NVIDIA CORP - FORM 10-Q - August 20, 2014

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - NVIDIA CORP	Financial_Report.xls
EX-32.1 - CEO 906 CERTIFICATION - NVIDIA CORP	nvda2015q2ex321.htm
EX-31.1 - CEO 302 CERTIFICATION - NVIDIA CORP	nvda2015q2ex311.htm
EX-10.1 - AMENDED AND RESTATED 2007 EQUITY INCENTIVE PLAN - NVIDIA CORP	nvda2015q2ex101.htm
EX-31.2 - CFO 302 CERTIFICATION - NVIDIA CORP	nvda2015q2ex312.htm
EX-32.2 - CFO 906 CERTIFICATION - NVIDIA CORP	nvda2015q2ex322.htm
EX-10.2 - AMENDED AND RESTATED 2012 EMPLOYEE STOCK PURCHASE PLAN - NVIDIA CORP	nvda2015q2ex102.htm

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 July 27, 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 August 15, 2014, was 541,915,105.

NVIDIA CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED July 27, 2014

TABLE OF CONTENTS



		Page
	PART I : FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	a) Condensed Consolidated Statements of Income for the three and six months ended July 27, 2014 and July 28, 2013	3

	b) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 27, 2014 and July 28, 2013	4

	c) Condensed Consolidated Balance Sheets as of July 27, 2014 and January 26, 2014	5

	d) Condensed Consolidated Statements of Cash Flows for the six months ended July 27, 2014 and July 28, 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					Six Months Ended
	July 27,			July 28,		July 27,		July 28,
	2014			2013		2014		2013

Revenue	$	1,102,824		$	977,238	$	2,205,611	$	1,931,977
Cost of revenue	483,850			431,700		982,435		867,871
Gross profit	618,974			545,538		1,223,176		1,064,106
Operating expenses
Research and development	337,124			331,738		671,387		658,899
Sales, general and administrative	118,671			108,266		237,251		216,892
Total operating expenses	455,795			440,004		908,638		875,791
Income from operations	163,179			105,534		314,538		188,315
Interest income	6,829			3,865		12,539		8,941
Interest expense	11,526			836		22,997		1,689
Other income (expense), net	(3,857		)	3,257		13,827		4,315
Income before income tax expense	154,625			111,820		317,907		199,882
Income tax expense	26,649			15,372		53,415		25,543
Net income	$	127,976		$	96,448	$	264,492	$	174,339

Net income per share:
Basic	$	0.23		$	0.16	$	0.47	$	0.29
Diluted	$	0.22		$	0.16	$	0.46	$	0.29

Weighted average shares used in per share computation:
Basic	558,223			585,345		558,657		601,109
Diluted	570,572			592,006		570,599		606,051

Cash dividends declared and paid per common share	$	0.085		$	0.075	$	0.170	$	0.150

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(In thousands)



	Three Months Ended						Six Months Ended
	July 27,			July 28,			July 27,			July 28,
	2014			2013			2014			2013

Net income	$	127,976		$	96,448		$	264,492		$	174,339
Other comprehensive loss, net of tax:
Net change in unrealized losses on available-for-sale securities, net of tax benefit (expense) of $118 and ($351) for the three and six months ended July 27, 2014, respectively, and $355 and $78 for the corresponding periods of fiscal year 2014, respectively	(1,931		)	(3,377		)	(247		)	(2,986		)
Reclassification adjustments for net realized gains on available-for-sale securities included in net income, net of tax effects of $30 and $136 for the three and six months ended July 27, 2014, respectively, and $549 and $591 for the corresponding periods of fiscal year 2014, respectively	(55		)	(1,019		)	(252		)	(1,098		)
Other comprehensive loss	$	(1,986	)	$	(4,396	)	$	(499	)	$	(4,084	)
Total comprehensive income	$	125,990		$	92,052		$	263,993		$	170,255

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands)



	July 27,			January 26,
	2014			2014
ASSETS
Current assets:
Cash and cash equivalents	$	515,092		$	1,151,587
Marketable securities	3,870,962			3,520,223
Accounts receivable, net	469,625			426,357
Inventories	387,434			387,765
Prepaid expenses and other	67,776			70,285
Deferred income taxes	66,697			68,494
Total current assets	5,377,586			5,624,711
Property and equipment, net	556,911			582,740
Goodwill	643,179			643,179
Intangible assets, net	260,613			296,012
Other assets	95,430			104,252
Total assets	$	6,933,719		$	7,250,894

