Edgar Filing: NVIDIA CORP

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



[x]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 30, 2016



[_]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-23985

NVIDIA CORPORATION

(Exact name of registrant as specified in its charter)



Delaware	94-3177549
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

2701 San Tomas Expressway

Santa Clara, California 95050

(408) 486-2000

(Address, including zip code, and telephone number,

including area code, of principal executive offices)

N/A

(Former name, former address and former fiscal year if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The number of shares of common stock, $0.001 par value, outstanding as of November 18, 2016, was 539 million.

NVIDIA CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED October 30, 2016

TABLE OF CONTENTS



		Page
	PART I : FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	a) Condensed Consolidated Statements of Income for the three and nine months ended October 30, 2016 and October 25, 2015	3

	b) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 30, 2016 and October 25, 2015	4

	c) Condensed Consolidated Balance Sheets as of October 30, 2016 and January 31, 2016	5

	d) Condensed Consolidated Statements of Cash Flows for the nine months ended October 30, 2016 and October 25, 2015	6

	e) Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	39

	PART II : OTHER INFORMATION

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41

Item 6.	Exhibits	42

Signature		43

WHERE YOU CAN FIND MORE INFORMATION

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:

NVIDIA Twitter Account (https://twitter.com/NVIDIA)

NVIDIA Blog (http://blogs.nvidia.com/)

NVIDIA Facebook Page (https://www.facebook.com/NVIDIA)

NVIDIA LinkedIn Page (http://www.linkedin.com/company/nvidia?trk=hb_tab_compy_id_3608)

In addition, investors and others can follow us on Flipboard, YouTube and Instagram.

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.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share data)

(Unaudited)



	Three Months Ended						Nine Months Ended
	October 30,			October 25,			October 30,			October 25,
	2016			2015			2016			2015

Revenue	$	2,004		$	1,305		$	4,737		$	3,609
Cost of revenue	821			571			1,977			1,589
Gross profit	1,183			734			2,760			2,020
Operating expenses
Research and development	373			329			1,069			987
Sales, general and administrative	171			152			487			441
Restructuring and other charges	—			8			3			97
Total operating expenses	544			489			1,559			1,525
Income from operations	639			245			1,201			495
Interest income	14			9			37			28
Interest expense	(16		)	(12		)	(39		)	(35		)
Other income (expense), net	(16		)	3			(19		)	1
Income before income tax expense (benefit)	621			245			1,180			489
Income tax expense (benefit)	79			(1		)	168			83
Net income	$	542		$	246		$	1,012		$	406

Net income per share:
Basic	$	1.01		$	0.45		$	1.89		$	0.75
Diluted	$	0.83		$	0.44		$	1.59		$	0.72

Weighted average shares used in per share computation:
Basic	538			542			536			544
Diluted	653			565			636			563

Cash dividends declared and paid per common share	$	0.1150		$	0.0975		$	0.3450		$	0.2800

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)



	Three Months Ended						Nine Months Ended
	October 30,			October 25,			October 30,			October 25,
	2016			2015			2016			2015

Net income	$	542		$	246		$	1,012		$	406
Other comprehensive loss, net of tax:
Available-for-sale securities:
Net unrealized gain (loss) on available-for-sale securities	(10		)	3			1			(2		)
Reclassification adjustments for net realized gain (loss) on available-for-sale securities included in net income	—			—			1			(1		)
Net change in unrealized gain (loss) on available-for-sale securities	(10		)	3			2			(3		)
Cash flow hedges:
Net change in unrealized gain (loss) on cash flow hedges	2			(3		)	(3		)	(3		)
Other comprehensive loss, net of tax	(8		)	—			(1		)	(6		)
Total comprehensive income	$	534		$	246		$	1,011		$	400

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)



	October 30,			January 31,
	2016			2016
ASSETS
Current assets:
Cash and cash equivalents	$	1,940		$	596
Marketable securities	4,731			4,441
Accounts receivable, net	833			505
Inventories	679			418
Prepaid expenses and other current assets	124			93
Total current assets	8,307			6,053
Property and equipment, net	503			466
Goodwill	618			618
Intangible assets, net	120			166
Other assets	64			67
Total assets	$	9,612		$	7,370

LIABILITIES, CONVERTIBLE DEBT CONVERSION OBLIGATION AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	523		$	296
Accrued and other current liabilities	507			642
Convertible debt, short-term	1,011			1,413
Total current liabilities	2,041			2,351

Long-term debt	1,982			—
Other long-term liabilities	213			453
Capital lease obligations, long-term	7			10
Total liabilities	4,243			2,814
Commitments and contingencies - see Note 12
Convertible debt conversion obligation	45			87
Shareholders’ equity:
Preferred stock	—			—
Common stock	1			1
Additional paid-in capital	4,581			4,170
Treasury stock, at cost	(4,783		)	(4,048		)
Accumulated other comprehensive loss	(4		)	(4		)
Retained earnings	5,529			4,350
Total shareholders' equity	5,324			4,469
Total liabilities, convertible debt conversion obligation and shareholders' equity	$	9,612		$	7,370

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)



	Nine Months Ended
	October 30,			October 25,
	2016			2015
Cash flows from operating activities:
Net income	$	1,012		$	406
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	140			151
Stock-based compensation expense	176			145
Deferred income taxes	146			107
Amortization of debt discount	20			22
Loss on early debt conversions	15			—
Net gain on sale and disposal of long-lived assets and investments	(2		)	(7		)
Restructuring and other charges	—			37
Other	8			11
Changes in operating assets and liabilities:
Accounts receivable	(328		)	(63		)
Inventories	(261		)	59
Prepaid expenses and other assets	(28		)	(25		)
Accounts payable	218			7
Accrued and other current liabilities	(136		)	(41		)
Other long-term liabilities	(29		)	(145		)
Net cash provided by operating activities	951			664
Cash flows from investing activities:
Proceeds from sales of marketable securities	1,239			1,651
Proceeds from maturities of marketable securities	712			872
Proceeds from sale of long-lived assets and investments	6			7
Purchases of marketable securities	(2,249		)	(2,669		)
Purchases of property and equipment and intangible assets	(125		)	(71		)
Reimbursement of headquarters building development costs from banks	—			24
Other	(3		)	(1		)
Net cash used in investing activities	(420		)	(187		)
Cash flows from financing activities:
Proceeds from issuance of debt	1,988			—
Payments related to repurchases of common stock	(509		)	(452		)
Repayment of convertible debt	(444		)	—
Dividends paid	(185		)	(152		)
Net proceeds (payments) related to employee stock plans	(29		)	99
Payments for debt issuance costs	(4		)	—
Payments under capital lease obligations	(3		)	(3		)
Other	(1		)	5
Net cash provided by (used in) financing activities	813			(503		)
Change in cash and cash equivalents	1,344			(26		)
Cash and cash equivalents at beginning of period	596			497
Cash and cash equivalents at end of period	$	1,940		$	471

Other non-cash activity:
Assets acquired by assuming related liabilities	$	25		$	—

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission, or SEC, Regulation S-X. The January 31, 2016 consolidated balance sheet was derived from our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016, as filed with the SEC, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments, consisting only of normal recurring adjustments except as otherwise noted, considered necessary for a fair statement of results of operations and financial position have been included. The results for the interim periods presented are not necessarily indicative of the results expected for any future period. The following information should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016.

