SAN JOSE, Calif. -- There's more bad news for Nvidia Corp., including product delays, unforeseen price cuts and lost share.
On Wednesday (July 2), Nvidia said it plans to take a charge from $150-to-$200 million to cover anticipated warranty, repair, return, replacement and other costs arising from a ''weak die/packaging material'' in select devices.
Following that announcement, analysts slammed Nvidia on Thursday (July 3). ''We knew that the July quarter was going to be choppy, but we didn't expect this magnitude of bad news so early in what is usually a back-end loaded quarter,'' said Daniel Berenbaum, an analyst with SG Cowen, in a report.
Regarding the product snafu, Nvidia's ''management suggested that the charge to cover warranty payments to a notebook OEM would cover all liability with respect to problems with chip packaging,'' he said. ''However, we are concerned that more problems could crop up.''
On top of that, Nvidia's chipset is delayed. ''In an unusual slip, Nvidia apparently failed to deliver a next-generation chipset on time. The good news is that this will not likely hit gross margin, as no costs were incurred, but the bad news is that the product may miss a window, hurting out-quarter revenue as well,'' he said.
The bottom line: Market share and pricing seem to be the main issues. ''We underestimated the effect of AMD's new discrete graphics products and pricing cuts, but our checks suggest that AMD is not likely to be able to sustain its momentum. We expect Nvidia to regain share in late '08,'' he added.
Others agreed. ''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,'' Longbow Research semiconductor analyst Tayyib Shah, in a report.
''Given the highly competitive pricing of AMD's 4000 series products, Nvidia has had to follow suit, which has contributed to the revenue shortfall,'' Shah said. ''We now anticipate a challenging pricing/margin
environment through F3Q09 until Nvidia can fully migrate its own mid-end product line to the 55-nm manufacturing process.''
Nvidia is also quietly cutting prices, but the company remains relatively strong despite the problems. ''We believe the company is making selective GPU price adjustments to compete against AMD's recently launched RV770 GPU for sub-$200 graphics cards,'' said analyst Doug Freedman of American Technology Research, in a report. ''In the long run, we believe Nvidia has significantly more R&D resources to invest and should remain highly competitive across all tiers of GPU.''
The end result? ''Second quarter revenue guidance is now down 21 percent Q/Q at the midpoint (was down 5 percent at midpoint) and the gross margin is expected to be lower due to the following (in order of importance): 1) GPU price adjustments in response to competitive products, 2) delayed ramp of next generation MCPs, and 3) end market weakness. Furthermore, a one-time charge of $150M—$200M against cost of revenue will be taken to cover warranty/returns of GPUs and MCPs in the field due to die/packaging material failures in certain thermal and usage conditions,'' according to Freedman.
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