FISCAL 2007 ANNUAL REPORT ON FORM 10-K
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________
FORM
10-K
[x] ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended January 28, 2007
OR
[_] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission
file number: 0-23985
NVIDIA
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
94-3177549
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
Identification
No.)
|
2701
San Tomas Expressway
Santa
Clara, California 95050
(408)
486-2000
(Address,
including zip code, and telephone number, including area code, of principal
executive offices)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
Name
of each exchange on which registered
|
Common
Stock, $0.001 par value per share
|
The
NASDAQ Stock Market, LLC
(NASDAQ
Global Select Market)
|
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
x
No
o
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Act.
Yes
o
No
x
Indicate
by check mark
whether the registrant (1) has filed all reports required to be filed by
Section
13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90
days.
Yes
x
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, indefinitive proxy or
information statements incorporated by reference in Part III of this Form
10-K
or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
x
Large
accelerated filer o
Accelerated
filer o
Non-accelerated
filer
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
o
No
x
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of July 30, 2006 was approximately $7.03 billion (based on
the
closing sales price of the registrant’s common stock as reported by the NASDAQ
Global Select Market, on July 30, 2006). Shares of common stock held by each
current executive officer and director and by each person who is known by
the
registrant to own 5% or more of the outstanding common stock have been excluded
from this computation in that such persons may be deemed to be affiliates
of the
registrant. Share ownership information of certain persons known by the
registrant to own greater than 5% of the outstanding common stock for purposes
of the preceding calculation is based solely on information on Schedule 13G
filed with the Commission and is as of July 30, 2006. This determination
of
affiliate status is not a conclusive determination for other purposes.
The
number of shares of common stock outstanding as of March 2, 2007 was
360,038,303.
DOCUMENTS
INCORPORATED BY REFERENCE
The
Registrant has incorporated by reference portions of its Proxy Statement
for its
2007 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission by May 28, 2007.
NVIDIA
CORPORATION
TABLE
OF CONTENTS
|
|
Page
|
|
|
|
|
|
1
|
|
|
10
|
|
|
24
|
|
|
25
|
|
|
25
|
|
|
27
|
|
|
|
|
|
28
|
|
|
30
|
|
|
31
|
|
|
48
|
|
|
49
|
|
|
49
|
|
|
49
|
|
|
49
|
|
|
|
|
|
50
|
|
|
50
|
|
|
51
|
|
|
51
|
|
|
51
|
|
|
|
|
|
52
|
|
|
96
|
Forward-Looking
Statements
When
used in this Annual Report on Form 10-K, the words “believes,” “plans,”
“estimates,” “anticipates,” “expects,” “intends,” “allows,” “can,” “will” and
similar expressions are intended to identify forward-looking statements.
These
statements relate to future periods and include, but are not limited to,
statements as to: the features, benefits, capabilities, performance, impact,
production and availability of our technologies and products; seasonality;
acquisitions and the benefits and results of acquisitions; our strategies
and
objectives; product cycles; our gross margin; product mix; our inventories;
average selling prices; our taxes; growth and factors contributing to growth;
anticipated areas of growth; expensing of stock options; the impact of
stock-based compensation expense; our critical accounting policies; mix
and
sources of revenue; anticipated revenue; changes in and reasons for our
expenditures; capital expenditures; our cash flow and cash balances; our
liquidity; uses of cash; dividends; investments and marketable securities;
our
stock repurchase program; our results of operations; Microsoft Windows
Vista;
our competitors' focuses; our competition and our competitive position;
our
intellectual property; the importance of our strategic relationships; customer
demand; reliance on a limited number of customers and suppliers; our internal
control over financial reporting; our disclosure controls and procedures;
recent
accounting pronouncements; our international operations; our ability to
attract
and retain qualified personnel; our foreign currency risk strategy; compliance
with environmental laws and regulations; litigation or regulatory action
arising
from the review of our stock option grant practices and financial restatements;
the Department of Justice subpoena and investigation; litigation, including
the
class action lawsuits; and the Securities and Exchange Commission inquiry.
Forward-looking statements are subject to risks and uncertainties that
could
cause actual results to differ materially from those projected. These risks
and
uncertainties include, but are not limited to, the risks discussed below
as well
as difficulties associated with conducting international operations; slower
than
anticipated growth; unanticipated decreases in average selling prices of
a
particular product; increased sales of lower margin products; difficulty
in
collecting accounts receivable; our inability to decrease inventory purchase
commitments; difficulties in entering new markets; the write-down of the
value
of inventory; entry of new competitors in our established markets; reduction
in
demand for our products; market acceptance of our competitors’ products; defects
in our products; the impact of competitive pricing pressures; disruptions
in our
relationships with our key suppliers; fluctuations in general economic
conditions; failure to achieve design wins; changes in customers’ purchasing
behaviors; international and political conditions; the concentration of
sales of
our products to a limited number of customers; decreases in demand for
our
products; delays in the development of new products by us or our partners;
delays in volume production of our products; developments in and expenses
related to litigation; our inability to realize the benefits of acquisitions;
the outcome of litigation or regulatory actions; and the matters set forth
under
Item 1A. - Risk Factors. These forward-looking statements speak only as
of the
date hereof. Except as required by law, we expressly disclaim any obligation
or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in our expectations with
regard thereto or any change in events, conditions or circumstances on
which any
such statement is based.
All
references to “NVIDIA,” “we,” “us,” “our” or the “Company” mean NVIDIA
Corporation and its subsidiaries, except where it is made clear that the
term
means only the parent company.
NVIDIA,
GeForce, SLI, GoForce, NVIDIA Quadro, Quadro, NVIDIA nForce, PureVideo, CUDA,
Quadro NVS, Quadro Plex and the NVIDIA logo are our trademarks or registered
trademarks in the United States and other countries that are used in this
document. We may also refer to trademarks of other corporations and
organizations in this document.
Overview
Our
Company
NVIDIA
Corporation is the worldwide leader in programmable graphics processor
technologies. Our products are designed to enhance the end-user experience
on
consumer and professional computing devices. We have four major product-line
operating segments: the graphics processing units, or GPU Business, media
and
communications processors, or MCP Business, Handheld GPU Business, and Consumer
Electronics Business. Our GPU Business is composed of products that support
desktop personal computers, or PCs, notebook PCs, professional workstations
and
other GPU-based products; our MCP Business is composed of NVIDIA nForce products
that operate as a single-chip or chipset that provide system functions, such
as
high speed storage and network communications, and perform these operations
independently from the host central processing unit, or CPU; our Handheld
GPU
Business is composed of products that support handheld personal digital
assistants, or PDAs, cellular phones and other handheld devices; and our
Consumer Electronics Business is concentrated in products that support video
game consoles and other digital consumer electronics devices. We were
incorporated in California in April 1993 and reincorporated in Delaware in
April
1998. Our headquarter facilities are in Santa Clara, California. Our Internet
address is www.nvidia.com.
Original
equipment manufacturers, or OEMs, original design manufacturers, or ODMs,
add-in-card manufacturers, system builders and consumer electronics companies
worldwide utilize NVIDIA processors as a core component of their entertainment
and business solutions. Our GPUs are designed to deliver performance and
visual
quality for PC-based applications such as manufacturing, science, e-business,
entertainment and education. Our MCPs perform demanding multimedia processing
for secure broadband connectivity, communications and storage. Our handheld
GPUs
deliver a quality visual experience by accelerating graphics and video
applications while implementing design techniques that result in high
performance and relatively low power consumption.
Our
Business
GPU
Business
The
combination of our GeForce 6, GeForce 7 and GeForce 8 series of GPUs and
our
Scalable Link Interface, or SLI, technology and NVIDIA Quadro professional
solutions has created a new class of gaming PCs and professional
workstations. SLI technology takes advantage of the increased bandwidth of
the peripheral component interconnect, or PCI, Express bus architecture to
allow
up to four NVIDIA GPUs to operate in a single PC or up to two NVIDIA GPUs
to
operate in a notebook PC or professional workstation. In fiscal 2007, we
announced PureVideo High-Definition, or HD technology, a combination of hardware
acceleration from an NVIDIA GPU, high definition movie player integration
and
High-Bandwidth Digital Content Protection or HDCP, feature support, to enable
manufacturers and consumers to build PCs that can play High-Definition Digital
Video Disc, or HD DVD, or Blu-ray movies. In November 2006, we launched the
GeForce 8800, the industry’s first GPU to support the new Microsoft DirectX 10
Application Programming Interface, or API. DirectX 10 is a new API for the
Microsoft Windows Vista operating
system,
or
Vista, and includes many new features, such as a geometry shader. GeForce
8800
is the first DirectX 10 GPU based on Unified Shader architecture, which can
adapt its computation resources to changing vertex and pixel shading workload
from scene to scene. We also announced Compute Unified Device Architecture,
or
CUDA, a new mode of operation on GPUs where the computational power of the
GPU
can be utilized for computation-intensive applications.
Technology
and market leadership in this generation of GPUs continues to be a key element
of our corporate strategy. The combination of the programmable Unified Shader
GPU with Microsoft Corporation’s, or Microsoft’s, DirectX 10 high-level shading
language is known as DirectX 10 GPUs. Combined with the ability to directly
access the GPU via the new Vista applications from Microsoft Office to Web
2.0
applications can now incorporate 3D effects. In fiscal 2007, our strategy
was to
extend our architectural and technology advantage with our second-generation
GPUs to support DirectX 9.0 Shader Model 3.0, the GeForce 7 Series GPUs.
By
extending our leadership position in the performance segment with the production
release of the GeForce 7900 in June 2006, we grew our market share from 79%
to
85%, according to the Mercury Research Fourth Quarter 2005 and 2006 PC Graphics
Reports, respectively.
The
NVIDIA Quadro brand has become the benchmark of performance and compatibility
for the professional industry. NVIDIA Quadro is recognized by many as the
standard for professional graphics solutions needed to solve many of the
world’s
most complex visual computing challenges in the manufacturing, entertainment,
medical, science, and aerospace industries. In fiscal 2007, we introduced
NVIDIA
Quadro Plex, a new category of visual computing solutions that brings a level
of
graphics scalability and processing density. In November 2006, we began seeding
the industry with our GeForce 8 GPU, enabled with CUDA, a technology and
compiler that, for the first time, allows for programmers to write C language
applications for GPUs. GeForce 8 and CUDA will enable a new class of high
performance computing we call “GPU Computing.” With CUDA-enabled GPUs, engineers
and scientists will be able to harness programmable GPUs in PCs to solve
mathematically-intensive problems that were previously cost prohibitive.
MCP
Business
The
NVIDIA nForce family of products represents our MCPs for Advanced Micro Devices,
Inc., or AMD, and Intel Corporation, or Intel,-based desktop, notebook,
professional workstations and servers. Our strategy for MCPs aligns with
what we
anticipate will drive growth in the MCP segment such as multi-core,
ever-increasing-speed networking and storage technologies, and integration
of
complex features such as virtualization, security processing, network processing
and more. The In-Stat Trendy Chipset for the x86 Processor Report projects
strong growth for PC chipsets through the end of this decade from $7.6 billion
in calendar 2006 to over $10 billion in calendar 2009.
In
fiscal
2007, we began production shipments of our single-chip motherboard GPUs for
AMD-based PCs. We are now the second largest core logic supplier in the world,
according to the Mercury Research Fourth Quarter 2006 PC Graphics Report.
We are
the largest supplier of AMD 64 chipsets with 53% segment share. NVIDIA nForce
MCP unit shipments for AMD64-based CPUs increased over 113% calendar
year-over-calendar year, based on the Mercury Research Fourth Quarter 2006
PC
Processor Forecast Report.
Also
during fiscal 2007, we launched our NVIDIA nForce 680i SLI MCP, which was
designed for Intel Core 2 Quad and Core 2 Duo-based PCs. The NVIDIA nForce
680i
SLI MCP is a motherboard solution with dual Gigabit Ethernet ports and advanced
storage features that is targeted at the hard-core enthusiast and provides
support for some of the latest technologies, including NVIDIA SLI multi-GPU
technology. We also started to design and released production of our own
line of
enthusiast-class NVIDIA nForce 680i SLI-based motherboards, which are being
offered as a turnkey solution for select channel partners. Our "Designed
by
NVIDIA" program allows NVIDIA partners to bring NVIDIA nForce 680i SLI-based
motherboards to market faster than before, and lets consumers know that the
motherboard they are purchasing supports all of the hardware and software
features that are offered with the NVIDIA nForce 680i SLI MCP.
In
fiscal
2007, we completed our acquisition of ULi Electronics, Inc., or ULi, a core
logic developer for the PC industry. This acquisition represents our ongoing
investment in our platform solution strategy.
Handheld
GPU Business
Our
strategy in our Handheld GPU business is to lead innovation and capitalize
on
the emergence of the cellular phone as a versatile consumer lifestyle
device. Every device in the NVIDIA GoForce product family is designed to
provide a high-performance, visually rich multimedia experience on cellular
phones and handheld devices. These products deliver an advanced visual
experience by accelerating graphics and video applications. NVIDIA GoForce
handheld GPUs and application processors implement design techniques, both
inside the chips and at the system level, which result in high performance
and
long battery life. These technologies enhance visual display capabilities,
improve connectivity, and minimize chip and system-level power consumption.
NVIDIA GoForce products can be found in multimedia cellular phones, PDAs,
and
other handheld devices.
In
March
2006, NVIDIA and Intel announced a collaboration to bring a high-performance
3D
gaming and multimedia platform to handheld devices. In addition, in March
2006
we acquired Hybrid Graphics Ltd., or Hybrid Graphics, a developer of embedded
2D
and 3D graphics software for handheld devices. In June 2006, we launched
our
MobileMedia Platform development kit for handheld devices running Windows
Mobile
5.0.
In
January 2007, we completed our acquisition of PortalPlayer, Inc., or
PortalPlayer, a leading supplier of semiconductors, firmware, and software
for
personal media players, or PMPs, and secondary display-enabled computers.
Until
recently, our Handheld GPU strategy has been to focus on establishing ourselves
in the market as the leader of multimedia technology by leveraging our expertise
in graphics, video, and image processing. With PortalPlayer’s expertise in
building low power application processors for Personal Media Players, or
PMPs,
we are now focused on delivering Systems-On-A-Chip, or SOCs, that combine
our
application processors and GPUs. We expect SOCs such as these to power next
generation smart multimedia phone and PMP devices.
Consumer
Electronics Business
Our
Consumer Electronics product group is composed of our contractual arrangements
with Sony Computer Entertainment, or SCE, to jointly develop a custom GPU
for
SCE’s PlayStation3, sales of our Xbox-related products, revenue from our
license agreement with Microsoft relating to the successor product to their
initial Xbox gaming console, the Xbox360, and related devices, and digital
media
processor products. SCE launched sales of its PlayStation 3 computer
entertainment system in November 2006. We recognized revenue from the sale
of
our Xbox-related products to Microsoft for the last time during the second
quarter of fiscal 2006.
Our
Products
We
have
four major product groups: GPUs, MCPs, Handheld GPUs, and Consumer Electronics.
Our products are designed to support current standards as determined by each
industry segment and to provide features that enhance the overall operation
and
compatibility of each platform they support.
GPUs. Our
GPU
products support desktop PCs, notebook PCs, professional workstations and
other
GPU-based products. We have three major families of GPUs: GeForce, Go and
NVIDIA
Quadro.
GeForce.
The
GeForce family represents our desktop GPUs and includes the GeForce 8, GeForce7,
GeForce 6, and GeForce FX families. During the first quarter of fiscal 2007,
we
shipped eight new GeForce 7 series GPUs for desktop and notebook PCs, expanding
our offering of products in the GeForce 7 GPU family. Also during the first
quarter of fiscal 2007, we shipped our first Quad SLI system for desktop
PCs,
enabling the use of four GPUs per system. During the second quarter of fiscal
2007, we shipped the GeForce 7950 GX2, which provides the resolution of
cinematic film and brought the 16:9 panoramic experience of cinema to gaming.
We
also announced PureVideo HD technology, a combination of hardware acceleration
from an NVIDIA GPU, high definition movie player integration and HDCP feature
support, to enable manufacturers and consumers to build PCs that can play
HD DVD
or Blu-ray movies. In the fourth quarter of fiscal 2007, we introduced our
flagship GPU series, the GeForce 8800. The GeForce 8800 is the industry’s first
unified shader GPU to support the new Microsoft DirectX 10 API. The GeForce
8800
unified shader architecture can adapt its computation resources to changing
vertex and pixel shading workload from scene to scene, which enables programmers
to create more complex effects and imagery while simplifying the actual
programming code. Our GeForce 7 GPU family, which is based on the prior
Microsoft DirectX 9.0 API, continues to deliver high price-per-performance
from
the mainstream to enthusiast segments both in desktop and notebook PCs. We
maintained our leading share in the desktop standalone GPU segment throughout
fiscal 2007.
GeForce
Go and NVIDIA Quadro Go.
The
GeForce Go and NVIDIA Quadro Go families represent our notebook GPUs and
include
the GeForce 7 Go, GeForce 6 Go, and NVIDIA QuadroFX Go GPUs. These GPUs are
designed to deliver desktop graphics performance and features for multiple
notebook configurations from desktop replacements, multimedia notebooks and
thin-and-lights to notebook workstations. The GeForce Go products are designed
to serve the needs of both professional and consumer users. The NVIDIA Quadro
Go
products are designed to serve the needs of workstation professionals in
the
area of product design and digital content creation. In fiscal 2007, we
introduced a complete family of notebook GPUs, the GeForce Go 7900, 7800,
7600
and 7400 families, all based on our second generation Shader Model 3.0
architecture and designed to deliver 3D, HD home theatre-quality video and
power
management to the notebook segment. In March 2006, we shipped the GeForce
Go
7900 and GeForce 7800 GTX notebook products that feature SLI technology for
notebook PCs. In early fiscal 2007, we launched our first notebook GPU, the
NVIDIA Quadro NVS, targeted specifically for business use. NVIDIA Quadro
NVS
graphics solutions provide business customers with notebooks that are designed
to be easy to deploy and maintain while minimizing total cost of ownership.
We
also launched the NVIDIA Quadro FX 3500M, a mobile workstation graphic solution
for computer aided design, or CAD, Digital Content Creation, and Scientific
Visualization. For the first time in our history, we captured the number
one
position in the notebook standalone GPU segment during the second half of
fiscal
2007, according to the Mercury Research Second Quarter 2006 PC Graphics Report.
NVIDIA
Quadro. The
NVIDIA Quadro branded products are professional workstation solutions that
are
available for high-end, mid-range, entry-level and multi-display product
lines.
The NVIDIA Quadro family, which consists of the NVIDIA Quadro Plex VCS, NVIDIA
Quadro FX, NVIDIA Quadro4 and the NVIDIA Quadro NVS professional workstation
processors, is designed to meet the needs of a number of workstation
applications such as industrial product design, digital content creation,
non-linear video editing, scientific and medical visualization, general purpose
business and financial trading. NVIDIA Quadro products are fully certified
by
several software developers for professional workstation applications and
are
designed to deliver the graphics performance and precision required by
professional applications. In August 2006, we introduced the NVIDIA Quadro
Plex
1000, the world's first dedicated Visual Computing System, or VCS. The NVIDIA
Quadro Plex 1000 offers scalability in a desktop or dense three unit rackmount
configuration for professional applications such as those powering multiple
streams of 4K high-definition video, 3D styling and design, scientific and
medical visualization, oil and gas exploration, or visual simulation and
training.
MCPs.
Our
MCP
product family, known as NVIDIA nForce, supports desktop PCs, notebook PCs,
professional workstations and servers.
NVIDIA
nForce. The
NVIDIA nForce family represents our MCPs for AMD and Intel-based desktop
PCs,
notebook PCs, professional workstations and servers and includes the NVIDIA
nForce4, NVIDIA nForce Professional, NVIDIA nForce 500 series for AMD and
Intel,
NVIDIA nForce 600 series for AMD and Intel, and GeForce 6100 Series GPUs
and
nForce 400 Series MCP motherboard solutions. We define an MCP as a single-chip
or chipset that provides system functions, such as high speed storage and
network communications, and performs these operations independently from
the
host CPU. In fiscal 2006, we introduced the GeForce 6100 Series GPU and NVIDIA
nForce 400 Series MCP. We offer the industry’s first integrated core logic to
feature DirectX 9.0 and Shader Model 3.0 technology. In January 2006, we
launched two new MCPs for the Intel platform, the NVIDIA nForce4 SLI XE and
NVIDIA nForce4 Ultra, both of which provide the system-builder and
do-it-yourself communities with lower cost discrete motherboard solutions
for
Intel PC platforms. In fiscal 2007, we began production shipments of our
single-chip motherboard GPUs for AMD-based PCs. In March 2006, we shipped
our
first integrated graphics processor, or IGP, core-logic solution for AMD-based
notebook PCs, the GeForce Go 6100 GPU and NVIDIA nForce Go 430 MCP. This
core
logic solution provides hardware accelerated H.264 high-definition video
playback. In May 2006, we shipped our NVIDIA nForce 590 SLI, a motherboard
solution for x86 PC platforms. SLI can utilize the power of up to one, two,
or
even four NVIDIA GeForce GPUs for HD gaming. In November 2006, we launched
the
NVIDIA nForce 680 SLI MCP, which is designed specifically for Intel Core
2 Quad
and Core 2 Duo processors.
Handheld
GPUs.
Our
Handheld GPU product family, known as GoForce, supports handheld PDAs and
multimedia cellular phones.
GoForce.
The
GoForce family represents our handheld GPUs for a wide range of multimedia
cellular phones and handheld devices. The GoForce 2100 and 2150 are two of
the
first handheld GPUs to offer hardware acceleration engines for 2D graphics
to
manufacturers that support liquid crystal display, or LCD, screen resolutions
up
to 320 x 240 pixels. The GoForce 3000 and 4000 offer a host of features for
cellular phones and PDAs, including support for up to 3-megapixel image capture,
accelerated graphics for gaming, and motion Joint Photographic Experts Group,
or
JPEG, capture and playback. Our GoForce 3D 4000, 4500 and 4800 handheld GPUs
are
the first to provide programmable 3D shaders, along with multi-megapixel
still
image and video processing in a single-chip package. Using dedicated hardware
accelerator engines, the GoForce family delivers multimedia applications
and
drives high-resolution displays, while extending handheld battery life through
a
variety of power management techniques. In the third quarter of fiscal 2007,
Motorola Inc., or Motorola, and Sony Ericsson Mobile Communications AB, or
Sony
Ericsson, launched Third Generation, or 3G, models of their RAZR and
Walkman portable phones, respectively, that are both powered by our GoForce
GPUs. Our GoForce handheld GPUs are now shipping in the Motorola 3G RAZR
V3X,
SLVR L6i, SLVR L7i, MOTORAZR Maxx, and Sony Ericsson Walkman phones. Our
newest
handheld GPU, the NVIDIA GoForce 5500 GPU, has been designed into Digital
Video
Broadcast - Handheld, or DVB-H, phones in North America, Europe, and Integrated
Services Digital Broadcasting - Terrestrial, or ISDB-T, in Japan.
In
February 2007, we unveiled our strategy to target the applications processor
market in order to meet the growing multimedia demands of today's mobile
phone
user by announcing the availability of the NVIDIA GoForce 6100. The NVIDIA
GoForce 6100, our first application processor, is a low power consumption
multimedia solution that supports computationally intensive multimedia codecs
as
well as a high quality audio subsystem, integrated WiFi, USB 2.0 and
more.
Consumer
Electronics. Our
Consumer Electronics product group is concentrated in products that support
video game consoles and other digital consumer electronics devices.
Playstation3.
In April
2005, we finalized our initial agreement with SCE to jointly develop a custom
GPU for SCE’s PlayStation3. SCE launched sales of the PlayStation 3
computer entertainment system in November 2006. We record license and
development revenue from our initial agreement with SCE, as well as from
certain
additional agreements with them. In addition, in fiscal 2007, we began to
record
royalty revenue from SCE based on per unit sales of the PlayStation
3.
Xbox.
Our
Xbox
platform processor supported Microsoft’s initial Xbox video game
console. The
Xbox
platform processor featured dual-processing architecture, which included
our GPU
designed specifically for the Xbox, or XGPU, and our MCP to power the Xbox’s
graphics, audio and networking capabilities. We also have a license
agreement with Microsoft relating to the successor product to their initial
Xbox
gaming console, the Xbox360, and related devices. We recognized revenue from
the
sale of our Xbox-related products to Microsoft for the last time during the
second quarter of fiscal 2006.
Our
Strategy
We
design
our GPUs, MCPs and handheld GPUs to enable our PC OEMs, ODMs, system builders,
motherboard and add-in board manufacturers, and cellular phone and consumer
electronics OEMs, to build products that deliver state-of-the-art features,
performance, compatibility and power efficiency while maintaining competitive
pricing and profitability. We believe that by developing 3D graphics, HD
video
and media communications solutions that provide superior performance and
address
the key requirements of each of the product segments we serve, we will
accelerate the adoption of HD digital media platforms and devices throughout
these segments. We combine scalable architectural technology with mass market
economies-of-scale to deliver a complete family of products that spans
professional workstations, to consumer PCs, to multimedia-rich cellular phones.
Our
objective is to be the leading supplier of performance GPUs, MCPs and handheld
GPUs and application processors. Our current focus is on the desktop PC,
professional workstation, notebook PC, application processor, server,
multimedia-rich cellular phone and video game console product lines, and
we plan
to expand into other product lines. Our strategy to achieve this objective
includes the following key elements:
Build
Award-Winning, Architecturally-Compatible 3D Graphics, HD Video, Media
Communications and Ultra-Low Power Product Families for the PC, Handheld
and
Digital Entertainment Platforms. Our
strategy is to achieve market segment leadership in these platforms by providing
award-winning performance at every price point. By developing 3D graphics,
HD
video and media communications solutions that provide superior performance
and
address the key requirements of these platforms, we believe that we will
accelerate the adoption of 3D graphics and rich digital media.
Target
Leading OEMs, ODMs and
System Builders. Our
strategy is to enable our leading PC, handheld and consumer electronics OEMs,
ODMs and major system builder customers to differentiate their products in
a
highly competitive marketplace by using our digital media processors. We
believe
that design wins with these industry leaders provide market validation of
our
products, increase brand awareness and enhance our ability to penetrate
additional leading customer accounts. In addition, we believe that close
relationships with OEMs and ODMs will allow us to better anticipate and address
customer needs with future generations of our products.
Sustain
Technology and Product Leadership in 3D Graphics and HD Video, and Media
Communications and Ultra-Low Power. We
are focused on using our advanced engineering capabilities to accelerate
the
quality and performance of 3D graphics, HD video, media communications and
ultra-low power processing in PCs and handheld devices. A fundamental aspect
of
our strategy is to actively recruit the best 3D graphics and HD video,
networking and communications engineers in the industry, and we believe that
we
have assembled an exceptionally experienced and talented engineering team.
Our
research and development strategy is to focus on concurrently developing
multiple generations of GPUs, MCPs and handheld GPUs using independent design
teams. As we have in the past, we intend to use this strategy to achieve
new
levels of graphics, networking and communications features and performance
and
ultra-low power designs, enabling our customers to achieve superior performance
in their products.
Increase
Market Share. We
believe that substantial market share will be important to achieving success.
We
intend to achieve a leading share of the market in areas in which we don't
have
a leading market share by devoting substantial resources to building families
of
products for a wide range of applications that offer significant improvement
in
performance over existing products.
Use
Our Expertise in Digital Multimedia. We
believe the synergy created by the combination of 3D graphics, HD video and
the
Internet will fundamentally change the way people work, learn, communicate
and
play. We believe that our expertise in HD graphics and system architecture
positions us to help drive this transformation. We are using our expertise
in
the processing and transmission of high-bandwidth digital media to develop
products designed to address the requirements of high-bandwidth concurrent
multimedia.
Use
our Intellectual Property and Resources to Enter into License and Development
Contracts.
In
fiscal 2006, we entered into license arrangements that require significant
customization of our intellectual property components and we anticipate that
we
will enter into additional agreements during fiscal 2008. For license
arrangements that require significant customization of our intellectual property
components, we generally recognize this license revenue using the
percentage-of-completion method of accounting over the period that services
are
performed. For example, in April 2005, we finalized our definitive agreement
with SCE to jointly develop a custom GPU for SCE’s PlayStation3. Our
collaboration with SCE includes license fees and royalties for the PlayStation3
and all derivatives, including next-generation digital consumer electronics
devices. In addition, we are licensing software development tools for
creating shaders and advanced graphics capabilities to SCE.
Sales
and Marketing
Our
worldwide sales and marketing strategy is a key part of our objective to
become
the leading supplier of performance GPUs, MCPs, and handheld GPUs for PCs,
handheld devices and consumer electronics platforms. Our sales and marketing
teams work closely with each industry’s respective OEMs, ODMs, system
integrators, motherboard manufacturers, add-in board manufacturers and industry
trendsetters, collectively our Channel, to define product features, performance,
price and timing of new products. Members of our sales team have a high level
of
technical expertise and product and industry knowledge to support the
competitive and complex design win process. We also employ a highly skilled
team
of application engineers to assist the Channel in designing, testing and
qualifying system designs that incorporate our products. We believe that
the
depth and quality of our design support are key to improving the Channel’s
time-to-market, maintaining a high level of customer satisfaction within
the
Channel and fostering relationships that encourage customers to use the next
generation of our products.
In
the
GPU and MCP segments we serve, the sales process involves achieving key design
wins with leading OEMs and major system integrators and supporting the product
design into high volume production with key ODMs, motherboard manufacturers
and
add-in board manufacturers. These design wins in turn influence the retail
and
system integrator channel that is serviced by add-in board and motherboard
manufacturers. Our distribution strategy is to work with a number of leading
independent contract equipment manufacturers, or CEMs, ODMs, motherboard
manufacturers, add-in board manufacturers and distributors each of which
has
relationships with a broad range of major OEMs and/or strong brand name
recognition in the retail channel. In the handheld GPU segments we serve,
the
sales process primarily involves achieving key design wins directly with
the
leading handheld OEMs and supporting the product design into high-volume
production. Currently, we sell a significant portion of our digital media
processors directly to distributors, CEMs, ODMs, motherboard manufacturers
and
add-in board manufacturers, which then sell boards and systems with our products
to leading OEMs, retail outlets and to a large number of system integrators.
Although a small number of our customers represent the majority of our revenue,
their end customers include a large number of OEMs and system integrators
throughout the world.
As
a result of our
channel strategy, our sales are focused on a small number of customers. Sales
to
Asustek Computer Inc., or Asustek, a CEM, accounted for 12% of our total
revenue
for fiscal 2007.
To
encourage software title developers and publishers to develop games optimized
for platforms utilizing our products, we seek to establish and maintain strong
relationships in the software development community. Engineering and marketing
personnel interact with and visit key software developers to promote and
discuss
our products, as well as to ascertain product requirements and solve technical
problems. Our developer program makes products available to developers prior
to
volume availability in order to encourage the development of software titles
that are optimized for our products.
Backlog
Our
sales
are primarily made pursuant to standard purchase orders. The quantity of
products purchased by our customers as well as shipment schedules are subject
to
revisions that reflect changes in both the customers’ requirements and in
manufacturing availability. The semiconductor industry is characterized by
short
lead time orders and quick delivery schedules. In light of industry practice
and
experience, we believe that only a small portion of our backlog is
non-cancelable and that the dollar amount associated with the non-cancelable
portion is not significant. We do not believe that a backlog as of any
particular date is indicative of future results.
Seasonality
Our
industry is largely focused on the consumer products market. Due to the
seasonality in this market, we typically expect to see stronger revenue
performance in the second half of the calendar year related to the
back-to-school and holiday seasons.
Manufacturing
We
do not
directly manufacture semiconductor wafers used for our products. Instead
we
utilize what is known as a fabless manufacturing strategy for all product-line
operating segments whereby we employ world-class suppliers for all phases
of the
manufacturing process, including wafer fabrication, assembly, testing and
packaging. This strategy uses the expertise of industry-leading suppliers
that
are certified by the International Organization for Standardization, or ISO,
in
such areas as fabrication, assembly, quality control and assurance, reliability
and testing. In addition, this strategy allows us to avoid many of the
significant costs and risks associated with owning and operating manufacturing
operations. Our suppliers are also responsible for procurement of most of
the
raw materials used in the production of our products. As a result, we can
focus
our resources on product design, additional quality assurance, marketing
and
customer support.
We
utilize industry-leading suppliers, such as Chartered Semiconductor
Manufacturing, or Chartered, Semiconductor Manufacturing International
Corporation, or SMIC, Taiwan Semiconductor Manufacturing Corporation, or
TSMC,
United Microelectronics Corporation, or UMC, and American MicroSemiconductor,
or
AMS, to produce our semiconductor wafers. We then utilize independent
subcontractors, such as Advanced Semiconductor Engineering, or ASE, Amkor
Technology, or Amkor, King Yuan Electronics Co., LTD, or KYEC, Siliconware
Precision Industries Company Ltd., or SPIL, and STATS ChipPAC Incorporated,
or
ChipPAC, to perform assembly, testing and packaging of most of our
products.
We
typically receive semiconductor products from our subcontractors, perform
incoming quality assurance and then ship the semiconductors to CEMs,
distributors, motherboard and add-in board manufacturer customers from our
third-party warehouse in Hong Kong. Generally, these manufacturers assemble
and
test the boards based on our design kit and test specifications, and then
ship
the products to retailers, system integrators or OEMs as motherboard and
add-in
board solutions.
Inventory
and Working Capital
Our management focuses considerable attention on managing our inventories
and
other working-capital-related items. We manage inventories by communicating
with
our customers and then using our industry experience to forecast demand on
a
product-by-product basis. We then place manufacturing orders for our products
that are based on this forecasted demand. The quantity of products actually
purchased by our customers as well as shipment schedules are subject to
revisions that reflect changes in both the customers’ requirements and in
manufacturing availability. We generally maintain substantial inventories
of our
products because the semiconductor industry is characterized by short lead
time
orders and quick delivery schedules.
Research
and Development
We
believe that the continued introduction of new and enhanced products designed
to
deliver leading 3D graphics, HD video, audio, ultra-low power communications,
storage, and secure networking performance and features is essential to our
future success. Our research and development strategy is to focus on
concurrently developing multiple generations of GPUs, MCPs and Handheld GPUs
application processors using independent design teams. Our research and
development efforts are performed within specialized groups consisting of
software engineering, hardware engineering, very large scale integration
design
engineering, process engineering, architecture and algorithms. These groups
act
as a pipeline designed to allow the efficient simultaneous development of
multiple generations of products.
A
critical component of our product development effort is our partnerships
with
leaders in the CAD industry. We invest significant resources in the development
of relationships with industry leaders, including Cadence Design Systems,
Inc.,
and Synopsys, Inc., often assisting these companies in the product 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 market 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 PC OEM and other
manufacturers.
We
substantially increased our engineering and technical resources in fiscal
2007,
and have 2,668 full-time employees engaged in research and development as
of
January 28, 2007, compared to 1,654 employees as of January 29, 2006. The
majority of the research and development employees added during fiscal 2007
are
located in international locations, including India, China, Taiwan and various
locations in Europe. During fiscal years 2007, 2006 and 2005, we incurred
research and development expenditures of $553.5 million, $357.1 million and
$348.2 million, respectively. Research and development expenses for fiscal
2007
included $70.1 million related to non-cash stock-based compensation, net
of
associated payroll taxes, which we began to record in fiscal 2007 as a result
of
our adoption of Statement
of Financial Accounting Standards No. 123(R), or SFAS No. 123(R), Share-Based
Payment.
Competition
The
market for GPUs, MCPs and handheld GPUs application processors is intensely
competitive and is characterized by rapid technological change, evolving
industry standards and declining average selling prices. We believe that
the
principal competitive factors in this market are performance, breadth of
product
offerings, access to customers and distribution channels, backward-forward
software support, conformity to industry standard APIs manufacturing
capabilities, price of processors and total system costs of add-in boards
or
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. In addition, it is possible that new competitors
or
alliances among competitors could emerge and acquire significant market
share.
An
additional significant source of competition is from companies that provide
or
intend to provide GPU, MCP, and Handheld GPU solutions. Some of our competitors
may have greater marketing, financial, distribution and manufacturing resources
than we do and may be more able to adapt to customer or technological changes.
Our current competitors include the following:
· |
suppliers
of discrete MCPs that incorporate a combination of networking, audio,
communications and input/output, or I/O, functionality as part of
their
existing solutions, such as AMD, as a result of its acquisition of
ATI
Technologies, Inc., or ATI,
Broadcom Corporation, or Broadcom, Silicon Integrated Systems,
Inc., or SIS, and 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 embedded 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, Renesas Technology,
Seiko-Epson, Texas Instruments Incorporated, and Toshiba America,
Inc.;
and
|
· |
suppliers
of application processors for handheld and embedded devices that
incorporate multimedia processing as part of their existing solutions
such
as Broadcom, Texas Instruments Inc., Qualcomm Incorporated, Marvell,
Freescale Semiconductor Inc., Samsung and ST
Microelectronics.
|
We
expect
substantial competition from Intel’s publicized focus on moving to selling
platform solutions dominated by Intel products, such as when Intel achieved
success with its Centrino platform solution. In addition to its current Centrino
notebook platform initiative, and its announced upcoming desktop initiative
branded as VIIV, we expect that Intel is now focused on developing and selling
platform solutions for all segments including professional workstations and
servers. AMD has also begun to focus on selling platform solutions. If Intel
and
AMD continue to pursue these initiatives, we may not be able to successfully
compete in these segments.
If
and to
the extent we offer products outside of the consumer and enterprise PC,
notebook, workstation, PDA, cellular phone, and video game console markets,
we
may face competition from some of our existing competitors as well as from
companies with which we currently do not compete. We cannot accurately predict
if we will compete successfully in any new markets we may enter. If we are
unable to compete in our current and any new markets, our financial results
will
suffer.
Patents
and Proprietary Rights
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. Our issued
patents have expiration dates from September 4, 2007 to December 8, 2024.
We
have numerous patents issued 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. 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 some of our products and for defensive
reasons, and expect to continue to enter into such license agreements. These
licenses may result in royalty payments to third parties, the cross licensing
of
technology by us or payment of other consideration. If these arrangements
are
not concluded on commercially reasonable terms, our business could suffer.
Employees
As
of
January 28, 2007 we had 4,083 employees, 2,668 of whom were engaged in research
and development and 1,415 of whom were engaged in sales, marketing, operations
and administrative positions. None of our employees are covered by collective
bargaining agreements, and we believe our relationships with our employees
are
good.
Financial
Information by Business Segment and Geographic Data
Our
Chief
Executive Officer, who is considered to be our chief operating decision maker,
or CODM, reviews financial information presented on an operating segment
basis
for purposes of making operating decisions and assessing financial performance.
During the first quarter of fiscal 2006, we reorganized our operating segments
to bring all major product groups in line with our strategy to position
ourselves as the worldwide leader in programmable graphics processor
technologies. We report financial information for four product-line operating
segments to our CODM: the GPU Business is composed of products that support
desktop PCs, notebook PCs, professional workstations and other GPU-based
products; the MCP Business is composed of NVIDIA nForce products that operate
as
a single-chip or chipset that provide system functions, such as high speed
storage and network communications, and perform these operations independently
from the host CPU; our Handheld GPU Business is composed of products that
support handheld PDAs, cellular phones and other handheld devices; and our
Consumer Electronics Business is concentrated in products that support video
game consoles and other digital consumer electronics devices and is composed
of
revenue from our contractual arrangements with SCE to jointly develop a custom
GPU for SCE’s PlayStation3, revenue from sales of our Xbox-related
products, revenue from our license agreement with Microsoft relating to the
successor product to their initial Xbox gaming console, the Xbox360, and
related
devices, and digital media processor products. In addition to these operating
segments, we have the “All Other” category that includes human resources, legal,
finance, general administration and corporate marketing expenses, which total
$242.3 million, $131.6 million and $118.0 million for fiscal years 2007,
2006
and 2005, respectively, that we do not allocate to our other operating segments.
“All Other” also includes the results of operations of other miscellaneous
operating segments that are neither individually reportable, nor aggregated
with
another operating segment. Revenue in the “All Other” category is primarily
derived from sales of memory. Certain prior period amounts have been
restated to conform to the presentation of our current fiscal
quarter.
Our
CODM
does not review any information regarding total assets on an operating segment
basis. Operating segments do not record intersegment revenue, and, accordingly,
there is none to be reported. The accounting policies for segment
reporting are the same as for NVIDIA as a whole. The information included
in Note 14 of the Notes to Consolidated Financial Statements is hereby
incorporated by reference.
Executive
Officers of the Registrant
The
following sets forth certain information regarding our executive officers,
their
ages and their positions as of January 28, 2007:
Name
|
Age
|
Position
|
Jen-Hsun
Huang
|
43
|
President,
Chief Executive Officer and Director
|
Marvin
D. Burkett
|
64
|
Chief
Financial Officer
|
Ajay
K. Puri
|
52
|
Senior
Vice President, Worldwide Sales
|
David
M. Shannon
|
51
|
Senior
Vice President, General Counsel and
Secretary
|
Jen-Hsun
Huang co-founded
NVIDIA in April 1993 and has served as its President, Chief Executive Officer
and a member of the Board of Directors since its inception. From 1985 to
1993,
Mr. Huang was employed at LSI Logic Corporation, a computer chip manufacturer,
where he held a variety of positions, most recently as Director of Coreware,
the
business unit responsible for LSI’s “system-on-a-chip” strategy. From 1983 to
1985, Mr. Huang was a microprocessor designer for Advanced Micro Devices,
Inc. a
semiconductor company. Mr. Huang holds a B.S.E.E. degree from Oregon State
University and an M.S.E.E. degree from Stanford University.
