<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended October 31, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to .
Commission file number: 0-23985
----------------
NVIDIA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-3177549
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3535 Monroe Street
Santa Clara, California 95051
(408) 615-2500
(Address, including Zip Code, of Registrant's Principal Executive Offices
and Registrant's Telephone Number, including Area Code)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The number of shares of the registrant's common stock outstanding as of
November 28, 1999 was 30,717,396 shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
NVIDIA CORPORATION
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Item 1. Condensed Financial Statements (unaudited)
Condensed Balance Sheets as of October 31, 1999 and January 31,
1999............................................................ 3
Condensed Statements of Operations for the three months and nine
months ended October 31, 1999 and October 25, 1998.............. 4
Condensed Statements of Cash Flows for the nine months ended
October 31, 1999 and October 25, 1998........................... 5
Notes to Condensed Financial Statements......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 15
PART II: OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds........................ 21
Item 6. Exhibits and Reports on Form 8-K................................ 21
Signature................................................................ 22
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (unaudited)
NVIDIA CORPORATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
1999 1999
----------- -----------
(In thousands)
(Unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents............................ $ 55,200 $ 50,257
Accounts receivable, less allowances of $4,995 at
October 31, 1999 and
$2,627 at January 31, 1999.......................... 56,419 20,633
Inventory............................................ 11,734 28,623
Prepaid expenses and other current assets............ 4,209 1,599
-------- --------
Total current assets............................... 127,562 101,112
Property and equipment, net............................ 26,624 11,650
Deposits and other assets.............................. 3,367 570
-------- --------
$157,553 $113,332
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable..................................... $ 43,027 $ 35,730
Line of credit....................................... -- 5,000
Accrued liabilities.................................. 7,191 5,012
Current portion of capital lease obligations......... 2,016 1,386
-------- --------
Total current liabilities.......................... 52,234 47,128
Capital lease obligations, less current portion........ 1,169 1,995
Long-term payable...................................... 5,750 --
Stockholders' equity:
Common stock......................................... 30 29
Additional paid-in capital........................... 84,473 74,372
Deferred compensation................................ (202) (780)
Retained earnings (accumulated deficit).............. 14,099 (9,412)
-------- --------
Total stockholders' equity......................... 98,400 64,209
======== ========
$157,553 $113,332
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
NVIDIA CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
October 31, October 25, October 31, October 25,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(In thousands, except per share amounts)
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Product..................... $97,015 $51,150 $246,050 $86,755
Royalty..................... -- 1,153 -- 5,945
------- ------- -------- -------
Total revenue............. 97,015 52,303 246,050 92,700
------- ------- -------- -------
Cost of revenue............... 60,195 33,566 155,766 67,400
------- ------- -------- -------
Gross profit.................. 36,820 18,737 90,284 25,300
------- ------- -------- -------
Operating expenses:
Research and development.... 12,420 6,290 32,018 16,656
Sales, general and
administrative............. 9,293 4,697 24,693 12,544
------- ------- -------- -------
Total operating expenses.. 21,713 10,987 56,711 29,200
------- ------- -------- -------
Operating income (loss)....... 15,107 7,750 33,573 (3,900)
Interest and other income,
net.......................... 430 11 1,141 60
------- ------- -------- -------
Income (loss) before income
tax expense (benefit)........ 15,537 7,761 34,714 (3,840)
Income tax expense (benefit).. 4,973 620 11,203 (308)
------- ------- -------- -------
Net income (loss)............. $10,564 $ 7,141 $ 23,511 $(3,532)
------- ------- -------- -------
Basic net income (loss) per
share........................ $ 0.35 $ 0.50 $ 0.80 $ (0.25)
------- ------- -------- -------
Diluted net income (loss) per
share........................ $ 0.29 $ 0.26 $ 0.66 $ (0.25)
------- ------- -------- -------
Shares used in basic per share
computation.................. 30,015 14,165 29,545 14,152
======= ======= ======== =======
Shares used in diluted per
share computation............ 35,931 27,774 35,613 14,152
======= ======= ======== =======
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
NVIDIA CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------
October 31, October 25,
1999 1998
----------- -----------
(In thousands)
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................... $ 23,511 $ (3,532)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation......................................... 6,143 2,796
Amortization of deferred compensation................ 578 2,191
Stock options granted in exchange of services........ 9 --
Tax benefit from employee stock plans................ 1,857 --
Changes in operating assets and liabilities:
Accounts receivable................................. (43,238) (20,519)
Inventory........................................... 16,889 (16,672)
Prepaid expenses and other current assets........... (2,610) (569)
Deposit and other current assets.................... (2,797) (387)
Accounts payable.................................... 7,297 31,058
Accrued liabilities................................. 2,179 (303)
Long-term payable................................... 750 --
-------- --------
Net cash provided by (used in) operating activities.... 10,568 (5,937)
-------- --------
Cash flows used in investing activities--purchases of
property and equipment................................ (9,949) (4,305)
-------- --------
Cash flows from financing activities:
Borrowings (payments) under line of credit............ (5,000) 5,000
Issuance of mandatorily convertible notes............. -- 11,000
Common stock issued under stock plans................. 4,949 25
Sale of common stock under public offering, net of
issuance costs....................................... 5,740 --
Payments under capital leases......................... (1,365) (1,306)
-------- --------
Net cash provided by financing activities.............. 4,324 14,719
-------- --------
Change in cash and cash equivalents.................... 4,943 4,477
Cash and cash equivalents at beginning of period....... 50,257 7,984
-------- --------
Cash and cash equivalents at end of period............. $ 55,200 $ 12,461
======== ========
Cash paid for interest................................. $ 186 $ 390
======== ========
Cash paid for taxes.................................... $ 12,665 $ --
======== ========
Noncash financing and investing activities:
Assets recorded under capital lease................... $ 1,168 $ 2,197
======== ========
Receipt of common stock in settlement of accounts
receivable........................................... $ (7,452) $ --
======== ========
Issuance of common stock in connection with long-term
software license..................................... $ 5,000 $ --
======== ========
Liabilities assumed in connection with long-term
software license..................................... $ 5,000 $ --
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
NVIDIA CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands)
1. Basis of presentation
The accompanying condensed unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, considered necessary for a fair
presentation have been included. The results for the interim periods presented
are not necessarily indicative of the results that may be expected for any
future period. The following information should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended January 31, 1999.
