Updated at 5:20 p.m. throughout. Also, correction made for earnings per share.
In the third quarter of its fiscal year, Nvidia's profit dropped sharply from last year's levels, but revenue came in above forecasts.
For the three months that ended October 26, profit sank 74 percent to $61.7 million, or 11 cents a share, from $235.7 million a year earlier. Excluding costs from stock compensation and other expenses, earnings were 20 cents a share. This exceeded the average estimate of 11 cents projected by First Call.
Revenue for the world's largest graphics chip supplier declined 20 percent to $897.7 million from $1.12 billion last year.
During the third quarter, Nvidia recorded an $8.3 million charge against operating expenses related to restructuring costs in connection with its workforce reduction. The company announced a 6.5 percent reduction in its workforce in September.
Nvidia also lost market share to Advanced Micro Devices' ATI graphics unit. "We lost some market share recently. We're focused on regaining market share," said Jen-Hsun Huang, president and CEO of Nvidia.
"We were caught flat footed at 65 (nanometer) and our chip and board solution was just too expensive. We've made that transition (to 55 nanometer) in Q2. And in Q3 we're through that transition and we're off and running," Huang said. Nvidia shifted to a more advanced 55-nanometer manufacturing process from a 65-nanometer process for its "performance segment" graphics chips in the third quarter.
The desktop segment is a concern for Nvidia, however. "The big swing factor in all of this is what happens to desktop revenue. We're focused on regaining some market share in that area," said Marvin D . Burkett, Nvidia's chief financial officer. "Caution tells me it could be a weak market in the fourth quarter," he added.
The company is aiming to gain share in the high-growth laptop segment. Nvidia launched the GeForce 9400M mobile chipset in the third quarter, its "first notebook chipset for Intel processors," Huang said.
"This is a very important growth opportunity for us. For the first time we have exposure to the vast majority of this fast-growing segment of the PC industry," Huang said.
Intel's Atom processor lifted processor shipments in the third quarter but the future for overall processor shipments is uncertain, IDC said.
Intel's Atom processor lifted shipments in the third quarter, IDC said.
Worldwide PC microprocessor shipments in the third calendar quarter of 2008 reached record levels again, according to market researcher IDC. However, the outlook for the processor market in the fourth quarter and 2009 is "very murky," said Shane Rau, director of Semiconductors: Personal Computing research at IDC, in a statement.
Worldwide PC processor unit shipments grew 14 percent quarter over quarter and 15.8 percent year over year, while market revenue grew 7.6 percent from the previous quarter and 4.1 percent compared to a year ago to $8.3 billion.
Intel's new Atom processor for the Netbook market "made a notable difference in the overall market performance," Rau said. Without Atom, unit shipments grew 8.3 percent from the second quarter and 8.7 percent from the same quarter last year.
"Not considering the effects of Atom, the overall market still grew at a decent pace in the third quarter," Rau said. "Intel's and AMD's shipments grew at a rate only slightly slower than typical for a third quarter, and seasonal demand appeared reasonable up until September."
"Up until September" may be the operative phrase, however, as that's when the U.S. financial markets fell sharply. "The worldwide demand environment looks weak, and both Intel and Advanced Micro Devices indicated an uncertain outlook for the market. As a result, IDC is conservative about 2009 and will be lowering its upcoming unit forecast for the year, the report said.
By segment, while the mobile processor segment grew aggressively, the server segment was soft, Rau said.
Third-quarter vendor highlights based on units shipped:
Intel claimed an 80.8 percent market share, a gain of 1.1 percent.
AMD finished with 18.5 percent, a loss of 1.2 percent.
Via Technologies earned a 0.6 percent share.
Intel is seeing solid results for the Atom processor--possibly giving the first significant evidence of Intel's likely future as a bigger provider of low-cost processors.
Intel confirmed on Tuesday that Atom is hot. CEO Paul Otellini said that Intel didn't meet demand in the third quarter and still can't meet demand. "We did not meed demand in Q3 for the product. We are up again substantially in the fourth quarter. Our expectation is that we will meet demand by the end of the year," Otellini said.
And many of the questions from analysts in Tuesday's earnings conference call revolved around Atom as it delivered $200 million in revenue to Intel in the quarter. "Between the microprocessor and the chipset, we did have a couple hundred million dollars of revenue from Atom in the third quarter," Chief Financial Officer Stacy Smith said. "We do expect that to grow rapidly in the fourth quarter."
What Intel appears to like most about Atom is what it calls "margin characteristics." In other words, it's a low-cost processor, but it yields better margins than typical inexpensive chips like the Celeron. "What we've seen in the third quarter is a very healthy product margin," Smith said.
"On a dollar basis it's equivalent to what we see in Celeron and on a product margin percent it's higher. So if you look at it relative to our low-end mainstream stack, it's generating nice product characteristics," Smith added.
Here's the question: if more and more consumers--particularly in places like China and India--opt for Netbooks with the Atom processor rather than traditional notebooks with standard Intel mobile processors, what kind of an impact will this have on Intel's profits?
Intel claims cannibalization of (higher-margin) mainstream mobile processors is not taking place. "To date we haven't seen any evidence of cannibalization. And believe me we're looking. It's something we watch very carefully," Otellini said. "And one of the best pieces of evidence that we have is the strength in the core mobile business independent of Atom," he added.
But tighter consumer budgets worldwide could push more people toward Netbooks. A Gartner report came out Tuesday that said third-quarter PC shipment growth was driven by sales of sub-$500 notebooks. Netbooks typically sell for less than $500.
Other notable comments in the earnings conference call:
• Inventories: Taiwan and channel customers cutting back, consumer traffic overall is light--Otellini
• Intel-Micron: Joint Singapore flash memory chip fab now on hold
• Corporate segment: In Q4, corporations to show softness as IT gets rationalized in macro environment
• Nehalem processor: Intel started shipping Nehalem processor, announcement coming in November
Nvidia has become a Silicon Valley hot spot for rumors. One is tied to an analyst downgrade Monday, the other to the rumored Apple MacBook refresh.
An analyst rekindled speculation Monday that the world's largest graphics chip supplier would sell off its chipset business, while rumors persist that the company would play a larger role in an expected refresh of the Apple MacBook.
Nvidia graphic on its notebook home page
(Credit: Nvidia)Nvidia shares fell Monday after a Pacific Crest analyst issued a negative report on the company's prospects. In the report, the analyst said "our checks confirm" that Nvidia will exit the chipset business next year.
Nvidia chipsets--sometimes referred to as MCPs--serve as supporting silicon for the company's graphics processors. In the past, Nvidia has denied that it will exit the chipset business.
The analyst also speculated that Nvidia will pre-announce negative results for the third quarter (ended October). Nvidia has been dogged by negative press and analyst reports after it disclosed issues with its processors and chipsets back in July.
If that wasn't enough, Pacific Crest said Nvidia may see share loss in the notebook market next year as a result of a future refresh of "Montevina" graphics silicon from Intel.
But not all is lost. On the upside, rumors persist that Nvidia will play a large role in an expected MacBook refresh this month. The latest rumor holds that Nvidia is showing off prototypes internally of upcoming MacBooks with new Nvidia silicon.
Some are even pointing to a graphic on the Nvidia notebook home page of a slim notebook design as a possible MacBook design--though a more plausible explanation is that it's simply generic artwork.
Apple uses Nvidia graphics chips in its high-end MacBook Pros, but the MacBook and MacBook Air use Intel integrated graphics silicon. One of the latter two could be recipients of new Nvidia graphics chips.
Nvidia would not comment on the rumors.
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