Marvin
D. Burkett joined
NVIDIA as Chief Financial Officer in September 2002. From February 2000 until
joining NVIDIA, Mr. Burkett was a financial consultant and served as Chief
Financial Officer of Arcot Systems, a security software company. From 1998
to 1999, Mr. Burkett was the Executive Vice President and Chief Financial
Officer of Packard Bell NEC. Mr. Burkett also previously spent 26 years at
Advanced Micro Devices, Inc. where he held a variety of positions including
Chief Financial Officer, Senior Vice President and Corporate Controller.
Mr.
Burkett holds B.S. and M.B.A. degrees from the University of
Arizona.
Ajay
K. Puri
joined
NVIDIA in December 2005 as Senior Vice President, Worldwide Sales. Prior
to
NVIDIA, he held positions in sales, marketing, and general management over
a
22-year career at Sun Microsystems, Inc. Mr. Puri previously held marketing,
management consulting, and product development positions at Hewlett-Packard
Company, Booz Allen Hamilton Inc., and Texas Instruments Incorporated. Mr.
Puri
holds an M.B.A. degree from Harvard University, an M.S.E.E. degree from the
California Institute of Technology and a B.S.E.E. degree from the University
of
Minnesota.
David
M. Shannon joined
NVIDIA in August 2002 as Vice President and General Counsel. Mr. Shannon
became
Secretary of NVIDIA in April 2005 and a Senior Vice President in December
2005.
From 1993 to 2002, Mr. Shannon held various counsel positions at Intel,
including the most recent position of Vice President and Assistant General
Counsel. Mr. Shannon also practiced for eight years in the law firm of
Gibson Dunn and Crutcher, focusing on complex commercial and high-technology
related litigation. Mr. Shannon holds B.A. and J.D. degrees from Pepperdine
University.
Available
Information
Our
Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports
on
Form 8-K and, if applicable, amendments to those reports filed or furnished
pursuant to Section 13(a) of the Securities Exchange Act of 1934, or the
Exchange Act, are available free of charge on or through our Internet web
site,
http://www.nvidia.com, as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the Securities and Exchange
Commission, or the SEC. Our web site and the information contained therein
as
connected thereto is not intended to be incorporated into this Annual Report
on
Form 10-K.
In
evaluating NVIDIA and our business, the following factors should be considered
in addition to the other information in this Annual Report on Form 10-K.
Before you buy our common stock, you should know that making such an investment
involved some risks including, but not limited to, the risks described below.
Additionally, any one of the following risks could seriously harm our business,
financial condition and results of operations, which could cause our stock
price
to decline. Additional risks and uncertainties not presently known to us
or that
we currently deem immaterial may also impair our business
operations.
Risks
Related to Our Operations
The
matters relating to the Audit Committee of the Board of Directors, or the
Board,
review of our historical stock option granting practices and the restatement
of
our consolidated financial statements have resulted in litigation, which
could
harm our financial results.
On
August
10, 2006, NVIDIA announced that the Audit Committee of the Board, with the
assistance of outside legal counsel, was conducting a review of our stock
option
practices covering the time from NVIDIA’s initial public offering in 1999, our
fiscal year 2000, through June 2006. The Audit Committee reached the conclusion
that incorrect measurement dates were used for financial accounting purposes
for
stock option grants in certain prior periods. As a result, NVIDIA recorded
additional non-cash stock-based compensation expense, and related tax effects,
related to stock option grants.
The
Audit
Committee’s review of NVIDIA’s stock option practices identified a number of
occasions on which the measurement date used for financial accounting and
reporting purposes for stock options granted to certain of our employees
was
different from the actual grant date. To correct these accounting errors,
we
amended our Annual Report on Form 10-K for the year ended January 29, 2006
and
our Quarterly Report on Form 10-Q for the three months ended April 30, 2006,
to
restate the consolidated financial statements contained in those
reports.
This
review of our historical stock option granting practices required us to incur
substantial expenses for legal, accounting, tax and other professional services,
diverted our management’s attention from our business, and in the future could
adversely affect our business, financial condition, results of operations
and
cash flows.
Our
historical stock option granting practices and the restatement of our prior
financial statements have exposed us to greater risks associated with litigation
and regulatory proceedings. Ten derivative complaints have been filed in
state
and federal court pertaining to allegations relating to stock option grants.
We
cannot assure you that these or future similar complaints, or any future
litigation or regulatory action will result in the same conclusions reached
by
the Audit Committee. The conduct and resolution of these matters will be
time
consuming, expensive and could distract our management’s attention from the
conduct of our business which could negatively impact our business.
We
voluntarily contacted the SEC regarding the Audit Committee’s review and, as of
the date of the filing of this Form 10-K, the SEC is continuing the inquiry
of
our historical stock option grant practices it began in late August 2006.
In
October 2006, we met with the SEC and provided it with a review of the status
of
the Audit Committee’s review and in November 2006 we voluntarily provided the
SEC with further documents. We plan to continue to cooperate with the SEC
in its
inquiry.
While
we
believe that we have made appropriate judgments in concluding the correct
measurement dates for option grants, the SEC may disagree with the manner
in
which we have accounted for and reported, or not reported, the financial
impact
of past option grant measurement date errors, and there is a risk that its
inquiry could lead to circumstances in which we may have to further restate
our
prior financial statements, amend prior filings made with the SEC, or otherwise
take other actions not currently contemplated. Any such circumstance could
also
lead to future delays in filing our SEC reports. Furthermore, if we are subject
to adverse findings in any of these matters, we could be required to pay
damages
or penalties or have other remedies imposed upon us which could harm our
business, financial condition, results of operations and cash flows.
Because
our gross margin for any period depends on a number of factors, our failure
to
forecast any change in such 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, such as:
· |
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
incorrectly forecast the impact of any of the aforementioned factors on our
business, we may be unable to take action in time to counteract any negative
impact on our gross margin. In addition, if we are unable to meet our gross
margin target for any period or the target set by analysts, the trading price
of
our common stock may decline.
We
are dependent on key personnel and the loss of these employees could negatively
impact our business.
Our
performance is substantially dependent on the performance of our executive
officers and key employees. None of our executive officers or employees is
bound
by an employment agreement, meaning our relationships with our executive
officers and employees are at will. We do not have “key person” life insurance
policies on any of our employees. The loss of the services of any of our
executive officers, technical personnel or other key employees, particularly
Jen-Hsun Huang, our President and Chief Executive Officer, would harm our
business. Our success will depend on our ability to identify, hire, train
and
retain highly qualified technical and managerial personnel. Our failure to
attract and retain the necessary technical and managerial personnel would
harm
our business. The integration of new executives or personnel could disrupt
our
ongoing operations.
Failure
to achieve expected manufacturing yields for existing and/or new products
could
reduce our gross margin and could adversely affect our ability to compete
effectively.
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, any decrease 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 and our gross profit. Our wafer manufacturers may
be
unable to achieve or maintain acceptable manufacturing yields in the future.
Our
inability to achieve planned yields from our wafer manufacturers could reduce
our gross margin. We also face the risk of product recalls or product returns
resulting from design or manufacturing defects that are not discovered during
the manufacturing and testing process. 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.
To
stay competitive 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 or other
competitive factors require us to invest significantly greater resources
than
anticipated in our research and development efforts, our operating expenses
would increase. We have increased our engineering and technical resources
and
had 2,668 full-time employees engaged in research and development as of January
28, 2007, 1,654 full-time employees as of January 29, 2006 and 1,231 full-time
employees as of January 30, 2005. Research and development expenditures were
$553.5 million, $357.1 million and $348.2 million for fiscal 2007, 2006,
and
2005, respectively. Research and development expenses for fiscal 2007 included
$70.1 million related to non-cash stock-based compensation, net of associated
payroll taxes, which we began to record in the first quarter of fiscal 2007
as a
result of our adoption of SFAS No. 123(R). 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.
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 as well as
hiring additional employees. 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.
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 27.6%, 24.1% and
27.5%
of our total revenue during fiscal years ended 2007, 2006 and 2005,
respectively. Operating expenses for fiscal 2007 included $108.5 million
related
to non-cash stock-based compensation, net of associated payroll taxes, which
we
began to record in fiscal 2007 as a result of our adoption of SFAS No. 123(R).
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 greater risk of 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 GPUs,
MCPs, Handheld GPUs and application processors.
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 relationships with our third-party
manufacturers to migrate to smaller geometry processes successfully.
Additionally, we compete with companies that own their own manufacturing
facilities. These competitors may be able to move to a new state of the art
manufacturing process more quickly than our manufacturing partners. If our
suppliers fall behind our competitors in the manufacturing processes, the
development and customer demand for our products and the use of our products
could be negatively impacted. The inability by us or our third-party
manufacturers to effectively and efficiently transition to new manufacturing
process technologies may adversely affect our operating results and our gross
margin.
Our
failure to estimate customer demand properly may result in excess or obsolete
inventory or, conversely, may result in inadequate inventory levels, either
of
which could adversely affect our financial results.
Our
inventory purchases are based upon future demand forecasts or orders from
our
customers, which may not accurately predict the quantity or type of our 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 either our older or newer
products, we may have inadequate manufacturing capability and 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 could damage our customer relationships,
result in lost revenue, cause a loss in market share or damage our
reputation.
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. We may
build inventories during periods of anticipated growth which does not occur.
Any
inability to sell products to which we have devoted significant resources
could
harm our business. In addition, cancellation or deferral of product 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 any 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 gross margin and
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. It
is,
therefore, 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-K or other factors could
prevent us from achieving our expected future revenue or net income.
Accordingly, we believe that period-to-period comparisons of our results
of
operations should not be relied upon as an indication of future performance.
In
addition, the results of any quarterly or full fiscal year period are not
necessarily indicative of results to be expected for a subsequent quarter
or a
full fiscal year.
Risks
Related to Our Products
If
we are unable to achieve design wins, our products may not be adopted by
our
target markets or customers either of which could negatively impact our
financial results.
The
future success of our business depends to a significant extent on our ability
to
develop new competitive products for our target markets and customers. We
believe achieving design wins, which entails having our existing and future
products chosen for hardware components or subassemblies designed by PC OEMs,
ODMs, and add-in board and motherboard manufacturers, will aid our future
success. Our OEM, ODM, and add-in board and motherboard manufacturers’ customers
typically introduce new system configurations as often as twice per year,
typically based on spring and fall design cycles or in connection with trade
shows. Accordingly, when our customers are making their design decisions,
our
existing products must have competitive performance levels or we must timely
introduce new products in order to be included in new system configurations.
This requires that we do the following:
· |
anticipate
the features and functionality that customers and consumers will
demand;
|
· |
incorporate
those features and functionalities into products that meet the exacting
design requirements of OEMs, ODMs, and add-in board and motherboard
manufacturers;
|
· |
price
our products competitively; and
|
· |
introduce
products to the market within the limited design cycle for OEMs,
ODMs, and
add-in board and motherboard manufacturers.
|
If
OEMs,
ODMs, and add-in board and motherboard manufacturers do not include our products
in their systems, they will typically not use our products in their design
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
AMD, Intel and Microsoft. Such changes would require us to invest significant
time and resources to redesign our products to be compliant with relevant
standards. If our products are not in compliance with prevailing industry
standards for a significant period of time, our ability to achieve design
wins
could suffer. If we are unable to achieve new design wins for existing or
new
customers, we may lose market share and our operating results would be
negatively impacted.
Achievement
of design wins may not result in the success of our products and could result
in
a loss of market share.
The
process of being qualified for inclusion in an OEM or ODM product can be
lengthy
and could cause us to miss a cycle in the demand of end-users for a particular
product feature, which also could result in a loss of market share and harm
our
business. Even if we do have design wins for OEM and ODM products, we may
not be
able to successfully develop or introduce new products in sufficient volumes
within the appropriate time to meet the OEM, ODM, add-in board and motherboard
manufacturers’ design cycles as well as other market demand. Additionally, even
if we achieve a significant number of design wins, there can be no assurance
that our OEM and ODM customers will actually take the design to production
or
that the design will be commercially successful. Furthermore, there may be
changes in the timing of product orders due to unexpected delays in the
introduction of our customers’ products that could negatively impact the success
of our products. Any of these factors could result in a loss of market share
and
could negatively impact our financial results.
Our
business results could be adversely affected if our product development efforts
are unsuccessful.
We
have in the past experienced delays in the development of some new products.
Any
delay in the future or failure of our GPUs or other processors to meet or
exceed
specifications of competitive products could materially harm our business.
The
success of our new product introductions will depend on many factors, including
the following:
· |
proper new
product definition;
|
· |
timely
completion and introduction of new product designs;
|
· |
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.
|
A
critical component of our product development effort is our partnerships
with
leaders in the CAD industry. We have invested significant resources to develop
relationships with industry leaders, including Cadence Design Systems, Inc.
and
Synopsys, Inc., often assisting these companies in the product 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 PC OEMs and other manufacturers. If these relationships are
not
successful, we may not be able to develop new products in a timely manner,
which
could result in a loss of market share, a decrease in revenue and a negative
impact on our operating results. Our failure to successfully develop, introduce
or achieve market acceptance for new processors would harm our business.
Our
failure to identify new market or product opportunities, or develop new products
could harm our business.
As
our
GPUs or 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 margins. In order for our processors to achieve high volumes, leading
PC
OEMs, ODMs, and add-in board and motherboard manufacturers must select our
processor for design into their products, and then successfully complete
the
designs of their products and sell them. We may be unable to successfully
identify new product opportunities or to develop and bring to market new
products in a timely fashion. In addition, we cannot guarantee that new products
we develop will be selected for design into PC OEMs’, ODMs’, and add-in board
and motherboard manufacturers’ products, that any new designs will be
successfully completed, or that any new products will be sold.
As
the
complexity of our products and the manufacturing process for our products
increases, there is an increasing risk that we will experience problems with
the
performance of our products and that there will be delays in the development,
introduction or volume shipment of our products. We may experience difficulties
related to the production of current or future products or other factors
that
may delay the introduction or volume sale of new products we develop. In
addition, we may be unable to successfully manage the production transition
risks with respect to future products. Failure to achieve any of the foregoing
with respect to future products or product enhancements could result in rapidly
declining average selling prices, reduced margins and reduced demand for
products or loss of market share. In addition, technologies developed by
others
may render our processors non-competitive or obsolete or result in our holding
excess inventory, any of which would harm our business.
We
could suffer a loss of market share if our products contain significant defects.
Products
as complex as those we offer may contain defects or experience failures when
introduced or when new versions or enhancements to existing products are
released. We have in the past discovered defects and incompatibilities with
customers’ hardware in some of our products and may experience delays or loss of
revenue to correct any defects or incompatibilities in the future. Errors
in new
products or releases 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 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
may not be able to realize the potential financial or strategic benefits
of
business acquisitions, which could hurt our ability to grow our business,
develop new products or sell our products.
In
the
past we have acquired and invested in other businesses that offered products,
services and technologies that we believed would help expand or enhance our
existing products and services or help expand our distribution channels.
We may
enter into future acquisitions of, or investments in, businesses, in order
to
complement or expand our current businesses or enter into a new business
market.
For example, in February 2006 we completed the acquisition of ULi, in March
2006
we completed the acquisition of Hybrid Graphics and in January 2007 we completed
the acquisition of 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. For any previous or future
acquisition or investment, including the acquisitions of ULi, Hybrid Graphics
and PortalPlayer, the following risks could impair our ability to grow our
business and develop new products, and ultimately, could impair our ability
to
sell our products, which could negatively impact our growth or our financial
results:
· |
difficulty
in combining the technology, products, operations or workforce of
the
acquired business with our business;
|
· |
difficulty
in operating in a new or multiple new locations;
|
· |
disruption
of our ongoing businesses;
|
· |
disruption
of the ongoing business of the company we
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 of our target’s key employees, as a result of the
integration of new businesses and management personnel.
|
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.
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
depend on foundries and independent contractors to manufacture our products
and
these third parties may not be able to satisfy our manufacturing requirements,
which would harm our business.
We
do not
manufacture the semiconductor wafers used for our products and do not own
or
operate a wafer fabrication facility. Our products require wafers manufactured
with state-of-the-art fabrication equipment and techniques so we utilize
industry-leading suppliers to produce our semiconductor wafers. We depend
on
these suppliers to allocate to us a portion of their manufacturing capacity
sufficient to meet our needs, to produce products of acceptable quality and
at
acceptable manufacturing yields, and to deliver those products to us on a
timely
basis at acceptable prices. Currently, one foundry manufactures the majority
of
our products. These manufacturers may be unable to meet our near-term or
long-term manufacturing or pricing requirements. We obtain manufacturing
services on a purchase order basis. The foundries we use have no obligation
to
provide us with any specified minimum quantities of product. These suppliers,
including the fabrication facility that produces a majority of our products,
fabricate wafers for other companies, including some of our competitors,
and
could choose to prioritize capacity for other users, reduce or eliminate
deliveries to us, or increase the prices that they charge us on short notice.
If
we are unable to meet customer demand due to reduced or eliminated deliveries,
we could lose sales to customers, which would negatively impact our revenue
and
our reputation. Because the lead-time needed to establish a strategic
relationship with a new manufacturing partner could be several quarters,
there
is no readily available alternative source of supply for any specific product.
In addition, the time and effort to qualify a new foundry could result in
additional expense, diversion of resources or lost sales any of which would
negatively impact our financial results. We believe that long-term market
acceptance for our products will depend on reliable relationships with
third-party manufacturers we may use to ensure adequate product supply and
competitive pricing so that we are able to respond to customer
demand.
We
are dependent on third parties for assembly, testing and packaging of our
products, which reduces our control over the delivery and quantity of our
products.
Our
processors are assembled, tested and packaged by independent subcontractors,
such as ASE, Amkor, KYEC, SPIL, and ChipPAC. We do not have long-term agreements
with any of these subcontractors. As a result of our dependence on third-party
subcontractors for assembly, testing and packaging of our products, we do
not
directly control product delivery schedules or product quality. Demand for
qualified independent subcontractors to assemble and test products is high.
If demand for these subcontractors exceeds the number of qualified
subcontractors, we may experience capacity constraints, which could result
in
product shortages, a decrease in the quality of our products or an increase
in
product cost. Any of our subcontractors may decide to prioritize the orders
of
one of our competitors over our orders. Any product shortages or quality
assurance problems could increase the costs of manufacture, assembly or testing
of our products, which could cause our gross margin to decline. Due to the
amount of time typically required to qualify assemblers and testers, we could
experience significant delays in the shipment of our products if we are required
to find alternative third parties to assemble, test or package our products
or
components. Any such delays could result in a loss of reputation or a decrease
in sales to our customers.
There
can be no assurance that the PlayStation3 will achieve long term commercial
success.
In
April
2005, we finalized our definitive agreement with SCE to jointly develop a
custom
GPU for SCE’s PlayStation3. Our collaboration with SCE includes license
fees and royalties for the PlayStation3 and all derivatives, including
next-generation digital consumer electronics devices. In addition, we are
licensing software development tools for creating shaders and advanced graphics
capabilities to SCE. During fiscal 2007, we recognized $92.9 million of
revenue from our contractual arrangements with SCE. There can be no
assurance that the PlayStation3 will achieve long term commercial success,
given
the intense competition in the game console market. If we do not receive
royalties as we anticipate, our revenue and gross margin may be adversely
affected.
As
we continue to work directly with more foreign customers, any difficulties
in
collecting accounts receivable 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 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, which could adversely affect our operating
results. We may have to record additional reserves or write-offs and/or defer
revenue on certain sales transactions in the future, which could negatively
impact our financial results.
We
rely on third-party vendors to supply software development tools to us for
the
development of our new products and we may be unable to obtain the tools
necessary to develop or enhance new or existing products.
When
we
design and develop new products or product enhancements, we rely on third-party
software development tools to assist us in the design, simulation and
verification of new products or enhancements to existing products. Although
we
currently are not dependent on any one vendor for the supply of these tools,
some or all of these tools may not be readily available in the future.
Additionally, the software development tools available at the time that we
are
designing, simulating or verifying a product may not be sophisticated enough
or
technologically advanced enough for our purposes. For example, we have
experienced delays in the introduction of products in the past as a result
of
the inability of then available software development tools to fully simulate
the
complex features and functionalities of our products. Therefore, the design
requirements necessary to meet consumer demands for more features and greater
functionality from our processors in the future may exceed the capabilities
of
the software development tools that are available to us. If the software
development tools we use become unavailable or fail to produce designs that
meet
consumer demands, we may miss design cycles or lose design wins either of
which
could result in a loss of market share, a decrease in revenue or negatively
impact our operating results.
We
sell our products to a small number of customers and our business could suffer
by the loss of any of these customers.
We
have
only a limited number of customers and our sales are highly concentrated.
Sales
to one significant customer accounted for approximately 12% of our total
revenue during fiscal 2007. Sales to two significant customers during fiscal
2006 accounted for approximately 26% of our total revenue. In addition, one
customer has historically comprised a significant portion of our Handheld
GPU
business revenue. Although a small number of our other customers represents
the
majority of our revenue, their end customers include a large number of OEMs
and
system integrators throughout the world who, in many cases, specify the graphics
supplier. Our sales process involves achieving key design wins with leading
PC
OEMs and major system builders and supporting the product design into high
volume production with key CEMs, ODMs, add-in board and motherboard
manufacturers. These design wins in turn influence the retail and system
builder
channel that is serviced by CEMs, ODMs, add-in board and motherboard
manufacturers. Our distribution strategy is to work with a small number of
leading independent CEMs, ODMs, add-in board and motherboard manufacturers,
and
distributors, each of which has relationships with a broad range of system
builders and leading PC OEMs. If we were to lose sales to our PC OEMs, CEMs,
ODMs, add-in board and motherboard manufacturers and were unable to replace
the
lost sales with sales to different customers, or if they were to significantly
reduce the number of products they order from us, our revenue may not reach
or
exceed the expected level in any period, which could harm our financial
condition and our results of operations.
Risks
Related to Our Competition
As
Intel and AMD continue to pursue platform solutions, we may not be able to
successfully compete and our business would be negatively
impacted.
We
expect
substantial competition from both Intel’s and AMD’s strategy of selling platform
solutions, such as the success Intel achieved with its Centrino platform
solution. In addition to the Centrino notebook platform solution, Intel has
announced a desktop initiative branded as VIIV. Shortly after its acquisition
of
ATI, AMD also announced a platform solution. Such platform solutions do not
require a discrete GPU from a third-party supplier such as NVIDIA. Prior
to its
acquisition of ATI, AMD did not sell their own GPUs but instead relied on
companies such as ATI or NVIDIA to supply graphics technology. If AMD and
Intel
continue to pursue platform solutions in desktop and notebook PCs, we may
be
unable to sell GPUs to either company. Additionally, we expect that Intel
and
AMD will extend this strategy to other segments including professional
workstations and servers. To the extent Intel and AMD are successful with
the
platform strategy, they would no longer need our discrete GPU solutions which
would negatively impact our business.
The
market for GPU, MCP, Handheld GPUs and application processors is highly
competitive and we may be unable to compete.
The
market for GPUs, MCPs and Handheld GPUs is intensely competitive and is
characterized by rapid technological change, evolving industry standards
and
declining average selling prices. We believe that the principal competitive
factors in this market are performance, breadth of product offerings, access
to
customers and distribution channels, backward-forward software support,
conformity to industry standard application programming interfaces,
manufacturing capabilities, price of processors and total system costs of
add-in
boards and motherboards. We believe that our ability to remain competitive
will
depend on how well we are able to anticipate the features and functions that
customers will demand and whether we are able to deliver consistent volumes
of
our products at acceptable levels of quality. We expect competition to increase
both from existing competitors and new market entrants with products that
may be
less costly than ours, or may provide better performance or additional features
not provided by our products, which could harm our business.
For
example, we are the largest supplier of AMD 64 chipsets with 53% segment
share.
NVIDIA nForce MCP unit shipments for AMD64-based CPUs increased over 113%
calendar year-over-calendar year, based on the Mercury Research Fourth Quarter
2006 PC Processor Forecast Report. Decline in demand in the AMD segment would
harm our business.
An
additional significant source of competition is from companies that provide
or
intend to provide GPU, MCP, and Handheld GPU solutions. Some of our competitors
may have or be able to obtain greater marketing, financial, distribution
and
manufacturing resources than we do and may be more able to adapt to customer
or
technological changes. Our current competitors include the following:
· |
suppliers
of discrete MCPs that incorporate a combination of networking, audio,
communications and input/output, or I/O, functionality as part of
their
existing solutions, such as AMD, Broadcom, SIS, 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 embedded 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, NEC Corporation, Qualcomm
Incorporated, Renesas Technology, Seiko-Epson, Texas Instruments
Incorporated, and Toshiba America, Inc.;
and
|
· |
suppliers
of application processors for handheld and embedded devices that
incorporate multimedia processing as part of their existing solutions
such
as Broadcom, Texas Instruments Inc., Qualcomm Incorporated, 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, PDA, cellular phone, and video game console markets,
we
may face competition from some of our existing competitors as well as from
companies with which we currently do not compete. We cannot accurately predict
if we will compete successfully in any new markets we may enter. If we are
unable to compete in our current or new markets, our financial results will
suffer.
Risks
Related to Market Conditions
We
are subject to risks associated with international operations which may harm
our
business.
Our
semiconductor wafers are manufactured, assembled, tested and packaged by
third-parties located outside of the United States. Additionally, we generated
83.6% of our revenue for fiscal 2007 and 84.0% of our revenue for fiscal
2006
from sales to customers outside the United States and other Americas. The
manufacture, assembly, test and packaging of our products outside of the
United
States, operation of offices outside of the United States, and sales to
customers outside of the United States and other Americas subjects us to
a
number of risks associated with conducting business outside of the United
States
and other Americas, including, but not limited to:
· |
international
economic and political conditions;
|
· |
unexpected
changes in, or impositions of, legislative or regulatory requirements;
|
· |
labor
issues in foreign countries;
|
· |
cultural
differences in the conduct of
business;
|
· |
inadequate
local infrastructure;
|
· |
delays
resulting from difficulty in obtaining export licenses for certain
technology, tariffs, quotas and other trade barriers and
restrictions;
|
· |
difficulty
in collecting accounts receivable;
|
· |
fluctuations
in currency exchange rates;
|
· |
impact
of currency exchange rate fluctuations on the price of our products
to our
customers, or on the supplies that we
buy;
|
· |
imposition
of additional taxes and penalties;
|
· |
different
legal standards with respect to protection of intellectual property;
|
· |
the
burdens of complying with a variety of foreign laws; and
|
· |
other
factors beyond our control, including terrorism, civil unrest, war
and
diseases such as severe acute respiratory syndrome and the Avian
flu.
|
If
sales
to any of our customers outside of the United States and other Americas are
delayed or cancelled because of any of the above factors, our revenue may
be
negatively impacted.
We
have
offices outside of the United States, including offices in Taiwan, Japan,
Korea,
China, Hong Kong, India, France, Russia, Germany, Finland and England. During
fiscal 2007, we added 934 international employees to our international
operations. As a result of our acquisition of PortalPlayer, we acquired land
and
a building under construction in Hyderabad, India. Our operations in our
international locations are subject to many of the risks contained in the
above
list. We intend to continue to expand our operations and expect to open other
international offices. Difficulties with our international operations, including
finding appropriate staffing and office space, may divert management’s attention
and other resources any of which could negatively impact our operating
results.
We
are dependent on the PC market and the rate of its growth has and may in
the
future have a negative impact on our business.
We
derive
the majority of our revenue from the sale of products for use in the desktop
PC
and notebook PC markets, including professional workstations. We expect to
continue to derive most of our revenue from the sale or license of products
for
use in the desktop PC and notebook PC markets in the next several years.
A
reduction in sales of PCs, or a reduction in the growth rate of PC sales,
will
reduce demand for our products. Moreover, changes in demand could be large
and
sudden. Since PC manufacturers often build inventories during periods of
anticipated growth, they may be left with excess inventories if growth slows
or
if they incorrectly forecast product transitions. In these cases, PC
manufacturers may abruptly suspend substantially all purchases of additional
inventory from suppliers like us until their excess inventory has been absorbed,
which would have a negative impact on our business.
If
our products do not continue to be adopted by the consumer and enterprise
desktop PC, notebook PC, workstation, PDA, cellular phone, and video game
console markets or if the demand in these markets for new and innovative
products decreases, our business and operating results would suffer.
Our
success depends in part upon continued broad adoption of our processors for
3D
graphics and multimedia in consumer and enterprise PC, notebook PC, workstation,
PDA, cellular phone, 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
comprised over 86.5% of fiscal 2007 revenue. As such, our financial results
would suffer if for any reason our current or future GPUs or MCPs do not
continue to achieve widespread adoption by the PC market. If we are unable
to
complete the timely development of products or if we were unable to successfully
and cost-effectively manufacture and deliver products that meet the requirements
of the consumer and enterprise PC, notebook, workstation, 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.
Our
failure to comply with any applicable environmental regulations could result
in
a range of consequences, including fines, suspension of production, excess
inventory, sales limitations, and criminal and civil liabilities.
We
may be
subject to various state, federal and international laws and regulations
governing the environment, including restricting the presence of certain
substances in electronic products and making producers of those products
financially responsible for the collection, treatment, recycling and disposal
of
those products. The European Union Directive on Restriction of Hazardous
Substances Directive, or RoHS Directive, is European legislation that restricts
the use of a number of substances, including lead, and other hazardous
substances in electrical and electronic equipment in the market in the European
Union which became effective on July 1, 2006. Similarly, the State of California
has adopted certain restrictions, which go into effect in 2007, that restrict
the use of certain materials in electronic products, which are intended to
harmonize with the RoHS directive and other states are contemplating similar
legislation. China has adopted similar legislation to the RoHS directive
which
began to go into effect on March 1, 2007.
Also,
we
could face significant costs and liabilities in connection with the European
Union Directive on Waste Electrical and Electronic Equipment, or WEEE. The
WEEE
directs members of the European Union to enact laws, regulations, and
administrative provisions to ensure that producers of electric and electronic
equipment are financially responsible for the collection, recycling, treatment
and environmentally responsible disposal of certain products sold into the
market after August 15, 2005. Implementation in certain European Union member
states has been delayed into 2007. Similar legislation has been or may be
enacted in other jurisdictions, including the United States, Canada, Mexico,
China and Japan, the cumulative impact of which could be significant. We
continue to evaluate the impact of specific registration and compliance
activities required by WEEE.
It
is
possible that unanticipated supply shortages, delays or excess non-compliant
inventory may occur as a result of such regulations. Failure to comply with
any applicable environmental regulations could result in a range of consequences
including costs, fines, suspension of production, excess inventory, sales
limitations, criminal and civil liabilities and could impact our ability
to
conduct business in the countries that have adopted these types of
regulations.
We
are exposed to fluctuations in the market values of our portfolio investments
and in interest rates.
At
the
end of fiscal 2007, we had $1.12 billion in cash, cash equivalents and
marketable securities. We invest our cash in a variety of financial instruments,
consisting principally of investments in commercial paper, money market funds
and highly liquid debt securities of corporations, municipalities and the
United
States government and its agencies. These investments are denominated in
U.S.
dollars.
We
account for our investment instruments in accordance with Statement of Financial
Accounting Standards No. 115, or SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. All of the cash equivalents and
marketable securities are treated as “available-for-sale” under SFAS No. 115.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate debt securities may have
their
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, our future investment income may fall short
of
expectations due to changes in interest rates or if the decline in fair value
of
our publicly traded equity investments is judged to be other-than-temporary.
We
may suffer losses in principal if we are forced to sell securities that decline
in market value due to changes in interest rates. However, because any debt
securities we hold are classified as “available-for-sale,” no gains or losses
are recognized due to changes in interest rates unless such securities are
sold
prior to maturity.
Our
business is cyclical in nature and an industry downturn could harm our financial
results.
Our
business is directly affected by market conditions in the highly cyclical
semiconductor industry, including alternating periods of overcapacity and
capacity constraints, variations in manufacturing costs and yields, significant
expenditures for capital equipment and product development and rapid
technological change. If we are unable to respond to changes in our industry,
which can be unpredictable and rapid, in an efficient and timely manner,
our
operating results could suffer. In particular, from time to time, the
semiconductor industry has experienced significant and sometimes prolonged
downturns characterized by diminished product demand and accelerated erosion
of
average selling prices. If we cannot take appropriate actions such as reducing
our manufacturing or operating costs to sufficiently offset declines in demand
during a downturn, our revenue and earnings will suffer.
Political
instability in Taiwan and in The People’s Republic of China or elsewhere could
harm our business.
Because
of our reliance on foundries and independent contractors located in Taiwan
and
The People’s Republic of China, and because we have offices in these locations,
our business may be harmed by political instability in Taiwan, including
the
worsening of the strained relations between The People’s Republic of China and
Taiwan.
Risks
Related to Government Action, Regulatory Action, Intellectual Property, and
Litigation
The
pending investigation by the United States Department of Justice regarding
investigation into the market for Graphics Processors could adversely affect
our
business.
On
November 29, 2006, we received a subpoena from the San Francisco Office of
the
Antitrust Division of the United States Department of Justice, or DOJ, in
connection with the DOJ's investigation into potential antitrust violations
related to graphics processing units and cards. No specific allegations have
been made against us. We plan to cooperate with the DOJ in its investigation.
As
of March 14, 2007, 42 civil complaints have been filed against us. The
majority are pending in the Northern District of California, a number are
pending in the Central District of California, and other cases are pending
in
several other Federal district courts. Although the complaints differ, they
generally purport to assert federal and state antitrust claims based on alleged
price fixing, market allocation, and other alleged anti-competitive agreements
between us and Advanced Micro Devices, Inc., or AMD, as a result of its
acquisition of ATI Technologies, Inc., or ATI. Many of the cases also assert
a
variety of state law unfair competition or consumer protection claims on
the
same allegations and some cases assert unjust enrichment or other common
law
claims. The complaints are putative class actions alleging classes of direct
and/or indirect purchasers of our graphic processing units and cards. The
plaintiffs in a few of the Northern District of California actions have filed
a
motion with the Judicial Panel on Multidistrict Litigation asking that all
pending and subsequent cases be consolidated in one court for all pre-trial
discovery and motion practice. A hearing on this motion is set for March
29,
2007. We believe the allegations in the complaints are without merit and
intend
to vigorously defend the cases.
Expensing
employee stock options materially and aversely affects our reported operating
results and could also adversely affect our competitive
position.
Since
inception, we have used stock options and our employee stock purchase program
as
fundamental components of our compensation packages. We believe that these
incentives directly motivate our employees and, through the use of vesting,
encourage our employees to remain with us. As a result of adjustments arising
from our restatement related to stock option grant dates, our operating results
for fiscal years prior to fiscal 2007 contain recorded amounts of stock-based
compensation expense. For our fiscal 2000 through 2006, this stock-based
compensation expense was calculated using primarily the intrinsic value-based
method under Accounting Principles Board Opinion No. 25, or APB 25, Accounting
for Stock Issued to Employees and related interpretations.
In
December 2004, the Financial Accounting Standards Board, or FASB,
issued SFAS No. 123(R) which
requires the measurement and recognition of compensation expense for all
stock-based compensation payments. SFAS No. 123(R) requires that we record
compensation expense for stock options and our employee stock purchase plan
using the fair value of those awards. During fiscal 2007, we recorded $116.7
million, related to stock-based compensation, net of the associated payroll
tax
impact resulting from our restatement, which negatively impacted our operating
results. We believe that SFAS No. 123(R) will continue to negatively impact
our
operating results.
To
the
extent that SFAS No. 123(R) makes it more expensive to grant stock options
or to
continue to have an employee stock purchase program, we may decide to incur
increased cash compensation costs. In addition, actions that we may take
to
reduce stock-based compensation expense that may be more severe than any
actions
our competitors may implement may make it difficult to attract, retain and
motivate employees, which could adversely affect our competitive position
as
well as our business and operating results.
We
are a party to litigation, which, if determined adversely to us, could harm
our
business and financial condition.
We
are a
party to litigation. There can be no assurance that actions that have been
brought against us or any brought by us will be resolved in our favor. Any
claim
that is successfully asserted against us may cause us to pay substantial
damages
and other related fees. Regardless of whether these lawsuits are resolved
in our
favor or if we are the plaintiff or the defendant in the litigation, any
lawsuits to which we are a party will likely be expensive and time consuming
to
defend or resolve. Such lawsuits could also harm our relationships with existing
customers and result in the diversion of management’s time and attention away
from business operations, which could harm our business. Costs of defense
and
any damages resulting from litigation a ruling against us or a settlement
of the
litigation could adversely affect our cash flow and financial results.
Our
ability to compete will be harmed if we are unable to adequately protect
our
intellectual property.
We
rely
primarily on a combination of patents, trademarks, trade secrets, employee
and
third-party nondisclosure agreements, and licensing arrangements to protect
our
intellectual property in the United States and internationally. We have numerous
patents issued, allowed and pending in the United States and in foreign
countries. Our patents and pending patent applications primarily relate to
technology used by us in connection with our products. We also rely on
international treaties and organizations and foreign laws to protect our
intellectual property. The laws of certain foreign countries in which our
products are or may be manufactured or sold, including various countries
in
Asia, may not protect our products or intellectual property rights to the
same
extent as the laws of the United States. This makes the possibility of piracy
of
our technology and products more likely. We continuously assess whether and
where to seek formal protection for particular innovations and technologies
based on such factors as:
· |
the
commercial significance of our operations and our competitors’ operations
in particular countries and
regions;
|
· |
the
location in which our products are manufactured;
|
· |
our
strategic technology or product directions in different countries;
and
|
· |
the
degree to which intellectual property laws exist and are meaningfully
enforced in different
jurisdictions.
|
Our
pending patent applications and any future applications may not be approved.
In
addition, any issued patents may not provide us with competitive advantages
or
may be challenged by third parties. The enforcement of patents by others
may
harm our ability to conduct our business. Others may independently develop
substantially equivalent intellectual property or otherwise gain access to
our
trade secrets or intellectual property. Our failure to effectively protect
our
intellectual property could harm our business. We have licensed technology
from
third parties for incorporation in our digital media processors and for
defensive reasons, and expect to continue to enter into such license agreements.
These licenses may result in royalty payments to third parties, the cross
licensing of technology by us or payment of other consideration. If these
arrangements are not concluded on commercially reasonable terms, our business
could suffer.
Litigation
to defend against alleged infringement of intellectual property rights or
to
enforce our intellectual property rights and the outcome of such litigation
could result in substantial costs to us.
We
expect
that as the number of issued hardware and software patents increases and
as
competition intensifies, the volume of intellectual property infringement
claims
and lawsuits may increase. We may become involved in lawsuits or other legal
proceedings alleging patent infringement or other intellectual property rights
violations by us or by our customers that we have agreed to indemnify them
for
certain claims of infringement arising out of the sale of our products to
these
customers. An unfavorable ruling could include significant damages, invalidation
of a patent or family of patents, indemnification of customers, payment of
lost
profits, or, when it has been sought, injunctive relief.
In
addition, we may need to commence litigation or other legal proceedings in
order
to:
· |
assert
claims of infringement of our intellectual
property;
|
· |
protect
our trade secrets or know-how; or
|
· |
determine
the enforceability, scope and validity of the propriety rights of
others.
|
If
we
have to initiate litigation in order to protect our intellectual property,
our
operating expenses may increase which could negatively impact our operating
results. Our failure to effectively protect our intellectual property could
harm
our business.
If
infringement claims are made against us or we are found to infringe a third
parties’ patent, we may seek licenses under the third parties’ patents or other
intellectual property rights. In addition, an indemnified customer may be
required to obtain a license to a third parties’ patents or intellectual
property. However, licenses may not be offered to us at all or on terms
acceptable to us, particularly by competitors. If we fail to obtain a license
from a third party for technology that we use or that is used in one of our
products used by an indemnified customer, we could be subject to substantial
liabilities or have to suspend or discontinue the manufacture and sale of
one or
more of our products either of which could reduce our revenue and harm our
business. Furthermore, the indemnification of a customer may increase our
operating expenses which could negatively impact our operating results.
Our
operating results may be adversely affected if we are subject to unexpected
tax
liabilities.
We
are
subject to taxation by a number of taxing authorities both in the United
States
and throughout the world. Tax rates vary among the jurisdictions in which
we
operate. Significant judgment is required in determining our provision for
our
income taxes as there are many transactions and calculations where the ultimate
tax determination is uncertain. Although we believe our tax estimates are
reasonable, any of the below could cause our effective tax rate to be materially
different than that which is reflected in historical income tax provisions
and
accruals:
· |
the
jurisdictions in which profits are determined to be earned and taxed;
|
· |
adjustments
to estimated taxes upon finalization of various tax returns;
|
· |
changes
in available tax credits;
|
· |
changes
in share-based compensation expense;
|
· |
changes
in tax laws, the interpretation of tax laws either in the United
States or
abroad or the issuance of new interpretative accounting guidance
related
to uncertain transactions and calculations where the tax treatment
was
previously uncertain; and
|
· |
the
resolution of issues arising from tax audits with various tax
authorities.
|
Should
additional taxes be assessed as a result of any of the above, our operating
results could be adversely affected. In addition, our future effective tax
rate
could be adversely affected by changes in the mix of earnings in countries
with
differing statutory tax rates, changes in tax laws or changes in the
interpretation of tax laws.
