<PAGE>
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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 July 30, 2000
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)
<TABLE>
<S> <C>
Delaware 94-3177549
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
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
September 1, 2000 was 65,453,929 shares.
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<PAGE>
NVIDIA CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of July 30, 2000 and
January 30, 2000.............................................. 3
Condensed Consolidated Statements of Income for the three
months and six months ended July 30, 2000 and August 1, 1999.. 4
Condensed Consolidated Statements of Cash Flows for the six
months ended July 30, 2000 and August 1, 1999................. 5
Notes to Condensed Consolidated 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..... 14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.............................................. II-1
Item 2. Changes in Securities and Use of Proceeds...................... II-1
Item 4. Submissiom of Matters to a Vote of Security Holders............ II-2
Item 6. Exhibits and Reports on Form 8-K............................... II-2
Signature............................................................... II-3
</TABLE>
i
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
NVIDIA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 30, January 30,
2000 2000
-------- -----------
(In thousands)
(Unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.............................. $289,205 $ 61,560
Accounts receivable, less allowances of $10,388 at July
30, 2000 and $6,443 at January 30, 2000............... 85,092 67,224
Inventory.............................................. 68,135 37,631
Prepaid expenses and other current assets.............. 24,504 6,760
-------- --------
Total current assets................................. 466,936 173,175
Property and equipment, net.............................. 34,908 25,886
Deposits and other assets................................ 5,339 3,189
-------- --------
$507,183 $202,250
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable....................................... $ 75,887 $ 64,910
Accrued liabilities.................................... 23,430 9,529
Current portion of capital lease obligations........... 1,104 1,786
-------- --------
Total current liabilities............................ 100,421 76,225
Capital lease obligations, less current portion.......... 672 962
Deferred revenue......................................... 200,000 --
Long-term payable........................................ -- 500
Stockholders' equity:
Common stock........................................... 65 62
Additional paid-in capital............................. 136,563 95,933
Deferred compensation.................................. (33) (118)
Retained earnings...................................... 69,495 28,686
-------- --------
Total stockholders' equity........................... 206,090 124,563
-------- --------
$507,183 $202,250
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
NVIDIA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ -----------------
July 30, August 1, July 30, August
2000 1999 2000 1, 1999
-------- --------- -------- --------
(In thousands, except per share
amounts)
(Unaudited)
<S> <C> <C> <C> <C>
Revenue.................................. $170,398 $78,017 $318,881 $149,035
Cost of revenue.......................... 106,631 49,625 199,606 95,571
-------- ------- -------- --------
Gross profit............................. 63,767 28,392 119,275 53,464
-------- ------- -------- --------
Operating expenses:
Research and development............... 20,141 10,813 37,971 19,598
Sales, general and administrative...... 14,603 8,116 26,717 15,400
-------- ------- -------- --------
Total operating expenses............. 34,744 18,929 64,688 34,998
-------- ------- -------- --------
Operating income......................... 29,023 9,463 54,587 18,466
Interest and other income, net........... 4,098 369 5,426 711
-------- ------- -------- --------
Income before income tax expense......... 33,121 9,832 60,013 19,177
Income tax expense....................... 10,599 3,146 19,204 6,230
-------- ------- -------- --------
Net income............................... $ 22,522 $ 6,686 $ 40,809 $ 12,947
======== ======= ======== ========
Basic net income per share............... $ 0.35 $ 0.11 $ 0.64 $ 0.22
======== ======= ======== ========
Diluted net income per share............. $ 0.28 $ 0.09 $ 0.52 $ 0.18
======== ======= ======== ========
Shares used in basic per share
computation............................. 64,617 58,687 63,988 58,620
Shares used in diluted per share
computation............................. 79,487 70,910 78,633 70,910
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
NVIDIA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
-------------------
July 30, August 1,
2000 1999
-------- ---------
(In thousands)
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 40,809 $ 12,947
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................ 6,359 3,640
Amortization of deferred compensation.................... 85 452
Common stock issued in exchange for assets and services.. 1,324 4
Tax benefit from employee stock plans.................... 30,325 503
Changes in operating assets and liabilities:
Accounts receivable.................................... (17,868) (36,998)
Inventory.............................................. (30,504) 20,182
Prepaid expenses and other current assets.............. (17,744) (1,147)
Deposit and other current assets....................... (2,471) (2,968)
Accounts payable....................................... 10,477 (951)
Accrued liabilities.................................... 13,901 3,441
-------- --------
Net cash provided by operating activities............ 34,693 (895)
-------- --------
Cash flows used in investing activities:
Purchase of property and equipment....................... (15,060) (4,716)
-------- --------
Cash flows from financing activities:
Payments under line of credit............................ -- (5,000)
Common stock issued under employee stock plans........... 8,984 990
Long-term payable related to patent license agreement.... -- 1,000
Advance in connection with Microsoft agreement........... 200,000 --
Sale of common stock under public offering, net of
issuance costs.......................................... -- 5,810
Payments under capital leases............................ (972) (689)
-------- --------
Net cash provided by financing activities............ 208,012 2,111
-------- --------
Change in cash and cash equivalents........................ 227,645 (3,500)
Cash and cash equivalents at beginning of period........... 61,560 50,257
-------- --------
Cash and cash equivalents at end of period................. $289,205 $ 46,757
======== ========
Cash paid for interest..................................... $ 92 $ 133
======== ========
Cash paid for taxes........................................ $ 145 $ 8,803
======== ========
Noncash financing and investing activities:
Assets recorded under capital lease...................... $ -- $ 16
======== ========
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 consolidated financial statements.
5
<PAGE>
NVIDIA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands)
1. Basis of presentation
The accompanying condensed consolidated 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 notes 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 30, 2000.
2. Net income per share
Basic net income per share is computed using the weighted average number of
common shares outstanding during the period. Diluted net income per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period, using either the as-if-
converted method for convertible preferred stock or the treasury stock method
for options and warrants.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ------------------
July 30, August 1, July 30, August 1,
2000 1999 2000 1999
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Denominator:
Denominator for basic net income per
share--weighted-average shares........ 64,617 58,687 63,988 58,620
Effect of dilutive securities:
Stock options outstanding............ 14,870 11,436 14,645 11,754
Warrants............................. -- 282 -- 283
Common stock issuable in connection
with long-term software license..... -- 505 -- 253
------ ------ ------ ------
Denominator for diluted net income per
share................................. 79,487 70,910 78,633 70,910
====== ====== ====== ======
</TABLE>
3. Comprehensive income
The Company had no other components of comprehensive income other than the
reported amounts of net income.
