UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________
FORM
10-Q
[x] QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended July 31, 2005
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 an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes [X] No [_]
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 August 12,
2005 was 168,692,071 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 July 31, 2005 and January 30,
2005 |
1 |
|
Condensed
Consolidated Statements of Income for the three and six months ended July
31, 2005 and July 25, 2004 |
2 |
|
Condensed
Consolidated Statements of Cash Flows for the six months ended July 31,
2005 and July 25, 2004 |
3 |
|
Notes
to Condensed Consolidated Financial Statements |
4 |
|
|
|
Item
2. |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations |
15 |
|
|
|
Item
3. |
Quantitative
and Qualitative Disclosures About Market Risk |
25 |
|
|
|
Item
4. |
Controls
and Procedures |
40 |
|
|
|
|
PART
II: OTHER INFORMATION |
|
Item
1. |
Legal
Proceedings |
41 |
|
|
|
Item
2. |
Unregistered
Sales of Equity Securities and Use of Proceeds |
41 |
|
|
|
Item
3. |
Defaults
Upon Senior Securities |
41 |
|
|
|
Item
4. |
Submission
of Matters to a Vote of Security Holders |
41 |
|
|
|
Item
5. |
Other
Information |
42 |
|
|
|
Item
6. |
Exhibits |
42 |
|
|
|
Signature |
|
43 |
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS (Unaudited)
NVIDIA
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands)
(Unaudited)
|
|
July
31, |
|
January
30, |
|
|
|
2005 |
|
2005 |
|
ASSETS |
|
|
|
|
|
Current
assets: |
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
242,170 |
|
$ |
208,512 |
|
Marketable
securities |
|
|
475,376 |
|
|
461,533 |
|
Accounts
receivable, net |
|
|
355,393 |
|
|
296,279 |
|
Inventories |
|
|
300,955 |
|
|
315,518 |
|
Prepaid
expenses and other current assets |
|
|
24,756 |
|
|
19,819 |
|
Deferred
income taxes |
|
|
3,265 |
|
|
3,265 |
|
Total
current assets |
|
|
1,401,915 |
|
|
1,304,926 |
|
|
|
|
|
|
|
|
|
Property
and equipment, net |
|
|
178,951 |
|
|
178,955 |
|
Deposits
and other assets |
|
|
15,977 |
|
|
9,034 |
|
Goodwill |
|
|
108,107 |
|
|
108,107 |
|
Intangible
assets, net |
|
|
23,268 |
|
|
27,514 |
|
|
|
$ |
1,728,218 |
|
$ |
1,628,536 |
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
221,047 |
|
$ |
238,223 |
|
Accrued
liabilities |
|
|
204,451 |
|
|
182,077 |
|
Current
portion of capital lease obligations |
|
|
- |
|
|
856 |
|
Total
current liabilities |
|
|
425,498 |
|
|
421,156 |
|
|
|
|
|
|
|
|
|
Deferred
income tax liabilities |
|
|
20,754 |
|
|
20,754 |
|
Long-term
liabilities |
|
|
6,733 |
|
|
8,358 |
|
|
|
|
|
|
|
|
|
Stockholders’
equity: |
|
|
|
|
|
|
|
Common
stock |
|
|
174 |
|
|
169 |
|
Additional
paid-in capital |
|
|
691,914 |
|
|
636,618 |
|
Deferred
compensation |
|
|
(2,290 |
) |
|
(2,926 |
) |
Treasury
stock |
|
|
(122,142 |
) |
|
(24,644 |
) |
Accumulated
other comprehensive loss, net |
|
|
(4,218 |
) |
|
(3,463 |
) |
Retained
earnings |
|
|
711,795 |
|
|
572,514 |
|
Total
stockholders' equity |
|
|
1,275,233 |
|
|
1,178,268 |
|
|
|
$ |
1,728,218 |
|
$ |
1,628,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Six
Months Ended |
|
|
|
July
31, |
|
July
25, |
|
July
31, |
|
July
25, |
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
574,812 |
|
$ |
456,061 |
|
$ |
1,158,658 |
|
$ |
927,966 |
|
Cost
of revenue |
|
|
357,278 |
|
|
315,968 |
|
|
730,971 |
|
|
639,037 |
|
Gross
profit |
|
|
217,534 |
|
|
140,093 |
|
|
427,687 |
|
|
288,929 |
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development |
|
|
85,814 |
|
|
85,420 |
|
|
171,727 |
|
|
163,170 |
|
Sales,
general and administrative |
|
|
51,683 |
|
|
50,874 |
|
|
99,741 |
|
|
98,080 |
|
Total
operating expenses |
|
|
137,497 |
|
|
136,294 |
|
|
271,468 |
|
|
261,250 |
|
Operating
income |
|
|
80,037 |
|
|
3,799 |
|
|
156,219 |
|
|
27,679 |
|
Interest
income |
|
|
4,867 |
|
|
2,688 |
|
|
8,762 |
|
|
5,539 |
|
Interest
expense |
|
|
(2 |
) |
|
(46 |
) |
|
(12 |
) |
|
(122 |
) |
Other
income (expense), net |
|
|
354 |
|
|
(42 |
) |
|
842 |
|
|
(10 |
) |
Income
before income tax expense |
|
|
85,256 |
|
|
6,399 |
|
|
165,811 |
|
|
33,086 |
|
Income
tax expense |
|
|
10,419 |
|
|
1,280 |
|
|
26,530 |
|
|
6,618 |
|
Net
income |
|
$ |
74,837 |
|
$ |
5,119 |
|
$ |
139,281 |
|
$ |
26,468 |
|
Basic
net income per share |
|
$ |
0.44 |
|
$ |
0.03 |
|
$ |
0.83 |
|
$ |
0.16 |
|
Diluted
net income per share |
|
$ |
0.41 |
|
$ |
0.03 |
|
$ |
0.77 |
|
$ |
0.15 |
|
Shares
used in basic per share computation |
|
|
168,943 |
|
|
166,252 |
|
|
168,795 |
|
|
165,711 |
|
Shares
used in diluted per share computation |
|
|
180,790 |
|
|
177,419 |
|
|
180,612 |
|
|
177,999 |
|
See
accompanying notes to condensed consolidated financial
statements.
NVIDIA
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Six
Months Ended |
|
|
|
July
31, |
|
July
25, |
|
|
|
2005 |
|
2004 |
|
Cash
flows from operating activities: |
|
|
|
|
|
|
|
Net
income |
|
$ |
139,281 |
|
$ |
26,468 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
49,667 |
|
|
47,486 |
|
Stock-based
compensation |
|
|
562 |
|
|
747 |
|
Bad
debt expense |
|
|
(477 |
) |
|
(202 |
) |
Other |
|
|
85 |
|
|
- |
|
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
Accounts
receivable |
|
|
(48,637 |
) |
|
(59,834 |
) |
Inventories |
|
|
14,563 |
|
|
(32,747 |
) |
Prepaid
expenses and other current assets |
|
|
(4,937 |
) |
|
(1,789 |
) |
Deposits
and other assets |
|
|
(6,943 |
) |
|
(546 |
) |
Accounts
payable |
|
|
(17,176 |
) |
|
37,859 |
|
Accrued
liabilities |
|
|
10,938 |
|
|
15,153 |
|
Net
cash provided by operating activities |
|
|
136,926 |
|
|
32,595 |
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
Purchases
of marketable securities |
|
|
(133,214 |
) |
|
(170,132 |
) |
Sales
and maturities of marketable securities |
|
|
115,614 |
|
|
121,967 |
|
Purchases
of property, equipment and intangible assets |
|
|
(42,689 |
) |
|
(35,227 |
) |
Net
cash used in investing activities |
|
|
(60,289 |
) |
|
(83,392 |
) |
Cash
flows from financing activities: |
|
|
|
|
|
|
|
Common
stock issued under employee stock plans |
|
|
55,895 |
|
|
19,787 |
|
Stock
repurchases |
|
|
(98,509 |
) |
|
- |
|
Principal
payments on capital leases |
|
|
(856 |
) |
|
(2,833 |
) |
Retirement
of common stock |
|
|
491 |
|
|
- |
|
Net
cash (used in) provided by financing activities |
|
|
(42,979 |
) |
|
16,954 |
|
Change
in cash and cash equivalents |
|
|
33,658 |
|
|
(33,843 |
) |
Cash
and cash equivalents at beginning of period |
|
|
208,512 |
|
|
214,422 |
|
Cash
and cash equivalents at end of period |
|
$ |
242,170 |
|
$ |
180,579 |
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information: |
|
|
|
|
|
|
|
Cash
paid for interest |
|
$ |
12 |
|
$ |
122 |
|
Net
payment (refund) of income taxes |
|
$ |
1,838 |
|
$ |
(258 |
) |
|
|
|
|
|
|
|
|
Non
cash activities: |
|
|
|
|
|
|
|
Acquisition
of business - goodwill adjustment |
|
$ |
- |
|
$ |
343 |
|
Application
of customer advance to accounts receivable |
|
$ |
10,000 |
|
$ |
10,271 |
|
Deferred
stock compensation |
|
$ |
74 |
|
$ |
251 |
|
Unrealized
losses from marketable securities |
|
$ |
944 |
|
$ |
5,041 |
|
|
|
|
|
|
|
|
|
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 30, 2005.
Fiscal
year
We
operate on a 52 or 53-week year, ending on the Sunday nearest January 31. Fiscal
year 2006 is a 52-week year, compared to fiscal year 2005 which was a
53-week year. The second quarters of fiscal year 2006 and fiscal year 2005 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, income taxes and contingencies. These
estimates are based on historical facts and various other assumptions that we
believe are reasonable.
Stock-Based
Compensation
We use
the intrinsic value method, as prescribed by Accounting Principles Board Opinion
No. 25,
Accounting for Stock Issued to Employees, to
account for our stock-based employee compensation plans. As such, compensation
expense is recorded if on the date of grant the current fair value per share of
the underlying stock exceeds the exercise price per share. Compensation cost for
our stock-based compensation plans as determined consistent with Statement
of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, would
have decreased net income in the periods presented to the pro forma amounts
indicated below:
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
|
|
Three
Months Ended |
|
Six
Months Ended |
|
|
|
July
31, |
|
July
25, |
|
July
31, |
|
July
25, |
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
|
(In
thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
Net
income, as reported |
|
$ |
74,837 |
|
$ |
5,119 |
|
$ |
139,281 |
|
$ |
26,468 |
|
Add:
Stock-based employee compensation expense included in reported net income,
net of related tax effects |
|
|
244 |
|
|
291 |
|
|
472 |
|
|
597 |
|
Deduct:
Stock-based employee compensation expense determined under fair value
based method for all awards, net of related tax effects |
|
|
(22,034 |
) |
|
(21,699 |
) |
|
(38,880 |
) |
|
(42,420 |
) |
Pro
forma net income (loss) |
|
$ |
53,047 |
|
$ |
(16,289 |
) |
$ |
100,873 |
|
$ |
(15,355 |
) |
Basic
net income per share - as reported |
|
$ |
0.44 |
|
$ |
0.03 |
|
$ |
0.83 |
|
$ |
0.16 |
|
Basic
net income (loss) per share - pro forma |
|
$ |
0.31 |
|
$ |
(0.10 |
) |
$ |
0.60 |
|
$ |
(0.09 |
) |
Diluted
net income per share - as reported |
|
$ |
0.41 |
|
$ |
0.03 |
|
$ |
0.77 |
|
$ |
0.15 |
|
Diluted
net income (loss) per share - pro forma |
|
$ |
0.29 |
|
$ |
(0.10 |
) |
$ |
0.56 |
|
$ |
(0.09 |
) |
During
the first quarter of fiscal 2006, we
transitioned from a Black-Scholes model to a binomial model for calculating the
estimated fair value of new stock-based compensation awards granted
under our stock option plans. As a
result of recent regulatory guidance, including SEC Staff Accounting Bulletin
No. 107, or SAB No. 107, and in anticipation of the impending effective date of
Financial Accounting Standards Board, or FASB, Statement of Financial Accounting
Standards No. 123(R), or SFAS No. 123(R), Share-Based
Payment, we
reevaluated the assumptions we use 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. Our management determined that the
use of implied volatility is expected to be more reflective of market conditions
and, therefore, can reasonably be expected to be a better indicator of 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 make full use of the
capabilities of the binomial valuation model. As such, the expected term
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, our management decided to continue to use the Black-Scholes model
to
calculate the estimated fair value.