While
we believe that we currently have adequate internal control over financial
reporting, we are exposed to risks from legislation requiring companies to
evaluate those internal controls.
Section 404
of the Sarbanes-Oxley Act of 2002 requires our management to report on, and
our
independent registered public accounting firm to attest to, the effectiveness
of
our internal control structure and procedures for financial reporting. We
have
an ongoing program to perform the system and process evaluation and testing
necessary to comply with these requirements. However, the manner in which
companies and their independent public accounting firms apply these requirements
and testing companies’ internal controls, remains subject to some uncertainty.
To date, we have incurred, and we expect to continue to incur increased expense
and to devote additional management resources to Section 404 compliance.
Despite our efforts, if we identify a material weakness in internal controls,
there can be no assurance that we will be able to remediate such material
weakness identified in a timely manner, or that we will be able to maintain
all
of the controls necessary to determine that our internal control over financial
reporting is effective. In the event that our chief executive officer, chief
financial officer or our independent registered public accounting firm determine
that our internal control over financial reporting is not effective as defined
under Section 404, investor perceptions of us may be adversely affected and
could cause a decline in the market price of our stock.
Changes
in financial accounting standards or interpretations of existing standards could
affect our reported results of operations.
We
prepare our consolidated financial statements in conformity with United States
generally accepted accounting principles. These principles are constantly
subject to review and interpretation by the SEC and various bodies formed
to
interpret and create appropriate accounting principles. A change in these
principles can have a significant effect on our reported results and may
even
retroactively affect previously reported transactions.
Risks
Related to our Common Stock
Provisions
in our certificate of incorporation, our bylaws and our agreement with Microsoft
could delay or prevent a change in control.
Our
certificate of incorporation and bylaws contain provisions that could make
it
more difficult for a third party to acquire a majority of our outstanding
voting
stock. These provisions include the following:
· |
the
ability of the Board to create and issue preferred stock without
prior
stockholder approval;
|
· |
the
prohibition of stockholder action by written consent;
|
· |
a
classified Board; and
|
· |
advance
notice requirements for director nominations and stockholder proposals.
|
On
March
5, 2000, we entered into an agreement with Microsoft in which we agreed to
develop and sell graphics chips and to license certain technology to Microsoft
and its licensees for use in the Xbox. Under the agreement, if an individual
or
corporation makes an offer to purchase shares equal to or greater than 30%
of
the outstanding shares of our common stock, Microsoft may have first and
last
rights of refusal to purchase the stock. The Microsoft provision and the
other
factors listed above could also delay or prevent a change in control of NVIDIA.
None.
Our
headquarters complex is located on a leased site in Santa Clara, California
and
is comprised of six buildings. Additionally, we lease three other buildings
in
Santa Clara with one used as warehouse space and the other two used as
lab
space. Outside of Santa Clara, we lease space in Austin and Houston, Texas;
Berkeley, California; Beaverton, Oregon; Bedford, Massachusetts; Bellevue
and
Kirkland, Washington; Madison, Alabama; Charlotte and Durham, North Carolina;
Greenville, South Carolina; and Fort Collins, Colorado. These facilities
are
used as design centers and/or sales and administrative offices.
Outside
of the United States, we lease space in Taipei and Neihu in Taiwan; Tokyo,
Japan; Seoul, Korea; Beijing, Shanghai, and Shenzhen, China; Wanchai, and
Shatin, New Territories, Hong Kong; Bangalore, Hyderabad and Pune, India;
Paris,
France; Moscow, Russia; Munich and Wurselen, Germany; Helsinki, Finland
and
Theale, England. These facilities are used primarily to support our customers
and operations and as sales and administrative offices. The office lease
spaces
in Wurselen, Germany, Shenzhen, China and Bangalore, Pune and Hyderabad,
India
are used primarily as design centers. Additionally, as a result of our
acquisition of PortalPlayer, we acquired a building under construction
in
Hyderabad, India, which will be used primarily as a design center.
We
believe that we currently have sufficient facilities to conduct our operations
for the next twelve months, although we expect to lease additional facilities
throughout the world as our business requires. For additional information
regarding obligations under leases, see Note 12 of the Notes to the Consolidated
Financial Statements under the subheading “Lease Obligations,” which information
is hereby incorporated by reference.
3dfx
On
December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries
entered into an agreement to purchase certain graphics chip assets from 3dfx
Interactive, Inc., or 3dfx, which closed on April 18, 2001.
In
May
2002, we were served with a California state court complaint filed by the
landlord of 3dfx’s San Jose, California commercial real estate lease,
CarrAmerica. In December 2002, we were served with a California state court
complaint filed by the landlord of 3dfx’s Austin, Texas commercial real estate
lease, Carlyle Fortran Trust. The landlords’ complaints both asserted claims
for, among other things, interference with contract, successor liability
and
fraudulent transfer and seek to recover, among other things, amounts owed
on
their leases with 3dfx in the aggregate amount of approximately $15 million.
In
October 2002, 3dfx filed for chapter 11 bankruptcy protection in the United
States Bankruptcy Court for the Northern District of California. The landlords’
actions were subsequently removed to the United States Bankruptcy Court for
the
Northern District of California and consolidated, for purposes of discovery,
with a complaint filed by the Trustee in the 3dfx bankruptcy case. Upon motion
by NVIDIA in 2005, the District Court withdrew the reference to the Bankruptcy
Court and the landlord actions were removed to the United States District
Court
for the Northern District of California. On November 10, 2005, the District
Court granted our motion to dismiss the landlords’ respective amended complaints
and allowed the landlords to have until February 4, 2006 to amend their
complaints. The landlords re-filed claims against NVIDIA in early February
2006,
and NVIDIA again filed motions requesting the District Court to dismiss all
such
claims. The District Court took both motions under submission. On September
29,
2006, the court dismissed the CarrAmerica action in its entirety and without
leave to amend. The court found, among other things, that CarrAmerica lacks
standing to bring the lawsuit and that such standing belongs exclusively
to the
bankruptcy trustee. On October 27, 2006, CarrAmerica filed a notice of appeal
from that order. On December 15, 2006, the District Court also dismissed
the
Carlyle complaint in its entirety, finding that Carlyle lacked standing to
pursue some of its claims, and that certain other claims were substantively
unmeritorious. NVIDIA has filed motions to recover its litigation costs and
attorneys fees against both Carlyle and Carr. Those motions are currently
scheduled for hearing in early April, 2007.
In
March
2003, we were served with a complaint filed by the Trustee appointed by the
Bankruptcy Court to represent the interests of the 3dfx bankruptcy estate.
The
Trustee’s complaint asserts claims for, among other things, successor liability
and fraudulent transfer and seeks additional payments from us. On October
13,
2005, the Court held a hearing on the Trustee’s motion for summary adjudication.
On December 23, 2005, the Court issued its ruling denying the Trustee’s Motion
for Summary Adjudication in all material respects and holding that NVIDIA
is
prevented from disputing that the value of the 3dfx transaction to NVIDIA
was
less than $108.0 million. The Court expressly denied the Trustee’s request to
find that the value of the 3dfx assets conveyed to NVIDIA were at least $108.0
million. In early November 2005, after many months of mediation, NVIDIA and
the
Official Committee of Unsecured Creditors, or the Creditors’ Committee, reached
a conditional settlement of the Trustee’s claims against NVIDIA. This
conditional settlement, presented as the centerpiece of a proposed Plan of
Liquidation in the bankruptcy case, was subject to a confirmation process
through a vote of creditors and the review and approval of the Bankruptcy
Court
after notice and hearing. The Trustee advised that he intended to object
to the
settlement, which would have called for a payment by NVIDIA of approximately
$30.6 million to the 3dfx estate. Under the settlement, $5.6 million related
to
various administrative expenses and Trustee fees, and $25.0 million related
to
the satisfaction of debts and liabilities owed to the general unsecured
creditors of 3dfx. Accordingly, during the three month period ended October
30,
2005, we recorded $5.6 million as a charge to settlement costs and $25.0
million
as additional purchase price for 3dfx.
However,
the conditional settlement never progressed substantially through the
confirmation process. On December 21, 2005, the Bankruptcy Court determined
that
it would schedule trial of one portion of the Trustee’s case against NVIDIA. On
January 2, 2007, NVIDIA exercised its right to terminate the settlement
agreement on grounds that the bankruptcy court had failed to proceed toward
confirmation of the Creditors’ Committee’s plan. In
addition, while the conditional settlement agreement was awaiting the
confirmation process, the Bankruptcy Court, over objection of the Creditors’
Committee and NVIDIA, ordered the discovery portion of the Trustee’s litigation
to proceed. The expert discovery was completed, but the Bankruptcy Court
also
ruled on a Trustee discovery motion allowing additional discovery of NVIDIA.
Because that order would have required NVIDIA to disclose privileged
attorney-client communications, NVIDIA asked the District Court to review
that
order and to stay its execution while the District Court’s review is pending.
The District Court did issue the requested stay order on August 3, 2006.
Oral
argument on that matter was held on November 15, 2006, and the District Court
reversed the Bankruptcy Court’s order by order of its own dated December 15,
2006. The District Court permitted certain limited additional discovery,
but
concluded that on the record before it, there was no basis to set aside the
attorney-client privilege.
Following
the Trustee’s filing of a Form 8-K on behalf of 3dfx, in which the Trustee
disclosed the terms of the proposed settlement agreement between NVIDIA and
the
Creditor’s Committee, certain shareholders of 3dfx filed a petition with the
Bankruptcy Court to appoint an official committee to represent the claimed
interests of 3dfx shareholders. That petition was granted and an Equity Holders
Committee was appointed. Since that appointment, the Equity Holders Committee
has filed a competing plan of reorganization/liquidation. The Equity Holders
plan assumes that 3dfx can raise additional equity capital that would be
used to
retire all of 3dfx’s debts. Upon the payment of that debt, the Equity Holders
Committee contends that NVIDIA would be obliged to pay the stock consideration
provided for in the asset purchase agreement. By virtue of stock splits since
the execution of the asset purchase agreement, the stock consideration would
now
total four million shares of our common stock. The Equity Holders’ Committee
filed a motion with the Bankruptcy Court for an order giving it standing
to
bring that lawsuit to enforce the Asset Purchase Agreement. Over our objection,
the Bankruptcy Court granted that motion on May 1, 2006 and the Equity Holders’
Committee filed its Complaint for Declaratory Relief against NVIDIA that
same
day. NVIDIA moved to dismiss the Complaint for Declaratory Relief, and the
Bankruptcy court granted that motion with leave to amend. The Equity Committee
thereafter amended its complaint, and NVIDIA moved to dismiss that amended
complaint as well. At the hearing on December 21, 2006, the Bankruptcy Court
granted the motion as to one of the Equity Holders’ Committee’s claims, and
denied it as to the others. However, the Bankruptcy Court also ruled that
NVIDIA
would only be required to answer the first three causes of action by which
the
Equity Holders’ Committee seeks a determination that the Asset Purchase
Agreement was not terminated before 3dfx filed for bankruptcy protection,
that
the 3dfx bankruptcy estate still holds some rights in the Asset Purchase
Agreement, and that the agreement is capable of being assumed by the bankruptcy
estate. In addition, the Equity Holders Committee filed a motion seeking
Bankruptcy court approval of investor protections for Harbinger Capital Partners
Master Fund I, Ltd., an equity investment firm that has conditionally agreed
to
pay no more than $51.5 million for preferred stock in 3dfx. The hearing on
that
motion was held on January 18, 2007, and the court approved the proposed
protections. Beginning on March 21, 2007, NVIDIA and the Trustee are scheduled
to try the question of the value of the assets 3dfx conveyed to NVIDIA and,
in
particular, whether the price NVIDIA paid for those assets was reasonably
equivalent to the value of the assets 3dfx sold to NVIDIA.
Lawsuits
related to our historical stock option granting practices and SEC
inquiry
In
June
2006, the Audit Committee of the Board of NVIDIA, or the Audit Committee,
began
a review of our stock option practices based on the results of an internal
review voluntarily undertaken by management. The Audit Committee, with
the
assistance of outside legal counsel, completed its review on November
13, 2006
when the Audit Committee reported its findings to our full Board. The
review
covered option grants to all employees, directors and consultants for
all grant
dates during the period from our initial public offering in January 1999
through
June 2006. Based on the findings of the Audit Committee and our internal
review,
we identified a number of occasions on which we used an incorrect measurement
date for financial accounting and reporting purposes.
We
voluntarily contacted the SEC regarding the Audit Committee’s review and, as of
the date of the filing of this Form 10-K, the SEC is continuing the inquiry
of
our historical stock option grant practices it began in late August 2006.
In
October 2006, we met with the SEC and provided it with a review of the
status of
the Audit Committee’s review and in November 2006 we voluntarily provided the
SEC with further documents. We continue to cooperate with the SEC in
its
inquiry.
Concurrently
with our internal review and the SEC’s inquiry, since September 29, 2006, ten
derivative cases have been filed in state and federal courts asserting
claims
concerning errors related to our historical stock option granting practices
and
associated accounting for stock-based compensation expense. These complaints
have been filed in various courts, including the California Superior
Court,
Santa Clara County, the United States District Court for the Northern
District
of California, and the Court of Chancery of the State of Delaware in
and for New
Castle County. Plaintiffs
filed a consolidated complaint in the United States District Court for
the
Northern District of California on February 28, 2007. The
California Superior Court cases have
been
consolidated and plaintiffs are scheduled to file a consolidated complaint
on or
before March 22, 2007. All of the
cases
purport to be brought derivatively on behalf of NVIDIA against members
of our
Board and several of our current and former officers and directors. All
allege
in substantially similar fashion claims for, among other things, breach
of
fiduciary duty, unjust enrichment, insider selling, abuse of control,
gross
mismanagement, waste, constructive fraud, and violations of Sections
10(b) and
14(a) of the Securities Exchange Act of 1934, or the Exchange Act. The
plaintiffs seek to recover for NVIDIA, among other things, damages in
an
unspecified amount, rescission, punitive damages, treble damages for
insider
selling, and fees and costs. Plaintiffs also seek an accounting, a constructive
trust and other equitable relief. We
intend
to take all appropriate action in response to these
complaints.
Opti
Incorporated
On
October 19, 2004, Opti Incorporated, or Opti, filed a complaint for patent
infringement against NVIDIA in the United States District Court for the
Eastern
District of Texas. In its complaint, Opti asserted that unspecified NVIDIA
chipsets infringe five United States patents held by Opti. Opti sought
unspecified damages for our alleged conduct, attorneys’ fees and triple damages
for alleged willful infringement by NVIDIA. In April 2006, the District
Court
issued a Markman ruling adopting Opti's proposed construction on 13 of
the 15
terms at issue and Opti dropped from the lawsuit two of the five United
States
patents that Opti alleged NVIDIA infringes, and elected to pursue the three
remaining patents at trial.
In
August
2006, Opti and NVIDIA settled this litigation. Under that settlement, NVIDIA
was
obligated to pay to Opti $11.0 million dollars for past and present licenses
to
the patents in suit and NVIDIA agreed to make additional quarterly payments
to
Opti should NVIDIA use certain patented technology after January 31, 2007.
The
case has now been dismissed with prejudice. The agreements with Opti call
for us
to pay $11.0 million in exchange for Opti’s dismissal of its lawsuit against us
and for certain patent license rights. Of this $11.0 million, we recorded
$8.0
million as a patent-related intangible asset and $3.0 million as a charge
to
cost of revenue.
Department
of Justice Subpoena and Investigation
On
November 29, 2006, we received a subpoena from the San Francisco Office of
the
Antitrust Division of the United States Department of Justice, or DOJ, in
connection with the DOJ's investigation into potential antitrust violations
related to graphics processing units and cards. No specific allegations have
been made against us. We plan to cooperate with the DOJ in its investigation.
As
of March 14, 2007, 42 civil complaints have been filed against us. The
majority are pending in the Northern District of California, a number are
pending in the Central District of California, and other cases are pending
in
several other Federal district courts. Although the complaints differ, they
generally purport to assert federal and state antitrust claims based on alleged
price fixing, market allocation, and other alleged anti-competitive agreements
between us and Advanced Micro Devices, Inc., or AMD, as a result of its
acquisition of ATI Technologies, Inc., or ATI. Many of the cases also assert
a
variety of state law unfair competition or consumer protection claims on
the
same allegations and some cases assert unjust enrichment or other common
law
claims. The complaints are putative class actions alleging classes of direct
and/or indirect purchasers of our graphic processing units and cards. The
plaintiffs in a few of the Northern District of California actions have filed
a
motion with the Judicial Panel on Multidistrict Litigation asking that all
pending and subsequent cases be consolidated in one court for all pre-trial
discovery and motion practice. A hearing on this motion is set for March
29,
2007. We believe the allegations in the complaints are without merit and
intend
to vigorously defend the cases.
No
matters were submitted to a vote of our security holders during the fourth
quarter of fiscal 2007.
Our
common stock is traded on the NASDAQ Global Select Market under the
symbol NVDA. Public trading of our common stock began on January 22, 1999.
Prior
to that, there was no public market for our common stock. As of March 2,
2007,
we had approximately 461 registered stockholders, not including those shares
held in street or nominee name. The following table sets forth for the periods
indicated the high and low sales price for our common stock as quoted on
the
NASDAQ Global Select Market:
|
|
High
|
|
Low
|
|
Fiscal
year ending January 27, 2008
|
|
|
|
|
|
|
|
First
Quarter (through March 2, 2007)
|
|
$
|
34.91
|
|
$
|
29.71
|
|
|
|
|
|
|
|
|
|
Fiscal
year ended January 28, 2007
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
38.96
|
|
$
|
30.90
|
|
Third
Quarter
|
|
$
|
34.59
|
|
$
|
20.85
|
|
Second
Quarter
|
|
$
|
31.88
|
|
$
|
17.17
|
|
First
Quarter (1)
|
|
$
|
30.84
|
|
$
|
21.44
|
|
|
|
|
|
|
|
|
|
Fiscal
year ended January 29, 2006
|
|
|
|
|
|
|
|
Fourth
Quarter (1)
|
|
$
|
23.38
|
|
$
|
16.28
|
|
Third
Quarter (1)
|
|
$
|
17.98
|
|
$
|
13.52
|
|
Second
Quarter (1)
|
|
$
|
14.70
|
|
$
|
10.76
|
|
First
Quarter (1)
|
|
$
|
14.80
|
|
$
|
10.46
|
|
(1) Reflects
a two-for-one stock split effective on April 6, 2006.
Dividend
Policy
We
have
never paid and do not expect to pay cash dividends for the foreseeable future.
Equity
Compensation Plan Information
Information
regarding our equity compensation plans, including both stockholder approved
plans and non-stockholder approved plans, will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Stockholders under
the
caption "Equity Compensation Plan Information," and is incorporated by reference
into this report.
Issuer
Purchases of Equity Securities
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 million. Subsequently, on March 6, 2006,
we
announced that our Board had approved a $400 million increase to the
original stock repurchase program. As a result of this increase, the amount
of
common stock the Board has authorized to be repurchased has now been increased
to a total of $700 million. The repurchases will be made from time to time
in
the open market, in privately negotiated transactions, or in structured stock
repurchase programs, in compliance with the Exchange Act, Rule 10b-18,
subject to market conditions, applicable legal requirements, and other factors.
The program does not obligate NVIDIA to acquire any particular amount of
common
stock and the program may be suspended at any time at our
discretion.
As
part
of our share repurchase program, we have entered into and we may continue
to
enter into structured share repurchase transactions with financial institutions.
These agreements generally require that we make an up-front payment in exchange
for the right to receive a fixed number of shares of our common stock upon
execution of the agreement, and a potential incremental number of shares
of our
common stock, within a pre-determined range, at the end of the term of the
agreement. Through the end of fiscal 2007, we have repurchased 27.3 million
shares under our stock repurchase program for a total cost of $488.1 million.
During the first quarter of fiscal 2008, 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 first fiscal
quarter.
Period
|
|
Total
Number of Shares Purchased
|
|
|
|
Average
Price Paid per Share
|
|
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans
of
Programs
|
|
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the
Plans or
Programs (1)
|
|
October
30, 2006 - November 26, 2006
|
|
|
-
|
|
|
|
|
$
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
311,869,417
|
|
November
27, 2006 - December 24, 2006
|
|
|
-
|
|
|
|
|
$ |
-
|
|
|
|
|
|
-
|
|
|
|
|
|
311,869,417
|
|
December
25, 2006 - January 28, 2007
|
|
|
2,868,123
|
|
|
(3)
|
|
$
|
34.87
|
|
|
(2)
|
|
|
2,868,123
|
|
|
(3)
|
|
|
211,869,417
|
|
Total
|
|
|
2,868,123
|
|
|
|
|
$
|
34.87
|
|
|
|
|
|
2,868,123
|
|
|
|
|
|
|
|
(1)
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 $700 million on the open market, in negotiated transactions
or
through structured stock repurchase agreements through August 2007.
(2)
Represents
weighted average price paid per share during the fourth quarter of fiscal
2007.
(3)
As part of our share repurchase program, we have entered into and we may
continue to enter into structured share repurchase transactions with financial
institutions. During the fourth quarter of fiscal 2007, we repurchased 2.9
million shares of our common stock for $100 million under a structured share
repurchase transaction. This transaction required that we make an up-front
payment.
Stock
Performance Graph
The
following graph compares the cumulative total stockholder return for our
common
stock, the S & P 500 Index and the S & P 500 Semiconductors Index for
the five years ended January 28, 2007. The graph assumes that $100 was invested
on January 25, 2002 in our common stock or on January 31, 2002 in each of
the S
& P 500 Index and the S & P Semiconductors Index. Total return assumes
reinvestment of dividends in each of the indices indicated. We have never
paid
cash dividends on our common stock. Our results are calculated on fiscal
year-end basis and each of the S & P 500 Index and the S & P
Semiconductors Index are calculated on month-end basis. Total return is based
on
historical results and is not intended to indicate future performance.
|
|
1/25/2002
|
|
1/24/2003
|
|
1/25/2004
|
|
1/30/2005
|
|
1/29/2006
|
|
1/28/2007
|
|
NVIDIA
Corporation
|
|
$
|
100
|
|
$
|
15.53
|
|
$
|
35.27
|
|
$
|
34.95
|
|
$
|
70.64
|
|
$
|
96.14
|
|
S
& P 500
|
|
$
|
100
|
|
$
|
76.98
|
|
$
|
103.6
|
|
$
|
110.05
|
|
$
|
121.47
|
|
$
|
139.11
|
|
S
& P Semiconductors
|
|
$
|
100
|
|
$
|
44.26
|
|
$
|
88.1
|
|
$
|
66.21
|
|
$
|
76.56
|
|
$
|
72.09
|
|
The
following selected financial data should be read in conjunction with our
financial statements and the notes thereto, and with Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.” The
consolidated statement of income data for the years ended January 28, 2007,
January 29, 2006, and January 30, 2005 and the consolidated balance sheet
data
as of January 28, 2007 and January 29, 2006 have been derived from and should
be
read in conjunction with our audited consolidated financial statements and
the
notes thereto included elsewhere in this Annual Report on Form 10-K. The
consolidated statement of income data for the year ended January 25, 2004
and
the consolidated balance sheet data as of January 30, 2005, are derived from
audited consolidated financial statements and the notes thereto which are
not
included in this Annual Report on Form 10-K. The
consolidated statement of income data for the year ended January 26, 2003
and the consolidated balance sheet data as of January 25, 2004
and January 26, 2003 are derived from unaudited consolidated financial
statements which are not included
in this Annual Report on Form 10-K.
|
|
Year
Ended
|
|
|
|
January
28,
|
|
January
29,
|
|
January
30,
|
|
January
25,
|
|
January
26,
|
|
|
|
2007
(B,
C)
|
|
2006
(D)
|
|
2005
|
|
2004
(E,
F)
|
|
2003
(G,
H)
|
|
|
|
(In
thousands, except per share data)
|
|
Consolidated
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,068,771
|
|
$
|
2,375,687
|
|
$
|
2,010,033
|
|
$
|
1,822,945
|
|
$
|
1,909,447
|
|
Income
from operations
|
|
$
|
453,452
|
|
$
|
336,664
|
|
$
|
95,176
|
|
$
|
49,788
|
|
$
|
82,201
|
|
Net
income
|
|
$
|
448,834
|
|
$
|
301,176
|
|
$
|
88,615
|
|
$
|
48,630
|
|
$
|
50,901
|
|
Basic
net income per share
|
|
$
|
1.27
|
|
$
|
0.89
|
|
$
|
0.27
|
|
$
|
0.15
|
|
$
|
0.17
|
|
Diluted
net income per share
|
|
$
|
1.15
|
|
$
|
0.82
|
|
$
|
0.25
|
|
$
|
0.14
|
|
$
|
0.15
|
|
Shares
used in basic per share computation (A)
|
|
|
352,404
|
|
|
339,380
|
|
|
332,124
|
|
|
321,848
|
|
|
307,026
|
|
Shares
used in diluted per share computation (A)
|
|
|
391,504
|
|
|
365,704
|
|
|
351,624
|
|
|
344,108
|
|
|
331,654
|
|
|
|
January
28,
|
|
January
29,
|
|
January
30,
|
|
January
25,
|
|
January
26,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(In
thousands)
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents and marketable securities
|
|
$
|
1,117,850
|
|
$
|
950,174
|
|
$
|
670,045
|
|
$
|
604,043
|
|
$
|
1,028,413
|
|
Total
assets
|
|
$
|
2,675,263
|
|
$
|
1,954,687
|
|
$
|
1,663,551
|
|
$
|
1,452,040
|
|
$
|
1,658,035
|
|
Capital
lease obligations, less current portion
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
856
|
|
$
|
4,880
|
|
Other
long-term debt
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
300,000
|
|
Total
stockholders’ equity
|
|
$
|
2,006,919
|
|
$
|
1,495,992
|
|
$
|
1,221,091
|
|
$
|
1,089,493
|
|
$
|
960,933
|
|
Cash
dividends declared per common share
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
(A)
Reflects a two-for-one stock-split effective April 6, 2006.
(B)
Fiscal 2007 included a charge of $17.5 million associated with a confidential
patent licensing arrangement.
(C)
Fiscal 2007 included a charge of $13.4 million related to the write-off of
acquired research and development expense from our purchase of PortalPlayer
that
had not yet reached technological feasibility and has no alternative future
use.
(D)
Fiscal 2006 included a charge of $14.2 million related to settlement costs
associated with two litigation matters, 3dfx and American Video Graphics,
LP, or
AVG.
(E)
Fiscal 2004 included a charge of $3.5 million related to the write-off of
acquired research and development expense from our purchase of MediaQ, Inc.,
or
MediaQ that had not yet reached technological feasibility and has no alternative
future use.
(F)
Fiscal 2004 included a charge of $13.1 million in connection with our
convertible subordinated debenture redemption.
(G)
Fiscal 2003 included $40.4 million in additional revenue related to our
settlement of our arbitration with Microsoft regarding Xbox
pricing.
(H)
Fiscal 2003 included a charge for stock option exchange expenses of $61.8
million related to personnel associated with cost of revenue, for manufacturing
personnel, research and development and sales, general and administrative
of
$6.2 million, $35.4 million and $20.2 million, respectively.
The
following discussion and analysis of our financial condition and results
of
operations should be read in conjunction with “Item 1A. Risk Factors”, “Item 6.
Selected Financial Data”, our Consolidated Financial Statements and related
Notes thereto, as well as other cautionary statements and risks described
elsewhere in this Annual Report on Form 10-K, before deciding to purchase,
hold
or sell shares of our common stock.
Overview
Our
Company
NVIDIA
Corporation is the worldwide leader in programmable graphics processor
technologies. Our products are designed to enhance the end-user experience
on
consumer and professional computing devices. We have four major product-line
operating segments: the graphics processing units, or GPU Business, media
and
communications processors, or MCP Business, Handheld GPU Business, and Consumer
Electronics Business. Our GPU Business is composed of products that support
desktop personal computers, or PCs, notebook PCs, professional workstations
and
other GPU-based products; our MCP Business is composed of NVIDIA nForce products
that operate as a single-chip or chipset that provide system functions, such
as
high speed storage and network communications, and perform these operations
independently from the host central processing unit, or CPU; our Handheld
GPU
Business is composed of products that support handheld personal digital
assistants, or PDAs, cellular phones and other handheld devices; and our
Consumer Electronics Business is concentrated in products that support video
game consoles and other digital consumer electronics devices and is composed
of
our contractual arrangements with Sony Computer Entertainment, or SCE, to
jointly develop a custom GPU for SCE’s PlayStation3, sales of our Xbox-related
products, revenue from our license agreement with Microsoft Corporation, or
Microsoft, relating to the successor product to their initial Xbox gaming
console, the Xbox360, and related devices.
Original
equipment manufacturers, or OEMs, original design manufacturers, or ODMs,
add-in-card manufacturers, system builders and consumer electronics companies
worldwide utilize NVIDIA processors as a core component of their entertainment
and business solutions. Our GPUs are designed to deliver superior performance
and crisp visual quality for PC-based applications such as manufacturing,
science, e-business, entertainment and education. Our MCPs perform highly
demanding multimedia processing for secure broadband connectivity,
communications and storage. Our handheld GPUs deliver an advanced visual
experience by accelerating graphics and video applications while implementing
design techniques that result in high performance and relatively low power
consumption.
We
were
incorporated in California in April 1993 and reincorporated in Delaware in
April
1998. Our headquarter facilities are in Santa Clara, California. Our Internet
address is www.nvidia.com.
Seasonality
Our
industry is largely focused on the consumer products market. Due to the
seasonality in this market, we typically expect to see stronger revenue
performance in the second half of the calendar year related to the
back-to-school and holiday seasons.
Fiscal
2007 Developments, Future Objectives and Challenges
GPU
Business
The
combination of our GeForce 6, GeForce 7 and GeForce 8 series of GPUs and
our
Scalable Link Interface, or SLI, technology has created a new class of gaming
PCs and professional workstations. SLI technology takes advantage of the
increased bandwidth of the peripheral component interconnect, or PCI, Express
bus architecture to allow up to four NVIDIA-based graphics cards to operate
in a
single PC or up to two NVIDIA-based graphics cards to operate in a notebook
PC
or professional workstation.
During
the first quarter of fiscal 2007, we shipped eight new GeForce 7 series GPUs
for
desktop and notebook PCs, expanding the offering of products in the GeForce
7
GPU family. In March 2006, we shipped our first Quad SLI system for desktop
PCs,
enabling the use of four GPUs per system. We also shipped the GeForce Go
7800
GTX notebook GPU featuring SLI technology for notebook PCs.
During
the second quarter of fiscal 2007, our NVIDIA GeForce Go notebook GPU product
line achieved record revenue for the second consecutive quarter. In addition,
our NVIDIA Quadro professional product line increased its revenue 27% from
the
second quarter of fiscal 2006. We transitioned from our NVIDIA GeForce 6600
to
the NVIDIA GeForce 7600, which delivers almost a 100% performance increase
at
the same price point.
During
the third quarter of fiscal 2007, we continued to experience growth in sales
of
our GeForce 7 series products, primarily in the mainstream and performance
segments. Our NVIDIA GeForce Go notebook GPU product line achieved record
revenue for the third consecutive quarter, primarily through increased sales
in
the notebook standalone GPU segment.
In
June
2006, we shipped the GeForce 7950 GX2, which provides 2500x1600 resolution.
This
is the resolution of cinematic film, and brings the 16:9 panoramic experience
of
cinema to gaming. We also announced PureVideo High-Definition, or HD technology,
a combination of hardware acceleration from an NVIDIA GPU, high definition
movie
player integration and High-Bandwidth Digital Content Protection, or HDCP,
feature support, to enable manufacturers and consumers to build PCs that
can
play High-Definition Digital Video Disc, or HD DVD or Blu-ray
movies.
In
August
2006, we introduced the NVIDIA Quadro Plex 1000, the world's first dedicated
Visual Computing System. The NVIDIA Quadro Plex 1000 offers scalability in
a
desktop or dense 3U rackmount configuration for professional applications
such
as those powering multiple streams of 4K high-definition video, 3D styling
and
design, scientific and medical visualization, oil and gas exploration, or
visual
simulation and training.
In
November 2006, we introduced our GeForce 8 series GPUs, which is based on
a
unified shader architecture. Instead of separate vertex and pixel shading
processors, the GeForce 8800 has 128 stream processors, operating at 1.35GHz,
that can process either vertex or pixel shader programs. GeForce 8800 is
also
the world’s first DX10 GPU. DX10 is a new Application Programming Interface, or
API, for Microsoft Windows Vista, or Vista, and includes many new features.
We
also announced Compute Unified Device Architecture, or CUDA, a new mode of
operation on GPUs where the computational power of the GPU can be utilized
for
computation-intensive applications.
During
the fourth quarter of fiscal 2007, we extended our leadership share position
in
the notebook GPU segment to 58% share, according to the Mercury Research
Fourth
Quarter 2006 PC Graphics Report. Notebook GPU revenue grew over 120%
year-over-year. Additionally, the NVIDIA Quadro professional product line
achieved record revenue with a 24% revenue increase from the fourth quarter
fiscal 2006.
MCP
Business
In
February 2006, we completed our acquisition of ULi Electronics, Inc., or
ULi, a
core logic developer for the PC industry. This acquisition represents our
ongoing investment in our platform solution strategy and has strengthened
our
sales, marketing, and customer engineering presence in Taiwan and
China.
In
March
2006, we shipped our first integrated graphics processor, or IGP, core-logic
solution for Advanced Micro Devices, Inc., or AMD, based notebook PCs - the
GeForce Go 6100 GPU and NVIDIA nForce Go 430 MCP. This core logic solution
is
the industry’s first high-definition IGP to provide hardware accelerated H.264
high-definition video playback.
In
May
2006, we shipped our NVIDIA nForce 590 SLI, a high-performance motherboard
solution for x86 PC platforms, including those based on socket AM2 processors
by
AMD. The NVIDIA nForce 590 SLI can utilize the power of up to four NVIDIA
GeForce GPUs for HD gaming.
In
June
2006, we introduced the NVIDIA nForce 590 SLI for Intel Core2 Duo and Core
2
Extreme CPUs.
In
November 2006, we introduced our new NVIDIA nForce 680i SLI MCPs, which deliver
performance for Intel Corporation, or Intel, CPUs and are designed specifically
for enthusiasts with features such as SLI, Dual Net Gigabit Ethernet, and
MediaShield RAID. The introduction of our NVIDIA nForce 680i SLI MCPs extends
our nForce products for Intel Corporation, or Intel’s, CPUs with a performance
platform for Intel’s Core2 Duo and new Core 2 Quad CPUs.
During
the fourth quarter of fiscal 2007, the NVIDIA nForce MCP product line achieved
record revenue for its tenth consecutive quarter. NVIDIA nForce MCP revenue
grew
16% sequentially from the third quarter fiscal 2007 and 89% year-over-year.
Our
MCP growth was driven in part by increased adoption of our NVIDIA nForce
notebook solutions by large PC manufacturers.
For
fiscal 2008, our key growth objectives for our MCP Business are to deliver
new
motherboard products for the Intel CPU segment and maintain our leadership
positions on AMD platforms. We believe that Intel-based consumers will demand
NVIDIA-branded graphics and system performance.
Handheld
GPU Business
In
March
2006, NVIDIA and Intel announced a collaboration to bring a 3D gaming and
multimedia platform to handheld devices. The collaboration combines the NVIDIA
GoForce family of handheld GPUs with Intel processors to deliver a development
platform to content developers.
Our
GoForce handheld GPUs ship in the Motorola 3G RAZR V3X, SLVR L6i, SLVR L7i,
MOTORAZR Maxx, and Sony Ericsson Walkman phones. Our newest handheld GPU,
the
NVIDIA GoForce 5500 GPU, has been designed into Digital Video Broadcast -
Handheld, or DVB-H, phones in North America, Europe, and Integrated Services
Digital Broadcasting - Terrestrial, or ISDB-T, in Japan.
In
March
2006, we acquired Hybrid Graphics Ltd., or Hybrid Graphics, a developer of
embedded 2D and 3D graphics software for handheld devices.
In
June
2006, we launched our MobileMedia Platform for handheld devices running Windows
Mobile 5.0. The MobileMedia Platform is a development kit, containing both
software and hardware components, that enables handheld manufacturers to
design
and release digital media-rich devices with Windows Mobile 5.0.
In
January 2007, we completed our acquisition of PortalPlayer, Inc., or
PortalPlayer. Until recently, our Handheld GPU strategy has been to focus
on
establishing ourselves in the market as the leader of multimedia technology
by
leveraging our expertise in graphics, video, and image processing. With the
acquisition of PortalPlayer’s expertise in building low power application
processors for personal media players, or PMPs, we are now focused on delivering
Systems-On-A-Chip, or SOCs, that combine our application processors and GPUs.
We
expect SOCs such as these to power next generation smart phone and PMP
devices.
Consumer
Electronics Business
We
record
license revenue from our initial agreement with SCE to jointly develop a
custom
GPU for SCE’s PlayStation 3 computer entertainment system, as well as from
certain additional agreements with them. In addition, we record royalty revenue
from SCE based on per unit sales of the PlayStation 3, which was launched
by SCE
in November 2006.
Gross
Margin Improvement
We
continue to remain focused on improving our gross margin. Beginning in fiscal
2005, we implemented profit improvement initiatives across our company which
were designed to improve business and operational processes. During fiscal
2007, our gross margin was 42.4%, which represents an increase of over 410
basis
points from our gross margin of 38.3% for fiscal 2006. Our gross margin was
38.3% for fiscal 2006, which represents an increase of 610 basis points from
our
gross margin of 32.2% for fiscal 2005. We will continue to focus on improving
our gross margin during fiscal 2008.
Restatement
On
November 29, 2006, we restated our previously-issued financial statements
for
fiscal years 2004 through 2006, and for the first quarter of fiscal 2007,
together with selected financial statement items for earlier years, to
correct
errors related to accounting for stock-based compensation expense. In
June 2006,
the Audit Committee of the Board of NVIDIA, or the Audit Committee, began
a
review of our stock option practices based on the results of an internal
review
voluntarily undertaken by management. The Audit Committee, with the assistance
of outside legal counsel, completed its review on November 13, 2006 when
the
Audit Committee reported its findings to our Board of Directors, or the
Board. The review covered option grants to all employees, directors and
consultants for all grant dates during the period from our initial public
offering in January 1999 through June 2006. Based on the findings of
the Audit
Committee and our internal review, we identified a number of occasions
on which
we used an incorrect measurement date for financial accounting and reporting
purposes. These errors resulted primarily from our use during our fiscal
years
2000, 2001 and 2002, of certain date selection methods discussed below
which
resulted in employees receiving options with stated exercise prices lower
than
the market prices as measured based upon the actual grant dates. We ceased
using
such practices beginning in our fiscal year 2003. The Audit Committee
found
that, beginning in our fiscal year 2003, we improved our stock option
grant
processes and have generally granted and priced our employee stock options
in an
objective and consistent manner since that time. However, for one Company-wide
annual stock option grant we made in fiscal 2004, we did not finalize
the number
of options allocated to each employee as of the stated grant date in
May 2003,
which resulted in stock-based compensation charges due to the change
in the
measurement date to the date the grants were finalized. The Audit Committee’s
review did not identify any additional stock-based compensation charges
from
measurement date issues subsequent to that fiscal 2004 grant.
As
a
result of the measurement date errors identified from the Audit Committee’s
review, through January 29, 2006, we recorded aggregate non-cash stock-based
compensation charges of $127.4 million, net of related tax effects. The errors
resulted in after-tax charges of $1.4 million and $11.7 million for our fiscal
years 2006 and 2005, respectively. Additionally, the cumulative effect of
the
related after-tax charges for periods prior to our fiscal year ended January
30,
2005 was $114.2 million. These additional stock-based compensation expense
charges were non-cash and had no impact on our reported revenue, cash, cash
equivalents or marketable securities for each of the restated periods. These
charges were based primarily on Accounting
Principles Board Opinion No. 25, or APB No. 25, Accounting
for Stock Issued to Employees (intrinsic value-based) charges and
associated payroll taxes of $199.6 million on a pre-tax basis, which were
amortized over the vesting term of the stock options in accordance with
Financial Accounting Standards Board Interpretation No. 28, or FIN 28,
Accounting for Stock Appreciation Rights and Other Variable Stock Option
or
Award Plans. We amortized a substantial portion of these charges to expense
during our fiscal years 2000 to 2006.
The
types
of errors we identified generally fell into the following
categories:
Improper
Measurement Dates for Company-Wide Annual or Retention Stock Option
Grants.
We
determined that, in connection with certain annual or retention stock option
grants that we made to employees during our fiscal years 2000, 2001, 2002,
2003
and 2004, the final number of shares that an individual employee was entitled
to
receive was not determined and/or the proper approval of the related stock
option grant had not been given until after the stated grant date. Therefore,
the measurement date for such options for accounting purposes was actually
subsequent to the stated grant date, resulting in new measurement dates for
the
related options.
Improper
Measurement Dates for Stock Option Grants during Fiscal Years 2001 and
2002.
In
connection with stock option grants that we made to newly-hired employees
(and,
to a much lesser degree, retention grants to existing employees) during fiscal
years 2001 and 2002, our practice was to grant stock options with an exercise
price based upon the lowest closing price of our common stock in the last
few
days of the month of hire or the last few days of any subsequent month in
the
quarter of hire. The selection of the grant date of the related option grants
would be made at the end of the fiscal quarter and was based on achieving
the
lowest exercise price for the affected employees. As a result of these
practices, the measurement date for such options for accounting purposes
was
actually subsequent to the stated grant date, resulting in new measurement
dates
for the related options.
