Edgar Filing: NVIDIA CORP

NVDA 2014 Q2 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 July 28, 2013



[_]	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 August 16, 2013, was 578,598,038.

NVIDIA CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED July 28, 2013

TABLE OF CONTENTS



		Page
	PART I : FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	a) Condensed Consolidated Statements of Income for the three and six months ended July 28, 2013 and July 29, 2012	3

	b) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended July 28, 2013 and July 29, 2012	4

	c) Condensed Consolidated Balance Sheets as of July 28, 2013 and January 27, 2013	5

	d) Condensed Consolidated Statements of Cash Flows for the six months ended July 28, 2013 and July 29, 2012	6

	e) Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4.	Controls and Procedures	33

	PART II : OTHER INFORMATION

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 6.	Exhibits	51

Signature		52

WHERE YOU CAN FIND MORE INFORMATION

Investors and others should note that we announce material financial information to our investors using our investor relations website, press releases, SEC filings and public conference calls and webcasts. We intend to also use the following social media channels as a means of disclosing information about the company, our services and other matters and for complying with our disclosure obligations under Regulation FD:

NVIDIA Company Blog (http://blogs.nvidia.com/)

NVIDIA Facebook Page (https://www.facebook.com/NVIDIA)

NVIDIA Twitter Account (https://twitter.com/NVIDIA)

NVIDIA LinkedIn Page (http://www.linkedin.com/company/nvidia?trk=hb_tab_compy_id_3608)

The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts and the blog, in addition to following our press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time. The information we post through these channels is not a part of this quarterly report on Form 10-Q. These channels may be updated from time to time on NVIDIA's investor relations website.

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				Six Months Ended
	July 28,		July 29,		July 28,		July 29,
	2013		2012		2013		2012

Revenue	$	977,238	$	1,044,270	$	1,931,977	$	1,969,147
Cost of revenue	431,700		503,551		867,871		965,064
Gross profit	545,538		540,719		1,064,106		1,004,083
Operating expenses
Research and development	331,738		281,193		658,899		565,095
Sales, general and administrative	108,266		119,903		216,892		226,539
Total operating expenses	440,004		401,096		875,791		791,634
Income from operations	105,534		139,623		188,315		212,449
Interest income	3,865		5,316		8,941		10,514
Other income (expense), net	2,421		269		2,626		(660		)
Income before income tax expense	111,820		145,208		199,882		222,303
Income tax expense	15,372		26,162		25,543		42,820
Net income	$	96,448	$	119,046	$	174,339	$	179,483

Basic net income per share	$	0.16	$	0.19	$	0.29	$	0.29
Shares used in basic per share computation	585,345		618,996		601,109		617,388

Diluted net income per share	$	0.16	$	0.19	$	0.29	$	0.29
Shares used in diluted per share computation	592,006		623,143		606,051		623,397

Cash dividends declared and paid per common share	$	0.075	$	—	$	0.150	$	—

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(In thousands)



	Three Months Ended						Six Months Ended
	July 28,			July 29,			July 28,			July 29,
	2013			2012			2013			2012

Net income	$	96,448		$	119,046		$	174,339		$	179,483
Other comprehensive income (loss), net of tax:
Net change in unrealized gains (losses) on available-for-sale securities, net of tax benefit (expense) of $355 and $78 for the three and six months ended July 28, 2013, respectively, and $(264) and $(243) for the corresponding periods of fiscal 2013, respectively	(3,377		)	847			(2,986		)	766
Reclassification adjustments for net realized gains on available-for-sale securities included in net income, net of tax effects of $549 and $591 for the three and six months ended July 28, 2013, respectively, and $73 and $119 for the corresponding periods of fiscal 2013, respectively	(1,019		)	(135		)	(1,098		)	(221		)
Other comprehensive income (loss)	$	(4,396	)	$	712		$	(4,084	)	$	545
Total comprehensive income	$	92,052		$	119,758		$	170,255		$	180,028

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands)



	July 28,			January 27,
	2013			2013
ASSETS
Current assets:
Cash and cash equivalents	$	591,321		$	732,786
Marketable securities	2,344,572			2,995,097
Accounts receivable, net	418,123			454,252
Inventories	378,280			412,467
Prepaid expenses and other	81,876			76,920
Deferred income taxes	108,436			103,736
Total current assets	3,922,608			4,775,258
Property and equipment, net	578,948			576,144
Goodwill	641,030			641,030
Intangible assets, net	322,520			312,332
Other assets	104,486			107,481
Total assets	$	5,569,592		$	6,412,245

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	310,271		$	356,428
Accrued liabilities and other	625,520			619,795
Total current liabilities	935,791			976,223
Other long-term liabilities	443,943			589,321
Capital lease obligations, long-term	17,685			18,998
Commitments and contingencies - see Note 11	—			—
Stockholders’ equity:
Preferred stock	—			—
Common stock	726			720
Additional paid-in capital	3,104,501			3,193,623
Treasury stock, at cost	(2,269,766		)	(1,622,709		)
Accumulated other comprehensive income	5,897			9,981
Retained earnings	3,330,815			3,246,088
Total stockholders' equity	4,172,173			4,827,703
Total liabilities and stockholders' equity	$	5,569,592		$	6,412,245

See accompanying Notes to Condensed Consolidated Financial Statements.

NVIDIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)



	Six Months Ended
	July 28,			July 29,
	2013			2012
Cash flows from operating activities:
Net income	$	174,339		$	179,483
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	121,584			110,686
Stock-based compensation expense	65,792			67,824
Deferred income taxes	(611		)	13,791
Excess tax benefits from stock-based compensation	(17,360		)	(18,154		)
Other	8,867			32,496
Changes in operating assets and liabilities:
Accounts receivable	37,271			(109,218		)
Inventories	34,722			(46,834		)
Prepaid expenses and other current assets	(4,956		)	(3,912		)
Other assets	4,445			494
Accounts payable	(36,452		)	65,646
Accrued liabilities and other long-term liabilities	(115,522		)	(100,624		)
Net cash provided by operating activities	272,119			191,678
Cash flows from investing activities:
Purchases of marketable securities	(936,214		)	(1,247,664		)
Proceeds from sale of marketable securities	1,248,511			476,379
Proceeds from maturities of marketable securities	320,838			442,477
Purchases of property and equipment and intangible assets	(150,653		)	(90,867		)
Other	(1,450		)	(82		)
Net cash provided by (used in) investing activities	481,032			(419,757		)
Cash flows from financing activities:
Proceeds from issuance of common stock under employee stock plans	31,303			42,678
Payments under capital lease obligations	(1,169		)	(1,011		)
Excess tax benefits from stock-based compensation	17,360			18,154
Payments for repurchases of common stock	(850,000		)	—
Dividends paid	(89,610		)	—
Other	(2,500		)	—
Net cash provided by (used in) financing activities	(894,616		)	59,821
Change in cash and cash equivalents	(141,465		)	(168,258		)
Cash and cash equivalents at beginning of period	732,786			667,876
Cash and cash equivalents at end of period	$	591,321		$	499,618
Supplemental disclosures of cash flow information:
Cash paid (received) for income taxes, net	$	5,083		$	(43,149	)
Cash paid for interest on capital lease obligations	$	1,294		$	1,474
Other non-cash activities:
Assets acquired by assuming related liabilities	$	3,725		$	54,230
Change in unrealized gains (losses) from marketable securities	$	(4,084	)	$	545

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 27, 2013.

Fiscal Year

We operate on a 52- or 53-week year, ending on the last Sunday in January. Fiscal year 2014 and fiscal year 2013 are both 52-week years. The second quarters of fiscal years 2014 and 2013 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.

Reclassifications

Certain prior fiscal year balances have been reclassified to conform to the current fiscal year presentation.

