Investment and Interest Rate Risk
At October 26, 2008 and January 27, 2008, we had $1.30 billion and $1.81 billion, respectively, in cash, cash equivalents and marketable securities. We invest in a variety of financial instruments, consisting principally of investments incash 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. TheseAs of October 26, 2008, we did not have any investments in auction-rate preferred securities. Our investments are denominated in United States dollars. As of October 28, 2007, we had $1.85 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 weif 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 we classify ourany debt securities we hold are classified as “available-for-sale”,“available-for-sale,” no gains or losses are recognizedrealized 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 fair value are determined to be other than temporary.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 October 28, 2007,26, 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 $3.0$3.6 million.
The current financial turmoil affecting the banking system and financial markets and the possibility that financial institutions may consolidate or go out of business have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets. There could be a number of follow-on effects from the credit crisis on our business, including insolvency of key suppliers resulting in product delays; inability of customers, including channel partners, to obtain credit to finance purchases of our products and/or customer, including channel partner, insolvencies; and failure of financial institutions, which may negatively impact our treasury operations. Other income and expense could also vary materially from expectations depending on gains or losses realized on the sale or exchange of financial instruments; impairment charges related to debt securities as well as equity and other investments; interest rates; and cash, cash equivalent and marketable securities balances. The current volatility in the financial markets and overall economic uncertainty increases the risk that the actual amounts realized in the future on our financial instruments could differ significantly from the fair values currently assigned to them. For instance, we recorded other than temporary impairment charges of $8.8 million during the three months ended October 26, 2008. These charges include $5.6 million related to what we believe is an other than temporary impairment of our investment in the International Reserve Fund. Please refer to Note 17 of these Notes to the Condensed Consolidated Financial Statements for further details. As of October 26, 2008, our investments in government agencies and government sponsored enterprises represented approximately 68% of our total investment portfolio, while the financial sector accounted for approximately 19%, 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. 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 $15-$38 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 third quarter of fiscal years 2009 and 2008, the aggregate exchange gain (loss) included in determining net income was $3.3 million and $(0.6) million, respectively. During the first nine months of fiscal years 2009 and 2008, the aggregate exchange loss included in determining net income was $1.8 million and $1.3 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 October 28, 2007. Subsequent to October 28, 2007, we have entered into a forward foreign exchange contract to purchase Euros with a notional principal of $83.2 million.
Controls and Procedures
Disclosure Controls and Procedures
Based on their evaluation as of October 28, 2007,26, 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 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.effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting during our fiscal quarter ended October 28, 2007,26, 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 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, ItemII, “Item 1A. “RiskRisk Factors” of our Form 10-K for the fiscal year ended January 28, 2007.
Risks Related to Our Operations
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.
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; |
· | 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, impact our customer relationships or damage our reputation, any of which could adversely impact our financial results.
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 3,020 full-time employees engaged in research and development as of October 28, 2007 and 2,327 full-time employees as of October 29, 2006. Research and development expenditures were $179.5 million and $495.8 million for the three and nine months ended fiscal year 2008, respectively and $140.7 million and $391.2 million for the three and nine months ended fiscal year 2007, respectively. Research and development expenses included non-cash stock-based compensation expense of $18.7 million and $57.5 million for the three and nine months ended fiscal year 2008, respectively, and $18.7 million and $49.7 million for the three and nine months ended fiscal year 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 24% and 26% of our total revenue during the third quarter of fiscal years 2008 and 2007, respectively and 26% and 27% for the first nine months of fiscal years 2008 and 2007, respectively. Operating expenses included $29.4 million for the third quarters of fiscal years 2008 and 2007, and $90.8 million and $77.5 million for the first nine months 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. Some of our competitors own their own manufacturing facilities and may be able to move to a new state of the art manufacturing process more quickly than our manufacturing partners. For example, Intel recently released a 45nm 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. 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.
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 monthsfiscal quarter 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.July 27, 2008.
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 NVIDIA should proceed with respect to the claims and allegations asserted in the underlying derivative cases brought on NVIDIA. 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 which could negatively impact 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.
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. 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.
Risks Related to Our ProductsCompetition
If we are unable to achieve design wins,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 be adoptedprovided by our target marketsproducts, or customers eitherfrom companies that provide or intend to provide competing product solutions. Any of whichthese sources of competition could negativelyharm our business. For example, we were the largest supplier of AMD 64 chipsets with 49% segment share in the third quarter of calendar year 2008, as reported in the October 2008 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.
