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 RSUs. We estimate the fair value of shares to be issued our employee stock purchase plan using the Black-Scholes at the commencement of an offering period in March and September each year. Our stock-based compensation for employee stock purchase plan is expensed using an accelerated amortization model.

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



	Year Ended
	January 27, 2013		January 29, 2012		January 30, 2011
	(In thousands)
Cost of revenue	$	10,490	$	11,322	$	8,308
Research and development	82,157		80,502		57,974
Sales, general and administrative	44,015		44,530		34,071
Total	$	136,662	$	136,354	$	100,353

As of January 27, 2013 and January 29, 2012, the aggregate amount of unearned stock-based compensation expense related to our equity awards was $208.7 million and $185.8 million, respectively, adjusted for estimated forfeitures. As of January 27, 2013 and January 29, 2012, we expect to recognize the unearned stock-based compensation expense related to stock options over an estimated weighted average amortization period of 2.7 years and 2.5 years, respectively. As of January 27, 2013 and January 29, 2012, we expect to recognize the unearned stock-based compensation expense related to RSUs over an estimated weighted average amortization period of 2.7 years and 2.5 years.

Stock-based compensation capitalized in inventories resulted in a net charge of $0.4 million , $0.1 million and $0.7 million in cost of revenue during the fiscal years ended January 27, 2013 , January 29, 2012 and January 30, 2011, respectively.

During fiscal years 2013, 2012 and 2011, we granted approximately 7.1 million, 6.4 million and 5.8 million stock options, respectively, with estimated total grant-date fair values of $38.3 million, $52.4 million and $34.4 million, respectively, and weighted average grant-date fair values of $5.38, $8.16 and $5.89 per option, respectively. During fiscal years 2013, 2012 and 2011, we granted approximately 8.1 million, 7.3 million and 7.1 million RSUs, respectively, with estimated total grant-date fair values of $112.8 million, $119.7 million and $96.7 million, respectively, and weighted average grant-date fair values of $13.86, $16.31 and $13.61 per RSU, respectively.

Of the estimated total grant-date fair value, we estimated that the stock-based compensation expense related to the equity awards that are not expected to vest for fiscal years 2013, 2012 and 2011 was $27.1 million, $30.8 million and $23.5 million, 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 stock option plans and shares issued under our employee stock purchase plan have been estimated with the following assumptions:



	Year Ended
	January 27, 2013	January 29, 2012	January 30, 2011
Stock Options	(Using a binomial model)
Weighted average expected life (in years)	3.1-4.9	3.0-5.4	3.1-6.7
Risk-free interest rate	1.5%-2.3%	1.9%-3.8%	1.5%-3.3%
Volatility	39%-49%	46%-65%	42%-53%
Dividend yield	2.4%	—	—



	Year Ended
	January 27, 2013	January 29, 2012	January 30, 2011
Employee Stock Purchase Plan	(Using the Black-Scholes model)
Weighted average expected life (in years)	0.5-2.0	0.5-2.0	0.5-2.0
Risk-free interest rate	0.1%-0.3%	0.1%-0.7%	0.2%-0.8%
Volatility	44%-47%	57%-61%	45%-47%
Dividend yield	—	—	—

Equity Incentive Program

We consider equity compensation to be long-term compensation and an integral component of our efforts to attract and retain exceptional executives, senior management and world-class employees. Currently, we grant stock options and RSUs under our equity incentive plans. We believe that properly structured equity compensation aligns the long-term interests of stockholders and employees by creating a strong, direct link between employee compensation and stock appreciation, as stock options are only valuable to our employees if the value of our common stock increases after the date of grant.

Amended and Restated 2007 Equity Incentive Plan

At the Annual Meeting of Stockholders held on June 21, 2007, our stockholders approved the NVIDIA Corporation 2007 Equity Incentive Plan, or the 2007 Plan. At the Annual Meeting of Stockholders held on May 17, 2012, our stockholders approved an amendment and restatement of the 2007 Plan, or the Restated 2007 Plan.

The Restated 2007 Plan authorizes the issuance of incentive stock options, nonstatutory stock options, restricted stock, restricted stock unit, stock appreciation rights, performance stock awards, performance cash awards, and other stock-based awards to employees, directors and consultants. Only our employees may receive incentive stock options. The Restated 2007 Plan succeeds our 1998 Equity Incentive Plan, our 1998 Non-Employee Directors’ Stock Option Plan, our 2000 Nonstatutory Equity Incentive Plan, and the PortalPlayer, Inc. 2004 Stock Incentive Plan, or collectively, the Prior Plans. All options and stock awards granted under the Prior Plans shall remain subject to the terms of the Prior Plans with respect to which they were originally granted. Under the 2007 Plan or the Prior Plans, we could issue up to 101,845,177 shares, which due to the subsequent stock split became 152,767,766 shares, of our common stock. With the amendment and restatement of the 2007 Plan, which increased the number of shares of common stock authorized for issuance under the 2007 Plan by 25,000,000 shares, up to 177,767,766 shares of our common stock may be issued pursuant to stock awards granted under the Restated 2007 Plan or the Prior Plans. Currently, we grant stock options and RSUs under our equity incentive plans. As of January 27, 2013, there were 36,889,121 shares available for future issuance under the Restated 2007 Plan.