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 of the related receivable 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. 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.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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.

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 the related 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. Excess, 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 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)

Net Income Per Share

Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common and potentially dilutive shares outstanding during the period, using the treasury stock method. Under the treasury stock method, the effect of equity awards outstanding is not included in the computation of diluted net income per share for periods when their effect is anti-dilutive.

Adoption of New and Recently Issued Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board, or FASB, issued guidance regarding the presentation of unrecognized tax benefits when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. The new guidance requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement in this manner is available under the tax law. This guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013. Retrospective and early adoption is permitted. We expect to adopt this guidance in our interim and annual periods beginning January 27, 2014. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

In February 2013, the FASB issued updated guidance requiring entities to report the effect of significant reclassifications to accumulated other comprehensive income on the respective line items in net income. These reclassifications are reported, only if U.S. GAAP requires the entire amount to be reclassified to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. We adopted this guidance in our interim period ended April 28, 2013. The adoption of this guidance did not impact our financial statements, as the guidance is related to disclosure only, and we have not had significant reclassifications out of accumulated other comprehensive income.

Note 2 - Stock-Based Compensation

We measure stock-based compensation expense based on the estimated fair value of equity awards at the grant date, and recognize the expense using a straight-line attribution method over the requisite employee service period. We estimate the fair value of employee stock options on the date of grant using a binomial model and we use the closing trading price of our common stock on the date of grant, minus a dividend yield discount, as the fair value of awards of restricted stock units, or RSUs. We estimate the fair value of shares to be issued under our employee stock purchase plan using the Black-Scholes model at the commencement of an offering period in March and September of each year. Stock-based compensation for our employee stock purchase plan is expensed using an accelerated amortization model.

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



	Three Months Ended				Six Months Ended
	July 28, 2013		July 29, 2012		July 28, 2013		July 29, 2012
	(In thousands)				(In thousands)
Cost of revenue	$	2,168	$	2,649	$	4,821	$	5,175
Research and development	18,555		18,885		40,490		40,092
Sales, general and administrative	11,672		10,721		20,481		22,557
Total	$	32,395	$	32,255	$	65,792	$	67,824

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

During the three and six months ended July 28, 2013, we granted approximately 0.5 million and 3.3 million stock options, with an estimated total grant-date fair value of $1.4 million and $10.1 million and a weighted average grant-date fair value of $2.96 and $3.09 per option, respectively. During the three and six months ended July 28, 2013, we granted approximately 0.7 million and 5.6 million RSUs with an estimated total grant-date fair value of $8.9 million and $66.3 million and a weighted average grant-date fair value of $13.49 and $11.93 per RSU, respectively.

During the three and six months ended July 29, 2012, we granted approximately 0.7 million and 3.6 million stock options, with an estimated total grant-date fair value of $3.1 million and $19.3 million and a weighted average grant-date fair value of $4.80 and $5.16 per option, respectively. During the three and six months ended July 29, 2012, we granted approximately 0.7 million and 4.0 million RSUs, with an estimated total grant-date fair value of $8.3 million and $56.5 million and a weighted average grant-date fair value of $12.37 and $14.23 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 were not expected to vest was $1.8 million and $13.7 million for the three and six months ended July 28, 2013, respectively, and $2.1 million and $13.6 million for the three and six months ended July 29, 2012, respectively. As of July 28, 2013 and July 29, 2012, the aggregate amount of unearned stock-based compensation expense related to our equity awards was $222.8 million and $197.4 million, respectively, adjusted for estimated forfeitures. As of July 28, 2013 and July 29, 2012, we expected to recognize the unearned stock-based compensation expense related to stock options for both periods over an estimated weighted average amortization period of 2.6 years. As of July 28, 2013 and July 29, 2012, we expected to recognize the unearned stock-based compensation expense related to RSUs over an estimated weighted average amortization period of 2.8 years and 2.6 years years, respectively.

Valuation Assumptions

We determine the fair value of stock option awards on the date of grant using an option-pricing model that is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, weighted average expected term, risk-free interest rate, expected stock price volatility, dividend yield, actual and projected employee stock option exercise behaviors, vesting schedules and death and disability probabilities. We 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. The expected life of employee stock options is a derived output of our valuation model and is impacted by the underlying assumptions of our company. The risk-free interest rate assumption is based upon observed interest rates on Treasury bills appropriate for the term of our employee stock options. Our management has determined that the use of implied volatility is expected to be more reflective of market conditions and, therefore, can reasonably be expected to be a better indicator of our expected volatility than historical volatility. Dividend yield is based on history and expectation of dividend payouts. Our RSU awards are not eligible for cash dividends prior to vesting; therefore, the fair value of RSUs is discounted by the dividend yield.

Prior to the initial declaration of a quarterly cash dividend on November 8, 2012, the fair value of our equity awards was based on an expected dividend yield of 0% reflecting our prior history in which we had not paid and did not expect to pay cash dividends on our common stock. For awards granted on or subsequent to November 8, 2012, we now use a dividend yield at grant date based on the per share dividends declared during the most recent quarter.

Additionally, for employee stock option and RSU awards, we estimate forfeitures annually and revise the estimates of forfeiture in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If factors change and we employ different assumptions in the application of accounting standards in future periods, the compensation expense that we record under these accounting standards may differ significantly from what we have recorded in the current period.

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:

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



	Three Months Ended		Six Months Ended
	July 28, 2013	July 29, 2012	July 28, 2013	July 29, 2012
Stock Options	(Using a binomial model)
Expected life (in years)	2.4 - 3.4	3.1 - 4.8	2.4 - 3.4	3.1 - 4.8
Risk-free interest rate	1.8% - 2.7%	1.5% - 1.9%	1.8% - 2.7%	1.5% - 2.3%
Volatility	30% - 33%	43% - 48%	30% - 37%	43% - 48%
Dividend yield	2.1% - 2.2%	—	2.1% - 2.4%	—



	Three Months Ended		Six Months Ended
	July 28, 2013	July 29, 2012	July 28, 2013		July 29, 2012
Employee Stock Purchase Plan	(Using a Black-Scholes model)
Expected life (in years)	—	—	0.5 - 2.0		0.5 - 2.0
Risk-free interest rate	—	—	0.1% - 0.3%		0.1% - 0.3%
Volatility	—	—	37	%	44	%
Dividend yield	—	—	2.4	%	—

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 27, 2013	32,995		$	14.66
Granted	3,280		$	12.90
Exercised	(1,176	)	$	9.57
Cancelled	(2,408	)	$	19.89
Balances, July 28, 2013	32,691		$	14.28



	RSUs Outstanding		Weighted Average Grant-Date Fair Value
Restricted Stock Units	(In thousands)		(Per share)
Balances, January 27, 2013	15,159		$	14.46
Granted	5,558		$	11.93
Vested	(3,259	)	$	15.43
Cancelled	(628	)	$	13.89
Balances, July 28, 2013	16,830		$	13.46

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				Six Months Ended
	July 28,		July 29,		July 28,		July 29,
	2013		2012		2013		2012
	(In thousands, except per share data)
Numerator:
Net income	$	96,448	$	119,046	$	174,339	$	179,483
Denominator:
Denominator for basic net income per share, weighted average shares	585,345		618,996		601,109		617,388
Effect of dilutive securities:
Equity awards outstanding	6,661		4,147		4,942		6,009
Denominator for diluted net income per share, weighted average shares	592,006		623,143		606,051		623,397
Net income per share:
Basic net income per share	$	0.16	$	0.19	$	0.29	$	0.29
Diluted net income per share	$	0.16	$	0.19	$	0.29	$	0.29
Potentially dilutive securities excluded from income per diluted share because their effect would have been anti-dilutive	17,749		27,121		27,039		24,882

Note 4 – Income Taxes

We recognized income tax expense of $15.4 million and $25.5 million for the three and six months ended July 28, 2013, respectively, and $26.2 million and $42.8 million for the three and six months ended July 29, 2012, respectively. Income tax expense as a percentage of income before taxes, or our effective tax rate, was 13.8% and 12.8% for the three and six months ended July 28, 2013, respectively, and 18.0% and 19.3% for the three and six months ended July 29, 2012, respectively.

