Edgar Filing: NVIDIA CORP

NVDA 2013 Q3 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



[x]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 28, 2012



[_]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-23985

NVIDIA CORPORATION

(Exact name of registrant as specified in its charter)



Delaware	94-3177549
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

2701 San Tomas Expressway

Santa Clara, California 95050

(408) 486-2000

(Address, including zip code, and telephone number,

including area code, of principal executive offices)

N/A

(Former name, former address and former fiscal year if changed since last report)

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 Q No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes Q No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No Q

The number of shares of common stock, $0.001 par value, outstanding as of November 16, 2012, was 624,850,798 .

NVIDIA CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED October 28, 2012

TABLE OF CONTENTS



		Page
	PART I : FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	a) Condensed Consolidated Statements of Income for the three and nine months ended October 28, 2012 and October 30, 2011	3

	b) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 28, 2012 and October 30, 2011	4

	c) Condensed Consolidated Balance Sheets as of October 28, 2012 and January 29, 2012	5

	d) Condensed Consolidated Statements of Cash Flows for the three and nine months ended October 28, 2012 and October 30, 2011	6

	e) Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	40

	PART II : OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59

Item 6.	Exhibits	60

Signature		61

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except per share data)



	Three Months Ended					Nine Months Ended
	October 28,			October 30,		October 28,			October 30,
	2012			2011		2012			2011

Revenue	$	1,204,110		$	1,066,180	$	3,173,257		$	3,044,736
Cost of revenue	567,452			509,463		1,532,516			1,478,232
Gross profit	636,658			556,717		1,640,741			1,566,504
Operating expenses
Research and development	284,180			256,498		849,275			735,743
Sales, general and administrative	100,261			103,129		326,800			304,779
Total operating expenses	384,441			359,627		1,176,075			1,040,522
Income from operations	252,217			197,090		464,666			525,982
Interest income	4,701			4,356		15,215			14,936
Other income (expense), net	(3,290		)	3,341		(3,950		)	(2,099		)
Income before income tax expense	253,628			204,787		475,931			538,819
Income tax expense	44,548			26,514		87,368			73,754
Net income	$	209,080		$	178,273	$	388,563		$	465,065

Basic net income per share	$	0.34		$	0.29	$	0.63		$	0.77
Shares used in basic per share computation	622,352			607,063		619,043			600,563

Diluted net income per share	$	0.33		$	0.29	$	0.62		$	0.76
Shares used in diluted per share computation	628,845			613,560		625,973			614,688

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(In thousands)



	Three Months Ended						Nine Months Ended
	October 28,			October 30,			October 28,			October 30,
	2012			2011			2012			2011

Net income	$	209,080		$	178,273		$	388,563		$	465,065
Net change in unrealized gains (losses) on available-for-sale securities	(364		)	(5,357		)	646			(278		)
Less: reclassification adjustments for net realized gains on available-for-sale securities included in net income	(47		)	(174		)	(387		)	(575		)
Income tax expense (benefit) related to net unrealized and net realized gains on available-for-sale securities	111			94			(13		)	(421		)
Other comprehensive income (loss), net of tax	$	(300	)	$	(5,437	)	$	246		$	(1,274	)
Total comprehensive income	$	208,780		$	172,836		$	388,809		$	463,791

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands)



	October 28,			January 29,
	2012			2012
ASSETS
Current assets:
Cash and cash equivalents	$	525,388		$	667,876
Marketable securities	2,909,384			2,461,700
Accounts receivable, net	444,944			336,143
Inventories	428,983			340,297
Prepaid expenses and other	66,197			49,411
Deferred income taxes	49,931			49,931
Total current assets	4,424,827			3,905,358
Property and equipment, net	566,540			560,072
Goodwill	641,030			641,030
Intangible assets, net	331,248			326,136
Other assets	111,499			120,332
Total assets	$	6,075,144		$	5,552,928

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	390,265		$	335,072
Accrued liabilities and other	601,094			594,886
Total current liabilities	991,359			929,958
Other long-term liabilities	341,312			455,807
Capital lease obligations, long-term	19,627			21,439
Commitments and contingencies - see Note 12	—			—
Stockholders’ equity:
Preferred stock	—			—
Common stock	719			700
Additional paid-in capital	3,114,995			2,900,896
Treasury stock, at cost	(1,522,709		)	(1,496,904		)
Accumulated other comprehensive income	10,860			10,614
Retained earnings	3,118,981			2,730,418
Total stockholders' equity	4,722,846			4,145,724
Total liabilities and stockholders' equity	$	6,075,144		$	5,552,928

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)



	Nine Months Ended
	October 28,			October 30,
	2012			2011
Cash flows from operating activities:
Net income	$	388,563		$	465,065
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	167,834			152,310
Stock-based compensation expense	100,893			100,918
Deferred income taxes	42,684			14,242
Excess tax benefits from stock-based compensation	(25,646		)	(52,703		)
Other	39,978			13,689
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable	(109,008		)	(8,834		)
Inventories	(88,378		)	39,748
Prepaid expenses and other current assets	(16,786		)	35
Other assets	4,784			(2,992		)
Accounts payable	49,099			9,218
Accrued liabilities and other long-term liabilities	(180,854		)	(232,058		)
Net cash provided by operating activities	373,163			498,638
Cash flows from investing activities:
Purchases of marketable securities	(1,729,307		)	(1,324,350		)
Proceeds from sales and maturities of marketable securities	1,262,167			953,808
Purchases of property and equipment and intangible assets	(135,551		)	(93,553		)
Acquisition of businesses, net of cash acquired	—			(348,884		)
Other	135			(1,890		)
Net cash used in investing activities	(602,556		)	(814,869		)
Cash flows from financing activities:
Proceeds from issuance of common stock under employee stock plans	62,781			176,490
Payments under capital lease obligations	(1,522		)	(1,188		)
Excess tax benefits from stock-based compensation	25,646			52,703
Payment of notes payable assumed from acquisition	—			(10,319		)
Net cash provided by financing activities	86,905			217,686
Change in cash and cash equivalents	(142,488		)	(98,545		)
Cash and cash equivalents at beginning of period	667,876			665,361
Cash and cash equivalents at end of period	$	525,388		$	566,816
Supplemental disclosures of cash flow information:
Cash paid (received) for income taxes, net	$	(40,442	)	$	3,857
Cash paid for interest on capital lease obligations	$	2,189		$	2,254
Other non-cash activities:
Assets acquired by assuming related liabilities	$	43,792		$	12,064
Change in unrealized gains (loss) from marketable securities	$	246		$	(1,274	)

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission, or SEC, Regulation S-X. In the opinion of management, all adjustments, consisting only of normal recurring adjustments except as otherwise noted, considered necessary for a fair statement of results of operations and financial position have been included. The results for the interim periods presented are not necessarily indicative of the results expected for any future period. The following information should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2012.

Fiscal Year

We operate on a 52- or 53-week year, ending on the last Sunday in January. Fiscal year 2013 and fiscal year 2012 are both 52-week years. The third quarters of fiscal years 2013 and 2012 are both 13-week quarters.

Principles of Consolidation

Our condensed consolidated financial statements include the accounts of NVIDIA Corporation and its wholly-owned subsidiaries. All material inter-company balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, cash equivalents and marketable securities, accounts receivable, inventories, income taxes, goodwill, stock-based compensation, warranty liabilities, litigation, investigation and settlement costs and other contingencies. These estimates are based on historical facts and various other assumptions that we believe are reasonable.

Revenue Recognition

Product Revenue

We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or determinable and collection is reasonably assured. For most sales, we use a binding purchase order and in certain cases we use a contractual agreement as evidence of an arrangement. We consider delivery to occur upon shipment provided title and risk of loss have passed to the customer based on the shipping terms. At the point of sale, we assess whether the arrangement fee is fixed or determinable and whether collection is reasonably assured. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of payment.

Our policy on sales to certain distributors, with rights of return, is to defer recognition of revenue and related cost of revenue until the distributors resell the product, as the level of returns cannot be reasonably estimated. Our customer programs primarily involve rebates, which are designed to serve as sales incentives to resellers of our products in various target markets. We accrue for 100% of the potential rebates and do not apply a breakage factor. We recognize a liability for these rebates at the later of the date at which we record the related revenue or the date at which we offer the rebate. Rebates typically expire six months from the date of the original sale, unless we reasonably believe that the customer intends to claim the rebate. Unclaimed rebates are reversed to revenue.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Our customer programs also include marketing development funds, or MDFs. We account for MDFs as either a reduction of revenue or an operating expense, depending on the nature of the program. MDFs represent monies paid to retailers, system builders, original equipment manufacturers, distributors and add-in card partners that are earmarked for market segment development and expansion and typically are designed to support our partners’ activities while also promoting NVIDIA products. Depending on market conditions, we may take actions to increase amounts offered under customer programs, possibly resulting in an incremental reduction of revenue at the time such programs are offered.

We also record a reduction to revenue by establishing a sales return allowance for estimated product returns at the time revenue is recognized, based primarily on historical return rates. However, if product returns for a particular fiscal period exceed historical return rates we may determine that additional sales return allowances are required to properly reflect our estimated exposure for product returns.

License and Development Revenue

For license arrangements that require significant customization of our intellectual property components, we generally recognize this license revenue over the period that services are performed. For most license and service arrangements, we determine progress to completion based on actual direct labor hours incurred to date as a percentage of the estimated total direct labor hours required to complete the project. We periodically evaluate the actual status of each project to ensure that the estimates to complete each contract remain accurate. A provision for estimated losses on contracts is made in the period in which the loss becomes probable and can be reasonably estimated. Costs incurred in advance of revenue recognized are recorded as deferred costs on uncompleted contracts. If the amount billed exceeds the amount of revenue recognized, the excess amount is recorded as deferred revenue. Revenue recognized in any period is dependent on our progress toward completion of projects in progress. Significant management judgment and discretion are used to estimate total direct labor hours. Any changes in or deviations from these estimates could have a material effect on the amount of revenue we recognize in any period.

For license arrangements that do not require significant customization but where we are obligated to provide further deliverables over the term of the license agreement, we record revenue over the life of the license term, with consideration received in advance of the performance period classified as deferred revenue.

Royalty revenue is recognized related to the distribution or sale of products that use our technologies under license agreements with third parties. We recognize royalty revenue upon receipt of a confirmation of earned royalties and when collectability is reasonably assured from the applicable licensee.

Inventories

Inventory cost is computed on an adjusted standard basis, which approximates actual cost on an average or first-in, first-out basis. Inventory costs consist primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, manufacturing support costs, including labor and overhead associated with such purchases, final test yield fallout, inventory provisions and shipping costs. We write down our inventory to the lower of cost or estimated market value. Obsolete or unmarketable inventory is completely written off based upon assumptions about future demand, future product purchase commitments, estimated manufacturing yield levels and market conditions. If actual market conditions are less favorable than those projected by management, or if our current inventory or our future product purchase commitments to our suppliers exceed our forecasted future demand for such products, additional future inventory write-downs may be required that could adversely affect our operating results. Inventory reserves once established are not reversed until the related inventory has been sold or scrapped. If actual market conditions are more favorable than expected and we sell products that we have previously written down, our reported gross margin would be favorably impacted.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Adoption of New and Recently Issued Accounting Pronouncements

In the third quarter of fiscal year 2013, we adopted an amended standard that simplifies how entities test indefinite-lived intangible assets for impairment and also improves consistency in impairment testing requirements among long-lived asset categories. This amended standard permits an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets for which this assessment concludes it is more likely than not that the fair value is more than its carrying value, the amended standard eliminates the requirement to perform quantitative impairment testing as outlined in the previously issued standard. This new standard did not have a significant impact on our condensed consolidated financial statements.