In September 2010, we changed the vesting schedule for stock options and RSUs granted to employees from a three year period to a four year period. Stock options granted to employees, subject to certain exceptions, vest over a four year period, subject to continued service, with 25% vesting on the anniversary of the hire date in the case of new hires or the anniversary of the date of grant in the case of grants to existing employees and 6.25% vesting at the end of each quarterly period thereafter. We do have unvested stock options that continue to vest pursuant to a three year vesting period, subject to continued service. Options granted under the 2007 Plan generally expire six or ten years from the date of grant.

With respect to RSUs, subject to certain exceptions, RSUs granted to employees vest over a four year period, subject to continued service, with 25% vesting on a pre-determined date that is close to the anniversary of the date of grant and 12.5% vesting semi-annually thereafter until fully vested. We do have unvested RSUs that continue to vest pursuant to a three vesting period, subject to continued service.

Unless terminated sooner, the Restated 2007 Plan is scheduled to terminate on March 21, 2022. Our Board may suspend or terminate the Restated 2007 Plan at any time. No awards may be granted under the Restated 2007 Plan while the Restated 2007 Plan is suspended or after it is terminated. The Board may also amend the Restated 2007 Plan at any time. However, if legal, regulatory or listing requirements require stockholder approval, the amendment will not go into effect until the stockholders have approved the amendment.

PortalPlayer, Inc. 1999 Stock Option Plan

We assumed options issued under the PortalPlayer, Inc. 1999 Stock Option Plan, or the 1999 Plan, when we completed our acquisition of PortalPlayer on January 5, 2007. The 1999 Plan was terminated upon completion of PortalPlayer’s initial public offering of common stock in 2004. No shares of common stock are available for issuance under the 1999 Plan other than to satisfy exercises of stock options granted under the 1999 Plan prior to its termination and any shares that become available for issuance as a result of expiration or cancellation of an option that was issued pursuant to the 1999 Plan. Previously authorized yet unissued shares under the 1999 Plan were cancelled upon completion of PortalPlayer’s initial public offering.

Each option we assumed in connection with our acquisition of PortalPlayer was converted into the right to purchase that number of shares of NVIDIA common stock determined by multiplying the number of shares of PortalPlayer common stock underlying such option by 0.3601 and then rounding down to the nearest whole number of shares. The exercise price per share for each assumed option was similarly adjusted by dividing the exercise price by 0.3601 and then rounding up to the nearest whole cent. Vesting schedules and expiration dates did not change.

Under the 1999 Plan, incentive stock options were granted at a price that was not less than 100% of the fair market value of PortalPlayer’s common stock, as determined by its board of directors, on the date of grant. Non-statutory stock options were granted at a price that was not less than 85% of the fair market value of PortalPlayer’s common stock, as determined by its board of directors, on the date of grant.

Generally, options granted under the 1999 Plan are exercisable for a period of ten years from the date of grant, and shares vest at a rate of 25% on the first anniversary of the grant date of the option, and an additional 1/48th of the shares upon completion of each succeeding full month of continuous employment thereafter.

1998 and 2012 Employee Stock Purchase Plans

In February 1998, our Board approved the 1998 Employee Stock Purchase Plan, or the 1998 Plan. At the Annual Meeting of Stockholders held on May 17, 2012, our stockholders approved the 2012 Employee Stock Purchase Plan, or the 2012 Plan, the successor to the 1998 Plan, and collectively with the 1998 Plan, the ESPP Plans.

Prior to the effective date of the 2012 Plan, we had authorized a total of 78,000,000 shares for issuance under the 1998 Plan, 54,567,667 shares of which had been issued, 15,000,000 shares of which were reserved for issuance pursuant to outstanding purchase rights and 8,432,333 shares of which were available for future issuance. Upon its approval by our stockholders, the maximum aggregate number of shares that could be issued under the 2012 Plan would not exceed 55,432,333 shares, representing the sum of (i) 32,000,000 newly requested shares, (ii) the 8,432,333 shares which had been available for issuance under the 1998 Plan and (iii) the number of shares subject to outstanding purchase rights granted under the 1998 Plan that would otherwise have returned to the 1998 Plan (such as upon the cancellation or expiration of an outstanding purchase right), as such shares would become available from time to time (which could not exceed 15,000,000 shares).

Effective upon the August 31, 2012 purchase date pursuant to the 1998 Plan, of the 15,000,000 shares which had been reserved for issuance pursuant to outstanding purchase rights, 2,687,698 shares were issued pursuant to outstanding purchase rights, 183,000 shares were available but reserved for future issuance, and the remaining 12,129,302 shares were moved into the share reserve of the 2012 Plan.

