Certain prior fiscal year balances have been reclassified to conform to the current fiscal year presentation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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, accounts receivable, inventories, warranties, income taxes, goodwill, stock-based compensation expense and contingencies. These estimates are based on historical facts and various other assumptions that we believe are reasonable.
SFAS No. 123(R) also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If factors change and we employ different assumptions in the application of SFAS No. 123(R) in future periods, the compensation expense that we record under SFAS No. 123(R) may differ significantly from what we have recorded in the current period.
During fiscal year 2002, we completed the purchase of certain assets from 3dfx Interactive, Inc., or 3dfx, for an aggregate purchase price of approximately $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. Under the terms of the APA, the cash consideration due at the closing was $70.0 million, less $15.0 million that was loaned to 3dfx pursuant to a Credit Agreement dated December 15, 2000. The APA also provided, subject to the other provisions thereof, that if 3dfx properly certified that all its debts and other liabilities had been provided for, then we would have been obligated to pay 3dfx one million shares, which due to subsequent stock splits now totals foursix million shares, of NVIDIA common stock. If 3dfx could not make such a certification, but instead properly certified that its debts and liabilities could be satisfied for less than $25.0 million, then 3dfx could have elected to receive a cash payment equal to the amount of such debts and liabilities and a reduced number of shares of our common stock, with such reduction calculated by dividing the cash payment by $25.00 per share. If 3dfx could not certify that all of its debts and liabilities had been provided for, or could not be satisfied, for less than $25.0 million, we would not be obligated under the APA to pay any additional consideration for the assets.
On December 21, 2005, the Bankruptcy Court determined that it would schedule trial of one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA exercised its right to terminate the settlement agreement on grounds that the Bankruptcy Court had failed to proceed toward confirmation of the Creditors’ Committee’s plan. TrialA non-jury trial began on March 21, 2007 on valuation issues in the Trustee's constructive fraudulent transfer claims against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx transfer to NVIDIA in the APA?; (2) of what was transferred, what qualifies as "property" subject to the Bankruptcy Court's avoidance powers under the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions?; (3) what is the fair market value of the "property" identified in answer to question (2)?; and (4) was the $70 million that NVIDIA paid "reasonably equivalent" to the fair market value of that property?. At the conclusion of the evidence, the Bankruptcy Court asked the parties to submit a post-trial briefing. That briefing was concludedcompleted on May 25, 2007,2007. 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 with respect to each of the questions to be tried. The Bankruptcy Court’sCourt concluded that "the creditors of 3dfx were not injured by the Transaction." This decision does not entirely dispose of the Trustee's action, however; still pending are the Trustee's claims for successor liability and intentional fraudulent conveyance. On May 12, 2008, the Trustee filed a motion for leave to pursue an interlocutory appeal, but thereafter withdrew the motion. NVIDIA has filed a motion for summary judgment on all causes of action in order to convert the Memorandum Decision After Trial to a final judgment. That motion is still pending.scheduled to be heard on August 28, 2008.
We allocated the purchase price of each of these acquisitions to tangible assets, liabilities and identifiable intangible assets acquired, as well as in-process research and development, or IPR&D, if identified, based on their estimated fair values. The excess of purchase price over the aggregate fair values was recorded as goodwill. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions determinedmade by management. Purchased intangibles are amortized on a straight-line basis over their respective useful lives. The allocation of the purchase price for the Mental Images and Ageia acquisitions have been prepared on a preliminary basis and reasonable changes are expected as additional information becomes available.
The pro forma results of operations for these acquisitions have not been presented because the effects of the acquisitions, individually or in the aggregate, were not material to our results.
We are currently amortizing our intangible assets with definitive lives over periods ranging from one to fiveseven years, primarily on a straight-line basis. The components of our amortizable intangible assets are as follows:
The increase in the grossnet carrying amount of technology licenses as of July 29, 200727, 2008 when compared to January 28, 2007 was27, 2008, is primarily related to approximately $20.7$26.7 million in paymentsof net cash outflows under a confidential patent licensing arrangement that we entered into during fiscal year 2007. Our aggregate commitment2007, offset by amortization for license payments under this arrangement could range from $97.0 million to $110.0 million over a ten year period; however,the six months ended July 27, 2008. Additionally, the increase in the net outlay may be reducedcarrying value of acquired intellectual property is primarily related to the intangible assets that resulted from our acquisition of Ageia during the first quarter of fiscal year 2009, offset by amortization for the occurrencesix months ended July 27, 2008. Please refer to Note 7 of certain events covered bythese Notes to Condensed Consolidated Financial Statements for further information. The decrease in the arrangement.gross carrying amounts of the intangible assets as of July 27, 2008 when compared to January 27, 2008 is primarily due to the write-off of fully amortized intangible assets.
Amortization expense associated with intangible assets for the three and six months ended July 27, 2008 was $7.5 million and $15.0 million, respectively. Amortization expense associated with intangible assets for the three and six months ended July 29, 2007 was $5.6 million and $12.6 million, respectively. Amortization expense associated with intangible assets for the three and six months ended July 30, 2006 was $4.0 million and $8.1 million, respectively. Future amortization expense related to the net carrying amount of intangible assets at July 29, 200727, 2008 is estimated to be $9.3$18.7 million for the remainder of fiscal 2008, $13.8 million in fiscalyear 2009, $9.1$28.5 million in fiscal 2010, $4.6$23.7 million in fiscal 2011, $3.7$22.0 million in fiscal 2012, and a total of $14.2$17.4 million in fiscal 2013, $13.3 million in fiscal 2014 and $21.5 million in fiscal years subsequent toof fiscal 2013.2014.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 9 - Marketable Securities
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. All of our cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Cash equivalents consist of financial instruments which are readily convertible into cash and have original maturities of three months or less at the time of acquisition. Marketable securities consist primarily of highly liquid investments with a maturity of greater than three months when purchased and some equity investments. We classify our marketable securities at the date of acquisition in the available-for-sale category as our intention is to convert them into cash for operations. 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. Realized gains and losses on the sale of marketable securities are determined using the specific-identification method. Net realized and unrealized losses for the three and six months ended July 29, 2007 were not material.
Note 10 - Balance Sheet Components
Certain balance sheet components are as follows:
| | | July 29, 2007 | | | January 28, 2007 | | |
| | | (In thousands) | | | July 27, 2008 | | January 27, 2008 | |
Inventories: | | | | | | | | | |
| | $ | 33,197 | | | $ | 56,261 | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | $ | 276,305 | | | $ | 354,680 | | | | | | | | |
At July 29, 2007,27, 2008, we had outstanding inventory purchase obligations totaling approximately $483.4$615.6 million.
| | | July 29, 2007 | | | January 28, 2007 | |
| | | (In thousands) | |
Deposits and other assets: | | | | | | |
Investment in non-affiliates | | $ | 11,684 | | | $ | 11,684 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total deposits and other assets | | $ | 25,912 | | | $ | 35,729 | |
| | | July 27, 2008 | | | January 27, 2008 | | | Estimated Useful Life |
| | | (In thousands) | | | (Years) |
| Property and Equipment: | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Office furniture and equipment | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | |
Accumulated depreciation and amortization | | | | | | | | ) | | |
Total property and equipment, net | | | | | | | | | | |
| | | July 29, 2007 | | | January 28, 2007 | |
| | | (In thousands) | |
Accrued Liabilities: | | | | | | |
Accrued customer programs | | | | | | | | |
| Accrued payroll and related expenses | | | 89,481 | | | | 81,352 | |
| | | | | | | | |
| Deferred rent | | | 11,980 | | | | 12,551 | |
Income and other taxes payable | | | | | | | | |
| Deferred revenue | | | 3,584 | | | | 1,180 | |
| | | | | | | | |
| Total accrued liabilities | | $ | 357,417 | | | $ | 366,732 | |
(A) Land is a non-depreciable asset.
(B) Leasehold improvements are amortized based on the lesser of either the asset’s estimated useful life or the remaining lease term.
(C) Construction in process represents assets that are not in service as of the balance sheet date.
| | | July 27, 2008 | | | January 27, 2008 | |
| | | |
Accrued customer programs (1) | | | | | | | | |
| | | | | | | | |
Accrued payroll and related expenses | | | | | | | | |
Accrued costs related to purchase of property | | | | | | | | |
Accrued legal settlement (3) | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total accrued liabilities | | | | | | | | |
(1) Please refer to Note 1 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the nature of accrued customer programs and their accounting treatment related to our revenue recognition policies and estimates.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| | | July 29, 2007 | | | January 28, 2007 | |
| | | (In thousands) | |
Deferred tax and other long-term liabilities: | | | | | | |
| | $ | 37,691 | | | $ | - | |
| Deferred income tax liability | | | 31,897 | | | | - | |
Other long-term liabilities | | | | | | | | |
| Accrued payroll taxes related to stock options | | | 8,995 | | | | 8,995 | |
Asset retirement obligation | | | | | | | | |
| Total deferred tax and other long-term liabilities | | $ | 95,191 | | | $ | 29,537 | |
(2) Please refer to Note 311 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the reclassificationwarranty accrual.
(3) Please refer to Note 12 of income taxes payable from accrued liabilitiesthese Notes to deferred tax and other long-term liabilities as a result ofCondensed Consolidated Financial Statements for discussion regarding the adoption of FIN 48.3dfx litigation.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| | | July 27, 2008 | | | January 27, 2008 | |
| Other Long-term Liabilities: | | (In thousands) | |
Deferred income tax liability | | | | | | | | |
Income taxes payable, long term | | | | | | | | |
Asset retirement obligation | | | | | | | | |
Other long-term liabilities | | | | | | | | |
Total other long-term liabilities | | | | | | | | |
Note 11 - Comprehensive Income
Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss components include unrealized gains or losses on available-for-sale securities, net of tax. The components of comprehensive income, net of tax, were as follows:
| | | Three Months Ended | | | Six Months Ended | |
| | | July 29, 2007 | | | July 30 2006 | | | July 29, 2007 | | July 30 2006 | |
| | | (In thousands) | |
| | | | | | | | | | | | | | | | |
| Net change in unrealized gains (losses) on available-for-sale securities, net of tax | | | 320 | | | | 93 | | | | 241 | | | | (394 | ) |
Reclassification adjustments for net realized gains on available-for-sale securities included in net income, net of tax | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | |
Note 12 - Guarantees
FASB Interpretation No. 45, or FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, 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, FIN 45 requires disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities.
The following table summarizesProduct Defect
Our products are complex and may contain defects or experience failures due to any number of issues in design, fabrication, packaging, materials and/or use within a system. If any of our products or technologies contains a defect, compatibility issue or other error, we may have to invest additional research and development efforts to find and correct the changesissue. Such efforts could divert our management’s and engineers’ attention from the development of new products and technologies and could increase our operating costs and reduce our gross margin. In addition, an error or defect in new products or releases or related software drivers after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins. Also, we may be required to reimburse customers, including for customers’ costs to repair or replace the products in the field, which could cause our revenue to decline. A product recall or a significant number of product returns could be expensive, damage our reputation and could result in the shifting of business to our competitors. Costs associated with correcting defects, errors, bugs or other issues could be significant and could materially harm our financial results.
During our fiscal quarter ended July 27, 2008, we recorded a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other associated costs arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems. All of our newly manufactured products and all of our products that are currently shipping in volume have a different material set that we believe is more robust.
The previous generation MCP and GPU products that are impacted were included in a number of notebook products that were shipped and sold in significant quantities. Certain notebook configurations of these MCP and GPU products are failing in the field at higher than normal rates. While we have not been able to determine a root cause for these failures, testing suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors. We have worked with our customers to develop and have made available for download a software driver to cause the system fan to begin operation at the powering up of the system and reduce the thermal stress on these chips. We have also recommended to our customers that they consider changing the thermal management of the MCP and GPU products in their notebook system designs. We intend to fully support our customers in their repair and replacement of these impacted MCP and GPU products that fail, and their other efforts to mitigate the consequences of these failures.
We continue to engage in discussions with our supply chain regarding reimbursement to us for some or all of the costs we have incurred and may incur in the future relating to the weak material set. We also continue to seek to access our insurance coverage. However, there can be no assurance that we will recover any such reimbursement. We continue to not see any abnormal failure rates in any systems using NVIDIA products other than certain notebook configurations. However, we are continuing to test and otherwise investigate other products. There can be no assurance that we will not discover defects in other MCP or GPU products.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Accrual for estimated product returns and 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 that are calculated at the point of revenue recognition. Under limited circumstances, we may offer an extended limited warranty to customers for certain products. The estimated product returns and estimated product warranty liabilities for the three months ended July 29, 2007 and July 30, 2006 and six months ended July 27, 2008 and July 29, 2007 and July 30, 2006: are as follows:
| | | Three Months Ended | | | Six Months Ended | |
| | | July 29, 2007 | | | July 30 2006 | | | July 29, 2007 | | July 30 2006 | |
| | | (In thousands) | |
Balance at beginning of period | | | | | | | | | | | | | | | | |
| Additions (1) | | | 8,468 | | | | | | | | 13,448 | | | | | |
| | | | | | | | | | | | | | | | |
Balance at end of period (3) | | $ | | | | $ | | | | $ | | | | $ | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)| | | Three Months Ended | | | Six Months Ended | |
| | | July 27, 2008 | | | July 29, 2007 | | | July 27, 2008 | | July 29, 2007 | |
| | | (In thousands) | |
Balance at beginning of period | | | | | | | | | | | | | | | | |
| Additions (1),(4) | | | 203,743 | | | | 8,468 | | | | 213,293 | | | | 13,448 | |
| | | | | | | | | | | | | | | | |
Balance at end of period (3) | | $ | | | | $ | | | | $ | | | | $ | | |
(1) Includes $7,173 and $16,039 for the three and six months ended July 27, 2008, respectively and $8,281 and $13,027 for the three and six months ended July 29, 2007, respectively, and $12,417 and $24,192 for the three and six months ended July 30, 2006, respectively, towards allowanceallowances for sales returns estimated at the time revenue is recognized primarily based on historical return rates and is charged as a reduction to revenue.
(2)
| Includes $6,837 and $ 10,712(2) Includes $7,922 and $16,804 for the three and six months ended July 27, 2008, respectively and $6,837 and $10,712 for the three months and six months ended July 29, 2007, respectively, and $11,602 and $22,050 for the three and six months ended July 30, 2006, respectively, written off against the allowance for sales returns. |
(3)
| Includes $16,792 as of July 29, 2007 and $12,381 as of July 30, 2006(3) Includes $17,960 and $16,792 at July 27, 2008 and July 29, 2007, respectively, relating to allowance for sales returns. |
(4) Includes $195,954 for the three and six months ended July 27, 2008 for incremental repair and replacement costs from a weak die/packaging material set.
(5) Includes $15,830 for the three and six months ended July 27, 2008 in deductions towards warranty accrual associated with incremental repair and replacement costs from a weak die/packaging material set.
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 1312 - Commitments and Contingencies
3dfx
Litigation
3dfx
On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into thean Asset Purchase Agreement, or APA, to purchase certain graphics chip assets from 3dfx which closed on April 18, 2001.
In May 2002, we were served with a California state court complaint filed by the landlord of 3dfx’s San Jose, California commercial real estate lease, Carlyle Fortran Trust, or Carlyle. In December 2002, we were served with a California state court complaint filed by the landlord of 3dfx’s Austin, Texas commercial real estate lease, CarrAmerica Realty Corporation. The landlords’ complaints both asserted claims for, among other things, interference with contract, successor liability and fraudulent transfer andtransfer. The landlords’ sought to recover among other things,money damages, including amounts owed on their leases with 3dfx in the aggregate amount of approximately $15 million. In October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. TheIn January 2003, the landlords’ actions were subsequently removed to the United States Bankruptcy Court for the Northern District of California and consolidated, for purposes of discovery, with a complaint filed against NVIDIA by the Trustee in the 3dfx bankruptcy case. Upon motion by NVIDIA in 2005, the District Court withdrew the reference to the Bankruptcy Court andfor the landlords’ actions, which were removed to the United States District Court for the Northern District of California. The Trustee’s lawsuit remained in the Bankruptcy Court. On November 10, 2005, the District Court granted our motion to dismiss the landlords’ respective amended complaints and allowed the landlords until February 4, 2006 to amend their complaints. The landlords re-filed claims against NVIDIA in early February 2006, and NVIDIA again filed motions requesting the District Court to dismiss all suchthose claims. The District Court took both motions under submission. On September 29, 2006, the District Court dismissed the CarrAmerica action in its entirety and without leave to amend. The District Court found, among other things, that CarrAmerica lacked standing to bring the lawsuit and that such standing belongsrests exclusively towith the bankruptcy Trustee. On October 27, 2006, CarrAmerica filed a notice of appeal from that order. On December 15, 2006, the District Court also dismissed the Carlyle complaintaction in its entirety, finding that Carlyle also lacked standing to pursue some of its claims, and that certain other claims were substantively unmeritorious. Carlyle filed a notice of appeal from that order on January 9, 2007. Both landlords’ appeals are pending before the Ninth CircuitUnited States Court of Appeals for the Ninth Circuit, and briefing on both appeals has been consolidated. NVIDIA has filed motions to recover its litigation costs and attorneys fees against both Carlyle and CarrAmerica. ThoseThe District Court has postponed consideration of those motions were scheduled for hearing in early August 2007, but have been taken off calendar byuntil after the Court,appeals are resolved. On July 17, 2008, the Ninth Circuit held oral argument on the landlords' appeals, and willthe matter now be rescheduled.
awaits that court's decision.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In March 2003, we were served with a complaint filed by the Trustee appointed by the Bankruptcy Court to represent the interests of the 3dfx3dfx’s bankruptcy estate. The Trustee’s complaint asserts claims for, among other things, successor liability and fraudulent transfer and seeks additional payments from us. On October 13, 2005, the Bankruptcy Court held a hearing on the Trustee’s motion for summary adjudication. On December 23, 2005, the Bankruptcy Court issued its ruling denyingdenied the Trustee’s Motion for Summary Adjudication in all material respects and holdingheld that NVIDIA is prevented from disputingmay not dispute that the value of the 3dfx transaction to NVIDIA was less than $108.0 million. The Bankruptcy Court expressly denied the Trustee’s request to find that the value of the 3dfx assets conveyed to NVIDIA werewas at least $108.0 million. In early November 2005, after manyseveral months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, reachedagreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee’s claims against NVIDIA.us. This conditional settlement presented as the centerpiece of a proposed Plan of Liquidation in the bankruptcy case, was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court after notice and hearing. The Trustee advised that he intended to object to theconditional settlement which would have called for a payment by NVIDIA of approximately $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.
However, The Trustee advised that he intended to object to the settlement. The conditional settlement never progressed substantially through the confirmation process.
On December 21, 2005, the Bankruptcy Court determined that it would schedule trial of one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA exercised its right to terminate the settlement agreement on grounds that the Bankruptcy Court had failed to proceed toward confirmation of the Creditors’ Committee’s plan. TrialA non-jury trial began on March 21, 2007 on valuation issues in the Trustee's constructive fraudulent transfer claims against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx transfer to NVIDIA in the APA?; (2) of what was transferred, what qualifies as "property" subject to the Bankruptcy Court's avoidance powers under the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions?; (3) what is the fair market value of the "property" identified in answer to question (2)?; and (4) was the $70 million that NVIDIA paid "reasonably equivalent" to the fair market value of that property?. At the conclusion of the evidence, the Bankruptcy Court asked the parties to submit post-trial briefing. That briefing was concludedcompleted on May 25, 2007,2007. 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 with respect to each of the questions to be tried. The Bankruptcy Court’sCourt concluded that "the creditors of 3dfx were not injured by the Transaction." This decision does not entirely dispose of the Trustee's action, however; still pending are the Trustee's claims for successor liability and intentional fraudulent conveyance. On May 12, 2008, the Trustee filed a motion for leave to pursue an interlocutory appeal, but thereafter withdrew the motion. NVIDIA has filed a motion for summary judgment on all causes of action in order to convert the Memorandum Decision After Trial to a final judgment. That motion is still pending.scheduled to be heard on August 28, 2008.
FollowingNVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On December 8, 2005, the Trustee’s filing ofTrustee filed a Form 8-K on behalf of 3dfx, in which the Trustee disclosed the terms of the proposedconditional settlement agreement between NVIDIA and the Creditor’s Committee,Committee. Thereafter, certain shareholders of 3dfx filed a petition with the Bankruptcy Court to appoint an official committee to represent the claimed interests of 3dfx shareholders. That petition was granted and an Equity HoldersHolders’ Committee was appointed. Since that appointment, the Equity HoldersHolders’ Committee has filed a competing plan of reorganization/liquidation. The Equity HoldersHolders’ Committee’s plan assumes that 3dfx can raise additional equity capital that would be used to retire all of 3dfx’s debts. Upon the payment of that debt, theThe Equity HoldersHolders’ Committee contends that the commitment by an investor to pay in equity capital is sufficient to trigger NVIDIA's obligations under the APA to pay the stock consideration. NVIDIA would be obligedcontends, among other things, that such a commitment is not sufficient and that its obligation to pay the stock consideration provided for in the APA.has been extinguished. By virtue of stock splits since the execution of the APA, the stock consideration would now total foursix million shares of ourNVIDIA common stock. The Equity Holders’ Committee filed a motion with the Bankruptcy Court forseeking an order giving it standing to bring a lawsuit to enforceobtain the APA.stock consideration. Over our objection, the Bankruptcy Court granted that motion on May 1, 2006 and the Equity Holders’ Committee filed its Complaint for Declaratory Relief against NVIDIA that same day. NVIDIA moved to dismiss the Complaint for Declaratory Relief, and the Bankruptcy Court granted that motion with leave to amend. The Equity Committee thereafter amended its complaint, and NVIDIA moved to dismiss that amended complaint as well. At thea hearing on December 21, 2006, the Bankruptcy Court granted the motion as to one of the Equity Holders’ Committee’s claims, and denied it as to the others.
However, the Bankruptcy Court also ruled that NVIDIA would only be required to answer the first three causes of action by which the Equity Holders’ Committee seeks a determination that the APA was not terminated before 3dfx filed for bankruptcy protection, that the 3dfx bankruptcy estate still holds some rights in the APA, and that the APA is capable of being assumed by the bankruptcy estate. Because of the trial of the Trustee's fraudulent transfer claims against NVIDIA, the Equity Committee's lawsuit did not progress substantially in 2007. On July 31, 2008, the Equity Holders' Committee filed a motion for summary judgment on its first three causes of action. A hearing is scheduled on that motion for October 24, 2008. The next status conference is scheduled for August 28, 2008. In addition, the Equity Holders' Committee filed a motion seeking Bankruptcy Court approval of investor protections for Harbinger Capital Partners Master Fund I, Ltd., an equity investment firm that has conditionally agreed to pay no more than $51.5 million for preferred stock in 3dfx. The hearing on that motion was held on January 18, 2007, and the Bankruptcy Court approved the proposed protections.
Proceedings, SEC inquiry and lawsuits related to our historical stock option granting practices
In June 2006, the Audit Committee of the Board of NVIDIA, or the Audit Committee, began a review of our stock option practices based on the results of an internal review voluntarily undertaken by management. The Audit Committee, with the assistance of outside legal counsel, completed its review on November 13, 2006 when the Audit Committee reported its findings to our full Board. The review covered option grants to all employees, directors and consultants for all grant dates during the period from our initial public offering in January 1999 through June 2006. Based on the findings of the Audit Committee and our internal review, we identified a number of occasions on which we used an incorrect measurement date for financial accounting and reporting purposes.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
We voluntarily contacted the SEC regarding the Audit Committee’s review and, as of the present date,review. In late August 2006, the SEC is continuing theinitiated an inquiry ofrelated to our historical stock option grant practices it began in late August 2006.practices. In October 2006, we met with the SEC and provided it with a review of the status of the Audit Committee’s review and inreview. In November 2006, we voluntarily provided the SEC with furtheradditional documents. We continuecontinued to cooperate with the SEC inthroughout its inquiry. On October 26, 2007, the SEC formally notified us that the SEC's investigation concerning our historical stock option granting practices had been terminated and that no enforcement action was recommended.
Concurrently with our internal review and the SEC’s inquiry, since September 29, 2006, ten derivative cases have been filed in state and federal courts asserting claims concerning errors related to our historical stock option granting practices and associated accounting for stock-based compensation expense. These complaints have been filed in various courts, including the California Superior Court, Santa Clara County, the United States District Court for the Northern District of California, and the Court of Chancery of the State of Delaware in and for New Castle County. Plaintiffs filed a consolidated complaint in the United States District Court for the Northern District of California on February 28, 2007. The California Superior Court cases have been consolidated and plaintiffs filed a consolidated complaint on April 23, 2007. Plaintiffs in the Delaware action filed an Amended Shareholder Derivative Complaint on February 12, 2008. Plaintiffs in the federal action submitted a Second Amended Consolidated Verified Shareholders Derivative Complaint on March 18, 2008. All of the cases purport to be brought derivatively on behalf of NVIDIA against members of our Board and several of our current and former officers and directors. Plaintiffs in these actions allege claims for, among other things, breach of fiduciary duty, unjust enrichment, insider selling, abuse of control, gross mismanagement, waste, and constructive fraud. The Northern District of California action also alleges violations of federal provisions, including Sections 10(b), and 14(a) and 20(a) of the Securities Exchange Act of 1934. The plaintiffs seek to recover for NVIDIA, among other things, damages in an unspecified amount, rescission, punitive damages, treble damages for insider selling, and fees and costs. Plaintiffs also seek an accounting, a constructive trust and other equitable relief. We intend to take all appropriate action in response to these complaints. Between May 14, 2007 and May 17, 2007, we filed several motions to dismiss or to stay the federal, Delaware and Santa Clara actions. AllThe Delaware motions were superseded when the Delaware plaintiffs filed the Amended Shareholder Derivative Complaint on February 28, 2008. The federal motions were superseded when the federal plaintiffs submitted the Second Amended Consolidated Verified Shareholders Derivative Complaint on March 18, 2008. We have not yet responded to either of these Complaints. The Santa Clara motion to stay was denied without prejudice and the motions remain pending.parties are currently engaged in discovery-related proceedings.
On August 5, 2007, our Board authorized the formation of a Special Litigation Committee comprised of three current Board members, to investigate, evaluate, and make a determination as to how NVIDIA should proceed with respect to the claims and allegations asserted in the underlying derivative cases brought on behalf of NVIDIA. The Special Litigation Committee has made substantial progress in completing its work, but has not yet issued a report.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Department of Justice Subpoena and Investigation, and Civil Cases
On November 29, 2006, we received a subpoena from the San Francisco Office of the Antitrust Division of the United States Department of Justice, or DOJ, in connection with the DOJ's investigation into potential antitrust violations related to graphics processing units, or GPUs and cards. No specific allegations have been made against us. We are cooperating with the DOJ in its investigation.
As of the date of this disclosure, over 50May 13, 2008, 55 civil complaints have been filed against us. The majority of the complaints were filed in the Northern District of California, several were filed in the Central District of California, and other cases were filed in several other Federal district courts. On April 18, 2007, the Judicial Panel on Multidistrict Litigation transferred the actions currently pending outside of the Northern District of California to the Northern District of California for coordination of pretrial proceedings before the Honorable William H. Alsup. By agreement of the parties, Judge Alsup will retain jurisdiction over the consolidated cases through trial or other resolution.
In the consolidated proceedings, two groups of plaintiffs (one putatively representing all direct purchasers of GPUs and the other putatively representing all indirect purchasers) filed consolidated, amended class-action complaints on June 14, 2007.complaints. These complaints purport to assert federal antitrust claims based on alleged price fixing, market allocation, and other alleged anti-competitive agreements between us and ATI Technologies, Inc.ULC., or ATI, and Advanced Micro Devices, Inc., or AMD, as a result of its acquisition of ATI. The indirect purchasers’ consolidated amended complaint also asserts a variety of state law antitrust, unfair competition and consumer protection claims on the same allegations, as well as a common law claim for unjust enrichment.
Plaintiffs filed their first consolidated complaints on June 14, 2007. On July 16, 2007, we moved to dismiss the amendedthose complaints. The motions to dismiss are pending and scheduled to bewere heard by Judge Alsup on September 20, 2007. We also moved to stay all discoveries whileThe Court subsequently granted and denied the motions in part, and gave the plaintiffs leave to dismiss are resolved. The courtmove to amend the complaints. On November 7, 2007, the Court granted ourplaintiffs’ motion to file amended complaints, ordered defendants to answer the complaints, lifted a previously entered stay on discovery, and set a trial date for January 12, 2009. Discovery is underway and Plaintiffs filed motions for class certification on April 24, 2008. We filed oppositions to the motions on May 20, 2008. On July 24,18, 2008, the Court ruled on Plaintiffs’ class certification motions. The Court denied class certification for the proposed class of indirect purchasers. The Court granted in part class certification for the direct purchasers but limited the direct purchaser class to individual purchasers that acquired graphics processing cards products directly from NVIDIA or ATI from their websites between December 4, 2002 and November 7, 2007. The Court excluded from the direct purchaser class business entities that purchased graphics products from NVIDIA or ATI for resale. The case will continue on behalf of the class of direct purchasers certified by the Court as well as for the several individual indirect purchasers suing on their own behalf. The Court also instructed the parties to give written notice of the class certification order to all non-certified direct purchasers, who will then have thirty days from the notice to move to intervene in this action. The Court's ruling on class certification is subject to interim appeal at the discretion of the United States Court of Appeals for the Ninth Circuit. We believe the allegations in the consolidated, amended complaints are without merit and intend to vigorously defend the cases.
