Nvidia takes charge for faulty graphics chips

But it reports better earnings than expected

Nvidia on Thursday disclosed a charge of US$119.1 million for its second fiscal quarter, ended July 26, to cover costs related to a faulty die and weak packaging material used in its graphics chips.

It was Nvidia's second charge related to the faulty chips. Nvidia recorded a $196 million charge during last year's second fiscal quarter to cover warranty and product replacement costs associated with the issue.

Nvidia last July reported that some graphics chips were overheating due to weak packaging material and the thermal design of some laptops. PC makers such as Dell, Hewlett-Packard and Apple used the faulty graphics chips in their products. Following the revelation, PC makers put programs in place that would either fix the BIOS or replace PCs that had the faulty chips. The costs of those programs were shared between Nvidia and the manufacturers.

Initially it was hard to estimate the size of a charge for repairs, as very few deals were in place with Nvidia's customers, such as PC makers, said Jen-Hsun Huang, president and chief executive officer of Nvidia, during a conference call. Since then, Nvidia has negotiated agreements with affected customers, making it easier to estimate repair costs and their financial impact, Huang said. The costs were higher than originally anticipated, and he could not estimate whether the company would incur further charges related to the flaw.

However, the costs are a small distraction and haven't impacted Nvidia's ability to launch new products, Huang said.

The charges were revealed as part of second-quarter results announced by Nvidia on Thursday. Including the charge, the company recorded a net loss of $105.3 million, or $0.19 per share, compared to a net loss of $120.9 million reported in the second quarter of last year. Not counting the charges, Nvidia had net income of $0.07 per share, beating a consensus estimate of $0.02 from analysts polled by Thomson Reuters.

Revenue for the quarter was $776.5 million, a fall from $892.6 million last year.

"Nvidia's business is recovering. Product demand is improving, and our strategic investments are leading to new growth," Huang said. The company has invested in new products such as Tesla, a graphics processing unit for high-performance computing, and low-power Tegra chips for mobile devices. The products should start contributing to the revenue stream soon, Huang said.

"Our two newest businesses began to ship meaningful amounts of product this past quarter and show significant promise," Huang said. Tegra has already been adopted by Microsoft for its upcoming Zune HD portable media player, and Samsung has said it would use the chip in a future netbook.

Nvidia may also benefit from Microsoft's upcoming Windows 7 OS, which could fuel demand for GPUs, Huang said. Consumers are demanding better visual experiences from PCs, and the OS can boost graphics performance by breaking up tasks over multiple cores. Nvidia is building multicore graphics cards that are designed to work with the OS. Windows 7 is due for launch on Oct. 22.

"It's the greatest opportunity in the GPU business I've seen in the last 10 years," Huang said. Taking a shot at rival Intel, Huang said that parallel processing capabilities in computers will reside in the GPUs, not in the CPUs.

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