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Nvidia Slashes Forecast (Update)

Alexei Oreskovic

SAN FRANCISCO -- Nvidia(NVDA) cut its financial forecast for the current quarter, and disclosed that defects in certain graphics chips would result in at least $150 million in charges.

The Santa Clara, Calif., chipmaker said it now expects sales in the quarter ending July 27 to range between $875 million and $950 million. That represents a 17% to 23% sequential drop in sales, compared to the 5% falloff to $1.09 billion in quarterly revenue expected by analysts polled by Thomson Financial.

Nvidia also said its gross margin would be lower than previously indicated. In May, Nvidia said it expected its gross margin to increase by at least one percentage point from the first quarter's 44.6% level.

Following the announcement, shares of Nvidia slid more than 22% to $14.05 in recent after-hours trading - their lowest level since July 2006.

The company blamed the worse-than-expected results on weak global demand, and delays in ramping its new integrated graphics chip. Nvidia also cited price adjustments to its new line up of chips, due to competition from Advanced Micro Devices'(AMD) ATI graphics group, which recently announced its own new product.

Last month, Nvidia introduced its newest generation of graphics processors, touting the chips raw horsepower for delivering high-end graphics performance. Rival ATI took a different tack, with a more moderately priced and less-beefy family of graphics chips.

According to news reports in recent weeks, Nvidia was forced to cut the price of its newest midrange chip out of the gate, in order to keep its product competitive with the ATI offerings.

An Nvidia spokesperson said Wednesday that he had no specific information about the price adjustments cited in the financial preannouncement.

Nvidia also disclosed Wednesday that certain of its graphics processors designed for notebook PCs were failing at higher-than-normal rates due to what it described as "weak die/packaging materials."

As a result, Nvidia will take a charge between $150 million and $200 million to cover anticipated customer warranty, repair and replacement costs.

Nvidia spokesperson Hector Marinez said the root cause of the problems have not yet been fully identified, but that it appears the chip packaging materials were not strong enough to handle the thermal requirements of certain notebook PCs.

"The material gets hot, cold, hot, cold, and develops a little bit of stress fracture and fail," Marinez said.

Nvidia said the problems were limited to older generation products, and that its newest products use different and more robust materials.

Still, the company said that there is no assurance that more defects will not be discovered in other products.