Edgar Filing: NVIDIA CORP

NVDA 2015 Q3 10Q

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 26, 2014



[_]	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 Q No o

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 Q 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 Q

The number of shares of common stock, $0.001 par value, outstanding as of November 14, 2014, was 543,536,901.

NVIDIA CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED October 26, 2014

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 26, 2014 and October 27, 2013	3

	b) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 26, 2014 and October 27, 2013	4

	c) Condensed Consolidated Balance Sheets as of October 26, 2014 and January 26, 2014	5

	d) Condensed Consolidated Statements of Cash Flows for the nine months ended October 26, 2014 and October 27, 2013	6

	e) Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	36

	PART II : OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 6.	Exhibits	54

Signature		55

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?trk=hb_tab_compy_id_3608)

In addition, investors and others can use the Pulse news reader to subscribe to the NVIDIA Daily News feed and 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.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except per share data)



	Three Months Ended						Nine Months Ended
	October 26,			October 27,			October 26,		October 27,
	2014			2013			2014		2013

Revenue	$	1,225,382		$	1,053,967		$	3,430,993	$	2,985,944
Cost of revenue	548,684			469,552			1,531,119		1,337,423
Gross profit	676,698			584,415			1,899,874		1,648,521
Operating expenses
Research and development	340,085			340,294			1,011,472		999,193
Sales, general and administrative	123,298			103,133			360,549		320,025
Total operating expenses	463,383			443,427			1,372,021		1,319,218
Income from operations	213,315			140,988			527,853		329,303
Interest income	7,422			4,022			19,961		12,963
Interest expense	11,542			819			34,539		2,508
Other income (expense), net	(125		)	(2,707		)	13,702		1,608
Income before income tax expense	209,070			141,484			526,977		341,366
Income tax expense	36,103			22,750			89,518		48,293
Net income	$	172,967		$	118,734		$	437,459	$	293,073

Net income per share:
Basic	$	0.32		$	0.20		$	0.79	$	0.49
Diluted	$	0.31		$	0.20		$	0.77	$	0.49

Weighted average shares used in per share computation:
Basic	547,789			580,870			555,035		594,363
Diluted	558,201			588,752			565,653		600,108

Cash dividends declared and paid per common share	$	0.085		$	0.075		$	0.255	$	0.225

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(In thousands)



	Three Months Ended					Nine Months Ended
	October 26,		October 27,			October 26,			October 27,
	2014		2013			2014			2013

Net income	$	172,967	$	118,734		$	437,459		$	293,073
Other comprehensive income (loss), net of tax:
Net change in net unrealized gains (losses) on available-for-sale securities, net of tax expense of ($502) and ($852) for the three and nine months ended October 26, 2014, respectively, and ($126) and ($47) for the three and nine months ended October 27, 2013, respectively	5,283		8			5,036			(2,978		)
Reclassification adjustments for net realized gains (losses) on available-for-sale securities included in net income, net of tax benefit (expense) of ($54) and $82 for the three and nine months ended October 26, 2014, respectively, and $24 and $615 for the three and nine months ended October 27, 2013, respectively	100		(43		)	(152		)	(1,141		)
Other comprehensive income (loss)	5,383		(35		)	4,884			(4,119		)
Total comprehensive income	$	178,350	$	118,699		$	442,343		$	288,954

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands)



	October 26,			January 26,
	2014			2014
ASSETS
Current assets:
Cash and cash equivalents	$	394,683		$	1,151,587
Marketable securities	3,846,114			3,520,223
Accounts receivable, net	563,400			426,357
Inventories	408,081			387,765
Prepaid expenses and other current assets	67,333			70,285
Deferred income taxes	61,498			68,494
Total current assets	5,341,109			5,624,711
Property and equipment, net	566,601			582,740
Goodwill	643,179			643,179
Intangible assets, net	241,301			296,012
Other assets	93,679			104,252
Total assets	$	6,885,869		$	7,250,894

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	328,097		$	324,391
Accrued liabilities and other current liabilities	605,810			621,105
Total current liabilities	933,907			945,496

Long-term debt	1,377,259			1,356,375
Other long-term liabilities	355,133			475,125
Capital lease obligations, long-term	14,977			17,500
Commitments and contingencies - see Note 12	—			—
Stockholders’ equity:
Preferred stock	—			—
Common stock	752			732
Additional paid-in capital	3,783,099			3,483,342
Treasury stock, at cost	(3,390,985		)	(2,537,295		)
Accumulated other comprehensive income	9,761			4,877
Retained earnings	3,801,966			3,504,742
Total stockholders' equity	4,204,593			4,456,398
Total liabilities and stockholders' equity	$	6,885,869		$	7,250,894

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)



	Nine Months Ended
	October 26,			October 27,
	2014			2013
Cash flows from operating activities:
Net income	$	437,459		$	293,073
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	166,170			184,310
Stock-based compensation expense	115,371			100,091
Amortization of debt discount	20,884			—
Net gain on sale and disposal of long-lived assets and investments	(17,654		)	(258		)
Deferred income taxes	62,081			7,914
Tax benefits from stock-based compensation	(11,744		)	(23,743		)
Others	19,343			11,569
Changes in operating assets and liabilities:
Accounts receivable	(138,729		)	7,806
Inventories	(19,875		)	32,178
Prepaid expenses and other assets	5,024			2,898
Accounts payable	9,827			(38,376		)
Accrued liabilities and other current liabilities	(23,356		)	34,296
Other long-term liabilities	(161,874		)	(177,324		)
Net cash provided by operating activities	462,927			434,434
Cash flows from investing activities:
Purchases of marketable securities	(2,126,079		)	(1,420,471		)
Proceeds from sale of marketable securities	1,100,014			1,475,403
Proceeds from maturities of marketable securities	688,168			447,134
Proceeds from sale of long-lived assets and investments	20,862			—
Purchases of property and equipment and intangible assets	(91,336		)	(188,812		)
Acquisition of business	—			(17,145		)
Other	(500		)	(2,450		)
Net cash provided by (used in) investing activities	(408,871		)	293,659
Cash flows from financing activities:
Proceeds from issuance of common stock under employee stock plans	129,691			64,749
Payments under capital lease obligations	(2,160		)	(1,780		)
Tax benefits from stock-based compensation	11,744			23,743
Payments for repurchases of common stock	(810,000		)	(850,000		)
Dividends paid	(140,235		)	(133,007		)
Other	—			(2,500		)
Net cash used in financing activities	(810,960		)	(898,795		)
Change in cash and cash equivalents	(756,904		)	(170,702		)
Cash and cash equivalents at beginning of period	1,151,587			732,786
Cash and cash equivalents at end of period	$	394,683		$	562,084

Other non-cash activity:
Assets acquired by assuming related liabilities	$	14,498		$	28,963

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. 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 financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 26, 2014.

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 26, 2014. 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 2015 and fiscal year 2014 are both 52-week years. The third quarters of fiscal years 2015 and 2014 are both 13-week quarters.

Principles of Consolidation

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

Reclassifications

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

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, warranty liabilities, litigation, investigation and settlement costs 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

In August 2014, the Financial Accounting Standards Board, or FASB, issued new guidance related to our responsibility to evaluate whether there is substantial doubt about our ability to continue ongoing business operations and to provide relevant footnote disclosures. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our financial statements.

In June 2014, the FASB issued new guidance related to stock-based compensation. The new guidance requires that a performance target that affects vesting, and that could be achieved after the requisite service period is rendered, be treated as a performance condition. The new guidance is effective for interim periods within and those fiscal years, beginning after December 15, 2015. We currently do not have awards with a performance target where the employee would be eligible to vest in the award regardless of whether the employee is rendering service on the date the performance target is achieved. Therefore, we believe, the adoption of this new accounting guidance will not have an impact on our consolidated financial statements.

In May 2014, the FASB issued a new accounting standard update that creates a single source of revenue guidance under U.S. GAAP for all companies, in all industries. Under the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new guidance requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used. This new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. 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, or PSUs, and our employee stock purchase plan, or ESPP.

