Nvidia Puts Sales Growth at Low End of Range

It also implies earnings will suffer as it experiences margin pressure.
Publish date:

Updated from 6:03 p.m. EDT

Hamstrung by manufacturing troubles with a new graphics chip,


(NVDA) - Get Report

has reeled in the top end of its May quarter guidance.

The Santa Clara, Calif., chipmaker said after the bell Monday that second-quarter revenue will be at the low end of the May guidance while implying earnings will fall short of expectations.

Back then, Nvidia said sales in the second quarter would be between $454 million and $478 million, far above the then-analyst consensus estimate of $424 million. The increase was supposed to reflect a seasonal rise in Xbox revenue and sales from the FX processor family.

Monday Nvidia said revenue should come in at $455 million to $460 million in the period, which ended July 27. Analysts polled by Thomson First Call were expecting revenue of $461.9 million, on average.

Nvidia further said gross margins would be slightly below its original guidance because of higher costs related to a new semiconductor process technology. The company provided no specific earnings guidance; leading up to today's revision, analysts were expecting the company to earn 14 cents a share in the second quarter.

Analysts seemed unsurprised by the news, casting it as a short-term stumble. "Net-net I don't think it's a negative. Probably the stock will get hit a little on Tuesday," says Michael McConnell, a senior research analyst at Pacific Crest. "Still, it's refreshing to see them hit the top line more or less. They're almost hitting some pretty aggressive guidance, so it could have been a lot worse."

The yield troubles are related to Nvidia's NV31 graphics chip, McConnell explains. "For whatever reason TSMC

Nvidia's foundry is having a hard time producing that at .13 microns. I believe that the yields they were assuming with NV31 haven't materialized and they've had to take a little off the gross margins and take on further costs." But yields are likely to improve in the second half of the year, he adds. He has a neutral rating on the shares; his firm hasn't done any banking for NVDA.

In fact, Nvidia has been pushing into advanced process chipmaking more aggressively than rival



, notes Gartner communication-chip analyst Joe Byrne. "It's understandable to see why this may be an issue," he says.

Nvidia shares ended regular trading Monday at $20.41, down 65 cents, or 3%. In after-hours Instinet trading the shares were recently down another 91 cents, or 4.5%, to $19.50.

Three months ago, Nvidia sparked a rally in its shares by predicting robust sales growth in the second quarter. The company kicked off a one-day 25% surge in its shares in early May when it predicted second-quarter sales would rise 12% to 18% over the $405 million it booked in its April quarter.

After closing at $16.06 on May 8, the stock surged steadily to a closing high of $26.57 on June 5, and slowly sagged since.

At the time, Nvidia also said second-quarter gross margins could drop 1% to 2% due to low yields on its new 0.13-micron processor technology.

In its latest release, Nvidia saw "solid growth from Xbox and from record shipments of the GeForce FX family of GPUs," it said in a statement. It also claimed to have successfully moved its mobile product line to its new GeForce FX Go family and reported "numerous notebook design wins."