Improper
Measurement Dates for Stock Option Grants during Fiscal Year
2000.
In
connection with certain stock option grants to newly-hired employees (and,
to a
much lesser degree, retention grants to existing employees) during a portion
of
fiscal year 2000, our practice was to delay the selection of the related
grant
dates until the end of a two-month period in the fiscal quarter during which
the
employees who received the grants began their employment with NVIDIA. As
a
result of this practice, the exercise price of the related option grants
was not
determined until subsequent to the stated grant date. We also determined
that,
during fiscal year 2000, we generally set the grant date and exercise price
of
employee option grants for new hires and promotions at the lowest price of
the
last few business days of the month of their hire or promotion (or of the
following month in certain two-month periods that were chosen for an
indeterminate reason). As a result of these practices, the measurement date
for
such options for accounting purposes was actually subsequent to the stated
grant
date, resulting in new measurement dates for the related options. In addition,
we also determined that the exercise price or the number of options to be
granted had not been determined, or the proper approval had not been given,
for
various other miscellaneous option grants during fiscal year 2000 until after
the stated grant date - resulting in new measurement dates for accounting
purposes for the related options.
Other
Issues Identified. We also identified instances where stock option grants
did not comply with applicable terms and conditions of the stock plans from
which the grants were issued. For example, two grants were made to officers
of
NVIDIA by the chief executive officer under delegated authority; however,
under
the terms of the applicable plan, the option grant should have been made
by our
Board or the Compensation Committee. There were also instances where (1)
option
grants were made to a small group of employees who joined NVIDIA pursuant
to a
business combination, and to a few other employees in certain instances,
with
stated exercise prices below the fair market value of our common stock on
the
actual measurement date of the related grants; and (2) option grants were
made
to a few individuals who were contractors rather than employees, without
recording the appropriate accounting charges. In addition, the Audit Committee
did not find any evidence that these violations were committed for improper
purposes.
The
following table reconciles share-based compensation previously recorded,
the
impact of these errors, by type, to the total restated share-based compensation
for all periods impacted:
|
|
Three
Months Ended
|
|
For
the Fiscal Years Ended
|
|
|
|
Total
Compensation
|
|
|
|
April
30, 2006
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
Expense
|
|
|
|
(In
thousands)
|
|
|
|
Restatement
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Improper
measurement dates for company-wide annual or retention stock
option
grants
|
|
$
|
1,860
|
|
$
|
5,719
|
|
$
|
17,468
|
|
$
|
31,387
|
|
$
|
27,051
|
|
$
|
21,390
|
|
$
|
9,230
|
|
$
|
1,177
|
|
$
|
115,282
|
|
Improper
measurement dates for stock option grants during fiscal years
2001 and
2002
|
|
|
115
|
|
|
233
|
|
|
2,039
|
|
|
6,239
|
|
|
32,082
|
|
|
23,079
|
|
|
6,454
|
|
|
-
|
|
|
70,241
|
|
Improper
measurement dates for stock option grants during fiscal year
2000
|
|
|
(1,738
|
)
|
|
(3,163
|
)
|
|
(1,608
|
)
|
|
1,398
|
|
|
2,612
|
|
|
5,781
|
|
|
4,230
|
|
|
726
|
|
|
8,238
|
|
Other
issues identified
|
|
|
(1,061
|
)
|
|
644
|
|
|
518
|
|
|
1,345
|
|
|
40
|
|
|
2,750
|
|
|
699
|
|
|
39
|
|
|
4,974
|
|
Additional
compensation expense
|
|
|
(824
|
)
|
|
3,433
|
|
|
18,417
|
|
|
40,369
|
|
|
61,785
|
|
|
53,000
|
|
|
20,613
|
|
|
1,942
|
|
|
198,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
related effects
|
|
|
140
|
|
|
(2,023
|
)
|
|
(6,676
|
)
|
|
(14,580
|
)
|
|
(21,887
|
)
|
|
(18,477
|
)
|
|
(7,824
|
)
|
|
(723
|
)
|
|
(72,050
|
)
|
Impact
of restatement adjustments on income (loss) before change in
accounting
principle
|
|
|
(684
|
)
|
|
1,410
|
|
|
11,741
|
|
|
25,789
|
|
|
39,898
|
|
|
34,523
|
|
|
12,789
|
|
|
1,219
|
|
|
126,685
|
|
Cumulative
effect of change in accounting principle, net of tax
|
|
|
(704
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(704
|
)
|
Impact
of restatement adjustments on net income (loss)
|
|
$
|
(1,388
|
)
|
$
|
1,410
|
|
$
|
11,741
|
|
$
|
25,789
|
|
$
|
39,898
|
|
$
|
34,523
|
|
$
|
12,789
|
|
$
|
1,219
|
|
$
|
125,981
|
|
Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation, as originally recorded
|
|
$
|
23,049
|
|
$
|
1,096
|
|
$
|
1,337
|
|
$
|
672
|
|
$
|
(156
|
)
|
$
|
6
|
|
$
|
112
|
|
$
|
662
|
|
$
|
26,778
|
|
Restatement
adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
compensation expense
|
|
|
(824
|
)
|
|
3,433
|
|
|
18,417
|
|
|
40,369
|
|
|
61,785
|
|
|
53,000
|
|
|
20,613
|
|
|
1,942
|
|
|
198,735
|
|
Stock-based
compensation, as restated
|
|
$
|
22,225
|
|
$
|
4,529
|
|
$
|
19,754
|
|
$
|
41,041
|
|
$
|
61,629
|
|
$
|
53,006
|
|
$
|
20,725
|
|
$
|
2,604
|
|
$
|
225,513
|
|
Critical
Accounting Policies and Estimates
Management’s
discussion and analysis of financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates
and
judgments that affect the reported amounts of assets, liabilities, revenue,
cost
of revenue, expenses and related disclosure of contingencies. On an on-going
basis, we evaluate our estimates, including those related to revenue
recognition, accounts receivable, inventories, income taxes, and goodwill.
We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which
form the basis for making judgments about the carrying values of assets and
liabilities.
We
believe the following critical accounting policies affect our significant
judgments and estimates used in the preparation of our consolidated financial
statements. Our management has discussed the development and selection of
these
critical accounting policies and estimates with the Audit Committee of our
Board. The Audit Committee has reviewed our disclosures relating to our critical
accounting policies and estimates in this Annual Report on Form
10-K.
Revenue
Recognition
Product
Revenue
We
recognize revenue from product sales when persuasive evidence of an arrangement
exists, the product has been delivered, the price is fixed and determinable
and
collection is reasonably assured. For most sales, we use a binding purchase
order and in certain cases we use a contractual agreement as evidence of
an
arrangement. We consider delivery to occur upon shipment provided title
and risk
of loss have passed to the customer. At the point of sale, we assess whether
the
arrangement fee is fixed and determinable and whether collection is reasonably
assured. If we determine that collection of a fee is not reasonably assured,
we
defer the fee and recognize revenue at the time collection becomes reasonably
assured, which is generally upon receipt of payment.
Our
policy on sales to distributors is to defer recognition of revenue and
related
cost of revenue until the distributors resell the product.
We
record
estimated reductions to revenue for customer programs at the time revenue
is
recognized. Our customer programs primarily involve rebates, which are
designed
to serve as sales incentives to resellers of our products in various target
markets. We account for rebates in accordance with Emerging Issues Task
Force
Issue 01-9, or EITF 01-9, Accounting for Consideration Given by a Vendor to
a Customer (Including a Reseller of the Vendor’s Products) and, as such, we
accrue for 100% of the potential rebates and do not apply a breakage factor.
Rebates typically expire six months from the date of the original sale,
unless
we reasonably believe that the customer intends to claim the rebate. Unclaimed
rebates are reversed to revenue upon expiration of the rebate.
Our
customer programs also include marketing development funds, or MDFs. We
account
for MDFs as either a reduction of revenue or an operating expense in accordance
with EITF 01-9. MDFs represent monies paid to retailers, system builders,
OEMs,
distributors and add-in card partners that are earmarked for market segment
development and expansion and typically are designed to support our partners’
activities while also promoting NVIDIA products. If market conditions decline,
we may take actions to increase amounts offered under customer programs,
possibly resulting in an incremental reduction of revenue at the time such
programs are offered.
We
also
record a reduction to revenue by establishing a sales return allowance for
estimated product returns at the time revenue is recognized, based primarily
on
historical return rates. However, if product returns for a particular fiscal
period exceed historical return rates we may determine that additional sales
return allowances are required to properly reflect our estimated exposure
for
product returns.
License
and Development Revenue
For
license arrangements that require significant customization of our intellectual
property components, we generally recognize this license revenue using the
percentage-of-completion method of accounting over the period that services
are
performed. For all license and service arrangements accounted for under the
percentage-of-completion method, we determine progress to completion based
on
actual direct labor hours incurred to date as a percentage of the estimated
total direct labor hours required to complete the project. We periodically
evaluate the actual status of each project to ensure that the estimates to
complete each contract remain accurate. A provision for estimated losses
on
contracts is made in the period in which the loss becomes probable and can
be
reasonably estimated. To date, we have not recorded any such losses. Costs
incurred in advance of revenue recognized are recorded as deferred costs
on
uncompleted contracts. If the amount billed exceeds the amount of revenue
recognized, the excess amount is recorded as deferred revenue. Revenue
recognized in any period is dependent on our progress toward completion of
projects in progress. Significant management judgment and discretion are
used to
estimate total direct labor hours. Any changes in or deviations from these
estimates could have a material effect on the amount of revenue we recognize
in
any period.
Accounts
Receivable
We
maintain an allowance for doubtful accounts receivable for estimated losses
resulting from the inability of our customers to make required payments.
Management determines this allowance, which consists of an amount identified
for
specific customer issues as well as an amount based on general estimated
exposure. Our overall estimated exposure excludes significant amounts that
are
covered by credit insurance and letters of credit. If the financial condition
of
our customers, the financial institutions providing letters of credit, or
our
credit insurance carrier were to deteriorate, resulting in an impairment
of
their ability to make payments, additional allowances may be required that
could
adversely affect our operating results. Furthermore, there can be no assurance
that we will be able to obtain credit insurance in the future. Our current
credit insurance agreement expires on December 31, 2007.
As
of
January 28, 2007, our allowance for doubtful accounts receivable was $1.3
million and our gross accounts receivable balance was $534.4 million. Of
the
$534.4 million, $150.3 million was covered by credit insurance and $19.8
million
was covered by letters of credit. 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 and we may have to record
additional reserves or write-offs on certain sales transactions in the
future.
As a percentage of our gross accounts receivable balance, our allowance
for
doubtful accounts receivable has ranged between 0.2% and 0.4% during fiscal
years 2007 and 2006. Factors impacting the allowance include the level of
gross receivables, the financial condition of our customers and the extent
to
which balances are covered by credit insurance or letters of credit. As
of
January 28, 2007, our allowance for doubtful accounts receivable represented
0.2% of our gross accounts receivable balance. If our allowance for doubtful
accounts receivable balance had been recorded at the high end of the range,
at
0.4% of our gross receivable balance, then our allowance for doubtful accounts
receivable balance at January 28, 2007, would have been approximately $2.4
million, rather than the actual balance of $1.3 million.
Inventories
Inventory
cost is computed on an adjusted standard basis; which approximates actual
cost
on an average or first-in, first-out basis. We write down our inventory for
estimated lower of cost or market, obsolescence or unmarketable inventory
equal
to the difference between the cost of inventory and the estimated market
value
based upon assumptions about future demand, future product purchase commitments,
estimated manufacturing yield levels and market conditions. If actual market
conditions are less favorable than those projected by management, or if our
future product purchase commitments to our suppliers exceed our forecasted
future demand for such products, additional future inventory write-downs
may be
required that could adversely affect our operating results. If actual market
conditions are more favorable, we may have higher gross margins when products
are sold. Sales to date of such products have not had a significant impact
on
our gross margin. As of January 28, 2007, our inventory reserve was $39.7
million. As a percentage of our gross inventory balance, our inventory reserve
has ranged between 8.9% and 15.9% during fiscal years 2007 and 2006. As of
January 28, 2007, our inventory reserve represented 10.1% of our gross inventory
balance. If our inventory reserve balance had been recorded at the high end
of
the range, at 15.9% of our gross inventory balance, then our inventory reserve
balance at January 28, 2007, would have been approximately $62.8 million,
rather
than the actual balance of $39.7 million. Inventory reserves once established
are not reversed until the related inventory has been sold or
scrapped.
Income
Taxes
Statement
of Financial Accounting Standards No. 109, or SFAS No. 109,
Accounting
for Income Taxes,
establishes financial accounting and reporting standards for the effect of
income taxes. In accordance with SFAS No. 109, we recognize federal, state
and foreign current tax liabilities or assets based on our estimate of taxes
payable or refundable in the current fiscal year by tax jurisdiction. We
also
recognize federal, state and foreign deferred tax assets or liabilities,
as
appropriate, for our estimate of future tax effects attributable to temporary
differences and carryforwards; and we record a valuation allowance to reduce
any
deferred tax assets by the amount of any tax benefits that, based on available
evidence and judgment, are not expected to be realized.
United
States income tax has not been provided on earnings of our non-U.S. subsidiaries
to the extent that such earnings are considered to be permanently reinvested.
Our
calculation of current and deferred tax assets and liabilities is based on
certain estimates and judgments and involves dealing with uncertainties in
the
application of complex tax laws. Our estimates of current and deferred tax
assets and liabilities may change based, in part, on added certainty or finality
to an anticipated outcome, changes in accounting standards or tax laws in
the
United States, or foreign jurisdictions where we operate, or changes in other
facts or circumstances. In addition, we recognize liabilities for potential
United States and foreign income tax contingencies based on our estimate
of
whether, and the extent to which, additional taxes may be due. If we determine
that payment of these amounts is unnecessary or if the recorded tax liability
is
less than our current assessment, we may be required to recognize an income
tax
benefit or additional income tax expense in our financial statements,
accordingly.
As
of
January 28, 2007, we had a valuation allowance of $68.6 million. Of
the total valuation allowance, $3.7 million relates to state tax attributes
acquired in certain acquisitions for which realization of the related deferred
tax assets was determined not likely to be realized due, in part, to potential
utilization limitations as a result of stock ownership changes, and
$64.9 million relates to state deferred tax assets that management
determined not likely to be realized due, in part, to projections of future
taxable income. To the extent realization of the deferred tax assets related
to
certain acquisitions becomes probable, recognition of these acquired tax
benefits would first reduce goodwill to zero, then reduce other non-current
intangible assets related to the acquisition to zero with any remaining benefit
reported as a reduction to income tax expense. To the extent realization
of the
deferred tax assets related to state tax benefits becomes probable, we would
recognize an income tax benefit in the period such asset is more likely than
not
to be realized.
As
of
January 28, 2007, with the adoption of Statement of Financial Accounting
Standards No. 123(R), or SFAS No. 123(R), Share Based Payment, we
have derecognized both deferred tax assets for the excess of tax benefit
related
to stock-based compensation, reflected in our federal and state net operating
loss and research tax credit carryforwards, and the offsetting valuation
allowance. Consistent with prior years, the excess tax benefit reflected
in our
net operating loss and research tax credit carryforwards, in the amount
of
$344.9 million as of January 28, 2007, will be accounted for as a credit
to
stockholders’ equity, if and when realized. In determining if and when excess
tax benefits have been realized, we have elected to do so on a
“with-and-without” approach with respect to such excess tax benefits. We have
also elected to ignore the indirect tax effects of stock-based compensation
deductions for financial and accounting reporting purposes, and specifically
to
recognize the full effect of the research tax credit in income from continuing
operations.
Goodwill
Our
impairment review process compares the fair value of the reporting unit in
which the goodwill resides to its carrying value. We determined that our
reporting units are equivalent to our operating segments for the purposes
of
completing our Statement of Financial Accounting Standards No. 142, or SFAS
No. 142, Goodwill
and Other Intangible Assets,
impairment test. We utilize a two-step approach to testing goodwill for
impairment. The first step tests for possible impairment by applying a fair
value-based test. In computing fair value of our reporting units, we use
estimates of future revenues, costs and cash flows from such units. The second
step, if necessary, measures the amount of such an impairment by applying
fair
value-based tests to individual assets and liabilities. We elected to perform
our annual goodwill impairment review during the fourth quarter of each fiscal
year. We completed our most recent annual impairment test during the fourth
quarter of fiscal 2007 and concluded that there was no impairment. However,
future events or circumstances may result in a charge to earnings in future
periods due to the potential for a write-down of goodwill in connection with
such tests.
Stock-based
Compensation
Effective
January 30, 2006, we adopted the provisions of SFAS No.
123(R) which
establishes accounting for stock-based awards exchanged for employee services.
Accordingly, stock-based compensation cost is measured at grant date, based
on
the fair value of the awards, and is recognized as expense over the requisite
employee service period. Stock-based compensation expense recognized during
fiscal 2007 was $116.7 million, which consisted of stock-based compensation
expense related to stock options and our employee stock purchase plan. Please
refer to Note 2 of the Notes to Consolidated Financial Statements for further
information.
We
elected to adopt the modified prospective application method beginning January
30, 2006 as provided by SFAS No. 123(R). We recognize stock-based compensation
expense using the straight-line attribution method. We
estimate the value of employee stock options on the date of grant using a
lattice-binomial model. Prior to the adoption of SFAS No. 123(R), we recorded
stock-based compensation expense equal to the amount that would have been
recognized if the fair value method was used, for the purpose of the pro
forma
financial information provided in accordance with Statement
of Financial Accounting Standards No. 123, or SFAS No. 123, Accounting
for Stock-Based Compensation,
as
amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosures.
At
the
beginning of fiscal 2006, we transitioned from a Black-Scholes model to a
binomial model for calculating the estimated fair value of new stock-based
compensation awards granted under our stock option plans. The determination
of
fair value of share-based payment awards on the date of grant using an
option-pricing model is affected by our stock price as well as assumptions
regarding a number of highly complex and subjective variables. These variables
include, but are not limited to, the expected stock price volatility over
the
term of the awards, actual and projected employee stock option exercise
behaviors, vesting schedules, death and disability probabilities, expected
volatility and risk-free interest. Our
management determined that the use of implied volatility is expected to be
more
reflective of market conditions and, therefore, could reasonably be expected
to
be a better indicator of our expected volatility than historical volatility.
The
risk-free interest rate assumption is based upon observed interest rates
appropriate for the term of our employee stock options. The dividend yield
assumption is based on the history and expectation of dividend payouts.
We
began
segregating options into groups for employees with relatively homogeneous
exercise behavior in order to calculate the best estimate of fair value using
the binomial valuation model.
Using
the
lattice-binomial model,
the
fair value of the stock options granted under our stock option plans have
been
estimated using the following assumptions during the year ended January 28,
2007:
Weighted
average expected life of stock options (in years)
|
|
|
3.6
- 5.1
|
|
Risk
free interest rate
|
|
|
4.7%
- 5.1
|
%
|
Volatility
|
|
|
39%
- 51
|
%
|
Dividend
yield
|
|
|
—
|
|
For
our
employee stock purchase plan we continue to use the Black-Scholes model.
The
fair value of the shares issued under the employee stock purchase plan has
been
estimated using the following assumptions during year ended January 28,
2007:
Weighted
average expected life of stock options (in years)
|
|
|
0.5
- 2.0
|
|
Risk
free interest rate
|
|
|
1.6%
- 5.2
|
%
|
Volatility
|
|
|
30%
- 47
|
%
|
Dividend
yield
|
|
|
—
|
|
SFAS
No. 123(R) also requires forfeitures to be estimated at the time of grant
and
revised, if necessary, in subsequent periods if actual forfeitures differ
from
those estimates. Forfeitures were estimated based on historical experience.
If
factors change and we employ different assumptions in the application of
SFAS
No. 123(R) in future periods, the compensation expense that we record under
SFAS
No. 123(R) may differ significantly from what we have recorded in the current
period.
Litigation,
Investigation and Settlement Costs
From
time
to time, we are involved in legal actions and/or investigations by regulatory
bodies. We are aggressively defending our current litigation matters. However,
there are many uncertainties associated with any litigation or investigations,
and we cannot be certain that these actions or other third-party claims against
us will be resolved without costly litigation, fines and/or substantial
settlement payments. If that occurs, our business, financial condition and
results of operations could be materially and adversely affected. If information
becomes available that causes us to determine that a loss in any of our pending
litigation, investigations or settlements is probable, and we can reasonably
estimate the loss associated with such events, we will record the loss in
accordance with accounting principles generally accepted in the United States.
However, the actual liability in any such litigation or investigations may
be
materially different from our estimates, which could require us to record
additional costs.
Results
of Operations
The
following table sets forth, for the periods indicated, certain items in our
consolidated statements of income expressed as a percentage of
revenue.
|
|
Year
Ended
|
|
|
|
January
28, 2007
|
|
January
29, 2006
|
|
January
30, 2005
|
|
Revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of revenue
|
|
|
57.6
|
|
|
61.7
|
|
|
67.8
|
|
Gross
profit
|
|
|
42.4
|
|
|
38.3
|
|
|
32.2
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
18.0
|
|
|
15.0
|
|
|
17.3
|
|
Sales,
general and administrative
|
|
|
9.6
|
|
|
8.5
|
|
|
10.2
|
|
Settlement
costs
|
|
|
-
|
|
|
0.6
|
|
|
-
|
|
Total
operating expenses
|
|
|
27.6
|
|
|
24.1
|
|
|
27.5
|
|
Income
from operations
|
|
|
14.8
|
|
|
14.2
|
|
|
4.7
|
|
Interest
and other income, net
|
|
|
1.3
|
|
|
0.8
|
|
|
0.6
|
|
Income
before income tax expense
|
|
|
16.1
|
|
|
15.0
|
|
|
5.3
|
|
Income
tax expense
|
|
|
1.5
|
|
|
2.3
|
|
|
0.9
|
|
Net
income
|
|
|
14.6
|
%
|
|
12.7
|
%
|
|
4.4
|
%
|
Fiscal
Years Ended January 28, 2007, January 29, 2006, and January 30, 2005.
Revenue
We
report
financial information for four product-line operating segments to our Chief
Executive Officer, who is considered to be our chief operating decision maker,
as follows: the GPU Business, the MCP Business, the Handheld GPU Business,
and
the Consumer Electronics Business.
Revenue
in the "All Other" category is primarily derived from sales of memory
devices. Please refer to Note 14 of our Notes to Consolidated Financial
Statements for further information.
Fiscal
2005 was a 53-week year, compared to fiscal years 2007 and 2006 which were
52-week years, and we believe that this extra week may have had a positive
impact on our revenue in fiscal 2005. However, we are not able to quantify
the effect of the slightly longer year on our fiscal 2005 revenue.
Fiscal
Year 2007 vs. Fiscal Year 2006
Revenue
was $3.07 billion for fiscal 2007, compared to $2.38 billion for fiscal 2006,
which represents an increase of 29.2%. A discussion of our revenue results
for
each of our operating segments is as follows:
GPU
Business.
GPU
Business revenue increased by 20.3% to $1.99 billion for fiscal 2007, compared
to $1.66 billion for fiscal 2006. The increase was a result of increased
sales
of our desktop GPU products, notebook products and our NVIDIA professional
workstation products. The increase in sales of our desktop GPU products was
led
by our GeForce 7-based and GeForce 8-based products that serve the high-end
segment. Sales of our NVIDIA notebook products improved due to an increased
mix
of GeForce 7-based products, shipping for notebook PC design wins based on
Intel’s Napa platform. This increase in sales was slightly offset by a decrease
in average selling prices. Our NVIDIA professional workstation product sales
increased due to an increase in unit shipments, offset by a slight decrease
in average selling prices.
MCP
Business.
MCP
Business revenue was $661.5 million for fiscal 2007, compared to $352.3 million
for fiscal 2006, which represents an increase of 87.8%. The overall
increase in MCP business revenue is primarily due to sales of newer NVIDIA
nForce4 products, NVIDIA nForce5 products, integrated AMD-based desktop
products, and integrated Intel-based desktop products, which began shipping
after the second quarter of fiscal 2007. In addition, revenue also increased
as
a result of our acquisition of ULi in February 2006.
Handheld
GPU Business.
Handheld GPU Business revenue was $108.5 million for fiscal 2007, compared
to
$58.7 million for fiscal 2006, which represents an increase of 84.7%. The
overall increase in Handheld GPU Business revenue is due to an increase in
unit
sales of high-end feature cellular phone and PDA products.
Consumer
Electronics Business. Consumer
Electronics Business revenue was $96.3 million for fiscal 2007, compared to
$167.4 million for fiscal 2006, which represents a decrease of 42.5%. This
decrease is a result of discontinued sales of our Xbox-related products to
Microsoft, partially offset by revenue recognized from our contractual
development arrangements. We recognized revenue from the sale of our
Xbox-related products to Microsoft for the last time during the second quarter
of fiscal 2006. During fiscal 2007, we recognized $92.9 million of revenue
from
our contractual arrangements with SCE for its PlayStation3, compared
to $49.0 million of revenue recognized during fiscal 2006.
For
the
first quarter of fiscal 2008, we expect a seasonal decline associated with
the
PC business. Although we believe our market and competitive position in each
of
our business units continues to be strong, there are no significant industry
growth drivers to offset seasonality. Microsoft’s next generation operating
system, Microsoft Windows Vista, or Vista, has shipped. We believe that Vista
is
the first operating system to present, as a standard, the power of the GPU to
all applications and that, in the future, a significant percentage of PCs will
have Vista. With Vista, DX10, and HD/Blu-ray DVD as the technologies for PCs
for
the coming year, we believe that 3D graphics will become a central part of
the
computing experience and that the GPU will be more important than ever. However,
to date we have not seen a significant impact from the launch of
Vista.
Fiscal
Year 2006 vs. Fiscal Year 2005
Revenue
was $2.38 billion for fiscal 2006, compared to $2.01 billion for fiscal 2005,
which represents an increase of 18.2%. A discussion of our revenue results
for
each of our operating segments is as follows:
GPU
Business.
GPU
Business revenue increased by 22.9% to $1.66 billion for fiscal 2006 compared
to
$1.35 billion for fiscal 2005. The increase was the result of increased sales
of
our GeForce 6 and GeForce 7 families of desktop GPUs that serve the high-end
GPU
segment, offset by a slight decline in sales of our mainstream GPU products.
In
addition, sales of our NVIDIA Quadro professional workstation products and
notebook products continued to improve due to an increased mix of GeForce
6-based and GeForce 7-based products, which resulted in an increase in average
selling prices.
MCP
Business.
MCP Business revenue was $352.3 million for fiscal 2006, compared to $175.7
million for fiscal 2005, which represents an increase of 100.6%. The
overall increase in MCP Business revenue is primarily due to increased sales
of
NVIDIA nForce4 products, which we began selling during the fourth quarter of
fiscal 2005, and an increase in average selling prices. The overall increase
was
offset by a decrease in sales of NVIDIA nForce3 and NVIDIA nForce2 products.
Handheld
GPU Business.
Handheld GPU Business revenue was $58.7 million for fiscal 2006, compared to
$45.9 million for fiscal 2005, which represents an increase of 27.9%. The
overall increase in Handheld GPU Business revenue is due to an increase in
average selling prices of high-end feature phone products and revenue recognized
as a result of a development contract.
Consumer
Electronics Business. Consumer Electronics Business revenue was $167.4
million for fiscal 2006, compared to $260.0 million for fiscal 2005, which
represents a decrease of 35.6%. The decrease in our Consumer Electronics
Business is a result of decreased and discontinued sales of our Xbox-related
products to Microsoft, partially offset by revenue recognized from our
contractual arrangement with SCE. During the first quarter of fiscal 2006,
Microsoft indicated that it would not order any more Xbox-related products
from
us after our second fiscal quarter. As a result, we recognized revenue from
the
sale of our Xbox-related products to Microsoft for the last time during the
second quarter of fiscal 2006. During fiscal 2006, we recognized $49.0 million
of revenue from our contractual arrangements with SCE to jointly develop a
custom GPU for SCE’s PlayStation3. No such revenue was recognized during our
fiscal 2005 as our definitive agreement with SCE was not executed until the
first quarter of fiscal 2006.
Concentration
of Revenue
Revenue
from sales to customers outside of the United States and other Americas
accounted for 83.6%, 84.0% and 75.9% of total revenue for fiscal 2007, 2006,
and
2005, respectively. Revenue by geographic region is allocated to individual
countries based on the location to which the products are initially billed
even
if the foreign contract equipment manufacturers, or CEMs’, add-in board and
motherboard manufacturers’ revenue is attributable to end customers in a
different location. The increase in the percentage of revenue from sales to
customers outside of the United States and other Americas for fiscal 2006 as
compared to fiscal 2005 was primarily due to discontinued sales of XGPUs and
MCPs used in the Microsoft Xbox product during fiscal 2006, which were billed
to
Microsoft in the United States.
Sales
to
our significant customers accounted for approximately 12% of our total revenue
from one customer during fiscal year 2007, 26% of our total revenue from two
customers during fiscal year 2006, and 31% of our total revenue from two
customers during fiscal year 2005.
Gross
Profit
Gross
profit consists of total revenue, net of allowances, less cost of revenue.
Cost
of revenue consists primarily of the cost of semiconductors purchased from
subcontractors, including wafer fabrication, assembly, testing and packaging,
manufacturing support costs, including labor and overhead associated with such
purchases, final test yield fallout, inventory provisions and shipping
costs. Cost of revenue also includes development costs for license and
service arrangements. Gross margin is the percentage of gross profit to revenue.
Our gross margin can vary in any period depending on the mix of types of
products sold. Our gross margin was 42.4%, 38.3%, and 32.2% for fiscal years
2007, 2006 and 2005, respectively. A discussion of our gross margin results
for
each of our operating segments is as follows:
Fiscal
Year 2007 vs. Fiscal Year 2006
GPU
Business.
The
gross margin of our GPU Business increased during fiscal 2007 as compared to
fiscal 2006, primarily due to the sale of our GeForce 8 series GPUs and
increased sales of our GeForce 7 series GPUs, which collectively accounted
for
approximately 70% of our GPU Business revenue. Our GeForce 8 and our
GeForce 7 series GPUs generally have higher gross margins than our previous
generations of GPUs.
MCP
Business.
The
gross margin of our MCP Business decreased during fiscal 2007 as compared to
fiscal 2006, primarily due to a shift in product mix to higher volumes of
integrated AMD-based desktop products which have experienced lower gross margins
than our discrete MCP products, and inventory reserves that we recorded as
a
charge to cost of revenue that primarily related to purchase commitments that
we
believed had exceeded future demand.
Handheld
GPU
Business.
The
gross margin of our Handheld GPU Business increased during fiscal 2007 as
compared to fiscal 2006, primarily due to an increase in unit sales of high-end
feature cellular phone and PDA products which generally have higher gross
margins than our previous Handheld GPU products.
Consumer
Electronics Business.
The
gross margin of our Consumer Electronics Business increased during fiscal 2007
as compared to fiscal 2006, primarily due to license and royalty revenue from
our contractual development arrangements that have higher gross margins compared
to the gross margin of Xbox products shipped in fiscal 2006.
Fiscal
Year 2006 vs. Fiscal Year 2005
GPU
Business.
The
gross margin of our GPU Business increased during fiscal 2006 as compared to
fiscal 2005, primarily due to the sale of our GeForce 7 series GPUs and
increased sales of our GeForce 6 series GPUs, which collectively accounted
for
approximately 78% of our fiscal 2006 GPU Business revenue. Our GeForce 7
and our GeForce 6 series GPUs generally have higher gross margins than our
GeForce FX series GPUs which comprised 53% of our fiscal 2005 GPU Business
revenue. In addition, average selling prices from our notebook GeForce 7 and
GeForce 6 series GPU products increased as a larger percentage of our total
notebook revenue during fiscal 2006 as compared to fiscal 2005.
MCP
Business.
The
gross
margin of our MCP Business increased during fiscal 2006 as compared to fiscal
2005, primarily due to the increase in revenue from sales of our NVIDIA nForce3
and NVIDIA nForce4 products, which to date have experienced higher gross margins
than previous generations of NVIDIA nForce products.
Handheld
GPU Business.
The
gross margin of our Handheld GPU Business increased during fiscal 2006 as
compared to fiscal 2005, primarily due to the inventory write-off of certain
handheld products in the third quarter of fiscal 2005.
Consumer
Electronics Business.
The
gross margin of our Consumer Electronics Business increased during fiscal 2006
as compared to fiscal 2005, primarily due to the reduction of die costs for
Xbox-related products, and the recognition of revenue from our contractual
arrangements with SCE to jointly develop a custom GPU for SCE’s PlayStation3.
Consolidated
Gross Margin
The
improvement in our gross margin reflects our continuing focus on delivering
cost
effective product architectures, enhancing business processes and delivering
profitable growth. We expect gross margin to remain flat or improve
slightly during the first quarter of fiscal 2008.
Operating
Expenses
Research
and Development
|
|
Year
Ended
|
|
|
|
|
|
Year
Ended
|
|
|
|
|
|
|
|
Jan.
28,
2007
|
|
Jan.
29,
2006
|
|
$
Change
|
|
%
Change
|
|
Jan.
29,
2006
|
|
Jan.
30, 2005
|
|
$
Change
|
|
%
Change
|
|
|
|
(In
millions)
|
|
|
|
(In
millions)
|
|
|
|
Research
and Development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
$
|
280.3
|
|
$
|
205.1
|
|
$
|
75.2
|
|
|
37
|
%
|
$
|
205.1
|
|
$
|
172.6
|
|
$
|
32.5
|
|
|
19
|
%
|
Stock-based
compensation (1)
|
|
|
70.1
|
|
|
5.9
|
|
|
64.2
|
|
|
1,088
|
%
|
|
5.9
|
|
|
14.1
|
|
|
(8.2
|
)
|
|
(58
|
)%
|
Depreciation
and amortization
|
|
|
59.8
|
|
|
58.2
|
|
|
1.6
|
|
|
3
|
%
|
|
58.2
|
|
|
56.1
|
|
|
2.1
|
|
|
4
|
%
|
Computer
software and lab equipment
|
|
|
57.6
|
|
|
46.4
|
|
|
11.2
|
|
|
24
|
%
|
|
46.4
|
|
|
41.1
|
|
|
5.3
|
|
|
13
|
%
|
Facility
expense
|
|
|
38.4
|
|
|
32.0
|
|
|
6.4
|
|
|
20
|
%
|
|
32.0
|
|
|
31.4
|
|
|
0.6
|
|
|
2
|
%
|
New
product development
|
|
|
35.7
|
|
|
28.6
|
|
|
7.1
|
|
|
25
|
%
|
|
28.6
|
|
|
29.0
|
|
|
(0.4
|
)
|
|
(1
|
)%
|
In-process
research and development
|
|
|
14.0
|
|
|
-
|
|
|
14.0
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
License
and development project costs
|
|
|
(18.4
|
)
|
|
(28.9
|
)
|
|
10.5
|
|
|
36
|
%
|
|
(28.9
|
)
|
|
(2.0
|
)
|
|
(26.9
|
)
|
|
(1,345
|
)%
|
Other
|
|
|
16.0
|
|
|
9.8
|
|
|
6.2
|
|
|
63
|
%
|
|
9.8
|
|
|
5.9
|
|
|
3.9
|
|
|
66
|
%
|
Total
|
|
$
|
553.5
|
|
$
|
357.1
|
|
$
|
196.4
|
|
|
55
|
%
|
$
|
357.1
|
|
$
|
348.2
|
|
$
|
8.9
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development as a percentage of net revenue
|
|
|
18
|
%
|
|
15
|
%
|
|
|
|
|
|
|
|
15
|
%
|
|
17
|
%
|
|
|
|
|
|
|
(1) Stock-based
compensation includes charges/credits relating to payroll taxes accrued for
as
part of the restatement.
Research
and
development expenses increased by $196.4 million, or 55%, from fiscal 2006
to
fiscal 2007 primarily due to a $75.2 million increase in salaries and benefits
related to 1,014 additional personnel and a $64.2 million increase in
stock-based compensation due to our adoption of SFAS No. 123(R) during the
first quarter of fiscal 2007. In-process research and development expense,
or
IPR&D, increased by $14.0 million as a result of our acquisitions of
PortalPlayer and Hybrid Graphics during fiscal 2007. Depreciation and
amortization increased $1.6 million due to emulation hardware and software
programs that were purchased during fiscal 2006, resulting in a full year of
depreciation in fiscal 2007 compared to a partial year of depreciation in fiscal
2006. Computer software and equipment increased $11.2 million primarily due
to
increased allocation of information technology expenses and facilities increased
$6.4 million due to increased facilities expense allocation, both of which
were
based on the growth in headcount. New product development increased by $7.1
million as a result of costs related to an overall increase in the number of
product tape-outs and in prototype materials. License and development project
costs decreased by $10.5 million primarily due to the inversed impact of
decreased development costs related to our collaboration with SCE and other
engineering costs related to a different development contract. Certain of our
personnel who usually devote their time to research and development efforts
have
spent time working on these development projects. The cost associated with
the
time these individuals spend working on development projects is allocated from
research and development to cost of revenue or is capitalized on our balance
sheet. During fiscal 2007, less time was spent working on development projects
so less cost was allocated to cost of revenue or capitalized and, therefore,
more cost remained in research and development. Other expenses increased $6.2
million primarily due to travel and other employee related expenses associated
with the expansion of our international sites including our acquisitions of
ULi
and Hybrid Graphics.
Research
and development expenses increased by $8.9 million, or 3%, from fiscal 2005
to
fiscal 2006 primarily due to a $32.5 million increase in salaries and benefits
related to 423 additional personnel and a $5.3 million increase in computer
software and equipment primarily due to increased allocation of information
technology expenses. Depreciation and amortization increased $2.1 million due
to
increased purchases of hardware and software equipment and facilities increased
$0.6 million due to increased facilities expense allocation, both of which
were
based on the growth in headcount. Other expenses increased $3.9 million
primarily due to travel and other employee related expenses associated with
the
expansion of our international sites. These increases were offset by a decrease
in stock-based compensation expense of $8.2 million and an increase of $26.9
million in license and development project costs, primarily related to increased
development costs related to our collaboration with SCE and other engineering
costs related to a different development contract. Certain of our personnel
who
usually devote their time to research and development efforts have spent time
working on these development projects. The cost associated with the time these
individuals spend working on development projects is allocated from research
and
development to cost of revenue or is capitalized on our balance sheet. During
fiscal 2006, more time was spent working on development projects so more cost
was allocated to cost of revenue or capitalized and, therefore, less cost
remained in research and development.
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. Research and development expenses are likely to
fluctuate from time to time to the extent we make periodic incremental
investments in research and development and these investments may be independent
of our level of revenue.
Sales,
General and Administrative
|
|
Year
Ended
|
|
|
|
|
|
Year
Ended
|
|
|
|
|
|
|
|
Jan.
28, 2007
|
|
Jan.
29, 2006
|
|
$
Change
|
|
%
Change
|
|
Jan.
29, 2006
|
|
Jan.
30, 2005
|
|
$
Change
|
|
%
Change
|
|
|
|
(In
millions)
|
|
|
|
(In
millions)
|
|
|
|
Sales,
General and Administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and benefits
|
|
$
|
139.0
|
|
$
|
108.3
|
|
$
|
30.7
|
|
|
28
|
%
|
$
|
108.3
|
|
$
|
94.4
|
|
$
|
13.9
|
|
|
15
|
%
|
Advertising
and promotions
|
|
|
63.5
|
|
|
49.4
|
|
|
14.1
|
|
|
29
|
%
|
|
49.4
|
|
|
66.6
|
|
|
(17.2
|
)
|
|
(26
|
)%
|
Stock-based
compensation (1)
|
|
|
38.5
|
|
|
(2.2
|
)
|
|
40.7
|
|
|
1,850
|
%
|
|
(2.2
|
)
|
|
3.7
|
|
|
(5.9
|
)
|
|
(159
|
)%
|
Legal
and accounting fees
|
|
|
25.9
|
|
|
18.7
|
|
|
7.2
|
|
|
39
|
%
|
|
18.7
|
|
|
12.6
|
|
|
6.1
|
|
|
48
|
%
|
Facility
expense
|
|
|
14.0
|
|
|
12.5
|
|
|
1.5
|
|
|
12
|
%
|
|
12.5
|
|
|
9.6
|
|
|
2.9
|
|
|
30
|
%
|
Depreciation
and amortization
|
|
|
8.6
|
|
|
8.5
|
|
|
0.1
|
|
|
1
|
%
|
|
8.5
|
|
|
13.0
|
|
|
(4.5
|
)
|
|
(35
|
)%
|
Other
|
|
|
4.0
|
|
|
6.9
|
|
|
(2.9
|
)
|
|
(42
|
)%
|
|
6.9
|
|
|
4.3
|
|
|
2.6
|
|
|
60
|
%
|
Total
|
|
$
|
293.5
|
|
$
|
202.1
|
|
$
|
91.4
|
|
|
45
|
%
|
$
|
202.1
|
|
$
|
204.2
|
|
$ |
(2.1
|
)
|
|
(1
|
)%
|
Sales,
general and administrative as a percentage of net revenue
|
|
|
10
|
%
|
|
9
|
%
|
|
|
|
|
|
|
|
9
|
%
|
|
10
|
%
|
|
|
|
|
|
|
(1) Stock-based
compensation includes charges/credits relating to payroll taxes accrued for
as
part of the restatement.