For the
purpose of the pro forma calculation, the fair value of stock options granted
under our stock option plans and the fair value of shares issued under our
employee stock purchase plan have been estimated with the following
assumptions:
|
Stock
Options |
|
Employee
Stock Purchase Plan |
|
|
|
|
|
|
|
|
|
Three
Months Ended |
|
Three
Months Ended |
|
July
31, |
|
July
25, |
|
July
31, |
|
July
25, |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
(Using
a binomial model) |
|
(Using
the Black-Scholes model) |
|
(Using
the Black-Scholes model) |
|
(Using
the Black-Scholes model) |
Expected
life (in years) |
3.6
- 5.1 |
|
4.0 |
|
0.5
- 2.0 |
|
1.5 |
Risk
free interest rate |
4.1% |
|
3.4% |
|
1.1%
- 2.1% |
|
1.9% |
Volatility |
40%
- 46% |
|
80% |
|
41% |
|
80% |
Dividend
yield |
-- |
|
-- |
|
-- |
|
-- |
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
|
Stock
Options |
|
Employee
Stock Purchase Plan |
|
|
|
|
|
|
|
|
|
Six
Months Ended |
|
Six
Months Ended |
|
July
31, |
|
July
25, |
|
July
31, |
|
July
25, |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
(Using
a binomial model) |
|
(Using
the Black-Scholes model) |
|
(Using
the Black-Scholes model) |
|
(Using
the Black-Scholes model) |
Expected
life (in years) |
3.6
- 5.1 |
|
4.0 |
|
0.5
- 2.0 |
|
1.5 |
Risk
free interest rate |
4.0% |
|
2.9% |
|
1.1%
- 2.1% |
|
1.9% |
Volatility |
37%
- 48% |
|
80% |
|
41% |
|
80% |
Dividend
yield |
-- |
|
-- |
|
-- |
|
-- |
Note
2 - Recently
Issued Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123(R), which requires the measurement
and recognition of compensation expense for all stock-based compensation
payments. In April 2005, the SEC delayed the effective date of SFAS No. 123(R),
which is now effective for annual periods that begin after June 15, 2005. In
March 2005, the SEC issued SAB No. 107, which includes interpretive guidance for
the initial implementation of SFAS 123(R). SFAS No. 123(R) allows for either
prospective recognition of compensation expense or retrospective recognition. We
are currently evaluating which expense recognition method we will apply upon
adoption of SFAS No. 123(R). We will implement the provisions of SFAS No. 123(R)
beginning in fiscal 2007. Once adopted, the standard will have an adverse impact
on our operating results.
In June
2005, the FASB issued SFAS No. 154, or SFAS No. 154, Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3. SFAS
No. 154 applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. We will adopt SFAS 154 during the first quarter of fiscal 2007.
We do not expect the adoption of SFAS No. 154 to have a material impact on our
consolidated financial position, results of operations or cash flows.
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. The following is a reconciliation of the numerators and
denominators of the basic and diluted net income per share computations for the
periods presented:
|
|
Three
Months Ended |
|
Six
Months Ended |
|
|
|
July
31, |
|
July
25, |
|
July
31, |
|
July
25, |
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
|
(In
thousands, except per share data) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
Numerator
for basic and diluted net income per share |
|
$ |
74,837 |
|
$ |
5,119 |
|
$ |
139,281 |
|
$ |
26,468 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic net income per share, weighted average shares |
|
|
168,943 |
|
|
166,252 |
|
|
168,795 |
|
|
165,711 |
|
Effect
of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options outstanding |
|
|
11,847 |
|
|
11,167 |
|
|
11,817 |
|
|
12,288 |
|
Denominator
for diluted net income per share, weighted average shares |
|
|
180,790 |
|
|
177,419 |
|
|
180,612 |
|
|
177,999 |
|
Net
income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share |
|
$ |
0.44 |
|
$ |
0.03 |
|
$ |
0.83 |
|
$ |
0.16 |
|
Diluted
net income per share |
|
$ |
0.41 |
|
$ |
0.03 |
|
$ |
0.77 |
|
$ |
0.15 |
|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
Diluted
net income per share for the three and six months ended July 31, 2005 does not
include the effect of 4.1 million and 11.3 million anti-dilutive common
equivalent shares, respectively. The weighted-average exercise price of stock
options excluded from the computation of diluted net income per share was $34.76
and $29.32 for the three and six months ended July 31, 2005, respectively.
Diluted net income per share for the three and six months ended July 25, 2004
does not include the effect of 14.0 million and 13.2 million anti-dilutive
common equivalent shares, respectively. The weighted-average exercise price of
stock options excluded from the computation of diluted net income per share was
$27.93 and $28.37 for the three and six months ended July 25, 2004,
respectively.
Note
4 - Guarantees
FASB
Interpretation No. 45, or FIN 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, requires
that upon issuance of a guarantee, the guarantor must recognize a liability for
the fair value of the obligation it assumes under that guarantee. In addition,
FIN 45 requires disclosures about the guarantees that an entity has issued,
including a tabular reconciliation of the changes of the entity’s product
warranty liabilities.
We record
a reduction to revenue for estimated product returns at the time revenue is
recognized primarily based on historical return rates. The reductions to revenue
for estimated product returns for the three and six months ended July 31, 2005
and July 25, 2004 are as follows:
Description |
|
Balance
at Beginning of Period |
|
Additions
(1) |
|
Deductions
(2) |
|
Balance
at End of Period |
|
|
|
(In
thousands) |
|
Three
months ended July 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for sales returns |
|
$ |
10,805 |
|
$ |
8,213 |
|
$ |
(8,331 |
) |
$ |
10,687 |
|
Three
months ended July 25, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for sales returns |
|
$ |
8,066 |
|
$ |
6,532 |
|
$ |
(3,559 |
) |
$ |
11,039 |
|
Six
months ended July 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for sales returns |
|
$ |
11,687 |
|
$ |
14,144 |
|
$ |
(15,144 |
) |
$ |
10,687 |
|
Six
months ended July 25, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for sales returns |
|
$ |
9,421 |
|
$ |
10,609 |
|
$ |
(8,991 |
) |
$ |
11,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 our agreements do not have a maximum stated liability.
However, historically costs related to these indemnification provisions have not
been significant. As such, we have not recorded any liability in our
condensed consolidated financial statements for such indemnifications.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
Note
5 - Comprehensive Income
Comprehensive
income consists of net income and other comprehensive income or loss. Other
comprehensive income or loss components include unrealized gains or losses on
available-for-sale securities, net of tax. The components of comprehensive
income, net of tax, were as follows:
|
|
Three
Months Ended |
|
Six
Months Ended |
|
|
|
July
31, |
|
July
25, |
|
July
31, |
|
July
25, |
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
|
(In
thousands) |
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
$ |
74,837 |
|
$ |
5,119 |
|
$ |
139,281 |
|
$ |
26,468 |
|
Net
change in unrealized losses on available-for-sale securities
|
|
|
(526 |
) |
|
(1,807 |
) |
|
(1,245 |
) |
|
(5,078 |
) |
Tax
effect of unrealized losses on available-for-sale
securities |
|
|
105 |
|
|
705 |
|
|
249 |
|
|
2,024 |
|
Reclassification
adjustments for net realized losses on available-for-sale securities
included in net income |
|
|
138 |
|
|
91 |
|
|
301 |
|
|
36 |
|
Tax
effect of reclassification adjustments for net realized losses on
available-for-sale securities included in net income |
|
|
(27 |
) |
|
(18 |
) |
|
(60 |
) |
|
(7 |
) |
Total
comprehensive income |
|
$ |
74,527 |
|
$ |
4,090 |
|
$ |
138,526 |
|
$ |
23,443 |
|
Note
6 - 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 two million shares of NVIDIA common stock. If 3dfx could not make such
a certification, but instead properly certified that its debts and liabilities
could be satisfied for less than $25.0 million, then 3dfx could have elected to
receive a cash payment equal to the amount of such debts and liabilities and a
reduced number of shares of our common stock, with such reduction calculated by
dividing the cash payment by $25.00 per share. If 3dfx could not certify that
all of its debts and liabilities had been provided for, or could not be
satisfied, for less than $25.0 million, we would not be obligated under the
agreement to pay any additional consideration for the assets. We are currently
party to litigation relating to certain aspects of the asset purchase and 3dfx’s
subsequent bankruptcy in October 2002. Please see Note 11 for further
information regarding this litigation.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
The 3dfx
asset purchase price of $70.0 million and direct transaction costs of $4.2
million 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 |
|
|
60,418 |
|
|
-- |
|
Total |
|
$ |
74,161 |
|
|
|
|
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
7 - Goodwill and Intangible Assets
We are
currently amortizing our intangible assets with finite lives over periods
ranging from 3 to 5 years. The components of our amortizable intangible assets
are as follows:
|
|
July
31, 2005 |
|
January
30, 2005 |
|
|
|
Gross
Carrying Amount |
|
Accumulated
Amortization |
|
Net
Carrying Amount |
|
Gross
Carrying Amount |
|
Accumulated
Amortization |
|
Net
Carrying Amount |
|
|
|
(In
thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
licenses |
|
$ |
21,586 |
|
$ |
(11,607 |
) |
$ |
9,979 |
|
$ |
17,236 |
|
$ |
(9,841 |
) |
$ |
7,395 |
|
Patents |
|
|
23,380 |
|
|
(17,699 |
) |
|
5,681 |
|
|
23,260 |
|
|
(15,400 |
) |
|
7,860 |
|
Acquired
intellectual property |
|
|
27,086 |
|
|
(21,859 |
) |
|
5,227 |
|
|
27,086 |
|
|
(18,578 |
) |
|
8,508 |
|
Trademarks |
|
|
11,310 |
|
|
(9,676 |
) |
|
1,634 |
|
|
11,310 |
|
|
(8,544 |
) |
|
2,766 |
|
Other |
|
|
1,494 |
|
|
(747 |
) |
|
747 |
|
|
1,494 |
|
|
(509 |
) |
|
985 |
|
Total
intangible assets |
|
$ |
84,856 |
|
$ |
(61,588 |
) |
$ |
23,268 |
|
$ |
80,386 |
|
$ |
(52,872 |
) |
$ |
27,514 |
|
Amortization
expense associated with intangible assets for the three and six months ended
July 31, 2005 was $4.4 million and $8.7 million, respectively. Amortization
expense associated with intangible assets for the three and six months ended
July 25, 2004 was $5.3 million and $10.3 million, respectively. Amortization
expense for the net carrying amount of intangible assets at July 31, 2005 is
estimated to be $8.3 million for the remainder of fiscal 2006, $10.4 million in
fiscal 2007, $4.1 million in fiscal 2008, and $0.5 million fiscal 2009 and
thereafter.