2. Net income (loss) per share
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income
(loss) per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period, using either
the as-if-converted method for convertible preferred stock or the treasury
stock method for options and warrants. The following is a reconciliation of the
denominators of the basic and diluted net income (loss) per share computations
for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
October 31, October 25, October 31, October 25,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Denominator:
Denominator for basic net
income (loss) per share--
weighted-average shares..... 30,015 14,165 29,545 14,152
Effect of dilutive
securities:
Stock options outstanding.. 5,683 2,603 5,812 --
Warrants................... -- 108 94 --
Mandatorily convertible
notes..................... -- 1,571 -- --
Convertible preferred
stock..................... -- 9,327 -- --
Common stock issuable in
connection with long-term
software license.......... 233 -- 162 --
------ ------ ------ ------
Denominator for diluted net
income (loss) per share..... 35,931 27,774 35,613 14,152
------ ------ ------ ------
</TABLE>
As of October 25, 1998, there were 9,327,087 shares of convertible preferred
stock, options to purchase 7,455,458 shares of common stock, warrants to
purchase 158,806 shares of common stock and $11,000,000 convertible notes with
a conversion price of $7.00 per share outstanding. The effect of these common
equivalent shares would have been anti-dilutive for the nine-month period ended
October 25, 1998, and, as a result, such effect has been excluded from the
computation of diluted net loss per share.
3. Comprehensive income
The Company had no other components of comprehensive income other than the
reported amounts of net income (loss).
6
<PAGE>
NVIDIA CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(In thousands)
4. Inventory
<TABLE>
<CAPTION>
October 31, January 31,
1999 1999
----------- -----------
<S> <C> <C>
Work in-process...................................... $ 8,726 $15,385
Finished goods....................................... 3,008 13,238
------- -------
Total inventory.................................... $11,734 $28,623
======= =======
</TABLE>
At October 31, 1999, the Company had noncancelable inventory purchase
commitments totaling $104.3 million.
5. New Accounting Pronouncement
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which provides
guidance on accounting for the costs of computer software intended for internal
use. Effective February 1, 1999, the Company adopted SOP 98-1. There was no
material change to the Company's results of operations or financial position as
a result of the adoption of SOP 98-1.
6. Long-term Software Licensing Agreement
On April 12, 1999, the Company entered into a $10.0 million five-year
software licensing agreement with a supplier in the electronic design
automation industry. Under this agreement, the $10.0 million is due in two
installments. The first installment was settled in June 1999 for 243,902 shares
of the Company's common stock valued at $5.0 million. The second installment is
due on or before March 31, 2000 and may be settled in cash or in stock at the
option of the Company.
7. Stock Repurchase Agreement
In June 1999, the Company repurchased 428,572 shares of the Company's common
stock from a major customer in settlement for a portion of then outstanding
accounts receivable, in the amount of $7.5 million.
8. Segment information
The Company operates in a single industry segment: the design, development
and marketing of 3D graphics processors for the personal computer (PC) market.
The Company's chief operating decision maker, the Chief Executive Officer,
reviews financial information presented on a consolidated basis for purposes of
making operating decisions and assessing financial performance. The following
table summarizes geographic information on net sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
October 31, October 25, October 31, October 25,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
United States................ $23,451 $38,136 $ 86,821 $78,495
Asia Pacific................. 50,264 12,181 123,170 12,219
Europe....................... 23,300 1,986 36,059 1,986
------- ------- -------- -------
Total revenue.............. $97,015 $52,303 $246,050 $92,700
======= ======= ======== =======
</TABLE>
7
<PAGE>
NVIDIA CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(In thousands)
Revenue from significant customers, those representing approximately 10% or
more of total revenue for the respective periods, is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
October 31, October 25, October 31, October 25,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales
Customer A.............. 1% 30% 5% 40%
Customer B.............. 15% 31% 21% 28%
Customer C.............. 10% 21% 15% 12%
Customer D.............. -- 16% 3% 9%
Customer E.............. 16% -- 16% --
Customer F.............. 12% -- 10% --
Customer G.............. 11% -- 6% --
</TABLE>
<TABLE>
<CAPTION>
As of
October 31, January 31,
1999 1999
----------- -----------
<S> <C> <C>
Accounts receivable
Customer A...................................... 1% 19%
Customer B...................................... 12% 28%
Customer C...................................... 14% 18%
Customer D...................................... -- 14%
Customer E...................................... 14% 4%
Customer F...................................... 10% --
Customer G...................................... 13% --
</TABLE>
9. Strategic Relationship and Patent License Agreements
On July 17, 1999, the Company entered into agreements with Silicon Graphics,
Inc. (SGI) to create a broad strategic alliance to collaborate on future
graphics technologies. As part of the Strategic Relationship Agreement, SGI has
dismissed its patent infringement suit against the Company and the Company has
licensed SGI's enabling 3D graphics patent portfolio. Additionally, SGI will
incorporate the Company's graphics technology into new desktop graphics
systems. During this quarter, 17 engineering personnel transferred from SGI to
the Company. In connection with the Patent License Agreement, the Company will
pay SGI a total of $3.0 million in nine quarterly installments with the final
payment due in May 2001.
10. Line of Credit Agreement
In July 1999, the Company entered into an amended loan and security
agreement with a bank, which included a $10.0 million revolving credit facility
with a borrowing base equal to 80% of eligible accounts. Borrowings under the
line of credit bear interest at prime rate and are due in July 2000. Covenants
governing the credit facility require the maintenance of certain financial
ratios. As of October 31, 1999, the Company had no outstanding borrowings
against the line of credit.
8
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are subject to the "safe harbor" created
by those sections. These forward-looking statements include but are not limited
to: statements related to industry trends and future growth in the markets for
3D graphics processors; our product development efforts; the timing of our
introduction of new products; industry and consumer acceptance of our products;
and future profitability. These forward-looking statements involve risks and
uncertainties that could cause our actual results to differ materially from
those in the forward-looking statements. We undertake no obligation to publicly
release any revisions to the forward-looking statements or reflect events or
circumstances after the date of this document. The business risks on pages 15
through 20, among other things, should be considered in evaluating our
prospects and future financial performance.