Sales,
general and administrative expenses increased $91.4 million, or 45%, from fiscal
2006 to fiscal 2007 primarily due to a $40.7 million increase in stock-based
compensation resulting from our adoption of SFAS No. 123(R) during the
first quarter of fiscal 2007 and a $30.7 million increase in salaries and
benefits related to 201 additional personnel. Legal and accounting fees
increased by $7.2 million primarily due to our internal review of historical
stock option granting practices and the restatement of prior year financial
results. Advertising and promotions increased by $14.1 million due to travel
and
other employee costs associated with our international expansion. These
increases were offset by a decrease of $2.9 million in other expenses related
to
reimbursement from collection settlements.
Sales,
general and administrative expenses decreased $2.1 million, or 1%, from fiscal
2005 to fiscal 2006 primarily due to a a $17.2 million decrease in advertising
and promotion costs, primarily associated with a reduction in certain marketing
programs, tradeshow expenses, new product launches and customer samples, other
marketing costs, travel related and employee recruitment expenses. In addition,
stock-based compensation expense decreased by $5.9 million and depreciation
and
amortization decreased by $4.5 million. These decreases were offset by a $13.9
million increase in salaries and benefits related to 122 additional personnel
and a $6.1 million increase in legal expenses primarily due to certain insurance
reimbursements that we received during fiscal 2005 that reduced this expense,
and increased litigation activity during fiscal 2006 related to 3dfx
Interactive, Inc., or 3dfx, and American Video Graphics, LP, or AVG. In addition
there were increases of $2.9 million in facility expense due primarily to the
expansion of our international sites and $2.6 million in other general and
administrative expenses, offset by a reduction in bad debt expense.
Operating
Expenses
We
anticipate that our operating expenses will be relatively flat in the first
quarter of fiscal 2008. We believe that even with the additional expense from
our acquisition of PortalPlayer, we may be able to keep operating expenses
flat
as we focus on expense controls and restrict headcount additions in the first
quarter of fiscal 2008 as compared to the fourth quarter of fiscal
2007.
In-process
research and development
In
connection with our acquisition of Hybrid Graphics in March 2006 and
PortalPlayer in January 2007, we wrote-off $0.6 million and $13.4 million,
respectively, of IPR&D, that had not yet reached technological feasibility
and had no alternative future use. In accordance with SFAS No. 2,
Accounting
for Research and Development Costs,
as
clarified by FIN 4, Applicability
of SFAS No. 2 to Business Combinations Accounted for by the Purchase Method
an interpretation of SFAS No. 2, amounts
assigned to IPR&D meeting the above-stated criteria must be charged to
expense as part of the allocation of the purchase price.
Settlement
Costs
Settlement
costs were $14.2 million for fiscal 2006. The settlement costs are associated
with two litigation matters, 3dfx and AVG. AVG is settled. For further
information about the 3dfx matter, please refer to Note 12 of the Notes to
Consolidated Financial Statements.
Interest
Income and Interest Expense
Interest
income consists of interest earned on cash, cash equivalents and marketable
securities. Interest income increased from $20.7 million to $41.8 million from
fiscal 2006 to fiscal 2007 primarily due to the result of higher average
balances of cash, cash equivalents and marketable securities and higher interest
rates in fiscal 2007 when compared to fiscal 2006. Interest income increased
from $11.4 million to $20.7 million from fiscal 2005 to fiscal 2006 primarily
due to the result of higher average balances of cash, cash equivalents and
marketable securities and higher interest rates in fiscal 2006 when compared
to
fiscal 2005.
Other
Income (Expense), net
Other
income and expense primarily consists of realized gains and losses on the sale
of marketable securities. There were no significant changes in other income
from
fiscal 2006 to fiscal 2007. However, other income decreased by $1.1 million
from fiscal 2005 to fiscal 2006 primarily due to the liquidation of
marketable securities during fiscal 2006 in order to obtain the cash needed
for
the repatriation of certain foreign earnings under the American Jobs Creation
Act of 2004.
Income
Taxes
We
recognized income
tax expense of $46.4 million, $55.6 million and $18.4 million during fiscal
years 2007, 2006 and 2005, respectively. Income tax expense as a percentage
of
income before taxes, or our annual effective tax rate, was 9.4% in fiscal
2007,
15.6% in fiscal 2006, and 17.2% in fiscal 2005.
The
difference in the effective tax rates amongst the three years was primarily
a
result of changes in our geographic mix of income subject to tax, with the
additional change in mix in fiscal 2007 due to certain stock-based compensation
expensed for financial accounting purposes under SFAS No. 123(R) and an
increase in the research tax credit benefit in fiscal 2007.
Please
refer to Note 13 of the Notes to Consolidated Financial Statements for
further
information regarding the components of our income tax expense.
Liquidity
and Capital Resources
|
|
As
of January 28, 2007
|
|
As
of January 29, 2006
|
|
|
|
(In
millions)
|
|
Cash
and cash equivalents
|
|
$
|
544.4
|
|
$
|
551.8
|
|
Marketable
securities
|
|
|
573.4
|
|
|
398.4
|
|
Cash,
cash equivalents, and marketable securities
|
|
$
|
1,117.8
|
|
$
|
950.2
|
|
|
|
Year
Ended
|
|
|
|
January
28,
|
|
January
29,
|
|
January
30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in
millions)
|
|
Net
cash provided by operating activities
|
|
$
|
587.1
|
|
$
|
446.4
|
|
$
|
132.2
|
|
Net
cash used in investing activities
|
|
|
(540.8
|
)
|
|
(41.8
|
)
|
|
(152.0
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(53.6
|
)
|
|
(61.4
|
)
|
|
13.8
|
|
As
of
January 28, 2007, we had $1.12 billion in cash, cash equivalents and marketable
securities, an increase of $167.6 million from the end of fiscal 2006. Our
portfolio of cash equivalents and marketable securities is managed by several
financial institutions. Our investment policy requires the purchase of top-tier
investment grade securities, the diversification of asset type and certain
limits on our portfolio duration.
Operating
activities generated cash of $587.1 million, $446.4 million, and $132.2 million
during fiscal years 2007, 2006 and 2005, respectively. The annual cash provided
by operating activities in amounts greater than net income is due primarily
to
non-cash charges to earnings and the tax benefit on the exercise of stock
options. Non-cash charges to earnings included stock-based compensation and
depreciation and amortization on our long-term assets. Upon adoption of SFAS
No.
123(R) in fiscal 2007, non-cash charges to earnings included $116.7 million
of
stock-based compensation expense and related deferred income tax
impact. The increase in cash flows from operating activities in fiscal 2006
when compared to fiscal 2005 was primarily related to the $212.6 million
increase in net income and changes in operating assets and liabilities. On
our
consolidated balance sheet, accrued liabilities increased $77.2 million from
fiscal 2005 to fiscal 2006 primarily due to the recording of income taxes
payable for fiscal 2006, the increase in accruals related to customer programs
and the recording of $30.6 million in relation to 3dfx, of which $25.0 million
was recorded as an adjustment to goodwill. Accounts payable decreased $58.8
million and inventories decreased $60.9 million from fiscal 2005 to
fiscal 2006 primarily as a result of significant reductions in older
products, offset by an increase in new products. Accounts receivable increased
$21.9 million primarily due to increased sales and improved linearity of sales,
and cash collections during the fourth quarter of fiscal 2006 as compared to
the
fourth quarter of fiscal 2005.
Investing
activities have consisted primarily of purchases and sales of marketable
securities, acquisition of businesses and purchases of property and equipment,
which include leasehold improvements for our facilities, and intangible assets.
Investing activities used cash of $540.8 million, $41.8 million and $152.0
million during fiscal years 2007, 2006 and 2005, respectively. Net cash used
by
investing activities during fiscal 2007 was primarily due to $401.8 million
of
cash used for our acquisitions of PortalPlayer, ULi and Hybrid Graphics during
the fiscal year. Additionally, net cash used in investing activities included
capital expenditures of $145.3 million attributable to purchases of new research
and development equipment, hardware equipment, technology licenses, software,
intangible assets and leasehold improvements at our various facilities. These
uses of cash were offset by $6.2 million of net proceeds from sales of
marketable securities. Net cash used by investing activities during fiscal
2006
was primarily due to $79.6 million for capital expenditures primarily
attributable to purchases of new research and development equipment, hardware
equipment, technology licenses, software, intangible assets and leasehold
improvements at our headquarters facility in Santa Clara, California and at
our
international sites. In addition, we used cash of $12.1 million for our
acquisition of a private company and $9.7 million for the investments we made
during fiscal 2006 in non-affiliated companies. These uses of cash were offset
by $59.6 million of net proceeds from sales of marketable securities. Net
cash
used by investing activities during fiscal 2005 was primarily due to $84.7
million of net purchases of marketable securities. In addition, we used $67.3
million for capital expenditures primarily attributable to purchases of
leasehold improvements for our new data center at our headquarters campus,
new
research and development emulation equipment, technology licenses, software
and
intangible assets. We expect to spend approximately $120 million to $140 million
for capital expenditures during fiscal 2008, primarily for purchases of software
licenses, emulation equipment, computers and engineering workstations. In
addition, we may continue to use cash in connection with the acquisition of
new
businesses or assets.
Financing
activities used cash of $53.6 million, $61.4 million and provided cash of
$13.8
million during fiscal years 2007, 2006 and fiscal 2005, respectively. Net
cash
used by financing activities in fiscal 2007 was primarily due to $275.0 million
paid towards our stock repurchase program, offset by cash proceeds of $221.2
million from common stock issued under employee stock plans. Cash used in
fiscal
2006 resulted primarily from $188.5 million related to our stock repurchase
program, offset by $127.5 million of common stock issued under employee stock
plans.
Stock
Repurchase Program
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 million. Subsequently, on March 6, 2006,
we
announced that our Board had approved a $400 million increase to the
original stock repurchase program. As a result of this increase, the amount
of
common stock the Board has authorized to be repurchased has now been increased
to a total of $700 million. The repurchases will be made from time to time
in
the open market, in privately negotiated transactions, or in structured stock
repurchase programs, in compliance with the Securities Exchange Act of 1934,
or
the Exchange Act, Rule 10b-18, subject to market conditions, applicable legal
requirements, and other factors. The program does not obligate NVIDIA to acquire
any particular amount of common stock and the program may be suspended at any
time at our discretion.
As
part
of our share repurchase program, we have entered into and we may continue to
enter into structured share repurchase transactions with financial institutions.
These agreements generally require that we make an up-front payment in exchange
for the right to receive a fixed number of shares of our common stock upon
execution of the agreement, and a potential incremental number of shares of
our
common stock, within a pre-determined range, at the end of the term of the
agreement. During fiscal 2007, we repurchased 10.3 million shares of our common
stock for $275.0 million under structured share repurchase transactions, which
we recorded on the trade date of the transaction. Through the end of fiscal
2007, we have repurchased 27.3 million shares under our stock repurchase program
for a total cost of $488.1 million. During the first quarter of fiscal 2008,
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 first fiscal quarter.
Operating
Capital and Capital Expenditure Requirements
We
believe that our existing cash balances and anticipated cash flows from
operations will be sufficient to meet our operating, acquisition and capital
requirements for at least the next 12 months. However, there is no assurance
that we will not need to raise additional equity or debt financing within this
time frame. Additional financing may not be available on favorable terms or
at
all and may be dilutive to our then-current stockholders. We also may require
additional capital for other purposes not presently contemplated. If we are
unable to obtain sufficient capital, we could be required to curtail capital
equipment purchases or research and development expenditures, which could harm
our business. Factors that could affect our cash used or generated from
operations and, as a result, our need to seek additional borrowings or capital
include:
· decreased
demand and market acceptance for our products and/or our customers’ products;
· inability
to successfully develop and produce in volume production our next-generation
products;
· competitive
pressures resulting in lower than expected average selling prices;
and
· new
product announcements or product introductions by our competitors.
For
additional factors see “Item 1A. Risk Factors - Risks Related to Our Operations
- Our operating results are unpredictable and may fluctuate, and if our
operating results are below the expectations of securities analysts or
investors, our stock price could decline.”
3dfx
Asset Purchase
On
December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries
entered into an agreement, which closed on April 18, 2001, to purchase certain
graphics chip assets from 3dfx.
Under
the terms of the Asset Purchase Agreement, the cash consideration due at the
closing was $70.0 million, less $15.0 million that was loaned to 3dfx pursuant
to a Credit Agreement dated December 15, 2000. The Asset Purchase Agreement
also provided, subject to the other provisions thereof, that if 3dfx properly
certified that all its debts and other liabilities had been provided for, then
we would have been obligated to pay 3dfx two million shares of NVIDIA common
stock. If 3dfx could not make such a certification, but instead properly
certified that its debts and liabilities could be satisfied for less than $25.0
million, then 3dfx could have elected to receive a cash payment equal to the
amount of such debts and liabilities and a reduced number of shares of our
common stock, with such reduction calculated by dividing the cash payment by
$25.00 per share. If 3dfx could not certify that all of its debts and
liabilities had been provided for, or could not be satisfied, for less than
$25.0 million, we would not be obligated under the agreement to pay any
additional consideration for the assets.
In
October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United
States Bankruptcy Court for the Northern District of California. In March 2003,
we were served with a complaint filed by the Trustee appointed by the Bankruptcy
Court which sought, among other things, payments from us as additional purchase
price related to our purchase of certain assets of 3dfx. In early November
2005,
after many months of mediation, NVIDIA and the Official Committee of Unsecured
Creditors, or the Creditors’ Committee, reached a conditional settlement of the
Trustee’s claims against NVIDIA. This conditional settlement, presented as the
centerpiece of a proposed Plan of Liquidation in the bankruptcy case, was
subject to a confirmation process through a vote of creditors and the review
and
approval of the Bankruptcy Court after notice and hearing. The Trustee advised
that he intended to object to the settlement, which would have called for a
payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under
the
settlement, $5.6 million related to various administrative expenses and Trustee
fees, and $25.0 million related to the satisfaction of debts and liabilities
owed to the general unsecured creditors of 3dfx. Accordingly, during the three
month period ended October 30, 2005, we recorded $5.6 million as a charge to
settlement costs and $25.0 million as additional purchase price for 3dfx.
However,
the conditional settlement never progressed substantially through the
confirmation process. On December 21, 2005, the Bankruptcy Court determined
that
it would schedule trial of one portion of the Trustee’s case against NVIDIA. On
January 2, 2007, NVIDIA exercised its right to terminate the settlement
agreement on grounds that the bankruptcy court had failed to proceed toward
confirmation of the Creditors’ Committee’s plan. Beginning on March 21, 2007,
NVIDIA and the Trustee are scheduled to try the question of the value of the
assets 3dfx conveyed to NVIDIA and, in particular, whether the price NVIDIA
paid
for those assets was reasonably equivalent to the value of the assets 3dfx
sold
to NVIDIA.
Please
refer to Note 12 of the Notes to Consolidated Financial Statements for further
information regarding this litigation.
Contractual
Obligations
The
following summarizes our contractual obligations that are not on our balance
sheet as of January 28, 2007 and the effect such obligations are expected to
have on our liquidity and cash flow in future periods:
Contractual
Obligations
|
|
Total
|
|
Within
1 Year
|
|
2-3
Years
|
|
4-5
Years
|
|
After
5 Years
|
|
|
|
(In
thousands)
|
|
Operating
leases
|
|
$
|
167,765
|
|
$
|
33,890
|
|
$
|
65,432
|
|
$
|
61,998
|
|
$
|
6,445
|
|
Purchase
obligations (1)
|
|
|
364,486
|
|
|
364,486
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Capital
purchase obligations
|
|
|
4,829
|
|
|
4,829
|
|
|
|
|
|
|
|
|
|
|
Total
contractual obligations
|
|
$
|
537,080
|
|
$
|
403,205
|
|
$
|
65,432
|
|
$
|
61,998
|
|
$
|
6,445
|
|
(1) Represents
our inventory purchase commitments as of January 28, 2007.
During
the fiscal year 2007, we entered into a confidential patent licensing
arrangement. Our commitment for future license payments under this arrangement
could range from $97.0 million to $110.0 million over a ten year period;
however, the net outlay under this arrangement may be reduced by the occurrence
of certain events covered by the arrangement.
Off-Balance
Sheet Arrangements
As
of
January 28, 2007, we had no material off-balance sheet arrangements as defined
in Regulation S-K 303(a)(4)(ii).
Recently
Issued Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board, or FASB, issued Interpretation
No. 48, or FIN 48, Accounting
for Uncertainty in Income Taxes.
FIN 48
applies to all tax positions related to income taxes subject to FASB Statement
109, Accounting
for Income Taxes.
Under
FIN 48 a company would recognize the benefit from a tax position only if it
is
more-likely-than-not that the position would be sustained upon audit based
solely on the technical merits of the tax position. FIN 48 clarifies how a
company would measure the income tax benefits from the tax positions that are
recognized, provides guidance as to the timing of the derecognition of
previously recognized tax benefits, and describes the methods for classifying
and disclosing the liabilities within the financial statements for any
unrecognized tax benefits. FIN 48 also addresses when a company should record
interest and penalties related to tax positions and how the interest and
penalties may be classified within the financial statements. Any
differences between tax liability amounts recognized in the statements of
operations as a result of adoption of FIN 48 would be accounted for as a
cumulative effect adjustment to the beginning balance of retained earnings.
FIN
48 is effective for fiscal years beginning after December 15, 2006. The
provisions of FIN 48 will be effective as of first quarter of fiscal 2008.
We
believe that the cumulative effect of adoption of FIN 48 will not result in
any
material change to the beginning balance of our retained earnings.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, or SFAS No. 157, Fair
Value Measurements.
SFAS
No. 157 establishes a framework for measuring fair value and expands disclosures
about fair value measurements. The changes to current practice resulting from
the application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. We are required to adopt the provisions of SFAS No. 157
beginning with our fiscal quarter ending April 29, 2007. We do not believe
the
adoption of SFAS No. 157 will have a material impact on our consolidated
financial position, results of operations or cash flows.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, or SAB No.
108, Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements,
which
provides interpretive guidance on how the effects of the carryover or reversal
of prior year misstatements should be considered in quantifying a current year
misstatement. We adopted the provisions of SAB No. 108 in our fiscal year 2007.
The adoption of SAB No. 108 did not have a material impact on our consolidated
financial position, results of operations or cash flows.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, or SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities.
SFAS
No. 159 permits companies to choose to measure certain financial
instruments and certain other items at fair value. The standard requires that
unrealized gains and losses on items for which the fair value option has been
elected be reported in earnings. We are required to adopt the provisions of
SFAS
No. 159 beginning with our fiscal quarter ending April 27, 2008, although
earlier adoption is permitted. We are currently evaluating the impact that
SFAS
No. 159 will have on our consolidated financial position, results of
operations or cash flows.
Interest
Rate Risk
We
invest
in a variety of financial instruments, consisting principally of investments
in
commercial paper, money market funds and highly liquid debt securities of
corporations, municipalities and the United States government and its agencies.
These investments are denominated in United States dollars.
We
account for our investment instruments in accordance with Statement of Financial
Accounting Standards No. 115, or SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
All of
the cash equivalents and marketable securities are treated as
“available-for-sale” under SFAS No. 115. Investments in both fixed rate and
floating rate interest earning instruments carry a degree of interest rate
risk.
Fixed rate securities may have their market value adversely impacted due to
a
rise in interest rates, while floating rate securities may produce less income
than expected if interest rates fall. Due in part to these factors, our future
investment income may fall short of expectations due to changes in interest
rates or we may suffer losses in principal if we are forced to sell securities
that decline in market value due to changes in interest rates. However, because
we classify our debt securities as “available-for-sale”, no gains or losses are
recognized due to changes in interest rates unless such securities are sold
prior to maturity or declines in fair value are determined to be other than
temporary. These securities are reported at fair value with the related
unrealized gains and losses included in accumulated other comprehensive income,
a component of stockholders’ equity, net of tax.
As
of
January 28, 2007, we performed a sensitivity analysis on our floating and fixed
rate financial investments. According to our analysis, parallel shifts in the
yield curve of both +/- 0.5% would result in changes in fair market values
for
these investments of approximately $3.0 million.
Exchange
Rate Risk
We
consider our direct exposure to foreign exchange rate fluctuations to be
minimal. Currently, sales and arrangements with third-party manufacturers
provide for pricing and payment in United States dollars, and, therefore, are
not subject to exchange rate fluctuations. Increases in the value of the United
States’ dollar relative to other currencies would make our products more
expensive, which could negatively impact our ability to compete. Conversely,
decreases in the value of the United States’ dollar relative to other currencies
could result in our suppliers raising their prices in order to continue doing
business with us. To date, we have not engaged in any currency hedging
activities, although we may do so in the future. Fluctuations in currency
exchange rates could harm our business in the future.
The
information required by this Item is set forth in our Consolidated Financial
Statements and Notes thereto included in this Annual Report on Form 10-K.
Not
applicable.
ITEM 9A.
CONTROLS AND PROCEDURES
Controls
and Procedures
Disclosure
Controls and Procedures
Based
on
their evaluation as of January 28, 2007, our management, including our
Chief Executive Officer and Chief Financial Officer, have concluded that our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) were effective.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting as of January 28, 2007 based on the criteria set forth
in Internal
Control - Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. Based
on
our evaluation under the criteria set forth in Internal
Control — Integrated Framework,
our
management concluded that our internal control over financial reporting was
effective as of January 28, 2007.
Our
management’s assessment of the effectiveness of our internal control over
financial reporting as of January 28, 2007 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
as
stated in their report which is included herein.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal controls over financial reporting during our
last fiscal quarter 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.
None.
Identification
of Directors
Reference
is made to the information regarding directors appearing under the heading
“Proposal 1- Election of Directors” in our 2007 Proxy Statement, which
information is hereby incorporated by reference.
Identification
of Executive Officers
Reference
is made to the information regarding executive officers appearing under the
heading “Executive Officers of the Registrant” in Part I of this Annual Report
on Form 10-K, which information is hereby incorporated by reference.
Identification
of Audit Committee and Financial Expert
Reference
is made to the information regarding directors appearing under the heading
“Report of the Audit Committee of the Board of Directors” and “Information about
the Board of Directors and Corporate Governance” in our 2007 Proxy Statement,
which information is hereby incorporated by reference.
Material
Changes to Procedures for Recommending Directors
Reference
is made to the information regarding directors appearing under the heading
“Information about the Board of Directors and Corporate Governance” in our 2007
Proxy Statement, which information is hereby incorporated by reference.
Compliance
with Section 16(a) of the Exchange Act
Reference
is made to the information appearing under the heading “Section 16(a) Beneficial
Ownership Reporting Compliance” in our 2007 Proxy Statement, which information
is hereby incorporated by reference.
Code
of Conduct
Reference
is made to the information appearing under the heading “Information about the
Board of Directors and Corporate Governance - Code of Conduct” in our 2007 Proxy
Statement, which information is hereby incorporated by reference. The full
text
of our “Worldwide Code of Conduct” and “Financial Team Code of Conduct” are
published on the Investor Relations portion of our web site, under Corporate
Governance, at www.nvidia.com.
The
information required by this item is hereby incorporated by reference from
the
section entitled “Executive Compensation” in our 2007 Proxy
Statement.
Ownership
of NVIDIA Securities
The
information required by this item is hereby incorporated by reference from
the
section entitled “Security Ownership of Certain Beneficial Owners and
Management” in our 2007 Proxy Statement.
Equity
Compensation Plan Information
Information
concerning our equity compensation plans, including both stockholder approved
plans and non-stockholder approved plans, is hereby incorporated by reference
from the section entitled “Equity Compensation Plan Information” in our 2007
Proxy Statement.
The
information required by this item is hereby incorporated by reference from
the
sections entitled “Transactions with Related Persons” and “Information about the
Board of Directors and Corporate Governance - Independence of the Members
of the Board of Directors” in our 2007 Proxy Statement.
The
information required by this item is hereby incorporated by reference from
the
section entitled “Fees Billed by the Independent Registered Public Accounting
Firm” in our 2007 Proxy Statement.
|
|
|
Page
|
(a)
|
1.
|
Consolidated
Financial Statements
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity and
Comprehensive Income for the years ended January 28, 2007, January
29,
2006, and January 30, 2005 |
57
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended
January 28, 2007, January 29, 2006, and January 30, 2005 |
58
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements |
60
|
|
|
|
|
(a)
|
2.
|
Financial
Statement Schedules
|
|
|
|
|
|
|
|
Schedule
II Valuation and Qualifying Accounts
|
93
|
|
|
|
|
(a)
|
3.
|
Exhibits
|
|
|
|
The
exhibits listed in the accompanying index to
exhibits are filed or incorporated by reference as a part of this
Annual
Report on Form 10-K. |
94
|
|
|
|
|
To the
Stockholders and Board of Directors
NVIDIA
Corporation:
We
have
completed integrated audits of NVIDIA Corporation’s
consolidated financial
statements and of its internal control over financial reporting as of January
28, 2007, in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated
financial
statements and financial statement schedule
In
our
opinion, the consolidated
financial statements listed in the index
appearing under Item 15(a)(2) present
fairly, in all material respects, the financial position of NVIDIA
Corporation and
its
subsidiaries at January 28, 2007 and January 29, 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
January 28, 2007 in conformity with accounting principles generally accepted
in
the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under
Item 15(a)(2) presents
fairly, in all material respects, the information set forth therein when read
in
conjunction with the related consolidated financial statements.
These financial statements and financial statement schedules are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based
on our
audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
As
discussed in Note 2 of the Notes to Consolidated Financial Statements, the
Company changed the manner in which it accounts for stock-based compensation
in
fiscal 2007.
Internal
control over financial reporting
Also,
in
our opinion, management’s assessment, included in Management’s Annual Report on
Internal Control over Financial Reporting appearing
under Item 9A, that the Company maintained effective internal control over
financial reporting as of January 28, 2007 based on criteria established in
Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of January 28, 2007,
based on criteria established in Internal
Control - Integrated Framework
issued
by the COSO. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness
of the Company’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit
to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding
of
internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PricewaterhouseCoopers
LLP
San
Jose,
CA
March
15,
2007
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share data)
|
|
Year
Ended
January 28,
2007
|
|
Year
Ended
January 29,
2006
|
|
Year
Ended
January 30,
2005
|
|
Revenue
|
|
$
|
3,068,771
|
|
$
|
2,375,687
|
|
$
|
2,010,033
|
|
Cost
of revenue
|
|
|
1,768,322
|
|
|
1,465,654
|
|
|
1,362,478
|
|
Gross
profit
|
|
|
1,300,449
|
|
|
910,033
|
|
|
647,555
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
553,467
|
|
|
357,123
|
|
|
348,220
|
|
Sales,
general and administrative
|
|
|
293,530
|
|
|
202,088
|
|
|
204,159
|
|
Settlement
costs
|
|
|
-
|
|
|
14,158
|
|
|
—
|
|
Total
operating expenses
|
|
|
846,997
|
|
|
573,369
|
|
|
552,379
|
|
Income
from operations
|
|
|
453,452
|
|
|
336,664
|
|
|
95,176
|
|
Interest
income
|
|
|
41,820
|
|
|
20,698
|
|
|
11,422
|
|
Interest
expense
|
|
|
(21
|
)
|
|
(72
|
)
|
|
(164
|
)
|
Other
income (expense), net
|
|
|
(771
|
)
|
|
(502
|
)
|
|
594
|
|
Income
before income tax expense
|
|
|
494,480
|
|
|
356,788
|
|
|
107,028
|
|
Income
tax expense
|
|
|
46,350
|
|
|
55,612
|
|
|
18,413
|
|
Income
before change in accounting principle
|
|
|
448,130
|
|
|
301,176
|
|
|
88,615
|
|
Cumulative
effect of change in accounting principle, net of tax
|
|
|
704
|
|
|
-
|
|
|
-
|
|
Net
income
|
|
$
|
448,834
|
|
$
|
301,176
|
|
$
|
88,615
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share
|
|
|
|
|
|
|
|
|
|
|
Income
before change in accounting principle
|
|
$
|
1.27
|
|
$
|
0.89
|
|
$
|
0.27
|
|
Cumulative
effect of change in accounting principle
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Basic
net income per share
|
|
$
|
1.27
|
|
$
|
0.89
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in basic per share computation (1)
|
|
|
352,404
|
|
|
339,380
|
|
|
332,124
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per share:
|
|
|
|
|
|
|
|
|
|
|
Income
before change in accounting principle
|
|
$
|
1.15
|
|
$
|
0.82
|
|
$
|
0.25
|
|
Cumulative
effect of change in accounting principle
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Diluted
net income per share
|
|
$
|
1.15
|
|
$
|
0.82
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in diluted per share computation (1)
|
|
|
391,504
|
|
|
365,704
|
|
|
351,624
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Reflects
a two-for-one stock split effective on April 6, 2006.
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share data)
|
|
January 28,
2007
|
|
January 29,
2006
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
544,414
|
|
$
|
551,756
|
|
Marketable
securities
|
|
|
573,436
|
|
|
398,418
|
|
Accounts
receivable, less allowances of $15,749 and $10,837 in 2007 and 2006,
respectively
|
|
|
518,680
|
|
|
318,186
|
|
Inventories
|
|
|
354,680
|
|
|
254,870
|
|
Prepaid
expenses and other current assets
|
|
|
31,141
|
|
|
24,387
|
|
Deferred
income taxes
|
|
|
9,419
|
|
|
2,682
|
|
Total
current assets
|
|
|
2,031,770
|
|
|
1,550,299
|
|
Property
and equipment, net
|
|
|
260,828
|
|
|
178,152
|
|
Goodwill
|
|
|
301,425
|
|
|
145,317
|
|
Intangible
assets, net
|
|
|
45,511
|
|
|
15,421
|
|
Deposits
and other assets
|
|
|
28,349
|
|
|
27,477
|
|
Deferred
income taxes
|
|
|
7,380
|
|
|
38,021
|
|
|
|
$
|
2,675,263
|
|
$
|
1,954,687
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
272,075
|
|
$
|
179,395
|
|
Accrued
liabilities
|
|
|
366,732
|
|
|
259,264
|
|
Total
current liabilities
|
|
|
638,807
|
|
|
438,659
|
|
Other
long-term liabilities
|
|
|
29,537
|
|
|
20,036
|
|
Commitments
and contingencies - see Note 12
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value; 2,000,000 shares authorized; none
issued
|
|
|
—
|
|
|
—
|
|
Common
stock, $.001 par value; 1,000,000,000 shares authorized; 388,308,979
shares issued and 360,988,504 outstanding in 2007; and 359,927,958
shares
issued and 342,954,912 outstanding in 2006 (1)
|
|
|
388
|
|
|
360
|
|
Additional
paid-in capital
|
|
|
1,295,650
|
|
|
965,604
|
|
Deferred
compensation
|
|
|
-
|
|
|
(3,604
|
)
|
Treasury
stock, at cost (27,227,145 shares in 2007 and 16,889,716 shares in
2006)
|
|
|
(487,120
|
)
|
|
(212,142
|
)
|
Accumulated
other comprehensive income (loss), net
|
|
|
1,436
|
|
|
(1,957
|
)
|
Retained
earnings
|
|
|
1,196,565
|
|
|
747,731
|
|
Total
stockholders' equity
|
|
|
2,006,919
|
|
|
1,495,992
|
|
|
|
$
|
2,675,263
|
|
$
|
1,954,687
|
|
|
|
|
|
|
|
|
|
(1) Reflects
a two-for-one stock split effective on April 6, 2006.
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
AND
COMPREHENSIVE INCOME
(In
thousands, except share data)
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
(1)
|
|
|
Deferred
Compensation
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
Retained
Earnings
|
|
Total
Stockholders’
Equity
|
|
Total
Comprehensive
Income
|
|
|
|
Outstanding
Shares (1)
|
|
Amount
|
|
|
|
|
|
|
|
|
Balances,
January 25, 2004
|
|
|
328,291,574
|
|
$
|
328
|
|
$
|
770,278
|
|
$
|
(39,903
|
)
|
$
|
—
|
|
$
|
850
|
|
$
|
357,940
|
|
$
|
1,089,493
|
|
$
|
45,720
|
|
Issuance
of common stock from stock plans
|
|
|
10,056,222
|
|
|
10
|
|
|
42,492
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
42,502
|
|
|
|
|
Stock
repurchase
|
|
|
(4,168,706
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24,644
|
)
|
|
—
|
|
|
—
|
|
|
(24,644
|
)
|
|
|
|
Tax
benefit from stock-based compensation
|
|
|
—
|
|
|
—
|
|
|
8,616
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,616
|
|
|
|
|
Reversal
of deferred compensation
|
|
|
—
|
|
|
—
|
|
|
(5,359
|
)
|
|
5,359
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Amortization
of deferred compensation
|
|
|
—
|
|
|
—
|
|
|
(145
|
)
|
|
20,967
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20,822
|
|
|
|
|
Unrealized
loss, net of $1,470 tax effect
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,468
|
)
|
|
—
|
|
|
(4,468
|
)
|
|
(4,468
|
)
|
Reclassification
adjustment for net losses included in net income, net of ($38)
tax
effect
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
155
|
|
|
—
|
|
|
155
|
|
|
155
|
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
88,615
|
|
|
88,615
|
|
|
88,615
|
|
Balances,
January 30, 2005
|
|
|
334,179,090
|
|
|
338
|
|
|
815,882
|
|
|
(13,577
|
)
|
|
(24,644
|
)
|
|
(3,463
|
)
|
|
446,555
|
|
|
1,221,091
|
|
|
84,302
|
|
Issuance
of common stock from stock plans
|
|
|
21,663,492
|
|
|
22
|
|
|
127,475
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
127,497
|
|
|
|
|
Stock
repurchase
|
|
|
(12,804,340
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(188,509
|
)
|
|
—
|
|
|
—
|
|
|
(188,509
|
)
|
|
|
|
Tax
benefit from stock-based compensation
|
|
|
—
|
|
|
—
|
|
|
24,868
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,868
|
|
|
|
|
Cancellation
of shares
|
|
|
(83,330
|
)
|
|
—
|
|
|
(520
|
)
|
|
—
|
|
|
1,011
|
|
|
—
|
|
|
—
|
|
|
491
|
|
|
|
|
Reversal
of deferred compensation
|
|
|
—
|
|
|
—
|
|
|
(2,101
|
)
|
|
2,101
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Amortization
of deferred compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,872
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,872
|
|
|
|
|
Unrealized
loss, net of $845 tax effect
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(120
|
)
|
|
—
|
|
|
(120
|
)
|
|
(120
|
)
|
Reclassification
adjustment for net losses included in net income, net of ($407)
tax
effect
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,626
|
|
|
—
|
|
|
1,626
|
|
|
1,626
|
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
301,176
|
|
|
301,176
|
|
|
301,176
|
|
Balances,
January 29, 2006
|
|
|
342,954,912
|
|
|
360
|
|
|
965,604
|
|
|
(3,604
|
)
|
|
(212,142
|
)
|
|
(1,957
|
)
|
|
747,731
|
|
|
1,495,992
|
|
|
302,682
|
|
Issuance
of common stock from stock plans
|
|
|
28,381,021
|
|
|
28
|
|
|
221,132
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
221,160
|
|
|
|
|
Stock
repurchase
|
|
|
(10,337,429
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(274,978
|
)
|
|
—
|
|
|
—
|
|
|
(274,978
|
)
|
|
|
|
Tax
deficit from stock-based
compensation
|
|
|
—
|
|
|
—
|
|
|
(8,482
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,482
|
)
|
|
|
|
Reversal
of deferred compensation
|
|
|
—
|
|
|
—
|
|
|
(3,604
|
)
|
|
3,604
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Stock-based
compensation expense related to acquisitions
|
|
|
—
|
|
|
—
|
|
|
2,914
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,914
|
|
|
|
|
Stock-based
compensation related to employees
|
|
|
—
|
|
|
—
|
|
|
118,790
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
118,790
|
|
|
|
|
Unrealized
gain, net of $1,223 tax effect
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,509
|
|
|
—
|
|
|
3,509
|
|
|
3,509
|
|
Reclassification
adjustment for net gains included in net income, net of $78 tax
effect
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(116
|
)
|
|
—
|
|
|
(116
|
)
|
|
(116
|
)
|
Impact
of change in accounting principle, net of ($379) tax
effect
|
|
|
—
|
|
|
—
|
|
|
(704
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(704
|
)
|
|
|
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
448,834
|
|
|
448,834
|
|
|
448,834
|
|
Balances,
January 28, 2007
|
|
|
360,988,504
|
|
$
|
388
|
|
$
|
1,295,650
|
|
$
|
-
|
|
$
|
(487,120
|
)
|
$
|
1,436
|
|
$
|
1,196,565
|
|
$
|
2,006,919
|
|
$
|
452,227
|
|
(1) Reflects
a two-for-one stock split effective on April 6, 2006.
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Year Ended
|
|
|
|
January 28,
2007
|
|
January 29,
2006
|
|
January 30,
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
448,834
|
|
$
|
301,176
|
|
$
|
88,615
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting principle
|
|
|
(704
|
)
|
|
—
|
|
|
—
|
|
Bad
debt expense (benefit)
|
|
|
205
|
|
|
(492
|
)
|
|
(844
|
)
|
In-process
research and development
|
|
|
14,002
|
|
|
—
|
|
|
—
|
|
Depreciation
and amortization
|
|
|
107,562
|
|
|
97,977
|
|
|
102,597
|
|
Stock-based
compensation expense related to employees
|
|
|
116,735
|
|
|
7,872
|
|
|
20,822
|
|
Gross
tax benefit from stock-based compensation
|
|
|
(188
|
)
|
|
—
|
|
|
—
|
|
Tax
benefit (deficit) from stock-based compensation
|
|
|
(8,482
|
)
|
|
24,868
|
|
|
8,616
|
|
Deferred
income taxes
|
|
|
41,766
|
|
|
(2,691
|
)
|
|
8,694
|
|
Net
loss on retirements of property and equipment
|
|
|
251
|
|
|
1,005
|
|
|
412
|
|
Non-cash
realized gain on investment exchange
|
|
|
—
|
|
|
(96
|
)
|
|
(533
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(175,261
|
)
|
|
(21,415
|
)
|
|
(110,312
|
)
|
Inventories
|
|
|
(91,395
|
)
|
|
60,916
|
|
|
(80,906
|
)
|
Prepaid
expenses and other current assets
|
|
|
(5,294
|
)
|
|
(4,568
|
)
|
|
(5,569
|
)
|
Deposits
and other assets
|
|
|
7,314
|
|
|
(8,073
|
)
|
|
(1,458
|
)
|
Accounts
payable
|
|
|
38,613
|
|
|
(58,828
|
)
|
|
52,941
|
|
Accrued
liabilities and other long-term liabilities
|
|
|
93,153
|
|
|
48,757
|
|
|
49,125
|
|
Net
cash provided by operating activities
|
|
|
587,111
|
|
|
446,408
|
|
|
132,200
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchases
of marketable securities
|
|
|
(220,834
|
)
|
|
(338,058
|
)
|
|
(313,760
|
)
|
Proceeds
from sales and maturities of marketable securities
|
|
|
227,067
|
|
|
397,686
|
|
|
229,068
|
|
Acquisition
of businesses, net of cash and cash equivalents
|
|
|
(401,800
|
)
|
|
(12,131
|
)
|
|
—
|
|
Purchases
of property and equipment and intangible assets
|
|
|
(145,256
|
)
|
|
(79,600
|
)
|
|
(67,261
|
)
|
Investments
in affiliates
|
|
|
|
|
|
(9,684
|
)
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(540,823
|
)
|
|
(41,787
|
)
|
|
(151,953
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock under employee stock plans
|
|
|
221,160
|
|
|
127,497
|
|
|
42,502
|
|
Payments
for stock repurchases
|
|
|
(274,978
|
)
|
|
(188,509
|
)
|
|
(24,644
|
)
|
Gross
tax benefit from stock-based compensation
|
|
|
188
|
|
|
—
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
(365
|
)
|
|
(4,015
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(53,630
|
)
|
|
(61,377
|
)
|
|
13,843
|
|
Change
in cash and cash equivalents
|
|
|
(7,342
|
)
|
|
343,244
|
|
|
(5,910
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
551,756
|
|
|
208,512
|
|
|
214,422
|
|
Cash
and cash equivalents at end of period
|
|
$
|
544,414
|
|
$
|
551,756
|
|
$
|
208,512
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
—
|
|
$
|
12
|
|
$
|
163
|
|
Cash
paid for income taxes, net
|
|
$
|
26,628
|
|
$
|
3,368
|
|
$
|
763
|
|
NVIDIA
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Continued)
(In
thousands)
|
|
Year Ended
|
|
|
|
January 28,
2007
|
|
January 29,
2006
|
|
January 30,
2005
|
|
Other
non-cash activities:
|
|
|
|
|
|
|
|
Unrealized
gains/losses from marketable securities
|
|
$
|
4,492
|
|
$
|
1,068
|
|
$
|
5,745
|
|
Deferred
stock-based compensation
|
|
$
|
3,604
|
|
$
|
(2,101
|
)
|
$
|
(5,359
|
)
|
Acquisition
of business - goodwill adjustment
|
|
$
|
17,862
|
|
$
|
25,765
|
|
$
|
1,091
|
|
Assets
acquired by assuming related liabilities
|
|
$
|
37,251
|
|
$
|
—
|
|
$
|
—
|
|
Acquisition
of business - stock option conversion
|
|
$
|
2,914
|
|
$
|
—
|
|
$
|
—
|
|
Application
of customer advance to accounts receivable
|
|
$
|
—
|
|
$
|
—
|
|
$
|
11,508
|
|
Marketable
security received from investment exchange
|
|
$
|
—
|
|
$
|
96
|
|
$
|
688
|
|
Asset
retirement obligation
|
|
$
|
—
|
|
$
|
1,835
|
|
$
|
4,483
|
|
See
accompanying notes to consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Organization and Summary of Significant Accounting Policies
Our
Company
NVIDIA
Corporation is the worldwide leader in programmable graphics processor
technologies. Our products are designed to enhance the end-user experience
on
consumer and professional computing devices. We have four major product-line
operating segments: graphics processing units, or GPUs, media and communications
processors, or MCPs, Handheld GPUs, and Consumer Electronics. Our GPU Business
is composed of products that support desktop personal computers, or PCs,
notebook PCs, professional workstations and other GPU-based products; our MCP
Business is composed of NVIDIA nForce products that operate as a single-chip or
chipset that provide system functions, such as high speed storage and network
communications, and perform these operations independently from the host central
processing unit, or CPU; our Handheld GPU Business is composed of products
that
support handheld personal digital assistants, or PDAs, cellular phones and
other
handheld devices; and our Consumer Electronics Business is concentrated in
products that support video game consoles and other digital consumer electronics
devices and is composed of our contractual arrangements with Sony Computer
Entertainment, or SCE, to jointly develop a custom GPU for SCE’s PlayStation3,
sales of our Xbox-related products, revenue from our license agreement with
Microsoft relating to the successor product to their initial Xbox gaming
console, the Xbox360, and related devices. We were incorporated in
California in April 1993 and reincorporated in Delaware in April 1998. Our
headquarter facilities are in Santa Clara, California.