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	261,627		$	324,391
Accrued liabilities and other	607,102			621,105
Total current liabilities	868,729			945,496

Long-term debt	1,370,249			1,356,375
Other long-term liabilities	374,113			475,125
Capital lease obligations, long-term	15,842			17,500
Commitments and contingencies - see Note 12	—			—
Stockholders’ equity:
Preferred stock	—			—
Common stock	744			732
Additional paid-in capital	3,682,742			3,483,342
Treasury stock, at cost	(3,058,149		)	(2,537,295		)
Accumulated other comprehensive income	4,378			4,877
Retained earnings	3,675,071			3,504,742
Total stockholders' equity	4,304,786			4,456,398
Total liabilities and stockholders' equity	$	6,933,719		$	7,250,894

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)



	Six Months Ended
	July 27,			July 28,
	2014			2013
Cash flows from operating activities:
Net income	$	264,492		$	174,339
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	110,690			121,584
Stock-based compensation expense	73,936			65,792
Amortization of debt discount	13,874			—
Gain on sale of long-lived assets and investments	(14,482		)	—
Deferred income taxes	38,313			(611		)
Tax benefits from stock-based compensation	(6,843		)	(17,360		)
Other	14,124			8,867
Changes in operating assets and liabilities:
Accounts receivable	(45,747		)	37,271
Inventories	508			34,722
Prepaid expenses and other current assets	2,510			(4,956		)
Deposits and other assets	1,028			4,445
Accounts payable	(63,648		)	(36,452		)
Accrued liabilities and other long-term liabilities	(141,451		)	(115,522		)
Net cash provided by operating activities	247,304			272,119
Cash flows from investing activities:
Purchases of marketable securities	(1,682,854		)	(936,214		)
Proceeds from sale of marketable securities	869,087			1,248,511
Proceeds from maturities of marketable securities	451,474			320,838
Proceeds from sale of long-lived assets and investments	20,862			—
Purchases of property and equipment and intangible assets	(51,595		)	(150,653		)
Other	(250		)	(1,450		)
Net cash provided by (used in) investing activities	(393,276		)	481,032
Cash flows from financing activities:
Proceeds from issuance of common stock under employee stock plans	98,220			31,303
Payments under capital lease obligations	(1,423		)	(1,169		)
Tax benefits from stock-based compensation	6,843			17,360
Payments for repurchases of common stock	(500,000		)	(850,000		)
Dividends paid	(94,163		)	(89,610		)
Other	—			(2,500		)
Net cash used in financing activities	(490,523		)	(894,616		)
Change in cash and cash equivalents	(636,495		)	(141,465		)
Cash and cash equivalents at beginning of period	1,151,587			732,786
Cash and cash equivalents at end of period	$	515,092		$	591,321
Supplemental disclosures of cash flow information:
Cash paid for income taxes, net	$	6,766		$	5,083
Cash paid for interest	$	8,623		$	1,294
Other non-cash activities:
Assets acquired by assuming related liabilities	$	5,570		$	3,725
Change in unrealized losses from marketable securities	$	(499	)	$	(4,084	)

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.

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 second 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.

Adoption of New and Recently Issued Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board, or 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 fiscal years, and interim periods within 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.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 may 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.

In July 2013, the FASB issued updated guidance regarding the presentation of unrecognized tax benefits when a net operating loss carry forward, similar tax loss, or tax credit carry forward exists. The guidance requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carry forward, a similar tax loss, or a tax credit carry forward when settlement in this manner is available under the tax law. We adopted this guidance in our interim period ended April 27, 2014. The adoption of this guidance did not impact our consolidated financial statements.

Note 2 - Stock-Based Compensation

Our stock-based compensation expense is associated with stock options, restricted stock units, or RSUs, and performance stock units, or PSUs, and is measured based on the estimated fair value of equity awards at the grant date.

