Santa Clara (CA) - The replacement of faulty graphics chips as well as a much stronger than expected AMD  /ATI pushed Nvidia deep into the red during the second quarter. The company reported a revenue decline of 23% sequentially and a triple-digit loss.

The company posted sales of $893 million, down 23% from $1.15 billion the first quarter and down 5% from $936 million year over year. In a rare event, Nvidia http://en.wikipedia.org/wiki/Nvidia reported a hefty loss of $120.9 million, compared to a net income of $211.8 million in the first quarter.

Nvidia said that its GPU http://en.wikipedia.org/wiki/Graphics_processing_unit replacement program had a price tag of $196 million. CEO Jen-Hsun Huang said that while the failures affected a relatively small percentage of its total GPU output, repairing an entire notebook http://en.wikipedia.org/wiki/Laptop “can be expensive”. Huang also admitted that Nvidia underestimated the “price/performance” of AMD’s/ATI http://en.wikipedia.org/wiki/Ati ’s most recent graphics chip, resulting in a wrong position of its products and forcing the company to adjust its pricing during the quarter.

The desktop GPU segment apparently came under heavy pressure and declined 23% from Q1 overall, according to Mercury Research. Nvidia appears to have been especially exposed to this trend as the company said that unit shipments declined by 20% sequentially, while average selling prices dropped by 25%. Overall, Nvidia desktop GPU sales were down 40% from Q1 and down 25% from the second quarter of last year.

Huang believes that this trend is amplified by a market that is moving away from desktops http://en.wikipedia.org/wiki/Desktop_computer and to notebooks as well as stronger demand of entry-level desktop PCs - a market that is currently underserved by Nvidia. The executive said that Nvidia will begin targeting the entry-level desktop segment with low-cost GPUs this quarter.