Rambus Corporation
On July 10, 2008, Rambus Corporation, or Rambus, filed suit against NVIDIA Corporation, asserting patent infringement of 17 patents claimed to be owned by Rambus. Rambus seeks damages, enhanced damages and injunctive relief. The lawsuit was filed in the Northern District of California in San Jose, California. On July 11, 2008, NVIDIA filed suit against Rambus in the Middle District of North Carolina asserting numerous claims, including antitrust and other claims. NVIDIA seeks damages, enhanced damages and injunctive relief. NVIDIA intends to pursue its offensive and defensive cases vigorously.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 1413 - Stockholders’ Equity
Stock Repurchase Program
During fiscal year 2005, we announced that our Board had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300 million. During fiscal year 2007, the Board further approved an increase of $400 million to the original stock repurchase program. On May 21, 2007,In fiscal year 2008, we announced a stock repurchase program under which we may purchase up to an additional $1.0 billion of our common stock over a three year period through May 2010. On August 12, 2008, we announced that our Board further authorized an additional increase of $1.0 billion to the stock repurchase program. As a result of these increases, we have an ongoing authorization from the Board, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $1.7 billion. $2.7 billion through May 2010.
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 the Securities Exchange Act of 1934, or the Exchange Act, Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate us 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.
Through July 27, 2008, we had repurchased 68.0 million shares under our stock repurchase program for a total cost of $1.16 billion. During the three months ended July 27, 2008, we did not enter into any structured share repurchase transactions.
Convertible Preferred Stock
As of July 27, 2008 and January 27, 2008, there were no shares of preferred stock outstanding.
Common Stock
At the Annual Meeting of Stockholders held on June 19, 2008, the stockholders approved an increase in our authorized number of shares of common stock to 2,000,000,000. The par value of common stock remains unchanged at $0.001 per share.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 14 - Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income or loss. Other comprehensive income or loss components include unrealized gains or losses on available-for-sale securities, net of tax. The components of comprehensive income (loss), net of tax, were as follows:
| | | Three Months Ended | | | Six Months Ended | |
| | | July 27, 2008 | | | July 29, 2007 | | | July 27, 2008 | | July 29, 2007 | |
| | | (In thousands) | |
| | | | | | | | | | | | | | | | |
| Net change in unrealized gains (losses) on available-for-sale securities, net of tax | | | (2,545 | ) | | | 320 | | | | (8,176 | ) | | | 241 | |
Reclassification adjustments for net realized gains (losses) on available-for-sale securities included in net income (loss), net of tax | | | | | | | | | | | | | | | | |
Total comprehensive income (loss) | | | | | | | | | | | | | | | | |
Note 15 - 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.
We report financial information for four operating segments to our CODM: the GPU business, which is comprised primarily of our GeForce products that support desktop and notebook PCs, plus memory products; the professional solutions business, or PSB, which is comprised of our NVIDIA Quadro professional workstation products and other professional graphics products, including our NVIDIA Tesla high-performance computing products; the MCP business which is comprised of NVIDIA nForce core logic and motherboard GPU products; and our consumer products business, or CPB, which is comprised of our GoForce and APX mobile brands and products that support handheld personal media players, or PMPs, personal digital assistants, or PDAs, cellular phones and other handheld devices. CPB also includes license, royalty, other revenue and associated costs related to video game consoles and other digital consumer electronics devices.
In addition to these operating segments, we have the “All Other” category that includes human resources, legal, finance, general administration and corporate marketing expenses, which total $80.8 million and $62.9 million for second quarter of fiscal years 2009 and 2008, respectively, and total $156.9 million and $130.8 million for the first half of fiscal years 2009 and 2008, respectively, that we do not allocate to our other operating segments as these expenses are not included in the segment operating performance measures evaluated by our CODM. “All Other” also includes the results of operations of other miscellaneous reporting segments that are neither individually reportable, nor aggregated with another operating segment. Revenue in the “All Other” category is primarily derived from sales of components.
Our CODM does not review any information regarding total assets on an operating segment basis. Operating segments do not record intersegment revenue, and, accordingly, there is none to be reported. The accounting policies for segment reporting are the same as for NVIDIA Corporation as a whole.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| | | GPU | | | PSB | | | MCP | | | CPB | | | All Other | | | Consolidated | | |
| | | (In thousands) | |
| Three Months Ended July 27, 2008: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization expense | | $ | 13,826 | | | $ | 5,241 | | | $ | 7,756 | | | $ | 4,600 | | | $ | 14,440 | | | $ | 45,863 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended July 29, 2007: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization expense | | $ | 8,932 | | | $ | 1,960 | | | $ | 6,844 | | | $ | 5,004 | | | $ | 9,710 | | | $ | 32,450 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended July 27, 2008: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization expense | | $ | 26,540 | | | $ | 9,866 | | | $ | 15,426 | | | $ | 9,518 | | | $ | 26,081 | | | $ | 87,431 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended July 29, 2007: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization expense | | $ | 17,217 | | | $ | 4,147 | | | $ | 13,437 | | | $ | 11,099 | | | $ | 18,872 | | | $ | 64,772 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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, 2008 | | | July 29, 2007 | | | July 27, 2008 | | | July 29, 2007 | |
| | | (In thousands) | |
| Revenue: | | | | | | | | | | | | |
| Taiwan | | $ | 272,078 | | | $ | 316,974 | | | $ | 663,706 | | | $ | 589,957 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Europe | | | 81,519 | | | | 89,318 | | | | 213,473 | | | | 170,868 | |
| | | | | | | | | | | | | | | | |
| Other Americas | | | 21,349 | | | | 20,149 | | | | 22,044 | | | | 59,959 | |
| Total revenue | | $ | 892,676 | | | $ | 935,253 | | | $ | 2,046,064 | | | $ | 1,779,533 | |
Revenue from significant customers, those representing approximately 10% or more of total revenue for the respective periods, is summarized as follows:
| | | Three Months Ended | | | Six Months Ended | |
| | | July 27, 2008 | | | July 29, 2007 | | | July 27, 2008 | | | July 29, 2007 | |
| Revenue: | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Accounts receivable from significant customers, those representing approximately 10% or more of total trade accounts receivable for the respective periods, is summarized as follows:
| | | July 27, 2008 | | | January 27, 2008 | |
| | | | | | | |
| | | | | | | |
Note 16 – Fair Value of Cash Equivalents and Marketable Securities
We measure our cash equivalents and marketable securities at fair value. Our financial assets and liabilities are determined using market prices from both active markets, or Level 1, and less active markets, or Level 2. Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 valuations are obtained from readily-available pricing sources for identical instruments in less active markets. All of our cash equivalents and marketable securities valuations are classified as Level 1 or Level 2 because we value those using quoted market prices or alternative pricing sources and models utilizing market observable inputs.
As of July 27, 2008, we did not have any assets or liabilities without observable market values, or Level 3 assets, that would require a high level of judgment to determine fair value.
Financial assets and liabilities measured at fair value are summarized below:
| | | | | | Fair value measurement at reporting date using | |
| | | | | | Quoted Prices in Active Markets for Identical Assets | | | Significant Other Observable Inputs | |
| | | July 27, 2008 | | | (Level 1) | | | (Level 2) | |
| | | (In thousands) | |
Asset-backed Securities (1) | | | | | | | | | | | | |
| | | | | | | | | | | | |
Corporate debt securities (3) | | | | | | | | | | | | |
Debt securities issued by United States Treasury (1) | | | | | | | | | | | | |
Other Debt securities issued by U.S. Government agencies (4) | | | | | | | | | | | | |
Mortgage-backed securities issued by Government-sponsored entities (1) | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(1) Included in Marketable securities on the Condensed Consolidated Balance Sheet.
(2) Includes $377,412 in Cash and cash equivalents and $20,092 in Marketable securities on the Condensed Consolidated Balance Sheet.
(3) Includes $4,318 in Cash and cash equivalents and $275,743 in Marketable securities on the Condensed Consolidated Balance Sheet.
(4) Includes $42,915 in Cash and cash equivalents and $391,984 in Marketable securities on the Condensed Consolidated Balance Sheet.
(5) Included in Cash and cash equivalents on the Condensed Consolidated Balance Sheet.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements:
When used in this Quarterly Report on Form 10-Q, the words “believes,” “plans,” “estimates,” “anticipates,” “expects,” “intends,” “allows,” “can,” “will” and similar expressions are intended to identify forward-looking statements. These statements relate to future periods and include, but are not limited to, statements as to: the features, benefits, capabilities, performance, impact and production of our products and technologies; product, manufacturing, design or software defects and the impact of such defects; defects in materials used to manufacture a product; causes of product defects; our reliance on third parties to manufacture, assemble and test our products; reliance on a limited number of customers and suppliers; new products or markets; design wins; our market position; our competition, sources of competition and our competitive position; our strategic relationships; average selling prices; seasonality; customer demand; growth; our international operations; our ability to attract and retain qualified personnel; our inventory; acquisitions and investments; stock options; the impact of stock-based compensation expense; our financial results; our tax positions; mix and sources of revenue; capital and operating expenditures; our cash; liquidity; our investment portfolio and marketable securities; our exchange rate risk; our stock repurchase program; our internal control over financial reporting; our disclosure controls and procedures; recent accounting pronouncements; our intellectual property; compliance with environmental laws and regulations; ongoing and potential litigation; and the Department of Justice subpoena and investigation. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, the risks discussed below as well as difficulties associated with: fluctuations in general economic conditions in the United States and worldwide; difficulties in entering new markets; slower than expected development of a new market; conducting international operations; slower than anticipated growth; forecasting customer demand; product, manufacturing, software and design defects; defects in product design or materials used to manufacture a product; supply constraints; the impact of competitive pricing pressures; unanticipated decreases in average selling prices; increased sales of lower margin products; international and political conditions; changes in international laws; fluctuations in the global credit market; fixed operating expenses; our inventory levels; fluctuations in investments and the securities market; changes in customers’ purchasing behaviors; the concentration of sales of our products to a limited number of customers; decreases in demand for our products; delays in the development of new products by us or our partners; delays in volume production of our products; developments in and expenses related to litigation or regulatory actions; our inability to realize the benefits of acquisitions; and the matters set forth under Part II, Item 1A. - Risk Factors. These forward-looking statements speak only as of the date hereof. Except as required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
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, GeForce, SLI, Hybrid SLI, GoForce, Quadro, NVIDIA Quadro, NVIDIA nForce, Tesla, Tegra, CUDA, NVIDIA APX, PhysX, Ageia, Mental Images, and the NVIDIA logo are our trademarks and/or registered trademarks in the United States and other countries that are used in this document. We may also refer to trademarks of other corporations and organizations in this document.
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 27, 2008 and Part II, “Item 1A. Risk Factors”, of 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, hold or sell shares of our common stock.
Overview
Our Company
NVIDIA Corporation is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or the GPU. Our products are designed to generate realistic, interactive graphics on consumer and professional computing devices. We serve the entertainment and consumer market with our GeForce products, the professional design and visualization market with our Quadro products, and the high-performance computing market with our Tesla products. We have four major product-line operating segments: the GPU Business, the professional solutions business, or PSB, the media and communications processor, or MCP, business, and the consumer products business, or CPB.
Our GPU business is comprised primarily of our GeForce products that support desktop and notebook personal computers, or PCs, plus memory products. Our PSB is comprised of our NVIDIA Quadro professional workstation products and other professional graphics products, including our NVIDIA Tesla high-performance computing products. Our MCP business is comprised of NVIDIA nForce core logic and motherboard GPU, or mGPU products. Our CPB is comprised of our GoForce and APX mobile brands and products that support handheld personal media players, or PMPs, personal digital assistants, or PDAs, cellular phones and other handheld devices. CPB also includes license, royalty, other revenue and associated costs related to video game consoles and other digital consumer electronics devices. Original equipment manufacturers, original design manufacturers, add-in-card manufacturers, system builders and consumer electronics companies worldwide utilize our processors as a core component of their entertainment, business and professional solutions.
We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our headquarter facilities are in Santa Clara, California. Our Internet address is www.nvidia.com. The contents of our website are not a part of this Form 10-Q.
Recent Developments, Future Objectives and Challenges
GPU Business
During the first half of fiscal year 2009, we launched several new GPUs in the GeForce family. The product launches included the GeForce 9600 GT, which provides more than double the performance of our previous GeForce 8600 GTS; the GeForce 9800 GX2, which provides a new dual GPU board featuring Quad SLI technology; and the GeForce 9800 GTX, which is a flexible GPU that supports both two-way and three-way Scalable Link Interface, or SLI, technology. Additionally, we also launched the GeForce 8800 GT, which is the first after-market consumer graphics card for the Mac Pro and is sold directly by us.
On February 10, 2008, we completed our acquisition of Ageia Technologies, Inc., or Ageia, an industry leader in gaming physics technology. Ageia's PhysX software is widely adopted in several PhysX-based games that are shipping or in development on Sony Playstation 3, Microsoft Xbox 360, Nintendo Wii, and gaming PCs. We believe that the combination of the GPU and physics engine brands will result in an enhanced visual experience for the gaming world.
During the second quarter of fiscal year 2009, we launched the GeForce GTX 280 and 260 GPUs. These products represent the second-generation of our unified architecture. Based on a comparison between the GeForce GTX 280 and the GeForce 8800 Ultra in a variety of benchmarks and resolutions, the GeForce GTX 280 and 260 GPUs deliver 50 percent more gaming performance over our previous GeForce 8800 Ultra GPU. We also launched the GeForce 9800 GTX+, GeForce 9800 GT, and GeForce 9500 GT GPUs that provide support for our PhysX physics engine and CUDA parallel processing across a wide range of price segments.
Professional Solutions Business
During the first half of fiscal year 2009, we launched the Quadro FX 3600M Professional, which is among the highest performing notebook GPUs.
In the second quarter of fiscal year 2009, we launched the Tesla C1060 computing processor and the S1070 computing system, which is among the first teraflop processors and has a 1U system with up to four teraflops of performance.
MCP Business
During the first half of fiscal year 2009, we shipped Hybrid SLI DX10 mGPUs – the GeForce 8000 GPU series. The GeForce 8000 GPU series includes GeForce Boost Hybrid SLI technology, which is designed to double performance when paired with a GeForce 8 series desktop GPU. Additionally, we also launched the NVIDIA nForce 790i Ultra SLI MCP, which is one of the industry’s highly rated overclockable platform for Intel processors.
During the second quarter of fiscal year 2009, we launched the GeForce 9M series of notebook GPUs that enables improved performance in notebooks with Hybrid SLI technology and PhysX technology. We also launched SLI for Intel Broomfield CPU platforms. When paired with the nForce 200 SLI MCP, Intel’s Bloomfield CPU and Tylersburg core logic chipset will deliver NVIDIA three-way SLI technology with up to a 2.8 times performance boost over traditional single graphics card platforms.
Consumer Products Business
During the first half of fiscal year 2009, we launched the NVIDIA APX 2500 application processor. The APX 2500 is a computer-on-a-chip designed to meet the growing multimedia demands of today's mobile phone and entertainment user. We believe that the mobile application processor is an area where we can add a significant amount of value and we also believe it represents a revenue growth opportunity.
During the second quarter of fiscal year 2009, we launched the Tegra 600 and 650 that represent a single-chip heterogeneous computer architecture designed for low-power mobile computing devices.
Product Defect
Our products are complex and may contain defects or experience failures due to any number of issues in design, fabrication, packaging, materials and/or use within a system. If any of our products or technologies contains a defect, compatibility issue or other error, we may have to invest additional research and development efforts to find and correct the issue. Such efforts could divert our management’s and engineers’ attention from the development of new products and technologies and could increase our operating costs and reduce our gross margin. In addition, an error or defect in new products or releases or related software drivers after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins. Also, we may be required to reimburse customers, including for customers’ costs to repair or replace the products in the field, which could cause our revenue to decline. A product recall or a significant number of product returns could be expensive, damage our reputation and could result in the shifting of business to our competitors. Costs associated with correcting defects, errors, bugs or other issues could be significant and could materially harm our financial results.
During our fiscal quarter ended July 27, 2008, we recorded a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other associated costs arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems. All of our newly manufactured products and all of our products that are currently shipping in volume have a different material set that we believe is more robust.
The previous generation MCP and GPU products that are impacted were included in a number of notebook products that were shipped and sold in significant quantities. Certain notebook configurations of these MCP and GPU products are failing in the field at higher than normal rates. While we have not been able to determine a root cause for these failures, testing suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors. We have worked with our customers to develop and have made available for download a software driver to cause the system fan to begin operation at the powering up of the system and reduce the thermal stress on these chips. We have also recommended to our customers that they consider changing the thermal management of the MCP and GPU products in their notebook system designs. We intend to fully support our customers in their repair and replacement of these impacted MCP and GPU products that fail, and their other efforts to mitigate the consequences of these failures.
We continue to engage in discussions with our supply chain regarding reimbursement to us for some or all of the costs we have incurred and may incur in the future relating to the weak material set. We also continue to seek to access our insurance coverage. However, there can be no assurance that we will recover any such reimbursement. We continue to not see any abnormal failure rates in any systems using NVIDIA products other than certain notebook configurations. However, we are continuing to test and otherwise investigate other products. There can be no assurance that we will not discover defects in other MCP or GPU products.
Dependence on PC Market
We derive and expect to continue to derive the majority of our revenue from the sale or license of products for use in the desktop PC and notebook PC markets, including professional workstations. A reduction in sales of PCs, or a reduction in the growth rate of PC sales, may reduce demand for our products. These changes in demand could be large and sudden. During the second quarter of fiscal year 2009, sales of our desktop GPU products decreased by approximately 25% compared to the second quarter of fiscal year 2008. These decreases were primarily due to the Standalone Desktop GPU market segment decline as reported in the latest PC Graphics 2008 Report from Mercury Research. Since PC manufacturers often build inventories during periods of anticipated growth, they may be left with excess inventories if growth slows or if they incorrectly forecast product transitions. In these cases, PC manufacturers may abruptly suspend substantially all purchases of additional inventory from suppliers like us until their excess inventory has been absorbed, which would have a negative impact on our financial results.
Seasonality
Our industry is largely focused on the consumer products market. Due to seasonality in this market, we typically expect to see stronger revenue performance in the second half of the calendar year related to back-to-school and holiday seasons.
Financial Information by Business Segment and Geographic Data
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.
We report financial information for four operating segments to our CODM: the GPU business, which is comprised primarily of our GeForce products that support desktop and notebook personal computers, or PCs, plus memory products; the PSB, which is comprised of our NVIDIA Quadro professional workstation products and other professional graphics products, including our NVIDIA Tesla high-performance computing products; the MCP business which is comprised of NVIDIA nForce core logic and mGPU products; and our CPB, which is comprised of our GoForce and APX mobile brands and products that support handheld PMPs, PDAs, cellular phones and other handheld devices. CPB also includes license, royalty, other revenue and associated costs related to video game consoles and other digital consumer electronics devices.
In addition to these operating segments, we have the “All Other” category that includes human resources, legal, finance, general administration and corporate marketing expenses, which total $80.8 million and $62.9 million for second quarter of fiscal years 2009 and 2008, respectively, and total $156.9 million and $130.8 million for the first half of fiscal years 2009 and 2008, respectively, that we do not allocate to our other operating segments as these expenses are not included in the segment operating performance measures evaluated by our CODM. “All Other” also includes the results of operations of other miscellaneous reporting segments that are neither individually reportable, nor aggregated with another operating segment. Revenue in the “All Other” category is primarily derived from sales of components.
Results of Operations
The following table sets forth, for the periods indicated, certain items in our consolidated statements of operations expressed as a percentage of revenue.
| | | Three Months Ended | | | Six Months Ended | |
| | | July 27, 2008 | | | July 29, 2007 | | | July 27, 2008 | | | July 29, 2007 | |
| | | | | | | | | | | | | |
| Cost of revenue | | | 83.2 | | | 54.7 | | | 67.5 | | | 54.8 | |
| Gross profit | | | 16.8 | | | 45.3 | | | 32.5 | | | 45.2 | |
| | | | | | | | | | | | | |
| Research and development | | | 23.9 | | | 16.9 | | | 21.1 | | | 17.8 | |
Sales, general and administrative | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Interest and other income, net | | | 1.0 | | | 1.7 | | | 0.9 | | | 1.6 | |
| Income (loss) before income tax expense (benefit) | | | (16.5 | ) | | 21.4 | | | 3.2 | | | 19.9 | |
Income tax expense (benefit) | | | | | | | | | | | | | |
| Net income (loss) | | | (13.6 | )% | | 18.4 | % | | 2.7 | % | | 17.1 | % |
Three and six months ended July 27, 2008 and July 29, 2007
Revenue
Revenue was $892.7 million for our second quarter of fiscal year 2009, compared to $935.3 million for our second quarter of fiscal year 2008, which represents a decrease of 5%. Revenue was $2.05 billion for the first half of fiscal year 2009 and $1.78 billion for the first half of fiscal year 2008, which represented an increase of 15%. We expect revenue to grow slightly during the third quarter of fiscal year 2009 as compared to the second quarter of fiscal year 2009. A discussion of our revenue results for each of our operating segments is as follows:
GPU Business. GPU Business revenue decreased by 13% to $503.5 million in the second quarter of fiscal year 2009, compared to $579.0 million for the second quarter of fiscal year 2008. This decrease was primarily due to decreased sales of our desktop GPU and memory products offset by increased sales of our notebook GPU products. Sales of our desktop GPU and memory products decreased by approximately 25% and 61%, respectively, compared to the second quarter of fiscal year 2008. These decreases were primarily due to a decline in the Standalone Desktop market segment as reported in the latest PC Graphics 2008 Report from Mercury Research. This decline was driven by negative macro-economic outlook and a shift in the mix of desktop GPU sales towards lower priced products. In addition, the average sales price, or ASP, of our GeForce 9-based products and our prior generation products declined and we experienced lower shipments of our prior generation products as we transitioned to our GeForce 9-based and GeForce 200-based products. Sales of our NVIDIA notebook GPU products increased by approximately 43% compared to the second quarter of fiscal year 2008. This notebook GPU revenue increase was primarily due to growth of the general market in the Standalone Notebook segment as reported in the latest PC Graphics 2008 Report from Mercury Research. Our share position continued to hold in the Standalone Notebook segment primarily as a result of shipments of products used in notebook PC design wins related to Intel’s Santa Rosa platform.
GPU Business revenue increased by 13% to $1.20 billion for the first half of fiscal year 2009 compared to $1.06 billion for the first half of fiscal year 2008. The increase was primarily the result of increased sales across desktop and notebook GPU categories. Sales of our desktop GPU products increased approximately 7% and notebook GPU products increased by approximately 65% as compared to the first half of fiscal year 2008. This increase was primarily due to share gains in the Standalone Desktop and the Standalone Notebook segments during the first half of fiscal year 2009 compared to fiscal year 2008 as reported in the latest PC Graphics 2008 Report from Mercury Research. Our share gains in the Standalone Desktop segment were primarily driven by the leadership position of our GeForce 8-based and GeForce 9-based products during the first quarter of fiscal year 2009. Our share gains in the Standalone Notebook segment were primarily as a result of continued shipments of products used in notebook PC design wins related to Intel’s Santa Rosa platform.
PSB. PSB revenue increased by 41% to $179.7 million in the second quarter of fiscal year 2009, compared to $127.3 million for the second quarter of fiscal year 2008. PSB revenue increased by 43% to $383.1 million for the first half of fiscal year 2009 as compared to $268.2 million for the first half of fiscal year 2008. Our NVIDIA professional workstation product sales increased due to an overall increase in shipments of boards and chips as compared to the second quarter and first half of fiscal year 2008. This increase was primarily driven by strong demand and our transition from the previous generations of NVIDIA Quadro professional workstation products to GeForce 8-based and GeForce 9-based products.
MCP Business. MCP Business revenue increased by 4% to $166.8 million in the second quarter of fiscal year 2009, compared to $161.1 million for the second quarter of fiscal year 2008. The increase was a result of growth of approximately 300% in sales of our Intel-based platform products, offset by a decline of approximately 15% in sales of our AMD-based platform products as compared to the second quarter of fiscal year 2008.
MCP Business revenue increased by 17% to $361.9 million for the first half of fiscal year 2009 as compared to $309.8 million for first half of fiscal year 2008. The increase was a result of approximately 140% increase in sales of our Intel-based platform products while sales of our AMD-based platform products remained flat as compared to the first half of fiscal year 2008.
CPB. CPB revenue decreased by 44% to $34.6 million for the second quarter of fiscal year 2009, compared to $62.2 million for the second quarter of fiscal year 2008. CPB revenue decreased by 40% to $77.1 million for the first half of fiscal year 2009 as compared to $129.4 million for the first half of fiscal year 2008. The decline in CPB revenue is primarily driven by a combination of a decrease in revenue from our cell phone products, a decrease in revenue from our contractual development arrangements with Sony Computer Entertainment, or SCE, and a drop in royalties from SCE as they transition the PlayStation3 to a new process node.
Concentration of Revenue
Revenue from sales to customers outside of the United States and other Americas accounted for 89% and 90% of total revenue for the second quarter of fiscal years 2009 and 2008, respectively, and 91% and 87% for the first half of fiscal years 2009 and 2008, respectively. Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if the foreign contract equipment manufacturers, add-in board and motherboard manufacturers’ revenue is attributable to end customers in a different location.
In the second quarter of fiscal years 2009 and 2008, sales to one significant customer, in excess of 10% of our total revenue, accounted for approximately 13% and 12%, respectively, of our total revenue. Aggregate sales to our two largest customers accounted for approximately 21% and approximately 16% of our total revenue for the first half of fiscal years 2009 and 2008, 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 and service arrangements.
Gross margin is the percentage of gross profit to revenue. Our gross margin can vary in any period depending on a variety of factors including the mix of types of products sold. Product mix is often difficult to estimate with accuracy. Therefore, if we experience product transition or competitive 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 gross margin was 16.8% and 45.3% for the second quarter of fiscal years 2009 and 2008, respectively. The decline in gross margin for the second quarter of fiscal year 2009 reflects a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and associated costs arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems, as well as the impact of average sales price regression we experienced in our desktop GPU products as a result of increased competition.
We will continue to focus on improving our gross margin during fiscal year 2009. 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 decreased during the second quarter of fiscal year 2009 as compared to the second quarter of fiscal year 2008, as well as during the first half of fiscal year 2008 as compared to the first half of fiscal year 2007. This decrease was primarily due to ASP regression of our GeForce 9-based and previous generations of desktop products and a charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and associated costs arising from a weak die/packaging material set in certain versions of our previous generation GPU products used in notebook systems.
PSB. The gross margin of our PSB increased slightly during the second quarter of fiscal year 2009 as compared to the second quarter fiscal year 2008, as well as during the first half of fiscal year 2009 as compared to the first half of fiscal year 2008. This increase was primarily due to increased sales of our GeForce 9-based NVIDIA Quadro products, which began selling in the fourth quarter of fiscal year 2008, and GeForce 8-based NVIDIA Quadro products, which generally have higher gross margins than our previous generations of NVIDIA Quadro products.
MCP Business. The gross margin of our MCP Business decreased during the second quarter of fiscal year 2009 as compared to the second quarter fiscal year 2008, as well as during the first half of fiscal year 2009 as compared to the first half of fiscal year 2008. This decrease was primarily due a charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and associated costs arising from a weak die/packaging material set in certain versions of our previous generation MCP products used in notebook systems.
CPB. The gross margin of our CPB increased during the second quarter of fiscal year 2009 as compared to the second quarter fiscal year 2008, as well as during the first half of fiscal year 2009 as compared to the first half of fiscal year 2008. This increase was primarily due to changes in the product mix in our CPB product lines. We experienced greater revenue decline in our lower margin cell phone and other handheld devices product lines as compared to higher margin SCE transactions.
Operating Expenses
| | | Three Months Ended | | | Six Months Ended | |
| | | July 27, 2008 | | July 29, 2007 | | | $ Change | | | % Change | | | July 27, 2008 | | | July 29, 2007 | | | $ Change | | | % Change | |
| | | (in millions) | | | | | | | (in millions) | | | | | |
Research and development expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales, general and administrative expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Research and development as a percentage of net revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales, general and administrative as a percentage of net revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Research and Development
Research and development expenses were $212.9 million and $158.0 million during the second quarter of fiscal years 2009 and 2008, respectively, an increase of $54.9 million, or 35%. The increase is primarily related to an increase in salaries and benefits by approximately $20.8 million as a result of the addition of approximately 1,000 personnel in departments related to research and development functions, offset by lower expenses during the second quarter of fiscal year 2009 related to our variable compensation programs when compared to the second quarter of fiscal year 2008. Development expenses increased by $6.8 million primarily as a result of increased prototype materials and engineering consumption due to a higher volume of activity related to new product introductions in the current fiscal year. Stock-based compensation expense increased by $7.8 million primarily because of the impact of stock awards granted subsequent to the first half of fiscal year 2008 for new hire and semi-annual grants, offset by a reduction in expense related to older stock awards that were almost fully vested and for which the related expense had been almost fully amortized by the end of the first quarter of fiscal year 2009. Other increases in research and development expenses are primarily related to costs that were driven by personnel growth, including depreciation and amortization, facilities, and computer software and equipment.