In the first quarter of fiscal year 2013, we adopted an amended standard that increases the prominence of items reported in other comprehensive income. This amended standard eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity and requires that all changes in stockholders' equity-except investments by, and distributions to, owners-be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The adoption of this amended standard impacted the presentation of other comprehensive income, as we have elected to present two separate but consecutive statements, but did not have an impact on our financial position or results of operations.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 2 - Stock-Based Compensation

We measure stock-based compensation expense at the grant date of the related equity awards, based on the fair value of the awards, and recognize the expense using the straight-line attribution method over the requisite employee service period adjusted for estimated forfeitures. We estimate the fair value of employee stock options on the date of grant using a binomial model and use the closing trading price of our common stock on the date of grant as the fair value of awards of restricted stock units, or RSUs. We calculate the fair value of our employee stock purchase plan using the Black-Scholes model.

Our consolidated statements of operations include stock-based compensation expense, net of amounts capitalized as inventory, as follows:



	Three Months Ended				Nine Months Ended
	October 28, 2012		October 30, 2011		October 28, 2012		October 30, 2011
	(In thousands)				(In thousands)
Cost of revenue	$	2,489	$	3,049	$	7,664	$	8,274
Research and development	20,056		19,308		60,148		59,594
Sales, general and administrative	10,524		10,872		33,081		33,050
Total	$	33,069	$	33,229	$	100,893	$	100,918

During the three and nine months ended October 28, 2012, we granted approximately 3.2 million and 6.8 million stock options, with an estimated total grant-date fair value of $17.9 million and $37.2 million and a weighted average grant-date fair value of $5.54 and $5.45 per option, respectively. During the three and nine months ended October 28, 2012, we granted approximately 3.5 million and 7.5 million RSUs, with an estimated total grant-date fair value of $48.2 million and $104.7 million and a weighted average grant-date fair value of $13.72 and $13.99 per RSU, respectively.

During the three and nine months ended October 30, 2011, we granted approximately 3.0 million and 6.3 million stock options, with an estimated total grant-date fair value of $21.8 million and $51.4 million and a weighted average grant-date fair value of $7.35 and $8.20 per option, respectively. During the three and nine months ended October 30, 2011, we granted approximately 3.1 million and 6.8 million RSUs, with an estimated total grant-date fair value of $43.9 million and $111.8 million and a weighted average grant-date fair value of $14.34 and $16.43 per RSU, respectively.

Of the estimated total grant-date fair value, we estimated that the stock-based compensation expense related to the equity awards that are not expected to vest was $11.8 million and $25.4 million for the three and nine months ended October 28, 2012, respectively, and $11.8 million and $29.2 million for the three and nine months ended October 30, 2011, respectively. As of October 28, 2012 and October 30, 2011, the aggregate amount of unearned stock-based compensation expense related to our equity awards was $226.5 million and $206.1 million, respectively, adjusted for estimated forfeitures. As of October 28, 2012 and October 30, 2011, we expect to recognize the unearned stock-based compensation expense related to stock options over an estimated weighted average amortization period of 2.8 years and 2.7 years, respectively. As of October 28, 2012 and October 30, 2011, we expect to recognize the unearned stock-based compensation expense related to RSUs over an estimated weighted average amortization period of 2.9 years and 2.7 years, respectively.

Valuation Assumptions

We utilize a binomial model for calculating the estimated fair value of new stock-based compensation awards granted under our equity incentive plans. We have determined that the use of implied volatility is expected to be reflective of market conditions and, therefore, can be expected to be a reasonable indicator of our expected volatility. We also segregate options into groups of employees with relatively homogeneous exercise behavior in order to calculate the best estimate of fair value using the binomial valuation model. As such, the expected term assumption used in calculating the estimated fair value of our stock-based compensation awards using the binomial model is based on detailed historical data about employees' exercise behavior, vesting schedules, and death and disability probabilities. Our management believes the resulting binomial calculation provides a reasonable estimate of the fair value of our employee stock options. For our employee stock purchase plan, we continue to use the Black-Scholes model.

We estimate forfeitures annually and revise the estimates of forfeiture, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of stock options granted under our equity incentive plans and shares issued under our employee stock purchase plan have been estimated at the date of grant with the following assumptions:



	Three Months Ended		Nine Months Ended
	October 28, 2012	October 30, 2011	October 28, 2012	October 30, 2011
Stock Options	(Using a binomial model)
Expected life (in years)	4.3-4.9	4.1-4.9	3.1-4.9	3.6-5.4
Risk free interest rate	1.7%-1.8%	1.9%-2.4%	1.5%-2.3%	1.9%-3.8%
Volatility	45%-49%	58%-65%	43%-49%	46%-65%
Dividend yield	—	—	—	—



	Three Months Ended				Nine Months Ended
	October 28, 2012		October 30, 2011		October 28, 2012	October 30, 2011
Employee Stock Purchase Plan	(Using a Black-Scholes model)
Expected life (in years)	0.5-2.0		0.5-2.0		0.5-2.0	0.5-2.0
Risk free interest rate	0.1%-0.2%		0.1%-0.2%		0.1%-0.3%	0.1%-0.7%
Volatility	47	%	61	%	44%-47%	57%-61%
Dividend yield	—		—		—	—

Equity Award Activity

The following summarizes the stock option and RSU activity under our equity incentive plans:



	Options Outstanding		Weighted Average Exercise Price
Stock Options	(In thousands)		(Per share)
Balances, January 29, 2012	33,329		$	14.44
Granted	6,827		$	13.94
Exercised	(3,348	)	$	8.79
Cancelled	(3,396	)	$	16.98
Balances, October 28, 2012	33,412		$	14.66



	RSUs Outstanding		Weighted Average Grant-Date Fair Value
Restricted Stock Units	(In thousands)		(Per share)
Balances, January 29, 2012	13,638		$	15.10
Granted	7,486		$	13.99
Vested	(5,670	)	$	15.03
Cancelled	(656	)	$	15.26
Balances, October 28, 2012	14,798		$	14.55

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 3 – Net Income Per Share

The following is a reconciliation of the numerator and denominator of the basic and diluted net income per share computations for the periods presented:



	Three Months Ended				Nine Months Ended
	October 28,		October 30,		October 28,		October 30,
	2012		2011		2012		2011
	(In thousands, except per share data)
Numerator:
Net income	$	209,080	$	178,273	$	388,563	$	465,065
Denominator:
Denominator for basic net income per share, weighted average shares	622,352		607,063		619,043		600,563
Effect of dilutive securities:
Equity awards outstanding	6,493		6,497		6,930		14,125
Denominator for diluted net income per share, weighted average shares	628,845		613,560		625,973		614,688
Net income per share:
Basic net income per share	$	0.34	$	0.29	$	0.63	$	0.77
Diluted net income per share	$	0.33	$	0.29	$	0.62	$	0.76
Potentially dilutive securities excluded from income per diluted share because their effect would have been anti-dilutive	27,555		25,131		31,697		22,033

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4 – Income Taxes

We recognized income tax expense of $44.5 million and $87.4 million for the three and nine months ended October 28, 2012, respectively, and $26.5 million and $73.8 million for the three and nine months ended October 30, 2011, respectively. Income tax expense as a percentage of income before taxes, or our effective tax rate, was 17.6% and 18.4% for the three and nine months ended October 28, 2012, respectively, and 13.0% and 13.7% for the three and nine months ended October 30, 2011, respectively.

The increase in our effective tax rate in fiscal year 2013 as compared to the same periods in the prior fiscal year was primarily related to the expiration of the U.S. federal research tax credit on December 31, 2011, which provided no tax benefit for the three and nine months ended October 28, 2012.

Our effective tax rate on income before tax for the first nine months of fiscal year 2013 of 18.4% and fiscal year 2012 of 13.7% were lower than the United States federal statutory rate of 35% due primarily to income earned in jurisdictions where the tax rate is lower than the United States federal statutory tax, and for fiscal year 2012 due to the benefit of the U.S. federal research tax credit.

We classify an unrecognized tax benefit as a current liability, or as a reduction of the amount of a net operating loss carryforward or amount refundable, to the extent that we anticipate payment or receipt of cash for income taxes within one year. Likewise, the amount is classified as a long-term liability if we anticipate payment or receipt of cash for income taxes during a period beyond a year. For the nine months ended October 28, 2012, we increased unrecognized tax benefits by approximately $56.2 million, primarily on account of tax position with respect to an acquired tax attribute, and decreased unrecognized tax benefits by $5.0 million, thereby recognizing the related tax benefits, due to the expiration of statutes of limitations in certain non-U.S. jurisdictions. There have been no other significant changes to our unrecognized tax benefits, related interest or penalties from our fiscal year ended January 29, 2012. For the nine months ended October 28, 2012, there have been no material changes to our tax years that remain subject to examination by major tax jurisdictions.

While we believe that we have adequately provided for all uncertain tax positions, or tax positions where it is believed not more-likely-than-not that the position will be sustained upon examination, amounts asserted by tax authorities could be greater or less than our accrued position. Accordingly, our provisions on federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or the underlying matters are settled or otherwise resolved with the respective tax authorities. As of October 28, 2012, we do not believe that our estimates, as otherwise provided for, on such tax positions will significantly increase or decrease within the next twelve months.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 5 - Marketable Securities

All of our cash equivalents and marketable securities are classified as “available-for-sale” securities. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders’ equity, net of tax.

We performed an impairment review of our investment portfolio as of October 28, 2012. Based on our quarterly impairment review and having considered the guidance in the relevant accounting literature, we concluded that our investments were appropriately valued and that no other than temporary impairment charges were necessary on our portfolio as of October 28, 2012. The following is a summary of cash equivalents and marketable securities at October 28, 2012 and January 29, 2012:



	October 28, 2012
	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
	(In thousands)
Debt securities of United States government agencies	$	846,587	$	1,175	$	(166	)	$	847,596
Corporate debt securities	1,187,944		3,841		(127		)	1,191,658
Mortgage backed securities issued by United States government-sponsored enterprises	184,488		6,321		(148		)	190,661
Money market funds	85,030		—		—			85,030
Debt securities issued by United States Treasury	694,591		980		(105		)	695,466
Total	$	2,998,640	$	12,317	$	(546	)	$	3,010,411
Classified as:
Cash equivalents								$	101,027
Marketable securities								2,909,384
Total								$	3,010,411



	January 29, 2012
	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
	(In thousands)
Debt securities of United States government agencies	$	769,300	$	1,605	$	(151	)	$	770,754
Corporate debt securities	1,114,439		3,268		(260		)	1,117,447
Mortgage backed securities issued by United States government-sponsored enterprises	156,668		4,964		(73		)	161,559
Money market funds	290,732		—		—			290,732
Debt securities issued by United States Treasury	533,616		2,161		(3		)	535,774
Total	$	2,864,755	$	11,998	$	(487	)	$	2,876,266
Classified as:
Cash equivalents								$	414,566
Marketable securities								2,461,700
Total								$	2,876,266

The amortized cost and estimated fair value of cash equivalents and marketable securities which are primarily debt instruments are classified as available-for-sale at October 28, 2012 and January 29, 2012 and are shown below by contractual maturity.