As of
July 31, 2005 and January 30, 2005, the carrying amount of goodwill is as
follows:
|
|
(In
thousands) |
|
|
|
|
|
3dfx |
|
$ |
50,326 |
|
MediaQ |
|
|
52,913 |
|
Other |
|
|
4,868 |
|
Total
goodwill |
|
$ |
108,107 |
|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
Note
8 - Marketable Securities
We
account for our investment instruments in accordance with Statement of Financial
Accounting Standards No. 115, or SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities. All of
our cash equivalents and marketable securities are treated as
“available-for-sale” under SFAS No. 115. Cash equivalents consist of financial
instruments which are readily convertible into cash and have original maturities
of three months or less at the time of acquisition. Marketable securities
consist primarily of highly liquid investments with a maturity of greater than
three months when purchased and some equity investments. We classify our
marketable securities at the date of acquisition in the available-for-sale
category as our intention is to convert them into cash for operations. These
securities are reported at fair value with the related unrealized gains and
losses included in accumulated other comprehensive income (loss), a component of
stockholders’ equity, net of tax. Realized gains and losses on the sale of
marketable securities are determined using the specific-identification method.
Net realized losses for the three and six months ended July 31, 2005 were $0.1
million and $0.3 million, respectively. Net realized losses for the three and
six months ended July 25, 2004 were $0.1 million and nil,
respectively.
Note
9 - Balance Sheet Components
Certain
balance sheet components are as follows:
|
|
July
31, |
|
January
30, |
|
Inventories: |
|
2005 |
|
2005 |
|
|
|
(In
thousands) |
|
|
|
|
|
Raw
materials |
|
$ |
22,848 |
|
$ |
23,225 |
|
Work
in-process |
|
|
113,980 |
|
|
130,211 |
|
Finished
goods |
|
|
164,127 |
|
|
162,082 |
|
Total
inventories |
|
$ |
300,955 |
|
$ |
315,518 |
|
The
significant decrease in work-in-process primarily relates to the ramping of our
GeForce 6 series products in the fourth quarter of fiscal 2005.
At July
31, 2005, we had outstanding inventory purchase obligations totaling
approximately $267 million.
|
|
July
31, |
|
January
30, |
|
Property
and Equipment: |
|
2005 |
|
2005 |
|
|
|
(In
thousands) |
|
|
|
|
|
Software |
|
$ |
142,228 |
|
$ |
125,310 |
|
Test
equipment |
|
|
88,842 |
|
|
86,883 |
|
Computer
equipment |
|
|
96,475 |
|
|
82,428 |
|
Leasehold
improvements |
|
|
81,991 |
|
|
79,160 |
|
Construction
in process |
|
|
3,138 |
|
|
3,264 |
|
Office
furniture and equipment |
|
|
20,554 |
|
|
18,777 |
|
|
|
|
433,228 |
|
|
395,822 |
|
Accumulated
depreciation and amortization |
|
|
(254,277 |
) |
|
(216,867 |
) |
Property
and equipment, net |
|
$ |
178,951 |
|
$ |
178,955 |
|
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
|
|
July
31, |
|
January
30, |
|
|
|
2005 |
|
2005 |
|
|
|
(In
thousands) |
|
Accrued
Liabilities: |
|
|
|
Accrued
customer programs |
|
$ |
77,932 |
|
$ |
83,013 |
|
Deferred
revenue |
|
|
5,584 |
|
|
11,500 |
|
Customer
advances |
|
|
10,235 |
|
|
1,457 |
|
Taxes
payable |
|
|
53,395 |
|
|
28,826 |
|
Accrued
payroll and related expenses |
|
|
35,996 |
|
|
37,016 |
|
Deferred
rent |
|
|
11,413 |
|
|
10,844 |
|
Other |
|
|
9,896 |
|
|
9,421 |
|
Total
accrued liabilities |
|
$ |
204,451 |
|
$ |
182,077 |
|
|
|
July
31, |
|
January
30, |
|
|
|
2005 |
|
2005 |
|
Long-term
Liabilities: |
|
(In
thousands) |
|
Asset
retirement obligation |
|
$ |
4,483 |
|
$ |
4,483 |
|
Technology
licenses |
|
|
2,250 |
|
|
3,875 |
|
Total
long-term liabilities |
|
$ |
6,733 |
|
$ |
8,358 |
|
Note
10 - Segment Information
Our chief
operating decision maker, or CODM, our Chief Executive Officer, reviews
financial information presented on an operating segment basis for purposes of
making operating decisions and assessing financial performance. During the first
quarter of fiscal 2006, we reorganized our operating segments to bring all major
product groups in line with our strategy to position ourselves as a leader in
graphics and digital media processing solutions for digital devices. We now
report financial information for four product-line operating segments to our
CODM: the GPU Business, which is composed of products that support desktop PCs,
notebook PCs and professional workstations; the MCP Business, which is composed
of NVIDIA nForce products; the WMP Business, which supports handheld personal
digital assistants, cellular phones and other handheld devices; and the Consumer
Electronics Business, which is composed of revenue from our contractual
arrangements with Sony Computer Entertainment, or SCE, for the development of
their next-generation PlayStation3, revenue from sales of our Xbox-related
products, revenue from our license agreement with Microsoft relating to the
successor product to their initial Xbox gaming console, the Xbox360, and related
devices, and digital media processor products. In addition to these operating
segments, we have the “All Other” category that includes human resources, legal,
finance, general administration and corporate marketing expenses, which total
$27.7 million for the second quarter of fiscal 2006, $26.0 million for the
second quarter of fiscal 2005, $51.6 million for the first half of fiscal 2006,
and $50.8 million for the first half of fiscal 2005, 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. All
prior period amounts have been restated to reflect our new reporting
structure.
Our CODM
does not review any information regarding property and equipment 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.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
|
|
GPU |
|
MCP |
|
WMP |
|
CE |
|
All
Other |
|
Consolidated |
|
|
|
(In
thousands) |
|
Three
Months Ended July 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
385,826 |
|
$ |
75,872 |
|
$ |
2,135 |
|
$ |
81,543 |
|
$ |
29,436 |
|
$ |
574,812 |
|
Depreciation
expense |
|
$ |
8,219 |
|
$ |
3,080 |
|
$ |
2,882 |
|
$ |
337 |
|
$ |
8,062 |
|
$ |
22,580 |
|
Operating
income (loss) |
|
$ |
72,737 |
|
$ |
5,340 |
|
$ |
(10,115 |
) |
$ |
40,787 |
|
$ |
(28,712 |
) |
$ |
80,037 |
|
Three
Months Ended July 25, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
288,507 |
|
$ |
33,208 |
|
$ |
5,201 |
|
$ |
86,722 |
|
$ |
42,423 |
|
$ |
456,061 |
|
Depreciation
expense |
|
$ |
8,226 |
|
$ |
3,463 |
|
$ |
2,749 |
|
$ |
205 |
|
$ |
8,389 |
|
$ |
23,032 |
|
Operating
income (loss) |
|
$ |
17,296 |
|
$ |
(15,769 |
) |
$ |
(9,258 |
) |
$ |
32,872 |
|
$ |
(21,342 |
) |
$ |
3,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended July 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
795,752 |
|
$ |
147,677 |
|
$ |
9,897 |
|
$ |
139,621 |
|
$ |
65,711 |
|
$ |
1,158,658 |
|
Depreciation
expense |
|
$ |
16,279 |
|
$ |
6,190 |
|
$ |
6,040 |
|
$ |
697 |
|
$ |
15,702 |
|
$ |
44,908 |
|
Operating
income (loss) |
|
$ |
150,868 |
|
$ |
12,263 |
|
$ |
(25,975 |
) |
$ |
69,727 |
|
$ |
(50,664 |
) |
$ |
156,219 |
|
Six
Months Ended July 25, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
663,776 |
|
$ |
68,121 |
|
$ |
10,860 |
|
$ |
110,511 |
|
$ |
74,698 |
|
$ |
927,966 |
|
Depreciation
expense |
|
$ |
16,273 |
|
$ |
6,739 |
|
$ |
5,263 |
|
$ |
390 |
|
$ |
16,806 |
|
$ |
45,471 |
|
Operating
income (loss) |
|
$ |
79,273 |
|
$ |
(29,605 |
) |
$ |
(16,051 |
) |
$ |
40,895 |
|
$ |
(46,833 |
) |
$ |
27,679 |
|
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 table summarizes information pertaining to our operations in different
geographic regions:
|
|
Three
Months Ended |
|
Six
Months Ended |
|
|
|
July
31, |
|
July
25, |
|
July
31, |
|
July
25, |
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
|
(In
thousands) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
United
States |
|
$ |
133,406 |
|
$ |
148,750 |
|
$ |
231,211 |
|
$ |
209,565 |
|
Other
Americas |
|
|
6,043 |
|
|
2,288 |
|
|
6,965 |
|
|
3,546 |
|
China |
|
|
110,407 |
|
|
46,896 |
|
|
179,150 |
|
|
152,640 |
|
Taiwan |
|
|
241,582 |
|
|
161,849 |
|
|
539,281 |
|
|
399,657 |
|
Other
Asia Pacific |
|
|
44,809 |
|
|
38,946 |
|
|
99,640 |
|
|
79,281 |
|
Europe |
|
|
38,565 |
|
|
57,332 |
|
|
102,411 |
|
|
83,277 |
|
Total
revenue |
|
$ |
574,812 |
|
$ |
456,061 |
|
$ |
1,158,658 |
|
$ |
927,966 |
|
Revenue
from significant customers, those representing approximately 10% or more of
total revenue for the respective periods, is summarized as follows:
|
Three
Months Ended |
Six
Months Ended |
|
July
31, |
July
25, |
July
31, |
July
25, |
|
2005 |
2004 |
2005 |
2004 |
Revenue: |
|
|
|
|
Customer
A |
10% |
12% |
14% |
22% |
Customer
B |
7% |
4% |
7% |
11% |
Customer
C |
13% |
20% |
10% |
13% |
Customer
D |
8% |
12% |
11% |
8% |
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
Note
11 - 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 closed on April 18, 2001. In May 2002, we were served
with a complaint filed by the landlord of 3dfx’s San Jose, California commercial
real estate lease. In October 2002, 3dfx filed for Chapter 11 bankruptcy
protection in the United States Bankruptcy Court for the Northern District of
California. In December 2002, we were served with a 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. The landlords’ are
seeking to recover, among other things, amounts owed on their leases in the
aggregate amount of approximately $10 million. 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. The Trustee’s complaint seeks additional payments from us, the amount
of which has not been quantified. The landlords’ actions were removed to the
Bankruptcy Court from the Superior Court of California and consolidated with the
Trustee’s action for purposes of discovery. Upon motion by NVIDIA, the District
Court withdrew the reference to the Bankruptcy Court of the two actions filed by
the landlords. These actions are now before the District Court and should be
tried there. The District Court declined, at this time, to withdraw the
reference as to the Trustee’s case. Discovery in all actions is currently
proceeding and no trial dates
have been set in either the District Court or the Bankruptcy Court. We believe
the claims asserted against us are without merit and we will continue to defend
ourselves vigorously.
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. Opti asserts that unspecified NVIDIA chipsets infringe five
U.S. patents held by Opti. Opti seeks unspecified damages for our alleged
conduct, attorneys fees and triple damages for alleged willful infringement by
NVIDIA. NVIDIA filed a response to this complaint in December 2004. After a case
management conference in July 2005, discovery has just begun and a trial date
has now been set for July 2006. We believe the claims asserted against us are
without merit and we will continue to defend ourselves vigorously.
American
Video Graphics
In August
2004, a Texas limited partnership named American Video Graphics, LP, or AVG,
filed three separate complaints for patent infringement against various
corporate defendants, not including NVIDIA, in the United States District Court
for the Eastern District of Texas. AVG initially asserted that each of the
approximately thirty defendants sells products that infringe one or more of
seven separate patents that AVG claims relate generally to graphics processing
functionality. Each of the three lawsuits target a different group of
defendants; one case involves approximately twenty of the leading personal
computer manufacturers, the PC Makers Case, one case involves the three leading
video game console makers, the Game Console Case, and one case involves
approximately ten of the leading video game publishers, the Game Publishers
Case. In November 2004, NVIDIA sought and was granted permission to intervene in
two of the three pending AVG lawsuits, the PC Makers Case and the Game Console
Case. Our complaint in intervention alleges both that the patents in suit are
invalid and that, to the extent AVG’s claims target NVIDIA products, the
asserted patents are not infringed. Two other leading suppliers of graphics
processing products, Intel Corporation, or Intel, and ATI Technologies, Inc., or
ATI, have also intervened in the cases, ATI in both the PC Makers and Game
Console Case, and Intel in the PC Makers Case.
