Q107 FORM 10Q
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 30, 2006
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, of Registrant's Principal Executive Offices
and
Registrant's Telephone Number, including Area Code)
----------------
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 [_]
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 Exchange Act). Yes
[_]
No [X]
The
number of shares of the registrant's common stock outstanding as of May 12,
2006
was 352,513,038 shares.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NVIDIA
CORPORATION
FORM
10-Q
TABLE
OF CONTENTS
|
|
Page
|
|
PART
I: FINANCIAL INFORMATION
|
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
|
Condensed
Consolidated Balance Sheets as of April 30, 2006 and January 29,
2006
|
1
|
|
Condensed
Consolidated Statements of Income for the three months ended April
30,
2006 and May 1, 2005
|
2
|
|
Condensed
Consolidated Statements of Cash Flows for the three months ended
April 30,
2006 and May 1, 2005
|
3
|
|
Notes
to Condensed Consolidated Financial Statements
|
4
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
19
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
29
|
|
|
|
Item
4.
|
Controls
and Procedures
|
29
|
|
|
|
|
PART
II: OTHER INFORMATION
|
|
Item
1.
|
Legal
Proceedings
|
30
|
|
|
|
Item
1A.
|
Risk
Factors
|
30
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
44
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
44
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
44
|
|
|
|
Item
5.
|
Other
Information
|
44
|
|
|
|
Item
6.
|
Exhibits
|
45
|
|
|
|
Signature
|
|
46
|
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS (Unaudited)
NVIDIA
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands)
(Unaudited)
|
|
April
30,
|
|
January
29,
|
|
|
|
2006
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
487,763
|
|
$
|
551,756
|
|
Marketable
securities
|
|
|
467,290
|
|
|
398,418
|
|
Accounts
receivable, net
|
|
|
391,270
|
|
|
318,186
|
|
Inventories
|
|
|
346,366
|
|
|
254,792
|
|
Prepaid
expenses and other current assets
|
|
|
28,545
|
|
|
24,387
|
|
Deferred
income taxes
|
|
|
1,393
|
|
|
1,393
|
|
Total
current assets
|
|
|
1,722,627
|
|
|
1,548,932
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
180,206
|
|
|
178,152
|
|
Deposits
and other assets
|
|
|
31,028
|
|
|
27,477
|
|
Goodwill
|
|
|
204,603
|
|
|
145,317
|
|
Intangible
assets, net
|
|
|
22,989
|
|
|
15,421
|
|
|
|
$
|
2,161,453
|
|
$
|
1,915,299
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
298,147
|
|
$
|
179,395
|
|
Accrued
liabilities
|
|
|
236,239
|
|
|
259,264
|
|
Total
current liabilities
|
|
|
534,386
|
|
|
438,659
|
|
|
|
|
|
|
|
|
|
Deferred
income tax liabilities
|
|
|
8,260
|
|
|
8,260
|
|
Other
long-term liabilities
|
|
|
10,156
|
|
|
10,624
|
|
Commitments
and contingencies - see Note 11 and Note 13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
--
|
|
|
--
|
|
Common
stock
|
|
|
371
|
|
|
360
|
|
Additional
paid-in capital
|
|
|
907,097
|
|
|
798,071
|
|
Deferred
compensation
|
|
|
--
|
|
|
(1,676
|
)
|
Treasury
stock
|
|
|
(262,142
|
)
|
|
(212,142
|
)
|
Accumulated
other comprehensive loss, net
|
|
|
(2,451
|
)
|
|
(1,957
|
)
|
Retained
earnings
|
|
|
965,776
|
|
|
875,100
|
|
Total
stockholders' equity
|
|
|
1,608,651
|
|
|
1,457,756
|
|
|
|
$
|
2,161,453
|
|
$
|
1,915,299
|
|
See
accompanying notes to condensed consolidated financial statements.
NVIDIA
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(In
thousands, except per share data)
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
April
30,
|
|
May
1,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
681,807
|
|
$
|
583,846
|
|
Cost
of revenue (A)
|
|
|
393,050
|
|
|
373,693
|
|
Gross
profit
|
|
|
288,757
|
|
|
210,153
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Research
and development (A)
|
|
|
122,404
|
|
|
85,913
|
|
Sales,
general and administrative (A)
|
|
|
65,668
|
|
|
48,058
|
|
Total
operating expenses
|
|
|
188,072
|
|
|
133,971
|
|
Operating
income
|
|
|
100,685
|
|
|
76,182
|
|
Interest
income
|
|
|
8,808
|
|
|
3,895
|
|
Interest
expense
|
|
|
(1
|
)
|
|
(10
|
)
|
Other
income (expense), net
|
|
|
(244
|
)
|
|
488
|
|
Income
before income tax expense
|
|
|
109,248
|
|
|
80,555
|
|
Income
tax expense
|
|
|
18,572
|
|
|
16,111
|
|
Net
income
|
|
$
|
90,676
|
|
$
|
64,444
|
|
Basic
net income per share
|
|
$
|
0.26
|
|
$
|
0.19
|
|
Diluted
net income per share
|
|
$
|
0.23
|
|
$
|
0.18
|
|
Shares
used in basic per share computation
|
|
|
347,937
|
|
|
337,294
|
|
Shares
used in diluted per share computation
|
|
|
390,370
|
|
|
360,984
|
|
(A)
Results for the three months ended April 30, 2006 include stock-based
compensation expense as follows:
|
Cost
of revenue
|
$
1,143
|
|
Research
and development
|
13,628
|
|
Sales,
general and administrative
|
8,278
|
|
Total
stock-based compensation expense
|
$23,049
|
|
See
accompanying notes to condensed consolidated financial statements.
NVIDIA
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
April
30,
|
|
May
1,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
90,676
|
|
$
|
64,444
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
In-process
research and development
|
|
|
602
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
24,031
|
|
|
24,897
|
|
Stock-based
compensation
|
|
|
23,049
|
|
|
285
|
|
Bad
debt expense (recovery)
|
|
|
255
|
|
|
(341
|
)
|
Excess
tax benefits from stock-based compensation
|
|
|
(6,470
|
)
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(64,135
|
)
|
|
49,430
|
|
Inventories
|
|
|
(87,958
|
)
|
|
7,759
|
|
Prepaid
expenses and other current assets
|
|
|
(3,332
|
)
|
|
(2,050
|
)
|
Deposits
and other assets
|
|
|
(3,406
|
)
|
|
(1,644
|
)
|
Accounts
payable
|
|
|
107,729
|
|
|
(56,077
|
)
|
Accrued
liabilities
|
|
|
(30,645
|
)
|
|
2,876
|
|
Net
cash provided by operating activities
|
|
|
50,396
|
|
|
89,579
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of marketable securities
|
|
|
(92,344
|
)
|
|
(56,411
|
)
|
Sales
and maturities of marketable securities
|
|
|
22,523
|
|
|
65,304
|
|
Purchases
of property and equipment and intangible assets
|
|
|
(20,667
|
)
|
|
(13,504
|
)
|
Acquisition
of businesses, net of cash and cash equivalents
|
|
|
(67,026
|
)
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(157,514
|
)
|
|
(4,611
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Common
stock issued under employee stock plans
|
|
|
86,655
|
|
|
36,011
|
|
Stock
repurchase
|
|
|
(50,000
|
)
|
|
(48,467
|
)
|
Other
|
|
|
-
|
|
|
(20
|
)
|
Excess
tax benefits from stock-based compensation
|
|
|
6,470
|
|
|
-
|
|
Net
cash provided by (used in) financing activities
|
|
|
43,125
|
|
|
(12,476
|
)
|
Change
in cash and cash equivalents
|
|
|
(63,993
|
)
|
|
72,492
|
|
Cash
and cash equivalents at beginning of period
|
|
|
551,756
|
|
|
208,512
|
|
Cash
and cash equivalents at end of period
|
|
$
|
487,763
|
|
$
|
281,004
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
-
|
|
$
|
10
|
|
Cash
paid for income taxes, net
|
|
$
|
24,645
|
|
$
|
901
|
|
|
|
|
|
|
|
|
|
Other
non-cash activities:
|
|
|
|
|
|
|
|
Application
of customer advance to accounts receivable
|
|
$
|
-
|
|
$
|
8,062
|
|
Unrealized
losses from marketable securities
|
|
$
|
824
|
|
$
|
556
|
|
Deferred
compensation
|
|
$
|
1,676
|
|
$
|
3
|
|
See
accompanying notes to condensed consolidated financial statements.
NVIDIA
CORPORATION AND SUBSIDIARIES
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 29,
2006.
Fiscal
year
We
operate on a 52 or 53-week year, ending on the Sunday nearest January 31. The
first quarter of fiscal 2007 and fiscal 2006 were both 13-week
quarters.
Reclassifications
Certain
prior fiscal year balances were reclassified to conform to the current fiscal
year presentation.
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, stock-based compensation, income taxes and
contingencies. These estimates are based on historical facts and various other
assumptions that we believe are reasonable.
Note
2 - Stock-Based
Compensation
Effective
January 30, 2006, we adopted the provisions of Statement of Financial Accounting
Standards No. 123(R), or SFAS No. 123(R), Share-Based
Payment.
SFAS
No. 123(R) establishes accounting for stock-based awards exchanged for employee
services. Accordingly, stock-based compensation cost is measured at grant date,
based on the fair value of the awards, and is recognized as expense over the
requisite employee service period.
Prior
to the adoption of SFAS No. 123(R)
Prior
to
the adoption of SFAS No. 123(R), we applied Accounting Principles Board Opinion
No. 25, or APB No. 25, Accounting
for Stock Issued to Employees,
and
related interpretations to account for our stock-based employee compensation
plans. As such, compensation expense was recorded if on the date of grant the
current fair value per share of the underlying stock exceeded the exercise
price
per share. We provided the disclosures required under SFAS No. 123, Accounting
for Stock-Based Compensation,
as
amended by SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosures,
in our
periodic reports.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
The
pro
forma information required under SFAS No. 123(R) for periods prior to fiscal
2007, as if we had applied the fair value recognition provisions of SFAS No.
123
to awards granted under our equity incentive plans, was as follows for the
three
months ended May 1, 2005:
|
|
Three
Months Ended
|
|
|
|
May
1, 2005
|
|
|
|
(In
thousands, except per share data)
|
|
Net
income, as reported
|
|
$
|
64,444
|
|
Add:
Stock-based employee compensation expense included in reported net
income,
net of related tax effects
|
|
|
228
|
|
Deduct:
Stock-based employee compensation expense determined under fair value
based method for all awards, net of related tax effects
|
|
|
(16,846
|
)
|
Pro
forma net income
|
|
$
|
47,826
|
|
Basic
net income per share - as reported
|
|
$
|
0.19
|
|
Basic
net income per share - pro forma
|
|
$
|
0.14
|
|
Diluted
net income per share - as reported
|
|
$
|
0.18
|
|
Diluted
net income per share - pro forma
|
|
$
|
0.13
|
|
Impact
of the adoption of SFAS No. 123(R)
We
elected to adopt the modified prospective application method beginning January
30, 2006 as provided by SFAS No. 123(R). Accordingly, during the three months
ended April 30, 2006, we recorded stock-based compensation expense equal to
the
amount that would have been recognized if the fair value method required
for pro forma disclosure under SFAS No. 123 had been in effect for
expense recognition purposes, adjusted for estimated forfeitures. We recognized
stock-based compensation expense using the straight-line attribution method.
Previously reported amounts have not been restated. The effect of recording
stock-based compensation for the three month period ended April 30, 2006 was
as
follows:
|
|
Three
Months Ended
|
|
|
|
April
30, 2006
|
|
|
|
(In
thousands, except per share data)
|
|
Stock-based
compensation expense by type of award:
|
|
|
|
Employee
stock options
|
|
$
|
22,457
|
|
Employee
stock purchase plan
|
|
|
1,601
|
|
Amount
capitalized as inventory
|
|
|
(1,009
|
)
|
Total
stock-based compensation
|
|
|
23,049
|
|
Tax
effect of stock-based compensation
|
|
|
(2,596
|
)
|
Net
effect on net income
|
|
$
|
20,453
|
|
|
|
|
|
|
Effect
on net income per share:
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
Diluted
|
|
$
|
0.05
|
|
Prior
to
adopting SFAS No. 123(R), we presented all tax benefits resulting from the
exercise of stock options as operating cash flows in our Statement of Cash
Flows. However, as required by our adoption of SFAS No. 123(R) during the three
months ended April 30, 2006, we began classifying cash flows resulting from
excess tax benefits as a part of cash flows from financing activities. Excess
tax benefits are realized tax benefits from tax deductions for exercised options
in excess of the deferred tax asset attributable to stock-based compensation
for
such options. The effect of this change in classification on our Statement
of
Cash Flows for the three months ended April 30, 2006 is as follows:
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
April
30, 2006
|
|
|
|
(In
thousands)
|
|
Cash
flows from operations
|
|
$
|
(6,470
|
)
|
Cash
flows from financing activities
|
|
$
|
6,470
|
|
As
of
January 30, 2006, we had unearned stock-based compensation related to stock
options of $156.3 million before the impact of estimated forfeitures. In our
pro
forma footnote disclosures prior to the adoption of SFAS No. 123(R), we
accounted for forfeitures upon occurrence. SFAS No. 123(R) requires forfeitures
to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Accordingly, as
of
January 30, 2006, we estimated that stock-based compensation expense for the
awards that are not expected to vest was $22.2 million, and, therefore, the
unearned stock-based compensation expense related to stock options was adjusted
to $134.1 million after estimated forfeitures.
During
the three months ended April 30, 2006, we granted approximately 5.9 million
stock options with an estimated total grant date fair value of $63.9 million
and
a weighted average grant date fair value of $10.86 per option. Of this amount,
we estimated that the stock-based compensation expense related to the awards
that are not expected to vest was $7.1 million. During the three months ended
April 30, 2006, we recorded stock-based compensation expense related to stock
options of $22.5 million.
As
of
April 30, 2006, the aggregate amount of unearned stock-based compensation
expense related to our stock options was $167.0 million, adjusted for estimated
forfeitures, which we will recognize over an estimated weighted average
amortization period of 2.2 years.
Approximately
$1.0 million of stock-based compensation was capitalized as inventory at April
30, 2006. We elected not to capitalize any stock-based compensation to inventory
at January 29, 2006, prior to the initial adoption of the provisions of SFAS
No.
123(R).