	October 28, 2012				January 29, 2012
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In thousands)
Less than one year	$	1,301,359	$	1,303,269	$	1,705,916	$	1,708,154
Due in 1 - 5 years	1,582,124		1,588,451		1,047,956		1,053,265
Mortgage-backed securities issued by government-sponsored enterprises not due at a single maturity date	115,157		118,691		110,883		114,847
Total	$	2,998,640	$	3,010,411	$	2,864,755	$	2,876,266

Net realized gains for the three and nine months ended October 28, 2012 were $0.1 million and $0.4 million, respectively. Net realized gains for the three and nine months ended October 30, 2011 were $0.1 million and $0.5 million, respectively.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6 – Fair Value of Cash Equivalents and Marketable Securities

We measure our cash equivalents and marketable securities at fair value. The fair values of our financial assets and liabilities are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets. Our Level 1 assets consist of our money market fund deposits. We classify securities within Level 1 assets when the fair value is obtained from real time quotes for transactions in active exchange markets involving identical assets. Our available-for-sale securities are classified as having Level 2 inputs. Our Level 2 assets are valued utilizing a market approach where the market prices of similar assets are provided by a variety of independent industry standard data providers to our investment custodian. There were no significant transfers between Levels 1 and 2 assets for the three and nine months ended October 28, 2012.

Financial assets and liabilities measured at fair value are summarized below:



	Fair Value Measurement at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs
	October 28, 2012		(Level 1)		(Level 2)
	(In thousands)
Debt securities issued by United States government agencies (1)	$	847,596	$	—	$	847,596
Debt securities issued by United States Treasury (1)	695,466		—		695,466
Corporate debt securities (2)	1,191,658		—		1,191,658
Mortgage-backed securities issued by government-sponsored entities (1)	190,661		—		190,661
Money market funds (3)	85,030		85,030		—
Total cash equivalents and marketable securities	$	3,010,411	$	85,030	$	2,925,381


(1)	Included in Marketable Securities on the Condensed Consolidated Balance Sheet.


(2)	Includes $16.0 million in Cash Equivalents and $1,175.7 million in Marketable Securities on the Condensed Consolidated Balance Sheet.


(3)	Included in Cash Equivalents on the Condensed Consolidated Balance Sheet.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 7 - 3dfx

During fiscal year 2002, we completed the purchase of certain assets from 3dfx Interactive, Inc., or 3dfx, for an aggregate purchase price of approximately $74.2 million. On December 15, 2000, NVIDIA Corporation and one of our indirect subsidiaries entered into an Asset Purchase Agreement, or the APA, which closed on April 18, 2001, to purchase certain graphics chip assets from 3dfx.

In October 2002, 3dfx filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of California. In March 2003, the Trustee appointed by the Bankruptcy Court to represent 3dfx’s bankruptcy estate served his complaint on NVIDIA. The Trustee’s complaint asserted claims for, among other things, successor liability and fraudulent transfer and sought additional payments from us. In early November 2005, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors’ Committee, agreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee’s claims against us. This conditional settlement was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court. The conditional settlement called for a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, during the three month period ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx. The Trustee advised that he intended to object to the settlement.

The conditional settlement reached in November 2005 never progressed through the confirmation process and the Trustee’s case still remains pending appeal. As such, we have not reversed the accrual of $30.6 million - $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx – that we recorded during the three months ended October 30, 2005, pending resolution of the appeal of the Trustee’s case.

The 3dfx asset purchase price of $95.0 million and $4.2 million of direct transaction costs were allocated based on fair values presented below. The final allocation of the purchase price of the 3dfx assets is contingent upon the outcome of all of the 3dfx litigation. Please refer to Note 12 of these Notes to the Condensed Consolidated Financial Statements for further information regarding this litigation.



	Fair Market Value		Straight-Line Amortization Period
	(In thousands)		(In years)
Property and equipment	$	2,433	1-2
Trademarks	11,310		5
Goodwill	85,418		—
Total	$	99,161

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 8 - Business Combinations

On June 10, 2011, we completed the acquisition of Icera, Inc. by acquiring all issued and outstanding preferred and common shares in exchange for cash. Icera develops baseband processors for 3G and 4G cellular phones and tablets. In addition to leveraging on the existing Icera business, the objective of the acquisition is to accelerate and enhance the combination of our application processor with Icera’s baseband processor for use in mobile devices such as smartphones and tablets.

Total consideration to acquire Icera was $352.2 million in cash. All existing Icera equity based incentive plans were terminated upon the completion of the acquisition. In connection with the acquisition of Icera, we established a retention program in the aggregate amount of approximately $68.0 million to be paid out to Icera employees over a period of four years.

The fair values of the assets acquired and liabilities assumed by major class in the acquisition of Icera were recognized as follows (in thousands):



Cash	$	3,315
Accounts receivable	13,740
Inventory	13,510
Prepaid and other current assets	1,972
Deferred tax assets	13,036
Property, plant and equipment	3,649
Goodwill	271,186
Intangible assets	97,515
Other assets	591
Total assets acquired	418,514

Accounts payable	(6,026		)
Accrued liabilities	(38,735		)
Notes payable	(10,319		)
Income taxes payable	(4,558		)
Deferred income tax liabilities	(6,677		)
Net assets acquired	$	352,199

The goodwill of $271.2 million arising from the acquisition is primarily attributed to the assembled workforce of Icera and premium paid over net assets acquired. Goodwill recognized is not expected to be deductible for tax purposes. We have determined that goodwill from the acquisition of Icera should be allocated to our Consumer Products Business, or CPB, operating segment. In addition, revenue contribution from Icera was not significant for the three and nine months ended October 28, 2012.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The acquisition-related intangible assets assumed from the acquisition of Icera were recognized as follows based upon their fair values as of June 10, 2011:



Intangible Assets	Fair Value		Weighted-Average Estimated Useful Lives
	(In thousands)		(In years)
Technology	$	58,300	7.4
In-process technology	$	20,200	5.0
Customer relationships	$	18,200	6.8

Technology

Technology consists of core technology and existing technology. Core technology represents a series of processes and trade secrets that are used in Icera’s products and form a major part of the architecture of both the current products and planned future releases of current products. We used a profit allocation method to value the core technology of Icera, based on market royalties for similar fundamental technologies. The profit allocation method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be payable on revenues earned through the use of the asset. The royalty rate we used was based on an analysis of empirical, market-derived royalty rates for guideline intangible assets. Revenue was projected over the expected remaining useful life of the core technology and then the market-derived royalty rate was applied to estimate the royalty savings.

Existing technology is specific to certain products acquired that have also passed technological feasibility. We used an income approach to value Icera’s existing technology. Using this approach, we calculated the estimated fair value using expected future cash flows from specific products discounted to their net present values at an appropriate risk-adjusted rate of return.

In-Process Technology

In-process technology, or IPR&D, represents the fair values of incomplete Icera research and development projects that had not reached technological feasibility as of the date of acquisition. In the third quarter of fiscal 2013 we deemed these projects as complete and have estimated a definite life of five years, over which the technology will be amortized.

The fair value of the IPR&D was determined using the income approach. Under the income approach, the expected future cash flows from each project under development were estimated and discounted to their net present values at an appropriate risk-adjusted rate of return. Significant factors considered in the calculation of the rate of return were the weighted average cost of capital, the return on assets, as well as the risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. Each project was analyzed to determine the unique technological innovations, the existence and reliance on core technology, the existence of any alternative future use or current technological feasibility, and the complexity, cost and time to complete the remaining development. Future cash flows for each project were estimated based on forecasted revenue and costs, taking into account the expected product life cycles, market penetration and growth rates.

Customer Relationships

Customer relationships represent the fair value of projected cash flows that will be derived from the sale of products to Icera’s existing customers based on existing, in-process, and future versions of the underlying technology.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 9 - Intangible Assets

The components of our amortizable intangible assets are as follows:



	October 28, 2012							January 29, 2012
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(In thousands)
Acquisition-related intangible assets	$	172,039	$	(92,063	)	$	79,976	$	172,039	$	(79,261	)	$	92,778
Patents and licensed technology	408,552		(157,280		)	251,272		352,386		(119,028		)	233,358
Total intangible assets	$	580,591	$	(249,343	)	$	331,248	$	524,425	$	(198,289	)	$	326,136

The increase in gross carrying amount of intangible assets is primarily due to an agreement entered into during the first quarter of fiscal year 2013 to acquire a patent portfolio for our CPB operating segment.

Amortization expense associated with intangible assets for the three and nine months ended October 28, 2012 was $17.3 million and $51.1 million, respectively. Amortization expense associated with intangible assets for the three and nine months ended October 30, 2011 was $16.4 million and $42.9 million, respectively. Amortization expense increased compared to the prior year primarily due to the addition of a patent portfolio. Please refer to Note 8 of these Notes to Condensed Consolidated Financial Statements for further information regarding the Icera business combination. Future amortization expense related to the net carrying amount of intangible assets at October 28, 2012 is estimated to be $17.0 million for the remainder of fiscal year 2013, $66.3 million in fiscal year 2014, $66.2 million in fiscal year 2015, $60.8 million in fiscal year 2016, $50.6 million in fiscal year 2017 and a total of $70.3 million in fiscal year 2018 and fiscal years subsequent to fiscal year 2018.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 10 - Balance Sheet Components

Certain balance sheet components are as follows:



	October 28,		January 29,
	2012		2012
Inventories:	(In thousands)
Raw materials	$	107,241	$	84,927
Work in-process	71,327		62,934
Finished goods	250,415		192,436
Total inventories	$	428,983	$	340,297

At October 28, 2012, we had outstanding inventory purchase obligations totaling approximately $596.7 million.



	October 28,		January 29,
	2012		2012
Prepaid Expenses and Other:	(In thousands)
Prepaid maintenance	$	17,307	$	12,965
Prepaid insurance	3,522		3,502
Prepaid taxes	10,069		10,069
Prepaid rent	2,553		3,410
Other	32,746		19,465
Total prepaid expenses and other	$	66,197	$	49,411



	October 28,		January 29,
	2012		2012
Accrued Liabilities:	(In thousands)
Deferred revenue	$	269,003	$	270,649
Accrued customer programs (1)	155,298		143,972
Warranty accrual (2)	15,047		18,406
Accrued payroll and related expenses	83,757		88,879
Accrued legal settlement (3)	30,600		30,600
Taxes payable, short-term	10,324		6,941
Other	37,065		35,439
Total accrued liabilities and other	$	601,094	$	594,886

(1) Please refer to Note 1 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the nature of accrued customer programs and their accounting treatment related to our revenue recognition policies and estimates.

(2) Please refer to Note 11 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the warranty accrual.

(3) Please refer to Note 12 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the 3dfx litigation.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



	October 28,		January 29,
	2012		2012
Other Long-Term Liabilities:	(In thousands)
Deferred income tax liability	$	172,058	$	133,288
Income taxes payable, long-term	111,653		63,007
Asset retirement obligation	9,655		10,199
Deferred revenue	2,190		200,370
Other long-term liabilities	45,756		48,943
Total other long-term liabilities	$	341,312	$	455,807

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 11 - Guarantees

U.S. GAAP requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, U.S. GAAP requires disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities.

Accrual for Product Warranty Liabilities

We record a reduction to revenue for estimated product returns at the time revenue is recognized primarily based on historical return rates. Cost of revenue includes the estimated cost of product warranties. Under limited circumstances, we may offer an extended limited warranty to customers for certain products. Additionally, we accrue for known warranty and indemnification issues if a loss is probable and can be reasonably estimated. The estimated product warranty liabilities for the three and nine months ended October 28, 2012 and October 30, 2011 were as follows:



	Three Months Ended						Nine Months Ended
	October 28,			October 30,			October 28,			October 30,
	2012			2011			2012			2011
	(In thousands)
Balance at beginning of period (1)	$	16,537		$	53,818		$	18,406		$	107,896
Additions	1,358			2,010			4,715			4,994
Deductions (2)	(2,848		)	(12,119		)	(8,074		)	(69,181		)
Balance at end of period	$	15,047		$	43,709		$	15,047		$	43,709

(1) Includes $10.9 million and $13.2 million for the three and nine months ended October 28, 2012, respectively, and $49.4 million and $103.7 million for the three and nine months ended October 30, 2011, respectively, related to warranty accrual associated with incremental repair and replacement costs from a weak die/packaging material set.

