There were no changes in our internal controls over financial reporting during our fiscal quarter ended July 27, 2008April 26, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within NVIDIA have been detected.
Please see Part I, Item 1, Note 12 of the Notes to Condensed Consolidated Financial Statements for a discussion of our legal proceedings.
A description of the risk factors associated withIn evaluating NVIDIA and our business, is set forth below. This description includes any material changesthe following factors should be considered in addition to and supersedes the description of risk factors associated with our business previously disclosedother information in Part II, “Item 1A. Risk Factors” of ourthis Quarterly Report on Form 10-Q for10-Q. Before you buy our common stock, you should know that making such an investment involves some risks including, but not limited to, the fiscal quarter ended April 27, 2008.
Risks Related to Competition
If we are unable to compete inrisks described below. Additionally, any one of the markets for our products, our financial resultsfollowing risks could be adversely impacted.
The markets for our products are highly competitive and are characterized by rapid technological change, new product introductions, evolving industry standards, and declining average selling prices. We believe that our ability to remain competitive will depend on how well we are able to anticipate the features and functions that customers will demand from our products and whether we are able to deliver consistent volumes of our products at acceptable prices and quality levels. We believe other factors impacting our ability to compete are:
· | product performance; |
·
| product bundling by competitors with multiple product lines; |
·
| breadth and frequency of product offerings; |
·
| access to customers and distribution channels; |
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| backward-forward software support; |
·
| conformity to industry standard application programming interfaces; and |
·
| manufacturing capabilities. |
We expect competition to increase both from existing competitors and new market entrants with products that may be less costly than ours, may provide better performance or additional features not provided by our products, or from companies that provide or intend to provide competing product solutions. Any of these sources of competition couldseriously harm our business. For example, we were the largest supplierbusiness, financial condition and results of AMD 64 chipsets with 60% segment share in the second quarter of calendar year 2008, as reported in the 2008 Second Quarter PC Processoroperations, which could cause our stock price to decline. Additional risks and Chipset report from Mercury Research. Decline in demand for our chipsets in the AMD segment for any reason including competition from existing competitors or new market entrants could materially impact our financial results.
Some of our competitors may have or be ableuncertainties not presently known to obtain greater marketing, financial, distribution and manufacturing resources than we do and may be better able to adapt to customer or technological changes. Currently, Intel Corporation, or Intel, which has greater resources than we do, is working on a multi-core architecture code-named Larrabee, which is reported to combine the graphics processing capabilities of a graphics processing unit, or GPU, with an x86 architecture and is expected to compete with our products in various markets. Intel is targeting the gaming market as well as other industries that demand high-performance graphics and computing with Larrabee, both of which are important markets for us. In order to compete, we may have to invest substantial amounts in research and development without assurance that our products will be superior to those of our competitorsus or that our products will achieve market acceptance.
Our current competitors include the following:
·
| suppliers of discrete media and communication processors, or MCPs, that incorporate a combination of networking, audio, communications and input/output functionality as part of their existing solutions, such as Advanced Micro Devices, Inc., or AMD, Broadcom Corporation, or Broadcom, Silicon Integrated Systems Corporation, or SIS, and Intel;
|
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| suppliers of GPUs, including MCPs that incorporate 3D graphics functionality as part of their existing solutions, such as AMD, Intel, Matrox Electronics Systems Ltd., SIS and VIA Technologies, Inc.;
|
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| suppliers of GPUs or GPU intellectual property for handheld and digital consumer electronics devices that incorporate advanced graphics functionality as part of their existing solutions, such as AMD, Broadcom, Fujitsu Limited, Imagination Technologies Ltd., ARM Holdings plc, Marvell Technology Group Ltd., or Marvell, NEC Corporation, Qualcomm Incorporated, or Qualcomm, Renesas Technology, Seiko-Epson, Texas Instruments Incorporated, or Texas Instruments, and Toshiba America, Inc.; and
|
·
| suppliers of application processors for handheld and digital consumer electronics devices that incorporate multimedia processing as part of their existing solutions such as Broadcom, Texas Instruments, Qualcomm, Marvell, Freescale Semiconductor Inc., Samsung and ST Microelectronics. |
As Intel and AMD continue to pursue platform solutions, we currently deem immaterial may not be able to successfully compete andalso impair our business would be negatively impacted.
We expect substantial competition from both Intel’s and AMD’s strategy of selling platform solutions, such as the success Intel achieved with its Centrino platform solution. AMD has also announced a platform solution. Additionally, we expect that Intel and AMD will extend this strategy to other segments, including the possibility of successfully integrating a central processing unit, or CPU, and a GPU on the same chip, as evidenced by AMD’s announcement of its Fusion processor project. If AMD and Intel continue to pursue platform solutions, we may not be able to successfully compete and our business would be negatively impacted.operations.
Risks Related to Our PartnersBusiness and CustomersIndustry
We depend on foundries 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 silicon wafers usedGlobal economic conditions have reduced demand for our products, adversely impacted our customers and do not own suppliers and harmed our business.
Our operations and performance depend significantly on worldwide economic conditions. Uncertainty about current global economic conditions poses a continuing risk to our business as consumers and businesses have postponed spending in response to tighter credit, negative financial news and/or operate a wafer fabrication facility. Instead, industry-leading foundries manufacture our semiconductor wafers using their state-of-the-art fabrication equipment and techniques. The foundries,declines in income or asset values, which have limited capacity, also manufacture products for other semiconductor companies, including some of our competitors. Since we do not have long-term commitment contracts with any of these foundries, they do not have an obligation to provide us with any minimum quantity of product at any time or at any set price, except as may be provided in a specific purchase order. Most of our products are only manufactured by one foundry at a time. In times of highreduced the demand the foundries could choose to prioritize their capacity for other companies, reduce or eliminate deliveries to us, or increase the prices that they charge us. If we are unable to meet customer demand due to reduced or eliminated deliveries or have to increase the prices of our products, we could lose sales to customers, which would negatively impact our revenue and our reputation.
Because the lead-time needed to establish a strategic relationship with a new manufacturing partner could be several quarters, we do not have an alternative source of supply for our products. In addition, the time and effort to qualify a new foundryOther factors that 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 acceptancedepress demand for our products will depend on reliable relationships within the third-party manufacturers we use to ensure adequate product supplyfuture include conditions in the residential real estate and competitive pricing to respond to customer demand.
Failure to achieve expected manufacturing yields for our products could negatively impact our financial resultsmortgage markets, labor and damage our reputation.
Manufacturing yields for our products are a function of product design, which is developed largely by us, and process technology, which typically is proprietary to the manufacturer. Low yields may result from either product design or process technology failure. We do not know a yield problem exists until our design is manufactured. When a yield issue is identified, the product is analyzed and tested to determine the cause. As a result, yield problems may not be 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 limitedhealthcare costs, access to wafer foundry capacity, decreases in manufacturing yields could result in an increase in our costscredit, consumer confidence, and force us to allocate our available product supply among our customers. Lower than expected yields could potentially harm customer relationships, our reputationother macroeconomic factors affecting consumer spending behavior. These and our financial results.
We are dependent on third parties for assembly, testing and packaging of our products, which reduces our control over the delivery schedule, product quantity or product quality.
Our products are assembled, tested and packaged by independent subcontractors, such as Advanced Semiconductor Engineering, Inc., Amkor Technology, JSI Logistics, Ltd., King Yuan Electronics Co., Siliconware Precision Industries Co. Ltd., and ChipPAC. As a result, we do not directly control our product delivery schedules, product quantity, or product quality. All of these subcontractors assemble, test and package products for other companies, including some of our competitors. Since we do noteconomic factors have long-term agreements with our subcontractors, when demand for subcontractors to assemble, test or package products is high, our subcontractors may decide to prioritize the orders of other customers over our orders. Since the time required to qualify a different subcontractor to assemble, test or package our products can be lengthy, if we have to find a replacement subcontractor we could experience significant delays in shipments of our products, product shortages, a decrease in the quality of our products, or an increase in product cost. Any product shortages or quality assurance problems could increase the costs of manufacture, assembly or testing of our products, which could cause our gross margin and revenue to decline.
Failure to transition to new manufacturing process technologies could adversely affect our operating results and gross margin.
We use the most advanced manufacturing process technology appropriate for our products that is available from our third-party foundries. As a result, we continuously evaluate the benefits of migrating our products to smaller geometry process technologies in order to improve performance and reduce costs. We believe this strategy will help us remain competitive. Our current product families are manufactured using 0.15 micron, 0.14 micron, 0.13 micron, 0.11 micron, 90 nanometer, 65 nanometer and 55 nanometer process technologies. Manufacturing process technologies are subject to rapid change and require significant expenditures for research and development, which could negatively impact our operating expenses and gross margin.
We have experienced difficulty in migrating to new manufacturing processes in the past and, consequently, have suffered reduced yields, delays in product deliveries and increased expense levels. We may face similar difficulties, delays and expenses as we continue to transition our new products to smaller geometry processes. Moreover, we are dependent on our third-party manufacturers to invest sufficient funds in new manufacturing techniques in order to have ample capacity for all of their customers and to develop the techniques in a timely manner. Our product cycles may also depend on our third-party manufacturers migrating to smaller geometry processes successfully and in time for us to meet our customer demands. Some of our competitors own their manufacturing facilities and may be able to move to a new state of the art manufacturing process more quickly or more successfully than our manufacturing partners. For example, Intel has released a 45 nanometer chip for desktop computers which it is manufacturing in its foundries. If our suppliers fall behind our competitors in manufacturing processes, the development and customer demand for our products and could further harm our business, financial condition and operating results.
The current financial turmoil affecting the usebanking system and financial markets and the possibility that financial institutions may consolidate or go out of business have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets. There could be a number of follow-on effects from the credit crisis on our business, including insolvency of key suppliers resulting in product delays; inability of customers, including channel partners, to obtain credit to finance purchases of our products and/or customer, including channel partner, insolvencies; and failure of financial institutions, which may negatively impact our treasury operations. Other income and expense could be negatively impacted. If we are forcedalso vary materially from expectations depending on gains or losses realized on the sale or exchange of financial instruments; impairment charges related to use larger geometric processesdebt securities as well as equity and other investments; interest rates; and cash, cash equivalent and marketable securities balances. The current volatility in manufacturingthe financial markets and overall economic uncertainty increases the risk that the actual amounts realized in the future on our financial instruments could differ significantly from the fair values currently assigned to them.
Our business is cyclical in nature and is currently experiencing a severe downturn, which has harmed and may continue to harm our financial results.
Our business is directly affected by market conditions in the highly cyclical semiconductor industry, which is currently experiencing a severe downturn. The semiconductor industry has been adversely affected by many factors, including the current global downturn, ongoing efforts by our customers to reduce their spending, diminished product thandemand, increased inventory levels, lower average selling prices, uncertainty regarding long-term growth rates and underlying financial health and increased competition. These factors, could, among other things, limit our competition,ability to maintain or increase our gross margin may be reduced. The inability by ussales or our third-party manufacturers to effectivelyrecognize revenue and efficiently transition to new manufacturing process technologies mayin turn adversely affect our business, operating results and financial condition. If our gross margin.actions to reduce our operating expenses to sufficiently offset these factors during this downturn are unsuccessful, our operating results will suffer.
We rely on third-party vendors Our revenue may fluctuate while our operating expenses are relatively fixed, which makes our results difficult to supply software development toolspredict and could cause our results to usfall short of expectations.
Demand for the developmentmany of our new productsrevenue components fluctuate and we may be unableare difficult to obtain the tools necessary to develop or enhance new or existing products.
We rely on third-party software development tools to assist us in the design, simulationpredict, and verification of new products or product enhancements. To bring new products or product enhancements to market in a timely manner, or at all, we need software development tools that are sophisticated enough or technologically advanced enough to complete our design, simulations and verifications. In the past, we have experienced delays in the introduction of products as a result of the inability of then available software development tools to fully simulate the complex features and functionalities of our products. In the future, the design requirements necessary to meet consumer demands for more features and greater functionality from our products may exceed the capabilities of available software development tools. Unavailability of software development tools may result in our missing design cycles or losing design wins either of which could result in a loss of market share or negatively impact our operating results.
