Q1 '08 FORM 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________
FORM
10-Q
[X] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended April
29, 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)
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 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
number of shares of common stock, $.001 par value, outstanding as of May 18,
2007 was 362,913,421.
NVIDIA
CORPORATION
FORM
10-Q
FOR
THE QUARTER ENDED APRIL 29, 2007
TABLE
OF CONTENTS
|
|
Page
|
|
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
21
|
|
|
30
|
|
|
30
|
|
|
|
|
|
|
|
|
31
|
|
|
31
|
|
|
45
|
|
|
45
|
|
|
45
|
|
|
45
|
|
|
46
|
|
47
|
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In
thousands, except per share data)
|
|
Three
Months Ended
|
|
|
|
April
29,
2007
|
|
April
30,
2006
|
|
Revenue
|
|
$
|
844,280
|
|
$
|
681,807
|
|
Cost
of revenue
|
|
|
464,142
|
|
|
393,134
|
|
Gross
profit
|
|
|
380,138
|
|
|
288,673
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Research
and development
|
|
|
158,321
|
|
|
123,202
|
|
Sales,
general and administrative
|
|
|
80,571
|
|
|
63,962
|
|
Total
operating expenses
|
|
|
238,892
|
|
|
187,164
|
|
Income
from operations
|
|
|
141,246
|
|
|
101,509
|
|
Interest
income
|
|
|
13,208
|
|
|
8,808
|
|
Other
expense, net
|
|
|
(665
|
)
|
|
(245
|
)
|
Income
before income tax expense
|
|
|
153,789
|
|
|
110,072
|
|
Income
tax expense
|
|
|
21,530
|
|
|
18,712
|
|
Income
before change in accounting principle
|
|
|
132,259
|
|
|
91,360
|
|
Cumulative
effect of change in accounting principle, net of tax
|
|
|
-
|
|
|
704
|
|
Net
income
|
|
$
|
132,259
|
|
$
|
92,064
|
|
|
|
|
|
|
|
|
|
Basic
income per share:
|
|
|
|
|
|
|
|
Income
before change in accounting principle
|
|
$
|
0.37
|
|
$
|
0.26
|
|
Cumulative
effect of change in accounting principle
|
|
|
-
|
|
|
-
|
|
Basic
net income per share
|
|
$
|
0.37
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
Shares
used in basic per share computation
|
|
|
360,831
|
|
|
347,937
|
|
|
|
|
|
|
|
|
|
Diluted
income per share:
|
|
|
|
|
|
|
|
Income
before change in accounting principle
|
|
$
|
0.33
|
|
$
|
0.23
|
|
Cumulative
effect of change in accounting principle
|
|
|
-
|
|
|
0.01
|
|
Diluted
net income per share
|
|
$
|
0.33
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
Shares
used in diluted per share computation
|
|
|
398,866
|
|
|
389,428
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In
thousands, except share data)
|
|
April
29, 2007
|
|
January 28,
2007
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
678,951
|
|
$
|
544,414
|
|
Marketable
securities
|
|
|
628,073
|
|
|
573,436
|
|
Accounts
receivable, net
|
|
|
471,519
|
|
|
518,680
|
|
Inventories
|
|
|
332,635
|
|
|
354,680
|
|
Prepaid
expenses and other current assets
|
|
|
43,055
|
|
|
40,560
|
|
Total
current assets
|
|
|
2,154,233
|
|
|
2,031,770
|
|
Property
and equipment, net
|
|
|
271,190
|
|
|
260,828
|
|
Goodwill
|
|
|
291,077
|
|
|
301,425
|
|
Intangible
assets, net
|
|
|
50,914
|
|
|
45,511
|
|
Deposits
and other assets
|
|
|
33,454
|
|
|
35,729
|
|
|
|
$
|
2,800,868
|
|
$
|
2,675,263
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
334,046
|
|
$
|
272,075
|
|
Accrued
liabilities
|
|
|
289,821
|
|
|
366,732
|
|
Total
current liabilities
|
|
|
623,867
|
|
|
638,807
|
|
Other
long-term liabilities
|
|
|
81,107
|
|
|
29,537
|
|
Commitments
and contingencies - see Note 13
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
—
|
|
|
—
|
|
Common
stock
|
|
|
393
|
|
|
388
|
|
Additional
paid-in capital
|
|
|
1,377,513
|
|
|
1,295,650
|
|
Treasury
stock, at cost
|
|
|
(612,120
|
)
|
|
(487,120
|
)
|
Accumulated
other comprehensive income, net
|
|
|
1,284
|
|
|
1,436
|
|
Retained
earnings
|
|
|
1,328,824
|
|
|
1,196,565
|
|
Total
stockholders' equity
|
|
|
2,095,894
|
|
|
2,006,919
|
|
|
|
$
|
2,800,868
|
|
$
|
2,675,263
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In
thousands)
|
Three
Months Ended
|
|
|
April
29,
2007
|
|
April
30,
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
Net
income
|
$
|
132,259
|
|
$
|
92,064
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
37,405
|
|
|
24,111
|
|
Depreciation
and amortization
|
|
31,334
|
|
|
24,031
|
|
Gross
tax benefit from stock-based compensation
|
|
-
|
|
|
(7,330
|
)
|
Other
|
|
60
|
|
|
153
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
Accounts
receivable
|
|
47,847
|
|
|
(64,135
|
)
|
Inventories
|
|
22,840
|
|
|
(87,958
|
)
|
Prepaid
expenses and other current assets
|
|
(2,642
|
)
|
|
(3,332
|
)
|
Deposits
and other assets
|
|
2,275
|
|
|
(3,406
|
)
|
Accounts
payable
|
|
61,344
|
|
|
107,729
|
|
Accrued
liabilities and other long-term liabilities
|
|
(26,233)
|
|
|
(32,391
|
)
|
Net
cash provided by operating activities
|
|
306,489
|
|
|
49,536
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
Purchases
of marketable securities
|
|
(268,211
|
)
|
|
(92,344
|
)
|
Proceeds
from sales and maturities of marketable securities
|
|
214,775
|
|
|
22,523
|
|
Purchases
of property and equipment and intangible assets
|
|
(37,627
|
)
|
|
(67,026
|
)
|
Acquisition
of businesses, net of cash and cash equivalents
|
|
-
|
|
|
(20,667
|
)
|
Net
cash used in investing activities
|
|
(91,063
|
)
|
|
(157,514
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Payments
for stock repurchases
|
|
(125,000
|
)
|
|
(50,000
|
)
|
Proceeds
from issuance of common stock under employee stock plans
|
|
44,111
|
|
|
86,655
|
|
Gross
tax benefit from stock-based compensation
|
|
-
|
|
|
7,330
|
|
Net
cash provided by (used in) financing activities
|
|
(80,889
|
)
|
|
43,985
|
|
Change
in cash and cash equivalents
|
|
134,537
|
|
|
(63,993
|
)
|
Cash
and cash equivalents at beginning of period
|
|
544,414
|
|
|
551,756
|
|
Cash
and cash equivalents at end of period
|
$
|
678,951
|
|
$
|
487,763
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
Cash
paid for income taxes, net
|
$
|
1,916
|
|
$
|
24,645
|
|
|
|
|
|
|
|
|
Other
non-cash activities:
|
|
|
|
|
|
|
Unrealized
gains/(losses) from marketable securities
|
$
|
(213
|
)
|
$
|
824
|
|
Deferred
stock-based compensation
|
$
|
-
|
|
$
|
3,604
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 - Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements were prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-Q and Article 10 of Securities and Exchange Commission, or SEC, Regulation
S-X. In the opinion of management, all adjustments, consisting only of normal
recurring adjustments except as otherwise noted, considered necessary for a
fair
statement of results of operations and financial position have been included.
The results for the interim periods presented are not necessarily indicative
of
the results expected for any future period. The following information should
be
read in conjunction with the audited financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended January 28,
2007.
Fiscal
year
We
operate on a 52 or 53-week year, ending on the Sunday nearest January 31.
The first quarters of fiscal year 2008 and fiscal year 2007 were both
13-week quarters.
Reclassifications
Certain
prior fiscal year balances have been reclassified to conform to the current
fiscal year presentation.
Principles
of Consolidation
Our
condensed 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, goodwill, stock-based
compensation and contingencies. These estimates are based on historical facts
and various other assumptions that we believe are reasonable.
Recently
Issued Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 157, or SFAS No. 157,
Fair
Value Measurements.
SFAS
No. 157 establishes a framework for measuring fair value and expands disclosures
about fair value measurements. The changes to current practice resulting from
the application of SFAS No. 157 relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. We are required to adopt the provisions of SFAS No. 157
beginning with our fiscal quarter ending April 27, 2008. We 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
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.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Adoption
of FASB Interpretation No. 48
On
January 29, 2007, we adopted FASB
Interpretation No. 48, or FIN 48, Accounting
for Uncertainty in Income Taxes, issued
in
July 2006. FIN 48 applies to all tax positions related to income taxes subject
to FASB Statement of Financial Accounting Standards No. 109, or SFAS No. 109,
Accounting
for Income Taxes.
Under
FIN 48 we recognize the benefit from a tax position only if it is
more-likely-than-not that the position would be sustained upon audit based
solely on the technical merits of the tax position. The cumulative effect of
adoption of FIN 48 did not result in a material adjustment to our tax liability
for unrecognized income tax benefits. Our policy to include interest and
penalties related to unrecognized tax benefits as a component of income tax
expense did not change as a result of implementing the FIN 48. Please refer
to
Note 3 of these Notes to Condensed Consolidated Financial Statements for
additional information.
Note
2 - Stock-Based Compensation
At
the
beginning of fiscal 2007, 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) which establishes accounting for stock-based awards exchanged
for employee services. Accordingly, we measure stock-based compensation at
grant
date, based on the fair value of the awards, and we recognize that compensation
as expense using the straight-line attribution method over the requisite
employee service period, which is typically the vesting period of each award.
We
elected to adopt the modified prospective application method provided by SFAS
No. 123(R). Our estimates of the fair values of employee stock options are
calculated using a binomial model.
For
option grants prior to our adoption of SFAS No. 123(R), we record stock-based
compensation expense equal to the amount that would have been recognized if
the
fair value method 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, had
been
used.
Cumulative
Effect of Change in Accounting Principle
Our
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 amounts
capitalized as inventory, as follows:
|
Three
Months Ended
|
|
April
29,
|
|
April
30,
|
|
2007
|
|
2006
|
|
(In
thousands)
|
Cost
of revenue
|
$
|
2,809
|
|
$
|
1,227
|
Research
and development
|
|
22,400
|
|
|
14,426
|
Sales,
general and administrative
|
|
12,196
|
|
|
6,572
|
Total
|
$
|
37,405
|
|
$
|
22,225
|
During
the three months ended April 29, 2007 and April 30, 2006, we granted
approximately 4.8 million and 5.9 million stock options, respectively, with
an
estimated total grant-date fair value of $56.1 million and $63.9 million,
respectively, and a per option weighted average grant-date fair value of $11.62
and $10.86, respectively. Of the estimated total grant-date fair value, we
estimated that the stock-based compensation expense related to the awards that
are not expected to vest was $10.5 million and $12.3 million, respectively.
As
of
April 29, 2007 and April 30, 2006, the aggregate amount of unearned stock-based
compensation expense related to our stock options was $185.3 million and $190.3
million, respectively, adjusted for estimated forfeitures, which we will
recognize over an estimated weighted average amortization period of 2.1 years
and 2.3 years, respectively.
As
of
April 29, 2007 and April 30, 2006, we had unearned stock-based compensation
related to stock options of $208.4 million and $212.8 million, before the impact
of estimated forfeitures.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Valuation
Assumptions
In
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. 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. 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. We also segregated 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.
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.
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:
|
Three
Months Ended
|
|
|
April 29, 2007
|
|
April
30, 2006
|
|
|
(Using
a
binomial
model)
|
|
(Using
a
binomial
model)
|
|
Weighted
average expected life of stock options (in years)
|
|
3.9
- 5.8
|
|
|
3.6
- 5.1
|
|
Risk
free interest rate
|
|
4.6
|
%
|
|
4.7
|
%
|
Volatility
|
|
39%
- 45
|
%
|
|
39%
- 41
|
%
|
Dividend
yield
|
|
—
|
|
|
—
|
|
Employee
Stock Purchase Plan:
|
|
Three
Months Ended
|
|
|
|
April
29, 2007
|
|
|
April
30, 2006
|
|
|
|
(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
|
|
Risk
free interest rate
|
|
3.52%
- 5.15
|
%
|
|
1.6%
- 4.6
|
%
|
Volatility
|
|
38%
- 47
|
%
|
|
30%
- 45
|
%
|
Dividend
yield
|
|
—
|
|
|
—
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The
following summarizes the transactions under our stock option plans:
|
Options
Available for Grant
|
|
Options
Outstanding
|
|
Weighted
Average Exercise Price Per Share
|
|
Balances,
January 28, 2007
|
|
21,780,284
|
|
|
73,994,662
|
|
$
|
13.29
|
|
Granted
|
|
(4,833,408
|
)
|
|
4,833,408
|
|
|
28.79
|
|
Exercised
|
|
-
|
|
|
(3,900,292
|
)
|
|
7.75
|
|
Cancelled
|
|
739,335
|
|
|
(739,335
|
)
|
|
26.59
|
|
Balances,
April 29, 2007
|
|
17,686,211
|
|
|
74,188,443
|
|
$
|
14.47
|
|
The
aggregate intrinsic value of stock options exercised was $91.5 million and
$161.8 million for the three months ended April 29, 2007 and April 30, 2006,
respectively.