No additional purchase rights will be granted under the 1998 Plan (although all outstanding purchase rights granted under the 1998 Plan will continue to be subject to the terms of the 1998 Plan and any offering document describing the terms and conditions of offerings made pursuant to the 1998 Plan). At January 27, 2013, we had issued 57,255,365 shares under the 1998 Plan and 183,000 shares were available but reserved for future issuance.

At January 27, 2013, no shares had been issued under the 2012 Plan and 52,561,635 shares were available but reserved for future issuance.

Each of the ESPP Plans is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. Under the ESPP Plans, the Board has authorized participation by eligible employees, including officers, in periodic offerings following the adoption of each of the ESPP Plans. Under the ESPP Plans, separate offering periods shall be no longer than 27 months. Under the current offerings adopted pursuant to the ESPP Plans, each offering period is 24 months, which is divided into four purchase periods of six months.

Employees are eligible to participate if they are employed by us or an affiliate of us as designated by the Board. Employees who participate in an offering may have up to 10% of their earnings withheld pursuant to the ESPP Plans up to certain limitations and applied on specified dates determined by the Board to the purchase of shares of common stock. The Board may increase this percentage at its discretion, up to 15%. The price of common stock purchased under the ESPP Plans will be equal to 85% of the lower of the fair market value of the common stock on the commencement date of each offering period and the purchase date of each offering period. During fiscal years 2013, 2012 and 2011, employees purchased approximately 5.5 million, 5.8 million, and 6.7 million shares, respectively, under the 1998 Plan with weighted-average prices of $10.83, $8.18, and $6.59 per share, respectively, and weighted average grant-date fair values of $5.16, $5.47 and $4.06 per share, respectively. Employees may end their participation in the ESPP Plans at any time during the offering period, and participation ends automatically on termination of employment with us and in each case their contributions are refunded.

The following is a summary of our equity award transactions under our equity incentive plans:



			Options Outstanding							Restricted Stock Units Outstanding
	Total Stock Awards Available for Grant		Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value (1)		Number of Shares		Weighted Average Grant-Date Fair Value

Balances, January 31, 2010	44,016,042		58,348,422		$	11.30				7,488,512		$	12.28
Authorized	—		—		$	—				—		—
Granted	(12,923,659	)	5,818,966		$	13.79				7,104,693		$	13.61
Exercised	—		(18,287,483	)	$	8.16				—		—
Vested Restricted Stock	—		—		—					(3,215,633	)	$	11.74
Canceled and forfeited	2,644,105		(1,878,447	)	$	12.56				(765,658	)	$	13.76
Balances, January 30, 2011	33,736,488		44,001,458		$	12.88				10,611,914		$	13.23
Authorized	—		—		$	—				—		—
Granted	(13,767,554	)	6,430,778		$	16.18				7,336,776		$	16.31
Exercised	—		(15,515,053	)	$	10.70				—		—
Vested Restricted Stock	—		—		—					(3,442,076	)	$	12.02
Canceled and forfeited	2,457,018		(1,588,207	)	$	14.78				(868,811	)	$	14.72
Balances, January 29, 2012	22,425,952		33,328,976		$	14.44				13,637,803		$	15.10
Authorized (2)	25,000,000		—		$	—				—		—
Granted	(15,254,977	)	7,119,319		$	13.88				8,135,658		$	13.86
Exercised	—		(3,646,680	)	$	8.66				—		—
Vested Restricted Stock	—		—		—					(5,691,623	)	$	15.02
Canceled and forfeited	4,728,901		(3,806,290	)	$	17.04				(922,611	)	$	15.14
Balances, January 27, 2013	36,899,876		32,995,325		$	14.66	5.08	$	26,006,026	15,159,227		$	14.46
Exercisable at January 27, 2013			20,156,213		$	14.89	3.00	$	22,850,198
Vested and Expected to Vest after January 27, 2013			30,971,523		$	14.68	4.86	$	25,520,514	12,245,083		$	14.46

(1) The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at January 27, 2013, based on the $12.41 closing stock price of our common stock on the NASDAQ Global Select Market on January 25, 2013, the last trading day of fiscal year 2013, which would have been received by the option holders had all in-the-money option holders exercised their options as of that date. The total number of in-the-money options outstanding and exercisable as of January 27, 2013 was 26.7 million shares and 9.6 million shares, respectively.

(2) Represents the shares that were approved at our 2012 Annual Meeting of Stockholders.

The total intrinsic value of options exercised was $21.1 million, $105.3 million and $139.1 million for fiscal years 2013, 2012 and 2011, respectively. Upon exercise of an option, we issue new shares of stock. The total fair value of options vested was $40.3 million, $49.5 million and $60.7 million for fiscal years 2013, 2012 and 2011, respectively.