Significant Accounting Policies

For a description of significant accounting policies, see 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 31, 2016. There have been no material changes to our significant accounting policies since the filing of the Annual Report on Form 10-K.

Fiscal Year

We operate on a 52- or 53-week year, ending on the last Sunday in January. Fiscal year 2017 is a 52-week year and fiscal year 2016 was a 53-week year. The third quarter of fiscal years 2017 and 2016 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 from those estimates. On an on-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.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Adoption of New and Recently Issued Accounting Pronouncements

Recently Adopted Accounting Pronouncement

In March 2016, the Financial Accounting Standards Board, or FASB, issued an accounting standards update which simplifies certain aspects of stock-based compensation accounting. Among other elements, the new guidance eliminates additional paid in capital, or APIC, pools and requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The new standard is effective for us beginning in our first quarter of fiscal year 2018 with early adoption permitted. We elected to early adopt this new guidance in the third quarter of fiscal year 2017, which required us to reflect any adjustments as of February 1, 2016.

Early adoption of this guidance resulted in the following:


•	We recorded excess tax benefits within income tax expense, rather than in APIC, of $12 million, $8 million and $42 million for the first, second and third quarters of fiscal year 2017, respectively.


•	We recorded a cumulative-effect adjustment as of February 1, 2016 to increase retained earnings by $353 million, with a corresponding increase to deferred tax assets, to recognize the net operating loss and federal research tax credit carryforwards attributable to excess tax benefits on stock-based compensation that had not been previously recognized in APIC.


•	The excess tax benefits are now included in net operating cash rather than net financing cash in our Condensed Consolidated Statements of Cash Flows. We elected to apply this change in presentation prospectively and thus prior periods have not been adjusted.

We elected not to change our policy on accounting for forfeitures, although the new guidance provides an option for us to account for forfeitures as they occur, and thus continued to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period.

The adoption of this new guidance impacted our previously reported quarterly results for fiscal year 2017 as follows:



	Three Months Ended												Six Months Ended
	July 31, 2016						May 1, 2016						July 31, 2016
	As reported			As adjusted			As reported			As adjusted			As reported			As adjusted
	(In millions, except per share data)
Condensed Consolidated Statements of Income:
Income tax expense	$	64		$	56		$	45		$	33		$	109		$	89
Net income	$	253		$	261		$	196		$	208		$	449		$	469
Basic net income per share	$	0.47		$	0.49		$	0.36		$	0.39		$	0.84		$	0.88
Diluted net income per share	$	0.40		$	0.41		$	0.33		$	0.35		$	0.73		$	0.76
Weighted average shares used in diluted net income per share computation	631			634			597			599			617			620

Condensed Consolidated Statements of Cash Flows:
Net cash provided by operating activities	$	184		$	201		$	309		$	318		$	493		$	519
Net cash used in financing activities	$	(35	)	$	(52	)	$	(534	)	$	(545	)	$	(570	)	$	(597	)

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Recent Accounting Pronouncements Not Yet Adopted

In October 2016, the FASB issued an accounting standards update that requires the recognition of income tax consequences for intra-entity transfers of assets other than inventory when the transfer occurs. The update will be effective for us beginning in our first quarter of fiscal year 2019, with early adoption permitted. The adoption of this accounting guidance is not currently expected to have a material impact on our consolidated financial statements.

In August 2016, the FASB issued an accounting standards update that clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The update will be effective for us beginning in our first quarter of fiscal year 2019, with early adoption permitted. The adoption of this accounting guidance is not expected to have a material impact on our consolidated financial statements.

In February 2016, the FASB issued an accounting standards update regarding the accounting for leases by which we will begin recognizing lease assets and liabilities on the balance sheet for leases with a lease term of more than 12 months. The update will require additional disclosures regarding key information about leasing arrangements. Under existing guidance, operating leases are not recorded as lease assets and lease liabilities on the balance sheet. The update will be effective for us beginning in our first quarter of fiscal year 2020, with early adoption permitted. We are currently evaluating the impact of the adoption of this accounting guidance on our consolidated financial statements. However, we expect the adoption of this accounting guidance to result in an increase in lease assets and a corresponding increase in lease liabilities on our Condensed Consolidated Balance Sheets.

The FASB issued an accounting standards update that creates a single source of revenue guidance under U.S. GAAP for all companies, in all industries, effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The new standard will be effective for us beginning in our first quarter of fiscal year 2019, although we are permitted to adopt the standard one year earlier. We will adopt this guidance either by using a full retrospective approach for all periods presented in the period of adoption, or a modified retrospective approach. We are currently evaluating the impact of this accounting guidance on our consolidated financial statements and have not yet determined which transition method we will apply.

Note 2 - Stock-Based Compensation

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 as inventory, as follows:



	Three Months Ended				Nine Months Ended
	October 30, 2016		October 25, 2015		October 30, 2016		October 25, 2015
	(In millions)
Cost of revenue	$	2	$	4	$	10	$	10
Research and development	36		28		95		82
Sales, general and administrative	27		19		71		53
Total	$	65	$	51	$	176	$	145

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Equity Award Activity

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



	RSUs, PSUs and Market-based PSUs Outstanding				Options Outstanding
	Number of Shares		Weighted Average Grant-Date Fair Value Per Share		Number of Shares		Weighted Average Exercise Price Per Share
	(In millions, except per share data)
Balances, January 31, 2016	26		$	19.12	13		$	14.49
Granted (1) (2)	11		$	48.88	—		$	—
Exercised	—		$	—	(4	)	$	14.44
Vested restricted stock	(9	)	$	17.84	—		$	—
Canceled and forfeited	(1	)	$	21.58	—		$	—
Balances, October 30, 2016	27		$	31.76	9		$	14.52


(1)	Includes PSUs that will be issued and eligible to vest if the corporate financial performance maximum target level for fiscal year 2017 is achieved. Depending on the actual level of achievement of the corporate performance target at the end of fiscal year 2017, the PSUs issued could range from 0 to 2 million shares.

(2)

Includes market-based PSUs that will be issued and eligible to vest if the maximum target for total shareholder return, or TSR, over the 3-year measurement period is achieved. Depending on the ranking of our TSR compared to the respective TSRs of the companies comprising the Standard & Poor’s 500 Index during a 3-year measurement period, the market-based PSUs issued could range from 0 to 0.3 million shares.

Of the total fair value of equity awards granted during the three and nine months ended October 30, 2016, the stock-based compensation expense related to equity awards that are not expected to vest was $72 million and $89 million, respectively. Of the total fair value of equity awards granted during the three and nine months ended October 30, 2015, the stock-based compensation expense related to equity awards that are not expected to vest was $34 million and $43 million, respectively.