Fiscal
year
We
operate on a 52 or 53-week year, ending on the Sunday nearest January 31.
Fiscal years 2007 and 2006 were 52-week years, compared to fiscal 2005
which was a 53-week year.
Stock
Split
In
March
2006, our Board of Directors, or the Board, approved a two-for-one stock split
of our outstanding shares of common stock to be effected in the form of a 100%
stock dividend. The stock split was effective on Thursday, April 6, 2006 for
stockholders of record at the close of business on Friday, March 17, 2006.
All
share and per-share numbers contained herein have been retroactively adjusted
to
reflect this stock split.
Reclassifications
Certain
prior fiscal year balances have been reclassified to conform to the current
fiscal year presentation.
Principles
of Consolidation
Our
consolidated financial statements include the accounts of NVIDIA Corporation
and
its wholly owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. On an on-going basis,
we evaluate our estimates, including those related to revenue recognition,
accounts receivable, inventories, income taxes and contingencies. These
estimates are based on historical facts and various other assumptions that
we
believe are reasonable.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Revenue
Recognition
Product
Revenue
We
recognize revenue from product sales when persuasive evidence of an arrangement
exists, the product has been delivered, the price is fixed and determinable
and
collection is reasonably assured. For most sales, we use a binding purchase
order and in certain cases we use a contractual agreement as evidence of an
arrangement. We consider delivery to occur upon shipment provided title and
risk
of loss have passed to the customer based on the shipping terms. At the point
of
sale, we assess whether the arrangement fee is fixed and determinable and
whether collection is reasonably assured. If we determine that collection of
a
fee is not reasonably assured, we defer the fee and recognize revenue at the
time collection becomes reasonably assured, which is generally upon receipt
of
payment.
Our
policy on sales to distributors is to defer recognition of revenue and related
cost of revenue until the distributors resell the product.
We
record
estimated reductions to revenue for customer programs at the time revenue is
recognized. Our customer programs primarily involve rebates, which are designed
to serve as sales incentives to resellers of our products in various target
markets. We account for rebates in accordance with Emerging Issues Task Force
Issue 01-9, or EITF 01-09, Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of
the
Vendor’s Products)
and, as
such, we accrue for 100% of the potential rebates and do not apply a breakage
factor. Rebates typically expire six months from the date of the original sale,
unless we reasonably believe that the customer intends to claim the rebate.
Unclaimed rebates are reversed to revenue upon expiration of the rebate,
Our
customer programs also include marketing development funds, or MDFs. We account
for MDFs as either a reduction of revenue or an operating expense in accordance
with EITF 01-09. MDFs represent monies paid to retailers, system builders,
original equipment manufacturers, or OEMs, distributors and add-in card partners
that are earmarked for market segment development and expansion and typically
are designed to support our partners’ activities while also promoting NVIDIA
products. If market conditions decline, we may take actions to increase amounts
offered under customer programs, possibly resulting in an incremental reduction
of revenue at the time such programs are offered.
We
also
record a reduction to revenue by establishing a sales return allowance for
estimated product returns at the time revenue is recognized, based primarily
on
historical return rates. However, if product returns for a particular fiscal
period exceed historical return rates we may determine that additional sales
return allowances are required to properly reflect our estimated exposure for
product returns.
License
and Development Revenue
For
license arrangements that require significant customization of our intellectual
property components, we generally recognize this license revenue using the
percentage-of-completion method of accounting over the period that services
are
performed. For all license and service arrangements accounted for under the
percentage-of-completion method, we determine progress to completion based
on
actual direct labor hours incurred to date as a percentage of the estimated
total direct labor hours required to complete the project. We periodically
evaluate the actual status of each project to ensure that the estimates to
complete each contract remain accurate. A provision for estimated losses on
contracts is made in the period in which the loss becomes probable and can
be
reasonably estimated. To date, we have not recorded any such losses. Costs
incurred in advance of revenue recognized are recorded as deferred costs on
uncompleted contracts. If the amount billed exceeds the amount of revenue
recognized, the excess amount is recorded as deferred revenue. Revenue
recognized in any period is dependent on our progress toward completion of
projects in progress. Significant management judgment and discretion are used
to
estimate total direct labor hours. Any changes in or deviations from these
estimates could have a material effect on the amount of revenue we recognize
in
any period.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Advertising
Expenses
We
expense advertising costs in the period in which they are incurred. Advertising
expenses for fiscal years 2007, 2006, and 2005 were $14.8 million, $9.2 million,
and $15.2 million, respectively.
Rent
Expense
We
recognize rent expense on a straight-line basis over the lease period and have
accrued for rent expense incurred, but not paid.
Product
Warranties
We
generally offer limited warranty to end-users that range from one to three
years
for products in order to repair or replace products for any manufacturing
defects or hardware component failures. Cost of revenue includes the estimated
cost of product warranties that are calculated at the point of revenue
recognition. Under limited circumstances, we may offer an extended limited
warranty to customers for certain products.
Foreign
Currency Translation
We
use the United States dollar as our functional currency for all of our
subsidiaries. Foreign currency monetary assets and liabilities are remeasured
into United States dollars at end-of-period exchange rates. Non-monetary assets
and liabilities, including inventories, prepaid expenses and other current
assets, property and equipment, deposits and other assets and equity, are
remeasured at historical exchange rates. Revenue and expenses are remeasured
at
average exchange rates in effect during each period, except for those expenses
related to the previously noted balance sheet amounts, which are remeasured
at
historical exchange rates. Gains or losses from foreign currency remeasurement
are included in “Other income (expense), net” and to date have not been
significant. The aggregate exchange gain (loss) included in determining net
income was $(0.5) million in fiscal 2007, $0.01 million in fiscal 2006 and
$0.04
million in fiscal 2005.
Cash
and Cash Equivalents
We
consider all highly liquid investments purchased with an original maturity
of
three months or less at the time of purchase to be cash equivalents. As of
January 28, 2007, our cash and cash equivalents were $544.4 million, which
includes $467.2 million invested in money market funds.
Marketable
Securities
We
account for our investment instruments in accordance with Statement of Financial
Accounting Standards No. 115, or SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
All of
our cash equivalents and marketable securities are treated as
“available-for-sale” under SFAS No. 115. Cash equivalents consist of
financial instruments which are readily convertible into cash and have original
maturities of three months or less at the time of acquisition. Marketable
securities consist primarily of highly liquid investments with a maturity of
greater than three months when purchased and some equity investments. We
classify our marketable securities at the date of acquisition in the
available-for-sale category as our intention is to convert them into cash for
operations. These securities are reported at fair value with the related
unrealized gains and losses included in accumulated other comprehensive income
(loss), a component of stockholders’ equity, net of tax. We follow the guidance
provided by Emerging Issues Task Force Issue No. 03-01, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments,
in
order to assess whether our investments with unrealized loss positions are
other
than temporarily impaired. Realized gains and losses on the sale of marketable
securities are determined using the specific-identification method.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Inventories
Inventory
cost is computed on an adjusted standard basis, which approximates actual cost
on an average or first-in, first-out basis. Inventory costs consist primarily
of
the cost of semiconductors purchased from subcontractors, including wafer
fabrication, assembly, testing and packaging, manufacturing support costs,
including labor and overhead associated with such purchases, final test yield
fallout, inventory provisions and shipping costs. We write down our inventory
for estimated amounts related to lower of cost or market, obsolescence or
unmarketable inventory equal to the difference between the cost of inventory
and
the estimated market value based upon assumptions about future demand, future
product purchase commitments, estimated manufacturing yield levels and market
conditions. If actual market conditions are less favorable than those projected
by management, or if our future product purchase commitments to our suppliers
exceed our forecasted future demand for such products, additional future
inventory write-downs may be required that could adversely affect our operating
results. If actual market conditions are more favorable, we may have higher
gross margins when products are sold. Sales to date of such products have not
had a significant impact on our gross margin. Inventory reserves once
established are not reversed until the related inventory has been sold or
scrapped.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation is computed using the
straight-line method based on estimated useful lives, generally three to five
years. Depreciation expense includes the amortization of assets recorded under
capital leases. Leasehold improvements and assets recorded under capital leases
are amortized over the shorter of the lease term or the estimated useful life
of
the asset.
Goodwill
We
account for goodwill in accordance with Statement of Financial Accounting
Standards No. 142, or SFAS No. 142, Goodwill
and Other Intangible Assets.
Goodwill is subject to our annual impairment test during our fourth quarter
of
our fiscal year, or earlier if indicators of potential impairment exist, using
a
fair value-based approach. Our impairment review process compares the fair
value
of the reporting unit in which the goodwill resides to its carrying
value. For the purposes of completing our SFAS
No. 142 impairment test, we perform our analysis on a
reporting unit basis. We utilize a two-step approach to testing goodwill
for impairment. The first step tests for possible impairment by applying a
fair
value-based test. In computing fair value of our reporting units, we use
estimates of future revenues, costs and cash flows from such units. The second
step, if necessary, measures the amount of such impairment by applying fair
value-based tests to individual assets and liabilities. We elected to perform
our annual goodwill impairment review during the fourth quarter of each fiscal
year. We completed our most recent annual impairment test during the fourth
quarter of fiscal 2007 and concluded that there was no impairment. However,
future events or circumstances may result in a charge to earnings due to the
potential for a write-down of goodwill in connection with such
tests.
Concentration
of Credit Risk
Financial
instruments that potentially subject us to concentrations of credit risk consist
primarily of cash equivalents, marketable securities and trade accounts
receivable. Our investment policy requires the purchase of top-tier investment
grade securities, the diversification of asset type and certain limits on our
portfolio duration. All marketable securities are held in our name, managed
by
several investment managers and held by one major financial institution under
a
custodial arrangement. One customer accounted for approximately 18% of our
accounts receivable balance at January 28, 2007. We perform ongoing credit
evaluations of our customers’ financial condition and maintain an allowance for
potential credit losses. This allowance consists of an amount identified for
specific customers and an amount based on overall estimated exposure. Our
overall estimated exposure excludes amounts covered by credit insurance and
letters of credit.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Impairment
of Long-Lived Assets
In
accordance with Statement of Financial Accounting Standards No. 144, or
SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, long-lived
assets, such as property and equipment and intangible assets subject to
amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of
an
asset exceeds its estimated future cash flows, an impairment charge is
recognized for the amount by which the carrying amount of the asset exceeds
the
fair value of the asset. Fair value is determined based on the estimated
discounted future cash flows expected to be generated by the asset. Assets
and
liabilities to be disposed of would be separately presented in the consolidated
balance sheet and the assets would be reported at the lower of the carrying
amount or fair value less costs to sell, and would no longer be depreciated.
Fair
Value of Financial Instruments
The
carrying value of cash, cash equivalents, accounts receivable, accounts payable
and accrued liabilities approximate their fair values due to their relatively
short maturities as of January 28, 2007 and January 29, 2006.
Marketable securities are comprised of available-for-sale securities that 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. Fair value of the marketable securities is determined based
on quoted market prices.
Accounting
for Asset Retirement Obligations
We
account for asset retirement obligations in accordance with Statement of
Financial Accounting Standards No. 143, or SFAS No. 143, Accounting
for Asset Retirement Obligations,
which
addresses financial accounting and reporting for obligations associated with
the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and/or normal use of the assets. SFAS No. 143 requires that the
fair value of a liability for an asset retirement obligation be recognized
in
the period in which it is incurred if a reasonable estimate of fair value can
be
made. The fair value of the liability is added to the carrying amount of the
associated asset and this additional carrying amount is depreciated over the
life of the asset. During fiscal years 2006 and 2007, we recorded asset
retirement obligations to return the leasehold improvements to their original
condition upon lease termination at our headquarters facility in Santa Clara,
California and our leasehold improvements at our international sites. At January
28, 2007 and January 29, 2006, our net asset retirement obligations were $6.4
million and $6.5 million, respectively.
Income
Taxes
Statement
of
Financial Accounting Standards No. 109, or SFAS No. 109, Accounting
for Income Taxes,
establishes financial accounting and reporting standards for the effect of
income taxes. In accordance with SFAS No. 109, we recognize federal, state
and foreign current tax liabilities or assets based on our estimate of taxes
payable or refundable in the current fiscal year by tax jurisdiction. We also
recognize federal, state and foreign deferred tax assets or liabilities, as
appropriate, for our estimate of future tax effects attributable to temporary
differences and carryforwards; and we record a valuation allowance to reduce
any
deferred tax assets by the amount of any tax benefits that, based on available
evidence and judgment, are not expected to be realized.
United
States income tax has not been provided on earnings of our
non-United States subsidiaries to the extent that such earnings are
considered to be permanently reinvested.
Our
calculation of current and deferred tax assets and liabilities is based on
certain estimates and judgments and involves dealing with uncertainties in
the
application of complex tax laws. Our estimates of current and deferred tax
assets and liabilities may change based, in part, on added certainty or finality
to an anticipated outcome, changes in accounting standards or tax laws in the
United States or foreign jurisdictions where we operate, or changes in other
facts or circumstances. In addition, we recognize liabilities for potential
United States and foreign income tax contingencies based on our estimate of
whether, and the extent to which, additional taxes may be due. If we determine
that payment of these amounts is unnecessary or if the recorded tax liability
is
less than our current assessment, we may be required to recognize an income
tax
benefit or additional income tax expense in our financial statements,
accordingly.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Litigation,
Investigation and Settlement Costs
From
time to time, we are
involved in legal actions and/or investigations by regulatory bodies. We are
aggressively defending our current litigation matters. However, there are many
uncertainties associated with any litigation or investigation, and we cannot
be
certain that these actions or other third-party claims against us will be
resolved without costly litigation, fines and/or substantial settlement
payments. If that occurs, our business, financial condition and results of
operations could be materially and adversely affected. If information becomes
available that causes us to determine that a loss in any of our pending
litigation, investigations or settlements is probable, and we can reasonably
estimate the loss associated with such events, we will record the loss in
accordance with accounting principles generally accepted in the United States.
However, the actual liability in any such litigation or investigations may
be
materially different from our estimates, which could require us to record
additional costs.
Comprehensive
Income
Comprehensive
income consists of net income and other comprehensive income or loss. Other
comprehensive income or loss components include unrealized gains or losses
on
available-for-sale securities, net of tax.
Net
Income Per Share
Basic
net
income per share is computed using the weighted average number of common shares
outstanding during the period. Diluted net income per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period, using the treasury stock method. Under the
treasury stock method, the effect of stock options outstanding is not included
in the computation of diluted net income per share for periods when their effect
is anti-dilutive. The following is a reconciliation of the numerators and
denominators of the basic and diluted net income per share computations for
the
periods presented:
|
|
Year Ended
|
|
|
|
January 28,
2007
|
|
January 29,
2006
|
|
January 30,
2005
|
|
|
|
(In
thousands, except per share data)
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
448,834
|
|
$
|
301,176
|
|
$
|
88,615
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic net income per share, weighted average shares
|
|
|
352,404
|
|
|
339,380
|
|
|
332,124
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Stock
options outstanding
|
|
|
39,100
|
|
|
26,324
|
|
|
19,500
|
|
Denominator
for diluted net income per share, weighted average shares
|
|
|
391,504
|
|
|
365,704
|
|
|
351,624
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
1.27
|
|
$
|
0.89
|
|
$
|
0.27
|
|
Diluted
net income per share
|
|
$
|
1.15
|
|
$
|
0.82
|
|
$
|
0.25
|
|
Diluted
net income per share does not include the effect of anti-dilutive common
equivalent shares from stock options outstanding of 8.9 million,
11.6 million and 27.4 million for fiscal years 2007, 2006 and 2005,
respectively. The weighted average exercise price of stock options excluded
from
the computation of diluted earnings per share was $30.14, $17.79 and $13.93
for
fiscal years 2007, 2006 and 2005, respectively.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Recently
Issued Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board, or FASB, issued Interpretation
No. 48, or FIN 48, Accounting
for Uncertainty in Income Taxes.
FIN 48
applies to all tax positions related to income taxes subject to FASB Statement
109, Accounting
for Income Taxes.
Under
FIN 48 a company would recognize the benefit from a tax position only if it
is
more-likely-than-not that the position would be sustained upon audit based
solely on the technical merits of the tax position. FIN 48 clarifies how a
company would measure the income tax benefits from the tax positions that are
recognized, provides guidance as to the timing of the derecognition of
previously recognized tax benefits, and describes the methods for classifying
and disclosing the liabilities within the financial statements for any
unrecognized tax benefits. FIN 48 also addresses when a company should record
interest and penalties related to tax positions and how the interest and
penalties may be classified within the financial statements. Any
differences between tax liability amounts recognized in the statements of
operations as a result of adoption of FIN 48 would be accounted for as a
cumulative effect adjustment to the beginning balance of retained earnings.
FIN
48 is effective for fiscal years beginning after December 15, 2006. The
provisions of FIN 48 will be effective as of first quarter of fiscal 2008.
We
believe that the cumulative effect of adoption of FIN 48 will not result in
any
material change to the beginning balance of our retained earnings.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, or SFAS No. 157, Fair
Value Measurements.
SFAS
No. 157 establishes a framework for measuring fair value and expands disclosures
about fair value measurements. The changes to current practice resulting from
the application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. We are required to adopt the provisions of SFAS No. 157
beginning with our fiscal quarter ending April 29, 2007. We do not believe
the
adoption of SFAS No. 157 will have a material impact on our consolidated
financial position, results of operations or cash flows.
In
September 2006, the Securities and Exchange Commission, or SEC, issued Staff
Accounting Bulletin No. 108, or SAB No. 108, Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements,
which
provides interpretive guidance on how the effects of the carryover or reversal
of prior year misstatements should be considered in quantifying a current year
misstatement. We adopted the provisions of SAB No. 108 in our fiscal year 2007.
The adoption of SAB No. 108 did not have a material impact on our consolidated
financial position, results of operations or cash flows.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, or SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities..
SFAS
No. 159 permits companies to choose to measure certain financial
instruments and certain other items at fair value. The standard requires that
unrealized gains and losses on items for which the fair value option has been
elected be reported in earnings. We are required to adopt the provisions of
SFAS
No. 159 beginning with our fiscal quarter ending April 27, 2008, although
earlier adoption is permitted. We are currently evaluating the impact that
SFAS
No. 159 will have on our consolidated financial position, results of
operations or cash flows.
Note
2 - Stock-Based Compensation
Effective
January 30, 2006, we adopted the provisions of Statement of Financial Accounting
Standards No. 123(R), or SFAS No. 123(R), Share-Based
Payment.
SFAS
No. 123(R) establishes accounting for stock-based awards exchanged for employee
services. Accordingly, stock-based compensation cost is measured at grant date,
based on the fair value of the awards, and is recognized as expense over the
requisite employee service period.
Prior
to the adoption of
SFAS No. 123(R)
Prior
to
the adoption of SFAS No. 123(R), we applied Accounting Principles Board Opinion
No. 25, or APB No. 25, Accounting
for Stock Issued to Employees,
and
related interpretations to account for our stock-based employee compensation
plans. As such, compensation expense was recorded if on the date of grant the
current fair value per share of the underlying stock exceeded the exercise
price
per share. We provided the disclosures required under Statement of Financial
Accounting Standards No. 123, or SFAS No. 123, Accounting
for Stock-Based Compensation,
as
amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosures,
in our
periodic reports.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
pro
forma information required under SFAS No. 123(R) for periods prior to fiscal
2007 as if we had applied the fair value recognition provisions of SFAS No.
123
to awards granted under our equity incentive plans was as follows for the
periods presented:
|
|
Year Ended
|
|
|
|
January 29,
2006
|
|
January 30,
2005
|
|
|
|
(In
thousands, except per share data)
|
|
Net
income, as reported
|
|
$
|
301,176
|
|
$
|
88,615
|
|
Add:
Stock-based employee compensation expense
included
in reported net income, net of related tax effects
|
|
|
6,644
|
|
|
17,241
|
|
Deduct:
Stock-based employee compensation expense
determined
under fair value-based method for all awards,
net
of related tax effects
|
|
|
(90,405
|
)
|
|
(108,430
|
)
|
Pro
forma net income (loss)
|
|
$
|
217,415
|
|
$
|
(2,574
|
)
|
|
|
|
|
|
|
|
|
Basic
net income per share - as reported
|
|
$
|
0.89
|
|
$
|
0.27
|
|
Basic
net income (loss) per share - pro forma
|
|
$
|
0.64
|
|
$
|
(0.01
|
)
|
Diluted
net income per share - as reported
|
|
$
|
0.82
|
|
$
|
0.25
|
|
Diluted
net income (loss) per share - pro forma
|
|
$
|
0.60
|
|
$
|
(0.01
|
)
|
Impact
of the adoption of SFAS No. 123(R)
We
elected to adopt the modified prospective application method beginning January
30, 2006 as provided by SFAS No. 123(R). Accordingly, during fiscal 2007, we
recorded stock-based compensation expense for awards granted prior to, but
not
yet vested, as of January 29, 2006, equal to the amount that would have been
recognized if the fair value method required for pro forma disclosure under
SFAS
No. 123 had been in effect for expense recognition purposes, adjusted for
estimated forfeitures. For options granted in fiscal 2007, we measured
compensation expense under the provisions of SFAS No. 123(R). We recognized
stock-based compensation expense using the straight-line attribution method.
Previously reported amounts have not been restated. The effect of stock-based
compensation expense, net of associated payroll taxes, for the year ended
January 28, 2007 on net income was as follows:
|
|
Year
Ended
|
|
|
|
January
28, 2007
|
|
|
|
(In
thousands)
|
|
Stock-based
compensation expense by type of award:
|
|
|
|
Employee
stock options
|
|
$
|
108,654
|
|
Employee
stock purchase plan
|
|
|
9,717
|
|
Amount
capitalized as inventory
|
|
|
(1,636
|
)
|
Total
stock-based compensation
|
|
|
116,735
|
|
Tax
effect of stock-based compensation
|
|
|
(13,995
|
)
|
Net
effect on net income
|
|
$
|
102,740
|
|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Cumulative
Effect of Change in Accounting Principle
The
adoption of SFAS No. 123(R) resulted in a cumulative benefit from accounting
change of $0.7 million for the three months ended April 30, 2006, which reflects
the net cumulative impact of estimating forfeitures in the determination of
period expense by reversing the previously recognized cumulative compensation
expense related to those forfeitures, rather than recording forfeitures when
they occur as previously permitted.
The
income statement includes stock-based compensation expense, net of associated
payroll taxes, and amounts capitalized as inventory, as
follows:
|
|
|
Year
Ended
|
|
|
|
|
January
28,
|
|
January
29,
|
|
January
30,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
(In
thousands)
|
|
Cost
of revenue
|
|
|
$
|
8,200
|
|
$
|
829
|
|
$
|
1,998
|
|
Research
and development
|
|
|
|
70,077
|
|
|
5,943
|
|
|
14,074
|
|
Sales,
general and administrative
|
|
|
|
38,458
|
|
|
(2,243)
|
|
|
3,682
|
|
Total
|
|
|
$
|
116,735
|
|
$
|
4,529
|
|
$
|
19,754
|
|
Prior
to
adopting SFAS No. 123(R), we presented all tax benefits resulting from the
exercise of stock options as operating cash flows in our Statement of Cash
Flows. However, as required by our adoption of SFAS No. 123(R) during the twelve
months ended January 28, 2007, we began classifying cash flows resulting from
gross tax benefits as a part of cash flows from financing activities. Gross
tax
benefits are realized tax benefits from tax deductions for exercised options
in
excess of cumulative compensation cost for those instruments recognized in
our
consolidated financial statements. The effect of this change in classification
on our Consolidated Statement of Cash Flows resulted in cash used from
operations of $0.2 million and cash provided from financing activities of $0.2
million for the year ended January 28, 2007.
As
of
January 29, 2006, we had unearned stock-based compensation related to stock
options of $167.9 million before the impact of estimated forfeitures. In our
pro
forma footnote disclosures prior to the adoption of SFAS No. 123(R), we
accounted for forfeitures upon occurrence. SFAS No. 123(R) requires forfeitures
to be estimated at the time of grant and revised if necessary in subsequent
periods if actual forfeitures differ from those estimates. Accordingly, as
of
January 30, 2006, we estimated that stock-based compensation expense for the
awards that are not expected to vest was $32.4 million, and, therefore, the
unearned stock-based compensation expense related to stock options was adjusted
to $135.5 million after estimated forfeitures.
During
the twelve months ended January 28, 2007, we granted approximately 11.9 million
stock options with an estimated total grant-date fair value of $138.4 million,
and a weighted average grant-date fair value of $11.78 per option. Of this
amount, we estimated that the stock-based compensation expense related to the
awards that are not expected to vest was $26.7 million.
As
of
January 28, 2007, the aggregate amount of unearned stock-based compensation
expense related to our stock options was $167.6 million, adjusted for estimated
forfeitures, which we will recognize over an estimated weighted average
amortization period of 2.0 years.
Approximately
$1.6 million of stock-based compensation was capitalized as inventory for the
twelve months ending January 28, 2007.
Stock-based
compensation expense that would have been recorded under APB No. 25 during
the
twelve months ended January 28, 2007 was approximately $3.0 million. Upon our
adoption of SFAS No. 123(R), we reclassified the unearned stock-based
compensation expense balance of approximately $3.6 million that would have
been
recorded under APB No. 25 to additional paid-in capital in our Consolidated
Balance Sheet. The adoption of SFAS No. 123(R) reduced our basic and diluted
earnings per share by $0.28 and $0.25, respectively, for the year ended January
28, 2007.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Valuation
Assumptions
At
the
beginning of fiscal 2006, we transitioned from a Black-Scholes model to a
binomial model for calculating the estimated fair value of new stock-based
compensation awards granted under our stock option plans. As a result of
regulatory guidance, including SEC Staff Accounting Bulletin No. 107, or SAB
No.
107, Share-Based
Payment,
and in
anticipation of the impending effective date of SFAS No. 123(R), we reevaluated
the assumptions we used to estimate the value of employee stock options and
shares issued under our employee stock purchase plan, beginning with stock
options granted and shares issued under our employee stock purchase plan in
the
first quarter of fiscal 2006. At that time, our management also determined
that the use of implied volatility is expected to be more reflective of market
conditions and, therefore, could reasonably be expected to be a better indicator
of our expected volatility than historical volatility.
Additionally,
in the first quarter of fiscal 2006, we began segregating options into groups
for employees with relatively homogeneous exercise behavior in order to
calculate the best estimate of fair value using the binomial valuation
model. As such, the expected term assumption used in calculating the
estimated fair value of our stock-based compensation awards using the binomial
model is based on detailed historical data about employees' exercise behavior,
vesting schedules, and death and disability probabilities. Our management
believes the resulting binomial calculation provides a more refined estimate
of
the fair value of our employee stock options. For our employee stock purchase
plan we continued to use the Black-Scholes model. The fair value of stock
options granted under our stock option plans, and shares issued under our
employee stock purchase plan have been estimated at the date of grant using
a
straight-line attribution method with the following assumptions:
|
|
Stock
Options
|
|
|
|
Year
Ended
January 28, 2007
|
|
Year
Ended
January 29, 2006
|
|
Year
Ended
January 30,
2005
|
|
|
|
(Using a
binomial
model)
|
|
(Using a
binomial
model)
|
|
(Using the
Black-Scholes
model)
|
|
Weighted
average expected life of stock options (in years)
|
|
|
3.6
- 5.1
|
|
|
3.6
- 5.1
|
|
|
4.0
|
|
Risk
free interest rate
|
|
|
4.7%
- 5.1
|
%
|
|
4.0%
- 4.4
|
%
|
|
3.0
|
%
|
Volatility
|
|
|
39%
- 51
|
%
|
|
34%
- 48
|
%
|
|
75%
- 80
|
%
|
Dividend
yield
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Employee
Stock Purchase Plan
|
|
|
|
Year
Ended
January 28,
2007
|
|
|
Year
Ended
January
29, 2006
|
|
|
Year
Ended
January
30, 2005
|
|
|
|
|
(Using the
Black-Scholes
model)
|
|
|
(Using
the
Black-Scholes
model)
|
|
|
(Using
the
Black-Scholes
model)
|
|
Weighted
average expected life of stock options (in years)
|
|
|
0.5
- 2.0
|
|
|
0.5
- 2.0
|
|
|
0.5
- 2.0
|
|
Risk
free interest rate
|
|
|
1.6%
- 5.2
|
%
|
|
0.9%
- 3.7
|
%
|
|
1.1%
- 2.1
|
%
|
Volatility
|
|
|
30%
- 47
|
%
|
|
30%
- 45
|
%
|
|
80
|
%
|
Dividend
yield
|
|
|
—
|
|
|
—
|
|
|
—
|
|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Equity
Incentive Program
Overview.
We
consider equity compensation to be long term compensation and an integral
component of our efforts to attract and retain exceptional executives, senior
management and world-class employees. We believe that properly structured equity
compensation aligns the long-term interests of stockholders and employees by
creating a strong, direct link between employee compensation and stock
appreciation, as stock options are only valuable to our employees if the value
of our common stock increases after the date of grant.
PortalPlayer,
Inc. 2004 Stock Incentive Plan
We
assumed the PortalPlayer, Inc. 2004 stock incentive plan, or the 2004 Plan,
and
all related outstanding options in connection with our acquisition of
PortalPlayer, Inc., or PortalPlayer, on January 5, 2007. The 2004 Plan was
adopted by the PortalPlayer stockholders in 2004 and as of January 28, 2007,
1,017,644 shares of NVIDIA common stock were authorized for issuance under
the
2004 Plan. In addition, any shares subject to outstanding options under the
PortalPlayer 1999 stock option plan that expire unexercised or any unvested
shares that are forfeited will be available for issuance under the 2004 Plan.
The number of shares authorized for issuance under the 2004 Plan will be
increased on January 1 from 2007 through 2009 by 460,033 shares and on
January 1 from 2010 through 2014 by 276,000 or a number of shares
determined by the Board.
Each
option we assumed in connection with our acquisition of PortalPlayer has been
converted into the right to purchase that number of shares of NVIDIA common
stock determined by multiplying the number of shares of PortalPlayer common
stock underlying such option by 0.3601 and then rounding down to the nearest
whole number of shares. The exercise price per share for each assumed option
has
been similarly adjusted by dividing the exercise price by 0.3601 and then
rounding up to the nearest whole cent. Vesting schedules and expiration dates
for the assumed options did not change.
Under
the
2004 Plan, options generally vest as to 25% of the shares one year after the
date of grant and as to 1/48th of the shares each month thereafter and expire
ten years from the date of grant.
PortalPlayer,
Inc. 1999 Stock Option Plan
We
assumed options issued under the PortalPlayer, Inc. 1999 Stock Option Plan,
or
the 1999 Plan, when we completed our acquisition of PortalPlayer on January
5,
2007. The 1999 Plan was terminated upon completion of PortalPlayer’s initial
public offering of common stock in calendar 2004. No shares of common stock
are
available for issuance under the 1999 Plan other than to satisfy exercises
of
stock options granted under the 1999 Plan prior to its termination and any
shares that become available for issuance as a result of expiration or
cancellation of an option that was issued pursuant to the 1999 Plan shall become
available for issuance under the 2004 Plan. Previously authorized yet unissued
shares under the 1999 Plan were cancelled upon completion of PortalPlayer’s
initial public offering.
Each
option we assumed in connection with our acquisition of PortalPlayer has been
converted into the right to purchase that number of shares of NVIDIA common
stock determined by multiplying the number of shares of PortalPlayer common
stock underlying such option by 0.3601 and then rounding down to the nearest
whole number of shares. The exercise price per share for each assumed option
has
been similarly adjusted by dividing the exercise price by 0.3601 and then
rounding up to the nearest whole cent. Vesting schedules and expiration dates
did not change.
Under
the
1999 Plan, incentive stock options were granted at a price that was not less
than 100% of the fair market value of PortalPlayer’s common stock, as determined
by its board of directors, on the date of grant. Non-statutory stock options
were granted at a price that was not less than 85% of the fair market value
of
PortalPlayer’s common stock, as determined by its board of directors, on the
date of grant.
Generally,
options granted under the 1999 Plan are exercisable for a period of ten years
from the date of grant, and shares vest at a rate of 25% on the first
anniversary of the grant date of the option, and an additional 1/48th of the
shares upon completion of each succeeding full month of continuous employment
thereafter.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2000
Nonstatutory Equity Incentive Plan
On
August 1, 2000, our Board approved the 2000 Nonstatutory Equity Incentive
Plan, or the 2000 Plan, to provide for the issuance of our common stock to
employees and affiliates who are not directors, executive officers or 10%
stockholders. The 2000 Plan provides for the issuance of nonstatutory stock
options, stock bonuses, restricted stock purchase rights, restricted stock
unit
awards and stock appreciation rights. Options granted under the 2000 plan
generally expire in six to 10 years from the date of grant. The Compensation
Committee appointed by the Board, or the Compensation Committee, has the
authority to amend the 2000 Plan and to determine the option term, exercise
price and vesting period of each grant. Options granted to new employees prior
to February 10, 2004, generally vest ratably over a four-year period,
with 25% becoming vested approximately one year from the date of grant and
the
remaining 75% vesting on a quarterly basis over the next three years. From
February 10, 2004, initial options granted to new employees generally vest
ratably quarterly over a three-year period. Grants to existing employees in
recognition of performance generally vest as to 25% of the shares two years
and
three months after the date of grant and as to the remaining 75% of the shares
subject to the option in equal quarterly installments over a nine month
period. We amended our 2000 Plan in October 2006 to add the ability to
issue restricted stock unit awards and stock appreciation rights and make
certain other modifications. There were a total of 21,939,202 shares authorized
for issuance and 18,776,119 shares available for future issuance under the
2000
Plan as of January 28, 2007.
1998
Equity
Incentive Plan
The
1998
Equity Incentive Plan, or the 1998 Plan, was adopted by our Board on
February 17, 1998 and was approved by our stockholders on April 6,
1998 as an amendment and restatement of our then existing Equity Incentive
Plan
which had been adopted on May 21, 1993. The 1998 Plan provides for the
issuance of our common stock to directors, employees and consultants. The 1998
Plan provides for the issuance of stock bonuses, restricted stock purchase
rights, incentive stock options or nonstatutory stock options. There were a
total of 110,094,385 shares authorized for issuance and 2,570,982 shares
available for future issuance under the 1998 Plan as of January 28, 2007.
Pursuant
to the 1998 Plan, the exercise price for incentive stock options is at least
100% of the fair market value on the date of grant or for employees owning
in
excess of 10% of the voting power of all classes of stock, 110% of the fair
market value on the date of grant. For nonstatutory stock options, the exercise
price must be no less than 85% of the fair market value on the date of grant.
Option
grants issued under the 1998 Plan generally expire in six to ten years from
the
date of grant. Vesting periods are determined by the Board or the Compensation
Committee. Initial option grants to new employees made after February 10,
2004 under the 1998 Plan generally vest ratably quarterly over a three year
period. Subsequent option grants generally vest up to 25% of the shares two
years and three months after the date of grant and as to the remaining 75%
of
the shares subject to the option in quarterly installments over a nine month
period.
1998
Non-Employee Directors’ Stock Option Plan
In
February 1998, our Board adopted the 1998 Non-Employee Directors’ Stock Option
Plan, or the Directors’ Plan, to provide for the automatic grant of
non-qualified options to purchase shares of our common stock to our directors
who are not employees or consultants of us or of an affiliate of us.
In
July
2000, the Board amended the 1998 Plan to incorporate the automatic grant
provisions of the Directors’ Plan into the 1998 Plan. Future automatic grants to
non-employee directors will be made according to the terms of the Directors’
Plan, but will be made out of the 1998 Plan until such time as shares may become
available for issuance under the amended Directors’ Plan. In May 2002, and
subsequently in March 2006, the Directors’ Plan was amended further to reduce
the number of shares granted to our non-employee directors. The altered
automatic grant provisions of the Directors’ Plan are also incorporated into the
1998 Plan. The terms of the amended Directors’ Plan are described below.
Under
the
amended Directors’ Plan, each non-employee director who is elected or appointed
to our Board for the first time is automatically granted an option to purchase
90,000 shares, which vests quarterly over a three-year period, or Initial Grant.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On
August 1 each year, each non-employee director is automatically granted an
option to purchase 30,000 shares, or Annual Grant. These Annual Grants will
begin vesting on the second anniversary of the date of the grant and vest
quarterly during the next year. The Annual Grants will be fully vested on the
third anniversary of the date of the grant, provided that the director attended
at least 75% of the meetings during the year following the date of the grant.
On
August 1 of each year, each non-employee director who is a member of a
committee of the Board, except for the Nominating and Corporate Governance
Committee, will automatically be granted an option to purchase 10,000 shares,
or
the Committee Grant. The Committee Grants vests in full on the first anniversary
of the date of the grant, provided that the director has attended at least
75%
of the meetings during the year following the date of the grant. Directors
who
were members of two committees, Messrs. Cox, Gaither and Jones, waived their
grant of an additional 10,000 shares for being a member of a second committee
in
fiscal 2005 and 2006.
If
a
non-employee director fails to attend at least 75% of the regularly scheduled
meetings during the year following the grant of an option, rather than vesting
as described previously, the Committee Grants will vest annually over four
years
following the date of grant at the rate of 10% per year for the first three
years and 70% for the fourth year, and the Annual Grants will vest 30% upon
the
three-year anniversary of the grant date and 70% for the fourth year, such
that
in each case the entire option will become fully vested on the four-year
anniversary of the date of the grant. For Annual Grants and Committee Grants,
if
the person has not been serving on the Board or committee since a prior year’s
annual meeting, the number of shares granted will be reduced pro rata for each
full quarter prior to the date of grant during which such person did not serve
in such capacity.
The
Compensation Committee administers the amended Directors’ Plan. A total of
1,200,000 shares have been authorized and issued under the amended Directors’
Plan of which none is available for future issuance as of January 28, 2007.
As described above, future grants to non-employee directors will be made out
of
the 1998 Plan.
1998
Employee
Stock Purchase Plan
In
February 1998, our Board approved the 1998 Employee Stock Purchase Plan, or
the
Purchase Plan. In June 1999, the Purchase Plan was amended to increase the
number of shares reserved for issuance automatically each year at the end of
our
fiscal year for the next 10 years (commencing at the end of fiscal 2000 and
ending 10 years later in 2009) by an amount equal to 2% of the outstanding
shares on each such date, including on an as-if-converted basis preferred
stock and convertible notes, and outstanding options and warrants, calculated
using the treasury stock method; provided that the maximum number of shares
of
common stock available for issuance from the Purchase Plan could not exceed
52,000,000 shares. The number of shares will no longer be increased annually
as
we reached the maximum permissible number of shares at the end of fiscal 2006.
There are a total of 52,000,000 shares authorized for issuance. At
January 28, 2007, 18,857,690 shares have been issued under the Purchase
Plan and 33,142,310 shares are available for future issuance.
The
Purchase Plan is intended to qualify as an “employee stock purchase plan” under
Section 423 of the Internal Revenue Code. Under the Purchase Plan, the
Board has authorized participation by eligible employees, including officers,
in
periodic offerings following the adoption of the Purchase Plan. Under the
Purchase Plan, separate offering periods shall be no longer than 27 months.
Under the current offering adopted pursuant to the Purchase Plan, each offering
period is 24 months, which is divided into four purchase periods of 6 months.