Overview
We design, develop and market 3D graphics processors that provide high
performance interactive 3D graphics to the mainstream PC market. In the first
quarter of fiscal 2000, we began commercial shipment of the RIVA TNT2 family of
graphics processors. During the third quarter, we launched the NVIDIA GeForce
256(TM) and NVIDIA Quadro(TM) the industry's first graphics processor units
(GPUs), and the first products to incorporate transform and lighting into a
single chip. The GeForce 256 and Quadro GPUs are graphics processors capable of
building a new generation of e-commerce, e-business, education and
entertainment applications. We expect that substantially all of our revenue for
the foreseeable future will be derived from the sale of our 3D graphics
processors in the mainstream PC market. We recognize product sales revenue upon
shipment, net of
appropriate allowances. Our policy on sales to distributors is to defer
recognition of sales and related gross profit until the distributors resell the
product. Royalty revenue is generally recognized upon shipment of product to
the licensee's customers. Currently, all of our product sales and our
arrangements with third-party manufacturers provide for pricing and payment in
U.S. dollars. We have not engaged in any foreign currency hedging activities,
although we may do so in the future. Since we have no other product line, our
business would suffer if for any reason our graphics processors do not achieve
widespread acceptance in the mainstream PC market.
A majority of our sales have been to a limited number of customers and sales
are highly concentrated. We sell graphics processors to add-in board
manufacturers, primarily Creative Technology Ltd., Diamond Multimedia Systems,
Inc., STB Systems, Inc. and ASUSTeK Computer Inc., and motherboard
manufacturers such as Intel Corporation. These manufacturers incorporate our
processors in the boards they sell to PC original equipment manufacturers
("OEMs"), retail outlets and systems integrators. The average selling prices
("ASPs") for our products, as well as our customers' products, vary by
distribution channel. Sales to Edom Technology Co., Ltd. accounted for 16%,
sales to Diamond accounted for 15%, sales to ASUSTeK accounted for 12%, sales
to Guillemot Corporation accounted for 11% and sales to Creative accounted for
10% of our total revenue for the third quarter ended October 31, 1999. For the
first nine months of fiscal 2000, sales to Diamond accounted for 21%, sales to
Edom accounted for 16%, sales to Creative accounted for 15% and sales to
ASUSTeK accounted for 10% of total revenue. Sales to STB accounted for 30%,
sales to Diamond accounted for 31%, sales to Creative accounted for 21% and
sales to Intel accounted for 16% of our total revenue for the third quarter
ended October 25, 1998. For the first nine months of fiscal 1999, sales to STB
accounted for 40%, sales to Diamond accounted for 28% and sales to Creative
accounted for 12% of total revenue. The number of potential customers for our
products is limited, and we expect sales to be concentrated to a few major
customers for the foreseeable future. In October 1999, S3 Incorporated, a
supplier of graphics processors and a competitor, completed the acquisition of
Diamond. Our sales to Diamond declined significantly to 15% in the third
quarter from 24% of total revenue in the second quarter of fiscal 2000
following the consummation of the acquisition. 3Dfx Interactive, Inc., a 3D
graphics company and a competitor, completed the acquisition of STB in May
1999. Our sales to STB in the third quarter declined to 1% from 13% of total
revenue in the first quarter and STB is no longer one of our significant
customers.
9
<PAGE>
Currently, the loss of business from Diamond and STB did not have a material
impact on our revenues and profitability due to our ability to expand product
sales to other customers.
As markets for our 3D graphics processors develop and competition increases,
we anticipate that product life cycles in the high end will remain short and
ASPs will continue to decline. In particular, ASPs and gross margins are
expected to decline as each product matures. Our add-in board manufacturers and
major OEM customers typically introduce new system configurations as often as
twice per year for the high end, typically based on spring and fall design
cycles. Accordingly, our existing products must have competitive performance
levels in order to be included in new system configurations, or we must timely
introduce new products with such performance characteristics at costs and in
sufficient volumes to maintain overall average selling prices and gross
margins. Failure to achieve necessary costs and volume shipments with respect
to future products or product enhancements could result in rapidly declining
ASPs, reduced margins, reduced demand for products or loss of market share.
We currently utilize Taiwan Semiconductor Manufacturing Company ("TSMC") and
WaferTech, LLC (a joint venture of TSMC) to produce semiconductor wafers, and
utilize independent contractors to perform assembly, test and packaging. We
depend on these suppliers to allocate to us a portion of their manufacturing
capacity sufficient to meet our needs, to produce products of acceptable
quality and at acceptable manufacturing yields, and to deliver those products
to us on a timely basis. These manufacturers may not always be able to meet our
near-term or long-term manufacturing requirements. Yields or product
performance could suffer due to difficulties associated with adapting our
technology and product design to the proprietary process technology and design
rules of each manufacturer. A manufacturing disruption experienced by these
manufacturers would impact the production of our products, which could harm our
business. In addition, as the complexity of our products and the accompanying
manufacturing process increases, there is an increasing risk that we will
experience problems with the performance of new products and that there will be
yield problems or other delays in the development or introduction of these
products. We have recently introduced the GeForce 256 family of graphics
processors and we may experience problems or other delays while in production
of these products.
Substantially all of our sales are made on the basis of purchase orders
rather than long-term agreements. As a result, we may commit resources to the
production of products without having received advance purchase commitments
from customers. Any inability to sell products to which we have devoted
significant resources could harm our business. In addition, cancellation or
deferral of product orders could result in our holding excess inventory, which
could adversely affect our profit margins and restrict our ability to fund
operations. Product returns or delays or difficulties in collecting accounts
receivable could result in significant charges against income, which could harm
our business.
Results of Operations
Three Months and Nine Months Ended October 31, 1999 and October 25, 1998
Revenue
Product Revenue. Product revenue increased 90% to $97.0 million in the third
quarter ended October 31, 1999 from $51.2 million in the third quarter ended
October 25, 1998. Revenue of $246.1 million for the first nine months of fiscal
2000 grew 184% over the first nine months of fiscal 1999. The increase was
primarily the result of increased sales of our RIVA TNT2 graphics processors
and the strong demand for the new GeForce 256(TM) GPU products at higher unit
ASPs. Revenue from sales outside of the U.S. represented 76% and 65% of total
revenue in the third quarter and the first nine months of fiscal 2000,
respectively. Our international revenue increased 419% to $73.6 million in the
third quarter of fiscal 2000 from $14.2 million in the comparable quarter a
year ago. This increase in revenue from sales outside of the U.S. is primarily
attributable to (i) the geographic limitation of the worldwide license
agreement with ST Microelectronics, Inc. with respect to sales of the RIVA 128
and RIVA 128ZX graphics processors, which agreement did not restrict the sales
of the RIVA TNT and RIVA TNT2 families of processors in fiscal 2000, and (ii)
increased demand for our products in the Asia Pacific and European regions. We
believe that the substantial growth in product revenue
10
<PAGE>
achieved in this period is not necessarily indicative of future results. In
addition, we expect that the ASPs of our products will decline over the lives
of the products. The declines in ASPs of 3D graphics processors generally may
also accelerate as the market develops and competition increases.