The future successSome of our business dependscompetitors 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 significant extent onmulti-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 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 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 included in new system configurations. This requiressuperior to those of our competitors or that we doour products will achieve market acceptance.
Our current competitors include the following:
· | anticipate the features | suppliers of discrete media and communication processors, or MCPs, that incorporate a combination of networking, audio, communications and input/output functionality that customersas part of their existing solutions, such as Advanced Micro Devices, Inc., or AMD, Broadcom Corporation, or Broadcom, Silicon Integrated Systems Corporation, or SIS, and consumers will demand; Intel; |
· | · | suppliers of GPUs, including MCPs, that incorporate those features3D graphics functionality as part of their existing solutions, such as AMD, Intel, Matrox Electronics Systems Ltd., SIS and functionalities into products that meet the exacting design requirements of OEMs, ODMs, and add-in board and motherboard manufacturers; VIA Technologies, Inc.; |
· | price our products competitively;· | 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 |
· | introduce products to the market within the limited design cycle· | suppliers of application processors for OEMs, ODMs,handheld and add-in boarddigital 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 motherboard manufacturers. ST Microelectronics. |
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 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, or45
As Intel and Microsoft Corporation, or Microsoft. Such changes would require usAMD continue 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,pursue platform solutions, 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 boardcompete and motherboard manufacturers’ design cyclesour business would be negatively impacted.
We expect substantial competition from both Intel’s and AMD’s strategy of selling platform solutions, such 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 inIntel achieved with its Centrino platform solution. AMD has also announced a loss of market shareplatform solution. Additionally, we expect that Intel 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, ourAMD will extend this strategy to 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,segments, 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. |
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.
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’, or 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, 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 are a fabless semiconductor company meaning we do not manufacture the semiconductorsilicon wafers used for our products and do not own or operate a wafer fabrication facility. Instead, we utilize industry-leading foundries to producemanufacture our semiconductor wafers withusing their state-of-the-art fabrication equipment and techniques. Therefore, we rely onThe foundries, which have limited capacity, also manufacture products for other semiconductor companies, including some of 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.competitors. Since we obtain semiconductor wafers on a purchase order basis, thedo not have long-term commitment contracts with any of these foundries, we usethey do not have noan obligation to provide us with any specified minimum quantitiesquantity of product so we rely on them to allocate to usat any time or at any set price, except as may be provided in a portion of their manufacturing capacity that will be sufficient to meet our needs. Because these suppliers, including the fabrication facility that produces a majorityspecific purchase order. Most of our products fabricate wafers for other companies, including someare only manufactured by one foundry at a time. In times of our competitors, theyhigh demand, the foundries could choose to prioritize their capacity for other users,companies, reduce or eliminate deliveries to us, or increase the prices that they charge us on short notice.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, there is no readily availablewe do not have an alternative source of supply for any specific product.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 ableidentified 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 realize the potential financial or strategic benefits of business acquisitions, whichwafer foundry capacity, decreases in manufacturing yields could hurtresult in an increase in our abilitycosts and force us to growallocate our business, develop new products or sellavailable product supply among our products.
We have acquiredcustomers. Lower than expected yields could potentially harm customer relationships, our reputation 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: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 andschedule, product quantity of our products.or product quality.
Our processorsproducts are assembled, tested and packaged by independent subcontractors, such as Advanced Semiconductor Engineering, Inc., or ASE, Amkor Technology, or Amkor,JSI Logistics, Ltd., King Yuan Electronics Co., or KYEC, Siliconware Precision Industries Co. Ltd., or SPIL, and ChipPAC. WeAs 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 any of these subcontractors. As a result of our dependence on third-party subcontractors, when demand 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 or package products is high. If demand for thesehigh, our subcontractors exceedsmay decide to prioritize the numberorders of qualified subcontractors,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 mayhave to find a replacement subcontractor we could experience capacity constraints, which could resultsignificant delays in shipments of our products, 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 and revenue 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,Failure 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 capabilitiestransition to SCE. Contractual arrangements with SCE generated $32.5 million and $18.3 million of revenue during the third quarter of fiscal years 2008 and 2007, respectively, and $77.0 million and $65.5 million for the first nine months of fiscal years 2008 and 2007, respectively. 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. Three customers that had individual balances in excess of 10% of total accounts receivable, accounted for approximately 35% and 26% of our total accounts receivable balance as at October 28, 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 whichnew manufacturing process technologies could adversely affect our operating results. Inresults and gross margin.