The following summarizes the aggregate unearned stock-based compensation expense and estimated weighted average amortization period as of October 30, 2016 and January 31, 2016:



	October 30,		January 31,
	2016		2016
	(In millions)
Aggregate unearned stock-based compensation expense	$	662	$	381

Estimated weighted average amortization period	(In years)
Stock options	0.7		1.1
RSUs, PSUs and market-based PSUs	2.8		2.7
ESPP	0.6		0.7

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 3 – Net Income Per Share

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



	Three Months Ended				Nine Months Ended
	October 30,		October 25,		October 30,		October 25,
	2016		2015		2016		2015
	(In millions, except per share data)
Numerator:
Net income	$	542	$	246	$	1,012	$	406
Denominator:
Basic weighted average shares	538		542		536		544
Dilutive impact of outstanding securities:
Equity awards outstanding	27		13		25		13
1% Convertible Senior Notes	45		10		42		6
Warrants issued with the 1% Convertible Senior Notes	43		—		33		—
Diluted weighted average shares	653		565		636		563
Net income per share:
Basic (1)	$	1.01	$	0.45	$	1.89	$	0.75
Diluted (2)	$	0.83	$	0.44	$	1.59	$	0.72
Equity awards excluded from diluted net income per share because their effect would have been anti-dilutive	7		9		9		13


(1)	Calculated as net income divided by basic weighted average shares.


(2)	Calculated as net income divided by diluted weighted average shares.

The 1.00% Convertible Senior Notes, or the Convertible Notes, are included in the calculation of diluted net income per share. The Convertible Notes have a dilutive impact on net income per share if our average stock price for the reporting period exceeds the adjusted conversion price of $20.0780 per share. The Warrants outstanding are included in the calculation of diluted net income per share. The Warrants have a dilutive impact on net income per share if our average stock price for the quarter exceeds the adjusted strike price of $27.0281 per share. For the three and nine months ended October 30, 2016, our average stock price was $63.83 and $47.82, respectively, which exceeded both the adjusted conversion price and the adjusted strike price, causing the Convertible Notes and the Warrants to have a dilutive impact for these periods.

The denominator for diluted net income per share does not include any effect from the convertible note hedge transactions, or the Note Hedges, that we entered into concurrently with the issuance of the Convertible Notes, as its effect would be anti-dilutive. In the event of conversion of the Convertible Notes, the shares delivered to us under the Note Hedges will offset the dilutive effect of the shares that we would issue under the Convertible Notes. Please refer to Note 11 of these Notes to Condensed Consolidated Financial Statements for additional discussion regarding the Convertible Notes.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4 – Income Taxes

We recognized income tax expense of $79 million and $168 million for the three and nine months ended October 30, 2016, respectively, and $83 million for the nine months ended October 25, 2015. We recognized income tax benefit of $1 million for the three months ended October 25, 2015. Income tax expense as a percentage of income before income tax was 12.8% and 14.2% for the three and nine months ended October 30, 2016, respectively, and 16.9% for the nine months ended October 25, 2015. Income tax benefit as a percentage of income before income tax was 0.5% for the three months ended October 25, 2015. Our income tax expense includes $42 million and $62 million of tax benefit for the three and nine months ended October 30, 2016, respectively, from the early adoption of an accounting standard related to stock-based compensation. Please refer to Note 1 of these Notes to Condensed Consolidated Financial Statements for further information.

The increase in our effective tax rate in the three months ended October 30, 2016 compared to the same period in the prior fiscal year was primarily due to the absence of the tax benefit related to the restructuring associated with the wind-down of our Icera operations. The decrease in our effective tax rate in the nine months ended October 30, 2016 compared to the same period in the prior fiscal year was primarily due to the favorable benefit of the U.S. federal research tax credit, which was permanently enacted in the fourth quarter of fiscal year 2016, and our early adoption of an accounting standard, partially offset by the absence of the Icera restructuring tax benefit and an increase in the amount of our earnings subject to U.S. tax.

Our effective tax rate for the nine months ended October 30, 2016 of 14.2% was lower than the U.S. federal statutory rate of 35% due primarily to income earned in jurisdictions where the tax rate is lower than the U.S. federal statutory tax rate, the benefit of the U.S. federal research tax credit, as well as tax benefits recognized in the period in which they occur for early adoption of an accounting standard and expiration of statutes of limitations in certain non-U.S. jurisdictions.

For the nine months ended October 30, 2016, there have been no material changes to our tax years that remain subject to examination by major tax jurisdictions. Additionally, there have been no material changes to our unrecognized tax benefits and any related interest or penalties since the fiscal year ended January 31, 2016, other than the closure of our state income tax position in the three months ended July 31, 2016 and the aforementioned recognition of tax benefits upon the expiration of statutes of limitations in certain non-U.S. jurisdictions in the nine months ended October 30, 2016.

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 October 30, 2016, 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.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 5 - Marketable Securities

All of our cash equivalents and marketable securities are classified as “available-for-sale” securities. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of shareholders’ equity, net of tax, and net realized gains and losses recorded in other income and expense, net, on the Condensed Consolidated Statements of Income.

We performed an impairment review of our investment portfolio as of October 30, 2016. Based on our quarterly impairment review, we concluded that our investments were appropriately valued and that no other-than-temporary impairment charges were necessary on our portfolio of available-for-sale investments as of October 30, 2016.

The following is a summary of cash equivalents and marketable securities as of October 30, 2016 and January 31, 2016:



	October 30, 2016
	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
	(In millions)
Corporate debt securities	$	2,239	$	2	$	(2	)	$	2,239
Debt securities of United States government agencies	1,152		1		(1		)	1,152
Debt securities issued by United States Treasury	770		1		(1		)	770
Money market funds	542		—		—			542
Asset-backed securities	436		1		—			437
Mortgage-backed securities issued by United States government-sponsored enterprises	162		2		(1		)	163
Foreign government bonds	68		—		—			68
Total	$	5,369	$	7	$	(5	)	$	5,371
Classified as:
Cash equivalents								$	640
Marketable securities								4,731
Total								$	5,371



	January 31, 2016
	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
	(In millions)
Corporate debt securities	$	1,903	$	1	$	(3	)	$	1,901
Debt securities of United States government agencies	1,170		1		(1		)	1,170
Debt securities issued by United States Treasury	800		1		—			801
Asset-backed securities	435		—		—			435
Mortgage-backed securities issued by United States government-sponsored enterprises	229		3		(1		)	231
Foreign government bonds	92		—		—			92
Money market funds	43		—		—			43
Total	$	4,672	$	6	$	(5	)	$	4,673
Classified as:
Cash equivalents								$	232
Marketable securities								4,441
Total								$	4,673

The following table provides the breakdown of the investments with unrealized losses as of October 30, 2016:



	Less than 12 months					12 months or greater					Total
	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
	(In millions)
Corporate debt securities	$	977	$	(2	)	$	58	$	—		$	1,035	$	(2	)
Debt securities issued by United States government agencies	536		(1		)	27		—			563		(1		)
Debt securities issued by the US Treasury	197		(1		)	—		—			197		(1		)
Mortgage-backed securities issued by United States government-sponsored enterprises	43		—			36		(1		)	79		(1		)
	$	1,753	$	(4	)	$	121	$	(1	)	$	1,874	$	(5	)

The gross unrealized losses as of October 30, 2016 related to fixed income securities due to changes in interest rates and are temporary in nature. We have the intent and ability to hold our investments with impairment indicators until maturity.