We estimate the fair value of employee stock options on the date of grant using a binomial model and recognize the expense using a straight-line attribution method over the requisite employee service period. We use the closing trading price of our common stock on the date of grant, minus a dividend yield discount, as the fair value of awards of RSUs and PSUs. The compensation expense for the RSUs is recognized using a straight-line attribution method over the requisite employee service period while compensation expense for PSUs is recognized using an accelerated amortization model. We estimate the fair value of shares to be issued under our ESPP using the Black-Scholes model at the commencement of an offering period in March and September of each year. Stock-based compensation for our employee stock purchase plan is expensed using an accelerated amortization model.

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 26, 2014		October 27, 2013		October 26, 2014		October 27, 2013
	(In thousands)
Cost of revenue	$	3,021	$	3,090	$	8,596	$	7,911
Research and development	22,680		20,902		64,636		61,392
Sales, general and administrative	15,734		10,307		42,139		30,788
Total	$	41,435	$	34,299	$	115,371	$	100,091

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Equity Award Activity

The following summarizes the stock option, RSU and PSU activity under our equity incentive plans:



	Options Outstanding		Weighted Average Exercise Price
Stock Options	(In thousands)		(Per share)
Balances, January 26, 2014	32,504		$14.22
Granted	86		$18.66
Exercised	(7,945	)	$12.59
Cancelled	(1,361	)	$19.49
Balances, October 26, 2014	23,284		$14.48



	RSUs and PSUs Outstanding		Weighted Average Grant-Date Fair Value
RSUs and PSUs	(In thousands)		(Per share)
Balances, January 26, 2014	18,852		$13.82
Granted (1)	12,506		$17.63
Vested	(7,138	)	$13.75
Cancelled	(1,089	)	$14.21
Balances, October 26, 2014	23,131		$15.88

(1) Includes the total number of PSUs issuable if the maximum corporate financial performance target level for fiscal year 2015 is achieved. Depending on the actual level of achievement of the corporate performance goal at the end of fiscal year 2015, the range of PSUs issued could be from 1.3 million to 2.5 million shares. The PSUs were granted during the first quarter of fiscal year 2015 to our CEO and senior management as approved by our Compensation Committee.

Of the total grant-date fair value, we estimated the stock-based compensation expense related to the stock options, RSUs and PSUs that were not expected to vest was $35.2 million for the nine months ended October 26, 2014. As of October 26, 2014 and January 26, 2014, the aggregate amount of unearned stock-based compensation expense related to our stock options, RSUs and PSUs was $322.6 million and $241.3 million, respectively, adjusted for estimated forfeitures. As of October 26, 2014 and January 26, 2014, we expected to recognize the unearned stock-based compensation expense related to stock options over an estimated weighted average amortization period of 2.0 years and 2.5 years, respectively. As of October 26, 2014 and January 26, 2014, we expected to recognize the unearned stock-based compensation expense related to RSUs and PSUs over an estimated weighted average amortization period of 3.0 years and 2.7 years, respectively.

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 26,		October 27,		October 26,		October 27,
	2014		2013		2014		2013
	(In thousands, except per share data)
Numerator:
Net income	$	172,967	$	118,734	$	437,459	$	293,073
Denominator:
Denominator for basic net income per share, weighted average shares	547,789		580,870		555,035		594,363
Effect of dilutive securities:
Equity awards outstanding	10,412		7,882		10,618		5,745
Denominator for diluted net income per share, weighted average shares	558,201		588,752		565,653		600,108
Net income per share:
Basic net income per share	$	0.32	$	0.20	$	0.79	$	0.49
Diluted net income per share	$	0.31	$	0.20	$	0.77	$	0.49
Potentially dilutive securities excluded from diluted net income per share because their effect would have been anti-dilutive	11,324		21,870		16,155		27,351

The denominator for diluted net income per share for the three and nine months ended October 26, 2014 did not include any effect from the 1.00% Convertible Senior Notes due 2018, or the Notes. The calculation of the dilution impact is based on the treasury stock method in accordance with Accounting Standards Codification, or ASC 260, Earnings per Share. Commencing after the fiscal quarter ended on April 27, 2014, the Notes will not impact the denominator for diluted net income per share unless the average price of our common stock, as calculated under the terms of the Notes, exceeds the conversion price of $20.16 per share. Likewise, the denominator for diluted net income per share will not include any effect from the warrants that were issued simultaneously with the Notes unless the average price of our common stock, as calculated under the terms of the warrants, exceeds $27.14 per share. Please refer to Note 11 of these Notes to Condensed Consolidated Financial Statements for additional discussion regarding the Notes.

The denominator for diluted net income per share for the three and nine months ended October 26, 2014 also did not include any effect from the note hedges that were issued simultaneously with the Notes. In future periods, the denominator for diluted net income per share will exclude any effect of the note hedges, unless in the event an actual conversion of any or all of the Notes occurs, the shares that would be delivered to us under the note hedges are designed to neutralize the dilutive effect of the shares that we would issue under the Notes.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4 – Income Taxes

We recognized income tax expense of $36.1 million and $89.5 million for the three and nine months ended October 26, 2014, respectively, and $22.8 million and $48.3 million for the three and nine months ended October 27, 2013, respectively. Income tax expense as a percentage of income before taxes, or our effective tax rate, was 17.3% and 17.0% for the three and nine months ended October 26, 2014, respectively, and 16.1% and 14.2% for the three and nine months ended October 27, 2013, respectively.

The increase in our effective tax rate in fiscal year 2015 as compared to the same period in the prior fiscal year was primarily related to the expiration of the U.S. federal research tax credit on December 31, 2013 which resulted in no tax benefit in the nine months ended October 26, 2014.

Our effective tax rate on income before tax for the first nine months of fiscal year 2015 of 17.0% was lower than the United States federal statutory rate of 35% due primarily to income earned in jurisdictions where the tax rate is lower than the United States federal statutory tax rate. Further, our effective tax rate for the first nine months of fiscal year 2015 of 17.0% differs from our annual projected effective tax rate for the first nine months of fiscal year 2015 of 18.5% due to discrete events that occurred in the first nine months of fiscal year 2015 primarily attributable to the tax benefits recognized upon the expiration of statutes of limitations in certain non-U.S. jurisdictions.

Our effective tax rate on income before tax for the first nine months of fiscal year 2014 of 14.2% was lower than the United States federal statutory rate of 35% due primarily to income earned in jurisdictions where the tax rate is lower than the United States federal statutory tax and the benefit of the U.S. federal research tax credit.

For the nine months ended October 26, 2014, there have been no material changes to our tax years that remain subject to examination by major tax jurisdictions. Additionally, there have been no other material changes to our unrecognized tax benefits and any related interest or penalties since the fiscal year ended January 26, 2014, other than the recognition of tax benefits upon the expiration of statute of limitation in certain non-U.S. jurisdictions in the nine months ended October 26, 2014.

While we believe that we have adequately provided for all uncertain tax positions, or tax positions where it is believed not more-likely-than-not that the position will be sustained upon examination, 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 26, 2014, 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, a component of stockholders’ equity, net of tax, and net realized gains and losses recorded in other income, net, on the Condensed Consolidated Statements of Income.

We performed an impairment review of our investment portfolio as of October 26, 2014. Based on our quarterly impairment review and having considered the guidance in the relevant accounting literature, we concluded that our investments were appropriately valued and that no other than temporary impairment charges were necessary on our portfolio as of October 26, 2014.

