UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended October 25, 2020

OR

☐ 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.)

2788 San Tomas Expressway

Santa Clara, California 95051

(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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	NVDA	The Nasdaq Global Select Market

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of common stock, $0.001 par value, outstanding as of November 13, 2020, was 619 million.

NVIDIA CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED October 25, 2020

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 25, 2020 and October 27, 2019	3
	b) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 25, 2020 and October 27, 2019	4
	c) Condensed Consolidated Balance Sheets as of October 25, 2020 and January 26, 2020	5
	d) Condensed Consolidated Statements of Shareholders' Equity for the three and nine months ended October 25, 2020 and October 27, 2019	6
	e) Condensed Consolidated Statements of Cash Flows for the nine months ended October 25, 2020 and October 27, 2019	8
	f) Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
	PART II : OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 6.	Exhibits	41
Signature		42

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

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

NVIDIA LinkedIn Page (http://www.linkedin.com/company/nvidia)

NVIDIA Instagram Page (https://www.instagram.com/nvidia)

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.

2

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 25,		October 27,		October 25,		October 27,
	2020		2019		2020		2019
Revenue	$	4,726	$	3,014	$	11,672	$	7,813
Cost of revenue	1,766		1,098		4,432		3,060
Gross profit	2,960		1,916		7,240		4,753
Operating expenses
Research and development	1,047		712		2,778		2,091
Sales, general and administrative	515		277		1,437		806
Total operating expenses	1,562		989		4,215		2,897
Income from operations	1,398		927		3,025		1,856
Interest income	7		45		50		137
Interest expense	(53)		(13)		(131)		(39)
Other, net	(4)		—		(5)		—
Other income (expense), net	(50)		32		(86)		98
Income before income tax	1,348		959		2,939		1,954
Income tax expense	12		60		64		109
Net income	$	1,336	$	899	$	2,875	$	1,845
Net income per share:
Basic	$	2.16	$	1.47	$	4.67	$	3.03
Diluted	$	2.12	$	1.45	$	4.59	$	2.99
Weighted average shares used in per share computation:
Basic	618		610		616		609
Diluted	630		618		626		617

See accompanying Notes to Condensed Consolidated Financial Statements.

3

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

	Three Months Ended				Nine Months Ended
	October 25,		October 27,		October 25,		October 27,
	2020		2019		2020		2019
Net income	$	1,336	$	899	$	2,875	$	1,845
Other comprehensive income (loss), net of tax
Available-for-sale securities:
Net change in unrealized gain (loss)	(1)		—		3		9
Reclassification adjustments for net realized gain (loss) included in net income	—		—		(2)		—
Net change in unrealized gain (loss)	(1)		—		1		9
Cash flow hedges:
Net unrealized gain	5		—		10		4
Reclassification adjustments for net realized gain included in net income	4		(2)		—		(4)
Net change in unrealized gain (loss)	9		(2)		10		—
Other comprehensive income (loss), net of tax	8		(2)		11		9
Total comprehensive income	$	1,344	$	897	$	2,886	$	1,854

See accompanying Notes to Condensed Consolidated Financial Statements.

4

NVIDIA CORPORATION AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

	October 25,		January 26,
	2020		2020
ASSETS
Current assets:
Cash and cash equivalents	$	2,251	$	10,896
Marketable securities	7,888		1
Accounts receivable, net	2,546		1,657
Inventories	1,495		979
Prepaid expenses and other current assets	213		157
Total current assets	14,393		13,690
Property and equipment, net	2,059		1,674
Operating lease assets	681		618
Goodwill	4,193		618
Intangible assets, net	2,861		49
Deferred income tax assets	666		548
Other assets	2,028		118
Total assets	$	26,881	$	17,315
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,097	$	687
Accrued and other current liabilities	1,574		1,097
Short-term debt	998		—
Total current liabilities	3,669		1,784
Long-term debt	5,963		1,991
Long-term operating lease liabilities	604		561
Other long-term liabilities	1,311		775
Total liabilities	11,547		5,111
Commitments and contingencies - see Note 13
Shareholders’ equity:
Preferred stock	—		—
Common stock	1		1
Additional paid-in capital	8,301		7,045
Treasury stock, at cost	(10,530)		(9,814)
Accumulated other comprehensive income	12		1
Retained earnings	17,550		14,971
Total shareholders' equity	15,334		12,204
Total liabilities and shareholders' equity	$	26,881	$	17,315

See accompanying Notes to Condensed Consolidated Financial Statements.