Research and development expenses were $431.7 million and $316.3 million in the first half of fiscal years 2009 and 2008, respectively, an increase of $115.4 million, or 36%. The increase is primarily related to an increase in salaries and benefits by approximately $47.9 million as a result of the addition of approximately 1,000 personnel in departments related to research and development functions, offset by lower expenses during the first half of fiscal year 2009 related to our variable compensation programs when compared to the first half of fiscal year 2008. Development expenses increased by $14.9 million primarily as a result of increased prototype materials and engineering consumption due to a higher volume of activity related to new product introductions in the current fiscal year. Stock-based compensation expense increased by $9.9 million primarily because of the impact of stock awards granted subsequent to the first half of fiscal year 2008 for new hire and semi-annual grants, offset by a reduction in expense related to older stock awards that became fully vested and for which the related expense had been almost fully amortized by the end of the first quarter of fiscal year 2009. Other increases in research and development expenses are primarily related to costs that were driven by personnel growth, including depreciation and amortization, facilities, and computer software and equipment.
While we will continue to monitor our allocation of resources to research and development, we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and greater number of products under development. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and these investments may be independent of our level of revenue.
Sales, General and Administrative
Sales, general and administrative expenses were $92.4 million and $81.2 million during the second quarter of fiscal years 2009 and 2008, respectively, an increase of $11.2 million, or 14%. Labor and related expenses decreased despite marginal headcount growth of approximately 30 personnel, primarily due to lower expenses during the second quarter of fiscal year 2009 related to our variable compensation programs when compared to the second quarter of fiscal year 2008. Outside professional fees increased by $4.8 million primarily due to increased fees pertaining to licensing arrangements and legal expenses. Marketing and advertising expenses increased by $4.4 million, primarily due to increased advertising campaign related activities, trade shows and samples distributed in the current quarter. Depreciation and amortization expense increased by $4.6 million primarily due to amortization of intangible assets acquired from our acquisitions of Mental Images and Ageia; and from increased capital expenditures. Stock-based compensation expense increased by $2.5 million primarily due to stock awards granted subsequent to the first half of fiscal year 2008 for new hire and semi-annual grants, offset by a reduction in expense related to older stock awards that became fully vested and for which the related expense had been almost fully amortized by the end of the first quarter of fiscal year 2009.
Sales, general and administrative expenses were $185.5 million and $161.8 million for the first half of fiscal years 2009 and 2008, respectively, an increase of $23.7 million, or 15%. Labor and related expenses increased marginally due to growth in headcount by approximately 70 personnel; however, the increase was offset by lower expenses during the first half of fiscal year 2009 related to our variable compensation programs when compared to the first half of fiscal year 2008. Stock-based compensation expense increased by $4.7 million primarily due to the impact of stock awards granted subsequent to the first half of fiscal year 2008 for new hire and semi-annual grants, offset by a reduction in expense related to older stock awards that became fully vested and for which the related expense had been almost fully amortized by the end of the first quarter of fiscal year 2009. Outside professional fees increased by $9.2 million, primarily due to legal fees related to the 3dfx Interactive, Inc., or 3dfx, and Department of Justice matters described in Note 12 of the Notes to Condensed Consolidated Financial Statements. Marketing and advertising expenses increased by $7.4 million, primarily due to expenses related to a worldwide sales conference, increased advertising campaign costs and other marketing related activities.
We expect operating expenses to increase slightly in the third quarter of fiscal year 2009 compared to the second quarter of fiscal year 2009.
Interest Income
Interest income consists of interest earned on cash, cash equivalents and marketable securities. Interest income was $12.1 million and $15.6 million in the second quarter of fiscal years 2009 and 2008, respectively, a decrease of $3.5 million. Interest income was $26.4 million and $28.8 million for the first half of fiscal year 2009 and fiscal year 2008, respectively, a decrease of $2.4 million. These decreases were primarily a result of the fall in interest rates and our relatively lower balances for cash, cash equivalents, and marketable securities during the first half of fiscal year 2009 when compared to the first half of fiscal year 2008.
Income Taxes
We recognized income tax expense (benefit) of ($25.7) million and $28.1 million for the second quarter of fiscal year 2009 and 2008, respectively, and $10.5 million and $49.6 million for the first half of fiscal year 2009 and 2008, respectively. Income tax expense (benefit) as a percentage of income before taxes, or our effective tax rate, was (17.5%) and 14.0% for the second quarter of fiscal year 2009 and 2008, respectively, and 15.9% and 14.0% for the first half of fiscal year 2009 and 2008, respectively. Our effective tax rate is lower than the United States Federal Statutory rate of 35.0% due primarily to income earned in lower tax jurisdictions and U.S. tax benefit of the federal research tax credits available in the respective periods.
Our effective tax rates for the first half of fiscal year 2009 increased to 15.9% from 14.0% during the first half of fiscal year 2008 primarily due to the expiration of the federal research tax credit in fiscal year 2009. In addition, during the second quarter of fiscal year 2009, we increased our estimate of the annual effective tax rate for fiscal year 2009 from 17.0% to 22.8%. The increase in our effective income tax rate was a result of the impact of non-deductible tax items to our annual effective tax rate caused by the change in our outlook for the financial results of fiscal year 2009. This increase in our estimated annual effective tax rate was offset in the second quarter of fiscal year 2009, primarily by a favorable impact from the expiration of statues of limitations in certain non-U.S jurisdictions, resulting in an effective tax rate for the first half of fiscal year 2009 of 15.9%.
Liquidity and Capital Resources
| | As of July 27, 2008 | | As of January 27, 2008 | |
| | (In millions) | |
Cash and cash equivalents | | | | | | | | |
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Cash, cash equivalents, and marketable securities | | | | | | | | |
| | Six Months Ended | |
| | July 27, | | July 29, | |
| | 2008 | | 2007 | |
| | | (In millions) | |
Net cash provided by operating activities | | | | | | | | |
Net cash used in investing activities | | | | | | | | |
Net cash used in financing activities | | | | | | | | |
As of July 27, 2008, we had $1.66 billion in cash, cash equivalents and marketable securities, a decrease of $152.2 million from $1.81 billion at the end of fiscal year 2008. Our portfolio of cash equivalents and marketable securities is managed by several financial institutions. Our investment policy requires the purchase of top-tier investment grade securities, the diversification of asset type and includes certain limits on our portfolio duration.
Operating activities
Operating activities generated cash of $226.2 million and $616.9 million during the first half of fiscal years 2009 and 2008, respectively. Our net income (loss) plus the impact of non-cash charges to earnings and deferred income taxes decreased during the comparable periods. Additionally, changes in operating assets and liabilities resulted in a net decrease in cash flow from operations. The changes in operating assets and liabilities resulted from the timing of payments to vendors and an increase in inventories.
Investing activities
Investing activities have consisted primarily of purchases and sales of marketable securities, acquisitions of businesses and purchases of property and equipment, which includes purchases of property, leasehold improvements for our facilities and intangible assets. Investing activities used cash of $150.1 million and $128.2 million during the first half of fiscal years 2009 and 2008, respectively. Investing activities for the first half of fiscal year 2009 used cash of approximately $150.0 million for a property that includes approximately 25 acres of land and ten commercial buildings in Santa Clara, California. Capital expenditures also included new research and development equipment, testing equipment to support our increased production requirements, technology licenses, software, intangible assets and leasehold improvements at our campus and international offices. Additionally, we acquired Ageia during the first quarter of fiscal year 2009. The cash inflow from maturities of marketable securities provided cash of $131.8 million, which partially offset the expenditures described above.
We expect to spend approximately $100 million to $150 million for capital expenditures that are typical to our business during the remainder of fiscal year 2009, primarily for property development, leasehold improvements, software licenses, emulation equipment, computers and engineering workstations. We are also currently in the process of planning to construct a new campus in Santa Clara, California. If we move forward with these plans, we may be required to fund significant construction costs using our cash, cash equivalents and marketable securities. While we expect that we will have sufficient balances of cash, cash equivalents and marketable securities available for this purpose, there is no assurance that we will not need to raise additional debt financing in order to fund this project. Such additional financing, if required, may not be available on favorable terms, or at all. In addition, we may continue to use cash in connection with the acquisition of new businesses or assets.
Financing activities
Financing activities used cash of $83.9 million and $118.3 million during the first half of fiscal years 2009 and 2008, respectively. Net cash used by financing activities in the first half of fiscal year 2009 was primarily due to $123.9 million paid towards our stock repurchase program, offset by cash proceeds of $40.0 million from common stock issued under our employee stock plans. During the first half of fiscal year 2008, we used $249.4 million towards our stock repurchase program, while we received cash proceeds of $131.1 million from common stock issued under our employee stock plans.
Liquidity
Cash generated by operations is used as our primary source of liquidity. Our investment portfolio consisted of cash and cash equivalents, asset-backed securities, commercial paper, mortgage-backed securities issued by Government-sponsored enterprises, equity securities, money market funds and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. As of July 27, 2008, we did not have any investments in auction-rate preferred securities. These investments are denominated in United States dollars.
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. All of the cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded debt or equity investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because any debt securities we hold are classified as “available-for-sale,” no gains or losses are realized in our statement of operations due to changes in interest rates unless such securities are sold prior to maturity or unless declines in market values are determined to be other-than-temporary. 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.
At July 27, 2008 and January 27, 2008, we had $1.66 billion and $1.81 billion, respectively, in cash, cash equivalents and marketable securities. Our investment policy requires the purchase of top-tier investment grade securities, the diversification of asset type and includes certain limits on our portfolio duration, as specified in our investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument. As of July 27, 2008, we were in compliance with our investment policy. As of July 27, 2008, our investments in the financial sector and government agencies accounted for approximately 36% and 30%, respectively, of our total investment portfolio. Substantially all of our investments are with A/A2 or better rated securities with the substantial majority of the securities rated AA-/Aa3 or better. As of July 27, 2008, $892.6 million of our portfolio had a maturity of less than a year, and a substantial majority of our remaining investments have remaining maturities of three years or less.
Recent U.S. sub-prime mortgage defaults have had a significant impact across various sectors of the financial markets, causing global credit and liquidity issues. The short-term funding markets experienced issues since the third and fourth quarter of calendar 2007, leading to liquidity disruption in the market. If the global credit market continues to deteriorate, our investment portfolio may be impacted and we could determine some of our investments are impaired, which could adversely impact our financial results.
Stock Repurchase Program
During fiscal year 2005, we announced that our Board of Directors, or the Board, had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300 million. During fiscal year 2007, the Board further approved an increase of $400 million to the original stock repurchase program. In fiscal year 2008, we announced a stock repurchase program under which we may purchase up to an additional $1.0 billion of our common stock over a three year period through May 2010. On August 12, 2008, we announced that our Board further authorized an additional increase of $1.0 billion to the stock repurchase program. As a result of these increases, we have an ongoing authorization from the Board, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $2.7 billion through May 2010.
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 the Exchange Act Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate us 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.
During the first half of fiscal year 2009, we entered into a structured share repurchase transaction to repurchase 6.3 million shares for $123.9 million which we recorded on the trade date of the transaction. Through July 27, 2008, we had repurchased 68.0 million shares under our stock repurchase program for a total cost of $1.16 billion. During the third quarter of fiscal year 2009, we expect to use cash in connection with the repurchase of shares under our stock repurchase program.
Common Stock
At the Annual Meeting of Stockholders held on June 19, 2008, the stockholders approved an increase in our authorized number of shares of common stock to 2,000,000,000. The par value of common stock remains unchanged at $0.001 per share.
Operating Capital and Capital Expenditure Requirements
We believe that our existing cash balances and anticipated cash flows from operations will be sufficient to meet our operating, acquisition and capital requirements for at least the next 12 months. However, there is no assurance that we will not need to raise additional equity or debt financing within this time frame. Additional financing may not be available on favorable terms or at all and may be dilutive to our then-current stockholders. We also may require additional capital for other purposes not presently contemplated. If we are unable to obtain sufficient capital, we could be required to curtail capital equipment purchases or research and development expenditures, which could harm our business. Factors that could affect our cash used or generated from operations and, as a result, our need to seek additional borrowings or capital include:
· | decreased demand and market acceptance for our products and/or our customers’ products; |
· | inability to successfully develop and produce in volume production our next-generation products; |
· | competitive pressures resulting in lower than expected average selling prices; and |
· | new product announcements or product introductions by our competitors. |
In addition, we may continue to use cash in connection with the acquisition of new businesses or assets and capital expenditures related to our property purchases or property development activities. We are currently in the process of planning to construct a new campus in Santa Clara, California. If we move forward with these plans, we may be required to fund significant construction costs using our cash, cash equivalents and marketable securities. While we expect that we will have sufficient balances of cash, cash equivalents and marketable securities available for this purpose, there is no assurance that we will not need to raise additional debt financing in order to fund this project. Such additional financing may not be available on favorable terms, or at all.
For additional factors that could impact our liquidity, please refer to “Item 1A. Risk Factors - Risks Related to Our Business and Products” - Our operating results are unpredictable and may fluctuate, and if our operating results are below the expectations of securities analysts or investors, the trading price of our stock could decline.”
3dfx Asset Purchase
On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an Asset Purchase Agreement, or APA, which closed on April 18, 2001, to purchase certain graphics chip assets from 3dfx. Under the terms of the APA, the cash consideration due at the closing was $70.0 million, less $15.0 million that was loaned to 3dfx pursuant to a Credit Agreement dated December 15, 2000. The Asset Purchase Agreement also provided, subject to the other provisions thereof, that if 3dfx properly certified that all its debts and other liabilities had been provided for, then we would have been obligated to pay 3dfx one million shares, which due to subsequent stock splits now totals six million shares, of NVIDIA common stock. If 3dfx could not make such a certification, but instead properly certified that its debts and liabilities could be satisfied for less than $25.0 million, then 3dfx could have elected to receive a cash payment equal to the amount of such debts and liabilities and a reduced number of shares of our common stock, with such reduction calculated by dividing the cash payment by $25.00 per share. If 3dfx could not certify that all of its debts and liabilities had been provided for, or could not be satisfied, for less than $25.0 million, we would not be obligated under the agreement to pay any additional consideration for the assets.
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, we were served with a complaint filed by the Trustee appointed by the Bankruptcy Court which sought, among other things, payments from us as additional purchase price related to our purchase of certain assets of 3dfx. 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 after notice and hearing. The conditional settlement called for a payment by NVIDIA of approximately $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. However, the conditional settlement never progressed substantially through the confirmation process.
On December 21, 2005, the Bankruptcy Court determined that it would schedule trial of one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA exercised its right to terminate the settlement agreement on grounds that the Bankruptcy Court had failed to proceed toward confirmation of the Creditors’ Committee’s plan. A non-jury trial began on March 21, 2007 on valuation issues in the Trustee's constructive fraudulent transfer claims against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx transfer to NVIDIA in the APA?; (2) of what was transferred, what qualifies as "property" subject to the Bankruptcy Court's avoidance powers under the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions?; (3) what is the fair market value of the "property" identified in answer to question (2)?; and (4) was the $70 million that NVIDIA paid "reasonably equivalent" to the fair market value of that property? At the conclusion of the evidence, the Bankruptcy Court asked the parties to submit post-trial briefing. That briefing was completed on May 25, 2007. 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 with respect to each of the questions to be tried. The Bankruptcy Court concluded that "the creditors of 3dfx were not injured by the Transaction." This decision does not entirely dispose of the Trustee's action, however; still pending are the Trustee's claims for successor liability and intentional fraudulent conveyance. On May 12, 2008, the Trustee filed a motion for leave to pursue an interlocutory appeal, but thereafter withdrew the motion. NVIDIA has filed a motion for summary judgment on all causes of action in order to convert the Memorandum Decision After Trial to a final judgment. That motion is scheduled to be heard on August 28, 2008.
Please refer to Note 12 of the Notes to Condensed Consolidated Financial Statements for further information regarding this litigation.
Product Defect
Our products are complex and may contain defects or experience failures due to any number of issues in design, fabrication, packaging, materials and/or use within a system. If any of our products or technologies contains a defect, compatibility issue or other error, we may have to invest additional research and development efforts to find and correct the issue. Such efforts could divert our management’s and engineers’ attention from the development of new products and technologies and could increase our operating costs and reduce our gross margin. In addition, an error or defect in new products or releases or related software drivers after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins. Also, we may be required to reimburse customers, including for customers’ costs to repair or replace the products in the field, which could cause our revenue to decline. A product recall or a significant number of product returns could be expensive, damage our reputation and could result in the shifting of business to our competitors. Costs associated with correcting defects, errors, bugs or other issues could be significant and could materially harm our financial results.
During our fiscal quarter ended July 27, 2008, we recorded a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other associated costs arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems. All of our newly manufactured products and all of our products that are currently shipping in volume have a different material set that we believe is more robust.
The previous generation MCP and GPU products that are impacted were included in a number of notebook products that were shipped and sold in significant quantities. Certain notebook configurations of these MCP and GPU products are failing in the field at higher than normal rates. While we have not been able to determine a root cause for these failures, testing suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors. We have worked with our customers to develop and have made available for download a software driver to cause the system fan to begin operation at the powering up of the system and reduce the thermal stress on these chips. We have also recommended to our customers that they consider changing the thermal management of the MCP and GPU products in their notebook system designs. We intend to fully support our customers in their repair and replacement of these impacted MCP and GPU products that fail, and their other efforts to mitigate the consequences of these failures.
We continue to engage in discussions with our supply chain regarding reimbursement to us for some or all of the costs we have incurred and may incur in the future relating to the weak material set. We also continue to seek to access our insurance coverage. However, there can be no assurance that we will recover any such reimbursement. We continue to not see any abnormal failure rates in any systems using NVIDIA products other than certain notebook configurations. However, we are continuing to test and otherwise investigate other products. There can be no assurance that we will not discover defects in other MCP or GPU products.
Contractual Obligations
At July 27, 2008, we had outstanding inventory purchase obligations and capital purchase obligations totaling approximately $615.6 million and $46.0 million, respectively. There were no other material changes in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the year ended January 27, 2008. Please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in our Form 10-K for a description of our contractual obligations.
Off-Balance Sheet Arrangements
As of July 27, 2008, we had no material off-balance sheet arrangements as defined in Regulation S-K 303(a)(4)(ii).
Adoption of New Accounting Pronouncements
On January 28, 2008, we adopted Statement of Financial Accounting Standards No. 157, or SFAS No. 157, Fair Value Measurements. SFAS No. 157 for all financial assets and financial liabilities recognized or disclosed at fair value in the financial statements. SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS No. 157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. The adoption of SFAS No. 157 for financial assets and liabilities did not have a significant impact on our consolidated financial statements, and the resulting fair values calculated under SFAS No. 157 after adoption were not significantly different than the fair values that would have been calculated under previous guidance. Please refer to Note 16 of these Notes to the Condensed Consolidated Financial Statements for further details on our fair value measurements.
Additionally, in February 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No. FAS 157-2, or FSP No. 157-2, Effective Date of FASB Statement No. 157, to partially defer FASB Statement No. 157, Fair Value Measurements. FSP No. 157-2 defers the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. We do not believe the adoption of FSP No. 157-2 will have a material impact on our consolidated financial position, results of operations and cash flows.
On January 28, 2008, we adopted Statement of Financial Accounting Standards No. 159, or SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value using an instrument-by-instrument election. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. Under SFAS No. 159, we did not elect the fair value option for any of our assets and liabilities. The adoption of SFAS No. 159 did not have an impact on our consolidated financial statements.
In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 07-3, or EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. EITF 07-3 requires non-refundable advance payments for goods and services to be used in future research and development activities to be recorded as an asset and the payments to be expensed when the research and development activities are performed. We adopted the provisions of EITF 07-3 beginning with our fiscal quarter ended April 27, 2008. The adoption of EITF 07-3 did not have any impact on our consolidated financial position, results of operations and cash flows.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), or SFAS No. 141(R), Business Combinations. Under SFAS No. 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. In addition, acquired in-process research and development is capitalized as an intangible asset and amortized over its estimated useful life. We are required to adopt the provisions of SFAS No. 141(R) beginning with our fiscal quarter ending April 26, 2009. The adoption of SFAS No. 141(R) is expected to change our accounting treatment for business combinations on a prospective basis beginning in the period it is adopted.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment and Interest Rate Risk
At July 27, 2008 and January 27, 2008, we had $1.66 billion and $1.81 billion, respectively, in cash, cash equivalents and marketable securities. We invest in a variety of financial instruments, consisting principally of cash and cash equivalents, asset-backed securities, commercial paper, mortgage-backed securities issued by Government-sponsored enterprises, equity securities, money market funds and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. As of July 27, 2008, we did not have any investments in auction-rate preferred securities. Our investments are denominated in United States dollars.
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. All of the cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded debt or equity investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in securities market value due to changes in interest rates. However, because any debt securities we hold are classified as “available-for-sale,” no gains or losses are realized in our condensed consolidated statements of income due to changes in interest rates unless such securities are sold prior to maturity or unless declines in value are determined to be other-than-temporary. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax.
As of July 27, 2008, we performed a sensitivity analysis on our floating and fixed rate financial investments. According to our analysis, parallel shifts in the yield curve of both plus or minus 0.5% would result in changes in fair market values for these investments of approximately $4.6 million.
Recent U.S. sub-prime mortgage defaults have had a significant impact across various sectors of the financial markets, causing global credit and liquidity issues. The short-term funding markets experienced issues since the third and fourth quarter of calendar 2007, leading to liquidity disruption in the market. If the global credit market continues to deteriorate, our investment portfolio may be impacted and we could determine some of our investments are impaired, which could adversely impact our financial results. Our investments in the financial sector and government agencies accounted for approximately 36% and 30%, respectively, of our total investment portfolio. If the fair value of our investments in these sectors was to decline by 2%-5%, it would result in changes in fair market values for these investments by approximately $20-$49 million.
Exchange Rate Risk
We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, sales and arrangements with third-party manufacturers provide for pricing and payment in United States dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the United States’ dollar relative to other currencies would make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the United States’ dollar relative to other currencies could result in our suppliers raising their prices in order to continue doing business with us. Fluctuations in currency exchange rates could harm our business in the future. During the second quarter of fiscal years 2009 and 2008, the aggregate exchange loss included in determining net income (loss) was $0.9 million and $0.1 million, respectively. During the first half of fiscal years 2009 and 2008, the aggregate exchange loss included in determining net income was $5.1 million and $0.7 million, respectively.
We may enter into certain transactions such as forward contracts which are designed to reduce the future potential impact resulting from changes in foreign currency exchange rates. There were no forward exchange contracts outstanding at July 27, 2008.
Controls and Procedures
Disclosure Controls and Procedures
Based on their evaluation as of July 27, 2008, our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting during our fiscal quarter ended July 27, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within NVIDIA have been detected.
Please see Part I, Item 1, Note 12 of the Notes to Condensed Consolidated Financial Statements for a discussion of our legal proceedings.
A description of the risk factors associated with our business is set forth below. This description includes any material changes to and supersedes the description of risk factors associated with our business previously disclosed in Part II, “Item 1A. Risk Factors” of our Quarterly Report on Form 10-Q for the fiscal quarter ended April 27, 2008.
Risks Related to Competition
If we are unable to compete in the markets for our products, our financial results could be adversely impacted.
The markets for our products are highly competitive and are characterized by rapid technological change, new product introductions, evolving industry standards, and declining average selling prices. We believe that our ability to remain competitive will depend on how well we are able to anticipate the features and functions that customers will demand from our products and whether we are able to deliver consistent volumes of our products at acceptable prices and quality levels. We believe other factors impacting our ability to compete are:
| · | product performance; |
· | product bundling by competitors with multiple product lines; |
· | breadth and frequency of product offerings; |
· | access to customers and distribution channels; |
· | backward-forward software support; |
· | conformity to industry standard application programming interfaces; and |
· | manufacturing capabilities. |
We expect competition to increase both from existing competitors and new market entrants with products that may be less costly than ours, may provide better performance or additional features not provided by our products, or from companies that provide or intend to provide competing product solutions. Any of these sources of competition could harm our business. For example, we were the largest supplier of AMD 64 chipsets with 60% segment share in the second quarter of calendar year 2008, as reported in the 2008 Second Quarter PC Processor and Chipset report from Mercury Research. Decline in demand for our chipsets in the AMD segment for any reason including competition from existing competitors or new market entrants could materially impact our financial results.
Some of our competitors may have or be able to obtain greater marketing, financial, distribution and manufacturing resources than we do and may be better able to adapt to customer or technological changes. Currently, Intel Corporation, or Intel, which has greater resources than we do, is working on a multi-core architecture code-named Larrabee, which is reported to combine the graphics processing capabilities of a graphics processing unit, or GPU, with an x86 architecture and is expected to compete with our products in various markets. Intel is targeting the gaming market as well as other industries that demand high-performance graphics and computing with Larrabee, both of which are important markets for us. In order to compete, we may have to invest substantial amounts in research and development without assurance that our products will be superior to those of our competitors or that our products will achieve market acceptance.
Our current competitors include the following:
· | suppliers of discrete media and communication processors, or MCPs, that incorporate a combination of networking, audio, communications and input/output functionality as part of their existing solutions, such as Advanced Micro Devices, Inc., or AMD, Broadcom Corporation, or Broadcom, Silicon Integrated Systems Corporation, or SIS, and Intel; |
· | suppliers of GPUs, including MCPs that incorporate 3D graphics functionality as part of their existing solutions, such as AMD, Intel, Matrox Electronics Systems Ltd., SIS and VIA Technologies, Inc.; |
· | suppliers of GPUs or GPU intellectual property for handheld and digital consumer electronics devices that incorporate advanced graphics functionality as part of their existing solutions, such as AMD, Broadcom, Fujitsu Limited, Imagination Technologies Ltd., ARM Holdings plc, Marvell Technology Group Ltd., or Marvell, NEC Corporation, Qualcomm Incorporated, or Qualcomm, Renesas Technology, Seiko-Epson, Texas Instruments Incorporated, or Texas Instruments, and Toshiba America, Inc.; and |
· | suppliers of application processors for handheld and digital consumer electronics devices that incorporate multimedia processing as part of their existing solutions such as Broadcom, Texas Instruments, Qualcomm, Marvell, Freescale Semiconductor Inc., Samsung and ST Microelectronics. |
As Intel and AMD continue to pursue platform solutions, we may not be able to successfully compete and our business would be negatively impacted.
We expect substantial competition from both Intel’s and AMD’s strategy of selling platform solutions, such as the success Intel achieved with its Centrino platform solution. AMD has also announced a platform solution. Additionally, we expect that Intel and AMD will extend this strategy to other segments, including the possibility of successfully integrating a central processing unit, or CPU, and a GPU on the same chip, as evidenced by AMD’s announcement of its Fusion processor project. If AMD and Intel continue to pursue platform solutions, we may not be able to successfully compete and our business would be negatively impacted.
Risks Related to Our Partners and Customers
We depend on foundries to manufacture our products and these third parties may not be able to satisfy our manufacturing requirements, which would harm our business.
We do not manufacture the silicon wafers used for our products and do not own or operate a wafer fabrication facility. Instead, industry-leading foundries manufacture our semiconductor wafers using their state-of-the-art fabrication equipment and techniques. The foundries, which have limited capacity, also manufacture products for other semiconductor companies, including some of our competitors. Since we do not have long-term commitment contracts with any of these foundries, they do not have an obligation to provide us with any minimum quantity of product at any time or at any set price, except as may be provided in a specific purchase order. Most of our products are only manufactured by one foundry at a time. In times of high demand, the foundries could choose to prioritize their capacity for other companies, reduce or eliminate deliveries to us, or increase the prices that they charge us. If we are unable to meet customer demand due to reduced or eliminated deliveries or have to increase the prices of our products, we could lose sales to customers, which would negatively impact our revenue and our reputation.
Because the lead-time needed to establish a strategic relationship with a new manufacturing partner could be several quarters, we do not have an alternative source of supply for our products. In addition, the time and effort to qualify a new foundry could result in additional expense, diversion of resources, or lost sales any of which would negatively impact our financial results. We believe that long-term market acceptance for our products will depend on reliable relationships with the third-party manufacturers we use to ensure adequate product supply and competitive pricing to respond to customer demand.
Failure to achieve expected manufacturing yields for our products could negatively impact our financial results and damage our reputation.
Manufacturing yields for our products are a function of product design, which is developed largely by us, and process technology, which typically is proprietary to the manufacturer. Low yields may result from either product design or process technology failure. We do not know a yield problem exists until our design is manufactured. When a yield issue is identified, the product is analyzed and tested to determine the cause. As a result, yield problems may not be identified until well into the production process. Resolution of yield problems requires cooperation by and communication between us and the manufacturer. Because of our potentially limited access to wafer foundry capacity, decreases in manufacturing yields could result in an increase in our costs and force us to allocate our available product supply among our customers. Lower than expected yields could potentially harm customer relationships, our reputation and our financial results.
