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Nvidia takes charges punch as Q2 sales drop

Thanks for the expensive memory

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With sales dropping during its second quarter Nvidia's decided to write off a whole bunch of old chip inventory and take a write down against a proposed settlement of a chip packaging lawsuit hanging over it since late 2008.

Nvidia said Thursday sales fell by 19 per cent for the period to August 1, to $811.2m, and Nvidia posted a loss of $141m, compared to $137.6m in net earnings in the year ago quarter.

Were it not for the lawsuit and excess inventory writedowns, Jen-Hsun Huang, Nvidia's president and chief executive officer, said the company would have beat its profit guidance for the quarter.

Ignoring the charge for litigation and remedies relating to the chip packaging issue, Nvidia had a non-GAAP net income of $20.1m.

In a statement accompanying the financials, Nvidia said that the packing issue was related to notebook chipsets and graphics chips that were made before July 2008, which we told you about here.

Nvidia has set aside $193.9m to cover remediation costs for the chip bugs for notebook chipsets and GPUs made prior to July 2008 that were affected by the issue, which caused them to have higher than expected failure rates. In September 2008, Nvidia was sued in the US District Court for the Northern District of California in San Francisco, and in April 2009, a class action lawsuit was merged into the suit. Nvidia said in the statement today that it had a settlement pending, subject to approvals.

Huang said Nvidia also wrote off more than the usual amount of inventory during the quarter as PC OEMs and consumers stalled their discrete graphics purchases, most likely as they awaited the delivery of Fermi-based GPUs.

On the call, one Wall Street analyst did a quick calculation and said it looked like it was $75m, and Huang said that was in the right ballpark.

Nvidia was pinched by higher memory prices. Its discrete memory cards are packed with lots of memory, which is one of the reasons why people buy them - except of course, when they feel broke and downgrade to cheaper cards with less memory or go with integrated graphics on desktops or notebooks.

Huang said that Nvidia saw a shift in PC OEM and consumer buying patterns that began at the end of May, and that other IT suppliers are just starting to feel the shift now.

"We are taking a conservative posture with regard to the PC OEM business," said Huang.

Huang conceded that the GeForce GTX 470 and GTX 480 high-end graphics cards were about six months late, and this has hurt Nvidia's business and market share in the consumer space over the past couple of quarters. But, Huang said, the company is looking to take back some market share with both its GeForce consumer and Quadro professional discrete graphics cards in the remainder of this year.

David White, chief financial officer, said the graphics business for notebooks and desktops were both down in Q2, but that the company expected sales to be up - but not by that much - in Q3. GeForce sales in EMEA and China were particularly hard hit.

Nvidia's chipset business, which it is gradually weaning itself from, is still generating a little under $200m per quarter, and the company hopes that its Tesla GPU co-processor and Tegra system on chip (graphics plus chipset) businesses will pick up speed to help offset the decline.

The Tegra SoCs are used in smartphones and tablet PCs, and represent Nvidia's first foray into these markets, which Huang said were the fastest-growing part of the graphics market. Nvidia expects production shipments of the Tegra products to start in the current quarter.

The Tesla co-processor business had another "record quarter," but Nvidia did not put any numbers on it.

In the third quarter of fiscal 2011, Nvidia is projecting sequential revenue growth of between three and five per cent. The company has an impressive $1.78bn in the bank and no debt. It can afford to ride out this soft spot and lawsuits relating to some weak packaging just fine. ®

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