(2) Includes $1.1 million and $3.0 million for the three and nine months ended October 28, 2012, respectively, and $8.2 million and $48.4 million for the three and nine months ended October 30, 2011, respectively, in payments related to the warranty accrual associated with incremental repair and replacement costs from a weak die/packaging material set.

In connection with certain agreements that we have executed in the past, we have at times provided indemnities to cover the indemnified party for matters such as tax, product and employee liabilities. We have also on occasion included intellectual property indemnification provisions in our technology related agreements with third parties. Maximum potential future payments cannot be estimated because many of these agreements do not have a maximum stated liability. As such, we have not recorded any liability in our Condensed Consolidated Financial Statements for such indemnifications.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 12 - Commitments and Contingencies

3dfx

On December 15, 2000, NVIDIA and one of our indirect subsidiaries entered into an Asset Purchase Agreement, or APA, to purchase certain graphics chip assets from 3dfx. The transaction closed on April 18, 2001. That acquisition, and 3dfx's October 2002 bankruptcy filing, led to four lawsuits against NVIDIA: two brought by 3dfx's former landlords, one by 3dfx's bankruptcy trustee and the fourth by a committee of 3dfx's equity security holders in the bankruptcy estate. The two landlord cases have been settled with payments from the landlords to NVIDIA, and the equity security holders lawsuit was dismissed with prejudice and no appeal was filed. Accordingly, only the bankruptcy trustee suit remains outstanding as more fully explained below.

In March 2003, the Trustee appointed by the Bankruptcy Court to represent 3dfx's bankruptcy estate served a complaint on NVIDIA asserting claims for, among other things, successor liability and fraudulent transfer and seeking additional payments from us. The Trustee's fraudulent transfer theory alleged that NVIDIA had failed to pay reasonably equivalent value for 3dfx's assets, and sought recovery of the difference between the $70.0 million paid and the alleged fair value, which the Trustee estimated to exceed $50.0 million. The Trustee's successor liability theory alleged NVIDIA was effectively 3dfx's legal successor and therefore was responsible for all of 3dfx's unpaid liabilities.

On October 13, 2005, the Bankruptcy Court heard the Trustee's motion for summary adjudication, and on December 23, 2005, denied that motion in all material respects and held that NVIDIA may not dispute that the value of the 3dfx transaction was less than $108.0 million. The Bankruptcy Court denied the Trustee's request to find that the value of the 3dfx assets conveyed to NVIDIA was at least $108.0 million.

In early November 2005, after several months of mediation, NVIDIA and the Official Committee of Unsecured Creditors, or the Creditors' Committee, agreed to a Plan of Liquidation of 3dfx, which included a conditional settlement of the Trustee's claims against us. This conditional settlement was subject to a confirmation process through a vote of creditors and the review and approval of the Bankruptcy Court. The conditional settlement called for a payment by NVIDIA of approximately $30.6 million to the 3dfx estate. Under the settlement, $5.6 million related to various administrative expenses and Trustee fees, and $25.0 million related to the satisfaction of debts and liabilities owed to the general unsecured creditors of 3dfx. Accordingly, during the three month period ended October 30, 2005, we recorded $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx. The Trustee advised that he intended to object to the settlement. The conditional settlement never progressed substantially through the confirmation process.

On December 21, 2006, the Bankruptcy Court scheduled a trial for one portion of the Trustee's case against NVIDIA. On January 2, 2007, NVIDIA terminated the settlement agreement on grounds that the Bankruptcy Court had failed to proceed toward confirmation of the Creditors' Committee's plan. A non-jury trial began on March 21, 2007 on valuation issues in the Trustee's constructive fraudulent transfer claims against NVIDIA. Specifically, the Bankruptcy Court tried four questions: (1) what did 3dfx transfer to NVIDIA in the APA; (2) of what was transferred, what qualifies as “property” subject to the Bankruptcy Court's avoidance powers under the Uniform Fraudulent Transfer Act and relevant bankruptcy code provisions; (3) what is the fair market value of the “property” identified in answer to question (2); and (4) was the $70.0 million that NVIDIA paid “reasonably equivalent” to the fair market value of that property. The parties completed post-trial briefing on May 25, 2007.

On April 30, 2008, the Bankruptcy Court issued its Memorandum Decision After Trial, in which it provided a detailed summary of the trial proceedings and the parties' contentions and evidence and concluded that “the creditors of 3dfx were not injured by the Transaction.” This decision did not entirely dispose of the Trustee's action, however, as the Trustee's claims for successor liability and intentional fraudulent conveyance were still pending. On June 19, 2008, NVIDIA filed a motion for summary judgment to convert the Memorandum Decision After Trial to a final judgment. That motion was granted in its entirety and judgment was entered in NVIDIA's favor on September 11, 2008. The Trustee filed a Notice of Appeal from that judgment on September 22, 2008, and on September 25, 2008, NVIDIA exercised its election to have the appeal heard by the United States District Court.

The District Court's hearing on the Trustee's appeal was held on June 10, 2009. On December 20, 2010, the District Court issued an Order affirming the Bankruptcy Court's entry of summary judgment in NVIDIA's favor. On January 19, 2011, the Trustee filed a Notice of Appeal to the United States Court of Appeals for the Ninth Circuit. The appeal is currently pending.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

While the conditional settlement reached in November 2005 never progressed through the confirmation process, the Trustee's case still remains pending on appeal. Accordingly, we have not reversed the accrual of $30.6 million - $5.6 million as a charge to settlement costs and $25.0 million as additional purchase price for 3dfx - that we recorded during the three months ended October 30, 2005, pending resolution of the appeal of the Trustee's case.

Product Defect Litigation and Securities Cases

Product Defect Litigation

In September, October and November 2008, several putative consumer class action lawsuits were filed against us, asserting various claims arising from a weak die/packaging material set in certain versions of our previous generation products used in notebook configurations. On February 26, 2009, the various lawsuits were consolidated in the United States District Court for the Northern District of California, San Jose Division, under the caption “The NVIDIA GPU Litigation.” On March 2, 2009, several of the parties filed motions for appointment of lead counsel and briefs addressing certain related issues. On April 10, 2009, the District Court appointed Milberg LLP lead counsel. On May 6, 2009, the plaintiffs filed an Amended Consolidated Complaint, alleging claims for violations of California Business and Professions Code Section 17200, Breach of Implied Warranty under California Civil Code Section 1792, Breach of the Implied Warranty of Merchantability under the laws of 27 other states, Breach of Warranty under the Magnuson-Moss Warranty Act, Unjust Enrichment, violations of the New Jersey Consumer Fraud Act, Strict Liability and Negligence, and violation of California's Consumer Legal Remedies Act.

After extensive motion practice and litigation, plaintiffs on December 14, 2009 filed a Second Amended Consolidated Complaint seeking unspecified damages and asserting claims for violations of California Business and Professions Code Section 17200, Breach of Implied Warranty under California Civil Code Section 1792, Breach of Warranty under the Magnuson-Moss Warranty Act, violations of the New Jersey Consumer Fraud Act, Strict Liability and Negligence, and violation of California's Consumer Legal Remedies Act.

On July 16, 2010, the parties filed a stipulation with the District Court advising that, following mediation they had reached a settlement in principle in The NVIDIA GPU Litigation. The settlement in principle was subject to certain approvals, including final approval by the court. As a result of the settlement in principle, and the other estimated settlement, and offsetting insurance reimbursements, NVIDIA recorded a net charge of $12.7 million to sales, general and administrative expense during the second quarter of fiscal year 2011. In addition, a portion of the $181.2 million of additional charges we recorded against cost of revenue related to the weak die/packaging set during the second quarter of fiscal year 2011, relates to estimated additional repair and replacement costs related to the implementation of these settlements. On August 12, 2010, the parties executed a Stipulation and Agreement of Settlement and Release. On September 15, 2010, the Court issued an order granting preliminary approval of the settlement and providing for notice to the potential class members. The Final Approval Hearing was held on December 20, 2010, and on that same day the Court approved the settlement and entered Final Judgment over several objections. In January 2011, several objectors filed Notices of Appeal of the Final Judgment to the United States Court of Appeals for the Ninth Circuit. The appeal is currently pending.

On July 22, 2011, a putative class action titled Granfield v. NVIDIA Corp. was filed in federal court in Massachusetts asserting claims for breach of implied warranties arising out of the weak die/packaging material set, on behalf of a class of consumers alleged to not be covered by the settlement approved by the California court in The NVIDIA GPU Litigation. On November 3, 2011 the action was transferred to the Northern District of California, San Francisco Division, based upon stipulation of the parties. On December 30, 2011, Plaintiff filed a First Amended Complaint asserting claims for violation of California Consumers Legal Remedies Act and Unfair Competition Law. On March 19, 2012, Plaintiff filed a Second Amended Complaint asserting claims for California Consumers Legal Remedies Act and Unfair Competition Law violations, Breach of Implied Warranty, and violations of the Massachusetts consumer protection statutes. NVIDIA filed a motion to dismiss the Second Amended Complaint on April 12, 2012.

On July 12, 2012, the District Court dismissed six of the seven asserted causes of action with prejudice, allowing only one cause of action for violation of the Massachusetts consumer protection statute to continue, and instructed Plaintiff to file an amended complaint consistent with its Order. On August 15, 2012, Plaintiff indicated that he would not be filing an amended complaint. The Granfield case is now over.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Securities Cases

In September 2008, three putative securities class actions, or the Actions, were filed in the United States District Court for the Northern District of California arising out of our announcements on July 2, 2008, that we would take a charge against cost of revenue to cover anticipated costs and expenses arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products and that we were revising financial guidance for our second quarter of fiscal year 2009. The Actions purport to be brought on behalf of purchasers of NVIDIA stock and assert claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act. On October 30, 2008, the Actions were consolidated under the caption In re NVIDIA Corporation Securities Litigation, Civil Action No. 08-CV-04260-JW (HRL). Lead Plaintiffs and Lead Plaintiffs' Counsel were appointed on December 23, 2008. On February 6, 2009, co-Lead Plaintiff filed a Writ of Mandamus with the Ninth Circuit Court of Appeals challenging the designation of co-Lead Plaintiffs' Counsel. On February 19, 2009, co-Lead Plaintiff filed with the District Court, a motion to stay the District Court proceedings pending resolution of the Writ of Mandamus by the Ninth Circuit. On February 24, 2009, Judge Ware granted the stay. On November 5, 2009, the Court of Appeals issued an opinion reversing the District Court's appointment of one of the lead plaintiffs' counsel, and remanding the matter for further proceedings. On December 8, 2009, the District Court appointed Milberg LLP and Kahn Swick & Foti, LLC as co-lead counsel.

On January 22, 2010, Plaintiffs filed a Consolidated Amended Class Action Complaint for Violations of the Federal Securities Laws, asserting claims for violations of Section 10(b), Rule 10b-5, and Section 20(a) of the Securities Exchange Act. The consolidated complaint sought unspecified compensatory damages. We filed a motion to dismiss the consolidated complaint in March 2010 and a hearing was held on June 24, 2010 before Judge Seeborg. On October 19, 2010, Judge Seeborg granted our motion to dismiss with leave to amend. On December 2, 2010, co-Lead Plaintiffs filed a Second Consolidated Amended Complaint. We moved to dismiss the Second Consolidated Amended Complaint on February 14, 2011. Following oral argument, on October 12, 2011, Judge Seeborg granted our motion to dismiss without leave to amend, and on November 8, 2011, Plaintiffs filed a Notice of Appeal to the Ninth Circuit. The appeal has been fully briefed, but the Ninth Circuit has not yet set a hearing date.