We are dependent on third parties for assembly, testing and packaging of our products, which reduces our control over the delivery schedule, product quantity or product quality.
Our products are assembled, tested and packaged by independent subcontractors, such as Advanced Semiconductor Engineering, Inc., Amkor Technology, JSI Logistics, Ltd., King Yuan Electronics Co., Siliconware Precision Industries Co. Ltd., and ChipPAC. As a result, we do not directly control our product delivery schedules, product quantity, or product quality. All of these subcontractors assemble, test and package products for other companies, including some of our competitors. Since we do not have long-term agreements with our subcontractors, when demand for subcontractors to assemble, test or package products is high, our subcontractors may decide to prioritize the orders of other customers over our orders. Since the time required to qualify a different subcontractor to assemble, test or package our products can be lengthy, if we have to find a replacement subcontractor we could experience significant delays in shipments of our products, product shortages, a decrease in the quality of our products, or an increase in product cost. Any product shortages or quality assurance problems could increase the costs of manufacture, assembly or testing of our products, which could cause our gross margin and revenue to decline.
Failure to transition to new manufacturing process technologies could adversely affect our operating results and gross margin.
We use the most advanced manufacturing process technology appropriate for our products that is available from our third-party foundries. As a result, we continuously evaluate the benefits of migrating our products to smaller geometry process technologies in order to improve performance and reduce costs. We believe this strategy will help us remain competitive. Our current product families are manufactured using 0.15 micron, 0.14 micron, 0.13 micron, 0.11 micron, 90 nanometer, 65 nanometer and 55 nanometer process technologies. Manufacturing process technologies are subject to rapid change and require significant expenditures for research and development, which could negatively impact our operating expenses and gross margin.
We have experienced difficulty in migrating to new manufacturing processes in the past and, consequently, have suffered reduced yields, delays in product deliveries and increased expense levels. We may face similar difficulties, delays and expenses as we continue to transition our new products to smaller geometry processes. Moreover, we are dependent on our third-party manufacturers to invest sufficient funds in new manufacturing techniques in order to have ample capacity for all of their customers and to develop the techniques in a timely manner. Our product cycles may also depend on our third-party manufacturers migrating to smaller geometry processes successfully and in time for us to meet our customer demands. Some of our competitors own their manufacturing facilities and may be able to move to a new state of the art manufacturing process more quickly or more successfully than our manufacturing partners. For example, Intel has released a 45 nanometer chip for desktop computers which it is manufacturing in its foundries. If our suppliers fall behind our competitors in manufacturing processes, the development and customer demand for our products and the use of our products could be negatively impacted. If we are forced to use larger geometric processes in manufacturing a product than our competition, our gross margin may be reduced. The inability by us or our third-party manufacturers to effectively and efficiently transition to new manufacturing process technologies may adversely affect our operating results and our gross margin.
We rely on third-party vendors to supply software development tools to us for the development of our new products and we may be unable to obtain the tools necessary to develop or enhance new or existing products.
We rely on third-party software development tools to assist us in the design, simulation and verification of new products or product enhancements. To bring new products or product enhancements to market in a timely manner, or at all, we need software development tools that are sophisticated enough or technologically advanced enough to complete our design, simulations and verifications. In the past, we have experienced delays in the introduction of products as a result of the inability of then available software development tools to fully simulate the complex features and functionalities of our products. In the future, the design requirements necessary to meet consumer demands for more features and greater functionality from our products may exceed the capabilities of available software development tools. Unavailability of software development tools may result in our missing design cycles or losing design wins either of which could result in a loss of market share or negatively impact our operating results.
Because of the importance of software development tools to the development and enhancement of our products, a critical component of our product development efforts is our partnerships with leaders in the computer-aided design industry, including Cadence Design Systems, Inc. and Synopsys, Inc. We have invested significant resources to develop relationships with these industry leaders and have often assisted them in the definition of their new products. We believe that forming these relationships and utilizing next-generation development tools to design, simulate and verify our products will help us remain at the forefront of the 3D graphics, communications and networking segments and develop products that utilize leading-edge technology on a rapid basis. If these relationships are not successful, we may be unable to develop new products or product enhancements in a timely manner, which could result in a loss of market share, a decrease in revenue or negatively impact our operating results.
We sell our products to a small number of customers and our business could suffer if we lose any of these customers.
We have a limited number of customers and our sales are highly concentrated. Sales to a significant customer with revenue in excess of 10% of our total revenue, represented approximately 13% and 12% of our total revenue during the second quarter of fiscal years 2009 and 2008, respectively. Aggregate sales to our two largest customers accounted for approximately 21% and 16% of our total revenue for the first half of fiscal years 2009 and 2008, respectively. Although a small number of our other customers represent the majority of our revenue, their end customers include a large number of original equipment manufacturers, or OEMs, and system integrators throughout the world who, in many cases, specify the graphics supplier. Our sales process involves achieving key design wins with leading personal computer, or PC, OEMs and major system builders and supporting the product design into high volume production with key contract equipment manufacturers, or CEMs, original design manufacturers, or ODMs, add-in board and motherboard manufacturers. These design wins in turn influence the retail and system builder channel that is serviced by CEMs, ODMs, add-in board and motherboard manufacturers. Our distribution strategy is to work with a small number of leading independent CEMs, ODMs, add-in board and motherboard manufacturers, and distributors, each of which has relationships with a broad range of system builders and leading PC OEMs. If we were to lose sales to our PC OEMs, CEMs, ODMs, add-in board manufacturers and motherboard manufacturers and were unable to replace the lost sales with sales to different customers, they were to significantly reduce the number of products they order from us, or we were unable to collect accounts receivable from them, our revenue may not reach or exceed the expected level in any period, which could harm our financial condition and our results of operations.
Any difficulties in collecting accounts receivable, including from foreign customers, could harm our operating results and financial condition.
Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers' businesses, and to downturns in the industry and the worldwide economy. One customer accounted for approximately 11% and 12% of our accounts receivable balance at July 27, 2008 and January 27, 2008, respectively.
Difficulties in collecting accounts receivable could materially and adversely affect our financial condition and results of operations. We continue to work directly with more foreign customers and it may be difficult to collect accounts receivable from them. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. If the financial condition of our customers were to deteriorate, resulting in an impairment in their ability to make payments, additional allowances may be required, we may be required to defer revenue recognition on sales to affected customers, and we may be required to pay higher credit insurance premiums, any of which could adversely affect our operating results. In the future, we may have to record additional reserves or write-offs and/or defer revenue on certain sales transactions which could negatively impact our financial results.
Risks Related to Our Business and Products
If our products contain significant defects our financial results could be negatively impacted, our reputation could be damaged and we could lose market share.
Our products are complex and may contain defects or experience failures due to any number of issues in design, fabrication, packaging, materials and/or use within a system. If any of our products or technologies contains a defect, compatibility issue or other error, we may have to invest additional research and development efforts to find and correct the issue. Such efforts could divert our management’s and engineers’ attention from the development of new products and technologies and could increase our operating costs and reduce our gross margin. In addition, an error or defect in new products or releases or related software drivers after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins. Also, we may be required to reimburse customers, including for customers’ costs to repair or replace the products in the field, which could cause our revenue to decline. A product recall or a significant number of product returns could be expensive, damage our reputation and could result in the shifting of business to our competitors. Costs associated with correcting defects, errors, bugs or other issues could be significant and could materially harm our financial results.
During our fiscal quarter ended July 27, 2008, we recorded a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other associated costs arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems. All of our newly manufactured products and all of our products that are currently shipping in volume have a different material set that we believe is more robust.
The previous generation MCP and GPU products that are impacted were included in a number of notebook products that were shipped and sold in significant quantities. Certain notebook configurations of these MCP and GPU products are failing in the field at higher than normal rates. While we have not been able to determine a root cause for these failures, testing suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors. We have worked with our customers to develop and have made available for download a software driver to cause the system fan to begin operation at the powering up of the system and reduce the thermal stress on these chips. We have also recommended to our customers that they consider changing the thermal management of the MCP and GPU products in their notebook system designs. We intend to fully support our customers in their repair and replacement of these impacted MCP and GPU products that fail, and their other efforts to mitigate the consequences of these failures.
We continue to engage in discussions with our supply chain regarding reimbursement to us for some or all of the costs we have incurred and may incur in the future relating to the weak material set. We also continue to seek to access our insurance coverage. However, there can be no assurance that we will recover any such reimbursement. We continue to not see any abnormal failure rates in any systems using NVIDIA products other than certain notebook configurations. However, we are continuing to test and otherwise investigate other products. There can be no assurance that we will not discover defects in other MCP or GPU products.
Our failure to estimate customer demand properly could adversely affect our financial results.
Our inventory purchases are based upon future demand forecasts or orders from our customers and may not accurately predict the quantity or type of products that our customers will want or will ultimately purchase. In forecasting demand, we make multiple assumptions any of which may prove to be incorrect. Situations that may result in excess or obsolete inventory, which could result in write-downs of the value of our inventory and/or a reduction in average selling prices, and where our gross margin could be adversely affected include:
· | if there were a sudden and significant decrease in demand for our products; |
· | if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements; |
· | if we fail to estimate customer demand properly for our older products as our newer products are introduced; or |
· | if our competition were to take unexpected competitive pricing actions. |
Conversely, if we underestimate our customers’ demand for our products, our third party manufacturing partners may not have adequate capacity to increase production for us meaning that we may not be able to obtain sufficient inventory to fill our customers’ orders on a timely basis. Even if we are able to increase production levels to meet customer demand, we may not be able to do so in a cost effective or timely manner. Inability to fulfill our customers’ orders on a timely basis, or at all, could damage our customer relationships, result in lost revenue, cause a loss in market share, impact our customer relationships or damage our reputation, any of which could adversely impact our business.
Because we order products or materials in advance of anticipated customer demand, our ability to reduce our inventory purchase commitments quickly in response to lower than expected demand is limited.
We manufacture our products based on forecasts of customer demand in order to have shorter shipment lead times for our customers. As a result, we may build inventories for anticipated periods of growth which do not occur or may build inventory anticipating demand for a product that does not materialize. Any inability to sell products to which we have devoted resources could harm our business. In addition, cancellation or deferral of customer purchase orders could result in our holding excess inventory, which could adversely affect our gross margin and restrict our ability to fund operations. Additionally, because we often sell a substantial portion of our products in the last month of each quarter, we may not be able to reduce our inventory purchase commitments in a timely manner in response to customer cancellations or deferrals. We could be subject to excess or obsolete inventories and be required to take corresponding inventory write-downs if growth slows or does not materialize, or if we incorrectly forecast product demand, which could negatively impact our financial results.
Our business results could be adversely affected if the identification and development of new products or entry into or development of a new market is delayed or unsuccessful.
In order to maintain or improve our financial results, we will need to continue to identify and develop new products as well as identify and enter new markets. As our GPUs and other processors develop and competition increases, we anticipate that product life cycles at the high end will remain short and average selling prices will decline. In particular, average selling prices and gross margins for our GPUs and other processors could decline as each product matures and as unit volume increases. As a result, we will need to introduce new products and enhancements to existing products to maintain or improve overall average selling prices, our gross margin and our financial results. We believe the success of our new product introductions will depend on many factors outlined elsewhere in these risk factors as well as the following:
· | market demand for new products and enhancements to existing products; |
· | timely completion and introduction of new product designs and new opportunities for existing products; |
· | seamless transitions from an older product to a new product; |
· | differentiation of our new products from those of our competitors; |
· | delays in volume shipments of our products; |
· | market acceptance of our products instead of our customers' products; and |
· | availability of adequate quantity and configurations of various types of memory products. |
In the past, we have experienced delays in the development and adoption of new products and have been unable to successfully manage product transitions from older to newer products resulting in obsolete inventory.
To be successful, we must also enter new markets or develop new uses for our future or existing products. We cannot accurately predict if our current or existing products or technologies will be successful in the new opportunities or markets that we identify for them or that we will compete successfully in any new markets we may enter. For example, we have developed products and other technology in order for certain general-purpose computing operations to be performed on a GPU rather than a CPU. This general purpose computing, which is often referred to as GP computing, was a new use for the GPU which had been entirely used for graphics rendering. During our fiscal year 2008 we introduced our NVIDIA Tesla family of products, which was our entry into the high-performance computing industry, a new market for us. We also offer our CUDA software development solution, which is a C language programming environment for GPUs, that allows parallel computing on the GPU by using standard C language to create programs that process large quantities of data in parallel. Some of our competitors, including Intel, are now developing their own solutions for the discrete graphics and computing markets. Our failure to successfully develop, introduce or achieve market acceptance for new GPUs, other products or other technologies or to enter into new markets or identify new uses for existing or future products, could result in rapidly declining average selling prices, reduced demand for our products or loss of market share any of which could cause our revenue, gross margin and overall financial results to suffer.
If we are unable to achieve design wins, our products may not be adopted by our target markets or customers either of which could negatively impact our financial results.
The success of our business depends to a significant extent on our ability to develop new competitive products for our target markets and customers. We believe achieving design wins, which entails having our existing and future products chosen for hardware components or subassemblies designed by OEMs, ODMs, add-in board and motherboard manufacturers, are an integral part of our future success. Our OEM, ODM, and add-in board and motherboard manufacturers’ customers typically introduce new system configurations as often as twice per year, typically based on spring and fall design cycles or in connection with trade shows. Accordingly, when our customers are making their design decisions, our existing products must have competitive performance levels or we must timely introduce new products in order to be included in our customers’ new system configurations. This requires that we:
· | anticipate the features and functionality that customers and consumers will demand; |
· | incorporate those features and functionalities into products that meet the exacting design requirements of our customers; |
· | price our products competitively; and |
· | introduce products to the market within our customers’ limited design cycles. |
If OEMs, ODMs, and add-in board and motherboard manufacturers do not include our products in their systems, they will typically not use our products in their systems until at least the next design configuration. Therefore, we endeavor to develop close relationships with our OEMs and ODMs, in an attempt to better anticipate and address customer needs in new products so that we will achieve design wins.
Our ability to achieve design wins also depends in part on our ability to identify and be compliant with evolving industry standards. Unanticipated changes in industry standards could render our products incompatible with products developed by major hardware manufacturers and software developers like AMD, Intel and Microsoft Corporation, or Microsoft. If our products are not in compliance with prevailing industry standards, we may not be designed into our customers’ product designs. However, to be compliant with changes to industry standards, we may have to invest significant time and resources to redesign our products which could negatively impact our gross margin or operating results. If we are unable to achieve new design wins for existing or new customers, we may lose market share and our operating results would be negatively impacted.
We may have to invest more resources in research and development than anticipated, which could increase our operating expenses and negatively impact our operating results.
If new competitors, technological advances by existing competitors, our entry into new markets, or other competitive factors require us to invest significantly greater resources than anticipated in our research and development efforts, our operating expenses would increase. We have increased our engineering and technical resources and had 3,876 and 2,865 full-time employees engaged in research and development as of July 27, 2008 and July 29, 2007, respectively. Research and development expenditures were $212.9 and $158.0 million for the second quarter of fiscal years 2009 and 2008, respectively and $431.7 million and $316.3 million for the first half of fiscal years 2009 and 2008, respectively. Research and development expenses included non-cash stock-based compensation expense of $24.2 million and $16.4 million for the second quarter of fiscal years 2009 and 2008, respectively and $48.8 million and $38.8 million for the first half of fiscal years 2009 and 2008, respectively. If we are required to invest significantly greater resources than anticipated in research and development efforts without a corresponding increase in revenue, our operating results could decline. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and these investments may be independent of our level of revenue which could negatively impact our financial results. In order to remain competitive, we anticipate that we will continue to devote substantial resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products under development.
Because our gross margin for any period depends on a number of factors, our failure to forecast changes in any of these factors could adversely affect our gross margin.
We are focused on improving our gross margin. Our gross margin for any period depends on a number of factors, including:
· | the mix of our products sold; |
· | average selling prices; |
· | introduction of new products; |
· | product transitions; |
· | sales discounts; |
· | unexpected pricing actions by our competitors; |
· | the cost of product components; and |
· | the yield of wafers produced by the foundries that manufacture our products. |
During the second quarter of fiscal year 2009, our gross margin declined significantly to 16.8% as compared to 45.3% during the second quarter of fiscal year 2008 and 44.6% during the first quarter of fiscal year 2009. The decline in gross margin for the second quarter of fiscal year 2009 reflects a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and associated costs arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems, as well as the impact of average sales price regression we experienced in our desktop GPU products as a result of increased competition. If we do not correctly forecast the impact of any of the relevant factors on our business, there may not be any actions we can take or we may not be able to take any possible actions in time to counteract any negative impact on our gross margin. In addition, if we are unable to meet our gross margin target for any period or the target set by analysts, the trading price of our common stock may decline.
We may not be able to realize the potential financial or strategic benefits of business acquisitions or strategic investments, which could hurt our ability to grow our business, develop new products or sell our products.
We have acquired and invested in other businesses that offered products, services and technologies that we believe will help expand or enhance our existing products and business. We may enter into future acquisitions of, or investments in, businesses, in order to complement or expand our current businesses or enter into a new business market. Negotiations associated with an acquisition or strategic investment could divert management’s attention and other company resources. Any of the following risks associated with past or future acquisitions or investments could impair our ability to grow our business, develop new products, our ability to sell our products, and ultimately could have a negative impact on our growth or our financial results:
· | difficulty in combining the technology, products, operations or workforce of the acquired business with our business; |
· | difficulty in operating in a new or multiple new locations; |
· | disruption of our ongoing businesses or the ongoing business of the company we invest in or acquire; |
· | difficulty in realizing the potential financial or strategic benefits of the transaction; |
· | difficulty in maintaining uniform standards, controls, procedures and policies; |
· | disruption of or delays in ongoing research and development efforts; |
· | diversion of capital and other resources; |
· | assumption of liabilities; |
· | diversion of resources and unanticipated expenses resulting from litigation arising from potential or actual business acquisitions or investments; |
· | difficulties in entering into new markets in which we have limited or no experience and where competitors in such markets have stronger positions; and |
· | impairment of relationships with employees and customers, or the loss of any of our key employees or customers of our target’s key employees or customers, as a result of our acquisition or investment. |
In addition, the consideration for any future acquisition could be paid in cash, shares of our common stock, the issuance of convertible debt securities or a combination of cash, convertible debt and common stock. If we make an investment in cash or use cash to pay for all or a portion of an acquisition, our cash reserves would be reduced which could negatively impact the growth of our business or our ability to develop new products. However, if we pay the consideration with shares of common stock, or convertible debentures, the holdings of our existing stockholders would be diluted. We cannot forecast the number, timing or size of future strategic investments or acquisitions, or the effect that any such investments or acquisitions might have on our operations or financial results.
We are dependent on key employees and the loss of any of these employees could negatively impact our business.
Our future success and ability to compete is substantially dependent on our ability to identify, hire, train and retain highly qualified key personnel. The market for key employees in the semiconductor industry can be competitive. None of our key employees is bound by an employment agreement, meaning our relationships with all of our key employees are at will. For instance, Marvin D. Burkett, Chief Financial Officer, or CFO, informed us on March 21, 2008 of his intention to retire. Mr. Burkett is expected to remain as CFO while a search is conducted to find his replacement, and he may continue in some capacity with us thereafter. We are in the process of recruiting a new CFO. The loss of the services of Mr. Burkett or any of our other key employees without an adequate replacement or our inability to hire new employees as needed could delay our product development efforts, harm our ability to sell our products or otherwise negatively impact our business.
Our operating expenses are relatively fixed and we may not be able to reduce operating expenses quickly in response to any revenue shortfalls.
Our operating expenses, which are comprised of research and development expenses and sales, general and administrative expenses, represented 34% and 26% of our total revenue for the second quarter of fiscal years 2009 and 2008, respectively and 30% and 27% for the first half of fiscal years 2009 and 2008, respectively. Operating expenses included stock-based compensation expense of $37.0 million and $26.8 million for the second quarter of fiscal years 2009 and 2008, respectively and $76.0 million and $61.4 million for the first half of fiscal years 2009 and 2008, respectively. Since we often recognize a substantial portion of our revenue in the last month of each quarter, we may not be able to adjust our operating expenses in a timely manner in response to any unanticipated revenue shortfalls in any quarter as was in the case of the second quarter of fiscal year 2009. Further, some of our operating expenses, like non-cash stock-based compensation expense can only be adjusted over a longer period of time and cannot be reduced during a quarter. If we are unable to reduce operating expenses quickly in response to any revenue shortfalls, our financial results would be negatively impacted.
Expensing employee equity compensation materially and adversely affects our reported operating results and could also adversely affect our competitive position.
Since inception, we have used equity through our stock option plans and our employee stock purchase program as a fundamental component of our compensation packages. We believe that these programs directly motivate our employees and, through the use of vesting, encourage our employees to remain with us. As a result of adjustments arising from our restatement related to stock option grant dates, our operating results for fiscal years prior to fiscal year 2007 contain recorded amounts of non-cash stock-based compensation expense. For our fiscal years 2000 through 2006, this non-cash stock-based compensation expense was calculated using primarily the intrinsic value-based method under Accounting Principles Board Opinion No. 25, or APB 25, Accounting for Stock Issued to Employees and related interpretations.
In December 2004, the FASB issued SFAS No. 123(R) which requires the measurement and recognition of compensation expense for all stock-based compensation payments. SFAS No. 123(R) requires that we record compensation expense for stock options and our employee stock purchase plan using the fair value of those awards. Stock-based compensation expense resulting from our compliance with SFAS No. 123(R), included $40.4 million and $29.5 million for the second quarter of fiscal years 2009 and 2008, respectively and $82.5 and $66.9 million for the first half of fiscal years 2009 and 2008, respectively, which negatively impacted our operating results. We believe that SFAS No. 123(R) will continue to negatively impact our operating results.
To the extent that SFAS No. 123(R) makes it more expensive to grant stock options or to continue to have an employee stock purchase program, we may decide to incur increased cash compensation costs. In addition, actions that we may take to reduce stock-based compensation expense that may be more severe than any actions our competitors may implement and may make it difficult to attract retain and motivate employees, which could adversely affect our competitive position as well as our business and operating results.
We may be required to record a charge to earnings if our goodwill or amortizable intangible assets become impaired, which could negatively impact our operating results.
Under accounting principles generally accepted in the United States, we review our amortizable intangible assets and goodwill for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment at least annually. The carrying value of our goodwill or amortizable assets may not be recoverable due to factors such as a decline in stock price and market capitalization, reduced estimates of future cash flows and slower growth rates in our industry or in any of our business units. Estimates of future cash flows are based on an updated long-term financial outlook of our operations. However, actual performance in the near-term or long-term could be materially different from these forecasts, which could impact future estimates. For example, if one of our business units does not meet its near-term and longer-term forecasts, the goodwill assigned to the business unit could be impaired. We may be required to record a charge to earnings in our financial statements during a period in which an impairment of our goodwill or amortizable intangible assets is determined to exist, which may negatively impact our results of operations.
Our operating results are unpredictable and may fluctuate, and if our operating results are below the expectations of securities analysts or investors, the trading price of our stock could decline.
Many of our revenue components fluctuate and are difficult to predict, and our operating expenses are largely independent of revenue. Therefore, it is difficult for us to accurately forecast revenue and profits or losses in any particular period.
Any one or more of the risks discussed in this Quarterly Report on Form 10-Q or other factors could prevent us from achieving our expected future revenue or net income. Accordingly, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of future performance. Similarly, the results of any quarterly or full fiscal year period are not necessarily indicative of results to be expected for a subsequent quarter or a full fiscal year.
As a result, it is possible that in some quarters our operating results could be below the expectations of securities analysts or investors, which could cause the trading price of our common stock to decline. We believe that our quarterly and annual results of operations may continue to be affected by a variety of factors that could harm our revenue, gross profit and results of operations.
Risks related to Market Conditions
We are exposed to fluctuations in the market values of our portfolio investments and in interest rates.
At July 27, 2008 and January 27, 2008, we had $1.66 billion and $1.81 billion, respectively, in cash, cash equivalents and marketable securities. We invest in a variety of financial instruments, consisting principally of cash and cash equivalents, asset-backed securities, commercial paper, mortgage-backed securities issued by Government-sponsored enterprises, equity securities, money market funds and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. As of July 27, 2008, we did not have any investments in auction-rate preferred securities. All of our investments are denominated in United States dollars.
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. All of our cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded debt or equity investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because any debt securities we hold are classified as “available-for-sale,” no gains or losses are realized in our condensed consolidated statements of income due to changes in interest rates unless such securities are sold prior to maturity or unless declines in value are determined to be other-than-temporary. 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.
Recent U.S. sub-prime mortgage defaults have had a significant impact across various sectors of the financial markets, causing global credit and liquidity issues. The short-term funding markets experienced issues since the third and fourth quarter of calendar 2007, leading to liquidity disruption in the market. If the global credit market continues to deteriorate, our investment portfolio may be impacted and we could determine some of our investments are impaired, which could adversely impact our financial results. As of July 27, 2008, our investments in the financial sector and government agencies accounted for approximately 36% and 30%, respectively, of our total investment portfolio. If the fair value of our investments in these sectors was to decline by 2%-5%, it would result in changes in fair market values for these investments by approximately $20-$49 million.
We are subject to risks associated with international operations which may harm our business.
We conduct our business worldwide. Our semiconductor wafers are manufactured, assembled, tested and packaged by third-parties located outside of the United States. We generated 89% and 90% of our revenue for the second quarter of fiscal years 2009 and 2008, respectively, and 91% and 87% of our revenue for the first half of fiscal years 2009 and 2008, respectively, from sales to customers outside the United States and other Americas. As of July 27, 2008, we had offices in thirteen countries outside of the United States. The manufacture, assembly, test and packaging of our products outside of the United States, operation of offices outside of the United States, and sales to customers internationally subjects us to a number of risks, including:
· | international economic and political conditions, such as political tensions between countries in which we do business; |
· | unexpected changes in, or impositions of, legislative or regulatory requirements; |
· | complying with a variety of foreign laws; |
· | differing legal standards with respect to protection of intellectual property and employment practices; |
· | cultural differences in the conduct of business; |
· | inadequate local infrastructure that could result in business disruptions; |
· | exporting or importing issues related to export or import restrictions, tariffs, quotas and other trade barriers and restrictions; |
· | financial risks such as longer payment cycles, difficulty in collecting accounts receivable and fluctuations in currency exchange rates; |
· | imposition of additional taxes and penalties; and |
· | other factors beyond our control such as terrorism, civil unrest, war and diseases such as severe acute respiratory syndrome and the Avian flu. |
If sales to any of our customers outside of the United States and other Americas are delayed or cancelled because of any of the above factors, our revenue may be negatively impacted.
Our international operations in Australia, Taiwan, Japan, Korea, China, Hong Kong, India, France, Finland, Germany, Russia, Switzerland and the United Kingdom are subject to many of the above listed risks. Difficulties with our international operations, including finding appropriate staffing and office space, may divert management’s attention and other resources any of which could negatively impact our operating results.
The economic conditions in our primary overseas markets, particularly in Asia, may negatively impact the demand for our products abroad. All of our international sales to date have been denominated in United States dollars. Accordingly, an increase in the value of the United States dollar relative to foreign currencies could make our products less competitive in international markets or require us to assume the risk of denominating certain sales in foreign currencies. We anticipate that these factors will impact our business to a greater degree as we further expand our international business activities.
If our products do not continue to be adopted by the desktop PC, notebook PC, workstation, high-performance computing, personal media players, or PMPs, personal digital assistants, or PDAs, cellular handheld devices, and video game console markets or if the demand for new and innovative products in these markets decreases, our business and operating results would suffer.
Our success depends in part upon continued broad adoption of our processors for 3D graphics and multimedia in desktop PC, notebook PC, workstation, high-performance computing, PMPs, PDAs, cellular handheld devices, and video game console applications. The market for processors has been characterized by unpredictable and sometimes rapid shifts in the popularity of products, often caused by the publication of competitive industry benchmark results, changes in pricing of dynamic random-access memory devices and other changes in the total system cost of add-in boards, as well as by severe price competition and by frequent new technology and product introductions. Broad market acceptance is difficult to achieve and such market acceptance, if achieved, is difficult to sustain due to intense competition and frequent new technology and product introductions. Our GPU and MCP businesses together comprised approximately 75% and 79% of our revenue for the second quarter of fiscal years 2009 and 2008, respectively, and 77% of our revenue during the first half of fiscal years 2009 and 2008, respectively. As such, our financial results would suffer if for any reason our current or future GPUs or MCPs do not continue to achieve widespread adoption by the PC market. If we are unable to complete the timely development of new products or if we were unable to successfully and cost-effectively manufacture and deliver products that meet the requirements of the desktop PC, notebook PC, workstation, high-performance computing, PMP, PDA, cellular phone, and video game console markets, we may experience a decrease in revenue which could negatively impact our operating results.