Becauseexpenses are relatively fixed and largely independent of the importancerevenue. Therefore, it is difficult for us to accurately forecast revenue and profits or losses in any particular period. Our operating expenses, which are comprised of softwareresearch and development tools to the developmentexpenses, sales, general and enhancement of our products, a critical component of our product development efforts is our partnerships with leaders in the computer-aided design industry, including Cadence Design Systems, Inc.administrative expenses, represented 63% and Synopsys, Inc. We have invested significant resources to develop relationships with these industry leaders and have often assisted them in the definition of their new products. We believe that forming these relationships and utilizing next-generation development tools to design, simulate and verify our products will help us remain at the forefront of the 3D graphics, communications and networking segments and develop products that utilize leading-edge technology on a rapid basis. If these relationships are not successful, we may be unable to develop new products or product enhancements in a timely manner, which could result in a loss of market share, a decrease in revenue or negatively impact our operating results.
We sell our products to a small number of customers and our business could suffer if we lose any of these customers.
We have a limited number of customers and our sales are highly concentrated. Sales to a significant customer with revenue in excess of 10% of our total revenue, represented approximately 13% and 12% of our total revenue during the second quarter of fiscal years 2009 and 2008, respectively. Aggregate sales to our two largest customers accounted for approximately 21% and 16%27% of our total revenue for the first halfquarters of fiscal years 2010 and 2009, and 2008, respectively. AlthoughSince we often recognize a small number of our other customers represent the majoritysubstantial portion of our revenue their end customers includein the last month of each quarter, we may not be able to adjust our operating expenses in a large numbertimely manner in response to any unanticipated revenue shortfalls in any quarter. Further, some of original equipment manufacturers, or OEMs,our operating expenses, like stock-based compensation expense can only be adjusted over a longer period of time and system integrators throughout the world who, in many cases, specify the graphics supplier. Our sales process involves achieving key design wins with leading personal computer, or PC, OEMs and major system builders and supporting the product design into high volume production with key contract equipment manufacturers, or CEMs, original design manufacturers, or ODMs, add-in board and motherboard manufacturers. These design wins in turn influence the retail and system builder channel that is serviced by CEMs, ODMs, add-in board and motherboard manufacturers. Our distribution strategy is to work withcannot be reduced during a small number of leading independent CEMs, ODMs, add-in board and motherboard manufacturers, and distributors, each of which has relationships with a broad range of system builders and leading PC OEMs.quarter. If we were to lose sales to our PC OEMs, CEMs, ODMs, add-in board manufacturers and motherboard manufacturers and wereare unable to replace the lost sales with salesreduce operating expenses quickly in response to different customers, they were to significantly reduce the number of products they order from us, or we were unable to collect accounts receivable from them, ourany revenue may not reach or exceed the expected level in any period, which could harmshortfalls, our financial condition and our results of operations.
Any difficulties in collecting accounts receivable, including from foreign customers, could harm our operating results and financial condition.
Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers' businesses, and to downturns in the industry and the worldwide economy. One customer accounted for approximately 11% and 12% of our accounts receivable balance at July 27, 2008 and January 27, 2008, respectively.
Difficulties in collecting accounts receivable could materially and adversely affect our financial condition and results of operations. We continue to work directly with more foreign customers and it maywill be difficult to collect accounts receivable from them. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. If the financial condition of our customers were to deteriorate, resulting in an impairment in their ability to make payments, additional allowances may be required, we may be required to defer revenue recognition on sales to affected customers, and we may be required to pay higher credit insurance premiums, any of which could adversely affect our operating results. In the future, we may have to record additional reserves or write-offs and/or defer revenue on certain sales transactions which could negatively impact our financial results.
impacted.
Risks RelatedIn response to Our Businessthe current economic environment, we have commenced several cost reduction measures which are designed to reduce our operating expenses and Productswill continue to focus on reducing our operating expenses during the second quarter of fiscal year 2010. Please refer to the discussion in Note 3 to the Notes to the Consolidated Financial Statements for the impact of the tender offer related to the stock option purchase on operating expenses during the first quarter of fiscal year 2010.
IfAny one or more of the risks discussed in this Quarterly Report on Form 10-Q or other factors could prevent us from achieving our products contain significant defectsexpected future revenue or net income. Accordingly, we believe that period-to-period comparisons of our financialresults of operations should not be relied upon as an indication of future performance. Similarly, the results of any quarterly or full fiscal year period are not necessarily indicative of results to be expected for a subsequent quarter or a full fiscal year. As a result, it is possible that in some quarters our operating results could be negatively impacted, our reputation could be damaged and we could lose market share.
Our products are complex and may contain defectsbelow the expectations of securities analysts or experience failures due to any number of issues in design, fabrication, packaging, materials and/or use within a system. If any of our products or technologies contains a defect, compatibility issue or other error, we may have to invest additional research and development efforts to find and correct the issue. Such efforts could divert our management’s and engineers’ attention from the development of new products and technologies and could increase our operating costs and reduce our gross margin. In addition, an error or defect in new products or releases or related software drivers after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins. Also, we may be required to reimburse customers, including for customers’ costs to repair or replace the products in the field,investors, which could cause the trading price of our common stock to decline. We believe that our quarterly and annual results of operations may continue to be affected by a variety of factors that could harm our revenue, to decline. A product recall or a significant numbergross profit and results of product returns could be expensive, damage our reputation and could result in the shifting of business to our competitors. Costs associated with correcting defects, errors, bugs or other issues could be significant and could materially harm our financial results.
During our fiscal quarter ended July 27, 2008, we recorded a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other associated costs arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems. All of our newly manufactured products and all of our products that are currently shipping in volume have a different material set that we believe is more robust.
The previous generation MCP and GPU products that are impacted were included in a number of notebook products that were shipped and sold in significant quantities. Certain notebook configurations of these MCP and GPU products are failing in the field at higher than normal rates. While we have not been able to determine a root cause for these failures, testing suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors. We have worked with our customers to develop and have made available for download a software driver to cause the system fan to begin operation at the powering up of the system and reduce the thermal stress on these chips. We have also recommended to our customers that they consider changing the thermal management of the MCP and GPU products in their notebook system designs. We intend to fully support our customers in their repair and replacement of these impacted MCP and GPU products that fail, and their other efforts to mitigate the consequences of these failures.
We continue to engage in discussions with our supply chain regarding reimbursement to us for some or all of the costs we have incurred and may incur in the future relating to the weak material set. We also continue to seek to access our insurance coverage. However, there can be no assurance that we will recover any such reimbursement. We continue to not see any abnormal failure rates in any systems using NVIDIA products other than certain notebook configurations. However, we are continuing to test and otherwise investigate other products. There can be no assurance that we will not discover defects in other MCP or GPU products.
operations.
Our failure to estimate customer demand properly could adversely affect our financial results.
Our We manufacture our products based on forecasts of customer demand in order to have shorter shipment lead times and quicker delivery schedules for our customers. As a result, we may build inventories for anticipated periods of growth which do not occur or may build inventory purchases are based upon futureanticipating demand forecasts or orders fromfor a product that does not materialize. The current negative worldwide economic conditions and market instability makes it increasingly difficult for us, our customers and may notour suppliers to accurately predict the quantity or type of products that our customers will want or will ultimately purchase.forecast future product demand trends. In forecasting demand, we make multiple assumptions any of which may prove to be incorrect. Situations that may result in excess or obsolete inventory which could result in write-downs of the value of our inventory and/or a reduction in average selling prices, and where our gross margin could be adversely affected include:
· | if there were a sudden and significant decrease in demand for our products; |
· | if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements; |
· | if we fail to estimate customer demand properly for our older products as our newer products are introduced; or |
· | if our competition were to take unexpected competitive pricing actions. |
Conversely, if we underestimate our customers’ demand for our products, our third party manufacturing partners may not have adequate capacity to increase production for us meaning that we may not be able to obtain sufficient inventory to fill our customers’ orders on a timely basis. Even if we are able to increase production levels to meet customer demand, we may not be able to do so in a cost effective or timely manner. Inability to fulfill our customers’ orders on a timely basis, or at all, could damage our customer relationships, result in lost revenue, cause a loss in market share, impact our customer relationships or damage our reputation, any of which could adversely impact our business.
Because we order products or materials in advance of anticipated customer demand, our ability to reduce our inventory purchase commitments quickly in response to lower than expected demand is limited.
We manufacture our products based on forecasts of customer demand in order to have shorter shipment lead times for our customers. As a result, we may build inventories for anticipated periods of growth which do not occur or may build inventory anticipating demand for a product that does not materialize. Any inability to sell products to which we have devoted resources could harm our business. In addition, cancellation or deferral of customer purchase orders could result in our holding excess inventory, which could adversely affect our gross margin and restrict our ability to fund operations. Additionally, because we often sell a substantial portion of our products in the last month of each quarter, we may not be able to reduce our inventory purchase commitments in a timely manner in response to customer cancellations or deferrals. We could be subject to excess or obsolete inventories and be required to take corresponding inventory write-downs and/or a reduction in average selling prices if growth slows or does not materialize, or if we incorrectly forecast product demand, which could negatively impact our financial results.
Conversely, if we underestimate our customers’ demand for our products, our third party manufacturing partners may not have adequate lead-time or capacity to increase production for us meaning that we may not be able to obtain sufficient inventory to fill our customers’ orders on a timely basis. Even if we are able to increase production levels to meet customer demand, we may not be able to do so in a cost effective or timely manner. Inability to fulfill our customers’ orders on a timely basis, or at all, could damage our customer relationships, result in lost revenue, cause a loss in market share, impact our customer relationships or damage our reputation, any of which could adversely impact our business.
Because our gross margin for any period depends on a number of factors, our failure to forecast changes in any of these factors could adversely affect our gross margin.
We are focused on improving our gross margin. Our gross margin for any period depends on a number of factors, including:
· | the mix of our products sold; |
· | average selling prices; |
· | introduction of new products; |
· | product transitions; |
· | sales discounts; |
· | unexpected pricing actions by our competitors; |
· | the cost of product components; and |
· | the yield of wafers produced by the foundries that manufacture our products. |
If we do not correctly forecast the impact of any of the relevant factors on our business, there may not be any actions we can take or we may not be able to take any possible actions in time to counteract any negative impact on our gross margin. For example, our gross margin declined to 28.6% during the first quarter of fiscal year 2010 as compared to 44.6% from the first quarter of fiscal year 2009. During the first quarter of fiscal year 2010, the revenue and gross margins from our sale of desktop products decreased when compared to the revenue and gross margins during the first quarter of fiscal year 2009 primarily due to a decline in the Standalone Desktop market segment as reported in the May 2009 PC Graphics Report from Mercury Research. This decline was driven by a combination of market migration from desktop PCs towards notebook PCs and an overall market shift in the mix of products towards lower priced products. If the overall shift in the demand from the consumer continues to shift towards lower priced products, it will have an adverse impact on our gross margin.
If we are unable to compete in the markets for our products, our financial results could be adversely impacted.
The market for GPUs, MCPs, and computer-on-a-chip products that support netbooks, PNDs, PMPs, PDAs, cellular phones or other handheld devices is intensely competitive and is characterized by rapid technological change, new product introductions, evolving industry standards and declining average selling prices. We believe that the principal competitive factors in this market are performance, breadth of product offerings, access to customers and distribution channels, software support, conformity to industry standard Application Programming Interface, or APIs, manufacturing capabilities, price of processors, and total system costs. 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 from both existing competitors and new market entrants with products that may be less costly than ours, or may provide better performance or additional features not provided by our products. In addition, it is possible that new competitors or alliances among competitors could emerge and acquire significant market share. We believe other factors impacting our ability to compete are:
· | product performance; |
· | product bundling by competitors with multiple product lines; |
· | breadth and frequency of product offerings; |
· | access to customers and distribution channels; |
· | backward-forward software support; |
· | conformity to industry standard application programming interfaces; and |
· | manufacturing capabilities. |
A significant source of competition is from companies that provide or intend to provide GPU, MCP, and computer-on-a-chip products that support netbooks, PNDs, PMPs, PDAs, cellular phones or other handheld devices. 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. Currently, Intel Corporation, or Intel, which has greater resources than we do, is working on a multi-core architecture code-named Larrabee, which may compete with our products in various markets. Intel may also release an enthusiast level discrete GPU based on the Larrabee architecture. Additionally, in fiscal year 2009, Intel also introduced the Intel Atom processor which is designed for lower cost PCs. Intel may also release a second generation of Atom chips by 2010 which is expected to have an improved battery life. The Intel Atom processor may compete with our products that support netbooks, PDAs, cellular phones and other handheld devices.
