LOS ANGELES (Reuters) - Microsoft Corp. has forced graphics chipmaker Nvidia Corp. into arbitration over the price of chips made for the Xbox game console, and Nvidia said on Monday that if it loses the case it may have to make the chips at a loss.
The net result could be either a gain of $13 million as deferred revenues from the Microsoft deal comes on to the books if Nvidia wins the case, or the prospect of having to pump up production, pay damages and slash prices if it loses, executives said.
That potential of lower revenues from the Xbox processor was overshadowed on Monday by news that Nvidia would beat Wall Street estimates for the current quarter, and Nvidia shares jumped almost 15 percent in heavy volume.
In a filing with the U.S. Securities and Exchange Commission on Monday, Nvidia said that on April 23 Microsoft had submitted claims for binding arbitration under the terms of its contract with Nvidia.
Microsoft has requested a reduction in chipset prices for the Xbox, damages for alleged violations of the agreement between the two companies, and an order that Nvidia supply chipsets in whatever quantities Microsoft requests.
A call to Microsoft for comment was not immediately returned.
Nvidia was one of the highest-flyers of 2001, with the launch of the Xbox drawing investor attention to the company's focus on high-margin chip design while leaving the actual manufacturing to foundries like Taiwan Semiconductor Manufacturing Co. Ltd. 2330.TW
The shares were the best performing of all the S&P 500 stocks last year, but are down nearly 50 percent this year after a Securities and Exchange Commission investigation into its accounting practices and worries that sales of the Xbox were lagging expectations.
'DRAMATIC POSITIVE IMPACT'
"We're delighted we have a wonderful relationship with Microsoft and working on many fronts together, and the arbitration is just a step in an overall process in resolving this thing," Nvidia's Chief Executive Jen-Hsun Huang said.
"In the meantime we're recognizing the difference between what Microsoft is paying and the price they believe they should be paying as deferred revenues," he added.
On a conference call with analysts, Huang said "when all this gets resolved, my guess is it'll be a pretty dramatic positive impact on our business."
However, one analyst who declined to be named, said the arbitration was a bad sign for Nividia.
"(The news) positions Nvidia very badly to get into the next-generation Xbox," the analyst said. "It'll have to get settled, and Microsoft cannot go to someone else."
"NO ASSURANCE" ON HARM TO BUSINESS
"Even if we do prevail, there can be no assurance that our business will not be materially harmed," Nvidia said in an SEC filing, noting that possible consequences include having to make chips for Microsoft at a loss or reduce production of other products to increase its Xbox chip capacity.
The agreement between the two companies dates to March 2000. Nvidia said that a $200 million advance from Microsoft in April 2000 has now been fully used.
"All of our guidance we've given to you guys in the past is consistent with the conservative position we've taken with Xbox," Huang told financial analysts on a conference call.
He said that revenue and operating income in the fourth quarter of fiscal 2002 were about $13 million lower than they would have been because of the deferrals pending the Microsoft arbitration ruling.
Less than two weeks ago, Microsoft lowered its own fiscal 2002 unit sales forecast for the Xbox by as much as 40 percent, blaming weak sales in Europe and Japan.
The company also cut prices on the console by as much as 38 percent in Europe and Australia.
Earlier on Monday, Nvidia gave guidance for the current quarter ahead of Wall Street expectations, restated results from the last three fiscal years because of problems related to the recognition of charges and accruals, and named an interim chief financial officer after its present CFO went on leave
