From WSJ
NeoMagic Slid Thursday
Shares of NeoMagic lost ground Thursday, as concerns about a decline in fiscal third-quarter
gross margins led the stock lower -- even though the company beat analysts' revenue
expectations.
Shares of NeoMagic slid 1 7/16, or 12%, to 10 1/4 at 4 p.m. EST on the Nasdaq Stock
Market.
Meanwhile, the Nasdaq Composite Index gained 77.72 to a record 3347.11, while Morgan
Stanley's high-tech 35 index surged 76.63, or 5.2%, to 1566.01. The Dow Jones Internet
Index gained 8.49 to 308.84.
Late Wednesday, the Santa Clara, Calif., company reported net income for the third quarter
ended Oct. 31 of $4.1 million, or 16 cents a diluted share, compared with net income of $8.6
million, or 36 cents a share, in the year-ago period. Analysts had expected the company, which
makes graphics chips for notebook computers, to post net income of 11 cents a share.
Third-quarter revenue, meanwhile, climbed 4.4% to $70.3 million from $67.4 in the
previous-year period.
The company's gross margins, though, decreased, to 26.7% from 30% in the last quarter,
sparking jitters among analysts.
One of the factors hurting its profit margins was the delayed rollout of NeoMagic's 3D
graphics chip, called the MagicMedia256XL+. The chip was originally scheduled to be shipped
in late May 1999, but NeoMagic had difficulty developing a production process stable enough
to manufacture significant volumes. The company now plans to ship the chip in large volume
starting in February 2000.
But the delay caused many customers to change their orders. Brian Alger, an analyst with
Preferred Capital Markets, said that because NeoMagic "expected to be shipping in May, it
requested capacity according to those expectations." When the company didn't have the 3-D
chip ready for shipment in May, many customers who had originally requested the new chip
changed their orders to the company's popular MagicMedia256AV product. The 256AV chip
enables high-performance video, graphic, and audio capabilities in a single chip. The bulk of
NeoMagic's revenue increase in the third quarter was due to increased sales of the older chip
model.
NeoMagic wasn't prepared for customers' demand for the fallback 256AV chip and purchased
more capacity from their distributors, Mitsubishi and Toshiba, at a premium price because the
order was unexpected. The additional costs hurt margins.
Mr. Alger maintained his "buy" rating on the company, in anticipation of full production of the
3D chip in the first quarter of 2001, but he reduced his revenue estimate to $58 million from
$65 million and cut his earnings-per-share prediction to 11 cents a share from 14 cents a share.
In a research note, Arnab Chanda, an analyst with Robertson Stephens, didn't cut his
fourth-quarter estimates, keeping his revenue estimate at $58 million and his earnings-per-share
prediction at ten cents.
Mr. Chanda also kept his "hold" investment rating on the company, but added that "even
though NeoMagic is shipping the 3D product, we maintain caution in the near term." He
believes that the full effect of the delay of the 3D product should start to manifest itself in the
first half of fiscal year 2001.
Another factor weighing on margins is the strength of the yen against the dollar. NeoMagic's
suppliers are in Japan, and the company pays for parts in yen, which has historically traded at
about 120 yen to a dollar, but now is down to 105 yen to a dollar. "While they do hedge that
movement, it still hurts them in the conversion rate," Mr. Alger said.
But Robertson Stephens's Mr. Chanda sees a silver lining. NeoMagic's new supplier,
Germany's Infineon Technologies (formerly Siemens Semiconductor), is currently ramping up
production. He expects that NeoMagic will be able to receive volume deliveries from Infineon
by the end of the fourth quarter. "This is an important step in the right direction," Mr. Chandra
said.
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