5

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED OCTOBER 25, 2020 AND OCTOBER 27, 2019

(Unaudited)

	Common Stock Outstanding			Additional Paid-in Capital		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total Shareholders' Equity
(In millions, except per share data)	Shares	Amount
Balances, July 26, 2020	617	$	1	$	7,828	$	(10,232)	$	4	$	16,313	$	13,914
Net income	—	—		—		—		—		1,336		1,336
Other comprehensive income	—	—		—		—		8		—		8
Issuance of common stock from stock plans	3	—		96		—		—		—		96
Tax withholding related to vesting of restricted stock units	(1)	—		—		(298)		—		—		(298)
Cash dividends declared and paid ($0.16 per common share)	—	—		—		—		—		(99)		(99)
Stock-based compensation	—	—		377		—		—		—		377
Balances, October 25, 2020	619	$	1	$	8,301	$	(10,530)	$	12	$	17,550	$	15,334
Balances, July 28, 2019	609	$	1	$	6,543	$	(9,524)	$	(1)	$	13,317	$	10,336
Net income	—	—		—		—		—		899		899
Other comprehensive loss	—	—		—		—		(2)		—		(2)
Issuance of common stock from stock plans	4	—		63		—		—		—		63
Tax withholding related to vesting of restricted stock units	(1)	—		—		(202)		—		—		(202)
Cash dividends declared and paid ($0.16 per common share)	—	—		—		—		—		(98)		(98)
Stock-based compensation	—	—		218		—		—		—		218
Balances, October 27, 2019	612	$	1	$	6,824	$	(9,726)	$	(3)	$	14,118	$	11,214

See accompanying Notes to Condensed Consolidated Financial Statements.

6

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED OCTOBER 25, 2020 AND OCTOBER 27, 2019

(Unaudited)

	Common Stock Outstanding			Additional Paid-in Capital		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total Shareholders' Equity
(In millions, except per share data)	Shares	Amount
Balances, January 26, 2020	612	$	1	$	7,045	$	(9,814)	$	1	$	14,971	$	12,204
Net income	—	—		—		—		—		2,875		2,875
Other comprehensive income	—	—		—		—		11		—		11
Issuance of common stock from stock plans	9	—		190		—		—		—		190
Tax withholding related to vesting of restricted stock units	(2)	—		—		(716)		—		—		(716)
Cash dividends declared and paid ($0.48 per common share)	—	—		—		—		—		(296)		(296)
Fair value of partially vested equity awards assumed in connection with acquisitions	—	—		86		—		—		—		86
Stock-based compensation	—	—		980		—		—		—		980
Balances, October 25, 2020	619	$	1	$	8,301	$	(10,530)	$	12	$	17,550	$	15,334
Balances, January 27, 2019	606	$	1	$	6,051	$	(9,263)	$	(12)	$	12,565	$	9,342
Net income	—	—		—		—		—		1,845		1,845
Other comprehensive income	—	—		—		—		9		—		9
Issuance of common stock from stock plans	9	—		146		—		—		—		146
Tax withholding related to vesting of restricted stock units	(3)	—		—		(463)		—		—		(463)
Cash dividends declared and paid ($0.48 per common share)	—	—		—		—		—		(292)		(292)
Stock-based compensation	—	—		627		—		—		—		627
Balances, October 27, 2019	612	$	1	$	6,824	$	(9,726)	$	(3)	$	14,118	$	11,214

See accompanying Notes to Condensed Consolidated Financial Statements.