Accounting for Loss Contingencies

While there can be no assurance of favorable outcomes, we believe the claims made by other parties in the above ongoing matters are without merit and we intend to vigorously defend the actions. With the exception of the 3dfx and product defect litigation cases, we have not recorded any accrual for contingent liabilities associated with the legal proceedings described above based on our belief that liabilities, while possible, are not probable. Further, any possible range of loss in these matters cannot be reasonably estimated at this time. We are engaged in other legal actions not described above arising in the ordinary course of its business and, while there can be no assurance of favorable outcomes, we believe that the ultimate outcome of these actions will not have a material adverse effect on our operating results, liquidity or financial position.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 13 - Stockholders’ Equity

Stock Repurchase Program

In fiscal year 2007, our Board of Directors, or Board, authorized us, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $2.7 billion through May 2013. In October 2012, the Board extended the program through December 2014. The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, and may be made in one or more larger repurchases, in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. As part of our stock repurchase program, we have entered into, and we may continue to enter into, structured stock repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement.

We did not enter into any structured stock repurchase transactions or otherwise purchase any shares of our common stock during the three and nine months ended October 28, 2012. Through October 28, 2012, we have repurchased an aggregate of 90.9 million shares under our stock repurchase program for a total cost of $1.46 billion. As of October 28, 2012, we are authorized, subject to certain specifications, to repurchase shares of our common stock up to $1.24 billion.

Convertible Preferred Stock

As of October 28, 2012 and January 29, 2012, there were no shares of preferred stock outstanding.

Common Stock

We are authorized to issue up to 2,000,000,000 shares of our common stock at $0.001 per share par value.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 14 - Segment Information

Our Chief Executive Officer, who is considered to be our chief operating decision maker, or CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. We report financial information for three operating segments to our CODM: Graphics Processing Unit, or GPU, Business; Professional Solutions Business, or PSB; and Consumer Products Business, or CPB. The GPU business is comprised of our desktop, notebook, memory and chipset products. Our GPU business also includes license revenue in connection with our patent cross license agreement with Intel. The PSB includes Quadro workstation graphics and Tesla high-performance computing products. The CPB is comprised of Tegra based smartphone and tablet products as well as Icera baseband processors and radio frequency transceivers. Our CPB also includes embedded products for entertainment and automotive devices as well as license and royalty revenue associated with game consoles.

In addition to these operating segments, we also have an “All Other” category that includes non-recurring charges and benefits which we do not allocate to our operating segments as these items are not included in the segment operating performance measures evaluated by our CODM. On June 12, 2012, we pledged a charitable contribution of $25.0 million to Stanford Hospital and Clinics, payable over a ten year period. The charitable contribution was recorded at its net present value of $20.1 million and is considered a non-recurring charge for the nine months ended October 28, 2012. There were no non-recurring charges or benefits for the three and nine months ended October 30, 2011.

Our CODM does not review any information regarding total assets on an operating segment basis. Operating segments do not record inter-segment revenue, and, accordingly, there is none to be reported. The accounting policies for segment reporting are the same for NVIDIA as a whole.



	GPU		PSB		CPB			All Other			Consolidated
	(In thousands)
Three Months Ended October 28, 2012
Revenue	$	739,652	$	220,557	$	243,901		$	—		$	1,204,110
Depreciation and amortization expense	$	32,351	$	4,278	$	20,519		$	—		$	57,148
Operating income (loss)	$	193,226	$	100,895	$	(41,904	)	$	—		$	252,217
Three Months Ended October 30, 2011
Revenue	$	644,802	$	230,295	$	191,083		$	—		$	1,066,180
Depreciation and amortization expense	$	29,547	$	5,427	$	17,413		$	—		$	52,387
Operating income (loss)	$	146,843	$	95,887	$	(45,640	)	$	—		$	197,090
Nine Months Ended October 28, 2012
Revenue	$	1,987,671	$	629,527	$	556,059		$	—		$	3,173,257
Depreciation and amortization expense	$	96,481	$	13,109	$	58,244		$	—		$	167,834
Operating income (loss)	$	434,818	$	283,520	$	(233,545	)	$	(20,127	)	$	464,666
Nine Months Ended October 30, 2011
Revenue	$	1,920,935	$	642,425	$	481,376		$	—		$	3,044,736
Depreciation and amortization expense	$	89,238	$	17,414	$	45,658		$	—		$	152,310
Operating income (loss)	$	406,833	$	235,635	$	(116,486	)	$	—		$	525,982

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if our customers’ revenue is attributable to end customers that are located in a different location. The following tables summarize information pertaining to our revenue from customers based on invoicing address in different geographic regions:



	Three Months Ended				Nine Months Ended
	October 28,		October 30,		October 28,		October 30,
	2012		2011		2012		2011
	(In thousands)
Revenue:
China	$	205,636	$	209,986	$	580,934	$	732,202
Taiwan	403,769		293,171		1,020,232		857,717
Other Asia Pacific	192,814		223,597		583,858		561,708
United States	257,551		180,245		557,561		442,733
Other Americas	81,463		84,868		239,291		228,223
Europe	62,877		74,313		191,381		222,153
Total revenue	$	1,204,110	$	1,066,180	$	3,173,257	$	3,044,736

Revenue from significant customers, those representing 10% or more of total revenue, was approximately 14% and 12% of our total revenue from one customer for the three and nine months ended October 28, 2012, respectively. Revenue from significant customers, those representing 10% or more of total revenue, was approximately 11% of our total revenue from one customer for the three and nine months ended October 30, 2011.

Accounts receivable from significant customers, those representing 10% or more of total accounts receivable, was approximately 19% of our accounts receivable balance from one customer at October 28, 2012 and approximately 20% of our accounts receivable balance from one customer at January 29, 2012.

Note 15 - Subsequent Events

On November 8, 2012, we announced the initiation of a quarterly cash dividend program. The initial quarterly dividend of 7.5 cents per share is equivalent to 30 cents per share on an annual basis. The initial cash dividend will be payable on December 14, 2012 to all common stockholders of record at the close of business on November 23, 2012.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “goal,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

All references to “NVIDIA,” “we,” “us,” “our” or the “Company” mean NVIDIA Corporation and its subsidiaries, except where it is made clear that the term means only the parent company.

NVIDIA, the NVIDIA logo, GeForce, Icera, Kepler, Quadro, Tegra, and Tesla are trademarks and/or registered trademarks of NVIDIA Corporation in the United States and other countries. Other company and product names may be trademarks of the respective companies with which they are associated.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Item 6. Selected Financial Data” of our Annual Report on Form 10-K for the fiscal year ended January 29, 2012 and “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q and our Condensed Consolidated Financial Statements and related Notes thereto, as well as other cautionary statements and risks described elsewhere in this Quarterly Report on Form 10-Q, before deciding to purchase, hold or sell shares of our common stock.

Overview

Our Company

NVIDIA is known to millions around the world for creating the graphics chips used in personal computers, or PCs, that bring games and home movies to life. With the invention of the graphics processing unit, or GPU, we introduced the world to the power of computer graphics. Today, we reach well beyond PC graphics. Our energy-efficient processors power a broad range of products, from smartphones to supercomputers. Our mobile processors are used in cell phones, tablets and auto infotainment systems. PC gamers rely on our GPUs to enjoy visually immersive worlds. Designers use GPUs to create visual effects in movies and create everything from golf clubs to jumbo jets. Researchers utilize GPUs to push the frontiers of science with high-performance computing. NVIDIA has over 5,000 patents granted and pending worldwide.

NVIDIA solutions are based on two important technologies: the GPU and the mobile processor. Both are highly complex chips, designed by NVIDIA engineers, and manufactured for us by a third party chip foundry. GPUs are the engines of visual computing, the science and art of using computers to understand, create and enhance images. One of the most complex processors ever created, the most advanced GPUs contain billions of transistors. We have three GPU product brands: GeForce, which creates realistic visual experiences for gamers; Quadro, the standard in visual computing for designers and digital artists; and Tesla, which accelerates applications for scientists and researchers.

Mobile processors incorporate central processing unit, or CPU, and GPU technologies to deliver an entire computer system on a single chip, or system-on-chip. Modern mobile processors possess significant computing capabilities yet consume one hundred times less energy than a typical PC. Tegra is our mobile processor and is built for applications ranging from smartphones, tablets and notebook PCs to televisions and cars. We believe energy-efficient mobile computing will transform how computers are used in our lives.

We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our headquarter facilities are in Santa Clara, California. Our Internet address is www.nvidia.com. The contents of our website are not a part of this Form 10-Q.

Recent Developments, Future Objectives and Challenges

GPU Business

During the third quarter of fiscal year 2013, our Kepler-based GPU architecture was extended to lower price points with the launch of our GeForce 660 Ti, GeForce GTX 660, GeForce GTX 650 Ti and GeForce GTX 650 products.

During the second quarter of fiscal year 2013, original equipment manufacturers announced more Kepler-based notebooks. Included among them were new notebooks from Acer, Apple, Asus, Dell, HP, Lenovo, Samsung and Sony. During the first quarter of fiscal year 2013, we had refreshed our notebook GPUs with the launch of the GeForce 600M series. Acer's Aspire Timeline M3, which incorporates the GeForce 600M, is the first Ultrabook with an NVIDIA GPU.

During the first quarter of fiscal year 2013, we launched our new Kepler GPU architecture. Our first Kepler products to be launched were the GeForce GTX 670 and GeForce GTX 680, which are faster, smaller and more power efficient than our previous architecture. We also introduced our third GeForce Kepler product, the GeForce GTX 690, which uses two Kepler GPUs to further enhance performance.

Professional Solutions Business

During the third quarter of fiscal year 2013, Oak Ridge National Laboratory announced the completion of their Titan supercomputer, powered by almost nineteen thousand of our Tesla K20 GPU accelerators. Additionally, we also launched the VGX K2 graphic processor based on the Kepler architecture, for cloud-based workstation graphics and brought our Kepler architecture to Mac professional with the NVIDIA Quadro 5000 for Apple Mac Pro systems.

During the second quarter of fiscal year 2013, we introduced the Tesla K10 and K20 GPU for use in high performance computing applications, including seismic processing, life sciences and video processing. Further, we announced that the space research organization in India was utilizing their Supercomputer for Aerospace with GPU Architecture, or SAGA, system to improve the design and analysis of new and existing satellite launch vehicles.

Consumer Products Business

During the third quarter of fiscal year 2013, Microsoft launched its Surface RT, powered by Tegra-3.

During the second quarter of fiscal year 2013, Google announced that our Tegra 3 would power its Nexus 7 tablet. Nexus is the first device to run Jelly Bean, the latest version of the Android operating system. Also, Microsoft announced that a Tegra processor would be powering the Windows RT Surface tablet. Further, Fujitsu's Arrows X, a quad-core LTE smartphone powered by Tegra 3, began shipping into Japan in the second quarter of fiscal year 2013. Additionally, Tegra processors also began shipping in the 17-inch touchscreen infotainment and navigation system in Tesla Motors' new Model S.

During the first quarter of fiscal year 2013, the first Tegra 3 phone, the HTC One X, was launched. Other noteworthy phone wins announced at Mobile World Congress in March 2012 include ZTE, the first Tegra plus Icera phone, Fujitsu, LG and K-Touch.