The decrease in our effective tax rate in the fiscal year 2014 periods as compared to the same periods in the prior fiscal year was primarily related to the benefit of the U.S. federal research tax credit which was re-enacted on January 2, 2013 under the American Taxpayer Relief Act, and favorable discrete events that occurred in the first six months of fiscal year 2014 primarily attributable to the expiration of statute of limitation in certain non-U.S. jurisdictions.

Our effective tax rate on income before tax for the first six months of fiscal year 2014 of 12.8% and fiscal year 2013 of 19.3% 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 2014 due to the benefit of the U.S. federal research tax credit.

For the six months ended July 28, 2013, there have been no material changes to our tax years that remain subject to examination by major tax jurisdictions. Additionally, there have been no other material changes to our unrecognized tax benefits and any related interest or penalties from our fiscal year ended January 27, 2013, other than the recognition of tax benefits related to the expiration of statute of limitation in certain non-U.S. jurisdictions in the six months ended July 28, 2013.

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 July 28, 2013, 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 July 28, 2013. 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 July 28, 2013.

The following is a summary of cash equivalents and marketable securities at July 28, 2013 and January 27, 2013:



	July 28, 2013
	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
	(In thousands)
Debt securities of United States government agencies	$	691,223	$	634	$	(393	)	$	691,464
Corporate debt securities	965,222		1,637		(914		)	965,945
Mortgage backed securities issued by United States government-sponsored enterprises	191,265		5,114		(362		)	196,017
Money market funds	164,885		—		—			164,885
Debt securities issued by United States Treasury	496,789		487		(130		)	497,146
Total	$	2,509,384	$	7,872	$	(1,799	)	$	2,515,457
Classified as:
Cash equivalents								$	170,885
Marketable securities								2,344,572
Total								$	2,515,457



	January 27, 2013
	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
	(In thousands)
Debt securities of United States government agencies	$	867,087	$	1,199	$	(139	)	$	868,147
Corporate debt securities	1,255,297		3,175		(542		)	1,257,930
Mortgage backed securities issued by United States government-sponsored enterprises	183,034		6,194		(57		)	189,171
Money market funds	195,790		—		—			195,790
Debt securities issued by United States Treasury	785,228		1,102		(105		)	786,225
Total	$	3,286,436	$	11,670	$	(843	)	$	3,297,263
Classified as:
Cash equivalents								$	302,166
Marketable securities								2,995,097
Total								$	3,297,263

The estimated fair value of cash equivalents and marketable securities was $2.52 billion and $3.30 billion at July 28, 2013 and January 27, 2013, respectively, a decrease of $781.8 million. This decrease was primarily due to the liquidation of a portion of our investment portfolio to finance the accelerated share repurchase transaction of $750.0 million we entered into on May 14, 2013.

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 July 28, 2013 and January 27, 2013 and are shown below by contractual maturity.



	July 28, 2013				January 27, 2013
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In thousands)
Less than one year	$	991,260	$	992,324	$	1,397,350	$	1,399,304
Due in 1 - 5 years	1,430,967		1,434,002		1,777,785		1,783,103
Mortgage-backed securities issued by government-sponsored enterprises not due at a single maturity date	87,157		89,131		111,301		114,856
Total	$	2,509,384	$	2,515,457	$	3,286,436	$	3,297,263

Net realized gains for the three and six months ended July 28, 2013 were $1.6 million and $1.7 million, respectively. Net realized gains for the three and six months ended July 29, 2012 were $0.2 million and $0.3 million, respectively.

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 six months ended July 28, 2013.

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
	July 28, 2013		(Level 1)		(Level 2)
	(In thousands)
Debt securities issued by United States government agencies (1)	$	691,464	$	—	$	691,464
Debt securities issued by United States Treasury (2)	497,146		—		497,146
Corporate debt securities (3)	965,945		—		965,945
Mortgage-backed securities issued by government-sponsored entities (2)	196,017		—		196,017
Money market funds (4)	164,885		164,885		—
Total cash equivalents and marketable securities	$	2,515,457	$	164,885	$	2,350,572


(1)	Includes $2.0 million in Cash Equivalents and $689.5 million in Marketable Securities on the Condensed Consolidated Balance Sheet.


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


(3)	Includes $4.0 million in Cash Equivalents and $961.9 million in Marketable Securities on the Condensed Consolidated Balance Sheet.


(4)	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 11 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

Note 8 - Intangible Assets

The components of our amortizable intangible assets are as follows:



	July 28, 2013							January 27, 2013
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(In thousands)
Acquisition-related intangible assets	$	173,039	$	(104,288	)	$	68,751	$	172,039	$	(96,389	)	$	75,650
Patents and licensed technology	452,161		(198,392		)	253,769		407,002		(170,320		)	236,682
Total intangible assets	$	625,200	$	(302,680	)	$	322,520	$	579,041	$	(266,709	)	$	312,332

The increase in gross carrying amount of intangible assets is primarily due to new purchases of licenses to technology and patents during the six months ended July 28, 2013.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Amortization expense associated with intangible assets for the three and six months ended July 28, 2013 was $18.6 million and $36.0 million, respectively. Amortization expense associated with intangible assets for the three and six months ended July 29, 2012 was $17.2 million and $33.8 million, respectively. Amortization expense increased compared to the prior year primarily due to the addition of licensed technology and patent portfolio. Future amortization expense related to the net carrying amount of intangible assets at July 28, 2013 is estimated to be $33.3 million for the remainder of fiscal year 2014, $76.4 million in fiscal year 2015, $76.5 million in fiscal year 2016, $54.1 million in fiscal year 2017, $46.0 million in fiscal year 2018 and a total of $36.2 million in fiscal year 2019 and fiscal years subsequent to fiscal year 2019.

Note 9 - Balance Sheet Components

Certain balance sheet components are as follows:



	July 28,		January 27,
	2013		2013
Inventories:	(In thousands)
Raw materials	$	119,491	$	157,990
Work in-process	64,937		67,352
Finished goods	193,852		187,125
Total inventories	$	378,280	$	412,467

At July 28, 2013, we had outstanding inventory purchase obligations totaling approximately $457.6 million.



	July 28,		January 27,
	2013		2013
Prepaid Expenses and Other:	(In thousands)
Prepaid maintenance	$	17,619	$	18,013
Prepaid insurance	3,369		3,729
Prepaid taxes	13,644		9,785
Prepaid rent	3,019		2,909
Assets held for sale (1)	7,547		—
Testing materials	8,601		7,219
Other	28,077		35,265
Total prepaid expenses and other	$	81,876	$	76,920

(1) As of July 28, 2013, the company classified $7.5 million of net properties, plant and equipment held for sale within “Prepaid Expenses and Other” on the Condensed Consolidated Balance Sheet. This asset is associated with an office building at an international location that is expected to be sold before the end of fiscal year 2014.



	July 28,		January 27,
	2013		2013
Accrued Liabilities and Other:	(In thousands)
Deferred revenue	$	267,252	$	273,605
Accrued customer programs (1)	158,576		163,406
Warranty accrual (2)	17,474		14,874
Accrued payroll and related expenses	104,727		98,977
Accrued legal settlement (3)	30,600		30,600
Taxes payable, short-term	6,576		3,173
Other	40,315		35,160
Total accrued liabilities and other	$	625,520	$	619,795

(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.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(2) Please refer to Note 10 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the warranty accrual.

