NVIDIA (NASDAQ: NVDA) recently announced that it is recalling Shield tablets sold between July 2014 and July 2015. The company says that the batteries inside the devices "can overheat, posing a fire hazard."
The recall itself isn't anything that shareholders should get worked up about; it was a relatively low-volume product and the impact on the company's financials should be minimal. What is interesting, though, is that as a result of this recall, investors can now glean some insight into the financials of NVIDIA's device business.
Unit sales and estimated revenue
According to PC World, 88,000 Shield tablets will be recalled. According to NVIDIA's recall website, the Shield tablets came with one of two battery model numbers: "Y01" or "B01."
The B01 models, per NVIDIA, are not affected by this recall but the Y01 models were. If we assume that half of the tablets need to be recalled, then this would imply total unit shipments of the Shield tablet of approximately 176,000 units (although it's worth noting that NVIDIA has not, to my knowledge, disclosed the proportion of total Shield tablet sales that shipped with B01 versus Y01 batteries, so this is an educated guess).
To try to get a ballpark sense of what kind of revenue NVIDIA was able to generate from these sales, I'm going to assume that two-thirds of the devices sold were the $299 16 gigabyte model and the remaining third were the $399 model, implying an average selling price of $333.
If we multiply unit shipments by my estimated average selling price, we get total revenue of approximately $58.6 million in the period between July 2014 and July 2015. Overall Shield tablet-related revenue is likely higher, though, as the company offers additional accessories, such as a game pad, for purchase.
Putting this into perspective
Sales of NVIDIA's devices, including the Shield tablet, are included under the "Tegra Processor" line item in the company's earnings reports. In fiscal 2014, this segment brought in $398 million in revenue, and in its fiscal 2015, $579 million.
The roughly $59 million that NVIDIA seemingly brought in from sales of Shield tablets, along with whatever revenue it enjoyed from accessory sales, represents a relatively small fraction of its annual Tegra processor division revenue.
Furthermore, I believe that the gross margin percentages that NVIDIA sees on sales of consumer-oriented devices like the Shield tablet and the Shield Portable are likely substantially lower than the gross margin percentages that the company sees on chip sales. This would suggest that these devices contribute even less to gross profit dollars than they do to revenue dollars.
Should NVIDIA exit the devices business?
With the first Shield, NVIDIA made a play for the mobile gaming device business, but given that the company didn't launch a direct successor to that device, it probably didn't do all that well in the marketplace.
Then, with the Shield tablet, we know that unit sales and revenue weren't all that large, which may explain why we haven't seen a successor to the original Shield tablet using the latest Tegra X1 processor announced earlier this year.
It would seem that the future of NVIDIA's devices business is dependent on the performance of the Shield Android TV box in the marketplace.
The device is pricier than the competition (the Shield Android TV starts at $199, while the Amazon Fire TV sells for $99) and, according to PC World, is "rough around the edges in both hardware and software."
However, it has been praised for its fast performance, gaming functionality, and 4K streaming capability.
If NVIDIA can sell significantly more Shield Android TV boxes than it did Shield Portables or Shield tablets, then there might be a reasonable business case for the company to stay in the devices business.
However, if the Shield Android TV winds up being a cool-but-niche device that only captures a small amount of market segment share, then we might see NVIDIA simply exit the devices business altogether.
Editor's Note: An earlier version of this article assumed that the recall affected all tablets sold and did not account for the fact that there are two variants of the tablet with different battery revisions. The author is grateful to Mike for alerting him to this error.