The following is a summary of cash equivalents and marketable securities at October 26, 2014 and January 26, 2014:



	October 26, 2014
	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
	(In thousands)
Corporate debt securities	$	1,954,162	$	3,418	$	(520	)	$	1,957,060
Debt securities of United States government agencies	585,391		787		(53		)	586,125
Debt securities issued by United States Treasury	575,188		2,891		(66		)	578,013
Asset-backed securities	437,791		159		(199		)	437,751
Mortgage-backed securities issued by United States government-sponsored enterprises	273,812		4,590		(718		)	277,684
Foreign government bonds	85,259		135		(16		)	85,378
Money market funds	72,881		—		—			72,881
Total	$	3,984,484	$	11,980	$	(1,572	)	$	3,994,892
Classified as:
Cash equivalents								$	148,778
Marketable securities								3,846,114
Total								$	3,994,892



	January 26, 2014
	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
	(In thousands)
Corporate debt securities	$	1,762,833	$	1,837	$	(945	)	$	1,763,725
Debt securities of United States government agencies	1,012,740		848		(261		)	1,013,327
Debt securities issued by United States Treasury	495,889		621		(57		)	496,453
Money market funds	307,865		—		—			307,865
Asset-backed securities	258,017		15		(315		)	257,717
Mortgage-backed securities issued by United States government-sponsored enterprises	185,594		3,837		(725		)	188,706
Foreign government bonds	64,955		20		(120		)	64,855
Total	$	4,087,893	$	7,178	$	(2,423	)	$	4,092,648
Classified as:
Cash equivalents								$	572,425
Marketable securities								3,520,223
Total								$	4,092,648

The following table provides the breakdown of the investments with unrealized losses at October 26, 2014:



	Less than 12 months					12 months or greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	(In thousands)
Corporate debt securities	$	698,851	$	(83	)	$	1,258,209	$	(437	)	$	1,957,060	$	(520	)
Debt securities of United States government agencies	278,703		(8		)	307,422		(45		)	586,125		(53		)
Debt securities issued by United States Treasury	71,564		(66		)	506,449		—			578,013		(66		)
Asset-backed securities	224,100		(27		)	213,651		(173		)	437,751		(200		)
Mortgage-backed securities issued by United States government-sponsored enterprises	—		—			277,684		(717		)	277,684		(717		)
Foreign government bonds	33,606		—			51,772		(16		)	85,378		(16		)
Total	$	1,306,824	$	(184	)	$	2,615,187	$	(1,388	)	$	3,922,011	$	(1,572	)

The gross unrealized losses related to fixed income securities were due to changes in interest rates. We have determined that the gross unrealized losses on investment securities at October 26, 2014 are temporary in nature. Currently, 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 at October 26, 2014 and January 26, 2014 and are shown below by contractual maturity.



	October 26, 2014				January 26, 2014
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In thousands)
Less than 1 year	$	1,378,709	$	1,379,705	$	1,883,132	$	1,883,753
Due in 1 - 5 years	2,490,537		2,497,644		2,114,289		2,117,387
Mortgage-backed securities issued by government-sponsored enterprises not due at a single maturity date	115,238		117,543		90,472		91,508
Total	$	3,984,484	$	3,994,892	$	4,087,893	$	4,092,648

Net realized gains and losses for the three and nine months ended October 26, 2014, and for the three months ended October 27, 2013, were not significant. Net realized gains for the nine months ended October 27, 2013 were $1.8 million.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6 – Fair Value of Financial Assets and Liabilities

Financial assets measured at fair value

We measure our cash equivalents and marketable securities at fair value. 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. Our Level 1 assets consist of our money market funds. We classify securities within Level 1 assets when the fair value is obtained from real time quotes for transactions in active exchange markets involving identical assets. Our available-for-sale securities are classified as having Level 2 inputs. Our Level 2 assets are valued utilizing a market approach where the market prices of similar assets are provided by a variety of independent industry standard data providers to our investment custodian. We review the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy. There were no significant transfers between Levels 1 and 2 assets for the three and nine months ended October 26, 2014.

Financial assets measured at fair value are summarized below:



			Fair Value Measurement as of October 26, 2014 Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs
	October 26, 2014		(Level 1)		(Level 2)
	(In thousands)
Corporate debt securities (1)	$	1,957,060	$	—	$	1,957,060
Debt securities of United States government agencies (2)	586,125		—		586,125
Debt securities issued by United States Treasury (2)	578,013		—		578,013
Asset-backed securities (2)	437,751		—		437,751
Mortgage-backed securities issued by government-sponsored enterprises (2)	277,684		—		277,684
Foreign government bonds (2)	85,378		—		85,378
Money market funds (3)	72,881		72,881		—
Total cash equivalents and marketable securities	$	3,994,892	$	72,881	$	3,922,011


(1)	Includes $75.9 million in cash equivalents and $1.88 billion in marketable securities on the Condensed Consolidated Balance Sheets.


(2)	Included in marketable securities on the Condensed Consolidated Balance Sheets.


(3)	Included in cash equivalents on the Condensed Consolidated Balance Sheets.

Financial liabilities measured at fair value

We issued $1.50 billion Convertible Senior Notes, or Notes, in December 2013. The Notes are carried at their original issuance value, net of unamortized debt discount, and are not marked to market each period. The estimated fair value of the Notes was $1.70 billion and $1.53 billion as of October 26, 2014 and January 26, 2014, respectively. The estimated fair value of the Notes was determined on the basis of market prices observable for similar instruments and is considered Level 2 in the fair value hierarchy. Please refer to Note 11 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the Notes.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 7 - 3dfx

During fiscal year 2002, we completed the purchase of certain assets from 3dfx Interactive, Inc., or 3dfx, for an aggregate purchase price of $74.2 million. On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an Asset Purchase Agreement, or the APA, which closed on April 18, 2001, to purchase certain graphics chip assets from 3dfx.

In October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. In March 2003, the Trustee appointed by the Bankruptcy Court to represent 3dfx’s bankruptcy estate served his complaint on NVIDIA. The Trustee’s complaint asserted claims for, among other things, successor liability and fraudulent transfer and sought additional payments from us. In early November 2005, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, agreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee’s claims against us. This conditional settlement was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court. The conditional settlement called for a payment by NVIDIA of $30.6 million to the 3dfx estate. Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, during the three month period ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx. The Trustee advised that he intended to object to the settlement.

The conditional settlement reached in November 2005 never progressed through the confirmation process and the Trustee’s case still remains pending appeal. As such, we have not reversed the accrual of $30.6 million - $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx – that we recorded during the three months ended October 30, 2005, pending resolution of the appeal of the Trustee’s case.

The 3dfx asset purchase price of $95.0 million and $4.2 million of direct transaction costs were allocated based on fair values presented below. The final allocation of the purchase price of the 3dfx assets is contingent upon the outcome of all of the 3dfx litigation. Please refer to Note 12 of these Notes to Condensed Consolidated Financial Statements for further information regarding this litigation.



	Fair Market Value		Straight-Line Amortization Period
	(In thousands)		(In years)
Property and equipment	$	2,433	1-2
Trademarks	11,310		5
Goodwill	85,418		—
Total	$	99,161

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 8 - Intangible Assets

The components of our amortizable intangible assets are as follows:



	October 26, 2014							January 26, 2014
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(In thousands)
Acquisition-related intangible assets	$	189,239	$	(129,073	)	$	60,166	$	189,239	$	(114,104	)	$	75,135
Patents and licensed technology	449,204		(268,069		)	181,135		446,196		(225,319		)	220,877
Total intangible assets	$	638,443	$	(397,142	)	$	241,301	$	635,435	$	(339,423	)	$	296,012

Amortization expense associated with intangible assets for the three and nine months ended October 26, 2014 was $19.3 million and $57.7 million, respectively. Amortization expense associated with intangible assets for the three and nine months ended October 27, 2013 was $19.6 million and $55.6 million, respectively. Future amortization expense related to the net carrying amount of intangible assets at October 26, 2014 is estimated to be $19.3 million for the remainder of fiscal year 2015, $71.9 million in fiscal year 2016, $63.8 million in fiscal year 2017, $49.1 million in fiscal year 2018, $20.5 million in fiscal year 2019 and a total of $16.7 million in fiscal year 2020 and beyond.