4. Inventory
<TABLE>
<CAPTION>
July
30, January 30,
2000 2000
------- -----------
<S> <C> <C>
Work in-process....................................... $21,496 $ 6,446
Finished goods........................................ 46,639 31,185
------- -------
Total inventory..................................... $68,135 $37,631
======= =======
</TABLE>
At July 30, 2000, the Company had noncancelable inventory purchase
commitments totaling $157.1 million.
6
<PAGE>
NVIDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Segment Information
The Company operates in a single industry segment: the design, development
and marketing of 3D graphics processors for the entire desktop personal
computer or PC market, from professional workstations to low-cost PCs. 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 Six Months Ended
------------------ ------------------
July 30, August 1, July 30, August 1,
2000 1999 2000 1999
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
United States.......................... $ 23,298 $28,543 $ 38,143 $ 63,370
Asia Pacific........................... 121,440 41,585 231,325 72,906
Europe................................. 25,660 7,889 49,413 12,759
-------- ------- -------- --------
Total revenue........................ $170,398 $78,017 $318,881 $149,035
======== ======= ======== ========
</TABLE>
Revenue to significant customers, those representing approximately 10% or
more of total revenue and accounts receivable for the respective periods, is
summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- ------------------
July 30, August 1, July 30, August 1,
2000 1999 2000 1999
-------- ----------- -------- ---------
<S> <C> <C> <C> <C>
Sales
Customer A......................... 1% 24% -- 25%
Customer B......................... 7% 17% 9% 18%
Customer C......................... 21% 20% 22% 16%
Customer D......................... 11% -- 10% --
<CAPTION>
As of
--------------------
July 30, January 30,
2000 2000
-------- -----------
<S> <C> <C> <C> <C>
Accounts receivable
Customer B......................... 7% 15%
Customer C......................... 15% 12%
Customer D......................... 12% 13%
</TABLE>
6. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133, as amended by
SFAS No. 138, establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. Management does not expect the
adoption of SFAS 133 to have a material effect on the Company's results of
operations or financial position. The Company is required to adopt SFAS 133, as
amended, in fiscal 2002.
In December 1999, the Securities and Exchange Commission, or SEC issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues. The Company is required to adopt SAB 101 no later than the
fourth quarter of fiscal 2001. The SEC has recently
7
<PAGE>
NVIDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
indicated it intends to issue further guidance with respect to adoption of
specific issues addressed by SAB 101. Until such time as this additional
guidance is issued, the Company is unable to assess the impact, if any, it may
have on its results of operations or financial position.
7. 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 487,804 shares
of the Company's common stock valued at $5.0 million. The second installment
was settled in cash on March 31, 2000.
8. Microsoft Agreement
On March 5, 2000, the Company entered into an agreement with Microsoft
pursuant to which the Company agreed to develop and sell graphics chips and to
license certain technology to Microsoft and its licensees for use in the Xbox
video game console under development by Microsoft. In April 2000, Microsoft
paid the Company $200 million as an advance against graphics chip purchases.
Microsoft may terminate the agreement at any time. If termination occurs prior
to offset in full of the advance payments, the Company would be required to
return to Microsoft up to $100 million of the prepayment and to convert the
remainder into preferred stock of the Company at a 30% premium to the 30-day
average trading price of its common stock preceding Microsoft's termination of
the agreement. In addition, in the event that an individual or corporation
makes an offer to purchase shares equal to or greater than thirty percent (30%)
of the outstanding shares of the Company's common stock, Microsoft has first
and last rights of refusal to purchase the stock. The graphics chip
contemplated by the agreement is highly complex, and the development and
release of the Microsoft Xbox video game console and its commercial success are
dependent upon a number of factors, many of which the Company cannot control.
The Company cannot guarantee that it will be successful in developing the
graphics chip for use by Microsoft or that the product will be developed or
released, or if released, will be commercially successful.
9. Stockholders' Equity and Stock Split
In May 2000, the Company's Board of Directors approved a two-for-one stock
split of the Company's common stock for stockholders of record on June 12,
2000, to be effected in the form of a 100% stock dividend. The transfer agent
distributed the shares resulting from the split on June 26, 2000. All share and
per-share numbers contained herein reflect this stock split.
10. Subsequent Event
In August 2000, the Company signed an agreement with ELSA AG to market a
complete line of professional workstation products designed and built by the
Company. The Company will market directly to major original equipment
manufacturers or OEMs, while ELSA will retain the worldwide exclusive
distribution rights to market to all other channels, including system
integrators, value-added resellers and distributors. The Company paid ELSA $3.0
million at signing of the agreement and the second installment of $3.0 million
is due in September 2000 for all workstation software source code and related
intellectual property. As part of the agreement, twelve engineers from the
ELSA's workstation graphics team joined the Company.
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
"Certain Business Risks" section, among other things, should be considered in
evaluating our prospects and future financial performance.
Overview
We design, develop and market a "top-to-bottom" family of award-winning 3D
graphics processors, graphics processing units or GPUs and related software
that set the standard for performance, quality and features for a broad range
of desktop PCs, from professional workstations to low-cost PCs. Our 3D
graphics processors are used in a wide variety of applications, including
games, business productivity, the Internet and industrial design. Our graphics
processors were the first to incorporate a 128-bit multi-texturing graphics
architecture designed to deliver to users of our products a highly immersive,
interactive 3D experience with compelling visual quality, realistic imagery
and motion, stunning effects, and complex object and scene interaction at
real-time frame rates. The NVIDIA TNT2, TNT2 M64 and Vanta graphics processors
deliver high performance 3D and 2D graphics at affordable prices, making them
the graphics hardware of choice for a wide range of applications for both
consumer and commercial use. Our graphics processors are designed to be
architecturally compatible backward and forward, giving our OEM customers and
end users a low cost of ownership. We are recognized for developing the
world's first GPU, which incorporates independent hardware transform and
lighting processing units along with a complete rendering pipeline into a
single-chip architecture. Our GPUs, the GeForce2 Ultra, the GeForce2 GTS, the
GeForce2 MX, the GeForce 256, NVIDIA Quadro2 Pro, Quadro2 MXR and Quadro,
process hundreds of billions of operations per second and increase the PC's
ability to render high-definition 3D scenes in real-time. The GeForce 256,
Quadro and GeForce2 family of GPUs provide the capability for content
developers to build a new generation of entertainment, e-commerce, e-business
and education applications. We also developed an integrated core
logic/graphics chipset called Aladdin TNT2 through a partnership with Acer
Laboratories, Inc. or ALi, one of the leading suppliers of core logic chipsets
for the PC. The Aladdin TNT2 chipset brings NVIDIA-class graphics performance
and quality to the value PC segment.