We use the future,most advanced manufacturing process technology appropriate for our products that is available from our third-party foundries. As a result, we may havecontinuously evaluate the benefits of migrating our products to record additional reserves or write-offs and/or defer revenue on certain sales transactionssmaller 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 financial results.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. In addition, in October 2008, AMD and the Advanced Technology Investment Company, a technology investment company backed by the government of Abu Dhabi, announced the establishment of a U.S. headquartered semiconductor manufacturing company that will manufacture AMD’s advance processors. 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.
When we design and develop new products or product enhancements, weWe 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 toenhancements. To bring ournew products or product enhancements to existing products, to market in a timely manner, or at all.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 processorsproducts may exceed the capabilities of theavailable software development tools. Unavailability of 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 missresult in our missing design cycles or loselosing 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 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. 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 ableunable to develop new products or product enhancements for existing products in a timely manner, which could result in a loss of market share, a decrease in revenue and a negativeor negatively 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. SalesIn the third quarter of fiscal years 2009 and 2008, aggregate sales to significant customers, representing revenue in excess of 10% of our total revenue, accounted for approximately 25% from two customers and 10% and 13%, of our total revenue for the third quarter andfrom another customer, respectively. For the first nine months of fiscal years 2009 and 2008, aggregate sales to customers in excess of 10% of our total revenue accounted for approximately 11% of total revenue from one customer and 2007,approximately 10% of our total revenue from another customer, respectively. Although a small number of our other customers representsrepresent 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, or if they were to significantly reduce the number of products they order from us, or if 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, Quanta Computer Incorporated, accounted for approximately 22% of our accounts receivable balance at October 26, 2008 and another customer, Asustek Computer Inc., accounted for approximately 12% of our accounts receivable balance at January 27, 2008, respectively.
Difficulties in collecting accounts receivable could materially and adversely affect our financial condition and results of operations. These difficulties are heightened during periods when economic conditions worsen. 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 CompetitionBusiness 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, could result in the shifting of business to our competitors and could result in litigation against us. Costs associated with correcting defects, errors, bugs or other issues could be significant and could materially harm our financial results. For example, in July 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 media and communications processor, or MCP, and GPU products used in notebook systems. In September and October 2008, several putative class action lawsuits were filed against us, asserting various claims related to the impacted MCP and GPU products. Please refer to the risk entitled “We are subject to litigation arising from alleged defects in our previous generation MCP and GPU products, which if determined adversely to us, could harm our business” for the risk associated with this litigation.
As Intel 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 AMD continuemay 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 pursue platform solutions,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 successfully compete andobtain sufficient inventory to fill 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 announcedcustomers’ orders on a platform solution. Additionally,timely basis. Even if we expect that Intel and AMD will extend this strategyare able to other segments, including the possibility of successfully integrating a CPU and a GPU on the same chip. If AMD and Intel continueincrease production levels to pursue platform solutions,meet customer demand, we may not be able to successfully compete anddo so in a cost effective or timely manner. Inability to fulfill our business would be negatively impacted.
Thecustomers’ orders on a timely basis, or at all, could damage our customer relationships, result in lost revenue, cause a loss in market forshare, impact our products is highly competitive and we may be unable to compete.
The market forcustomer relationships or damage our products is highly competitive and is characterized by rapid technological change, new product introductions, evolving industry standards and declining average selling prices. We believe that the principal competitive factors in this market are:
· | breadth and frequency 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, eitherreputation, any of which could harmadversely impact our business.
For example,Because we are the largest supplierorder products or materials in advance of AMD 64 chipsets with 61% segment shareanticipated 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 thirdlast month of each quarter, of calendar year 2007, as reportedwe may not be able to reduce our inventory purchase commitments in the latest PC Processora timely manner in response to customer cancellations or deferrals. We could be subject to excess or obsolete inventories and Chipset report from Mercury Research. Decline inbe required to take corresponding inventory write-downs if growth slows or does not materialize, or if we incorrectly forecast product demand, forwhich could negatively impact our chipsets in the AMD segment would harm our business.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.
An additional significant source of competition is from companies that provideIn order to maintain or intendimprove our financial results, we will need to provide competing product solutions. Some of our competitors may have or be ablecontinue to obtain greater marketing, financial, distributionidentify and manufacturing resources than we do and may be more able to adapt to customer or technological changes. For example, Intel is working on a multi-core architecture code-named Larrabee, which may compete with ourdevelop new products in various markets. Intel may also release an enthusiast level discrete GPU based on the Larrabee architecture. If Intel devotes more resources to the development of Larrabee as well as future architecturesidentify and GPUenter 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 than we do, it may produceand enhancements to existing products that out performto maintain or improve overall average selling prices, our currentgross margin and future generations of technology and products.