7

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

	Nine Months Ended
	October 25,		October 27,
	2020		2019
Cash flows from operating activities:
Net income	$	2,875	$	1,845
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense	981		624
Depreciation and amortization	810		275
Deferred income taxes	(117)		(5)
Other	(2)		5
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(667)		(32)
Inventories	(190)		531
Prepaid expenses and other assets	(409)		55
Accounts payable	289		91
Accrued and other current liabilities	111		(103)
Other long-term liabilities	74		10
Net cash provided by operating activities	3,755		3,296
Cash flows from investing activities:
Proceeds from maturities of marketable securities	5,165		4,744
Proceeds from sales of marketable securities	502		3,363
Purchases of marketable securities	(12,840)		(1,461)
Acquisitions, net of cash acquired	(8,524)		—
Purchases related to property and equipment and intangible assets	(845)		(344)
Investments and other, net	(4)		(6)
Net cash provided by (used in) investing activities	(16,546)		6,296
Cash flows from financing activities:
Issuance of debt, net of issuance costs	4,971		—
Proceeds related to employee stock plans	190		146
Payments related to tax on restricted stock units	(716)		(463)
Dividends paid	(296)		(292)
Other	(3)		—
Net cash provided by (used in) financing activities	4,146		(609)
Change in cash and cash equivalents	(8,645)		8,983
Cash and cash equivalents at beginning of period	10,896		782
Cash and cash equivalents at end of period	$	2,251	$	9,765

See accompanying Notes to Condensed Consolidated Financial Statements.

8

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 26, 2020 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 26, 2020, 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 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 26, 2020. 

The unaudited condensed consolidated financial statements in this report include the financial results of Mellanox Technologies Ltd., or Mellanox, prospectively from April 27, 2020. For additional details, refer to Note 2 - Business Combination.

Significant Accounting Policies

Except for the accounting policies for business combination and investment in non-affiliated entities, there have been no material changes to our significant accounting policies disclosed 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 26, 2020.

Business Combination

We allocate the fair value of the purchase price of an acquisition to the tangible assets acquired, liabilities assumed, and intangible assets acquired, including in-process research and development, or IPR&D, based on their estimated fair values. The excess of the fair value of the purchase price over the fair values of these net tangible and intangible assets acquired is recorded as goodwill. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but our estimates and assumptions are inherently uncertain and subject to refinement. The estimates and assumptions used in valuing intangible assets include, but are not limited to, the amount and timing of projected future cash flows, discount rate used to determine the present value of these cash flows and asset lives. These estimates are inherently uncertain and, therefore, actual results may differ from the estimates made. As a result, during the measurement period of up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of the purchase price of an acquisition, whichever comes first, any subsequent adjustments are recorded to our condensed consolidated statements of income.

We initially capitalize the fair value of IPR&D as an intangible asset with an indefinite life. We assess for impairment thereafter. When IPR&D projects are completed, we reclassify the IPR&D as an amortizable purchased intangible asset and amortize over the asset’s estimated useful life.

Acquisition-related expenses are recognized separately from the business combination and expensed as incurred.

Investment in Non-Affiliated Entities

Non-marketable equity investments in privately-held companies are recorded at fair value on a non-recurring basis only if an impairment or observable price adjustment occurs in the period with changes in fair value recorded through net income. These investments are valued using observable and unobservable inputs or data in an inactive market and the valuation requires our judgment due to the absence of market prices and inherent lack of liquidity. The estimated fair value is based on quantitative and qualitative factors including subsequent financing activities by the investee.

9

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Fiscal Year

We operate on a 52- or 53-week year, ending on the last Sunday in January. Fiscal year 2021 is a 53-week year and fiscal year 2020 is a 52-week year. The third quarters of fiscal years 2021 and 2020 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 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. The inputs into our judgments and estimates consider the economic implications of COVID-19 on our critical and significant accounting estimates. 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 Pronouncement

In June 2016, the Financial Accounting Standards Board issued a new accounting standard to replace the existing incurred loss impairment methodology 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 for accounts receivable and other financial instruments, including available-for-sale debt securities. We adopted the standard in the first quarter of fiscal year 2021 and the impact of the adoption was not material to our consolidated financial statements.