(3) Please refer to Note 11 of these Notes to Condensed Consolidated Financial Statements for discussion regarding the 3dfx litigation.



	July 28,		January 27,
	2013		2013
Other Long-Term Liabilities:	(In thousands)
Deferred income tax liability	$	197,039	$	192,950
Income taxes payable, long-term	114,830		115,267
Asset retirement obligation	10,377		10,165
Deferred revenue	104,011		236,152
Other long-term liabilities	17,686		34,787
Total other long-term liabilities	$	443,943	$	589,321

Note 10 - 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 six months ended July 28, 2013 and July 29, 2012 were as follows:



	Three Months Ended						Six Months Ended
	July 28,			July 29,			July 28,			July 29,
	2013			2012			2013			2012
	(In thousands)
Balance at beginning of period (1)	$	14,833		$	17,070		$	14,874		$	18,406
Additions	3,482			1,678			4,900			3,357
Deductions (2)	(841		)	(2,211		)	(2,300		)	(5,226		)
Balance at end of period	$	17,474		$	16,537		$	17,474		$	16,537

(1) Includes $9.1 million and $9.6 million for the three and six months ended July 28, 2013, respectively, and $11.6 million and $13.2 million for the three and six months ended July 29, 2012, respectively, related to warranty accrual associated with incremental repair and replacement costs from a weak die/packaging material set.

(2) Payments related to the warranty accrual associated with incremental repair and replacement costs from a weak die/packaging material set were $0.5 million for the six months ended July 28, 2013, and $0.7 million and $1.9 million for the three and six months ended July 29, 2012, respectively. No payments were made for the three months ended July 28, 2013.

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 11 - 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 remains pending.

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

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 Ninth Circuit heard oral argument on August 13, 2013, and the appeal is currently under submission.

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

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 a hearing has not yet been held.

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.

Note 12 - Stockholders’ Equity

Stock Repurchase Program

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 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, subject to market conditions, applicable legal requirements, and other factors. The program does not obligate NVIDIA to acquire any particular amount of common stock and the program may be suspended at any time at our discretion. As part of our share repurchase program, we have entered into, and we may continue to enter into, structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement.

As part of the $2.7 billion repurchase program, on May 14, 2013, we executed an accelerated share repurchase, or ASR, agreement with Goldman, Sachs & Co., or Goldman, such that we paid Goldman $750.0 million and Goldman delivered to us 36.9 million shares on May 16, 2013. Upon final settlement of the ASR, Goldman may be required to deliver additional shares of common stock to NVIDIA or NVIDIA may be required to deliver shares of its common stock, or elect to make a cash payment, to Goldman, based on the terms and conditions under the ASR.

We accounted for the ASR program as two separate transactions (i) the 36.9 million shares of common stock initially delivered to us, were accounted for as treasury stock transaction and (ii) the unsettled contract was determined to be a forward contract indexed to our own common stock. The initial delivery of 36.9 million shares resulted in an immediate reduction, on the delivery date, of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted earnings per share. We have determined that the forward contract, indexed to our common stock met all of the applicable criteria for equity classification.

Therefore, we recorded $532.7 million as treasury stock and recorded $217.3 million, the implied value of the forward contract, in additional paid-in-capital, or APIC, in our Condensed Consolidated Balance Sheets as of July 28, 2013. As the remainder of the shares are delivered to us in the third quarter of fiscal year 2014, the forward contract will be reclassified from APIC to treasury stock.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Convertible Preferred Stock

As of July 28, 2013 and January 27, 2013, 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.

Note 13 - 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. Our operating segments are equivalent to our reportable segments. During the last several years, we have operated and reported three reporting segments to our CODM: the GPU business, the Professional Solutions business, and the Consumer Products business. However, during the fourth quarter of fiscal year 2013, we began reporting two segments to reflect the way we are now managing our businesses internally which is based on whether the underlying products leverage our GPU or our Tegra Processor technologies. Comparative periods presented reflect this change.

Our GPU business leverages our GPU technology across multiple end markets. It now comprises of four primary product lines, including GeForce for desktop and notebook PCs and Macs; Quadro for professional workstations; Tesla for high-performance servers and workstations; and NVIDIA GRID for server graphics solutions. It also includes other related products, licenses and revenue supporting the GPU business, such as memory products. Our Tegra Processor business comprises product lines primarily based on our Tegra system-on-a-chip and modem processor technologies. This includes Tegra for smartphones and tablets for both Android and Windows RT-based devices; automotive computers, including infotainment and navigation systems; and gaming devices such as SHIELD. It also includes other related products, licenses, and revenue supporting the Tegra Processor business such as Icera baseband processors and RF transceivers, embedded products, and licenses and other revenue associated with game consoles.

In addition to the two reporting segments discussed above, the “All Other” category represents unallocated revenue and expenses which primarily includes licensing revenue from our patent cross licensing agreement with Intel Corporation. Revenue related to this agreement is recognized ratably over the term of our agreement and is not actively managed. This category also includes corporate operating expenses that we do not allocate to our other reporting segments as such expenses are not directly related to the function or operations of our reporting segments. These expenses include certain corporate infrastructure and support costs that are deemed to be enterprise in nature. Additionally, we do not allocate stock-based compensation, amortization of acquisition-related intangible assets, other acquisition-related costs and non-recurring expenses and benefits. The table below presents details of our reportable segments and the “All Other” category.

NVIDIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)



	GPU		Tegra Processor			All Other			Consolidated
	(In thousands)
Three Months Ended July 28, 2013
Revenue	$	858,613	$	52,625		$	66,000		$	977,238
Depreciation and amortization expense	$	32,327	$	19,116		$	10,397		$	61,840
Operating income (loss)	$	270,228	$	(150,250	)	$	(14,444	)	$	105,534

Three Months Ended July 29, 2012
Revenue	$	798,624	$	179,646		$	66,000		$	1,044,270
Depreciation and amortization expense	$	31,397	$	14,400		$	10,398		$	56,195
Operating income (loss)	$	216,030	$	(45,328	)	$	(31,079	)	$	139,623

Six Months Ended July 28, 2013
Revenue	$	1,644,225	$	155,752		$	132,000		$	1,931,977
Depreciation and amortization expense	$	62,552	$	38,352		$	20,680		$	121,584
Operating income (loss)	$	494,874	$	(274,838	)	$	(31,721	)	$	188,315

Six Months Ended July 29, 2012
Revenue	$	1,524,989	$	312,158		$	132,000		$	1,969,147
Depreciation and amortization expense	$	62,458	$	27,118		$	21,110		$	110,686
Operating income (loss)	$	369,507	$	(107,864	)	$	(49,194	)	$	212,449



	Three Months Ended						Six Months Ended
	July 28, 2013			July 29, 2012			July 28, 2013			July 29, 2012
	(In thousands)
Reconciling items included in "All Other" category :
Revenue not allocated to reporting segments	$	66,000		$	66,000		132,000			132,000
Unallocated corporate operating expenses and other expenses	(36,795		)	(35,838		)	(77,814		)	(74,871	)
Stock-based compensation	(32,395		)	(32,255		)	(65,792		)	(67,824	)
Amortization of acquisition-related intangibles	(3,980		)	(4,065		)	(7,895		)	(8,407	)
Other acquisition-related costs	(4,984		)	(4,794		)	(9,930		)	(9,965	)
Other non-recurring expenses and benefits (1)	(2,290		)	(20,127		)	(2,290		)	(20,127	)
Total	$	(14,444	)	$	(31,079	)	$	(31,721	)	(49,194	)

(1) For the three and six months ended July 29, 2012, we recorded a non-recurring charge of $20.1 million. This charge represents the net present value of a $25.0 million charitable contribution pledged to Stanford Hospital and Clinics on June 12, 2012 and is payable over a ten year period.