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 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 and
motherboard manufacturers, primarily ASUSTeK Computer Inc., Creative
Technology Ltd., ELSA AG, and Guillemot Corporation, and contract electronics
manufacturers or CEMs, including Celestica Hong Kong Ltd., Mitac International
Corporation, Micro-Star International Co., Ltd., or MSI, SCI Systems, Inc.,
and VisionTek, Inc. These manufacturers incorporate our processors in the
boards they sell to PC OEMs, retail outlets and systems integrators. The
average selling prices for our products, as well as our customers' products,
vary by distribution channel. Sales to Edom Technology Co., Ltd., an Asian
distributor, accounted for 21%, and sales to Celestica accounted for 11% of
our total revenue for the second
9
<PAGE>
quarter of fiscal 2001. For the first half of fiscal 2001, sales to Edom
accounted for 22%, and sales to Celestica accounted for 10% of our total
revenue. For the second quarter of fiscal 2000, sales to Diamond Multimedia
Systems, Inc. accounted for 24%, sales to Edom accounted for 20%, and sales to
Creative accounted for 17% of our total revenue. For the first half of fiscal
2000, sales to Diamond Multimedia Systems, Inc. accounted for 25%, sales to
Edom accounted for 16%, and sales to Creative accounted for 18% of our total
revenue. Diamond is no longer one of our significant customers following its
acquisition by S3 Incorporated in October 1999. 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.
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
average selling prices will continue to decline. In particular, average selling
prices 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. In order to maintain average selling
prices and gross margins, our existing and new products must achieve
competitive performance levels to be designed into new system configurations
and must be produced at low costs, in sufficient volumes and on a timely basis,
especially with respect to our new products.
We currently utilize Taiwan Semiconductor Manufacturing Company, or TSMC,
our primary manufacturer, and WaferTech LLC (a joint venture controlled by
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 a new manufacturer. The
level of finished goods inventory we maintain may fluctuate and therefore 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.
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. We may build memory and component inventories during periods of
anticipated growth and in connection with selling workstation boards directly
to major OEMs. We could be subject to excess or obsolete inventories and be
required to take corresponding write-downs if growth slows or if we incorrectly
forecast product demand. A reduction in demand could negatively impact our
gross margins and financial results. Product returns or delays or difficulties
in collecting accounts receivable could result in significant charges against
income, which could harm our business.
10
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain items in
our statements of operations expressed as a percentage of total revenue.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ------------------
July 30, August 1, July 30, August 1,
2000 1999 2000 1999
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Revenue................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenue........................... 62.6 63.6 62.6 64.1
----- ----- ----- -----
Gross profit.............................. 37.4 36.4 37.4 35.9
Operating expenses:
Research and development................ 11.8 13.9 11.9 13.2
Sales, general and administrative....... 8.6 10.4 8.4 10.3
----- ----- ----- -----
Total operating expenses.............. 20.4 24.3 20.3 23.5
----- ----- ----- -----
Operating income.......................... 17.0 12.1 17.1 12.4
Interest and other income, net............ 2.4 0.5 1.7 0.5
----- ----- ----- -----
Income before income tax expense.......... 19.4 12.6 18.8 12.9
Income tax expense........................ 6.2 4.0 6.0 4.2
----- ----- ----- -----
Net income................................ 13.2% 8.6% 12.8% 8.7%
===== ===== ===== =====
</TABLE>
Three Months and Six Months Ended July 30, 2000 and August 1, 1999
Revenue
Revenue increased 118% to $170.4 million in the second quarter ended July
30, 2000 from $78.0 million in the second quarter ended August 1, 1999. Revenue
of $318.9 million for the first half of fiscal 2001 grew 114% over the first
half of fiscal 2000. The growth was primarily the result of increased sales of
our RIVA TNT2 and GeForce families of graphics processors related to commercial
desktop wins and the strong demand for our new products which have higher unit
average selling prices. We began bundling double data rate memories with
GeForce products sold in the third quarter of fiscal 2000. Revenue derived from
the bundling of double data rate memories with a portion of our GeForce
products totaled $10.4 million in the second quarter and $29.6 million in the
first half of fiscal 2001. Revenue from sales outside of the United States
accounted for 86% of total revenue for the second quarter and 88% of total
revenue for the first half of fiscal 2001. Revenue from sales outside of the
U.S. represented 63% of total revenue in the second quarter and 58% in the
first half of fiscal 2000. Our international revenue increased 197% to $147.1
million for the second quarter of fiscal 2001 from $49.5 million a year ago.
This increase in revenue from sales outside of the United States is primarily
attributable to (i) expanded use of CEMs and add-in board manufacturers located
outside of the United States, and (ii) increased demand for our products in the
Asia Pacific and European regions. Revenue by geographical region is allocated
to individual countries based on the location to which the products are
initially shipped. The portion of revenue derived from foreign CEMs and add-in
board manufacturers attributable to end customers in the U.S. is not separately
disclosed. Although we achieved substantial growth in product revenue from the
first half of fiscal 2000 to the same period in fiscal 2001, we do not expect
to sustain this rate of growth in future periods. In addition, we expect that
the average selling prices of our products will decline over the lives of the
products. The declines in average selling prices of 3D graphics processors
generally may also accelerate as the market develops and competition increases.
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
11
<PAGE>
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 125% from the second quarter of fiscal
2000 to the same period of fiscal 2001, and 123% from the first half of fiscal
2000 to the same period of fiscal 2001, primarily due to significant increases
in unit shipments and the favorable impact of the higher margin GeForce
families of graphics processing units, partially offset by declining profit
margins in our previous generation products. We began the bundling of double
data rate memories with our GeForce processors in the second half of fiscal
2000. The inclusion of the double data rate memories has reduced the gross
margin percentage but has no incremental impact on absolute margin dollars, as
they are sold at cost. We expect to continue bundling double data rate memories
with some of our high-performance products for at least the next six months.