Note
3 - Income Taxes
On
January 29, 2007, we adopted FIN 48. The cumulative effect of adoption of FIN
48
did not result in a material adjustment to our tax liability for unrecognized
income tax benefits. At the adoption date of January 29, 2007, we had $63.8
million of unrecognized tax benefits, $61.1 million of which would affect our
effective tax rate if recognized. The
recognition of the remaining unrecognized tax benefits would be reported as
an
adjustment to goodwill to
the
extent of pre-acquisition unrecognized tax benefits. There
have been no significant changes to these amounts during the three months ended
April, 29, 2007. We
have
historically classified certain unrecognized tax benefits as income taxes
payable, which is included within the current liabilities section of our
Condensed Consolidated Balance Sheet. As a result of our adoption of FIN 48,
we
reclassified unrecognized tax benefits of $33.1 million to income taxes payable
and deferred tax liability, which is included within the long-term liabilities
section of our Condensed Consolidated Balance Sheet.
Our
policy to include interest and penalties related to unrecognized tax benefits
as
a component of income tax expense did not change as a result of implementing
FIN
48. At the adoption date of January 29, 2007, we had accrued $6.2 million for
the payment of interest related to unrecognized tax benefits, which is included
as a component of the $63.8 million of unrecognized tax benefits as noted above.
While
we
believe that we have adequately provided for all tax positions, amounts asserted
by tax authorities could be greater or less than our accrued position.
Accordingly, our provisions on federal, state and foreign tax-related matters
to
be recorded in the future may change as revised estimates are made or the
underlying matters are settled or otherwise resolved. As of April 29, 2007,
we
do not believe that our estimates, as otherwise provided for, on such tax
positions will significantly increase or decrease within the next twelve
months.
We
are
subject to taxation by a number of taxing authorities both in the United States
and throughout the world. The material tax jurisdictions that are subject to
examination for our tax years beginning in fiscal year 2002 through fiscal
year
2007 include the United States, Hong Kong, Taiwan, and China, depending upon
the
statute of limitations applicable to such particular jurisdiction. As of April
29, 2007, we are under examination for U.S. federal tax purposes for fiscal
years 2004, 2005 and 2006 and by tax authorities in Canada and Taiwan for
fiscal year 2003.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
4 - 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:
|
Three
Months Ended
|
|
|
April
29,
2007
|
|
April 30,
2006
|
|
|
(In
thousands, except per share data)
|
|
Numerator:
|
|
|
|
|
Net
income
|
$
|
132,259
|
|
$
|
92,064
|
|
Denominator:
|
|
|
|
|
|
|
Denominator
for basic net income per share, weighted average shares
|
|
360,831
|
|
|
347,937
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
Weighted
average effect of equity incentive plans
|
|
38,035
|
|
|
41,491
|
|
Denominator
for diluted net income per share, weighted average shares
|
|
398,866
|
|
|
389,428
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
Basic
net income per share
|
$
|
0.37
|
|
$
|
0.26
|
|
Diluted
net income per share
|
$
|
0.33
|
|
$
|
0.24
|
|
Diluted
net income per share does not include the effect of anti-dilutive common
equivalent shares from stock options outstanding of 12.8 million and
6.4 million as of April 29, 2007 and April 30, 2006, respectively.
Note
5 - 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 Asset Purchase Agreement, or the APA, which closed
on April 18, 2001, to purchase certain graphics chip assets from 3dfx. Under
the
terms of the APA, the cash consideration due at the closing was $70.0 million,
less $15.0 million that was loaned to 3dfx pursuant to a Credit Agreement dated
December 15, 2000. The APA also provided, subject to the other provisions
thereof, that if 3dfx properly certified that all its debts and other
liabilities had been provided for, then we would have been obligated to pay
3dfx
one million shares, which due to subsequent stock splits now totals four million
shares, of NVIDIA common stock. If 3dfx could not make such a certification,
but
instead properly certified that its debts and liabilities could be satisfied
for
less than $25.0 million, then 3dfx could have elected to receive a cash payment
equal to the amount of such debts and liabilities and a reduced number of shares
of our common stock, with such reduction calculated by dividing the cash payment
by $25.00 per share. If 3dfx could not certify that all of its debts and
liabilities had been provided for, or could not be satisfied, for less than
$25.0 million, we would not be obligated under the APA to pay any additional
consideration for the assets.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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. Trial began on March 21, 2007
on valuation issues in the Trustee's constructive fraudulent transfer claims
against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1)
what did 3dfx transfer to NVIDIA in the APA?; (2) of what was transferred,
what
qualifies as "property" subject to the Bankruptcy Court's avoidance powers
under
the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions?;
(3) what is the fair market value of the "property" identified in answer to
question (2)?; and (4) was the $70 million that NVIDIA paid "reasonably
equivalent" to the fair market value of that property? At the conclusion of
the
evidence, the Bankruptcy Court asked the parties to submit post-trial briefing.
That briefing is scheduled to be concluded on May 25, 2007, and we expect a
decision to be forthcoming from the Bankruptcy Court at some point thereafter.
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 refer to Note 13 of these Notes to Condensed
Consolidated Financial Statements 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
|
|
|
|
|
Note
6 - 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 Inc., or
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. The allocation of the
purchase price for the PortalPlayer acquisition has been prepared on a
preliminary basis and reasonable changes are expected as additional information
becomes available.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
As
of
April 29, 2007, the estimated fair values of the purchase price allocated to
assets we acquired and liabilities we assumed on the respective acquisition
dates were as follows:
|
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
|
|
|
16,850
|
|
Inventories
|
|
4,896
|
|
|
-
|
|
|
2,326
|
|
Other
assets
|
|
935
|
|
|
73
|
|
|
12,798
|
|
Property
and equipment
|
|
1,010
|
|
|
134
|
|
|
19,991
|
|
In-process
research and development
|
|
-
|
|
|
602
|
|
|
13,400
|
|
Goodwill
|
|
31,051
|
|
|
27,906
|
|
|
104,468
|
|
Intangible
assets:
|
|
|
|
|
|
|
|
|
|
Existing technology
|
|
2,490
|
|
|
5,179
|
|
|
6,700
|
|
Backlog
|
|
-
|
|
|
-
|
|
|
2,200
|
|
Patents
|
|
-
|
|
|
-
|
|
|
600
|
|
Customer relationships
|
|
653
|
|
|
2,650
|
|
|
2,700
|
|
Trademark
|
|
-
|
|
|
482
|
|
|
-
|
|
Non-compete agreements
|
|
-
|
|
|
72
|
|
|
-
|
|
Total
assets acquired
|
|
70,734
|
|
|
39,086
|
|
|
368,699
|
|
Current
liabilities
|
|
(16,878
|
)
|
|
(1,373
|
)
|
|
(12,766
|
)
|
Acquisition
related costs
|
|
(781
|
)
|
|
(740
|
)
|
|
(8,043
|
)
|
Long-term
liabilities
|
|
-
|
|
|
(301
|
)
|
|
(46
|
)
|
Total
liabilities assumed
|
|
(17,659
|
)
|
|
(2,414
|
)
|
|
(20,855
|
)
|
Net
assets acquired
|
$
|
53,075
|
|
$
|
36,672
|
|
$
|
347,844
|
|
|
ULi
|
|
Hybrid
Graphics
|
|
PortalPlayer
|
|
|
Straight-line
depreciation / amortization period
|
|
Property
and equipment
|
|
4
-
49 months
|
|
|
1 -
36 months
|
|
|
3 -
60 months
|
|
Intangible
assets:
|
|
|
|
|
|
|
|
|
|
Existing
technology
|
|
3
years
|
|
|
3
years
|
|
|
3
years
|
|
Customer
relationships
|
|
3
years
|
|
|
3
years
|
|
|
1-3
years
|
|
Backlog
|
|
-
|
|
|
-
|
|
|
2
months
|
|
Patents
|
|
-
|
|
|
-
|
|
|
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
7 - Goodwill
The
carrying amount of goodwill is as follows:
|
|
April
29,
2007
|
|
January 28,
2007
|
|
|
|
(In
thousands)
|
|
3dfx
|
|
$
|
75,326
|
|
$
|
75,326
|
|
MediaQ
|
|
|
35,342
|
|
|
35,342
|
|
ULi
|
|
|
31,051
|
|
|
31,051
|
|
Hybrid
Graphics
|
|
|
27,906
|
|
|
27,906
|
|
PortalPlayer
|
|
|
104,468
|
|
|
114,816
|
|
Other
|
|
|
16,984
|
|
|
16,984
|
|
Total
goodwill
|
|
$
|
291,077
|
|
$
|
301,425
|
|
During
the first quarter of fiscal year 2008, goodwill related to PortalPlayer
decreased by $10.3 million primarily to reflect an increase in the fair value
of
land acquired based on a third party appraisal obtained by us as a result of
our
acquisition of PortalPlayer. Please refer to Note 6 of these Notes to Condensed
Consolidated Financial Statements for further information regarding the
PortalPlayer acquisition.
Note
8 - Amortizable Intangible Assets
We
are
currently amortizing our intangible assets with definitive lives over periods
ranging from one to five years on a straight-line basis. The components of
our
amortizable intangible assets are as follows:
|
|
April 29, 2007
|
|
January 28, 2007
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
|
|
(In
thousands)
|
|
Technology
licenses
|
|
$
|
49,368
|
|
$
|
(23,437
|
)
|
$
|
25,931
|
|
$
|
37,516
|
|
$
|
(20,480
|
)
|
$
|
17,036
|
|
Patents
|
|
|
34,539
|
|
|
(25,489
|
)
|
|
9,050
|
|
|
34,623
|
|
|
(24,569
|
)
|
|
10,054
|
|
Acquired
intellectual property
|
|
|
50,812
|
|
|
(34,899
|
)
|
|
15,913
|
|
|
50,212
|
|
|
(31,894
|
)
|
|
18,318
|
|
Trademarks
|
|
|
11,310
|
|
|
(11,310
|
)
|
|
-
|
|
|
11,310
|
|
|
(11,310
|
)
|
|
-
|
|
Other
|
|
|
1,494
|
|
|
(1,474
|
)
|
|
20
|
|
|
1,494
|
|
|
(1,391
|
)
|
|
103
|
|
Total
intangible assets
|
|
$
|
147,523
|
|
$
|
(96,609
|
)
|
$
|
50,914
|
|
$
|
135,155
|
|
$
|
(89,644
|
)
|
$
|
45,511
|
|
The
increase in the gross carrying amount of technology licenses as of April 29,
2007 when compared to January 28, 2007 is primarily related to approximately
$10.6 million committed by us during the first quarter of fiscal 2008 related
to
payments under a confidential patent licensing arrangement that we entered
into
during fiscal year 2007. Our aggregate commitment for license payments under
this arrangement could range from $97.0 million to $110.0 million over a ten
year period; however, the net outlay may be reduced by the occurrence of certain
events covered by the arrangement.
Amortization
expense associated with intangible assets was $7.0 million and $4.0 million
for
the three months ended April 29, 2007 and April 30, 2006,
respectively. Future amortization expense related to the net carrying amount
of
intangible assets at April 29, 2007 is estimated to be $13.3 million for the
remainder of fiscal 2008, $13.2 million in fiscal 2009, $7.8 million in fiscal
2010, $3.8 million in fiscal 2011, $2.9 million in fiscal 2012 and a total
of
$9.9 million in fiscal 2013 and fiscal years subsequent of fiscal
2013.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
9 - Marketable Securities
We
account for our investment instruments in accordance with Statement of Financial
Accounting Standards No. 115, or SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
All of
our cash equivalents and marketable securities are treated as
“available-for-sale” under SFAS No. 115. Cash equivalents consist of
financial instruments which are readily convertible into cash and have original
maturities of three months or less at the time of acquisition. Marketable
securities consist primarily of highly liquid investments with a maturity of
greater than three months when purchased and some equity investments. We
classify our marketable securities at the date of acquisition in the
available-for-sale category as our intention is to convert them into cash for
operations. These securities are reported at fair value with the related
unrealized gains and losses included in accumulated other comprehensive income
(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 and unrealized losses for the
three
months ended April 29, 2007 and April 30, 2006 were not material.
Note
10 - Balance Sheet Components
Certain
balance sheet components are as follows:
|
April
29,
2007
|
|
January 28,
2007
|
|
|
(In
thousands)
|
|
Inventories:
|
|
|
|
|
|
|
Raw
materials
|
$
|
44,343
|
|
$
|
56,261
|
|
Work
in-process
|
|
121,930
|
|
|
111,058
|
|
Finished
goods
|
|
166,362
|
|
|
187,361
|
|
Total
inventories
|
$
|
332,635
|
|
$
|
354,680
|
|
At
April
29, 2007, we had outstanding inventory purchase obligations totaling
approximately $344 million.
|
April
29,
2007
|
|
January 28,
2007
|
|
|
(In
thousands)
|
|
Accrued
Liabilities:
|
|
|
|
|
Accrued
customer programs
|
$
|
153,521
|
|
$
|
181,182
|
|
Deferred
revenue
|
|
4,386
|
|
|
1,180
|
|
Income
and other taxes payable
|
|
5,607
|
|
|
37,903
|
|
Accrued
payroll and related expenses
|
|
64,520
|
|
|
81,352
|
|
Deferred
rent
|
|
12,024
|
|
|
12,551
|
|
Accrued
legal settlement
|
|
30,600
|
|
|
30,600
|
|
Other
|
|
19,163
|
|
|
21,964
|
|
Total
accrued liabilities
|
$
|
289,821
|
|
$
|
366,732
|
|
|
April
29,
2007
|
|
January 28,
2007
|
|
|
(In
thousands)
|
|
Other
Long-term Liabilities:
|
|
|
|
|
Asset
retirement obligation
|
$
|
6,411
|
|
$
|
6,362
|
|
Accrued
payroll taxes related to stock options
|
|
8,995
|
|
|
8,995
|
|
Income
taxes payable and deferred tax liability
|
|
51,929
|
|
|
-
|
|
Other
long-term liabilities
|
|
13,772
|
|
|
14,180
|
|
Total
other long-term liabilities
|
$
|
81,107
|
|
$
|
29,537
|
|
Please
refer to Note 3 of these Notes to Condensed Consolidated Financial Statements
for discussion
regarding the reclassification of income taxes payable from accrued liabilities
to other long-term liabilities as a result of the adoption of FIN
48.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
11 - Comprehensive Income
Comprehensive
income consists of net income and other comprehensive income or loss. Other
comprehensive income or loss components include unrealized gains or losses
on
available-for-sale securities, net of tax. The components of comprehensive
income, net of tax, were as follows:
|
Three
Months Ended
|
|
|
April 29,
2007
|
|
April 30,
2006
|
|
|
(In
thousands)
|
|
Net
income
|
$
|
132,259
|
|
$
|
92,064
|
|
Net
change in unrealized (gains) / losses on available-for-sale securities,
net of tax
|
|
(79
|
)
|
|
(486
|
)
|
Reclassification
adjustments for net realized gains on available-for-sale securities
included in net income, net of tax
|
|
(73
|
)
|
|
(8
|
)
|
Total
comprehensive income
|
$
|
132,107
|
|
$
|
91,570
|
|
|
|
|
|
|
|
|
Note
12 - Guarantees
FASB
Interpretation No. 45, or FIN 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others,
requires
that upon issuance of a guarantee, the guarantor must recognize a liability
for
the fair value of the obligation it assumes under that guarantee. In addition,
FIN 45 requires disclosures about the guarantees that an entity has issued,
including a tabular reconciliation of the changes of the entity’s product
warranty liabilities.