NVIDIA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
(Unaudited)
After
some consensual reconfigurations proposed by the various parties, in January
2005, the district court judge entered docket control and discovery orders in
the three lawsuits. Plaintiff has recently dismissed one patent from the PC
Makers case such that the case now involves three separate patents and is
currently scheduled for trial beginning in September 2006. The Game Console Case
involves a single patent and is currently scheduled for trial beginning in
December 2006. We believe that, to the extent AVG’s infringement allegations
target functionality that may be performed by NVIDIA products, those claims are
without merit, and we will continue to defend ourselves and our products
vigorously.
We are
subject to other legal proceedings, but we do not believe that the ultimate
outcome of any of these proceedings will have a material adverse effect on our
financial position or overall trends in results of operations. However, if an
unfavorable ruling were to occur in any specific period, there exists the
possibility of a material adverse impact on the results of operations of that
period.
Note
12 - 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.
During the second quarter of fiscal 2006, we repurchased 1.8 million shares of
our common stock for $50.0 million. As part of our share repurchase program, we
may from time-to-time 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 an incremental number
of shares of our common stock, within a minimum and a maximum, at the end of the
term of the agreement. We entered into two such transactions during the second
quarter of fiscal 2006 which, in the aggregate, required up-front payments
totaling $25.0 million. Under these agreements, we repurchased 0.9 million
shares of our common stock, which we recorded on the trade
date of
the transactions. Through the end of the second quarter of fiscal 2006, we have
repurchased 5.8 million shares under our stock repurchase program for a total
cost of approximately $123.1 million.
Note
13 - Change in Accounting Estimate
We
compute income taxes for interim reporting purposes using estimates of our
effective annual income tax rate for the entire fiscal year. During the second
quarter of fiscal 2006, we revised our estimated effective income tax rate for
fiscal year 2006 to 16% from the 20% rate that we had used in the first quarter
of fiscal 2006. The change in the rate was primarily a result of changes in our
geographic mix of income subject to tax. As a result of the change, the
effective income tax rate for the second quarter of fiscal 2006 was 12.2%. The
effect of the change in the estimated annual effective income tax rate for
fiscal 2006 was to increase net income by $6.6 million for both the three months
and six months ended July 31, 2005. The effect of the change in estimate on
earnings per share was $0.04 for basic earnings per share and $0.03 for diluted
earnings per share for the three months ended July 31, 2005. The effect of the
change in estimate on basic and diluted earnings per share was $0.04 for the six
months ended July 31, 2005.
Note
14 - Income Taxes
The
American Jobs Creation Act of 2004 was signed into law on October 22, 2004. This
act provides a special one-time
dividends received deduction on the repatriation of certain foreign earnings to
a United States taxpayer. We are currently in the process of evaluating whether
or not, and to what extent, if any, this provision may benefit NVIDIA.
We expect
to complete such evaluation before the end of our fiscal year 2006. The range of
possible amounts that we are considering for repatriation under this provision
is between zero and $500 million. The range of income tax expense we would
recognize if we repatriate earnings in this range is expected to be between zero
and $27 million.
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 technology and
products, the length of product cycles, our gross margin, sources of revenue and
anticipated revenue, including anticipated revenue derived from our relationship
with SEC and our license with Microsoft, revenue mix, increases
in and reasons for our expenditures, planned capital expenditures, products
under development, our cash flow and cash balances, our liquidity, uses of cash,
investments of our cash and marketable securities, our tax rate, repatriation of
foreign earnings, our quarterly and annual results of operations, our
inventories, product life cycles, average selling prices, our strategies as to
our GPU, MCP, WMP and Consumer Electronics Businesses, growth of our
businesses, our fastest growing business, factors contributing to the growth of
our businesses, the ramp of our WMP products, the adoption of PCI Express,
additional platform innovations, focus of our competitors on platform solutions,
importance of stock option grants to our business, expensing of stock options,
use of the binomial model for calculating the fair value of stock compensation
awards, our critical accounting policies, our relationship with and the
development of a GPU for SCE, the impact of recent accounting pronouncements,
expectations regarding our competition and our competitive position, our
intellectual property, the importance of our strategic relationships, customer
demand, our reliance on a limited number of customers, expansion of our
technologies and products, including by investment or acquisition, our internal
control over financial reporting, our ability to attract customers, our ability
to attract and retain qualified personnel, our foreign currency risk strategy,
compliance with the RoHS Directive and other 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,
our inability to decrease inventory purchase commitments in a meaningful
timeframe, 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 Taiwan Semiconductor Manufacturing Company, or TSMC,
International Business Machines Corporation, or IBM, United Microelectronics
Corporation, or UMC, Chartered Semiconductor Manufacturing, or Chartered, and
other key suppliers, fluctuations in general economic conditions, failure to
achieve design wins, the seasonality of the PC and our other product segments,
international and political conditions, the concentration of sales of our
products to a limited number of customers, unforeseen reductions in demand for
our products, our ability to safeguard our intellectual property, delays in the
development of new products, delays in volume production of our products,
developments in and expenses related to litigation and the matters set forth
under the caption “Business Risks.” 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, MXM, SLI, 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 a worldwide leader in graphics and digital media processors. Our
products enhance the end-user experience on consumer and professional computing
devices. NVIDIA graphics processing units, or GPUs, media and communications
processors, or MCPs, and wireless media processors, or WMPs, have broad market
reach and are incorporated into a variety of platforms, including consumer and
enterprise personal computers, or PCs, notebooks, workstations, personal digital
assistants, or PDAs, cellular phones, and video game consoles. We were
incorporated in California in April 1993 and reincorporated in Delaware in April
1998. Our headquarter facilities are in Santa Clara, California.
Fiscal
2006 Developments, Future Objectives and Challenges
GPU
Business
In
February 2005, we announced the GeForce Go 6600, a mobile GPU designed
specifically to deliver advanced multimedia functionality without sacrificing
portability. Also in February 2005, we introduced the GeForce Go 6800
Ultra mobile GPU - our fastest mobile GPU to date.
In March
2005, we introduced two new GeForce 6 GPUs: a 512MB version of the GeForce 6800
Ultra GPU designed for the enthusiast segment, and a new lower-cost AGP version
of the GeForce 6200 GPU, designed to bring Microsoft DirectX 9.0 Shader Model
3.0 technology to the mainstream segment. These two GPUs utilize the
NVIDIA ForceWare software suite and Unified Driver Architecture to incorporate
software optimizations that take full advantage of our newest features.
In June
2005, we launched and simultaneously shipped our second generation Shader Model
3.0 GPU, the GeForce 7800 GTX, which is designed to address the high-end
enthusiast desktop PC segment. In August 2005, we launched and shipped our
second GeForce 7 GPU, the GeForce 7800 GT, which is designed to address the
high-end performance desktop PC segment.
In July
2005, we introduced two new NVIDIA Quadro GPUs, the NVIDIA Quadro FX 4500 and
the NVIDIA Quadro FX 3450, which are designed for the high-end and mainstream
professional segments, respectively. Both products support our Scalable Link
Interface, or SLI, technology.
The
combination of our GeForce 7 and GeForce 6 series of GPUs and our SLI technology
has created a new class of gaming and workstation class PCs. SLI
technology takes advantage of the increased bandwidth of the PCI Express bus
architecture to allow two NVIDIA-based graphics cards to operate in a single PC
or workstation. In June 2005, we made our SLI technology available to
users in the mainstream segment with our GeForce 6600.
MCP
Business
In April
2005, we announced the availability of our NVIDIA nForce4 SLI Intel Edition MCP
for Intel platforms. This new line of core-logic solutions incorporates a
host of new and innovative NVIDIA features that have never before been available
on the Intel platform and extends the NVIDIA nForce brand into new
segments. In addition, during the first quarter of fiscal 2006, NVIDIA
nForce Professional MCP shipped in its first enterprise server platform.
In August
2005, we announced that the NVIDIA nForce4 SLI X16 Intel Edition technology is
now featured in the new Dell Dimension XPS 600 desktop PC.
Our
NVIDIA nForce product line has achieved record revenue for three consecutive
quarters. We believe that Advanced Micro Devices’, or AMD’s, transition to
K8, our extension into new segments, and our entry into the Intel market 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. We are now beginning production of a new NVIDIA nForce MCP
with an integrated GPU and expect this to be an important new growth driver for
both our desktop and mobile businesses.
WMP
Business
Our
strategy in the WMP Business is to lead innovation and capitalize on the
emergence of the mobile phone as a versatile consumer lifestyle device.
Our initial focus was on 3G cellular phones. As a result, our current WMP
Business has been heavily concentrated at one original equipment manufacturer,
or OEM, and its products have not achieved the anticipated level of commercial
success. However, we expect that we will ramp up production of WMP
products related to a number of new design wins with existing and new customers
for the holiday season, many of which are scheduled to go into production during
the third quarter of fiscal 2006.
Consumer
Electronics Business
In April
2005, we finalized our definitive agreement 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 next generation PlayStation3.
Our
collaboration with SCE includes license fees and royalties for the next
generation 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. In fiscal
2006, we expect to recognize revenue of approximately $40 million from
development, software, and license fees associated with this
collaboration. Depending
on the ultimate success of this next generation platform, we expect to generate,
starting in fiscal 2007, revenue ranging from $50 million to $100 million
annually from license fees and royalties over the next five years with the
possibility of additional royalties for several years thereafter.
During
our fiscal 2004, Microsoft Corporation announced that it had entered into an
agreement with one of our competitors to develop technology for future Xbox
products and services. During the first quarter of fiscal 2006, Microsoft
indicated that it would not order any more Xbox-related products from us after
our second fiscal quarter. As a result, the second quarter of fiscal 2006 was
the last quarter during which we will recognize revenue from the sale of our
Xbox-related products to Microsoft. However, as a result of our license
agreement with Microsoft relating to the successor product to their initial Xbox
gaming console, the Xbox360, and related devices, we recognized an incremental
amount of related license revenue from Microsoft during the second quarter of
fiscal 2006, and expect to do so in future periods.
Gross
Margin Improvement
We
continue to remain intensely focused on improving our gross margin. During the
second quarter of fiscal 2006, our gross margin was 37.8%, which represented an
increase of 180 basis points from our gross margin of 36.0% for the first
quarter of fiscal 2006 and an increase of 710 basis points from our gross margin
of 30.7% for the second quarter of fiscal 2005. We expect our gross margin to be
approximately 37% to 38% during the third quarter of fiscal 2006.
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, long-lived assets, goodwill,
income taxes and contingencies. 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.