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				Six Months Ended
	July 28,		July 29,		July 28,		July 29,
	2013		2012		2013		2012
	(In thousands)
Revenue:
China	$	184,086	$	196,687	$	359,130	$	375,297
Taiwan	319,004		340,144		608,885		616,463
Other Asia Pacific	165,117		212,367		332,374		391,044
United States	163,796		154,814		349,774		300,756
Other Americas	76,531		81,260		141,538		157,082
Europe	68,704		58,998		140,276		128,505
Total revenue	$	977,238	$	1,044,270	$	1,931,977	$	1,969,147

Revenue from significant customers, those representing 10% or more of total revenue, was approximately 23% and 22%, respectively, of our total revenue from two customers for the three and six months ended July 28, 2013. Revenue from significant customers, those representing 10% or more of total revenue, was approximately 12% and 11%, respectively, of our total revenue from one customer for the three and six months ended July 29, 2012.

Accounts receivable from significant customers, those representing 10% or more of total accounts receivable, was approximately 37% of our accounts receivable balance from two customers at July 28, 2013 and approximately 40% of our accounts receivable balance from three customers at January 27, 2013.

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, NVIDIA GRID, GTX, ICERA, Kepler, Quadro, SHIELD, Tegra, Tesla, NVIDIA Titan, and vGPU 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 27, 2013 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 a visual computing company, connecting people through the powerful medium of computer graphics. In a world increasingly filled with visual displays, our graphics technologies let our customers interact with the world of digital ideas, information and entertainment with an efficiency that no other communication medium can provide. Visualization transcends cultural and language boundaries and enhances the quality of life whether the setting is work or pleasure and the task is mission critical or for entertainment.

We have long been known to millions around the world for creating the graphics chips used in PCs that bring video games to life. With our invention of the GPU, we introduced the world to the power of programmable shading, which defines modern computer graphics. Today, we reach well beyond PC graphics and games. Our energy-efficient processors are at the heart of products ranging from mobile devices to supercomputers. PC gamers choose our GPUs by name to enjoy immersive fantasy worlds. Our Tegra processors power smartphones, tablets and automobile infotainment systems. Professional designers use our GPUs to create visual effects in movies and design everything from audio headsets to commercial aircraft. And supercomputers take advantage of the massively parallel processing capabilities of our GPUs to accelerate a wide range of important applications, from simulations of viruses at the molecular level, to modern weather forecasting and global oil exploration.

NVIDIA's research and development in visual computing has yielded more than 5,000 patents granted or pending worldwide, and including ones covering inventions essential to modern computing.

Our businesses are based on two important technologies: the GPU and the Tegra processor. GPUs, each with billions of transistors, are the engine of visual computing and among the world's most complex processors. We have GPU product brands designed for specific users and applications: GeForce for gamers; Quadro for designers; Tesla for researchers; and GRID VGX for cloud-based server graphics modules. We recently announced the NVIDIA GRID visual computing appliance, a fully integrated system with GRID VGX graphics modules that run NVIDIA's proprietary system software. GRID is a first-of-its-kind device, designed to serve graphics-intensive applications from the cloud simultaneously to a large number of concurrent users.

The Tegra processor is a system-on-a-chip, or SOC, integrating an entire computer on a single chip. Tegra processors incorporate multi-core GPUs and CPUs together with audio, video and input/output capabilities. They can also be integrated with baseband processors for phone and data communication. Unlike power-inefficient processors built for PCs, our Tegra SOC conserves power while delivering state-of-the-art graphics and multimedia processing. Tegra runs devices like smartphones, tablets and PCs; it can also be embedded into smart devices, such as televisions, monitors, set-top boxes, gaming devices and cars. We recently announced SHIELD, the first Android device designed for gaming. SHIELD features our Tegra 4 processor, contains proprietary NVIDIA-developed software and system technologies and leverages our deep partnerships with game developers all over the world.

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

Recent Developments, Future Objectives and Challenges

GPU Business

During the second quarter of fiscal year 2014, we launched a new family of high-end Kepler-based gaming GPUs - the GeForce GTX 760, GeForce GTX 770 and GeForce GTX 780, announced an IP licensing initiative designed to bring our GPU technology to new markets and generate revenue from markets previously inaccessible to us, and announced that Citrix's XenDesktop 7 has now fully integrated our GRIDvGPU technology to share GPUs across virtual machines.

During the first quarter of fiscal year 2014, we shipped GeForce GTX Titan for gamers, launched GRID VCA - the industry's first visual computing appliance that enables businesses to deploy cloud-based, GPU-accelerated applications through any Windows, Linux or Mac client on their network, and shipped four new professional graphics products under our Quadro K Series - extending our Kepler technology into the workstation market.

Tegra Processor Business

During the second quarter of fiscal year 2014, we demonstrated the capabilities of the Kepler-based GPU in Project Logan, our next-generation mobile processor, prepared to release NVIDIA SHIELD, an open-platform gaming and entertainment portable that began shipping on July 31, 2013, and demonstrated Tegra 4i making phone calls on AT&T's network.

During the first quarter of fiscal year 2014, we announced our first fully integrated 4G LTE mobile processor - Tegra 4i.

Stock Repurchase and Cash Dividends

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 through December 2014.

In fiscal year 2014, we plan to return in excess of $1 billion to our shareholders, in the form of share repurchases and quarterly dividend payments. In the second quarter of fiscal 2014, we executed an accelerated share repurchase agreement to repurchase $750.0 million worth of shares of our common stock. To date, we have received 36.9 million shares under this agreement and expect to receive additional shares when the contract ends in the third quarter of fiscal 2014. Please refer to Note 12 of the Notes to the Condensed Consolidated Financial Statements for further disclosure regarding this accelerated share repurchase agreement. In addition, during the first half of fiscal 2014, we returned $189.6 million to shareholders, including $100 million in share repurchases and $89.6 million in dividend payments.

Financial Information by Business Segment and Geographic Data

Our GPU business leverages our GPU technology across multiple end markets. It now comprises of four primary product lines, including GeForce for desktop and notebook PCs and Macs; Quadro for professional workstations; Tesla for high-performance servers and workstations; and NVIDIA GRID for server graphics solutions. It also includes other related products, licenses and revenue supporting the GPU business, such as memory products. Our Tegra Processor business comprises product lines primarily based on our Tegra SOC and modem processor technologies. This includes Tegra for smartphones and tablets for both Android and Windows RT-based devices; automotive computers, including infotainment and navigation systems; and gaming devices such as SHIELD. It also includes other related products, licenses, and revenue supporting the Tegra Processor business such as Icera baseband processors and RF transceivers, embedded products, and licenses and other revenue associated with game consoles.

Our CODM does not review any information regarding total assets on a reporting segment basis. Reporting 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. Please refer to Note 13 of the Notes to the Condensed Consolidated Financial Statements for further disclosure regarding segment information.