The amortized cost and estimated fair value of cash equivalents and marketable securities, which are primarily debt instruments, are classified as available-for-sale as of October 30, 2016 and January 31, 2016 and are shown below by contractual maturity:



	October 30, 2016				January 31, 2016
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In millions)
Less than 1 year	$	2,346	$	2,347	$	1,619	$	1,619
Due in 1 - 5 years	2,967		2,968		3,019		3,020
Mortgage-backed securities issued by United States government-sponsored enterprises not due at a single maturity date	56		56		34		34
Total	$	5,369	$	5,371	$	4,672	$	4,673

Net realized gains and losses were not significant for the three and nine months ended October 30, 2016 and October 25, 2015.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6 – Fair Value of Financial Assets and Liabilities

We measure our cash equivalents, marketable securities, and interest rate swap at fair value using quoted market prices of identical assets or similar assets from active markets. We review the fair value hierarchy classification on a quarterly basis. There were no significant transfers between Levels 1 and 2 assets or liabilities for the three months ended October 30, 2016, and we did not have any investments or liabilities classified as Level 3 as of October 30, 2016.



		Estimated Fair Value at
	Pricing Category	October 30, 2016		January 31, 2016
		(In millions)
Assets
Cash equivalents and marketable securities:
Corporate debt securities (1)	Level 2	$	2,239	$	1,901
Debt securities of United States government agencies (2)	Level 2	$	1,152	$	1,170
Debt securities issued by United States Treasury (3)	Level 2	$	770	$	801
Money market funds (4)	Level 1	$	542	$	43
Asset-backed securities (5)	Level 2	$	437	$	435
Mortgage-backed securities issued by United States government-sponsored enterprises (5)	Level 2	$	163	$	231
Foreign government bonds (5)	Level 2	$	68	$	92


Liabilities
Current liabilities:
1.00% Convertible Senior Notes (6)	Level 2	$	3,725	$	2,273
Other noncurrent liabilities:
2.20% Notes Due 2021 (6)	Level 2	$	997	$	—
3.20% Notes Due 2026 (6)	Level 2	$	997	$	—
Interest rate swap (7)	Level 2	$	9	$	7


(1)	Included $35 million and $51 million in cash equivalents as of October 30, 2016 and January 31, 2016, respectively, and $2.20 billion and $1.85 billion in marketable securities as of October 30, 2016 and January 31, 2016, respectively, on the Condensed Consolidated Balance Sheets.


(2)	Included $38 million and $90 million in cash equivalents as of October 30, 2016 and January 31, 2016, respectively, and $1.11 billion and $1.08 billion in marketable securities as of October 30, 2016 and January 31, 2016, respectively, on the Condensed Consolidated Balance Sheets.


(3)	Included $25 million in cash equivalents as of October 30, 2016 and $745 million and $801 million in marketable securities as of October 30, 2016 and January 31, 2016, respectively, on the Condensed Consolidated Balance Sheets.


(4)	Reported in cash equivalents on the Condensed Consolidated Balance Sheets.


(5)	Reported in marketable securities on the Condensed Consolidated Balance Sheets.


(6)	The Convertible Notes, 2.20% Notes Due 2021, and 3.20% Notes Due 2026 are carried on our Condensed Consolidated Balance Sheets at their original issuance value, net of unamortized debt discount and issuance costs, and are not marked to fair value each period. See Note 11 of these Notes to Condensed Consolidated Financial Statements for additional information.


(7)	Please refer to Note 9 of these Notes to Condensed Consolidated Financial Statements for a discussion regarding our interest rate swap.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 7 - Amortizable Intangible Assets

The components of our amortizable intangible assets are as follows:



	October 30, 2016							January 31, 2016
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(In millions)
Acquisition-related intangible assets	$	193	$	(163	)	$	30	$	193	$	(152	)	$	41
Patents and licensed technology	469		(379		)	90		462		(337		)	125
Total intangible assets	$	662	$	(542	)	$	120	$	655	$	(489	)	$	166

Amortization expense associated with intangible assets was $18 million and $53 million for the three and nine months ended October 30, 2016, respectively, and $18 million and $56 million for the three and nine months ended October 25, 2015, respectively. Future amortization expense related to the net carrying amount of intangible assets as of October 30, 2016 is estimated to be $16 million for the remainder of fiscal year 2017, $54 million in fiscal year 2018, $26 million in fiscal year 2019, $16 million in fiscal year 2020, $7 million in fiscal year 2021 and a total of $1 million in fiscal year 2022 and beyond.

Note 8 - Balance Sheet Components

Certain balance sheet components are as follows:



	October 30,		January 31,
	2016		2016
Inventories:	(In millions)
Raw materials	$	203	$	105
Work in-process	203		103
Finished goods	273		210
Total inventories	$	679	$	418

As of October 30, 2016, we had outstanding inventory purchase obligations totaling $908 million.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



	October 30,		January 31,
	2016		2016
Accrued and Other Current Liabilities:	(In millions)
Customer related liabilities (1)	$	175	$	160
Deferred revenue	170		322
Accrued payroll and related expenses	79		79
Accrued restructuring and other charges (2)	13		23
Professional service fees	13		23
Coupon interest on notes	12		3
Income taxes payable	9		2
Warranty accrual (3)	8		11
Contributions payable	4		3
Leases payable	4		4
Accrued royalties	4		1
Other	16		11
Total accrued and other current liabilities	$	507	$	642


(1)	Customer related liabilities include accrued customer programs, such as rebates and marketing development funds.


(2)	Please refer to Note 15 of these Notes to Condensed Consolidated Financial Statements for a discussion regarding restructuring and other charges.


(3)	Please refer to Note 10 of these Notes to Condensed Consolidated Financial Statements for a discussion regarding warranties.



	October 30,		January 31,
	2016		2016
Other Long-Term Liabilities:	(In millions)
Deferred income tax liability (1)	$	88	$	301
Income taxes payable	85		78
Contributions payable	13		13
Interest rate swap (2)	9		7
Deferred revenue (3)	2		44
Other	16		10
Total other long-term liabilities	$	213	$	453


(1)	Please refer to the “Recently Adopted Accounting Pronouncement” section of Note 1 of these Notes to Condensed Consolidated Financial Statements for a discussion regarding the impact of a recently adopted accounting pronouncement on deferred taxes.


(2)	Please refer to Note 9 of these Notes to Condensed Consolidated Financial Statements for a discussion regarding our interest rate swap.