Although we achieved substantial growth in gross profit and gross profit margin
from the first half of fiscal 2000 to the same period of fiscal 2001, 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. Research and development
expenses increased by 86% from the second quarter of fiscal 2000 to the same
period of fiscal 2001, and 94% from the first half of fiscal 2000 to the first
half of fiscal 2001, primarily due to additional personnel and related
engineering costs to support development of our next generation products, such
as depreciation charges incurred on capital expenditures and software license
and maintenance fees. 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 increased complexity and
the number of products under development. Research and development expenses are
likely to fluctuate from time to time to the extent we make periodic
incremental investments in research and development and our level of revenue
fluctuates.
Sales, General and Administrative. Sales, general and administrative
expenses consist primarily of salaries, commissions and bonuses, promotional
and advertising expenses, travel and entertainment expenses and legal and
accounting expenses. Sales, general and administrative expenses increased 80%
from the second quarter of fiscal 2000 to the same period of fiscal 2001, and
73% from the first half of fiscal 2000 to the first half of fiscal 2001,
primarily due to costs associated with additional personnel, commissions and
bonuses on sales of the RIVA TNT2 and GeForce families of graphics processors,
and increase in bad debt provision of $2.0 million related to one customer
which filed for bankruptcy. We expect sales and marketing expenses to remain
relatively constant in absolute dollars for the second half of fiscal 2001. As
we expand our operations, sales, general and administrative expenses are likely
to increase in absolute dollars. However, 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. Interest expense remained relatively flat
in the second quarter of fiscal 2001 as compared to fiscal 2000. Interest and
other income increased $3.7 million from the second quarter of fiscal 2000 to
the same period of fiscal 2001, due to higher average cash balances as a result
of a $200 million advance received from Microsoft in connection with our
agreement with Microsoft.
Income Taxes
We had an effective tax rate of 32% in the first half of fiscal 2001 and
fiscal 2000. We anticipate our income tax rates for fiscal 2001 will be
relatively constant, but depends on the income tax attributable to foreign
operations and availability of research and experimentation credits.
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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
$85,000 in the first half of fiscal 2001 and $452,000 in the first half of
fiscal 2000. We anticipate total amortization of approximately $113,000 in
fiscal 2001.
Liquidity and Capital Resources
As of July 30, 2000, we had $289.2 million in cash and cash equivalents, an
increase of $227.6 million from the end of fiscal 2000. 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
$157.1 million of noncancelable manufacturing commitments outstanding at July
30, 2000.
In July 1999, we entered into an amended loan and security agreement with a
bank, which included a $10.0 million revolving loan agreement. The agreement
expired on July 29, 2000.
Operating activities generated cash of $34.7 million during the first half
of fiscal 2001 and used cash of $895,000 during the first half of fiscal 2000.
The increase from the first half of fiscal 2000 to same period of fiscal 2001
was due to a substantial increase in net income, offset by changes in operating
assets and liabilities. Income tax benefit derived from the difference between
the exercise price and the fair value of acquired stock in association with
employees' exercise of stock options totaled $30.3 million for the first half
of fiscal 2001 compared to $503,000 in the first half of fiscal 2000. Our
accounts receivable are highly concentrated. As of July 30, 2000, our four
largest customers accounted for approximately 42% of our accounts receivable.
During the second quarter of fiscal 2001, we recorded a bad debt provision of
$2.0 million related to one customer which filed for bankruptcy. Significant
bad debt write-offs in the future could harm our business.
To date, our investing activities have consisted primarily of purchases of
property and equipment. We incurred $14.7 million in capital expenditures in
the first half of fiscal 2000, including $10.0 million attributable to a
software license agreement with an electronic design automation supplier. This
compared to capital expenditures of $15.1 million in the first half of fiscal
2001 for purchases of computer and emulation equipment to support increased
research and development activities, and enterprise resource planning system
implementation. 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 approximately $30.0 to $40.0 million for capital
expenditures in fiscal 2001, primarily for software licenses, emulation
equipment, purchase of computer and engineering workstations, future phases of
enterprise resource planning system implementation and tenant improvements in
our new headquarters facility.
In April 2000, we entered into leases for our new headquarters complex in
Santa Clara, California. Our new complex will comprise four buildings,
representing approximately 500,000 total square feet. We expect the first phase
of two buildings consisting of approximately 250,000 square feet to be
completed in June 2001, the second phase of one building consisting of
approximately 125,000 square feet to be completed in July 2001 and the last
phase to be completed in March 2002. The leases expire in 2012 and include two
seven-year renewals at our option. Future minimum lease payments under these
operating leases total approximately $240.0 million over the terms of the
leases.
Financing activities provided cash of $208.0 million in the first half of
fiscal 2001, compared to $2.1 million in the first half of fiscal 2000. 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 a product under development by
Microsoft. In April 2000, Microsoft paid us $200.0 million
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as an advance against graphics chip purchases. Microsoft may terminate the
agreement at any time. If termination occurs prior to offset in full of the
advance payments, we would be required to return to Microsoft up to $100.0
million of the prepayment and to convert the remainder into shares of our
preferred stock at a 30% premium to the 30-day average trading price of our
common stock preceding Microsoft's termination of the agreement.
We believe that our existing cash balances and anticipated cash flows from
operations will be sufficient to meet our operating and capital requirements
for at least the next 12 months. However, we may need to raise additional
equity or debt financing within this time frame. In March 2000, we filed a
shelf registration statement with the SEC for the offering and sale of up to
$400.0 million of securities. Additional financing may not be available on
favorable terms or at all and may be dilutive to our then-current stockholders.
We also may require additional capital for other purposes not presently
contemplated. If we are unable to obtain sufficient capital, we could be
required to curtail capital equipment purchases or research and development
expenditures, which could harm our business.
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 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 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 and/or customers' products;
. the successful development and volume production of next-generation
products;
. new product announcements or product introductions by our competitors;
. our ability to introduce new products in accordance with OEM design
requirements and design cycles;
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. changes in the timing of product orders due to unexpected delays in the
introduction of products of our customers' products;
. fluctuations in the availability of manufacturing capacity or
manufacturing yields;
. competitive pressures resulting in lower than expected average selling
prices;
. rates of return in excess of that forecasted or expected due to quality
issues;
. the rescheduling or cancellation of customer orders;
. the loss of a key customer or the termination of a strategic
relationship;
. seasonal fluctuations associated with the PC market;
. substantial disruption in our suppliers' operations, either as a result
of a natural disaster, equipment failure or other cause;
. supply constraints for and the changes in the cost of the other
components incorporated into our customers' products, including memory
devices;
. our ability to reduce the manufacturing costs of our products;
. legal and other costs related to defending intellectual property;
. bad debt write-offs;
. unexpected inventory write-downs; and
. introduction of enabling technologies to keep pace with faster
generations of processors and controllers.
