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Nvidia loss reflects lingering chip defect issue

Nvidia posts a smaller loss than the year-earlier period but is still grappling with costs related to a chip defect first addressed by the company last July.

Updated at 6:40 p.m. PDT, adding Microsoft Windows 7 and Apple Snow Leopard discussion.

Nvidia on Thursday posted a smaller loss than the year-earlier period but the graphics chip supplier is still grappling with costs related to a chip defect first addressed by the company last July.

Shares of the Santa Clara, Calif.-based company were up in after-hours trading.

Nvidia reported a second-quarter loss of $105.3 million, or 19 cents a share, better than the year-earlier period when it posted a loss of $120.9 million, or 22 cents a share.

Revenue was $776.5 million, down 13 percent, from $892.7 million reported in the second quarter of last year.

Excluding items (non-GAAP basis), Nvidia reported a profit of 7 cents a share, better than analyst estimates of a loss of 2 cents a share.

Jen-Hsun Huang, the president and chief executive officer, said the company's "business is recovering. Product demand is improving, and our strategic investments are leading to new growth." Nvidia expects revenue in the third quarter--ending October 25, 2009--to be up 5 to 7 percent over the second quarter.

Gross margin, a critical profit indicator, was 20.2 percent, above the 16.8 percent reported last year.

However, Nvidia's results were negatively affected by an additional net charge of approximately $119.1 million "to cover costs related to a weak die/packaging material set that was used in certain versions of its previous-generation chips. Although the number of units impacted by this issue remains consistent with the company's initial estimates a year ago, the cost of remediation and repair of impacted systems has been higher than originally anticipated," the company said in a statement.

In July 2008, a $196 million reserve was accrued for the purpose of supporting affected customers around the world. The weak die/package material combination is not used in any products currently in production, the company said.

As early as 2007, Hewlett-Packard listed laptop models affected by the defect. In August 2008, Dell also listed affected models. And Apple said in October that it would repair faulty graphics chips.

On a more positive note, Huang said that future operating systems from Microsoft and Apple will "stimulate growth" in 2010 because of new technologies that take better advantage of the graphics processor, making it a "powerful co-processor" that works in conjunction with Intel processors.

Microsoft's Windows 7 and Apple's Snow Leopard will including programming features called Direct Compute and OpenCL, respectively, that accelerate graphics-based processing for everyday computing tasks.