Stock-based
compensation expense that would have been recorded under APB No. 25 during
the
three months ended April 30, 2006 was approximately $0.3 million. Upon our
adoption of SFAS No. 123(R), we reclassified the unearned stock-based
compensation expense balance of approximately $1.7 million that would have
been
recorded under APB No. 25 to additional-paid-in-capital in our Condensed
Consolidated Balance Sheet.
Valuation
Assumptions
During
the three months ended May 1, 2005, we
transitioned from a Black-Scholes model to a binomial model for calculating
the
estimated fair value of new stock-based compensation awards granted
under our stock option plans. As
a
result of regulatory guidance, including SEC Staff Accounting Bulletin No.
107,
Share-Based
Payment,
and in
anticipation of the impending effective date of SFAS No. 123(R), we reevaluated
the assumptions we used to estimate the value of employee stock options and
shares issued under our employee stock purchase plan, beginning with stock
options granted and shares issued under our employee stock purchase plan in
our
first quarter of fiscal 2006. At that time, our management also determined
that the use of implied volatility is expected to be more reflective of market
conditions and, therefore, could reasonably be expected to be a better indicator
of our expected volatility than historical volatility. Additionally, in the
first quarter of fiscal 2006, we began segregating options into groups for
employees with relatively homogeneous exercise behavior in order to calculate
the best estimate of fair value using the binomial valuation model. As
such, the expected term assumption used in calculating the estimated fair value
of our stock-based compensation awards using the binomial model is based
on
detailed historical data about employees' exercise behavior, vesting schedules,
and death and disability probabilities. Our management
believes the resulting binomial calculation provides a more refined estimate
of
the fair value of our employee stock options. For our employee stock purchase
plan we continued to use the Black-Scholes model. The fair value of stock
options granted under our stock option plans and shares issued under our
employee stock purchase plan have been estimated at the date of grant using
a
straight-line attribution method with the following assumptions:
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
|
Stock
Options
|
|
Employee
Stock Purchase Plan
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
April
30,
|
|
May
1,
|
|
April
30,
|
|
May
1,
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
(Using
a binomial model)
|
|
(Using
the Black-Scholes model)
|
Expected
life (in years)
|
3.6
- 5.1
|
|
3.6
- 5.1
|
|
0.5
- 2.0
|
|
0.5
- 2.0
|
Risk
free interest rate
|
4.7%
|
|
4.0%
|
|
1.6%
- 4.6%
|
|
1.6%
- 1.8%
|
Volatility
|
39%
- 41%
|
|
37%
- 48%
|
|
30%
- 45%
|
|
41%
|
Dividend
yield
|
--
|
|
--
|
|
--
|
|
--
|
Equity
Incentive Program
Overview.
We
consider equity compensation to be long term compensation and an integral
component of our efforts to attract and retain exceptional executives, senior
management and world-class employees. We believe that properly structured equity
compensation aligns the long-term interests of stockholders and employees by
creating a strong, direct link between employee compensation and stock
appreciation, as stock options are only valuable to our employees if the value
of our common stock increases after the date of grant.
2000
Nonstatutory Equity Incentive Plan. The
2000
Nonstatutory Equity Incentive Plan, or the 2000 Plan, provides for the issuance
of our common stock to employees and affiliates who are not directors, officers
or 10% stockholders. The 2000 Plan provides for the issuance of nonstatutory
stock options, stock bonuses and restricted stock purchase rights. Option grants
issued under the 2000 plan generally expire in six to 10 years. Grants made
after May 8, 2003 generally have six year terms. Until April 2004, initial
options granted to new employees would vest over four years, with 25% of the
shares vesting one year from the date of grant and the remaining 75% of the
shares vesting each quarter over the subsequent three years. During this same
time period, stock options granted to existing employees generally would vest
each quarter over a four-year period from the date of grant. Beginning in April
2004, initial options granted to new employees generally vest over a three-year
period on a quarterly basis. Grants to existing employees in recognition of
performance generally also vest over a three-year period; however, these option
grants typically do not begin vesting until the second anniversary of the date
of grant, after which time these option grants will usually vest in quarterly
increments over the remaining one-year period.
1998 Equity Incentive Plan.
The
Equity Incentive Plan, or the 1998 Plan, provides for the issuance of stock
bonuses, restricted stock purchase rights, stock appreciation rights, incentive
stock options or nonstatutory stock options. Option grants issued under the
1998
Plan generally expire in six to ten years. Vesting periods are determined by
the
Board of Directors, or Board, or the Compensation Committee of the Board.
Initial option grants made after February 10, 2004 under the 1998 Plan to new
employees generally vest over a three year period on a quarterly basis.
Subsequent option grants to existing employees are generally granted for
performance and generally vest quarterly over a three year period, however
these
option grants will typically not begin vesting until the second anniversary
of
the date of grant, after which time the option will usually vest in quarterly
increments over the remaining one-year period.
1998 Non-Employee Directors’ Stock Option Plan. In
February 1998, our Board of Directors adopted the 1998 Non-Employee Directors’
Stock Option Plan, or the Directors Plan, to provide for the automatic grant
of
non-qualified options to purchase shares of our common stock to our directors
who are not employees or consultants or an affiliate of NVIDIA.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
In July 2000, the Board of Directors amended the 1998 Plan to incorporate the
automatic grant provisions of the Directors’ Plan into the 1998 Plan. Future
automatic grants to non-employee directors will be made according to the terms
of the Directors’ Plan, but will be made out of the 1998 Plan until such time as
shares may become available for issuance under the amended Directors’ Plan. In
May 2002, the Directors’ Plan was amended further to reduce the number of shares
granted to our non-employee directors. The altered automatic grant provisions
of
the Directors’ Plan are also incorporated into the 1998 Plan. In
March 2006, the Board amended the Directors’ Plan, to reduce the number of
shares issuable pursuant to each of the initial non-employee director stock
option grant and the annual non-employee director stock option grant by 40%.
The
Directors’ Plan was also amended to eliminate the annual option grant made to
members of our Nominating and Corporate Governance Committee. The terms of
the
amended Directors’ Plan are described below.
· |
Initial
Grants. Initial
stock option grants of 90,000 are automatically made to each non-employee
director who is elected or appointed to our Board on the date of
election
or appointment.
|
· |
Annual
Grants—Board Members. On
August 1st of each year, each non-employee director is automatically
granted an option to purchase 30,000 shares. These options begin
to vest
quarterly on the second anniversary of the date of grant and will
be fully
vested on the third anniversary of the date of grant.
|
· |
Annual
Grants—Committee Members. On
August 1st of each year, each non-employee director who is a member
of a committee of the Board is automatically granted an option to
purchase
10,000 shares. These options vest in full on the first anniversary
of the
date of the grant. Beginning in fiscal year 2007, Board members will
no
longer receive a Committee grant for serving as a member of the Nominating
and Corporate Governance Committee.
|
Employee Stock Purchase Plan.
The
1998
Employee Stock Purchase Plan, or the Purchase Plan, is intended to qualify
as an
“employee stock purchase plan” under Section 423 of the Internal Revenue Code.
Under the Purchase Plan, the Board has authorized participation by eligible
employees, including officers, in periodic offerings following the adoption
of
the Purchase Plan. Under the Purchase Plan, separate offering periods shall
be
no longer than 27 months. Under the current offering adopted pursuant to the
Purchase Plan, each offering period is 24 months, which is divided into four
purchase periods of 6 months.
Employees
are eligible to participate if they are employed by NVIDIA or an affiliate
of
NVIDIA as designated by the Board. Employees who participate in an offering
may
have up to 10% of their earnings withheld pursuant to the Purchase Plan up
to
certain limitations and applied on specified dates determined by the Board
to purchase shares of our common stock. The Board may increase this percentage
at its discretion, up to 15%. The price of common stock purchased under the
Purchase Plan will be equal to the lower of the fair market value of the common
stock on the commencement date of each offering period and the purchase date
of
each offering period at 85% at the fair market value of the common stock on
the
relevant purchase date. Employees may end their participation in the Purchase
Plan at any time during the offering period, and participation ends
automatically on termination of employment with us and in each case their
contributions are refunded.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
The
following table summarizes the combined activity under the 2000 Plan, 1998
Plan,
and the Directors Plan for the three months ending April 30, 2006:
|
|
Options
Available for Grant
|
|
Options
Outstanding
|
|
Weighted
Average Exercise Price Per Share
|
|
Weighted
Average Remaining Contractual Term (in years)
|
|
Aggregate
Intrinsic Value
|
|
Balances,
January 29, 2006
|
|
|
31,310,976
|
|
|
87,958,480
|
|
$
|
9.50
|
|
|
|
|
|
|
|
Authorized
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Granted
|
|
|
(5,884,805
|
)
|
|
5,884,805
|
|
|
27.28
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
(9,445,011
|
)
|
|
7.93
|
|
|
|
|
|
|
|
Cancelled
|
|
|
605,184
|
|
|
(605,184
|
)
|
|
11.43
|
|
|
|
|
|
|
|
Balances,
April 30, 2006
|
|
|
26,031,355
|
|
|
83,793,090
|
|
$
|
10.91
|
|
|
4.3
|
|
$
|
1,534,251,478
|
|
Vested
and expected to vest at April 30, 2006
|
|
|
|
|
|
80,625,294
|
|
$
|
10.79
|
|
|
4.3
|
|
$
|
1,485,924,168
|
|
Options
exercisable at April 30, 2006
|
|
|
|
|
|
45,769,764
|
|
$
|
8.06
|
|
|
4.0
|
|
$
|
968,488,206
|
|
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value for in-the-money options at April 30, 2006, based on the $29.22
closing stock price of our common stock on the NASDAQ National Market, which
would have been received by the option holders had all option holders exercised
their options as of that date. The total number of in-the-money options
outstanding and exercisable as of April 30, 2006 was 83.8 million and 45.8
million, respectively.
During
the three months ended April 30, 2006:
|
|
|
|
Weighted
average grant date fair value of options granted
|
|
$
|
10.86
per share
|
|
Total
fair value of shares vested
|
|
$
|
18.0
million
|
|
Total
intrinsic value of options exercised
|
|
$
|
161.8
million
|
|
Total
cash received from employees as a result of employee stock option
exercises
|
|
$
|
74.9
million
|
|
Tax
benefits realized as a result of employee stock option
exercises
|
|
$
|
9.0
million
|
|
We
settle
employee stock option exercises with newly issued common shares. We do not
have
any equity instruments outstanding other than options described above as of
April 30, 2006.
Note
3 - 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, which
in
the current period includes consideration of unearned stock-based compensation
as required by SFAS No. 123(R). The
following is a reconciliation of the numerators and denominators of the basic
and diluted net income per share computations for the periods
presented:
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
|
Three
Months Ended
|
|
April
30,
|
|
May
1,
|
|
2006
|
|
2005
|
|
(In
thousands, except per share data)
|
Numerator:
|
|
|
|
Numerator
for basic and diluted net income per share
|
$
|
90,676
|
|
$
|
64,444
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Denominator
for basic net income per share, weighted average shares
|
|
347,937
|
|
|
337,294
|
Effect
of dilutive securities:
|
|
|
|
|
|
Weighted
average effect of dilutive securities
|
|
42,433
|
|
|
23,690
|
Denominator
for diluted net income per share, weighted average shares
|
|
390,370
|
|
|
360,984
|
Net
income per share:
|
|
|
|
|
|
Basic
net income per share
|
$
|
0.26
|
|
$
|
0.19
|
Diluted
net income per share
|
$
|
0.23
|
|
$
|
0.18
|
Diluted
net income per share does not include the effect of 6.4 million and 21.7 million
stock options as of April 30, 2006 and May 1, 2005, respectively, which were
anti-dilutive.
Note
4 - Acquisition of ULi Electronics, Inc.
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 is expected to strengthen our sales, marketing, and customer engineering
presence in Taiwan and China. The
aggregate purchase price consisted of cash consideration of approximately $53.1
million, including $0.9 million of direct acquisition costs.
Our
allocation of the purchase price of ULi has been prepared on a preliminary
basis
and reasonable changes are expected as additional information becomes available.
The following is a summary of estimated fair values of the assets we acquired
and liabilities we assumed as of the date of acquisition:
|
|
Fair
Market Value
|
|
Straight-Line Depreciation/Amortization
Period
|
|
|
|
(In
thousands)
|
|
|
|
Cash
|
|
$
|
21,551
|
|
|
|
|
Accounts
receivable
|
|
|
8,148
|
|
|
--
|
|
Inventories
|
|
|
2,607
|
|
|
--
|
|
Other
assets
|
|
|
888
|
|
|
--
|
|
Property
and equipment
|
|
|
1,097
|
|
|
4
- 55 months
|
|
Goodwill
|
|
|
32,287
|
|
|
--
|
|
Intangible
assets:
|
|
|
|
|
|
|
|
Existing
technology
|
|
|
2,490
|
|
|
3
years
|
|
Customer
relationships
|
|
|
653
|
|
|
3
years
|
|
Total
assets acquired
|
|
|
69,721
|
|
|
|
|
Current
liabilities
|
|
|
(15,765
|
)
|
|
--
|
|
Acquisition
related expenses
|
|
|
(881
|
)
|
|
--
|
|
Total
liabilities assumed
|
|
|
(16,646
|
)
|
|
|
|
Net
assets acquired
|
|
$
|
53,075
|
|
|
|
|
The
pro
forma results of operations have not been presented for the acquisition of
ULi
because the effect of this acquisition was not considered material.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
Note
5 - Acquisition of Hybrid Graphics Ltd.
On
March
29, 2006, we completed our acquisition of Hybrid Graphics Ltd., or Hybrid
Graphics. Hybrid Graphics is a developer of embedded 2-dimensional and
3-dimensional graphics software for handheld devices. We believe that the
acquisition will enable the customers of both companies to deploy rich graphics
solutions for the worldwide handheld market. The aggregate purchase price
consisted of cash consideration of approximately $36.7 million, including $0.2
million of direct acquisition costs and $0.6 million of in-process research
and
development, or IPR&D.