Our current competitors includeour financial results. We believe 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 somesuccess of our existing competitorsnew 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 companies with whichan 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 currently do not compete.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 competeachieve 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, is 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 currentcustomers’ 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 3,710 and 3,020 full-time employees engaged in research and development as of October 26, 2008 and October 28, 2007, respectively. Research and development expenditures were $212.4 million and $179.5 million for the third quarter of fiscal years 2009 and 2008, respectively, and $644.1 million and $495.8 million for the first nine months of fiscal years 2009 and 2008, respectively. Research and development expenses included non-cash stock-based compensation expense of $22.7 million and $18.7 million for the third quarter of fiscal years 2009 and 2008, respectively, and $71.5 million and $57.5 million for the first nine months 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 third quarter of fiscal year 2009, our gross margin declined to 41% as compared to 46.2% during the third quarter of fiscal year 2008 and increased from 16.8% for the second quarter of fiscal year 2009. The decline in gross margin in 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 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. The significant decline in the trading price of our common stock would make the dilution to our stockholders more extreme and could negatively impact our ability to pay the consideration with shares of common stock or convertible debentures. 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. The loss of the services of 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.
In September 2008, we reduced our global workforce by approximately 6.5% as part of our efforts to allow continued investment in strategic growth areas. This reduction in our workforce may impair our ability to recruit and retain qualified employees of our workforce as a result of a perceived risk of future workforce reductions. Employees, whether or not directly affected by the reduction, may also seek future employment with our business partners, customers or competitors. In addition, we rely on stock-based awards as one means for recruiting, motivating and retaining highly skilled talent. If the value of such stock awards does not appreciate as measured by the performance of the price of our common stock or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain, and motivate employees could be weakened, which could harm our results of operations. The significant decline in the trading price of our common stock has resulted in the exercise price of a significant portion of our outstanding options to significantly exceed the current trading price of our common stock, thus lessening the effectiveness of these stock-based awards. We may not continue to successfully attract and retain key personnel which would harm 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 24% of our total revenue for the third quarter of fiscal years 2009 and 2008, respectively, and 31% and 26% for the first nine months of fiscal years 2009 and 2008, respectively. Operating expenses included stock-based compensation expense of $34.8 million and $29.4 million for the third quarter of fiscal years 2009 and 2008, respectively, and $110.8 million and $90.8 million for the first nine months 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 the case in 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.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R), Share-based Payment, 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 $38.4 million and $32.0 million for the third quarter of fiscal years 2009 and 2008, respectively, and $120.9 million and $98.9 million for the first nine months of fiscal years 2009 and 2008, respectively, which negatively impacted our operating results. We believe that SFAS No. 123(R) will suffer.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. For example, during the nine months ended October 26, 2008, our market capitalization declined from approximately $14 billion to approximately $4 billion. 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
Global economic conditions could reduce demand for our products, adversely impact our customers and suppliers and harm our business.
Our operations and performance depend significantly on worldwide economic conditions. Uncertainty about current global economic conditions poses a risk as consumers and businesses may postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for our products and services. Other factors that could influence demand include continuing increases in fuel and other energy costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could have a material adverse effect on demand for our products and services and on our financial condition and operating results.
The current financial turmoil affecting the banking system and financial markets and the possibility that financial institutions may consolidate or go out of business have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets. There could be a number of follow-on effects from the credit crisis on our business, including insolvency of key suppliers resulting in product delays; inability of customers, including channel partners, to obtain credit to finance purchases of our products and/or customer, including channel partner, insolvencies; and failure of financial institutions, which may negatively impact our treasury operations. Other income and expense could also vary materially from expectations depending on gains or losses realized on the sale or exchange of financial instruments; impairment charges related to debt securities as well as equity and other investments; interest rates; and cash, cash equivalent and marketable securities balances. For example, during the third quarter of fiscal 2009, we recorded impairment charges of $8.8 million for the third quarter of fiscal year 2009. The current volatility in the financial markets and overall economic uncertainty increases the risk that the actual amounts realized in the future on our financial instruments could differ significantly from the fair values currently assigned to them.
We are exposed to credit risk, fluctuations in the market values of our portfolio investments and in interest rates.
