NVIDIA’s Arm Failure To Account For A Whopping 38% Of Its Q1 Expenses Reveals CFO

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Chip designer NVIDIA Corporation's management made their first comments yesterday after the company had officially called it quits on its attempt to acquire British design house Arm Ltd last week. NVIDIA announced the deal in 2020, and since then it faced significant regulatory scrutiny all over the world as bodies raised concerns about the impact of the acquisition on market competition. Rumors that NVIDIA's management had canceled their bid surfaced before the company's earnings call yesterday, and at the event, NVIDIA's chief executive officer Mr. Jen-Hsun Huang and its chief financial officer Ms. Collette Kress shared their take on the affair. Mr. Huang, who did not hold back previously of his praise of Arm's business model, had few words to say about the deal, while Ms. Kress described the impact the fall through would have on her company's earnings for the ongoing quarter.

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Before Mr. Huang and Ms. Kress shared their take on the deal's termination, NVIDIA provided a brief summary of the impact that the affair will have on its income statement for its ongoing quarter. This was in the form of a brief note made in its CFO commentary that the company shares with investors at every earnings report event.

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This document stated that:

On February 8, 2022, NVIDIA and SoftBank Group Corp. (SoftBank) announced the termination of the Share Purchase Agreement whereby NVIDIA would have acquired Arm Limited from SoftBank. The parties agreed to terminate because of significant regulatory challenges preventing the consummation of the transaction. We intend to record in operating expenses a $1.36 billion charge (the Arm Write-off) in the first quarter of fiscal 2023 reflecting the write-off of the prepayment provided at signing in September 2020.

Following the earnings release, Mr. Huang delivered his pre-prepared remarks for the termination at the earnings call. These were rather muted in nature and attempted to keep a positive spin on the effort despite the impact it will have on NVIDIA's cash flows.

NVIDIA Corporation's depiction of its Cambridge-1 Artificial Intelligence Supercomputer announced at the same time as the Arm acquisition. The Cambridge-1 will be located in the United Kingdom, with NVIDIA investing ~$52 million in the system aimed at helping drug companies leverage modern day computing in their research efforts. Image: NVIDIA Corporation

Mr. Huang stated at the event that:

Thanks, Colette. Last week, we terminated our efforts to purchase Arm. When we entered into the transaction in September 2020, we believed that would accelerate Arm's focus on high-performance CPUs and help Arm expand into new markets, benefiting all our customers in the entire ecosystem. Like any combination of pioneers of important technologies, our proposed acquisition spurred questions from regulators worldwide.

We appreciated the regulatory concerns. For over a year, we worked closely with SoftBank and Arm to explain our vision for Arm and reassure regulators that NVIDIA would be a worthy steward of the Arm ecosystem. We gave it our best shot, but the headwinds were too strong, and we could not give regulators the comfort they needed to approve our deal. NVIDIA's work in accelerated computing and our overall strategy will continue as before.

Our focus is accelerated computing. We are on track to launch our Arm-based CPU, targeting giant AI and HPC workloads in the first half of next year. Our 20-year architectural license to Arm's IP allows us the full breadth and flexibility of options across technologies and markets. We will deliver on our three-chip strategy across CPUs, GPUs, and DPUs.

Whether x86 or Arm, we will use the best CPU for the job. And together with partners in the computer industry, offer the world's best computing platform to tackle the impactful challenges of our time. Back to you, Colette.

Ms. Kress then shred details about NVIDIA's operating expenses for the current quarter, the bulk of which will now be affected by the termination. She stated that the expenses, which represent direct and indirect costs incurred by a company for conducting business, should be around $3.55 billion, out of which $1.36 billion will be the termination payment made to Arm. In other words, 38% of the non-product, non-interest and non-tax expenses that NVIDIA will incur in the ongoing quarter will be due to the fact that it failed to secure regulatory approval for what would have been one of the biggest deals in the history of the semiconductor industry.

Later during the call, Mr. Huang reiterated his company's plans to diversify NVIDIA from a company that primarily designs and sells graphics processing units (GPUs) to a firm that has a presence in a variety of industries such as robotics, automotive, cloud computing, data centers and other applications. Wall Street expects the company to significantly grow its revenue this year and touch $35 billion by January next year.