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nVidia's CEO Admits Supply Chain Problems

nVidia had plenty of good news to tout following its bang out quarterly earnings report today. But CEO Jen-Hsun Huang also admitted it's having a hard time keeping up with demand.

On an earnings call with analysts, CEO Jen-Hsun Huang said nVidia saw "healthy market demand across the board," especially its bread and butter GPU business, which was up 25 percent for the quarter. That broke down to 19 percent growth in desktop parts and 41 percent growth in notebook parts.

A repeated complaint voiced throughout the call was that the company was "supply constrained throughout the quarter," especially in 40 nanometer parts. nVidia's supplier, TSMC, has reportedly struggled to improve yields for 40nm parts but it has been a slow process for both nVidia and arch-rival ATI, AMD's graphics business, which also farms out GPU production to TSMC.

"Demand is really high. We've just got nothing left. We shipped everything we could last quarter, and we're not trying to keep any for a rainy day. Customers are just yanking parts out of our hands," said Huang.

He added that improving yields is "nVidia's number one strategic initiative right now. It floods my e-mail, that's all we talk about, that's all we meet about. So it's absolutely important to us to get 40nm up to world class yields. We have complete confidence we will get there soon."

Asked about chipset business, which nVidia said it had to suspend due to conflict with licensing issues with Intel, Huang figures it has about two more years left. "The only thing I have said and want it to be very clear is we have no intentions of building a DMI-based chipset. Otherwise we have ongoing investments in the current chipset architecture," he said.

DMI, or direct media interface, is the interface used in Intel's forthcoming desktop Nehalem products codenamed Arrandale and Clarkdale. Instead, nVidia will continue to support the Core 2 (Penryn) line for the foreseeable future.

"They're transitioning to a new architecture and some people might want to go to Arrandale. Some might stick with Core 2 Duo. The market is a big and differentiated place. The benefit of MCP79 and MCP89 [his forthcoming Core 2 chipsets] is it allows customers to build different types of devices," said Huang.

nVidia's supply problems will become even more challenging in the first quarter of 2010. The company will be fully ramping up the Fermi generation of chips, which means new GeForce video cards and chips for laptops, new Quadro cards for business computers and new Tesla cards for high performance computing. Plus, nVidia will also be ramping production of new chipsets and Tegra products.

The company expects the fourth quarter to taper off, with revenue up only two percent sequentially from Q3. GAAP gross margin is expected to be in the range of 40 to 42 percent.