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.
Our 3D graphics solution may not continue to be accepted by the PC market.
Our success will depend in part upon continued broad adoption of our 3D
graphics processors for high performance 3D graphics in PC applications. The
market for 3D graphics 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 dynamic
random memory devices pricing and other changes in the total system cost of
add-in boards, as well as by severe price competition and by frequent new
technology and product introductions. Only a small number of products have
achieved broad market acceptance and such market acceptance, if achieved, is
difficult to sustain due to intense competition. Since we have no other product
line, our business would suffer if for any reason our current or future 3D
graphics processors do not continue to achieve widespread acceptance in the PC
market. If we are unable to complete the timely development of or successfully
and cost-effectively manufacture and deliver products that meet the
requirements of the PC market, our business would be harmed.
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Our integrated graphics product may not be accepted by the PC market.
We expect that integrated graphics chipset products will become an
increasing part of the lower cost segment of the PC graphics market. We have
only recently introduced a 3D graphics processor targeted at this segment, as
part of a joint development effort with ALi. If this product is not competitive
in this segment and the integrated chipset segment continues to account for an
increasing percentage of the units sold in the PC market, our business may
suffer.
We need to develop new products and to 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 system
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
CEMs;
. price our products competitively; and
. introduce the products to the market within the limited window for PC
OEMs and add-in board manufacturers.
As a result, we believe that significant expenditures for research and
development will continue to be required in the future. The success of new
product introductions will depend on several factors, including the following:
. proper new product definition;
. timely completion and introduction of new product designs;
. the ability of TSMC, WaferTech, and any additional third-party
manufacturers to effectively manufacture our new products in a timely
manner;
. the quality of any new products;
. differentiation of new products from those of our competitors;
. market acceptance of our and our customers' products; and
. availability of adequate quantity and configurations of various types of
memory products.
Our strategy is to utilize the most advanced semiconductor 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.
Our failure to identify new product opportunities or to develop new products
could harm our business.
As markets for our 3D graphics processors develop and competition increases,
we anticipate that product life cycles at the high end will remain short and
average selling prices will continue to decline. In particular,
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we expect average selling prices and gross margins for our 3D graphics
processors to decline as each product matures and as unit volumes increase. As
a result, we will need to introduce new products and enhancements to existing
products to maintain overall average selling prices and gross margins. In order
for our 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 to 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 products increases, there is an increasing risk that we will
experience problems with the performance of products and that there will be
delays in the development, introduction or volume shipment of our products. We
may experience difficulties related to the production of current or future
products or other factors 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 average selling prices, reduced margins, and
reduced demand for 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.
We rely on third-party vendors to supply us tools for the development of our
new products and we may be unable to obtain the tools necessary to develop
these products.
In the design and development of new products and product enhancements, we
rely on third-party software development tools. While we currently are not
dependent on any one vendor for the supply of these tools, some or all of these
tools may not be readily available in the future. For example, we have
experienced delays in the introduction of products in the past as a result of
the inability of then available software development tools to fully simulate
the complex features and functionalities of our products. The design
requirements necessary to meet consumer demands for more features and greater
functionality from 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.
Our industry is characterized by vigorous protection and pursuit of
intellectual property rights or positions that could result in substantial
costs to us.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which has resulted in
protracted and expensive litigation. The 3D graphics market in particular has
been characterized recently by the aggressive pursuit of intellectual property
positions, and we expect our competitors to continue to pursue aggressive
intellectual property positions. In addition, from time to time we receive
notices alleging that we have infringed patents or other intellectual property
rights owned by third parties. We expect that, as the number of issued hardware
and software patents increases, and as competition in our markets intensifies,
the volume of intellectual property infringement claims will increase. If
infringement claims are made against us, we may seek licenses under the
claimant's patents or other intellectual property rights. However, licenses may
not be offered at all or on terms acceptable to us. The failure to obtain a
license from a third party for technology used by us could cause us to incur
substantial liabilities and to suspend the manufacture of products.
Furthermore, we may initiate claims or litigation against third parties for
infringement of our proprietary rights or to establish the validity of our
proprietary rights. We have agreed to indemnify certain customers for claims of
infringement arising out of sale of our products. Litigation by or against us
or our customers concerning infringement would likely result in significant
expense to us and divert the efforts of our technical and management personnel,
whether or not the litigation results in a favorable determination for us.
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We are subject to a patent infringement lawsuit that could divert our
resources and result in the payment of substantial damages.
On September 21, 1998, 3Dfx filed a patent infringement suit against us in
the United States District Court for the Northern District of California
alleging infringement of a 3Dfx patent. On March 2, 1999, 3Dfx added a second
patent to the suit and on May 24, 1999, 3Dfx added a third patent to the suit.
The amended complaint alleges that our RIVA TNT, RIVA TNT2 and RIVA TNT2 Ultra
products infringe the patents in suit and seeks unspecified compensatory and
trebled damages and attorney's fees. Our current generation of products is not
identified as infringing any of the patents in suit. We have filed an answer
and counter-claims asserting that the patents in suit are invalid and not
infringed. These assertions are supported by our investigations to date and an
opinion from our patent counsel in this suit. We anticipate that the trial date
will be set by the District Court after it rules on claims construction issues.
We have and will continue to defend vigorously this suit. The litigation with
3Dfx has resulted, and we expect that the 3Dfx litigation will continue to
result, in significant legal expenses, whether or not the litigation results in
a favorable determination for us. In the event of an adverse result in the 3Dfx
suit, we might be required to do one or more of the following:
. pay substantial damages (including treble damages);
. permanently cease the manufacture and sale of any of the infringing
products;
. expend significant resources to develop non-infringing products; or
. obtain a license from 3Dfx for infringing products.