Stock Repurchase and Cash Dividend Programs

In fiscal year 2007, our Board of Directors authorized us, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $2.7 billion through May 2013. In October 2012, the Board extended the program through December 2014. Through October 28, 2012, we have repurchased an aggregate of 90.9 million shares under our stock repurchase program for a total cost of $1.46 billion. As of October 28, 2012, we are authorized, subject to certain specifications, to repurchase shares of our common stock up to $1.24 billion.

Financial Information by Business Segment and Geographic Data

In addition to these operating segments, we also have an “All Other” category that includes non-recurring charges and benefits which we do not allocate to our operating segments as these items are not included in the segment operating performance measures evaluated by our CODM. On June 12, 2012, we pledged a charitable contribution of $25.0 million to Stanford Hospital and Clinics, payable over a ten year period. The charitable contribution was recorded at its net present value of $20.1 million and is considered a non-recurring charge for the first nine months of fiscal year 2013. There were no non-recurring charges or benefits for the third quarter and first nine months of fiscal year 2012. Please refer to Note 14 of the Notes to the Condensed Consolidated Financial Statements for further disclosure regarding segment information.

Our CODM does not review any information regarding total assets on an operating segment basis. Operating segments do not record intersegment revenue, and, accordingly, there is none to be reported. The accounting policies for segment reporting are the same as for NVIDIA as a whole.

Results of Operations

The following table sets forth, for the periods indicated, certain items in our condensed consolidated statements of operations expressed as a percentage of revenue.



	Three Months Ended				Nine Months Ended
	October 28, 2012		October 30, 2011		October 28, 2012		October 30, 2011
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenue	47.1		47.8		48.3		48.6
Gross profit	52.9		52.2		51.7		51.4
Operating expenses
Research and development	23.6		24.1		26.8		24.2
Sales, general and administrative	8.3		9.7		10.3		10.0
Total operating expenses	31.9		33.8		37.1		34.2
Operating income	21.0		18.5		14.6		17.2
Interest and other income, net	0.1		0.7		0.4		0.4
Income before income tax	21.1		19.2		15.0		17.6
Income tax expense	3.7		2.5		2.8		2.4
Net income	17.4	%	16.7	%	12.2	%	15.2	%

Three and nine months ended October 28, 2012 and October 30, 2011

Revenue

Revenue was $1.20 billion for our third quarter of fiscal year 2013, compared to $1.07 billion for our third quarter of fiscal year 2012, which represents an increase of approximately 12.9%. A discussion of our revenue results for each of our operating segments is as follows:

GPU Business. GPU business revenue increased by approximately 14.7% to $739.6 million in the third quarter of fiscal year 2013, compared to $644.8 million for the third quarter of fiscal year 2012. GPU revenues increased due to richer product mix driven by sales of our high-end desktop 28 nanometer Kepler products, offset slightly by a decrease of mainstream desktop sales. Notebook revenues increased as a result of strong design wins based on Intel's Ivy Bridge platform. Memory sales also increased as a result of strength in high-end desktop products. Offsetting these increases were decreases in revenues from our media and communications processors, or MCPs, as these chipsets approach their end of life.

GPU business revenue increased by approximately 3.5% to $1.99 billion for the first nine months of fiscal year 2013, compared to $1.92 billion for the first nine months of fiscal year 2012. GPU revenues increased due to richer product mix driven by sales of our high-end desktop 28 nanometer Kepler products, offset slightly by a decrease of mainstream desktop sales. Notebook revenues also increased as a result of strong design wins based on Intel's Ivy Bridge platform. Additionally, the first nine months of fiscal year 2013 included the full impact of nine months of revenue from the cross licensing arrangement with Intel, while the first nine months of fiscal year 2012 only included seven months of the corresponding revenue. Offsetting these increases were decreases in revenues from our MCP chipsets as these products approach their end of life.

PSB. PSB revenue decreased by approximately 4.2% to $220.6 million in the third quarter of fiscal year 2013, compared to $230.3 million in the third quarter of fiscal year 2012, and decreased by 2.0% to $629.5 million for the first nine months of fiscal year 2013, compared to $642.4 million for the first nine months of fiscal year 2012. These decreases were mainly due to lower sales of our Quadro products, which have been challenged by the macroeconomic environment including weak economic conditions in Europe and softness in other geographies. Conversely, sales of our Tesla products were up in both the third quarter and first nine months of fiscal year 2013, driven largely by the first shipments of our new Kepler-based Tesla products to Oak Ridge National Laboratory in connection with the build of their new Titan supercomputer.

CPB. CPB revenue increased by approximately 27.6% to $243.9 million in the third quarter of fiscal year 2013, compared to $191.1 million for the third quarter of fiscal year 2012. This increase was primarily due to higher sales of our Tegra 3-based devices as we transitioned from the previous generation Tegra 2-based products, as well as increased sales of embedded products for automotive devices. Offsetting these increases were decreases in license and royalty revenue associated with game consoles and a decrease in revenue from embedded entertainment products.

CPB revenue increased by approximately 15.5% to $556.1 million for the first nine months of fiscal year 2013, compared to $481.4 million for the first nine months of fiscal year 2012. The main drivers for the increase were higher sales of our Tegra products and higher sales of our embedded products for entertainment and automotive devices. Offsetting these increases was a decrease in license and royalty revenue associated with game consoles.

Concentration of Revenue

Revenue from sales to customers outside of the United States and Other Americas accounted for 72% and 75% of total revenue for the third quarter of fiscal years 2013 and 2012, respectively, and were 75% and 79% of total revenue for the first nine months of fiscal years 2013 and 2012, respectively. Revenue by geographic region is allocated to individual countries based on the location to which the products are initially billed even if the revenue is attributable to end customers in a different location.

Gross Profit and Gross Margin

Gross profit consists of total revenue, net of allowances, less cost of revenue. Cost of revenue consists primarily of the cost of semiconductors purchased from subcontractors, including wafer fabrication, assembly, testing and packaging, manufacturing support costs, including labor and overhead associated with such purchases, final test yield fallout, inventory and warranty provisions and shipping costs. Cost of revenue also includes development costs for license, service arrangements and stock-based compensation related to personnel associated with manufacturing.

Gross margin is the percentage of gross profit to revenue. Our gross margin can vary in any period depending on the mix of types of products sold. Our gross margin is significantly impacted by the mix of products we sell. Product mix is often difficult to estimate with accuracy. Therefore, if we experience product transition challenges, if we achieve significant revenue growth in our lower margin product lines, or if we are unable to earn as much revenue as we expect from higher margin product lines, our gross margin may be negatively impacted.

Our overall gross margin was 52.9% and 52.2% for the third quarter of fiscal years 2013 and 2012, respectively, and 51.7% and 51.4% for the first nine months of fiscal years 2013 and 2012, respectively.

We expect our gross margin for the fourth quarter of fiscal year 2013 to be relatively consistent with the third quarter of fiscal year 2013.

A discussion of our gross margin results for each of our operating segments is as follows:

GPU Business. The gross margin of our GPU business increased in the third quarter of fiscal year 2013 from the third quarter of fiscal year 2012. GPU margins increased primarily due to an increase in unit volume of our high-end 28 nanometer Kepler-based desktop and notebook products which contributed to a richer overall mix toward high-end GPU product sales. The gross margin of our GPU business increased slightly between the first nine months of fiscal year 2013 and first nine months of fiscal year 2012, also due primarily to a richer product mix favoring a higher volume of our high-end desktop and notebook products based on our 28 nanometer Kepler technology. Additionally, we recognized a full nine months of revenue from the cross licensing arrangement with Intel in the first nine months of fiscal year 2013 as compared to seven months of such revenue for the first nine months of fiscal year 2012, which also contributed to the gross margin improvement.

PSB. The gross margin of our PSB improved in the third quarter of fiscal year 2013 when compared to third quarter of fiscal year 2012 as well as in the first nine months of fiscal year 2013 when compared to the first nine months of fiscal year 2012, due primarily to a richer product mix.

CPB. The gross margin of our CPB remained relatively flat in the third quarter of fiscal year 2013 when compared with the third quarter of fiscal year 2012. Gross margin of our CPB decreased in the first nine months of fiscal year 2013 when compared to the first nine months of fiscal year 2012, primarily due to a shift in mix within Tegra products and due to decreases in licenses and royalty revenue associated with game consoles when compared to the same periods in the prior year.

Operating Expenses



	Three Months Ended												Nine Months Ended
	October 28, 2012			October 30, 2011			$ Change			% Change			October 28, 2012			October 30, 2011			$ Change		% Change
	($ in millions)												($ in millions)
Research and development expenses	$	284.2		$	256.5		$	27.7		10.8		%	$	849.3		$	735.7		$	113.5	15.4	%
Sales, general and administrative expenses	100.3			103.1			(2.8		)	(2.8	)	%	326.8			304.8			22.0		7.2	%
Total operating expenses	$	384.5		$	359.6		$	24.8		6.9		%	$	1,176.1		$	1,040.5		$	135.6	13.0	%
Research and development as a percentage of net revenue	23.6		%	24.1		%							26.8		%	24.2		%
Sales, general and administrative as a percentage of net revenue	8.3		%	9.7		%							10.3		%	10.0		%

Research and Development

Research and development expenses were $284.2 million and $256.5 million during the third quarter of fiscal years 2013 and 2012, respectively, an increase of $27.7 million, or 10.8%. This increase was primarily due to an increase in compensation and benefits of $22.6 million, driven by growth in headcount.

Research and development expenses were $849.3 million and $735.7 million in the first nine months of fiscal years 2013 and 2012, respectively, an increase of $113.5 million, or 15.4%. Compensation and benefits increased by $75.9 million, other employee related expenses increased by $1.9 million, and computer software and equipment expense increased by $2.3 million, primarily driven by growth in headcount. Development cost increased by $7.4 million primarily as a result of development costs associated with the ramp up and launch of our Kepler 28 nanometer technology and other products. Depreciation and amortization increased by $8.4 million primarily due to amortization of intangibles associated with our acquisition of Icera, as well as purchases of additional hardware and licenses.

Sales, General and Administrative

Sales, general and administrative expenses were $100.3 million and $103.1 million during the third quarter of fiscal years 2013 and 2012, respectively, a decrease of $2.8 million, or 2.8%. The decrease was primarily attributable due to a reduction in professional service costs associated with the acquisition of Icera in the prior fiscal year and in other litigation matters. These decreases were offset by an increase in compensation and benefits related to growth in headcount.

Sales, general and administrative expenses were $326.8 million and $304.8 million for the first nine months of fiscal years 2013 and 2012, respectively, an increase of $22.0 million, or 7.2%. The increase was primarily attributable due to a $20.1 million expense for the net present value of a charitable contribution, made in the second quarter of fiscal year 2013. Also contributing to the increase was $15.1 million of compensation and benefits, primarily driven by growth in headcount. These increases were offset by a $12.4 million decrease in professional services costs associated with the acquisition of Icera in the prior fiscal year and other litigation matters.

We expect operating expenses to increase in the fourth quarter of fiscal year 2013.

Interest Income

Interest income consists of interest earned on cash, cash equivalents and marketable securities. Interest income was $4.7 million and $4.4 million for the third quarter of fiscal years 2013 and 2012, respectively, an increase of $0.3 million. Interest income was $15.2 million and $14.9 million for the first nine months of fiscal years 2013 and 2012, respectively, an increase of $0.3 million. Both increases were primarily due to higher average cash balances.