Our current competitors include the following:
· | suppliers of discrete MCPs that incorporate a combination of networking, audio, communications and input/output, or I/O, functionality as part of their existing solutions, such as AMD, Broadcom Corporation, or Broadcom, Silicon Integrated Systems, Inc., or SIS, VIA Technologies, Inc., or VIA, and Intel; |
· | suppliers of GPUs, including MCPs that incorporate 3D graphics functionality as part of their existing solutions, such as AMD, Intel, Matrox Electronics Systems Ltd., SIS, and VIA; |
· | suppliers of computer-on-a-chip products that support netbooks, PNDs, PMPs, PDAs, cellular phones or other handheld devices such as AMD, Broadcom, Fujitsu Limited, Imagination Technologies Ltd., ARM Holdings plc, Marvell Technology Group Ltd, or Marvell, NEC Corporation, Qualcomm Incorporated, Renesas Technology, Samsung, Seiko-Epson, Texas Instruments Incorporated, and Toshiba America, Inc.; and |
· | suppliers of computer-on-a-chip products for handheld and embedded devices that incorporate multimedia processing as part of their existing solutions such as Broadcom, Texas Instruments Inc., Qualcomm Incorporated, Marvell, Freescale Semiconductor Inc., Renesas Technology, Samsung, and ST Microelectronics. |
If and to the extent we offer products in new markets, we may face competition from some of our existing competitors as well as from companies with which we currently do not compete. For example, in the case of our CPB, our Tegra and GoForce products primarily compete in architecture used in multimedia cellular phones and handheld devices. We believe that mobile devices like phones, music players, and portable navigation devices will increasingly become more consumer PC-like and be capable of delivering all the entertainment and web experiences in a handheld device. We cannot accurately predict if we will compete successfully in any of the new markets we may enter. If we are unable to compete in our current or new markets, demand for our products could decrease which could cause our revenue to decline and our financial results to suffer.
Our GPU and MCP products are currently used with both Intel and AMD processors. In February 2009, Intel filed suit against us, related to a patent license agreement that we signed with Intel in 2004. Intel seeks an order from the court declaring that the license does not extend to a new Intel processor architecture and enjoining us from stating that we have licensing rights for this architecture. If Intel successfully obtains such a court order, we could be unable to sell our MCP products for use with these Intel processors and our competitive position would be harmed. In addition, in order to continue to sell MCP products for use with these Intel processors we could be required to negotiate a new license agreement with Intel and we may not be able to do so on reasonable terms, if at all.
We are dependent on the personal computer market and its rate of growth in the future may have a negative impact on our business.
We derive and expect to continue to derive the majority of our revenue from the sale or license of products for use in the desktop personal computer, or PC, and notebook PC markets, including professional workstations. A reduction in sales of PCs, or a reduction in the growth rate of PC sales, may reduce demand for our products. These changes in demand could be large and sudden. During first quarter of fiscal year 2010, sales of our desktop GPU products decreased by approximately 48% compared to the first quarter of fiscal year 2009. These decreases were primarily due to the Standalone Desktop GPU market segment decline as reported in the May 2009 PC Graphics Report from Mercury Research. Since PC manufacturers often build inventories during periods of anticipated growth, they may be left with excess inventories if growth slows or if they incorrectly forecast product transitions. In these cases, PC manufacturers may abruptly suspend substantially all purchases of additional inventory from suppliers like us until their excess inventory has been absorbed, which would have a negative impact on our financial results.
As Intel and AMD continue to pursue platform solutions, we may not be able to successfully compete and our business would be negatively impacted.
We expect substantial competition from both Intel’s and AMD’s strategy of selling platform solutions, such as the success Intel achieved with its Centrino platform solution. AMD has also announced a platform solution. Additionally, we expect that Intel and AMD will extend this strategy to other segments, including the possibility of successfully integrating a central processing unit, or CPU, and a GPU on the same chip, as evidenced by AMD’s announcement of its Fusion processor project. If AMD and Intel continue to pursue platform solutions, we may not be able to successfully compete and our business would be negatively impacted.
If our products contain significant defects our financial results could be negatively impacted, our reputation could be damaged and we could lose market share.
Our products are complex and may contain defects or experience failures due to any number of issues in design, fabrication, packaging, materials and/or use within a system. If any of our products or technologies contains a defect, compatibility issue or other error, we may have to invest additional research and development efforts to find and correct the issue. Such efforts could divert our engineers’ attention from the development of new products and technologies and could increase our operating costs and reduce our gross margin. In addition, an error or defect in new products or releases or related software drivers after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins. Also, we may be required to reimburse customers, including our customers’ costs to repair or replace products in the field. A product recall or a significant number of product returns could be expensive, damage our reputation, could result in the shifting of business to our competitors and could result in litigation against us. Costs associated with correcting defects, errors, bugs or other issues could be significant and could materially harm our financial results. For example, during the second quarter of fiscal year 2009, we recorded a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other associated costs arising from a weak die/packaging material set in certain versions of our previous generation media and communications processor, or MCP, and GPU products used in notebook systems. In September, October and November 2008, several putative class action lawsuits were filed against us, asserting various claims related to the impacted MCP and GPU products. Please refer to the risk entitled “We are subject to litigation arising from alleged defects in our previous generation MCP and GPU products, which if determined adversely to us, could harm our business” for the risk associated with this litigation.
If our products do not continue to be adopted by the desktop PC, notebook PC, workstation, high-performance computing, netbook, personal media player, or PMP, personal digital assistant, or PDA, cellular handheld device, and video game console markets or if the demand for new and innovative products in these markets decreases, our business and operating results would suffer.
Our success depends in part upon continued broad adoption of our processors for 3D graphics and multimedia in desktop PC, notebook PC, workstation, high-performance computing, netbooks, PMPs, PDAs, cellular handheld devices, and video game console applications. The market for processors has been characterized by unpredictable and sometimes rapid shifts in the popularity of products, often caused by the publication of competitive industry benchmark results, changes in pricing of dynamic random-access memory devices and other changes in the total system cost of add-in boards, as well as by severe price competition and by frequent new technology and product introductions. Broad market acceptance is difficult to achieve and such market acceptance, if achieved, is difficult to sustain due to intense competition and frequent new technology and product introductions. Our GPU and MCP businesses together comprised approximately 82% and 78% of our revenue during the first quarters of fiscal years 2010 and 2009, respectively. As such, our financial results would suffer if for any reason our current or future GPUs or MCPs do not continue to achieve widespread adoption by the PC market. If we are unable to complete the timely development of new products or if we were unable to successfully and cost-effectively manufacture and deliver products that meet the requirements of the desktop PC, notebook PC, workstation, high-performance computing, netbook, PMP, PDA, cellular phone, and video game console markets, we may experience a decrease in revenue which could negatively impact our operating results.
Additionally, there can be no assurance that the industry will continue to demand new products with improved standards, features or performance. If our customers, OEMs, ODMs, add-in-card and motherboard manufacturers, system builders and consumer electronics companies, do not continue to design products that require more advanced or efficient processors and/or the market does not continue to demand new products with increased performance, features, functionality or standards, sales of our products could decline and the markets for our products could shrink. Decreased sales of our products for these markets could negatively impact our revenue and our financial results.
We are subject to risks associated with international operations which may harm our business.
We conduct our business worldwide. Our semiconductor wafers are manufactured, assembled, tested and packaged by third-parties located outside of the United States. We generated 92% of our revenue for both the first quarter of fiscal year 2010 and the first quarter of fiscal year 2009 from sales to customers outside the United States. As of April 26, 2009, we had offices in fifteen countries outside of the United States. The manufacture, assembly, test and packaging of our products outside of the United States, operation of offices outside of the United States, and sales to customers internationally subjects us to a number of risks, including:
· | international economic and political conditions, such as political tensions between countries in which we do business; |
· | unexpected changes in, or impositions of, legislative or regulatory requirements; |
· | complying with a variety of foreign laws; |
· | differing legal standards with respect to protection of intellectual property and employment practices; |
· | cultural differences in the conduct of business; |
· | inadequate local infrastructure that could result in business disruptions; |
· | exporting or importing issues related to export or import restrictions, tariffs, quotas and other trade barriers and restrictions; |
· | financial risks such as longer payment cycles, difficulty in collecting accounts receivable and fluctuations in currency exchange rates; |
· | imposition of additional taxes and penalties; and |
· | other factors beyond our control such as terrorism, civil unrest, war and diseases such as severe acute respiratory syndrome and the Avian flu. |
If sales to any of our customers outside of the United States and other Americas are delayed or cancelled because of any of the above factors, our revenue may be negatively impacted.
Our international operations in Australia, China, Finland, France, Germany, Hong Kong, India, Japan, Korea, Russia, Singapore, Sweden, Switzerland, Taiwan, and the United Kingdom are subject to many of the above listed risks. Difficulties with our international operations, including finding appropriate staffing and office space, may divert management’s attention and other resources any of which could negatively impact our operating results.
The economic conditions in our primary overseas markets, particularly in Asia, may negatively impact the demand for our products abroad. All of our international sales to date have been denominated in United States dollars. Accordingly, an increase in the value of the United States dollar relative to foreign currencies could make our products less competitive in international markets or require us to assume the risk of denominating certain sales in foreign currencies. We anticipate that these factors will impact our business to a greater degree as we further expand our international business activities.
Our business results could be adversely affected if the identification and development of new products or entry into or development of a new market is delayed or unsuccessful.
In order to maintain or improve our financial results, we will need to continue to identify and develop new products as well as identify and enter new markets. As our GPUs and other processors develop and competition increases, we anticipate that product life cycles at the high end will remain short and average selling prices will decline. In particular, average selling prices and gross margins for our GPUs and other processors could decline as each product matures and as unit volume increases. As a result, we will need to introduce new products and enhancements to existing products to maintain or improve overall average selling prices, our gross margin and our financial results. We believe the success of our new product introductions will depend on many factors outlined elsewhere in these risk factors as well as the following:
· | market demand for new products and enhancements to existing products; |
· | timely completion and introduction of new product designs and new opportunities for existing products; |
· | seamless transitions from an older product to a new product; |
· | differentiation of our new products from those of our competitors; |
· | delays in volume shipments of our products; |
· | market acceptance of our products instead of our customers' products; and |
· | availability of adequate quantity and configurations of various types of memory products. |
In the past, we have experienced delays in the development and adoption of new products and have been unable to successfully manage product transitions from older to newer products resulting in obsolete inventory.
To be successful, we must also enter new markets or develop new uses for our future or existing products. We cannot accurately predict if our current or existing products or technologies will be successful in the new opportunities or markets that we identify for them or that we will compete successfully in any new markets we may enter. For example, we have developed products and other technology in order for certain general-purpose computing operations to be performed on a GPU rather than a CPU. This general purpose computing, which is often referred to as GP computing, was a new use for the GPU which had been entirely used for graphics rendering. During our fiscal year 2008, we introduced our NVIDIA Tesla family of products, which was our entry into the high-performance computing industry, a new market for us. We also offer our CUDA software development solution, which is a C language programming environment for GPUs, that allows parallel computing on the GPU by using standard C language to create programs that process large quantities of data in parallel. Some of our competitors, including Intel, are now developing their own solutions for the discrete graphics and computing markets. Our failure to successfully develop, introduce or achieve market acceptance for new GPUs, other products or other technologies or to enter into new markets or identify new uses for existing or future products, could result in rapidly declining average selling prices, reduced demand for our products or loss of market share any of which could cause our revenue, gross margin and overall financial results to suffer.
If we are unable to achieve design wins, our products may not be adopted by our target markets or customers either of which could negatively impact our financial results.
The success of our business depends to a significant extent on our ability to develop new competitive products for our target markets and customers. We believe achieving design wins, which entails having our existing and future products chosen for hardware components or subassemblies designed by OEMs, ODMs, add-in board and motherboard manufacturers, areis an integral part of our future success. Our OEM, ODM, and add-in board and motherboard manufacturers’ customers typically introduce new system configurations as often as twice per year, typically based on spring and fall design cycles or in connection with trade shows. Accordingly, when our customers are making their design decisions, our existing products must have competitive performance levels or we must timely introduce new products in order to be included in our customers’ new system configurations. This requires that we:
· | anticipate the features and functionality that customers and consumers will demand; |
· | incorporate those features and functionalities into products that meet the exacting design requirements of our customers; |
· | price our products competitively; and |
· | introduce products to the market within our customers’ limited design cycles. |
If OEMs, ODMs, and add-in board and motherboard manufacturers do not include our products in their systems, they will typically not use our products in their systems until at least the next design configuration. Therefore, we endeavor to develop close relationships with our OEMs and ODMs, in an attempt to better anticipate and address customer needs in new products so that we will achieve design wins.