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 employee stock purchase plan 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				Six Months Ended
	July 27, 2014		July 28, 2013		July 27, 2014		July 28, 2013
	(In thousands)				(In thousands)
Cost of revenue	$	2,656	$	2,168	$	5,575	$	4,821
Research and development	21,462		18,555		41,956		40,490
Sales, general and administrative	14,297		11,672		26,405		20,481
Total	$	38,415	$	32,395	$	73,936	$	65,792

During the three and six months ended July 27, 2014, we granted 78,129 and 85,929 stock options, respectively, with a total grant-date fair value of $309.4 thousand and $345.3 thousand and a weighted average grant-date fair value of $3.96 and $4.02 per option, respectively. During the three and six months ended July 27, 2014, we granted 0.5 million and 3.7 million of RSUs and PSUs combined, with a total grant-date fair value of $8.4 million and $64.1 million and a weighted average grant-date fair value of $17.68 and $17.20 per share, respectively. The PSUs were granted during the first quarter of fiscal year 2015 to our CEO and senior management as approved by our Compensation Committee.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

During the three and six months ended July 28, 2013, we granted 0.5 million and 3.3 million stock options, respectively, with an estimated total grant-date fair value of $1.4 million and $10.1 million and a weighted average grant-date fair value of $2.96 and $3.09 per option, respectively. During the three and six months ended July 28, 2013, we granted 0.7 million and 5.6 million RSUs with an estimated total grant-date fair value of $8.9 million and $66.3 million and a weighted average grant-date fair value of $13.49 and $11.93 per share, respectively.

Of the total grant-date fair value, we estimated that the stock-based compensation expense related to the equity awards that were not expected to vest was $1.6 million and $11.5 million for the three and six months ended July 27, 2014, respectively, and $1.8 million and $13.7 million for the three and six months ended July 28, 2013, respectively. As of July 27, 2014 and January 26, 2014, the aggregate amount of unearned stock-based compensation expense related to our equity awards was $235.6 million and $241.3 million, respectively, adjusted for estimated forfeitures. As of July 27, 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 2.2 years and 2.5 years, respectively. As of July 27, 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 2.6 years and 2.7 years, respectively.

The fair value of stock options granted under our equity incentive plan and shares issued under our employee stock purchase plan have been estimated at the date of grant with the following assumptions:



	Three Months Ended			Six Months Ended
	July 27, 2014		July 28, 2013	July 27, 2014		July 28, 2013
Stock Options	(Using a binomial model)
Expected life (in years)	2.5		2.4 - 3.4	2.5 - 3.2		2.4 - 3.4
Risk-free interest rate	2.5	%	1.8% - 2.7%	2.5% - 2.8%		1.8% - 2.7%
Volatility	31	%	30% - 33%	31	%	30% - 37%
Dividend yield	1.8	%	2.1% - 2.2%	1.8% - 1.9%		2.1% - 2.4%



	Three Months Ended				Six Months Ended
	July 27, 2014		July 28, 2013		July 27, 2014		July 28, 2013
Employee Stock Purchase Plan	(Using a Black-Scholes model)
Expected life (in years)	—		—		0.5 - 2.0		0.5 - 2.0
Risk-free interest rate	—		—		0.1% - 0.3%		0.1% - 0.3%
Volatility	—	%	—	%	31	%	37	%
Dividend yield	—	%	—	%	1.9	%	2.4	%

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	(6,291	)	$	12.89
Cancelled	(942	)	$	18.89
Balances, July 27, 2014	25,357		$	14.39

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



	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)	3,729		$	17.20
Vested	(3,319	)	$	13.33
Cancelled	(793	)	$	13.98
Balances, July 27, 2014	18,469		$	14.58

(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 range from 1.4 million to 2.5 million shares.

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				Six Months Ended
	July 27,		July 28,		July 27,		July 28,
	2014		2013		2014		2013
	(In thousands, except per share data)
Numerator:
Net income	$	127,976	$	96,448	$	264,492	$	174,339
Denominator:
Denominator for basic net income per share, weighted average shares	558,223		585,345		558,657		601,109
Effect of dilutive securities:
Equity awards outstanding	12,349		6,661		11,942		4,942
Denominator for diluted net income per share, weighted average shares	570,572		592,006		570,599		606,051
Net income per share:
Basic net income per share	$	0.23	$	0.16	$	0.47	$	0.29
Diluted net income per share	$	0.22	$	0.16	$	0.46	$	0.29
Potentially dilutive securities excluded from diluted net income per share because their effect would have been anti-dilutive	3,987		17,749		7,928		27,039

The denominator for diluted net income per share for the three and six months ended July 27, 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.