Note 2 - Business Combination

Pending Acquisition of Arm Limited

On September 13, 2020, we entered into a Share Purchase Agreement, or the Purchase Agreement, with Arm Limited, or Arm, and SoftBank Group Capital Limited and SVF Holdco (UK) Limited, or together, SoftBank, for us to acquire, from SoftBank, all of the allotted and issued ordinary shares of Arm in a transaction valued at $40 billion. We paid $2 billion in cash at signing, or the Signing Consideration, and will pay upon closing of the acquisition $10 billion in cash and issue to SoftBank 44.3 million shares of our common stock with an aggregate value of $21.5 billion. The transaction includes a potential earn out, which is contingent on the achievement of certain financial performance targets by Arm during the fiscal year ending March 31, 2022. If the financial targets are achieved, SoftBank can elect to receive either up to $5 billion in cash or up to 10.3 million shares of our common stock. We will issue up to $1.5 billion in restricted stock units to Arm employees after closing. The $2 billion paid upon signing was allocated between advanced consideration for the acquisition of $1.36 billion and the prepayment of intellectual property licenses from Arm of $0.17 billion and royalties of $0.47 billion. The closing of the acquisition is subject to customary closing conditions, including receipt of specified governmental and regulatory consents and approvals and expiration of any related mandatory waiting period, and Arm's implementation of the reorganization and distribution of Arm’s IoT Services Group and certain other assets and liabilities. If the Purchase Agreement is terminated under certain circumstances, we will be refunded $1.25 billion of the Signing Consideration. The $2 billion payment upon signing was allocated on a fair value basis and any refund of the Signing Consideration will use stated values in the Purchase Agreement. We believe the closing of the acquisition will likely occur in the first quarter of calendar year 2022.

10

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Acquisition of Mellanox Technologies, Ltd.

On April 27, 2020, we completed the acquisition of all outstanding shares of Mellanox for a total purchase consideration of $7.13 billion. Mellanox is a supplier of high-performance interconnect products for computing, storage and communications applications. We acquired Mellanox to optimize data center workloads to scale across the entire computing, networking, and storage stack.

Preliminary Purchase Price Allocation

The aggregate purchase consideration has been preliminarily allocated as follows (in millions):

Purchase Price
Cash paid for outstanding Mellanox ordinary shares (1)	$	7,033
Cash for Mellanox equity awards (2)	16
Total cash consideration	7,049
Fair value of Mellanox equity awards assumed by NVIDIA (3)	85
Total purchase consideration	$	7,134
Allocation
Cash and cash equivalents	$	115
Marketable securities	699
Accounts receivable, net	216
Inventories	320
Prepaid expenses and other assets	179
Property and equipment, net	144
Goodwill	3,431
Intangible assets	2,970
Accounts payable	(136)
Accrued and other current liabilities	(236)
Income tax liability	(191)
Deferred income tax liability	(258)
Other long-term liabilities	(119)
	$	7,134

(1)    Represents the cash consideration of $125.00 per share paid to Mellanox shareholders for approximately 56 million shares of outstanding Mellanox ordinary shares.

(2)    Represents the cash consideration for the settlement of approximately 249 thousand Mellanox stock options held by employees and non-employee directors of Mellanox.

(3)    Represents the fair value of Mellanox’s stock-based compensation awards attributable to pre-combination services.

We allocated the purchase price to tangible and identified intangible assets acquired and liabilities assumed based on the preliminary estimates of their estimated fair values, which were determined using generally accepted valuation techniques based on estimates and assumptions made by management at the time of the acquisition and are subject to change during the measurement period which is not expected to exceed one year. The primary tasks that are required to be completed include validation of business level forecasts, jurisdictional forecasts, customer attrition rates, contingent liabilities assessments and any related tax impacts from the acquisition. Any adjustments to our preliminary purchase price allocation identified during the measurement period will be recognized in the period in which the adjustments are determined.