Our ability to achieve design wins also depends in part on our ability to identify and be compliant with evolving industry standards. Unanticipated changes in industry standards could render our products incompatible with products developed by major hardware manufacturers and software developers like AMD, Intel and Microsoft Corporation, or Microsoft. If our products are not in compliance with prevailing industry standards, we may not be designed into our customers’ product designs. However, to be compliant with changes to industry standards, we may have to invest significant time and resources to redesign our products which could negatively impact our gross margin or operating results. If we are unable to achieve new design wins for existing or new customers, we may lose market share and our operating results would be negatively impacted.
We may have to invest more resources in research and development than anticipated, which could increase our operating expenses and negatively impact our operating results.
If new competitors, technological advances by existing competitors, our entry into new markets, or other competitive factors require us to invest significantly greater resources than anticipated in our research and development efforts, our operating expenses would increase. We have increased our engineering and technical resources and had 3,876 and 2,8653,816 full-time employees engaged in research and development as of JulyApril 26, 2009, compared to 3,683 employees as of April 27, 2008 and July 29, 2007, respectively.2008. Research and development expenditures were $212.9 and $158.0 million for the second quarter of fiscal years 2009 and 2008, respectively and $431.7$301.8 million and $316.3$218.8 million, for the first halfquarters of fiscal years 20092010 and 2008,2009, respectively. Research and development expenses included non-cash stock-based compensation expense of $24.2$21.3 million and $16.4$24.5 million forrelated to on-going vesting of equity awards during the secondfirst quarters of fiscal years 2010 and 2009, respectively. Additionally, during the first quarter of fiscal years 2009year 2010, research and 2008, respectively and $48.8development expenses included stock-based compensation of $90.5 million and $38.8 million forrelated to the first halfpurchase of fiscal years 2009 and 2008, respectively.certain outstanding options that were tendered in March 2009. If we are required to invest significantly greater resources than anticipated in research and development efforts without a corresponding increase in revenue, our operating results could further decline. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental investments in research and development and these investments may be independent of our level of revenue which could negatively impact our financial results. In order to remain competitive, we anticipate that we will continue to devote substantial resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexitydevelopment.
We are dependent on key employees and the greater numberloss of products under development.
Because our gross margin for any period depends on a number of factors, our failure to forecast changes in any of these factorsemployees could adversely affectnegatively impact our gross margin.business.
We are focusedOur future success and ability to compete is substantially dependent on improving our gross margin. Our gross marginability to identify, hire, train and retain highly qualified key personnel. The market for any period depends on a number of factors, including:
·
| the mix of our products sold; |
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| average selling prices; |
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| introduction of new products; |
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| product transitions; |
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| sales discounts; |
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| unexpected pricing actions by our competitors; |
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| the cost of product components; and |
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| the yield of wafers produced by the foundries that manufacture our products. |
Duringkey employees in the second quarter of fiscal year 2009, our gross margin declined significantly to 16.8% as compared to 45.3% during the second quarter of fiscal year 2008 and 44.6% during the first quarter of fiscal year 2009. The decline in gross margin for the second quarter of fiscal year 2009 reflects a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and associated costs arising from a weak die/packaging material set in certain versionssemiconductor industry can be competitive. None of our previous generation MCP and GPUkey employees is bound by an employment agreement, meaning our relationships with all of our key employees are at will. The loss of the services of any of our other key employees without an adequate replacement or our inability to hire new employees as needed could delay our product development efforts, harm our ability to sell our products usedor otherwise negatively impact our business.
In September 2008, we reduced our global workforce by approximately 6.5% as part of our efforts to allow continued investment in notebook systems, as well as the impact of average sales price regression we experiencedstrategic growth areas. This reduction in our desktop GPU productsworkforce may impair our ability to recruit and retain qualified employees of our workforce as a result of increased competition.a perceived risk of future workforce reductions. Employees, whether or not directly affected by the reduction, may also seek future employment with our business partners, customers or competitors. In addition, we rely on stock-based awards as one means for recruiting, motivating and retaining highly skilled talent. If we dothe value of such stock awards does not correctly forecastappreciate as measured by the impact of anyperformance of the relevant factors onprice of our business, there may notcommon stock or if our share-based compensation otherwise ceases to be any actions we can take or we may notviewed as a valuable benefit, our ability to attract, retain, and motivate employees could be able to take any possible actionsweakened, which could harm our results of operations. The significant decline in time to counteract any negative impact on our gross margin. In addition, if we are unable to meet our gross margin target for any period or the target set by analysts, the trading price of our common stock has resulted in the exercise price of a significant portion of our outstanding options to significantly exceed the current trading price of our common stock, thus lessening the effectiveness of these stock-based awards. We may decline.not continue to successfully attract and retain key personnel which would harm our business.
We may not be able to realize the potential financial or strategic benefits of business acquisitions or strategic investments, which could hurt our ability to grow our business, develop new products or sell our products.
We have acquired and invested in other businesses that offered products, services and technologies that we believe will help expand or enhance our existing products and business. We may enter into future acquisitions of, or investments in, businesses, in order to complement or expand our current businesses or enter into a new business market. Negotiations associated with an acquisition or strategic investment could divert management’s attention and other company resources. Any of the following risks associated with past or future acquisitions or investments could impair our ability to grow our business, develop new products, our ability to sell our products, and ultimately could have a negative impact on our growth or our financial results:
· | difficulty in combining the technology, products, operations or workforce of the acquired business with our business; |
· | difficulty in operating in a new or multiple new locations; |
· | disruption of our ongoing businesses or the ongoing business of the company we invest in or acquire; |
· | difficulty in realizing the potential financial or strategic benefits of the transaction; |
· | difficulty in maintaining uniform standards, controls, procedures and policies; |
· | disruption of or delays in ongoing research and development efforts; |
· | diversion of capital and other resources; |
· | assumption of liabilities; |
· | diversion of resources and unanticipated expenses resulting from litigation arising from potential or actual business acquisitions or investments; |
· | difficulties in entering into new markets in which we have limited or no experience and where competitors in such markets have stronger positions; and |
· | impairment of relationships with employees and customers, or the loss of any of our key employees or customers of our target’s key employees or customers, as a result of our acquisition or investment. |
In addition, the consideration for any future acquisition could be paid in cash, shares of our common stock, the issuance of convertible debt securities or a combination of cash, convertible debt and common stock. If we make an investment in cash or use cash to pay for all or a portion of an acquisition, our cash reserves would be reduced which could negatively impact the growth of our business or our ability to develop new products. However, if we pay the consideration with shares of common stock, or convertible debentures, the holdings of our existing stockholders would be diluted. The significant decline in the trading price of our common stock would make the dilution to our stockholders more extreme and could negatively impact our ability to pay the consideration with shares of common stock or convertible debentures. We cannot forecast the number, timing or size of future strategic investments or acquisitions, or the effect that any such investments or acquisitions might have on our operations or financial results.
We are dependent on key employees and the loss of any of these employees could negatively impact our business.
Our future success and ability to compete is substantially dependent on our ability to identify, hire, train and retain highly qualified key personnel. The market for key employees in the semiconductor industry can be competitive. None of our key employees is bound by an employment agreement, meaning our relationships with all of our key employees are at will. For instance, Marvin D. Burkett, Chief Financial Officer, or CFO, informed us on March 21, 2008 of his intention to retire. Mr. Burkett is expected to remain as CFO while a search is conducted to find his replacement, and he may continue in some capacity with us thereafter. We are in the process of recruiting a new CFO. The loss of the services of Mr. Burkett or any of our other key employees without an adequate replacement or our inability to hire new employees as needed could delay our product development efforts, harm our ability to sell our products or otherwise negatively impact our business.
Our operating expenses are relatively fixed and we may not be able to reduce operating expenses quickly in response to any revenue shortfalls.
Our operating expenses, which are comprised of research and development expenses and sales, general and administrative expenses, represented 34% and 26% of our total revenue for the second quarter of fiscal years 2009 and 2008, respectively and 30% and 27% for the first half of fiscal years 2009 and 2008, respectively. Operating expenses included stock-based compensation expense of $37.0 million and $26.8 million for the second quarter of fiscal years 2009 and 2008, respectively and $76.0 million and $61.4 million for the first half of fiscal years 2009 and 2008, respectively. Since we often recognize a substantial portion of our revenue in the last month of each quarter, we may not be able to adjust our operating expenses in a timely manner in response to any unanticipated revenue shortfalls in any quarter as was in the case of the second quarter of fiscal year 2009. Further, some of our operating expenses, like non-cash stock-based compensation expense can only be adjusted over a longer period of time and cannot be reduced during a quarter. If we are unable to reduce operating expenses quickly in response to any revenue shortfalls, our financial results would be negatively impacted.
Expensing employee equity compensation materially and adversely affects our reported operating results and could also adversely affect our competitive position.
Since inception, we have used equity through our stock option plans and our employee stock purchase program as a fundamental component of our compensation packages. We believe that these programs directly motivate our employees and, through the use of vesting, encourage our employees to remain with us. As a result of adjustments arising from our restatement related to stock option grant dates, our operating results for fiscal years prior to fiscal year 2007 contain recorded amounts of non-cash stock-based compensation expense. For our fiscal years 2000 through 2006, this non-cash stock-based compensation expense was calculated using primarily the intrinsic value-based method under Accounting Principles Board Opinion No. 25, or APB 25, Accounting for Stock Issued to Employees and related interpretations.
In December 2004, the FASB issued SFAS No. 123(R) which requires the measurement and recognition of compensation expense for all stock-based compensation payments. SFAS No. 123(R) requires that we record compensation expense for stock options and our employee stock purchase plan using the fair value of those awards. Stock-based compensation expense resulting from our compliance with SFAS No. 123(R), included $40.4 million and $29.5 million for the second quarter of fiscal years 2009 and 2008, respectively and $82.5 and $66.9 million for the first half of fiscal years 2009 and 2008, respectively, which negatively impacted our operating results. We believe that SFAS No. 123(R) will continue to negatively impact our operating results.
To the extent that SFAS No. 123(R) makes it more expensive to grant stock options or to continue to have an employee stock purchase program, we may decide to incur increased cash compensation costs. In addition, actions that we may take to reduce stock-based compensation expense that may be more severe than any actions our competitors may implement and may make it difficult to attract retain and motivate employees, which could adversely affect our competitive position as well as our business and operating results.
We may be required to record a charge to earnings if our goodwill or amortizable intangible assets become impaired, which could negatively impact our operating results.
Under accounting principles generally accepted in the United States, we review our amortizable intangible assets and goodwill for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment at least annually. The carrying value of our goodwill or amortizable assets may not be recoverable due to factors such as a decline in stock price and market capitalization, reduced estimates of future cash flows and slower growth rates in our industry or in any of our business units. Estimates of future cash flows are based on an updated long-term financial outlook of our operations. However, actual performance in the near-term or long-term could be materially different from these forecasts, which could impact future estimates. For example, if one of our business units does not meet its near-term and longer-term forecasts, the goodwill assigned to the business unit could be impaired. We may be required to record a charge to earnings in our financial statements during a period in which an impairment of our goodwill or amortizable intangible assets is determined to exist, which may negatively impact our results of operations.
Our operating results are unpredictable and may fluctuate, and if our operating results are below the expectations of securities analysts or investors, the trading price of our stock could decline.
Many of our revenue components fluctuate and are difficult to predict, and our operating expenses are largely independent of revenue. Therefore, it is difficult for us to accurately forecast revenue and profits or losses in any particular period.
Any one or more of the risks discussed in this Quarterly Report on Form 10-Q or other factors could prevent us from achieving our expected future revenue or net income. Accordingly, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of future performance. Similarly, the results of any quarterly or full fiscal year period are not necessarily indicative of results to be expected for a subsequent quarter or a full fiscal year.
As a result, it is possible that in some quarters our operating results could be below the expectations of securities analysts or investors, which could cause the trading price of our common stock to decline. We believe that our quarterly and annual results of operations may continue to be affected by a variety of factors that could harm our revenue, gross profit and results of operations.
Risks related to Market Conditions
We are exposed to credit risk, fluctuations in the market values of our portfolio investments and in interest rates.