Royalty Revenue. ST has a worldwide license to sell the RIVA 128 and RIVA
128ZX graphics processors. Royalty revenue from sales by ST of the RIVA 128
graphics processor and a derivative of the RIVA 128ZX graphics processor
decreased to zero in the third quarter and first nine months of fiscal 2000 due
primarily to reduced sales of such products and disputes with ST regarding
payment. Royalty revenue totaled $1.2 million, or 2% of our total revenue, in
the third quarter ended October 25, 1998 and $5.9 million for the first nine
months of fiscal 1999. We do not expect to record or receive royalty revenue
from ST in the future.
Gross Profit
Gross profit consists of total revenue net of allowances less cost of
revenue. Cost of revenue consists primarily of the costs of semiconductors
purchased from contract manufacturers (including assembly, test and packaging),
manufacturing support costs (labor and overhead associated with such
purchases), inventory provisions and shipping costs. Our gross profit margin in
any period varies depending on the mix of types of graphics processors sold.
Gross profit increased to $36.8 million in the third quarter of fiscal 2000
from $18.7 million in the third quarter of fiscal 1999. Excluding royalty
revenue, gross profit margin on product revenue increased to 38% in the third
quarter of fiscal 2000 from 34% in the third quarter of fiscal 1999. For the
first nine months of fiscal 2000, gross profit grew to $90.3 million from $25.3
million in the comparable period of the prior year. Year-to-date gross profit
margin on product revenue was 37% in fiscal 2000 compared to 22% in fiscal
1999. The increase in gross profit margin relates primarily to significant
increases in unit shipments and the favorable impact of the higher margin RIVA
TNT2 graphics processors, partially offset by declining profit margins in our
older product families. In the third quarter of fiscal 2000, a portion of our
new GeForce 256(TM) GPU sold was bundled with Double Data Rate (DDR) memories,
and the inclusion of the DDR memories has tended to increase absolute margin
dollars but to lower the gross margin percentage. We expect to continue
bundling DDR memories with some of our high-performance products for the
foreseeable future, which may negatively impact our gross margin percentage.
Although we achieved substantial growth in gross profit and gross profit margin
in this period, we do not expect to sustain these rates of growth in future
periods.
Operating Expenses
Research and Development. Research and development expenses consist of
salaries and benefits, cost of development tools and software, costs of
prototypes of new products and consultant costs. As a percentage of total
revenue, research and development expenses increased to 13% in the third
quarter of fiscal 2000 from 12% in the third quarter of fiscal 1999, and
increased in absolute dollars to $12.4 million from $6.3 million. Year-to-date
research and development expenses in fiscal 2000 increased to $32.0 million
from $16.7 million in fiscal 1999. As a percentage of total revenue, year-to-
date research and development expenses in fiscal 2000 decreased to 13% compared
to 18% in the same period in fiscal 1999. The increase in absolute dollars was
primarily due to additional personnel and related engineering costs to support
our next generations products, such as depreciation charges incurred on capital
expenditures and software license and maintenance fees. As part of the
strategic relationship agreement, 17 engineering personnel transferred from SGI
during this quarter. 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 fourth quarter of fiscal 2000. 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 our level
of revenue fluctuates.
As part of a strategic collaboration agreement with ST, we received contract
funding in support of research and development and marketing efforts for the
RIVA 128 and RIVA 128ZX graphics processors. Accordingly, we recorded
approximately $625,000 and $1.9 million in the third quarter and first nine
months of fiscal 1999, respectively, as a reduction primarily to research and
development. We were obligated to provide continued
11
<PAGE>
development and support to ST through the end of calendar 1998. We currently do
not have any plans to enter into contractual development arrangements and do
not expect to receive contract funding in the future.
Sales, General and Administrative. Sales, general and administrative
expenses consist primarily of salaries, commissions and bonuses earned by
sales, marketing and administrative personnel, promotional and advertising
expenses, travel and entertainment expenses and legal expenses. Sales, general
and administrative expenses as a percentage of total revenue increased to 10%
in the third quarter of fiscal 2000 from 9% in the third quarter of fiscal 1999
and increased in absolute dollars to $9.3 million from $4.7 million. For the
first nine months of fiscal 2000, sales, general and administrative expenses
increased to $24.7 million compared to $12.5 million in the same period in
fiscal 1999. The increase in absolute dollars was primarily the result of
additional personnel and commissions and bonuses on sales of the RIVA TNT2 and
GeForce 256 graphics processors as well as legal expenses associated with
patent litigation. We expect sales, general and administrative expenses to
continue to increase in absolute dollars as we expand our operations, but we do
not expect significant changes in these expenses as a percentage of revenue in
future periods.
Interest and Other Income, Net
Interest income primarily consists of interest earned on cash and cash
equivalents. Interest expense primarily consists of interest incurred as a
result of capital lease obligations. Net interest income increased to $430,000
in the third quarter of fiscal 2000 from $11,000 in the third quarter of fiscal
1999. For the first nine months of fiscal 2000, net interest income increased
to $1.1 million from $60,000 in the comparable period of fiscal 1999. The
increase in net interest income was primarily due to higher average cash
balances as a result of cash proceeds received from the initial public offering
of our common stock in January 1999.
Income Taxes
We had an effective tax rate of 32% in the third quarter and first nine
months of fiscal 2000. For the first nine months of fiscal 1999, we recorded an
aggregate benefit of $308,000 for income taxes. We anticipate our tax rates for
the remainder of fiscal 2000 will remain relatively constant, depending on the
availability and realizability of deferred tax assets. Realization of the
deferred tax assets will depend on future taxable income.
Stock-Based Compensation
With respect to stock options granted to employees, we recorded deferred
compensation of $4.3 million in 1997 and $361,000 in the one month ended
January 31, 1998. These amounts are being amortized over the vesting period of
the individual options, generally four years. We amortized approximately
$126,000 in the third quarter of fiscal 2000 compared to $526,000 in the third
quarter of fiscal 1999. Year-to-date amortization decreased to $578,000 in
fiscal 2000 from $2.2 million in fiscal 1999. We anticipate total amortization
of approximately $650,000 in fiscal 2000.
