The costs of resolving a chip-packaging problem that affected some Nvidia graphics chip could impact the company's results.
The chip-packaging problem, revealed in May, causes some Nvidia graphics chips to fail due to thermal stress. The problem does not affect all of the company's products and is so far limited to chips used in some laptops, including models sold by HP and Dell.
"Only a very small percentage of the notebook chips that have shipped are potentially affected and the problem depends on a combination of environmental conditions, configuration and usage model," said Derek Perez, an Nvidia spokesman, adding that graphics chips used in desktops are not affected.
While only a small percentage of chips may be affected, the cost of fixing the problem will be significant. Nvidia announced on July 2 it would take a one-time charge of $150m to $200m during the second quarter to cover costs related to the problem, including the cost of replacing affected chips
Underscoring the severity of the problem, the expected charge is six to eight times larger than the $25m Nvidia has set aside on its balance sheet to cover the cost of product returns and warranty liabilities across its entire product line - a provision that is based on historical return rates, and does not include costs related to the chip-packaging problem.
Nvidia will likely disclose more information about the chip-packaging problem when the company releases its second-quarter financial results on August 12.
In particular, observers will be watching to see if the company takes a larger than expected charge or expects future charges related to the problem, moves that would signal the problem is more serious than Nvidia's management initially expected.
Conversely, a charge that is in line with expectations, or lower, would signal the company believes it has the problem under control.
The packaging defect comes at a bad time for Nvidia. Rival AMD is rolling out a new, more powerful graphics chip, the R700, and Intel is ready to introduce its own discrete graphics processor, called Larrabee, next year. Any setback that affects Nvidia's relationships with computer makers and other customers could have lasting consequences - something the company itself warned about in its last earnings announcement.
"A product recall or a significant number of product returns could be expensive, damage our reputation and could result in the shifting of business to our competitors," Nvidia said in a May 22 filing with the US Securities and Exchange Commission (SEC).
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