The denominator for diluted net income per share for the three and six months ended July 27, 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. Please refer to Note 11 of these Notes to Condensed Consolidated Financial Statements for additional discussion regarding the Notes.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4 – Income Taxes

We recognized income tax expense of $26.6 million and $53.4 million for the three and six months ended July 27, 2014, respectively, and $15.4 million and $25.5 million for the three and six months ended July 28, 2013, respectively. Income tax expense as a percentage of income before taxes, or our effective tax rate, was 17.2% and 16.8% for the three and six months ended July 27, 2014, respectively, and 13.8% and 12.8% for the three and six months ended July 28, 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 six months ended July 27, 2014.

Our effective tax rate on income before tax for the first six months of fiscal year 2015 of 16.8% 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 six months of fiscal year 2015 of 16.8% differs from our annual projected effective tax rate as of the first six months of fiscal year 2015 of 19.1% due to favorable discrete events that occurred in the first six 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 six months of fiscal year 2014 of 12.8% 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 six months ended July 27, 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 from our 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 six months ended July 27, 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 July 27, 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 Statement of Income.

We performed an impairment review of our investment portfolio as of July 27, 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 July 27, 2014.

The following is a summary of cash equivalents and marketable securities at July 27, 2014 and January 26, 2014:



	July 27, 2014
	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
	(In thousands)
Corporate debt securities	$	2,042,721	$	2,139	$	(1,430	)	$	2,043,430
Debt securities of United States government agencies	700,025		352		(216		)	700,161
Debt securities issued by United States Treasury	586,484		896		(69		)	587,311
Asset-backed securities	411,669		169		(310		)	411,528
Mortgage-backed securities issued by United States government-sponsored enterprises	258,483		4,279		(1,340		)	261,422
Money market funds	119,491		—		—			119,491
Total	$	4,118,873	$	7,835	$	(3,365	)	$	4,123,343
Classified as:
Cash equivalents								$	252,381
Marketable securities								3,870,962
Total								$	4,123,343



	January 26, 2014
	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
	(In thousands)
Corporate debt securities	$	1,827,788	$	1,857	$	(1,065	)	$	1,828,580
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
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 July 27, 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	$	664,945	$	(90	)	$	1,378,485	$	(1,340	)	$	2,043,430	$	(1,430	)
Debt securities of United States government agencies	304,481		(3		)	395,680		(213		)	700,161		(216		)
Debt securities issued by United States Treasury	45,045		(28		)	542,266		(41		)	587,311		(69		)
Asset-backed securities	162,899		(14		)	248,629		(296		)	411,528		(310		)
Mortgage-backed securities issued by United States government-sponsored enterprises	—		—			261,422		(1,340		)	261,422		(1,340		)
Total	$	1,177,370	$	(135	)	$	2,826,482	$	(3,230	)	$	4,003,852	$	(3,365	)

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 July 27, 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 July 27, 2014 and January 26, 2014 and are shown below by contractual maturity.



	July 27, 2014				January 26, 2014
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In thousands)
Less than 1 year	$	1,296,254	$	1,296,861	$	1,883,132	$	1,883,753
Due in 1 - 5 years	2,665,096		2,667,222		2,114,289		2,117,387
Mortgage-backed securities issued by government-sponsored enterprises not due at a single maturity date	157,523		159,260		90,472		91,508
Total	$	4,118,873	$	4,123,343	$	4,087,893	$	4,092,648

Net realized gains for the three and six months ended July 27, 2014 were not significant. Net realized gains for the three and six months ended July 28, 2013 were $1.6 million and $1.7 million, respectively.

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. There were no significant transfers between Levels 1 and 2 assets for the three and six months ended July 27, 2014.