Note 9 - Balance Sheet Components

Certain balance sheet components are as follows:



	October 26,		January 26,
	2014		2014
Inventories:	(In thousands)
Raw materials	$	128,588	$	126,896
Work in-process	78,849		94,844
Finished goods	200,644		166,025
Total inventories	$	408,081	$	387,765

At October 26, 2014, we had outstanding inventory purchase obligations totaling $512.2 million.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



	October 26,		January 26,
	2014		2014
Accrued Liabilities and Other Current Liabilities:	(In thousands)
Deferred revenue, short-term	$	240,829	$	265,616
Accrued customer programs (1)	154,185		157,840
Accrued payroll and related expenses	98,870		109,721
Accrued legal settlement (2)	30,600		30,600
Customer advances	17,806		9,297
Professional service fees	12,368		13,572
Warranty accrual (3)	7,222		7,571
Coupon interest on Notes	6,292		2,500
Taxes payable, short-term	5,512		2,378
Facilities related liabilities	15,781		5,216
Other	16,345		16,794
Total accrued liabilities and other current liabilities	$	605,810	$	621,105

(1) Please refer to Note 1 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended January 26, 2014, for discussion regarding the nature of accrued customer programs and their accounting treatment related to our revenue recognition policies and estimates.

(2) Please refer to Note 12 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the 3dfx litigation.

(3) Please refer to Note 10 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the warranty accrual.



	October 26,		January 26,
	2014		2014
Other Long-Term Liabilities:	(In thousands)
Deferred income tax liability	$	210,388	$	157,953
Income taxes payable, long-term	122,854		119,977
Deferred revenue, long-term (1)	—		172,199
Asset retirement obligation	7,406		11,056
Other	14,485		13,940
Total other long-term liabilities	$	355,133	$	475,125

(1) Consists primarily of annual consideration received in advance of our performance obligation under our patent cross licensing agreement with Intel Corporation entered into in January 2011. The decrease in deferred revenue, long-term, is a result of revenue recognized during the nine months ended October 26, 2014.

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. The estimated product warranty liabilities for the three and nine months ended October 26, 2014 and October 27, 2013 were as follows:



	Three Months Ended						Nine Months Ended
	October 26,			October 27,			October 26,			October 27,
	2014			2013			2014			2013
	(In thousands)
Balance at beginning of period	$	8,202		$	17,474		$	7,571		$	14,874
Additions	988			1,143			4,177			6,043
Deductions	(1,968		)	(2,655		)	(4,526		)	(4,955		)
Balance at end of period	$	7,222		$	15,962		$	7,222		$	15,962

In connection with certain agreements that we have executed in the past, we have at times provided indemnities to cover the indemnified party for matters such as tax, product and employee liabilities. We have also on occasion 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. As such, we have not recorded any liability in our Condensed Consolidated Financial Statements for such indemnifications.

Note 11 - Long-Term Debt

1.00 % Convertible Senior Notes Due 2018

On December 2, 2013, we issued $1.50 billion of 1.00% convertible senior notes due 2018, or the Notes. The Notes are unsecured, unsubordinated obligations of the Company, which pay interest in cash semi-annually at a rate of 1.00% per annum. The Notes will mature on December 1, 2018 unless earlier repurchased or converted in accordance with their terms prior to such date. The Notes may be converted, under the conditions specified below, based on an initial conversion rate of 49.60 shares of common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of $20.16 per share of common stock), subject to adjustment as described in the indenture governing the Notes.

Holders may convert their notes at their option at any time prior to August 1, 2018 only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ended on April 27, 2014 (and only during such fiscal quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) 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 notes regardless of the foregoing conditions. Upon conversion, we will pay cash up to the aggregate principal amount of the notes to be converted and pay or deliver, as the case may be, 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 notes being converted.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

As of October 26, 2014, none of the conditions allowing holders of the Notes to convert had been met. The determination of whether or not the Notes are convertible must be performed quarterly. If the Notes become convertible at the option of the holder, the difference between the principal amount and the carrying value of the Notes would be reflected as convertible debt in the mezzanine equity section on our Condensed Consolidated Balance Sheets.

In accordance with ASC 470-20 Debt with Conversion and Other Options, all cash-settled convertible debt should be separated into debt and equity components at issuance and be assigned a fair value. The value assigned to the debt component is 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, represents the value assigned to the equity component and is 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 Notes was valued at $1,351.8 million 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 carrying value of the permanent equity component reported in additional paid-in-capital was valued at $125.7 million and recorded as a debt discount. This amount, together with the $22.5 million purchaser's discount to the par value of the Notes represents the total unamortized debt discount of $148.2 million we recorded at the time of issuance of the Notes. The aggregate debt discount is amortized as interest expense over the contractual term of the Notes using the effective interest method using an interest rate of 3.15%.

The following table presents the carrying amounts of the liability and equity components:



	October 26,			January 26,
	2014			2014
	(In thousands)
Amount of the equity component	$	125,725		$	125,725

1.00% convertible senior notes due 2018	$	1,500,000		$	1,500,000
Unamortized debt discount (1)	(122,741		)	(143,625		)
Net carrying amount	$	1,377,259		$	1,356,375

(1) As of October 26, 2014, the unamortized debt discount will be amortized over a remaining period of 4.1 years.

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



	Three Months Ended				Nine Months Ended
	October 26,		October 27,		October 26,		October 27,
	2014		2013		2014		2013
	(In thousands)
Contractual coupon interest expense	$	3,750	$	—	$	11,250	$	—
Amortization of debt discount	7,010		—		20,884		—
Amortization of debt issuance costs	49		—		146		—
Total interest expense related to Notes	$	10,809	$	—	$	32,280	$	—

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 12 - Commitments and Contingencies

3dfx

On December 15, 2000, NVIDIA and one of our indirect subsidiaries entered into an Asset Purchase Agreement, or APA, to purchase certain graphics chip assets from 3dfx. The transaction closed on April 18, 2001. In October 2002, 3dfx filed for bankruptcy.

Following the bankruptcy, in March 2003, the Trustee appointed by the Bankruptcy Court to represent 3dfx's bankruptcy estate served a complaint on NVIDIA asserting claims for, among other things, successor liability and fraudulent transfer and seeking additional payments from us. The Trustee's fraudulent transfer theory alleged that NVIDIA had failed to pay reasonably equivalent value for 3dfx's assets, and sought recovery of the difference between the $70.0 million paid and the alleged fair value, which difference the Trustee estimated to exceed $50.0 million. The Trustee's successor liability theory alleged NVIDIA was effectively 3dfx's legal successor and therefore was responsible for all of 3dfx's unpaid liabilities.

In early November 2005, after several months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors' Committee, agreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee's claims against us. This conditional settlement was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court. The conditional settlement called for a payment by NVIDIA of $30.6 million to the 3dfx estate. Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, during the three month period ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx. The Trustee advised that he intended to object to the settlement. The conditional settlement never progressed substantially through the confirmation process, and because the Trustee's case remains pending on appeal, we have not reversed the $30.6 million accrual - $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx - that we recorded during the three months ended October 30, 2005.

In March 2007, a trial was held regarding certain valuation issues in the Trustee's constructive fraudulent transfer claims against NVIDIA. On April 30, 2008, the Bankruptcy Court issued its Memorandum Decision After Trial, in which it provided a detailed summary of the trial proceedings and the parties' contentions and evidence and concluded that “the creditors of 3dfx were not injured by the Transaction.” This decision did not entirely dispose of the Trustee's action, however, as the Trustee's claims for successor liability and intentional fraudulent conveyance were still pending. On June 19, 2008, NVIDIA filed a motion for summary judgment to convert the Memorandum Decision After Trial to a final judgment. That motion was granted in its entirety and judgment was entered in NVIDIA's favor on September 11, 2008. The Trustee filed a Notice of Appeal from that judgment on September 22, 2008, and on September 25, 2008, NVIDIA exercised its election to have the appeal heard by the United States District Court.