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				Six Months Ended
	July 28, 2013		July 29, 2012		July 28, 2013		July 29, 2012
Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenue	44.2		48.2		44.9		49.0
Gross profit	55.8		51.8		55.1		51.0
Operating expenses
Research and development	33.9		26.9		34.1		28.7
Sales, general and administrative	11.1		11.5		11.2		11.5
Total operating expenses	45.0		38.4		45.3		40.2
Operating income	10.8		13.4		9.8		10.8
Interest and other income, net	0.6		0.5		0.6		0.5
Income before income tax	11.4		13.9		10.4		11.3
Income tax expense	1.6		2.5		1.3		2.2
Net income	9.8	%	11.4	%	9.1	%	9.1	%

Three and six months ended July 28, 2013 and July 29, 2012

Revenue

Revenue was $977.2 million for the second quarter of fiscal year 2014, compared to $1,044.3 million for the second quarter of fiscal year 2013, which represents a decrease of approximately 6.4%. Revenue for the first half of fiscal year 2014 was $1,932.0 million, compared to $1,969.1 million for the first half of fiscal year 2013, which represents a decrease of approximately 1.9%. A discussion of our revenue results for each of our operating segments is as follows:

GPU Business. GPU business revenue increased by approximately 7.5% to $858.6 million in the second quarter of fiscal year 2014, compared to $798.6 million for the second quarter of fiscal year 2013. GPU business revenue increased by approximately 7.8% to $1,644.2 million in the first half of fiscal year 2014, compared to $1,525.0 million for the first half of fiscal year 2013. Both of these increases were due primarily to an increase in sales of our high-end Kepler-based GeForce desktop products, offset by a decrease in mainstream desktop sales volume. Quadro and Tesla revenue increased as we ramped sales of our Kepler-based products. GeForce notebook revenues contributed to the increase in the first half of fiscal year 2014 as a result of strong design wins based on Intel's Ivy Bridge platform.

Tegra Processor Business. Tegra Processor business revenue decreased by approximately 70.7% to $52.6 million in the second quarter of fiscal year 2014, compared to $179.6 million for the second quarter of fiscal year 2013. Tegra Processor business revenue decreased by approximately 50.1% to $155.8 million in the first half of fiscal year 2014, compared to $312.2 million for the first half of fiscal year 2013. These decreases were anticipated and were primarily due to lower sales of our Tegra 2 and Tegra 3 processors as customers ramped down production of smartphones and tablets based on those processors. The decrease also reflects lower revenue from the sale of embedded products and lower license and royalty revenue associated with game consoles.

All Other. We recognized $66.0 million and $132.0 million in revenue from the patent cross licensing arrangement with Intel during the second quarter of fiscal years 2014 and 2013 and first half of fiscal years 2014 and 2013, respectively.

Concentration of Revenue

Revenue from sales to customers outside of the United States and Other Americas accounted for 75% of total revenue for the second quarter and first half of fiscal year 2014 and 77% of total revenue for the second quarter and first half of fiscal year 2013. 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.

Revenue from significant customers, those representing 10% or more of total revenue, was approximately 23% and 22%, respectively, of our total revenue from two customers for the second quarter and first half of fiscal 2014. Revenue from significant customers was approximately 12% and 11%, respectively, of our total revenue from one customer for the second quarter and first half of fiscal 2013.

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, which 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 55.8% and 51.8% for the second quarter of fiscal years 2014 and 2013, respectively and 55.1% and 51.0% for the first half of fiscal years 2014 and 2013, respectively.

We expect our gross margin for the third quarter of fiscal year 2014 to be relatively consistent with the second quarter of fiscal year 2014.

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 second quarter and first half of fiscal year 2014 from the second quarter and first half of fiscal year 2013, respectively. GPU margins increased primarily due to an increase in unit volume of our high-end Kepler-based GeForce desktop products which contributed to a richer overall mix of product sales. Additionally, the volume increase of Kepler-based Quadro and Tesla products also contributed to a richer mix of GPU sales.

Tegra Processor Business. The gross margin of our Tegra Processor business decreased in the second quarter and first half of fiscal year 2014 when compared with the second quarter and first half of fiscal year 2013, respectively, primarily due to decreases in license and royalty revenue associated with game consoles when compared to the same periods in the prior year.

Operating Expenses



	Three Months Ended												Six Months Ended
	July 28, 2013			July 29, 2012			$ Change			% Change			July 28, 2013			July 29, 2012			$ Change			% Change
	(In millions)												($ in millions)
Research and development expenses	$	331.7		$	281.2		$	50.5		18.0		%	$	658.9		$	565.1		$	93.8		16.6		%
Sales, general and administrative expenses	108.3			119.9			(11.6		)	(9.7	)	%	216.9			226.5			(9.6		)	(4.3	)	%
Total operating expenses	$	440.0		$	401.1		$	38.9		9.7		%	$	875.8		$	791.6		$	84.2		10.6		%
Research and development as a percentage of net revenue	33.9		%	26.9		%							34.1		%	28.7		%
Sales, general and administrative as a percentage of net revenue	11.1		%	11.5		%							11.2		%	11.5		%

Research and Development

Research and development expenses were $331.7 million and $281.2 million during the second quarter of fiscal years 2014 and 2013, respectively, an increase of $50.5 million, or 18.0%. This increase was primarily due to an increase in compensation and benefits of $27.5 million, or 18%, as we continue to hire engineering talent to invest in our strategic growth initiatives. The increase in compensation, benefits, and other employee-related costs also reflects annual salary increases and a 401(k) match program that we initiated in January 2013. In addition, development expenses increased by $7.0 million, primarily related to activities to bring up our next generation Tegra and GPU products. Also contributing to the increase were facility and equipment infrastructure spend to support planned hiring for our strategic growth businesses, including a $9.5 million increase in facilities and IT support expense and a $5.0 million increase in depreciation and amortization expense for increased purchases of machinery and equipment and licenses.

Research and development expenses were $658.9 million and $565.1 million during the first half of fiscal years 2014 and 2013, respectively, an increase of $93.8 million, or 16.6%. This increase was primarily due to an increase in compensation and benefits of $53.0 million, or 17%, as we continue to hire engineering talent to invest in our strategic growth initiatives. The increase in compensation, benefits, and other employee-related costs also reflects annual salary increases and a 401(k) match program that we initiated in January 2013. In addition, development expenses increased by $12.2 million, primarily related to activities to bring up our next generation Maxwell 20nm technology, Tegra and GPU products. Also contributing to the increase were facility and equipment infrastructure spend to support planned hiring for our strategic growth businesses, including an $18.7 million increase in allocated facilities and IT support expense driven by an increase in hiring and a $7.9 million increase in depreciation and amortization expense for increased purchases of machinery and equipment and licenses.

Sales, General and Administrative

Sales, general and administrative expenses were $108.3 million and $119.9 million during the second quarter of fiscal years 2014 and 2013, respectively, a decrease of $11.6 million, or 9.7%. This decrease was primarily attributable to the absence in the second quarter of fiscal year 2014 of a charge of $20.1 million for a charitable contribution in the prior fiscal year. Offsetting this decrease was an increase of $8.7 million in compensation and benefits as we continue to invest in our strategic growth initiatives. The increase in compensation, benefits, and other employee-related costs also reflects annual salary increases and a 401(k) match program we initiated in January 2013.

Sales, general and administrative expenses were $216.9 million and $226.5 million during the first half of fiscal years 2014 and 2013, respectively, a decrease of $9.6 million, or 4.3%. This decrease was primarily attributable to the absence in the second half of fiscal year 2014 of both a charge of $20.1 million for a charitable contribution, and a charge of $3.1 million for a class action settlement in the prior fiscal year. Offsetting this decrease was an increase of $17.0 million in compensation and benefits as we continue to invest in our strategic growth initiatives. The increase in compensation, benefits, and other employee-related costs also reflects annual salary increases and a 401(k) match program that we initiated in January 2013. Facilities expense increased by $3.8 million driven by expansion into new leased office space to accommodate employee growth.

We expect operating expenses to increase in the third quarter of fiscal year 2014.

Interest Income

Interest income consists of interest earned on cash, cash equivalents and marketable securities. Interest income was $3.9 million and $5.3 million for the second quarter of fiscal years 2014 and 2013, respectively, a decrease of $1.5 million. Interest income was $8.9 million and $10.5 million for the first half of fiscal years 2014 and 2013, respectively, a decrease of $1.6 million. The decrease in interest income for these periods was primarily due to a lower average cash equivalent and marketable securities balance for the period ended July 28, 2013 as we liquidated a portion of our investment portfolio to finance the accelerated share repurchase transaction of $750.0 million we entered into on May 14, 2013.