At July 27, 2008 and January 27, 2008, we had $1.66 billion and $1.81 billion, respectively, in cash, cash equivalents and marketable securities. We invest in a variety of financial instruments, consisting principally of cash and cash equivalents, asset-backed securities, commercial paper, mortgage-backed securities issued by Government-sponsored enterprises, equity securities, money market funds and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. As of July 27, 2008, we did not have any investments in auction-rate preferred securities. All of our 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 ourthe cash equivalents and marketable securities are treated as “available-for-sale” under SFAS No. 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded debt or equity investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in securities market value due to changes in interest rates. Future declines in the market values of our cash, cash equivalents and marketable securities could have a material adverse effect on our financial condition and operating results. However, because any debt securities we hold are classified as “available-for-sale,” no gains or losses are realized in our condensed consolidated statementsConsolidated Statements of incomeOperations due to changes in interest rates unless such securities are sold prior to maturity or unless declines in value are determined to be other-than-temporary. These securities are reported at fair value with the related unrealized gains
At April 26, 2009 and losses includedJanuary 25, 2009, we had $1.34 billion and $1.26 billion, respectively, in accumulated other comprehensive income, a component of stockholders’ equity, net of tax.
Recent U.S. sub-prime mortgage defaults have had a significant impact across various sectors of the financial markets, causing global creditcash, cash equivalents and liquidity issues. The short-term funding markets experienced issues since the third and fourth quarter of calendar 2007, leading to liquidity disruption in the market. Ifmarketable securities. Given the global credit market continues to deteriorate,nature of our investment portfolio may be impactedbusiness, we have invested both domestically and we could determine someinternationally. All of our investments are impaired,denominated in United States dollars. We invest in a variety of financial instruments, consisting principally of cash and cash equivalents, asset-backed securities, commercial paper, mortgage-backed securities issued by Government-sponsored enterprises, equity securities, money market funds and debt securities of corporations, municipalities and the United States government and its agencies. As of April 26, 2009, we did not have any investments in auction-rate preferred securities. As of April 26, 2009, our investments in government agencies and government sponsored enterprises represented approximately 63% of our total cash equivalents and marketable securities, while the financial sector accounted for approximately 14% of our total cash equivalents and marketable securities.
The current volatility in the financial markets and overall economic uncertainty increases the risk that the actual amounts realized in the future on our financial instruments could differ significantly from the fair values currently assigned to them. Other income and expense could also vary materially from expectations depending on gains or losses realized on the sale or exchange of financial instruments; impairment charges related to debt securities as well as equity and other investments; interest rates; and cash, cash equivalent and marketable securities balances. For instance, we recorded $5.6 million related to what we believe is an other than temporary impairment of our investment in the money market funds held by the International Reserve Fund during the third quarter of fiscal year 2009. Please refer to Notes 6 and 7 of these Notes to Condensed Consolidated Financial Statements for further details. As of April 26, 2009, our money market investment in the International Reserve Fund, which was valued at $40.0 million, net of $5.6 million of other than temporary impairment charges that we recorded during fiscal year 2009, was classified as marketable securities in our Condensed Consolidated Balance Sheet due to the halting of redemption requests in September 2008 by the International Reserve Fund. The $40.0 million value of our holdings in the International Reserve Fund as of April 26, 2009 reflects an initial investment of $130.0 million, reduced by $84.4 million that we received from the International Reserve Fund during the first quarter of fiscal 2010 and the $5.6 million other than temporary impairment charge we recorded against the value of this investment during fiscal year 2009. The $84.4 million we received was our portion of a payout of approximately 65% of the total assets of the International Reserve Fund. We expect to receive the proceeds from our remaining investment in the International Reserve Fund, excluding some or all of the $5.6 million, by October 2009, when all of the underlying securities held by the International Reserve Fund are scheduled to have matured. However, redemptions from the International Reserve Fund are currently subject to pending litigation, which could adverselycause further delay in receipt of our funds. In addition, we may determine that further impairment of our investment in the International Reserve Fund may be necessary.
Risks Related to Our Partners and Customers
We depend on foundries 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 silicon wafers used for our products and do not own or operate a wafer fabrication facility. Instead, we are dependent on industry-leading foundries, such as Taiwan Semiconductor Manufacturing Corporation, or TSMC, to manufacture our semiconductor wafers using their state-of-the-art fabrication equipment and techniques. The foundries, which have limited capacity, also manufacture products for other semiconductor companies, including some of our competitors. Since we do not have long-term commitment contracts with any of these foundries, they do not have an obligation to provide us with any minimum quantity of product at any time or at any set price, except as may be provided in a specific purchase order. Most of our products are only manufactured by one foundry at a time. In times of high demand, the foundries could choose to prioritize their capacity for other companies, reduce or eliminate deliveries to us, or increase the prices that they charge us. If we are unable to meet customer demand due to reduced or eliminated deliveries or have to increase the prices of our products, we could lose sales to customers, which would negatively impact our revenue and our reputation.
Because the lead-time needed to establish a strategic relationship with a new manufacturing partner could be several quarters, we do not have an alternative source of supply for our products. In addition, the time and effort to qualify a new foundry could result in additional expense, diversion of resources, or lost sales, any of which would negatively impact our financial results. We believe that long-term market acceptance for our products will depend on reliable relationships with the third-party manufacturers we use to ensure adequate product supply and competitive pricing to respond to customer demand.
Failure to achieve expected manufacturing yields for our products could negatively impact our financial results and damage our reputation.
Manufacturing yields for our products are a function of product design, which is developed largely by us, and process technology, which typically is proprietary to the manufacturer. Low yields may result from either product design or process technology failure. We do not know a yield problem exists until our design is manufactured. When a yield issue is identified, the product is analyzed and tested to determine the cause. As a result, yield problems may not be identified until well into the production process. Resolution of July 27, 2008,yield problems requires cooperation by, and communication between, us and the manufacturer. Because of our investmentspotentially limited access to wafer foundry capacity, decreases in manufacturing yields could result in an increase in our costs and force us to allocate our available product supply among our customers. Lower than expected yields could potentially harm customer relationships, our reputation and our financial results.
We are dependent on third parties for assembly, testing and packaging of our products, which reduces our control over the delivery schedule, product quantity or product quality.
Our products are assembled, tested and packaged by independent subcontractors, such as Advanced Semiconductor Engineering, Inc., Amkor Technology, JSI Logistics, Ltd., King Yuan Electronics Co., Siliconware Precision Industries Co. Ltd., and ChipPAC. As a result, we do not directly control our product delivery schedules, product quantity, or product quality. All of these subcontractors assemble, test and package products for other companies, including some of our competitors. Since we do not have long-term agreements with our subcontractors, when demand for subcontractors to assemble, test or package products is high, our subcontractors may decide to prioritize the orders of other customers over our orders. Since the time required to qualify a different subcontractor to assemble, test or package our products can be lengthy, if we have to find a replacement subcontractor we could experience significant delays in shipments of our products, product shortages, a decrease in the financial sector and government agencies accounted for approximately 36% and 30%, respectively,quality of our total investment portfolio. Ifproducts, or an increase in product cost. Any product shortages or quality assurance problems could increase the fair valuecosts of manufacture, assembly or testing of our investmentsproducts, which could cause our gross margin and revenue to decline.
Failure to transition to new manufacturing process technologies could adversely affect our operating results and gross margin.
We use the most advanced manufacturing process technology appropriate for our products that is available from our third-party foundries. As a result, we continuously evaluate the benefits of migrating our products to smaller geometry process technologies in these sectors wasorder to decline by 2%-5%, it would result in changes in fair market valuesimprove performance and reduce costs. We believe this strategy will help us remain competitive. Our current product families are manufactured using 0.15 micron, 0.14 micron, 0.13 micron, 0.11 micron, 90 nanometer, 65 nanometer and 55 nanometer process technologies. Manufacturing process technologies are subject to rapid change and require significant expenditures for these investments by approximately $20-$49 million.research and development, which could negatively impact our operating expenses and gross margin.
We are subject to risks associated with international operations which may harm our business.
We conducthave 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 business worldwide.new products to smaller geometry processes. Moreover, we are dependent on our third-party manufacturers to invest sufficient funds in new manufacturing techniques in order to have ample capacity for all of their customers and to develop the techniques in a timely manner. Our semiconductor wafers are manufactured, assembled, testedproduct cycles may also depend on our third-party manufacturers migrating to smaller geometry processes successfully and packaged by third-parties located outsidein time for us to meet our customer demands. Some of our competitors own their manufacturing facilities and may be able to move to a new state of the United States. We generated 89%art manufacturing process more quickly or more successfully than our manufacturing partners. For example, Intel has released a 45 nanometer chip for desktop computers which it is manufacturing in its foundries. In addition, in October 2008, AMD and 90%the Advanced Technology Investment Company, a technology investment company backed by the government of Abu Dhabi, announced the establishment of a U.S. headquartered semiconductor manufacturing company that will manufacture AMD’s advance processors. If our revenuesuppliers fall behind our competitors in manufacturing processes, the development and customer demand for our products and the second quarter of fiscal years 2009 and 2008, respectively, and 91% and 87% of our revenue for the first half of fiscal years 2009 and 2008, respectively, from sales to customers outside the United States and other Americas. As of July 27, 2008, we had offices in thirteen countries outside of the United States. The manufacture, assembly, test and packaginguse of our products outsidecould be negatively impacted. If we are forced to use larger geometric processes in manufacturing a product than our competition, our gross margin may be reduced. The inability by us or our third-party manufacturers to effectively and efficiently transition to new manufacturing process technologies may adversely affect our operating results and our gross margin.
We rely on third-party vendors to supply software development tools to us for the development of our new products and we may be unable to obtain the tools necessary to develop or enhance new or existing products.
We rely on third-party software development tools to assist us in the design, simulation and verification of new products or product enhancements. To bring new products or product enhancements to market in a timely manner, or at all, we need software development tools that are sophisticated enough or technologically advanced enough to complete our design, simulations and verifications. In the past, we have experienced delays in the introduction of products as a result of the United States, operationinability of offices outside ofthen available software development tools to fully simulate the United States,complex features and sales to customers internationally subjects us to a number of risks, including:
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| international economic and political conditions, such as political tensions between countries in which we do business; |
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| unexpected changes in, or impositions of, legislative or regulatory requirements; |
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| complying with a variety of foreign laws; |
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| differing legal standards with respect to protection of intellectual property and employment practices; |
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| cultural differences in the conduct of business; |
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| inadequate local infrastructure that could result in business disruptions; |
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| exporting or importing issues related to export or import restrictions, tariffs, quotas and other trade barriers and restrictions; |
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| financial risks such as longer payment cycles, difficulty in collecting accounts receivable and fluctuations in currency exchange rates; |
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| imposition of additional taxes and penalties; and |
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| other factors beyond our control such as terrorism, civil unrest, war and diseases such as severe acute respiratory syndrome and the Avian flu. |
If sales to anyfunctionalities of our customers outsideproducts. In the future, the design requirements necessary to meet consumer demands for more features and greater functionality from our products may exceed the capabilities of the United States and other Americas are delayedavailable software development tools. Unavailability of software development tools may result in our missing design cycles or cancelled because of any of the above factors, our revenue may be negatively impacted.
Our international operations in Australia, Taiwan, Japan, Korea, China, Hong Kong, India, France, Finland, Germany, Russia, Switzerland and the United Kingdom are subject to many of the above listed risks. Difficulties with our international operations, including finding appropriate staffing and office space, may divert management’s attention and other resources anylosing design wins, either of which could result in a loss of market share or negatively impact our operating results.
The economic conditionsBecause of the importance of software development tools to the development and enhancement of our products, a critical component of our product development efforts is our partnerships with leaders in the computer-aided design industry, including Cadence Design Systems, Inc. and Synopsys, Inc. We have invested significant resources to develop relationships with these industry leaders and have often assisted them in the definition of their new products. We believe that forming these relationships and utilizing next-generation development tools to design, simulate and verify our primary overseas markets, particularlyproducts 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. If these relationships are not successful, we may be unable to develop new products or product enhancements in Asia, maya timely manner, which could result in a loss of market share, a decrease in revenue or negatively impact the demand forour operating results.
We sell our products abroad. Allto a small number of customers and our business could suffer if we lose any of these customers.
We have a limited number of customers and our sales are highly concentrated. For the first quarters of fiscal years 2010 and 2009, aggregate sales to customers in excess of 10% of our international sales to date have been denominated in United States dollars. Accordingly, an increase in the valuetotal revenue accounted for approximately 22% of the United States dollar relative to foreign currencies could make our products less competitive in international markets or require us to assume the risk of denominating certain sales in foreign currencies. We anticipate that these factors will impact our business to a greater degree as we further expand our international business activities.
