$196M should cover costs of bad graphics chips, Nvidia says

Nvidia took a US$196 million warranty charge to cover the cost of fixing bad graphics chips used in laptops.

Nvidia took a one-time warranty charge of US$196 million against its second-quarter revenue on Tuesday, saying that amount should cover the cost of replacing bad Nvidia graphics chips used in a range of laptop models from different manufacturers. Chairman and CEO Jen-Hsun Huang stopped short of ruling out additional charges related to this problem in the future, but said Nvidia was not obligated to replace the bad graphics chips.

"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."

"Obviously, this isn't something that we absolutely need to do but we stepped up to do it because we think it's the right thing to do," he said.

Nvidia reported a second-quarter loss of US$121 million on revenue of $893 million, partly due to the one-time warranty charge.

Some Nvidia graphics chips used in laptops have failed at alarmingly high rates, an issue the company attributed to weak silicon die and packaging material used in the chips.

Twenty-four laptop models sold by Hewlett-Packard and 15 Dell laptop models are affected, underscoring the breadth and severity of the problem.

Affected laptops may have displays that do not function, display random characters or lines on the screen, or simply fail to start when turned on, the computer makers said.

To address the problem, Dell and HP have issued BIOS updates that run laptop fans continuously or more often in an attempt to lower system temperatures and reduce the heat stress on the graphics chips that is causing them to fail. The companies have also extended two-year warranties to some users hit by the problem.

Users with a graphics chip that fails after their laptop warranty expires appear to be out of luck when it comes to getting a replacement.

The size of the charge recorded by Nvidia to cover the bad graphics chips suggests the scale of the problem is significant, despite Nvidia's claim that only a small percentage of chips have failed. The charge taken by Nvidia is nearly eight times the US$25 million the company 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 one-time warranty charge came in at the top end of the company's estimate of US$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.

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