Our
allocation of the purchase price of Hybrid Graphics has been prepared on a
preliminary basis and reasonable changes are expected as additional information
becomes available. The following is a summary of estimated fair values of the
assets we acquired and the liabilities we assumed as of the date of
acquisition:
|
|
Fair
Market Value
|
|
Straight-Line Depreciation/Amortization
Period
|
|
|
|
(In
thousands)
|
|
|
|
Cash
|
|
$
|
1,180
|
|
|
|
|
Accounts
receivable
|
|
|
1,056
|
|
|
--
|
|
Other
assets
|
|
|
74
|
|
|
--
|
|
Property
and equipment
|
|
|
238
|
|
|
1
month - 3 years
|
|
In-process
research and development
|
|
|
602
|
|
|
--
|
|
Goodwill
|
|
|
26,983
|
|
|
--
|
|
Intangible
assets:
|
|
|
|
|
|
|
|
Existing
technology
|
|
|
5,179
|
|
|
3
years
|
|
Customer
relationships
|
|
|
2,650
|
|
|
3
years
|
|
Trademark
|
|
|
482
|
|
|
3
years
|
|
Non-compete
agreements
|
|
|
72
|
|
|
3
years
|
|
Total
assets acquired
|
|
|
38,516
|
|
|
|
|
Current
liabilities
|
|
|
(1,301
|
)
|
|
--
|
|
Acquisition
related expenses
|
|
|
(242
|
)
|
|
--
|
|
Long-term
liabilities
|
|
|
(301
|
)
|
|
--
|
|
Total
liabilities assumed
|
|
|
(1,844
|
)
|
|
|
|
Net
assets acquired
|
|
$
|
36,672
|
|
|
|
|
The
amount of the IPR&D represents the value assigned to research and
development projects of Hybrid Graphics that had commenced but had not yet
reached technological feasibility and had no alternative future use. In
accordance with SFAS No. 2, Accounting
for Research and Development Costs,
as
clarified by FIN 4, Applicability
of 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 expense
as part of the allocation of the purchase price.
The
pro
forma results of operations have not been presented for the acquisition of
Hybrid Graphics because the effect of this acquisition was not considered
material.
Note
6 - Guarantees
Financial
Accounting Standards Board, or 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.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
We
record
a reduction to revenue for estimated product returns at the time revenue is
recognized primarily based on historical return rates. The reductions to revenue
for estimated product returns for the three months ended April 30, 2006 and
May
1, 2005 are as follows:
Description
|
|
Balance
at Beginning of Period
|
|
Additions
(1)
|
|
Deductions
(2)
|
|
Balance
at End of Period
|
|
|
|
(In
thousands)
|
|
Three
months ended April 30, 2006
|
|
|
|
|
|
|
|
|
|
Allowance
for sales returns
|
|
$
|
10,239
|
|
$
|
11,775
|
|
$
|
(10,448
|
)
|
$
|
11,566
|
|
Three
months ended May 1, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for sales returns
|
|
$
|
11,687
|
|
$
|
5,931
|
|
$
|
(6,813
|
)
|
$
|
10,805
|
|
(1)
Allowances for sales returns are charged as a reduction to revenue.
(2)
Represents amounts written off against the allowance for sales
returns.
In
connection with certain agreements that we have executed in the past, we have
at
times provided indemnities to cover the indemnified party for matters such
as
tax, product and employee liabilities. We have also on occasion included
intellectual property indemnification provisions in our technology related
agreements with third parties. Maximum potential future payments cannot be
estimated because many of these agreements do not have a maximum stated
liability. As such, we have not recorded any liability in our consolidated
financial statements for such indemnifications.
Note
7 - 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
30,
|
|
May
1,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Net
income
|
|
$
|
90,676
|
|
$
|
64,444
|
|
Net
change in unrealized losses on available-for-sale securities
|
|
|
(811
|
)
|
|
(719
|
)
|
Tax
effect of the change in unrealized losses on available-for-sale
securities
|
|
|
325
|
|
|
144
|
|
Reclassification
adjustments for net realized (gains) losses on available-for-sale
securities included in net income
|
|
|
(13
|
)
|
|
163
|
|
Tax
effect of reclassification adjustments for net realized (gains) losses
on
available-for-sale securities included in net income
|
|
|
5
|
|
|
(33
|
)
|
Total
comprehensive income
|
|
$
|
90,182
|
|
$
|
63,999
|
|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
Note
8 - 3dfx Asset Purchase
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. The 3dfx asset purchase was accounted for under the purchase
method of accounting and closed on April 18, 2001. Under the terms of the Asset
Purchase Agreement, the cash consideration due at the closing was $70.0 million,
less $15.0 million that was loaned to 3dfx pursuant to a Credit Agreement dated
December 15, 2000. The Asset Purchase Agreement also provided, subject to the
other provisions thereof, that if 3dfx properly certified that all its debts
and
other liabilities had been provided for, then we would have been obligated
to
pay 3dfx 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 of 3dfx reached a conditional settlement of the Trustee’s claims
against NVIDIA. This conditional settlement, which will be subject to the review
and approval of the Bankruptcy Court, calls for a payment of approximately
$30.6
million to the 3dfx estate. Under the settlement, $5.6 million relates to
various administrative expenses and Trustee fees, and $25.0 million relates
to
the satisfaction of debts and liabilities owed to the general unsecured
creditors of 3dfx. As such, during the three months 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. Please see Note 13 for further information
regarding this litigation.
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.
|
|
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
|
|
|
|
|
The
final
allocation of the purchase price of the 3dfx assets is contingent upon the
amount of and circumstances surrounding additional consideration, if any, that
we may pay related to the 3dfx asset purchase.
Note
9 - Goodwill and Intangible Assets
We
are
currently amortizing our intangible assets with definitive lives over periods
ranging from 1 to 5 years on a straight-line basis. The components of our
amortizable intangible assets are as follows:
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
|
|
April
30, 2006
|
|
January
29, 2006
|
|
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying Amount
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying Amount
|
|
|
|
(In
thousands)
|
|
Technology
licenses
|
|
$
|
21,586
|
|
$
|
(14,573
|
)
|
$
|
7,013
|
|
$
|
21,586
|
|
$
|
(13,595
|
)
|
$
|
7,991
|
|
Patents
|
|
|
23,750
|
|
|
(20,939
|
)
|
|
2,811
|
|
|
23,750
|
|
|
(19,911
|
)
|
|
3,839
|
|
Acquisition-related
|
|
|
38,612
|
|
|
(25,861
|
)
|
|
12,751
|
|
|
27,086
|
|
|
(24,516
|
)
|
|
2,570
|
|
Trademarks
|
|
|
11,310
|
|
|
(11,310
|
)
|
|
-
|
|
|
11,310
|
|
|
(10,807
|
)
|
|
503
|
|
Other
|
|
|
1,494
|
|
|
(1,080
|
)
|
|
414
|
|
|
1,494
|
|
|
(976
|
)
|
|
518
|
|
Total
intangible assets
|
|
$
|
96,752
|
|
$
|
(73,763
|
)
|
$
|
22,989
|
|
$
|
85,226
|
|
$
|
(69,805
|
)
|
$
|
15,421
|
|
The
$11.5
million increase in the gross carrying amount of acquisition-related intangible
assets is related to $3.1 million and $8.4 million of intangible assets that
resulted from our acquisitions of ULi and Hybrid Graphics, respectively, during
the three months ended April 30, 2006. Please refer to Note 4 and Note 5 of
our
Notes to Consolidated Financial Statements for further information.
Amortization
expense associated with intangible assets for the three months ended April
30,
2006 and May 1, 2005 was $4.0 million and $4.3 million, respectively.
Amortization expense for the net carrying amount of intangible assets at April
30, 2006 is estimated to be $9.9 million for the remainder of fiscal 2007,
$8.1
million in fiscal 2008, $4.4 million in fiscal 2009, and $0.6 million in fiscal
2010 and thereafter.
As
of
April 30, 2006 and January 29, 2006, the carrying amount of goodwill is as
follows:
|
|
|
April
30,
|
|
January
29,
|
|
|
|
|
2006
|
|
2006
|
|
|
|
|
(in
thousands)
|
|
3dfx
|
|
|
$
|
75,326
|
|
$
|
75,326
|
|
MediaQ
|
|
|
|
52,913
|
|
|
52,913
|
|
ULi
|
|
|
|
32,287
|
|
|
-
|
|
Hybrid
Graphics
|
|
|
|
26,983
|
|
|
-
|
|
Other
|
|
|
|
17,094
|
|
|
17,078
|
|
Total
goodwill
|
|
|
$
|
204,603
|
|
$
|
145,317
|
|
During
the first quarter of fiscal 2007, we recorded $32.3 million and $27.0 million
as
goodwill related to our acquisitions of ULi and Hybrid Graphics, respectively.
These acquisitions were accounted for under the purchase method of accounting.
We intend to assign the goodwill related to our acquisition of ULi to our media
and communications processor, or MCP, Business and the goodwill related to
our
acquisition of Hybrid Graphics to our Handheld graphics processing unit, or
Handheld GPU, Business.
Note
10 - 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. 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
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
(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 gains for the three months ended April 30, 2006 were not
material, and net realized losses for the three months ended May 1, 2005 were
$0.2 million.
Note
11 - Balance Sheet Components
Certain
balance sheet components are as follows:
|
|
April
30,
|
|
January
29,
|
|
|
|
2006
|
|
2006
|
|
Inventories:
|
|
(In
thousands)
|
|
Raw
materials
|
|
$
|
29,513
|
|
$
|
25,743
|
|
Work
in-process
|
|
|
120,845
|
|
|
107,847
|
|
Finished
goods
|
|
|
196,008
|
|
|
121,202
|
|
Total
inventories
|
|
$
|
346,366
|
|
$
|
254,792
|
|
The
significant increase in finished goods inventories primarily relates to our
build-up of inventory levels of several of our new GeForce 7 products in the
first quarter of fiscal 2007.
At
April
30, 2006, we had outstanding inventory purchase obligations totaling $411.6
million.
|
|
April
30,
|
|
January
29,
|
|
|
|
2006
|
|
2006
|
|
Accrued
Liabilities:
|
|
(In
thousands)
|
|
Accrued
customer programs
|
|
$
|
75,827
|
|
$
|
90,056
|
|
Deferred
revenue
|
|
|
6,805
|
|
|
217
|
|
Taxes
payable
|
|
|
53,253
|
|
|
58,355
|
|
Accrued
payroll and related expenses
|
|
|
38,511
|
|
|
53,080
|
|
Deferred
rent
|
|
|
11,996
|
|
|
11,879
|
|
Accrued
legal settlement
|
|
|
30,600
|
|
|
30,600
|
|
Other
|
|
|
19,247
|
|
|
15,077
|
|
Total
accrued liabilities
|
|
$
|
236,239
|
|
$
|
259,264
|
|
|
|
April
30,
|
|
January
29,
|
|
|
|
2006
|
|
2006
|
|
Other
Long-term Liabilities:
|
|
(In
thousands)
|
|
Asset
retirement obligations
|
|
$
|
6,477
|
|
$
|
6,440
|
|
Other
long-term liabilities
|
|
|
3,679
|
|
|
4,184
|
|
Total
other long-term liabilities
|
|
$
|
10,156
|
|
$
|
10,624
|
|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
Note
12 - 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.
Our operating segments are organized to bring all of our major product groups
in
line with our strategy to position ourselves as the worldwide leader in
programmable graphics processor technologies. We report financial information
for four product-line operating segments to our CODM: the GPU Business is
composed of products that support desktop PCs, notebook PCs and professional
workstations; the MCP Business is composed of NVIDIA nForce products that
operate as a single-chip or chipset that can off-load system functions, such
as
audio processing and network communications, and perform these operations
independently from the host central processing unit, or CPU; our Handheld GPU
Business is composed of products that support handheld personal digital
assistants, cellular phones and other handheld devices; and our Consumer
Electronics Business is concentrated in products that support video game
consoles and other digital consumer electronics devices and is composed of
revenue from our contractual arrangements with Sony Computer Entertainment,
or
SCE, to jointly develop a custom GPU incorporating our next-generation GeForce
GPU and SCE’s system solutions in SCE’s PlayStation3, revenue from sales of our
Xbox-related products, revenue from our license agreement with Microsoft
relating to the successor product to their initial Xbox gaming console, the
Xbox360, and related devices, and embedded graphics processor products. In
addition to these operating segments, we have the “All Other” category that
includes human resources, legal, finance, general administration, corporate
marketing expenses, and stock-based compensation, which total $51.0 million
and
$23.9 million for the first quarter of fiscal 2007 and 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 memory
devices. Certain prior period amounts have been restated to conform to the
presentation of our current fiscal quarter.
Our
CODM
does not review any information regarding total assets on an operating segment
basis. Operating segments do not record intersegment revenue, and, accordingly,
there is none to be reported. The accounting policies for segment
reporting are the same as for NVIDIA as a whole.
|
|
GPU
|
|
MCP
|
|
Handheld
GPU
|
|
Consumer
Electronics
|
|
All
Other
|
|
Consolidated
|
|
|
|
(In
thousands)
|
|
Three
Months Ended April 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
452,431
|
|
$
|
118,384
|
|
$
|
30,721
|
|
$
|
26,162
|
|
$
|
54,109
|
|
$
|
681,807
|
|
Depreciation
and amortization expense
|
|
$
|
8,455
|
|
$
|
4,153
|
|
$
|
3,589
|
|
$
|
84
|
|
$
|
7,619
|
|
$
|
23,900
|
|
Operating
income (loss)
|
|
$
|
128,858
|
|
$
|
2,983
|
|
$
|
(1,424
|
)
|
$
|
19,372
|
|
$
|
(49,104
|
)
|
$
|
100,685
|
|
Three
Months Ended May 1, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
409,926
|
|
$
|
71,805
|
|
$
|
7,762
|
|
$
|
58,078
|
|
$
|
36,275
|
|
$
|
583,846
|
|
Depreciation
and amortization expense
|
|
$
|
8,895
|
|
$
|
3,246
|
|
$
|
3,175
|
|
$
|
360
|
|
$
|
7,641
|
|
$
|
23,317
|
|
Operating
income (loss)
|
|
$
|
78,132
|
|
$
|
6,923
|
|
$
|
(15,860
|
)
|
$
|
28,941
|
|
$
|
(21,954
|
)
|
$
|
76,182
|
|
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:
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
April
30,
|
|
May
1,
|
|
|
|
2006
|
|
2005
|
|
Revenue:
|
|
(In
thousands)
|
|
United
States
|
|
$
|
77,372
|
|
$
|
97,805
|
|
Other
Americas
|
|
|
27,590
|
|
|
922
|
|
China
|
|
|
179,720
|
|
|
68,743
|
|
Taiwan
|
|
|
227,574
|
|
|
297,699
|
|
Other
Asia Pacific
|
|
|
111,218
|
|
|
54,831
|
|
Europe
|
|
|
58,333
|
|
|
63,846
|
|
Total
revenue
|
|
$
|
681,807
|
|
$
|
583,846
|
|
Revenue
from significant customers, those representing approximately 10% or more of
total revenue for the respective periods, is summarized as follows:
|
Three
Months Ended
|
|
April
30,
|
|
May
1,
|
|
2006
|
|
2005
|
Revenue:
|
|
|
|
Customer
A
|
6%
|
|
17%
|
Customer
B
|
14%
|
|
1%
|
Customer
C
|
7%
|
|
11%
|
Customer
D
|
9%
|
|
14%
|
Note
13 - Litigation
3dfx
On
December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries
entered into an agreement to purchase certain graphics chip assets from 3dfx.