Employees
are eligible to participate if they are employed by us or an affiliate of us
as
designated by the Board. Employees who participate in an offering may have
up to
10% of their earnings withheld pursuant to the Purchase Plan up to certain
limitations and applied on specified dates determined by the Board to the
purchase of shares of common stock. The Board may increase this percentage
at
its discretion, up to 15%. The price of common stock purchased under the
Purchase Plan will be equal to the lower of the fair market value of the common
stock on the commencement date of each offering period and the purchase date
of
each offering period at 85% at the fair market value of the common stock on
the
relevant purchase date. During fiscal 2007, 2006 and 2005, employees purchased
approximately 3.8 million, 3.6 million, and 4.0 million shares with
weighted-average prices of $6.42, $5.59, and $4.36 per share, respectively,
and
grant-date fair values of $3.64, $1.70, and $1.57 per share, respectively.
Employees may end their participation in the Purchase Plan at any time during
the offering period, and participation ends automatically on termination of
employment with us and in each case their contributions are refunded.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
following summarizes the transactions under the 1998 Plan, 2000 Plan, 1999
Plan,
2004 Plan and Directors’ Plan:
|
Options
Available for Grant
|
|
Options
Outstanding
|
|
Weighted
Average Exercise Price Per Share
|
|
Balances,
January 25, 2004
|
|
57,914,062
|
|
|
85,533,410
|
|
$
|
7.10
|
|
Authorized
|
|
-
|
|
|
-
|
|
|
-
|
|
Granted
|
|
(17,029,852
|
)
|
|
17,029,852
|
|
|
11.74
|
|
Exercised
|
|
-
|
|
|
(6,103,750
|
)
|
|
4.10
|
|
Cancelled
|
|
4,139,198
|
|
|
(4,139,198
|
)
|
|
9.41
|
|
Balances,
January 30, 2005
|
|
45,023,408
|
|
|
92,320,314
|
|
$
|
8.05
|
|
Authorized
|
|
-
|
|
|
-
|
|
|
|
|
Granted
|
|
(16,417,786
|
)
|
|
16,417,786
|
|
|
13.87
|
|
Exercised
|
|
-
|
|
|
(18,074,266
|
)
|
|
5.95
|
|
Cancelled
|
|
2,705,354
|
|
|
(2,705,354
|
)
|
|
10.29
|
|
Balances,
January 29, 2006
|
|
31,310,976
|
|
|
87,958,480
|
|
$
|
9.50
|
|
Authorized
|
|
1,091,383
|
|
|
-
|
|
|
-
|
|
Granted
and assumed
|
|
(12,539,612
|
)
|
|
12,539,612
|
|
|
29.60
|
|
Exercised
|
|
-
|
|
|
(24,585,893
|
)
|
|
8.01
|
|
Cancelled
|
|
1,917,537
|
|
|
(1,917,537
|
)
|
|
13.42
|
|
Balances,
January 28, 2007
|
|
21,780,284
|
|
|
73,994,662
|
|
$
|
13.29
|
|
The
following table summarizes the options outstanding, options vested and expected
to vest and options exercisable as of January 28, 2007:
|
|
Options
Outstanding
|
|
Weighted
Average Exercise Price Per Share
|
|
Weighted
Average Remaining Contractual Term (in years)
|
|
Aggregate
Intrinsic Value(1)
|
|
Options
outstanding
|
|
|
73,994,662
|
|
$
|
13.29
|
|
|
3.77
|
|
$
|
1,363,448,818
|
|
Options
vested and expected to vest
|
|
|
66,365,198
|
|
$
|
12.40
|
|
|
3.70
|
|
$
|
1,282,391,307
|
|
Options
exercisable
|
|
|
42,212,234
|
|
$
|
9.30
|
|
|
3.25
|
|
$
|
943,461,713
|
|
(1) The
aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value for in-the-money options at January 28, 2007, based on the
$31.47 closing stock price of our common stock on the NASDAQ Global Select
Market, which would have been received by the option holders had all option
holders exercised their options as of that date. The total number of
in-the-money options outstanding and exercisable as of January 28, 2007 was
72.2
million shares and 41.9 million shares, respectively.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
following table summarizes information about stock options outstanding as of
January 28, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Range
of Exercise Prices
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
$0.16 - $0.17
|
|
|
105,000
|
|
|
0.6
|
|
$
|
0.16
|
|
|
105,000
|
|
$
|
0.16
|
|
0.33 -
0.40
|
|
|
290,537
|
|
|
0.9
|
|
$
|
0.38
|
|
|
290,537
|
|
$
|
0.38
|
|
0.69 - 0.97
|
|
|
3,740,783
|
|
|
1.3
|
|
$
|
0.87
|
|
|
3,740,783
|
|
$
|
0.87
|
|
1.13 - 1.25
|
|
|
112,327
|
|
|
2.8
|
|
$
|
1.15
|
|
|
97,409
|
|
$
|
1.13
|
|
2.05 - 2.94
|
|
|
3,006,036
|
|
|
2.5
|
|
$
|
2.35
|
|
|
3,004,052
|
|
$
|
2.35
|
|
3.83 -
5.54
|
|
|
4,970,417
|
|
|
3.6
|
|
$
|
4.70
|
|
|
4,830,338
|
|
$
|
4.73
|
|
5.76 - 8.59
|
|
|
13,470,438
|
|
|
3.0
|
|
$
|
7.27
|
|
|
10,562,463
|
|
$
|
7.30
|
|
8.77 - 13.13
|
|
|
23,143,952
|
|
|
3.7
|
|
$
|
11.76
|
|
|
11,881,607
|
|
$
|
11.40
|
|
13.19 - 19.77
|
|
|
11,958,889
|
|
|
4.4
|
|
$
|
16.30
|
|
|
5,980,184
|
|
$
|
16.29
|
|
20.63 - 30.90
|
|
|
11,498,508
|
|
|
5.3
|
|
$
|
27.10
|
|
|
1,449,430
|
|
$
|
22.73
|
|
31.97 - 46.94
|
|
|
1,380,007
|
|
|
6.1
|
|
$
|
37.06
|
|
|
123,646
|
|
$
|
44.65
|
|
48.99 - 73.01
|
|
|
251,356
|
|
|
7.2
|
|
$
|
61.62
|
|
|
111,935
|
|
$
|
60.50
|
|
73.87 - 86.40
|
|
|
65,361
|
|
|
6.2
|
|
$
|
79.04
|
|
|
33,799
|
|
$
|
79.75
|
|
312.42 - 312.42
|
|
|
200
|
|
|
1.0
|
|
$
|
312.42
|
|
|
200
|
|
$
|
312.42
|
|
1,249.66
and above
|
|
|
851
|
|
|
3.0
|
|
$
|
1,324.55
|
|
|
851
|
|
$
|
1,324.55
|
|
|
|
|
73,994,662
|
|
|
3.8
|
|
$
|
13.29
|
|
|
42,212,234
|
|
$
|
9.30
|
|
|
|
Year
Ended
|
|
|
|
January
28, 2007
|
|
Total
intrinsic value of options exercised
|
|
$
|
530.7
million
|
|
Total
cash received from employees as a result of employee stock option
exercises
|
|
$
|
196.2
million
|
|
We
settle
employee stock option exercises with newly issued common shares. We do not
have
any equity instruments outstanding other than the options described above as
of
January 28, 2007.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
3 - 3dfx
During
fiscal year 2002, we completed the purchase of certain assets from 3dfx
Interactive, Inc., or 3dfx, for an aggregate purchase price of approximately
$74.2 million. On December 15, 2000, NVIDIA Corporation and one of our indirect
subsidiaries entered into an agreement, which closed on April 18, 2001, to
purchase certain graphics chip assets from 3dfx.
Under
the terms of the Asset Purchase Agreement, the cash consideration due at the
closing was $70.0 million, less $15.0 million that was loaned to 3dfx pursuant
to a Credit Agreement dated December 15, 2000. The Asset Purchase Agreement
also provided, subject to the other provisions thereof, that if 3dfx properly
certified that all its debts and other liabilities had been provided for, then
we would have been obligated to pay 3dfx two million shares of NVIDIA common
stock. If 3dfx could not make such a certification, but instead properly
certified that its debts and liabilities could be satisfied for less than $25.0
million, then 3dfx could have elected to receive a cash payment equal to the
amount of such debts and liabilities and a reduced number of shares of our
common stock, with such reduction calculated by dividing the cash payment by
$25.00 per share. If 3dfx could not certify that all of its debts and
liabilities had been provided for, or could not be satisfied, for less than
$25.0 million, we would not be obligated under the agreement to pay any
additional consideration for the assets.
In
October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United
States Bankruptcy Court for the Northern District of California. In March 2003,
we were served with a complaint filed by the Trustee appointed by the Bankruptcy
Court which sought, among other things, payments from us as additional purchase
price related to our purchase of certain assets of 3dfx. In early November
2005,
after many months of mediation, NVIDIA and the Official Committee of Unsecured
Creditors, or the Creditors’ Committee, reached a conditional settlement of the
Trustee’s claims against NVIDIA. This conditional settlement, presented as the
centerpiece of a proposed Plan of Liquidation in the bankruptcy case, was
subject to a confirmation process through a vote of creditors and the review
and
approval of the Bankruptcy Court after notice and hearing. The Trustee advised
that he intended to object to the settlement, which would have called for a
payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under
the
settlement, $5.6 million related to various administrative expenses and Trustee
fees, and $25.0 million related to the satisfaction of debts and liabilities
owed to the general unsecured creditors of 3dfx. Accordingly, during the three
month period ended October 30, 2005, we recorded $5.6 million as a charge to
settlement costs and $25.0 million as additional purchase price for 3dfx.
However,
the conditional settlement never progressed substantially through the
confirmation process. On December 21, 2005, the Bankruptcy Court determined
that
it would schedule trial of one portion of the Trustee’s case against NVIDIA. On
January 2, 2007, NVIDIA exercised its right to terminate the settlement
agreement on grounds that the bankruptcy court had failed to proceed toward
confirmation of the Creditors’ Committee’s plan. Beginning on March 21, 2007,
NVIDIA and the Trustee are scheduled to try the question of the value of the
assets 3dfx conveyed to NVIDIA and, in particular, whether the price NVIDIA
paid
for those assets was reasonably equivalent to the value of the assets 3dfx
sold
to NVIDIA.
The
3dfx
asset purchase price of $95.0 million and $4.2 million of direct transaction
costs were allocated based on fair values presented below. The final allocation
of the purchase price of the 3dfx assets is contingent upon the outcome of
all
of the 3dfx litigation. Please see Note 12 for further information regarding
this litigation.
|
|
Fair
Market Value
|
|
Straight-Line
Amortization Period
|
|
|
|
(In
thousands)
|
|
(Years)
|
|
Property
and equipment
|
|
$
|
2,433
|
|
|
1-2
|
|
Trademarks
|
|
|
11,310
|
|
|
5
|
|
Goodwill
|
|
|
85,418
|
|
|
--
|
|
Total
|
|
$
|
99,161
|
|
|
|
|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
4 - Business Combinations
On
February 20, 2006, we completed our acquisition of ULi Electronics, Inc., or
ULi, a core logic developer for the personal computer, or PC, industry. The
acquisition represents our ongoing investment in our platform solution strategy
and has strengthened our sales, marketing, and customer engineering presence
in
Taiwan and China. The aggregate purchase price consisted of cash
consideration of approximately $53.1 million.
On
March
29, 2006, we completed our acquisition of Hybrid Graphics Ltd., or Hybrid
Graphics, a developer of embedded 2D and 3D graphics software for handheld
devices. The aggregate purchase price consisted of cash consideration of
approximately $36.7 million.
On
January 5, 2007, we completed our acquisition of PortalPlayer, a leading
supplier of semiconductors, firmware, and software for personal media players,
or PMPs, and secondary display-enabled computers. We believe that the
acquisition will accelerate our ongoing investment in our handheld product
strategy. Pursuant to the terms of the acquisition, we paid cash consideration
of approximately $344.9 million in exchange for common stock in PortalPlayer
and
recognized an additional purchase price of $2.9 million, the value of
approximately 658,000 options of NVIDIA common stock issued upon conversion
of
outstanding PortalPlayer stock options.
We
allocated the purchase price of each of these acquisitions to tangible assets,
liabilities and identifiable intangible assets acquired, as well as in-process
research and development, or IPR&D, if identified, based on their estimated
fair values. The excess of purchase price over the aggregate fair values was
recorded as goodwill. The fair value assigned to identifiable intangible assets
acquired was based on estimates and assumptions determined by management.
Purchased intangibles are amortized on a straight-line basis over their
respective useful lives. The allocation of the purchase price has been prepared
on a preliminary basis and reasonable changes are expected as additional
information becomes available.
The
following is a summary of estimated fair values of the assets we acquired and
liabilities we assumed as of January 28, 2007 for acquisitions we completed
in
fiscal 2007:
|
|
ULi
|
|
Hybrid
Graphics
|
|
PortalPlayer
|
|
|
|
(In
thousands)
|
|
Fair
Market Values
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
21,551
|
|
$
|
1,180
|
|
$
|
10,174
|
|
Marketable
Securities
|
|
|
-
|
|
|
-
|
|
|
176,492
|
|
Accounts
receivable
|
|
|
8,148
|
|
|
808
|
|
|
16,480
|
|
Inventories
|
|
|
4,896
|
|
|
-
|
|
|
1,883
|
|
Other
assets
|
|
|
935
|
|
|
73
|
|
|
12,945
|
|
Property
and equipment
|
|
|
1,010
|
|
|
134
|
|
|
9,755
|
|
In-process
research and development
|
|
|
-
|
|
|
602
|
|
|
13,400
|
|
Goodwill
|
|
|
31,051
|
|
|
27,906
|
|
|
114,816
|
|
Intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
Existing
technology
|
|
|
2,490
|
|
|
5,179
|
|
|
8,900
|
|
Customer
relationships
|
|
|
653
|
|
|
2,650
|
|
|
2,700
|
|
Trademark
|
|
|
-
|
|
|
482
|
|
|
-
|
|
Non-compete
agreements
|
|
|
-
|
|
|
72
|
|
|
-
|
|
Total
assets acquired
|
|
|
70,734
|
|
|
39,086
|
|
|
367,545
|
|
Current
liabilities
|
|
|
(16,878
|
)
|
|
(1,373
|
)
|
|
(12,139
|
)
|
Acquisition
related costs
|
|
|
(781
|
)
|
|
(740
|
)
|
|
(7,516
|
)
|
Long-term
liabilities
|
|
|
-
|
|
|
(301
|
)
|
|
(46
|
)
|
Total
liabilities assumed
|
|
|
(17,659
|
)
|
|
(2,414
|
)
|
|
(19,701
|
)
|
Net
assets acquired
|
|
$
|
53,075
|
|
$
|
36,672
|
|
$
|
347,844
|
|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
ULi
|
|
Hybrid
Graphics
|
|
PortalPlayer
|
|
|
|
Straight-line
depreciation / amortization period
|
|
Property
and equipment
|
|
|
4
-
49 months
|
|
|
1
month - 36 months
|
|
|
3
months - 60 months
|
|
Intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
Existing
technology
|
|
|
3
years
|
|
|
3
years
|
|
|
3
years
|
|
Customer
relationships
|
|
|
3
years
|
|
|
3
years
|
|
|
3
years
|
|
Trademark
|
|
|
-
|
|
|
3
years
|
|
|
-
|
|
Non-compete
agreements
|
|
|
-
|
|
|
3
years
|
|
|
-
|
|
The
amount of the IPR&D represents the value assigned to research and
development projects of Hybrid Graphics and PortalPlayer that had commenced
but
had not yet reached technological feasibility and had no alternative future
use.
In accordance with Statement of Financial Accounting Standards No. 2, or SFAS
No. 2, Accounting
for Research and Development Costs,
as
clarified by FASB issued Interpretation No. 4, or FIN 4, Applicability
of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method an interpretation of FASB Statement No. 2,
amounts
assigned to IPR&D meeting the above-stated criteria were charged to research
and development expenses as part of the allocation of the purchase
price.
The
pro
forma results of operations for these acquisitions have not been presented
because the effects of the acquisitions, individually or in the aggregate,
were
not material to our results.
Note
5 - Goodwill
The
carrying amount of goodwill is as follows:
|
|
January 28,
2007
|
|
January 29,
2006
|
|
|
|
(In
thousands)
|
|
3dfx
|
|
$
|
75,326
|
|
$
|
75,326
|
|
MediaQ
|
|
|
35,342
|
|
|
52,913
|
|
ULi
|
|
|
31,051
|
|
|
—
|
|
Hybrid
Graphics
|
|
|
27,906
|
|
|
—
|
|
PortalPlayer
|
|
|
114,816
|
|
|
—
|
|
Other
|
|
|
16,984
|
|
|
17,078
|
|
Total
goodwill
|
|
$
|
301,425
|
|
$
|
145,317
|
|
During
fiscal 2007, we recorded $31.1 million, $27.9 million and $114.8 million as
goodwill related to our acquisitions accounted for under the purchase method
of
accounting of ULi, Hybrid Graphics and PortalPlayer, respectively. Please refer
to Note 4 of the Notes to Consolidated Financial Statements for further
information. In addition, during fiscal 2007, the amount allocated to MediaQ
Inc., or MediaQ, goodwill was adjusted to $35.3 million as a result of the
reversal of the valuation allowance of deferred tax assets related to our
acquisition of MediaQ.
During
fiscal 2006, we recorded $12.2 million as goodwill for the acquisition of a
small international company accounted for under the purchase method of
accounting. In addition, during fiscal 2006, we recorded $25.0 million as
goodwill related to the purchase of certain assets of 3dfx. Please refer to
Note
3 of the Notes to Consolidated Financial Statements for further
information.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In
computing fair value of our reporting units, we use estimates of future
revenues, costs and cash flows from such units. The amount of goodwill allocated
to our GPU, MCP, Handheld GPU, Consumer Electronics, and All Other segments
as
of January 28, 2007, was $99.3 million, $46.2 million, $137.7 million,
$11.9 million, and $6.3 million, respectively. As of January 29,
2006, the amount of goodwill allocated to our GPU, MCP, Handheld GPU, Consumer
Electronics, and All Other segments, was $99.3 million, $15.1 million, $12.7
million, $11.9 million, and $6.3 million, respectively. Please refer to
Note 14 of the Notes to Consolidated Financial Statements for further
segment information.
Note
6 - Amortizable Intangible Assets
We
are
currently amortizing our intangible assets with definitive lives over periods
ranging from 1 to 5 years on a straight-line basis. The components of our
amortizable intangible assets are as follows:
|
|
January 28, 2007
|
|
January 29, 2006
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
|
|
(In
thousands)
|
|
Technology
licenses
|
|
$
|
37,516
|
|
$
|
(20,480
|
)
|
$
|
17,036
|
|
$
|
21,586
|
|
$
|
(13,595
|
)
|
$
|
7,991
|
|
Patents
|
|
|
34,623
|
|
|
(24,569
|
)
|
|
10,054
|
|
|
23,750
|
|
|
(19,911
|
)
|
|
3,839
|
|
Acquired
intellectual property
|
|
|
50,212
|
|
|
(31,894
|
)
|
|
18,318
|
|
|
27,086
|
|
|
(24,516
|
)
|
|
2,570
|
|
Trademarks
|
|
|
11,310
|
|
|
(11,310
|
)
|
|
-
|
|
|
11,310
|
|
|
(10,807
|
)
|
|
503
|
|
Other
|
|
|
1,494
|
|
|
(1,391
|
)
|
|
103
|
|
|
1,494
|
|
|
(976
|
)
|
|
518
|
|
Total
intangible assets
|
|
$
|
135,155
|
|
$
|
(89,644
|
)
|
$
|
45,511
|
|
$
|
85,226
|
|
$
|
(69,805
|
)
|
$
|
15,421
|
|
The
increase in the gross carrying amount of acquired intellectual property as
of
January 28, 2007 as compared to January 29, 2006 is primarily related to $3.1
million, $8.4 million and $11.6 million of intangible assets that resulted
from
our acquisitions of ULi, Hybrid Graphics and PortalPlayer, respectively, during
fiscal 2007. Please refer to Note 4 of our Notes to Consolidated Financial
Statements for further information. In addition, the $10.9 million increase
in
the gross carrying amount of patents is related primarily to patents licensed
from Opti Incorporated, or Opti, for $8.0 million as a result of the license
and
settlement agreements described in Note 12 of our Notes to Consolidated
Financial Statements.
During
fiscal 2007, we entered into a confidential patent licensing arrangement. As
part of this arrangement, we recorded a charge of $16.0 million to the cost
of
revenue category in our statement of income related to past usage of certain
patents subject to the arrangement. Our commitment for future license payments
under this arrangement could range from $97.0 million to $110.0 million over
a
ten year period; however, the net outlay under this arrangement may be reduced
by the occurrence of certain events covered by the arrangement. The increase
in
the gross carrying amount of technology licenses as of January 28, 2007 when
compared to January 29, 2006 is primarily related to approximately $14.4 million
committed by us during fiscal 2007 under this arrangement.
Amortization
expense associated with intangible assets for fiscal years 2007, 2006 and 2005
was $19.8 million, $16.9 million and $19.7 million, respectively. Future
amortization expense for the net carrying amount of intangible assets at
January 28, 2007 is estimated to be $17.1 million in fiscal 2008,
$11.1
million in fiscal 2009, $6.9
million in fiscal 2010, $2.8 million in fiscal 2011, $2.0 million in fiscal
2012, and $5.6 million in fiscal 2013 and thereafter.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
7 - Marketable Securities
We
account for our investment instruments in accordance with SFAS No. 115,
Accounting
for Certain Investments in Debt and Equity Securities.
All of
our cash equivalents and marketable securities are treated as
“available-for-sale” under SFAS No. 115. Cash equivalents consist of
financial instruments which are readily convertible into cash and have original
maturities of three months or less at the time of acquisition. Marketable
securities consist primarily of highly liquid investments with a maturity of
greater than three months when purchased and some equity investments. We
classify our marketable securities at the date of acquisition in the
available-for-sale category as our intention is to convert them into cash for
operations. These securities are reported at fair value with the related
unrealized gains and losses included in accumulated other comprehensive income
(loss), a component of stockholders’ equity, net of tax. Realized gains and
losses on the sale of marketable securities are determined using the
specific-identification method. Net realized losses for fiscal years 2007 and
2006 were $0.2 million and $2.8 million, respectively.
The
following is a summary of cash equivalents and marketable securities at
January 28, 2007 and January 29, 2006:
|
|
January 28,
2007
|
|
|
|
Amortized
Cost
|
|
Unrealized
Gain
|
|
Unrealized
Loss
|
|
Estimated
Fair
Value
|
|
|
|
(In
thousands)
|
|
Asset-backed
securities
|
|
$
|
153,471
|
|
$
|
92
|
|
$
|
(450
|
)
|
$
|
153,113
|
|
Commercial
paper
|
|
|
113,576
|
|
|
|
|
|
(2
|
)
|
|
113,574
|
|
Obligations
of the United States government & its agencies
|
|
|
59,729
|
|
|
|
|
|
(627
|
)
|
|
59,102
|
|
United
States corporate notes, bonds and obligations
|
|
|
277,641
|
|
|
26
|
|
|
(1,099
|
)
|
|
276,568
|
|
Equity
Securities
|
|
|
2,491
|
|
|
3,338
|
|
|
|
|
|
5,829
|
|
Money
market
|
|
|
467,198
|
|
|
—
|
|
|
—
|
|
|
467,198
|
|
Total
|
|
$
|
1,074,106
|
|
$
|
3,456
|
|
$
|
(2,178
|
)
|
$
|
1,075,384
|
|
Classified
as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
|
|
|
|
|
|
|
|
|
|
$
|
501,948
|
|
Marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
573,436
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
$
|
1,075,384
|
|
|
|
January 29,
2006
|
|
|
|
Amortized
Cost
|
|
Unrealized
Gain
|
|
Unrealized
Loss
|
|
Estimated
Fair
Value
|
|
|
|
(In
thousands)
|
|
Asset-backed
securities
|
|
$
|
224,649
|
|
$
|
1
|
|
$
|
(983
|
)
|
$
|
223,667
|
|
Commercial
paper
|
|
|
138,091
|
|
|
13
|
|
|
(7
|
)
|
|
138,097
|
|
Obligations
of the United States government & its agencies
|
|
|
72,753
|
|
|
8
|
|
|
(834
|
)
|
|
71,927
|
|
United
States corporate notes, bonds and obligations
|
|
|
179,930
|
|
|
5
|
|
|
(1,467
|
)
|
|
178,468
|
|
Money
market
|
|
|
256,593
|
|
|
—
|
|
|
—
|
|
|
256,593
|
|
Total
|
|
$
|
872,016
|
|
$
|
27
|
|
$
|
(3,291
|
)
|
$
|
868,752
|
|
Classified
as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
|
|
|
|
|
|
|
|
|
|
$
|
470,334
|
|
Marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
398,418
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
$
|
868,752
|
|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The
following table provides the breakdown of the investments with unrealized losses
at January 28, 2007:
|
|
Less
than 12 months
|
|
12
months or greater
|
|
Total
|
|
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
|
|
(In
thousands)
|
|
Asset-backed
securities
|
|
$
|
56,663
|
|
$
|
(144
|
)
|
$
|
64,872
|
|
$
|
(307
|
)
|
$
|
121,535
|
|
$
|
(451
|
)
|
Commercial
paper
|
|
|
37,528
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
37,528
|
|
|
(2
|
)
|
Obligations
of the United States government & its agencies
|
|
|
28,058
|
|
|
(217
|
)
|
|
31,044
|
|
|
(410
|
)
|
|
59,102
|
|
|
(627
|
)
|
United
States corporate notes, bonds and obligations
|
|
|
103,118
|
|
|
(318
|
)
|
|
110,700
|
|
|
(780
|
)
|
|
213,818
|
|
|
(1,098
|
)
|
Total
|
|
$
|
225,367
|
|
$
|
(681
|
)
|
$
|
206,616
|
|
$
|
(1,497
|
)
|
$
|
431,983
|
|
$
|
(2,178
|
)
|
As
of
January 28, 2007, we had 87 investments that were in an unrealized loss
position with an average unrealized loss duration of less than one year. The
gross unrealized losses related to fixed income securities were due to changes
in interest rates. We have determined that the gross unrealized losses on
investment securities at January 28, 2007 are temporary in nature. We
review our investments to identify and evaluate investments that have
indications of possible impairment. Factors considered in determining whether
a
loss is temporary include the length of time and extent to which fair value
has
been less than the cost basis, the financial condition and near-term prospects
of the investee, and our intent and ability to hold the investment for a period
of time sufficient to allow for any anticipated recovery in market value. Our
investment policy requires the purchase of top-tier investment grade securities,
the diversification of asset type and certain limits on our portfolio duration.
The
amortized cost and estimated fair value of cash equivalents and marketable
securities classified as available-for-sale at January 28, 2007 and
January 29, 2006 by contractual maturity are shown below.
All
of
our marketable securities are debt instruments with the exception of $5.8
million of publicly traded equity securities at January 28, 2007.
|
|
January 28,
2007
|
|
January 29,
2006
|
|
|
|
Amortized
Cost
|
|
Estimated
Fair
Value
|
|
Amortized
Cost
|
|
Estimated
Fair
Value
|
|
|
|
(In
thousands)
|
|
Less
than one year
|
|
$
|
810,754
|
|
$
|
810,081
|
|
$
|
491,259
|
|
$
|
491,246
|
|
Due
in 1 - 5 years
|
|
|
257,623
|
|
|
256,274
|
|
|
364,065
|
|
|
361,047
|
|
Due
in 6-7 years
|
|
|
3,238
|
|
|
3,201
|
|
|
16,692
|
|
|
16,459
|
|
Total
|
|
$
|
1,071,615
|
|
$
|
1,069,556
|
|
$
|
872,016
|
|
$
|
868,752
|
|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
8 - Balance Sheet Components
Certain
balance sheet components are as follows:
|
|
January 28,
2007
|
|
January 29,
2006
|
|
|
|
(In
thousands)
|
|
Inventories:
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
56,261
|
|
$
|
25,743
|
|
Work
in-process
|
|
|
111,058
|
|
|
107,847
|
|
Finished
goods
|
|
|
187,361
|
|
|
121,280
|
|
Total
inventories
|
|
$
|
354,680
|
|
$
|
254,870
|
|
The
significant increase in finished goods inventories primarily relates to our
build-up of inventory levels of several of our MCP and memory products to meet
forecasted sales demand.
|
|
January 28,
2007
|
|
January 29,
2006
|
|
|
|
(In
thousands)
|
|
Deposits
and other assets:
|
|
|
|
|
|
Investments
in non-affiliates
|
|
$
|
11,684
|
|
$
|
11,684
|
|
Long-term
prepayments
|
|
|
8,245
|
|
|
7,504
|
|
Other
|
|
|
8,420
|
|
|
8,289
|
|
Total
deposits and other assets
|
|
$
|
28,349
|
|
$
|
27,477
|
|
|
|
January 28,
2007
|
|
January 29,
2006
|
|
Estimated
Useful Life
|
|
|
|
(In
thousands)
|
|
(Years)
|
|
Property
and Equipment:
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,230
|
|
$
|
-
|
|
|
(A
|
)
|
Software
and licenses
|
|
|
195,556
|
|
|
153,618
|
|
|
3
-
5
|
|
Test
equipment
|
|
|
135,607
|
|
|
88,468
|
|
|
3
|
|
Computer
equipment
|
|
|
113,538
|
|
|
106,061
|
|
|
3
|
|
Office
furniture and equipment
|
|
|
24,203
|
|
|
21,618
|
|
|
5
|
|
Leasehold
improvements
|
|
|
92,784
|
|
|
88,376
|
|
|
(B
|
)
|
Construction
in process
|
|
|
6,580
|
|
|
2,260
|
|
|
(C
|
)
|
|
|
|
569,498
|
|
|
460,401
|
|
|
|
|
Accumulated
depreciation and amortization
|
|
|
(308,670
|
)
|
|
(282,249
|
)
|
|
|
|
Total
property and equipment, net
|
|
$
|
260,828
|
|
$
|
178,152
|
|
|
|
|
(A) Land
is a non-depreciable asset.
(B) Leasehold
improvements are amortized based on the lesser of either the asset’s estimated
useful life or the remaining lease term.
(C) Construction
in process represents assets that are not in service as of the balance sheet
date.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Depreciation
expense for fiscal years 2007, 2006 and 2005 was $88.0 million, $76.4 million,
and $71.3 million, respectively. Assets recorded under capital leases included
in property and equipment were $17.1 million as of January 28, 2007 and
January 29, 2006. Related accumulated amortization was $17.1 million as of
January 28, 2007 and January 29, 2006. Amortization expense for fiscal 2006
and 2005 related to capital leases was $1.2 million, and $3.8 million,
respectively. As of January 28, 2007, all assets recorded under capital leases
have been fully amortized.
|
|
January 28,
2007
|
|
January 29,
2006
|
|
|
|
(In
thousands)
|
|
Accrued
Liabilities:
|
|
|
|
|
|
Accrued
customer programs
|
|
$
|
181,182
|
|
$
|
90,056
|
|
Deferred
revenue
|
|
|
1,180
|
|
|
217
|
|
Customer
advances
|
|
|
239
|
|
|
1,556
|
|
Taxes
payable
|
|
|
37,903
|
|
|
58,355
|
|
Accrued
payroll and related expenses
|
|
|
81,352
|
|
|
53,080
|
|
Deferred
rent
|
|
|
12,551
|
|
|
11,879
|
|
Accrued
legal settlement
|
|
|
30,600
|
|
|
30,600
|
|
Other
|
|
|
21,725
|
|
|
13,521
|
|
Total
accrued liabilities
|
|
$
|
366,732
|
|
$
|
259,264
|
|
The
increase in accrued customer programs as of January 28, 2007 when compared
to
January 29, 2006 primarily relates to an increase in rebates payable to OEMs
as
a result of our increased sales to OEMs during fiscal 2007 when compared to
fiscal 2006. The increase in accrued payroll and related expenses as of January
28, 2007 when compared to January 29, 2006 primarily relates to the significant
increase in the number of employees during fiscal 2007.
|
|
January 28,
2007
|
|
January 29,
2006
|
|
|
|
(In
thousands)
|
|
Other
Long-term Liabilities:
|
|
|
|
|
|
Asset
retirement obligation
|
|
$
|
6,362
|
|
$
|
6,440
|
|
Accrued
payroll taxes related to stock options
|
|
|
8,995
|
|
|
9,412
|
|
Other
long-term liabilities
|
|
|
14,180
|
|
|
4,184
|
|
Total
other long-term liabilities
|
|
$
|
29,537
|
|
$
|
20,036
|
|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
9 - Guarantees
FASB
Interpretation No. 45, or FIN 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others,
requires
that upon issuance of a guarantee, the guarantor must recognize a liability
for
the fair value of the obligation it assumes under that guarantee. In addition,
FIN 45 requires disclosures about the guarantees that an entity has issued,
including a tabular reconciliation of the changes of the entity’s product
warranty liabilities.
We
record
a reduction to revenue for estimated product returns at the time revenue is
recognized primarily based on historical return rates. The reductions to revenue
for estimated product returns for fiscal years 2007, 2006 and 2005 are as
follows:
Description
|
|
Balance at
Beginning
of
Period
|
|
Additions (1)
|
|
Deductions (2)
|
|
Balance
at
End of
Period
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended January 28, 2007 Allowance for sales returns
|
|
$
|
10,239
|
|
$
|
37,033
|
|
$
|
(32,795
|
)
|
$
|
14,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended January 29, 2006 Allowance for sales returns
|
|
$
|
11,687
|
|
$
|
35,127
|
|
$
|
(36,575
|
)
|
$
|
10,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended January 30, 2005 Allowance for sales returns
|
|
$
|
9,421
|
|
$
|
22,463
|
|
$
|
(20,197
|
)
|
$
|
11,687
|
|
(1) Allowances
for sales returns are charged as a reduction to revenue.
(2) Represents
amounts written off against the allowance for sales returns.
In
connection with certain agreements that we have executed in the past, we have
at
times provided indemnities to cover the indemnified party for matters such
as
tax, product and employee liabilities. We have also on occasion included
intellectual property indemnification provisions in our technology related
agreements with third parties. Maximum potential future payments cannot be
estimated because many of these agreements do not have a maximum stated
liability. As such, we have not recorded any liability in our consolidated
financial statements for such indemnifications.
Note
10 - Stockholders’ Equity
Stock
Repurchase Program
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 million. Subsequently, on March 6, 2006,
we
announced that our Board had approved a $400 million increase to the
original stock repurchase program. As a result of this increase, the amount
of
common stock the Board has authorized to be repurchased has now been increased
to a total of $700 million. The repurchases will be made from time to time
in
the open market, in privately negotiated transactions, or in structured stock
repurchase programs, in compliance with the Securities Exchange Act of 1934,
or
the Exchange Act, Rule 10b-18, subject to market conditions, applicable legal
requirements, and other factors. The program does not obligate NVIDIA to acquire
any particular amount of common stock and the program may be suspended at any
time at our discretion.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 fiscal 2007, we repurchased 10.3 million shares of our common
stock for $275.0 million under structured share repurchase transactions, which
we recorded on the trade date of the transaction. Through the end of fiscal
2007, we have repurchased 27.3 million shares under our stock repurchase program
for a total cost of $488.1 million. During the first quarter of fiscal 2008,
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 first fiscal quarter.
Convertible
Preferred Stock
As
of
January 28, 2007 and January 29, 2006, there were no shares of preferred
stock outstanding.
Note
11 - 401(k) Retirement Plan
We
have a
401(k) Retirement Plan, or the 401(k) Plan, covering substantially all of our
United States employees. Under the Plan, participating employees may defer
up to
100% of their pre-tax earnings, subject to the Internal Revenue Service annual
contribution limits. We do not make employer contributions to the 401(k) Plan.
Note
12 - Financial Arrangements, Commitments and Contingencies
Inventory
Purchase Obligations
At
January 28, 2007, we had outstanding inventory purchase obligations
totaling $364.5 million.
Capital
Purchase Obligations
At
January 28, 2007, we had outstanding capital purchase obligations totaling
$4.8 million.
Lease
Obligations
Our
headquarters complex is located on a leased site in Santa Clara, California
and
is comprised of six buildings. The
related leases expire in fiscal 2013 and include two seven-year renewals at
our
option for five buildings and a three-year renewal option for one
building. Future minimum lease payments under these operating leases
total $130.0 million over the remaining terms of the leases, including
predetermined rent escalations, and are included in the future minimum lease
payment schedule below.
In
addition to the commitment of our headquarters, we have other domestic and
international office facilities under operating leases expiring through fiscal
2015. Future minimum lease payments under our noncancelable operating leases
as
of January 28, 2007, are as follows:
|
|
Future
Minimum Lease Obligations
|
|
|
|
(In thousands)
|
|
Year
ending January:
|
|
|
|
2008
|
|
$
|
33,890
|
|
2009
|
|
|
33,480
|
|
2010
|
|
|
31,952
|
|
2011
|
|
|
31,549
|
|
2012
|
|
|
30,449
|
|
2013
and thereafter
|
|
|
6,445
|
|
Total
|
|
$
|
167,765
|
|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Rent
expense for the years ended January 28, 2007, January 29, 2006
and January 30, 2005 was $32.6 million, $29.5 million, and $28.0
million, respectively.
Litigation
3dfx
On
December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries
entered into an agreement to purchase certain graphics chip assets from 3dfx
which closed on April 18, 2001.
In
May
2002, we were served with a California state court complaint filed by the
landlord of 3dfx’s San Jose, California commercial real estate lease,
CarrAmerica. In December 2002, we were served with a California state court
complaint filed by the landlord of 3dfx’s Austin, Texas commercial real estate
lease, Carlyle Fortran Trust. The landlords’ complaints both asserted claims
for, among other things, interference with contract, successor liability and
fraudulent transfer and seek to recover, among other things, amounts owed on
their leases with 3dfx in the aggregate amount of approximately $15 million.
In
October 2002, 3dfx filed for chapter 11 bankruptcy protection in the United
States Bankruptcy Court for the Northern District of California. The landlords’
actions were subsequently removed to the United States Bankruptcy Court for
the
Northern District of California and consolidated, for purposes of discovery,
with a complaint filed by the Trustee in the 3dfx bankruptcy case. Upon motion
by NVIDIA in 2005, the District Court withdrew the reference to the Bankruptcy
Court and the landlord actions were removed to the United States District Court
for the Northern District of California. On November 10, 2005, the District
Court granted our motion to dismiss the landlords’ respective amended complaints
and allowed the landlords to have until February 4, 2006 to amend their
complaints. The landlords re-filed claims against NVIDIA in early February
2006,
and NVIDIA again filed motions requesting the District Court to dismiss all
such
claims. The District Court took both motions under submission. On September
29,
2006, the court dismissed the CarrAmerica action in its entirety and without
leave to amend. The court found, among other things, that CarrAmerica lacks
standing to bring the lawsuit and that such standing belongs exclusively to
the
bankruptcy trustee. On October 27, 2006, CarrAmerica filed a notice of appeal
from that order. On December 15, 2006, the District Court also dismissed the
Carlyle complaint in its entirety, finding that Carlyle lacked standing to
pursue some of its claims, and that certain other claims were substantively
unmeritorious. NVIDIA has filed motions to recover its litigation costs and
attorneys fees against both Carlyle and Carr. Those motions are currently
scheduled for hearing in early April, 2007.
In
March
2003, we were served with a complaint filed by the Trustee appointed by the
Bankruptcy Court to represent the interests of the 3dfx bankruptcy estate.
The
Trustee’s complaint asserts claims for, among other things, successor liability
and fraudulent transfer and seeks additional payments from us. On October 13,
2005, the Court held a hearing on the Trustee’s motion for summary adjudication.
On December 23, 2005, the Court issued its ruling denying the Trustee’s Motion
for Summary Adjudication in all material respects and holding that NVIDIA is
prevented from disputing that the value of the 3dfx transaction to NVIDIA was
less than $108.0 million. The Court expressly denied the Trustee’s request to
find that the value of the 3dfx assets conveyed to NVIDIA were at least $108.0
million. In early November 2005, after many months of mediation, NVIDIA and
the
Official Committee of Unsecured Creditors, or the Creditors’ Committee, reached
a conditional settlement of the Trustee’s claims against NVIDIA. This
conditional settlement, presented as the centerpiece of a proposed Plan of
Liquidation in the bankruptcy case, was subject to a confirmation process
through a vote of creditors and the review and approval of the Bankruptcy Court
after notice and hearing. The Trustee advised that he intended to object to
the
settlement, which would have called for a payment by NVIDIA of approximately
$30.6 million to the 3dfx estate. Under the settlement, $5.6 million related
to
various administrative expenses and Trustee fees, and $25.0 million related
to
the satisfaction of debts and liabilities owed to the general unsecured
creditors of 3dfx. Accordingly, during the three month period ended October
30,
2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million
as additional purchase price for 3dfx.
However,
the conditional settlement never progressed substantially through the
confirmation process. On December 21, 2005, the Bankruptcy Court determined
that
it would schedule trial of one portion of the Trustee’s case against NVIDIA. On
January 2, 2007, NVIDIA exercised its right to terminate the settlement
agreement on grounds that the bankruptcy court had failed to proceed toward
confirmation of the Creditors’ Committee’s plan.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In
addition, while the conditional settlement agreement was awaiting the
confirmation process, the Bankruptcy Court, over objection of the Creditors’
Committee and NVIDIA, ordered the discovery portion of the Trustee’s litigation
to proceed. The expert discovery was completed, but the Bankruptcy Court also
ruled on a Trustee discovery motion allowing additional discovery of NVIDIA.