Future declines in the market values of our cash, cash equivalents and marketable securities could have a material adverse effect on our financial condition and operating results. At October 26, 2008 and January 27, 2008, we had $1.30 billion and $1.81 billion, respectively, in cash, cash equivalents and marketable securities. Given the global nature of our business, we have invested both domestically and internationally. All of our investments are denominated in United States dollars. 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 debt securities of corporations, municipalities and the United States government and its agencies. As of October 26, 2008, we did not have any investments in auction-rate preferred securities. As of October 26, 2008, our investments in the financial sector, which has been negatively impacted by recent market liquidity conditions, and government agencies including government-sponsored enterprises accounted for approximately 19% and 68%, respectively, of our total investment portfolio. Credit ratings and pricing of these investments can be negatively impacted by liquidity, credit deterioration or losses, financial results, or other factors. As a result, the value or liquidity of our cash, cash equivalents and marketable securities could decline and result in a material impairment, which could have a material adverse effect on our financial condition and operating results. For example, during the third quarter of fiscal 2009, we recorded impairment charges of $8.8 million for the third quarter of fiscal year 2009. These charges include $5.6 million towards the other than temporary impairment of our investment in the money market funds held by the Reserve International Liquidity Fund, Ltd., or International Reserve Fund. Please refer to Note 17 of the Notes to Condensed Consolidated Financial Statements for further detail. As of October 26, 2008, our money market investment in the International Reserve Fund, which was valued at $124.4 million, net of other than temporary impairment charges, was classified as marketable securities in our Condensed Consolidated Balance Sheet due to the halting of redemption requests in September 2008 by the International Reserve Fund. We expect to receive the proceeds of our investment in the International Reserve Fund by no later than October 2009, when all of the underlying securities held by the International Reserve Fund are scheduled to have matured. However, redemptions from the International Reserve Fund are currently subject to pending litigation, which could cause further delay in receipt of our funds. In addition, we may determine that further impairment of our investment in the International Reserve Fund may be necessary.
Risks RelatedWe 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 Market Conditionsa 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.
Our stock price continues to be volatile.
Our stock has at times experienced substantial price volatility as a result of variations between our actual and anticipated financial results, announcements by us and our competitors, or uncertainty about current global economic conditions. The stock market as a whole also has experienced extreme price and volume fluctuations that have affected the market price of many technology companies in ways that may have been unrelated to these companies’ operating performance.
In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. For example, following our announcement on July 2, 2008, that we would take a charge against cost of revenue to cover anticipated costs and expenses arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products and that we were revising financial guidance for our second fiscal quarter, the trading price of our common stock declined. In September 2008, several putative class action lawsuits were filed against us relating to this announcement. Please refer to Note 13 of the Notes to Condensed Consolidated Financial Statements for further information regarding these lawsuits. Due to changes in the potential volatility of our stock price, we may be the target of securities litigation in the future. Such lawsuits could result in the diversion of management’s time and attention away from business operations, which could harm our business. In addition, the 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 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. Additionally, weWe generated 89%83% and 87%90% of totalour revenue for the third quarter of fiscal years 20082009 and 2007,2008, respectively, and 86% and 85%88% of our revenue for the first nine months of each fiscal yearsyear 2009 and 2008, and 2007, respectively, from sales to customers outside the United States and other Americas. As of October 26, 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 outside of the United States and other Americasinternationally subjects us to a number of risks, associated with conducting business outside of the United States and other Americas, including, but not limited to:including:
| · | international economic and political conditions; conditions, such as political tensions between countries in which we do business; |
| · | unexpected changes in, or impositions of, legislative or regulatory requirements; |
· | labor issues in· | complying with a variety of foreign countries; laws; |
| · | differing legal standards with respect to protection of intellectual property and employment practices; |
| · | cultural differences in the conduct of business; |
| · | inadequate local infrastructure;infrastructure that could result in business disruptions; |
· | delays resulting from difficulty in obtaining· | exporting or importing issues related to export licenses for certain technology,or import restrictions, tariffs, quotas and other trade barriers and restrictions; |
| · | financial risks such as longer payment cycles; |
· | cycles, difficulty in collecting accounts receivable; |
· | receivable and 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; and |
· | 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 includingsuch 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.
We have offices outside of the United States, including officesOur international operations in Australia, Taiwan, Japan, Korea, China, Hong Kong, India, France, Finland, Germany, Russia, Germany, FinlandSwitzerland and England. Our operations in our international locationsthe United Kingdom 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.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.
We are dependent onThe economic conditions in our primary overseas markets, particularly in Asia, may negatively impact 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, changesproducts abroad. All of our international sales to date have been denominated in demandUnited States dollars. Accordingly, an increase in the value of the United States dollar relative to foreign currencies could be large and sudden. Since PC manufacturers often build inventories during periodsmake our products less competitive in international markets or require us to assume the risk of anticipated growth, they may be left with excess inventories if growth slows or if they incorrectly forecast product transitions. Indenominating certain sales in foreign currencies. We anticipate that 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 havefactors will impact our business to a negative impact ongreater degree as we further expand our business.international business activities.