Financial assets measured at fair value are summarized below:



			Fair Value Measurement as of July 27, 2014 Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs
	July 27, 2014		(Level 1)		(Level 2)
	(In thousands)
Corporate debt securities (1)	$	2,043,430	$	—	$	2,043,430
Debt securities issued by United States government agencies (2)	700,161		—		700,161
Debt securities issued by United States Treasury (3)	587,311		—		587,311
Asset-backed securities (3)	411,528		—		411,528
Mortgage-backed securities issued by government-sponsored enterprises (3)	261,422		—		261,422
Money market funds (4)	119,491		119,491		—
Total cash equivalents and marketable securities	$	4,123,343	$	119,491	$	4,003,852


(1)	Includes $96.2 million in cash equivalents and $1.95 billion in marketable securities on the Condensed Consolidated Balance Sheet.


(2)	Includes $36.7 million in cash equivalents and $663.5 million in marketable securities on the Condensed Consolidated Balance Sheet.


(3)	Included in marketable securities on the Condensed Consolidated Balance Sheet.


(4)	Included in cash equivalents on the Condensed Consolidated Balance Sheet.

Financial liabilities measured at fair value:

We issued $1.5 billion 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 $1.63 billion and $1.53 billion as of July 27, 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:



	July 27, 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	$	(124,083	)	$	65,156	$	189,239	$	(114,104	)	$	75,135
Patents and licensed technology	449,204		(253,747		)	195,457		446,196		(225,319		)	220,877
Total intangible assets	$	638,443	$	(377,830	)	$	260,613	$	635,435	$	(339,423	)	$	296,012

Amortization expense associated with intangible assets for the three and six months ended July 27, 2014 was $19.3 million and $38.4 million, respectively. Amortization expense associated with intangible assets for the three and six months ended July 28, 2013 was $18.6 million and $36.0 million, respectively. Amortization expense increased compared to the prior year primarily due to the addition of licensed technology, the purchase of certain assets of a business, and the addition of acquired in-process research and development technology that was determined to be complete. Future amortization expense related to the net carrying amount of intangible assets at July 27, 2014 is estimated to be $40.0 million for the remainder of fiscal year 2015, $71.9 million in fiscal year 2016, $63.7 million in fiscal year 2017, $49.0 million in fiscal year 2018, $20.4 million in fiscal year 2019 and a total of $15.6 million in fiscal year 2020 and beyond.

Note 9 - Balance Sheet Components

Certain balance sheet components are as follows:



	July 27,		January 26,
	2014		2014
Inventories:	(In thousands)
Raw materials	$	126,191	$	126,896
Work in-process	85,895		94,844
Finished goods	175,348		166,025
Total inventories	$	387,434	$	387,765

At July 27, 2014, we had outstanding inventory purchase obligations totaling $486.3 million.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



	July 27,		January 26,
	2014		2014
Accrued Liabilities and Other:	(In thousands)
Deferred revenue, short-term	$	265,704	$	265,616
Accrued customer programs (1)	131,973		157,840
Accrued payroll and related expenses	112,024		109,721
Accrued legal settlement (2)	30,600		30,600
Professional service fees	12,218		13,572
Customer advances	11,329		9,297
Office lease related liabilities	8,549		3,139
Warranty accrual (3)	8,202		7,571
Taxes payable, short-term	5,810		2,378
Coupon interest on Notes	2,542		2,500
Other	18,151		18,871
Total accrued liabilities and other	$	607,102	$	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.



	July 27,		January 26,
	2014		2014
Other Long-Term Liabilities:	(In thousands)
Deferred income tax liability	$	192,702	$	157,953
Income taxes payable, long-term	119,661		119,977
Deferred revenue, long-term (1)	40,063		172,199
Asset retirement obligation	7,386		11,056
Other long-term liabilities	14,301		13,940
Total other long-term liabilities	$	374,113	$	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 six months ended July 27, 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 six months ended July 27, 2014 and July 28, 2013 were as follows:



	Three Months Ended						Six Months Ended
	July 27,			July 28,			July 27,			July 28,
	2014			2013			2014			2013
	(In thousands)
Balance at beginning of period	$	8,250		$	14,833		$	7,571		$	14,874
Additions	1,155			3,482			3,189			4,900
Deductions	(1,203		)	(841		)	(2,558		)	(2,300		)
Balance at end of period	$	8,202		$	17,474		$	8,202		$	17,474

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.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 11 - Long-Term Debt

1.00 % Convertible Senior Notes Due 2018

On December 2, 2013, we issued $1.5 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.