Because that order would have required NVIDIA to disclose privileged
attorney-client communications, NVIDIA asked the District Court to review that
order and to stay its execution while the District Court’s review is pending.
The District Court did issue the requested stay order on August 3, 2006. Oral
argument on that matter was held on November 15, 2006, and the District Court
reversed the Bankruptcy Court’s order by order of its own dated December 15,
2006. The District Court permitted certain limited additional discovery, but
concluded that on the record before it, there was no basis to set aside the
attorney-client privilege.
Following
the Trustee’s filing of a Form 8-K on behalf of 3dfx, in which the Trustee
disclosed the terms of the proposed settlement agreement between NVIDIA and
the
Creditor’s Committee, certain shareholders of 3dfx filed a petition with the
Bankruptcy Court to appoint an official committee to represent the claimed
interests of 3dfx shareholders. That petition was granted and an Equity Holders
Committee was appointed. Since that appointment, the Equity Holders Committee
has filed a competing plan of reorganization/liquidation. The Equity Holders
plan assumes that 3dfx can raise additional equity capital that would be used
to
retire all of 3dfx’s debts. Upon the payment of that debt, the Equity Holders
Committee contends that NVIDIA would be obliged to pay the stock consideration
provided for in the asset purchase agreement. By virtue of stock splits since
the execution of the asset purchase agreement, the stock consideration would
now
total four million shares of our common stock. The Equity Holders’ Committee
filed a motion with the Bankruptcy Court for an order giving it standing to
bring that lawsuit to enforce the Asset Purchase Agreement. Over our objection,
the Bankruptcy Court granted that motion on May 1, 2006 and the Equity Holders’
Committee filed its Complaint for Declaratory Relief against NVIDIA that same
day. NVIDIA moved to dismiss the Complaint for Declaratory Relief, and the
Bankruptcy court granted that motion with leave to amend. The Equity Committee
thereafter amended its complaint, and NVIDIA moved to dismiss that amended
complaint as well. At the hearing on December 21, 2006, the Bankruptcy Court
granted the motion as to one of the Equity Holders’ Committee’s claims, and
denied it as to the others. However, the Bankruptcy Court also ruled that NVIDIA
would only be required to answer the first three causes of action by which
the
Equity Holders’ Committee seeks a determination that the Asset Purchase
Agreement was not terminated before 3dfx filed for bankruptcy protection, that
the 3dfx bankruptcy estate still holds some rights in the Asset Purchase
Agreement, and that the agreement is capable of being assumed by the bankruptcy
estate. In addition, the Equity Holders Committee filed a motion seeking
Bankruptcy court approval of investor protections for Harbinger Capital Partners
Master Fund I, Ltd., an equity investment firm that has conditionally agreed
to
pay no more than $51.5 million for preferred stock in 3dfx. The hearing on
that
motion was held on January 18, 2007, and the court approved the proposed
protections. Beginning on March 21, 2007, NVIDIA and the Trustee are scheduled
to try the question of the value of the assets 3dfx conveyed to NVIDIA and,
in
particular, whether the price NVIDIA paid for those assets was reasonably
equivalent to the value of the assets 3dfx sold to NVIDIA.
Lawsuits
related to our historical stock option granting practices and SEC
inquiry
In
June
2006, the Audit Committee of the Board of NVIDIA, or the Audit Committee,
began
a review of our stock option practices based on the results of an internal
review voluntarily undertaken by management. The Audit Committee, with the
assistance of outside legal counsel, completed its review on November 13,
2006
when the Audit Committee reported its findings to our full Board. The review
covered option grants to all employees, directors and consultants for all
grant
dates during the period from our initial public offering in January 1999
through
June 2006. Based on the findings of the Audit Committee and our internal
review,
we identified a number of occasions on which we used an incorrect measurement
date for financial accounting and reporting purposes.
We
voluntarily contacted the SEC regarding the Audit Committee’s review and, as of
the date of the filing of this Form 10-K, the SEC is continuing the inquiry
of
our historical stock option grant practices it began in late August 2006.
In
October 2006, we met with the SEC and provided it with a review of the status
of
the Audit Committee’s review and in November 2006 we voluntarily provided the
SEC with further documents. We continue to cooperate with the SEC in its
inquiry.
Concurrently
with our internal review and the SEC’s inquiry, since September 29, 2006, ten
derivative cases have been filed in state and federal courts asserting claims
concerning errors related to our historical stock option granting practices
and
associated accounting for stock-based compensation expense. These complaints
have been filed in various courts, including the California Superior Court,
Santa Clara County, the United States District Court for the Northern District
of California, and the Court of Chancery of the State of Delaware in and
for New
Castle County. Plaintiffs
filed a consolidated complaint in the United States District Court for the
Northern District of California on February 28, 2007. The
California Superior Court cases have
been
consolidated and plaintiffs are scheduled to file a consolidated complaint
on or
before March 22, 2007. All of the
cases
purport to be brought derivatively on behalf of NVIDIA against members of
our
Board and several of our current and former officers and directors. All
allege
in substantially similar fashion claims for, among other things, breach of
fiduciary duty, unjust enrichment, insider selling, abuse of control, gross
mismanagement, waste, constructive fraud, and violations of Sections 10(b)
and
14(a) of the Securities Exchange Act of 1934, or the Exchange Act. The
plaintiffs seek to recover for NVIDIA, among other things, damages in an
unspecified amount, rescission, punitive damages, treble damages for insider
selling, and fees and costs. Plaintiffs also seek an accounting, a constructive
trust and other equitable relief. We
intend
to take all appropriate action in response to these
complaints.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Opti
On
October 19, 2004 Opti filed a complaint for patent infringement against NVIDIA
in the United States District Court for the Eastern District of Texas. In its
complaint, Opti asserted that unspecified NVIDIA chipsets infringe five United
States patents held by Opti. Opti sought unspecified damages for our alleged
conduct, attorneys’ fees and triple damages for alleged willful infringement by
NVIDIA. In April 2006, the District Court issued a Markman ruling adopting
Opti's proposed construction on 13 of the 15 terms at issue and Opti dropped
from the lawsuit two of the five United States patents that Opti alleged NVIDIA
infringes, and elected to pursue the three remaining patents at trial.
In
August
2006, Opti and NVIDIA settled this litigation. Under that settlement, NVIDIA
was
obligated to pay to Opti $11.0 million dollars for past and present licenses
to
the patents in suit and NVIDIA agreed to make additional quarterly payments
to
Opti should NVIDIA use certain patented technology after January 31, 2007.
The
case has now been dismissed with prejudice. The agreements with Opti call for
us
to pay $11.0 million in exchange for Opti’s dismissal of its lawsuit against us
and for certain patent license rights. Of this $11.0 million, we recorded $8.0
million as a patent-related intangible asset and $3.0 million as a charge to
cost of revenue.
Department
of Justice Subpoena and Investigation
On
November 29, 2006, we received a subpoena from the San Francisco Office of
the
Antitrust Division of the United States Department of Justice, or DOJ, in
connection with the DOJ's investigation into potential antitrust violations
related to graphics processing units and cards. No specific allegations have
been made against us. We plan to cooperate with the DOJ in its investigation.
As
of March 14, 2007, 42 civil complaints have been filed against us. The
majority are pending in the Northern District of California, a number are
pending in the Central District of California, and other cases are pending
in
several other Federal district courts. Although the complaints differ, they
generally purport to assert federal and state antitrust claims based on alleged
price fixing, market allocation, and other alleged anti-competitive agreements
between us and Advanced Micro Devices, Inc., or AMD, as a result of its
acquisition of ATI Technologies, Inc., or ATI. Many of the cases also assert
a
variety of state law unfair competition or consumer protection claims on the
same allegations and some cases assert unjust enrichment or other common law
claims. The complaints are putative class actions alleging classes of direct
and/or indirect purchasers of our graphic processing units and cards. The
plaintiffs in a few of the Northern District of California actions have filed
a
motion with the Judicial Panel on Multidistrict Litigation asking that all
pending and subsequent cases be consolidated in one court for all pre-trial
discovery and motion practice. A hearing on this motion is set for March 29,
2007. We believe the allegations in the complaints are without merit and intend
to vigorously defend the cases.
Note
13 - Income Taxes
The
provision for income taxes applicable to income before income taxes consists
of
the following:
|
|
Year Ended
|
|
|
|
January 28,
2007
|
|
January 29,
2006
|
|
January 30,
2005
|
|
|
|
(In
thousands)
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(17
|
)
|
$
|
22,050
|
|
$
|
—
|
|
State
|
|
|
(2,401
|
)
|
|
375
|
|
|
355
|
|
Foreign
|
|
|
6,758
|
|
|
11,012
|
|
|
8,826
|
|
Total
current
|
|
|
4,340
|
|
|
33,437
|
|
|
9,181
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
41,721
|
|
|
(2,692
|
)
|
|
1,237
|
|
State
|
|
|
—
|
|
|
—
|
|
|
(620
|
)
|
Total
deferred
|
|
|
41,721
|
|
|
(2,692
|
)
|
|
617
|
|
Charge
in lieu of taxes attributable to employer stock option
plans
|
|
|
289
|
|
|
24,867
|
|
|
8,615
|
|
Provision
for income taxes
|
|
$
|
46,350
|
|
$
|
55,612
|
|
$
|
18,413
|
|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Income
before income taxes consists of the following:
|
|
Year Ended
|
|
|
|
January 28,
2007
|
|
January 29,
2006
|
|
January 30,
2005
|
|
|
|
(In
thousands)
|
|
Domestic
|
|
$
|
(19,617
|
)
|
$
|
52,112
|
|
$
|
(7,537
|
)
|
Foreign
|
|
|
514,097
|
|
|
304,676
|
|
|
114,565
|
|
|
|
$
|
494,480
|
|
$
|
356,788
|
|
$
|
107,028
|
|
The
provision for income taxes differs from the amount computed by applying the
federal statutory income tax rate of 35% to income before income taxes as
follows:
|
|
Year Ended
|
|
|
|
January 28,
2007
|
|
January 29,
2006
|
|
January 30,
2005
|
|
|
|
(In
thousands)
|
|
Tax
expense computed at federal statutory rate
|
|
$
|
173,068
|
|
$
|
124,876
|
|
$
|
37,460
|
|
State
income taxes, net of federal tax effect
|
|
|
(1,372
|
)
|
|
847
|
|
|
219
|
|
Foreign
tax rate differential
|
|
|
(97,390
|
)
|
|
(57,286
|
)
|
|
(8,462
|
)
|
Research
tax credit
|
|
|
(35,359
|
)
|
|
(13,175
|
)
|
|
(10,935
|
)
|
In-process
research and development
|
|
|
4,690
|
|
|
—
|
|
|
—
|
|
Stock-based
compensation
|
|
|
3,564
|
|
|
—
|
|
|
—
|
|
Other
|
|
|
(851
|
)
|
|
350
|
|
|
131
|
|
Provision
for income taxes
|
|
$
|
46,350
|
|
$
|
55,612
|
|
$
|
18,413
|
|
The
tax effect of temporary differences that gives rise
to significant portions of the deferred tax assets and liabilities are presented
below:
|
|
January 28,
2007
|
|
January 29,
2006
|
|
|
|
(In
thousands)
|
|
Deferred
tax assets:
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
23,272
|
|
$
|
134,385
|
|
Accruals
and reserves, not currently deductible for tax purposes
|
|
|
17,702
|
|
|
16,109
|
|
Property,
equipment and intangible assets
|
|
|
16,436
|
|
|
16,928
|
|
Research
and other tax credit carryforwards
|
|
|
145,393
|
|
|
146,089
|
|
Stock-based
compensation
|
|
|
31,835
|
|
|
45,924
|
|
Gross
deferred tax assets
|
|
|
234,638
|
|
|
359,435
|
|
Less
valuation allowance
|
|
|
(68,563
|
)
|
|
(233,016
|
)
|
Deferred
tax assets
|
|
|
166,075
|
|
|
126,419
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Unremitted
earnings of foreign subsidiaries
|
|
|
(149,276
|
)
|
|
(85,716
|
)
|
Net
deferred tax asset
|
|
$
|
16,799
|
|
$
|
40,703
|
|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Income
tax expense as a
percentage of income before taxes, or our annual effective tax rate, was 9.4%
in
fiscal 2007, 15.6% in fiscal 2006, and 17.2% in fiscal 2005. The difference
in
the effective tax rates amongst the three years was primarily a result of
changes in our geographic mix of income subject to tax, with the additional
change in mix in fiscal 2007 due to certain stock-based compensation expensed
for financial accounting purposes under SFAS No. 123(R), and an increase in
the amount of research tax credit benefit in fiscal 2007.
As
of
January 28, 2007, we had a valuation allowance of $68.6 million. Of
the total valuation allowance, $3.7 million relates to state tax attributes
acquired in certain acquisitions for which realization of the related deferred
tax assets was determined not likely to be realized due, in part, to potential
utilization limitations as a result of stock ownership changes, and
$64.9 million relates to state deferred tax assets that management
determined not likely to be realized due, in part, to projections of future
taxable income. To the extent realization of the deferred tax assets related
to
certain acquisitions becomes probable, recognition of these acquired tax
benefits would first reduce goodwill to zero, then reduce other non-current
intangible assets related to the acquisition to zero with any remaining benefit
reported as a reduction to income tax expense. To the extent realization of
the
deferred tax assets related to state tax benefits becomes probable, we would
recognize an income tax benefit in the period such asset is more likely than
not
to be realized.
As
of
January 28, 2007, with the adoption of SFAS No. 123(R), we have
derecognized both deferred tax assets for the excess of tax benefit related
to
stock-based compensation, reflected in our federal and state net operating
loss
and research tax credit carryforwards, and the offsetting valuation allowance.
Consistent with prior years, the excess tax benefit reflected in our net
operating loss and research tax credit carryforwards, in the amount of $344.9
million as of January 28, 2007, will be accounted for as a credit to
stockholders’ equity, if and when realized. In determining if and when excess
tax benefits have been realized, we have elected to do so on a
“with-and-without” approach with respect to such excess tax benefits. We have
also elected to ignore the indirect tax effects of stock-based compensation
deductions for financial and accounting reporting purposes, and specifically
to
recognize the full effect of the research tax credit in income from continuing
operations.
As
of
January 28 2007, we had a federal net operating loss carryforward of
approximately $770.5 million and cumulative state net operating loss
carryforwards of approximately $584.1 million. The federal net operating loss
carryforward will expire beginning in fiscal 2012 and the state net operating
loss carryforwards will begin to expire in fiscal 2008 according to the rules
of
each particular state. As of January 28, 2007 we had federal research tax
credit carryforwards of approximately $129.0 million that will begin to expire
in fiscal 2008. We have other federal tax credit carryforwards of approximately
$1.2 million that will begin to expire in fiscal 2011. The research tax credit
carryforwards attributable to states is approximately $125.6 million, of which
approximately $121.3 million is attributable to the State of California and
may
be carried over indefinitely, and approximately $4.3 million is attributable
to
various other states and will expire beginning in fiscal 2016 according to
the
rules of each particular state. We have other California state tax credit
carryforwards of approximately $4.8 million that will begin to expire in fiscal
2009. Utilization of net operating losses and tax credit carryforwards may
be
subject to limitations due to ownership changes and other limitations provided
by the Internal Revenue Code and similar state provisions. If such a limitation
applies, the net operating loss and tax credit carryforwards may expire before
full utilization.
As
of
January 28, 2007, United States federal and state income taxes have
not been provided on approximately $304.0 million of undistributed earnings
of
non-United States subsidiaries as such earnings are considered to be
permanently reinvested.
Note
14 - Segment Information
Our
Chief
Executive Officer, who is considered to be our chief operating decision maker,
or CODM, reviews financial information presented on an operating segment basis
for purposes of making operating decisions and assessing financial performance.
During the first quarter of fiscal 2006, we reorganized our operating segments
to bring all major product groups in line with our strategy to position
ourselves as the worldwide leader in programmable graphics processor
technologies. We report financial information for four product-line operating
segments to our CODM: the GPU Business is composed of products that support
desktop PCs, notebook PCs, professional workstations and other
GPU-based products;
the MCP
Business is composed of NVIDIA nForce products that operate as a single-chip
or
chipset that provide system functions, such as high speed processing and network
communications, and perform these operations independently from the host CPU;
our Handheld GPU Business is composed of products that support handheld PDAs,
cellular phones and other handheld devices; and our Consumer Electronics
Business is concentrated in products that support video game consoles and other
digital consumer electronics devices and is composed of revenue from our
contractual arrangements with SCE to jointly develop a custom GPU for SCE’s
PlayStation3, revenue from sales of our Xbox-related products, revenue from
our license agreement with Microsoft Corporation, or Microsoft, relating to
the
successor product to their initial Xbox gaming console, the Xbox360, and related
devices, and digital media processor products. In addition to these operating
segments, we have the “All Other” category that includes human resources, legal,
finance, general administration and corporate marketing expenses, which total
$242.3 million, $131.6 million and $118.0 million for fiscal years 2007, 2006
and 2005, respectively, that we do not allocate to our other operating segments.
“All Other” also includes the results of operations of other miscellaneous
operating segments that are neither individually reportable, nor aggregated
with
another operating segment. Revenue in the “All Other” category is primarily
derived from sales of memory. Certain prior period amounts have been
restated to conform to the presentation of our current fiscal
quarter.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Our
CODM
does not review any information regarding total assets on an operating segment
basis. Operating segments do not record intersegment revenue, and, accordingly,
there is none to be reported. The accounting policies for segment reporting
are the same as for NVIDIA as a whole.
|
|
GPU
|
|
MCP
|
|
Handheld GPU
|
|
Consumer
Electronics
|
|
All
Other
|
|
Consolidated
|
|
|
|
(In
thousands)
|
|
Twelve
Months Ended January 28, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,994,334
|
|
$
|
661,483
|
|
$
|
108,496
|
|
$
|
96,314
|
|
$
|
208,144
|
|
$
|
3,068,771
|
|
Depreciation
and amortization expense
|
|
$
|
35,785
|
|
$
|
20,751
|
|
$
|
17,322
|
|
$
|
176
|
|
$
|
33,798
|
|
$
|
107,832
|
|
Operating
income (loss)
|
|
$
|
583,873
|
|
$
|
77,952
|
|
$
|
(41,399
|
)
|
$
|
84,327
|
|
$
|
(251,301
|
)
|
$
|
453,452
|
|
Twelve
Months Ended January 29, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,657,221
|
|
$
|
352,319
|
|
$
|
58,745
|
|
$
|
167,398
|
|
$
|
140,004
|
|
$
|
2,375,687
|
|
Depreciation
and amortization expense
|
|
$
|
33,080
|
|
$
|
12,092
|
|
$
|
12,480
|
|
$
|
1,552
|
|
$
|
30,817
|
|
$
|
90,021
|
|
Operating
income (loss)
|
|
$
|
359,821
|
|
$
|
32,865
|
|
$
|
(34,922
|
)
|
$
|
94,696
|
|
$
|
(115,796
|
)
|
$
|
336,664
|
|
Twelve
Months Ended January 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,348,968
|
|
$
|
175,663
|
|
$
|
45,921
|
|
$
|
259,968
|
|
$
|
179,513
|
|
$
|
2,010,033
|
|
Depreciation
and amortization expense
|
|
$
|
32,849
|
|
$
|
12,824
|
|
$
|
11,620
|
|
$
|
880
|
|
$
|
32,643
|
|
$
|
90,816
|
|
Operating
income (loss)
|
|
$
|
178,597
|
|
$
|
(39,912
|
)
|
$
|
(37,532
|
)
|
$
|
107,901
|
|
$
|
(113,878
|
)
|
$
|
95,176
|
|
Revenue
by geographic region is allocated to individual countries based on the location
to which the products are initially billed even if our customers’ revenue is
attributable to end customers that are located in a different location. The
following tables summarize information pertaining to our revenue from customers
based on invoicing address in different geographic regions:
|
|
Year
Ended
|
|
|
|
January 28,
2007
|
|
January 29,
2006
|
|
January 30,
2005
|
|
|
|
(In
thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
United
States
|
|
$
|
332,268
|
|
$
|
340,598
|
|
$
|
473,721
|
|
Other
Americas
|
|
|
171,851
|
|
|
38,572
|
|
|
11,045
|
|
China
|
|
|
659,711
|
|
|
401,612
|
|
|
269,306
|
|
Taiwan
|
|
|
1,118,989
|
|
|
1,131,784
|
|
|
883,346
|
|
Other
Asia Pacific
|
|
|
483,872
|
|
|
250,844
|
|
|
169,888
|
|
Europe
|
|
|
302,080
|
|
|
212,277
|
|
|
202,727
|
|
Total
revenue
|
|
$
|
3,068,771
|
|
$
|
2,375,687
|
|
$
|
2,010,033
|
|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
January 28,
2007
|
|
January 29,
2006
|
|
|
|
(In
thousands)
|
|
Long-lived
assets:
|
|
|
|
|
|
United
States
|
|
$
|
241,795
|
|
$
|
177,568
|
|
Other
Americas
|
|
|
20,197
|
|
|
9,957
|
|
China
|
|
|
5,589
|
|
|
4,645
|
|
Taiwan
|
|
|
3,278
|
|
|
1,185
|
|
India
|
|
|
13,263
|
|
|
7,332
|
|
Other
Asia Pacific
|
|
|
1,822
|
|
|
1,905
|
|
Europe
|
|
|
3,233
|
|
|
3,037
|
|
Total
long-lived assets
|
|
$
|
289,177
|
|
$
|
205,629
|
|
Revenue
from significant customers, those representing approximately 10% or more of
total revenue for the respective dates, is summarized as follows:
|
|
Year
Ended
|
|
|
|
January 28,
2007
|
|
January 29,
2006
|
|
January 30,
2005
|
|
Revenue:
|
|
|
|
|
|
|
|
Customer
A
|
|
|
12
|
%
|
|
12
|
%
|
|
7
|
%
|
Customer
B
|
|
|
5
|
%
|
|
14
|
%
|
|
18
|
%
|
Customer
C
|
|
|
-
|
%
|
|
5
|
%
|
|
13
|
%
|
Accounts
receivable from significant customers, those representing approximately 10%
or
more of total accounts receivable for the respective periods, is summarized
as
follows:
|
|
January 28,
2007
|
|
January 29,
2006
|
|
Accounts
Receivable:
|
|
|
|
|
|
Customer
A
|
|
|
18
|
%
|
|
8
|
%
|
Customer
B
|
|
|
5
|
%
|
|
11
|
%
|
Note
15 - Settlement Costs
Settlement
costs were $14.2 million for fiscal 2006. The settlement costs are associated
with two litigation matters, 3dfx and American Video Graphics, LP, or AVG.
AVG
is settled. For further information about the 3dfx matter, please refer to
Note
12 of the Notes to Consolidated Financial Statements.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
16 - Quarterly Summary (Unaudited)
The
following table sets forth our unaudited consolidated financial, for the last
eight fiscal quarters ended January 28, 2007.
|
|
Fiscal
2007
Quarters
Ended
|
|
|
|
Jan.
28, 2007
(B)
|
|
Oct.
29, 2006
(C)
|
July
30, 2006
|
|
April
30, 2006
|
|
|
|
(In
thousands, except per share data)
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
878,873
|
|
$
|
820,572
|
|
$
|
687,519
|
|
$
|
681,807
|
|
Cost
of revenue
|
|
$
|
493,167
|
|
$
|
486,630
|
|
$
|
395,391
|
|
$
|
393,134
|
|
Gross
profit
|
|
$
|
385,706
|
|
$
|
333,942
|
|
$
|
292,128
|
|
$
|
288,673
|
|
Income
before change in accounting principle
|
|
$
|
163,506
|
|
$
|
106,511
|
|
$
|
86,753
|
|
$
|
91,360
|
|
Net
income
|
|
$
|
163,506
|
|
$
|
106,511
|
|
$
|
86,753
|
|
$
|
92,064
|
|
Basic
income per share before change in accounting principle (A)
|
|
$
|
0.46
|
|
$
|
0.30
|
|
$
|
0.25
|
|
$
|
0.26
|
|
Basic
net income per share (A)
|
|
$
|
0.46
|
|
$
|
0.30
|
|
$
|
0.25
|
|
$
|
0.26
|
|
Diluted
income per share before change in accounting principle (A)
|
|
$
|
0.41
|
|
$
|
0.27
|
|
$
|
0.22
|
|
$
|
0.23
|
|
Diluted
net income per share (A)
|
|
$
|
0.41
|
|
$
|
0.27
|
|
$
|
0.22
|
|
$
|
0.24
|
|
|
|
Fiscal
2006
Quarters
Ended
|
|
|
|
Jan.
29, 2006
|
|
Oct.
29, 2005
(D)
|
|
July
30, 2005
|
|
April
30, 2005
|
|
|
|
(In
thousands, except per share data)
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
633,614
|
|
$
|
583,415
|
|
$
|
574,812
|
|
$
|
583,846
|
|
Cost
of revenue
|
|
$
|
378,812
|
|
$
|
355,420
|
|
$
|
357,437
|
|
$
|
373,985
|
|
Gross
profit
|
|
$
|
254,802
|
|
$
|
227,995
|
|
$
|
217,375
|
|
$
|
209,861
|
|
Net
income
|
|
$
|
97,374
|
|
$
|
64,447
|
|
$
|
73,833
|
|
$
|
65,522
|
|
Basic
net income per share (A)
|
|
$
|
0.28
|
|
$
|
0.19
|
|
$
|
0.22
|
|
$
|
0.19
|
|
Diluted
net income per share (A)
|
|
$
|
0.26
|
|
$
|
0.18
|
|
$
|
0.20
|
|
$
|
0.18
|
|
(A)
Reflects a two-for-one stock-split effective April 6, 2006.
(B)
Included a charge of $13.4 million related to the write-off of acquired research
and development expense from our purchase of PortalPlayer that had not yet
reached technological feasibility and has no alternative future
use.
(C)
Included a charge of $17.5 million associated with a confidential patent
licensing arrangement.
(D)
Included a charge of $14.2 million related to settlement costs associated with
two litigation matters, 3dfx and AVG.
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
Description
|
|
Balance at
Beginning
of
Period
|
|
Additions
(3)
|
|
Deductions
(2)
|
|
Balance
at
End
of
Period
|
|
|
|
(In
thousands)
|
|
Year
ended January 28, 2007
|
|
|
|
|
|
|
|
|
|
Allowance
for sales returns and allowances
|
|
$
|
10,239
|
|
$
|
37,033
|
|
$
|
(32,795)
|
(1)
|
$
|
14,477
|
|
Allowance
for doubtful accounts
|
|
$
|
598
|
|
$
|
676
|
(4) |
$
|
(3)
|
(2)
|
$
|
1,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended January 29, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for sales returns and allowances
|
|
$
|
11,687
|
|
$
|
35,127
|
|
$
|
(36,575)
|
(1)
|
$
|
10,239
|
|
Allowance
for doubtful accounts
|
|
$
|
1,466
|
|
$
|
(492
|
)
|
$
|
(376)
|
(2)
|
$
|
598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended January 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for sales returns and allowances
|
|
$
|
9,421
|
|
$
|
22,463
|
|
$
|
(20,197)
|
(1)
|
$
|
11,687
|
|
Allowance
for doubtful accounts
|
|
$
|
2,310
|
|
$
|
(844
|
)
|
$
|
—
|
|
$
|
1,466
|
|
(1) Represents
amounts written off against the allowance for sales returns.
(2) Represents
uncollectible accounts written off against the allowance for doubtful accounts.
(3) Allowances
for sales returns are charged as a reduction to revenue. Allowances for doubtful
accounts are charged to expenses.
(4) Additions
to allowance for doubtful accounts includes $471 related to our acquisitions
of
ULi Electronics, Inc., Hybrid Graphics Ltd. and PortalPlayer, Inc.
|
|
Incorporated
by Reference
|
Exhibit
No.
|
Exhibit
Description
|
Schedule/Form
|
File
Number
|
Exhibit
|
Filing
Date
|
|
|
|
|
|
|
2.1
|
Agreement
and Plan of Merger by and among NVIDIA Corporation, Partridge Acquisition,
Inc. and PortalPlayer, Inc. dated 11/6/06
|
8-K
|
0-23985
|
2.1
|
11/9/2006
|
|
|
|
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation
|
S-8
|
333-74905
|
4.1
|
3/23/1999
|
|
|
|
|
|
|
3.2
|
Certificate
of Amendment of Amended and Restated Certificate of
Incorporation
|
10-Q
|
0-23985
|
3.4
|
9/10/2002
|
|
|
|
|
|
|
3.3
|
Bylaws
of NVIDIA Corporation, Amended and Restated as of March 7,
2006
|
10-K
|
0-23985
|
3.3
|
3/16/2006
|
|
|
|
|
|
|
4.1
|
Reference
is made to Exhibits 3.1, 3.2 and 3.3
|
|
|
|
|
|
|
|
|
|
|
4.2
|
Specimen
Stock Certificate
|
S-1/A
|
333-47495
|
4.2
|
4/24/1998
|
|
|
|
|
|
|
10.1
|
Form
of Indemnity Agreement between NVIDIA Corporation and each of its
directors and officers
|
8-K
|
0-23985
|
10.1
|
3/7/2006
|
|
|
|
|
|
|
10.2+
|
1998
Equity Incentive Plan, as amended
|
8-K
|
0-23985
|
10.2
|
3/13/2006
|
|
|
|
|
|
|
10.3+
|
1998
Equity Incentive Plan ISO, as amended
|
10-Q
|
0-23985
|
10.5
|
11/22/2004
|
|
|
|
|
|
|
10.4+
|
1998
Equity Incentive Plan NSO, as amended
|
10-Q
|
0-23985
|
10.6
|
11/22/2004
|
|
|
|
|
|
|
10.5+
|
Certificate
of Stock Option Grant
|
10-Q
|
0-23985
|
10.7
|
11/22/2004
|
|
|
|
|
|
|
10.6+
|
1998
Employee Stock Purchase Plan Offering, as amended
|
S-8
|
333-51520
|
99.4
|
12/8/2000
|
|
|
|
|
|
|
10.7+
|
Form
of Employee Stock Purchase Plan Offering, as amended
|
S-8
|
333-100010
|
99.5
|
9/23/2002
|
|
|
|
|
|
|
10.8+
|
Form
of Employee Stock Purchase Plan Offering, as amended - International
Employees
|
S-8
|
333-100010
|
99.6
|
9/23/2002
|
|
|
|
|
|
|
10.9+
|
1998
Non-Employee Directors’ Stock Option Plan, as amended
|
8-K
|
0-23985
|
10.1
|
4/3/2006
|
|
|
|
|
|
|
10.10+
|
1998
Non-Employee Directors’ Stock Option Plan (Annual Grant - Board Service),
as amended
|
10-Q
|
0-23985
|
10.1
|
11/22/2004
|
|
|
|
|
|
|
10.11+
|
1998
Non-Employee Directors’ Stock Option Plan (Committee Grant - Committee
Service), as amended
|
10-Q
|
0-23985
|
10.2
|
11/22/2004
|
|
|
|
|
|
|
10.12+
|
1998
Non-Employee Directors’ Stock Option Plan (Initial Grant)
|
10-Q
|
0-23985
|
10.3
|
11/22/2004
|
|
|
|
|
|
|
10.13+
|
2000
Nonstatutory Equity Incentive Plan, as amended
|
SC
TO-1
|
005-56649
|
99(d)(1)(A)
|
11/29/2006
|
|
|
|
|
|
|
10.14
|
Lease
dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests
III
for Building A
|
S-3/A
|
333-33560
|
10.1
|
4/20/2000
|
|
|
|
|
|
|
10.15
|
Lease
dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests
III
for Building B
|
S-3/A
|
333-33560
|
10.2
|
4/20/2000
|
EXHIBIT
INDEX
(Continued)
|
|
Incorporated
by Reference
|
Exhibit No.
|
Exhibit
Description
|
Schedule
/Form
|
File
Number
|
Exhibit
|
Filing
Date
|
|
|
|
|
|
|
10.16
|
Lease
dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests
III
for Building C
|
S-3/A
|
333-33560
|
10.3
|
4/20/2000
|
|
|
|
|
|
|
10.17
|
Lease
dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests
III
for Building D
|
S-3/A
|
333-33560
|
10.4
|
4/20/2000
|
|
|
|
|
|
|
10.18+
|
NVIDIA
Corporation Fiscal Year 2007 Variable Compensation Plan
|
8-K
|
0-23985
|
10.2
|
4/3/2006
|
|
|
|
|
|
|
10.19+
|
NVIDIA
Corporation 2000 NonStatutory Equity Incentive Plan NSO
|
SC
TO-1
|
005-56649
|
99.1(d)(1)(B)
|
11/29/2006
|
|
|
|
|
|
|
10.20+
|
PortalPlayer,
Inc. 1999 Stock Option Plan and Form of Agreements
thereunder
|
S-8
|
333-140021
|
99.1
|
1/16/2007
|
|
|
|
|
|
|
10.21+
|
PortalPlayer,
Inc. Amended and Restated 2004 Stock Incentive Plan
|
S-8
|
333-140021
|
99.2
|
1/16/2007
|
|
|
|
|
|
|
21.1*
|
List
of Registrant’s Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
23.1*
|
Consent
of PricewaterhouseCoopers LLP
|
|
|
|
|
|
|
|
|
|
|
24.1*
|
Power
of Attorney (included in signature page)
|
|
|
|
|
|
|
|
|
|
|
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
+ Management
contract or compensatory plan or arrangement.
# 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-K and will not be deemed “filed” for
purpose of Section 18 of the Exchange Act. Such certifications will not be
deemed to be incorporated by reference into any filing under the Securities
Act
or the Exchange Act, except to the extent that the registrant specifically
incorporates it by reference.
Copies
of
above exhibits not contained herein are available to any stockholder upon
written request to: Investor Relations: NVIDIA Corporation, 2701 San Tomas
Expressway, Santa Clara, CA 95050.
Pursuant
to the requirements of Section 13 or 15(d) 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, on March 15, 2007.
|
|
NVIDIA
Corporation
|
By:
|
/s/
JEN-HSUN HUANG
|
|
Jen-Hsun
Huang
|
|
President
and Chief Executive Officer
|
POWER
OF ATTORNEY
KNOW
ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Jen-Hsun Huang and Marvin D. Burkett, and each or
any
one of them, his true and lawful attorney-in-fact and agent, with full power
of
substitution and resubstitution, for him and in his name, place and stead,
in
any and all capacities, to sign any and all amendments (including posting
effective amendments) to this report, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-facts and agents, and
each
of them, full power and authority to do and perform each and every act and
thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitutes or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
Title
|
Date
|
/s/
JEN-HSUN HUANG
Jen-Hsun
Huang
|
President,
Chief Executive Officer and Director
(Principal
Executive Officer)
|
March
15, 2007
|
|
|
|
/s/
MARVIN D. BURKETT
Marvin
D. Burkett
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
March
15, 2007
|
|
|
|
/s/
TENCH COXE
Tench
Coxe
|
Director
|
March
15, 2007
|
|
|
|
/s/
STEVEN CHU
Steven
Chu
|
Director
|
March
14, 2007
|
|
|
|
/s/
JAMES C. GAITHER
James
C. Gaither
|
Director
|
March
13, 2007
|
|
|
|
/s/
HARVEY C. JONES
Harvey
C. Jones
|
Director
|
March
12, 2007
|
|
|
|
/s/
MARK L. PERRY
Mark
L. Perry
|
Director
|
March
15, 2007
|
|
|
|
/s/
WILLIAM J. MILLER
William
J. Miller
|
Director
|
March
15, 2007
|
|
|
|
/s/
A. BROOKE SEAWELL
A.
Brooke Seawell
|
Director
|
March
15, 2007
|
EXHIBIT
INDEX
|
|
Incorporated
by Reference
|
Exhibit
No.
|
Exhibit
Description
|
Schedule/Form
|
File
Number
|
Exhibit
|
Filing
Date
|
|
|
|
|
|
|
2.1
|
Agreement
and Plan of Merger by and among NVIDIA Corporation, Partridge
Acquisition,
Inc. and PortalPlayer, Inc. dated 11/6/06
|
8-K
|
0-23985
|
2.1
|
11/9/2006
|
|
|
|
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation
|
S-8
|
333-74905
|
4.1
|
3/23/1999
|
|
|
|
|
|
|
3.2
|
Certificate
of Amendment of Amended and Restated Certificate of
Incorporation
|
10-Q
|
0-23985
|
3.4
|
9/10/2002
|
|
|
|
|
|
|
3.3
|
Bylaws
of NVIDIA Corporation, Amended and Restated as of March 7,
2006
|
10-K
|
0-23985
|
3.3
|
3/16/2006
|
|
|
|
|
|
|
4.1
|
Reference
is made to Exhibits 3.1, 3.2 and 3.3
|
|
|
|
|
|
|
|
|
|
|
4.2
|
Specimen
Stock Certificate
|
S-1/A
|
333-47495
|
4.2
|
4/24/1998
|
|
|
|
|
|
|
10.1
|
Form
of Indemnity Agreement between NVIDIA Corporation and each of
its
directors and officers
|
8-K
|
0-23985
|
10.1
|
3/7/2006
|
|
|
|
|
|
|
10.2+
|
1998
Equity Incentive Plan, as amended
|
8-K
|
0-23985
|
10.2
|
3/13/2006
|
|
|
|
|
|
|
10.3+
|
1998
Equity Incentive Plan ISO, as amended
|
10-Q
|
0-23985
|
10.5
|
11/22/2004
|
|
|
|
|
|
|
10.4+
|
1998
Equity Incentive Plan NSO, as amended
|
10-Q
|
0-23985
|
10.6
|
11/22/2004
|
|
|
|
|
|
|
10.5+
|
Certificate
of Stock Option Grant
|
10-Q
|
0-23985
|
10.7
|
11/22/2004
|
|
|
|
|
|
|
10.6+
|
1998
Employee Stock Purchase Plan Offering, as amended
|
S-8
|
333-51520
|
99.4
|
12/8/2000
|
|
|
|
|
|
|
10.7+
|
Form
of Employee Stock Purchase Plan Offering, as amended
|
S-8
|
333-100010
|
99.5
|
9/23/2002
|
|
|
|
|
|
|
10.8+
|
Form
of Employee Stock Purchase Plan Offering, as amended - International
Employees
|
S-8
|
333-100010
|
99.6
|
9/23/2002
|
|
|
|
|
|
|
10.9+
|
1998
Non-Employee Directors’ Stock Option Plan, as amended
|
8-K
|
0-23985
|
10.1
|
4/3/2006
|
|
|
|
|
|
|
10.10+
|
1998
Non-Employee Directors’ Stock Option Plan (Annual Grant - Board Service),
as amended
|
10-Q
|
0-23985
|
10.1
|
11/22/2004
|
|
|
|
|
|
|
10.11+
|
1998
Non-Employee Directors’ Stock Option Plan (Committee Grant - Committee
Service), as amended
|
10-Q
|
0-23985
|
10.2
|
11/22/2004
|
|
|
|
|
|
|
10.12+
|
1998
Non-Employee Directors’ Stock Option Plan (Initial Grant)
|
10-Q
|
0-23985
|
10.3
|
11/22/2004
|
|
|
|
|
|
|
10.13+
|
2000
Nonstatutory Equity Incentive Plan, as amended
|
SC
TO-1
|
005-56649
|
99(d)(1)(A)
|
11/29/2006
|
|
|
|
|
|
|
10.14
|
Lease
dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests
III
for Building A
|
S-3/A
|
333-33560
|
10.1
|
4/20/2000
|
|
|
|
|
|
|
10.15
|
Lease
dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests
III
for Building B
|
S-3/A
|
333-33560
|
10.2
|
4/20/2000
|
EXHIBIT
INDEX
(Continued)
|
|
Incorporated
by Reference
|
Exhibit No.
|
Exhibit
Description
|
Schedule
/Form
|
File
Number
|
Exhibit
|
Filing
Date
|
|
|
|
|
|
|
10.16
|
Lease
dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests
III
for Building C
|
S-3/A
|
333-33560
|
10.3
|
4/20/2000
|
|
|
|
|
|
|
10.17
|
Lease
dated April 4, 2000 between NVIDIA Corporation and Sobrato Interests
III
for Building D
|
S-3/A
|
333-33560
|
10.4
|
4/20/2000
|
|
|
|
|
|
|
10.18+
|
NVIDIA
Corporation Fiscal Year 2007 Variable Compensation Plan
|
8-K
|
0-23985
|
10.2
|
4/3/2006
|
|
|
|
|
|
|
10.19+
|
NVIDIA
Corporation 2000 NonStatutory Equity Incentive Plan NSO
|
SC
TO-1
|
005-56649
|
99.1(d)(1)(B)
|
11/29/2006
|
|
|
|
|
|
|
10.20+
|
PortalPlayer,
Inc. 1999 Stock Option Plan and Form of Agreements
thereunder
|
S-8
|
333-140021
|
99.1
|
1/16/2007
|
|
|
|
|
|
|
10.21+
|
PortalPlayer,
Inc. Amended and Restated 2004 Stock Incentive Plan
|
S-8
|
333-140021
|
99.2
|
1/16/2007
|
|
|
|
|
|
|
21.1*
|
List
of Registrant’s Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
23.1*
|
Consent
of PricewaterhouseCoopers LLP
|
|
|
|
|
|
|
|
|
|
|
24.1*
|
Power
of Attorney (included in signature page)
|
|
|
|
|
|
|
|
|
|
|
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
+ Management
contract or compensatory plan or arrangement.
# 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-K 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.