If our products do not continue to be adopted by the desktop PC, notebook PC, workstation, high-performance computing, personal media players, or PMPs, personal digital assistants, or PDAs, cellular handheld devices,total revenue from two customers and video game console markets or if the demand for new and innovative products in these markets decreases, our business and operating results would suffer.
Our success depends in part upon continued broad adoptionapproximately 11% of our processors for 3D graphics and multimedia in desktop PC, notebook PC, workstation, high-performance computing, PMPs, PDAs, cellular handheld devices, and video game console applications. The market for processors has been characterized by unpredictable and sometimes rapid shifts intotal revenue from another customer, respectively. Although a small number of our other customers represent the popularity of products, often caused by the publication of competitive industry benchmark results, changes in pricing of dynamic random-access memory devices and other changes in the total system cost of add-in boards, as well as by severe price competition and by frequent new technology and product introductions. Broad market acceptance is difficult to achieve and such market acceptance, if achieved, is difficult to sustain due to intense competition and frequent new technology and product introductions. Our GPU and MCP businesses together comprised approximately 75% and 79%majority of our revenue, fortheir end customers include a large number of original equipment manufacturers, or OEMs, and system integrators throughout the second quarterworld who, in many cases, specify the graphics supplier. Our sales process involves achieving key design wins with leading PC, OEMs and major system builders and supporting the product design into high volume production with key contract equipment manufacturers, or CEMs, original design manufacturers, or ODMs, add-in board and motherboard manufacturers. These design wins in turn influence the retail and system builder channel that is serviced by CEMs, ODMs, add-in board and motherboard manufacturers. Our distribution strategy is to work with a small number of fiscal years 2009leading independent CEMs, ODMs, add-in board and 2008, respectively,motherboard manufacturers, and 77%distributors, each of our revenue during the first halfwhich has relationships with a broad range of fiscal years 2009system builders and 2008, respectively. As such, our financial results would suffer if for any reason our current or future GPUs or MCPs do not continue to achieve widespread adoption by theleading PC market.OEMs. If we arewere to lose sales to our PC OEMs, CEMs, ODMs, add-in board manufacturers and motherboard manufacturers and were unable to completereplace the timely developmentlost sales with sales to different customers, if they were to significantly reduce the number of new products they order from us, or if we were unable to successfully and cost-effectively manufacture and deliver products that meetcollect accounts receivable from them, our revenue may not reach or exceed the requirements of the desktop PC, notebook PC, workstation, high-performance computing, PMP, PDA, cellular phone, and video game console markets, we may experience a decreaseexpected level in revenueany period, which could negatively impactharm our operating results.financial condition and our results of operations.
Additionally, there can be no assurance that the industry will continue to demand new products with improved standards, features or performance. If our customers, OEMs, ODMs, add-in-card and motherboard manufacturers, system builders and consumer electronics companies, do not continue to design products that require more advanced or efficient processors and/or the market does not continue to demand new products with increased performance, features, functionality or standards, sales of our products could decline and the markets for our products could shrink. Decreased sales of our products for these markets could negatively impact our revenue and our financial results.
Any difficulties in collecting accounts receivable, including from foreign customers, could harm our operating results and financial condition.
Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers' businesses, and to downturns in the industry and the worldwide economy. Accounts receivable from significant customers, those representing 10% or more of total accounts receivable aggregated approximately 27% of our accounts receivable balance from two customers at April 26, 2009 and approximately 38% of our accounts receivable balance from three customers at January 25, 2009.
Difficulties in collecting accounts receivable could materially and adversely affect our financial condition and results of operations. These difficulties are heightened during periods when economic conditions worsen. We continue to work directly with more foreign customers and it may be difficult to collect accounts receivable from them. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. If the financial condition of our customers were to deteriorate, resulting in an impairment in their ability to make payments, additional allowances may be required, we may be required to defer revenue recognition on sales to affected customers, and we may be required to pay higher credit insurance premiums, any of which could adversely affect our operating results. In the future, we may have to record additional reserves or write-offs and/or defer revenue on certain sales transactions which could negatively impact our financial results.
We obtain credit insurance over the purchasing credit extended to certain customers. As a result of the tightening of the credit markets, we may not be able to acquire credit insurance on the credit we extend to these customers or in amounts that we deem sufficient. While we have procedures to monitor and limit exposure to credit risk on our accounts receivables, there can be no assurance such procedures will effectively limit our credit risk or avoid losses, which could harm our financial condition or operating results.
Risks Related to Regulatory, Legal, Our Common Stock and Other Matters
We are dependent on the PC marketsubject to litigation arising from alleged defects in our previous generation MCP and its rate of growth in the future may have a negative impact onGPU products, which if determined adversely to us, could harm our business.
We derive and expect to continue to derive the majority of our revenue from the sale or license of products for use in the desktop PC and notebook PC markets, including professional workstations. A reduction in sales of PCs, or a reduction in the growth rate of PC sales, may reduce demand for our products. These changes in demand could be large and sudden. During the second quarter of fiscal year 2009, saleswe recorded a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other associated costs arising from a weak die/packaging material set in certain versions of our desktopprevious generation MCP and GPU products decreased by approximately 25% comparedused in notebook systems. The previous generation MCP and GPU products that are impacted were included in a number of notebook products that were shipped and sold in significant quantities. Certain notebook configurations of these MCP and GPU products are failing in the field at higher than normal rates. While we have not been able to determine a root cause for these failures, testing suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors. We continue to engage in discussions with our supply chain regarding reimbursement to us for some or all of the costs we have incurred and may incur in the future relating to the second quarter ofweak material set. We also continue to seek to access our insurance coverage, which provided us with $8 million in related reimbursement during fiscal year 2008. These decreases2009. However, there can be no assurance that we will recover any additional reimbursement. We continue to not see any abnormal failure rates in any systems using NVIDIA products other than certain notebook configurations. However, we are continuing to test and otherwise investigate other products. There can be no assurance that we will not discover defects in other MCP or GPU products.
In September, October and November 2008, several putative class action lawsuits were primarily duefiled against us, asserting various claims related to the Standalone Desktopimpacted MCP and GPU market segment decline as reportedproducts. Such lawsuits could result in the latest PC Graphics 2008 Reportdiversion of management’s time and attention away from Mercury Research. Since PC manufacturers often build inventories during periods of anticipated growth, they may be left with excess inventories if growth slows or if they incorrectly forecast product transitions. In these cases, PC manufacturers may abruptly suspend substantially all purchases of additional inventory from suppliers like us until their excess inventory has been absorbed,business operations, which would have a negative impact on our financial results.
Our business is cyclical in nature and an industry downturn could harm our business. In addition, the costs of defense and any damages resulting from this litigation, a ruling against us, or a settlement of the litigation could adversely affect our cash flow and financial results.
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 The ongoing civil actions or any new actions relating to respond to changes in our industry, which can be unpredictable and rapid, in an efficient and timely manner, our operating results could suffer. In particular, from time to time, the semiconductor industry has experienced significant and sometimes prolonged downturns characterized by diminished product demand, increased inventory levels and accelerated erosion of average selling prices. If we cannot take appropriate actions such as reducing our manufacturing or operating expenses to sufficiently offset declines in demand, increased inventories, or decreased selling prices during a downturn, our revenue and operating results will suffer.
Risks Related to Regulatory, Legal and Other Matters
The United States Department of Justice’s pending investigation into the market for graphics processors and the ongoing civil actionsGPUs could adversely affect our business.
OnIn November 29, 2006, we received a subpoena from the San Francisco Office of the Antitrust Division of the United States Department of Justice, or DOJ, in connection with the DOJ's investigation into potential antitrust violations related to GPUs and cards. In October 2008, the DOJ formally notified us that the DOJ investigation had been closed. No specific allegations have beenwere made against us. We are cooperating withNVIDIA during the DOJ in its investigation.
As of May 13, 2008, 55Several putative civil complaints have been filed against us. The majority of the complaints were filed in the Northern District of California, several were filed in the Central District of California,against us by direct and other cases were filed in several other Federal district courts. On April 18, 2007, the Judicial Panel on Multidistrict Litigation transferred the actions currently pending outside of the Northern District of California to the Northern District of California for coordination of pretrial proceedings before the Honorable William H. Alsup. By agreement of the parties, Judge Alsup will retain jurisdiction over the consolidated cases through trial or other resolution.
In the consolidated proceedings, two groups of plaintiffs (one putatively representing all directindirect purchasers of GPUs, and the other putatively representing all indirect purchasers) filed consolidated, amended class-action complaints. These complaints purport to assertasserting federal antitrust claims based on alleged price fixing, market allocation, and other alleged anti-competitive agreements between us and ATI Technologies, ULC., , or ATI, and Advanced Micro Devices, Inc., or AMD, as a result of its acquisition of ATI. The indirect purchasers’ consolidated amended complaint also asserts a variety of state law antitrust, unfair competition and consumer protection claims on the same allegations, as well as a common law claim for unjust enrichment.
Plaintiffs filed their first consolidated complaints on June 14, 2007. On July 16, 2007,
In September 2008, we moved to dismiss those complaints. The motions to dismiss were heard by Judge Alsup on September 20, 2007. The Court subsequently granted and deniedexecuted a settlement agreement, or the motionsAgreement, in part, and gaveconnection with the plaintiffs leave to move to amend the complaints. On November 7, 2007, the Court granted plaintiffs’ motion to file amended complaints, ordered defendants to answer the complaints, lifted a previously entered stay on discovery, and set a trial date for January 12, 2009. Discovery is underway and Plaintiffs filed motions for class certification on April 24, 2008. We filed oppositions to the motions on May 20, 2008. On July 18, 2008, the Court ruled on Plaintiffs’ class certification motions. The Court denied class certification for the proposed class of indirect purchasers. The Court granted in part class certification for the direct purchasers but limited the direct purchaser class to individual purchasers that acquired graphics processing cards products directly from NVIDIA or ATI from their websites between December 4, 2002 and November 7, 2007. The Court excluded from the direct purchaser class business entities that purchased graphics products from NVIDIA or ATI for resale. The case will continue on behalfclaims of the certified class of direct purchasers certifiedpurchaser plaintiffs. The Agreement has received final approval from the court and disposes of all claims and appeals raised by the Court as well as for the several individual indirect purchasers suing on their own behalf. The Court also instructed the parties to give written notice of thecertified class certification order to all non-certified direct purchasers, who will then have thirty days from the date of the notice to move to intervene in this action. The Court's ruling on class certification is subject to interim appeal at the discretion of the United States Court of Appeals for the Ninth Circuit. While we believe the allegations in the complaints against NVIDIA. In addition, in September 2008, we reached a settlement agreement with the remaining individual indirect purchaser plaintiffs that provides for a dismissal of all claims and appeals related to the complaints raised by the individual indirect purchaser plaintiffs. Although the pending cases against us have been settled, additional parties may bring claims against us relating to the potential antitrust violations related to GPUs and cards. If additional claims are without meritbrought against us, such lawsuits could result in the diversion of management’s time and intend to vigorously defend the cases,attention away from business operations, which could harm our business. In addition, the costs of defense and any damages resulting from this litigation, a ruling against us, or a settlement of the litigation could adversely affect our business.cash flow and financial results.
We are a party to other litigation, including patent litigation, which, if determined adversely to us, could adversely affect our cash flow and financial results.
The matters relatingWe are a party to the Board’s review of our historical stock option granting practicesother litigation as both a defendant and the restatement of our consolidated financial statements have resultedas a plaintiff. For example, we are engaged in litigation with Intel Corporation, Rambus Corporation and with various parties related to our acquisition of 3dfx in 2001. Please refer to Note 12 of the Notes to Condensed Consolidated Financial Statements for further detail on these lawsuits. There can be no assurance that any litigation to which we are a party will be resolved in our favor. Any claim that is successfully decided against us may cause us to pay substantial damages, including punitive damages, and other related fees. Regardless of whether lawsuits are resolved in our favor or if we are the plaintiff or the defendant in the litigation, any lawsuits to which we are a party will likely be expensive and time consuming to defend or resolve. Such lawsuits could also harm our relationships with existing customers and result in the diversion of management’s time and attention away from business operations, which could harm our business. Costs of defense and any damages resulting from litigation, a ruling against us, or a settlement of the litigation could adversely affect our cash flow and financial results.