The 3dfx asset purchase agreement 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. 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. The
landlords’ complaints both assert claims for, among other things, interference
with contract, successor liability and fraudulent transfer and seek to recover,
among other things, amounts owed on their leases with 3dfx in the aggregate
amount of approximately $15 million. In October 2002, 3dfx filed for Chapter
11
bankruptcy protection in the United States Bankruptcy Court for the Northern
District of California. The landlords’ actions were subsequently removed to the
United States Bankruptcy Court for the Northern District of California and
consolidated with a complaint filed by the Trustee in the 3dfx bankruptcy case
for purposes of discovery. 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
has
taken those motions under submission and we await a ruling. Discovery is stayed
pending this hearing and no trial date has been set in these actions. We believe
the claims asserted against us by the landlords are without merit and we will
continue to defend ourselves vigorously.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
In
March
2003, we were served with a complaint filed by the Trustee appointed by the
Bankruptcy Court to represent the interests of the 3dfx bankruptcy estate.
The
Trustee’s complaint asserts claims for, among other things, successor liability
and fraudulent transfer and seeks additional payments from us. On October
13, 2005, the Court held a hearing on the Trustee’s motion for summary
adjudication. On December 23, 2005, the Court issued its ruling denying the
Trustee's Motion for Summary Adjudication in all material respects and holding
that NVIDIA is prevented from disputing that the value of the 3dfx
transaction to NVIDIA was less than $108.0 million. The Court
expressly denied the Trustee's request to find that the value of the 3dfx assets
conveyed to NVIDIA were at least $108.0 million. In early November 2005, after
many months of mediation, NVIDIA and the Official Committee of Unsecured
Creditors, or the Creditors’ Committee, reached a conditional settlement of the
Trustee’s claims against NVIDIA. This conditional
settlement, presented as the centerpiece of a proposed Plan of Liquidation
in the bankruptcy case, is subject to a confirmation process
through a vote of creditors and the review and approval of the Bankruptcy
Court after notice and hearing. The
scope
and schedule for that confirmation process has yet to be determined. The Trustee
has advised that he intends to object to the settlement. The settlement with
the
Creditors’ Committee calls for a payment of approximately $30.6 million to the
3dfx estate. Under the settlement, $5.6 million relates to various
administrative expenses and Trustee fees, and $25.0 million relates to the
satisfaction of debts and liabilities owed to the general unsecured creditors
of
3dfx. Accordingly, during the three month period ended October 30, 2005, we
recorded $5.6 million as a charge to settlement costs and $25.0 million as
additional purchase price for 3dfx.
The
Bankruptcy Court, over objection of the Creditors’ Committee and NVIDIA, has
ordered the discovery portion of the litigation to proceed while the conditional
settlement is pending approval through the confirmation process. The expert
discovery is now completed, but the Bankruptcy Court has yet to rule on two
motions filed by the Trustee that could re-open discovery more generally. No
trial date has been set in the Trustee's action. In addition, following the
Trustee’s filing of a Form 8-K on behalf of 3dfx, in which the Trustee disclosed
the terms of the proposed settlement agreement between NVIDIA and the Creditor’s
Committee, certain shareholders of 3dfx filed a petition with the Bankruptcy
Court to appoint an official committee to represent the claimed interests of
3dfx shareholders. That petition was granted and an Equity Holders' Committee
was appointed. Since that appointment, the Equity Holders' Committee has filed
a
competing plan of reorganization/liquidation. The Equity Holders' plan assumes
that 3dfx can raise additional equity capital that would be used to retire
all
of 3dfx's debts. Upon the payment of that debt, the Equity Holders' Committee
contends that NVIDIA would be obliged to pay the stock consideration provided
for in the asset purchase agreement. By virtue of stock splits since the
execution of the asset purchase agreement, the stock consideration would now
total four million shares of our common stock. The Equity Holders' Committee
filed a motion with the Bankruptcy Court for an order giving it standing to
bring that lawsuit to enforce the Asset Purchase Agreement. Over our objection,
the Court granted that motion on May 1, 2006 and the Equity Holders’ Committee
filed its Complaint for Declaratory Relief against NVIDIA that same day. On
May
11, 2006, NVIDIA filed a motion with the District Court for leave to appeal
the
order granting standing to the Equity Holders’ Committee. We also asked the
Bankruptcy Court to stay the litigation while that motion for leave to appeal
is
pending. If the litigation is not stayed, then NVIDIA will move to dismiss
the
Equity Holders' Committee's complaint. That motion must be filed no later than
June 1, 2006. In the meantime, the Bankruptcy Court still has not set a schedule
for presentation of either of the proposed plans of reorganization and
liquidation to the creditors for a vote.
Opti
Incorporated
On
October 19, 2004, Opti Incorporated, or Opti, filed a complaint for patent
infringement against NVIDIA in the United States District Court for the Eastern
District of Texas. In its complaint, Opti asserted that unspecified NVIDIA
chipsets infringe five United States patents held by Opti. Opti seeks
unspecified damages for our alleged conduct, attorneys’ fees and triple damages
for alleged willful infringement by NVIDIA. We filed a response to this
complaint in December 2004. A case management conference was held in July 2005
where a trial date was set for July 2006. A court mandated mediation was held
in
January 2006 and did not resolve the matter. The discovery period formally
ended
on May 6, 2006. On April 13, 2006, a Markman hearing took place and on April
24,
2006, the District Court issued a ruling adopting Opti's proposed
construction on 13 of the 15 terms at issue. In May 2006, Opti
dropped from the lawsuit two of the five United States patents that Opti alleged
NVIDIA infringes. We continue to prepare for trial. We believe the claims
asserted against us are without merit and we will continue to defend ourselves
vigorously. We do not have sufficient information to determine whether a loss
is
probable. As such, we have not recorded any liability in our consolidated
financial statements for such loss, if any.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
Note
14 - Stock Repurchase Program
On
August
9, 2004, we announced that our Board of Directors, or the Board, had authorized
a stock repurchase program to repurchase shares of our common stock, subject
to
certain specifications, up to an aggregate maximum amount of $300.0 million.
On
March 6, 2006, we announced that the Board had approved a $400.0 million
increase to the original stock repurchase program we had announced in August
2004. As a result of this increase, the amount of common stock the Board of
Directors has authorized to be repurchased has now been increased to a total
of
$700.0 million. As part of our stock 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 2007, we
repurchased 2.1 million shares of our common stock for $50.0 million under
a
structured share repurchase transaction, which we recorded on the trade date
of
the transaction. Through the end of the first quarter of fiscal 2007, we have
repurchased an aggregate of 19.1 million shares under our stock repurchase
program for a total cost of $263.2 million. Subsequent to April 30, 2006, we
entered into a structured share repurchase transaction to repurchase shares
of
our common stock for $75.0 million that we expect to settle prior to the end
of
our second quarter of fiscal 2007.
Note
15 - Stockholders' Equity and Stock Split
In
March
2006, our Board of Directors approved a two-for-one stock split of our
outstanding shares of common stock to be effected in the form of a 100% stock
dividend. The stock split was effective on Thursday, April 6, 2006 for
stockholders of record at the close of business on Friday, March 17, 2006.
Each
stockholder of record received one additional share for every outstanding share
of common stock held. The transfer agent distributed the shares resulting from
the split on April 6, 2006. All share and per-share numbers contained herein,
for all periods presented, reflect this stock split.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
The
following discussion contains forward-looking statements within the meaning
of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are subject to the “safe harbor” created by those
sections. When used in this report, the words “expects,” “believes,” “intends,”
“anticipates,” “estimates,” “plans,” and similar expressions are intended to
identify forward-looking statements. These forward-looking statements relate
to
future periods and include, but are not limited to, the features, benefits,
capabilities, performance, production and availability of our technologies
and
products, seasonality, possible acquisitions and the results of acquisitions,
product cycles, our gross margin, product mix, our inventories, average
selling
prices, our strategies as to our primary businesses, growth of and factors
contributing to the growth of our primary businesses, our competitors'
focuses,
expensing of stock options, use of the binomial model, our critical accounting
policies, mix and sources of revenue, anticipated revenue, our relationship
with
SCE, our expectations regarding increases in and reasons for our expenditures,
capital expenditures, our cash flow and cash balances, our liquidity, uses
of
cash, investments and marketable securities, our stock repurchase program,
our
results of operations, our competition and our competitive position, our
intellectual property, the importance of our strategic relationships, customer
demand, reliance on a limited number of customers, our internal control
over
financial reporting, our taxes, our international operations, our ability
to
attract and retain qualified personnel, our foreign currency risk strategy,
and
compliance with environmental laws and regulations. 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 unanticipated decreases
in
average selling prices of a particular product, difficulties associated
with
conducting international operations, increased sales of lower margin products,
difficulty in collecting accounts receivable, our inability to decrease
inventory purchase commitments, our inability to compete in new markets,
the
write-down of the value of inventory, entry of new competitors in our
established markets, reduction in demand for or market acceptance of our
products or our customers’ products, defects in our products, the impact of
competitive pricing pressure, new product announcements or introductions
by our
competitors, disruptions in our relationships with our key suppliers,
fluctuations in general economic conditions, failure to achieve design
wins, the
seasonality of the PC and in the markets of our other primary businesses,
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 and the matters set forth under Item 1A. - Risk Factors. These
forward-looking statements speak only as of the date hereof. 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.
In
this
report, all references to “NVIDIA,” “we,” “us,” or “our,” mean NVIDIA
Corporation and our subsidiaries.
NVIDIA,
GeForce, SLI, NVIDIA GoForce, NVIDIA Quadro, and NVIDIA nForce are our
trademarks or registered trademarks in the United States and other countries.
We
also refer to trademarks of other corporations and organizations in this
document.
Overview
Our
Company
NVIDIA
Corporation is the worldwide leader in programmable graphics processor
technologies. Our products 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 media and
communications processor, or MCP, Business; the Handheld GPU Business, and
the
Consumer Electronics Business. Our GPU Business is composed of products that
support desktop personal computers, or PCs, notebook PCs and professional
workstations; our MCP Business is composed of NVIDIA nForce products that
operate as a single-chip or chipset that can off-load system functions, such
as
audio processing and network communications, and perform these operations
independently from the host central processing unit, or CPU; our Handheld GPU
Business is composed of products that support handheld personal digital
assistants, cellular phones and other handheld devices; and our Consumer
Electronics Business is concentrated in products that support video game
consoles and other digital consumer electronics devices and is composed of
our
contractual arrangements with Sony Computer Entertainment, or SCE, to jointly
develop a custom GPU incorporating our next-generation GeForce GPU and SCE’s
system solutions in SCE’s PlayStation3, sales of our Xbox-related
products, revenue from our license agreement with Microsoft Corporation, or
Microsoft, relating to the successor product to their initial Xbox gaming
console, the Xbox360, and related devices, and embedded graphics processor
products. We were incorporated in California in April 1993 and
reincorporated in Delaware in April 1998. Our headquarter facilities are in
Santa Clara, California. Our Internet address is www.nvidia.com.
Original
equipment manufacturers, or OEMs, original design manufacturers, or ODMs,
add-in-card manufacturers, system builders and consumer electronics companies
worldwide utilize NVIDIA embedded graphics processors
as
a core
component of their entertainment and business solutions. Our GPUs deliver
superior performance and crisp visual quality for PC-based applications such
as
manufacturing, science, e-business, entertainment and education. Our MCPs
perform highly demanding multimedia processing for secure broadband
connectivity, communications and breakthrough audio functions. Our handheld
GPUs
deliver an advanced visual experience by accelerating graphics and video
applications while implementing design techniques that are designed to result
in
high performance and low power consumption.
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.
Recent
Developments, Future Objectives and Challenges
GPU
Business
The
combination of our GeForce 7 and GeForce 6 series of GPUs and our Scalable
Link
Interface, or SLI, technology has created a new class of gaming PCs and
professional workstations. SLI technology takes advantage of the increased
bandwidth of the peripheral component interconnect, or PCI, Express bus
architecture to allow two NVIDIA-based graphics cards to operate in a single
PC
or professional workstation.
During
the first quarter of fiscal 2007, we shipped eight new GeForce 7 series GPUs
for
desktop and notebook PCs, and now offer a top-to-bottom family of GeForce 7
GPUs. In March 2006, we shipped our first Quad SLI system for desktop PCs,
enabling the use of four GPUs per system. We also shipped the GeForce Go 7800
GTX notebook GPU featuring SLI technology for notebook PCs.
We
expect
additional growth in our GPU Business during the remainder of fiscal 2007.
We
believe that sales of our desktop GPU products will be increased by share gains
from our anticipated position in the market, the release of Microsoft’s
next generation operating system, Microsoft Windows Vista, or Vista,
the
introduction of high-definition, or HD, and Blu-ray video. The GeForce 7 and
GeForce 6 series of desktop and notebook GPUs are designed to be compatible
with
Vista. We believe that in the upcoming year there will be increased demand
for
HD and Blu-ray video, and that SCE’s PlayStation3 will be a key driver of demand
for Blu-ray video. We expect HD and Blu-ray video to promote increased
demand for the video processing capabilities of our next generation GPUs.
MCP
Business
In
February 2006, we completed our acquisition of ULi Electronics, Inc., or ULi,
a
core logic developer for the PC industry. This acquisition represents our
ongoing investment in our platform solution strategy and is expected to
strengthen our sales, marketing, and customer engineering presence in Taiwan
and
China.
In
March
2006, we shipped our first integrated graphics processor, or IGP, core-logic
solution for Advanced Micro Devices, or AMD,-based notebook PCs - the GeForce
Go
6100 GPU and NVIDIA nForce Go 430 MCP. This core logic solution is the
industry’s first high-definition IGP to provide hardware accelerated H.264
high-definition video playback.
Our
NVIDIA nForce product line has achieved record revenue for seven consecutive
quarters. We believe that the transition by AMD to K8, our extension into
new segments, and our entry into the Intel market with our first ever mainstream
Intel nForce4 MCPs will make our MCP Business one of our fastest growing
businesses. Furthermore, we believe that our ability to simultaneously innovate
using our GPU, MCP, and software knowledge base will allow us to make additional
platform innovations in the future.