(3)	Deferred revenue under our patent cross licensing agreement with Intel Corporation is now located in short term deferred revenue as less than twelve months remains on the agreement.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 9 - Derivative Financial Instruments

In August 2015 we entered into an interest rate swap for a portion of the operating lease financing arrangement for our new headquarters building that entitles us to pay amounts based on a fixed interest rate in exchange for receipt of amounts based on variable interest rates. The objective of this interest rate swap is to mitigate variability in the benchmark interest rate on the first $200 million of existing operating lease financing payments. This interest rate swap is designated as a cash flow hedge, will have settlements beginning in the second quarter of fiscal year 2019, and will terminate in the fourth quarter of fiscal year 2023. Gains or losses on this swap are recorded in accumulated other comprehensive income or loss and will subsequently be recorded in earnings at the point when the related operating lease financing expense begins to affect earnings or if ineffectiveness of the swap should occur.

During the three and nine months ended October 30, 2016, we entered into foreign currency forward contracts with a total U.S. dollar equivalent notional value of $64 million and $160 million, respectively, to mitigate the impact of foreign currency exchange rate movements on our operating expenses. We designate these contracts as cash flow hedges and assess the effectiveness of the hedge relationships on a spot to spot basis. 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 as of October 30, 2016 was not significant.

During the three and nine months ended October 30, 2016, we also entered into foreign currency forward contracts with a total U.S. dollar equivalent notional value of $54 million and $67 million, respectively, to mitigate the impact of foreign currency movements on monetary assets and liabilities that are denominated in currencies other than our reporting currency. These foreign currency forward contracts were not designated for hedge accounting treatment. Therefore, the change in fair value of these contracts is recorded as a component of other income or expense, net, and offsets the change in fair value of the foreign currency denominated monetary assets and liabilities, which is also recorded in other income or expense, net.

Under the master netting agreements with the respective counterparties to our foreign currency forward contracts, we are allowed to net settle transactions with the same counterparty, subject to applicable requirements. However, we present our derivative assets and liabilities at their gross fair values on our Condensed Consolidated Balance Sheets. We are not required to pledge, and are not entitled to receive, cash collateral related to these derivative instruments.

As of October 30, 2016, the maturities of the designated foreign currency forward contracts were three months or less.

We formally assess, both at inception and on an ongoing basis, whether derivative financial instruments designated for hedge accounting treatment are highly effective. For the three and nine months ended October 30, 2016, all derivative financial instruments designated for hedge accounting treatment were determined to be highly effective and there were no gains or losses associated with ineffectiveness.

During the three and nine months ended October 30, 2016, we recognized a net change in unrealized gains (losses) on derivative financial instruments designated for hedge accounting treatment of $2 million and $(3) million, respectively, net of tax, in other comprehensive income.

We expect to realize all gains and losses deferred into accumulated other comprehensive income or loss related to foreign currency forward contracts within the next twelve months. However, we do not expect to reclassify any amount from accumulated other comprehensive income or loss into earnings related to the interest rate swap as the underlying operating lease financing payments for our new headquarters building will not start within the next twelve months.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 10 - Guarantees

U.S. GAAP requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, U.S. GAAP requires disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities.

Accrual for Product Warranty Liabilities

We record a reduction to revenue for estimated product returns at the time revenue is recognized primarily based on historical return rates. Cost of revenue includes the estimated cost of product warranties. Under limited circumstances, we may offer an extended limited warranty to customers for certain products. Additionally, we accrue for known warranty and indemnification issues if a loss is probable and can be reasonably estimated.

On July 31, 2015, we announced a voluntary recall and replacement of our SHIELD 8-inch tablets that were sold between July 2014 and July 2015. We have determined that the battery in these tablets can overheat, posing a fire hazard. The recall does not affect any other NVIDIA products. During the twelve months ended January 31, 2016, we recorded a $26 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other associated costs.

The estimated product returns and estimated product warranty liabilities as of and for the nine and twelve months ended October 30, 2016 and January 31, 2016 were as follows:



	October 30,			January 31,
	2016			2016
	(In millions)
Balance at beginning of period	$	11		$	8
Additions	1			27
Deductions	(5		)	(24		)
Balance at end of period	$	7		$	11

In connection with certain agreements that we have entered into in the past, we have provided indemnities to cover the indemnified party for matters such as tax, product, and employee liabilities. We have included intellectual property indemnification provisions in our technology related agreements with third parties. Maximum potential future payments cannot be estimated because many of these agreements do not have a maximum stated liability. We have not recorded any liability in our Condensed Consolidated Financial Statements for such indemnifications.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 11 - Debt

Convertible Debt

1.00 % Convertible Senior Notes Due 2018

On December 2, 2013, we issued $1.50 billion of 1.00% convertible senior notes, or the Convertible Notes, due 2018. The Convertible Notes are unsecured, unsubordinated obligations of the Company, which pay interest in cash semi-annually at a rate of 1.00% per annum. The Convertible Notes will mature on December 1, 2018 unless repurchased or converted prior to such date. The Convertible Notes were initially convertible at a rate of 49.5958 shares of common stock per $1,000 principal amount of the Convertible Notes (equivalent to an initial conversion price of $20.1630 per share of common stock). The conversion rate and conversion price are adjusted upon the occurrence of certain events, including our cash dividends or distributions exceeding $0.085 per share. Accordingly, as of October 30, 2016, the conversion rate has been adjusted to 49.8058 shares of common stock per $1,000 principal amount of the Convertible Notes (equivalent to an adjusted conversion price of $20.0780 per share of common stock) for dividend increases.

We separately accounted for the liability and equity components of the Convertible Notes at issuance and the value assigned to the debt component was the estimated fair value, as of the issuance date, of a similar debt without the conversion feature. The difference between the net cash proceeds and this estimated fair value represented the value assigned to the equity component and was recorded as a debt discount. The debt discount is amortized using the effective interest method from the origination date through its stated contractual maturity date.

The initial debt component of the Convertible Notes was valued at $1.35 billion based on the contractual cash flows discounted at an appropriate market rate for a non-convertible debt at the date of issuance, which was determined to be 3.15%. The initial carrying value of the permanent equity component reported in additional paid-in-capital was valued at $126 million and recorded as a debt discount. This amount, together with the $23 million purchaser's discount to the par value of the Convertible Notes, represented the total unamortized debt discount of $148 million we recorded at the time of issuance of the Convertible Notes. The aggregate debt discount is amortized as interest expense over the contractual term of the Convertible Notes using the effective interest method using an interest rate of 3.15%.

The following table presents the carrying value of the Convertible Notes:



	October 30,			January 31,
	2016			2016
	(In millions)
1.00% Convertible Senior Notes Due 2018	$	1,056		$	1,500
Unamortized debt discount (1)	(45		)	(87		)
Net carrying amount	$	1,011		$	1,413

(1) As of October 30, 2016, the remaining period over which the unamortized debt discount will be amortized is 2.1 years.

