NVIDIA 2007 Annual Report Download - page 23

We are dependent on third parties for assembly, testing and packaging of our products, which reduces our control over the
delivery and quantity of our products.
Our processors are assembled, tested and packaged by independent subcontractors, such as ASE, Amkor, KYEC, SPIL, and
ChipPAC. We do not have long−term agreements with any of these subcontractors. As a result of our dependence on third−party
subcontractors for assembly, testing and packaging of our products, we do not directly control product delivery schedules or product
quality. Demand for qualified independent subcontractors to assemble and test products is high. If demand for these subcontractors
exceeds the number of qualified subcontractors, we may experience capacity constraints, which could result in product shortages, a
decrease in the quality of our products or an increase in product cost. Any of our subcontractors may decide to prioritize the orders of
one of our competitors over our orders. Any product shortages or quality assurance problems could increase the costs of manufacture,
assembly or testing of our products, which could cause our gross margin to decline. Due to the amount of time typically required to
qualify assemblers and testers, we could experience significant delays in the shipment of our products if we are required to find
alternative third parties to assemble, test or package our products or components. Any such delays could result in a loss of reputation
or a decrease in sales to our customers.
There can be no assurance that the PlayStation3 will achieve long term commercial success.
In April 2005, we finalized our definitive agreement with SCE to jointly develop a custom GPU for SCE's PlayStation3. Our
collaboration with SCE includes license fees and royalties for the PlayStation3 and all derivatives, including next−generation digital
consumer electronics devices. In addition, we are licensing software development tools for creating shaders and advanced graphics
capabilities to SCE. During fiscal 2007, we recognized $92.9 million of revenue from our contractual arrangements with SCE. There
can be no assurance that the PlayStation3 will achieve long term commercial success, given the intense competition in the game
console market. If we do not receive royalties as we anticipate, our revenue and gross margin may be adversely affected.
As we continue to work directly with more foreign customers, any difficulties in collecting accounts receivable could harm our
operating results and financial condition.
Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers' businesses and to
downturns in the economy and the industry. In addition, difficulties in collecting accounts receivable or the loss of any significant
customer could materially and adversely affect our financial condition and results of operations. 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 of 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, which could adversely affect our operating results. We may have to record additional reserves or write−offs and/or defer
revenue on certain sales transactions in the future, which could negatively impact our financial results.
We rely on third−party vendors to supply software development tools to us for the development of our new products and we
may be unable to obtain the tools necessary to develop or enhance new or existing products.
When we design and develop new products or product enhancements, we rely on third−party software development tools to assist
us in the design, simulation and verification of new products or enhancements to existing products. Although we currently are not
dependent on any one vendor for the supply of these tools, some or all of these tools may not be readily available in the future.
Additionally, the software development tools available at the time that we are designing, simulating or verifying a product may not be
sophisticated enough or technologically advanced enough for our purposes. For example, we have experienced delays in the
introduction of products in the past as a result of the inability of then available software development tools to fully simulate the
complex features and functionalities of our products. Therefore, the design requirements necessary to meet consumer demands for
more features and greater functionality from our processors in the future may exceed the capabilities of the software development
tools that are available to us. If the software development tools we use become unavailable or fail to produce designs that meet
consumer demands, we may miss design cycles or lose design wins either of which could result in a loss of market share, a decrease in
revenue or negatively impact our operating results. 17
Source: NVIDIA CORP, 10−K, March 16, 2007