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NVDA’s Capital Allocatations: Shareholder Returns, Mellanox Deal


May. 27 2019, Published 3:30 p.m. ET


NVIDIA (NVDA) suffered a blow after the end of crypto-related GPU (graphics processing unit) demand piled up inventory in the channel, forcing the company to stall shipments of midrange GPUs in the fourth quarter of fiscal 2019. In the same quarter, data center customers shifted from buying capacity to absorbing the excess capacity they purchased ahead of the US-China trade war.

NVIDIA’s fiscal 2019 fourth-quarter earnings results hit bottom because of the two above-mentioned factors. The company’s earnings showed a slight sequential improvement in the first quarter of fiscal 2020 as it started shipping midrange Turing-based GeForce RTX GPUs, and this sequential growth is likely to continue throughout the year.

In the first quarter of fiscal 2020, NVIDIA’s non-GAAP (generally accepted accounting principles) EPS rose 10% sequentially to $0.88 after falling 56.5% sequentially in the last quarter. On a YoY (year-over-year) basis, its EPS fell 57%.

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Shareholder returns

NVIDIA’s operating cash flow fell 20% sequentially to $720 million in the first quarter of fiscal 2020 as its receivables increased and its payables reduced. Its FCF (free cash flow) after deducting $128 million in capex stood at $592 million. The company spent $97 million of its FCF on dividend payments and made no stock repurchases during the quarter, as it was investing that money in its business. The company announced the acquisition of Mellanox Technologies (MLNX) for $6.97 billion cash, which it plans to complete by the end of the year.

Despite the acquisition, NVIDIA has maintained its plan to return $3 billion to shareholders in fiscal 2020 after adding the last quarter’s $700 million stock buyback.

Mellanox acquisition

It’s not clear how NVIDIA will fund the Mellanox acquisition. It could either use its $7.8 billion cash reserve or take on some term debt. It has a long-term debt of $2 billion. The Mellanox acquisition comes at a time of trade tensions between the United States and China, raising concerns among investors as to whether the acquisition will meet the same fate as the Qualcomm–NXP Semiconductors deal, in which Qualcomm withdrew due to delays in regulatory approval from China.

On NVIDIA’s fiscal 2020 first-quarter earnings call, CEO Jensen Huang stated that he was confident that the acquisition would close by the end of the year. Supporting his statement, he said that the acquisition and the trade war were two different matters and that the Mellanox acquisition would only add value in China.


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