NVIDIA 2005 Annual Report Download - page 37

We order materials in advance of anticipated customer demand. Therefore, we have limited ability to reduce our inventory
purchase commitments quickly in response to any revenue shortfalls.
Substantially all of our sales are made on the basis of purchase orders rather than long−term agreements. As a result, we may commit
resources to the production of products without having received advance purchase commitments from customers. Any inability to sell
products to which we have devoted significant resources could harm our business. In addition, cancellation or deferral of product
orders could result in our holding excess inventory, which could adversely affect our gross margin and restrict our ability to fund
operations. We may build inventories during periods of anticipated growth and in connection with selling workstation boards directly
to major original equipment manufacturers, or OEMs. Additionally, because we typically recognize a substantial portion of our
revenue in the last month of each quarter, we may not be able to reduce our inventory purchase commitments in a timely manner in
response to any revenue shortfalls. We could be subject to excess or obsolete inventories and be required to take corresponding
inventory write−downs if growth slows or if we incorrectly forecast product demand. A reduction in demand could negatively impact
our gross margin and financial results.
We are dependent on key personnel and the loss of these employees could negatively impact our business.
Our performance is substantially dependent on the performance of our executive officers and key employees. None of our officers or
employees is bound by an employment agreement, meaning our relationships with our officers and employees are at will. We do not
have "key person" life insurance policies on any of our employees. The loss of the services of any of our executive officers, technical
personnel or other key employees, particularly Jen−Hsun Huang, our President and Chief Executive Officer, would harm our business.
Our success will depend on our ability to identify, hire, train and retain highly qualified technical and managerial personnel. Our
failure to attract and retain the necessary technical and managerial personnel would harm our business. The integration of new
executives or personnel could disrupt our ongoing operations.
Failure to achieve expected manufacturing yields for existing and/or new products would reduce our gross margin.
Semiconductor manufacturing yields are a function both of product design, which is developed largely by us, and process technology,
which typically is proprietary to the manufacturer. Since low yields may result from either design or process technology failures, yield
problems may not be effectively determined or resolved until an actual product exists that can be analyzed and tested to identify
process sensitivities relating to the design rules that are used. As a result, yield problems may not be identified until well into the
production process. Resolution of yield problems would require cooperation by and communication between us and the manufacturer.
Because of our potentially limited access to wafer fabrication capacity from our manufacturers, any decrease in manufacturing yields
could result in an increase in our per unit costs and force us to allocate our available product supply among our customers. This could
potentially harm customer relationships, our reputation, our revenue and our gross profit. Our wafer manufacturers may be unable to
achieve or maintain acceptable manufacturing yields in the future. Our inability to achieve planned yields from our wafer
manufacturers could harm our business. We also face the risk of product recalls or product returns resulting from design or
manufacturing defects that are not discovered during the manufacturing and testing process. A significant number of product returns
due to a defect or recall, could damage our reputation and result in customers working with our competitors.
To stay competitive, we may have to invest more resources in research and development.
If new competitors, technological advances by existing competitors or other competitive factors require us to invest significantly
greater resources than anticipated in research and development efforts, our operating expenses would increase. We have substantially
increased our engineering and technical resources and have 1,231 full−time employees engaged in research and development as of
January 30, 2005, compared to 1,057 employees as of January 25, 2004. During fiscal 2005, 2004 and 2003, research and
development expenditures represented 17%, 15% and 12% as a percentage of revenue, respectively. If we are required to invest
significantly greater resources than anticipated in research and development efforts without an increase in revenue, our operating
results would decline. 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. Research and development expenses are likely to fluctuate from time to time to the extent we make
periodic incremental investments in research and development and these investments may be independent of our level of revenue.
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