As of July 27, 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:



	July 27, 2014			January 26, 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)	(129,751		)	(143,625		)
Net carrying amount	$	1,370,249		$	1,356,375

(1) As of July 27, 2014, the unamortized debt discount will be amortized over a remaining period of 4.4 years.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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



	Three Months Ended				Six Months Ended
	July 27,		July 28,		July 27,		July 28,
	2014		2013		2014		2013
	(In thousands)
Contractual coupon interest expense	$	3,750	$	—	$	7,500	$	—
Amortization of debt discount	6,973		—		13,874		—
Amortization of debt issuance costs	49		—		97		—
Total interest expense related to Notes	$	10,772	$	—	$	21,471	$	—

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.

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. The hearing on the appeal is currently scheduled for October 8, 2014.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

While the conditional settlement reached in November 2005 never progressed through the confirmation process, the Trustee's case still remains pending on appeal. Accordingly, 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.

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.

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 and the appeal is currently under submission.

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. Most recently, 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 July 27, 2014, we have repurchased an aggregate of 188.7 million shares under our stock repurchase program for a total cost of $2.95 billion. As of July 27, 2014, we are authorized, subject to certain specifications, to repurchase shares of our common stock up to $748.4 million through January 2016.

The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, and may be made in one or more larger repurchases, 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 with financial institutions. 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. During February 2014, we executed a $500.0 million accelerated share repurchase, or ASR, agreement with an investment bank that was completed in July 2014. Under the ASR, we have repurchased 27.4 million shares in aggregate at an average price of $18.23 per share, of which 20.6 million shares were delivered in the first quarter of fiscal year 2015 and 6.8 million shares were delivered in the second quarter of fiscal year 2015. The shares delivered resulted in a reduction, on the delivery date, of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted earnings per share. As of July 27, 2014, all shares delivered from the ASR have been placed into treasury stock.

Dividends

During the three and six months ended July 27, 2014, we paid $47.4 million and $94.2 million, respectively, in dividends to our common stockholders. 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 July 27, 2014
Revenue	$	877,980	$	158,844		$	66,000		$	1,102,824
Depreciation and amortization expense	$	29,493	$	14,562		$	11,552		$	55,607
Operating income (loss)	$	240,908	$	(54,542	)	$	(23,187	)	$	163,179

Three Months Ended July 28, 2013
Revenue	$	858,613	$	52,625		$	66,000		$	977,238
Depreciation and amortization expense	$	36,001	$	15,431		$	10,408		$	61,840
Operating income (loss)	$	207,914	$	(83,560	)	$	(18,820	)	$	105,534

Six Months Ended July 27, 2014
Revenue	$	1,775,343	$	298,268		$	132,000		$	2,205,611
Depreciation and amortization expense	$	59,017	$	28,730		$	22,943		$	110,690
Operating income (loss)	$	476,104	$	(115,981	)	$	(45,585	)	$	314,538

Six Months Ended July 28, 2013
Revenue	$	1,644,225	$	155,752		$	132,000		$	1,931,977
Depreciation and amortization expense	$	71,919	$	28,953		$	20,712		$	121,584
Operating income (loss)	$	366,440	$	(138,550	)	$	(39,575	)	$	188,315



	Three Months Ended						Six Months Ended
	July 27, 2014			July 28, 2013			July 27, 2014			July 28, 2013
	(In thousands)
Reconciling items included in "All Other" category :
Revenue not allocated to reporting segments	$	66,000		$	66,000		$	132,000		$	132,000
Unallocated corporate operating expenses	(41,599		)	(41,171		)	(85,035		)	(85,668		)
Stock-based compensation	(38,415		)	(32,395		)	(73,936		)	(65,792		)
Acquisition-related costs	(9,173		)	(8,964		)	(18,614		)	(17,825		)
Other non-recurring expenses	—			(2,290		)	—			(2,290		)
Total	$	(23,187	)	$	(18,820	)	$	(45,585	)	$	(39,575	)