On December 20, 2010, the District Court issued an Order affirming the Bankruptcy Court's entry of summary judgment in NVIDIA's favor, and on January 19, 2011, the Trustee filed a Notice of Appeal to the United States Court of Appeals for the Ninth Circuit. Oral argument on the appeal was held on October 8, 2014. On November 6, 2014, the Ninth Circuit affirmed the District Court’s decision upholding the ruling of the Bankruptcy Court. The Trustee has until November 20, 2014 to seek a rehearing.

Securities Cases

In September 2008, three putative securities class actions were filed in the United States District Court for the Northern District of California arising out of our announcements on July 2, 2008, that we would take a charge against cost of revenue to cover anticipated costs and expenses arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products and that we were revising financial guidance for our second quarter of fiscal year 2009. The actions purport to be brought on behalf of purchasers of NVIDIA stock and assert claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

On January 22, 2010, Plaintiffs filed a Consolidated Amended Class Action Complaint, asserting claims for violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Securities Exchange Act and seeking unspecified compensatory damages. We moved to dismiss the consolidated complaint and on October 19, 2010, Judge Seeborg granted our motion with leave to amend. On December 2, 2010, Plaintiffs filed a Second Consolidated Amended Complaint. We again moved to dismiss and on October 12, 2011, Judge Seeborg again granted our motion to dismiss, this time denying Plaintiffs leave to amend. On November 8, 2011, Plaintiffs filed a Notice of Appeal to the Ninth Circuit. Oral argument was held on January 14, 2014. On October 2, 2014, the Ninth Circuit issued an order affirming the dismissal. On October 16, 2014, Plaintiffs requested a rehearing or en banc review of the Ninth Circuit’s opinion affirming the dismissal. Plaintiffs’ request was denied on November 10, 2014. Plaintiffs have until February 9, 2015 to file a petition for writ of certiorari to the United States Supreme Court.

Patent Infringement Cases

On September 4, 2014, NVIDIA filed complaints against Qualcomm, Inc., or Qualcomm, and various Samsung entities with both the United States International Trade Commission, or ITC, and the United States District Court for the District of Delaware for alleged infringement of seven patents relating to graphics processing. In the ITC action, NVIDIA seeks to block shipments of Samsung Galaxy mobile phones and tablets containing Qualcomm’s Adreno, ARM’s Mali or Imagination’s PowerVR graphics architectures. On October 6, 2014, the ITC initiated an investigation of NVIDIA’s claim and the investigation is currently underway.

In the Delaware action, NVIDIA seeks unspecified damages for Samsung and Qualcomm’s alleged patent infringement. On October 22, 2014, Samsung and Qualcomm moved to stay the Delaware proceedings in light of the pending ITC action. The court granted the motion to stay on October 23, 2014.

On November 10, 2014, Samsung filed a complaint against NVIDIA and Velocity Micro, Inc., in the United States District Court for the Eastern District of Virginia. The complaint alleges that NVIDIA infringed six patents and falsely advertised that the Tegra K1 processor is the world’s fastest mobile processor. Samsung seeks unspecified damages and an injunction prohibiting NVIDIA from any future violations. NVIDIA has not yet responded to the complaint.

Accounting for Loss Contingencies

While there can be no assurance of favorable outcomes, we believe the claims made by other parties in the above ongoing matters are without merit and we intend to vigorously defend the actions. With the exception of the 3dfx case, we have not recorded any accrual for contingent liabilities associated with the legal proceedings described above based on our belief that liabilities, while possible, are not probable. Further, any possible range of loss in these matters cannot be reasonably estimated at this time. We are engaged in other legal actions not described above arising in the ordinary course of its business and, while there can be no assurance of favorable outcomes, we believe that the ultimate outcome of these actions will not have a material adverse effect on our operating results, liquidity or financial position.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 13 - Stockholders’ Equity

Stock Repurchase Program

Beginning August 2004, our Board of Directors authorized us, subject to certain specifications, to repurchase shares of our common stock. In November 2013, the Board extended the previously authorized repurchase program through January 2016 and authorized an additional $1.00 billion for an aggregate of $3.70 billion under the repurchase program. Through October 26, 2014, we have repurchased an aggregate of 205.4 million shares under our stock repurchase program for a total cost of $3.26 billion. As of October 26, 2014, we are authorized, subject to certain specifications, to repurchase shares of our common stock up to $438.4 million through January 2016.

The repurchases will be made in the open market, in privately negotiated transactions, or in structured stock repurchase programs, in compliance with Rule 10b-18 of the Exchange Act, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. As part of our share repurchase program, we have entered into, and we may continue to enter into, structured share repurchase transactions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement.

In November 2013, we announced the intention to return $1.00 billion to shareholders in fiscal year 2015 in the form of share repurchases and cash dividends. In February 2014, we executed an accelerated share repurchase, or ASR, agreement for $500.0 million that was completed in July 2014. Under this ASR, we repurchased 27.4 million shares in aggregate at an average price of $18.23 per share. In August 2014, we executed another ASR for $310.0 million that was completed in October 2014. Under this ASR, we repurchased 16.8 million shares in aggregate at an average price of $18.47 per share. The shares delivered under these ASRs 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. As of October 26, 2014, all shares delivered from these ASRs have been placed into treasury stock.

Cash Dividends

During the three and nine months ended October 26, 2014, we paid $46.1 million and $140.2 million, respectively, in cash dividends to our common shareholders. These dividends were equivalent to $0.085 per share on a quarterly basis, or $0.34 per share on an annual basis.

Convertible Preferred Stock

There are no shares of preferred stock outstanding.

Common Stock

We are authorized to issue up to 2,000,000,000 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 reporting segments - the GPU business and the Tegra Processor business.

Our GPU business leverages our GPU technology across multiple end markets. It comprises four primary product lines: GeForce for consumer desktop and notebook PCs; Quadro for professional workstations; Tesla for high-performance computing; and NVIDIA GRID to provide the power of NVIDIA graphics through the cloud. It also includes other related products, licenses and revenue supporting the GPU business, such as memory products.

Our Tegra Processor business comprises primarily product lines based on our Tegra SOC and modem processor technologies, including Tegra for tablets, smartphones and gaming devices; Icera baseband processors and RF transceivers; automotive computers, including infotainment and navigation systems; and gaming devices, such as SHIELD. It also includes embedded products and license and other revenue associated with game consoles.

During the fourth quarter of fiscal year 2014, our CODM completed a refinement of the methodology utilized to assign expenses to the GPU and Tegra Processor businesses to align to the Company’s product architecture and roadmap. With the announcement of our Tegra K1 processor, we now have a single unifying architecture for our GPU and Tegra Processors. This architecture unification prompted a methodology change that 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 reporting segments, our CODM assigns 100% of those expenses to the reporting segment that benefits the most. The revenue and cost of revenue of the reporting segments was not affected, and comparative periods presented below reflect the impact of this change.