Other Income (Expense), net

Other income (expense) primarily consists of realized gains and losses on the sale of marketable securities and foreign currency translation. Other income (expense) was $(3.3) million in the third quarter of fiscal year 2013 compared to income of $3.3 million in the third quarter of fiscal year 2012, an increase in expense of $6.6 million. Other income (expense) was $(4.0) million and $(2.1) million for the first nine months of fiscal years 2013 and 2012, respectively, a increase in expense of $1.9 million. These changes were primarily driven by an increase in foreign currency translation losses in the third quarter and first nine months of fiscal year 2013, when compared to third quarter and first nine months of fiscal year 2012.

Income Taxes

We expect our effective tax rate in the fourth quarter of fiscal year 2013 to be approximately 20%, plus or minus one percentage point, excluding any discrete tax events that may occur during the fourth quarter, which, if realized, may increase or decrease our fourth quarter tax rate.

Please refer to Note 4 of the Notes to Condensed Consolidated Financial Statements for further information regarding the components of our income tax expense.

Liquidity and Capital Resources



	As of October 28, 2012		As of January 29, 2012
	(In millions)
Cash and cash equivalents	$	525.4	$	667.9
Marketable securities	2,909.4		2,461.7
Cash, cash equivalents, and marketable securities	$	3,434.8	$	3,129.6



	Nine Months Ended
	October 28,			October 30,
	2012			2011
	(In millions)
Net cash provided by operating activities	$	373.2		$	498.6
Net cash used in investing activities	$	(602.6	)	$	(814.9	)
Net cash provided by financing activities	$	86.9		$	217.7

As of October 28, 2012, we had $3.43 billion in cash, cash equivalents and marketable securities, an increase of $305.2 million from $3.13 billion as of January 29, 2012. Our portfolio of cash equivalents and marketable securities is managed on our behalf by several financial institutions that are required to follow our investment policy, which requires the purchase of top-tier investment grade securities and the diversification of asset type and includes certain limits on our portfolio duration.

Operating activities

Operating activities provided cash of $373.2 million and $498.6 million during the first nine months of fiscal years 2013 and 2012, respectively. The decrease in cash provided by operating activities in the first nine months of fiscal year 2013 was primarily due to a decrease in our net income and an increase in inventory, attributable to a ramp in production builds of our Kepler GPU products.

Investing activities

Investing activities consisted primarily of purchases and sales of marketable securities and purchases of property and equipment, which include leasehold improvements for our facilities and intangible assets. Investing activities used cash of $602.6 million and $814.9 million during the first nine months of fiscal years 2013 and 2012, respectively. The decrease in cash used for investing activities was primarily due to the absence of acquisition activity during the first nine months of fiscal year 2013. This was offset by an increase in net purchases, sales and maturities of our available for sale investments.

Financing activities

Financing activities provided cash of $86.9 million and $217.7 million during the first nine months of fiscal years 2013 and 2012, respectively. Net cash provided by financing activities decreased in the first nine months of fiscal year 2013 when compared to the first nine months of fiscal year 2012, primarily due to a decrease in proceeds from the issuance of common stock under our employee stock purchase plan and from the exercise of stock options.

Liquidity

Our primary source of liquidity is cash generated by our operations. Our investment portfolio consists of cash and cash equivalents, commercial paper, mortgage-backed securities issued by government-sponsored enterprises, equity securities, money market funds and debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in United States dollars. As of October 28, 2012, we did not have any investments in auction-rate preferred securities.

All of our cash equivalents and marketable securities are treated as “available-for-sale”. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded debt or equity investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because any debt securities we hold are classified as “available-for-sale,” no gains or losses are realized in our statement of operations due to changes in interest rates unless such securities are sold prior to maturity or unless declines in market values are determined to be other-than-temporary. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders’ equity, net of tax.

As of October 28, 2012 and January 29, 2012, we had $3.43 billion and $3.13 billion, respectively, in cash, cash equivalents and marketable securities. Our investment policy requires the purchase of top-tier investment grade securities and the diversification of asset types and includes certain limits on our portfolio duration, as specified in our investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument. As of October 28, 2012, we were in compliance with our investment policy. As of October 28, 2012, our investments in government agencies and government sponsored enterprises represented approximately 58% of our total investment portfolio, while the financial sector accounted for approximately 22% of our total investment portfolio. Of the financial sector investments, 12% are guaranteed by the U.S. government. All of our investments are with A/A2 or better rated securities.

We performed an impairment review of our investment portfolio as of October 28, 2012. Based on our quarterly impairment review, we concluded that our investments were appropriately valued and did not record any impairment during the third quarter of fiscal year 2013.

Net realized gains for the third quarter and the first nine months of fiscal year 2013 were $0.1 million and $0.4 million, respectively. Net realized gains for the third quarter and the first nine months of fiscal year 2012 were $0.1 million and $0.5 million, respectively. As of October 28, 2012, we had a net unrealized gain of $11.8 million, which was comprised of gross unrealized gains of $12.3 million, offset by gross unrealized losses of $0.5 million. As of January 29, 2012, we had a net unrealized gain of $11.5 million, which was comprised of gross unrealized gains of $12.0 million, offset by $0.5 million of gross unrealized losses.

Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers’ businesses, and to downturns in the industry and the worldwide economy. One customer accounted for approximately 19% of our accounts receivable balance at October 28, 2012. While we strive to limit our exposure to uncollectible accounts receivable using a combination of credit insurance and letters of credit, difficulties in collecting accounts receivable could materially and adversely affect our financial condition and results of operations. These difficulties are heightened during periods when economic conditions worsen. We continue to work directly with more foreign customers and it may be difficult to collect accounts receivable from them. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. If the financial condition of our customers were to deteriorate, resulting in an impairment in their ability to make payments, additional allowances may be required, we may be required to defer revenue recognition on sales to affected customers, and we may be required to pay higher credit insurance premiums, any of which could adversely affect our operating results. In the future, we may have to record additional reserves or write-offs and/or defer revenue on certain sales transactions which could negatively impact our financial results.

Stock Repurchase Program

In fiscal year 2007, our Board of Directors, or "Board" authorized us, subject to certain specifications, to repurchase shares of our common stock up to an aggregate maximum amount of $2.7 billion through May 2013. In October 2012, the Board extended the program through December 2014.The repurchases will be made from time to time in the open market, in privately negotiated transactions, or in structured stock repurchase programs, and may be made in one or more larger repurchases, in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. As part of our stock repurchase program, we have entered into, and we may continue to enter into, structured stock repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement.

Cash Dividend Program

Operating Capital and Capital Expenditure Requirements

We believe that our existing cash balances and anticipated cash flows from operations will be sufficient to meet our operating, acquisition, stock repurchase, cash dividends and capital requirements for at least the next twelve months. However, there is no assurance that we will not need to raise additional equity or debt financing within this time frame. Additional financing may not be available on favorable terms or at all and may be dilutive to our then-current stockholders. We also may require additional capital for other purposes not presently contemplated. If we are unable to obtain sufficient capital, we could be required to curtail capital equipment purchases or research and development expenditures, which could harm our business. Factors that could affect our cash used or generated from operations and, as a result, our need to seek additional borrowings or capital include:

· decreased demand and market acceptance for our products and/or our customers’ products;

· inability to successfully develop and produce in volume production our next-generation products;

· competitive pressures resulting in lower than expected average selling prices; and

· new product announcements or product introductions by our competitors.

We expect to spend approximately $60.0 million to $70.0 million for capital expenditures during the remainder of fiscal year 2013.

For additional factors see “Item 1A. Risk Factors - Risks Related to Our Business, Industry and Partners - Our revenue may fluctuate while our operating expenses are relatively fixed, which makes our results difficult to predict and could cause our results to fall short of expectations.”

Contractual Obligations

As of October 28, 2012, we had outstanding inventory purchase obligations totaling approximately $596.7 million. There were no other material changes in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 29, 2012.

On June 12, 2012, we pledged a $25.0 million charitable contribution to Stanford Hospital and Clinic, payable over a period of ten years, the net present value of which was recorded at $20.1 million.

In addition, in connection with our completion of the acquisition of Icera on June 10, 2011, we have established a retention program in the aggregate amount of approximately $68.0 million to be paid out to Icera employees over a period of four years.

Please see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in our Annual Report on Form 10-K for a description of our contractual obligations.

Off-Balance Sheet Arrangements

As of October 28, 2012, we had no material off-balance sheet arrangements as defined in Regulation S-K 303(a)(4)(ii).

Adoption of New and Recently Issued Accounting Pronouncements

Please see Note 1 of the Notes to Condensed Consolidated Financial Statements for a discussion of adoption of new and recently issued accounting pronouncements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Investment and Interest Rate Risk

As of October 28, 2012 and January 29, 2012, we had $3.43 billion and $3.13 billion, respectively, in cash, cash equivalents and marketable securities. We invest in a variety of financial instruments, consisting principally of cash and cash equivalents, commercial paper, mortgage-backed securities issued by government-sponsored enterprises, equity securities, money market funds and debt securities of corporations, municipalities and the United States government and its agencies. As of October 28, 2012, we did not have any investments in auction-rate preferred securities. All of our investments are denominated in United States dollars.

All of the cash equivalents and marketable securities are treated as “available-for-sale.” Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded debt or equity investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in securities market value due to changes in interest rates. However, because any debt securities we hold are classified as “available-for-sale,” no gains or losses are realized in our statement of operations due to changes in interest rates unless such securities are sold prior to maturity or unless declines in value are determined to be other-than-temporary. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity, net of tax.

As of October 28, 2012, we performed a sensitivity analysis on our floating and fixed rate investments. According to our analysis, parallel shifts in the yield curve of both plus or minus 0.5% would result in changes in fair market values for these investments of approximately $16.6 million.

The financial turmoil that affected the banking system and financial markets and increased the possibility that financial institutions might consolidate or go out of business resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets. There could be a number of follow-on effects from the credit crisis on our business, including insolvency of key suppliers resulting in product delays; inability of customers, including channel partners, to obtain credit to finance purchases of our products and/or customer, including channel partner, insolvencies; and failure of financial institutions, which may negatively impact our treasury operations. Other income and expense could also vary materially from expectations depending on gains or losses realized on the sale or exchange of financial instruments; impairment charges related to debt securities as well as equity and other investments; interest rates; and cash, cash equivalent and marketable securities balances. Volatility in the financial markets and economic uncertainty increases the risk that the actual amounts realized in the future on our financial instruments could differ significantly from the fair values currently assigned to them. As of October 28, 2012, our investments in government agencies and government sponsored enterprises represented approximately 58% of our total investment portfolio, while the financial sector accounted for approximately 22% of our total investment portfolio. Of the financial sector investments, 12% are guaranteed by the U.S. government. All of our investments are with A/A2 or better rated securities. If the fair value of our investments in these sectors was to decline by 2% - 5%, fair market values for these investments would decline by approximately $47.9 - $119.8 million.

Exchange Rate Risk

We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Gains or losses from foreign currency re-measurement are included in “Other income (expense), net” in our Condensed Consolidated Financial Statements and to date have not been significant. The impact of foreign currency transaction gain (loss) included in determining net income for the third quarter of fiscal years 2013 and 2012 was $(3.0) million and 4.5 million, respectively. During the first nine months of fiscal years 2013 and 2012, the aggregate foreign currency exchange gain (loss) included in determining net income was (1.0) million and $1.8 million, respectively. Currently, revenue and arrangements with third-party manufacturers provide for pricing and payment in United States dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the United States’ dollar relative to other currencies would make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the United States’ dollar relative to other currencies could result in our suppliers raising their prices in order to continue doing business with us. Fluctuations in currency exchange rates could harm our business in the future.

We may enter into certain transactions such as forward contracts which are designed to reduce the future potential impact resulting from changes in foreign currency exchange rates. There were no forward exchange contracts outstanding at October 28, 2012.

