Nvidia cuts estimate, expects up to $200M charge on product issue
Nvidia Corp has significantly cut estimates for its fiscal Q2 2009 and announced a $150 million to $200 million charge for the quarter ending July 27 on a product defect issue.
The GPU market leader now expects total revenue to be between $875 million and $950 million, down approximately 20% from Nvidia’s fiscal Q1 revenue of $1.15 billion and far off from the 5% sequential drop off expected by most financial analysts.
Nvidia said the shortfall is due to end-market weakness around the world, the delayed ramp of a next-generation MCP, and price adjustments of its GPU products to respond to competitive products.
“Given degree of this miss, we believe that it may take some time for NVDA [Nvidia] to regain traction in terms of both margins and investor sentiment,” Tim Luke, a semiconductor market analyst at Lehman Brothers, wrote in a research note this morning. “While we have highlighted heightened AMD pressure as a risk it appears that the traction seen by AMD with customers and reviewers has taken Nvidia by surprise. AMD's offering has clearly emerged as significant force in the mainstream mid tier market where it has been priced aggressively and prompted NVDA to lower pricing across much of its portfolio by up to $100. Issues on pricing appeared to have been compounded by the unexpected chipset delay for the Intel DX10 market. Management has suggested that this delay with an 8800 series offering for Intel chipsets added a further $50 million to the shortfall. We do, however, expect the new chipset to begin to ship in the October quarter.”
Separately, Nvidia said it will take a one-time charge from $150 million to $200 million against cost of revenue for its fiscal Q2 to cover anticipated warranty, repair, return, replacement, and other costs and expenses, arising from a weak die/packaging material set in certain versions of its previous generation GPU and MCP products used in notebook systems.
The Santa Clara-based company admitted 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.
"Although the failure appears related to the combination of the interaction between the chip material set and system design, we have a responsibility to our customers and will take our part in resolving this problem,” Jen-Hsun Huang (pictured, right), Nvidia’s president and CEO, said in a statement Wednesday afternoon. “The GPU has become an increasingly important part of the computing experience and we are seeing more interest by PC OEMs to adopt GPUs in more platforms. Recognizing that the GPU is one of the most complex processors in the system, it is critical that we now work more closely with notebook system designers and our chip foundries to ensure that the GPU and the system are designed collaboratively for the best performance and robustness."
Nvidia noted that high performance notebooks are “highly complex” systems with “extreme” thermal environments, and said that the combination of limited thermal management and frequent power cycling is particularly challenging for complex processors like the GPU.
"This has been a challenging experience for us,” Huang said. “However, the lessons we've learned will help us build far more robust products in the future, and become a more valuable system design partner to our customers. As for the present, we have switched production to a more robust die/package material set and are working proactively with our OEM partners to develop system management software that will provide better thermal management to the GPU."
On the product issues, as well as on share losses to AMD/ATI and Intel’s new Montevina platform, Lehman expects a negative impact on Nvidia’s notebook GPU sales. The Wall Street watching firm said that notebook GPUs have a gross margin in the mid 40% range for Nvidia
“We estimate that around 30% of notebooks use discrete graphics card vs. over 40% for desktops,” Luke said. “Furthermore, average notebook GPU ASPs [average selling prices] (mid $20) are lower than desktop GPU ASPs (approximately $30), and growth in notebooks may be a headwind for discrete GPU growth given the much lower associated attach rates. We expect notebook GPU revenue growth for NVDA to slow to 4% year over year in calendar year 2008 and 6% in calendar year 2009 versus 113% in calendar year 2007.”
Dsektop GPUs, representing Nvidia’s largest segment with between 42 and 45% of overall revenues, also have a gross margin in the mid 40% range for the company. However, as noted by most industry research companies, desktop sales are giving way to notebook sales, which are expected to make up much of the PC industry’s estimated 10 to 11% revenue growth in 2008.
“Declining desktop unit growth, due to the shift towards notebooks and pressure due to AMD’s RV770 launch has likely impacted desktop revenue growth. We expect desktop GPUs may decline by 6% year over year in calendar year 2008 and decline by 4% in calendar year 2009 versus up 38% in calendar year 2007,” Luke said.
Following its fiscal Q2 update, Nvidia’s stock, NVDA, was down more than 30% in trading. The stock closed at $18.03 just before Nvidia gave its update and was trading at $12.90 at 9:40 am eastern time. The stock sank further to $12.60 by 11:23 am, and dipped even further to $12.49 at 1 pm.*