The goodwill is primarily attributable to the planned growth in the combined business of NVIDIA and Mellanox. Goodwill is not amortized to earnings, but instead is reviewed for impairment at least annually, absent any interim indicators of impairment. Goodwill recognized in the acquisition is not expected to be deductible for foreign tax purposes. Goodwill

11

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

arising from the Mellanox acquisition has been allocated to the Compute and Networking segment. Refer to Note 15 – Segment Information for further details on segments.

The operating results of Mellanox have been included in our condensed consolidated financial statements for the third quarter and first nine months of fiscal year 2021 since the acquisition date of April 27, 2020. Revenue attributable to Mellanox was approximately 13% and 10% of consolidated revenue for the third quarter and first nine months of fiscal year 2021, respectively. There is not a practical way to determine net income attributable to Mellanox due to integration. Acquisition-related costs attributable to Mellanox of $27 million were included in selling, general and administrative expense for the first nine months of fiscal year 2021.

Intangible Assets

The estimated fair value and weighted average useful life of the acquired intangible assets are as follows:

	Fair Value		Weighted Average Useful Lives
	(In millions)
Developed technology (1)	$	1,640	5 years
Customer relationships (2)	440		3 years
Order backlog (3)	190		Based on actual shipments
Trade names (4)	70		5 years
Total identified finite-lived intangible assets	2,340
IPR&D (5)	630		N/A
Total identified intangible assets	$	2,970

(1)    The fair value of developed technology was identified using the Multi-Period Excess Earning Method.

(2)    Customer relationships represent the fair value of the existing relationships using the With and Without Method.

(3)    Order backlog represents primarily the fair value of purchase arrangements with customers using the Multi-Period Excess Earning Method.

(4)    Trade names primarily relate to Mellanox trade names and fair value was determined by applying the Relief-from-Royalty Method under the income approach.

(5)    The fair value of IPR&D was determined using the Multi-Period Excess Earning Method.

The fair value of the finite-lived intangible assets will be amortized over the estimated useful lives based on the pattern in which the economic benefits are expected to be received to cost of revenue and operating expenses.

Mellanox had an IPR&D project associated with the next generation interconnect product that had not yet reached technological feasibility as of the acquisition date. Accordingly, we recorded an indefinite-lived intangible asset of $630 million for the fair value of this project, which will initially not be amortized. Instead, the project will be tested for impairment whenever events or changes in circumstances indicate that the project may be impaired or may have reached technological feasibility. Once the project reaches technological feasibility, we will begin to amortize the intangible asset over its estimated useful life.

Supplemental Unaudited Pro Forma Information

The following unaudited pro forma financial information summarizes the combined results of operations for NVIDIA and Mellanox as if the companies were combined as of the beginning of fiscal year 2020:

	Pro Forma
	Three Months Ended				Nine Months Ended
	October 25, 2020		October 27, 2019		October 25, 2020		October 27, 2019
	(In millions)
Revenue	$	4,726	$	3,350	$	12,101	$	8,765
Net income	$	1,388	$	786	$	3,267	$	1,190

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The unaudited pro forma information includes adjustments related to amortization of acquired intangible assets, adjustments to stock-based compensation expense, fair value of acquired inventory, and transaction costs. The unaudited pro forma information presented above is for informational purposes only and is not necessarily indicative of our consolidated results of operations of the combined business had the acquisition actually occurred at the beginning of fiscal year 2020 or of the results of our future operations of the combined businesses.

The pro forma results reflect the inventory step-up expense of $161 million in the first nine months of fiscal year 2020 and were excluded from the pro forma results for the first nine months of fiscal year 2021. There were no other material nonrecurring adjustments.

Note 3 - Leases

Our lease obligations primarily consist of operating leases for our headquarters complex, domestic and international office facilities, and data center space, with lease periods expiring between fiscal years 2021 and 2035.

