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Nvidia's Tegra mobile-chip revenue falls off a cliff in Q2

The company's mobile-chip business drops sharply, down 71 percent from the previous year.

Nvidia's Tegra 4 chip ships in the company's Shield gaming device.

Nvidia on Thursday reported a steep drop in revenue for its Tegra processor business, heightening concerns about its prospects in the mobile market.

The company said Tegra revenue totaled $52.6 million in the fiscal second quarter ended July 28, down a whopping 71 percent from the previous year and off 49 percent sequentially.

Nvidia actually generated more revenue from its patent license agreement with Intel -- $66 million -- than it did from its entire mobile business. Tegra has remained a relatively small part of Nvidia's overall business, but it's a key area for the company's future.

"These decreases were largely due to lower unit shipments of Tegra 3 processors as customers ramped down production of Tegra 3-based smartphones and tablets, as expected," Nvidia said. "They also reflect lower revenue associated with the sale of embedded products and game consoles, offset by increased revenue from automotive products."

The company added that it has ramped up production of its next-generation processor, Tegra 4, in anticipation of new devices from customers in the second half of the year.

Nevertheless, Karen Burns, Nvidia's interim chief financial officer, acknowledged during a conference call that Nvidia is "disappointed with the size of the decline" for Tegra. Executives noted that Tegra sales won't be flat this year as the company had earlier projected.

Tegra revenue totaled $750 million last year, Chief Executive Jen-Hsun Huang said, but this year's total should be about $200 million to $300 million below that.

"Even though the second half will be a big increase from the first half, we're not expecting the increase in the second half to make up for the full year last year," he said during the conference call.

Nvidia expects Tegra revenue to be "up significantly" in the third quarter over the second quarter as the company starts to ship Shield and products for its new design wins. The company also expects further growth in the fourth quarter.

Nvidia is traditionally known for making graphics processing units, or GPUs, found in computers and game consoles, but that business faces an uncertain future as the PC market struggles. Nvidia has been counting on its Tegra mobile chips to help offset weakness in its core PC market, but so far it hasn't been enough. Its presence in smartphones has been minimal, and the bulk of Tegra sales are for a couple of tablets, the Google Nexus 7 and the Microsoft Surface RT. Qualcomm recently replaced Nvidia in the Nexus tablet, and the Surface has largely flopped.

Nvidia recently released its Shield gaming device to appeal to its core user base. Shield has largely received good reviews, though it has faced some criticism about a lack of games. Shield hit the market a few days after the end of the fiscal second quarter, and Huang said stores have sold all the products they've received.Nvidia is increasing production to give partners more inventory.

Nvidia in April warned that its Tegra business wouldn't grow this year because it pushed out the release of its newest chip by a quarter to get 4G LTE ready. The company introduced Tegra 4 at the Consumer Electronics Show in January and then launched its chip that integrates LTE with its app processor, Tegra 4i, a month later.

While Nvidia has blamed Tegra weakness on its chip release schedule, tougher competition likely also plays a role. Qualcomm, the dominant chip provider for smartphones, has been gaining more traction in tablets while Nvidia's smartphone push hasn't been as quick as hoped. It's unclear how many design wins Nvidia has secured for Tegra 4 and Tegra 4i.

Overall, second-quarter results were actually better than anticipated, though Nvidia provided weak revenue guidance for the current period.

Nvidia posted net income of $96.4 million, or 16 cents a share, down from $119 million, or 19 cents a share, a year earlier. Analysts had expected 13 cents a share.

Excluding items, earnings totaled 23 cents.

Revenue, meanwhile, fell 6.4 percent from the previous year to $977.2 million. Nvidia in May had projected revenue of $975 million, plus or minus 2 percent.

For the fiscal third quarter, Nvidia anticipates revenue of $1.05 billion, plus or minus 2 percent. Analysts recently projected sales of $1.1 billion.

Updated at 2:50 p.m. PT with comments from conference call about Tegra and Shield.