Some notes to review
Seasonal softness in overall PC demand and persistently weak pricing for 2D graphics controllers frims are lowering revenue and earnings estimates for SIII. Revised Q2 97 EPS estimates moved down to $0.05 on $105 million in revenue from previous estimates of $0.10 EPS on $120 million in revenue. The CY 1997 and 1998 EPS estimates have been adjusted down to $0.66 and $0.95 respectively from $0.81 and $1.13.
Revenues should be down 24% sequentially primarily attributed to declining sales at add-in card vendor Diamond Multimedia . Sales at DIMD typically represent approximately 15% of quarterly revenue for SIII, and with Diamond's recent pre-announced shortfall,
The company continues to expect to realize double digit revenue growth in the September and December quarters lead by seasonal improvements in PC demand and additional design wins for its new ViRGE/GX2 and mobile graphics and audio chips. The company reports to already have 3 design wins for its Sonic Vibes audio products, which began to ship this month, and has won designs for its mobile Aurora products - including a win at Compaq. The new graphics accelerator, which is expected to contribute meaningfully to revenue by late 2H97. This bodes well for SIII as the company begins to gain momentum in front of the anticipated seasonal acceleration in demand during the latter part of Q3 97.
SIII is maintaining its dominant leadership in the mainstream PC market and beginning to experience growth in the segment 0 (sub-$1000 PC) market with the Plato/PX product line - in which the system controller and graphics/video accelerator are integrated onto a single chip. It is the mainstream to the lower end of the PC graphics market that will serve as the catalyst for revenue growth for the company in the next several quarters. To that end, we believe the long term outlook for SIII remains attractive for the following reasons:
* 2D performance remains the primary driver for the corporate PC market: The corporate PC and NetPC markets employ graphical user interface (GUI) environments, such as Windows, which demand high performance 2D graphics acceleration. We expect this 2D performance requirement to continue for sometime and believe SIII provides theindustry's leading 2D performance. In fact, SIII is currently experiencing an acceleration in orders for its 2D TRIO64V+ family of 2D graphics accelerators by a leading PC OEM.
* SIII is a market leader with strong OEM customer base: SIII captured 35% of the PC graphics market in Q1 97,
* Video could be a new battleground: Although high performance 3D is obviously becoming a key demand drive for next-generation graphics accelerators. The new air of differentiation will be in video playback performance, especially as the PC market transitions to DVD. SIII has recently partnered with Faroujia Labs, a market leader in providing high quality video playback for state-of-the-art home entertainment systems, to bring their technology to the mainstream PC. SIII plans to incorporate this technology into their graphics chips by the first half of 1998.
There is little downside risk for the stock as it is trading near support in the $10-$11 range. Expect the stock to appreciate in the latter half of the third quarter, primarily driven by multiple expansion in the PC graphics sector as business conditions firm up. |