Additionally, there can be no assurance that the industry will continue to demand new products with improved standards, features or performance. If our customers, OEMs, ODMs, add-in-card and motherboard manufacturers, system builders and consumer electronics companies, do not continue to design products that require more advanced or efficient processors and/or the market does not continue to demand new products with increased performance, features, functionality or standards, sales of our products could decline and the markets for our products could shrink. Decreased sales of our products for these markets could negatively impact our revenue and our financial results.
We are dependent on the PC market and its rate of growth in the future may have a negative impact on our business.
We derive and expect to continue to derive the majority of our revenue from the sale or license of products for use in the desktop PC and notebook PC markets, including professional workstations. A reduction in sales of PCs, or a reduction in the growth rate of PC sales, may reduce demand for our products. These changes in demand could be large and sudden. During the second quarter of fiscal year 2009, sales of our desktop GPU products decreased by approximately 25% compared to the second quarter of fiscal year 2008. These decreases were primarily due to the Standalone Desktop GPU market segment decline as reported in the latest PC Graphics 2008 Report from Mercury Research. Since PC manufacturers often build inventories during periods of anticipated growth, they may be left with excess inventories if growth slows or if they incorrectly forecast product transitions. In these cases, PC manufacturers may abruptly suspend substantially all purchases of additional inventory from suppliers like us until their excess inventory has been absorbed, which would have a negative impact on our financial results.
Our business is cyclical in nature and an industry downturn could harm our financial results.
Our business is directly affected by market conditions in the highly cyclical semiconductor industry, including alternating periods of overcapacity and capacity constraints, variations in manufacturing costs and yields, significant expenditures for capital equipment and product development, and rapid technological change. If we are unable to respond to changes in our industry, which can be unpredictable and rapid, in an efficient and timely manner, our operating results could suffer. In particular, from time to time, the semiconductor industry has experienced significant and sometimes prolonged downturns characterized by diminished product demand, increased inventory levels and accelerated erosion of average selling prices. If we cannot take appropriate actions such as reducing our manufacturing or operating expenses to sufficiently offset declines in demand, increased inventories, or decreased selling prices during a downturn, our revenue and operating results will suffer.
Risks Related to Regulatory, Legal and Other Matters
The United States Department of Justice’s pending investigation into the market for graphics processors and the ongoing civil actions could adversely affect our business.
On November 29, 2006, we received a subpoena from the San Francisco Office of the Antitrust Division of the United States Department of Justice, or DOJ, in connection with the DOJ's investigation into potential antitrust violations related to GPUs and cards. No specific allegations have been made against us. We are cooperating with the DOJ in its investigation.
As of May 13, 2008, 55 civil complaints have been filed against us. The majority of the complaints were filed in the Northern District of California, several were filed in the Central District of California, and other cases were filed in several other Federal district courts. On April 18, 2007, the Judicial Panel on Multidistrict Litigation transferred the actions currently pending outside of the Northern District of California to the Northern District of California for coordination of pretrial proceedings before the Honorable William H. Alsup. By agreement of the parties, Judge Alsup will retain jurisdiction over the consolidated cases through trial or other resolution.
In the consolidated proceedings, two groups of plaintiffs (one putatively representing all direct purchasers of GPUs and the other putatively representing all indirect purchasers) filed consolidated, amended class-action complaints. These complaints purport to assert federal antitrust claims based on alleged price fixing, market allocation, and other alleged anti-competitive agreements between us and ATI Technologies, ULC., , or ATI, and Advanced Micro Devices, Inc., or AMD, as a result of its acquisition of ATI. The indirect purchasers’ consolidated amended complaint also asserts a variety of state law antitrust, unfair competition and consumer protection claims on the same allegations, as well as a common law claim for unjust enrichment.
Plaintiffs filed their first consolidated complaints on June 14, 2007. On July 16, 2007, we moved to dismiss those complaints. The motions to dismiss were heard by Judge Alsup on September 20, 2007. The Court subsequently granted and denied the motions in part, and gave the plaintiffs leave to move to amend the complaints. On November 7, 2007, the Court granted plaintiffs’ motion to file amended complaints, ordered defendants to answer the complaints, lifted a previously entered stay on discovery, and set a trial date for January 12, 2009. Discovery is underway and Plaintiffs filed motions for class certification on April 24, 2008. We filed oppositions to the motions on May 20, 2008. On July 18, 2008, the Court ruled on Plaintiffs’ class certification motions. The Court denied class certification for the proposed class of indirect purchasers. The Court granted in part class certification for the direct purchasers but limited the direct purchaser class to individual purchasers that acquired graphics processing cards products directly from NVIDIA or ATI from their websites between December 4, 2002 and November 7, 2007. The Court excluded from the direct purchaser class business entities that purchased graphics products from NVIDIA or ATI for resale. The case will continue on behalf of the class of direct purchasers certified by the Court as well as for the several individual indirect purchasers suing on their own behalf. The Court also instructed the parties to give written notice of the class certification order to all non-certified direct purchasers, who will then have thirty days from the date of the notice to move to intervene in this action. The Court's ruling on class certification is subject to interim appeal at the discretion of the United States Court of Appeals for the Ninth Circuit. While we believe the allegations in the complaints are without merit and intend to vigorously defend the cases, the costs of defense and any damages resulting from a ruling against us or a settlement of the litigation could adversely affect our business.
The matters relating to the Board’s review of our historical stock option granting practices and the restatement of our consolidated financial statements have resulted in litigation, which could harm our financial results.
On August 10, 2006, we announced that the Audit Committee of our Board, with the assistance of outside legal counsel, was conducting a review of our stock option practices covering the time from our initial public offering in 1999, our fiscal year 2000, through June 2006. The Audit Committee reached the conclusion that incorrect measurement dates were used for financial accounting purposes for stock option grants in certain prior periods. As a result, we recorded additional non-cash stock-based compensation expense, and related tax effects, related to stock option grants.
The Audit Committee’s review of our historic stock option practices identified a number of occasions on which the measurement date used for financial accounting and reporting purposes for stock options granted to certain of our employees was different from the actual grant date. To correct these accounting errors, we amended our Annual Report on Form 10-K for the year ended January 29, 2006 and our Quarterly Report on Form 10-Q for the three months ended April 30, 2006 to restate the consolidated financial statements contained in those reports. This review of our historical stock option granting practices and subsequent restatement required us to incur substantial expenses for legal, accounting, tax and other professional services and diverted our management’s attention from our business.
Additionally, the review and the resulting restatement of our prior financial statements have exposed us to greater risks associated with litigation. Ten derivative complaints have been filed in state and federal court pertaining to allegations relating to stock option grants. We cannot assure you that these or future similar complaints, or any future litigation or regulatory action will result in the same conclusions reached by the Audit Committee. On August 5, 2007, our Board authorized the formation of a Special Litigation Committee to investigate, evaluate, and make a determination as to how we should proceed with respect to the claims and allegations asserted in the underlying derivative cases brought on behalf of NVIDIA. Currently, the Special Litigation Committee’s review is ongoing. The conduct and resolution of these matters will be time consuming, expensive and could distract our management’s attention from the conduct of our business. Furthermore, if we are subject to adverse rulings, we could be required to pay damages or penalties or have other remedies imposed upon us which could harm our business, financial condition, results of operations and cash flows.
Our ability to compete will be harmed if we are unable to adequately protect our intellectual property.
We rely primarily on a combination of patents, trademarks, trade secrets, employee and third-party nondisclosure agreements, and licensing arrangements to protect our intellectual property in the United States and internationally. We have numerous patents issued, allowed and pending in the United States and in foreign jurisdictions. Our patents and pending patent applications primarily relate to our products and the technology used in connection with our products. We also rely on international treaties, organizations and foreign laws to protect our intellectual property. The laws of certain foreign countries in which our products are or may be manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as the laws of the United States. This makes the possibility of piracy of our technology and products more likely. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as:
· | the commercial significance of our operations and our competitors’ operations in particular countries and regions; |
· | the location in which our products are manufactured; |
· | our strategic technology or product directions in different countries; and |
· | the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions. |
Our pending patent applications and any future applications may not be approved. In addition, any issued patents may not provide us with competitive advantages or may be challenged by third parties. The enforcement of patents by others may harm our ability to conduct our business. Others may independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property. Our failure to effectively protect our intellectual property could harm our business.
Litigation to defend against alleged infringement of intellectual property rights or to enforce our intellectual property rights and the outcome of such litigation could result in substantial costs to us.
We expect that as the number of issued hardware and software patents increases and as competition intensifies, the volume of intellectual property infringement claims and lawsuits may increase. We may become involved in lawsuits or other legal proceedings alleging patent infringement or other intellectual property rights violations by us or by our customers that we have agreed to indemnify them for certain claims of infringement.
An unfavorable ruling in any intellectual property related litigation could include significant damages, invalidation of a patent or family of patents, indemnification of customers, payment of lost profits, or, when it has been sought, injunctive relief.
In addition, we may need to commence litigation or other legal proceedings in order to:
· | assert claims of infringement of our intellectual property; |
· | enforce our patents; |
· | protect our trade secrets or know-how; or |
· | determine the enforceability, scope and validity of the propriety rights of others. |
If we have to initiate litigation in order to protect our intellectual property, our operating expenses may increase which could negatively impact our operating results. Our failure to effectively protect our intellectual property could harm our business.
If infringement claims are made against us or our products are found to infringe a third parties’ patent or intellectual property, we or one of our indemnified customers may have to seek a license to the third parties’ patent or other intellectual property rights. However, we may not be able to obtain licenses at all or on terms acceptable to us particularly from our competitors. If we or one of our indemnified customers is unable to obtain a license from a third party for technology that we use or that is used in one of our products, we could be subject to substantial liabilities or have to suspend or discontinue the manufacture and sale of one or more of our products. We may also have to make royalty or other payments, or cross license our technology. If these arrangements are not concluded on commercially reasonable terms, our business could be negatively impacted. Furthermore, the indemnification of a customer may increase our operating expenses which could negatively impact our operating results.
We are a party to litigation, including patent litigation, which, if determined adversely to us, could adversely affect our cash flow and financial results.
We are a party to litigation as both a defendant and as a plaintiff. There can be no assurance that any litigation to which we are a party will be resolved in our favor. Any claim that is successfully asserted against us may cause us to pay substantial damages, including punitive damages, and other related fees. Regardless of whether lawsuits are resolved in our favor or if we are the plaintiff or the defendant in the litigation, any lawsuits to which we are a party will likely be expensive and time consuming to defend or resolve. Such lawsuits could also harm our relationships with existing customers and result in the diversion of management’s time and attention away from business operations, which could harm our business. Costs of defense and any damages resulting from litigation, a ruling against us, or a settlement of the litigation could adversely affect our cash flow and financial results.
We are subject to the risks of owning real property.
In the first half of fiscal year 2009, we used approximately $150.0 million of our cash to purchase real property in Santa Clara, California that includes approximately 25 acres of land and ten commercial buildings. We also own real property in China and India. We have limited experience in the ownership and management of real property and are subject to the risks of owning real property, including:
· | the possibility of environmental contamination and the costs associated with fixing any environmental problems; |
· | adverse changes in the value of these properties, due to interest rate changes, changes in the neighborhood in which the property is located, or other factors; |
· | increased cash commitments for the possible construction of a campus; |
· | the possible need for structural improvements in order to comply with zoning, seismic and other legal or regulatory requirements; |
· | increased operating expenses for the buildings or the property or both; |
· | possible disputes with third parties, such as neighboring owners or others, related to the buildings or the property or both; and |
· | the risk of financial loss in excess of amounts covered by insurance, or uninsured risks, such as the loss caused by damage to the buildings as a result of earthquakes, floods and or other natural disasters. |
We may need to raise additional capital to fund the construction of our new campus, which may not be available on favorable terms, or at all.
Currently, we are in the process of planning to construct a new campus in Santa Clara, California. If we move forward with our plans, we will spend a significant amount for materials and related construction costs. If we are unable to control our construction related expenses or costs or such costs are higher than we anticipate, we may not have sufficient balances of cash, cash equivalents and marketable securities to fund our operations. As a result, we may need to raise additional financing. Such additional financing may not be available on favorable terms, or at all. Use of our available funds may also prevent us from making other necessary investments in our business such as in research and development of new products.
Our operating results may be adversely affected if we are subject to unexpected tax liabilities.
We are subject to taxation by a number of taxing authorities both in the United States and throughout the world. Tax rates vary among the jurisdictions in which we operate. Significant judgment is required in determining our provision for our income taxes as there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, any of the below could cause our effective tax rate to be materially different than that which is reflected in historical income tax provisions and accruals:
· | the jurisdictions in which profits are determined to be earned and taxed; |
· | adjustments to estimated taxes upon finalization of various tax returns; |
· | changes in available tax credits; |
· | changes in share-based compensation expense; |
· | changes in tax laws, the interpretation of tax laws either in the United States or abroad or the issuance of new interpretative accounting guidance related to uncertain transactions and calculations where the tax treatment was previously uncertain; and |
· | the resolution of issues arising from tax audits with various tax authorities. |
Should additional taxes be assessed as a result of any of the above, our operating results could be adversely affected. In addition, our future effective tax rate could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in tax laws or changes in the interpretation of tax laws.
Our failure to comply with any applicable environmental regulations could result in a range of consequences, including fines, suspension of production, excess inventory, sales limitations, and criminal and civil liabilities.
We are subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in electronic products and making producers of those products financially responsible for the collection, treatment, recycling and disposal of those products. For example, we are subject to the European Union Directive on Restriction of Hazardous Substances Directive, or RoHS Directive, that restricts the use of a number of substances, including lead, and other hazardous substances in electrical and electronic equipment in the market in the European Union. We could face significant costs and liabilities in connection with the European Union Directive on Waste Electrical and Electronic Equipment, or WEEE. The WEEE directs members of the European Union to enact laws, regulations, and administrative provisions to ensure that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the market after August 15, 2005.
It is possible that unanticipated supply shortages, delays or excess non-compliant inventory may occur as a result of the RoHS Directive, WEEE, and other domestic or international environmental regulations. Failure to comply with any applicable environmental regulations could result in a range of consequences including costs, fines, suspension of production, excess inventory, sales limitations, criminal and civil liabilities and could impact our ability to conduct business in the countries or states that have adopted these types of regulations.
While we believe that we have adequate internal control over financial reporting, if we or our independent registered public accounting firm determines that we do not, our reputation may be adversely affected and our stock price may decline.
Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent registered public accounting firm to audit the effectiveness of our internal control structure and procedures for financial reporting. We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. However, the manner in which companies and their independent public accounting firms apply these requirements and testing companies’ internal controls, remains subject to some judgment. To date, we have incurred, and we expect to continue to incur increased expense and to devote additional management resources to Section 404 compliance. Despite our efforts, if we identify a material weakness in our internal controls, there can be no assurance that we will be able to remediate that material weakness in a timely manner, or that we will be able to maintain all of the controls necessary to determine that our internal control over financial reporting is effective. In the event that our chief executive officer, chief financial officer or our independent registered public accounting firm determine that our internal control over financial reporting is not effective as defined under Section 404, investor perceptions of us may be adversely affected and could cause a decline in the market price of our stock.
Changes in financial accounting standards or interpretations of existing standards could affect our reported results of operations.
We prepare our consolidated financial statements in conformity with generally accepted accounting principles in the United States. These principles are constantly subject to review and interpretation by the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions.
Provisions in our certificate of incorporation, our bylaws and our agreement with Microsoft could delay or prevent a change in control.
Our certificate of incorporation and bylaws contain provisions that could make it more difficult for a third party to acquire a majority of our outstanding voting stock. These provisions include the following:
· | the ability of our Board to create and issue preferred stock without prior stockholder approval; |
· | the prohibition of stockholder action by written consent; |
· | a classified Board; and |
· | advance notice requirements for director nominations and stockholder proposals. |
On March 5, 2000, we entered into an agreement with Microsoft in which we agreed to develop and sell graphics chips and to license certain technology to Microsoft and its licensees for use in the Xbox. Under the agreement, if an individual or corporation makes an offer to purchase shares equal to or greater than 30% of the outstanding shares of our common stock, Microsoft may have first and last rights of refusal to purchase the stock. The Microsoft provision and the other factors listed above could also delay or prevent a change in control of NVIDIA.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
During fiscal year 2005, we announced that our Board had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300 million. During fiscal year 2007, the Board further approved an increase of $400 million to the original stock repurchase program. In fiscal year 2008, we announced a stock repurchase program under which we may purchase up to an additional $1.0 billion of our common stock over a three year period through May 2010. On August 12, 2008, we announced that our Board further authorized an additional increase of $1.0 billion to the stock repurchase program. As a result of these increases, we have an ongoing authorization from the Board, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $2.7 billion through May 2010.
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 the Securities Exchange Act of 1934, or the Exchange Act, Rule 10b-18, 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.
During the three months ended July 29, 2007, we entered into a structured share repurchase transaction to repurchase 3.3 million shares for $124.4 million which we recorded on the trade date of the transaction. Through July 29, 2007,27, 2008, we havehad repurchased 34.768.0 million shares under our stock repurchase program for a total cost of $737.5 million.
Subsequent to July 29, 2007, we entered into a structured share repurchase transaction to repurchase shares of our common stock for $125.0 million that we expect to settle prior to the end of our third quarter of fiscal year 2008 ending on October 28, 2007.
Convertible Preferred Stock
As of July 29, 2007 and July 30, 2006, no shares of preferred stock were outstanding.
Note 15 - 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.
During the first quarter of fiscal 2008, we reorganized our operating segments. We now report financial information for four operating segments to our CODM: the graphics processing unit, or GPU, business, which is comprised primarily of our GeForce products that support desktop and notebook PCs, plus memory products; the professional solutions business, or PSB, which is comprised of our NVIDIA Quadro professional workstation products and other professional graphics products, including our NVIDIA Tesla high-performance computing products; the media and communications processor, or MCP, business, which is comprised of NVIDIA nForce core logic and motherboard GPU products; and our consumer products business, or CPB, which is comprised of our GoForce brand mobile and consumer products that support handheld personal digital assistants, or PDAs, cellular phones and other handheld devices. CPB also includes license, royalty, other revenue and associated costs related to video game consoles and other digital consumer electronics devices.
In addition to these operating segments, we have the “All Other” category that includes human resources, legal, finance, general administration and corporate marketing expenses, which total $62.9 million and $58.4 million for second quarter of fiscal years 2008 and 2007, respectively, and total $130.8 million and $108.5 million for the first half of fiscal years 2008 and 2007, respectively, that we do not allocate to our other operating segments. “All Other” also includes the results of operations of other miscellaneous operating segments that are neither individually reportable, nor aggregated with another operating segment. Revenue in the “All Other” category is primarily derived from sales of components. All relevant prior period amounts have been revised to conform to the presentation of our current fiscal quarter.
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Our CODM does not review any information regarding total assets on an operating segment basis. Operating segments do not record intersegment revenue, and, accordingly, there is none to be reported. The accounting policies for segment reporting are the same as for NVIDIA as a whole.
| | | GPU | | | PSB | | | MCP | | | CPB | | | All Other | | | Consolidated | |
| | | (In thousands) | |
Three Months Ended July 29, 2007: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization expense | | $ | 8,932 | | | $ | 1,960 | | | $ | 6,844 | | | $ | 5,004 | | | $ | 9,710 | | | $ | 32,450 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended July 29, 2007: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization expense | | $ | 17,217 | | | $ | 4,147 | | | $ | 13,437 | | | $ | 11,099 | | | $ | 18,872 | | | $ | 64,772 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended July 30, 2006: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization expense | | $ | 5,588 | | | $ | 1,659 | | | $ | 4,407 | | | $ | 5,787 | | | $ | 8,153 | | | $ | 25,594 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended July 30, 2006: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Depreciation and amortization expense | | $ | 12,458 | | | $ | 3,487 | | | $ | 8,685 | | | $ | 9,573 | | | $ | 16,262 | | | $ | 50,465 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 29, 2007 | | | July 30, 2006 | | | July 29, 2007 | | | July 30, 2006 | |
| | | (In thousands) | |
Revenue: | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Other Americas | | | 36,592 | | | | 36,910 | | | | 91,136 | | | | 64,500 | |
| | | | | | | | | | | | | | | | |
| Taiwan | | | 316,974 | | | | 289,406 | | | | 589,957 | | | | 516,980 | |
| | | | | | | | | | | | | | | | |
| Europe | | | 89,318 | | | | 76,851 | | | | 170,868 | | | | 135,184 | |
| Total revenue | | $ | 935,253 | | | $ | 687,519 | | | $ | 1,779,533 | | | $ | 1,369,326 | |
NVIDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Revenue from significant customers, those representing approximately 10% or more of total revenue for the respective periods, is summarized as follows:
| | | Three Months Ended | | | Six Months Ended | |
| | | July 29, 2007 | | | July 30, 2006 | | | July 29, 2007 | | | July 30, 2006 | |
Revenue: | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Accounts receivable from a significant customer that represented approximately 10% or more of total accounts receivable for the respective periods, is summarized as follows:
| | | July 29, 2007 | | | January 28, 2007 | |
Accounts Receivable: | | | | | | |
| | | | | | | | |
| | | | | | | | |
Note 16 - Subsequent Event
Stock Split
On August 9, 2007, we announced that our Board approved a three-for-two stock split of our outstanding shares of common stock to be effected in the form of a stock dividend. The stock split will be effective on or about Monday, September 10, 2007 for stockholders of record at the close of business on Monday, August 20, 2007 and will entitle each stockholder of record to receive one additional share for every two outstanding shares of common stock held and cash in lieu of fractional shares. Upon the completion of the stock split, we expect to have approximately 550 million shares of common stock outstanding. If the stock split had been given retroactive effect in our Condensed Consolidated Statements of Income, our basic net income per share would have been $0.32 and $0.56 for the three and six months ended July 29, 2007, respectively, and $0.17 and $0.34 for the three and six months ended July 30, 2006, respectively. The diluted net income per share would have been $0.29 and $0.51 for the three and six months ended July 29, 2007, respectively, and $0.15 and $0.31 for the three and six months ended July 30, 2006, respectively.
Forward-Looking Statements
When used in this Quarterly Report on Form 10-Q, the words “believes,” “plans,” “estimates,” “anticipates,” “expects,” “intends,” “allows,” “can,” “will” and similar expressions are intended to identify forward-looking statements. These statements relate to future periods and include, but are not limited to, statements as to: the features, benefits, capabilities, performance, impact, production and availability of our technologies and products; seasonality; our strategies and objectives; gross margin; product mix; inventories; average selling prices; design wins; taxes; growth and factors contributing to growth; stock-based compensation expense; revenue; our expenditures; our capital expenditures; our cash flow and cash balances; our liquidity; uses of cash; dividends; investments and marketable securities; our stock repurchase program; our results of operations; competition; our intellectual property; our strategic relationships; customer demand; reliance on a limited number of customers, manufacturers, subcontractors and suppliers; our internal control over financial reporting; our disclosure controls and procedures; recent accounting pronouncements; our international operations; our ability to attract and retain qualified personnel; past or future acquisitions; our foreign currency risk strategy; compliance with environmental laws and regulations; litigation or regulatory action arising from the review of our stock option grant practices and financial restatements; the Department of Justice subpoena and investigation; litigation, including the class action lawsuits; and the Securities and Exchange Commission inquiry. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, the risks discussed below as well as difficulties associated with conducting international operations; slower than anticipated growth; unanticipated decreases in average selling prices of a particular product; increased sales of lower margin products; difficulty in collecting accounts receivable; our inability to adjust inventory purchase commitments; difficulties in entering new markets; the write-down of the value of inventory; entry of new competitors in our established markets; reduction in demand for our products; market acceptance of our competitors’ products; defects in our products; the impact of competitive pricing pressures; disruptions in our relationships with our key suppliers; fluctuations in general economic conditions; changes in customers’ purchasing behaviors; international and political conditions; the concentration of sales of our products to a limited number of customers; decreases in demand for our products; delays in the development of new products by us or our partners; delays in volume production of our products; developments in and expenses related to litigation; our inability to realize the benefits of acquisitions; the outcome of litigation or regulatory actions; and the matters set forth under Item 1A. - Risk Factors. These forward-looking statements speak only as of the date hereof. Except as required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
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, GeForce, SLI, GoForce, NVIDIA Quadro, Quadro, NVIDIA nForce, NVIDIA Tesla and the NVIDIA logo are our trademarks or registered trademarks in the United States and other countries that are used in this document. We may also refer to trademarks of other corporations and organizations in this document.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Item 1A. Risk Factors”, 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, hold or sell shares of our common stock.
Overview
Our Company
NVIDIA Corporation is the worldwide leader in programmable graphics processor technologies. Our products are designed to enhance the end-user experience on consumer and professional computing devices. We have four major product-line operating segments: the graphics processing unit, or GPU, business, the professional solutions business, or PSB, the media and communications processor, or MCP, business, and the consumer products business, or CPB.
Our GPU business is comprised primarily of our GeForce products that support desktop and notebook PCs, plus memory products. Our PSB is comprised of our NVIDIA Quadro professional workstation products and other professional graphics products, including our NVIDIA Tesla high-performance computing products. Our MCP business is comprised of NVIDIA nForce core logic and motherboard GPU products. Our CPB is comprised of our GoForce brand mobile and consumer products that support handheld personal digital assistants, or PDAs, cellular phones and other handheld devices. CPB also includes license, royalty, other revenue and associated costs related to video game consoles and other digital consumer electronics devices.
We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our headquarter facilities are in Santa Clara, California. Our Internet address is www.nvidia.com. The contents of our website are not part of this Form 10-Q.
Recent Developments, Future Objectives and Challenges
GPU Business
During the first half of our fiscal year 2008, our GeForce product was the share leader in the Standalone Desktop and Standalone Notebook segments as reported in the latest PC Graphics 2007 Report from Mercury Research for the first half of calendar year 2007.
During the first half of fiscal year 2008, we launched several new DirectX10 GPUs, adding the GeForce 8800 Ultra, GeForce 8600, GeForce 8500, and GeForce 8300 to our GeForce 8 series of GPUs, which previously included the NVIDIA GeForce 8800 GTX and GeForce 8800 GTS.
During the second quarter of fiscal year 2008, we maintained our leading share in both the DirectX9 and DirectX10 generation of desktop GPUs.
During the second quarter of fiscal year 2008, we launched a new family of GeForce 8M Series notebook GPUs. We also supported the production ramp of top notebook PC OEMs, including Acer, Apple, ASUS, Dell, HP, Lenovo, Samsung, Sony and Toshiba.
Professional Solutions Business
During the first quarter of fiscal year 2008, we launched the NVIDIA Quadro FX 4600 and NVIDIA Quadro FX 5600 products, which are professional solutions based on our GeForce 80 unified architecture.
During the first quarter of fiscal year 2008, we expanded our NVIDIA Quadro Plex family with the introduction of the NVIDIA Quadro Plex VCS IV, a new version of the NVIDIA Quadro Plex visual computing system, or VCS, which provides enhanced performance for a wide range of high-performance, graphics-intensive styling and design, oil and gas, and scientific applications.
During the second quarter of fiscal year 2008, we announced Tesla, our entry into the high-performance computing industry. The Tesla family consists of the C870 GPU Computing processor, the D870 Deskside Supercomputer and the S870 1U Computing Server.
During the second quarter of fiscal year 2008, we introduced a new line of notebook workstation GPUs based on our GeForce 8 series architecture. The new line consists of the NVIDIA Quadro FX 1600M, 570M and 360M.
MCP Business
During the first half of our fiscal year 2008, our NVIDIA nForce products held the leadership position for the AMD segment as reported in the latest PC Processor and Chipsets report from Mercury Research for the first half of calendar year 2007.
During the first quarter of fiscal year 2008, we shipped the GeForce 7050 motherboard GPU, which targets the lower cost segments of the market.
During the first quarter of fiscal year 2008, we extended the reach of Scalable Link Interface, or SLI, technology into the performance segments with the launch of our NVIDIA nForce 650i SLI, 680i LT SLI and 680i Ultra MCP products for Intel.
Consumer Products Business
During the first quarter of fiscal 2008, we unveiled our first applications processor - the GoForce 6100. The GoForce 6100 is designed for next generation personal media players, or PMPs, and multimedia smart phones. We expect that designs based on the GoForce 6100 will ship later this fiscal year.
Gross Margin Improvement
We continue to remain focused on improving our gross margin. During the second quarter of fiscal 2008, our gross margin was 45.3%, an increase of 280 basis points from our gross margin of 42.5% for the second quarter of fiscal year 2007.
Our gross margin is significantly impacted by the mix of products that we earn revenue from during each of our fiscal quarters. Product mix is often difficult to estimate with accuracy and, thus, 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. We expect to continue to focus on improving our gross margin during the remainder of fiscal 2008.
Seasonality
Our industry is largely focused on the consumer products market. Due to the seasonality in this market, we typically expect to see stronger revenue performance in the second half of the calendar year related to the back-to-school and holiday seasons.