The
following table summarizes the changes
in
the estimated product warranty liabilities for the three months ended April
29,
2007 and April 30, 2006:
Description
|
Balance at
Beginning
of
Period
|
|
Additions (1)
|
|
Deductions (2)
|
|
Balance
at
End of
Period
(3)
|
|
|
(In
thousands)
|
|
Three
months ended April 29, 2007
|
$
|
17,958
|
|
$
|
4,980
|
|
$
|
(3,875
|
)
|
$
|
19,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended April 30, 2006
|
$
|
10,239
|
|
$
|
11,775
|
|
$
|
(10,448
|
)
|
$
|
11,566
|
|
(1) Includes
$4,746 and $11,775 for the three months ended April 29, 2007 and April 30,
2006,
respectively, towards allowances for sales returns estimated at the time revenue
is recognized primarily based on historical return rates and is charged as
a
reduction to revenue.
(2) Includes
$3,875 and $10,448 for the three months ended April 29, 2007 and April 30,
2006,
respectively, written off against the allowance for sales returns.
(3) Includes
$15,348 and $11,566 at April 29, 2007 and April 30, 2006, respectively, relating
to 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 Condensed
Consolidated Financial Statements for such indemnifications.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
13 -
Commitments and Contingencies
Litigation
3dfx
On
December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries
entered into the APA to purchase certain graphics chip assets from 3dfx which
closed on April 18, 2001.
In
May
2002, we were served with a California state court complaint filed by the
landlord of 3dfx’s San Jose, California commercial real estate lease,
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 sought 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 District Court dismissed the CarrAmerica action in its entirety and
without leave to amend. The District Court found, among other things, that
CarrAmerica lacked standing to bring the lawsuit and that such standing 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 CarrAmerica. Those motions
are
currently scheduled for hearing in early August 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 Bankruptcy Court held a hearing on the Trustee’s motion for summary
adjudication. On December 23, 2005, the Bankruptcy Court issued its ruling
denying the Trustee’s Motion for Summary Adjudication in all material respects
and holding that NVIDIA is prevented from disputing that the value of the 3dfx
transaction to NVIDIA was less than $108.0 million. The Bankruptcy Court
expressly denied the Trustee’s request to find that the value of the 3dfx assets
conveyed to NVIDIA were at least $108.0 million. In early November 2005, after
many months of mediation, NVIDIA and the Official Committee of Unsecured
Creditors, or the Creditors’ Committee, reached a conditional settlement of the
Trustee’s claims against NVIDIA. This conditional settlement, presented as the
centerpiece of a proposed Plan of Liquidation in the bankruptcy case, was
subject to a confirmation process through a vote of creditors and the review
and
approval of the Bankruptcy Court after notice and hearing. The Trustee advised
that he intended to object to the settlement, which would have called for a
payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under
the
settlement, $5.6 million related to various administrative expenses and Trustee
fees, and $25.0 million related to the satisfaction of debts and liabilities
owed to the general unsecured creditors of 3dfx. Accordingly, during the three
month period ended October 30, 2005, we recorded $5.6 million as a charge to
settlement costs and $25.0 million as additional purchase price for 3dfx.
However,
the conditional settlement never progressed substantially through the
confirmation process. On December 21, 2005, the Bankruptcy Court determined
that
it would schedule trial of one portion of the Trustee’s case against NVIDIA. On
January 2, 2007, NVIDIA exercised its right to terminate the settlement
agreement on grounds that the Bankruptcy Court had failed to proceed toward
confirmation of the Creditors’ Committee’s plan. Trial began on March 21, 2007
on valuation issues in the Trustee's constructive fraudulent transfer claims
against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1)
what did 3dfx transfer to NVIDIA in the APA?; (2) of what was transferred,
what
qualifies as "property" subject to the Bankruptcy Court's avoidance powers
under
the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions?;
(3) what is the fair market value of the "property" identified in answer to
question (2)?; and (4) was the $70 million that NVIDIA paid "reasonably
equivalent" to the fair market value of that property? At the conclusion of
the
evidence, the Bankruptcy Court asked the parties to submit post-trial briefing.
That briefing is scheduled to be concluded on May 25, 2007, and we expect a
decision to be forthcoming from the Bankruptcy Court at some point thereafter.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 APA. By virtue of stock splits since the execution of the
APA, 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 APA. 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 APA was not
terminated before 3dfx filed for bankruptcy protection, that the 3dfx bankruptcy
estate still holds some rights in the APA, and that the APA is capable of being
assumed by the bankruptcy estate. In addition, the Equity Holders Committee
filed a motion seeking Bankruptcy Court approval of investor protections for
Harbinger Capital Partners Master Fund I, Ltd., an equity investment firm that
has conditionally agreed to pay no more than $51.5 million for preferred stock
in 3dfx. The hearing on that motion was held on January 18, 2007, and the
Bankruptcy Court approved the proposed protections.
Proceedings,
SEC inquiry and lawsuits
related to our historical stock option granting practices
In
June
2006, the Audit Committee of the Board of NVIDIA, or the Audit Committee, began
a review of our stock option practices based on the results of an internal
review voluntarily undertaken by management. The Audit Committee, with the
assistance of outside legal counsel, completed its review on November 13, 2006
when the Audit Committee reported its findings to our full Board. The review
covered option grants to all employees, directors and consultants for all grant
dates during the period from our initial public offering in January 1999 through
June 2006. Based on the findings of the Audit Committee and our internal review,
we identified a number of occasions on which we used an incorrect measurement
date for financial accounting and reporting purposes.
We
voluntarily contacted the SEC regarding the Audit Committee’s review and, as of
the present date, the SEC is continuing the inquiry of our historical stock
option grant practices it began in late August 2006. In October 2006, we met
with the SEC and provided it with a review of the status of the Audit
Committee’s review and in November 2006 we voluntarily provided the SEC with
further documents. We 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
filed
a
consolidated complaint on April
23,
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.
Plaintiffs in these actions
allege
claims for, among other things, breach of fiduciary duty, unjust enrichment,
insider selling, abuse of control, gross mismanagement, waste, and
constructive
fraud.
The
Northern District of California action also alleges
violations of federal
provisions, including Sections
10(b),
14(a)
and
20(a)
of
the
Securities Exchange Act of
1934.
The
plaintiffs seek to recover for NVIDIA, among other things, damages in an
unspecified amount, rescission, punitive damages, treble damages for insider
selling, and fees and costs. Plaintiffs also seek an accounting, a constructive
trust and other equitable relief. We
intend
to take all appropriate action in response to these complaints.
Between
May 14, 2007 and May 17, 2007, we filed several motions to dismiss the federal,
Delaware and Santa Clara actions. All of the motions are yet to be fully
briefed, and remain pending.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Department
of Justice Subpoena and Investigation, and Civil Cases
On
November 29, 2006, we received a subpoena from the San Francisco Office of
the
Antitrust Division of the United States Department of Justice, or DOJ, in
connection with the DOJ's investigation into potential antitrust violations
related to graphics processing units and cards. No specific allegations have
been made against us. We are cooperating with the DOJ in its investigation.
As
of May 14, 2007, 51 civil complaints have been filed against us. The majority
of
the complaints were filed in the Northern District of California, several were
filed in the Central District of California, and other cases were filed in
several other Federal district courts. 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 filed a
motion with the Judicial Panel on Multidistrict Litigation, or JPML, 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 took place on March
29,
2007. The JPML subsequently granted the motion and conditionally transferred
all
of the actions currently pending outside of the Northern District of California
to the Northern District of California for coordination of pretrial proceedings.
An initial case management conference for the coordinated cases is scheduled
to
be held on May 24, 2007. We believe the allegations in the complaints are
without merit and intend to vigorously defend the cases.
Note
14 - Stockholders’ Equity
Stock
Repurchase Program
During
fiscal year 2005, we announced that our Board of Directors, or Board, had
authorized a stock repurchase program to repurchase shares of our common
stock,
subject to certain specifications, up to an aggregate maximum amount of $300
million. During fiscal year 2007, we announced that our Board had approved
a $400 million increase to the original stock repurchase program. Subsequently,
on May 21, 2007, we announced a stock repurchase program under which we may
purchase up to an additional $1.0 billion of our common stock over a three
year
period through May 2010. As a result of these increases, we have an ongoing
authorization from the Board, subject to certain specifications, to repurchase
shares of our common stock up to an aggregate maximum amount of $1.7
billion.
The
repurchases will be made from time to time in the open market, in privately
negotiated transactions, or in structured stock repurchase programs, and
may be
made in one or more larger repurchases, in compliance with the Securities
Exchange Act of 1934, or the Exchange Act, Rule 10b-18, subject to market
conditions, applicable legal requirements, and other factors. The program
does
not obligate NVIDIA to acquire any particular amount of common stock and
the
program may be suspended at any time at our discretion. As part of our share
repurchase program, we have entered into, and we may continue to enter into,
structured share repurchase transactions with financial institutions. These
agreements generally require that we make an up-front payment in exchange
for
the right to receive a fixed number of shares of our common stock upon execution
of the agreement, and a potential incremental number of shares of our common
stock, within a pre-determined range, at the end of the term of the agreement.
During
the
three months ended April 29, 2007, we entered into a structured share repurchase
transaction to repurchase 4.0 million shares of our common stock for $125.0
million, which we recorded on the trade date of each transaction. Through
April
29, 2007, we have repurchased 31.4 million shares under our stock repurchase
program for a total cost of $613.1 million.
Convertible
Preferred Stock
As
of
April 29, 2007 and April 30, 2006, no shares of preferred stock were
outstanding.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note
15 - Segment Information
Our
Chief
Executive Officer, who is considered to be our chief operating decision maker,
or CODM, reviews financial information presented on an operating segment basis
for purposes of making operating decisions and assessing financial performance.
During
the first quarter of fiscal 2008, we reorganized our operating segments. We
now
report financial information for four operating segments to our CODM: the
Graphics Processing Unit, or GPU, Business, which is comprised primarily of
our
GeForce products that support desktop and notebook PCs, plus memory products,
the Professional Solutions Business, or PSB, which is comprised of our NVIDIA
Quadro professional workstation products and other professional graphics and
high-performance computing products, the Media and Communications Processor,
or
MCP, Business, which is comprised of NVIDIA nForce core logic and motherboard
GPU products, and our Consumer Products Business, or CPB, which is comprised
primarily of mobile and consumer products that support handheld PDAs, cellular
phones and other handheld devices, plus license, royalty and other revenue
and
associated costs related to video game consoles and other digital consumer
electronics devices.
In
addition to these operating segments, we have the “All Other” category that
includes human resources, legal, finance, general administration and corporate
marketing expenses, which total $68.0 million and $50.1 million for three months
ended April 29, 2007 and April 30, 2006, respectively, that we do not allocate
to our other operating segments. “All Other” also includes the results of
operations of other miscellaneous operating segments that are neither
individually reportable, nor aggregated with another operating segment. Revenue
in the “All Other” category is primarily derived from sales of components.
All relevant prior period amounts have been 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.
|
|
GPU
|
|
PSB
|
|
MCP
|
|
CPB
|
|
All
Other
|
|
Consolidated
|
|
|
|
(In
thousands)
|
|
Three
Months Ended April 29, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
483,495
|
|
$
|
140,873
|
|
$
|
148,750
|
|
$
|
67,226
|
|
$
|
3,936
|
|
$
|
844,280
|
|
Depreciation
and amortization expense
|
|
$
|
8,285
|
|
$
|
2,187
|
|
$
|
6,593
|
|
$
|
6,095
|
|
$
|
9,162
|
|
$
|
32,322
|
|
Operating
income (loss)
|
|
$
|
124,417
|
|
$
|
69,307
|
|
$
|
7,839
|
|
$
|
10,168
|
|
$
|
(70,485
|
)
|
$
|
141,246
|
|
Three
Months Ended April 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
404,807
|
|
$
|
100,042
|
|
$
|
118,384
|
|
$
|
57,385
|
|
$
|
1,189
|
|
$
|
681,807
|
|
Depreciation
and amortization expense
|
|
$
|
6,870
|
|
$
|
1,828
|
|
$
|
4,278
|
|
$
|
3,786
|
|
$
|
8,109
|
|
$
|
24,871
|
|
Operating
income (loss)
|
|
$
|
87,239
|
|
$
|
45,064
|
|
$
|
2,983
|
|
$
|
17,165
|
|
$
|
(50,942)
|
|
$
|
101,509
|
|
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:
|
April
29,
2007
|
|
April
30,
2006
|
|
|
(In
thousands)
|
|
Revenue:
|
|
|
|
|
United
States
|
$
|
101,866
|
|
$
|
77,372
|
|
Other
Americas
|
|
54,544
|
|
|
27,590
|
|
China
|
|
238,285
|
|
|
179,720
|
|
Taiwan
|
|
272,983
|
|
|
227,574
|
|
Other
Asia Pacific
|
|
95,052
|
|
|
111,218
|
|
Europe
|
|
81,550
|
|
|
58,333
|
|
Total
revenue
|
$
|
844,280
|
|
$
|
681,807
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Unaudited)
No
customer
represented 10% or more of total revenue for the three months ended April 29,
2007. One customer represented approximately 14% of revenue for the three
months ended April 30, 2006.
