Nvidia's spin borders on the truth

THE NVIDIA Q1 financial conference call was the usual mix of overreaching self-congratulations and dodged questions. It sounds good on the surface, but if you know what is really going on, you wonder how they can say what they do and get away with it.

The call started off in the usual way, with CEO Jen-Hsun Huang doing the 'we are the greatest in categories we made up' thing. The hype was all about Physx, GPU compute, and mobile. All were said to be doing really well and are - just as they have been every quarter of the past two or three years - expected to explode real soon now.

If you recall, two summers ago, GPU compute was supposed to make up 5 per cent of Nvidia's sales by the summer of 2008, according to its Investor Relations propaganda. Summer 2008 rolled by, GPU compute sales were at 0.5 per cent, and no one was talking about the cost of those sales. The company claimed that there were none, that people were getting huge grants to use those products and, well... they just smiled. Intel said much the same about the Second Coming Itanium chip Itanic for years.

The same story applies to Tegra. It was supposed to have products using it out about three quarters ago, but now Nvidia is on the verge of almost nearly having products ready. Nvidia's executives won't say who the customers are, but they are huge, trust them, they've never lied about it before. Nope, 100 per cent honesty, just ask them.

Moving right along, you learn something new every day. When asked about how Ion was doing, Jen-Hsun reported a huge number, $180 Million. When asked about how that number was derived, check out his response to the question from analyst Rajvindra Gill.

RG: "Right, but are you including the 9400M that you are showing to Apple as the... as Ion or is this actually two-thirds of that $180 million design wins with other companies outside of Apple that are using Ion?"

J-H H: "We don't distinguish the two... I mean, it's the same processor from our perspective. The... we call it, the platform, Ion, and increasingly people are calling the chip Ion, and so we don't distinguish the two, whatever people want to call it. I mean, when people buy the chipset from us, they call it Ion. When they put it into the box and they brand it from the outside, because Geforce is such a terrific brand and contributes so much to the brand value of the end product, people call it Geforce. Do you see what I'm saying? So people buy the Ion but they sell it as a Geforce."

Who knew? Ion is not only a brand now, but it encompasses any Geforce integrated GPU. Wow. If I didn't know any better, I would say that this is a blatant attempt to inflate category numbers using intentionally misleading information. Luckily, the analyst in question is not so easily duped as Jen-Hsun might have hoped.

Then they go on to talk about Physx, and tout how it is a huge sales success. According to the conference call, there are all of two (2) games that use it. But one is just eye-candy. Wow, and the pipeline is full, just ask them. But don't ask game reviewers, they don't seem to agree.

They don't agree with Nvidia's take on this week's flavor of Ion either. Remember, this box has twice the CPU power of the one in the Revo. Can you say high return rate? Oddly, Nvidia didn't mention those numbers during the conference call.

So, as with all self-serving spin, the end result is in the bottom line. Nvidia didn't break everything out where possible, but for one where it is possible - the professional line - sales were flat, quarter over quarter. With desktop sales up 50 per cent, notebooks up 28 per cent, and AMD based chipsets up 94 per cent, zero percent growth in a market that is such a stunning success is... at least odd. One might almost be tempted to say that Jen-Hsun's statements are not backed up by the numbers, but that would be using facts, and Nvidia really hates it when you do that.

That brings us to the next thing, margins. Recently, Nvidia's margins were in the mid-40s. This quarter, analysts were expecting mid-30s. They came in at 28.6 per cent GAAP, 30.6 per cent non-GAAP. Whoopsie! It was half explained away, but I don't buy the explanation for a minute.

A much better explanation is what we have been hearing from OEMs for a couple of quarters now, that Nvidia seems to be addicted to marketshare and will try to maintain it even at the cost of cash losses. If you have cash to burn, that works out, but when times are tough, it gets a bit more scrutiny. Just ask the game developers who used to get sacks of TWIMTBP cash.

In any case, Nvidia's marketshare took a jump in Q1. What it is not telling you is that marketshare growth was mainly due to the company dumping about a million units of 65nm DX9 inventory that it had previously written off.