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 tables summarize information pertaining to our revenue from customers based on invoicing address in different geographic regions:



	Three Months Ended				Six Months Ended
	July 27,		July 28,		July 27,		July 28,
	2014		2013		2014		2013
	(In thousands)
Revenue:
Taiwan	$	330,917	$	319,004	$	703,776	$	608,885
China	251,768		184,086		475,230		359,130
United States	206,128		163,796		379,063		349,774
Other Asia Pacific	150,799		165,117		305,649		332,374
Other Americas	83,055		76,531		174,818		141,538
Europe	80,157		68,704		167,075		140,276
Total revenue	$	1,102,824	$	977,238	$	2,205,611	$	1,931,977

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



	Three Months Ended				Six Months Ended
	July 27,		July 28,		July 27,		July 28,
	2014		2013		2014		2013
Revenue:
Customer A	11	%	11	%	10	%	11	%
Customer B	10	%	12	%	9	%	11	%

Revenue from Customer A was attributable primarily to the GPU business for the three and six months ended July 27, 2014 and to both the GPU and Tegra Processor businesses for the three and six months ended July 28, 2013. Revenue from Customer B was attributable to the GPU business for all comparative periods presented.

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



	July 27, 2014		January 26, 2014
Accounts Receivable:
Customer B	21	%	23	%
Customer C	10	%	9	%

Note 15 - Subsequent Event

In August 2014, as part of our stock repurchase program, we entered into an accelerated share repurchase agreement, or ASR, with an investment bank, under which we paid $310.0 million to purchase shares of our common stock and received 10.9 million shares. Upon final settlement of the ASR, we may either (1) receive additional shares of our common stock, or (2) be required to deliver shares of our common stock or elect to make a cash payment to the investment bank, based on the terms and conditions under the ASR. The shares we receive result 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.

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, Kepler, Maxwell, NVIDIA, 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, 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 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 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

During the first half of fiscal year 2015, as part of our stock repurchase program, we entered into an accelerated share repurchase agreement, or ASR, with an investment bank that was completed in July 2014. Under the terms of this ASR, we paid $500.0 million to purchase shares of our common stock and received an aggregate of 27.4 million shares under this repurchase agreement of which 20.6 million shares were delivered in the first quarter and 6.8 million shares were delivered in the second quarter of fiscal year 2015. Please refer to Note 13 of the Notes to Condensed Consolidated Financial Statements for further disclosure regarding the ASR. Additionally, we paid $94.2 million in cash dividends during the first half of fiscal year 2015. As such, in the aggregate for the first half of fiscal year 2015, we returned a total of $594.2 million of our intended capital return of $1.00 billion to shareholders during fiscal year 2015. Subsequently, in August 2014, we entered into an additional ASR to purchase $310.0 million in shares of our common stock.

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					Six Months Ended
	July 27, 2014			July 28, 2013		July 27, 2014		July 28, 2013
Revenue	100.0		%	100.0	%	100.0	%	100.0	%
Cost of revenue	43.9			44.2		44.5		44.9
Gross profit	56.1			55.8		55.5		55.1
Operating expenses:
Research and development	30.6			33.9		30.4		34.1
Sales, general and administrative	10.8			11.1		10.8		11.2
Total operating expenses	41.4			45.0		41.2		45.3
Operating income	14.7			10.8		14.3		9.8
Interest income	0.6			0.4		0.6		0.5
Interest expense	1.0			0.1		1.0		0.1
Other income (expense), net	(0.3	)		0.3		0.6		0.2
Income before income tax expense	14.0			11.4		14.5		10.4
Income tax expense	2.4			1.6		2.4		1.3
Net income	11.6		%	9.8	%	12.1	%	9.1	%

Three and six months ended July 27, 2014 and July 28, 2013

Revenue



	Three Months Ended								Six Months Ended
	July 27, 2014		July 28, 2013		$ Change		% Change		July 27, 2014		July 28, 2013		$ Change		% Change
	(In thousands)								(In thousands)
GPU	$	878.0	$	858.6	$	19.4	2	%	$	1,775.3	$	1,644.2	$	131.1	8	%
Tegra Processor	158.8		52.6		106.2		202	%	298.3		155.8		142.5		91	%
All Other	66.0		66.0		—		—	%	132.0		132.0		—		—	%
Total	$	1,102.8	$	977.2	$	125.6	13	%	$	2,205.6	$	1,932.0	$	273.6	14	%

