Now Hear This!

It’s a safe bet that Nvidia updated its fiscal Q2 2009 revenue expectations and announced a one-time $150 million to $200 million charge on Wednesday in the hopes of minimizing the bad press it would receive on the Independence Day holiday weekend here in the United States. Unfortunately for Nvidia, not only was its stock, NVDA, hammered on Thursday and sent it down some 30% to a new two-year-low close of $12.49, all the three-day weekend seems to have done is given analysts and GPU industry watchers time to question just what caused the fall from grace for Q1 darling Nvidia.

Specifically, Nvidia said it now expects Q2 revenue to be between $875 million and $950 million, down approximately 20% from its fiscal Q1 revenue of $1.15 billion and far off from the 5% sequential drop off expected by most financial analysts. The reasons behind the Q2 revenue downgrade are pretty apparent: Nvidia makes the biggest chunk of its money from GPUs for the desktop market, which is losing ground to the notebook market. The company is also facing significant pricing and technology competition from AMD’s ATI group, which is proving to be one of the few untarnished spots in AMD’s portfolio.

“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. Given the highly competitive pricing of AMD’s 4000 series products,
Nvidia has had to follow suit, which has contributed to the revenue shortfall. We now anticipate a challenging pricing/margin environment through fiscal Q3 2009 until Nvidia can fully migrate its own mid-end product line to the 55-nm manufacturing process,” Longbow Research Semiconductor Analyst Tayyib Shah said in a research note after lowering his rating on Nvidia from “buy” to “neutral.”

But what isn’t so apparent is what’s behind the one-time charge and product issue. All the Santa Clara-based company admitted to was that “certain” notebook configurations with GPUs and MCPs manufactured with a “certain die/packaging material set” are failing in the field at higher than normal rates.

Jen-Hsun Huang, Nvidia’s president and CEO, vaguely said in a statement last week that the failure appears to be related to the combination of the interaction between the chip material set and system design. He went on to state that the combination of limited thermal management and frequent power cycling is particularly challenging for complex processors like the GPU, but gave no real insight into the failure issue.

Speculation has spread across the industry with some suggesting Nvidia’s manufacturing partners are to blame. One rumor implies the failure issue is linked to the solder bumping process used by Nvidia’s foundry partners, which include industry leader TSMC. Another rumor hypothesizes that the problem is due to Nvidia’s PCB (printed circuit board) substrate suppliers. However, one has to wonder how, if the issue was on the end of a supplier or that of a manufacturer, we haven’t seen similar reports from competing companies in the semiconductor industry that work with TSMC and other Nvidia partners. Could it simply be that the failure issue was on Nvidia’s end? And if so, will the company properly own up to that?

Don’t look for Nvidia to share specifics until it has to face the analyst and press communities on its Q2 call, set for August 12. It certainly didn’t help Nvidia’s stock that the company failed to hold a conference call after its Q2 update Wednesday, blocking questions at this point. That’s never a good sign for Wall Street and the stock continued to sink this morning, dipping to $11.94 at 12:50pm eastern today.

Meanwhile, whatever the exact product issue is, it’s just in time to put a dent in Nvidia’s GPU notebook share as we move into the back-to-school and holiday-shopping PC seasons.

What do you think? Share your thoughts on what caused the Nvidia product issue or on the company's stock slide below.

--Suzanne Deffree, Managing Editor, News