Accounts
receivable from significant customers, those representing approximately 10%
or
more of total accounts receivable, was from two customers for 26.7% of total
accounts receivable balances at April 29, 2007.
Note
16 - Subsequent Event
Stock
Repurchase Program
On
May
21, 2007, we announced a stock repurchase program under which we may purchase
up
to an additional $1.0 billion of our common stock over a three year period
through May 2010. As a result of this increase, we have an ongoing authorization
from the Board, subject to certain specifications, to repurchase shares of
our
common stock up to an aggregate maximum amount of $1.7 billion.
The
repurchases will be made from time to time in the open market, in privately
negotiated transactions, or in structured stock repurchase programs, and
may be
made in one or more larger repurchases, in compliance with the Securities
Exchange Act of 1934, or the Exchange Act, Rule 10b-18, subject to market
conditions, applicable legal requirements, and other factors. The program
does
not obligate NVIDIA to acquire any particular amount of common stock and
the
program may be suspended at any time at our discretion. As part of our share
repurchase program, we have entered into, and we may continue to enter into,
structured share repurchase transactions with financial institutions. These
agreements generally require that we make an up-front payment in exchange
for
the right to receive a fixed number of shares of our common stock upon execution
of the agreement, and a potential incremental number of shares of our common
stock, within a pre-determined range, at the end of the term of the agreement.
During
the three months ended April 29, 2007, we entered into a structured share
repurchase transaction to repurchase 4.0 million shares of our common stock
for
$125.0 million, which we recorded on the trade date of each transaction.
Through
April 29, 2007, we have repurchased 31.4 million shares under our stock
repurchase program for a total cost of $613.1 million.
Forward-Looking
Statements
When
used in this Quarterly
Report on Form 10-Q, the words “believes,” “plans,” “estimates,” “anticipates,”
“expects,” “intends,” “allows,” “can,” “will” and similar expressions are
intended to identify forward-looking statements. These statements relate to
future periods and include, but are not limited to, statements as to: the
features, benefits, capabilities, performance, impact, production and
availability of our technologies and products; seasonality; past or future
acquisitions; our strategies and objectives; product cycles; gross margin;
product mix; inventories; average selling prices; taxes; growth and factors
contributing to growth; stock-based compensation expense; revenue; 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; competition; our
intellectual property; 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 and the NVIDIA
logo
are our trademarks or registered trademarks in the United States and other
countries that are used in this document. We may also refer to trademarks of
other corporations and organizations in this document.
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with “Item 1A. Risk Factors”, our
Condensed Consolidated Financial Statements and related Notes thereto, as well
as other cautionary statements and risks described elsewhere in this quarterly
report on Form 10-Q, before deciding to purchase, hold or sell shares of our
common stock.
Overview
Our
Company
NVIDIA
Corporation is the worldwide leader in programmable graphics processor
technologies. Our products are designed to enhance the end-user experience
on
consumer and professional computing devices. We have four major product-line
operating segments: the graphics processing unit, or GPU, Business, the
professional solutions business, or PSB, the media and communications processor,
or MCP, Business, and the consumer products business, or CPB.
Our
GPU
Business is comprised primarily of our GeForce products that support desktop
and
notebook PCs, plus memory products. Our PSB is comprised of our NVIDIA Quadro
professional workstation products and other professional graphics and
high-performance computing products. Our MCP Business is comprised of NVIDIA
nForce core logic and motherboard GPU products. Our CPB is comprised primarily
of mobile and consumer products that support handheld personal digital
assistants, or PDAs, cellular phones and other handheld devices, plus license,
royalty and other revenue and associated costs related to video game consoles
and other digital consumer electronics devices.
We
were
incorporated in California in April 1993 and reincorporated in Delaware in
April
1998. Our headquarter facilities are in Santa Clara, California. Our Internet
address is www.nvidia.com.
Recent
Developments, Future Objectives and Challenges
GPU
Business
During
the first quarter of fiscal 2008:
· |
our
GeForce product was the market leader in the Total Desktop, Standalone
Desktop and Standalone Notebook segments in the first quarter of
calendar
year 2007, based on the latest PC Graphics 2007 Report from Mercury
Research.
|
· |
in
April 2007, we launched several new DirectX10 GPUs, adding the GeForce
8600, GeForce 8500, and GeForce 8300 to our GeForce 8 series of GPUs,
which previously included the NVIDIA GeForce 8800 GTX and GeForce
8800
GTS.
|
Professional
Solutions Business
During
the first quarter of fiscal 2008:
· |
we
launched the NVIDIA Quadro FX 4600 and NVIDIA Quadro FX 5600 products,
which are professional solutions based on our G80 unified architecture.
|
· |
we
expanded our NVIDIA Quadro Plex family with the introduction of the
NVIDIA
Quadro Plex VCS IV, a new version of the NVIDIA Quadro Plex visual
computing system, or VCS, which provides enhanced performance for
a wide
range of high-performance, graphics-intensive styling and design,
oil and
gas, and scientific applications.
|
MCP
Business
During
the first quarter of fiscal 2008:
· |
our
NVIDIA nForce products held the leadership position for the AMD segment
based on the latest PC Processor and Chipsets report from Mercury
Research.
|
· |
we
shipped the GeForce 7050 motherboard GPU, which targets the lowest
cost
segments of the market.
|
· |
we
expanded the reach of Scalable Link Interface, or SLI, technology
into the
performance segments with the launch of the our NVIDIA nForce 650i
SLI MCP
product for Intel.
|
Consumer
Products Business
During
the first quarter of fiscal 2008, we unveiled our first applications processor
-
the GoForce 6100. The GoForce 6100 is designed for next generation personal
media players, or PMPs,
and
multimedia smart phones. We expect that designs based on the GoForce 6100 will
ship later this fiscal year.
Gross
Margin Improvement
We
continue to remain focused on improving our gross margin. During the first
quarter of fiscal 2008, our gross margin was a record 45.0%, an increase of
270
basis points from our gross margin of 42.3% for the first quarter of fiscal
year
2007.
Our
gross
margin is significantly impacted by the mix of products that we earn revenue
from during each of our fiscal quarters. Product mix is often difficult to
estimate with accuracy and, thus, if we achieve significant revenue growth
in
our lower margin product lines, it may negatively impact our gross margin.
We
expect to continue to focus on improving our gross margin during the remainder
of fiscal 2008.
Seasonality
Our
industry is largely focused on the consumer products market. Due to the
seasonality in this market, we typically expect to see stronger revenue
performance in the second half of the calendar year related to the
back-to-school and holiday seasons.
Subsequent
Event
Stock
Repurchase Program
On
May
21, 2007, we announced a stock repurchase program under which we may purchase
up
to an additional $1.0 billion of our common stock over a three year period
through May 2010. As a result of this increase, we have an ongoing authorization
from the Board, subject to certain specifications, to repurchase shares
of our
common stock up to an aggregate maximum amount of $1.7 billion.
The
repurchases will be made from time to time in the open market, in privately
negotiated transactions, or in structured stock repurchase programs, and
may be
made in one or more larger repurchases, in compliance with the Securities
Exchange Act of 1934, or the Exchange Act, Rule 10b-18, subject to market
conditions, applicable legal requirements, and other factors. The program
does
not obligate NVIDIA to acquire any particular amount of common stock and
the
program may be suspended at any time at our discretion. As part of our
share
repurchase program, we have entered into, and we may continue to enter
into,
structured share repurchase transactions with financial institutions. These
agreements generally require that we make an up-front payment in exchange
for
the right to receive a fixed number of shares of our common stock upon
execution
of the agreement, and a potential incremental number of shares of our common
stock, within a pre-determined range, at the end of the term of the agreement.
During
the three months ended April 29, 2007, we entered into a structured share
repurchase transaction to repurchase 4.0 million shares of our common stock
for
$125.0 million, which we recorded on the trade date of each transaction.
Through
April 29, 2007, we have repurchased 31.4 million shares under our stock
repurchase program for a total cost of $613.1 million.
Financial
Information by Business Segment and Geographic Data
Our
Chief
Executive Officer, who is considered to be our chief operating decision maker,
or CODM, reviews financial information presented on an operating segment basis
for purposes of making operating decisions and assessing financial performance.
During
the first quarter of fiscal 2008, we reorganized our operating segments. We
now
report financial information for four operating segments to our CODM: the
Graphics Processing Unit, or GPU, Business, which is comprised primarily of
our
GeForce products that support desktop and notebook PCs, plus memory products;
the Professional Solutions Business, or PSB, which is comprised of our NVIDIA
Quadro professional workstation products and other professional graphics and
high-performance computing products, the Media and Communications Processor,
or
MCP, Business, which is comprised of NVIDIA nForce core logic and motherboard
GPU products, and our Consumer Products Business, or CPB, which is comprised
primarily of mobile and consumer products that support handheld PDAs, cellular
phones and other handheld devices, plus license, royalty and other revenue
and
associated costs related to video game consoles and other digital consumer
electronics devices.
In
addition to these operating segments, we have the “All Other” category that
includes human resources, legal, finance, general administration and corporate
marketing expenses, which total $68.0 million and $50.1 million for first
quarter of fiscal year 2008 and first quarter of fiscal year 2007, respectively,
that we do not allocate to our other operating segments. “All Other” also
includes the results of operations of other miscellaneous operating segments
that are neither individually reportable, nor aggregated with another operating
segment. Revenue in the “All Other” category is primarily derived from sales of
components. All relevant prior period amounts have been 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.
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.
|
April
29,
2007
|
|
April
30,
2006
|
|
Revenue
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of revenue
|
|
55.0
|
|
|
57.7
|
|
Gross
profit
|
|
45.0
|
|
|
42.3
|
|
Operating
expenses:
|
|
|
|
|
|
|
Research
and development
|
|
18.8
|
|
|
18.1
|
|
Sales,
general and administrative
|
|
9.5
|
|
|
9.4
|
|
Total
operating expenses
|
|
28.3
|
|
|
27.5
|
|
Income
from operations
|
|
16.7
|
|
|
14.8
|
|
Interest
and other income, net
|
|
1.5
|
|
|
1.3
|
|
Income
before income tax expense
|
|
18.2
|
|
|
16.1
|
|
Income
tax expense
|
|
2.6
|
|
|
2.7
|
|
Cumulative
effect of change in accounting principle, net of tax
|
|
-
|
|
|
0.1
|
|
Net
income
|
|
15.6
|
%
|
|
13.5
|
%
|
First
Quarters of Fiscal Years 2008 and 2007
Revenue
Revenue
was $844.3 million for our first quarter of fiscal year 2008, compared to $681.8
million for our first quarter of fiscal year 2007, which represents an increase
of 23.8%. A discussion of our revenue results for each of our operating segments
is as follows:
GPU
Business.
GPU
Business revenue increased by 19.4% to $483.5 million in the first quarter
of
fiscal year 2008, compared to $404.8 million for the first quarter of fiscal
year 2007. The increase was a result of increased sales of our desktop GPU
products, notebook products and memory product sales. The increase in sales
of
our desktop GPU products was led by our GeForce 8-based products that serve
the
high-end segment. This increase in the high-end segment was offset by a decrease
of sales in our mainstream segment, as a result of decreases in unit shipments
and average selling prices of our more mature mainstream segment products.
Sales
of our NVIDIA notebook GPU products improved due to an increased mix of GeForce
8-based and GeForce 7-based products, shipping for notebook PC design wins
based
on Intel’s Napa platform.
PSB.
PSB
revenue increased by 40.8% to $140.9 million in the first quarter of fiscal
year
2008, compared to $100.0 million for the first quarter of fiscal year 2007.
Our
NVIDIA professional workstation product sales increased due to board sales
as a result of increased unit shipments and average selling prices of GeForce
7-based products, offset by decreased sales of older products and a slight
decrease in chip sales as a result of decreased average selling
prices.
MCP
Business.
MCP
Business revenue increased by 25.7% to $148.8 million in the first
quarter of fiscal year 2008, compared to $118.4 million for the first quarter
of
fiscal year 2007. 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 year 2007.
CPB.
CPB revenue increased by 17.1% to $67.2 million for the first quarter of fiscal
year 2008, compared to $57.4 million for the first quarter of fiscal year
2007. The overall increase in CPB revenue is primarily due to sales related
to our acquisition of PortalPlayer Inc., or PortalPlayer, in January 2007.
We
also
had increased revenue from our embedded products, and an increase in royalty
revenue
recognized from both our contractual arrangement with Microsoft related to
their
Xbox360 video game console and revenue from our contractual arrangements with
Sony Computer Entertainment, or SCE, related to their PS3 video game console,
and other digital consumer electronics devices. These increases were offset
by a
decrease in revenue from our contractual development arrangements with
SCE.
Concentration
of Revenue
Revenue
from sales to customers outside of the United States and other Americas
accounted for 81.5% and 84.6% of total revenue for the first quarter of fiscal
years 2008 and 2007, respectively. Revenue by geographic region is allocated
to
individual countries based on the location to which the products are initially
billed even if the foreign contract equipment manufacturers, or CEMs’, add-in
board and motherboard manufacturers’ revenue is attributable to end customers in
a different location.