If you do the math, that is more than enough to make up for the marketshare unit gains. What is a bit more troubling is that the margins for discrete GPU sales were not disclosed. Using the numbers that Nvidia did give out, the totals don't add up unless GPU margins were about half of the overall corporate margins. That is bad. Bad bad bad. Your core business should not be struggling to have double-digit margins.

Why are the margins so low? It's simple, ATI has a better product that is cheaper to make. AMD can force prices down and still make money. ATI, the division, is making money, but Nvidia is not. But it is growing marketshare! Lose money on every one sold but make it up in volume is not a healthy long-term corporate strategy - it's an old Lucille Ball and Desi Arnez sitcom skit! You can't say we didn't tell you so. And think about this, consumer price levels for GPU parts and everything else are way down since that article was written. GPU prices are down about 30 per cent in just the last two months, for example.

However - margins, smargins - Nvidia is the leader in visual computing, at least until it makes up a new category. And to top it off, things are looking good. Once again, Jen-Hsun said that the 40nm ramp was doing well. To use his exact words: "Let's see... the ramp is going fine." Bullsh*t.

No really, bullsh*t. He should know better than to say that. The only reason it isn't dishonest is that he can sleaze his way out of what "fine" actually means. Nvidia was supposed to beat ATI out to market with 40nm parts. Nvidia was slated for November, ATI for December.

The ATI parts, the RV740 / HD4770 came out in May. The Nvidia GT216 / 218 were supposed to beat them out by a few weeks. Three months ago, the parts were supposed to have been out by this time. Right now, the updated schedule - due to a ramp that is going "fine" - targets June or July. Sources in the Far East say things are looking more like late June, and slipping.

Toss in that the GT300, another 40nm part, was delayed 'til 2010, and it makes you wonder what the Nvidia definition of "fine" is. Boils? Cafeteria food? If its 40nm ramp is "fine", so is the mess in Iraq. What I suspect is going on is that Nvidia hasn't been able to get its 40nm chips up to an economically viable yield.

The now dead GT212 was a die-shrink of the GT200b from 55nm to 40nm, basically a margin improvement part. It is not to be. The GT214 / 216 / 218s are basically GT200 derivative parts, but we are also hearing that they are shrunken G92s. In any case, the largest of them, the GT214, failed like the GT212. It was reworked with an eye toward actually functioning, and evolved into the GT215.

The problem here is that the 214 to 215 evolution took so much die area that it is unlikely to ever be profitable. If you can't make a 130mm^2 chip on 40nm, what hope do you have of doing a 500mm^2 part?

Yeah, the new savior chips are the old chips but smaller. Given they are now eight (8) months late, best case, and don't have GDDR5, it is unlikely that they will be profitable at competitive price points. Toss in abysmal yields, and the 2009 profit margins are more or less non-existent. Best-case timeframe for a competitive mid-range part, Q2 of 2010.

That brings us to the GT300. Jen-Hsun artfully dodged the DX11 Windows 7 question. Why? AMD is on record saying that it will have a DX11 part out for the Windows 7 launch, and our sources back this up. Nvidia will be, best case, almost two quarters late to the party. Let me repeat that, Nvidia will have no parts out for either the Windows 7 launch or Christmas, so it is all ATI this year.

How they can spin this as good is beyond us, especially if you know the performance levels of both parts. Nvidia's strategy of GPU compute is going to be impacting its performance this round, hard. Nvidia took a stupid strategy with the GT300, and that is going to bite it.

Graphics performance sells graphics cards, GPU compute does not. It may be an adder, but without a base, it goes nowhere. ATI will likely have derivative parts out before Nvidia has its first DX11 part in volume, and ATI's current die area and therefore cost advantage should carry over as well.

If all goes well, Nvidia can hope to start competing for marketshare again next spring. Until then, things are only going to get worse for the green team.

Nvidia's executives can spin the situation all they want, but all the analysts I talk with understand the credibility gap the company has by now and seems bent on expanding.

Nvidia is not competitive, and it has nothing in the pipeline that will fix the problem for the next three to four quarters. Until then, well... things look ugly at best for Nvidia. You can only spin so hard before you throw up. µ