Future minimum lease payments under our non-cancelable operating leases as of October 25, 2020, are as follows:   

	Operating Lease Obligations
	(In millions)
Fiscal Year:
2021 (excluding first nine months of fiscal year 2021)	$	38
2022	143
2023	122
2024	102
2025	83
2026 and thereafter	347
Total	835
Less imputed interest	115
Present value of net future minimum lease payments	720
Less short-term operating lease liabilities	116
Long-term operating lease liabilities	$	604

Operating lease expense was $37 million and $28 million for the third quarter of fiscal years 2021 and 2020, respectively, and $104 million and $83 million for the first nine months of fiscal years 2021 and 2020, respectively. Short-term and variable lease expenses for the third quarter and first nine months of fiscal years 2021 and 2020 were not significant.

Other information related to leases was as follows:

	Nine Months Ended
	October 25, 2020		October 27, 2019
	(In millions)
Supplemental cash flows information
Operating cash flows used for operating leases	$	103	$	78
Operating lease assets obtained in exchange for lease obligations (1)	$	147	$	122

(1)    The first nine months of fiscal year 2021 includes $80 million of operating lease assets addition due to a business combination.

As of October 25, 2020, our operating leases had a weighted average remaining lease term of 7.8 years and a weighted average discount rate of 3.06%. As of January 26, 2020, our operating leases had a weighted average remaining lease term of 8.3 years and a weighted average discount rate of 3.45%.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4 - Stock-Based Compensation

Our stock-based compensation expense is associated with 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 allocated to inventory, as follows:

	Three Months Ended				Nine Months Ended
	October 25, 2020		October 27, 2019		October 25, 2020		October 27, 2019
	(In millions)
Cost of revenue	$	28	$	15	$	62	$	27
Research and development	232		141		594		400
Sales, general and administrative	123		67		325		197
Total	$	383	$	223	$	981	$	624

Equity Award Activity

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

	RSUs, PSUs, and Market-based PSUs Outstanding
	Number of Shares	Weighted Average Grant-Date Fair Value Per Share
	(In millions, except per share data)
Balances, January 26, 2020	14	$	176.72
Granted	8	$	300.75
Vested restricted stock	(6)	$	152.46
Balances, October 25, 2020	16	$	253.81

As of October 25, 2020, there was $3.42 billion of aggregate unearned stock-based compensation expense, net of forfeitures. This amount is expected to be recognized over a weighted average period of 2.7 years for RSUs, PSUs, and market-based PSUs, and 0.9 years for ESPP.

14

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 5 – Net Income Per Share

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

	Three Months Ended				Nine Months Ended
	October 25,		October 27,		October 25,		October 27,
	2020		2019		2020		2019
	(In millions, except per share data)
Numerator:
Net income	$	1,336	$	899	$	2,875	$	1,845
Denominator:
Basic weighted average shares	618		610		616		609
Dilutive impact of outstanding equity awards	12		8		10		8
Diluted weighted average shares	630		618		626		617
Net income per share:
Basic (1)	$	2.16	$	1.47	$	4.67	$	3.03
Diluted (2)	$	2.12	$	1.45	$	4.59	$	2.99
Equity awards excluded from diluted net income per share because their effect would have been anti-dilutive	—		5		8		11

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

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

Note 6 – Income Taxes

We recognized an income tax expense of $12 million and $64 million for the third quarter and first nine months of fiscal year 2021, respectively, and $60 million and $109 million for the third quarter and first nine months of fiscal year 2020, respectively. The income tax expense as a percentage of income before income tax was 0.9% and 2.2% for the third quarter and first nine months of fiscal year 2021, respectively, and 6.3% and 5.6% for the third quarter and first nine months of fiscal year 2020, respectively.

The decrease in our effective tax rate for the third quarter and first nine months of fiscal year 2021 as compared to the same periods of fiscal year 2020 was primarily due to a decrease in the proportional amount of earnings subject to United States tax and an increase of tax benefits from stock-based compensation.

Our effective tax rates for the first nine months of fiscal years 2021 and 2020 were lower than the U.S. federal statutory rate of 21% due to income earned in jurisdictions that are subject to taxes lower than the U.S. federal statutory tax rate, the benefit of the U.S. federal research tax credit, and tax benefits related to stock-based compensation.

