Nvidia: We underestimated AMD

Nvidia: We underestimated AMD

Summary: Nvidia had one ugly second quarter. It lost money.

TOPICS: Hardware, Processors

Nvidia had one ugly second quarter. It lost money. It took a charge for defective chips. And it's stuck with low-margin inventory it has to burn off. Amazing how a little price competition from AMD's ATI can magnify poor execution at Nvidia.

Nvidia CEO Jen-Hsun Huang said on the company's conference call:

We underestimated the price performance of our competitor’s most recent GPU, which led us to mis-position our fall lineup. The first step of our response was to reset our price to reflect competitive realities. Our action put us again in a strong competitive position but we took hard hits with respect to our overall GPU ASPs and ultimately to our gross margins. The price action was particularly difficult since we are just ramping 55-nanometer and the weak market resulted in taking longer than expected to work through our 65-nanometer inventory.

That competitor would be AMD's ATI and Nvidia has been forced to cut prices to keep share. The larger question is why Nvidia (BNET profile) underestimated AMD. Sure, AMD is struggling, but when a rival is backed into a corner it cuts prices. And when a weak economy aligns with AMD's price-per-performance mantra Nvidia should have known it would have some trouble. Simply put, Nvidia got cocky and AMD popped the company in the mouth.

Huang put on a brave face, acknowledged that "we got tripped up in Q2," but argued that "we’ve dusted ourselves off and we are now intensely focused on changes and improvements that will enhance our performance in the future." Nvidia is putting some money to back up its rebound thesis with a share buyback, but the company is no sure bet--at least until it burns off its low margin inventory.

By the numbers, Nvidia reported second quarter revenue of $892.7 million, down 5 percent from a year ago. The company reported a loss of $120.9 million, or 22 cents a share. That figure includes a $196 million charge to cover warranty and repair costs from defective notebook graphics chips. Excluding that charge and other items, Nvidia reported earnings of 13 cents a share. To cushion the blow, Nvidia said it may back another $1 billion in shares. Nvidia said its third quarter revenue will be up slightly, which is below what analysts were expecting.

Also see: Dell customers unhappy with BIOS band-aid for faulty NVIDIA GPUs

The message from Nvidia was that it will be putting its house in order and execute better. However, analysts weren't buying it. Why? Nvidia is in the penalty box, has to burn off excess channel inventory, AMD isn't going anywhere and Intel's Larrabee platform is a threat a few years from now.

Analysts remain skeptical with Piper Jaffray analyst Gary Mobley delivering the consensus assessment:

Competitive concerns have recently taken center stage, as new products from AMD/ATI are turning up better than expected, and Intel continues to make noise about its upcoming Larrabee graphics chip...The competitive pricing issue stems from a better than expected price-performance product released by arch rival ATI (a division of AMD). While some may argue that a lot of negative news is currently priced into the stock, we feel significant challenges remain an overhang for the near-to-intermediate term.

It's hard to argue with that take until Nvidia proves otherwise.


Topics: Hardware, Processors

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  • Wait till they get a dose of Intel

    I'm thinking Nvidia has underestimated the CPU powerhouses. Applying the CPU frenzy to the graphics side of AMD and Intel's business will prove to be whoop-azz they did not anticipate.

    The fact that their chips fail and drivers stink will give OEM's food for thought when picking a graphics supplier.
  • Well said

    And when a weak economy aligns with AMD???s price-per-performance mantra Nvidia should have known it would have some trouble. [i]Simply put, Nvidia got cocky and AMD popped the company in the mouth.[/i]

    Well said indeed.
  • Doom

    If this had been an AMD article everyone would have dog piled on by now.

    Where is the NV love?

  • RE: Nvidia: We underestimated AMD

    it's very hard for the NV loyalists to respond to this article as most of them can't start their systems with a faulty graphics chip, but I am sure once the parts are fixed under warranty they will be back in with all their support ;)
    • Mostly True...

      Funny... but seriously...

      I own both ATI and VNIDIA cards. It's my understanding that if price is no issue, the current NVIDIA top of the line offers a slight performance edge. On the other hand, to seek the most bang for the buck currently results in an ATI solution.

      The most important thing for consumers is that both companies continue to compete in price and quality!

      • not anymore

        Latest RadeonHD 4870 X2 is TEH most powerful card out now - it goes as far as having a not-yet-triggered new feature (direct GPU-to-GPU link).
        The RHD4850 I bought to give my Athlon64 X2 3800+ a little boost (the GF6600 it used before was already too slow when I built the machine) is very impressive - although its Linux driver exhibits one very nasty bug in some OpenGL apps cases, 2D performances are far over Nvidia's.
        Mitch 74
  • Larrabee?

    Larrabee looks interesting, but it's such a radical departure that there's no way of telling if it'll be better like they claim it will, or if it'll be a total flop. My personal opinion is that using the x86 instruction set will be too much overhead and may very well choke the system regardless of the radical changes elsewhere.
  • RE: Nvidia: We underestimated AMD

    AMD is coming back and will be on top of intel and Nvidia. Believe me!