, 2018.27, 2019.

We also enter into foreign currency forward contracts to mitigate the impact of foreign currency movements on monetary assets and liabilities that are denominated in currencies other than U.S. dollar. These forward contracts were not designated for hedge accounting treatment. Therefore, the change in fair value of these contracts is recorded in other income or expense and offsets the change in fair value of the hedged foreign currency denominated monetary assets and liabilities, which is also recorded in other income or expense.

The table below presents the notional value of our foreign currency forward contracts outstanding as of April 29, 201828, 2019 and January 28, 2018:27, 2019:

As of April 29, 2018,28, 2019, all designated foreign currency forward contracts mature within twelveeighteen months. We expect to realize allThe expected realized gains and losses deferred into accumulated other comprehensive income (loss) related to foreign currency forward contracts within the next twelve months.months was not significant.

During the first quarter of fiscal years 20192020 and 2018,2019, the impact of derivative financial instruments designated for hedge accounting treatment on other comprehensive income or loss was not significant and all such instruments were determined to be highly effective. Therefore, there were no gains or losses associated with ineffectiveness.

Long-Term Debt

2.20% Notes Due 2021 and 3.20% Notes Due 2026

In fiscal year 2017, we issued $1.00 billion of the 2.20% Notes Due 2021, and $1.00 billion of the 3.20% Notes Due 2026, or collectively, the Notes. Interest on the Notes is payable on March 16 and September 16 of each year, beginning on March 16, 2017. Upon 30 days' notice to holders of the Notes, we may redeem the Notes for cash prior to maturity, at redemption prices that include accrued and unpaid interest, if any, and a make-whole premium. However, no make-whole premium will be paid for redemptions of the Notes Due 2021 on or after August 16, 2021, or for redemptions of the Notes Due 2026 on or after June 16, 2026. The net proceeds from the Notes were $1.98 billion, after deducting debt discount and issuance costs.

The Notes are our unsecured senior obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated indebtedness. The Notes are structurally subordinated to the liabilities of our subsidiaries and are effectively subordinated to any secured indebtedness to the extent of the value of the assets securing such indebtedness. All existing and future liabilities of our subsidiaries will be effectively senior to the Notes.

The carrying value of the Notes and the associated interest rates were as follows:

We have a $575 million commercial paper program to support general corporate purposes. As of $1.49 billion of the Convertible Notes. The Convertible Notes are unsecured, unsubordinated obligations of the Company paying interest in cash semi-annually at a rate of 1.00% per annum and will mature on December 1, 2018 unless previously repurchased or converted. Upon conversion,April 28, 2019, we pay cash up to the aggregate principal amount and pay or deliver cash, shares of our common stock or a combination thereof, at our election, of our conversion obligation in excess of the aggregate principal amount being converted.had not issued any commercial paper.

Litigation

Polaris Innovations Limited

On May 16, 2016, Polaris Innovations Limited, or Polaris, a non-practicing entity and wholly-owned subsidiary of Quarterhill Inc. (formerly WiLAN Inc.), filed a complaint against NVIDIA for patent infringement in the United States District Courtand Germany.

NVIDIA and Polaris entered into an agreement effective April 3, 2019 that settled the litigation between the parties, which had an immaterial impact on our financial results. The agreement includes a license to NVIDIA for certain patents owned by Polaris, as well as options for NVIDIA to renew the Western District of Texas. Polaris alleges that NVIDIA has infringed and is continuing to infringe six U.S. patents relating tolicense through the control of dynamic random-access memory, or DRAM: 6,532,505; 7,124,325; 7,405,993; 7,886,122; 8,161,344; and 8,207,976. The complaint seeks unspecified monetary damages, enhanced damages, interest, fees, expenses, and costs against NVIDIA. On September 14, 2016, NVIDIA answered the Polaris Complaint and asserted various defenses including non-infringement and invaliditylife of the six Polaris patents.

ZiiLabs 1 Patents Lawsuit

ZiiLabs 2 Patents Lawsuits

On February 28, 2018,1, 2019, NVIDIA entered into an agreement in which it received a license to the ZiiLabs patents and the other respondents answered the ITC complaint and asserted various defenses including non-infringement and invaliditya dismissal of the four assertedZiiLabs 1 and 2 Patent Lawsuits, which had an immaterial impact on our financial results. The ZiiLabs 1 and 2 district court cases were dismissed pursuant to a stipulation of dismissal filed on February 8, 2019. The Administrative Law Judge issued an Initial Determination on February 12, 2019, granting the motion to terminate the USITC investigation addressing the ZiiLabs 2 patents.

Accounting for Loss Contingencies

While there can be no assurance of favorable outcomes, we believe the claims made by the other parties in the above ongoing matters are without merit and we intend to vigorously defend the actions. As of April 29, 2018, we have not recorded any accrual for contingent liabilities associated with the legal proceedings described above based on our belief that liabilities, while possible, are not probable. Further, any possible loss or range of loss in these matters cannot be reasonably estimated at this time. We are engaged in other legal actions not described above arising in the ordinary course of its business and, while there can be no assurance of favorable outcomes, we believe that the ultimate outcome of these actions will not have a material adverse effect on our operating results, liquidity or financial position. As of April 28, 2019, we have not recorded any accrual for contingent liabilities associated with the legal proceedings described above based on our belief that liabilities, while possible, are not probable. Further, except as specifically described above, any possible loss or range of loss in these matters cannot be reasonably estimated at this time.