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Predicting the future is tricky business, pick your data, premises, and emotions carefully.

Posted: 07.28.08

Nvidia should take a month off

Boy, for as long as I’ve known the company, which is actually before it was a company, I have never seen such a torrent of bad news and bad breaks at one time. Here’s the list of recent events and news:

  • Gave a guidance down from a previous forecast.
  • ATI’s new products offer better price-performance challenging Nvidia’s price platform.
  • Price cutting on the new and older parts.
  • Set aside a reserve for parts failing due to temperature cycling.
  • Delayed ramp of a next generation MCP.
  • The company is being sued by Rambus.
  • Intel’s continue war of words declaring the GPU as archaic architecture.
  • Share price dropped 60% (normalized to the DJIA) since the first of January.

The quote from the press release reads “The estimated decrease in revenue and gross margin is due to several reasons: end-market weakness around the world, the delayed ramp of a next generation MCP, and price adjustments of our GPU products to respond to competitive products.” Ouch.

Downward guidance

The trouble began when the Company had to announce that second quarter revenue and gross margin are expected to be lower than guidance provided during its first quarter financial conference call and be from $875 million to $950 million.

The company had previously forecast that revenue would be down 5% sequentially from the April quarter, or about $1.09 billion. The company previously said it expected gross margin to be up about 100 basis points from the April quarter. Nvidia said the shortfall is due to end-market weakness around the world, the delayed ramp of a next-generation media and communications processor, and price adjustments to its graphics processors to respond to competitive pressures.

The second quarter is always down, but last year Nvidia defied gravity, and may have gotten over confident that they could do it again this year—however, they probably didn’t count on a looming recession.

ATI’s new products

ATI surprised everyone and came out with high-performing parts in the midrange and the high-end at very aggressive prices.

Nvidia tried to counter in the midrange with a new 55nm based part, the 9800GTX+ initially priced at $230. However, that had the effect of impacting inventory of 9800GTX products in channel at $400 to $500, with the over-clocked versions being $500 and equivalent in performance to the GF9800GTX+. So, with the overstuffed channel (lots of 9800GTXs available out there) this looks like a train wreck because there’s price protection for the partners, so all this is going to impact margins for a couple of quarters.

Price cutting

Nvidia also had to drop prices on its new GTX2x0 AIBs to meet ATI’s aggressive new prices. The AIB (board partner) prices are expected to be as follows (US$)

Nvidia Intro Price New price ATI part Price
9800 GTX+ $229 $199 HD4850 $199
GTX 260 $399 $299 HD4850 $199
GTX 280 $649 $499 HD4870 $399

Set aside

With regard to the one-time charge from $150 million to $200 million against cost of revenue for the second quarter 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 graphics chips and chipset products used in notebook systems, well that could happen to anyone. The webzines are having a field day with this, some claiming Nvidia tried a cover up and that all their G84 and G86 parts, notebook and desktop, are bad. Nvidia says certain notebook configurations with chips manufactured with a certain die/packaging material set are failing in the field at higher than normal rates. The company plans to seek insurance coverage for this matter. The web­zines claim it’s mostly HP notebooks, and suggest some Dell units may also be involved.

The costs to Nvidia will be offset to the OEMs for their service costs to replace failed units, and to push a new driver that keeps the fan on longer (to minimized the temperature cycles—but which will also lower battery life). Some wags have suggested, and we can’t help but agree, that this is a class action waiting to happen, and that Nvidia may need a bigger set aside.

“This has been a challenging experience for us,’’ Said Jen-Hsun Huang, Nvidia’s unflappable president. “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.”

Delayed ramp: As for the MCP missed production cycle, it was/is for the Intel Penryn CPU with FSB. No, it’s not 790i that’s been delayed—its the discrete chipset. The delay affected the motherboard GPU, which the company hasn’t announced yet, so I won’t steal their thunder. Expect it ~August though.

Rambus suit: And finally in what seemed like a piling on, Rambus took the moment to announce that they had filed a suite against Nvidia over alleged memory controller patent infringements. Rambus alleges six Nvidia product lines infringe 17 patents it holds covering various graphics and multimedia processors in the suit, filed in the U.S. District Court for the Northern District of California.

Intel’s war of words: One of the bright spots in Nvidia’s future is GPU-compute, and the company is investing heavily in its CUDA programming environment. However, in a swipe at that, Intel’s Sr. VP Pat Gelsinger, relegated CUDA, and the Cell, to a footnote in the history books. Gelsinger has said that it sees no place in the future of computing for general purpose GPU (GPGPU) programming models such as Nvidia’s CUDA. That, of course, was not taken lightly by the investor community who freak out anytime Intel mentions Nvidia’s name or products.

Share price: As a result of all of the above, Nvidia’s share price took a hit that knocked 30% of its value down, putting stock options under water and scaring the hell out of 401k managers. The result has brought Nvidia’s year-to-date decline to 60%. The stock closed at $11.67 Friday, 11 July, at a two-year low.

Table 1: Nvidia’s share price this year—down 66%.
(Source: Company data)

When a company has been such a stellar performer for so many years, it is almost as if some folks got some kind of giddy enjoyment out of the rash of woes that suddenly hit the company. Certainly the Inquirer has taken great pleasure in announcing Nvidia’s demise.

The move to 55nm: Nvidia taped out the 55nm GT200 a few months back and we believe that they will pull this product in as fast as they can to offset costs and performance gains by ATI. It’s unlikely they can get it in time for back-to-school, but the holiday season is a possibility.