If our products do not continue to be adopted by the consumer and enterprise desktop PC, notebook PC, workstation, high-performance computing, personal media players, or PMPs, personal digital assistant,assistants, or PDA,PDAs, cellular handheld devices, and video game console markets or if the demand in these markets 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 consumer and enterprisedesktop PC, notebook PC, workstation, high-performance computing, PDA,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 of approximately 73% and 80% of our revenue for each of the third quarter of fiscal years 2009 and 2008, respectively, and 200776% and 78% and 77% of our revenue during the first nine months of fiscal years 20082009 and 2007,2008, 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 consumer and enterprisedesktop 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.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.
Our failure to comply with any applicable environmental regulations could result in a rangeWe are dependent on the PC market and its rate 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 equipmentgrowth in the market in the European Union which became effectivefuture may have a negative impact 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.our business.
It is possible that unanticipated supply shortages, delaysWe derive and expect to continue to derive the majority of our revenue from the sale or excess non-compliant inventory may occur as a resultlicense 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 businessproducts for use in the countries that have adopted these typesdesktop PC and notebook PC markets, including professional workstations. A reduction in sales of regulations.
We are exposed to fluctuationsPCs, or a reduction in the market valuesgrowth rate of our portfolio investments and in interest rates.
At October 28, 2007 and January 28, 2007, we had $1.85 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 accountPC sales, may reduce demand 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 toproducts. These changes in interest rates or if the decline in fair value of our publicly traded equity investments is judged todemand could 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.
Recent U.S. sub-prime mortgage defaults have had a significant impact across various sectors of the financial markets, causing global creditlarge and liquidity issues. The short-term funding markets experienced issues duringsudden. During the third quarter of calendar 2007, leadingfiscal year 2009, sales of our desktop GPU products decreased by approximately 42% compared to liquidity disruption in asset-backed commercial paper and failed auctionsthe third quarter of fiscal year 2008. These decreases were primarily due to the Standalone Desktop GPU market segment decline as reported in the auction rate market. If the global credit market continues to deteriorate, our investment portfoliolatest PC Graphics October 2008 Report from Mercury Research. Since PC manufacturers often build inventories during periods of anticipated growth, they may be impacted and we could determine someleft 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 our investments are impairedadditional inventory from suppliers like us until their excess inventory has been absorbed, which could adverselywould 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 costsexpenses to sufficiently offset declines in demand, increased inventories, or decreased selling prices during a downturn, our revenue and earningsoperating results will suffer.
Political instabilityRisks Related to Regulatory, Legal and Other Matters
We are subject to litigation arising from alleged defects in Taiwanour previous generation MCP and in The People’s Republic of China or elsewhereGPU products, which if determined adversely to us, could harm our business.
BecauseDuring 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 reliance on foundriesprevious generation MCP and independent contractors locatedGPU products used in Taiwannotebook systems. The previous generation MCP and The People’s RepublicGPU products that are impacted were included in a number of China,notebook products that were shipped and becausesold 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 officesnot 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 continue to engage in these locations,discussions with our business may be harmed by political instability in Taiwan, including the worseningsupply chain regarding reimbursement to us for some or all of the strained relations between The People’s Republic of Chinacosts we have incurred and Taiwan.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.
In September, October and November 2008, several putative class action lawsuits were filed against us, asserting various claims related to the impacted MCP and GPU products. Such lawsuits could result in the diversion of management’s time and attention away from business operations, which could harm our business. In addition, the costs of defense and any damages resulting from this litigation, a ruling against us, or a settlement of the litigation could adversely affect our cash flow and financial results.
Risks Related to Government Action, Regulatory Action, Intellectual Property, and Litigation
The pending investigation by the United States Department of Justice regarding investigation intoongoing civil actions or any new actions relating to the market for Graphics ProcessorsGPUs 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, or GPUs and cards. On October 10, 2008, the DOJ formally notified us that the DOJ investigation had been closed. No specific allegations have beenwere made against us. We are cooperating withNVIDIA during the DOJ in its investigation.