During the second quarter of fiscal year 2021, we completed the acquisition of Mellanox. As a result of the acquisition, we recorded $256 million of net deferred tax liabilities primarily on the excess of book basis over the tax basis of the acquired intangible assets and undistributed earnings in certain foreign subsidiaries. We also recorded $153 million of long-term tax liabilities related to tax basis differences in Mellanox. The net deferred tax liabilities and long-term tax liabilities are based upon certain assumptions underlying our purchase price allocation. Upon finalization of the purchase price allocation, additional adjustments to the amount of our net deferred taxes and long-term tax liabilities may be required. As a result of the acquisition, we intend to indefinitely reinvest approximately $675 million of cumulative undistributed earnings held by Mellanox non-U.S. subsidiaries. We have not provided the amount of unrecognized deferred tax liabilities for temporary differences related to investments in Mellanox non-U.S. subsidiaries as the determination of such amount is not practicable.

For the first nine months of fiscal year 2021, there have been no material changes to our tax years that remain subject to examination by major tax jurisdictions. We are currently under examination by the Internal Revenue Service for our fiscal years 2018 and 2019. In the second quarter of fiscal year 2021, we assumed $59 million of unrecognized tax

15

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

benefits and $4 million of related interest through the Mellanox acquisition. Other than these amounts, there have been no material changes to our unrecognized tax benefits and any related interest or penalties since the fiscal year ended January 26, 2020.

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 25, 2020, 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.

Note 7 - Cash Equivalents and Marketable Securities 

Our cash equivalents and marketable securities, except for money market funds and certificates of deposits, are classified as “available-for-sale” debt securities.

The following is a summary of cash equivalents and marketable securities as of October 25, 2020 and January 26, 2020:

	October 25, 2020
	Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value		Reported as
									Cash Equivalents		Marketable Securities
	(In millions)
Debt securities issued by the United States Treasury	$	3,881	$	—	$	—	$	3,881	$	1,116	$	2,765
Corporate debt securities	3,139		2		—		3,141		427		2,714
Debt securities issued by United States government agencies	1,571		1		—		1,572		—		1,572
Certificates of deposit	797		—		—		797		29		768
Money market funds	388		—		—		388		388		—
Foreign government bonds	117		—		—		117		48		69
Total	$	9,893	$	3	$	—	$	9,896	$	2,008	$	7,888

	January 26, 2020
	Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value		Reported as
									Cash Equivalents		Marketable Securities
	(In millions)
Money market funds	$	7,507	$	—	$	—	$	7,507	$	7,507	$	—
Debt securities issued by the United States Treasury	1,358		—		—		1,358		1,358		—
Debt securities issued by United States government agencies	1,096		—		—		1,096		1,096		—
Corporate debt securities	592		—		—		592		592		—
Foreign government bonds	200		—		—		200		200		—
Certificates of deposit	27		—		—		27		27		—
Asset-backed securities	1		—		—		1		—		1
Total	$	10,781	$	—	$	—	$	10,781	$	10,780	$	1

Net realized gains and unrealized gains and losses were not significant for all periods presented.

The amortized cost and estimated fair value of cash equivalents and marketable securities as of October 25, 2020 and January 26, 2020 are shown below by contractual maturity.

	October 25, 2020				January 26, 2020
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In millions)
Less than one year	$	9,329	$	9,330	$	10,781	$	10,781
Due in 1 - 5 years	564		566		—		—
Total	$	9,893	$	9,896	$	10,781	$	10,781

Note 8 – Fair Value of Financial Assets and Liabilities

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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

		Fair Value at
	Pricing Category	October 25, 2020		January 26, 2020
		(In millions)
Assets
Cash equivalents and marketable securities:
Money market funds	Level 1	$	388	$	7,507
Debt securities issued by the United States Treasury	Level 2	$	3,881	$	1,358
Corporate debt securities	Level 2	$	3,141	$	592
Debt securities issued by United States government agencies	Level 2	$	1,572	$	1,096
Certificates of deposit	Level 2	$	797	$	27
Foreign government bonds	Level 2	$	117