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 patent licensing revenue and the expenses include corporate infrastructure and support costs, stock-based compensation costs, amortization of acquisition-related intangible assets, other acquisition-related costs, and other non-recurring charges and benefits that our CODM deems to be enterprise in nature.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



	GPU		Tegra Processor			All Other			Consolidated
	(In thousands)
Three Months Ended October 26, 2014
Revenue	$	991,217	$	168,165		$	66,000		$	1,225,382
Depreciation and amortization expense	$	29,175	$	14,665		$	11,640		$	55,480
Operating income (loss)	$	294,289	$	(53,291	)	$	(27,683	)	$	213,315

Three Months Ended October 27, 2013
Revenue	$	876,833	$	111,134		$	66,000		$	1,053,967
Depreciation and amortization expense	$	38,677	$	13,164		$	10,885		$	62,726
Operating income (loss)	$	220,351	$	(64,219	)	$	(15,144	)	$	140,988

Nine Months Ended October 26, 2014
Revenue	$	2,766,560	$	466,433		$	198,000		$	3,430,993
Depreciation and amortization expense	$	88,193	$	43,395		$	34,582		$	166,170
Operating income (loss)	$	770,393	$	(169,274	)	$	(73,266	)	$	527,853

Nine Months Ended October 27, 2013
Revenue	$	2,521,058	$	266,886		$	198,000		$	2,985,944
Depreciation and amortization expense	$	116,389	$	36,479		$	31,442		$	184,310
Operating income (loss)	$	586,791	$	(202,770	)	$	(54,718	)	$	329,303



	Three Months Ended						Nine Months Ended
	October 26, 2014			October 27, 2013			October 26, 2014			October 27, 2013
	(In thousands)
Reconciling items included in "All Other" category :
Revenue not allocated to reporting segments	$	66,000		$	66,000		$	198,000		$	198,000
Unallocated corporate operating expenses	(42,676		)	(40,033		)	(127,709		)	(125,700		)
Stock-based compensation	(41,435		)	(34,299		)	(115,371		)	(100,091		)
Acquisition-related costs	(9,572		)	(4,577		)	(28,186		)	(22,402		)
Other non-recurring expenses	—			(2,235		)	—			(4,525		)
Total	$	(27,683	)	$	(15,144	)	$	(73,266	)	$	(54,718	)

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 26,		October 27,		October 26,		October 27,
	2014		2013		2014		2013
	(In thousands)
Revenue:
Taiwan	$	405,612	$	319,018	$	1,109,388	$	927,903
China	238,212		206,374		713,442		565,504
United States	215,484		195,529		594,541		545,303
Other Asia Pacific	169,793		174,691		475,442		507,065
Other Americas	100,531		79,382		275,355		220,920
Europe	95,750		78,973		262,825		219,249
Total revenue	$	1,225,382	$	1,053,967	$	3,430,993	$	2,985,944

The following table summarizes information pertaining to our revenue from significant customers, those representing 10% or more of total revenue for the respective dates:



	Three Months Ended				Nine Months Ended
	October 26,		October 27,		October 26,		October 27,
	2014		2013		2014		2013
Revenue:
Customer A	10	%	9	%	10	%	10	%
Customer B	8	%	11	%	9	%	11	%

Revenue from Customer A was attributable primarily to the GPU business for the three and nine months ended October 26, 2014 and to both the GPU and Tegra Processor businesses for the three and nine months ended October 27, 2013. Revenue from Customer B was attributable to the GPU business for all comparative periods presented.

The following table summarizes information pertaining to our accounts receivable from significant customers, those representing 10% or more of total accounts receivable for the respective periods:



	October 26, 2014		January 26, 2014
Accounts Receivable:
Customer B	17	%	23	%

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 its subsidiaries, except where it is made clear that the term means only the parent company.

NVIDIA, the NVIDIA logo, GeForce, GTX, ICERA, Jetson, Maxwell, NVIDIA GRID, NVLink, Quadro, SHIELD, Tegra, and Tesla 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 26, 2014 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

NVIDIA is a visual computing company. In a world increasingly filled with visual displays, our graphics technologies let our customers interact with the world of digital ideas, information and entertainment with an efficiency that no other communication medium can match.

Our strategy is to be the world leader in visual computing. We target applications in each of the major computing platforms - PC, Datacenter/Cloud, Mobile - where we can create value. Our target markets are gaming, design and visualization, high performance computing, or HPC, and data center, and automotive and smart devices. We deploy business models we believe are best suited for each application, whether IP, chips, systems, or NVIDIA-branded devices and services.

Our businesses are based on two technologies with a consistent underlying graphics architecture: the GPU and the Tegra Processor.

GPUs, each with billions of transistors, are the engines of visual computing and among the world's most complex processors. We have GPU product brands aimed at specific users and applications: GeForce for gamers; Quadro for designers; Tesla for researchers; and GRID for cloud-based graphics.


•	In gaming, GPUs enhance the gaming experience on PCs by improving the visual quality of graphics, increasing the frame rate for smoother gameplay and improving realism by replicating the behavior of light and physical objects.


•	For designers, GPUs improve productivity and introduce new capabilities. For example, an architect designing a new building in a CAD package can interact with the model in real time, the model can be more detailed, and photo realistic renderings can be generated for the client.


•	Researchers can use GPUs to run their simulations faster while consuming less power, increasing the accuracy of weather forecasts, or pricing financial derivatives more quickly.


•	GRID uses GPUs to deliver graphics performance remotely, from the cloud. Uses include gaming, professional applications provided as a service (SaaS) and improving Citrix and VMware installations.

The Tegra processor is a SOC integrating an entire computer on a single chip. Tegra processors incorporate GPUs and multi-core CPUs together with audio, video and input/output capabilities. They can also be integrated with baseband processors to add voice and data communication. Our Tegra SOC conserves power while delivering state-of-the-art graphics and multimedia processing.

Tegra runs devices like smartphones, tablets and PCs; it can also be embedded into smart devices, such as televisions, monitors, set-top boxes, gaming devices and cars. SHIELD, our Android gaming device based on Tegra, contains proprietary NVIDIA-developed software and system technologies and leverages our deep partnerships with game developers.

Headquartered in Santa Clara, California, we were incorporated in California in April 1993 and reincorporated in Delaware in April 1998.

Recent Developments, Future Objectives and Challenges

GPU Business

During the third quarter of fiscal year 2015, we released our new GeForce GTX 980 and GTX 970 series products for desktops and notebooks based on our Maxwell-based architecture. We also extended Maxwell-based processors into our Quadro product lineup. We continued to expand our reach in the big data analytics market, with IBM announcing future support for GPU acceleration in its IBM DB2 with BLU acceleration. In addition, we partnered with VMware to announce a customer access program for NVIDIA GRID with companies like Airbus, CH2M Hill, MetroHealth and Halliburton being the initial customers. NVIDIA GRID graphics virtualization also continued to gain momentum as more companies come forward to experience cloud-based GPU-accelerated virtual desktops through our “Try GRID” online demonstration.

During the second quarter of fiscal year 2015, we extended our reach in data center accelerated computing, with the world’s fifteen most highly efficient supercomputers all utilizing our Tesla GPUs. We also surpassed forty million installations of our GeForce Experience client, which provides game-ready drivers, optimized play settings, and streaming and sharing of gameplay. We also invented the first GPU acceleration technology for Adobe Illustrator CC.

During the first quarter of fiscal year 2015, we released our new GeForce GTX 750 and GeForce GTX 800M series products which include our NVIDIA Maxwell-based products, and disclosed the first details of our Pascal GPU architecture, which will succeed NVIDIA Maxwell. Pascal is expected to feature 3D memory and NVLink interconnect technology. NVLink is planned to be incorporated in future POWER8 CPUs from IBM. We also announced that NVIDIA GRID technology will be available on the VMware Horizon DaaS Platform to deliver 3D graphics on virtualized desktops and applications delivered through the cloud. In addition, we joined IBM, Google, and others to launch the OpenPOWER Foundation, an initiative to bring IBM’s POWER CPU to mainstream servers.

Tegra Processor Business

During the third quarter of fiscal year 2015, our Tegra K1 mobile processor was featured in the Google Nexus 9 tablet and NVIDIA's SHIELD tablet with 32GB of memory and LTE connectivity. Acer and HP also announced Chromebooks featuring Tegra K1. In addition, Honda announced that the infotainment systems in three of its car models for the European market - the Civic, Civic Tourer and CR-V, will include Tegra-based systems.

During the second quarter of fiscal year 2015, our Tegra K1 processor was previewed in Google’s new Android L and Project Tango tablets and was one of the first processors to support Android TV. We expanded our SHIELD family of gaming devices with the launch of the SHIELD tablet, along with the SHIELD wireless controller. BMW shipped new models, including the i8 and i3, with infotainment systems powered by NVIDIA, and Volkswagen announced that in addition to the Golf, Tegra will be included in the Passat later this year in Europe.

During the first quarter of fiscal year 2015, we launched Jetson TK1, a development platform aimed at automotive, robotics, defense and embedded applications.

