Nvidia quarter down on desktop market, price pressure, product issues

"Our Q2 financial performance was disappointing," Jen-Hsun Huang, president and CEO of Nvidia, admits. "The desktop PC market around the world weakened during the quarter. And our miscalculation of competitive price position further pressured our desktop GPU business."

By Suzanne Deffree, Managing Editor, News -- Electronic News, 8/13/2008

Nvidia Corp  Tuesday reported financials for its fiscal Q2 2009 that show the results of pressure applied by its GPU rivals, shrinking consumer interest for desktop PCs, and a previously announced product defect issue.

For the quarter ended July 27, revenue decreased to $892.7 million, down 5% year over year and down significantly from Nvidia’s fiscal Q1 revenue of $1.15 billion.

Nvidia also recorded a $196 million charge against cost of revenue to cover expected customer warranty, repair, return, replacement, and associated costs arising from a weak die/packaging material set in certain versions of its chipsets and GPU products used in notebook systems. The charge was at the high end of the anticipated $150 million to $200 million range Nvidia announced in early July when revising its financial outlook for the quarter.

Nvidia further reported a net loss of $120.9 million, or a loss of $0.22 per share.

"Our Q2 financial performance was disappointing,” Jen-Hsun Huang (pictured, right), president and CEO of Nvidia, admitted in a statement Tuesday afternoon. “The desktop PC market around the world weakened during the quarter. And our miscalculation of competitive price position further pressured our desktop GPU business.”

Indeed, desktop GPUs represent Nvidia’s largest segment and contribute approximately one third of the company’s revenue. According to a Jon Peddie Research report on calendar year Q2, Intel held its first place position in desktop GPUs with a 41.5% share against Nvidia's 36%, while AMD held 18.3%.

Desktop revenues at Nvidia were down 40% sequentially with units down 20% and ASP down 25% sequentially, according to separate research from Lehman Brothers today.

“Throughout the second quarter, we observed a general weakness in the desktop GPU segment. … Desktop standalone GPU shipments declined over 23% from the first quarter, mostly in the low-end GPU segments,” Huang said on Nvidia’s fiscal Q2 earnings call. “We believe the decline was primarily due to a weak economic environment, driving a mix shift to lower priced PCs, as well as a continued mix shift to notebook PCs.”

Meanwhile, notebook GPU revenues were up 8% quarter over quarter for Nvidia. However, Lehman said it expects notebook GPU revenue growth for Nvidia to slow to 26% year over year in calendar year 2008 and to 7% in calendar year 2009, versus 113% in calendar year 2007.

“Until we can offer motherboard graphics for Intel platforms, our penetration of notebooks and low cost PCs will remain low. We hope to start production this quarter,” Huang said on the call.

The weak die/packaging issue may also impact Nvidia’s notebook GPU sales, Lehman said. “We estimate that around 25 to 30% of notebooks use discrete graphics card vs 50 to 60% for desktops,” Tim Luke, a semiconductor market analyst at Lehman Brothers, said in a research this morning. “Furthermore, average notebook GPU ASPs (low $20) are lower than desktop GPU ASPs (high $20), and growth in notebooks may be a headwind for discrete GPU growth given the much lower associated attach rates.”

Looking at the overall GPU market, Luke said: “[Nvidia] has recently been ceding discrete graphics share to a reinvigorated AMD/ATI product portfolio and its unit share has declined from 67% in Q4 2007 to 63% in Q2 2008. The solid traction of AMD’s RV 770 and its cost efficiency by using 55 nm has helped AMD regain market share. As a result of share pressure, Nvidia had to cut prices for some of its discrete GPUs by 20 to 30%. We also note that the discrete segment may be viewed as somewhat discretionary in a subdued consumer environment. We highlight that the price cuts and share loss are impacting Nvidia’s revenue growth and margins.”

Huang further on the call reaffirmed Nvidia’s commitment to chipsets (MCP). Reports out of Taiwan earlier this month claimed that Nvidia was looking to exiting the chipset business sometime soon.

Backing that, Luke said: “We believe chipsets remains an integral part of Nvidia’s strategy and the company is unlikely to exit the chipset business as speculated by some news reports. We expect MCP to grow by 9% year over year in calendar year 2008 and 10% in calendar year 2009 vs 7% in calendar year 2007 due to entry into Intel and VIA platforms and possible share gains vs VIA and SIS.”

Despite the less-than-stellar quarter, Nvidia’s stock, NVDA, is on the up today, climbing more than 8% from its Tuesday close of $11.07 to more than $12 by 1pm eastern.