ITEM 4. CONTROLS AND PROCEDURES

Controls and Procedures

Disclosure Controls and Procedures

Based on their evaluation as of October 28, 2012, our management, including our Chief Executive Officer and Interim Chief Financial Officer, has concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) were effective to provide reasonable assurance.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting during our fiscal quarter ended October 28, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Interim Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within NVIDIA have been detected.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Please see Part I, Item 1, Note 12 of the Notes to Condensed Consolidated Financial Statements for a discussion of our legal proceedings.

ITEM 1A. RISK FACTORS

In evaluating NVIDIA and our business, the following factors should be considered in addition to the other information in this Quarterly Report on Form 10-Q. Before you buy our common stock, you should know that making such an investment involves some risks including, but not limited to, the risks described below. Additionally, any one of the following risks could seriously harm our business, financial condition and results of operations, which could cause our stock price to decline. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

Risks Related to Our Business, Industry and Partners

If we are unable to compete in the markets for our products, our financial results will be adversely impacted.

The market for our products is extremely competitive, and we expect competition to intensify as current competitors expand their product offerings, industry standards continue to evolve and others realize the market potential of mobile and consumer products and services.

Our current competitors include:


•	suppliers of graphics processing units, or GPUs, including chipsets that incorporate three-dimensional, or 3D, graphics functionality as part of their existing solutions, such as Advanced Micro Devices, or AMD, Intel Corporation, Matrox Electronics Systems Ltd. and VIA Technologies, Inc.;

•

suppliers of system-on-chip products that support tablets, smartphones, automotive navigation and other similar devices, such as AMD, Broadcom Corporation, Freescale Semiconductor Inc., Fujitsu Limited, Intel, Marvell Technology Group Ltd., NEC Corporation, Qualcomm Incorporated, Renesas Electronics Corporation, Samsung Electronics Co. Ltd., Seiko Epson Corporation, ST-Ericsson, Texas Instruments Incorporated and Toshiba America Electronic Components, Inc.;


•	licensors of graphics technologies, such as ARM Holdings plc and Imagination Technologies Group plc; and


•	suppliers of cellular basebands, such as Broadcom, Freescale Semiconductor, GCT Semiconductor Inc., HiSilicon Technologies Co., Ltd., Intel, Marvell, Mediatek, Qualcomm, Renesas Electronics, Samsung, Spreadtrum Communications Inc., ST-Ericsson, Texas Instruments and VIA Technologies, Inc.

We expect competition to increase from both existing competitors and new market entrants with products that may be less costly than ours, or may provide better performance or additional features not provided by our products. In addition, it is possible that new competitors or alliances among competitors could emerge and acquire significant market share. Furthermore, competitors with greater financial resources may be able to offer lower prices than us, or they may offer additional products, services or other incentives that we may not be able to match. In addition, many of our competitors operate and maintain their own fabrication facilities and have longer operating histories, greater name recognition, larger customer bases, and greater sales, marketing and distribution resources than we do.

Our ability to compete will depend on, among other factors, our ability to:


•	continue to keep pace with technological developments;


•	develop and introduce new products, services, technologies and enhancements on a timely basis;


•	transition our semiconductor products to increasingly smaller line width geometries;


•	obtain sufficient foundry capacity and packaging materials; and


•	succeed in significant foreign markets, such as China and India.

If we are unable to compete in our current or new markets, demand for our products could decrease which could cause our revenue to decline and our financial results to suffer.

If and to the extent we offer products in new markets, we may face competition from existing competitors as well as from companies with which we currently do not compete. We expect substantial competition from Intel and AMD, both of whom have a strategy of selling platform solutions, including integrating a central processing unit, or CPU, and a GPU on the same chip. As Intel and AMD continue to pursue platform solutions and integrated CPUs, our business could be negatively impacted. Despite the use of these integrated CPUs, personal computer, or PC, builders and consumers have continued to embrace discrete GPUs to provide higher performance, or the GPU attach rate. If integrated CPUs offer a more compelling value proposition in the future, our GPU attach rate could decrease, which could adversely affect our business and cause our financial results to decline.

Our business results could be adversely affected if the identification and development of new products is delayed or unsuccessful.

In order to maintain or improve our financial results, we will need to continue to identify and develop new products and enhancements to our existing products in a timely and cost-effective manner. The process of developing new products and services and enhancing existing products and services is highly complex, costly and uncertain, and any failure by us to anticipate customers' changing needs and emerging technology trends could adversely affect our business. We must make long-term investments and commit significant resources before knowing whether our predictions will accurately reflect customer demand for our new products and technologies. It is possible that our development efforts will not be successful and that our new technologies will not result in meaningful revenues. Even if we introduce new and enhanced products to the market, we may not be able to achieve market acceptance of them in a timely manner.

Our ability to successfully develop and deliver new products will depend on various factors, including our ability to:


•	effectively identify and capitalize upon opportunities in new markets;


•	timely complete and introduce new products and technologies;


•	transition our semiconductor products to increasingly smaller line width geometries; and


•	obtain sufficient foundry capacity and packaging materials.

We occasionally have experienced delays in completing the development and introduction of new products and product enhancements, and we could experience delays in the future. In addition, in the past, we have been unable to successfully manage product transitions from older to newer products resulting in obsolete inventory. Our failure to successfully develop and introduce new products and technologies or identify new uses for existing or future products could result in rapidly declining average selling prices, reduced demand for our products or loss of market share, any of which could harm our competitive position and cause our revenue, gross margin and overall financial results to suffer.

If we are unable to achieve market acceptance and design wins for our products and technologies, our results of operations and competitive position will be harmed.

The success of our business depends to a significant extent on our ability to achieve market acceptance of our new products and enhancements to our existing products and identify and enter new markets. The markets for our product and technologies have been characterized by unpredictable and sometimes rapid shifts in the popularity of products, often caused by the publication of competitive industry benchmark results, changes in pricing of dynamic random-access memory devices and other changes in the total system cost of add-in boards, or AIBs, as well as by severe price competition and by frequent new technology and product introductions. Broad market acceptance is difficult to achieve and such market acceptance, if achieved, is difficult to sustain due to intense competition and frequent new technology and product introductions. If we do not successfully achieve or maintain market acceptance for our products and enhancements or identify and enter new markets, our ability to compete and maintain or increase revenues will suffer.

Additionally, there can be no assurance that the industry will continue to demand new products with improved standards, features or performance. If our customers, original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, add-in card and motherboard manufacturers, system builders and consumer electronics companies do not continue to design products that require more advanced or efficient processors and/or the markets do not continue to demand new products with increased performance, features, functionality or standards, sales of our products could decline and the markets for our products could shrink. Decreased sales of our products for these markets could negatively impact our revenue and our financial results.

We believe achieving design wins, which entails having our existing and future products chosen for hardware components or subassemblies designed by OEMs, ODMs, and AIB and motherboard manufacturers, is an integral part of our future success. Our OEM, ODM, and AIB and motherboard manufacturers' customers typically introduce new system configurations as often as twice per year, typically based on spring and fall design cycles or in connection with trade shows. Accordingly, when our customers are making their design decisions, our existing products must have competitive performance levels or we must timely introduce new products in order to be included in our customers' new system configurations. This requires that we:


•	anticipate the features and functionality that customers and consumers will demand;


•	incorporate those features and functionalities into products that meet the exacting design requirements of our customers;


•	price our products competitively; and


•	introduce products to the market within our customers' limited design cycles.

If OEMs, ODMs, and AIB and motherboard manufacturers do not include our products in their systems, they will typically not use our products in their systems until at least the next design configuration. Therefore, we endeavor to develop close relationships with our OEMs and ODMs, in an attempt to better anticipate and address customer needs in new products so that we will achieve design wins.

Our ability to achieve design wins also depends in part on our ability to identify and be compliant with evolving industry standards. Unanticipated changes in industry standards could render our products incompatible with products developed by major hardware manufacturers and software developers. If our products are not in compliance with prevailing industry standards, we may not be designed into our customers' product designs. However, to be compliant with changes to industry standards, we may have to invest significant time and resources to redesign our products which could negatively impact our gross margin or operating results. If we are unable to achieve new design wins for existing or new customers, we may lose market share and our operating results would be negatively impacted.

If new consumer products and technologies which incorporate our products do not achieve market acceptance, our business could be negatively impacted.

The success of our business also depends on market acceptance of new consumer products and technologies, such as smartphones, smartbooks, tablets and other similar consumer electronics devices, which contain our products. As markets for these new consumer products emerge, we may encounter new sources of competition as well as customers who have different requirements than those in the PC business. If market acceptance of such products and technologies is not attained, our ability to compete and maintain or increase revenues will be adversely affected.

Our ability to be successful in emerging consumer product markets depends in part on our ability to cultivate new industry relationships in these market segments. As the number and variety of Internet-connected devices increase, we will need to improve the functionality of our products to succeed in these new markets, which may require significant time and resources on our part to design our products which could negatively impact our business.

We depend on foundries to manufacture our products and these third parties may not be able to satisfy our manufacturing requirements, which would harm our business.

We do not manufacture the silicon wafers used for our products and do not own or operate a wafer fabrication facility. Instead, we are dependent on industry-leading foundries, such as Taiwan Semiconductor Manufacturing Company Limited, or TSMC, to manufacture our semiconductor wafers using their fabrication equipment and techniques. A substantial portion of our wafers are supplied by TSMC. The foundries, which have limited capacity, also manufacture products for other semiconductor companies, including some of our competitors. Since we do not have long-term commitment contracts with any of these foundries, they do not have an obligation to provide us with any set pricing or minimum quantity of product at any time except as may be provided in a specific purchase order. Most of our products are only manufactured by one foundry at a time. In times of high demand, the foundries could choose to prioritize their capacity for other companies, reduce or eliminate deliveries to us, or increase the prices that they charge us. If we are unable to meet customer demand due to reduced or eliminated deliveries or have to increase the prices of our products, we could lose sales to customers, which would negatively impact our revenue and our reputation. For example, due to capacity constraint at TSMC of our 28 nanometer Kepler graphics processing units, or GPUs, in the first quarter of fiscal year 2013, we were unable to fulfill customer demand for our high-end desktop GPU products, and as our sales mix shifted to our mainstream desktop GPU products, revenue and gross margins for the first quarter of fiscal year 2013 were negatively impacted compared to the prior quarter. We experienced continued 28 nanometer-supply constraints in the second quarter of fiscal year 2013.

Because the lead-time needed to establish a strategic relationship with a new manufacturing partner and achieve initial production could be over a year, we do not have an alternative source of supply for our products. In addition, the time and effort to qualify a new foundry would result in additional expense and diversion of resources, and could result in lost sales, any of which would negatively impact our financial results. We believe that long-term market acceptance for our products will depend on reliable relationships with the third-party manufacturers we use to ensure adequate product supply and competitive pricing to respond to customer demand.

If our third-party foundries are not able to transition to new manufacturing process technologies or develop, obtain or successfully implement high quality, leading-edge process technologies, our operating results and gross margin could be adversely affected.

We use the most advanced manufacturing process technology appropriate for our products that is available from our third-party foundries. As a result, we continuously evaluate the benefits of migrating our products to smaller geometry process technologies in order to improve performance and reduce costs. We believe this strategy will help us remain competitive. Our current product families are manufactured using 0.18 micron, 0.14 micron, 0.13 micron, 0.11 micron, 90 nanometer, 80 nanometer, 65 nanometer, 55 nanometer, 40 nanometer and 28 nanometer process technologies. Manufacturing process technologies are subject to rapid change and require significant expenditures for research and development, which could negatively impact our operating expenses and gross margin.