In
the first quarter of fiscal year 2008, there were no sales to any customers
in
excess of 10% of our total revenue. However, in the first quarter of fiscal
year
2007, sales to one significant customer
accounted for approximately 14% of our total revenue.
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 45.0% and 42.3% for the first quarter of
fiscal year 2008 and 2007, respectively. A discussion of our gross margin
results for each of our operating segments is as follows:
GPU
Business.
The
gross margin of our GPU Business increased during the first quarter of fiscal
year 2008 as compared to the first quarter of fiscal year 2007, primarily due
to
increased sales of our GeForce 8 series GPUs, which began selling in the third
quarter of fiscal year 2007. Our GeForce 8 series and GeForce 7 series GPUs
generally have higher gross margins than our previous generations of GPUs.
PSB.
The
gross margin of our PSB increased during the first quarter of fiscal year 2008
as compared to the first quarter of fiscal year 2007, primarily due to increased
sales of our GeForce 8-based NVIDIA Quadro products, which began selling in
the
fourth quarter of fiscal year 2007, and GeForce 7-based NVIDIA Quadro products,
which generally have higher gross margins than our previous generations of
NVIDIA Quadro products.
MCP
Business.
The
gross margin of our MCP Business increased during the first quarter of fiscal
year 2008 as compared to the first quarter of fiscal year 2007, primarily due
to
increased sales of NVIDIA nForce integrated AMD-based desktop products and
NVIDIA nForce integrated Intel-based desktop products, which began shipping
after the second quarter of fiscal year 2007, both of which generally have
experienced higher gross margins than our previous generations of NVIDIA nForce
products.
CPB.
The
gross margin of our CPB increased during the first quarter of fiscal year 2008
as compared to the first quarter of fiscal year 2007, primarily due to gross
profit realized from sales related to mobile products related to our acquisition
of PortalPlayer in January 2007, gross profit realized from sales of our
high-end feature cellular phone and other handheld devices, which generally
have
higher gross margins than our previous cellular handheld products, and increased
gross profit from our contractual arrangements with Microsoft and SCE related
to
their video game consoles.
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.
Our
gross
margin is significantly impacted by the mix of products that we earn revenue
from during each of our fiscal quarters. The improvement in our gross margin
for
the first quarter of fiscal year 2008 resulted from a number of factors,
including:
· |
a
positive impact from our new GeForce 8 series
products;
|
· |
a
reduction of revenue from our MCP Business, which historically has
had a
gross margin that is lower than our overall gross margin;
|
· |
the
increase in NVIDIA Quadro workstation product revenue, which historically
has been higher than our overall gross margin;
and
|
· |
a
reduction of revenue from the sale of memory products, which historically
have been lower than our overall gross
margin
|
Product
mix is often difficult to estimate with accuracy and, thus, if we achieve
significant revenue growth in our lower margin product lines, it may negatively
impact our gross margin. We expect gross margin to remain relatively flat,
or
improve slightly, during the second quarter of fiscal year 2008.
Operating
Expenses
Research
and Development
|
Three
Months Ended
|
|
Change
|
|
April
29, 2007
|
|
April
30, 2006
|
|
$
|
|
%
|
|
(In
millions)
|
Research
and Development:
|
|
|
|
|
|
|
|
Salaries
and benefits
|
$
|
87.7
|
|
$
|
68.0
|
|
$
|
19.7
|
|
29%
|
Stock-based
compensation
|
|
22.4
|
|
|
14.4
|
|
|
8.0
|
|
56%
|
Depreciation
and amortization
|
|
16.5
|
|
|
15.0
|
|
|
1.5
|
|
10%
|
Computer
software and lab equipment
|
|
14.9
|
|
|
12.9
|
|
|
2.0
|
|
16%
|
Facility
expense
|
|
11.6
|
|
|
8.1
|
|
|
3.5
|
|
43%
|
New
product development
|
|
4.2
|
|
|
7.5
|
|
|
(3.3)
|
|
(44)%
|
In-process
research and development
|
|
|
|
|
|
|
|
|
|
|
License
and development project costs
|
|
(2.4)
|
|
|
(5.8
|
)
|
|
3.4
|
|
(59)%
|
Other
|
|
3.4
|
|
|
3.1
|
|
|
0.3
|
|
10%
|
Total
|
$
|
158.3
|
|
$
|
123.2
|
|
$
|
35.1
|
|
29%
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development as a percentage of net revenue
|
|
19
|
%
|
|
18
|
%
|
|
|
|
|
Research
and development expenses increased by $35.1 million, or 29%, in the first
quarter of fiscal year 2008 compared to the first quarter of fiscal year 2007
primarily due to a $19.7 million increase in salaries and benefits and an $8.0
million increase in stock-based compensation, both of which were related to
a
combination of 660 additional personnel and merit increases to existing
personnel. Facilities increased $3.5 million due to increased facilities expense
allocation, and computer software and equipment increased $2.0 million primarily
due to increased allocation of information technology expenses, both of which
were based on the growth in headcount in departments related to research and
development functions when compared to the growth in headcount related to sales,
general and administrative functions. License and development project costs
increased by $3.4 million primarily related to decreased development costs
related to our collaboration with SCE and other engineering costs related to
a
different development contract. Certain of our personnel who usually devote
their time to research and development efforts have spent time working on these
development projects. The cost associated with the time these individuals spend
working on development projects is allocated from research and development
to
cost of revenue or is capitalized on our balance sheet. During the first quarter
of fiscal year 2008, less time was spent working on development projects so
less
cost was allocated to cost of revenue or capitalized and, therefore, more cost
remained in research and development. Depreciation and amortization increased
$1.5 million due to emulation hardware and software programs that were purchased
during fiscal year 2007, resulting in a full year of depreciation in the first
quarter of fiscal year 2008 compared to a partial year of depreciation in fiscal
year 2007. These increases were offset by a decrease of $3.3 million in new
product development costs as a result of costs related to an overall decrease
we
experienced during the first quarter of fiscal year 2008 in the number of
product tape-outs and in prototype materials.
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
|
Three
Months Ended
|
|
Change
|
|
|
April
29, 2007
|
|
April
30, 2006
|
|
$
|
|
%
|
|
|
(In
millions)
|
|
Sales,
General and Administrative:
|
|
|
|
|
|
|
|
|
Salaries
and benefits
|
$
|
41.9
|
|
$
|
32.8
|
|
$
|
9.1
|
|
|
28%
|
|
Advertising
and promotions
|
|
13.7
|
|
|
14.5
|
|
|
(0.8)
|
|
|
(6)%
|
|
Stock-based
compensation
|
|
12.2
|
|
|
6.6
|
|
|
5.6
|
|
|
85%
|
|
Legal
and accounting fees
|
|
6.0
|
|
|
2.9
|
|
|
3.1
|
|
|
107%
|
|
Facility
expense
|
|
2.8
|
|
|
4.0
|
|
|
(1.2)
|
|
|
(30)%
|
|
Depreciation
and amortization
|
|
2.7
|
|
|
2.1
|
|
|
0.6
|
|
|
29%
|
|
Other
|
|
1.3
|
|
|
1.1
|
|
|
0.2
|
|
|
18%
|
|
Total
|
$
|
80.6
|
|
$
|
64.0
|
|
$
|
16.6
|
|
|
26%
|
|
Sales,
general and administrative as a percentage of net revenue
|
|
10%
|
|
|
9
|
%
|
|
|
|
|
|
|
Sales,
general and administrative expenses increased $16.6 million, or 26%, in the
first quarter of fiscal year 2008 to year fiscal year 2007 primarily due to
a
$9.1 million increase in salaries and benefits and a $5.6 million increase
in
stock-based compensation, both of which related to a combination of 134
additional personnel and merit increases to existing personnel. Legal and
accounting fees increased by $3.1 million primarily due to legal fees related
to
the 3dfx and Department of Justice, or DOJ, matters described in Note 13 of
the
Notes to Condensed Consolidated Financial Statements. These increases were
offset by a decrease of $1.2 million in facilities due to decreased facilities
expense allocation to sales, general and administrative functions, which was
driven by greater incremental headcount growth in departments that are included
within the research and development functions.
Operating
Expenses
We
expect
to continue to focus on expense controls during fiscal year 2008. However,
despite this expected focus, we anticipate that our operating expenses will
increase slightly in the second quarter of fiscal year 2008.
Interest
Income and Interest Expense
Interest
income consists of interest earned on cash, cash equivalents and marketable
securities. Interest income was $13.2 million and $8.8 million in the first
quarter of fiscal years 2008 and 2007, respectively, an increase of $4.4
million. These increases were primarily the result of higher average balances
of
cash, cash equivalents, and marketable securities during the first three months
of fiscal year 2008 when compared to the first quarter of fiscal year
2007.
Income
Taxes
We
recognized income tax expense of $21.5 million and $18.7 million in the first
quarter of fiscal year 2008 and fiscal year 2007, respectively. Income tax
expense as a percentage of income before taxes, or our annual effective tax
rate, was 14% for the first quarter of fiscal year 2008 and 17% for the first
quarter of fiscal year 2007. Our effective tax rate is lower than the
United States Federal Statutory rate of 35% due primarily to income earned
in
lower tax jurisdictions.
Please
refer to Note 3 of the Notes to Condensed Consolidated Financial Statements
for
additional information regarding income taxes.
Liquidity
and Capital Resources
|
As
of April 29, 2007
|
|
As
of January 28, 2007
|
|
|
(In
millions)
|
|
Cash
and cash equivalents
|
$
|
678.9
|
|
$
|
544.4
|
|
Marketable
securities
|
|
628.1
|
|
|
573.4
|
|
Cash,
cash equivalents, and marketable securities
|
$
|
1,307.0
|
|
$
|
1,117.8
|
|
|
Three
Months Ended
|
|
|
April
29, 2007
|
|
April
30, 2006
|
|
|
|
(In
millions)
|
|
Net
cash provided by operating activities
|
$
|
306.5
|
|
$
|
49.5
|
|
Net
cash used in investing activities
|
$
|
(91.1
|
)
|
$
|
(157.5
|
)
|
Net
cash provided by (used in) financing activities
|
$
|
(80.9
|
)
|
$
|
44.0
|
|
As
of
April 29, 2007, we had $1.3 billion in cash, cash equivalents and marketable
securities, an increase of $189.2 million from the end of fiscal year 2007.
Our
portfolio of cash equivalents and marketable securities is managed by several
financial institutions. Our investment policy requires the purchase of top-tier
investment grade securities, the diversification of asset type and certain
limits on our portfolio duration.
Operating
activities generated cash of $306.5 and $49.5 million during the first quarter
of fiscal year 2008 and fiscal year 2007, respectively. The cash provided by
operating activities has increased due to increases in the net income during
the
comparable periods. Additionally, during the first quarter of fiscal year 2008,
operating activities have generated cash in amounts greater than net income
primarily due to non-cash charges such as stock-based compensation and
depreciation and amortization. Improved days sales outstanding and days sales
in
inventory have contributed to inflows from accounts receivable and
inventories.
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 $91.1 million and $157.5 million during the
first quarter of fiscal year 2008 and fiscal 2007, respectively. Net cash used
by investing activities during the first quarter of fiscal year 2008 was
primarily due to $37.7 million for capital expenditures, including purchases
of
new research and development equipment, hardware equipment, technology licenses,
software and intangible assets and $53.4 million of net purchases of marketable
securities. We
expect
to spend approximately $90.0 million to $110.0 million for capital expenditures
unrelated to acquisitions during the remainder of fiscal year 2008. In addition,
we may continue to use cash in connection with the acquisition
of businesses or assets.
Financing
activities used cash of $80.9 million and provided cash of $44.0 million during
the first quarter of fiscal year 2008 and fiscal 2007, respectively. Net cash
used by financing activities in the first quarter of fiscal year 2008 was
primarily due to $125.0 million paid towards our stock repurchase program,
offset by cash proceeds of $44.1 million from common stock issued under employee
stock plans.
Stock
Repurchase Program
During
fiscal year 2005, we announced that our Board of Directors, or Board, had
authorized a stock repurchase program to repurchase shares of our common
stock,
subject to certain specifications, up to an aggregate maximum amount of $300
million. During fiscal year 2007, we announced that our Board had approved
a $400 million increase to the original stock repurchase program. Subsequently,
on May 21, 2007, we announced a stock repurchase program under which we may
purchase up to an additional $1.0 billion of our common stock over a three
year
period through May 2010. As a result of these increases, we have an ongoing
authorization from the Board, subject to certain specifications, to repurchase
shares of our common stock up to an aggregate maximum amount of $1.7 billion.
The
repurchases will be made from time to time in the open market, in privately
negotiated transactions, or in structured stock repurchase programs, and
may be
made in one or more larger repurchases, in compliance with the Securities
Exchange Act of 1934, or the Exchange Act, Rule 10b-18, subject to market
conditions, applicable legal requirements, and other factors. The program
does
not obligate NVIDIA to acquire any particular amount of common stock and
the
program may be suspended at any time at our discretion. As part of our share
repurchase program, we have entered into, and we may continue to enter into,
structured share repurchase transactions with financial institutions. These
agreements generally require that we make an up-front payment in exchange
for
the right to receive a fixed number of shares of our common stock upon execution
of the agreement, and a potential incremental number of shares of our common
stock, within a pre-determined range, at the end of the term of the agreement.
During
the first quarter of fiscal year 2008, we entered into a structured share
repurchase transaction to repurchase 4.0 million shares of our common stock
for
$125.0 million, which we recorded on the trade date of each transaction.
Through
April 29, 2007, we have repurchased 31.4 million shares under our stock
repurchase program for a total cost of $613.1 million.