Handheld
GPU Business
In
March
2006, NVIDIA and Intel Corporation, or Intel, announced a collaboration to
bring
a high-performance 3-dimensional, or 3D, gaming and multimedia platform to
handheld devices. The collaboration combines the NVIDIA GoForce family of
handheld GPUs with Intel’s newest processor family, which is based on the
third-generation Intel XScale architecture, to deliver a powerful development
platform to content developers.
Our
NVIDIA GoForce handheld GPUs are now shipping in the new Motorola 3G RAZR V3X
and the new Sony Ericsson Walkman phones. Our newest handheld GPU, the NVIDIA
GoForce 5500 GPU, has been designed into Digital Video Broadcast - Handheld,
or
DVB-H, phones in North America and Europe, and Integrated Services Digital
Broadcasting - Terrestrial, or ISDB-T, phones in Japan. Two out of the first
three DVB-H television service launches in the world are based on phones powered
by our handheld GPU.
In
addition, in March 2006 we acquired Hybrid Graphics Ltd., a developer of
embedded 2D and 3D graphics software for handheld devices. We believe that
this
acquisition will enable the customers of both companies to deploy rich graphics
solutions for the worldwide handheld market.
Our
strategy in the Handheld GPU Business is to lead innovation and capitalize
on
the emergence of the cellular phone as a versatile consumer lifestyle device
and
to build a new class of low power GPUs for multimedia rich devices like 3G
cell phones, smart phones, and portable media players. The increasing
availability of digital media content for 3G has increased demand for our
handheld GPUs. We believe that the graphics and multimedia capability of our
handheld GPUs has put us in the position to benefit from the increasing
multimedia demands of smart phones. We believe that there will be an increase
in
demand for mobile video products that deliver compelling and tangible
improvements to the overall end user experience of these new services, and
we
believe that we are well positioned to increase our share of the handheld
segment.
Gross
Margin Improvement
We
continue to remain intensely focused on improving our gross margin. Beginning
in
fiscal 2005, we implemented profit improvement initiatives across our company,
which were designed to improve business and operational processes. During the
first quarter of fiscal 2007, our gross margin was 42.4%, which represents
an
increase of 220 basis points from our gross margin of 40.2% for the fourth
quarter of fiscal 2006, and an increase of 640 basis points from our gross
margin of 36.0% for the first quarter of fiscal 2006. In addition to the
positive impact on our gross margin from our implementation of profit
improvement measures, we also realized improvement in the gross margin from
our Handheld GPU Business, as well as a significant contribution from our
GeForce 7 products, which have experienced higher than average gross margins.
Our
gross
margin is significantly impacted by product mix, which is often difficult to
estimate with accuracy and thus if we achieve significant revenue growth in
our
lower margin businesses, it may negatively impact our gross margin. We believe
that we can continue to improve our gross margin during the second half of
fiscal 2007.
Stock-Based
Compensation
Effective
January 30, 2006, we adopted the provisions of Statement of Financial Accounting
Standards No. 123(R), or SFAS No. 123(R), Share-Based
Payment.
SFAS No. 123(R) establishes accounting for stock-based awards exchanged for
employee services. Accordingly, stock-based compensation cost is measured
at grant date, based on the fair value of the awards, and is recognized as
expense over the requisite employee service period. As such, our
stock-based compensation expense totaled $23.0 million during the first
quarter of fiscal 2007.
Critical
Accounting Policies and Estimates
Management’s
discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates
and
judgments that affect the reported amounts of assets, liabilities, revenue,
cost
of revenue, expenses and related disclosure of contingencies. On an on-going
basis, we evaluate our estimates, including those related to revenue
recognition, accounts receivable, inventories, stock-based compensation, income
taxes, and goodwill. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities.
Stock-Based
Compensation. Effective
January 30, 2006, we adopted the provisions of SFAS No. 123(R).
We
estimate the fair value of stock options using a binomial model, consistent
with
the provisions of SFAS No. 123(R) and SEC Staff Accounting Bulletin No. 107,
Share-Based
Payment.
Option-pricing models require the input of highly subjective assumptions,
including the price volatility of the underlying stock. During the first
quarter of fiscal 2006, we determined that the use of implied volatility is
expected to be more reflective of market conditions and, therefore, could
reasonably be expected to be a better indicator of our expected volatility
than
historical volatility. Additionally, during the first quarter of fiscal 2006
we
began segregating options into groups for employees with relatively homogeneous
exercise behavior in order to calculate the best estimate of fair value using
the binomial valuation model. As such, the expected term assumption
used in calculating the estimated fair value of our stock-based compensation
awards using the binomial model is
based
on detailed historical data about employees' exercise behavior, vesting
schedules, and death and disability probabilities. In addition, we are required
to estimate the expected forfeiture rate and only recognize expense for those
shares expected to vest. We estimate the forfeiture rate based on historical
experience of our stock-based awards that are granted, exercised and cancelled.
We believe 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 decided to continue to use the Black-Scholes model to calculate the
estimated fair value.
Other
than related to our implementation of SFAS No. 123(R) during the three months
ended April 30, 2006, as described above, there were no other material changes
in our critical accounting policies and estimates during the first quarter
of
fiscal 2007 from those disclosed in our Annual Report on Form 10-K, or Form
10-K, for the year ended January 29, 2006. Please see Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations -
Critical Accounting Policies and Estimates” in our Form 10-K for a discussion of
our critical accounting policies and estimates.
Results
of Operations
The
following table sets forth, for the periods indicated, certain items in our
condensed consolidated income statements expressed as a percentage of
revenue.
|
|
Three
Months Ended
|
|
|
|
April
30,
|
|
May
1,
|
|
|
|
2006
|
|
2005
|
|
Revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of revenue
|
|
|
57.6
|
|
|
64.0
|
|
Gross
profit
|
|
|
42.4
|
|
|
36.0
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Research
and development
|
|
|
18.0
|
|
|
14.7
|
|
Sales,
general and administrative
|
|
|
9.6
|
|
|
8.2
|
|
Total
operating expenses
|
|
|
27.6
|
|
|
22.9
|
|
Operating
income
|
|
|
14.8
|
|
|
13.1
|
|
Interest
and other income, net
|
|
|
1.2
|
|
|
0.7
|
|
Income
before income tax expense
|
|
|
16.0
|
|
|
13.8
|
|
Income
tax expense
|
|
|
2.7
|
|
|
2.8
|
|
Net
income
|
|
|
13.3
|
%
|
|
11.0
|
%
|
Three
Months Ended April 30, 2006 and May 1, 2005
Revenue
Our
operating segments are organized to bring all of our major product groups in
line with our strategy to position ourselves as the worldwide leader in
programmable graphics processor technologies. We report financial
information
for four product-line operating segments to our Chief Executive Officer,
who is
considered to be our chief operating decision maker as follows: the GPU
Business, the MCP Business, the Handheld GPU Business, and the Consumer
Electronics Business. Revenue in the “All Other” category is primarily derived
from sales of memory devices. Please refer to Note -12 of our Notes to
Condensed Consolidated Financial Statements for further
information.
Revenue
was $681.8 million for the first quarter of fiscal 2007 and $583.8 million
for
the first quarter of fiscal 2006, which represented an increase of 16.8%.
GPU
Business. GPU
Business revenue increased by 10.4% to $452.4 million for the first quarter
of
fiscal 2007 compared to $409.9 million for the first quarter of fiscal 2006.
The
$42.5 million increase was primarily the result of increased sales of our
desktop products, led by our GeForce 7-based products, which we began selling
in
the second quarter of fiscal 2006. In addition, sales of our NVIDIA professional
workstation products and notebook products also continued to improve due to
an
increased mix of GeForce 7-based products. The increased sales of desktop,
notebook and professional workstation products were offset by lower average
selling prices.
MCP
Business. MCP
Business revenue increased by 64.9% to $118.4 million for the first quarter
of
fiscal 2007 compared to $71.8 million for the first quarter of fiscal
2006. The MCP business increase of $46.6 million is primarily due to sales
of newer NVIDIA nForce4 products introduced during the third quarter of
fiscal 2006, and NVIDIA nForce5 products shipped during the first quarter of
fiscal 2007. In addition, revenue also increased as a result of our acquisition
of ULi in February 2006.
Handheld
GPU Business. Handheld
GPU Business revenue increased by 295.8% to $30.7 million for the first quarter
of fiscal 2007 compared to $7.8 million for the first quarter of fiscal
2006. The
Handheld GPU Business increase of $22.9 million is
due to
increased product sales related to high-end feature phone products and revenue
recognized as a result of a development contract.
Consumer
Electronics Business. Consumer
Electronics Business revenue decreased by 54.9% to $26.2 million for the first
quarter of fiscal 2007 compared to $58.1 million for the first quarter of fiscal
2006. The decrease in our Consumer Electronics Business is a result of
discontinued sales of our Xbox-related products to Microsoft, partially offset
by revenue recognized from our contractual arrangements with SCE to jointly
develop a custom GPU incorporating our next-generation GeForce GPU and SCE’s
system solutions in SCE’s PlayStation3. The second quarter of fiscal 2006 was
the last quarter during which we recognized revenue from the sale of our
Xbox-related products to Microsoft.
Concentration
of Revenue
Revenue
from sales to customers outside of the United States and other Americas
accounted for 85% and 83% of revenue for the first quarter of fiscal 2007 and
2006, respectively. Revenue by geographic region is allocated to individual
countries based on the location to which the products are initially billed
even
if the foreign contract equipment manufacturers, or CEMs’, add-in board and
motherboard manufacturers’ revenue is attributable to end customers in a
different location. The increase in the percentage of revenue from sales to
customers outside of the United States and other Americas for fiscal 2007 as
compared to fiscal 2006 is primarily due to decreased sales of processors used
in the Microsoft Xbox product, which were billed to Microsoft in the United
States.
Sales
to
our largest customer accounted for approximately 14% of our revenue for the
first quarter of fiscal 2007 and approximately 1% of our revenue for the
same customer for the first quarter of fiscal 2006. No other customers accounted
for 10%, or greater, of our revenue for the first quarter of fiscal
2007.
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, overhead and non-cash stock-based
compensation 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 a number of factors, including the mix of types of products
sold,
average selling prices, introduction of new products, sales discounts,
unexpected pricing actions by our competitors, the cost of product components,
and the yield of wafers produced by the foundries that manufacture our products.
Our gross margin was 42.4% and 36.0% for the first quarter of fiscal 2007
and
the first quarter of fiscal 2006, respectively.
GPU
Business. The
gross
margin of our GPU Business increased during the first quarter of fiscal 2007
as
compared to the first quarter of 2006 primarily due to the success of our
GeForce 7 series GPUs, which have experienced higher gross margins than our
previous generations of GPUs.
MCP
Business. The
gross
margin of our MCP Business decreased during the first quarter of fiscal 2007
as
compared to the first quarter of fiscal 2006 primarily due to inventory reserves
that we recorded as a charge to cost of revenue of approximately $4.1 million
related to certain NVIDIA nForce purchase commitments that we
believed exceeded future demand.
Handheld
GPU Business. The
gross
margin of our Handheld GPU Business increased during the first quarter of fiscal
2007 as compared to the first quarter of fiscal 2006. This increase is due
to
the write-off in the first quarter of fiscal 2006 of certain handheld products
that we believed exceeded the demand of our handheld customers, which at that
time was heavily concentrated at one OEM.
Consumer
Electronics Business. The
gross
margin of our Consumer Electronics Business increased during the first quarter
of fiscal 2007 as compared to the first quarter of fiscal 2006 primarily due
to
development, software and license revenue from our contractual arrangements
with
SCE for the development of its PlayStation3 computer entertainment
system.
Consolidated
Gross Margin
The
improvement in our gross margin reflects our continuing focus on delivering
cost
effective product architectures, enhancing business processes and delivering
profitable growth. However, our gross margin is significantly impacted by
product mix, which is often difficult to estimate with accuracy and thus if
we
achieve significant revenue growth in our lower margin businesses, it may
negatively impact our gross margin for the second quarter of fiscal 2007. We
believe that we can continue to improve our gross margin during the second
half
of fiscal 2007.
Operating
Expenses
Research
and Development
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
April
30,
|
|
May
1,
|
|
$
|
|
%
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
Change
|
|
Research
and Development:
|
|
(in
millions)
|
|
Salaries
and benefits
|
|
$
|
68.0
|
|
$
|
48.9
|
|
$
|
19.1
|
|
|
39
|
%
|
Computer
software and lab equipment
|
|
|
12.9
|
|
|
10.9
|
|
|
2.0
|
|
|
18
|
%
|
New
product development
|
|
|
7.5
|
|
|
6.8
|
|
|
0.7
|
|
|
10
|
%
|
Facility
expense
|
|
|
8.1
|
|
|
7.8
|
|
|
0.3
|
|
|
4
|
%
|
Depreciation
and amortization
|
|
|
15.0
|
|
|
14.3
|
|
|
0.7
|
|
|
5
|
%
|
Stock-based
compensation
|
|
|
13.6
|
|
|
-
|
|
|
13.6
|
|
|
-
|
|
License
and development project costs
|
|
|
(5.8
|
)
|
|
(4.7
|
)
|
|
(1.1
|
)
|
|
23
|
%
|
Other
|
|
|
3.1
|
|
|
1.9
|
|
|
1.2
|
|
|
63
|
%
|
Total
|
|
$
|
122.4
|
|
$
|
85.9
|
|
$
|
36.5
|
|
|
42
|
%
|
Research
and development as a percentage of net revenue
|
|
|
18
|
%
|
|
15
|
%
|
|
|
|
|
|
|
Research
and development expenses were $122.4 million and $85.9 million in the first
quarter of fiscal 2007 and fiscal 2006, respectively, an increase of $36.5
million, or 42%. This increase was primarily due to a $19.1 million increase
in
salaries and benefits related to 709 additional personnel, which included
employees from both ULi and Hybrid Graphics, and an increase in payroll taxes
due to an increase in stock option exercises. In addition, during the first
quarter of fiscal 2007 we recorded $13.6 million of non-cash stock-based
compensation expense related to research and development employees for the
first
time as a result of our adoption of SFAS No. 123(R). Computer software and
lab
equipment increased $2.0 million due to an increased allocation of information
technology-related expenses based on the growth in our headcount, as well as
purchases of software packages and computer systems for new personnel. These
increases were offset by an increase of $1.1 million in license and development
project costs, primarily related to development costs related to our
collaboration with SCE and other engineering costs related to different
development contracts, that are classified as cost of revenue in our condensed
consolidated income statement or were capitalized on our condensed consolidated
balance sheet and will be expensed on a percentage of completion
basis.
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 current level of revenue.
