Nvidia's 10-K filing explained

We put Nvidia's latest filing to the SEC under the microscope to discover the real current state of the video card company.

Nvidia just put out it's annual 10-K filing with the SEC, effectively a state of the company address. In it, there are a few gems.

You can read it here, but be warned, it is as dry as toast, but still somehow makes you feel slimy when reading it. They never miss an opportunity to pat themselves on the back.

The interesting bits start out when they mention that they lost a point in marketshare, going from 64 per cent to 63per cent. This may not sound like much, but it very carefully omits two key points. The first is the dates, they claim that it covers FY/09, which for them goes from Feb 1/08 to Jan 31/09, but the numbers they use to make the claim are based on Dec 07 to Dec 08 Mercury reports.

Now this may seem like an innocent enough thing, eminent plausible deniablity there, but it is carefully crafted to avoid bad news. Remember this? It took place in January 09, their marketshare plunged in that one month. Later on, Nvidia goes on to say "Revenue in the second half of fiscal year 2009 declined by 33 per cent when compared to revenue from the first half of fiscal year 2009," almost all of that happened in January 09. With the carefully picked dates, Nvidia avoids having to say this for another year.

One other note here, the word margin is only used once in the 10-K, and that is only in passing. This and the marketshare are tied together though. Nvidia seems hell bent on keeping market share at any cost, and it does cost. They are selling their highest volume enthusiast part at a loss now, and have spent the last three to four quarters gutting margins to keep OEM sales up. We have heard numerous times that they are selling at a loss to support market share, but have been unable to get hard numbers from OEMs. There has to be a reason the company is willing to flush money to prop up market share numbers, but we can't explain it.

In any case, that strategy failed on the notebook side, with their market share of the standalone GPU business dropping from 75 per cent to 63 per cent. If you count Apple in that, the rest of the market must have tanked badly for them. The explanation is really dodgy, trying to cling to the fact that notebook GPU unit sales were up, but that is because of the shift away from desktops to notebooks overall. It is a second rate amateur attempt at deflection.

From there they go on to 'professional' graphics, and proudly proclaim that they are leading the market. True. They proudly omit the fact that they are bleeding marketshare here to ATI, and this is hurting their margins bad. If you follow Nvidia, ask them for specific marketshare numbers in this segment, it is extremely germane to their profits. Then go look at what Dell and HP sell in that space. Keep an eye out here, this is the engine that drives Nvidia's ability to play pricing games elsewhere, and it is falling apart.

The next interesting part is under 'Product Defect'. No, they don't come clean. No, they don't admit who they shafted, it is just more of the same, "Not our fault," waffling. The stunning bit? "While we have not been able to determine a root cause for these failures, testing suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors." Yes, they still claim to not know why it is happening. Are they a semiconductor company or a late night waffle house?

But it gets funnier, compare that to the 8-K they filed in July which said, "While we have not been able to determine a root cause for these failures, testing suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors."

Word for word. Looks like they haven't bothered to look since July, that or they are totally incompetent. They are still blaming partners, what a lark. Hint guys: I figured it out, read this, there is still time to update the 10-K and link it. Heck, we won't even charge you for using it.

But the humour doesn't stop there. From the 8-K: "We have developed and have made available for download a software driver to cause the system fan to begin operation at the powering up of the system and reduce the thermal stress on these chips. " From the 10-K: "We have worked with our customers to develop and have made available for download a software driver to cause the system fan to begin operation at the powering up of the system and reduce the thermal stress on these chips."

We thought it was a BIOS update that runs the fans permanently to annoy victims of the defective chips, but since they are working with customers, who am we to quibble.

Looks like zero has been done here since July either. Then again, maybe just opening the door to some really harsh discovery from the impending lawsuits, won't the 'customers' be pleased there.

It is astounding that Nvidia still won't come clean on this, and the firm denies they understand the problem. Then again, they claim to have fixed it, but don't understand it, and won't tell the victims either. How can they say this with a straight face, much less sleep at night?

Last up is an interesting note on market share. Nvidia ships product when it is sent to AIBs. ATI does it differently, so when a chip goes out the door and sits in a warehouse, it is sold from Nvidia, but not from ATI. A warehouse full of chips is market share for one side, not for the other.

This is explained in the section called Product Revenue, and has huge implications for the market share numbers mentioned above. When AIBs have huge inventory that they will have to liquidate later in the quarter, this may hammer Nvidia's marketshare numbers, keep an eye out. There is at least one more 'January surprise' out there for them, but they won't talk about it if you ask.

Overall, the 10-K puts out a self-congratulatory note that simply isn't backed up by facts. Nothing went wrong that was their fault, and minefields are carefully danced around. Basically it is more of the same