On August 10, 2006, we announced that the Audit Committee of our Board, with the assistance of outside legal counsel, was conducting a review of our stock option practices covering the time from our initial public offering in 1999, our fiscal year 2000, through June 2006. The Audit Committee reached the conclusion that incorrect measurement dates were used for financial accounting purposes for stock option grants in certain prior periods. As a result, we recorded additional non-cash stock-based compensation expense, and related tax effects, related to stock option grants.
The Audit Committee’s review of our historic stock option practices identified a number of occasions on which the measurement date used for financial accounting and reporting purposes for stock options granted to certain of our employees was different from the actual grant date. To correct these accounting errors, we amended our Annual Report on Form 10-K for the year ended January 29, 2006 and our Quarterly Report on Form 10-Q for the three months ended April 30, 2006 to restate the consolidated financial statements contained in those reports. This review of our historical stock option granting practices and subsequent restatement required us to incur substantial expenses for legal, accounting, tax and other professional services and diverted our management’s attention from our business.
Additionally, the review and the resulting restatement of our prior financial statements have exposed us to greater risks associated with litigation. Ten derivative complaints have been filed in state and federal court pertaining to allegations relating to stock option grants. We cannot assure you that these or future similar complaints, or any future litigation or regulatory action will result in the same conclusions reached by the Audit Committee. On August 5, 2007, our Board authorized the formation of a Special Litigation Committee to investigate, evaluate, and make a determination as to how we should proceed with respect to the claims and allegations asserted in the underlying derivative cases brought on behalf of NVIDIA. Currently, the Special Litigation Committee’s review is ongoing. The conduct and resolution of these matters will be time consuming, expensive and could distract our management’s attention from the conduct of our business. Furthermore, if we are subject to adverse rulings, we could be required to pay damages or penalties or have other remedies imposed upon us which could harm our business, financial condition, results of operations and cash flows.
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 jurisdictions. Our patents and pending patent applications primarily relate to our products and the technology used in connection with our products. We also rely on international treaties, organizations and foreign laws to protect our intellectual property. The laws of certain foreign countries in which our products are or may be manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as the laws of the United States. This makes the possibility of piracy of our technology and products more likely. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as:
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| the commercial significance of our operations and our competitors’ operations in particular countries and regions; |
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| the location in which our products are manufactured; |
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| our strategic technology or product directions in different countries; and |
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| the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions. |
Our pending patent applications and any future applications may not be approved. In addition, any issued patents may not provide us with competitive advantages or may be challenged by third parties. The enforcement of patents by others may harm our ability to conduct our business. Others may independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property. Our failure to effectively protect our intellectual property could harm our business.
Litigation to defend against alleged infringement of intellectual property rights or to enforce our intellectual property rights and the outcome of such litigation could result in substantial costs to us.
We expect that as the number of issued hardware and software patents increases and as competition intensifies, the volume of intellectual property infringement claims and lawsuits may increase. We may in the future become involved in lawsuits or other legal proceedings alleging patent infringement or other intellectual property rights violations by us or by our customers that we have agreed to indemnify them for certain claims of infringement.
An unfavorable ruling in any such intellectual property related litigation could include significant damages, invalidation of a patent or family of patents, indemnification of customers, payment of lost profits, or, when it has been sought, injunctive relief.
In addition, in the future, we may need to commence litigation or other legal proceedings in order to:
· | assert claims of infringement of our intellectual property; |
· | enforce our patents; |
· | protect our trade secrets or know-how; or |
· | determine the enforceability, scope and validity of the propriety rights of others. |
If we have to initiate litigation in order to protect our intellectual property, our operating expenses may increase which could negatively impact our operating results. Our failure to effectively protect our intellectual property could harm our business.
If infringement claims are made against us or our products are found to infringe a third parties’ patent or intellectual property, we or one of our indemnified customers may have to seek a license to the third parties’ patent or other intellectual property rights. However, we may not be able to obtain licenses at all or on terms acceptable to us particularly from our competitors. If we or one of our indemnified customers is unable to obtain a license from a third party for technology that we use or that is used in one of our products, we could be subject to substantial liabilities or have to suspend or discontinue the manufacture and sale of one or more of our products. We may also have to make royalty or other payments, or cross license our technology. If these arrangements are not concluded on commercially reasonable terms, our business could be negatively impacted. Furthermore, the indemnification of a customer may increase our operating expenses which could negatively impact our operating results.
We are a party
Our ability to litigation, including patent litigation, which, if determined adversely to us, could adversely affect our cash flow and financial results.
We are a party to litigation as both a defendant and as a plaintiff. There can be no assurance that any litigation to which we are a partycompete will be resolved in our favor. Any claim that is successfully asserted against us may cause us to pay substantial damages, including punitive damages, and other related fees. Regardless of whether lawsuits are resolved in our favor orharmed if we are the plaintiff or the defendantunable 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 jurisdictions. Our patents and pending patent applications primarily relate to our products and the technology used in connection with our products. We also rely on international treaties, organizations and foreign laws to protect our intellectual property. The laws of certain foreign countries in which our products are or may be manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as the laws of the United States. This makes the possibility of piracy of our technology and products more likely. We continuously assess whether and where to seek formal protection for particular innovations and technologies based on such factors as:
· | the commercial significance of our operations and our competitors’ operations in particular countries and regions; |
· | the location in which our products are manufactured; |
· | our strategic technology or product directions in different countries; and |
· | the degree to which intellectual property laws exist and are meaningfully enforced in different jurisdictions. |
Our pending patent applications and any future applications may not be approved. In addition, any issued patents may not provide us with competitive advantages or may be challenged by third parties. The enforcement of patents by others may harm our ability to conduct our business. Others may independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property. Our failure to effectively protect our intellectual property could harm our business.
Government investigations and inquiries from regulatory agencies could lead to enforcement actions, fines or other penalties and could result in litigation any lawsuitsagainst us.
In the past, we have been subject to government investigations and inquiries from regulatory agencies such as the DOJ and the SEC. We may be subject to government investigations and receive additional inquiries from regulatory agencies in the future, which we aremay lead to enforcement actions, fines or other penalties.
In addition, litigation has often been brought against a party will likely be expensivecompany in connection with the announcement of a government investigation or inquiry from a regulatory agency. For example, following the announcement of the DOJ investigation, several putative civil complaints were filed against us. In addition, following our Audit Committee’s investigation and time consumingthe SEC’s investigation concerning our historical stock option granting practices, ten derivative complaints were filed in state and federal court pertaining to defend or resolve.allegations relating to stock option grants. Please refer to Note 12 of the Notes to Condensed Consolidated Financial Statements for further information regarding these lawsuits. Such lawsuits could also harm our relationships with existing customers and result in the diversion of management’s time and attention away from business operations, which could harm our business. CostsIn addition, the costs of defense and any damages resulting from litigation, a ruling against us, or a settlement of the litigation could adversely affect our cash flow and financial results.
We are subject to the risks of owning real property.
In the first half ofDuring fiscal year 2009, we used approximately $150.0 million of our cash to purchasepurchased real property in Santa Clara, California that includes approximately 25 acres of land and ten commercial buildings. We also own real property in China and India. We have limited experience in the ownership and management of real property and are subject to the risks of owning real property, including:
· | the possibility of environmental contamination and the costs associated with fixing any environmental problems; |
· | adverse changes in the value of these properties, due to interest rate changes, changes in the neighborhood in which the property is located, or other factors; |
· | the risk of loss if we decide to sell and are not able to recover all capitalized costs; |
· | increased cash commitments for the possible construction of a campus; |
· | the possible need for structural improvements in order to comply with zoning, seismic and other legal or regulatory requirements; |
· | increased operating expenses for the buildings or the property or both; |
· | possible disputes with third parties, such as neighboring owners or others, related to the buildings or the property or both; and |
· | the risk of financial loss in excess of amounts covered by insurance, or uninsured risks, such as the loss caused by damage to the buildings as a result of earthquakes, floods and or other natural disasters. |
Expensing employee equity compensation adversely affects our operating results and could also adversely affect our competitive position.
Since inception, we have used equity through our stock option plans and our employee stock purchase program as a fundamental component of our compensation packages. We believe that these programs directly motivate our employees and, through the use of vesting, encourage our employees to remain with us.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), or SFAS No. 123(R), Share-based Payment, which requires the measurement and recognition of compensation expense for all stock-based compensation payments. SFAS No. 123(R) requires that we record compensation expense for stock options and our employee stock purchase plan using the fair value of those awards. Stock-based compensation expense resulting from our compliance with SFAS No. 123(R), was $34.1 million and $42.1 million related to on-going vesting of equity awards during the first quarters of fiscal years 2010 and 2009, respectively, which negatively impacted our operating results. Additionally, in March 2009, we completed a cash tender offer for to purchase certain employee stock options. A total of 28.5 million options were tendered under the offer for an aggregate cash purchase price of $78.1 million, in exchange for the cancellation of the eligible options. As a result of the tender offer, we incurred a charge of $140.2 million consisting of the remaining unamortized stock based compensation expense associated with the unvested portion of the options tendered in the offer, stock-based compensation expense resulting from amounts paid in excess of the fair value of the underlying options, plus associated payroll taxes and professional fees. We believe that SFAS No. 123(R) will continue to negatively impact our operating results.
To the extent that SFAS No. 123(R) makes it more expensive to grant stock options or to continue to have an employee stock purchase program, we may decide to incur increased cash compensation costs. In addition, actions that we may take to reduce stock-based compensation expense that may be more severe than any actions our competitors may implement and may make it difficult to attract retain and motivate employees, which could adversely affect our competitive position as well as our business and operating results.
We may needbe required to raise additional capitalrecord a charge to fundearnings if our goodwill or amortizable intangible assets become impaired, which could negatively impact our operating results.
Under accounting principles generally accepted in the construction ofUnited States, we review our new campus, whichamortizable intangible assets and goodwill for impairment when events or changes in circumstances indicate the carrying value may not be available on favorable terms,recoverable. Goodwill is tested for impairment at least annually. The carrying value of our goodwill or at all.
Currently, we are in the process of planning to construct a new campus in Santa Clara, California. If we move forward with our plans, we will spend a significant amount for materials and related construction costs. If we are unable to control our construction related expenses or costs or such costs are higher than we anticipate, we may not have sufficient balances of cash, cash equivalents and marketable securities to fund our operations. As a result, we may need to raise additional financing. Such additional financingamortizable assets may not be available on favorable terms,recoverable due to factors such as a decline in stock price and market capitalization, reduced estimates of future cash flows and slower growth rates in our industry or at all. Usein any of our available fundsbusiness units. For example, during the twelve months ended January 25, 2009, our market capitalization declined from approximately $14 billion to approximately $4 billion. Estimates of future cash flows are based on an updated long-term financial outlook of our operations. However, actual performance in the near-term or long-term could be materially different from these forecasts, which could impact future estimates. For example, if one of our business units does not meet its near-term and longer-term forecasts, the goodwill assigned to the business unit could be impaired. We may also prevent us from making other necessary investmentsbe required to record a charge to earnings in our financial statements during a period in which an impairment of our goodwill or amortizable intangible assets is determined to exist, which may negatively impact our results of operations.
Our stock price continues to be volatile and investors may suffer losses.
Our stock has at times experienced substantial price volatility as a result of variations between our actual and anticipated financial results, announcements by us and our competitors, or uncertainty about current global economic conditions. The stock market as a whole also has experienced extreme price and volume fluctuations that have affected the market price of many technology companies in ways that may have been unrelated to these companies’ operating performance.
In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. For example, following our announcement in July 2008 that we would take a charge against cost of revenue to cover anticipated costs and expenses arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products and that we were revising financial guidance for our second fiscal quarter of 2009, the trading price of our common stock declined. In September, October and November 2008, several putative class action lawsuits were filed against us relating to this announcement. Please refer to Note 12 of the Notes to Condensed Consolidated Financial Statements for further information regarding these lawsuits. Due to changes in the potential volatility of our stock price, we may be the target of securities litigation in the future. Such lawsuits could result in the diversion of management’s time and attention away from business such asoperations, which could harm our business. In addition, the costs of defense and any damages resulting from litigation, a ruling against us, or a settlement of the litigation could adversely affect our cash flow and financial results.
Changes in research and development of new products.U.S. tax legislation regarding our foreign earnings could materially impact our business.