There
were no material changes in our critical accounting policies and estimates
during the first quarter of fiscal 2006 from those disclosed in our Annual
Report on Form 10-K for the year ended January 30, 2005. Please see Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies and Estimates” in our Annual Report on
Form 10-K for the year ended January 30, 2005 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 |
|
Six
Months Ended |
|
|
|
July
31, |
|
July
25, |
|
July
31, |
|
July
25, |
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
100.0% |
|
|
100.0% |
|
|
100.0% |
|
|
100.0% |
|
Cost
of revenue |
|
|
62.2 |
|
|
69.3 |
|
|
63.1 |
|
|
68.9 |
|
Gross
profit |
|
|
37.8 |
|
|
30.7 |
|
|
36.9 |
|
|
31.1 |
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development |
|
|
14.9 |
|
|
18.7 |
|
|
14.8 |
|
|
17.6 |
|
Sales,
general and administrative |
|
|
9.0 |
|
|
11.2 |
|
|
8.6 |
|
|
10.5 |
|
Total
operating expenses |
|
|
23.9 |
|
|
29.9 |
|
|
23.4 |
|
|
28.1 |
|
Operating
income |
|
|
13.9 |
|
|
0.8 |
|
|
13.5 |
|
|
3.0 |
|
Interest
and other income, net |
|
|
0.9 |
|
|
0.6 |
|
|
0.8 |
|
|
0.6 |
|
Income
before income tax expense |
|
|
14.8 |
|
|
1.4 |
|
|
14.3 |
|
|
3.6 |
|
Income
tax expense |
|
|
1.8 |
|
|
0.3 |
|
|
2.3 |
|
|
0.7 |
|
Net
income |
|
|
13.0% |
|
|
1.1% |
|
|
12.0% |
|
|
2.9% |
|
Three
and Six Months Ended July 31, 2005 and July 25, 2004
Revenue
During
the first quarter of fiscal 2006, we reorganized our operating segments to bring
all major product groups in line with our strategy to position ourselves as a
leader in graphics and digital media processing solutions for digital devices.
We now report financial information for four product-line operating segments to
our chief operating decision maker, or CODM, our Chief Executive Officer:
the GPU Business, which is composed of products that support desktop PCs,
notebook PCs and professional workstations; the MCP Business, which is composed
of NVIDIA nForce products; the WMP Business, which supports handheld personal
digital assistants, cellular phones and other handheld devices; and the Consumer
Electronics Business, which is composed of revenue from our contractual
arrangements with SCE for the development of their next-generation PlayStation3,
revenue from sales of our Xbox-related products, revenue from our license
agreement with Microsoft relating to the successor product to their initial Xbox
gaming console, the Xbox360, and related devices, and digital media processor
products. Please
refer to Note 10 of the Notes to Condensed Consolidated Financial Statements for
further information.
Revenue
was $574.8 million for the second quarter of fiscal 2006 and $456.1 million for
the second quarter of fiscal 2005, which represented an increase of
26%.
Revenue was $1.16 billion for the first half of fiscal 2006 and
$928.0 million for the first half of fiscal 2005, which represented an increase
of 25%. A discussion of our revenue results for each of our operating segments
is as follows:
GPU
Business
GPU
Business revenue was $385.8 million for the second quarter of fiscal 2006 and
$288.5 million for the second quarter of fiscal 2005, which represented an
increase of 34%. The revenue increase was primarily the result of
increased sales of our desktop products and NVIDIA Quadro workstation products.
Desktop revenue increased due to a significant increase in high-end unit sales
volume and increased average selling prices that were offset by a decrease in
sales of mainstream desktop products. Workstation revenue increased due to an
increase in average selling prices as a result of the increased mix of GeForce
6-based products during the second quarter of fiscal 2006. Offsetting these
increases was a slight decrease in mobile revenue due to sales volume decreases
that were offset by an increase in average selling prices.
GPU
Business revenue increased by 20% to $795.8 million for the first half of fiscal
2006 compared to $663.8 million for the first half of fiscal 2005. The increase
was the result of sales of our GeForce 6 and GeForce 7 families of desktop GPUs
that serve the high-end segment. Sales of our NVIDIA Quadro workstation products
continued to improve, resulting primarily from an increase in average selling
prices.
MCP
Business
MCP
Business revenue was $75.9 million for the second quarter of fiscal 2006 and
$33.2 million for the second quarter of fiscal 2005, which represented an
increase of 128%. MCP Business revenue increased by 117% to $147.7 million
for the first half of fiscal 2006 compared to $68.1 million for the first half
of fiscal 2005. The overall increase in MCP Business revenue is primarily due to
increased sales of NVIDIA nForce4 products, which we began selling during the
fourth quarter of fiscal 2005 and, to a lesser degree, to increased sales of
NVIDIA nForce3 products, offset by decreased sales of NVIDIA nForce2
products.
WMP
Business
WMP
Business revenue was $2.1 million for the second quarter of fiscal 2006 and $5.2
million for the second quarter of fiscal 2005, which represented a decrease of
59%. WMP Business revenue decreased by 9% to $9.9 million for the first
half of fiscal 2006 compared to $10.9 million for the first half of fiscal 2005.
The overall decrease in WMP Business revenue is due to unit sales volume
decreases, offset by an increase in average selling prices. Our current WMP
Business has been heavily concentrated at one original equipment manufacturer,
or OEM, and its products have not achieved the anticipated level of commercial
success. However, we expect that we will ramp up production of WMP
products related to a number of new design wins with existing and new customers
for the holiday season.
Consumer
Electronics Business
Consumer
Electronics Business revenue was $81.5 million for the second quarter of fiscal
2006 and $86.7 million for the second quarter of fiscal 2005, which represented
a decrease of 6%. During the second quarter of fiscal 2006, we recognized
revenue from our contractual arrangements with SCE for the development of its
next-generation PlayStation3. No such revenue was recognized during the
second quarter of fiscal 2005 as our definitive agreement with SCE was not
executed until the first quarter of fiscal 2006. Offsetting the SCE revenue was
a decrease in sales of Xbox-related
products to Microsoft in the
second quarter of fiscal 2006 due to unit sales volume decreases.
During our fiscal 2004, Microsoft Corporation announced that it had entered into
an agreement with one of our competitors to develop technology for future Xbox
products and services. During the first quarter of fiscal 2006, Microsoft
indicated that it would not order any more Xbox-related products from us after
our second fiscal quarter. As a result, the second quarter of fiscal 2006 was
the last quarter during which we will recognize revenue from the sale of our
Xbox-related products to Microsoft. However, as a result of our license
agreement with Microsoft relating to the successor product to their initial Xbox
gaming console, the Xbox360, and related devices, we recognized an incremental
amount of related license revenue from Microsoft during the second quarter of
fiscal 2006, and expect to do so in future periods.
Consumer
Electronics Business revenue increased by 26% to $139.6 million for the first
half of fiscal 2006 compared to $110.5 million for the first half of fiscal
2005. During the first half of fiscal 2006, we recognized revenue from our
contractual arrangements with SCE for the development of its next-generation
PlayStation3. No such revenue was recognized during the first half of fiscal
2005 as our definitive agreement with SCE was not executed until the first
quarter of fiscal 2006. In addition, revenue from sales of Xbox-related products
to Microsoft during the first half of fiscal 2006 was greater than the first
half of fiscal 2005 due to unit sales volume increases.
Consolidated
Revenue
Revenue
from sales to customers outside of the United States and other Americas
accounted for 76% and 67% of revenue for the second quarter of fiscal 2006 and
2005, respectively. Revenue from sales to customers outside of the United States
and other Americas accounted for 79% and 77% of revenue for the first half of
fiscal 2006 and 2005, respectively. Revenue by geographic region is allocated to
individual countries based on the location to which the products are initially
billed even if the revenue is attributable to end customers in a different
location. The decrease in the percentage of revenue from sales to
customers outside of the United States and other Americas is primarily due to
increased sales of Xbox-related products, which are billed to Microsoft in the
United States.
Sales to
Microsoft accounted for approximately 13% of revenue for the second quarter of
fiscal 2006 and 10% of revenue for the first half of fiscal 2006. Our other
three largest customers accounted for approximately 25% of revenue for the
second quarter of fiscal 2006 and 32% of revenue for the first half of fiscal
2006. Sales to Microsoft accounted for approximately 20% of revenue for the
second quarter of fiscal 2005 and 13% of revenue for the first half of fiscal
2005. Our other three largest customers accounted for approximately 28% of
revenue for the second quarter of fiscal 2005 and 41% of revenue for the first
half of fiscal 2005.
Gross
Profit
Gross
profit consists of total revenue, net of allowances, less cost of revenue. Cost
of revenue consists primarily of the cost of semiconductors purchased from
subcontractors, including wafer fabrication, assembly, testing and packaging,
manufacturing support costs, including labor and overhead associated with such
purchases, final test yield fallout, inventory provisions and shipping
costs. Cost of revenue also includes development costs for license and
service arrangements. Gross margin is the ratio of gross profit to revenue. Our
gross margin can vary in any period depending on the mix of types of products
sold.
Our gross
margin was 37.8% and 30.7% for the second quarter of fiscal 2006 and the second
quarter of fiscal 2005, respectively. Our gross margin was 36.9% and 31.1% for
the first half of fiscal 2006 and the first half of fiscal 2005, respectively. A
discussion of our gross profit results for each of our operating segments is as
follows:
GPU
Business
The gross
margin of our GPU Business increased during the second quarter of fiscal 2006 as
compared to the second quarter of 2005 as well as during the first half of
fiscal 2006 as compared to the first half of fiscal 2005 primarily due to the
initial sales of our GeForce 7 series GPUs and increased sales of our GeForce 6
series GPUs, which collectively now account for more than 75% of our GPU
Business revenue. In addition, revenue from our NVIDIA Quadro workstation
products, which typically provide the highest gross margins of any of our
products, increased as a percentage of our total GPU Business
revenue.
MCP
Business
The gross
margin of our MCP Business increased during the second quarter of fiscal 2006 as
compared to the second quarter of fiscal 2005 as well
as during the first half of fiscal 2006 as compared to the first half of fiscal
2005
primarily due to the increase in revenue from sales of our NVIDIA nForce3 and
NVIDIA nForce4 products. Also, our NVIDIA nForce3 and NVIDIA nForce4
products have experienced higher gross margins than our previous generations of
NVIDIA nForce products, such as the NVIDIA nForce2.
WMP
Business
The gross
margin of our WMP Business increased during the second quarter of fiscal 2006 as
compared to the second quarter of fiscal 2005 primarily due to an increase in
average selling prices. Our WMP Business has been heavily concentrated at
one OEM. The gross margin of our WMP Business decreased during the first
half of fiscal 2006 as compared to the first half of fiscal 2005 due to the
write-off in the first half of fiscal 2006 of certain handheld products that we
believe exceeds the demand of that OEM.
Consumer
Electronics Business
The gross
margin of our Consumer Electronics Business increased during the second quarter
of fiscal 2006 as compared to the second quarter of fiscal 2005 as well as
during the first half of fiscal 2006 as compared to the first half of fiscal
2005 primarily due to the reduction of die costs for Xbox-related products. The
reduction in die costs began during the fourth quarter of fiscal 2005 as the
result of our utilization of a different foundry for the manufacturing of the
semiconductor wafers used for Xbox-related products.
Consolidated
Gross Margin
The
improvement in our gross margin reflects our continuing focus on delivering cost
effective product architectures, enhancing business processes and driving
profitable growth. We expect our gross margin to be approximately 37% to
38% during the third quarter of fiscal 2006.