Other Income and Expense, net

Other income and expense primarily consists of realized gains and losses on the sale of marketable securities and foreign currency translation. Other income was $2.4 million in the second quarter of fiscal year 2014 compared to $0.3 million in the second quarter of fiscal year 2013, an increase in income of $2.2 million. Other income was $2.6 million in the first half of fiscal year 2014 compared to expense of $0.7 million for the first half of fiscal year 2013, an increase in income of $3.3 million. This change was primarily driven by an increase in foreign currency translation gains in the second quarter and first half of fiscal year 2014, when compared to second quarter and first half of fiscal year 2013 as the United States dollar strengthened.

Income Taxes

We recognized income tax expense of $15.4 million and $25.5 million for the second quarter and first half of fiscal year 2014, respectively, and $26.2 million and $42.8 million for the second quarter and first half of fiscal year 2013, respectively. Income tax expense as a percentage of income before taxes, or our effective tax rate, was 13.8% and 12.8% for the second quarter and first half of fiscal year 2014, respectively, and 18.0% and 19.3% for the second quarter and first half of fiscal year 2013, respectively.

The decrease in our effective tax rate in the fiscal year 2014 periods as compared to the same periods in the prior fiscal year was primarily related to the benefit of the U.S. federal research tax credit which was re-enacted on January 2, 2013 under the American Taxpayer Relief Act, and favorable discrete events that occurred in the first half of fiscal year 2014 primarily attributable to the expiration of statute of limitation in certain non-U.S. jurisdictions.

Our effective tax rate on income before tax for the first half of fiscal year 2014 of 12.8% and the first half of fiscal year 2013 of 19.3% 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 2014 due to the benefit of the U.S. federal research tax credit.

We expect our effective tax rate to be approximately 16% in the third quarter of fiscal year 2014, excluding any discrete tax events that may occur, which, if realized, may increase or decrease our effective tax rate in such quarter.

Please refer to Note 4 of the Notes to Condensed Consolidated Financial Statements for further information.

Liquidity and Capital Resources



	As of July 28, 2013		As of January 27, 2013
	(In millions)
Cash and cash equivalents	$	591.3	$	732.8
Marketable securities	2,344.6		2,995.1
Cash, cash equivalents, and marketable securities	$	2,935.9	$	3,727.9



	Six Months Ended
	July 28,			July 29,
	2013			2012
	(In millions)
Net cash provided by operating activities	$	272.1		$	191.7
Net cash provided by (used in) investing activities	$	481.0		$	(419.8	)
Net cash provided by (used in) financing activities	$	(894.6	)	$	59.8

As of July 28, 2013, we had $2.94 billion in cash, cash equivalents and marketable securities, a decrease of $792.0 million from $3.73 billion as of January 27, 2013. This decrease was primarily due to the liquidation of a portion of our investment portfolio to finance the accelerated share repurchase transaction of $750.0 million we entered into on May 14, 2013. 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 $272.1 million and $191.7 million during the first half of fiscal years 2014 and 2013, respectively. The increase in cash provided by operating activities in the first half of fiscal year 2014 was primarily due to a decrease in our accounts receivable driven by strong collections and a decrease in inventory as we continue to tightly manage manufacturing production. This was offset by changes in operating liabilities in the first half of fiscal year 2014 when compared to the first quarter of fiscal year 2013 primarily due to the timing of payments to vendors.

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, purchases of test equipment and computer hardware, as well as intangible assets. Investing activities provided cash of $481.0 million and used cash of $419.8 million during the first half of fiscal years 2014 and 2013, respectively. The large increase in cash provided by investing activities during the first half of fiscal year 2014 was the result of the liquidation of a portion of our investment portfolio to finance the accelerated share repurchase transaction of $750.0 million that we entered into on May 14, 2013, offset by increased purchases of property and equipment and intangible assets when compared to the prior fiscal year.

Financing activities

Financing activities used cash of $894.6 million and provided cash of $59.8 million during the first half of fiscal years 2014 and 2013, respectively. The shift to net cash used by financing activities from cash provided by financing activities was primarily due to the utilization of our cash for stockholder return initiatives that began in the fourth quarter of fiscal year 2013. We repurchased $100.0 million of our common stock in the first quarter of fiscal year 2014, entered into an accelerated share repurchase transaction of $750.0 million in the second quarter of fiscal year 2014, and made total cash dividend payments of $89.6 million in the first half of fiscal year 2014. We also received lower cash proceeds from common stock issued under our employee stock plans during the first half of fiscal year 2014 when compared to the prior fiscal year.

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.

All of our cash equivalents and marketable securities are treated as “available-for-sale”. Investments in both fixed 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 July 28, 2013 and January 27, 2013, we had $2.94 billion and $3.73 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 July 28, 2013, we were in compliance with our investment policy. As of July 28, 2013, our investments in government agencies and government sponsored enterprises represented approximately 55% of our total investment portfolio, while the financial sector accounted for approximately 21% of our total investment portfolio. All of our investments are with A/A2 or better rated securities.

We performed an impairment review of our investment portfolio as of July 28, 2013. Based on our quarterly impairment review, we concluded that our investments were appropriately valued and did not record any impairment during the second quarter of fiscal year 2014.

Net realized gains for the second quarter and the first half of fiscal year 2014 were $1.6 million and $1.7 million, respectively. Net realized gains for the second quarter and the first half of fiscal year 2013 were $0.2 million and $0.3 million, respectively. As of July 28, 2013, we had a net unrealized gain of $6.1 million, which was comprised of gross unrealized gains of $7.9 million, offset by gross unrealized losses of $1.8 million. As of January 27, 2013, we had a net unrealized gain of $10.9 million, which was comprised of gross unrealized gains of $11.7 million, offset by $0.8 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. Two customers accounted for approximately 37% of our accounts receivable balance at July 28, 2013. 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.

Our cash balances are held in numerous locations throughout the world, including substantial amounts held outside of the United States. Most of the amounts held outside the United States may be repatriated to the United States. However, if we repatriate foreign earnings for cash requirements in the United States, we would incur U.S. Federal income tax at rate of 35%, less applicable foreign tax credits, plus any state income taxes on such income. Further, repatriation of some foreign balances may be restricted by local laws.

Dividend payments and any stock repurchases must be made from cash held in the United States. In the first half of fiscal year 2014, we made total cash dividend payments of $89.6 million, repurchased $100.0 million of our common stock in the first quarter of fiscal year 2014 and entered into an accelerated share repurchase transaction of $750.0 million in the second quarter of fiscal year 2014, utilizing a significant amount of our U.S. cash balance previously taxed as of the end of the second quarter of fiscal year 2014. For any future significant share repurchases, we anticipate that we would either need to repatriate cash and incur U.S. Income tax or access external sources for financing.

Stock Repurchase Program

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 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 share repurchase program, we have entered into, and we may continue to enter into, structured share repurchase transactions with financial institutions. These agreements generally require that we make an up-front payment in exchange for the right to receive a fixed number of shares of our common stock upon execution of the agreement, and a potential incremental number of shares of our common stock, within a pre-determined range, at the end of the term of the agreement.

Through July 28, 2013, we have received an aggregate of 144.2 million shares under our stock repurchase program for a total cost of $2.41 billion. As of July 28, 2013, we are authorized, subject to certain specifications, to repurchase additional shares of our common stock up to $285.7 million through December 2014. Please refer to Note 12 of the Notes to the Condensed Consolidated Financial Statements for further disclosure regarding the accelerated share repurchase program.

Cash Dividend Program

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.

In the first half of fiscal year 2014, we paid $89.6 million in dividends to our common stockholders. We declared on August 8, 2013 that we will pay our next quarterly cash dividend of 7.5 cents per share on September 13, 2013 to all stockholders of record on August 22, 2013.