On August 28, 2000, we filed a patent infringement lawsuit against 3Dfx in
the United States District Court for the Northern District of California. The
lawsuit alleges that 3Dfx's graphics chip and card products which are used to
accelerate 3D graphics on personal computers, infringe five of our patents and
seeks an injunction restraining 3Dfx from manufacturing, selling, or importing
infringing graphics chip and card products including its Voodoo3, Voodoo4, and
Voodoo5 and VSA-100 family of products, as well as monetary damages.
We have in the past been subject to patent infringement suits with SGI and
S3 Incorporated, both of which were settled and resulted in cross-licenses and,
in the case of SGI, payments by us.
We may be unable to adequately protect our intellectual property.
We rely primarily on a combination of patents, trademarks, copyrights, trade
secrets, employee and third-party nondisclosure agreements and licensing
arrangements to protect our intellectual property. We own 33 issued United
States patents, and have 46 United States patent applications pending. Our
issued patents have expiration dates from April 2015 to April 2018. Our issued
patents and pending patent applications relate to technology developed by us in
connection with the development of our 3D graphics processors. 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 of 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, or disclose our intellectual property
or trade secrets. Our failure to effectively protect our intellectual property
could harm our business. We have licensed technology from third parties for
incorporation in our graphics processors, and expect to continue to enter into
license agreements for future products. These licenses may result in royalty
payments to third parties, the cross-license of technology by us or payment of
other consideration. If these arrangements are not concluded on commercially
reasonable terms, our business could suffer.
Our failure to achieve one or more design wins would harm our business.
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
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by PC OEMs and motherboard and add-in board manufacturers. Our add-in board
manufacturers and major OEM customers typically introduce new system
configurations as often as twice per year, generally 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. 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 also depends in part on our ability to
identify and ensure compliance with evolving industry standards. Unanticipated
changes in industry standards could render our products incompatible with
products developed by major hardware manufacturers and software developers,
including Intel and Microsoft. 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.
We are dependent on the PC market, which may not continue to grow.
In fiscal 2000, we derived all of our revenue from the sale of products for
use in PCs. In the first half of fiscal 2001, we derived most of our revenue
from the sale of products for use in the entire desktop PC market, from
professional workstations to low-cost PCs. We expect to continue to derive most
of our revenue from the sale or license of products for use in PCs in the next
several years. 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 average selling prices 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 acceptance of next generation products in business PC 3D graphics may not
continue to develop.
Our success will depend in part upon the demand for performance 3D graphics
for business PC applications. The market for performance 3D graphics on
business 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 business 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 performance 3D graphics on business
PCs will in turn depend on the development and availability of a large number
of business PC software applications that support or take advantage of
performance 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.
Consequently, a broad market for full function performance 3D graphics on
business PCs may not develop. Our business prospects will suffer if the market
for business PC 3D graphics fails to develop or develops more slowly than
expected.
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 add-in board and motherboard
manufacturers and CEMs, which incorporate graphics products in the boards they
sell to PC OEMs. Sales to add-in board manufacturers and CEMs are primarily
dependent on achieving design wins with leading PC OEMs. The number of add-in
board manufacturers and CEMs and leading PC OEMs is limited. We expect that a
small number of add-in board manufacturers and CEMs directly,
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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 PC OEMs or add-in board
manufacturers and CEMs. In addition, revenue from add-in board manufacturers,
motherboard manufacturers, CEMs and 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.
Our business may be harmed by instability in Asia due to the concentration
of customers who are located or have substantial operations in Asia, including
Taiwan. The People's Republic of China and Taiwan have in the past experienced
and currently are experiencing strained relations. A worsening of these
relations or the development of hostilities between the two could result in
disruptions in Taiwan and possibly other areas of Asia, which could harm our
business. While we believe political instability in Asia has not adversely
affected our business, because of our reliance on companies with operations in
Asia, continued economic and political instability in Asia might harm us.
We may be unable to manage our growth and, as a result, may be unable to
successfully implement our strategy.
Our rapid growth has placed, and is expected to continue to place, a
significant strain on our managerial, operational and financial resources. As
of July 30, 2000, we had 529 employees as compared to 392 employees as of
January 30, 2000. We expect that the number of our employees will increase
substantially over the next 12 months. Our future growth, if any, will depend
on our ability to continue to implement and improve operational, financial and
management information and control systems on a timely basis, as well as our
ability to maintain effective cost controls. Further, we will be required to
manage multiple relationships with various customers and other third parties.
Our systems, procedures or controls may not be adequate to support our
operations and our management may be unable to achieve the rapid execution
necessary to successfully implement our strategy.
We are dependent on key personnel and the loss of these employees could harm
our business.
Our performance will be substantially dependent on the performance of our
executive officers and key employees. None of our officers or employees is
bound by an employment agreement, and our relationships with these officers and
employees are, therefore, at will. We do not have "key person" life insurance
policies on any of our employees. The loss of the services of any of our
executive officers, technical personnel or other key employees, particularly
Jen-Hsun Huang, our President and Chief Executive Officer, would harm our
business. Our success will depend on our ability to identify, hire, train and
retain highly qualified technical and managerial personnel. Our failure to
attract and retain the necessary technical and managerial personnel would harm
our business.
We depend on third-party fabrications 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
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several quarters, 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.
In September 1999, a significant earthquake in Taiwan contributed to a
temporary shortage of graphics processors in the third and fourth quarters of
fiscal 2000. Because of our reliance on TSMC, our business may be harmed by
political instability in Taiwan, including the worsening of the strained
relations between The People's Republic of China and Taiwan. Furthermore, any
substantial disruption in our suppliers' operations, either as a result of a
natural disaster, political unrest, economic instability, equipment failure or
other cause, could harm 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 significant 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 and/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 is based. Any difficulties like
these would harm our business.
Failure to achieve expected manufacturing yields would reduce our product
supply and harm our business.
Semiconductor manufacturing yields are a function both of product design,
which is developed largely by us, and process technology, which typically is
proprietary to the manufacturer. Since low yields may result from either design
or process technology failures, yield problems may not be effectively
determined or resolved until an actual product exists that can be analyzed and
tested to identify process sensitivities relating to the design rules that are
used. As a result, yield problems may not be identified until well into the
production process, 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 to identify, communicate
and resolve 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 also face the risk of
product recalls or product returns resulting from design or manufacturing
defects that are not discovered during the manufacturing and testing process.
In the event of a significant number of product returns due to a defect or
recall, our business could suffer.
Failure to transition to new manufacturing process technologies could affect
our ability to compete effectively.