Operating
Expenses
Research
and Development
|
|
Three
Months Ended |
|
|
|
|
|
Six
Months Ended |
|
|
|
|
|
|
|
July
31, |
|
July
25, |
|
$ |
|
% |
|
July
31, |
|
July
25, |
|
$ |
|
% |
|
|
|
2005 |
|
2004 |
|
Change |
|
Change |
|
2005 |
|
2004 |
|
Change |
|
Change |
|
|
|
(in
millions) |
|
Research
and Development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits |
|
$ |
50.1 |
|
$ |
43.3 |
|
$ |
6.8 |
|
|
16% |
|
$ |
98.9 |
|
$ |
84.2 |
|
$ |
14.7 |
|
|
17% |
|
Computer
software and lab equipment |
|
|
11.5 |
|
|
10.4 |
|
|
1.1 |
|
|
10% |
|
|
22.4 |
|
|
20.6 |
|
|
1.8 |
|
|
9% |
|
New
product development |
|
|
8.5 |
|
|
8.1 |
|
|
0.4 |
|
|
5% |
|
|
15.3 |
|
|
12.7 |
|
|
2.6 |
|
|
20% |
|
Facility
expense |
|
|
8.3 |
|
|
8.1 |
|
|
0.2 |
|
|
2% |
|
|
16.1 |
|
|
15.5 |
|
|
0.6 |
|
|
4% |
|
Depreciation
and amortization |
|
|
14.3 |
|
|
14.2 |
|
|
0.1 |
|
|
1% |
|
|
28.6 |
|
|
27.7 |
|
|
0.9 |
|
|
3% |
|
License
and development project costs |
|
|
(9.6 |
) |
|
- |
|
|
(9.6 |
) |
|
- |
|
|
(14.3 |
) |
|
- |
|
|
(14.3 |
) |
|
- |
|
Other |
|
|
2.7 |
|
|
1.3 |
|
|
1.4 |
|
|
108% |
|
|
4.7 |
|
|
2.5 |
|
|
2.2 |
|
|
88% |
|
Total |
|
$ |
85.8 |
|
$ |
85.4 |
|
$ |
0.4 |
|
|
0.5% |
|
$ |
171.7 |
|
$ |
163.2 |
|
$ |
8.5 |
|
|
5% |
|
Research
and development as a percentage of net revenue |
|
|
14.9 |
% |
|
18.7 |
% |
|
|
|
|
|
|
|
14.8 |
% |
|
17.6 |
% |
|
|
|
|
|
|
Research
and development expenses were $85.8 million and $85.4 million in the second
quarter of fiscal 2006 and fiscal 2005, respectively, an increase of $0.4
million, or 0.5%. This increase was primarily due to a $6.8 million increase in
salaries and benefits related to 200 additional personnel and a $1.1 million
increase in computer software and lab equipment. These increases were offset by
an increase of $9.6 million in license and development project costs, primarily
related to development costs related to our collaboration with SCE that are
classified as cost of revenue in our condensed consolidated income statement and
other engineering costs that were capitalized on our condensed consolidated
balance sheet and will be expensed on a percentage of completion basis under a
development contract. Neither of these development projects were in effect
during the second quarter of fiscal 2005.
Research
and development expenses were $171.7 million and $163.2 million for the first
half of fiscal 2006 and fiscal 2005, respectively, an increase of $8.5 million,
or 5%. This increase was primarily due to a $14.7 million increase in salaries
and benefits related to 200 additional personnel, a $2.6 million increase in new
product development costs related to an overall increase in product tape-outs
and prototype materials, and a $1.8 million increase in computer software and
lab equipment. These increases were offset by an increase of $14.3 million in
license and development project costs, primarily related to development costs
related to our collaboration with SCE that are classified as cost of revenue in
our condensed consolidated income statement and other engineering costs that
were capitalized on our condensed consolidated balance sheet and will be
expensed on a percentage of completion basis under a development contract.
Neither of these development projects were in effect during the first half of
fiscal 2005.
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.
Sales,
General and Administrative
|
|
Three
Months Ended |
|
|
|
|
|
Six
Months Ended |
|
|
|
|
|
|
|
July
31, |
|
July
25, |
|
$ |
|
% |
|
July
31, |
|
July
25, |
|
$ |
|
% |
|
|
|
2005 |
|
2004 |
|
Change |
|
Change |
|
2005 |
|
2004 |
|
Change |
|
Change |
|
|
|
(in
millions) |
|
Sales,
General and Administrative: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits |
|
$ |
28.0 |
|
$ |
22.7 |
|
$ |
5.3 |
|
|
23% |
|
$ |
54.2 |
|
$ |
45.3 |
|
$ |
8.9 |
|
|
20% |
|
Advertising
and promotions |
|
|
6.9 |
|
|
13.1 |
|
|
(6.2 |
) |
|
(47%) |
|
|
13.8 |
|
|
23.8 |
|
|
(10.0 |
) |
|
(42%) |
|
Legal
and accounting fees |
|
|
4.6 |
|
|
1.6 |
|
|
3.0 |
|
|
195% |
|
|
8.6 |
|
|
4.1 |
|
|
4.5 |
|
|
110% |
|
Facility
expense |
|
|
3.0 |
|
|
2.2 |
|
|
0.8 |
|
|
38% |
|
|
6.1 |
|
|
4.5 |
|
|
1.6 |
|
|
35% |
|
Depreciation
and amortization |
|
|
8.3 |
|
|
8.9 |
|
|
(0.6 |
) |
|
(7%) |
|
|
16.3 |
|
|
17.8 |
|
|
(1.5 |
) |
|
(8%) |
|
Other |
|
|
0.9 |
|
|
2.4 |
|
|
(1.5 |
) |
|
(63%) |
|
|
0.7 |
|
|
2.6 |
|
|
(1.9 |
) |
|
(73%) |
|
Total |
|
$ |
51.7 |
|
$ |
50.9 |
|
$ |
0.8 |
|
|
2% |
|
$ |
99.7 |
|
$ |
98.1 |
|
$ |
1.6 |
|
|
2% |
|
Sales,
general and administrative as a percentage of net revenue |
|
|
9.0 |
% |
|
11.2 |
% |
|
|
|
|
|
|
|
8.6 |
% |
|
10.5 |
% |
|
|
|
|
|
|
Sales,
general and administrative expenses were $51.7 million and $50.9 million in the
second quarter of fiscal 2006 and fiscal 2005, respectively, an increase of $0.8
million, or 2%. This increase was primarily due to a $5.3 million increase
related to 77 additional personnel, a $3.0 million increase in legal expenses
primarily due to certain insurance reimbursements that were received during the
second quarter of fiscal 2005, and an $0.8 million increase in facilities
expense due to the expansion of our international sites. These increases were
offset by a $6.2 million decrease in advertising and promotions, primarily
associated with a reduction in certain marketing programs, trade show expenses
and advertising during the
second quarter of fiscal 2006 compared to the second quarter of fiscal
2005.
Sales,
general and administrative expenses were $99.7 million and $98.1 million for the
first half of fiscal 2006 and fiscal 2005, respectively, an increase of $1.6
million, or 2%. This increase was primarily due to an $8.9 million increase
related to 77 additional personnel, a $4.5 million increase in legal expenses
primarily due to certain insurance reimbursements that were received during the
first half of fiscal 2005, and a $1.6 million increase in facilities expense due
primarily to the expansion of our international sites. These increases were
offset by a $10.0 million decrease in advertising and promotions, primarily
associated with a reduction in certain marketing programs, trade show expenses
and advertising during the first half of fiscal 2006 compared to the first half
of fiscal 2005. In addition, deprecation and amortization decreased $1.5 million
primarily due to the end of life of some intangible assets that occurred during
the fourth quarter of fiscal 2005.
We expect
sales, general and administrative expenses to continue to increase in absolute
dollars as we continue to support our operations and global business expansion
efforts, expand our sales, launch our new products, and protect our business
interests.
Interest
Income and Interest Expense
Interest
income consists of interest earned on cash, cash equivalents and marketable
securities. Interest income was $4.9 million and $2.7 million in the second
quarter of fiscal 2006 and fiscal 2005, respectively, an increase of $2.2
million. Interest income was $8.8 million and $5.5 million for the first half of
fiscal 2006 and fiscal 2005, respectively, an increase of $3.3 million. These
increases were primarily the result of higher average balances of cash, cash
equivalents, and marketable securities and higher yields during the first half
of fiscal 2006 when compared to the first half of fiscal 2005.
Interest
expense consists primarily of interest incurred as a result of capital lease
obligations.
Income
Taxes
We
recognized income tax expense of $10.4 million and $1.3 million in the second
quarter of fiscal 2006 and fiscal 2005, respectively. Income tax expense as a
percentage of income before taxes, or our annual effective tax rate, was 12.2%
for the second quarter of fiscal 2006 and 20% for the second quarter of fiscal
2005. We
recognized income tax expense of $26.5 million and $6.6 million for the first
half of fiscal 2006 and fiscal 2005, respectively. Our annual effective tax rate
was 16% for the first half of fiscal 2006 and 20% for the first half of fiscal
2005. During
the second quarter of fiscal 2006, we reduced our effective tax rate to 16% for
the year from the 20% effective tax rate used in the first quarter of fiscal
2006, primarily as a result of changes in our geographic mix of income subject
to tax. Our
annual effective tax rate is lower than the United States Federal Statutory rate
of 35% due primarily to income earned in lower tax jurisdictions and research
and development tax credits.
The
American Jobs Creation Act of 2004 was signed into law on October 22, 2004. This
act provides a special one-time
dividends received deduction on the repatriation of certain foreign earnings to
a United States taxpayer. We are currently in the process of evaluating whether
or not, and to what extent, if any, this provision may benefit NVIDIA.
We expect
to complete such evaluation before the end of our fiscal year 2006. The range of
possible amounts that we are considering for repatriation under this provision
is between zero and $500 million. The range of income tax expense we would
recognize if we repatriate earnings in this range is expected to be between zero
and $27 million.
Liquidity
and Capital Resources
As of
July 31, 2005, we had $717.5 million in cash, cash equivalents and marketable
securities, an increase of $47.5 million from $670.0 million at the end of
fiscal 2005. 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 $136.9 million and $32.6 million during the first
half of fiscal 2006 and fiscal 2005, respectively. Cash flows from operating
activities for the first half of fiscal 2006 were derived primarily from our net
income of $139.3 million, and a decrease of $14.6 million in our inventories on
our condensed consolidated balance sheet. Offsetting these increases is an
increase in our accounts receivable of $48.6 million, primarily due to the
decreased linearity of sales during the second quarter of fiscal 2006, which
resulted in a higher percentage of our shipments in the last month of the
quarter when compared to the fourth quarter of fiscal 2005, and a decrease of
our accounts payable of $17.2 million primarily due to the difference in timing
of when payments were made to vendors in the second quarter of fiscal 2006
compared to the fourth quarter of fiscal 2005.
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 intangible assets. Investing activities
used cash of $60.3 million during the first half of fiscal 2006. Net cash used
by investing activities during the first half of fiscal 2006 was primarily due
to $42.7 million of cash used for capital expenditures, including purchases of
new research and development equipment, hardware equipment, technology licenses,
software and intangible assets, and $17.6 million of net purchases of marketable
securities. We expect to spend approximately $30 million to $50 million for
capital expenditures during the remainder of fiscal 2006, primarily for
purchases of software licenses, emulation equipment, computers and engineering
workstations. In addition, we may use cash in connection with the acquisition of
new businesses or assets.
Financing
activities used cash of $43.0 million during the first half of fiscal 2006,
primarily as a result of $98.5 million of cash used in our stock repurchase
program, offset by $55.9 million of common stock issued under employee stock
plans.
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.
During the second quarter of fiscal 2006, we repurchased 1.8 million shares of
our common stock for $50.0 million. As part of our share repurchase program, we
may from time-to-time 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 an incremental number
of shares of our common stock, within a minimum and a maximum, at the end of the
term of the agreement. We entered into two such transactions during the second
quarter of fiscal 2006 which, in the aggregate, required up-front payments
totaling $25.0 million. Under these agreements, we repurchased 0.9 million
shares of our common stock, which we recorded on the trade date of the
transactions. Through the end of the second quarter of fiscal 2006, we have
repurchased 5.8 million shares under our stock repurchase program for a total
cost of approximately $123.1 million.
Operating
Capital and Capital Expenditure Requirements
We
believe that our existing cash balances and anticipated cash flows from
operations will be sufficient to meet our operating, acquisition and capital
requirements for at least the next 12 months. If we were to need additional
equity or debt financing, it 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 the section entitled “Business Risks.”
