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Nvidia cashes in on Xbox chips

The leading graphics chipmaker reports a big jump in earnings for its second quarter, which it attributed to its deal to supply chips for Microsoft's Xbox.

Nvidia, the leading maker of graphics chips for PCs and other devices, reported modest sales gains and a sharp jump in quarterly profits Thursday, which it attributed to its deal to supply chips for Microsoft's Xbox game machine.

The company reported net income of $24.2 million, or 14 cents a share, for its second quarter, which ended July 27. That compares with income of $5.3 million, or 3 cents a share, in the same period a year ago and the consensus estimate of 11 cents a share from analysts polled by research firm First Call.

Revenue for the quarter was $459.8 million, compared with $427.3 million a year ago.

In a conference call with financial analysts following the announcement of the results, Nvidia CEO Jen-Hsun Huang attributed much of the growth to increased shipments of Xbox parts to Microsoft. Nvidia won a contract several years ago to supply the graphics processor--the most expensive part of a game machine--for the Xbox.

The contract has been troublesome for Nvidia, which went through lengthy arbitration with Microsoft to settle pricing issues. Huang deflected speculation about whether Nvidia will work with Microsoft on the next version of the console, saying the company is focused now on meeting a jump in demand in anticipation of holiday sales.

"Our most important job is to help the ramp into the holiday season, so we're building as fast as we can," he said. "We have to stay really focused on that."

Huang also highlighted Nvidia's recent purchase of MediaQ, which makes graphics chips for mobile phones and other portable devices. He declined to estimate expected sales from the new business, but he predicted mobile devices will account for a significant part of Nvidia's sales in coming years.

"My sense is that the cell phone market is going to be several hundred million units a year...and the display element of that phone is going to become more and more important," he said.

On the PC side, Nvidia has finally begun to see significant sales from GeForce FX, the oft-delayed graphics chip, whose tardy release put Nvidia in a speed race with rival ATI Technologies. Manufacturing costs for the GeForce FX continue to be high, however, due to challenges associated with adopting new chipmaking technologies.

"Cost improvement is a continuous thing," said CFO Marving Burkett. "We're working very hard at it." Nvidia recently signed a contract with IBM for chipmaking services.