As of November 12, 2007, over 50Several putative 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,against us by direct 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 representing all directindirect purchasers of graphic processing units, or GPUs, and the other representing all indirect purchasers) filed consolidated, amended class-action complaints.. These complaints purport to assertasserting 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,In September 2008, we movedexecuted a settlement agreement, or the Agreement, in connection with the claims of the certified class of direct purchaser plaintiffs. The Agreement is subject to dismiss those complaints. The motions to dismiss were heardcourt approval and, if approved, would dispose of all claims and appeals raised 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 associated with these cases will be expensive. We believe the allegationscertified class in the complaints against NVIDIA. In addition, in September 2008, we reached a settlement agreement with the remaining individual indirect purchaser plaintiffs that provides for a dismissal of all claims and appeals related to the complaints raised by the individual indirect purchaser plaintiffs. This settlement is not subject to the approval of the court. While we expect the courts to approve the settlement agreement with the direct purchasers, there can be no assurance that it will approved. If the settlement agreement is not approved we may be required to pay damages or penalties or have other remedies imposed on us that could harm our business. In addition, additional parties may bring claims against us relating to the potential antitrust violations related to GPUs and cards. If additional claims are without meritbrought against us, such lawsuits could result in the diversion of management’s time and intend to vigorously defendattention away from business operations, which could harm our business. In addition, the cases. Costscosts of defense and any damages resulting from this litigation, a ruling against us, or a settlement of the litigation could adversely affect our business.cash flow and financial results.
The matters relating to the Board of Director’s, or 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.
Expensing employee stock options materially and adversely affects our reported operating results and could also adversely affect our competitive position.
Since inception,On August 10, 2006, we have used stock options and our employee stock purchase program as fundamental componentsannounced that the Audit Committee of our compensation packages. We believeBoard, 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 these incentives directly motivate our employees and, through the use of vesting, encourage our employees to remain with us.incorrect measurement dates were used for financial accounting purposes for stock option grants in certain prior periods. As a result, of adjustments arising from our restatementwe recorded additional non-cash stock-based compensation expense, and related tax effects, related to stock option grants. Ten derivative complaints were filed in state and federal court pertaining to allegations relating to stock option grants. In September 2008, we entered into Memoranda of Understanding regarding the settlement of the stockholder derivative lawsuits. In November 2008, the definitive settlement agreements were concurrently filed in the Chancery Court of Delaware and the United States District Court Northern District of California and are subject to approval by both such courts. The settlement agreements do not contain any admission of wrongdoing or fault on the part of NVIDIA, our board of directors or executive officers. While we expect the courts to approve the settlement agreements, there can be no assurance that they will approved. If the settlement agreements are not approved we may be required to pay damages or penalties or have other remedies imposed on us that could harm our business.
Government investigations and inquiries from regulatory agencies could lead to enforcement actions, fines or other penalties and could result in litigation against us.
We have been subject to government investigations and inquiries from regulatory agencies. For example, 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. On October 10, 2008, the DOJ formally notified us that the DOJ investigation had been closed. No specific allegations were made against NVIDIA during the investigation. In addition, in late August 2006, the Securities and Exchange Commission, or SEC initiated an inquiry related to our historical stock option grant dates,practices. On October 26, 2007, the SEC formally notified us that the SEC's investigation concerning our operating results for fiscal years priorhistorical stock option granting practices had been terminated and that no enforcement action was recommended. We may be subject 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 primarilygovernment investigations and receive additional inquiries from regulatory agencies in the intrinsic value-based method under Accounting Principles Board Opinion No. 25,future, which may lead to enforcement actions, fines or APB 25, Accounting for Stock Issued to Employees and related interpretations.other penalties.
In December 2004, the past, litigation has often been brought against a company in connection with the announcement of a government investigation or inquiry from a regulatory agency. For example, following the announcement of the DOJ investigation, several putative civil complaints were filed against us. In addition, following our Audit Committee’s investigation and the SEC’s investigation concerning our historical stock option granting practices, ten derivative complaints were filed in state and federal court pertaining to allegations relating to stock option grants. Please refer to Note 13 of the Notes to Condensed Consolidated Financial Accounting Standards Board,Statements for further information regarding these lawsuits. Such lawsuits could result in the diversion of management’s time and attention away from business operations, which could harm our business. In addition, the costs of defense and any damages resulting from litigation, a ruling against us, or FASB,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, SFAS No. 123(R)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 requiresour products are or may be manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the measurementsame extent as the laws of the United States. This makes the possibility of piracy of our technology and recognitionproducts 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 compensation expense for all stock-based compensation payments. SFAS No. 123(R) requirespatents 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 record compensation expensehave agreed to indemnify them for stock optionscertain 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 employee stock purchase plan using the fair value of those awards. During the third quarter of fiscal years 2008 and 2007 we recorded $32.0 million and $31.7 million, respectively, and $98.9 million and $82.8 million for the first nine months of fiscal years 2008 and 2007, respectively, related to non-cash stock-based compensation, resulting fromintellectual property, our compliance with SFAS 123 (R),operating expenses may increase which could negatively impactedimpact 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 believe that SFAS No. 123(R) will continuemay 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.