Other key
factors that could affect our liquidity include:
Shelf
Registration Statement
In
December 2003, we filed a Form S-3 with the Securities and Exchange Commission,
or SEC, under their “shelf” registration process. This shelf registration was
declared effective by the SEC on March 25, 2004. Under this shelf registration
process, 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. In particular, we expect to incur
significant operating expenses in connection with:
· |
continuing
to develop our technology; |
· |
hiring
additional personnel; |
· |
expanding
our sales and marketing organization and activities;
|
· |
acquiring
complementary technologies, assets or businesses; and
|
3dfx
Asset Purchase
The 3dfx
asset purchase 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 two million shares of NVIDIA common stock. If 3dfx could not make such
a certification, but instead properly certified that its debts and liabilities
could be satisfied for less than $25.0 million, then 3dfx could have elected to
receive a cash payment equal to the amount of such debts and liabilities and a
reduced number of shares of our common stock, with such reduction calculated by
dividing the cash payment by $25.00 per share. If 3dfx could not certify that
all of its debts and liabilities had been provided for, or could not be
satisfied, for less than $25.0 million, we would not be obligated under the
agreement to pay any additional consideration for the assets. We are currently
party to litigation relating to certain aspects of the asset purchase and 3dfx’s
subsequent bankruptcy in October 2002. Please see Part I, Item 1, Note 11,
“Litigation” for further information regarding this litigation.
Contractual
Obligations
As of
July 31, 2005, our outstanding inventory purchase obligations decreased to
approximately $267 million from approximately $457 million as of January 30,
2005, primarily due to a decrease in purchase orders from the ramping of our
GeForce 6 series of GPUs in the fourth quarter of fiscal 2005. There were no
other material changes in our contractual obligations from those disclosed in
our Annual Report on Form 10-K for the year ended January 30, 2005. Please see
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources” in our Annual Report on Form
10-K for the year ended January 30, 2005 for a description of our contractual
obligations.
Recent
Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R),
Share-Based
Payment,
which
requires the measurement and recognition of compensation expense for all
stock-based compensation payments. In April 2005, the SEC delayed the effective
date of SFAS No. 123(R), which is now effective for annual periods that begin
after June 15, 2005. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107, or SAB
No. 107, which includes interpretive guidance for the initial implementation of
SFAS 123(R). SFAS No. 123(R) allows for either prospective recognition of
compensation expense or retrospective recognition. We are currently evaluating
which expense recognition method we will apply upon adoption of SFAS No. 123(R).
We will implement the provisions of SFAS No. 123(R) beginning in fiscal 2007.
Once adopted, the standard will have an adverse impact on our operating results.
During
the first quarter of fiscal 2006, we transitioned from a Black-Scholes model to
a binomial model for calculating the estimated fair value of new stock-based
compensation awards granted under our stock option plans. As a result of recent
regulatory guidance, including SAB No. 107, and in anticipation of the impending
effective date of SFAS No. 123(R), we reevaluated the assumptions we use 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. Our management determined that the use of implied volatility is expected
to be more reflective of market conditions and, therefore, can reasonably be
expected to be a better indicator of 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 make full use of the capabilities of the binomial
valuation model. As such, the expected term 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, our management decided to
continue to use the Black-Scholes model to calculate the estimated fair
value.
In
June 2005, the FASB issued SFAS No. 154, or SFAS No. 154, Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3. SFAS
No. 154 applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. We will adopt SFAS 154 during the first quarter of fiscal 2007.
We do not expect the adoption of SFAS No. 154 to have a material impact on our
consolidated financial position, results of operations or cash flows.
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.
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. 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 Unites
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.
Business
Risks
In
addition to the risks discussed in “Management's Discussion and Analysis of
Financial Condition and Results of Operations,” our business is subject to the
risks set forth below.
Risks
Related to Our Operations
Our
failure to estimate customer demand properly may result in excess or obsolete
inventory or, conversely, may result in inadequate inventory levels, either of
which could adversely affect our financial results.
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 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 was a sudden and significant decrease in demand for our products;
|
· |
if
there was a higher incidence of inventory obsolescence because of rapidly
changing technology and customer requirements;
|
· |
if
we fail to estimate customer demand properly for our old products as our
new products are introduced; and |
· |
if
our competition were to take unexpected competitive pricing actions.
|
Conversely,
if we underestimate our customers’ demand for either our old or new products, we
may have inadequate manufacturing capability and may not be able to obtain
sufficient inventory to fill our customers’ orders on a timely basis. Even if we
are able to increase production levels to meet customer demand, we may not be
able to do so in a cost effective 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.
We
order materials in advance of anticipated customer demand. Therefore, we have
limited ability to reduce our inventory purchase commitments quickly in response
to any revenue shortfalls.
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 and in connection with selling workstation
boards directly to major original equipment manufacturers, or OEMs.
Additionally, because we typically 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. A reduction in demand could negatively
impact our gross margin and financial results. For example, our WMP business has
been heavily concentrated at one OEM. During the first half of fiscal 2006, the
OEM reduced the demand for our products. As a result, we wrote-down the value of
certain handheld products in our inventory that we believe exceeded the demand
of that OEM, which negatively impacted our gross margin.
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 would
reduce our gross margin and could adversely effect 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 would 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 1,384
full-time employees engaged in research and development as of July 31, 2005,
compared to 1,288 employees as of May 1, 2005. Research and development
expenditures represented 14.9% and 14.8% as a percentage of revenue during the
second quarter of fiscal 2006 and the first half of fiscal 2006, respectively.
If we are required to invest significantly greater resources than anticipated in
research and development efforts without an increase in revenue, our operating
results would 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. 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.
Our
operating expenses, which are comprised of research and development expenses and
sales, general and administrative expenses, represented 23.9% and 23.4% of our
total revenue during the second quarter of fiscal 2006 and the first half of
fiscal 2006, respectively. Since we typically 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 WMPs. The
majority of our newest GPUs, the GeForce 7 series, the GeForce 6 series, GeForce
FX and the GeForce FX Go products are manufactured in 0.13 micron and 0.11
micron process technologies. In our family of MCPs, the nForce4 product is
manufactured in 0.15 micron and 90 nanometer process technologies.
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 quarterly report 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 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
the adoption rate of PCI Express does not grow as anticipated, our business
results could suffer.
PCI
Express enables a new level of performance for high bandwidth applications like
graphics and networking. Industry adoption of PCI Express was slower than we
expected during fiscal 2005, has continued to be slower than we expected during
the first half of fiscal 2006, and there is no assurance that the adoption rate
will increase during the second half of fiscal 2006. If the adoption rate of PCI
Express does not increase or our PCI Express compatible products do not meet
consumer and/or customer demand or expectations, we may experience a decrease in
revenue relative to market expectations and/or an increase in
inventory.
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,
original design manufacturers, or ODMs, and add-in board and motherboard
manufacturers, will aid our future success. Our OEM, ODM, and add-in board and
motherboard manufacturers’ customers typically introduce new system
configurations as often as twice per year, typically based on spring and fall
design cycles. 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
and ODMs 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 ensure compliance 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
Intel and Microsoft. Such changes would require us to invest significant time
and resources to redesign our products to ensure compliance 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 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. 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 graphics processors 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 Taiwan Semiconductor Manufacturing Company, or
TSMC, International Business Machines Corporation, or IBM, United
Microelectronics Corporation, or
UMC, Chartered
Semiconductor Manufacturing, or Chartered,
and
any additional 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 cellular phone
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
graphics processors 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 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 new 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
The
loss of future revenue from Microsoft will result in a reduction of our
historical revenue level and operating results if we do not increase revenue
from other customers.
During
our fiscal 2004, Microsoft Corporation announced that it had entered into an
agreement with one of our competitors to develop technology for future Xbox
products and services. During the first quarter of fiscal 2006, Microsoft
indicated that it would not order any more Xbox-related products from us after
our second fiscal quarter. As a result, the second quarter of fiscal 2006 was
the last quarter during which we will recognize revenue from the sale of our
Xbox-related products to Microsoft. However, as a result of our license
agreement with Microsoft relating to the successor product to their initial Xbox
gaming console, the Xbox360, and related devices, we recognized an incremental
amount of related license revenue from Microsoft during the second quarter of
fiscal 2006, and expect to do so in future periods. Revenue from Microsoft
during the second quarter of fiscal 2006 and fiscal 2005 accounted for 13% and
20% respectively, of our total revenue. Revenue from Microsoft for the first
half of fiscal 2006 was $118.2 million, or 10% of our total revenue. As a result
of the loss of future Xbox-related revenue from Microsoft, we will need to
increase revenue from our other customers in order to be able to
maintain our revenue levels and operating results consistent with the second
quarter of fiscal 2006. If we do not replace our Xbox-related revenue with
revenue from other customers, our operating results will be adversely
affected.
We
may not be successful in developing the graphics processor required for SCE’s
PlayStation3 within the timeframe necessary to achieve commercial success and,
even if successful, 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 next generation PlayStation3. Our collaboration with SCE includes
license fees and royalties for the next generation PlayStation 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. In
fiscal 2006, we expect to recognize revenue of approximately $40 million from
development, software, and license fees associated with this
collaboration. Depending on the ultimate success of this next
generation platform, we expect to generate, starting in fiscal 2007, revenue
ranging from $50 million to $100 million annually from license fees and
royalties over the next five years, with the possibility of additional royalties
for several years thereafter. We may not be successful in developing the
graphics processor required for SCE’s PlayStation3 within the timeframe
necessary to achieve commercial success. In addition, even if the
graphics processor is developed on a timely basis there can be no assurance
that the PlayStation3 will achieve long term commercial success, given the
intense competition in the game console market. As such, our revenue and
gross margin may be adversely affected if any of these risks occur.
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.
If we do consider an acquisition, strategic alliance or joint venture, the
negotiations could divert management’s attention as well as other resources. For
any previous or future acquisition or investment, 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 due to litigation arising from a 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 key
employees as a result of any 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 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 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 these customers.
We have
only a limited number of customers and our sales are highly concentrated. Sales
to Microsoft accounted for approximately 13% of revenue for the second quarter
of fiscal 2006 and 10% of revenue for the first half of fiscal 2006. Our other
three largest customers accounted for approximately 25% of revenue for the
second quarter of fiscal 2006 and 32% of revenue for the first half of fiscal
2006. During the first quarter of fiscal 2006, Microsoft indicated that it
would not order any more Xbox-related products from us after our second fiscal
quarter. As a result, the second quarter of fiscal 2006 was the last quarter
during which we will recognize revenue from the sale of our Xbox-related
products to Microsoft. Although a small number of our other customers represent
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 TSMC,
IBM, UMC and Chartered 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. TSMC,
IBM, UMC and Chartered 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 expense 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
TSMC, IBM, UMC, Chartered and any other manufacturers we may use to ensure
adequate product supply and competitive pricing to respond to customer demand.
Any difficulties like these would harm our business.
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 primarily by Siliconware Precision
Industries Company Ltd., Amkor Technology Inc., STATS ChipPAC Incorporated and
Advanced Semiconductor Engineering, Inc., 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. 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.
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 these products.
In the
design and development of new products and product enhancements, we rely on
third-party software development tools. While 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. 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. The design requirements necessary to meet
consumer demands for more features and greater functionality from 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, our business could
suffer.
Difficulties
in collecting accounts receivable could result in significant charges against
income and the deferral of revenue recognition from sales to affected customers,
which 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. Accounts receivable owed by
foreign customers may be difficult to collect. We maintain an allowance for
doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. This allowance consists of an amount
identified for specific customers and an amount based on overall estimated
exposure. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required and we may be required to defer revenue recognition
on sales to affected customers, 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.
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. In the event that 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 has 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.
Risks
Related to Our Competition
The
3D graphics, platform processor and handheld industries are highly competitive
and we may be unable to compete.