Capital Return to Shareholders

As part of our stock repurchase program, during the first nine months of fiscal year 2015, we entered into two accelerated share repurchase agreements, or ASRs, that were completed in July 2014 and October 2014, respectively. Under the terms of these ASRs, we paid $810.0 million to purchase shares of our common stock and received an aggregate of 44.2 million shares. Please refer to Note 13 of the Notes to Condensed Consolidated Financial Statements for further disclosure regarding these ASRs. Additionally, we paid $140.2 million in cash dividends during the first nine months of fiscal year 2015. As such, in the aggregate for the first nine months of fiscal year 2015, we returned a total of $950.2 million of capital to shareholders.

On November 6, 2014, we announced our intent to return $600.0 million in capital to our shareholders in fiscal year 2016 through a combination of stock repurchases and quarterly dividend payments.

Litigation

In September 2014, we filed lawsuits against Qualcomm, Inc. and various Samsung entities in the United States International Trade Commission, or ITC, and the United States District Court for the District of Delaware for using our GPU patents without a license. The ITC has subsequently determined that it will investigate the case and hold an evidentiary hearing in June 2015. On November 10, 2014, Samsung filed a complaint against NVIDIA and Velocity Micro, Inc., in the United States District Court for the Eastern District of Virginia. The complaint alleges that NVIDIA infringed six patents and falsely advertised that the Tegra K1 processor is the world’s fastest mobile processor.

Financial Information by Business Segment and Geographic Data

Our CODM does not review any information regarding total assets on a reporting segment basis. We do not have intersegment revenue. The accounting policies for segment reporting are the same as for the Company as a whole. Please refer to Note 14 of the Notes to Condensed Consolidated Financial Statements for further disclosure regarding segment information.

Results of Operations

The following table sets forth, for the periods indicated, certain items in our condensed consolidated statements of operations expressed as a percentage of revenue.



	Three Months Ended					Nine Months Ended
	October 26, 2014		October 27, 2013			October 26, 2014		October 27, 2013
Revenue	100.0	%	100.0		%	100.0	%	100.0	%
Cost of revenue	44.8		44.6			44.6		44.8
Gross profit	55.2		55.4			55.4		55.2
Operating expenses:
Research and development	27.8		32.3			29.5		33.5
Sales, general and administrative	10.1		9.8			10.5		10.7
Total operating expenses	37.9		42.1			40.0		44.2
Operating income	17.3		13.3			15.4		11.0
Interest income	0.6		0.4			0.6		0.4
Interest expense	0.9		0.1			1.0		0.1
Other income (expense), net	—		(0.3	)		0.4		0.1
Income before income tax expense	17.0		13.3			15.4		11.4
Income tax expense	2.9		2.2			2.6		1.6
Net income	14.1	%	11.1		%	12.8	%	9.8	%

Three and nine months ended October 26, 2014 and October 27, 2013

Revenue



	Three Months Ended								Nine Months Ended
	October 26, 2014		October 27, 2013		$ Change		% Change		October 26, 2014		October 27, 2013		$ Change		% Change
	(In millions)								(In millions)
GPU	$	991.2	$	876.8	$	114.4	13	%	$	2,766.6	$	2,521.1	$	245.5	10	%
Tegra Processor	168.2		111.1		57.1		51	%	466.4		266.9		199.5		75	%
All Other	66.0		66.0		—		—	%	198.0		198.0		—		—	%
Total	$	1,225.4	$	1,054.0	$	171.4	16	%	$	3,431.0	$	2,985.9	$	445.1	15	%

Revenue for the third quarter of fiscal year 2015 increased by 16% when compared to the third quarter of fiscal year 2014. Revenue for the first nine months of fiscal year 2015 increased by 15% when compared to the first nine months of fiscal year 2014. A discussion of our revenue results for each of our operating segments is as follows:

GPU Business. GPU business revenue increased by 13% in the third quarter of fiscal year 2015 compared to the third quarter of fiscal year 2014 and by 10% in the first nine months of fiscal year 2015 compared to the first nine months of fiscal year 2014. These increases were due primarily to higher revenue from GeForce GPUs for gaming desktops and notebooks, reflecting a combination of continued strength in PC gaming and increased sales of our Maxwell-based GPU products. Revenue from Tesla for high performance computing also increased driven by large project wins with cloud service providers and government customers. Revenue from GeForce GPU products for mainstream PC OEMs declined compared to last year.

Tegra Processor Business. Tegra Processor business revenue increased by 51% in the third quarter of fiscal year 2015 compared to the third quarter of fiscal year 2014, and by 75% in the first nine months of fiscal year 2015 compared to the first nine months of fiscal year 2014. These increases were driven by sales of Tegra products serving automobile infotainment systems, mobile devices, embedded systems, and the onset of SHIELD tablet sales.

All Other. We recognized $66.0 million and $198.0 million in revenue from the patent cross licensing arrangement with Intel during the third quarter of fiscal years 2015 and 2014, and the first nine months of fiscal years 2015 and 2014, respectively.

Concentration of Revenue

Revenue from sales to customers outside of the United States and Other Americas accounted for 74% of total revenue for the third quarter of fiscal year 2015 and 75% of total revenue for the first nine months of fiscal year 2015, respectively. Revenue from sales to customers outside of the United States and Other Americas accounted for 74% of total revenue for both the third quarter and first nine months of fiscal year 2014. Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if the revenue is attributable to end customers in a different location.

Revenue from significant customers, those representing 10% or more of total revenue, was 10% of our total revenue from one customer for the third quarter and first nine months of fiscal year 2015. Revenue from significant customers was 11% of our total revenue from one customer for the third quarter of fiscal year 2014 and 21% of our total revenue from two customers for the first nine months of fiscal year 2014, respectively.

Gross Profit and Gross Margin

Gross profit consists of total revenue, net of allowances, less cost of revenue. Cost of revenue consists primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, manufacturing support costs, including labor and overhead associated with such purchases, final test yield fallout, inventory and warranty provisions and shipping costs. Cost of revenue also includes development costs for license, service arrangements and stock-based compensation related to personnel associated with manufacturing.

Gross margin is the percentage of gross profit to revenue. Our gross margin can vary in any period depending on the mix of types of products sold. Our gross margin is significantly impacted by the mix of products we sell, which is often difficult to estimate with accuracy. Therefore, if we experience product transition challenges, if we achieve significant revenue growth in our lower margin product lines, or if we are unable to earn as much revenue as we expect from higher margin product lines, our gross margin may be negatively impacted.

Our overall gross margin was 55.2% and 55.4% for the third quarter of fiscal years 2015 and 2014, respectively, and 55.4% and 55.2% for the first nine months of fiscal years 2015 and 2014, respectively.

Charges to cost of sales for inventory provisions totaled $12.7 million and $9.6 million for the third quarter of fiscal years 2015 and 2014, respectively, unfavorably impacting our gross margin by 1.0% and 0.9%, respectively. Sales of inventory that was previously written-off or written-down totaled $12.2 million and $7.7 million for the third quarter of fiscal years 2015 and 2014, respectively, favorably impacting our gross margin by 1.0% and 0.7%, respectively. As a result, the overall net effect on our gross margin from charges to cost of sales for inventory provisions and sales of items previously written-off or written-down was no impact for the third quarter of fiscal year 2015 and a 0.2% unfavorable impact for the third quarter of fiscal year 2014.

Charges to cost of sales for inventory provisions totaled $35.7 million and $33.7 million for the first nine months of fiscal years 2015 and 2014, respectively, unfavorably impacting our gross margin by 1.0% and 1.1%, respectively. Sales of inventory that was previously written-off or written-down totaled $26.0 million and $38.6 million for the first nine months of fiscal years 2015 and 2014, respectively, favorably impacting our gross margin by 0.8% and 1.3%, respectively. As a result, the overall net effect on our gross margin from charges to cost of sales for inventory provisions and sales of items previously written-off or written-down was a 0.2% unfavorable impact for the first nine months of fiscal year 2015 and a 0.2% favorable impact for the first nine months of fiscal year 2014.