Liquidity and Capital Resources
As of October 31, 1999, we had $55.2 million in cash and cash equivalents,
an increase of $4.9 million over the same balance at the end of fiscal 1999. We
historically have held our cash balances in cash equivalents such as money
market funds or as cash. We place the money market funds with high-quality
financial institutions and limit the amount of exposure with any one financial
institution. We had $104.3 million of noncancelable inventory purchase
commitments outstanding at October 31, 1999.
In July 1999, we entered into an amended loan and security agreement with a
bank, which included a $10.0 million revolving credit facility with a borrowing
base equal to 80% of eligible accounts. Borrowings under the line of credit
bear interest at prime rate and are due in July 2000. Covenants governing the
credit facility require the maintenance of certain financial ratios. As of
October 31, 1999, we had no outstanding borrowings against the line of credit.
12
<PAGE>
Operating activities generated cash of $10.6 million and used cash of $5.9
million during the first nine months of fiscal 2000 and 1999, respectively. For
the first nine months of fiscal 2000, the most significant source of cash was
$23.5 million of net income, offset by changes in operating assets and
liabilities. Our accounts receivable are highly concentrated. Five customers
accounted for approximately 64% of the accounts receivable for the first nine
months of fiscal 2000. Although we have not experienced any significant bad
debt write-offs to date, we may be required to write off bad debt in the
future, which could harm our business. In June 1999, we repurchased 428,572
shares of our common stock from a major customer in settlement for a portion of
then outstanding accounts receivable in the amount of $7.5 million.
To date, our investing activities have consisted primarily of purchases of
property and equipment. Our capital expenditures, including capital leases,
were $21.1 million during the first nine months of fiscal 2000 and $6.5 million
during the first nine months of fiscal 1999. The increase was primarily
attributable to a $10.0 million obligation pursuant to a long-term licensing
agreement with a supplier. We expect capital expenditures to increase as we
further expand research and development initiatives and as our employee base
grows. The timing and amount of future capital expenditures will depend
primarily on our future growth. We expect to spend an additional $5.0 million
for capital expenditures in the next three months, primarily for software
licenses, emulation equipment and the purchase of computer and engineering
workstations.
Financing activities provided cash of $4.3 million in the nine months ended
October 31, 1999, compared to $14.7 million in the nine months ended October
25, 1998. In February 1999, we received $5.7 million from the underwriters'
exercise of their option to purchase an additional 525,000 shares of common
stock at a price of $12 per share. Additionally, we received proceeds of $4.9
million from the issuance of common stock under employee stock option and
purchase plans. We used $5.0 million to repay in full amounts outstanding under
a bank line of credit. The balance of the net proceeds will be used for general
corporate purposes, including capital expenditures and working capital.
We believe that our existing cash balances, anticipated cash flows from
operations and capital lease financing will be sufficient to meet our operating
and capital requirements for at least the next 12 months, although we could
elect to raise additional funds during that period. We expect that we may need
to raise additional equity or debt financing in the future. Additional
financing may not be available on favorable terms or at all and may be dilutive
to our then-current stockholders. We also may require additional capital for
other purposes not presently contemplated. If we are unable to obtain
sufficient capital, we could be required to curtail capital equipment purchases
and/or research and development expenditures, which could harm our business.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software like this may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
We are heavily dependent upon the proper functioning of our own computer or
data-dependent systems. These include, but are not limited to, information
systems in business, finance, operations and service. Any failure or
malfunctioning on the part of these or other systems could adversely affect us
in ways that are not currently known, discernible, quantifiable or otherwise
anticipated by us.
Our graphics processors and related software do not depend on any date-
sensitive functions in order to perform in accordance with their respective
designs, and we do not expect their functions to be negatively affected by the
Year 2000 issue. Our products are ultimately used with a number of different
hardware and software products, and to the extent these third-party products
are not Year 2000 compliant, the interoperability of our products may be
adversely affected. Given the number of third-party components and our limited
resources, we do not expect to review these third-party products.
13
<PAGE>
We have conducted and completed an audit of our critical internal financial,
informational and operational systems and our electronic design tools to
identify and evaluate those areas of our business that may be affected by the
Year 2000 issue. We have completed a detailed plan to implement and test any
necessary modifications to these key areas to ensure that they are Year 2000
compliant. Our plan includes the following components:
. independent validation of our Year 2000 assessment procedures;
. formal communications with all significant suppliers, large customers and
tools vendors to determine the extent to which we are vulnerable to those
third parties' failure to remedy their own Year 2000 issues; and
. the development of contingency plans to address situations that may
result if we are unable to achieve Year 2000 readiness of our critical
operations.
We anticipate that any required remediation programs will be completed by
the end of calendar 1999.
To date, we have not incurred material incremental costs associated with our
efforts to become Year 2000 compliant, as the majority of the costs have
occurred as a result of normal upgrade procedures. We believe that total costs
associated with our Year 2000 compliance efforts will not exceed $500,000.
In addition to the risks associated with our own systems, we have
relationships with, and are to varying degrees dependent upon, a large number
of third parties that provide information, goods and services to us and
manufacture our graphics processors. Our business could suffer if key suppliers
experience Year 2000 issues that cause them to delay manufacturing or shipment
of finished product to us. In addition, our results of operations could suffer
if any of our key customers encounter Year 2000 issues that cause them to delay
or cancel substantial purchase orders or delivery of our product. We have
completed formal communications to ascertain the Year 2000 compliance of key
suppliers and determined the extent to which we may be vulnerable to those
third parties' failure to remedy their own Year 2000 issues.
We have completed an inventory of internal systems, hardware, software,
communication networks and non-information technology systems and services. To
date, we have substantially completed the following:
. assessing specific underlying computer systems, programs and hardware;
. evaluating remediation or replacement of Year 2000 non-compliant
technology;
. conducting validation and testing of technologically-compliant Year 2000
solutions; and
. completing implementation of Year 2000 compliant systems.
While we plan to complete modifications or upgrades of our business-critical
systems prior to the Year 2000, we may be unable to develop a plan to address
the Year 2000 issue in a timely manner or to upgrade any or all of our major
systems in accordance with our plan. If any required modifications or upgrades
or modifications by key suppliers or customers are not completed in a timely
manner or are not successful, we may be unable to conduct our business. In
addition, any upgrades made may not effectively address the Year 2000 issue.
