Nvidia struggles amid product delays, lost share

Recently, Nvidia said it plans to take a charge from $150 to $200 million to cover anticipated warranty, repair, return, replacement and other costs arising from a weak die/packaging material in select devices.

After that announcement, analysts slammed Nvidia. ''We knew that the July quarter was going to be choppy, but we didn't expect this bad news so early in what is usually a back-end loaded quarter,'' said Daniel Berenbaum, analyst, SG Cowen and Co., in a report.

"With regard the product snafu, Nvidia's management suggested that the charge to cover warranty payments to a notebook OEM would cover all liability with respect to problems with chip packaging,'' he said, adding that, ''However, we are concerned that more problems could crop up.''

"On top of that, Nvidia's chipset is delayed. In an unusual slip, Nvidia apparently failed to deliver a next-generation chipset on time. The good news is that this will not likely hit gross margin, as no costs were incurred. But the bad news is that the product may miss a window, hurting out-quarter revenue as well,'' he said.

"Market share and pricing seem to be the primary issues. We underestimated the effect of Advance Micro Device's (AMD) new discrete graphics products and pricing cuts, but our checks suggest that AMD is not likely to be able to sustain its momentum. We expect Nvidia to regain share in late 2008,'' he added.

Others agreed. ''Contrary to our earlier expectations and its previous track record, AMD has managed to ship substantial quantities of its new mid-end products into the channel shortly after product launch,'' said Tayyib Shah, analyst, Longbow Research, in a report.

''Given the highly competitive pricing of AMD's 4000 series products, Nvidia has had to follow suit, which has contributed to the revenue shortfall,'' Shah said. ''We now anticipate a challenging pricing/margin environment through F3Q09 until Nvidia can fully migrate its own mid-end product line to the 55nm manufacturing process,'' he added.

Taking things in control
Nvidia is also quietly cutting prices, but the company remains relatively strong despite the problems. ''We believe the company is making selective GPU price adjustments to compete against AMD's recently launched RV770 GPU for sub-$200 graphics cards,'' said Doug Freedman, analyst of American Technology Research, in a report. ''In the long run, we believe Nvidia has significantly more R&D resources to invest and should remain highly competitive across all tiers of GPU,'' he added.

The outcome
''Second quarter revenue guidance is now down 21 percent Q/Q at the midpoint (down 5 percent at midpoint) and the gross margin is expected to be lower because of several factors: a) GPU-price adjustments in response to competitive products; b) delayed ramp of next-generation multichip packages (MCPs); and c) end-market weakness," said Freedman. "At the same time, a one-time charge of $150M to $200M against cost of revenue will be taken to cover warranty or returns of GPUs and MCPs in the field because of die/packaging material failures in certain thermal and usage conditions," he added.

- Mark LaPedus
EE Times