A discussion of our gross margin results for each of our operating segments is as follows:

GPU Business. The gross margin of our GPU business increased in the third quarter and first nine months of fiscal year 2015 compared to the third quarter and first nine months of fiscal year 2014. GPU margins increased primarily due to a richer product mix resulting from stronger sales of our Maxwell-based GeForce GPU products. Additionally, the volume increase of Tesla and GRID products also contributed to a richer mix of GPU sales.

Tegra Processor Business. The gross margin of our Tegra Processor business decreased in the third quarter and first nine months of fiscal year 2015 compared to the third quarter and first nine months of fiscal year 2014. Tegra Processor margins decreased across most product categories and were also negatively impacted by the decline in license and royalty revenue associated with game consoles compared to the prior year.

Operating Expenses



	Three Months Ended											Nine Months Ended
	October 26, 2014			October 27, 2013			$ Change			% Change		October 26, 2014			October 27, 2013			$ Change		% Change
	(In millions)											(In millions)
Research and development expenses	$	340.1		$	340.3		$	(0.2	)	—	%	$	1,011.5		$	999.2		$	12.3	1	%
Sales, general and administrative expenses	123.3			103.1			20.2			20	%	360.5			320.0			40.5		13	%
Total operating expenses	$	463.4		$	443.4		$	20.0		5	%	$	1,372.0		$	1,319.2		$	52.8	4	%
Research and development as a percentage of net revenue	28		%	32		%						29		%	33		%
Sales, general and administrative as a percentage of net revenue	10		%	10		%						11		%	11		%

Research and Development

Research and development expenses remained relatively flat during the third quarter of fiscal year 2015 compared to the third quarter of fiscal year 2014. Compensation and benefits increased by $14.2 million resulting from employee additions, employee compensation increases and related costs. Offsetting these increases was a $10.7 million decrease in engineering development expenses.

Research and development expenses increased by 1% during the first nine months of fiscal year 2015 compared to the first nine months of fiscal year 2014. Compensation and benefits increased by $38.6 million resulting from employee additions, employee compensation increases and related costs, partially offset by a $22.2 million decrease in engineering development expenses.

Sales, General and Administrative

Sales, general and administrative expenses increased by 20% during the third quarter of fiscal year 2015 compared to the third quarter of fiscal year 2014. This increase was primarily due to a $16.0 million increase resulting from employee additions, employee compensation increases and related costs, including stock-based compensation expense. Advertising and marketing expenses also increased by $5.5 million as we continue to market our newly-launched GPU and SHIELD products. Offsetting these increases was a decrease of $3.0 million in outside professional fees.

Sales, general and administrative expenses increased by 13% during the first nine months of fiscal year 2015 compared to the first nine months of fiscal year 2014. This increase was primarily due to a $40.6 million increase resulting from employee additions, employee compensation increases and related costs, including stock-based compensation expense. Facilities costs increased by $8.1 million as we expanded our offices internationally and leased an office building within the boundaries of our main Santa Clara campus. Offsetting these increases were decreases in outside professional fees of $9.9 million as well as more favorable international taxes and government subsidies.

Interest Income and Interest Expense

Interest income consists of interest earned on cash, cash equivalents and marketable securities. Interest expense is primarily comprised of coupon interest and debt discount amortization related to the convertible notes issued in December 2013.

Interest income increased by $3.4 million and $7.0 million during the third quarter and first nine months of fiscal years 2015 and 2014, respectively. The increase was primarily due to higher average cash balances as we invested the proceeds from the convertible notes we issued in December 2013 in interest bearing securities.

Interest expense increased by $10.7 million and $32.0 million during the third quarter and first nine months of fiscal years 2015 and 2014, respectively. The increase was primarily due to coupon interest and debt discount amortization related to the convertible notes we issued in December 2013.

Other Income (Expense), net

Other income (expense), net consists primarily of realized gains and losses from the sale of marketable securities, sales of investments in non-affiliated companies, and the impact of changes in foreign currency rates.

Other income increased by $2.0 million during the third quarter of fiscal year 2015 compared to the same period in the prior fiscal year. This increase was due to higher foreign currency translation gains. Other income increased by $14.9 million during the first nine months of fiscal year 2015 compared to the same period in the prior fiscal year due to a gain from the sale of a non-affiliated investment, offset by lower foreign currency translation gains.

Other expense remained relatively flat during the third quarter of fiscal year 2015 compared to the third quarter of fiscal year 2014. Other expense increased by $2.8 million for the first nine months of fiscal year 2015 compared to the same period in the prior fiscal year due to the recognition of an impairment loss in a non-affiliated investment during the second quarter of fiscal year 2015. Additionally, losses from realized foreign exchange translations were greater in the first nine months of fiscal year 2015.

Income Taxes

We recognized income tax expense of $36.1 million and $89.5 million for the third quarter and first nine months of fiscal year 2015, respectively, and $22.8 million and $48.3 million for the third quarter and first nine months of fiscal year 2014, respectively. Income tax expense as a percentage of income before taxes, or our effective tax rate, was 17.3% and 17.0% for the third quarter and first nine months of fiscal year 2015, respectively, and 16.1% and 14.2% for the third quarter and first nine months of fiscal year 2014, respectively.

The increase in our effective tax rate in fiscal year 2015 as compared to the same periods in the prior fiscal year was primarily related to the expiration of the U.S. federal research tax credit on December 31, 2013 which resulted in no tax benefit in the first nine months of fiscal year 2015.

Our effective tax rate on income before tax for the first nine months of fiscal year 2015 of 17.0% was lower than the United States federal statutory rate of 35% due primarily to income earned in jurisdictions where the tax rate is lower than the United States federal statutory tax rate. Further, our effective tax rate for the first nine months of fiscal year 2015 of 17.0% differs from our annual projected effective tax rate as of the first nine months of fiscal year 2015 of 18.5% due to discrete events that occurred in the first nine months of fiscal year 2015 primarily attributable to the tax benefit recognized upon the expiration of statutes of limitations in certain non-U.S. jurisdictions.

Please refer to Note 4 of the Notes to Condensed Consolidated Financial Statements for further information.

Liquidity and Capital Resources



	As of October 26, 2014		As of January 26, 2014
	(In millions)
Cash and cash equivalents	$	394.7	$	1,151.6
Marketable securities	3,846.1		3,520.2
Cash, cash equivalents, and marketable securities	$	4,240.8	$	4,671.8

As of October 26, 2014, we had $4.24 billion in cash, cash equivalents and marketable securities, a decrease of $431.0 million from $4.67 billion as of January 26, 2014. This decrease was primarily due to the accelerated share repurchase transactions totaling $810.0 million that we entered into and the $140.2 million in dividends we paid during the first nine months of fiscal year 2015, partially offset by cash generated from operations. Our portfolio of cash equivalents and marketable securities is managed on our behalf by several financial institutions that are required to follow our investment policy, which requires the purchase of high grade investment securities and the diversification of asset type and includes certain limits on our portfolio duration.



	Nine Months Ended
	October 26,			October 27,
	2014			2013
	(In millions)
Net cash provided by operating activities	$	462.9		$	434.4
Net cash provided by (used in) investing activities	$	(408.9	)	$	293.7
Net cash used in financing activities	$	(811.0	)	$	(898.8	)

Operating activities

Operating activities consist primarily of net income for the fiscal period, offset by the impact of non-cash expenses such as depreciation and amortization expense, stock-based compensation expense, gains or losses from sale and disposal of long-lived assets and investments, and interest expense from the amortization of debt discount, as well as changes in operating assets and liabilities, such as accounts receivable, inventories and accounts payable.

Cash provided by operating activities increased in the first nine months of fiscal year 2015 compared to the first nine months of fiscal year 2014. The increase was primarily due to higher net income from revenue growth and contained operating expenses, partially offset by higher accounts receivable.

Investing activities