Sales,
General and Administrative
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
April
30,
|
|
May
1,
|
|
$
|
|
%
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
Change
|
|
Sales,
General and Administrative:
|
|
(in
millions)
|
|
Salaries
and benefits
|
|
$
|
32.8
|
|
$
|
26.2
|
|
$
|
6.6
|
|
|
25
|
%
|
Advertising
and promotions
|
|
|
14.5
|
|
|
12.1
|
|
|
2.4
|
|
|
20
|
%
|
Legal
and accounting fees
|
|
|
4.2
|
|
|
4.9
|
|
|
(0.7
|
)
|
|
(14
|
)%
|
Facility
expense
|
|
|
4.0
|
|
|
3.1
|
|
|
0.9
|
|
|
29
|
%
|
Depreciation
and amortization
|
|
|
7.9
|
|
|
8.0
|
|
|
(0.1
|
)
|
|
(1
|
)%
|
Stock-based
compensation
|
|
|
8.3
|
|
|
-
|
|
|
8.3
|
|
|
-
|
|
Other
|
|
|
(6.0
|
)
|
|
(6.2
|
)
|
|
0.2
|
|
|
(3
|
)%
|
Total
|
|
$
|
65.7
|
|
$
|
48.1
|
|
$
|
17.6
|
|
|
37
|
%
|
Sales,
general and administrative as a percentage of net revenue
|
|
|
10
|
%
|
|
8
|
%
|
|
|
|
|
|
|
Sales,
general and administrative expenses were $65.7 million and $48.1 million in
the
first quarter of fiscal 2007 and fiscal 2006, respectively, an increase of
$17.6
million, or 37%. During the first quarter of fiscal 2007, we recorded $8.3
million of non-cash stock-based compensation expense related to sales, general
and administrative employees for the first time as a result of our adoption
of
SFAS No. 123(R). Salaries and benefits increased $6.6 million related to 170
additional personnel and an increase in payroll taxes due to an increase in
stock option exercises. Advertising and promotions increased $2.4 million
primarily related to an increase in marketing development fund programs and
an
increase in travel related expenses primarily due to our ongoing international
expansion, offset by a decrease in advertising expense.
We
expect
sales, general and administrative expenses to continue to increase in absolute
dollars as we continue to support our operations, expand our sales, launch
our
new products and protect our business interests
and
these expenses may be independent of our current level of revenue.
Stock-Based
Compensation
Stock-based
compensation expense totaled $23.0 million during the first quarter of
fiscal 2007 as compared to $0.2 million during the first quarter of fiscal
2006.
Prior to the adoption of SFAS No. 123(R), we applied Accounting Principles
Board
Opinion No. 25, or APB No. 25, Accounting
for Stock Issued to Employees,
and
related interpretations to account for our stock-based employee compensation
plans. As such, compensation expense was recorded if
on
the
date of grant the current fair value per share of the underlying stock exceeded
the exercise price per share. We elected to adopt the modified prospective
application method beginning January 30, 2006 as provided by SFAS No.
123(R). Accordingly, during the three months ended April 30, 2006, we
recorded stock-based compensation expense equal to the amount that would
have
been recognized had the fair value method required for pro forma disclosure
under SFAS No. 123 had been in effect for expense recognition
purposes, adjusted for estimated forfeitures. We recognized stock-based
compensation expense using the straight-line attribution method. As of
April 30, 2006, the unearned stock-based compensation balance was $160.9
million
and will be recognized over an estimated weighted average amortization period
of
2.2 years. We anticipate that our stock-based compensation expense will increase
during the second quarter of fiscal 2007. Stock-based
compensation charges are included in the “all other” category for segment
reporting purposes.
Interest
Income
Interest
income consists of interest earned on cash, cash equivalents and marketable
securities. Interest income was $8.8 million and $3.9 million in the first
quarter of fiscal 2007 and fiscal 2006, respectively, an increase of $4.9
million. This increase was primarily the result of higher average balances
of
cash, cash equivalents, and marketable securities and higher yields during
the
first quarter of fiscal 2007 when compared to the first quarter of fiscal
2006.
Income
Taxes
We
recognized income tax expense of $18.6 million and $16.1 million in the first
quarter of fiscal 2007 and fiscal 2006, respectively. Income tax expense as
a
percentage of income before taxes, or our annual effective tax rate, was 17%
for
the first quarter of fiscal 2007 and 20% for the first quarter of fiscal 2006.
Our effective tax rate is lower than the United States Federal Statutory rate
of
35% due primarily to income earned in lower tax jurisdictions.
Liquidity
and Capital Resources
As
of
April 30, 2006, we had $955.1 million in cash, cash equivalents and marketable
securities, an increase of $4.9 million from the end of fiscal 2006. Our
portfolio of cash equivalents and marketable securities is managed by several
financial institutions. Our investment policy requires the purchase of top-tier
investment grade securities, the diversification of asset type and certain
limits on our portfolio duration.
Operating
activities generated cash of $50.4 million and $89.6 million during the first
three months of fiscal 2007 and fiscal 2006, respectively. Cash flows from
operating activities for the first quarter of fiscal 2007 were derived primarily
from our net income of $90.7 million. On our consolidated balance sheet,
accounts payable increased $118.8 million and inventories increased $91.6
million primarily as a result of our build-up of inventories, related mostly
to
several of our newly-introduced GeForce 7 products in anticipation of future
sales of such products. Accounts receivable increased $73.1 million, primarily
due to increased sales and decreased linearity of sales and decreased cash
collections during the first quarter of fiscal 2007 when compared to the fourth
quarter of fiscal 2006. During the first quarter of fiscal 2007, we recorded
$23.0 million of non-cash stock-based compensation expense for the first time
as
a result of our adoption of SFAS No. 123(R). Accrued liabilities decreased
$23.0
million primarily due to a $14.6 million decrease in payroll and related tax
accruals as a result of the timing of the end of the first quarter of fiscal
2007.
Cash
used
in investing activities has consisted primarily of investments in marketable
securities and purchases of property and equipment, which include leasehold
improvements for our facilities, and the purchase of intangible assets and
businesses. Our investing activities used cash of $157.5 million and $4.6
million during the first three months of fiscal 2007 and fiscal 2006,
respectively. Net cash used by investing activities during the first three
months of fiscal 2007 included net purchases of $69.8 million of marketable
securities, a cash expenditure of $35.5 million, net of cash and cash
equivalents acquired, for our acquisition of Hybrid Graphics and a cash
expenditure of $31.5 million, net of cash and cash equivalents acquired, for
our
acquisition of ULi, and $20.7 million for capital expenditures for purchases
of
new research and development equipment, software, and hardware equipment. We
expect to spend approximately $60.0 million to $80.0 million for capital
expenditures unrelated to acquisitions during the remainder of fiscal 2007.
In
addition, we may continue to use cash in connection with the acquisition
of businesses or assets.
Financing
activities generated cash of $43.1 million and used cash of $12.5 million during
the first three months of fiscal 2007 and fiscal 2006, respectively. Net cash
generated by financing activities during the first three months of fiscal 2007
was primarily a result of $86.7 million of proceeds that we received from
common stock issued under our employee stock plans, offset by $50.0 million
of
cash used in our stock repurchase program.
Stock
Repurchase Program
On
August
9, 2004, we announced that our Board of Directors, or the Board, had authorized
a stock repurchase program to repurchase shares of our common stock, subject
to
certain specifications, up to an aggregate maximum amount of $300.0 million.
On
March 6, 2006, we announced that the Board had approved a $400.0 million
increase to the original stock repurchase program we had announced in August
2004. As a result of this increase, the amount of common stock the Board has
authorized to be repurchased has now been increased to a total of $700.0
million. 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 2007, we
repurchased 2.1 million shares of our common stock for $50.0 million under
a
structured share repurchase transaction, which we recorded on the trade date
of
the transaction. Through the end of the first quarter of fiscal 2007, we have
repurchased an aggregate of 19.1 million shares under our stock repurchase
program for a total cost of $263.2 million. Subsequent to April 30, 2006, we
entered into a structured share repurchase transaction to repurchase shares
of
our common stock for $75.0 million that we expect to settle prior to the end
of
our second quarter of fiscal 2007.
Operating
Capital and Capital Expenditure Requirements
We
believe that our existing cash balances and anticipated cash flows from
operations will be sufficient to meet our operating, acquisition and capital
requirements for at least the next 12 months. However, there is no assurance
that we will not need to raise additional equity or debt financing within this
time frame. Additional financing may not be available on favorable terms or
at
all and may be dilutive to our then-current stockholders. We also may require
additional capital for other purposes not presently contemplated. If we are
unable to obtain sufficient capital, we could be required to curtail capital
equipment purchases or research and development expenditures, which could harm
our business. Factors that could affect our cash used or generated from
operations and, as a result, our need to seek additional borrowings or capital
include:
· |
decreased
demand and market acceptance for our products and/or our customers’
products;
|
· |
inability
to successfully develop and produce in volume production our
next-generation products;
|
· |
competitive
pressures resulting in lower than expected average selling prices;
and
|
· |
new
product announcements or product introductions by our competitors.
|
For
additional factors see “Business Risks - 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.”
Shelf
Registration Statement
In
December 2003, we filed a Form S-3 with the SEC under its "shelf" registration
process. This shelf registration was declared effective by the SEC on March
25,
2004. Under this shelf registration statement, we may sell common stock,
preferred stock, debt securities, warrants, stock purchase contracts and/or
stock purchase units in one or more offerings up to a total dollar amount of
$500.0 million. Unless otherwise indicated in the applicable prospectus
supplement, we intend to use the proceeds for working capital and general
corporate purposes.
Contractual
Obligations
There
were no material changes in our contractual obligations from those disclosed
in
our Form 10-K. 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.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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 30,
2006, we had $955.1 million 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.
ITEM
4. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
Based
on
their evaluation as of April 30, 2006, 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 control over financial reporting during our
last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Inherent
Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls, will prevent all error and all fraud. A control system,
no
matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within NVIDIA have been detected.
PART
II: OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
Please
see Part I, Item 1, Note 13, “Litigation” for discussion of our legal
proceedings.
ITEM
1A. RISK FACTORS
An
updated 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.
Business
Risks
In
evaluating NVIDIA and our business, the following factors should be considered
in addition to the other information in this Quarterly Report on Form 10-Q,
or
Form 10-Q. Any one of the following risks could seriously harm our
business, financial condition and results of operations, which could cause
our
stock price to decline. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may also impair our business
operations.
Risks
Related to Our Operations
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 measures in an effort to improve our 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; sales
discounts; unexpected pricing actions by our competitors; the cost of product
components; and the yield of wafers produced by the foundries that manufacture
our products. If we incorrectly forecast the impact of any of the
aforementioned factors on our business, we may be unable to take action in time
to counteract any negative impact on our gross margin. In addition, if we
are unable to meet our gross margin target for any period or the target set
by
analysts, the trading price of our common stock may decline.
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, which may not
accurately predict the quantity or type of our products that our customers
will
want in the future. 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 forced 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,
which could adversely affect our revenue results. Even if we are able to
increase production levels to meet customer demand, we may not be able to do
so
in a cost effective or timely manner. Inability to fill our customers' orders
on
a timely basis could damage our customer relationships, result in lost revenue,
cause a loss in market share or damage our reputation.
Because
we order materials in advance of anticipated customer demand our ability to
reduce our inventory purchase commitments quickly in response to any revenue
shortfalls is limited.
Substantially
all of our sales are made on the basis of purchase orders rather than long-term
agreements. As a result, we may commit resources to the production of products
without having received advance purchase commitments from customers. 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. We may build inventories
during periods of anticipated growth. Additionally, because we often sell a
substantial portion of our products in the last month of each quarter and,
therefore, we recognize a substantial portion of our revenue 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 if we incorrectly forecast product demand, which
could negatively impact our gross margin and financial results.
We
are dependent on key personnel and the loss of these employees could negatively
impact our business.
Our
performance is substantially dependent on the performance of our executive
officers and key employees. None of our executive officers or employees is
bound
by an employment agreement, meaning our relationships with our executive
officers and employees are at will. We do not have “key person” life insurance
policies on any of our employees. The loss of the services of any of our
executive officers, technical personnel or other key employees, particularly
Jen-Hsun Huang, our President and Chief Executive Officer, would harm our
business. Our success will depend on our ability to identify, hire, train and
retain highly qualified technical and managerial personnel. Our failure to
attract and retain the necessary technical and managerial personnel would harm
our business. The integration of new executives or personnel could disrupt
our
ongoing operations.
Failure
to achieve expected manufacturing yields for existing and/or new products could
reduce our gross margin and could adversely affect our ability to compete
effectively.
Semiconductor
manufacturing yields are a function both of product design, which is developed
largely by us, and process technology, which typically is proprietary to the
manufacturer. Since low yields may result from either design or process
technology failures, yield problems may not be effectively determined or
resolved until an actual product exists that can be analyzed and tested to
identify process sensitivities relating to the design rules that are used.
As a
result, yield problems may not be identified until well into the production
process. Resolution of yield problems requires cooperation by and communication
between us and the manufacturer.
Because
of our potentially limited access to wafer fabrication capacity from our
manufacturers, any decrease in manufacturing yields could result in an increase
in our per unit costs and force us to allocate our available product supply
among our customers. This could potentially harm customer relationships, our
reputation, our revenue and our gross profit. Our wafer manufacturers may be
unable to achieve or maintain acceptable manufacturing yields in the future.
Our
inability to achieve planned yields from our wafer manufacturers could reduce
our gross margin. We also face the risk of product recalls or product returns
resulting from design or manufacturing defects that are not discovered during
the manufacturing and testing process. A significant number of product returns
due to a defect or recall could damage our reputation and result in our
customers working with our competitors.
To
stay competitive, we may have to invest more resources in research and
development than anticipated, which could increase our operating expenses and
negatively impact our operating results.
If
new competitors, technological advances by existing competitors or other
competitive factors require us to invest significantly greater resources than
anticipated in research and development efforts, our operating expenses would
increase. We have substantially increased our engineering and technical
resources and have 1,997 full-time employees engaged in research and development
as of April 30, 2006, compared to 1,654 employees as of January 29, 2006.
Research and development expenditures were $122.4 million and $85.9 million
for
the first quarter of fiscal 2007 and fiscal 2006, respectively. Research and
development expenses for the first quarter of fiscal 2007 included $13.6 million
related to non-cash stock-based compensation, which we recorded for the first
time in that quarter. If we are required to invest significantly greater
resources than anticipated in research and development efforts without an
increase in revenue, our operating results could decline. In order to remain
competitive, we anticipate that we will continue to devote substantial resources
to research and development, and we expect these expenses to increase in
absolute dollars in the foreseeable future due to the increased complexity
and
the greater number of products under development as well as hiring additional
employees. Research and development expenses are likely to fluctuate from time
to time to the extent we make periodic incremental investments in research
and
development and these investments may be independent of our level of
revenue.