Furthermore, the systems of other companies on which we rely for the
manufacture of our products may not be converted in a timely manner. A failure
to convert by another company, or a conversion that is incompatible with our
systems, could harm our business.
We or one or more third parties may encounter unforeseen problems with
respect to any of our systems, which could harm our business. We are currently
evaluating possible actions, including accumulating excess inventory of our
finished products, to be taken in the event that our assessment of the Year
2000 issue is not successfully completed on a timely basis.
14
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from the investments
without significantly increasing risk. To minimize potential loss arising from
adverse changes in interest rates, we maintain a portfolio of cash and cash
equivalents primarily in highly rated domestic money market funds. In general,
money market funds are not subject to market risk because the interest paid on
such funds fluctuates with the prevailing interest rate.
Exchange Rate Risk
We consider our exposure to foreign exchange rate fluctuations to be
minimal. Currently, all of our arrangements with third-party manufacturers
provide for pricing and payment in U.S. dollars, and, therefore, are not
subject to exchange rate fluctuations. To date, we have not engaged in any
currency hedging activities, although we may do so in the future. Fluctuations
in foreign currency exchange rates could harm our business in the future.
Certain Business Risks
In addition to the risks discussed in "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our business is subject to
the risks set forth below.
Our operating results are unpredictable and they may fluctuate. Many of our
revenue components fluctuate and are difficult to predict, and our operating
expenses are largely independent of revenue in any particular period. It is
therefore difficult for us to accurately forecast revenue and profits or
losses. We believe that, even if we do achieve significant sales of our
products, our quarterly and annual results of operations will be affected by a
variety of factors that could adversely affect our revenue, gross profit and
results of operations.
Factors that have affected our results of operations in the past, and are
likely to affect our results of operations in the future, include the
following:
. demand and market acceptance for our products;
. the successful development of next-generation products;
. unanticipated delays or problems in the introduction or performance of
next-generation products;
. market acceptance of the products of our customers;
. new product announcements or product introductions by our competitors;
. our ability to introduce new products in accordance with OEM design
requirements and design cycles;
. changes in the timing of product orders due to unexpected delays in the
introduction of our products and/or our customers' products or due to the
life cycles of our customers' products ending earlier than anticipated;
. fluctuations in the availability of manufacturing capacity or
manufacturing yields;
. competitive pressures resulting in lower than expected average selling
prices;
. the volume of orders that are received and that can be fulfilled in a
quarter;
. rates of return in excess of that forecasted/expected due to quality
issues;
. the rescheduling or cancellation of customer orders;
. the unanticipated termination of strategic relationships;
15
<PAGE>
. seasonal fluctuations associated with the tendency of PC sales to
decrease in the second quarter and increase in the second half of each
calendar year; and
. the level of expenditures for our research and development and sales,
general and administrative functions.
In addition, we may experience difficulties related to the production of
current or future products and other factors may delay the introduction or
volume sales of new products we develop. We believe that quarterly and annual
results of operations also could be affected in the future by other factors,
including the following:
. changes in the relative volume of sales of our products;
. seasonality in the PC market;
. our ability to reduce the process geometry of our products;
. supply constraints for the other components incorporated into our
customers' products;
. the loss of a key customer;
. introductions of enabling technologies to keep pace with faster
generations of processors and controllers;
. shortages of memories due to increased demand in the industry;
. changes in the pricing of dynamic random access memory devices ("DRAMs")
or other memory components;
. legal and other costs related to defending intellectual property
litigation;
. costs associated with protecting our intellectual property;
. costs related to acquiring or licensing intellectual property;
. inventory write-downs; and
. foreign exchange rate fluctuations.
Any one or more of the factors discussed above could prevent us from
achieving our expected future revenue or net income.
Because most operating expenses are relatively fixed in the short term, we
may be unable to adjust spending sufficiently in a timely manner to compensate
for any unexpected sales shortfall. We may be required to reduce prices in
response to competition or to pursue new market opportunities. If new
competitors, technological advances by existing competitors or other
competitive factors require us to invest significantly greater resources than
anticipated in research and development or sales and marketing efforts, our
business could suffer. Accordingly, we believe that period-to-period
comparisons of our results of operations should not be relied upon as an
indication of our future performance. In addition, the results of any quarterly
period are not indicative of results to be expected for a full fiscal year.
We have a limited operating history and a history of losses. We have a
limited operating history and it is difficult to predict our future operating
results. Our recent revenue growth may not be sustainable and should not be
considered indicative of future revenue growth, if any. We generated net income
in the last five consecutive quarters ended October 31, 1999, and in the three
months ended December 31, 1997. However, we incurred losses in the first half
of fiscal 1999, in the first three quarters of fiscal 1997 and in each quarter
of our prior fiscal years. We may not be profitable on a quarterly or annual
basis in the future.
We need to develop new products and manage product transitions in order to
succeed. Our business will depend to a significant extent on our ability to
successfully develop new products for the 3D graphics market. Our add-in board
manufacturers and major OEM customers typically introduce new high end system
16
<PAGE>
configurations as often as twice per year, typically based on spring and fall
design cycles. Accordingly, our existing products must have competitive
performance levels or we must timely introduce new products with such
performance characteristics in order to be included in new system
configurations. This requires that we do the following:
. anticipate the features and functionality that consumers will demand;
. incorporate those features and functionality into products that meet the
exacting design requirements of PC OEMs and add-in board manufacturers or
contract electronics manufacturers (CEMs);
. price our products competitively; and
. introduce the products to the market within the limited window for PC OEM
and add-in board manufacturer or CEM design cycles.
As a result, we believe significant expenditures for research and
development will continue to be required in the future.
Our strategy is to utilize the most advanced process technology appropriate
for our products and available from commercial third-party foundries. Use of
advanced processes has in the past resulted in initial yield problems. New
products that we introduce may not incorporate the features and functionality
demanded by PC OEMs, add-in board manufacturers and consumers of 3D graphics.
In addition, we may not successfully develop or introduce new products in
sufficient volumes within the appropriate time to meet both the PC OEMs' design
cycles and market demand. We have in the past experienced delays in the
development of some new products. Our failure to successfully develop,
introduce or achieve market acceptance for new 3D graphics products would harm
our business.
As markets for our 3D graphics processors develop and competition increases,
we anticipate that product life cycles in the high end will remain short and
ASPs will continue to decline. In particular, we expect ASPs and gross margins
for our 3D graphics processors to decline as each product matures and as unit
volume increases. As a result, we will need to introduce new products and
enhancements to existing products to maintain overall ASPs and gross margins.