The
market for GPUs, MCPs and WMPs for PCs and handhelds 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, or APIs,
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 and MCP solutions for the PC market. Some of our
competitors may have greater marketing, financial, distribution and
manufacturing resources than we do and may be more able to adapt to customer or
technological changes. Our current competitors include the following:
|
· |
suppliers
of MCPs that incorporate a combination of 3D graphics, 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, Silicon Integrated Systems, Inc. and VIA
Technologies, Inc., or VIA; |
|
· |
suppliers
of standalone desktop GPUs that incorporate 3D graphics functionality as
part of their existing solutions, such as ATI, Creative Technology, Matrox
Electronics Systems Ltd. and XGI Technology,
Inc.; |
|
· |
suppliers
of standalone notebook GPUs that incorporate 3D graphics functionality as
part of their existing solutions, such as ATI, Silicon Motion Corporation,
and the joint venture formed by SONICblue Incorporated (formerly S3
Incorporated) and VIA; and |
|
· |
suppliers
of WMPs for handheld devices that incorporate advanced graphics
functionality as part of their existing solutions, such as ATI, Renesas
Technology, Broadcom and Seiko-Epson. |
If and to
the extent we offer products outside of the PC, consumer electronics and
handheld 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.
If
Intel continues to pursue platform solutions, we may not be able to successfully
compete.
We expect
substantial competition from Intel’s publicized focus on moving to selling
platform solutions dominated by Intel products, such as when Intel achieved
success with its Centrino platform solution. In addition to its current notebook
platform initiative, we expect that Intel is now focused on developing and
selling platform solutions for the workstation, server and desktop segments. If
Intel continues to pursue these initiatives, we may not be able to successfully
compete in these segments.
Risks
Related to Market Conditions
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 the excess inventory has been absorbed.
If
our products do not continue to be accepted by the PC and consumer electronics
markets or if demand by the PC and consumer electronics 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 PC and consumer electronics 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 segment is our core business, our business would suffer if for any
reason our current or future graphics processors do not continue to achieve
widespread acceptance in 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 PC market, 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 and the market do not continue to demand new
products with increased performance, features, functionality or standards, sales
of our products could decline and our business and operating results could
suffer.
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 76% and 79% of our total revenue from sales to
customers outside of the United States and other Americas for the second quarter
of fiscal 2006 and the first half of fiscal 2006, respectively. The manufacture,
assembly, test and packaging of our products outside of the United States and
sales to these 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, or SARS, 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
sales offices in several international locations including Taiwan, Russia,
Japan, China, Hong Kong, Korea, Germany, France and the United Kingdom. We also
have a design center in Germany and one in India. Our international operations
are subject to the many of the risks contained in the above list. Difficulties
with our international operations, including finding appropriate staffing, 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 Unites 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.
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.
Due to
environmental concerns, the need for lead-free solutions in electronic
components and systems is receiving increasing attention within the
semiconductor industry as companies are moving towards becoming compliant with
the Restriction of Hazardous Substances Directive, or RoHS Directive. The RoHS
Directive is European legislation that restricts the use of a number of
substances, including lead, effective July 2006. We believe that our
products will be compliant with the RoHS Directive and that materials will be
available to meet these emerging regulations. However, it is possible that
unanticipated supply shortages or delays or excess non-compliant inventory may
occur as a result of these new 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.
Hostilities
involving the United States and/or terrorist attacks could harm our business.
The
financial, political, economic and other uncertainties following the terrorist
attacks on the United States in 2001 led to a weakening of the global
economy. Similar terrorist acts and/or the threat of future outbreak or
continued escalation of hostilities involving the United States and Iraq or
other countries could adversely affect the growth rate of our revenue and have
an adverse effect on our business, financial condition or results of operations.
In addition, any escalation in these events or similar future events may disrupt
our operations or those of our customers, distributors and suppliers, which
could also adversely affect our business, financial condition or results of
operations.
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 during downturns.
Political
instability in Taiwan and in The People’s Republic of China or elsewhere could
harm our business.
Because
of our reliance on foundries and independent contractors located in Taiwan, our
business may be harmed by political instability in Taiwan, including the
worsening of the strained relations between The People’s Republic of China and
Taiwan, or if relations between the United States and The People’s Republic of
China are strained due to foreign relations events. If any of our suppliers
experienced a substantial disruption in their operations, as a result of a
natural disaster, political unrest, economic instability, acts of terrorism or
war, equipment failure or other cause, it could harm our business.
We
are exposed to fluctuations in the market values of our portfolio investments
and in interest rates.
We invest
in a variety of financial instruments, consisting principally of investments in
commercial paper, money market funds and highly liquid debt securities of
corporations, municipalities and the United States government and its agencies.
These investments are denominated in United States dollars.
We
account for our investment instruments in accordance with SFAS No. 115. All of
the cash equivalents and marketable securities are treated as
“available-for-sale” under SFAS No. 115. Investments in both fixed rate and
floating rate interest earning instruments carry a degree of interest rate risk.
Fixed rate debt securities may have their market value adversely impacted due to
a rise in interest rates, while floating rate securities may produce less income
than expected if interest rates fall. Part of our portfolio includes equity
investments in publicly traded companies, the value of which are subject to
market price volatility. Due in part to these factors, our future investment
income may fall short of expectations due to changes in interest rates or if the
decline in fair value of our publicly traded equity investments is judged to be
other-than-temporary. We may suffer losses in principal if forced to sell
securities that decline in market value due to changes in interest rates.
However, because our debt securities are classified as “available-for-sale,” no
gains or losses are recognized due to changes in interest rates unless such
securities are sold prior to maturity.
Our
stock price may continue to experience significant short-term fluctuations.
The
trading price of our common stock has fluctuated greatly. These price
fluctuations have been rapid and severe. 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 of
which could impact our stock price. Additionally, the price of our common stock
may continue to fluctuate greatly in the future due to factors that are
non-company specific, such as the decline in the United States and/or
international economies, acts of terror against the United States, war or due to
a variety of company specific factors, including quarter to quarter variations
in our operating results, shortfalls in revenue or earnings from levels expected
by securities analysts and the other factors discussed in these risk
factors.
Risks
Related to Intellectual Property, Litigation and Government Action
Expensing
employee stock options in future periods will materially and aversely affect our
reported operating results.
Since
inception, we have used stock options and our employee stock purchase program as
fundamental components of our compensation packages. To date we generally have
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 FASB issued
SFAS No. 123(R), which requires the measurement and recognition of compensation
expense for all stock-based compensation payments. In April 2005, the SEC
delayed the effective date of SFAS No. 123(R), which is now effective for annual
periods that begin after June 15, 2005. 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. Expensing these incentives in future
periods will materially and adversely affect our reported operating results as
the stock-based compensation expense would be charged directly against our
reported earnings. 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 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 us in the United
States District Court for the Eastern District of Texas. Opti asserts 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 because of our alleged willful infringement of these patents.
NVIDIA filed a response to this complaint in December 2004. After a case
management conference in July 2005, discovery has just begun and a trial date
has now been set for July 2006. We believe the claims asserted against us are
without merit and we will continue to defend ourselves vigorously.
In August
2004, a Texas limited partnership named American Video Graphics, LP, or AVG,
filed three separate complaints for patent infringement against various
corporate defendants, not including NVIDIA, in the United States District Court
for the Eastern District of Texas. AVG initially asserted that each of the
approximately thirty defendants sells products that infringe one or more of
seven separate patents that AVG claims relate generally to graphics processing
functionality. Each of the three lawsuits target a different group of
defendants; one case involves approximately twenty of the leading personal
computer manufacturers, the PC Makers Case, one case involves the three leading
video game console makers, the Game Console Case, and one case involves
approximately ten of the leading video game publishers, the Game Publishers
Case. In November 2004, NVIDIA sought and was granted permission to intervene in
two of the three pending AVG lawsuits, the PC Makers Case and the Game Console
Case. Our complaint in intervention alleges both that the patents in suit are
invalid and that, to the extent AVG’s claims target NVIDIA products, the
asserted patents are not infringed. Two other leading suppliers of graphics
processing products, Intel and ATI, have also intervened in the cases, ATI in
both the PC Makers and Game Console Case, and Intel in the PC Makers Case.
After
some consensual reconfigurations proposed by the various parties, in January
2005, the district court judge entered docket control and discovery orders in
the three lawsuits. Plaintiff has recently dismissed one patent from the PC
Makers case such that the case now involves three separate patents and is
currently scheduled for trial beginning in September 2006. The Game Console Case
involves a single patent and is currently scheduled for trial beginning in
December 2006. We believe that, to the extent AVG’s infringement allegations
target functionality that may be performed by NVIDIA products, those claims are
without merit, and we will continue to defend ourselves and our products
vigorously.
Our
defenses against these suits may be unsuccessful. At this time, we cannot
reasonably estimate the range of any loss or damages resulting from these suits
due to uncertainty regarding the ultimate outcome. If these cases go forward, we
expect that they will result 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 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 the 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 of 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 in 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.
While
we believe that we currently have adequate internal control over financial
reporting, we are exposed to risks from recent 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.
ITEM
4. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
Based on
their evaluation as of July 31, 2005, 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 11, “Litigation” for discussion of our legal
proceedings.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Issuer
Purchases of Equity Securities
Period |
Total
Number of Shares Purchased |
Average
Price Paid per Share |
Total
Number of Shares Purchased as Part of Publicly Announced Plans of
Programs |
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans or
Programs (1) |
|
|
|
|
|
May
2, 2005 through May 29, 2005 |
- |
$- |
- |
$226,888,622
|
|
|
|
|
|
May
30, 2005 through June 26, 2005 |
828,109 |
$27.35
|
828,109 |
$204,239,263
|
|
|
|
|
|
June
27, 2005 through July 31, 2005 |
1,012,184
(3) |
$27.06
|
1,012,184
(3) |
$176,846,554
|
|
|
|
|
|
Total |
1,840,293 |
$27.19
(2) |
1,840,293 |
|
(1) We
have an ongoing authorization from the Board of Directors, subject to certain
specifications, to repurchase shares of our common stock up to an aggregate
maximum amount of $300.0 million on the open market or in negotiated
transactions through August 2007.
(2)
Represents average price paid per share during the second quarter of fiscal
2006.
(3) As
part of our share repurchase program, we may from time-to-time enter into
structured share repurchase transactions with financial institutions. We entered
into two such transactions during the second quarter of fiscal 2006 which, in
the aggregate, required up-front payments totaling $25.0 million. Under these
agreements, we repurchased 0.9 million shares of our common stock, which we
recorded on the trade date of the transactions.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
Not
applicable.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the
Annual Meeting of Stockholders held on July 21, 2005 the following proposals
were adopted by the margin indicated. Proxies for the Annual Meeting were
solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and
there was no solicitation in opposition of management’s
solicitation.
1. |
The
election of three (3) directors to serve for a three-year term until the
2008 Annual Meeting of Stockholders. The results of the voting were as
follows: |
a. Steven
Chu, Ph.D.
Number of
shares voted For
150,220,428
Number of
shares Withholding Authority 2,563,801
b. Harvey
C. Jones
Number of
shares voted For
140,084,771
Number of
shares Withholding Authority 12,699,458
c.
William J. Miller
Number of
shares voted For
149,448,713
Number of
shares Withholding Authority
3,335,516
The other
directors whose term of office as a director continued after the Annual Meeting
of Stockholders are Tench Coxe, Mark A. Stevens, Mark L. Perry, James C.
Gaither, A. Brooke Seawell and Jen-Hsun Huang.
2. |
Ratification
of the appointment of PricewaterhouseCoopers LLP as our independent
registered accounting firm for our fiscal year ending January 29, 2006.
The results of the voting were as follows: |
Number
of shares voted For |
|
|
149,899,287 |
|
Number
of shares voted Against |
|
|
2,064,763 |
|
Number
of shares Abstaining |
|
|
820,179 |
|
Number
of Broker Non-Votes |
|
|
0 |
|
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
Exhibit
No. |
Description |
10.17 |
Fiscal
Year 2006 Variable Compensation Plan (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K, dated May 10, 2005 and incorporated
herein by reference). |
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. |
* 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
August 25, 2005.
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. |
Description |
10.17 |
Fiscal
Year 2006 Variable Compensation Plan (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K, dated May 10, 2005 and incorporated
herein by reference). |
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. |
* 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.