Subsequent Event
Stock Split
On August 9, 2007, we announced that our Board of Directors, or the Board, approved a three-for-two stock split of our outstanding shares of common stock to be effected in the form of a stock dividend. The stock split will be effective on or about Monday, September 10, 2007 for stockholders of record at the close of business on Monday, August 20, 2007 and will entitle each stockholder of record to receive one additional share for every two outstanding shares of common stock held and cash in lieu of fractional shares. Upon the completion of the stock split, we expect to have approximately 550 million shares of common stock outstanding. If the stock split had been given retroactive effect in our Condensed Consolidated Statements of Income, our basic net income per share would have been $0.32 and $0.56 for the three and six months ended July 29, 2007, respectively, and $0.17 and $0.34 for the three and six months ended July 30, 2006, respectively. The diluted net income per share would have been $0.29 and $0.51 for the three and six months ended July 29, 2007, respectively, and $0.15 and $0.31 for the three and six months ended July 30, 2006, respectively.
Financial Information by Business Segment and Geographic Data
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.
During the first quarter of fiscal 2008, we reorganized our operating segments. We now report financial information for four operating segments to our CODM: the graphics processing unit, or GPU, business, which is comprised primarily of our GeForce products that support desktop and notebook PCs, plus memory products, the professional solutions business, or PSB, which is comprised of our NVIDIA Quadro professional workstation products and other professional graphics products, including our NVIDIA Tesla high-performance computing products, the media and communications processor, or MCP, business, which is comprised of NVIDIA nForce core logic and motherboard GPU products, and our consumer products business, or CPB, which is comprised of mobile and consumer products that support handheld personal digital assistants, or PDAs, cellular phones and other handheld devices and license, royalty, other revenue and associated costs related to video game consoles and other digital consumer electronics devices.
In addition to these operating segments, we have the “All Other” category that includes human resources, legal, finance, general administration and corporate marketing expenses, which total $62.9 million and $58.4 million for second quarter of fiscal years 2008 and 2007, respectively, and total $130.8 million and $108.5 million for the first half of fiscal years 2008 and 2007, respectively, that we do not allocate to our other operating segments. “All Other” also includes the results of operations of other miscellaneous operating segments that are neither individually reportable, nor aggregated with another operating segment. Revenue in the “All Other” category is primarily derived from sales of components. All relevant prior period amounts have been revised to conform to the presentation of our current fiscal quarter.
Our CODM does not review any information regarding total assets on an operating segment basis. Operating segments do not record intersegment revenue, and, accordingly, there is none to be reported. The accounting policies for segment reporting are the same as for NVIDIA as a whole.
Results of Operations
The following table sets forth, for the periods indicated, certain items in our Condensed Consolidated Statements of Income expressed as a percentage of revenue.
| | | Three Months Ended | | | Six Months Ended | |
| | | July 29, 2007 | | | July 30, 2006 | | | July 29, 2007 | | | July 30, 2006 | |
| | | | | | | | | | | | | | | | |
| Cost of revenue | | | 54.7 | | | | 57.5 | | | | 54.8 | | | | 57.6 | |
| Gross profit | | | 45.3 | | | | 42.5 | | | | 45.2 | | | | 42.4 | |
| | | | | | | | | | | | | | | | |
| Research and development | | | 16.9 | | | | 18.6 | | | | 17.8 | | | | 18.3 | |
Sales, general and administrative | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Interest and other income, net | | | 1.7 | | | | 1.3 | | | | 1.6 | | | | 1.3 | |
| Income before income tax expense | | | 21.4 | | | | 15.2 | | | | 19.9 | | | | 15.7 | |
| | | | | | | | | | | | | | | | |
Cumulative effect of change in accounting principle | | | | | | | | | | | | | | | | |
| Net income | | | 18.4 | % | | | 12.6 | % | | | 17.1 | % | | | 13.1 | % |
Three and Six months Ended July 29, 2007 and July 30, 2006
Revenue
Revenue was $935.3 million for our second quarter of fiscal year 2008, compared to $687.5 million for our second quarter of fiscal year 2007, which represents an increase of 36.0%. Revenue was $1.78 billion for the first half of fiscal 2008 and $1.37 billion for the first half of fiscal 2007, which represented an increase of 30.0%. A discussion of our revenue results for each of our operating segments is as follows:
GPU Business. GPU Business revenue increased by 55.2% to $579.0 million in the second quarter of fiscal year 2008, compared to $373.1 million for the second quarter of fiscal year 2007. This increase was primarily due to increased sales of our desktop GPU products and notebook GPU products. Sales of our desktop GPU products increased by approximately 37% compared to the second quarter of fiscal year 2007. This increase was for the most part due to share gains we experienced in the Standalone Desktop segment as reported in the latest PC Graphics 2007 Report from Mercury Research which was driven by the leadership position of our top to bottom GeForce 8-based family. Sales of our NVIDIA notebook GPU products increased by approximately 129% compared to the second quarter of fiscal year 2007. Notebook GPU revenue growth was mostly due to share gains in the Standalone Notebook segment as reported in the latest PC Graphics 2007 Report from Mercury Research. Our share gains in the Standalone Notebook segment were primarily as a result of shipments of products used in notebook PC design wins related to Intel’s new Santa Rosa platform.
GPU Business revenue increased by 36.6% to $1.06 billion for the first half of fiscal 2008, compared to $777.9 million for the first half of fiscal 2007. This increase was primarily the result of increased sales across all GPU categories. Sales of our desktop GPU products increased approximately 25% and notebook GPU products increased by approximately 101% as compared to the first half of fiscal year 2007. This increase for the most part was due to share gains in the Standalone Desktop and the Standalone Notebook segments as reported in the latest PC Graphics 2007 Report from Mercury Research. Our share gains in the Standalone Desktop segment were primarily driven by the leadership position of our GeForce 8-based products and our share gains in the Standalone Notebook segment were primarily the result of shipments of products used in notebook PC design wins related to Intel’s new Santa Rosa platform.
PSB. PSB revenue increased by 8.7% to $127.3 million in the second quarter of fiscal year 2008, compared to $117.1 million for the second quarter of fiscal year 2007. PSB revenue increased by 23.5% to $268.2 million for the first half of fiscal 2008 as compared to $217.2 million for the first half of fiscal 2007. Our NVIDIA professional workstation product sales increased due to an overall increase in shipments of boards and chips as compared to the second quarter and first half of fiscal year 2007. This increase was primarily driven by our transition from previous generation of NVIDIA Quadro professional workstation products to GeForce 7-based and GeForce 8-based products.
MCP Business. MCP Business revenue increased by 15.8% to $161.1 million in the second quarter of fiscal year 2008, compared to $139.1 million for the second quarter of fiscal year 2007. The increase was a result of an approximately 17% increase in sales of our AMD-based platform products and over an 100% increase in sales of our Intel-based platform products as compared to the second quarter of fiscal year 2007. The increase in our AMD-based platform products was led by sales of notebook graphics products and by our ramping up shipments of our Intel-based platform products after the third quarter of fiscal year 2007. These increases were offset by a decline in sales of products related to our acquisition of ULi Electronics, Inc.
MCP business revenue increased by 20.3% to $309.8 million for the first half of fiscal 2008 as compared to $257.5 million for the first half of fiscal 2007. The increase was a result of an approximately 15% increase in sales of our AMD-based platform products and over a 200% increase in sales of our Intel-based platform products as compared to the first half of fiscal year 2007. The increase in our AMD-based platform products was led by sales of notebook graphics products and by our ramping up shipments of our Intel-based platform products after the third quarter of fiscal year 2007. These increases were offset by a decline in sales of products related to our acquisition of ULi Electronics, Inc.
CPB. CPB revenue increased by 11.7% to $62.2 million for the second quarter of fiscal year 2008, compared to $55.7 million for the second quarter of fiscal year 2007. CPB revenue increased by 14.4% to $129.4 million for the first half of fiscal 2008 as compared to $113.1 million for the first half of fiscal 2007. The overall increase in CPB revenue is primarily due to increased revenue from our digital consumer electronics devices and sales related to our acquisition of PortalPlayer Inc., or PortalPlayer, in January 2007. These increases were offset by a decrease in revenue from our cell phone products and contractual development arrangements with Sony Computer Entertainment, or SCE.
Concentration of Revenue
Revenue from sales to customers outside of the United States and other Americas accounted for 88.3% and 83.1% of total revenue for the second quarter of fiscal years 2008 and 2007, respectively, and 85.1% and 83.9% for the first half of fiscal years 2008 and 2007, respectively. Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if the foreign contract equipment manufacturers, or CEMs’, add-in board and motherboard manufacturers’ revenue is attributable to end customers in a different location.
In the second quarter of fiscal years 2008 and 2007, sales to one significant customer, in excess of 10% of our total revenue, accounted for approximately 12% and 15%, respectively, of our total revenue. Sales to our largest customer accounted for approximately 11% and approximately 12% of our total revenue for the first half of fiscal years 2008 and 2007, 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 provisions and shipping costs. Cost of revenue also includes development costs for license and service arrangements.
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 was 45.3% and 42.5% for the second quarter of fiscal year 2008 and 2007, respectively. The improvement in our gross margin reflects our continuing focus on delivering cost effective product architectures, enhancing business processes and delivering profitable growth. Our gross margin is significantly impacted by the mix of products we sell. Product mix is often difficult to estimate with accuracy and, thus, 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. We expect gross margin to remain relatively flat, or improve slightly, during the third quarter of fiscal year 2008. 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 during the second quarter of fiscal year 2008 as compared to the second quarter of fiscal year 2007, as well as during the first half of fiscal year 2008 as compared to the first half of fiscal year 2007. This increase was primarily due to increased sales of our GeForce 8 series GPUs, which began selling in the third quarter of fiscal year 2007. Our GeForce 8 series and our GeForce 7 series GPUs generally have higher gross margins than our previous generations of GPUs. Additionally, the costs of memory purchases were more favorable during the second quarter of fiscal year 2008.
PSB. The gross margin of our PSB increased during the second quarter of fiscal year 2008 as compared to the second quarter fiscal year 2007, as well as during the first half of fiscal year 2008 as compared to the first half of fiscal year 2007. This increase was primarily due to increased sales of our GeForce 8-based NVIDIA Quadro products, which began selling in the fourth quarter of fiscal year 2007, and GeForce 7-based NVIDIA Quadro products, which generally have higher gross margins than our previous generations of NVIDIA Quadro products.
MCP Business. The gross margin of our MCP Business increased during the second quarter of fiscal year 2008 as compared to the second quarter fiscal year 2007, as well as during the first half of fiscal year 2008 as compared to the first half of fiscal year 2007. This increase was primarily due to a shift in product mix towards Intel-based platform products, of which we began to ramp up shipment after the third quarter of fiscal year 2007, and inventory reserves that we recorded as a charge to cost of revenue during the first quarter of fiscal 2007 of approximately $4.1 million related to certain NVIDIA nForce purchase commitments that we believed had exceeded future demand.
CPB. The gross margin of our CPB decreased during the second quarter of fiscal year 2008 as compared to the second quarter fiscal year 2007, as well as during the first half of fiscal year 2008 as compared to the first half of fiscal year 2007. This decrease was primarily due to a drop in gross profit realized from sales of our high-end feature cellular phone and other handheld devices.
Operating Expenses
Research and Development
| | | Three Months Ended | | | | | | | | | | Six Months Ended | | | | | | | | |
| | | July 29, 2007 | | | July 30, 2006 | | | $ Change | | | % Change | | | July 29, 2007 | | | July 30, 2006 | | | $ Change | | | % Change | |
| | | (in millions) | | | | | | | | | | (in millions) | | | | | | | | |
Research and Development: | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Depreciation and amortization | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Computer software and lab equipment | | | 15.6 | | | | 13.4 | | | | 2.2 | | | | 16 | % | | | 30.5 | | | | 26.3 | | | | 4.2 | | | | 16 | % |
| Facility expense | | | 12.7 | | | | 8.8 | | | | 3.9 | | | | 44 | % | | | 24.4 | | | | 16.9 | | | | 7.5 | | | | 44 | % |
| New product development | | | 2.6 | | | | 7.3 | | | | (4.7 | ) | | | (64 | )% | | | 6.8 | | | | 14.8 | | | | (8.0 | ) | | | (54 | )% |
License and development project costs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other | | | 5.2 | | | | 4.0 | | | | 1.2 | | | | 30 | % | | | 8.5 | | | | 7.1 | | | | 1.4 | | | | 20 | % |
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Research and development as a percentage of net revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Research and development expenses were $158.0 million and $127.3 million in the second quarter of fiscal years 2008 and 2007, respectively, an increase of $30.7 million, or 24%. The increase was primarily due to a $22.8 million increase in salaries and benefits, which was related to hiring of approximately 710 additional personnel in research and development. Despite an increase in headcount, stock-based compensation expense remained comparable between the second quarters of fiscal years 2008 and 2007, primarily because the increase in compensation expense related to stock options granted since the second quarter of fiscal year 2007 was offset by a combination of the reduction in compensation expense related to older awards that were almost completely vested and amortized by the end of the first quarter of fiscal 2008 and the transition from the Black-Scholes model to the binomial valuation model. Facilities increased $3.9 million due to increased facilities expense allocation, and computer software and equipment increased $2.2 million primarily due to increased allocation of information technology expenses, both of which were based on the growth in headcount in departments related to research and development functions when compared to the growth in headcount related to sales, general and administrative functions. License and development project costs increased by $3.4 million primarily related to decreased development costs related to our collaboration with SCE and other engineering costs related to a different development contract. Certain of our personnel who usually devote their time to research and development efforts have spent time working on these development projects. The cost associated with the time these individuals spend working on development projects is allocated from research and development to cost of revenue or is capitalized on our balance sheet. During the second quarter of fiscal year 2008, less time was spent working on development projects, so less cost was allocated to cost of revenue or capitalized and, therefore, more cost remained in research and development. Depreciation and amortization expense increased $2.1 million due to emulation hardware and software programs that were purchased during fiscal year 2007, resulting in a full period of depreciation in the second quarter of fiscal year 2008 compared to a partial period of depreciation in fiscal year 2007. These increases were offset by a decrease of $4.7 million in new product development costs as a result of decreases in costs related to product tape-outs during the second quarter of fiscal year 2008.
Research and development expenses were $316.3 million and $250.5 million in the first half of fiscal years 2008 and 2007, respectively, an increase of $65.8 million, or 26%. The increase was primarily due to a $42.5 million increase in salaries and benefits which was related to hiring of approximately 710 additional personnel. Stock-based compensation expense increased by $7.8 million primarily due to an increase in headcount, offset by a combination of the reduction in compensation expense related to older awards that were almost completely vested and amortized by the end of the first quarter of fiscal 2008 and the transition from the Black-Scholes model to the binomial valuation model. Facilities increased $7.5 million due to increased facilities expense allocation, and computer software and equipment increased $4.2 million primarily due to increased allocation of information technology expenses, both of which were based on the growth in headcount in departments related to research and development functions when compared to the growth in headcount related to sales, general and administrative functions. License and development project costs increased by $6.8 million primarily related to decreased development costs related to our collaboration with SCE and other engineering costs related to a different development contract. Certain of our personnel who usually devote their time to research and development efforts have spent time working on these development projects. The cost associated with the time these individuals spend working on development projects is allocated from research and development to cost of revenue or is capitalized on our balance sheet. During the first half of fiscal year 2008, less time was spent working on development projects, so less cost was allocated to cost of revenue or capitalized and, therefore, more cost remained in research and development. Depreciation and amortization expense increased $3.6 million due to emulation hardware and software programs that were purchased during fiscal year 2007, resulting in a full period of depreciation in the first half of fiscal year 2008 compared to a partial period of depreciation in the first half of fiscal year 2007. These increases were offset by a decrease of $8.0 million in new product development costs as a result of decreases in costs of product tape-outs and in prototype materials during the first half of fiscal year 2008.
We anticipate that we will continue to devote substantial resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products under development. However, research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and these investments may be independent of our level of revenue.
Sales, General and Administrative
| | | Three Months Ended | | | | | | | | | Six Months Ended | | | | | | | |
| | | July 29, 2007 | | | July 30, 2006 | | | $ Change | | | % Change | | | July 29, 2007 | | | July 30, 2006 | | | $ Change | | | % Change | |
| | | (in millions) | | | | | | (in millions) | | | | |
Sales, General and Administrative: | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 39.2 | | | $ | 32.4 | | | $ | 6.8 | | | | 21 | % | | $ | 81.1 | | | $ | 65.2 | | | $ | 15.9 | | | | 24 | % |
Advertising and promotions | | | | | | | | | | | (0.8 | ) | | | (5 | )% | | | | | | | | | | | (1.6 | ) | | | (5 | )% |
| Legal and accounting fees | | | 10.4 | | | | 3.8 | | | | 6.6 | | | | 174 | % | | | 16.4 | | | | 6.6 | | | | 9.8 | | | | 148 | % |
| Stock-based compensation | | | 10.3 | | | | 10.5 | | | | (0.2 | ) | | | (2 | )% | | | 22.5 | | | | 17.1 | | | | 5.4 | | | | 32 | % |
Depreciation and amortization | | | | | | | | | | | | | | | 16 | % | | | | | | | | | | | | | | | 22 | % |
| Facility expense | | | 2.7 | | | | 4.3 | | | | (1.6 | ) | | | (37 | )% | | | 5.5 | | | | 8.3 | | | | (2.8 | ) | | | (34 | )% |
| | | | | | | | | | | | | | | 167 | % | | | | | | | | | | | | | | | 75 | % |
| Total | | $ | 81.3 | | | $ | 69.1 | | | $ | 12.2 | | | | 18 | % | | $ | 161.9 | | | $ | 133.0 | | | $ | 28.9 | | | | 22 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales, general and administrative as a percentage of net revenue | | | 9 | % | | | 10 | % | | | | | | | | | | | 9 | % | | | 10 | % | | | | | | | | |
Sales, general and administrative expenses were $81.3 million and $69.1 million in the second quarter of fiscal years 2008 and 2007, respectively, an increase of $12.2 million, or 18%, primarily due to a $6.8 million increase in salaries and benefits related to our hiring of approximately 140 additional personnel. Despite an increase in headcount, stock-based compensation expense remained comparable between the second quarters of fiscal years 2008 and 2007, primarily because the increase in compensation expense related to stock options granted since the second quarter of fiscal year 2007 was offset by a combination of the reduction in compensation expense related to older awards that were almost completely vested and amortized by the end of the first quarter of fiscal 2008 and the transition from the Black-Scholes model to the binomial valuation model. Legal and accounting fees increased by $6.6 million primarily due to legal fees related to the 3dfx and Department of Justice, or DOJ, matters described in Note 13 of the Notes to Condensed Consolidated Financial Statements. In addition, we received an insurance reimbursement which reduced our legal costs in the second quarter of fiscal year 2007. These increases were offset by a decrease of $1.6 million in facilities due to decreased facilities expense allocation to sales, general and administrative functions, which was driven by greater incremental headcount growth in departments that are included within the research and development functions.
Sales, general and administrative expenses were $161.9 million and $133.0 million for the first half of fiscal years 2008 and 2007, respectively, an increase of $28.9 million, or 22%. The increase was primarily due to a $15.9 million increase in salaries and benefits which related to our having added approximately 140 additional personnel. Stock-based compensation expense increased by $5.4 million primarily due to an increase in headcount, offset by a combination of the reduction in compensation expense related to older awards that were almost completely vested and amortized by the end of the first quarter of fiscal 2008 and the transition from the Black-Scholes model to the binomial valuation model. Legal and accounting fees increased by $9.8 million primarily due to legal fees related to the 3dfx and DOJ matters described in Note 13 of the Notes to Condensed Consolidated Financial Statements. These increases in sales, general and administrative expenses were offset by a decrease of $2.8 million in facilities due to decreased facilities expense allocation to sales, general and administrative functions, which was driven by greater incremental headcount growth in departments that are included within the research and development functions.
Operating Expenses
We expect operating expenses to increase by 5% to 7% from the second quarter to the third quarter of fiscal year 2008 as a result of continued hiring and salary increases.
Interest Income and Interest Expense
Interest income consists of interest earned on cash, cash equivalents and marketable securities. Interest income was $15.6 million and $8.8 million in the second quarter of fiscal years 2008 and 2007, respectively, an increase of $6.8 million. Interest income was $28.8 million and $17.6 million for the first half of fiscal 2008 and fiscal 2007, respectively, an increase of $11.2 million. These increases were primarily the result of higher average balances of cash, cash equivalents, and marketable securities during the first half of fiscal year 2008 when compared to the first half of fiscal year 2007.
Income Taxes
We recognized income tax expense of $28.1 million and $17.8 million for the second quarter of fiscal years 2008 and 2007, respectively, and $49.6 million and $36.5 million for the first half of fiscal years 2008 and 2007, respectively. Income tax expense as a percentage of income before taxes, or our annual effective tax rate, was 14% and 17% for the second quarter and first half of fiscal years 2008 and 2007, respectively. Our effective tax rate is lower than the United States Federal Statutory rate of 35% due primarily to income earned in lower tax jurisdictions.
Please refer to Note 3 of the Notes to Condensed Consolidated Financial Statements for additional information regarding income taxes.
Liquidity and Capital Resources
| | | As of July 29, 2007 | | | As of January 28, 2007 | |
| | | (In millions) | |
Cash and cash equivalents | | $ | 914.7 | | | $ | 544.4 | |
| | | | | | | | |
Cash, cash equivalents, and marketable securities | | $ | 1,571.5 | | | $ | 1,117.8 | |
| | | Six Months Ended | |
| | | July 29, 2007 | | | July 30, 2006 | |
| | | (In millions) | |
Net cash provided by operating activities | | $ | 637.6 | | | $ | 67.4 | |
Net cash used in investing activities | | $ | (149.0 | ) | | $ | (172.5 | ) |
Net cash provided by (used in) financing activities | | $ | (118.3 | ) | | $ | (58.2 | ) |
As of July 29, 2007, we had $1.57 billion in cash, cash equivalents and marketable securities, an increase of $453.7 million from the end of fiscal year 2007. Our portfolio of cash equivalents and marketable securities is managed by several financial institutions. Our investment policy requires the purchase of top-tier investment grade securities, the diversification of asset type and certain limits on our portfolio duration.
Operating activities generated cash of $637.6 million during the first half of fiscal year 2008. The cash provided by operating activities has increased due to an increase in our net income during the comparable periods. Additionally, operating activities have generated cash in amounts greater than net income primarily due to non-cash charges such as stock-based compensation expense, depreciation and amortization. The improvement we experienced in days sales in inventory, correlates to the incremental inflow from inventory sell through in excess of purchases. In addition, improved days sales outstanding was due to increased linearity of sales during the period which contributed to inflows of collections from accounts receivable.
Investing activities have consisted primarily of purchases and sales of marketable securities, purchases of property and equipment and purchases of intangible assets. Investing activities used cash of $149.0 million during the first half of fiscal year 2008, primarily due to $67.7 million for capital expenditures, including purchases of new research and development equipment, hardware equipment, technology licenses, software and intangible assets and $81.2 million of net purchases of marketable securities. We expect to spend approximately $50.0 million to $70.0 million for capital expenditures unrelated to acquisitions during the remainder of fiscal year 2008. In addition, we may continue to use cash in connection with the acquisition of businesses or assets.
Financing activities used cash of $249.4 million towards our stock repurchase program for the first half of fiscal 2008 and provided cash of $131.1 million from common stock issued under employee stock plans during the first half of fiscal year 2008.
Stock Repurchase Program
During fiscal year 2005, we announced that our Board had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300 million. During fiscal year 2007, the Board further approved an increase of $400 million to the original stock repurchase program. In fiscal 2008, on May 21, 2007, we announced a stock repurchase program under which we may purchase up to an additional $1.0 billion of our common stock over a three year period through May 2010. As a result of these increases, we have an ongoing authorization from the Board, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $1.7$1.16 billion.
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 the Securities Exchange Act of 1934, or the Exchange Act, Rule 10b-18, 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.
During the second quarter of fiscal 2007, we entered into a structured share repurchase transaction to repurchase 3.3 million shares for $124.4 million which we recorded on the trade date of the transaction. Through July 29, 2007, we have repurchased 34.7 million shares under our stock repurchase program for a total cost of $737.5 million.
Subsequent to July 29, 2007, we entered into a structured share repurchase transaction to repurchase shares of our common stock for $125.0 million that we expect to settle prior to the end of our third quarter of fiscal year 2008 ending on October 28, 2007.
Operating Capital and Capital Expenditure Requirements
We believe that our existing cash balances and anticipated cash flows from operations will be sufficient to meet our operating, acquisition and capital requirements for at least the next 12 months. However, there is no assurance that we will not need to raise additional equity or debt financing within this time frame. Additional financing may not be available on favorable terms or at all and may be dilutive to our then-current stockholders. We also may require additional capital for other purposes not presently contemplated. If we are unable to obtain sufficient capital, we could be required to curtail capital equipment purchases or research and development expenditures, which could harm our business. Factors that could affect our cash used or generated from operations and, as a result, our need to seek additional borrowings or capital include:
· | decreased demand and market acceptance for our products and/or our customers' products;
|
· | inability to successfully develop and produce in volume production our next-generation products; |
· | competitive pressures resulting in lower than expected average selling prices; and |
· | new product announcements or product introductions by our competitors. |
For additional factors see “Item 1A. Risk Factors - Risks Related to Our Operations - Our operating results are unpredictable and may fluctuate, and if our operating results are below the expectations of securities analysts or investors, the trading price of our stock could decline.”
3dfx Asset Purchase
On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into the Asset Purchase Agreement, or the APA, which closed on April 18, 2001, to purchase certain graphics chip assets from 3dfx. Under the terms of the APA, the cash consideration due at the closing was $70.0 million, less $15.0 million that was loaned to 3dfx pursuant to a Credit Agreement dated December 15, 2000. The Asset Purchase Agreement also provided, subject to the other provisions thereof, that if 3dfx properly certified that all its debts and other liabilities had been provided for, then we would have been obligated to pay 3dfx one million shares, which due to subsequent stock splits now totals four million shares, of NVIDIA common stock. If 3dfx could not make such a certification, but instead properly certified that its debts and liabilities could be satisfied for less than $25.0 million, then 3dfx could have elected to receive a cash payment equal to the amount of such debts and liabilities and a reduced number of shares of our common stock, with such reduction calculated by dividing the cash payment by $25.00 per share. If 3dfx could not certify that all of its debts and liabilities had been provided for, or could not be satisfied, for less than $25.0 million, we would not be obligated under the agreement to pay any additional consideration for the assets.
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, we were served with a complaint filed by the Trustee appointed by the Bankruptcy Court to represent the interests of the 3dfx bankruptcy estate. The Trustee’s complaint asserts claims for, among other things, successor liability and fraudulent transfer and seeks additional payments from us. On October 13, 2005, the Bankruptcy Court held a hearing on the Trustee’s motion for summary adjudication. On December 23, 2005, the Bankruptcy Court issued its ruling denying the Trustee’s Motion for Summary Adjudication in all material respects and holding that NVIDIA is prevented from disputing that the value of the 3dfx transaction to NVIDIA was less than $108.0 million. The Bankruptcy Court expressly denied the Trustee’s request to find that the value of the 3dfx assets conveyed to NVIDIA were at least $108.0 million. In early November 2005, after many months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, reached a conditional settlement of the Trustee’s claims against NVIDIA. This conditional settlement, presented as the centerpiece of a proposed Plan of Liquidation in the bankruptcy case, was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court after notice and hearing. The Trustee advised that he intended to object to the settlement, which would have called for a payment by NVIDIA of approximately $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.
However, the conditional settlement never progressed substantially through the confirmation process. On December 21, 2005, the Bankruptcy Court determined that it would schedule trial of one portion of the Trustee’s case against NVIDIA. On January 2, 2007, NVIDIA exercised its right to terminate the settlement agreement on grounds that the Bankruptcy Court had failed to proceed toward confirmation of the Creditors’ Committee’s plan. Trial began on March 21, 2007 on valuation issues in the Trustee's constructive fraudulent transfer claims against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx transfer to NVIDIA in the APA?; (2) of what was transferred, what qualifies as "property" subject to the Bankruptcy Court's avoidance powers under the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions?; (3) what is the fair market value of the "property" identified in answer to question (2)?; and (4) was the $70 million that NVIDIA paid "reasonably equivalent" to the fair market value of that property?. At the conclusion of the evidence, the Bankruptcy Court asked the parties to submit a post-trial briefing. That briefing was concluded on May 25, 2007, and the Bankruptcy Court’s decision is still pending.
Please refer to Note 13 of the Notes to Condensed Consolidated Financial Statements for further information regarding this litigation.
Contractual Obligations
At July 29, 2007, we had outstanding inventory purchase obligations totaling approximately $483.4 million. There were no other material changes in our contractual obligations from those disclosed in our Form 10-K for the year ended January 28, 2007. Please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in our Form 10-K for a description of our contractual obligations.
Off-Balance Sheet Arrangements
As of July 29, 2007, we had no material off-balance sheet arrangements as defined in Regulation S-K 303(a) (4) (ii).
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 157, or SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS No. 157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. We are required to adopt the provisions of SFAS No. 157 beginning with our fiscal quarter ending April 27, 2008. We are currently evaluating the impact that SFAS No. 157 will have on our consolidated financial position, results of operations and cash flows.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, or SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. We are required to adopt the provisions of SFAS No. 159 beginning with our fiscal quarter ending April 27, 2008, although earlier adoption is permitted. We are currently evaluating the impact that SFAS No. 159 will have on our consolidated financial position, results of operations and cash flows.
