--------------------------------------------------------------------------------
HEARD ON THE NET: Investors Snipe Online At NeoMagic
By Jason Anders
08/05/1999
Dow Jones News Service
(Copyright (c) 1999, Dow Jones & Company, Inc.)
NEW YORK (Dow Jones)--Investors on Internet stock-chat message boards seem to be losing their patience with once high-flying NeoMagic Corp. (NMGC).
"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. The stock closed Thursday at 8 5/16, down 5/32, or 1.8%.
Message-board participants have criticized the company's failure to deliver a chip capable of rendering high-end 3-D graphics for notebook computers. Some competitors are already shipping such chips, and some investors are worried that a delay on the part of NeoMagic could threaten its dominant position in notebook graphics.
Analysts say 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 analyst Josephine Mong of 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 upfront with investors about the delays in the 3-D technology and 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," said spokesman Mark Singer.
Chief Financial Officer Merle McClendon said 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," she said. "That isn't always true of some of the online conversations."
Still, NeoMagic is unable to put an exact date on when the 3-D chips will be ready. Singer said the company has yet to develop a production process stable enough to manufacture significant volumes. 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, he said.
Despite the delay, NeoMagic remains the leading supplier for graphics chips in notebook computers - controlling 47% of the overall market, according to IDC's Wong. That market share is even greater, according to some other analysts.
Near-Term Competitive Pressure
Designing graphics technology for notebook computers is a complicated process, analysts said. 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 producct for a very long time," said Morgan Stanley Dean Witter analyst Mark Edelstone, 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 Inc. (GTW), Hewlett-Packard Co. (HWP), Compaq Computer Corp. (CPQ) and Dell Computer Corp. (DELL). 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, the company uses chips from ATI Technologies Inc. (ATYT), 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," said Greg Nakagawa, Dell's Inspiron brand director. "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, said Dell has been pleased with the performance of the chips from ATI.
It's too early to say whether Dell will use NeoMagic's 3-D chips if and when they become available, Kirchoff said. "We do our own tests and we're looking to give the customer the best performance," he said. "Right now, that's ATI."
Online investors have been nervous about NeoMagic since May, when the company warned that continued delays in development of its 3-D chip could hurt profits. At that time, it also reported fiscal first-quarter earnings of $8.6 million, or 34 cents a diluted share, excluding charges for two acquisitions, on revenue of $72.4 million. That compares with year-earlier earnings of $6.7 million, or 26 cents a share, on revenue of $47.7 million. Net income after the charges was 13 cents for the latest quarter.
At the time, the company said that until resolved, delays in the 3-D technology would "adversely impact revenues, gross margins and overall profitability." 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 Preferred Capital Markets analyst Brian Alger. "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."
Alger pointed 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.
- Jason Anders; 201-938-5099
|
