RealTime IT News

nVidia Off to a Rocky Start in July

Graphics chip maker nVidia has built its reputation on proper execution, but a combination of lowered outlooks for the coming quarter and a big charge for product defects are making the month of July a bad one for the company.

The bad news that rattled through the technology sector was that the company would have to set aside between $150 million and $200 million in charges to replace defective graphics chips used in laptop computers. The chips would overheat and eventually fail, rendering the notebook unusable.

The failures were with certain notebook customers and certain notebook designs, which is about as specific as nVidia (NASDAQ: NVDA) will get. The problem is strictly limited to thermals on the notebooks and not the graphics chip itself. "The one thing I can say is that same GPU has no problems on the desktop side," said an nVidia spokesman, who declined to be identified.

nVidia said the materials used in that chip were not robust enough to handle the stress of heavy use. This includes the packaging, thermal set and heat sinks. Over time, the heat within the laptop eventually caused the cooling system to fail. This would seem to indicate an older chipset that has been on the market for more than a year.

The company, which has no fabrication facilities of its own, is working with its manufacturing partner TSMC to determine the problem. It has changed its manufacturing process and said it has new drivers to better manage chip cooling as well. The charge is to pay for warrantee coverage of dead notebooks.

The news on Wall Street, however, was that the company lowered its earnings and margin estimates for the coming quarter by 17 percent. The company cited several factors: "end-market weakness around the world, the delayed ramp of a next generation MCP, and price adjustments of our GPU products to respond to competitive products," it said in a statement.

Facing cheaper competition

Those "competitive products" are new chips from AMD's GPU division, formerly known as ATI Technologies. The chips are well reviewed, have leapfrogged nVidia for performance, are cheaper, and have score more than 100 notebook design wins, according to Jon Peddie, president of Jon Peddie Research.

The lowered earnings and margins forecasts, not the GPU failure news, are what hurt nVidia, which saw its stock drop 33 percent in one day, said Peddie." (nVidia's stock dropped from $18 to $12 on July 3. At today's stock market close, it was trading at $12.10).

"That scared the hedge fund managers. This little failure thing is a bump that wouldn't have knocked the price down, and even if it did it would only be because of the set aside, which is nothing for a five billion dollar company," Peddie told InternetNews.com.

Still, the double-whammy of bad news caused a analysts to pile-on. The company was hit with a number of downgrades following its reduction in Q2 guidance. nVidia declined to comment on the Wall Street reaction or reports of new products due in Q1 2009, but Peddie said the company has a lot in the works, including die shrinks, redesigns and new parts.

"Two quarters from now, nVidia will be back at the top of the pile and people will be claiming how much they love nVidia and they never abandoned it," he said. "It would be a serious mistake to underestimate nVidia and [CEO] Jen-Hsun Huang."

Peddie estimates that as of Q1 2008, nVidia held 27 percent of the mobile graphics market, ATI/AMD had 17.4 percent and Intel (NASDAQ: INTC) held 52.9 percent. He expects that to change in Q2 when new notebooks with the powerful new ATI chips become available, the latest jump in the game of leapfrog ATI and nVidia have played for over a decade.