Adoption of FASB Interpretation No. 48
On January 29, 2007, we adopted FASB Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes, issued in July 2006. FIN 48 applies to all tax positions related to income taxes subject to FASB Statement of Financial Accounting Standards No. 109, or SFAS No. 109, Accounting for Income Taxes. Under FIN 48 we recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. The cumulative effect of adoption of FIN 48 did not result in a material adjustment to our tax liability for unrecognized income tax benefits. Our policy to include interest and penalties related to unrecognized tax benefits as a component of income tax expense did not change as a result of implementing the FIN 48. Please refer to Note 3 of the Notes to Condensed Consolidated Financial Statements for additional information.
Interest Rate Risk
We invest in a variety of financial instruments, consisting principally of investments in commercial paper, money market funds and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in United States dollars. As of July 29, 2007, we had $1.57 billion in cash, cash equivalents and marketable securities.
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. All of the cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our debt securities as “available-for-sale”, no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other than temporary. 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.
As of July 29, 2007, we performed a sensitivity analysis on our floating and fixed rate financial investments. According to our analysis, parallel shifts in the yield curve of both +/- 0.5% would result in changes in fair market values for these investments of approximately $3.0 million.
Exchange Rate Risk
We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, sales and arrangements with third-party manufacturers provide for pricing and payment in United States dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the United States’ dollar relative to other currencies would make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the United States’ dollar relative to other currencies could result in our suppliers raising their prices in order to continue doing business with us. To date, we have not engaged in any currency hedging activities, although we may do so in the future. Fluctuations in currency exchange rates could harm our business in the future.
Controls and Procedures
Disclosure Controls and Procedures
Based on their evaluation as of July 29, 2007, our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, were effective to ensure that the material information required to be disclosed by us in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and instructions for Form 10-Q.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting during our quarter ended July 29, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within NVIDIA have been detected.
Please see Part I, Item 1, Note 13 of the Notes to Condensed Consolidated Financial Statements for a discussion of our legal proceedings.
A description of the risk factors associated with our business is set forth below. This description includes any material changes to and supersedes the description of risk factors associated with our business previously disclosed in Part I, Item 1A. “Risk Factors” of our Form 10-K for the fiscal year ended January 28, 2007.
Risks Related to Our Operations
The matters relating to the Audit Committee of the Board of Directors, or the Board, review of our historical stock option granting practices and the restatement of our consolidated financial statements have resulted in litigation, which could harm our financial results.
On August 10, 2006, NVIDIA announced that the Audit Committee of the Board, with the assistance of outside legal counsel, was conducting a review of our stock option practices covering the time from NVIDIA’s initial public offering in 1999, our fiscal year 2000, through June 2006. The Audit Committee reached the conclusion that incorrect measurement dates were used for financial accounting purposes for stock option grants in certain prior periods. As a result, NVIDIA recorded additional non-cash stock-based compensation expense, and related tax effects, related to stock option grants.
The Audit Committee’s review of NVIDIA’s historic stock option practices identified a number of occasions on which the measurement date used for financial accounting and reporting purposes for stock options granted to certain of our employees was different from the actual grant date. To correct these accounting errors, we amended our Annual Report on Form 10-K for the year ended January 29, 2006 and our Quarterly Report on Form 10-Q for the three months ended April 30, 2006 to restate the consolidated financial statements contained in those reports.July 27, 2008, we did not enter into any structured share repurchase transactions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
This review of our historical stock option granting practices required us to incur substantial expenses for legal, accounting, tax and other professional services, diverted our management’s attention from our business, and in the future could adversely affect our business, financial condition, results of operations and cash flows. None
Our historical stock option granting practices and the restatement of our prior financial statements have exposed us to greater risks associated with litigation and regulatory proceedings. Ten derivative complaints have been filed in state and federal court pertaining to allegations relating to stock option grants. We cannot assure you that these or future similar complaints, or any future litigation or regulatory action will result in the same conclusions reached by the Audit Committee. On August 5, 2007, our Board authorized the formation of a Special Litigation Committee, comprised of three current Board members, to investigate, evaluate, and make a determination as to how NVIDIA should proceed with respect to the claims and allegations asserted in the underlying derivative cases brought on behalf of NVIDIA. The conduct and resolution of these matters will be time consuming, expensive and could distract our management’s attention from the conduct of our business which could negatively impact our business.
We voluntarily contacted the Securities Exchange Commission, or SEC, regarding the Audit Committee’s review and, as of the present date, the SEC is continuing the inquiry of our historical stock option grant practices it began in late August 2006. In October 2006, we met with the SEC and provided it with a review of the status of the Audit Committee’s review and in November 2006 we voluntarily provided the SEC with further documents. We plan to continue to cooperate with the SEC in its inquiry.
While we believe that we have made appropriate judgments in concluding the correct measurement dates for option grants, the SEC may disagree with the manner in which we have accounted for and reported, or not reported, the financial impact of past option grant measurement date errors, and there is a risk that its inquiry could lead to circumstances in which we may have to further restate our prior financial statements, amend prior filings made with the SEC, or otherwise take other actions not currently contemplated. Any such circumstance could also lead to future delays in filing our SEC reports. Furthermore, if we are subject to adverse findings in any of these matters, we could be required to pay damages or penalties or have other remedies imposed upon us which could harm our business, financial condition, results of operations and cash flows.
Because our gross margin for any period depends on a number of factors, our failure to forecast changes in any of the factors could adversely affect our gross margin.
We continue to pursue improved gross margin. Our gross margin for any period depends on a number of factors, including:
· | the mix of our products sold; |
· | average selling prices; |
· | introduction of new products; |
· | unexpected pricing actions by our competitors; |
· | the cost of product components; and |
· | the yield of wafers produced by the foundries that manufacture our products. |
If we do not correctly forecast the impact of any of the relevant factors on our business, we may not be able to take action in time to counteract any negative impact on our gross margin. In addition, if we are unable to meet our gross margin target for any period or the target set by analysts, the trading price of our common stock may decline.
We are dependent on key personnel and the loss of these employees could negatively impact our business.
Our performance is substantially dependent on the performance of our executive officers and key employees. None of our executive officers or employees is bound by an employment agreement, meaning our relationships with our executive officers and employees are at will. We do not have “key person” life insurance policies on any of our employees. The loss of the services of any of our executive officers, technical personnel or other key employees, particularly Jen-Hsun Huang, our President and Chief Executive Officer, would harm our business. Our success will depend on our ability to identify, hire, train and retain highly qualified technical and managerial personnel. Our failure to attract and retain the necessary technical and managerial personnel would harm our business. The integration of new executives or personnel could disrupt our ongoing operations.
Failure to achieve expected manufacturing yields for existing and/or new products could negatively impact our financial results and damage our reputation.
Semiconductor manufacturing yields are a function both of product design, which is developed largely by us, and process technology, which typically is proprietary to the manufacturer. Since low yields may result from either design or process technology failures, yield problems may not be effectively determined or resolved until an actual product exists that can be analyzed and tested to identify process sensitivities relating to the design rules that are used. As a result, yield problems may not be identified until well into the production process. Resolution of yield problems requires cooperation by and communication between us and the manufacturer.
Because of our potentially limited access to wafer fabrication capacity from our manufacturers, decreases in manufacturing yields could result in an increase in our per unit costs and force us to allocate our available product supply among our customers. This could potentially harm customer relationships, our reputation, our revenue, our gross profit and our gross margin.
To stay competitive, which may include entering new markets, we may have to invest more resources in research and development than anticipated, which could increase our operating expenses and negatively impact our operating results.
If new competitors, technological advances by existing competitors, our entry into new markets, or other competitive factors require us to invest significantly greater resources than anticipated in our research and development efforts, our operating expenses would increase. We have increased our engineering and technical resources and had 2,865 full-time employees engaged in research and development as of July 29, 2007 and 2,156 full-time employees as of July 30, 2006. Research and development expenditures were $158.0 million and $316.3 million for the three and six months ended July 29, 2007, respectively and $127.3 million and $250.5 million for the three and six months ended July 30, 2006, respectively. Research and development expenses related to non-cash stock-based compensation expense included $16.4 million and $16.6 million for the second quarter of fiscal years 2008 and 2007, respectively, and $38.8 million and $31.0 million for the first half of fiscal years 2008 and 2007, respectively. If we are required to invest significantly greater resources than anticipated in research and development efforts without an increase in revenue, our operating results could decline. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and these investments may be independent of our level of revenue. In order to remain competitive, which may include entering new markets, we anticipate that we will continue to devote substantial resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products under development as well as hiring additional employees.
Our operating expenses are relatively fixed and we may not be able to reduce operating expenses quickly in response to any revenue shortfalls.
Our operating expenses, which are comprised of research and development expenses and sales, general and administrative expenses, represented 25.6% and 28.6% of our total revenue during the second quarter of fiscal years 2008 and 2007, respectively and 26.9% and 28.0% for the first half of fiscal years 2008 and 2007, respectively. Operating expenses included $26.8 million and $27.1 million for the second quarter of fiscal years 2008 and 2007, and $61.4 million and $48.1 million for the first half of fiscal years 2008 and 2007, respectively, related to non-cash stock-based compensation expense. Since we often recognize a substantial portion of our revenue in the last month of each quarter, we may not be able to adjust our operating expenses in a timely manner in response to any revenue shortfalls. If we are unable to reduce operating expenses quickly in response to any revenue shortfalls, our financial results would be negatively impacted.
Failure to transition to new manufacturing process technologies could adversely affect our operating results and gross margin.
Our strategy is to utilize the most advanced manufacturing process technology appropriate for our products and available from commercial third-party foundries. Use of advanced processes may have initial yield problems and higher product cost. Manufacturing process technologies are subject to rapid change and require significant expenditures for research and development. We continuously evaluate the benefits of migrating to smaller geometry process technologies in order to improve performance and reduce costs. We currently use 0.15 micron, 0.14 micron, 0.13 micron, 0.11 micron, 90 nanometer and 65 nanometer process technologies for our families of graphics processing units, or GPUs, media and communications processors, or MCPs, cellular phones, other handheld devices and other digital consumer electronic devices.
We have experienced difficulty in migrating to new manufacturing processes in the past and, consequently, have suffered reduced yields, delays in product deliveries and increased expense levels. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes. Moreover, we are dependent on our third-party manufacturers to migrate to smaller geometry processes successfully. Additionally, some of our competitors own their own manufacturing facilities. These competitors may be able to move to a new state of the art manufacturing process more quickly than our manufacturing partners. If our suppliers fall behind our competitors in manufacturing processes, the development and customer demand for our products and the use of our products could be negatively impacted. The inability by us or our third-party manufacturers to effectively and efficiently transition to new manufacturing process technologies may adversely affect our operating results and our gross margin.
Our failure to estimate customer demand properly may result in excess or obsolete inventory or, conversely, may result in inadequate inventory levels, either of which could adversely affect our financial results.
Our inventory purchases are based upon future demand forecasts or orders from our customers and may not accurately predict the quantity or type of products that our customers will want in the future or ultimately end up purchasing. In forecasting demand, we must make multiple assumptions any of which may prove to be incorrect. Situations that may result in excess or obsolete inventory, which could result in write-downs of the value of our inventory and/or a reduction in average selling prices, and where our gross margin could be adversely affected include:
· | if there were a sudden and significant decrease in demand for our products;
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· | if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements; |
· | if we fail to estimate customer demand properly for our older products as our newer products are introduced; or |
·
| if our competition were to take unexpected competitive pricing actions. |
Conversely, if we underestimate our customers’ demand for our products, our third party manufacturing partners may not have adequate capacity to increase production for us meaning that we may not be able to obtain sufficient inventory to fill our customers’ orders on a timely basis. Even if we are able to increase production levels to meet customer demand, we may not be able to do so in a cost effective or timely manner. Inability to fill our customers’ orders on a timely basis, or at all, could damage our customer relationships, result in lost revenue, cause a loss in market share or damage our reputation, any of which could adversely impact our financial results.
Because we order materials in advance of anticipated customer demand our ability to reduce our inventory purchase commitments quickly in response to any revenue shortfalls is limited.
Substantially all of our sales are made on the basis of purchase orders rather than long-term agreements. As a result, we may commit resources to the production of products without having received advance purchase commitments from customers. As a result, we may build inventories for anticipated periods of growth which do not occur. Any inability to sell products to which we have devoted significant resources could harm our business. In addition, cancellation or deferral of customer purchase orders could result in our holding excess inventory, which could adversely affect our gross margin and restrict our ability to fund operations. Additionally, because we often sell a substantial portion of our products in the last month of each quarter, we may not be able to reduce our inventory purchase commitments in a timely manner in response to customer cancellations or deferrals or other revenue shortfalls. We could be subject to excess or obsolete inventories and be required to take corresponding inventory write-downs if growth slows or does not materialize or if we incorrectly forecast product demand, which could negatively impact our financial results.
Our operating results are unpredictable and may fluctuate, and if our operating results are below the expectations of securities analysts or investors, the trading price of our stock could decline.
Many of our revenue components fluctuate and are difficult to predict, and our operating expenses are largely independent of revenue in any particular period. Therefore, it is difficult for us to accurately forecast revenue and profits or losses. As a result, it is possible that in some quarters our operating results could be below the expectations of securities analysts or investors, which could cause the trading price of our common stock to decline. We believe that our quarterly and annual results of operations may continue to be affected by a variety of factors that could harm our revenue, gross profit and results of operations.
Any one or more of the factors discussed in this Form 10-Q or other factors could prevent us from achieving our expected future revenue or net income. Accordingly, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of future performance. In addition, the results of any quarterly or full fiscal year period are not necessarily indicative of results to be expected for a subsequent quarter or a full fiscal year.
Risks Related to Our Products
If we are unable to achieve design wins, our products may not be adopted by our target markets or customers either of which could negatively impact our financial results.
The future success of our business depends to a significant extent on our ability to develop new competitive products for our target markets and customers. We believe achieving design wins, which entails having our existing and future products chosen for hardware components or subassemblies designed by PC original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, and add-in board and motherboard manufacturers, will aid our future success. Our OEM, ODM, and add-in board and motherboard manufacturers’ customers typically introduce new system configurations as often as twice per year, typically based on spring and fall design cycles or in connection with trade shows. Accordingly, when our customers are making their design decisions, our existing products must have competitive performance levels or we must timely introduce new products in order to be included in new system configurations. This requires that we do the following:
· | anticipate the features and functionality that customers and consumers will demand; |
· | incorporate those features and functionalities into products that meet the exacting design requirements of OEMs, ODMs, and add-in board and motherboard manufacturers; |
· | price our products competitively; and |
· | introduce products to the market within the limited design cycle for OEMs, ODMs, and add-in board and motherboard manufacturers. |
If OEMs, ODMs, and add-in board and motherboard manufacturers do not include our products in their systems, they will typically not use our products in their systems until at least the next design configuration. Therefore, we endeavor to develop close relationships with our original equipment manufacturers, or OEMs, and original design manufacturers, or ODMs, in an attempt to allow us to better anticipate and address customer needs in new products so that our products will achieve design wins.
Our ability to achieve design wins also depends in part on our ability to identify and be compliant with evolving industry standards. Unanticipated changes in industry standards could render our products incompatible with products developed by major hardware manufacturers and software developers, including Advanced Micro Devices, Inc., or AMD, Intel Corporation, or Intel and Microsoft Corporation, or Microsoft. Such changes would require us to invest significant time and resources to redesign our products to be compliant with relevant standards. If our products are not in compliance with prevailing industry standards for a significant period of time, our ability to achieve design wins could suffer. If we are unable to achieve new design wins for existing or new customers, we may lose market share and our operating results would be negatively impacted.
Achievement of design wins may not result in the success of our products and could result in a loss of market share.
The process of being qualified for inclusion in an OEM or ODM product can be lengthy and could cause us to miss a cycle in the demand of end-users for a particular product feature, which also could result in a loss of market share and harm our business. Even if we do have design wins for OEM and ODM products, we may not be able to successfully develop or introduce new products in sufficient volumes within the appropriate time to meet the OEM, ODM, add-in board and motherboard manufacturers’ design cycles as well as other market demand. Additionally, even if we achieve a significant number of design wins, there can be no assurance that our OEM and ODM customers will actually take the design to production or that the design will be commercially successful. Furthermore, there may be changes in the timing of product orders due to unexpected delays in the introduction of our customers’ products that could negatively impact the success of our products. Any of these factors could result in a loss of market share and could negatively impact our financial results.
Our business results could be adversely affected if our product development efforts are unsuccessful.
In the past, we have experienced delays in the development of new products. Any delay or failure of our GPUs, our other processors, or other technologies to meet or exceed specifications of our customers or competitive products could materially harm our business. The success of our new product introductions will depend on many factors, including the following:
· | proper new product definition; |
· | timely completion and introduction of new product designs; |
· | availability of next-generation software development tools to design, simulate and verify our products; |
· | the ability of third-party manufacturers to effectively manufacture our new products in a timely manner; |
· | dependence on third-party subcontractors for assembly, testing and packaging of our products and in meeting product delivery schedules and maintaining product quality; |
· | the quality of new products; |
· | differentiation of new products from those of our competitors; |
· | market acceptance of our products and our customers' products; and |
· | availability of adequate quantity and configurations of various types of memory products. |
Our failure to successfully develop, introduce or achieve market acceptance for new processors or other technologies would harm our business.
Our failure to identify new market or product opportunities, or develop new products could harm our business.
As our GPUs and other processors develop and competition increases, we anticipate that product life cycles at the high end will remain short and average selling prices will decline. In particular, we expect average selling prices and gross margins for our processors to decline as each product matures and as unit volume increases. As a result, we will need to introduce new products and enhancements to existing products to maintain or improve overall average selling prices and gross margin. In order for our processors to achieve high volumes, leading PC OEMs, ODMs, and add-in board and motherboard manufacturers must select our processors for design into their products, and then successfully complete the designs of their products and sell them. We may be unable to successfully identify new product opportunities or to develop and bring to market new products in a timely fashion. In addition, we cannot guarantee that new products we develop will be selected for design into PC OEMs’, ODMs’, and add-in board and motherboard manufacturers’ products, that any new designs will be successfully completed, or that any new products will be sold.
As the complexity of our products and the manufacturing process for our products increases, there is an increasing risk that we will experience problems with the performance of our products and that there will be delays in the development, introduction or volume shipment of our products. We may experience difficulties related to the production of current or future products or other factors that may delay the introduction or volume sale of new products we develop. In addition, we may be unable to successfully manage the production transition risks with respect to future products. Failure to achieve any of the foregoing with respect to future products or product enhancements could result in rapidly declining average selling prices, reduced margins and reduced demand for products or loss of market share. In addition, technologies developed by others may render our processors non-competitive or obsolete or result in our holding excess inventory, any of which would harm our business.
We could suffer a loss of market share if our products contain significant defects.
Products as complex as those we offer may contain defects or experience failures when introduced or when new versions or enhancements to existing products are released. In the past, we have discovered defects and incompatibilities with customers’ hardware in some of our products. Similar issues in the future may result in delays or loss of revenue to correct any defects or incompatibilities. Errors in new products or releases and related software drivers after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins. Our products typically go through only one verification cycle prior to beginning volume production and distribution. As a result, our products may contain defects or flaws that are undetected prior to volume production and distribution. If these defects or flaws exist and are not detected prior to volume production and distribution, we may be required to reimburse customers for costs to repair or replace the affected products in the field. We also face the risk of product recalls or product returns. A significant number of product returns due to a defect or recall could damage our reputation, result in our customers working with our competitors, and could adversely impact our financial results. We may also be required to incur additional research and development costs to find and correct the defect, which could divert the attention of our management and engineers from the development of new products. These costs could be significant and could adversely affect our business and operating results. We may also suffer a loss of reputation, loss of revenues and/or a loss in our market share, any of which could materially harm our financial results.
Risks Related to Our Partners and Customers
We depend on foundries and independent contractors to manufacture our products and these third parties may not be able to satisfy our manufacturing requirements, which would harm our business.We do not manufacture the semiconductor wafers used for our products and do not own or operate a wafer fabrication facility. Instead, we utilize industry-leading suppliers to produce our semiconductor wafers with their state-of-the-art fabrication equipment and techniques. Therefore, we rely on our manufacturers to produce products of acceptable quality and at acceptable manufacturing yields and deliver wafers to us on a timely basis at acceptable prices. Since we obtain semiconductor wafers on a purchase order basis, the foundries we use have no obligation to provide us with any specified minimum quantities of product so we rely on them to allocate to us a portion of their manufacturing capacity that will be sufficient to meet our needs. Because these suppliers, including the fabrication facility that produces a majority of our products, fabricate wafers for other companies, including some of our competitors, could choose to prioritize capacity for other users, reduce or eliminate deliveries to us, or increase the prices that they charge us on short notice, they may be unable to meet our near-term or long-term manufacturing or pricing requirements. If we are unable to meet customer demand due to reduced or eliminated deliveries, we could lose sales to customers, which would negatively impact our revenue and our reputation.
Because the lead-time needed to establish a strategic relationship with a new manufacturing partner could be several quarters, there is no readily available alternative source of supply for any specific product. In addition, the time and effort to qualify a new foundry could result in additional expense, diversion of resources or lost sales any of which would negatively impact our financial results. We believe that long-term market acceptance for our products will depend on reliable relationships with the third-party manufacturers we may use to ensure adequate product supply and competitive pricing so that we are able to respond to customer demand.
We may not be able to realize the potential financial or strategic benefits of business acquisitions, which could hurt our ability to grow our business, develop new products or sell our products.We have acquired and invested in other businesses that offered products, services and technologies that we believed would help expand or enhance our existing products and services or help expand our distribution channels. We may enter into future acquisitions of, or investments in, businesses, in order to complement or expand our current businesses or enter into a new business market. For example, in February 2006 we completed the acquisition of ULi Electronics, Inc., or ULi, in March 2006 we completed the acquisition of Hybrid Graphics Ltd., or Hybrid Graphics and in January 2007 we completed the acquisition of PortalPlayer, Inc., or PortalPlayer. If we do consider other acquisitions, a strategic alliance or a joint venture, the negotiations could divert management’s attention as well as other resources. Any of the following risks associated with past or future acquisitions or investments could impair our ability to grow our business, develop new products, sell our products, and ultimately could have a negative impact on our growth or our financial results:
· | difficulty in combining the technology, products, operations or workforce of the acquired business with our business; |
· | difficulty in operating in a new or multiple new locations; |
· | disruption of our ongoing businesses; |
· | disruption of the ongoing business of the company we invest in or acquire; |
· | difficulty in realizing the potential financial or strategic benefits of the transaction; |
· | difficulty in maintaining uniform standards, controls, procedures and policies; |
· | disruption of or delays in ongoing research and development efforts; |
· | diversion of capital and other resources; |
· | assumption of liabilities; |
· | diversion of resources and unanticipated expenses resulting from litigation arising from potential or actual business acquisitions or investments; |
· | difficulties in entering into new markets in which we have limited or no experience and where competitors in such markets have stronger positions; and |
· | impairment of relationships with employees and customers, or the loss of any of our key employees or customers of our target’s key employees or customers, as a result of our acquisition or investment. |
In addition, the consideration for any future acquisition could be paid in cash, shares of our common stock, the issuance of convertible debt securities or a combination of cash, convertible debt and common stock. If we pay all or a portion of the purchase price in cash, our cash reserves would be reduced which could negatively impact the growth of our business or our ability to develop new products. We paid for the acquisitions of Hybrid Graphics, ULi and PortalPlayer with primarily cash. If the consideration is paid with shares of our common stock, or convertible debentures, the holdings of our existing stockholders would be diluted. We cannot forecast the number, timing or size of future acquisitions, or the effect that any such acquisitions might have on our operations or financial results.
We are dependent on third parties for assembly, testing and packaging of our products, which reduces our control over the delivery and quantity of our products.
Our processors are assembled, tested and packaged by independent subcontractors, such as Advanced Semiconductor Engineering, Inc., or ASE, Amkor Technology, or Amkor, King Yuan Electronics Co., or KYEC, Siliconware Precision Industries Co. Ltd., or SPIL, and ChipPAC. We do not have long-term agreements with any of these subcontractors. As a result of our dependence on third-party subcontractors for assembly, testing and packaging of our products, we do not directly control product delivery schedules or product quality. Demand for qualified independent subcontractors to assemble and test products is high. If demand for these subcontractors exceeds the number of qualified subcontractors, we may experience capacity constraints, which could result in product shortages, a decrease in the quality of our products or an increase in product cost. Any of our subcontractors may decide to prioritize the orders of one of our competitors over our orders. Any product shortages or quality assurance problems could increase the costs of manufacture, assembly or testing of our products, which could cause our gross margin to decline. Due to the amount of time typically required to qualify assemblers and testers, we could experience significant delays in the shipment of our products if we are required to find alternative third parties to assemble, test or package our products or components. Any such delays could result in a loss of reputation or a decrease in sales to our customers.
There can be no assurance that the PlayStation3 will achieve long term commercial success.
In April 2005, we finalized our definitive agreement with Sony Computer Entertainment, or SCE, to jointly develop custom GPU for SCE’s PlayStation3. Our collaboration with SCE includes license fees and royalties for the PlayStation3 and all derivatives, including next-generation digital consumer electronics devices. In addition, we are licensing software development tools for creating shaders and advanced graphics capabilities to SCE. During the second quarter of fiscal years 2008 and 2007, we recognized $21.8 million and $23.8 million of revenue, and $44.5 million and $47.2 million for the first half of fiscal years 2008 and 2007, respectively, from our contractual arrangements with SCE. Given the intense competition in the game console market, there can be no assurance that the PlayStation3 will achieve long term commercial success. If we do not receive royalties as we anticipate, our revenue and gross margin may be adversely affected.
Any difficulties in collecting accounts receivable, including from foreign customers, could harm our operating results and financial condition.
Our accounts receivable are highly concentrated. Two of our customers had individual balances in excess of 10% of total accounts receivable. These customers accounted for approximately 24% and 23% of our total accounts receivable balance as at July 29, 2007 and January 28, 2007, respectively, and make us vulnerable to adverse changes in our customers' businesses and to downturns in the economy and the industry. In addition, difficulties in collecting accounts receivable or the loss of any significant customer could materially and adversely affect our financial condition and results of operations. We continue to work directly with more foreign customers and it may be difficult to collect accounts receivable from them. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required, we may be required to defer revenue recognition on sales to affected customers and we may be required to pay higher credit insurance premiums, any of which could adversely affect our operating results. In the future, we may have to record additional reserves or write-offs and/or defer revenue on certain sales transactions which could negatively impact our financial results.
We rely on third-party vendors to supply software development tools to us for the development of our new products and we may be unable to obtain the tools necessary to develop or enhance new or existing products.
When we design and develop new products or product enhancements, we rely on third-party software development tools to assist us in the design, simulation and verification of new products or enhancements to existing products. If the software development tools available at the time that we are designing, simulating or verifying a product are not sophisticated enough or technologically advanced enough for our purposes, we may be unable to bring our products, or enhancements to existing products, to market in a timely manner, or at all. In the past, we have experienced delays in the introduction of products as a result of the inability of then available software development tools to fully simulate the complex features and functionalities of our products. In the future, the design requirements necessary to meet consumer demands for more features and greater functionality from our processors may exceed the capabilities of the software development tools that are available to us. If the software development tools we use become unavailable or fail to produce designs that meet consumer demands, we may miss design cycles or lose design wins either of which could result in a loss of market share, a decrease in revenue or negatively impact our operating results.
Because of the importance of software development tools to the development of our products a critical component of our product development efforts is our partnerships with leaders in the computer-aided design industry, including Cadence Design Systems, Inc. and Synopsys, Inc. We have invested significant resources to develop relationships with these industry leaders and have often assisted them in the definition of their new products. We believe that forming these relationships and utilizing next-generation development tools to design, simulate and verify our products will help us remain at the forefront of the 3D graphics, communications and networking segments and develop products that utilize leading-edge technology on a rapid basis. We believe this approach assists us in meeting the new design schedules of our customers. If these relationships are not successful, we may not be able to develop new products or enhancements for existing products in a timely manner, which could result in a loss of market share, a decrease in revenue and a negative impact on our operating results.
We sell our products to a small number of customers and our business could suffer if we lose any of these customers.
We have only a limited number of customers and our sales are highly concentrated. Sales to one of our customers was in excess of 10% of our total revenue. This customer accounted for approximately 12% and 15% of our total revenue in the second quarter of fiscal years 2008 and 2007, respectively as well as for 11% and 12% of our total revenue for the first half of fiscal years 2008 and 2007, respectively. Although a small number of our other customers represents the majority of our revenue, their end customers include a large number of OEMs and system integrators throughout the world who, in many cases, specify the graphics supplier. Our sales process involves achieving key design wins with leading PC OEMs and major system builders and supporting the product design into high volume production with key contract equipment manufacturers, or CEMs, ODMs, add-in board and motherboard manufacturers. These design wins in turn influence the retail and system builder channel that is serviced by CEMs, ODMs, add-in board and motherboard manufacturers. Our distribution strategy is to work with a small number of leading independent CEMs, ODMs, add-in board and motherboard manufacturers, and distributors, each of which has relationships with a broad range of system builders and leading PC OEMs. If we were to lose sales to our PC OEMs, CEMs, ODMs, add-in board and motherboard manufacturers and were unable to replace the lost sales with sales to different customers, or if they were to significantly reduce the number of products they order from us, our revenue may not reach or exceed the expected level in any period, which could harm our financial condition and our results of operations.