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 the Asset Purchase Agreement, or the APA, which closed on April
18,
2001, to purchase certain graphics chip assets from 3dfx. Under the terms of
the
APA, the cash consideration due at the closing was $70.0 million, less $15.0
million that was loaned to 3dfx pursuant to a Credit Agreement dated
December 15, 2000. The Asset Purchase Agreement also provided, subject to
the other provisions thereof, that if 3dfx properly certified that all its
debts
and other liabilities had been provided for, then we would have been obligated
to pay 3dfx one million shares, which due to subsequent stock splits now totals
four million shares, of NVIDIA common stock. If 3dfx could not make such a
certification, but instead properly certified that its debts and liabilities
could be satisfied for less than $25.0 million, then 3dfx could have elected
to
receive a cash payment equal to the amount of such debts and liabilities and
a
reduced number of shares of our common stock, with such reduction calculated
by
dividing the cash payment by $25.00 per share. If 3dfx could not certify that
all of its debts and liabilities had been provided for, or could not be
satisfied, for less than $25.0 million, we would not be obligated under the
agreement to pay any additional consideration for the assets.
In
October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United
States Bankruptcy Court for the Northern District of California. In March 2003,
we were served with a complaint filed by the Trustee appointed by the Bankruptcy
Court 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. Trial began on March 21, 2007
on valuation issues in the Trustee's constructive fraudulent transfer claims
against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1)
what did 3dfx transfer to NVIDIA in the APA?; (2) of what was transferred,
what
qualifies as "property" subject to the Bankruptcy Court's avoidance powers
under
the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions?
;
(3) what is the fair market value of the "property" identified in answer to
question (2)?; and (4) was the $70 million that NVIDIA paid "reasonably
equivalent" to the fair market value of that property? At the conclusion of
the
evidence, the Bankruptcy Court asked the parties to submit post-trial briefing.
That briefing is scheduled to be concluded on May 25, 2007, and we expect a
decision to be forthcoming from the Bankruptcy Court at some point thereafter.
Please
refer to Note 13 of the Notes to Condensed Consolidated Financial Statements
for
further information regarding this litigation.
Contractual
Obligations
There
were no material changes in our contractual obligations from those disclosed
in
our Form 10-K for the year ended January 28, 2007. Please see Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources” in our Form 10-K for a description
of our contractual obligations.
Off-Balance
Sheet Arrangements
As
of
April 29, 2007, we had no material off-balance sheet arrangements as defined
in
Regulation S-K 303(a)(4)(ii).
Recently
Issued Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 157, or SFAS No. 157,
Fair
Value Measurements.
SFAS
No. 157 establishes a framework for measuring fair value and expands disclosures
about fair value measurements. The changes to current practice resulting from
the application of SFAS No. 157 relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. We are required to adopt the provisions of SFAS No. 157
beginning with our fiscal quarter ending April 27, 2008. We 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
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.
Adoption
of FASB Interpretation No. 48
On
January 29, 2007, we adopted FASB Interpretation No. 48, or FIN 48, Accounting
for Uncertainty in Income Taxes, issued
in
July 2006. FIN 48 applies to all tax positions related to income taxes subject
to FASB Statement of Financial Accounting Standards No. 109, or SFAS No. 109,
Accounting
for Income Taxes.
Under
FIN 48 we recognize the benefit from a tax position only if it is
more-likely-than-not that the position would be sustained upon audit based
solely on the technical merits of the tax position. The cumulative effect of
adoption of FIN 48 did not result in a material adjustment to our tax liability
for unrecognized income tax benefits. Our policy to include interest and
penalties related to unrecognized tax benefits as a component of income tax
expense did not change as a result of implementing the FIN 48. Please refer
to
Note 3 of the Notes to Condensed Consolidated Financial Statements for
additional information.
Interest
Rate Risk
We
invest
in a variety of financial instruments, consisting principally of investments
in
commercial paper, money market funds and highly liquid debt securities of
corporations, municipalities and the United States government and its agencies.
These investments are denominated in United States dollars. As of April 29,
2007, we had $1.3 billion in cash, cash equivalents and marketable
securities.
We
account for our investment instruments in accordance with Statement of Financial
Accounting Standards No. 115, or SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
All of
the cash equivalents and marketable securities are treated as
“available-for-sale” under SFAS No. 115. Investments in both fixed rate and
floating rate interest earning instruments carry a degree of interest rate
risk.
Fixed rate securities may have their market value adversely impacted due to
a
rise in interest rates, while floating rate securities may produce less income
than expected if interest rates fall. Due in part to these factors, our future
investment income may fall short of expectations due to changes in interest
rates or we may suffer losses in principal if we are forced to sell securities
that decline in market value due to changes in interest rates. However, because
we classify our debt securities as “available-for-sale”, no gains or losses are
recognized due to changes in interest rates unless such securities are sold
prior to maturity or declines in fair value are determined to be other than
temporary. These securities are reported at fair value with the related
unrealized gains and losses included in accumulated other comprehensive income,
a component of stockholders’ equity, net of tax.
Exchange
Rate Risk
We
consider our direct exposure to foreign exchange rate fluctuations to be
minimal. Currently, sales and arrangements with third-party manufacturers
provide for pricing and payment in United States dollars, and, therefore, are
not subject to exchange rate fluctuations. Increases in the value of the United
States’ dollar relative to other currencies would make our products more
expensive, which could negatively impact our ability to compete. Conversely,
decreases in the value of the United States’ dollar relative to other currencies
could result in our suppliers raising their prices in order to continue doing
business with us. To date, we have not engaged in any currency hedging
activities, although we may do so in the future. Fluctuations in currency
exchange rates could harm our business in the future.
Controls
and Procedures
Disclosure
Controls and Procedures
Based
on
their evaluation as of April 29, 2007, our management, including our Chief
Executive Officer and Chief Financial Officer, have concluded that our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, or the Exchange Act, were effective to ensure
that the material information required to be disclosed by us in this Quarterly
Report on Form 10-Q was recorded, processed, summarized and reported within
the
time periods specified in the SEC’s rules and instructions for Form
10-Q.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal controls over financial reporting during our
quarter ended April 29, 2007, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Inherent
Limitations on Effectiveness of Controls
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls, will prevent all error and all fraud. A control system, no matter
how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within NVIDIA have been detected.
Please
see Part I, Item 1, Note 13 of the Notes to Condensed Consolidated
Financial Statements for a discussion of our legal
proceedings.
A
description of the risk factors associated with our business is set forth below.
This description includes any material changes to and supersedes the description
of risk factors associated with our business previously disclosed in Part I,
Item 1A. “Risk Factors” of our Form 10-K for the fiscal year ended January 28,
2007.
Risks
Related to Our Operations
The
matters relating to the Audit Committee of the Board of Directors, or the Board,
review of our historical stock option granting practices and the restatement
of
our consolidated financial statements have resulted in litigation, which could
harm our financial results.
On
August
10, 2006, NVIDIA announced that the Audit Committee of the Board, with the
assistance of outside legal counsel, was conducting a review of our stock option
practices covering the time from NVIDIA’s initial public offering in 1999, our
fiscal year 2000, through June 2006. The Audit Committee reached the conclusion
that incorrect measurement dates were used for financial accounting purposes
for
stock option grants in certain prior periods. As a result, NVIDIA recorded
additional non-cash stock-based compensation expense, and related tax effects,
related to stock option grants.
The
Audit
Committee’s review of NVIDIA’s historic stock option practices identified a
number of occasions on which the measurement date used for financial accounting
and reporting purposes for stock options granted to certain of our employees
was
different from the actual grant date. To correct these accounting errors, we
amended our Annual Report on Form 10-K for the year ended January 29, 2006
and
our Quarterly Report on Form 10-Q for the three months ended April 30, 2006
to
restate the consolidated financial statements contained in those
reports.
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 Securities Exchange Commission, or SEC, regarding
the
Audit Committee’s review and, as of the present date, the SEC is continuing the
inquiry of our historical stock option grant practices it began in late August
2006. In October 2006, we met with the SEC and provided it with a review of
the
status of the Audit Committee’s review and in November 2006 we voluntarily
provided the SEC with further documents. We plan to continue to cooperate with
the SEC in its inquiry.
While
we
believe that we have made appropriate judgments in concluding the correct
measurement dates for option grants, the SEC may disagree with the manner in
which we have accounted for and reported, or not reported, the financial impact
of past option grant measurement date errors, and there is a risk that its
inquiry could lead to circumstances in which we may have to further restate
our
prior financial statements, amend prior filings made with the SEC, or otherwise
take other actions not currently contemplated. Any such circumstance could
also
lead to future delays in filing our SEC reports. Furthermore, if we are subject
to adverse findings in any of these matters, we could be required to pay damages
or penalties or have other remedies imposed upon us which could harm our
business, financial condition, results of operations and cash
flows.
Because
our gross margin for any period depends on a number of factors, our failure
to
forecast 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 relevant 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 also
reduce our gross margin.
To
stay competitive which may include entering new markets, we may have to invest
more resources in research and development than anticipated, which could
increase our operating expenses and negatively impact our operating results.
If
new
competitors, technological advances by existing competitors, our entry into
new
markets, or other competitive factors require us to invest significantly greater
resources than anticipated in our research and development efforts, our
operating expenses would increase. We have increased our engineering and
technical resources and had 2,657 full-time employees engaged in research and
development as of April 29, 2007 and 1,997 full-time employees as of April
30,
2006. Research and development expenditures were $158.3 million and $123.2
million for the first quarter of fiscal years 2008 and 2007, respectively.
Research and development expenses for the first quarter of fiscal years 2008
and
2007 included $22.4 million and $14.4 million, respectively, related to non-cash
stock-based compensation, which we began to record in the first quarter of
fiscal year 2007 as a result of our adoption of Statement of Financial
Accounting Standards No. 123(R), or SFAS No. 123(R), Share-Based
Payment.
If we
are required to invest significantly greater resources than anticipated in
research and development efforts without an increase in revenue, our operating
results could decline. Research and development expenses are likely to fluctuate
from time to time to the extent we make periodic incremental investments in
research and development and these investments may be independent of our level
of revenue. In order to remain competitive which may include entering new
markets, we anticipate that we will continue to devote substantial resources
to
research and development, and we expect these expenses to increase in absolute
dollars in the foreseeable future due to the increased complexity and the
greater number of products under development as well as hiring additional
employees.
Our
operating expenses are relatively fixed and we may not be able to reduce
operating expenses quickly in response to any revenue shortfalls.
Our
operating expenses, which are comprised of research and development expenses
and
sales, general and administrative expenses, represented 28.3% and 27.5% of
our
total revenue during the first quarter of fiscal years 2008 and 2007,
respectively. Operating expenses were $34.6 million and $21.0 million for first
quarter of fiscal years 2008 and 2007, respectively, related to non-cash
stock-based compensation, which we began to record in fiscal year 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 the graphics
processing unit, or GPU, the media and communications processor, or MCP, and
the
consumer products business, or CPB.
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, some of our competitors own their own manufacturing facilities.
These competitors may be able to move to a new state of the art manufacturing
process more quickly than our manufacturing partners. If our suppliers fall
behind our competitors in manufacturing processes, the development and customer
demand for our products and the use of our products could be negatively
impacted. The inability by us or our third-party manufacturers to effectively
and efficiently transition to new manufacturing process technologies may
adversely affect our operating results and our gross margin.
Our
failure to estimate customer demand properly may result in excess or obsolete
inventory or, conversely, may result in inadequate inventory levels, either
of
which could adversely affect our financial results.
Our
inventory purchases are based upon future demand forecasts or orders from our
customers, 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,
any of which could impact our financial results.
Because
we order materials in advance of anticipated customer demand our ability to
reduce our inventory purchase commitments quickly in response to any revenue
shortfalls is limited.
Substantially
all of our sales are made on the basis of purchase orders rather than long-term
agreements. As a result, we may commit resources to the production of products
without having received advance purchase commitments from customers. 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. Therefore,
it is difficult for us to accurately forecast revenue and profits or losses.
As
a result, it is possible that in some quarters our operating results could
be
below the expectations of securities analysts or investors, which could cause
the trading price of our common stock to decline. We believe that our quarterly
and annual results of operations may continue to be affected by a variety of
factors that could harm our revenue, gross profit and results of operations.
Any
one
or more of the factors discussed in this Form 10-Q or other factors could
prevent us from achieving our expected future revenue or net income.
Accordingly, we believe that period-to-period comparisons of our results of
operations should not be relied upon as an indication of future performance.
In
addition, the results of any quarterly or full fiscal year period are not
necessarily indicative of results to be expected for a subsequent quarter or
a
full fiscal year.
Risks
Related to Our Products
If
we are unable to achieve design wins, our products may not be adopted by our
target markets or customers either of which could negatively impact our
financial results.
The
future success of our business depends to a significant extent on our ability
to
develop new competitive products for our target markets and customers. We
believe achieving design wins, which entails having our existing and future
products chosen for hardware components or subassemblies designed by PC 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 systems
until at least the next design configuration. Therefore, we endeavor to develop
close relationships with our original equipment manufacturers, or OEMs, and
original design manufacturers, or ODMs, in an attempt to allow us to better
anticipate and address customer needs in new products so that our products
will
achieve design wins.
Our
ability to achieve design wins also depends in part on our ability to identify
and be compliant with evolving industry standards. Unanticipated changes in
industry standards could render our products incompatible with products
developed by major hardware manufacturers and software developers, including
Advanced Micro Devices, Inc., or AMD, Intel Corporation, or Intel and Microsoft
Corporation, or Microsoft. Such changes would require us to invest significant
time and resources to redesign our products to be compliant with relevant
standards. If our products are not in compliance with prevailing industry
standards for a significant period of time, our ability to achieve design wins
could suffer. If we are unable to achieve new design wins for existing or new
customers, we may lose market share and our operating results would be
negatively impacted.
Achievement
of design wins may not result in the success of our products and could result
in
a loss of market share.
