So we were delighted when an eagle-eyed researcher — no less than Shiva Rajgopal, head of the accounting department at Columbia Business School — brough an obscure detail to our attention. In its most recent fiscal year, Nvidia’s pretax U.S. earnings exceeded U.S. revenue. Figure 1, below, shows the proof. 

Domestic pretax earnings were $29.49 billion. Domestic revenue was $26.96 billion. That’s less. 

We had never seen something like this before — but in our defense, it’s such a weird concept that we’d never gone looking for it before either. Our first order of business was to use the world-famous Calcbench Trace feature to research exactly what those domestic revenue and EBIT disclosures were all about.

First we traced the $26.96 billion back to the geographic segment disclosure. Figure 2, below, shows that the U.S. market accounted for roughly 44 percent of all NVidia revenue that year.

Then we traced EBIT, both domestic and foreign. See Figure 3, below.

Interesting, but we’re still stuck on the basic question of how this could even happen. One immediate hunch is that Nvidia had to have some unusually large amount of non-operating income, such as gains from the sale of assets, investments, or one-time extraordinary gains. 

Except, when you look at Nvidia’s segment disclosure of revenue, it’s entirely operating income: $47.4 billion for its AI chips, and another $13.5 billion for graphics chips. So that hunch is incorrect.

Another possibility is that Nvidia had negative operating revenue — again, another weird concept we didn’t much contemplate before, but it’s theoretically possible. For example, if a company has a high amount of returns, refunds, or allowances exceeding gross sales, and also has other forms of income that push EBIT into a positive territory, you could end up with EBIT larger than revenue.

When you study the details, however, Nvidia doesn’t fit that profile either.

How Rare Is This Scenario, Anyway? 

Fully determined to go down this rabbit hole, the Calcbench research team started looking for other examples of EBIT exceeding revenue — and we found them. Still a super-rare scenario, but Nvidia is not alone.

We searched the annual filings of all public filers as far back as 2015, and found 233 instances of this happening. That’s 233 instances out of roughly 80,000 filings, a frequency rate of 0.3 percent. Extremely rare, but definitely a thing.

For example, Moderna ($MRNA) reported such an outcome in 2021: domestic revenue of $6.17 billion, domestic EBIT of $13.11 billion. See Figure 4, below.

Well, hold up. Moderna experienced gigantic revenue growth in 2021 because it launched its covid vaccine that year. Nvidia experienced gigantic revenue growth in 2023 because demand for its AI microchips took off that year. 

Could that be a clue? Is this phenomenon due to sudden global demand for your product, which brings a battalion of tax considerations in tow; and somehow those tax issues lead to domestic EBIT larger than domestic revenue? 

Hmmm. We looked up the tax footnotes for both Nvidia and Moderna, and both are as complicated as a graduate-level finance textbook. 

For example, both companies claimed a benefit in their respective fiscal years for foreign-derived intangible income. That, according to the U.S. Tax Foundation, is income from the use of intellectual property in the United States in creating an export. OK, Moderna used intellectual property in the United States to sell covid vaccines worldwide; Nvidia did the same to sell AI microchips. Figure 5, below, shows the FDII adjustment for Nvidia.

Moderna had a similar FDII adjustment in 2021, although it reported that item as a percentage adjustment (4.7 percent, if you’re curious) to its statutory tax rate; one of numerous adjustments Moderna made as it went from its statutory rate of 21 percent down to an effective tax rate of 8.1 percent. 

We then consulted with a few corporate finance gurus we know, who gave us this consensus answer: it’s about the transfer pricing these companies use as they try to report revenue globally.

For example, say you have sales from U.S. subsidiary A to foreign subsidiary B. Those sales are not recognized as GAAP revenue, but they do create tax revenue and pretax income. If you have enough of those sales (Nvidia selling its chips to foreign subsidiaries, Moderna selling its vaccines), you can generate significant U.S. EBIT — and if you don’t have huge U.S. revenues, yet, the pretax U.S. income can end up exceeding U.S. revenue. 

That also explains another issue we were struggling to reconcile: lots of other large companies also claim that FDII tax adjustment, across a range of industries (Amazon, Netflix, and Mastercard all do, for example), but none of them have domestic EBIT exceeding domestic revenue. Then again, none of them just launched a product with soaring demand globally; they already have large U.S. operations with plenty of U.S. revenue. 

If this all sounds confusing, you’re not alone. One of our gurus said the whole thing is “clear as mud;” others said 10-K financial reporting rules aren’t really designed to address this oddball discrepancy since it’s so rare. 

Regardless, the data itself is there. For financial analysts sleuthing around corporate filings trying to figure out what’s up, Calcbench is an indispensable tool no matter how weird the scenario!