Drastically changing market demand and escalating competition from rivals have imposed considerable pressure on Nvidia in 2002. However, with the launch of its latest high-end NV30 graphics chip, the company expects to reap great results once more. In an interview with DigiTimes, company president and CEO Huang Jen-hsun expressed his satisfaction and high hopes for the new product, and stressed that Nvidia enjoys a sound operating foundation with US$900 million in cash on hand.

Q:
Despite its fast growth in the past three years, Nvidia suffered losses in the third quarter of its 2003 fiscal year (ended October 27, 2002). Could you tell us about Nvidia's current operating condition and its primary challenges in the next three years?

A:
The third-quarter losses, a first-time situation since I have taken the post as CEO, were mainly caused by a charge of more than US$600 million for buying employee stock options. The system is to protect employees' rights. Though the amount is big, we think the investment is worthwhile. Excluding this charge, Nvidia maintained its record of turning in profits every quarter. In the past four years, we had never experienced losses, something shared by very few companies in Silicon Valley.
For companies that lack healthy operating structures, the economic downturn could have done great damage. However, for enterprises that possess advantages, the downturn may be a wonderful opportunity for business growth. Nvidia currently has a cash position of US$900 million. With a robust operating structure, the company is capable of coping with any operating changes.
In the next three years, Nvidia will continue concentrating on developing the GeForce (graphics chip) and nForce (chipset) lines. In the graphics chip market, Nvidia has not only aspired to take back its position as the performance leader in the desktop sector, but also expects to be the best in the notebook-use chip market. As for the chipset business, with the first-generation nForce successfully entering the OEM sector, which also introduced Advanced Micro Devices (AMD)-platform products to the enterprise sector, nForce2 chipsets will target the clone market.

Q:
What's Nvidia's present progress in dealing with the inventory problem that emerged in the first half of 2002? ATI Technologies has been making aggressive moves in the desktop graphics chip market. What product plans does Nvidia have for the fourth quarter to face the competition?

A:
At present, market demand has been fluctuating quite a bit, and judging from the forecasts provided by our downstream clients, visibility remains limited. However, as a chip supplier, what we feel about the market is something between the results reported by wafer foundries and motherboard makers.
About the inventory problem we suffered in the second quarter, the market demand that disappeared at a faster-than-expected rate was the main culprit, which also prevented us from reaching our original sales target of US$600 million for the quarter. However, given Nvidia's strong brand and its high market acceptance, inventory has already fallen from US$350 million to US$250 million worth. The problem is expected to be completely resolved soon.
Currently, market demand appears rather strong, so Nvidia holds a conservatively optimistic view about the fourth-quarter business. In addition to the shortage of NV25 chips, great sales of AGP 8x-supporting NV18 and NV28 chips, given their encouraging price/performance ratio, have also pushed the inventory levels of the two chips below the normal 45-day standard. To build up the basic inventory, we started placing extra orders to Taiwan Semiconductor Manufacturing Company (TSMC) in November.
With good market planning, excellent partners and our new high-end NV30 chips launched in the fourth quarter, Nvidia will return to the position of performance leader in the desktop graphics chip market.
Nvidia has invested two years of research and nearly US$400 million to develop the NV30 chip after acquiring 3dfx. The NV30 is not only the product that Nvidia has devoted the most resources to in the company's history, but will also be the product that sets the mainstream specification in the next two years.

Q:
Nvidia's launch of core logic chipsets has been regarded as a strategy to obtain a closer connection with the PC platform. Is Nvidia considering entering the SoC (system-on-chip) or processor markets in the future?

A:
If dividing the PC market into the medium-range to high-end and the low-end segments, we can see that the former is affected greatly by production technology, specifications and performance, while the latter is much more influenced by price. SoC products apparently are not suitable for the medium-range to high-end marketplace, especially as the specification changes in processors, graphics chips (called graphics processing units by Nvidia) and south bridge chips (media communications processor, MCP) - the three major product lines in the PC chip market - usually take different paces. The low-end sector, on the other hand, features more mature standards. The key issue here is the price.
At present, Nvidia has no plans of developing the SoC and processor markets. With processor performance reaching a certain level, the focus of the PC market will now gradually shift to the overall system and networking capability. If it had US$100 million on hand, Nvidia would invest 60% in graphics chip development and 40% in MCP development. A better response to market changes can be ensured by continuing research investment.

Q:
With its business focus, Nvidia successfully became the leading graphics chip supplier in the desktop market after Intel dropped out of the graphics chip sector. Lately, Nvidia has also extended its operations into the notebook graphics chip and core logic chipset sectors. Will the moves dilute research resources? Could you tell us about Nvidia's plans for manpower allocation and research expense management?

A:
Despite the market downturn, Nvidia has still invested around US$340 million in R&D in 2002, of which 75% was dedicated to graphics chip lines and 25% to chipset products. The investment figure has not only grown significantly from US$180 million in 2001, but also far exceeds the US$2.1 million when we established Nvidia 10 years ago.
Nvidia currently has a chip design team of 1,200 people, which is one of the largest teams in the fabless IC design industry. About 800 are involved in graphics chip development and 400 in nForce chipset development.
This interview was translated from a Chinese article.

Source: DigiTimes

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