Our strategy is to utilize the most advanced semiconductor process
technology appropriate for our products and available from commercial third-
party foundries. Use of advanced processes may have greater risk
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<PAGE>
of initial yield problems. Manufacturing process technologies are subject to
rapid change and require significant expenditures for research and development.
We continuously evaluate the benefits of migrating to smaller geometry process
technologies in order to improve performance and reduce costs. We have migrated
to the .18 micron technology with the GeForce2 GTS GPUs, and we believe that
the transition of our products to increasingly smaller geometries will be
important to our competitive position. Other companies in the industry have
experienced difficulty in migrating to new manufacturing processes and,
consequently, have suffered reduced yields, delays in product deliveries and
increased expense levels. We may experience similar difficulties and the
corresponding negative effects. Moreover, we are dependent on our relationships
with our third-party manufacturers to migrate to smaller geometry processes
successfully. We may be unable to migrate to new manufacturing process
technologies successfully or on a timely basis.
The 3D graphics industry is highly competitive and we may be unable to
compete.
The market for 3D graphics processors for PCs in which we compete is
intensely competitive and is characterized by rapid technological change,
evolving industry standards and declining average selling prices. We believe
that the principal competitive factors in this market are performance, breadth
of product offerings, access to customers and distribution channels, backward-
forward software support, conformity to industry standard APIs, manufacturing
capabilities, price of graphics processors and total system costs of add-in
boards and motherboards. We expect competition to increase both from existing
competitors and new market entrants with products that may be less costly than
our 3D graphics processors or may provide better performance or additional
features not provided by our products.
Our primary source of competition is from companies that provide or intend
to provide 3D graphics solutions for the PC market. Our competitors include the
following:
. suppliers of graphics add-in boards that utilize their internally
developed graphics chips, such as ATI Technologies Inc. and Matrox
Electronics Systems Ltd.;
. suppliers of integrated core logic chipsets that incorporate 2D and 3D
graphics functionality as part of their existing solutions, such as
Intel, Silicon Integrated Systems and Via Technologies;
. companies that have traditionally focused on the professional market and
provide high end 3D solutions for PCs and workstations, including 3Dlabs
Inc., SGI, Evans and Sutherland Computer Corporation; and
. companies that focus on the video game market, such as 3Dfx and
VideoLogic Group plc.
If and to the extent we offer products outside of the 3D graphics processor
market, we may face competition from some of our existing competitors as well
as from companies with which we currently do not compete. We cannot accurately
predict if we will compete successfully in any new markets we may enter.
We may compete with Intel in the integrated low-cost chipset market.
In June 2000, Intel began shipping the Intel 815 and 815e, 3D graphics
chipsets that are targeted at the low-cost PC market. Intel has significantly
greater resources than we do, and our products may not compete effectively
against future products introduced by Intel. In addition, we may be unable to
compete effectively against Intel or Intel may introduce additional products
that are competitive with our products in either performance or price or both.
We expect Intel to continue to do the following:
. invest heavily in research and development and new manufacturing
facilities;
. maintain its position as the largest manufacturer of PC microprocessors;
. increasingly dominate the PC platform; and
. promote its product offerings through advertising campaigns designed to
engender brand loyalty among PC users.
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Intel may in the future develop graphics add-in cards or graphics-enabled
motherboards that could directly compete with graphics add-in cards or
graphics-enabled motherboards based on our products. In addition, due to the
widespread industry acceptance of Intel's microprocessor architecture and
interface architecture, including AGP, and Intel's intellectual property
position with respect to such architecture, Intel exercises significant
influence over the PC industry generally. Any significant modifications by
Intel to the AGP, the microprocessor or core logic components or other aspects
of the PC microprocessor architecture could result in incompatibility with our
technology, which would harm our business. In addition, any delay in the public
release of information relating to modifications like this could harm our
business.
We are dependent on third parties for assembly and testing of our products.
Our graphics processors are assembled and tested by Advanced Semiconductor
Engineering, Inc., ChipPAC Incorporated and Siliconware Precision Industries
Company Ltd., all of which are based in Asia. Because we rely on Asian assembly
and test subcontractors, our business may be harmed by political instability in
Asia, including the worsening of the strained relations between The People's
Republic of China and Taiwan. We do not have long-term agreements with any of
these subcontractors. As a result of our dependence on third-party
subcontractors for assembly and testing of our products, we do not directly
control product delivery schedules or product quality. Any product shortages or
quality assurance problems could increase the costs of manufacture, assembly or
testing of our products and could harm our business. Due to the amount of time
typically required to qualify assemblers and testers, we could experience
significant delays in the shipment of our products if we are required to find
alternative third parties to assemble or test our products or components. Any
delays in delivery of our products could harm our business.
We are subject to risks associated with product defects and incompatibilities.
Products as complex as ours may contain defects or failures when introduced
or when new versions or enhancements to existing products are released. We have
in the past discovered software defects and incompatibilities with customers'
hardware in certain of our products and may experience delays or lost revenue
to correct any new defects in the future. Errors in new products or releases
after commencement of commercial shipments could result in loss of market share
or failure to achieve market acceptance. Our products typically go through only
one verification cycle prior to beginning volume production and distribution.
As a result, our products may contain defects or flaws that are undetected
prior to volume production and distribution. The widespread production and
distribution of defective products could harm our business.
We are subject to risks associated with international operations.
Our reliance on foreign third-party manufacturing, assembly and testing
operations subjects us to a number of risks associated with conducting business
outside of the United States, including the following:
. unexpected changes in, or impositions of, legislative or regulatory
requirements;
. delays resulting from difficulty in obtaining export licenses for certain
technology, tariffs, quotas and other trade barriers and restrictions;
. longer payment cycles;
. imposition of additional taxes and penalties;
. the burdens of complying with a variety of foreign laws; and
. other factors beyond our control.
We also are subject to general political risks in connection with our
international trade relationships. In addition, 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
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extent as do the laws of the United States. This makes the possibility of
piracy of our technology and products more likely. Currently, all of our
arrangements with third-party manufacturers provide for pricing and payment in
U.S. dollars, and to date we have not engaged in any currency hedging
activities, although we may do so in the future. Fluctuations in currency
exchange rates could harm our business in the future.
The semiconductor industry is cyclical in nature.
