December 19, 2017 / 4:42 PM / 5 months ago

Fitch Assigns 'F2' Short-Term Rating to NVIDIA

(The following statement was released by the rating agency) CHICAGO, December 19 (Fitch) Fitch Ratings has assigned an 'F2' Short-Term Issuer Default Rating (IDR) and commercial paper (CP) rating to NVIDIA Corporation following the company's authorization of a $575 million CP program. The facility will be fully back-stopped by NVIDIA'S $575 million revolving credit facility (RCF) expiring 2021. Fitch upgraded NVIDIA's Long-Term ratings to 'A-' from 'BBB+' on Dec. 15, 2017. The Rating Outlook is Positive. A full list of current ratings follows at the end of this release. KEY RATING DRIVERS Solid Top-Line Growth: Fitch expects NVIDIA will benefit from leading share positions in secular growth markets, driven by the company's unique accelerated graphics processing units (GPU) architecture, which provide parallel processing for superior performance and power characteristics and enable richer gaming experiences and deep learning for the evolution of artificial intelligence (AI). Thus, Fitch expects the combination of NVIDIA's technology leadership and secular demand will drive solid revenue growth through the forecast period, even within the context of a macroeconomic downturn. Strengthened Profitability Profile: Fitch believes a richer sales mix and operating leverage from a high level of platform adoption will enable NVIDIA to sustain profit margins near recently higher levels. Fitch expects operating EBITDA margins in the 30s through a macroeconomic cycle, versus margins in the 20s prior to the company shifting focus to higher-value competitive gaming, deep learning and autonomous driving markets from lower-margin original equipment manufacturer (OEM) sales. Fitch expects some gross profit margin degradation over time from competing architectures in deep learning and autonomous driving, as winning customers in these markets consolidate share. Conservative Financial Policies: Fitch expects NVIDIA's primary focus on funding growth organically and shareholder returns support a conservative financial profile. Fitch believes NVIDIA will focus on organic investments in growth markets, including competitive gaming, AI and autonomous driving. We also believe the company will limit shareholder returns to domestic pre-dividend FCF, although potential U.S. tax reform could increase cash available for shareholder returns, given the company's considerable offshore cash flow. As a result, credit protection measures should remain solid for the rating, including total leverage well below Fitch's 2x negative ratings trigger. Significant Technology Risk: Fitch believes technology risk is significant, given the large investments and pay-offs associated with transformative markets with robust growth prospects. Fitch believes NVIDIA will retain its technology leadership positions through at least the forecast period but that customers will support competing architectures to ensure long-term innovation. As a result, Fitch expects customers will also adopt new start-up technologies and competing architectures from existing industry rivals, although significant market growth rates provide ample opportunities for multiple architectures. Gaming Platform Leader: Fitch believes NVIDIA's strong share positions in gaming markets has resulted in a significant installed base and provides consistent and solid cash flow for reinvestment in non-gaming specialized platforms. NVIDIA's technology leadership has improved rendering for richer gaming experiences, attracted developers and game franchises and become the platform of choice for rapidly growing e-sports, where success is in part driven by having NVIDIA's latest and greatest gear. As a result, competitors have been forced to compete on price or on casual gamers, who spend significantly less than NVIDIA's targeted competitive gaming market. DERIVATION SUMMARY Fitch believes NVIDIA is well positioned relative to peers in each of its platform markets, given its unique and cumulative IP from long-term investing in processors and software. In gaming, NVIDIA's technology leadership has resulted in a large installed platform base and significant share leadership in faster-growing competitive gaming markets. In deep learning, Fitch believes NVIDIA is the market leader but faces competitors with comparable if not greater financial flexibility to support significant ongoing investment requirements. NVIDIA is the market leader in autonomous driving but Fitch expects intensifying competition as this nascent market continues to develop. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Revenue growth remains robust but slows through the remainder of the forecast period, growing 20% in fiscal 2019, 10% in fiscal 2020 and 5% in fiscal 2021. --Operating EBITDA margins remain near 38% with operating leverage offset by modest gross profit margin contraction over time. --Capital expenditures are roughly 2.5% of revenue and spending on acquisitions are minimal. --$1.25 billion of annual shareholder returns for fiscal 2018 and 2019, consisting of of dividends growing 10% per year and stock buybacks. Shareholder returns beyond fiscal 2019 equal to domestic pre-dividend FCF in the absence of meaningful U.S. tax reform or total pre-dividend FCF with it. --The company will maintain domestic cash of $1 billion. RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action: --Fitch's expects the company will largely fund investments and shareholder returns with cash flow, resulting in total leverage sustained below 1.5x. --Revenue growth exceeds that of target markets, supporting the case for NVIDIA's technology leadership in rapidly evolving gaming, data center and autonomous driving. Developments that May, Individually or Collectively, Lead to Negative Rating Action: --Total leverage sustained above 2x from shareholder returns well in excess of domestic cash flow requiring incremental borrowing. --Revenue growth below that of target markets, indicating positive momentum for competing technology architectures in rapidly evolving gaming, data center and self-driving cars. LIQUIDITY Fitch expects liquidity to remain solid and, as of Oct. 29, 2017 and pro forma for the CP program, was supported by $2.8 billion of cash and cash equivalents, $3.5 billion of marketable securities, and a $575 million CP program fully back-stopped by an undrawn $575 million RCF expiring 2021. Fitch's expectation for more than $2 billion of annual FCF through the forecast period also supports liquidity. Fitch believes the significant majority of NVIDIA's $6.3 billion of cash, cash equivalents and marketable securities was held by foreign subsidiaries and would be subject to tax liabilities if repatriated to the U.S. absent U.S. tax reform. FULL LIST OF CURRENT RATINGS AND RATING ACTIONS Fitch has assigned the following ratings: NVIDIA Corporation --Short-Term Issuer Default Rating 'F2'; --Commercial Paper 'F2'. Fitch currently rates NVIDIA Corporation as follows: --Long-Term Issuer Default Rating 'A-'; --Senior unsecured RCF 'A-'; --Senior unsecured debt 'A-'. The Rating Outlook is Positive. Contact: Primary Analyst Jason Pompeii Senior Director +1-312-368-3210 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Allen Dilallo Analyst +1-312-368-3337 Committee Chairperson Alen Lin Senior Director +1-312-368-5471 Date of Relevant Committee: Dec. 14, 2017 Summary of Financial Statement Adjustments - Fitch made no material adjustments that depart materially from those contained in the published financial statements of NVIDIA Corporation, aside from including obligations under the company's synthetic lease obligation in total debt. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com; Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. Additional information is available on www.fitchratings.com. 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