I recently had a chance to ask Scott Sellers of 3Dfx a few questions on 4 main concerns, (a) the retail segment, (b) the European sales, (c) the merger related issues, and (d) the revenue and margin growth. Here are Scott's answers. Clearly Scott is very comfortable with the merger. Unfortunately, neither Scott nor 3Dfx has not yet provided any financial model for the merger. For everything else, there is this interview.
Sun Tzu
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The Retail Segment
Do you still plan to have a "high-end" retail product line and a "low-end" OEM line? The announcement of Voodoo3 2000/3000 makes it seem that this is no longer the case and that there is only one product line at different speeds. If you are planing to have two product lines, what is your marketing plan to distinguish the two and maintain mind-share among the hard core gamers? And how will you keep the developers interested in supporting Glide?
Scott: Well, what you'll obviously see over time with any of our retail products is a natural price erosion, and with that price erosion we're able to target different market segments. For example, when Voodoo2 was launched, we clearly targetted the gaming enthusiast segment, pricing the boards around $249-$299. Now you can find Voodoo2 boards for under $100, and the volumes have been very consistent all along as Voodoo2 now is a "value" 3D upgrade board. The acquisition of STB obviously now allows us to control and plan that price erosion reasonably. Our strategy of introducing Voodoo3 with the 2000 and the 3000 products is very much along this same strategy of targetting multiple segments with similar products, differentiating on price. However, we are now able to do it at the same time when the product is launched instead of waiting 9-12 months for only price erosion to allow us to penetrate different markets. We feel this is a very powerful strategy. And one, by the way, we feel will not impact our high end sales significantly because those gaming enthusiast consumers always want the fastest, most powerful solution. So we feel we won't lose many high end sales as a result of a lower end product being available simultaneously in the market, but of course we then realize all the revenue and the gross margin of the lower end product being available and leveraging the strength of the "flagship" product.
On the subject of Glide, we continue to believe that Glide is a very important piece of technology that we need to continue to evangelize and cultivate. Our strategy with Glide has always been very straightforward -- keep it simple, and expose 100% of the hardware functionality. As we've stated numerous times, we're trying to bridge the gap between the traditional game console's life of 5 years and the PC market's requirement of new products every six months by introducing brand new hardware architectures once every (roughly) 2 years. As a result, as the fundamental hardware architecture matures, the "value add" of Glide is going to diminish relative to Direct3D or OpenGL. However, just as it was so vital to the success of the original Voodoo Graphics and Voodoo2, Glide will continue to be fundamental to the success of our brand new generation architectures in the future. What people don't seem to realize is that Glide is really our secret weapon. Imagine if you're one of our brandless competitors and you have some really cool new idea that you want to implement in hardware. Well, by the time you've evangelized this new idea to Microsoft or through the OpenGL ARB committee, you're 12-18 months before you see any games which actually uses it. With Glide, the day that hardware is introduced we can have games shipping that use groundbreaking new features and imaging techniques. This gives us a significant time-to-market advantage over anyone else, and also protects our intellectual property because we don't have to go out evangelizing new features to the "standard" APIs (and risk other IHVs seeing the direction we're headed) unless we choose to.
STB does not have a strong retail presence. How will you support the retailers and to what extent will the loss of multiple vendors lower your unit shipments?
Scott: Well, in the near term, we don't expect any significant loss of unit shipments because we have communicated to our current board partners that we will support them 110% through the end of life of the current products. Perhaps somewhat surprisingly, STB has very good retail and VAR/SI distribution in North America -- they have just never really focused on it as intently as we obviously will. Clearly, our challenges are going to be ramping a worldwide distribution channel for the launch of Voodoo3, but many plans are already in place that we'll be disclosing that allow us significant global distribution for the Voodoo3 launch.
Voodoo2 was a rather unique product without any comparable competition. Do you expect to generate the same kind of retail unit demand for your products in '99? What is your expected range of (feel free to make this as wide as you like) retail unit shipments for '99?
Scott: We believe as a strategy that a company cannot exist in the PC graphics business without significant success in both the retail *and* the OEM space. Most of our brandless competitors are simply focusing on the OEM side, and we feel that's going to be their achilles heel, because they'll lose every design win they have when something comes out that's cheaper and/or faster. Just ask S3 or Cirrus how quickly a brandless product can be replaced. However, if you build the brand and own the consumer through the retail channel, then it's much more difficult to pull the brand from a consumer PC. Just ask AMD how long it took them to convince consumers that a non-Intel CPU was just as good. So, you've got to have success and build foundation in both segments. And, once you understand that our goal is to dominate both, you'll realize that we feel very confident that we'll be introducing products in 1999 that we believe will be just as dominant as Voodoo1 and Voodoo2 were...
Will you be maintaining your relationship with any of the board makers here in U.S.? If so which ones?
Scott: As we stated at the acqusition announcement, we will continue to aggressively and substantially support our existing board customers through the end of life of the current 3Dfx products (Voodoo1, Voodoo2, and Voodoo Banshee). And, I think it's reasonable to assume that these products will be viable in the market into 2H99. So, our solid relationships with our current partners will still exist for quite some time. We do not have plans to introduce 3Dfx-branded products based on the existing technology, so we feel that our board partners still have substantial financial incentive to continue to support the existing 3Dfx products. Obviously, this changes with the launch of Voodoo3. To date, we have announced that we will only sell silicon to one outside board manufacturer, and that is Quantum3D. We have always had a very strong relationship with Quantum3D, and will continue to do so moving forward as Quantum3D focusing more on the very high end segments of the market such as Visual Simulation, Coin-Op, Military Training, etc.
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European Sales
Scott: Obviously, our partners who manufacture boards based on the existing 3Dfx products will continue to be supported as long as our board partners deem the current products viable in the marketplace. Moving forward with the launch of Voodoo3, we have not announced any intentions to continue doing business with our existing board partners in Europe.
To what extent do you expect the merger to affect your European sales?
Scott: Clearly we have a challenge building a first-class 3Dfx European distribution channel. We have not yet stated how the merger will impact projected European sales for Voodoo3. Obviously, for the existing products, we don't expect the merger to have much, if any, impact on European sales.
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The Merger
Over what time frame do you expect the two operations to be fully integrated?
Scott: We stated at the announcement of the merger that the merger will be official around the end of March. In terms of "fully integrated" we expect the basic framework of the integration between the systems of the two companies will be complete by that time, with much of the detailed integration to be complete in the subsequent several quarters.
What are the "out" or "break up" clauses in your agreement?
Scott: I'm probably not the right person to answer this question. Please email David Z. directly with this question. [For all other merger related questions Scott asked me to contact the CFO]
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Revenue and Margin Growth
Mr. Ballard once said that Banshee (the OEM part) will be 40% of the sales. He also said that the "gaming niche" ie the high-end is about $200 Mil in sales. Putting these two statements together makes for annual revenue of ~$350 Mill. How quickly does 3Dfx expect to achieve this?
Scott: We have not yet provided models to the outside investment community with our expected financials of the combined companies.
Given that STB has lower operating margins than 3Dfx and that OEMs will be good portion of your sales in '99, it is natural for your margins to drop. What range do you expect your operating and gross margins to be?
Scott: We have not yet provided models to the outside investment community with our expected financials of the combined companies.
Are you seriously considering a direct consumer sale over the Internet? If so, will you be partnering with someone or be doing it alone?
Scott: We're evaluating all distribution channels that make sense and give us the broadest coverage, so one could expect that e-commerce will certainly be part of our strategy moving forward.
Thank you for your time, Scott. |