The
process of being qualified for inclusion in an OEM or ODM product can be lengthy
and could cause us to miss a cycle in the demand of end-users for a particular
product feature, which also could result in a loss of market share and harm
our
business. Even if we do have design wins for OEM and ODM products, we may not
be
able to successfully develop or introduce new products in sufficient volumes
within the appropriate time to meet the OEM, ODM, add-in board and motherboard
manufacturers’ design cycles as well as other market demand. Additionally, even
if we achieve a significant number of design wins, there can be no assurance
that our OEM and ODM customers will actually take the design to production
or
that the design will be commercially successful. Furthermore, there may be
changes in the timing of product orders due to unexpected delays in the
introduction of our customers’ products that could negatively impact the success
of our products. Any of these factors could result in a loss of market share
and
could negatively impact our financial results.
Our
business results could be adversely affected if our product development efforts
are unsuccessful.
In
the past, we have experienced delays in the development of 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 computer-aided design, or 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 and other processors develop and competition increases, we anticipate
that
product life cycles at the high end will remain short and average selling prices
will decline. In particular, we expect average selling prices and gross margins
for our processors to decline as each product matures and as unit volume
increases. As a result, we will need to introduce new products and enhancements
to existing products to maintain or improve overall average selling prices
and
gross margin. In order for our processors to achieve high volumes, leading
PC
OEMs, ODMs, and add-in board and motherboard manufacturers must select our
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. In the past, we have 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 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. 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.
We
have
acquired and invested in other businesses that offered products, services and
technologies that we believed would help expand or enhance our existing products
and services or help expand our distribution channels. We may enter into future
acquisitions of, or investments in, businesses, in order to complement or expand
our current businesses or enter into a new business market. For example, in
February 2006 we completed the acquisition of ULi Electronics, Inc., or ULi,
in
March 2006 we completed the acquisition of Hybrid Graphics Ltd., or Hybrid
Graphics and in January 2007 we completed the acquisition of PortalPlayer,
Inc.,
or PortalPlayer. If we do consider other acquisitions, a strategic alliance
or a
joint venture, the negotiations could divert management’s attention as well as
other resources. Any of the following risks associated with past or future
acquisitions or investments could impair our ability to grow our business,
develop new products, our ability to sell our products, and ultimately could
have a negative impact on our growth or our financial results:
· |
difficulty
in combining the technology, products, operations or workforce of
the
acquired business with our
business;
|
· |
difficulty
in operating in a new or multiple new locations;
|
· |
disruption
of our ongoing businesses;
|
· |
disruption
of the ongoing business of the company we invest in or
acquire;
|
· |
difficulty
in realizing the potential financial or strategic benefits of the
transaction;
|
· |
difficulty
in maintaining uniform standards, controls, procedures and
policies;
|
· |
disruption
of or delays in ongoing research and development
efforts;
|
· |
diversion
of capital and other resources;
|
· |
assumption
of liabilities;
|
· |
diversion
of resources and unanticipated expenses resulting from litigation
arising from potential or actual business acquisitions or
investments;
|
· |
difficulties
in entering into new markets in which we have limited or no experience
and
where competitors in such markets have stronger positions; and
|
· |
impairment
of relationships with employees and customers, or the loss of any
of our
key employees or customers of our target’s key employees or customers, as
a result of our acquisition or
investment.
|
In
addition, the consideration for any future acquisition could be paid in cash,
shares of our common stock, the issuance of convertible debt securities or
a
combination of cash, convertible debt and common stock. If we pay all or a
portion of the purchase price in cash, our cash reserves would be reduced which
could negatively impact the growth of our business or our ability to develop
new
products. We paid for the acquisitions of Hybrid Graphics, ULi and PortalPlayer
with primarily cash. If the consideration is paid with shares of our common
stock, or convertible debentures, the holdings of our existing stockholders
would be diluted. We cannot forecast the number, timing or size of future
acquisitions, or the effect that any such acquisitions might have on our
operations or financial results.
We
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. Our 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 Advanced Semiconductor Engineering, Inc., or ASE, Amkor Technology,
or
Amkor, King Yuan Electronics Co., or KYEC, Siliconware Precision Industries
Co.
Ltd., or SPIL, and ChipPAC. We do not have long-term agreements with any of
these subcontractors. As a result of our dependence on third-party
subcontractors for assembly, testing and packaging of our products, we do not
directly control product delivery schedules or product quality. Demand for
qualified independent subcontractors to assemble and test products is high.
If demand for these subcontractors exceeds the number of qualified
subcontractors, we may experience capacity constraints, which could result
in
product shortages, a decrease in the quality of our products or an increase
in
product cost. Any of our subcontractors may decide to prioritize the orders
of
one of our competitors over our orders. Any product shortages or quality
assurance problems could increase the costs of manufacture, assembly or testing
of our products, which could cause our gross margin to decline. Due to the
amount of time typically required to qualify assemblers and testers, we could
experience significant delays in the shipment of our products if we are required
to find alternative third parties to assemble, test or package our products
or
components. Any such delays could result in a loss of reputation or a decrease
in sales to our customers.
There
can be no assurance that the PlayStation3 will achieve long term commercial
success.
In
April
2005, we finalized our definitive agreement with Sony Computer Entertainment,
or
SCE, to jointly develop custom GPU for SCE’s PlayStation3. Our
collaboration with SCE includes license fees and royalties for the PlayStation3
and all derivatives, including next-generation digital consumer electronics
devices. In addition, we are licensing software development tools for
creating shaders and advanced graphics capabilities to SCE. During the
first quarter of fiscal years 2008 and 2007, we recognized $22.7 million and
$23.4 million of revenue, respectively, from our contractual arrangements
with SCE. Given the intense competition in the game console market, there
can be no assurance that the PlayStation3 will achieve long term commercial
success,. If we do not receive royalties as we anticipate, our revenue and
gross margin may be adversely affected.
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. In the future, we may have to record additional reserves or write-offs
and/or defer revenue on certain sales transactions which could negatively impact
our financial results.
We
rely on third-party vendors to supply software development tools to us for
the
development of our new products and we may be unable to obtain the tools
necessary to develop or enhance new or existing products.
When
we
design and develop new products or product enhancements, we rely on third-party
software development tools to assist us in the design, simulation and
verification of new products or enhancements to existing products. 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. In
the
first quarter of fiscal year 2008, there were no sales for any customers in
excess of 10% of our total revenue. However, in the first quarter of fiscal
year
2007, sales to one significant customer
accounted for approximately 14% of our total 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 contract equipment manufacturers, or CEMs, ODMs, add-in board and
motherboard manufacturers. These design wins in turn influence the retail and
system builder channel that is serviced by CEMs, ODMs, add-in board and
motherboard manufacturers. Our distribution strategy is to work with a small
number of leading independent CEMs, ODMs, add-in board and motherboard
manufacturers, and distributors, each of which has relationships with a broad
range of system builders and leading PC OEMs. If we were to lose sales to our
PC
OEMs, CEMs, ODMs, add-in board and motherboard manufacturers and were unable
to
replace the lost sales with sales to different customers, or if they were to
significantly reduce the number of products they order from us, our revenue
may
not reach or exceed the expected level in any period, which could harm our
financial condition and our results of operations.
Risks
Related to Our Competition
As
Intel and AMD continue to pursue platform solutions, we may not be able to
successfully compete and our business would be negatively
impacted.
We
expect
substantial competition from both Intel’s and AMD’s strategy of selling platform
solutions, such as the success Intel achieved with its Centrino platform
solution. In addition to the Centrino notebook platform solution, Intel has
announced a desktop initiative branded as VIIV. AMD has also announced a
platform solution. Additionally, we expect that Intel and AMD will extend this
strategy to other segments. If AMD and Intel continue to pursue platform
solutions, we may not be able to successfully compete and our business would
be
negatively impacted.
The
market for our products is highly competitive and we may be unable to compete.
The
market for our products is highly competitive and is characterized by rapid
technological change, evolving industry standards and declining average selling
prices. We believe that the principal competitive factors in this market are
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 61.1% segment
share
in the first quarter of calendar year 2007, based on the latest PC Processor
and
Chipset report from Mercury Research. Decline in demand in the AMD segment
would
harm our business.
An
additional significant source of competition is from companies that provide
or
intend to provide competing product solutions. Some of our competitors may
have
or be able to obtain greater marketing, financial, distribution and
manufacturing resources than we do and may be more able to adapt to customer
or
technological changes. Our current competitors include the following:
· |
suppliers
of discrete MCPs that incorporate a combination of networking, audio,
communications and input/output, or I/O, functionality as part of
their
existing solutions, such as AMD, Broadcom, Silicon Integrated Systems
Corporation, or SIS, VIA Technologies, Inc., or VIA, and
Intel;
|
· |
suppliers
of GPUs, including MCPs that incorporate 3D graphics functionality
as part
of their existing solutions, such as AMD, Intel, Matrox Electronics
Systems Ltd., XGI Technology, Inc.,
SIS and VIA;
|
· |
suppliers
of GPUs or GPU intellectual property for handheld and 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.
|
If
and to
the extent we offer products outside of the consumer and enterprise PC,
notebook, workstation, personal digital assistants, or PDAs, 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
81.5% of our revenue for the first quarter of fiscal year 2008 and 84.6% of
our
revenue for the first quarter of fiscal year 2007 from sales to customers
outside the United States and other Americas. The manufacture, assembly, test
and packaging of our products outside of the United States, operation of offices
outside of the United States, and sales to customers outside of the United
States and other Americas subjects us to a number of risks associated with
conducting business outside of the United States and other Americas, including,
but not limited to:
· |
international
economic and political conditions;
|
· |
unexpected
changes in, or impositions of, legislative or regulatory requirements;
|
· |
labor
issues in foreign countries;
|
· |
cultural
differences in the conduct of
business;
|
· |
inadequate
local infrastructure;
|
· |
delays
resulting from difficulty in obtaining export licenses for certain
technology, tariffs, quotas and other trade barriers and
restrictions;
|
· |
difficulty
in collecting accounts
receivable;
|
· |
fluctuations
in currency exchange rates;
|
· |
impact
of currency exchange rate fluctuations on the price of our products
to our
customers, or on the supplies that we
buy;
|
· |
imposition
of additional taxes and
penalties;
|
· |
different
legal standards with respect to protection of intellectual property;
|
· |
the
burdens of complying with a variety of foreign laws; and
|
· |
other
factors beyond our control, including terrorism, civil unrest, war
and
diseases such as severe acute respiratory syndrome and the Avian
flu.
|
If
sales
to any of our customers outside of the United States and other Americas are
delayed or cancelled because of any of the above factors, our revenue may be
negatively impacted.
We
have
offices outside of the United States, including offices in Taiwan, Japan, Korea,
China, Hong Kong, India, France, Russia, Germany, Finland and England. Our
operations in our international locations are subject to many of the risks
contained in the above list. We intend to continue to expand our existing
operations and expect to open other international offices. Difficulties with
our
international operations, including finding appropriate staffing and office
space, may divert management’s attention and other resources any of which could
negatively impact our operating results.
We
are dependent on the PC market and the rate of its growth has and may in the
future have a negative impact on our business.
We
derive
the majority of our revenue from the sale of products for use in the desktop
PC
and notebook PC markets, including professional workstations. We expect to
continue to derive most of our revenue from the sale or license of products
for
use in the desktop PC and notebook PC markets in the next several years. A
reduction in sales of PCs, or a reduction in the growth rate of PC sales, will
reduce demand for our products. Moreover, changes in demand could be large
and
sudden. Since PC manufacturers often build inventories during periods of
anticipated growth, they may be left with excess inventories if growth slows
or
if they incorrectly forecast product transitions. In these cases, PC
manufacturers may abruptly suspend substantially all purchases of additional
inventory from suppliers like us until their excess inventory has been absorbed,
which would have a negative impact on our business.
If
our products do not continue to be adopted by the consumer and enterprise
desktop PC, notebook PC, workstation, PDA, cellular handheld devices, and video
game console markets or if the demand in these markets for new and innovative
products decreases, our business and operating results would suffer.
Our
success depends in part upon continued broad adoption of our processors for
3D
graphics and multimedia in consumer and enterprise PC, notebook PC, workstation,
PDA, cellular handheld devices, and video game console applications. The market
for processors has been characterized by unpredictable and sometimes rapid
shifts in the popularity of products, often caused by the publication of
competitive industry benchmark results, changes in pricing of dynamic
random-access memory devices and other changes in the total system cost of
add-in boards, as well as by severe price competition and by frequent new
technology and product introductions. Broad market acceptance is difficult
to
achieve and such market acceptance, if achieved, is difficult to sustain due
to
intense competition and frequent new technology and product introductions.
Our
GPU and MCP businesses together comprised over 74.8% and 76.7% of revenue for
the first quarter of fiscal year 2008 and fiscal year 2007. 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
April
29, 2007 and January 28, 2007, we had $1.3 billion and $1.1 billion in cash,
cash equivalents and marketable securities. We invest our cash in a variety
of
financial instruments, consisting principally of investments in commercial
paper, money market funds and highly liquid debt securities of corporations,
municipalities and the United States government and its agencies. These
investments are denominated in U.S. dollars.
We
account for our investment instruments in accordance with Statement of Financial
Accounting Standards No. 115, or SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
All of
the cash equivalents and marketable securities are treated as
“available-for-sale” under SFAS No. 115. Investments in both fixed rate and
floating rate interest earning instruments carry a degree of interest rate
risk.
Fixed rate debt securities may have their market value adversely impacted due
to
a rise in interest rates, while floating rate securities may produce less income
than expected if interest rates fall. Due in part to these factors, our future
investment income may fall short of expectations due to changes in interest
rates or if the decline in fair value of our publicly traded equity investments
is judged to be other-than-temporary. We may suffer losses in principal if
we
are forced to sell securities that decline in market value due to changes in
interest rates. However, because any debt securities we hold are classified
as
“available-for-sale,” no gains or losses are recognized due to changes in
interest rates unless such securities are sold prior to maturity.
Our
business is cyclical in nature and an industry downturn could harm our financial
results.
