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Nvidia Puts on Brave Face After Loss

The company's CEO sees no more writeoffs and stable pricing.

SAN FRANCISCO --

Nvidia

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"miscalculated" the competition and struggled with product defects, resulting in the chipmaker's first quarterly loss in six years.

But CEO Jen-Hsun Huang told investors that the company has "dusted" itself off and is ready to begin its comeback.

Exactly when or how the company will come back is still a little hazy. In a post-earnings conference call Tuesday, Nvidia said it wouldn't be able to sell its most profitable output of chips until it burns off excess inventory of lower-margin products.

And the company said sales in the current quarter will "grow slightly," which smells like a miss, given that the average analyst expectation called for sales to grow 13% sequentially to $1.01 billion.

Nonetheless, shares of Nvidia were up 10.2%, or $1.13, at $12.20 in extended trading Tuesday on relief that business conditions at least are not getting significantly worse.

For one thing, says Pacific Crest Securities analyst Mike McConnell, the damage stemming from Nvidia's defective graphics chips appears to be under control. Nvidia took a $196 million charge in the second quarter to cover warranty costs -- which was within the range it predicted last month -- and Nvidia said it didn't expect the charges to re-occur.

And the chipmaker said it expects gross margins in the current quarter to increase slightly, which McConnell said is better than the flat gross margins expected by Wall Street.

Nvidia also authorized a $1 billion buyback, which allow it to repurchase up to $2.7 billion of its common stock.

That doesn't mean Nvidia is anywhere close to thriving, however. Even excluding the product warranty charges, Nvidia's second-quarter gross margin was 39%, down from 44.6% in the first quarter.

And the chipmaker is still facing intense competition from

Advanced Micro Device's

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ATI division, whose latest line of graphics chips are garnering rave reviews and threatening to take market share from Nvidia, if they haven't already.

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McConnell says Nvidia may not be able to reverse any market share losses to AMD until the second quarter of next year at the earliest.

"Before now and then it's going to be a difficult stock to make a lot of money on," says McConnell, who rates Nvidia an outperform.

Nvidia spooked the Street in July, when it warned investors that sales in the second quarter would be significantly below expectations. The company's stock fell more than 25% in the following days.

On Tuesday, Nvidia delivered the final tally for the quarter, with sales down 5% year-over-year at $892.7 million. Analysts had been expecting $908.3 million.

Sales of Nvidia's desktop graphics processors declined 40% sequentially, while average selling prices fell 25%.

"The desktop PC market around the world weakened during the quarter. And our miscalculation of competitive price position further pressures our desktop GPU business," Huang said in a statement.

Nvidia said prices for its notebook graphics chips remained flat in the second quarter, while sales were up 8% sequentially.

Nvidia posted a net loss of $120.9 million, or 22 cents a share, vs. net income of $172.7 million, or 29 cents a share at this time last year.

The results included a $196 million charge against the company's cost of revenue to account for customer warranty and repair costs associated with defects in its previous generation of chips.

Excluding that charge, as well as the associated tax impact, and 7 cents a share worth of stock option compensation expenses, Nvidia said it earned 13 cents a share.

Analysts polled by Thomson Reuters were expecting 12 cents a share excluding stock compensation charges.

With Nvidia expecting prices for graphics chips to remain stable going forward, the company needs to find ways to cut costs in order to improve its profit margins.

But while Huang said the company has plenty of levers to pull to improve margins, the obvious ones appear to be running into trouble.

Nvidia has begun producing chips with smaller circuits, which means their costs are inherently lower. But executives said the company will not be able to reap the benefits until it unloads its inventory of older chips.

And despite the mission to cut costs, Nvidia said it expects operating expenses to rise 5% sequentially in the current quarter.

"Our op ex is too high," Huang said. "We need to moderate that."

For now though, Wall Street can only speculate as to how Nvidia plans to do that.