Bad graphics chips cost Nvidia $196M

Chip maker takes charge to cover cost of replacing faulty devices in laptops

Nvidia Corp. yesterday took a one-time warranty charge of $196 million against its fiscal second-quarter financial results, saying that amount should cover the cost of replacing bad graphics chips used in a range of laptop models from different manufacturers.

Jen-Hsun Huang, Nvidia's chairman and CEO, stopped short of ruling out additional charges related to the chip problem. But he noted that the Santa Clara, Calif.-based company wasn't obligated to replace the faulty chips in the first place.

"We're not expecting more write-downs in the future," Huang said during a conference call with financial analysts. "We think we have a pretty good handle on the situation. We thought we were relatively conservative, but we'll see how it goes."

Replacing the chips "isn't something that we absolutely need to do," he added. "But we stepped up to do it because we think it's the right thing to do."

The size of the warranty charge recorded by Nvidia suggests that the scale of the problem is significant, despite the chip maker's claim that only a small percentage of its devices have failed. The charge is nearly eight times the $25 million that the company has set aside on its balance sheet to cover the costs of warranty liabilities across all of its product lines.

Huang told analysts that repair costs were part of the reason the warranty charge came in at the top end of the company's estimate of $150 million to $200 million. "Although the failures are only seen in small percentages of all the chips we've shipped with this material set, the repair cost of a notebook can be expensive," he said.

With the one-time charge factored in, Nvidia reported a second-quarter loss of $121 million on revenue of $893 million, partly because of the one-time charge (download PDF). But there was more to the weak results than the charge. Revenue in the quarter, which ended July 27, was down 5% from the same period a year ago. In a statement, Huang described Nvidia's Q2 financial performance as "disappointing," saying that the company miscalculated competitive pricing and had to contend with weakening demand for desktop systems worldwide.

Nvidia first disclosed the chip problem in early July, saying that some graphics processors used in laptops have failed at alarmingly high rates — an issue that the company attributed to weak silicon dies and packaging materials that were used in the chips.

Underscoring the breadth and severity of the problem, Hewlett-Packard Co. has said that 24 of its laptops are affected, while Dell Inc. has said that the snafu has cropped up in 15 models it sells.

Affected laptops may have displays that don't function or that display random characters or lines on the screen, or they may simply fail to start up, according to the computer makers.

To address the problem, Dell and HP have issued BIOS updates that cause system fans to run more often than usual, or even continuously, in an attempt to lower temperatures and reduce the heat stress that is causing the graphics chips to fail. In some cases, the two companies have also extended their system warranties to two years.

But users with graphics chips that fail after their laptop warranties expire appear to be out of luck when it comes to getting a replacement free of charge.

Copyright © 2008 IDG Communications, Inc.

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