Our
business is directly affected by market conditions in the highly cyclical
semiconductor industry, including alternating periods of overcapacity and
capacity constraints, variations in manufacturing costs and yields, significant
expenditures for capital equipment and product development and rapid
technological change. If we are unable to respond to changes in our industry,
which can be unpredictable and rapid, in an efficient and timely manner, our
operating results could suffer. In particular, from time to time, the
semiconductor industry has experienced significant and sometimes prolonged
downturns characterized by diminished product demand and accelerated erosion
of
average selling prices. If we cannot take appropriate actions such as reducing
our manufacturing or operating costs to sufficiently offset declines in demand
during a downturn, our revenue and earnings will suffer.
Political
instability in Taiwan and in The People’s Republic of China or elsewhere could
harm our business.
Because
of our reliance on foundries and independent contractors located in Taiwan
and
The People’s Republic of China, and because we have offices in these locations,
our business may be harmed by political instability in Taiwan, including the
worsening of the strained relations between The People’s Republic of China and
Taiwan.
Risks
Related to Government Action, Regulatory Action, Intellectual Property, and
Litigation
The
pending investigation by the United States Department of Justice regarding
investigation into the market for Graphics Processors could adversely affect
our
business.
On
November 29, 2006, we received a subpoena from the San Francisco Office of
the
Antitrust Division of the United States Department of Justice, or DOJ, in
connection with the DOJ's investigation into potential antitrust violations
related to graphics processing units and cards. No specific allegations have
been made against us. We are cooperating with the DOJ in its investigation.
As
of May 14, 2007, 51 civil complaints have been filed against us. The
majority of our complaints were filed in the Northern District of California,
several were filed in the Central District of California, and other cases were
filed in several other Federal district courts. 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 AMD, as a result of its acquisition of 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,
or JPML, 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
took place on March 29, 2007. The JPML subsequently granted the motion and
conditionally transferred all of the actions currently pending outside of the
Northern District of California to the Northern District of California for
coordination of pretrial proceedings. An initial case management conference
for
the coordinated cases is scheduled to be held on May 24, 2007. We believe the
allegations in the complaints are without merit and intend to vigorously defend
the cases. Costs of defense and any damages resulting from a ruling against
us
or a settlement of the litigation could adversely affect our
business.
Expensing
employee stock options materially and adversely affects our reported operating
results and could also adversely affect our competitive
position.
Since
inception, we have used stock options and our employee stock purchase program
as
fundamental components of our compensation packages. We believe that these
incentives directly motivate our employees and, through the use of vesting,
encourages our employees to remain with us. As a result of adjustments arising
from our restatement related to stock option grant dates, our operating results
for fiscal years prior to fiscal year 2007 contain recorded amounts of
stock-based compensation expense. For our fiscal 2000 through 2006, this
stock-based compensation expense was calculated using primarily the intrinsic
value-based method under Accounting Principles Board Opinion No. 25, or APB
25,
Accounting
for Stock Issued to Employees and related interpretations.
In
December 2004, the Financial Accounting Standards Board, or FASB,
issued SFAS No. 123(R) which requires the measurement and recognition
of compensation expense for all stock-based compensation payments. SFAS
No. 123(R) requires that we record compensation expense for stock options and
our employee stock purchase plan using the fair value of those awards. During
the first quarter of fiscal years 2008 and 2007 we recorded $37.4 million and
$22.2 million, respectively, related to non-cash stock-based compensation,
resulting from our compliance with SFAS 123 (R), which negatively impacted
our
operating results. We believe that SFAS No. 123(R) will continue to negatively
impact our operating results.
To
the
extent that SFAS No. 123(R) makes it more expensive to grant stock options
or to
continue to have an employee stock purchase program, we may decide to incur
increased cash compensation costs. In addition, actions that we may take to
reduce stock-based compensation expense that may be more severe than any actions
our competitors may implement may make it difficult to attract retain and
motivate employees, which could adversely affect our competitive position as
well as our business and operating results.
We
are a party to litigation, which, if determined adversely to us, could harm
our
business and financial condition.
We
are a
party to litigation. There can be no assurance that actions that have been
brought against us or any brought by us will be resolved in our favor. Any
claim
that is successfully asserted against us may cause us to pay substantial damages
and other related fees. Regardless of whether these lawsuits are resolved in
our
favor or if we are the plaintiff or the defendant in the litigation, any
lawsuits to which we are a party will likely be expensive and time consuming
to
defend or resolve. Such lawsuits could also harm our relationships with existing
customers and result in the diversion of management’s time and attention away
from business operations, which could harm our business. Costs of defense and
any damages resulting from litigation a ruling against us or a settlement of
the
litigation could adversely affect our cash flow and financial results.
Our
ability to compete will be harmed if we are unable to adequately protect our
intellectual property.
We
rely
primarily on a combination of patents, trademarks, trade secrets, employee
and
third-party nondisclosure agreements, and licensing arrangements to protect
our
intellectual property in the United States and internationally. We have numerous
patents issued, allowed and pending in the United States and in foreign
countries. Our patents and pending patent applications primarily relate to
technology used by us in connection with our products. We also rely on
international treaties and organizations and foreign laws to protect our
intellectual property. The laws of certain foreign countries in which our
products are or may be manufactured or sold, including various countries in
Asia, may not protect our products or intellectual property rights to the same
extent as the laws of the United States. This makes the possibility of piracy
of
our technology and products more likely. We continuously assess whether and
where to seek formal protection for particular innovations and technologies
based on such factors as:
· |
the
commercial significance of our operations and our competitors’ operations
in particular countries and
regions;
|
· |
the
location in which our products are manufactured;
|
· |
our
strategic technology or product directions in different countries;
and
|
· |
the
degree to which intellectual property laws exist and are meaningfully
enforced in different
jurisdictions.
|
Our
pending patent applications and any future applications may not be approved.
In
addition, any issued patents may not provide us with competitive advantages
or
may be challenged by third parties. The enforcement of patents by others may
harm our ability to conduct our business. Others may independently develop
substantially equivalent intellectual property or otherwise gain access to
our
trade secrets or intellectual property. Our failure to effectively protect
our
intellectual property could harm our business. We have licensed technology
from
third parties for incorporation in our digital media processors and for
defensive reasons, and expect to continue to enter into such license agreements.
These licenses may result in royalty payments to third parties, the cross
licensing of technology by us or payment of other consideration. If these
arrangements are not concluded on commercially reasonable terms, our business
could suffer.
Litigation
to defend against alleged infringement of intellectual property rights or to
enforce our intellectual property rights and the outcome of such litigation
could result in substantial costs to us.
We
expect
that as the number of issued hardware and software patents increases and as
competition intensifies, the volume of intellectual property infringement claims
and lawsuits may increase. We may become involved in lawsuits or other legal
proceedings alleging patent infringement or other intellectual property rights
violations by us or by our customers that we have agreed to indemnify them
for
certain claims of infringement 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.
During
fiscal year 2005, we announced that our Board of Directors, or Board, had
authorized a stock repurchase program to repurchase shares of our common
stock,
subject to certain specifications, up to an aggregate maximum amount of $300
million. During fiscal year 2007, we announced that our Board had approved
a $400 million increase to the original stock repurchase program. Subsequently,
on May 21, 2007, we announced a stock repurchase program under which we may
purchase up to an additional $1.0 billion of our common stock over a three
year
period through May 2010. As a result of these increases, we have an ongoing
authorization from the Board, subject to certain specifications, to repurchase
shares of our common stock up to an aggregate maximum amount of $1.7
billion.
The
repurchases will be made from time to time in the open market, in privately
negotiated transactions, or in structured stock repurchase programs, and
may be
made in one or more larger repurchases, in compliance with the Securities
Exchange Act of 1934, or the Exchange Act, Rule 10b-18, subject to market
conditions, applicable legal requirements, and other factors. The program
does
not obligate NVIDIA to acquire any particular amount of common stock and
the
program may be suspended at any time at our discretion. As
part
of our share repurchase program, we have entered into, and we may continue
to
enter into, structured share repurchase transactions with financial
institutions. These agreements generally require that we make an up-front
payment in exchange for the right to receive a fixed number of shares of
our
common stock upon execution of the agreement, and a potential incremental
number
of shares of our common stock, within a pre-determined range, at the end
of the
term of the agreement.
During
the first quarter of fiscal year 2008, we entered into a structured share
repurchase transaction to repurchase 4.0 million shares of our common stock
for
$125.0 million, which we recorded on the trade date of each transaction.
Through
April 29, 2007, we have repurchased 31.4 million shares under our stock
repurchase program for a total cost of $613.1 million.
|
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)
|
January
29, 2007 - February 25, 2007
|
|
-
|
|
|
|
$
|
-
|
|
|
|
|
-
|
|
|
|
211,869,417
|
|
February
26, 2007 - March 25, 2007
|
|
-
|
|
|
|
$
|
-
|
|
|
|
|
-
|
|
|
|
211,869,417
|
|
March
26, 2006 - April 29, 2007
|
|
3,958,555
|
|
(3
|
)
|
$
|
31.58
|
|
(2
|
)
|
|
3,958,555
|
|
(3
|
)
|
86,869,417
|
|
Total
|
|
3,958,555
|
|
|
|
$
|
31.58
|
|
|
|
|
3,958,555
|
|
|
|
|
|
(1)On
August 9, 2004, we announced that our Board had authorized a stock
repurchase program to repurchase shares of our common stock, subject to certain
specifications, up to an aggregate maximum amount of $300.0 million. On
March 6, 2006, we announced that the Board had approved a $400.0
million increase to the original stock repurchase program. Subsequently, on
May
21, 2007, we announced a stock repurhase program under which we may purchase
up
to an additional $1.0 billion of our common stock over a three year period
through May 2010. As a result of these increases, we have an ongoing
authorization from the Board, subject to certain specifications, to repurchase
shares of our common stock up to an aggregate maximum amount of $1.7 billion
on
the open market, in negotiated transactions or through structured stock
repurchase agreements that may be made in one or more larger
repurchases.
(2)
Represents
weighted average price paid per share during the quarter ended April 29,
2007.
(3)
As part
of our share repurchase program, we have entered into and we may continue to
enter into structured share repurchase transactions with financial institutions.
During
the first quarter of fiscal year 2008, we entered into a structured share
repurchase transaction to repurchase shares of our common stock for $125.0
million.
Not
applicable.
None.
None.
EXHIBIT
INDEX
|
|
Incorporated
by Reference
|
Exhibit
No.
|
Exhibit
Description
|
Schedule/Form
|
File
Number
|
Exhibit
|
Filing
Date
|
|
|
|
|
|
|
10.22
|
Fiscal
Year 2008 Variable Compensation Plan
|
8-K
|
0-23985
|
10.1
|
4/5/2007
|
|
|
|
|
|
|
10.23
|
2007
Equity Incentive Plan
|
8-K
|
0-23985
|
10.1
|
4/30/2007
|
|
|
|
|
|
|
31.1*
|
Certification
of Chief Executive Officer as required by Rule 13a-14(a) of the Securities
Exchange Act of 1934
|
|
|
|
|
|
|
|
|
|
|
31.2*
|
Certification
of Chief Financial Officer as required by Rule 13a-14(a) of the Securities
Exchange Act of 1934
|
|
|
|
|
|
|
|
|
|
|
32.1#*
|
Certification
of Chief Executive Officer as required by Rule 13a-14(b) of the Securities
Exchange Act of 1934
|
|
|
|
|
|
|
|
|
|
|
32.2#*
|
Certification
of Chief Financial Officer as required by Rule 13a-14(b) of the Securities
Exchange Act of 1934
|
|
|
|
|
* Filed
Herewith
# In
accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release
Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control
Over Financial Reporting and Certification of Disclosure in Exchange Act
Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto
are deemed to accompany this Form 10-Q and will not be deemed “filed” for
purpose of Section 18 of the Exchange Act. Such certifications will not be
deemed to be incorporated by reference into any filing under the Securities
Act
or the Exchange Act, except to the extent that the registrant specifically
incorporates it by reference.
Copies
of
above exhibits not contained herein are available to any stockholder upon
written request to:
Investor
Relations: NVIDIA Corporation, 2701 San Tomas Expressway, Santa Clara, CA 95050.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date:
May 24, 2007
|
|
NVIDIA
Corporation
|
By:
|
/s/
MARVIN D. BURKETT
|
|
Marvin
D. Burkett
|
|
(Duly
Authorized Officer and Principal Financial and Accounting
Officer)
|
EXHIBIT
INDEX
|
|
Incorporated
by Reference
|
Exhibit
No.
|
Exhibit
Description
|
Schedule/Form
|
File
Number
|
Exhibit
|
Filing
Date
|
|
|
|
|
|
|
10.22
|
Fiscal
Year 2008 Variable Compensation Plan
|
8-K
|
0-23985
|
10.1
|
4/5/2007
|
|
|
|
|
|
|
10.23
|
2007
Equity Incentive Plan
|
8-K
|
0-23985
|
10.1
|
4/30/2007
|
|
|
|
|
|
|
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#*
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Certification
of Chief Executive Officer as required by Rule 13a-14(b) of the Securities
Exchange Act of 1934
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32.2#*
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Certification
of Chief Financial Officer as required by Rule 13a-14(b) of the Securities
Exchange Act of 1934
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* Filed
Herewith
# In
accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release
Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control
Over Financial Reporting and Certification of Disclosure in Exchange Act
Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto
are deemed to accompany this Form 10-Q and will not be deemed “filed” for
purpose of Section 18 of the Exchange Act. Such certifications will not be
deemed to be incorporated by reference into any filing under the Securities
Act
or the Exchange Act, except to the extent that the registrant specifically
incorporates it by reference.
Copies
of
above exhibits not contained herein are available to any stockholder upon
written request to:
Investor
Relations: NVIDIA Corporation, 2701 San Tomas Expressway, Santa Clara, CA 95050.