Risks Related to Our Competition
As Intel and AMD continue to pursue platform solutions, we may not be able to successfully compete and our business would be negatively impacted.
We expect substantial competition from both Intel’s and AMD’s strategy of selling platform solutions, such as the success Intel achieved with its Centrino platform solution. AMD has also announced a platform solution. Additionally, we expect that Intel and AMD will extend this strategy to other segments, including the possibility of successfully integrating a CPU and a GPU on the same chip. If AMD and Intel continue to pursue platform solutions, we may not be able to successfully compete and our business would be negatively impacted.
The market for our products is highly competitive and we may be unable to compete.
The market for our products is highly competitive and is characterized by rapid technological change, evolving industry standards and declining average selling prices. We believe that the principal competitive factors in this market are:
· | breadth of product offerings; |
· | access to customers and distribution channels; |
· | backward-forward software support; |
· | conformity to industry standard application programming interfaces; |
· | manufacturing capabilities; |
· | price of processors; and |
· | total system costs of add-in boards and motherboards. |
We believe that our ability to remain competitive will depend on how well we are able to anticipate the features and functions that customers will demand and whether we are able to deliver consistent volumes of our products at acceptable levels of quality. We expect competition to increase both from existing competitors and new market entrants with products that may be less costly than ours, or may provide better performance or additional features not provided by our products, either of which could harm our business.
For example, we are the largest supplier of AMD 64 chipsets with 62% segment share in the second quarter of calendar year 2007, as reported in the latest PC Processor and Chipset report from Mercury Research. Decline in demand in the AMD segment would harm our business.
An additional significant source of competition is from companies that provide or intend to provide competing product solutions. Some of our competitors may have or be able to obtain greater marketing, financial, distribution and manufacturing resources than we do and may be more able to adapt to customer or technological changes. Our current competitors include the following:
· | suppliers of discrete MCPs that incorporate a combination of networking, audio, communications and input/output, or I/O, functionality as part of their existing solutions, such as AMD, Broadcom, Silicon Integrated Systems Corporation, or SIS, VIA Technologies, Inc., or VIA, and Intel; |
· | suppliers of GPUs, including MCPs that incorporate 3D graphics functionality as part of their existing solutions, such as AMD, Intel, Matrox Electronics Systems Ltd., XGI Technology, Inc., SIS and VIA; |
· | suppliers of GPUs or GPU intellectual property for handheld and digital consumer electronics devices that incorporate advanced graphics functionality as part of their existing solutions, such as AMD, Broadcom, Fujitsu Limited, Imagination Technologies Ltd., ARM Holdings plc, Marvell Technology Group Ltd., or Marvell, NEC Corporation, Qualcomm Incorporated, or Qualcomm, Renesas Technology, Seiko-Epson, Texas Instruments Incorporated, and Toshiba America, Inc.; and |
· | suppliers of application processors for handheld and digital consumer electronics devices that incorporate multimedia processing as part of their existing solutions such as Broadcom, Texas Instruments Inc., Qualcomm, Marvell, Freescale Semiconductor Inc., Samsung and ST Microelectronics. |
If and to the extent we offer products outside of the consumer and enterprise PC, notebook, workstation, personal digital assistant, or PDA, cellular phone, and video game console markets, we may face competition from some of our existing competitors as well as from companies with which we currently do not compete. We cannot accurately predict if we will compete successfully in any new markets we may enter. If we are unable to compete in our current or new markets, our financial results will suffer.
Risks Related to Market Conditions
We are subject to risks associated with international operations which may harm our business.
Our semiconductor wafers are manufactured, assembled, tested and packaged by third-parties located outside of the United States. Additionally, we generated 88.3% and 83.1% of our revenue for the second quarter of fiscal years 2008 and 2007, and 85.1% and 83.9% of our revenue for the first half of fiscal years 2008 and 2007, respectively, from sales to customers outside the United States and other Americas. The manufacture, assembly, test and packaging of our products outside of the United States, operation of offices outside of the United States, and sales to customers outside of the United States and other Americas subjects us to a number of risks associated with conducting business outside of the United States and other Americas, including, but not limited to:
· | international economic and political conditions; |
· | unexpected changes in, or impositions of, legislative or regulatory requirements; |
· | labor issues in foreign countries; |
· | cultural differences in the conduct of business; |
· | inadequate local infrastructure; |
· | delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions; |
· | difficulty in collecting accounts receivable; |
· | fluctuations in currency exchange rates; |
· | impact of currency exchange rate fluctuations on the price of our products to our customers, or on the supplies that we buy; |
· | imposition of additional taxes and penalties; |
· | different legal standards with respect to protection of intellectual property; |
· | the burdens of complying with a variety of foreign laws; and |
· | other factors beyond our control, including terrorism, civil unrest, war and diseases such as severe acute respiratory syndrome and the Avian flu. |
If sales to any of our customers outside of the United States and other Americas are delayed or cancelled because of any of the above factors, our revenue may be negatively impacted.
We have offices outside of the United States, including offices in Taiwan, Japan, Korea, China, Hong Kong, India, France, Russia, Germany, Finland and England. Our operations in our international locations are subject to many of the risks contained in the above list. We intend to continue to expand our existing operations and expect to open other international offices. Difficulties with our international operations, including finding appropriate staffing and office space, may divert management’s attention and other resources any of which could negatively impact our operating results.
We are dependent on the PC market and the rate of its growth has and may in the future have a negative impact on our business.
We derive the majority of our revenue from the sale of products for use in the desktop PC and notebook PC markets, including professional workstations. We expect to continue to derive most of our revenue from the sale or license of products for use in the desktop PC and notebook PC markets in the next several years. A reduction in sales of PCs, or a reduction in the growth rate of PC sales, will reduce demand for our products. Moreover, changes in demand could be large and sudden. Since PC manufacturers often build inventories during periods of anticipated growth, they may be left with excess inventories if growth slows or if they incorrectly forecast product transitions. In these cases, PC manufacturers may abruptly suspend substantially all purchases of additional inventory from suppliers like us until their excess inventory has been absorbed, which would have a negative impact on our business.
If our products do not continue to be adopted by the consumer and enterprise desktop PC, notebook PC, workstation, high-performance computing, personal digital assistant, or PDA, cellular handheld devices, and video game console markets or if the demand in these markets for new and innovative products decreases, our business and operating results would suffer.
Our success depends in part upon continued broad adoption of our processors for 3D graphics and multimedia in consumer and enterprise PC, notebook PC, workstation, high-performance computing, PDA, cellular handheld devices, and video game console applications. The market for processors has been characterized by unpredictable and sometimes rapid shifts in the popularity of products, often caused by the publication of competitive industry benchmark results, changes in pricing of dynamic random-access memory devices and other changes in the total system cost of add-in boards, as well as by severe price competition and by frequent new technology and product introductions. Broad market acceptance is difficult to achieve and such market acceptance, if achieved, is difficult to sustain due to intense competition and frequent new technology and product introductions. Our GPU and MCP businesses together comprised over 79.1% and 74.5% of revenue for the second quarter of fiscal years 2008 and 2007 and 77.1% and 75.6% during first half of fiscal years 2008 and 2007, respectively. As such, our financial results would suffer if for any reason our current or future GPUs or MCPs do not continue to achieve widespread adoption by the PC market. If we are unable to complete the timely development of products or if we were unable to successfully and cost-effectively manufacture and deliver products that meet the requirements of the consumer and enterprise PC, notebook, workstation, high-performance computing, PDA, cellular phone, and video game console markets, we may experience a decrease in revenue which could negatively impact our operating results. Additionally, there can be no assurance that the industry will continue to demand new products with improved standards, features or performance. If our customers, OEMs, ODMs, add-in-card and motherboard manufacturers, system builders and consumer electronics companies, do not continue to design products that require more advanced or efficient processors and/or the market does not continue to demand new products with increased performance, features, functionality or standards, sales of our products could decline. Decreased sales of our products for these markets could negatively impact our financial results.
Our failure to comply with any applicable environmental regulations could result in a range of consequences, including fines, suspension of production, excess inventory, sales limitations, and criminal and civil liabilities.
We may be subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in electronic products and making producers of those products financially responsible for the collection, treatment, recycling and disposal of those products. The European Union Directive on Restriction of Hazardous Substances Directive, or RoHS Directive, is European legislation that restricts the use of a number of substances, including lead, and other hazardous substances in electrical and electronic equipment in the market in the European Union which became effective on July 1, 2006. Similarly, the State of California has adopted certain restrictions, which go into effect in 2007, that restrict the use of certain materials in electronic products, which are intended to harmonize with the RoHS directive and other states are contemplating similar legislation. China has adopted similar legislation to the RoHS directive which began to go into effect on March 1, 2007.
Also, we could face significant costs and liabilities in connection with the European Union Directive on Waste Electrical and Electronic Equipment, or WEEE. The WEEE directs members of the European Union to enact laws, regulations, and administrative provisions to ensure that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the market after August 15, 2005. Implementation in certain European Union member states has been delayed into 2007. Similar legislation has been or may be enacted in other jurisdictions, including the United States, Canada, Mexico, China and Japan, the cumulative impact of which could be significant. We continue to evaluate the impact of specific registration and compliance activities required by WEEE.
It is possible that unanticipated supply shortages, delays or excess non-compliant inventory may occur as a result of such regulations. Failure to comply with any applicable environmental regulations could result in a range of consequences including costs, fines, suspension of production, excess inventory, sales limitations, criminal and civil liabilities and could impact our ability to conduct business in the countries that have adopted these types of regulations.
We are exposed to fluctuations in the market values of our portfolio investments and in interest rates.
At July 29, 2007 and January 28, 2007, we had $1.57 billion and $1.12 billion in cash, cash equivalents and marketable securities. We invest our cash in a variety of financial instruments, consisting principally of investments in commercial paper, money market funds and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in U.S. dollars.
We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. All of the cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded equity investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because any debt securities we hold are classified as “available-for-sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity.
Our business is cyclical in nature and an industry downturn could harm our financial results.
Our business is directly affected by market conditions in the highly cyclical semiconductor industry, including alternating periods of overcapacity and capacity constraints, variations in manufacturing costs and yields, significant expenditures for capital equipment and product development and rapid technological change. If we are unable to respond to changes in our industry, which can be unpredictable and rapid, in an efficient and timely manner, our operating results could suffer. In particular, from time to time, the semiconductor industry has experienced significant and sometimes prolonged downturns characterized by diminished product demand and accelerated erosion of average selling prices. If we cannot take appropriate actions such as reducing our manufacturing or operating costs to sufficiently offset declines in demand during a downturn, our revenue and earnings will suffer.
Political instability in Taiwan and in The People’s Republic of China or elsewhere could harm our business.
Because of our reliance on foundries and independent contractors located in Taiwan and The People’s Republic of China, and because we have offices in these locations, our business may be harmed by political instability in Taiwan, including the worsening of the strained relations between The People’s Republic of China and Taiwan.
Risks Related to Government Action, Regulatory Action, Intellectual Property, and Litigation
The pending investigation by the United States Department of Justice regarding investigation into the market for Graphics Processors could adversely affect our business.
On November 29, 2006, we received a subpoena from the San Francisco Office of the Antitrust Division of the United States Department of Justice, or DOJ, in connection with the DOJ's investigation into potential antitrust violations related to graphics processing units and cards. No specific allegations have been made against us. We are cooperating with the DOJ in its investigation.
As of August 21, 2007, over 50 civil complaints have been filed against us. The majority of the complaints were filed in the Northern District of California, several were filed in the Central District of California, and other cases were filed in several other Federal district courts. On April 18, 2007, the Judicial Panel on Multidistrict Litigation transferred the actions currently pending outside of the Northern District of California to the Northern District of California for coordination of pretrial proceedings before the Honorable William H. Alsup.
In the consolidated proceedings, two groups of plaintiffs (one representing all direct purchasers of GPUs and the other representing all indirect purchasers) filed consolidated, amended class-action complaints on June 14, 2007. These complaints purport to assert federal antitrust claims based on alleged price fixing, market allocation, and other alleged anti-competitive agreements between us and ATI Technologies, Inc., or ATI, and Advanced Micro Devices, Inc., or AMD as a result of its acquisition of ATI. The indirect purchasers’ consolidated amended complaint also asserts a variety of state law antitrust, unfair competition and consumer protection claims on the same allegations, as well as a common law claim for unjust enrichment.
On July 16, 2007, we moved to dismiss the amended complaints. The motions to dismiss are pending and scheduled to be heard by Judge Alsup on September 20, 2007. We also moved to stay all discoveries while the motions to dismiss are resolved. The court granted our motion to stay on July 24, 2007. We believe the allegations in the consolidated, amended complaints are without merit and intend to vigorously defend the cases. Costs of defense and any damages resulting from a ruling against us or a settlement of the litigation could adversely affect our business.
Expensing employee stock options materially and adversely affects our reported operating results and could also adversely affect our competitive position.
Since inception, we have used stock options and our employee stock purchase program as fundamental components of our compensation packages. We believe that these incentives directly motivate our employees and, through the use of vesting, encourage our employees to remain with us. As a result of adjustments arising from our restatement related to stock option grant dates, our operating results for fiscal years prior to fiscal year 2007 contain recorded amounts of stock-based compensation expense. For our fiscal years 2000 through 2006, this stock-based compensation expense was calculated using primarily the intrinsic value-based method under Accounting Principles Board Opinion No. 25, or APB 25, Accounting for Stock Issued to Employees and related interpretations.
In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123(R) which requires the measurement and recognition of compensation expense for all stock-based compensation payments. SFAS No. 123(R) requires that we record compensation expense for stock options and our employee stock purchase plan using the fair value of those awards. During the second quarter of fiscal years 2008 and 2007 we recorded $29.5 million and $28.9 million, respectively, and $66.9 million and $51.1 million for the first half of fiscal years 2008 and 2007, respectively, related to non-cash stock-based compensation, resulting from our compliance with SFAS 123 (R), which negatively impacted our operating results. We believe that SFAS No. 123(R) will continue to negatively impact our operating results.
To the extent that SFAS No. 123(R) makes it more expensive to grant stock options or to continue to have an employee stock purchase program, we may decide to incur increased cash compensation costs. In addition, actions that we may take to reduce stock-based compensation expense that may be more severe than any actions our competitors may implement may make it difficult to attract retain and motivate employees, which could adversely affect our competitive position as well as our business and operating results.
We are a party to litigation, which, if determined adversely to us, could harm our business and financial condition.
We are a party to litigation. There can be no assurance that actions that have been brought against us or any brought by us will be resolved in our favor. Any claim that is successfully asserted against us may cause us to pay substantial damages and other related fees. Regardless of whether these lawsuits are resolved in our favor or if we are the plaintiff or the defendant in the litigation, any lawsuits to which we are a party will likely be expensive and time consuming to defend or resolve. Such lawsuits could also harm our relationships with existing customers and result in the diversion of management’s time and attention away from business operations, which could harm our business. Costs of defense and any damages resulting from litigation a ruling against us or a settlement of the litigation could adversely affect our cash flow and financial results.
Our ability to compete will be harmed if we are unable to adequately protect our intellectual property.
We rely primarily on a combination of patents, trademarks, trade secrets, employee and third-party nondisclosure agreements, and licensing arrangements to protect our intellectual property in the United States and internationally. We have numerous patents issued, allowed and pending in the United States and in foreign countries. Our patents and pending patent applications primarily relate to technology used by us in connection with our products. We also rely on international treaties and organizations and foreign laws to protect our intellectual property. The laws of certain foreign countries in which our products are or may be manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as the laws of the United States. This makes the possibility of piracy of our technology and products more likely. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as:
· | the commercial significance of our operations and our competitors’ operations in particular countries and regions; |
· | the location in which our products are manufactured; |
· | our strategic technology or product directions in different countries; and |
· | the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions. |
Our pending patent applications and any future applications may not be approved. In addition, any issued patents may not provide us with competitive advantages or may be challenged by third parties. The enforcement of patents by others may harm our ability to conduct our business. Others may independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property. Our failure to effectively protect our intellectual property could harm our business. We have licensed technology from third parties for incorporation in our digital media processors and for defensive reasons, and expect to continue to enter into such license agreements. These licenses may result in royalty payments to third parties, the cross licensing of technology by us or payment of other consideration. If these arrangements are not concluded on commercially reasonable terms, our business could suffer.
Litigation to defend against alleged infringement of intellectual property rights or to enforce our intellectual property rights and the outcome of such litigation could result in substantial costs to us.
We expect that as the number of issued hardware and software patents increases and as competition intensifies, the volume of intellectual property infringement claims and lawsuits may increase. We may become involved in lawsuits or other legal proceedings alleging patent infringement or other intellectual property rights violations by us or by our customers that we have agreed to indemnify them for certain claims of infringement. An unfavorable ruling could include significant damages, invalidation of a patent or family of patents, indemnification of customers, payment of lost profits, or, when it has been sought, injunctive relief.
In addition, we may need to commence litigation or other legal proceedings in order to:
· | assert claims of infringement of our intellectual property; |
· | protect our trade secrets or know-how; or |
· | determine the enforceability, scope and validity of the propriety rights of others. |
If we have to initiate litigation in order to protect our intellectual property, our operating expenses may increase which could negatively impact our operating results. Our failure to effectively protect our intellectual property could harm our business.
If infringement claims are made against us or we are found to infringe a third parties’ patent, we may seek licenses under the third parties’ patents or other intellectual property rights. In addition, an indemnified customer may be required to obtain a license to a third parties’ patents or intellectual property. However, licenses may not be offered to us at all or on terms acceptable to us, particularly by competitors. If we fail to obtain a license from a third party for technology that we use or that is used in one of our products that is used by an indemnified customer, we could be subject to substantial liabilities or have to suspend or discontinue the manufacture and sale of one or more of our products either of which could reduce our revenue and harm our business. Furthermore, the indemnification of a customer may increase our operating expenses which could negatively impact our operating results.
Our operating results may be adversely affected if we are subject to unexpected tax liabilities.
We are subject to taxation by a number of taxing authorities both in the United States and throughout the world. Tax rates vary among the jurisdictions in which we operate. Significant judgment is required in determining our provision for our income taxes as there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, any of the below could cause our effective tax rate to be materially different than that which is reflected in historical income tax provisions and accruals:
· | the jurisdictions in which profits are determined to be earned and taxed; |
· | adjustments to estimated taxes upon finalization of various tax returns; |
· | changes in available tax credits; |
· | changes in share-based compensation expense; |
· | changes in tax laws, the interpretation of tax laws either in the United States or abroad or the issuance of new interpretative accounting guidance related to uncertain transactions and calculations where the tax treatment was previously uncertain; and |
· | the resolution of issues arising from tax audits with various tax authorities. |
Should additional taxes be assessed as a result of any of the above, our operating results could be adversely affected. In addition, our future effective tax rate could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in tax laws or changes in the interpretation of tax laws.
While we believe that we currently have adequate internal control over financial reporting, we are exposed to risks from legislation requiring companies to evaluate those internal controls.
Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control structure and procedures for financial reporting. We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. However, the manner in which companies and their independent public accounting firms apply these requirements and testing companies’ internal controls, remains subject to some uncertainty. To date, we have incurred, and we expect to continue to incur increased expense and to devote additional management resources to Section 404 compliance. Despite our efforts, if we identify a material weakness in our internal controls, there can be no assurance that we will be able to remediate such material weakness identified in a timely manner, or that we will be able to maintain all of the controls necessary to determine that our internal control over financial reporting is effective. In the event that our chief executive officer, chief financial officer or our independent registered public accounting firm determine that our internal control over financial reporting is not effective as defined under Section 404, investor perceptions of us may be adversely affected and could cause a decline in the market price of our stock.
Changes in financial accounting standards or interpretations of existing standards could affect our reported results of operations.
We prepare our consolidated financial statements in conformity with generally accepted accounting principles in the United States. These principles are constantly subject to review and interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions.
Risks Related to our Common Stock
Provisions in our certificate of incorporation, our bylaws and our agreement with Microsoft could delay or prevent a change in control.
Our certificate of incorporation and bylaws contain provisions that could make it more difficult for a third party to acquire a majority of our outstanding voting stock. These provisions include the following:
· | the ability of the Board to create and issue preferred stock without prior stockholder approval; |
· | the prohibition of stockholder action by written consent; |
· | a classified Board; and |
· | advance notice requirements for director nominations and stockholder proposals. |
On March 5, 2000, we entered into an agreement with Microsoft in which we agreed to develop and sell graphics chips and to license certain technology to Microsoft and its licensees for use in the Xbox. Under the agreement, if an individual or corporation makes an offer to purchase shares equal to or greater than 30% of the outstanding shares of our common stock, Microsoft may have first and last rights of refusal to purchase the stock. The Microsoft provision and the other factors listed above could also delay or prevent a change in control of NVIDIA.
During fiscal year 2005, we announced that our Board of Directors, or Board, had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300 million. During fiscal year 2007, the Board further approved an increase of $400 million to the original stock repurchase program. In fiscal 2008, on May 21, 2007, we announced a stock repurchase program under which we may purchase up to an additional $1.0 billion of our common stock over a three year period through May 2010. As a result of these increases, we have an ongoing authorization from the Board, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $1.7 billion.
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 the Securities Exchange Act of 1934, or the Exchange Act, Rule 10b-18, 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.
During the second quarter of fiscal year 2008, we entered into a structured share repurchase transaction to repurchase 3.3 million shares of our common stock for $124.4 million, which we recorded on the trade date of the transaction. Through July 29, 2007, we have repurchased 34.7 million shares under our stock repurchase program for a total cost of $737.5 million.
Subsequent to July 29, 2007, we entered into a structured share repurchase transaction to repurchase shares of our common stock for $125.0 million that we expect to settle prior to the end of our third quarter of fiscal year 2008 ending on October 28, 2007.
Period | | Total Number of Shares Purchased | | | Average Price Paid per Share (2) | | | Total Number of Shares Purchased as Part of Publicly Announced Plans of Programs (3) | | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | |
| April 30, 2007 through May 27, 2007 | | | | | | $ | - | | | | | | | | | |
| May 28, 2007 through June 24, 2007 | | | | | | $ | - | | | | | | | | | |
| June 25, 2007 through July 29, 2007 | | | | | | $ | 37.32 | | | | | | | | | |
| | | | | | $ | | | | | | | | | | |
(1) On August 9, 2004, we announced that our Board had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300.0 million. On March 6, 2006, we announced that the Board had approved a $400.0 million increase to the original stock repurchase program. Subsequently, on May 21, 2007, we announced a stock repurchase program under which we may purchase up to an additional $1.0 billion of our common stock over a three year period through May 2010. As a result of these increases, we have an ongoing authorization from the Board, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $1.7 billion on the open market, in negotiated transactions or through structured stock repurchase agreements that may be made in one or more larger repurchases.
(2) Represents weighted average price paid per share during the quarter ended July 29, 2007.
(3) 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. During the second quarter of fiscal year 2008, we entered into a structured share repurchase transaction to repurchase shares of our common stock for $124.4 million. Subsequent to July 29, 2007, we entered into a structured share repurchase transaction to repurchase shares of our common stock for $125.0 million that we expect to settle prior to the end of our third quarter of fiscal year 2008 ending on October 28, 2007.
Not applicable.
At the Annual Meeting of Stockholders held on June 21, 200719, 2008 the following proposals were adopted by the margin indicated. Proxies for the Annual Meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition of management’s solicitation.
| 1. | The election of three (3) directors to serve for a three-year term until the 20102011 Annual Meeting of Stockholders. The results of the voting were as follows: |
| a. | James C. Gaither
Steven Chu | |
| | Number of shares For 203,811,310 | 487,245,948 |
| | Number of shares Withholding Authority 130,375,475 Against | 4,972,489 |
| | Number of shares For 324,539,772 |
| Abstain | Number of shares Witholding Authority 9,647,0134,012,543 |
c. b. | A. Brooke SeawellHarvey C. Jones | |
| | Number of shares For 316,812,050 | 479,745,136 |
| | Number of shares Witholding Authority 17,374,735Against | 12,460,467 |
| Number of shares Abstain | 4,025,376 |
| c. | William J. Miller | |
| Number of shares For | 474,938,642 |
| Number of shares Against | 17,017,103 |
| Number of shares Abstain | 4,275,235 |
The other directors whose term of office as a director continued after the Annual Meeting of Stockholders are Tench Coxe, Steven Chu, HarveyJames C. Jones, William J. Miller andGaither, Jen-Hsun Huang, Mark L. Perry.Perry and A. Brooke Seawell.
| 2. | The approval of the amendment to the NVIDIA Corporation 2007 Equity Incentive Plan.Amended and Restated Certificate of Incorporation. The results of the voting were as follows: |
| Number of shares voted For | 182,726,644402,773,505 |
| Number of shares voted Against | 102,346,41389,092,095 |
| Number of shares Abstaining | 2,069,2744,365,380 |
| Number of Broker Non-Votes | 47,044,4540 |
| 3. | The ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered accounting firm for our fiscal year ending January 27, 2008.25, 2009. The results of the voting were as follows: |
| Number of shares voted For | 328,541,406488,656,413 |
| Number of shares voted Against | 3,748,2873,637,439 |
| Number of shares Abstaining | 1,897,0923,937,128 |
| Number of Broker Non-Votes | -0 |
None.
EXHIBIT INDEX
| | | | Incorporated by Reference |
Exhibit No. | | Exhibit Description | Schedule/Form | | File Number | | | Exhibit | | Filing Date |
| | | | | | | | | | | |
| | 10.1 | | NVIDIA Corporation 2007 Equity Incentive Plan | 8-K | | | 000-23985 | | | | 10.1 | | June 27, 2007 |
| | | | | | | | | | | | | | |
| | 10.2 | * | 2007 Equity Incentive Plan - Non Statutory Stock Option (Annual Grant - Board Service) | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 10.3 | * | 2007 Equity Incentive Plan - Non Statutory Stock Option (Annual Grant - Committee Service) | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 10.4 | * | 2007 Equity Incentive Plan - Non Statutory Stock Option (Initial Grant) | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 10.5 | * | 2007 Equity Incentive Plan - Non Statutory Stock Option | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 10.6 | * | 2007 Equity Incentive Plan - Incentive Stock Option | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 31.1 | * | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 31.2 | * | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 32.1# | * | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 32.2# | * | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | |
| | | | | | Incorporated by Reference |
| Exhibit No. | | Exhibit Description | | Schedule/Form | | File Number | | | Exhibit | | Filing Date |
| | | | | | | | | | | | | |
| 3.1 | * | | Certificate of Amendment of Amended and Restated Certificate of Incorporation | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 31.1 | * | | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 31.2 | * | | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 32.1# | * | | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 32.2# | * | | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
* Filed Herewith
# In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
Copies of above exhibits not contained herein are available to any stockholder upon written request to:
Investor Relations: NVIDIA Corporation, 2701 San Tomas Expressway, Santa Clara, CA 95050.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 22, 200721, 2008 | |
| NVIDIA Corporation |
By: | /s/ MARVIN D. BURKETT |
| | Marvin D. Burkett |
| | (Duly Authorized Officer and Principal Financial and Accounting Officer) |
EXHIBIT INDEX
| | | | Incorporated by Reference |
Exhibit No. | | Exhibit Description | Schedule/Form | | File Number | | | Exhibit | | Filing Date |
| | | | | | | | | | | |
| | 10.1 | | NVIDIA Corporation 2007 Equity Incentive Plan | 8-K | | | 000-23985 | | | | 10.1 | | June 27, 2007 |
| | | | | | | | | | | | | | |
| | 10.2 | * | 2007 Equity Incentive Plan - Non Statutory Stock Option (Annual Grant - Board Service) | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 10.3 | * | 2007 Equity Incentive Plan - Non Statutory Stock Option (Annual Grant - Committee Service) | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 10.4 | * | 2007 Equity Incentive Plan - Non Statutory Stock Option (Initial Grant) | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 10.5 | * | 2007 Equity Incentive Plan - Non Statutory Stock Option | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 10.6 | * | 2007 Equity Incentive Plan - Incentive Stock Option | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 31.1 | * | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 31.2 | * | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 32.1# | * | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 32.2# | * | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | |
| | | | | | Incorporated by Reference |
| Exhibit No. | | Exhibit Description | | Schedule/Form | | File Number | | | Exhibit | | Filing Date |
| | | | | | | | | | | | | |
| 3.1 | * | | Certificate of Amendment of Amended and Restated Certificate of Incorporation | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 31.1 | * | | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 31.2 | * | | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 32.1# | * | | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 32.2# | * | | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
* Filed Herewith
# In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
Copies of above exhibits not contained herein are available to any stockholder upon written request to:
Investor Relations: NVIDIA Corporation, 2701 San Tomas Expressway, Santa Clara, CA 95050.