Our
operating expenses are relatively fixed and we may have limited ability to
reduce operating expenses quickly in response to any revenue shortfalls.
During
the first quarter of fiscal 2007, our operating expenses, which are comprised
of
research and development expenses and sales, general and administrative
expenses, represented 27.6% of our total revenue as compared to 22.9% of our
total revenue during the first quarter of fiscal 2006. Operating expenses for
the first quarter of fiscal 2007 included $21.9 million related to non-cash
stock-based compensation, which we recorded for the first time in that quarter.
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, and 90
nanometer process technologies for our families of GPUs, MCPs and Handheld
GPUs.
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. 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
operating results are unpredictable and may fluctuate, and if our operating
results are below the expectations of securities analysts or investors, the
trading price of our stock could decline.
Many
of
our revenue components fluctuate and are difficult to predict, and our operating
expenses are largely independent of revenue in any particular period. It is,
therefore, difficult for us to accurately forecast revenue and profits or
losses. As a result, it is possible that in some quarters our operating results
could be below the expectations of securities analysts or investors, which
could
cause the trading price of our common stock to decline, perhaps substantially.
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 and 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. Accordingly, when our
customers are making their design decisions, our existing products must have
competitive performance levels or we must timely introduce new products in
order
to be included in new system configurations. This requires that we do the
following:
· |
anticipate
the features and functionality that customers and consumers will
demand;
|
· |
incorporate
those features and functionalities into products that meet the exacting
design requirements of OEMs, ODMs, and add-in board and motherboard
manufacturers;
|
· |
price
our products competitively; and
|
· |
introduce
products to the market within the limited design cycle for OEMs,
ODMs, and
add-in board and motherboard manufacturers.
|
If
OEMs,
ODMs, and add-in board and motherboard manufacturers do not include our products
in their systems, they will typically not use our products in their design
systems until at least the next design configuration. Therefore, we endeavor
to
develop close relationships with our OEMs and ODMs in an attempt to allow us
to
better anticipate and address customer needs in new products so that our
products will achieve design wins.
Our
ability to achieve design wins also depends in part on our ability to identify
and be compliant with evolving industry standards. Unanticipated changes in
industry standards could render our products incompatible with products
developed by major hardware manufacturers and software developers, including
AMD, Intel and Microsoft. Such changes would require us to invest significant
time and resources to redesign our products to be compliant with relevant
standards. If our products are not in compliance with prevailing industry
standards for a significant period of time, our ability to achieve design wins
could suffer. If we are unable to achieve new design wins for existing or new
customers, we may lose market share and our operating results would be
negatively impacted.
Achievement
of design wins may not result in the success of our products and could result
in
a loss of market share.
The
process of being qualified for inclusion in an OEM 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 both the OEM, ODM, add-in board and
motherboard manufacturers’ design cycles as well as other market demand.
Additionally, even if we achieve a significant number of design wins, there
can
be no assurance that our OEM and ODM customers will actually take the design
to
production or that the design will be commercially successful. Furthermore,
there may be changes in the timing of product orders due to unexpected delays
in
the introduction of our customers’ products that could negatively impact the
success of our products. Any of these factors could result in a loss of market
share and could negatively impact our financial results.
Our
business results could be adversely affected if our product development efforts
are unsuccessful.
We
have in the past experienced delays in the development of some new products.
Any
delay in the future or failure of our GPUs or other processors to meet or exceed
specifications of competitive products could materially harm our business.
The
success of our new product introductions will depend on many factors, including
the following:
· |
proper new
product definition;
|
· |
timely
completion and introduction of new product designs;
|
· |
the
ability of third-party manufacturers to effectively manufacture our
new
products in a timely manner;
|
· |
dependence
on third-party subcontractors for assembly, testing and packaging
of our
products and in meeting product delivery schedules and maintaining
product
quality;
|
· |
the
quality of any 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 or other processors develop and competition increases, we anticipate that
product life cycles at the high end will remain short and average selling prices
will decline. In particular, we expect average selling prices and gross margins
for our processors to decline as each product matures and as unit volume
increases. As a result, we will need to introduce new products and enhancements
to existing products to maintain or improve overall average selling prices
and
gross margins. In order for our processors to achieve high volumes, leading
PC
OEMs, ODMs, and add-in board and motherboard manufacturers must select our
processor for design into their products, and then successfully complete the
designs of their products and sell them. We may be unable to successfully
identify new product opportunities or to develop and bring to market new
products in a timely fashion. In addition, we cannot guarantee that new products
we develop will be selected for design into PC OEMs’, ODMs’, and add-in board
and motherboard manufacturers’ products, that any new designs will be
successfully completed, or that any new products will be sold.
As
the
complexity of our products and the manufacturing process for our products
increases, there is an increasing risk that we will experience problems with
the
performance of our products and that there will be delays in the development,
introduction or volume shipment of our products. We may experience difficulties
related to the production of current or future products or other factors that
may delay the introduction or volume sale of new products we develop. In
addition, we may be unable to successfully manage the production transition
risks with respect to future products. Failure to achieve any of the foregoing
with respect to future products or product enhancements could result in rapidly
declining average selling prices, reduced margins and reduced demand for
products or loss of market share. In addition, technologies developed by others
may render our processors non-competitive or obsolete or result in our holding
excess inventory, any of which would harm our business.
We
could suffer a loss of market share if our products contain significant defects.
Products
as complex as those we offer may contain defects or experience failures when
introduced or when new versions or enhancements to existing products are
released. We have in the past discovered defects and incompatibilities with
customers’ hardware in some of our products and may experience delays or loss of
revenue to correct any defects or incompatibilities in the future. Errors in
new
products or releases after commencement of commercial shipments could result
in
failure to achieve market acceptance or loss of design wins. Our products
typically go through only one verification cycle prior to beginning volume
production and distribution. As a result, our products may contain defects
or
flaws that are undetected prior to volume production and distribution. If these
defects or flaws exist and are not detected prior to volume production and
distribution, we may be required to reimburse customers for costs to repair
or
replace the affected products in the field. We may also be required to incur
additional research and development costs to find and correct the defect, which
could divert the attention of our management and engineers from the development
of new products. These costs could be significant and could adversely affect
our
business and operating results. We may also suffer a loss of reputation and/or
a
loss in our market share, either of which could materially harm our financial
results.
Risks
Related to Our Partners and Customers
There
can be no assurance that the PlayStation3 will achieve long term commercial
success.
In
April
2005, we finalized our definitive agreement with SCE to jointly develop a custom
GPU incorporating our next-generation GeForce GPU and SCE’s system solutions in
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 2007, we recognized
$23.4 million of revenue from our contractual arrangements with SCE. Depending
on the ultimate success of this next-generation platform, we expect to generate
up to $100 million in revenue annually from license fees and royalties over
the
next five years, with the possibility of additional royalties for several years
thereafter. There can be no assurance that the PlayStation3 will achieve long
term commercial success, given the intense competition in the game console
market. Additionally, we do not have control over the launch date or
pricing of the Playstation3. As such, we do not have control over when we will
receive royalties. If we do not receive royalties as we anticipate, our revenue
and gross margin may be adversely affected.
We
may not be able to realize the potential financial or strategic benefits of
business acquisitions, which could hurt our ability to grow our business,
develop new products or sell our products.
In
the
past we have acquired and invested in other businesses that offered products,
services and technologies that we believed would help expand or enhance our
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 for $53.1
million paid in cash, and in March 2006 we completed the acquisition of Hybrid
Graphics for $36.7 million paid in cash. If we do consider other acquisitions,
a
strategic alliance or a joint venture, the negotiations could divert
management’s attention as well as other resources. For any previous or future
acquisition or investment, including ULi and Hybrid Graphics, the following
risks could impair our ability to grow our business and develop new products,
and ultimately, could impair our ability to sell our products, which could
negatively impact our growth or our financial results:
· |
difficulty
in combining the technology, products, operations or workforce of
the
acquired business with our
business;
|
· |
disruption
of our ongoing businesses:
|
· |
difficulty
in realizing the potential financial or strategic benefits of the
transaction;
|
· |
diversion
of management’s attention from our
business;
|
· |
difficulty
in maintaining uniform standards, controls, procedures and
policies;
|
· |
disruption
of or delays in ongoing research and development
efforts;
|
· |
diversion
of capital and other resources;
|
· |
assumption
of liabilities;
|
· |
diversion
of resources and unanticipated expenses resulting from litigation
arising from potential or actual business acquisitions or
investments;
|
· |
difficulties
in entering into new markets in which we have limited or no experience
and
where competitors in such markets have stronger positions; and
|
· |
impairment
of relationships with employees and customers, or the loss of any
of our
key employees or of our target’s key employees, as a result of the
integration of new businesses and management personnel.
|
In
addition, the consideration for any future acquisition could be paid in cash,
shares of our common stock, the issuance of convertible debt securities or
a
combination of cash, convertible debt and common stock. If we pay all or a
portion of the purchase price in cash, our cash reserves would be reduced.
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
sell our products to a small number of customers and our business could suffer
by the loss of any of these customers.
We
have
only a limited number of customers and our sales are highly concentrated. Sales
to our largest customer accounted for approximately 14% of our revenue during
the first quarter of fiscal 2007. Although a small number of our other customers
represents the majority of our revenue, their end customers include a large
number of OEMs and system integrators throughout the world who, in many cases,
specify the graphics supplier. Our sales process involves achieving key design
wins with leading PC OEMs and major system builders and supporting the product
design into high volume production with key CEMs, ODMs, motherboard and add-in
board manufacturers. These design wins in turn influence the retail and system
builder channel that is serviced by CEMs, ODMs, motherboard and add-in board
manufacturers. Our distribution strategy is to work with a small number of
leading independent CEMs, ODMs, motherboard manufacturers, add-in board
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, motherboard and add-in board 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.
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. We utilize
industry-leading suppliers, such as Chartered
Semiconductor Manufacturing, or Chartered, Semiconductor Manufacturing
International Corporation, or SMIC, Taiwan Semiconductor Manufacturing
Corporation, or TSMC, and United Microelectronics Corporation, or UMC, to
produce our semiconductor wafers and utilize independent
subcontractors
to
perform assembly, testing and packaging. 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. These manufacturers may be unable to meet our near-term or long-term
manufacturing or pricing requirements. We obtain manufacturing services on
a
purchase order basis. The foundries we use have no obligation to provide
us with
any specified minimum quantities of product. Suppliers, such as Chartered,
SMIC,
TSMC, and UMC, 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 located outside of the United States for
assembly, testing and packaging of our products, which reduces our control
over
the delivery and quantity of our products.
Our
processors are assembled and tested by independent subcontractors, such as
Advanced Semiconductor Engineering, Amkor Technology Inc., King Yuan Electronics
Co., LTD, Siliconware Precision Industries Company Ltd., and STATS ChipPAC
Incorporated, all of which are located outside of the United States. 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, quality
assurance problems or political instability outside of the United States 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 or test our products or components. Any such delays
could result in a loss of reputation or a decrease in sales to our customers.
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. In addition, we purchase credit insurance
on selected customers’ accounts receivable balances in an effort to further
mitigate our exposure for such losses. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability
to
make payments, additional allowances may be required, we may be required to
defer revenue recognition on sales to affected customers and we may be required
to pay higher credit insurance premiums, which could adversely affect our
operating results. We may have to record additional reserves or write-offs
and/or defer revenue on certain sales transactions in the future, which could
negatively impact our financial results.
We
rely on third-party vendors to supply software development tools to us for
the
development of our new products and we may be unable to obtain the tools
necessary to develop or enhance new or existing products.
When
we
design and develop new products or product enhancements, we rely on third-party
software development tools to assist us in the design, simulation and
verification of new products or enhancements to existing products. Although
we
currently are not dependent on any one vendor for the supply of these tools,
some or all of these tools may not be readily available in the future.
Additionally, the software development tools available at the time that we
are
designing, simulating or verifying a product may not be sophisticated enough
or
technologically advanced enough for our purposes. For example, we have
experienced delays in the introduction of products in the past as a result
of
the inability of then available software development tools to fully simulate
the
complex features and functionalities of our products. Therefore, the design
requirements necessary to meet consumer demands for more features and greater
functionality from our processors in the future may exceed the capabilities
of
the software development tools that are available to us. If the software
development tools we use become unavailable or fail to produce designs that
meet
consumer demands, we may miss design cycles or lose design wins either of which
could result in a loss of market share, a decrease in revenue or negatively
impact our operating results.
Risks
Related to Our Competition
The
market for GPU, MCP, and Handheld GPUs is highly competitive and we may be
unable to compete.
The
market for GPUs, MCPs and Handheld GPUs is intensely competitive and is
characterized by rapid technological change, evolving industry standards and
declining average selling prices. We believe that the principal competitive
factors in this market are performance, breadth of product offerings, access
to
customers and distribution channels, backward-forward software support,
conformity to industry standard application programming interfaces,
manufacturing capabilities, price of processors and total system costs of add-in
boards and motherboards. We believe that our ability to remain competitive
will
depend on how well we are able to anticipate the features and functions that
customers will demand and whether we are able to deliver consistent volumes
of
our products at acceptable levels of quality. We expect competition to increase
both from existing competitors and new market entrants with products that may
be
less costly than ours, or may provide better performance or additional features
not provided by our products, which could harm our business.
An
additional significant source of competition is from companies that provide
or
intend to provide GPU, MCP, and Handheld GPU solutions. Some of our competitors
may have or be able to obtain greater marketing, financial, distribution and
manufacturing resources than we do and may be more able to adapt to customer
or
technological changes. Our current competitors include the following:
· |
suppliers
of GPUs, including MCPs that incorporate 3D graphics functionality
as part
of their existing solutions, such as ATI, Intel, Silicon Integrated
Systems, Inc., or SIS, VIA Technologies, Inc., or VIA, and XGI Technology
Inc.;
|
· |
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 ATI Technologies, Inc., or ATI, Broadcom
Corporation, or Broadcom, Intel, SIS, and VIA;
and
|
· |
suppliers
of GPUs or GPU intellectual property that incorporate advanced graphics
functionality as part of their existing solutions, such as ATI, Bitboys,
Broadcom, Fujitsu Limited, Imagination Technologies Ltd., NEC Corporation,
Qualcomm Incorporated, Renesas Technology Corp., Seiko-Epson, Texas
Instruments Incorporated, and Toshiba America,
Inc.
|
If
and to
the extent we offer products outside of the consumer and enterprise PC,
notebook, workstation, PDA, cellular phone, and video game console markets,
we
may face competition from some of our existing competitors as well as from
companies with which we currently do not compete. We cannot accurately predict
if we will compete successfully in any new markets we may enter. If we are
unable to compete in our current and any new markets, our financial results
will
suffer.