Currently a majority of our revenue is generated from customers located outside the United States, and a substantial portion of our assets, including employees, are located outside the United States. United States income taxes and foreign withholding taxes have not been provided on undistributed earnings for certain non-United States subsidiaries, because such earnings are intended to be indefinitely reinvested in the operations of those subsidiaries. President Obama’s administration has recently announced initiatives that would substantially reduce our ability to defer U.S. taxes including, repealing the deferral of U.S. taxation of foreign earnings, eliminating utilization of or substantially reducing our ability to claim foreign tax credits, and eliminating various tax deductions until foreign earnings are repatriated to the United States. If any of these proposals are constituted into legislation, they could have a negative impact on our financial position and results of operations.
Our operating results may be adversely affected if we are subject to unexpected tax liabilities.
We are subject to taxation by a number of taxing authorities both in the United States and throughout the world. Tax rates vary among the jurisdictions in which we operate. Significant judgment is required in determining our provision for our income taxes as there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, any of the below could cause our effective tax rate to be materially different than that which is reflected in historical income tax provisions and accruals:
· | the jurisdictions in which profits are determined to be earned and taxed; |
· | adjustments to estimated taxes upon finalization of various tax returns; |
· | changes in available tax credits; |
· | changes in share-based compensation expense; |
· | changes in tax laws, the interpretation of tax laws either in the United States or abroad or the issuance of new interpretative accounting guidance related to uncertain transactions and calculations where the tax treatment was previously uncertain; and |
· | the resolution of issues arising from tax audits with various tax authorities. |
Should additional taxes be assessed as a result of any of the above, our operating results could be adversely affected. In addition, our future effective tax rate could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in tax laws or changes in the interpretation of tax laws.
Our failure to comply with any applicable environmental regulations could result in a range of consequences, including fines, suspension of production, excess inventory, sales limitations, and criminal and civil liabilities.
We are subject to various state, federal and international laws and regulations governing the environment, including restricting the presence of certain substances in electronic products and making producers of those products financially responsible for the collection, treatment, recycling and disposal of those products. For example, we are subject to the European Union Directive on Restriction of Hazardous Substances Directive, or RoHS Directive, that restricts the use of a number of substances, including lead, and other hazardous substances in electrical and electronic equipment in the market in the European Union. We could face significant costs and liabilities in connection with the European Union Directive on Waste Electrical and Electronic Equipment, or WEEE. The WEEE directs members of the European Union to enact laws, regulations, and administrative provisions to ensure that producers of electric and electronic equipment are financially responsible for the collection, recycling, treatment and environmentally responsible disposal of certain products sold into the market after August 15, 2005.
It is possible that unanticipated supply shortages, delays or excess non-compliant inventory may occur as a result of the RoHS Directive, WEEE, and other domestic or international environmental regulations. Failure to comply with any applicable environmental regulations could result in a range of consequences including costs, fines, suspension of production, excess inventory, sales limitations, criminal and civil liabilities and could impact our ability to conduct business in the countries or states that have adopted these types of regulations.
While we believe that we have adequate internal control over financial reporting, if we or our independent registered public accounting firm determines that we do not, our reputation may be adversely affected and our stock price may decline.
Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent registered public accounting firm to audit, the effectiveness of our internal control structure and procedures for financial reporting. We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. However, the manner in which companies and their independent public accounting firms apply these requirements and testingtest companies’ internal controls remains subject to some judgment. To date, we have incurred, and we expect to continue to incur, increased expense and to devote additional management resources to Section 404 compliance. Despite our efforts, if we identify a material weakness in our internal controls, there can be no assurance that we will be able to remediate that material weakness in a timely manner, or that we will be able to maintain all of the controls necessary to determine that our internal control over financial reporting is effective. In the event that our chief executive officer, chief financial officer or our independent registered public accounting firm determine that our internal control over financial reporting is not effective as defined under Section 404, investor perceptions of us may be adversely affected and could cause a decline in the market price of our stock.
Changes in financial accounting standards or interpretations of existing standards could affect our reported results of operations.
We prepare our consolidated financial statements in conformity with generally accepted accounting principles in the United States. These principles are constantly subject to review and interpretation by the Securities and Exchange CommissionSEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions.
Provisions in our certificate of incorporation, our bylaws and our agreement with Microsoft could delay or prevent a change in control.
Our certificate of incorporation and bylaws contain provisions that could make it more difficult for a third party to acquire a majority of our outstanding voting stock. These provisions include the following:
· | the ability of our Board to create and issue preferred stock without prior stockholder approval; |
· | the prohibition of stockholder action by written consent; |
· | a classified Board; and |
· | advance notice requirements for director nominations and stockholder proposals. |
On March 5, 2000, we entered into an agreement with Microsoft in which we agreed to develop and sell graphics chips and to license certain technology to Microsoft and its licensees for use in the Xbox. Under the agreement, if an individual or corporation makes an offer to purchase shares equal to or greater than 30% of the outstanding shares of our common stock, Microsoft may have first and last rights of refusal to purchase the stock. The Microsoft provision and the other factors listed above could also delay or prevent a change in control of NVIDIA.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
During fiscal year 2005, we announced that our Board of Directors, or Board, had authorized a stock repurchase program to repurchase shares of our common stock, subject to certain specifications, up to an aggregate maximum amount of $300 million. During fiscal year 2007, the Board further approved an increase of $400 million to the original stock repurchase program. In fiscal year 2008, we announced a stock repurchase program under which we may purchase up to an additional $1.0 billion of our common stock over a three year period through May 2010. On August 12, 2008, we announced that our Board further authorized an additional increase of $1.0 billion to the stock repurchase program. As a result of these increases, we have an ongoing authorization from the Board, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $2.7 billion through May 2010.
The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, and may be made in one or more larger repurchases, in compliance with the Securities Exchange Act of 1934 or the Exchange Act, Rule 10b-18, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. As part of our share repurchase program, we have entered into, and we may continue to enter into, structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement.agreement
During the three months ended April 26, 2009, we did not enter into any structured share repurchase transactions or otherwise purchase any shares of our common stock. Through July 27, 2008,fiscal year 2010, we hadhave repurchased 68.0an aggregate of 90.9 million shares under our stock repurchase program for a total cost of $1.16$1.46 billion. During the three months ended July 27, 2008,As of April 26, 2009, we did not enter into any structured shareare authorized, subject to certain specifications, to repurchase transactions.shares of our common stock up to an additional amount of $1.24 billion through May 2010.
Additionally, during fiscal year 2010, we granted approximately 4.9 million stock options and 4.6 million restricted stock units under the 2007 Equity Incentive Plan. In March 2009, we completed a cash tender offer for 28.5 million options held by our employees. Please refer to Note 3 and Note 4 of the Notes to Condensed Consolidated Financial Statements for further information regarding stock-based compensation related to our March 2009 stock option purchase and related to equity awards granted under our equity incentive programs.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
AtNo matters were submitted to a vote of our security holders during the Annual Meetingfirst quarter of Stockholders held on June 19, 2008 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.fiscal year 2010.
1. | The election of three (3) directors to serve for a three-year term until the 2011 Annual Meeting of Stockholders. The results of the voting were as follows: |
a. | Steven Chu | |
| Number of shares For | 487,245,948 |
| Number of shares Against | 4,972,489 |
| Number of shares Abstain | 4,012,543 |
b. | Harvey C. Jones | |
| Number of shares For | 479,745,136 |
| Number of shares Against | 12,460,467 |
| Number of shares Abstain | 4,025,376 |
c. | William J. Miller | |
| Number of shares For | 474,938,642 |
| Number of shares Against | 17,017,103 |
| Number of shares Abstain | 4,275,235 |
The other directors whose term of office as a director continued after the Annual Meeting of Stockholders are Tench Coxe, James C. Gaither, Jen-Hsun Huang, Mark L. Perry and A. Brooke Seawell.
2. | The approval of the amendment to the NVIDIA Corporation Amended and Restated Certificate of Incorporation. The results of the voting were as follows: |
Number of shares voted For | 402,773,505 |
Number of shares voted Against | 89,092,095 |
Number of shares Abstaining | 4,365,380 |
Number of Broker Non-Votes | 0 |
3. | The ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered accounting firm for our fiscal year ending January 25, 2009. The results of the voting were as follows: |
Number of shares voted For | 488,656,413 |
Number of shares voted Against | 3,637,439 |
Number of shares Abstaining | 3,937,128 |
Number of Broker Non-Votes | 0 |
None.
EXHIBIT INDEX
| | | | | | Incorporated by Reference |
| Exhibit No. | | Exhibit Description | | Schedule/Form | | File Number | | | Exhibit | | Filing Date |
| | | | | | | | | | | | | |
| 3.1 | * | | Certificate of Amendment of Amended and Restated Certificate of Incorporation | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 31.1 | * | | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 31.2 | * | | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 32.1# | * | | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 32.2# | * | | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | | | Incorporated by Reference |
| Exhibit No. | | Exhibit Description | Schedule/Form | | File Number | | | Exhibit | | Filing Date |
| | | | | | | | | | | |
| | 3.3 | | Bylaws of NVIDIA Corporation, Amended and Restated as of February 12, 2009 | Form 8-K | | | 0-23985 | | | | 3.1 | | 2/19/2009 |
| | | | | | | | | | | | | | |
| | 10.1 | + | 2007 Equity Incentive Plan – Restricted Stock Unit Grant Notice and Restricted Stock Unit Purchase Agreement | Form 8-K | | | 0-23985 | | | | 10.1 | | 2/11/2009 |
| | | | | | | | | | | | | | |
| | 10.2 | + | Offer Letter, dated January 28, 2009, with David L. White | Form 8-K | | | 0-23985 | | | | 10.1 | | 2/27/2009 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 10.3 | + | Fiscal Year 2010 Variable Compensation Plan | Form 8-K | | | 0-23985 | | | | 10.1 | | 4/8/2009 |
| | | | | | | | | | | | | | |
| | 31.1 | * | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 31.2 | * | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 32.1# | * | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 32.2# | * | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | |
* Filed Herewith
+ Management contract or compensatory plan or arrangement
# In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
Copies of above exhibits not contained herein are available to any stockholder upon written request to:
Investor Relations: NVIDIA Corporation, 2701 San Tomas Expressway, Santa Clara, CA 95050.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 21, 2008May 20, 2009 | |
| | NVIDIA Corporation |
| By: | /s/ MARVIN D. BURKETTDAVID L. WHITE |
| | Marvin D. BurkettDavid L. White |
| | (Duly Authorized Officer and Principal Financial and Accounting Officer) |
EXHIBIT INDEX
| | | | | | Incorporated by Reference |
| Exhibit No. | | Exhibit Description | | Schedule/Form | | File Number | | | Exhibit | | Filing Date |
| | | | | | | | | | | | | |
| 3.1 | * | | Certificate of Amendment of Amended and Restated Certificate of Incorporation | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 31.1 | * | | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 31.2 | * | | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 32.1# | * | | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 32.2# | * | | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | | |
| | | | Incorporated by Reference |
| Exhibit No. | | Exhibit Description | Schedule/Form | | File Number | | | Exhibit | | Filing Date |
| | | | | | | | | | | |
| | 3.3 | | Bylaws of NVIDIA Corporation, Amended and Restated as of February 12, 2009 | Form 8-K | | | 0-23985 | | | | 3.1 | | 2/19/2009 |
| | | | | | | | | | | | | | |
| | 10.1 | + | 2007 Equity Incentive Plan – Restricted Stock Unit Grant Notice and Restricted Stock Unit Purchase Agreement | Form 8-K | | | 0-23985 | | | | 10.1 | | 2/11/2009 |
| | | | | | | | | | | | | | |
| | 10.2 | + | Offer Letter, dated January 28, 2009, with David L. White | Form 8-K | | | 0-23985 | | | | 10.1 | | 2/27/2009 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 10.3 | + | Fiscal Year 2010 Variable Compensation Plan | Form 8-K | | | 0-23985 | | | | 10.1 | | 4/8/2009 |
| | | | | | | | | | | | | | |
| | 31.1 | * | Certification of Chief Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 31.2 | * | Certification of Chief Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 32.1# | * | Certification of Chief Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | 32.2# | * | Certification of Chief Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934 | | | | | | | | | | |
* Filed Herewith
+ Management contract or compensatory plan or arrangement
# In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
Copies of above exhibits not contained herein are available to any stockholder upon written request to:
Investor Relations: NVIDIA Corporation, 2701 San Tomas Expressway, Santa Clara, CA 95050.
