NeoMagic's Slow Going on 3-D
Draws Message-Board Barbs
August 4, 1999
By JASON ANDERS
THE WALL STREET JOURNAL INTERACTIVE EDITION
Investors on Internet stock-chat message boards seem to be losing their
patience with once highflying NeoMagic Corp.
"It's getting very hard to stay positive on this
stock," wrote one person on a Silicon
Investor message board dedicated to the
Santa Clara, Calif., maker of graphics chips
for notebook computers. "Someone needs to kick start this company and
get it moving again," wrote another on a Yahoo! Finance message board.
At the beginning of the year, NeoMagic shares were trading around 21 on
the Nasdaq Stock Market. But recently they've slumped, falling as low as
7 1/8 on June 15. NeoMagic shares fell 5/16 to 8 13/16 Tuesday.
The message-board participants have criticized the company's failure to
deliver a graphics chip capable of rendering high-end 3-D graphics for
notebook computers. Some of NeoMagic's competitors are already
shipping such chips, and some investors are worried that the company's
delay could threaten its dominant position in notebook graphics.
Analysts say the message-board
users are right to be concerned.
"This is a company that has
established a strong position very
quickly, but now faces some real
trouble over this 3-D issue," says
Josephine Mong, an analyst with
International Data Corp., a
Mountain View, Calif., research
firm. "I see 3-D as a checklist item
now for notebooks. Customers
expect it, just like they expect a
CD-ROM drive, and NeoMagic is
going to have to deliver."
For its part, NeoMagic says it has been up front with investors about the
delays in the 3-D technology, and says it is aggressively working to
address them. "We have faced some challenges with our 3-D product, and
we've been discussing that in our public forums for a year now," says
Mark Singer, a spokesman for NeoMagic.
Merle McClendon, NeoMagic's chief financial officer, says
message-board participants seem to have seized on the key issue facing
the company. "If indeed they are concerned about [the delay in shipping
3-D chips], then they are concerned about the right thing. That isn't always
true of some of the online conversations," she says.
Still, NeoMagic is unable to put an exact date on when the 3-D chips will
be ready. Mr. Singer says the company has yet to develop a production
process stable enough to manufacture significant volumes. He says a
"best-case scenario" would mean shipments of a new 3-D product would
begin toward the end of the year, in November or December.
Despite the delay, NeoMagic remains the leading supplier for graphics
chips in notebook computers -- controlling 47% of the overall market,
according to IDC's Ms. Wong. That market share is even greater,
according to some other analysts.
Designing graphics technology for notebook
computers is a complicated process, analysts
say. With superslim notebooks gaining in
popularity, engineers face pressure to fit the
technology into a smaller space. And
notebook computers have always posed
power challenges -- some of the high-end graphics technology used in
desktop computers would eat up valuable battery time in a notebook.
Analysts say NeoMagic has enjoyed an unusually long run as the dominant
player in the competitive notebook-graphics market, especially considering
the way rivals in desktop graphics continue to leapfrog each other for the
No. 1 spot.
"They've made a very good product for a very long time," says Mark
Edelstone, an analyst with Morgan Stanley Dean Witter who follows
NeoMagic. "They are definitely the dominant player, but this is an
extremely competitive area, and they face some near-term pressures."
NeoMagic has strong relationships with several major computer
manufacturers, including Gateway, Hewlett-Packard, Compaq Computer
and Dell Computer. But as demand grows for 3-D technology in notebook
computers, those computer makers are being forced to look to
NeoMagic's rivals for the chips.
Dell, for instance, uses NeoMagic chips in all of its notebook lines except
one. For some computers in its high-end Inspiron 7000 line, Dell uses
chips from ATI Technologies, a dominant player in desktop graphics
technology. ATI, of Thornhill, Ontario, has been shipping 3-D chips for
notebooks since last year.
"We're definitely seeing increased customer demand for 3-D in notebooks,
but right now there aren't a lot of [software programs] for notebooks that
need 3-D," says Greg Nakagawa, Inspiron brand director for Dell. "As
always, the desktop drives demand, and people are beginning to demand
the same technology in notebooks that they already have on their desktop
PCs."
Paul Kirchoff, manager of the Inspiron product line for Dell, says the
company has been pleased with the performance of the chips from ATI.
He says it's too early to say whether Dell will use NeoMagic's 3-D chips if
and when they become available. "I can't really give away what our plans
our at this point. We do our own tests and we're looking to give the
customer the best performance," he says. "Right now, that's ATI."
Online investors have been nervous about NeoMagic since May when the
company reported earnings for its fiscal first quarter and warned that
continued delays in development of its 3-D chip could hurt profits.
NeoMagic reported net income of $8.6 million, or 34 cents a diluted
share, on revenue of $72.4 million. That compares with earnings of $6.7
million, or 26 cents a share, on revenue of $47.7 million in the same period
a year earlier. The latest quarter's figures included charges related to two
acquisitions. After the charges, the company earned 13 cents a share.
At the time, the company said that until resolved, delays in the 3-D
technology would "adversely impact revenues, gross margins and overall
profitability going forward." The company also warned that it expects
revenue to slip to $60 million for its second quarter, which ends Saturday.
"The stock is obviously depressed because of the announcement that
they're having trouble with the design for the 3-D technology," says Brian
Alger, an analyst with Preferred Capital Markets. "But we've seen a bit of
a rebound lately [in the stock price] because I think people realize that this
company isn't going to zero, and it appears that they are very close to
solving some of their design issues."
Mr. Alger points out that NeoMagic's two purchases are part of the
company's strategy to expand into consumer-electronic devices.
NeoMagic aims to provide technology for DVD drives and digital
cameras, among other electronics.
Write to Jason Anders at: jason.anders@news.wsj.com
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since Jason copied this article outline from my post
Message 10767709
I figure I have every right to paste it right here. |