As
Intel continues to pursue platform solutions, we may not be able to successfully
compete.
We
expect
substantial competition from Intel’s strategy of selling platform solutions,
such as when Intel achieved success with its Centrino platform solution. In
addition to the Centrino notebook platform solution, it has announced a desktop
initiative branded as VIIV, and we expect that Intel will extend this strategy
to other segments including professional workstations and servers. To the extent
Intel is successful with this strategy, we may not be able to successfully
compete in these segments.
Risks
Related to Market Conditions
We
are subject to risks associated with international operations which may harm
our
business.
A
significant portion of our semiconductor wafers are manufactured, assembled,
tested and packaged by third-parties located outside of the United States.
Additionally, we generated 85% and 83% of revenue for the first quarter of
fiscal 2007 and 2006, respectively, from sales to customers outside the United
States and other Americas. The manufacture, assembly, test and packaging of
our
products outside of the United States 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;
|
· |
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, and England. We also have
a
subsidiary in Finland. During the first quarter of fiscal 2007, we added 333
international employees to our international operations. 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 international 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.
Currently,
all of our arrangements with third-party manufacturers and subcontractors
provide for pricing and payment in United States dollars as are sales to our
customers located outside of the United States and other Americas. Increases
in
the value of the United States’ dollar relative to other currencies would make
our products more expensive, which would 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.
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 PC,
notebook, workstation, PDA, cellular phone, and video game console markets
or if
the demand in these markets for new and innovative products decreases, our
business and operating results would suffer.
Our
success depends in part upon continued broad adoption of our processors for
3D
graphics in consumer and enterprise PC, notebook, workstation, PDA, cellular
phone, and video game console applications. The market for processors has been
characterized by unpredictable and sometimes rapid shifts in the popularity
of
products, often caused by the publication of competitive industry benchmark
results, changes in pricing of dynamic random-access memory devices and other
changes in the total system cost of add-in boards, as well as by severe price
competition and by frequent new technology and product introductions. Only
a
small number of products have achieved broad market acceptance and such market
acceptance, if achieved, is difficult to sustain due to intense competition
and
frequent new technology and product introductions. Since the GPU Business is
our
core business, our financial results would suffer if for any reason our current
or future GPUs 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, such as OEMs, ODMs, add-in-card 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. For example, the semiconductor industry is moving towards
becoming compliant with the Restriction of Hazardous Substances Directive,
or
RoHS Directive, which will become effective in July 2006. The RoHS Directive
is
European legislation that restricts the use of a number of substances, including
lead. 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, that are intended to harmonize with the RoHS directive and other
states are contemplating similar legislation. China has promulgated use
restrictions on the same substances as the RoHS directive, but has not yet
defined either the scope of the affected products or an effective date of any
such restrictions.
Also,
we
could face significant costs and liabilities in connection with the Waste
Electrical and Electronic Equipment Directive, 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 and from products in use prior to that date that are being replaced. We
continue to evaluate the impact of specific registration and compliance
activities required by WEEE. 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.
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 fines, suspension of production, excess inventory, sales limitations,
and criminal and civil liabilities.
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.
Risks
Related to Government Action, Regulatory Action, Intellectual Property, and
Litigation
Expensing
employee stock options materially and aversely affects our reported operating
results and could adversely affect our competitive position as
well.
Since
inception, we have used stock options and our employee stock purchase program
as
fundamental components of our compensation packages. Prior to January 30, 2006,
we had not recognized compensation cost for employee stock options or shares
sold pursuant to our employee stock purchase program. We believe that these
incentives directly motivate our employees and, through the use of vesting,
encourage our employees to remain with us. In December 2004, the Financial
Accounting Standards Board issued SFAS No. 123(R), Share-Based
Payment,
which
requires the measurement and recognition of compensation expense for all
stock-based compensation payments. Although the SEC delayed the effective date
of SFAS No. 123(R), it is now effective. 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 2007,
we recorded $23.0 million related to stock-based compensation 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 currently involved in patent litigation, which, if not resolved favorably,
could require us to pay damages.
We
are
currently involved in patent litigation. On October 19, 2004, Opti Incorporated,
or Opti, filed a complaint for patent infringement against NVIDIA in the United
States District Court for the Eastern District of Texas. In its complaint,
Opti
asserted that unspecified NVIDIA chipsets infringe five United States patents
held by Opti. Opti seeks unspecified damages for our alleged conduct, attorneys’
fees and triple damages for alleged willful infringement by NVIDIA. We filed
a
response to this complaint in December 2004. A case management conference was
held in July 2005 where a trial date was set for July 2006. A court mandated
mediation was held in January 2006 and did not resolve the matter. The discovery
period formally ended on May 6, 2006. On April 13, 2006, a Markman hearing
took
place and on April 24, 2006, the District Court issued a ruling adopting
Opti's proposed construction on 13 of the 15 terms at issue. In May 2006, Opti
dropped two of the five United States patents that it alleged that NVIDIA
infringes. We continue to prepare for trial. We believe the claims
asserted against us are without merit and we will continue to defend ourselves
vigorously.
Our
defenses against Opti may be unsuccessful. If this case continues to move
forward, or if other patent litigation matters involving us arise, we expect
that they will result in additional legal and other costs, regardless of the
outcome, which could be substantial.
Our
industry is characterized by vigorous protection and pursuit of intellectual
property rights and positions which could result in significant
expense.
The
semiconductor industry is characterized by vigorous protection and pursuit
of
intellectual property rights and positions, which have resulted in protracted
and expensive litigation. The graphics processor industry, in particular, has
been recently characterized by the aggressive pursuit of intellectual property
positions, and we expect our competitors and others will continue to
aggressively pursue intellectual property positions. The technology that we
use
to design and develop our products and that is incorporated into our products
may be subject to claims that it infringes the patents or intellectual property
rights of others. Our success is dependent on our ability to develop new
products without infringing or misappropriating the intellectual property rights
of others or by licensing the intellectual property of third parties. As such,
we have licensed technology from third parties for incorporation into our
products, and expect to continue to enter into license agreements with third
parties for future products. 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, or at all, our competitive position and our business could
suffer.
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 relate to technology
used
by us in connection with our products, including our processors. 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 by 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;
|
· |
location
in which our products are manufactured;
|
· |
our
strategic technology or product directions in different countries;
and
|
· |
degree
to which intellectual property laws exist and are meaningfully enforced
in
different jurisdictions.
|
Our
pending patent applications and any future applications may not be approved.
In
addition, any issued patents may not provide us with competitive advantages
or
may be challenged by third parties. The enforcement of patents by others may
harm our ability to conduct our business. Others may independently develop
substantially equivalent intellectual property or otherwise gain access to
our
trade secrets or intellectual property. Our failure to effectively protect
our
intellectual property could harm our business.
Litigation
to defend against alleged infringement of intellectual property rights or to
enforce our intellectual property rights and the outcome of such litigation
could result in substantial costs to us.
From
time
to time we receive notices or are included in legal actions alleging that we
have infringed patents or other intellectual property rights owned by third
parties. We expect that as the number of issued hardware and software patents
increases and as competition in our product lines intensifies, the volume of
intellectual property infringement claims may increase. We may become involved
in future 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.
In
addition, litigation or other legal proceedings may be necessary
to:
· |
assert
claims of infringement;
|
· |
protect
our trade secrets or know-how; or
|
· |
determine
the enforceability, scope and validity of the propriety rights of
others.
|
If
infringement claims are made against us, we may seek licenses under the
claimants’ patents or other intellectual property rights. In addition, we or 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.
Alternatively,
we may initiate claims or litigation against third parties for infringement
of
our proprietary rights or to establish the validity of our proprietary rights,
which could be costly. If we have to initiate a claim, our operating expenses
may increase which could negatively impact our operating results. Additionally,
if one of our patents is invalidated or found to be unenforceable, we would
be
unable to license the patent which could result in a loss of
revenue.
Regardless
of the outcome, litigation or negotiations involving intellectual property
rights can be very costly and can divert management’s attention from other
matters. We may be unsuccessful in defending or pursuing these lawsuits or
claims. 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.
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.
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. This legislation is relatively
new
and neither companies nor accounting firms
have
significant experience in complying with its requirements. As a result, we
have
incurred, and expect to continue to incur increased expense and to devote
additional management resources to Section 404 compliance. 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.
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 of directors to create and issue preferred stock
without prior stockholder
approval;
|
· |
the
prohibition of stockholder action by written consent;
|
· |
a
classified board of directors; and
|
· |
advance
notice requirements for director nominations and stockholder proposals.
|
On
March
5, 2000, we entered into an agreement with Microsoft in which we agreed to
develop and sell graphics chips and to license certain technology to Microsoft
and its licensees for use in the Xbox. Under the agreement, if an individual
or
corporation makes an offer to purchase shares equal to or greater than 30%
of
the outstanding shares of our common stock, Microsoft may have first and last
rights of refusal to purchase the stock. The Microsoft provision and the other
factors listed above could also delay or prevent a change in control of NVIDIA.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Issuer
Purchases of Equity Securities
|
|
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
30, 2006 through February 26, 2006
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
86,846,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
27, 2006 through March 26, 2006
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
486,846,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
27, 2006 through April 30, 2006
|
|
|
2,079,440
|
(3)
|
$
|
24.04
|
|
|
2,079,440
|
(3)
|
$
|
436,846,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,079,440
|
|
$
|
24.04
|
(2)
|
|
2,079,440
|
|
|
|
|
(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 we had announced in August 2004. 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 $700.0 million on the open market, in
negotiated transactions or through structured stock repurchase agreements
through August 2007.
(2)
Represents weighted average price paid per share during the first quarter of
fiscal 2007.
(3)
As
part of our share repurchase program, we have entered into and we may continue
to enter into structured share repurchase transactions with financial
institutions. During the first quarter of fiscal 2007, we repurchased 2.1
million shares of our common stock for $50.0 million under a structured share
repurchase transaction. This transaction required that we make an up-front
payment. Subsequent to April 30, 2006, we entered into a structured share
repurchase transaction to repurchase shares of our common stock for $75.0
million that we expect to settle prior to the end of our second quarter of
fiscal 2007.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
Not
applicable.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
EXHIBIT
INDEX
|
Exhibit
No.
|
Exhibit
Description
|
Form
|
File
Number
|
Exhibit
|
Filing
Date
|
Filed
Herewith
|
3.3
|
Bylaws
of NVIDIA Corporation, Amended and Restated as of March 7,
2006
|
10-K
|
0-23985
|
3.3
|
3/16/06
|
|
10.1
|
Form
of Indemnity Agreement 8-k between NVIDIA Corporation and each of
its
directors and officers
|
8-K
|
0-23985
|
10.1
|
3/07/06
|
|
10.2
|
1998
Equity Incentive Plan, as amended
|
8-K
|
0-23985
|
10.2
|
3/13/06
|
|
10.3+
|
NVIDIA
Corporation Fiscal Year 2007 Variable Compensation Plan
|
8-K
|
0-23985
|
10.1
|
4/03/06
|
|
10.4+
|
1998
Non-Employee Directors’ Stock Option Plan, as amended
|
8-K
|
0-23985
|
10.2
|
4/03/06
|
|
31.1
|
Certification
of Chief Executive Officer as required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended
|
|
|
|
|
*
|
31.2
|
Certification
of Chief Financial Officer as required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended
|
|
|
|
|
*
|
32.1#
|
Certification
of Chief Executive Officer as required by Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended
|
|
|
|
|
*
|
32.2#
|
Certification
of Chief Financial Officer as required by Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended
|
|
|
|
|
*
|
+
Management contract, compensatory plan or arrangement.
#
The
certifications attached as Exhibit 32.1 and Exhibit 32.2 accompany this
Quarterly Report on Form 10-Q, are not deemed filed with the Securities and
Exchange Commission and are not to be incorporated by reference into any filing
of NVIDIA Corporation under the Securities Act of 1933, or the Securities
Exchange Act of 1934, whether made before or after the date of this Form 10-Q,
irrespective of any general incorporation language contained in such
filing.
SIGNATURE
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, on May 31, 2006.
NVIDIA
Corporation
By: /s/
MARVIN D. BURKETT
Marvin
D.
Burkett
Chief
Financial
Officer
(Duly
Authorized
Officer and
Principal
Financial
and Accounting Officer)
EXHIBIT
INDEX
|
Exhibit
No.
|
Exhibit
Description
|
Form
|
File
Number
|
Exhibit
|
Filing
Date
|
Filed
Herewith
|
3.3
|
Bylaws
of NVIDIA Corporation, Amended and Restated as of March 7,
2006
|
10-K
|
0-23985
|
3.3
|
3/16/06
|
|
10.1
|
Form
of Indemnity Agreement 8-k between NVIDIA Corporation and each of
its
directors and officers
|
8-K
|
0-23985
|
10.1
|
3/07/06
|
|
10.2
|
1998
Equity Incentive Plan, as amended
|
8-K
|
0-23985
|
10.2
|
3/13/06
|
|
10.3+
|
NVIDIA
Corporation Fiscal Year 2007 Variable Compensation Plan
|
8-K
|
0-23985
|
10.1
|
4/03/06
|
|
10.4+
|
1998
Non-Employee Directors’ Stock Option Plan, as amended
|
8-K
|
0-23985
|
10.2
|
4/03/06
|
|
31.1
|
Certification
of Chief Executive Officer as required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended
|
|
|
|
|
*
|
31.2
|
Certification
of Chief Financial Officer as required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended
|
|
|
|
|
*
|
32.1#
|
Certification
of Chief Executive Officer as required by Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended
|
|
|
|
|
*
|
32.2#
|
Certification
of Chief Financial Officer as required by Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended
|
|
|
|
|
*
|
+
Management contract, compensatory plan or arrangement.
#
The
certifications attached as Exhibit 32.1 and Exhibit 32.2 accompany this
Quarterly Report on Form 10-Q, are not deemed filed with the Securities and
Exchange Commission and are not to be incorporated by reference into any filing
of NVIDIA Corporation under the Securities Act of 1933, or the Securities
Exchange Act of 1934, whether made before or after the date of this Form 10-Q,
irrespective of any general incorporation language contained in such
filing.