Our cash dividend program and the payment of future cash dividends under that program are subject to continued capital availability and our Board's continuing determination that the dividend program and the declaration of dividends thereunder are in the best interests of our stockholders and are in compliance with all laws and agreements of NVIDIA applicable to the declaration and payment of cash dividends.

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 dividend 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 $135.0 million to $155.0 million for capital expenditures during the remainder of fiscal year 2014, primarily for property development, leasehold improvements, software licenses, emulation equipment, computers and engineering workstations. In fiscal year 2014, we expect to break ground on a new building for our headquarters campus in Santa Clara to provide for our near-term growth needs. This 500,000 square foot building will provide 2,500 seats and be built on land we purchased five years ago. Of the total capital expenditures estimated for the remainder of fiscal year 2014, we estimate approximately $13 million of funds for the campus development project. In addition, we may continue to use cash in connection with the acquisition of new businesses or assets.

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 July 28, 2013, we had outstanding inventory purchase obligations totaling approximately $457.6 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 27, 2013.

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 July 28, 2013, 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 July 28, 2013 and January 27, 2013, we had $2.94 billion and $3.73 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 July 28, 2013, 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 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, a component of stockholders’ equity, net of tax.

As of July 28, 2013, 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 $15.1 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 July 28, 2013, our investments in government agencies and government sponsored enterprises represented approximately 55% of our total investment portfolio, while the financial sector accounted for approximately 21% of our total investment portfolio. 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 $38.4 - $96.1 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 included in determining net income for the second quarter of fiscal years 2014 and 2013 was $2.6 million and $1.8 million, respectively. During the first half of fiscal years 2014 and 2013, the aggregate foreign currency exchange gain included in determining net income was $4.4 million and $2.1 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 July 28, 2013.

ITEM 4. CONTROLS AND PROCEDURES

Controls and Procedures

Disclosure Controls and Procedures

Based on their evaluation as of July 28, 2013, 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 July 28, 2013 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 11 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.

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. In order to effectively compete we may have to invest more resources in research and development than anticipated, which could increase our operating expenses and negatively impact our operating results. If we are required to invest significantly greater resources than anticipated in research and development efforts without a corresponding increase in revenue, our operating results could decline. In order to remain competitive, we anticipate that we will continue to devote substantial resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products under development. 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 both Intel Corporation's and Advanced Micro Devices', or AMD's, strategy of selling platform solutions, including integrating a CPU and a GPU on the same chip or same package, as evidenced by AMD's APU product and Intel's CPUs with integrated graphics. As AMD and Intel continue to pursue platform solutions and integrated CPUs, we may not be able to successfully compete and 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. If integrated CPUs offer a more compelling value proposition in the future PC builders and consumers may move away from the use of discrete GPUs, which could adversely affect our business and cause our financial results to decline.

We are implementing a business strategy to license our GPU cores and visual computing patent portfolio to device manufacturers. Although we have engaged in licensing in the past, we are now engaging a broader market with new and existing competitors who may be able to adapt more quickly to customer requirements and emerging technologies. We cannot assure you of the extent of the demand for licenses to our GPU cores or other elements of our visual computing patent portfolio, or that we will be able to compete successfully against current or new competitors who may have stronger positions in these new markets.

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 consumer and/or 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 consumer and 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 consumer and market acceptance of our new products and enhancements to our existing products and identify and enter new markets, such as cloud-based computing appliances, servers, smartphones, tablets, video game consoles, and other similar consumer electronic devices. The markets for our products and technologies are 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 consumer and market acceptance is difficult to achieve and such consumer and market acceptance, if achieved, is difficult to sustain due to intense competition and frequent new technology and product introductions. Our success in achieving consumer and market acceptance will depend in part on our ability to cultivate new industry relationships and improve the functionality of our products as the number of internet-connected devices increases. If we do not successfully achieve or maintain consumer and 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.

We depend on foundries to manufacture our products and these third parties may not be able to obtain or successfully implement high quality, leading-edge process technologies or otherwise 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.

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. 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. Our third-party foundries may not be able to develop, obtain or successfully implement high quality, leading-edge process technologies needed to manufacture our products profitably or on a timely basis. Our competitors (including those that own their own manufacturing facilities) may also develop high quality, leading-edge process technologies earlier than our third-party foundries. If our third-party foundries experience manufacturing inefficiencies, we may fail to achieve acceptable yields or experience product delivery delays.

We have experienced difficulty in migrating to new manufacturing processes in the past and, consequently, have suffered reduced yields, delays in product deliveries and increased expense levels. For example, due to capacity constraints at TSMC of our 28 nanometer Kepler 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 strategic relationships with new manufacturing partners 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.

Failure to achieve expected manufacturing yields for our products could negatively impact our financial results and damage our reputation.

Manufacturing yields for our products are a function of product design, which is developed largely by us, and process technology, which typically is proprietary to the manufacturer. Low yields may result from either product design or process technology failure. We do not know a yield problem exists until our design is manufactured. When a yield issue is identified, the product is analyzed and tested to determine the cause. As a result, yield problems may not be identified until well into the production process. Resolution of yield problems requires cooperation by, and communication between, us and the manufacturer. Because of our potentially limited access to wafer foundry capacity, decreases in manufacturing yields could result in an increase in our costs and force us to allocate our available product supply among our customers. Lower than expected yields could potentially harm customer relationships, our reputation and our financial results.

A decline in demand in certain end-user markets could decrease the demand for our products and harm our results of operations.

Our customer base includes companies in a wide range of end-user markets, but we generate a significant amount of revenue from sales to customers in the communications- and computer-related industries. Within these end-user markets, a large portion of our revenue is generated from sales to customers in the cell phone, tablet and PC markets, including professional workstations. Decline in one or several of these end-user markets could harm demand for our products and our results of operations and financial condition. These declines could be large and sudden. Since cell phone, tablet and PC manufacturers often build inventories during periods of anticipated growth, they may be left with excess inventories if growth slows or if they incorrectly forecast product transitions. In these cases, these manufacturers may abruptly suspend substantially all purchases of additional inventory from suppliers like us until their excess inventory has been absorbed, which would have a negative impact on our financial results.

We sell our products to a small number of customers and our business could suffer if we lose any of these customers.

We receive a significant amount of our revenue from a limited number of customers. Two customers accounted for 23% and 22% of our total revenue for the second quarter and first half of fiscal year 2014, respectively, and one customer accounted for approximately 12% and 11% of our total revenue for the second quarter and first half of fiscal year 2013, respectively. Approximately 37% of our accounts receivable balance was from two customers as of July 28, 2013, and approximately 40% of our accounts receivable balance was from three customers as of January 27, 2013. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments and obtain credit insurance over the purchasing credit extended to certain customers. 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 and as a result of the tightening of the credit markets, we may not be able to acquire credit insurance on the credit we extend to these customers or in amounts that we deem sufficient.

Sales to our largest customers have fluctuated significantly from period to period primarily due to the timing and number of design wins with each customer, as well as the continued diversification of our customer base as we expand into new markets, and will likely continue to fluctuate dramatically in the future. Our operating results in the foreseeable future will continue to depend on sales to a relatively small number of customers, as well as the ability of these customers to sell products that incorporate our products. In the future, these customers may decide not to purchase our products at all, purchase fewer products than they did in the past, or alter their purchasing patterns in some other way, particularly because:


•	substantially all of our sales are made on a purchase order basis, which permits our customers to cancel, change or delay product purchase commitments with little or no notice to us and without penalty;


•	our customers may develop their own solutions;


•	our customers may purchase products from our competitors; or


•	our customers may discontinue sales or lose market share in the markets for which they purchase our products.