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, including patent litigation, which, if determined adversely to us, could harmadversely affect our businesscash flow and financial condition.results.
We are a party to litigation.litigation as both a defendant and as a plaintiff. There can be no assurance that actions that have been brought against us or any brought by uslitigation 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 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.
We are subject to the risks of owning real property.
In the first nine months 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. |
Our ability We may need to competeraise additional capital to fund the construction of a new campus, which may not be available on favorable terms, or at all.
Currently, we are considering construction of a new campus in Santa Clara, California. If we move forward with our plans, we will be harmed ifspend a significant amount for materials and related construction costs. If we are unable to adequately protectcontrol 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 productsconstruction related expenses or costs or such costs are or may be manufactured or sold, including various countries in Asia,higher than we anticipate, we may not protecthave sufficient balances of cash, cash equivalents and marketable securities to fund 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 mayoperations. As a 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, licensesraise additional financing. Such additional financing may not be offered to usavailable on favorable terms, or 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 oneall. Use of our products that is used by an indemnified customer, we could be subject to substantial liabilities or have to suspend or discontinue the manufactureavailable funds may also prevent us from making other necessary investments in our business such as in research and saledevelopment of one or more of our products 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.
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 currently have adequate internal control over financial reporting, if we are exposed to risks from legislation requiring companies to evaluate those internal controls.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 attest 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 testingtest companies’ internal controls remains subject to some uncertainty.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 suchthat 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 our Board to create and issue preferred stock without prior stockholder approval; · the prohibition of stockholder action by written consent; · a classified Board; and · | 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.
Issuer Purchases of Equity Securities
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 year 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. 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 NVIDIAus 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 October 28, 2007, we entered into a structured share repurchase transaction to repurchase 4.0 million shares for $125.0 million which we recorded on the trade date of the transaction. Through October 28, 2007,26, 2008, we havehad repurchased 56.091.1 million shares under our stock repurchase program for a total cost of $862.5 million.
Subsequent to$1.46 billion. During the three months ended October 28, 2007,26, 2008, we entered into a structured share repurchase transaction to repurchase 23.1 million shares for $299.7 million which we recorded on the trade date of our common stock for $125.0 million that we expect to settle prior to the end of our fourth quarter of fiscal year 2008 ending on January 27, 2008.transaction.
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) | |
| July 30, 2007 through August 26, 2007 | | | | | | $ | - | | | | | | | $ | | |
| August 27, 2007 through September 26, 2007 | | | | | | $ | - | | | | | | | $ | | |
| September 27, 2007 through October 28, 2007 | | | | | | $ | 31.34 | | | | | | | $ | | |
| | | | | | $ | | | | | | | | | | |
| 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) |
| July 28, 2008 through August 24, 2008 | - | | | - | | | - | | $ | 1,535,460,657 | |
| August 25, 2008 through September 28, 2008 | - | | | - | | | - | | $ | 1,535,460,657 | |
| September 29, 2008 through October 26, 2008 | 23,076,923 | | $ | 12.99 | | | 23,076,923 | | $ | 1,235,721,129 | |
| Total | 23,076,923 | | $ | 12.99 | | | 23,076,923 | | | | |
(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. Further, 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$2.7 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 October 28, 2007.26, 2008.
(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 three months ended October 28, 2007,26, 2008, we entered into a structured share repurchase transaction to repurchase 4.023.1 million shares for $125.0$299.7 million, which we recorded on the trade date of the transaction. Subsequent to October 28, 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 fourth quarter of fiscal year 2008 ending on January 27, 2008.
Not applicable. None
None.
None.
None.
EXHIBIT INDEX
| | | |
| | | Incorporated by Reference |
| Exhibit No. | | Exhibit Description |
| Schedule/Form |
| File Number | Exhibit
| Exhibit | | Filing Date |
| | | | | | | |
| | | | | | | |
| | 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 or otherwise subject to the liability of that Section. 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.
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: December 1, 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 |
| | | | | | | | | | | | |
| 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.Act or otherwise subject to the liability of that Section. 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: November 21, 2007 | |
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
|
| | | | | | |
| | | | | | |
| 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 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.