The following table presents interest expense for the contractual interest and the accretion of debt discount and issuance costs related to the Convertible Notes:



	Three Months Ended				Nine Months Ended
	October 30,		October 25,		October 30,		October 25,
	2016		2015		2016		2015
	(In millions)
Contractual coupon interest expense	$	3	$	4	$	10	$	11
Amortization of debt discount and issuance costs	5		7		20		22
Total interest expense related to Convertible Notes	$	8	$	11	$	30	$	33

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Holders may convert all or any portion of their Convertible Notes at their option at any time prior to August 1, 2018 only under the following circumstances: (1) during any fiscal quarter, if the last reported sale price of the common stock for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after August 1, 2018 to the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Convertible Notes regardless of the foregoing conditions.

The Convertible Notes first became convertible as of February 1, 2016. As of October 30, 2016, the Convertible Notes continued to be convertible at the holders’ option through January 29, 2017 as the price of our common stock was greater than or equal to 130% of the conversion price for at least 20 trading days during the 30 consecutive trading days ending on the last trading day of our fiscal quarter ended October 30, 2016. As such, the $1,011 million carrying value of the Convertible Notes continued to be classified as a current liability and the $45 million difference between the principal amount and the carrying value of the Convertible Notes continued to be classified as convertible debt conversion obligation in the mezzanine equity section of our Condensed Consolidated Balance Sheet, and will remain there for as long as the Convertible Notes are convertible. The determination of whether or not the Convertible Notes are convertible must continue to be performed on a quarterly basis. Consequently, the Convertible Notes may be reclassified as long-term debt and the convertible debt conversion obligation may be reclassified within shareholders' equity if the conversion threshold is not met in future quarters.

Upon conversion of the Convertible Notes, we will pay cash up to the aggregate principal amount of the Convertible Notes. We may pay or deliver cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted. Based on the closing price of our common stock on October 28, 2016 (the last trading day of the third quarter of fiscal year 2017) of $70.56, the if-converted value of our Convertible Notes exceeded their principal amount by approximately $2.66 billion.

During both the three and nine months ended October 30, 2016, we paid cash to settle $444 million in principal amount, issued 15 million shares of our common stock with respect to the conversion obligation in excess of the principal amount, and recognized a loss of $15 million on early conversions, of the Convertible Notes. Further, we received additional conversion notices for an aggregate of $229 million in principal amount of the Convertible Notes during the third quarter of fiscal year 2017. Settlements of these conversion requests are expected to be completed in the fourth quarter of fiscal year 2017.

Note Hedges and Warrants

Concurrently with the issuance of the Convertible Notes, we entered into a convertible note hedge transaction, or the Note Hedges, with a strike price equal to the initial conversion price of the Convertible Notes, or $20.1630 per share. Adjusting for dividends paid through October 30, 2016, the strike price of the Note Hedges has been adjusted to $20.0780 per share. The Note Hedges allow us to receive shares of our common stock and/or cash related to the excess conversion value that we would deliver and/or pay, respectively, to the holders of the Convertible Notes upon conversion. Through October 30, 2016, we had received 15 million shares of our common stock from the exercise of a portion of the Note Hedges related to the settlement of an aggregate of $444 million in principal amount of the Convertible Notes.

In addition, concurrent with the offering of the Convertible Notes and the purchase of the Note Hedges, we entered into a separate warrant transaction, or the Warrants, with an initial strike price to the holders of the Warrants of $27.1425 per share. Under the terms of the Warrants, the strike price is adjusted upon the occurrence of certain events, including our cash dividends or distributions that deviate from $0.085 per share. Accordingly, as of October 30, 2016, the strike price was adjusted to $27.0281 per share, reflecting adjustments for our dividend increases made to that date. The Warrants are net share settled and cover, subject to customary anti-dilution adjustments, 75 million shares of our common stock. As of October 30, 2016, the Warrants had not been exercised and remained outstanding. The value of the Warrants was initially recorded in equity and continues to be classified as equity.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Long-Term Debt

2.20% Notes Due 2021 and 3.20% Notes Due 2026

On September 16, 2016, we issued $1.00 billion of 2.20% notes due September 16, 2021 and $1.00 billion of 3.20% notes due September 16, 2026 (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 2.20% Notes Due 2021 on or after August 16, 2021, or for redemptions of the 3.20% Notes Due 2026 on or after June 16, 2026.

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 net proceeds from the Notes were $1.99 billion, after deducting debt discount and issuance costs. We intend to use the net proceeds from the Notes to prefund the repayment of the principal amount of our Convertible Notes and for general corporate purposes such as dividend payments or share repurchases.

The carrying value of our long-term debt and the associated interest rates were as follows:



	Expected Remaining Term (years)	Effective Interest Rate	October 30, 2016
			(In millions)
2.20% Notes Due 2021	4.9	2.38%	$	1,000
3.20% Notes Due 2026	9.9	3.31%	1,000
Unamortized debt discount and issuance costs			(18		)
Net carrying amount			$	1,982

Revolving Credit Facility

On October 7, 2016, we entered into a credit agreement, or the Credit Agreement, under which we may borrow, repay and re-borrow amounts from time to time, up to $575 million, for working capital and other general corporate purposes. The commitments under the Credit Agreement are available for a 5-year period ending on October 7, 2021, on which all outstanding obligations would be due and payable. The Credit Agreement also permits us to obtain additional revolving loan commitments up to $425 million, subject to certain conditions. As of October 30, 2016, we had not borrowed any amounts under the Credit Agreement.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 12 - Commitments and Contingencies

Operating Lease Financing Arrangement

In fiscal year 2016, we began to construct a new headquarters building in Santa Clara, California, which is currently targeted for completion in the fourth quarter of fiscal year 2018. We are financing this construction under an off-balance sheet, build-to-suit operating lease arrangement. As a part of this arrangement, we leased the real property we own where the building will be constructed under a 99 year ground lease to a syndicate of banks and concurrently leased back the building under a real property lease.

Under the real property lease, we pay rent, taxes, maintenance costs, utilities, insurance and other property related costs. The lease has an initial 7.5 year term expiring on December 19, 2022, consisting of an approximately 2.5 year construction period followed by a 5 year lease term. We have the option to renew this lease for up to three additional 5 year periods, subject to approval by the banks.

We will oversee the construction of the headquarters building. The banks have committed to fund up to $380 million of costs relating to construction. Advances will be made periodically to reimburse us for construction costs we incur. Once construction is complete, the lease balance will remain static at the completed cost for the remaining duration of the lease term. During construction, accrued interest will be capitalized into the lease balance. Following construction, we will pay rent in the form of interest. We have guaranteed the obligations under the lease held by our subsidiary.

During the term of the lease, we may elect to purchase the headquarters building for the amount of the banks’ investment in the building and any accrued but unpaid rent. At the end of the lease term, we may elect to buy the building for the outstanding balance on the maturity date or arrange for the cash sale of the building to an unaffiliated third party. The aggregate guarantee made by us under the lease is no more than 87.5% of the costs incurred in connection with the construction of the building. However, under certain default circumstances, the lease guarantee may be 100% of the banks’ investment in the building plus any and all accrued but unpaid interest and all other rent due and payable under the operative agreements.