In order for our 3D graphics processors to achieve high volumes, leading PC
OEMs and add-in board manufacturers must select our 3D graphics processor for
design into their products, and then successfully complete the designs of their
products and sell them. We may be unable to successfully identify new product
opportunities or develop and bring to market in a timely fashion any new
products. In addition, we cannot guarantee that any new products we develop
will be selected for design into PC OEMs' and add-in board manufacturers'
products, that any new designs will be successfully completed or that any new
products will be sold. As the complexity of our products and the manufacturing
process for our products increases, there is an increasing risk that we will
experience problems with the performance of our products and that there will be
delays in the development, introduction or volume shipment of our products. We
recently introduced the RIVA TNT2 and GeForce 256 families of graphics
processors. While we have not experienced yield problems to date, we may
experience problems or other delays while in production of these products. We
may experience difficulties related to the production of current or future
products or other factors may delay the introduction or volume sale of new
products we developed. In addition, we may be unable to successfully manage the
production transition risks with respect to future products. Failure to achieve
any of the foregoing with respect to future products or product enhancements
could result in rapidly declining ASPs, reduced margins, reduced demand for our
products or loss of market share. In addition, technologies developed by others
may render our 3D graphics products non-competitive or obsolete or result in
our holding excess inventory, either of which would harm our business.
In the design and development of new products and product enhancements, we
rely on third-party software development tools. While we currently are not
dependent on any one vendor for the supply of these tools, some or all of these
tools may not be readily available in the future. For example, we have
experienced delays in the introduction of products in the past as a result of
the inability of then-available software development tools to
17
<PAGE>
fully simulate or emulate the complex features and functionality of our
products. The design requirements necessary to meet consumer demands for more
features and greater functionality from 3D graphics products in the future may
exceed the capabilities of the software development tools available to us. If
the software development tools we use become unavailable or fail to produce
designs that meet consumer demands, our business could suffer.
We may be unable to obtain design wins. Our future success will depend in
large part on achieving design wins, which entails having our existing and
future products chosen as the 3D graphics processors for hardware components or
subassemblies designed by PC OEMs and add-in board manufacturers. Our failure
to achieve one or more design wins would harm our business. The process of
being qualified for inclusion in a PC OEM's product can be lengthy and could
cause us to miss a cycle in the demand of end users for a particular product
feature, which also could harm our business.
Our ability to achieve design wins will depend in part on our ability to
identify and ensure compliance with evolving industry standards. Unanticipated
changes in industry standards could render our products incompatible with
products developed by major hardware manufacturers and software developers,
including Intel and Microsoft. This would require us to invest significant time
and resources to redesign our products to ensure compliance with relevant
standards. If our products are not in compliance with prevailing industry
standards for a significant period of time, our ability to achieve design wins
could suffer. Our failure to achieve design wins would result in the loss of
any potential sales volume that could be generated by newly designed PC
hardware component or board subassembly. This would give a competitive
advantage to the 3D graphics processor manufacturer that achieved the design
win.
We are dependent on the desktop PC market, which may not continue to
grow. In the first nine months of fiscal 2000, we derived all our revenue from
the sale of products for use in PCs. We expect to continue to derive
substantially all of our revenue from the sale or license of products for use
in PCs. The PC market is characterized by rapidly changing technology, evolving
industry standards, frequent new product introductions and significant price
competition. These factors result in short product life cycles and regular
reductions of ASPs over the life of a specific product. Although the PC market
has grown substantially in recent years, this growth may not continue. A
reduction in sales of PCs, or a reduction in the growth rate of PC sales, would
likely reduce demand for our products. Moreover, changes in demand could be
large and sudden. Since PC manufacturers often build inventories during periods
of anticipated growth, they may be left with excess inventories if growth slows
or if they have incorrectly forecast product transitions. In these cases, PC
manufacturers may abruptly suspend substantially all purchases of additional
inventory from suppliers like us until the excess inventory has been absorbed.
Any reduction in the demand for PCs generally, or for a particular product that
incorporates our 3D graphic processors, could harm our business.
The market for mainstream PC 3D graphics is new and uncertain. Our success
will depend, in part, upon the demand for 3D graphics for mainstream PC
applications. The market for 3D graphics on mainstream PCs has only recently
begun to emerge and is dependent on the future development of, and substantial
end-user and OEM demand for, 3D graphics functionality. As a result, the market
for mainstream PC 3D graphics computing may not continue to develop or may not
grow at a rate sufficient to support our business. The development of the
market for 3D graphics on mainstream PCs will in turn depend on the development
and availability of a large number of mainstream PC software applications that
support or take advantage of 3D graphics capabilities. Currently there are only
a limited number of software applications like this, most of which are games,
and a broader base of software applications may not develop in the near term or
at all. Until very recently, the majority of multimedia PCs incorporated only
2D graphics acceleration technology, and as a result, the majority of graphics
applications currently available for mainstream PCs are written for 2D
acceleration technology. Consequently, a broad market for full function 3D
graphics on mainstream PCs may not develop. Our business will suffer if the
market for mainstream PC 3D graphics fails to develop or develops more slowly
than expected.
18
<PAGE>
We are dependent on a small number of customers and we are subject to order
and shipment uncertainties. We have only a limited number of customers and our
sales are highly concentrated. We primarily sell our products to CEMs, add-in
board and motherboard manufacturers, which incorporate graphics products in the
boards they sell to PC OEMs. Sales to add-in board and motherboard
manufacturers are primarily dependent on achieving design wins with leading PC
OEMs. We believe that a considerable portion of our revenue in the most recent
quarter was attributable to products that ultimately were incorporated into PCs
sold by Compaq Computer Corporation, Dell Computer Corporation, Gateway 2000,
Inc., Hewlett-Packard, Intel, International Business Machines Corporation and
Micron Technology, Inc. The number of add-in board and motherboard
manufacturers and leading PC OEMs is limited. We expect that a small number of
add-in board and motherboard manufacturers directly, and a small number of PC
OEMs indirectly, will continue to account for a substantial portion of our
revenue for the foreseeable future. As a result, our business could be harmed
by the loss of business from the OEM or add-in board and motherboard
manufacturers. In addition, revenue from add-in board and motherboard
manufacturers or PC OEMs that have directly or indirectly accounted for
significant revenue in past periods, individually or as a group, may not
continue, or may not reach or exceed historical levels in any future period.
