interesting Forbes article on Nvidia:
forbes.com
"Crying Wolf
Elisa Williams, 04.15.02
Graphics chip maker Nvidia wants to sex up your PC--but without bowing to Intel. Guess which one will prevail.
For a guy staring down the barrel of a very big gun, Nvidia Chief Jen-Hsun Huang seems awfully confident. "Nvidia has transcended being the most important 3-D graphics company in the world," he intones. "We are now on our way to becoming one of the most important electronics companies in the world."
Never mind that Nvidia is now enmeshed in two tangles with the Securities & Exchange Commission. From August to November the SEC filed insider-trading charges against 12 of its employees, charging they bought company stock and options after learning Nvidia had won a contract for Microsoft's new Xbox game console. Two have settled civil charges, and one was found liable. Three have pleaded guilty to criminal charges. In January the SEC raised questions about Nvidia's costs and reserves during certain quarters; that inquiry is pending.
And never mind, too, that Huang is about to bet a big part of Nvidia's future on a hotshot new chipset, the Nforce--without being able to sell it to makers of the latest Intel-based PCs that, by next year, may have 80% of the entire market. Huang, bolstered by technological pride and a grim resolve to maintain the company's 38% gross profit margins, balked at paying Intel for a license to let the Nforce work with the Pentium 4 microprocessor. He felt Intel was demanding too much; such license fees run an estimated $5 on each $20 chipset. Nvidia's rivals ATI Technologies, Acer Laboratories and others paid up and could outrace Nvidia in next-generation PC graphics.
Not to worry:Huang, who owns an 6% stake in Nvidia worth more than $500 million, is betting that the cool technology inside Nforce will persuade Intel to cave and push Nvidia beyond the PC and into videogames, cell phones and TV set-top boxes. And Nforce does indeed buttress a PC's microprocessor to let it churn out stunning animation and rich surround-sound audio that were heretofore unachievable on the cheap. The $40 chipset can turn a plain old PC, powered by the Pentium-like Athlon microprocessor from Advanced Micro Devices, into a home theater running a full-screen rendition of Charlie's Angels.
The problem is ensuring that the industry knows about it. The movie wasn't on display at the massive developer show that Intel hosted in San Francisco in February. At the Nvidia booth on the main floor, Huang showed only his older, graphics line that doesn't require any Intel license; he felt it would be wrong to show Nforce on Intel's turf. To get a peek at Nforce and the flick, attendees had to walk a block to a darkened hotel suite, far from the Intel crowd.
It was a rare display of deference for Huang, who is just brash enough to think he can win. It is more of a long shot than investors realize:Nvidia has a $6.7 billion market capitalization, roughly five times sales, and its stock trades at a price-to-earnings ratio of 45. Intel is expected to debut its own chipset, the 845G, in the second quarter. Rivals Via and ATI offer feature-packed chipsets for as little as half the price of the $40 Nforce.
But Nforce has its fans. Microsoft buys a version of it for Xbox and is expected to use 6 million chipsets a year.
Thanks to AMD's Athlon, which doesn't require a license, Nvidia's new chipset is in Compaq and Micron PCs. Nvidia, of Santa Clara, Calif., has since cut deals to supply Nforce for F-22 fighter jets and Exertris exercise bikes. Nforce is Nvidia's most important new product and is expected to provide 30% of its $2.4 billion in expected sales for fiscal 2003, including Xbox chips, and the bulk of its revenue in five years. More important, given the sluggish PC market for Nvidia's older lines, Nforce must thrive to keep the company growing at current rates.It earned $177million on $1.4 billion in revenue in fiscal 2002, with the vast majority coming from graphics chips like its GeForce, which wholesales for about $20.
Last year about 46% of the 161 million PCs built used new graphics chipsets; next year the share will rise to 50%, says Mercury Research. The Nforce opens up a far larger market, though.
So far Huang has defied the odds in the cutthroat graphics business, known for one-hit wonders that fizzle after a year or so. His GeForce chip has been a top seller for more than two years. Nvidia set out to be different from the get-go. Huang, a chip designer at AMD and LSILogic, cofounded the company in 1993 with $20 million from Sequoia Capital and others. After two ambitious products that bombed, Huang switched his focus to high-end graphics chips for PCs. He boasts that his chips, by assuming arduous visual rendering tasks, do more to boost PC performance than buying a faster microprocessor.
Nvidia's chips double in performance every 6 months, surpassing even Moore's Law and its 18-month time frame. Nvidia can do this by testing new chip designs on a special hardware simulator. Bugs are caught and fixed before the first silicon is ever etched. The frenetic pace pervades Nvidia's headquarters, where swarms of workers wolf down free buffet lunches and dinners in the cafeteria so they can rush back to work.
The new Nforce moves graphics processing from a stand-alone chip into the chipset, an essential building block that serves as the link between the microprocessor and the rest of the system. Its chipset crams processors for media, networking and graphics into two ceramic packages that later could be adapted to include a microprocessor core, letting it run a plethora of devices on its own.
Huang started work on Nforce with AMD in early 2000. Its graphics chips were already hot sellers. When the stock hit $100 in 2000 (or $25 adjusted for two stock splits), top executives delivered on a dare they had accepted one evening over drinks in the fall of 1999. Huang got his ear pierced. The head of human resources had a nipple pierced. The sales chief got an Nvidia-logo tattoo on his rump, and the marketing boss got one on his leg.
While Nforce was in the lab, Huang dealt with Microsoft on the Xbox. "They came to us with many deals that didn't make sense. It was just very draconian," he says. He hung in and got about $55 apiece for Xbox chipsets, far more than the $30 Microsoft pays for Intel's Pentium III to run the Xbox.
So far that bravado hasn't worked on Intel. "The royalty they are charging others was too rich for our blood," Huang says. He hopes eventually to strike a deal, but insists that Intel respect the intellectual- property value of Nforce. "I know that one of these days they're really going to see that they ought not to be afraid of us," he says. Intel, afraid? It's a fantasy worthy of a videogame." |
