S3 (A LONGER TERM PERSPECTIVE) Message Board

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Technology Stocks : S3 (A LONGER TERM PERSPECTIVE)

SIII 0.0001000

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May 12 5:00 PM EST

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To: richard surckla who wrote (7254)	11/4/1997 9:00:00 AM
From: jim detwiler	Read Replies (1) of 14577

Analsyt reasons not to sell today An Internal Audit Review is Still Ongoing . . . Official revenue and earnings impact will not be available until the third quarter 10Q is released in mid-November. Although the Company has not given official detail, we do not expect revenues to change from current Q4 expectations because we believe the excess inventory will simply replace product sales which would have shipped in the quarter anyway. However, we do believe gross margins in the out quarter may remain under pressure as S3 continues to try to accelerate this excess inventory through the channels. Although the company did not give official detail on the cause of this error, we believe it stems from aggressive product shipments into the channel in order to maintain market share. We believe that most of this inventory resides in the Asian distribution channel where there is significant pricing pressure and where the majority of S3's customers are located. S3 expects that most of their inventories will be sold through the channel in Q4 since the bulk of the products are mainstream 2D products, specifically Trio V2 and ViRGE/DX3 graphics controllers. Since most of S3's inventory is fresh in their product roadmap, the Company believes that there is little risk in its write-down. Finally, to reflect the restated revenue, the Company will add a deferred revenue item to the balance sheet offset by a reduction in retained earnings. No Changes in Q4 Estimates Although the Company has not given official guidance on the relative amount of revenue and earnings impacted, we view this error in timing of revenue recognition as significant which will therefore put pressure on the stock near term. We are maintaining our Hold rating. In the long term, we expect S3 to implement stricter accounting measures to ensure that this type of error is not repeated.

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