We depend on third-party manufacturers to produce our products. We do not
manufacture the semiconductor wafers used for our products and do not own or
operate a wafer fabrication facility. Our products require wafers manufactured
with state-of-the-art fabrication equipment and techniques. We utilize TSMC and
WaferTech to produce our semiconductor wafers and utilize independent
contractors to perform assembly, test and packaging. We depend on these
suppliers to allocate to us a portion of their manufacturing capacity
sufficient to meet our needs, to produce products of acceptable quality and at
acceptable manufacturing yields, and to deliver those products to us on a
timely basis. These manufacturers may be unable to meet our near-term or long-
term manufacturing requirements. We obtain manufacturing services on a purchase
order basis and TSMC has no obligation to provide us with any specified minimum
quantities of product. TSMC fabricates wafers for other companies, including
certain of our competitors, and could choose to prioritize capacity for other
users or reduce or eliminate deliveries to us on short notice. Because the lead
time needed to establish a strategic relationship with a new manufacturing
partner could be several months, there is no readily available alternative
source of supply for any specific product. We believe that long-term market
acceptance for our products will depend on reliable relationships with TSMC and
any other manufacturers used by us to ensure adequate product supply to respond
to customer demand.
During this quarter, the effects of the earthquake in Taiwan contributed to
a temporary shortage of graphics processors. Any substantial disruption in our
suppliers' operations, either as a result of a natural disaster, equipment
failure or other cause, could have a material adverse effect on our business.
We are dependent primarily on TSMC and we expect in the future to continue
to be dependent upon third-party manufacturers to do the following:
. produce wafers of acceptable quality and with acceptable manufacturing
yields;
. deliver those wafers to us and our independent assembly and testing
subcontractors on a timely basis and;
. allocate to us a portion of their manufacturing capacity sufficient to
meet our needs.
Our wafer requirements represent a small portion of the total production
capacity of TSMC. Although our products are designed using TSMC's process
design rules, TSMC may be unable to achieve or maintain acceptable yields or
deliver sufficient quantities of wafers on a timely basis or at an acceptable
cost. Additionally, TSMC may not continue to devote resources to the production
of our products or to advance the process design technologies on which the
manufacturing of our products are based. Any difficulties like this would harm
our business.
19
<PAGE>
Low manufacturing yields would harm our business. Semiconductor
manufacturing yields are a function both of product design, which is developed
largely by us, and process technology, which is typically proprietary to the
manufacturer. Since low yields may result from either design or process
technology failures, yield problems may not be effectively determined or
resolved until an actual product exists that can be analyzed and tested to
identify process sensitivities relating to the design rules that are used. As a
result, yield problems may not be identified until well into the production
process, and resolution of yield problems would require cooperation by and
communication between the manufacturer and us. The risk of low yields is
compounded by the offshore location of most of our manufacturers, increasing
the effort and time required identifying, communicating and resolving
manufacturing yield problems. Because of our potentially limited access to
wafer fabrication capacity from our manufacturers, any decrease in
manufacturing yields could result in an increase in our per unit costs and
force us to allocate our available product supply among our customers. This
could potentially harm customer relationships as well as revenue and gross
profit. Our wafer manufacturers may be unable to achieve or maintain acceptable
manufacturing yields in the future. Our inability to achieve planned yields
from our wafer manufacturers could harm our business.
We face many other risks. Also inherent in our business are additional
risks, which include but are not limited to the following:
. our ability to manage growth;
. our dependence on key personnel;
. the risk of product returns, product defects or product
incompatibilities;
. our inability to transition to new manufacturing process technologies;
. the risks associated with international operations, which accounted for a
significant portion of our revenue in the first nine months of fiscal
2000;
. the cyclical nature of the semiconductor industry; and
. our ability to adequately protect our intellectual property rights.
20
<PAGE>
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Use of Proceeds from Sales of Registered Securities
We commenced our initial public offering on January 21, 1999 pursuant to a
Registration Statement on Form S-1 (File No. 333-47495). The managing
underwriters of the public offering were Morgan Stanley & Co., Hambrecht &
Quist and Prudential Securities (the Underwriters). In the offering, we sold
an aggregate of 3.5 million shares of our common stock for an initial price of
$12.00 per share. On February 2, 1999, we sold an additional 525,000 shares of
our common stock at a price of $12.00 per share pursuant to the exercise of
the Underwriters' over-allotment option. The aggregate proceeds from the
offering were $48.3 million. We paid expenses of approximately $5.0 million,
of which approximately $3.4 million represented underwriting discounts and
commissions and approximately $1.6 million represented expenses related to the
offering. Net proceeds from the offering were $43.3 million. Of the net
proceeds, as of October 31, 1999, $5.0 million had been used to repay in full
amounts outstanding under a bank line of credit. The use of the proceeds from
the offering does not represent a material change in the use of proceeds
described in our Registration Statement. As of October 31, 1999, the remainder
of the net proceeds was invested in money market funds.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the registrant during the three months
ended October 31, 1999.
21
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on December 9, 1999.
NVIDIA Corporation
/s/ Christine B. Hoberg
By: _________________________________
Christine B. Hoberg
Chief Financial Officer
(Principal Financial and
Accounting Officer)
22
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF OCTOBER 31, 1999 AND THE STATEMENT OF INCOME FOR THE THREE MONTHS
ENDED OCTOBER 31 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-2000
<PERIOD-START> AUG-02-1999
<PERIOD-END> OCT-31-1999
<CASH> 55,200
<SECURITIES> 0
<RECEIVABLES> 61,414
<ALLOWANCES> 4,995
<INVENTORY> 11,734
<CURRENT-ASSETS> 127,562
<PP&E> 39,240
<DEPRECIATION> 12,616
<TOTAL-ASSETS> 157,553
<CURRENT-LIABILITIES> 52,234
<BONDS> 0
0
0
<COMMON> 30
<OTHER-SE> 98,370
<TOTAL-LIABILITY-AND-EQUITY> 157,553
<SALES> 97,015
<TOTAL-REVENUES> 97,015
<CGS> 60,195
<TOTAL-COSTS> 60,195
<OTHER-EXPENSES> 21,713
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54
<INCOME-PRETAX> 15,537
<INCOME-TAX> 4,973
<INCOME-CONTINUING> 10,564
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,564
<EPS-BASIC> 0.35
<EPS-DILUTED> 0.29
</TABLE>