The operative agreements are subject to customary default provisions, including, for example, those relating to payment and performance defaults, and events of bankruptcy. We are also subject to financial covenants including a covenant to maintain a maximum total leverage ratio not to exceed 3.0 to 1.0 and a minimum interest coverage ratio in excess of 3.5 to 1.0 during the term. If certain events of default occur and are continuing under the operative agreements, the banks may accelerate repayment of their investment under the lease.

Patent Infringement Cases

In September 2014, NVIDIA filed complaints against Qualcomm, Inc. and various Samsung entities in both the United States International Trade Commission, or ITC, and the United States District Court for the District of Delaware alleging infringement of certain patents relating to graphics processing. In November 2014, Samsung filed complaints against NVIDIA in the ITC and the United States District Court for the Eastern District of Virginia, alleging that NVIDIA infringed certain patents.

NVIDIA and Samsung, and NVIDIA and Qualcomm, also challenged the validity of certain of each other’s patents through inter partes review before the United States Patent and Trademark Office.

On April 28, 2016, NVIDIA and Samsung entered a binding memorandum of understanding which resolved all existing intellectual property disputes between the parties, and requires the immediate dismissal of all pending litigation between them. As a result of this agreement, on May 5, 2016, Samsung filed a Stipulation of Dismissal in the United States District Court for the Eastern District of Virginia. On May 11, 2016, NVIDIA voluntarily dismissed its petition to the United States Court of Appeals for the Federal Circuit to review the ITC’s decision in Investigation No. 337-TA-932. On May 12, 2016, NVIDIA voluntarily dismissed its Complaint in the United States District Court for the District of Delaware. On May 19, 2016, Samsung filed a Corrected Joint Motion to Terminate Investigation No. 337-TA-941. On June 16, 2016, the ITC granted the joint motion and terminated the ITC investigation. The parties have also moved to dismiss all pending inter partes reviews. Also as part of this agreement, NVIDIA and Samsung each received a license to a small number of patents of the other, but no portfolio license was granted nor was any compensation paid by either party. On June 28, 2016, NVIDIA and Samsung executed a settlement agreement based on the April 28, 2016 memorandum of understanding.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NVIDIA’s dismissals on May 11, 2016 and May 12, 2016 also terminated its claims against Qualcomm.

In December 2015, Advanced Silicon Technologies LLC filed complaints in the ITC and the United States District Court for the District of Delaware alleging infringement of certain patents relating to graphics processing and memory management. NVIDIA and Advanced Silicon Technologies resolved this litigation on April 22, 2016 and NVIDIA agreed to license the patents asserted and other patents owned and controlled by Advanced Silicon Technologies and certain of its affiliates. On April 27, 2016, NVIDIA and Advanced Silicon Technologies jointly moved to terminate the investigation as to NVIDIA. The Office of Unfair Import Investigations supported the motion, and none of the other parties opposed it. On May 10, 2016, the Administrative Law Judge issued an Initial Determination granting the joint request to terminate the investigation as to NVIDIA. On June 1, 2016, the ITC issued a Notice determining not to review the Administrative Law Judge’s determination, thereby finalizing termination of the investigation as to NVIDIA. Pursuant to the license agreement, $10 million was recorded as a charge to cost of revenue during the three months ended May 1, 2016.

Accounting for Loss Contingencies

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.

Note 13 - Shareholders’ Equity

Capital Return Program

Beginning August 2004, our Board of Directors authorized us, subject to certain specifications, to repurchase shares of our common stock. On November 7, 2016, the Board authorized an additional $2.00 billion under our repurchase program and extended it through December 2020.

In March 2016, we entered into an accelerated share repurchase, or ASR, agreement with an investment bank, under which we made an upfront payment of $500 million to purchase shares of our common stock and received an initial delivery of 12 million shares. The shares delivered resulted in a reduction, on the delivery date, of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted earnings per share. The ASR agreement was settled in July 2016 with a cash payment of $9 million to the investment bank. As a result, a total of 12 million shares were repurchased under the ASR transaction for $509 million, or an average price of $42.06 per share.

During the three and nine months ended October 30, 2016, we also paid $61 million and $185 million, respectively, in cash dividends to our shareholders, equivalent to $0.1150 per share. As a result, we returned $61 million and $694 million to shareholders during the three and nine months ended October 30, 2016, respectively, in the form of share repurchases and dividend payments.

Through October 30, 2016, we have repurchased an aggregate of 243 million shares under our share repurchase program for a total cost of $4.36 billion. All shares delivered from these repurchases have been placed into treasury stock. As of November 7, 2016, we were authorized, subject to certain specifications, to repurchase additional shares of our common stock up to $2.96 billion through December 2020.

We intend to return $1.00 billion to our shareholders in fiscal year 2017 through a combination of share repurchases and cash dividends. For fiscal year 2018, we intend to return $1.25 billion to our shareholders through ongoing quarterly cash dividends and share repurchases. We also declared an increase in our quarterly cash dividend to $0.14 per share from $0.1150 per share, to be paid with our next quarterly cash dividend on December 19, 2016, to all shareholders of record on November 28, 2016.

Convertible Preferred Stock

As of October 30, 2016 and January 31, 2016, there were no shares of preferred stock outstanding.

Common Stock

We are authorized to issue up to 2.00 billion shares of our common stock at $0.001 per share par value.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 14 - Segment Information

Our Chief Executive Officer, who is considered to be our chief operating decision maker, or CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. Our operating segments are equivalent to our reportable segments.

We report our business in two primary reportable segments - the GPU business and the Tegra Processor business - based on a unified underlying graphics architecture.

Our GPU product brands are aimed at specialized markets including GeForce for gamers; Quadro for designers; Tesla for researchers and data scientists focused on artificial intelligence and big-data analytics; and GRID for cloud-based visual computing users. Our Tegra brand integrates an entire computer onto a single chip, incorporating GPUs and multi-core CPUs aimed at online gaming and entertainment devices, as well as autonomous robots, drones and cars.

We have a single unifying architecture for our GPU and Tegra Processors. This architecture unification leverages our visual computing expertise by charging the operating expenses of certain core engineering functions to the GPU business, while charging the Tegra Processor business for the incremental cost of the teams working directly for that business. In instances where the operating expenses of certain functions benefit both reportable segments, our CODM assigns 100% of those expenses to the reportable segment that benefits the most.

The “All Other” category presented below represents the revenue and expenses that our CODM does not assign to either the GPU business or the Tegra Processor business for purposes of making operating decisions or assessing financial performance. The revenue includes primarily patent licensing revenue and the expenses include stock-based compensation expense, corporate infrastructure and support costs, acquisition-related costs, restructuring and other charges, contributions, product warranty charge, legal settlement costs, and other non-recurring charges and benefits that our CODM deems to be enterprise in nature.