Revenue for the second quarter of fiscal year 2015 increased 13% when compared the second quarter of fiscal year 2014. Revenue for the first half of fiscal year 2015 increased 14% when compared to the first half 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 2% in the second quarter of fiscal year 2015 compared to the second quarter of fiscal year 2014. This increase was due primarily to higher revenue from Tesla and GRID products for data center and high performance computing, driven by large project wins and VDI deployments. Quadro revenue also increased, with growth in Kepler-based products for mobile workstations. Revenue from GeForce desktop and notebook GPU products for gaming grew, reflecting a combination of continued strength in PC gaming and increased sales of our Maxwell-based GPU products. Revenue from GeForce GPU products for mainstream PC OEMs declined compared to last year.

GPU business revenue increased by 8% in the first half of fiscal year 2015 compared to the first half of fiscal year 2014. This increase was due primarily to increased revenue from sales of GeForce GPU products for gaming, reflecting a combination of continued strength in PC gaming and increased sales of our Maxwell-based GPU products. Revenue from GeForce GPU products for mainstream PC OEMs declined compared to last year. Tesla and GRID product revenues both increased, driven by large project wins and VDI deployments, and Quadro revenue increased due primarily to increased sales of our Kepler-based Quadro products.

Tegra Processor Business. Tegra Processor business revenue increased by 202% in the second quarter of fiscal year 2015 compared to the second quarter of fiscal year 2014, and by 91% in the first half of fiscal year 2015 compared to the first half of fiscal year 2014. These increases were driven by sales of Tegra products serving smartphones, tablets and automobile infotainment systems.

All Other. We recognized $66.0 million and $132.0 million in revenue from the patent cross licensing arrangement with Intel during the second quarter of fiscal years 2015 and 2014, and the first half 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 second quarter and 75% of total revenue for the first half of fiscal year 2015. Revenue from sales to customers outside of the United States and Other Americas accounted for 75% of total revenue for both the second quarter and the first half 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 21% of our total revenue from two customers for the second quarter of fiscal year 2015 and 10% of total revenue from one customer for the first half of fiscal year 2015. Revenue from significant customers was 23% and 22% of our total revenue from two customers for the second quarter and first half 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 56.1% and 55.8% for the second quarter of fiscal years 2015 and 2014, respectively, and 55.5% and 55.1% for the first half of fiscal years 2015 and 2014, respectively.

Charges to cost of sales for inventory provisions totaled $12.7 million and $10.5 million for the second quarter of fiscal years 2015 and 2014, respectively, unfavorably impacting our gross margin by 1.1% for both periods. Sales of inventory that was previously written-off or written-down totaled $8.8 million and $13.8 million for the second quarter of fiscal years 2015 and 2014, respectively, favorably impacting our gross margin by 0.8% and 1.4%, 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 0.3% unfavorable impact for the second quarter of fiscal year 2015 and a 0.3% favorable impact for the second quarter of fiscal year 2014.

Charges to cost of sales for inventory provisions totaled $22.9 million and $24.1 million for the first half of fiscal years 2015 and 2014, respectively, unfavorably impacting our gross margin by 1.0% and 1.2%, respectively. Sales of inventory that was previously written-off or written-down totaled $13.8 million and $30.9 million for the first half of fiscal years 2015 and 2014, respectively, favorably impacting our gross margin by 0.6% and 1.6%, 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 0.4% unfavorable impact for the first half of fiscal year 2015 and a 0.4% favorable impact for the first half 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 second quarter and first half of fiscal year 2015 compared to the second quarter and first half of fiscal year 2014. GPU margins increased primarily due to an increase in unit volume of our high-end GeForce GPU products, which contributed to a richer overall mix of product sales. Additionally, the volume increase of Kepler-based Quadro, 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 second quarter and first half of fiscal year 2015 compared to the second quarter and first half 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

Six Months Ended

July 27,
2014

July 28,
2013

Change

July 27,
2014

July 28,
2013

Change

(In millions)

($ in millions)