The semiconductor industry historically has been characterized by the
following factors:
. rapid technological change;
. cyclical market patterns;
. significant average selling price erosion;
. fluctuating inventory levels;
. alternating periods of overcapacity and capacity constraints; and
. variations in manufacturing costs and yields and significant expenditures
for capital equipment and product development.
In addition, the industry has experienced significant economic downturns at
various times, characterized by diminished product demand and accelerated
erosion of average selling prices. We may experience substantial period-to-
period fluctuations in results of operations due to general semiconductor
industry conditions.
Failure in implementation of our enterprise resource planning system could
adversely affect our operations.
In December 1999, we began the implementation of an SAP A.G. system as our
enterprise resource planning, or ERP, system to replace our information systems
in business, finance, operations and service. The first phase of the
implementation was successfully completed in June 2000 and our operations are
fully functioning under the new ERP system. Future phases of the implementation
are expected to occur throughout fiscal 2001. We are heavily dependent upon the
proper functioning of our internal systems to conduct our business. System
failure or malfunctioning may result in disruptions of operations and inability
to process transactions. Our results of operations and financial position could
be adversely affected if we encounter unforeseen problems with respect to
system operations or future implementation.
Some provisions in our certificate of incorporation, our bylaws and our
agreement with Microsoft could delay or prevent a change in control.
Our certificate of incorporation and bylaws contain provisions that could
make it more difficult for a third party to acquire a majority of our
outstanding voting stock. These provisions include the following:
. the ability of the Board of directors to create and issue preferred stock
without prior stockholder approval;
. the prohibition of stockholder action by written consent;
. a classified board of directors; and
. advance notice requirements for director nominations and stockholder
proposals.
On March 5, 2000, we entered into a licensing and development agreement with
Microsoft that included a grant to Microsoft of first and last rights of
refusal over any offer we receive to purchase 30% or more of the outstanding
shares of our common stock. This provision could also delay or prevent a change
in control of NVIDIA.
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<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On September 21, 1998, 3Dfx filed a patent infringement lawsuit against us
in the United States District Court for the Northern District of California
alleging infringement of a 3Dfx patent. On March 2, 1999, 3Dfx added a second
patent to the suit and on May 24, 1999, 3Dfx added a third patent to the suit.
The amended complaint alleges that our RIVA TNT, RIVA TNT2 and RIVA TNT2 Ultra
products infringe the patents in suit and seeks unspecified compensatory and
trebled damages and attorney's fees. Our current generation of products is not
identified as infringing any of the patents in suit. We have filed an answer
and counter-claims asserting that the patents in suit are invalid and not
infringed. These assertions are supported by our investigations to date and an
opinion from our patent counsel in this suit. We anticipate that the trial date
will be set by the District Court after it rules on claims construction issues.
On August 28, 2000, we filed a patent infringement lawsuit against 3Dfx in
the United States District Court for the Northern District of California. The
lawsuit alleges that 3Dfx's graphics chip and card products which are used to
accelerate 3D graphics on personal computers, infringe five of our patents and
seeks an injunction restraining 3Dfx from manufacturing, selling, or importing
infringing graphics chip and card products including its Voodoo3, Voodoo4, and
Voodoo5 and VSA-100 family of products, as well as monetary damages.
On February 22, 2000, Graphiques Matrox, Inc. and Systemes Electroniques
Matrox Ltd. (collectively "Matrox") filed suit against us in the Superior
Court, Judicial District of Montreal, Province of Quebec, Canada. The suit
alleges that we improperly solicited and recruited Matrox employees and
encouraged Matrox employees to breach their Matrox confidentiality and/or non-
competition agreements. The suit by Matrox seeks, among other things, certain
injunctive relief. We believe that the claims asserted by Matrox are without
merit and we intend to vigorously defend this suit.
On May 19, 2000, we filed suit against Matrox in Santa Clara County Superior
Court alleging that Matrox's efforts to prevent its current and former
employees from pursuing employment opportunities with us constitute
interference with prospective economic advantage and contract and unfair
competition. Our suit seeks, among other things, unspecified monetary damages,
a declaration that Matrox's confidentiality and/or non-competition agreements
are unenforceable under California law and a declaration that its use of those
agreements and other tactics constitutes unfair competition. On May 26, 2000,
the case was transferred to the San Jose Division of the United States District
Court for the Northern District of California. On June 14, 2000, Matrox filed
an answer denying our claims and a counterclaim alleging trade secret
misappropriation, intentional interference with contractual relations and
unfair competition. Matrox's California suit seeks unspecified monetary damages
and injunctive relief. We filed an answer to this counterclaim on July 7, 2000,
denying all of Matrox's claims. As with the Montreal action, we believe that
the claims asserted by Matrox are without merit and we intend to vigorously
defend this suit.
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 7.0 million shares of our common stock for an initial price of
$6.00 per share. On February 2, 1999, we sold an additional 1,050,000 shares of
our common stock at a price of $6.00 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
II-1
<PAGE>
proceeds from the offering were $43.3 million. Of the net proceeds, as of July
30, 2000, $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 July 30, 2000, the remainder of the net proceeds
was invested in money market funds or held as cash.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on July 12, 2000, the following
proposals were adopted by the margin indicated. Due to the fact that the Proxy
Statement was sent prior to the effective date of the two-for-one stock split,
the following results are presented on a pre-split basis.
(a) To elect two directors, Tench Coxe and Mark A. Stevens to hold office
until the 2003 Annual Meeting of Stockholders.
<TABLE>
<CAPTION>
Nominee For Withheld
------- ---------- --------
<S> <C> <C>
Tench Coxe............................................... 25,492,490 33,871
Mark A. Stevens.......................................... 25,491,155 35,206
</TABLE>
Directors continuing in office until the 2001 Annual Meeting:
James C. Gaither
Jen-Hsun Huang
A. Brooke Seawell
Directors continuing in office until the 2002 Annual Meeting:
Harvey C. Jones, Jr.
William J. Miller
(b) To ratify the selection of KPMG LLP as independent accountants of the
Company for its fiscal year ended January 28, 2001.
Shares voting:
<TABLE>
<S> <C>
For............................................................... 25,513,304
Against........................................................... 4,025
Abstain........................................................... 8,932
Broker non-vote................................................... 100
</TABLE>
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 July 30, 2000.
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<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 September 12, 2000.
NVIDIA Corporation
/s/ Christine B. Hoberg
By: _________________________________
Christine B. Hoberg
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