Our CODM does not review any information regarding total assets on a reportable segment basis. Reportable segments do not record intersegment revenue, and, accordingly, there is none to be reported. The accounting policies for segment reporting are the same as for NVIDIA as a whole. The table below presents details of our reportable segments and the “All Other” category.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



	GPU		Tegra Processor			All Other			Consolidated
	(In millions)
Three Months Ended October 30, 2016
Revenue	$	1,697	$	241		$	66		$	2,004
Depreciation and amortization expense	$	30	$	8		$	10		$	48
Operating income (loss)	$	678	$	17		$	(56	)	$	639

Three Months Ended October 25, 2015
Revenue	$	1,110	$	129		$	66		$	1,305
Depreciation and amortization expense	$	26	$	11		$	11		$	48
Operating income (loss)	$	367	$	(65	)	$	(57	)	$	245

Nine Months Ended October 30, 2016
Revenue	$	3,972	$	567		$	198		$	4,737
Depreciation and amortization expense	$	87	$	22		$	31		$	140
Operating income (loss)	$	1,405	$	(35	)	$	(169	)	$	1,201

Nine Months Ended October 25, 2015
Revenue	$	3,009	$	402		$	198		$	3,609
Depreciation and amortization expense	$	81	$	36		$	34		$	151
Operating income (loss)	$	917	$	(164	)	$	(258	)	$	495



	Three Months Ended						Nine Months Ended
	October 30, 2016			October 25, 2015			October 30, 2016			October 25, 2015
	(In millions)
Reconciling items included in "All Other" category:
Unallocated revenue	$	66		$	66		$	198		$	198
Stock-based compensation expense	(65		)	(51		)	(176		)	(145		)
Unallocated cost of revenue and operating expenses	(53		)	(60		)	(156		)	(181		)
Acquisition-related costs	(4		)	(4		)	(12		)	(18		)
Restructuring and other charges	—			(8		)	(3		)	(97		)
Contributions	—			—			(4		)	—
Product warranty charge	—			—			—			(15		)
Legal settlement costs	—			—			(16		)	—
Total	$	(56	)	$	(57	)	$	(169	)	$	(258	)

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if our customers’ revenue is attributable to end customers that are located in a different location. The following table summarizes information pertaining to our revenue from customers based on invoicing address in different geographic regions:



	Three Months Ended				Nine Months Ended
	October 30,		October 25,		October 30,		October 25,
	2016		2015		2016		2015
	(In millions)
Revenue:
Taiwan	$	747	$	515	$	1,696	$	1,348
China	341		229		845		583
Other Asia Pacific	309		181		660		554
United States	282		156		682		474
Europe	171		116		494		341
Other Americas	154		108		360		309
Total revenue	$	2,004	$	1,305	$	4,737	$	3,609

The following table summarizes information pertaining to our revenue by each of the specialized markets we serve:



	Three Months Ended				Nine Months Ended
	October 30,		October 25,		October 30,		October 25,
	2016		2015		2016		2015
	(In millions)
Revenue:
Gaming	$	1,244	$	761	$	2,712	$	2,008
Professional Visualization	207		190		610		547
Datacenter	240		82		534		242
Automotive	127		79		359		227
OEM & IP	186		193		522		585
Total revenue	$	2,004	$	1,305	$	4,737	$	3,609

Revenue from significant customers, those representing 10% or more of total revenue for the respective dates, is summarized as follows:



	Three Months Ended				Nine Months Ended
	October 30,		October 25,		October 30,		October 25,
	2016		2015		2016		2015
Revenue:
Customer A	13	%	10	%	12	%	11	%

Revenue from Customer A was attributable to the GPU business.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Accounts receivable from significant customers, those representing 10% or more of total accounts receivable for the respective periods, is summarized as follows:



	October 30,		January 31,
	2016		2016
Accounts Receivable:
Customer B	18	%	21	%
Customer C	12	%	3	%

Note 15 - Restructuring and Other Charges

In the second quarter of fiscal year 2016, we began the wind-down of our Icera operations. Our operating expenses for the nine months ended October 30, 2016 included $3 million of restructuring and other charges. No restructuring charges were recorded during the three months ended October 30, 2016.

The following table provides a summary of the restructuring activities and related liabilities recorded in accrued liabilities on our Condensed Consolidated Balance Sheets as of October 30, 2016 (in millions):



Balance as of January 31, 2016	$	23
Restructuring and other charges	3
Cash payments	(14		)
Non-cash adjustments	1
Balance as of October 30, 2016	$	13

The majority of the remaining balance of $13 million as of October 30, 2016 is expected to be paid during fiscal year 2018.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

All references to “NVIDIA,” “we,” “us,” “our” or the “Company” mean NVIDIA Corporation and our subsidiaries, except where it is made clear that the term means only the parent company.

NVIDIA, the NVIDIA logo, GeForce, Quadro, Tegra, Tesla, Ansel, GeForce NOW, Icera, Iray, NVIDIA DGX-1, NVIDIA DRIVE, NVIDIA DesignWorks, NVIDIA GRID, NVIDIA SHIELD, NVIDIA TensorRT, NVIDIA VRWorks, and Pascal are trademarks and/or registered trademarks of NVIDIA Corporation in the United States and other countries. Other company and product names may be trademarks of the respective companies with which they are associated.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Item 6. Selected Financial Data” of our Annual Report on Form 10-K for the fiscal year ended January 31, 2016 and “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q and our Condensed Consolidated Financial Statements and related Notes thereto, as well as other cautionary statements and risks described elsewhere in this Quarterly Report on Form 10-Q, before deciding to purchase or sell shares of our common stock.

Overview

Our Company and Our Businesses

NVIDIA is the world leader in visual computing. NVIDIA has transformed into a specialized platform company that targets four large markets - Gaming, Professional Visualization, Datacenter and Automotive - where visual computing is essential and valued.

Our two reportable segments - GPU and Tegra Processor - are based on a single underlying graphics architecture. From our proprietary processors, we have created platforms that address the four large markets where our visual computing expertise is critically important. We are focused on delivering value through PC, mobile and cloud architectures. Our vertical integration enables us to bring together hardware, system software, programmable algorithms, systems and services to create unique value for the markets we serve.

Headquartered in Santa Clara, California, NVIDIA was incorporated in California in April 1993 and reincorporated in Delaware in April 1998.

Recent Developments, Future Objectives and Challenges

Third Quarter of Fiscal Year 2017 Summary



	Three Months Ended
	October 30, 2016			July 31, 2016			October 25, 2015			Q/Q		Y/Y
	(In millions, except per share data)
Revenue	$	2,004		$	1,428		$	1,305		40	%	54	%
Gross margin	59.0		%	57.9		%	56.3		%	110 bps		270 bps
Operating expenses	$	544		$	509		$	489		7	%	11	%
Income from operations	$	639		$	317		$	245		102	%	161	%
Net income	$	542		$	261		$	246		108	%	120	%
Net income per diluted share	$	0.83