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Technology Stocks : S3 (A LONGER TERM PERSPECTIVE) -- Ignore unavailable to you. Want to Upgrade?

To: richard surckla who wrote (7254)	11/4/1997 9:00:00 AM
From: jim detwiler	Read Replies (1) \| Respond to 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.

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

More reasons to be reasonable and not sell current book value $7.68 (don't be the fools who always sell low wait for a buyout or something to give support) marketcap to revenue is at 1.3 yesterday even with restatement and loss of marketcap (coming today) the new number will be near 1.1 That is too cheap and can not stay there too long. Water finds it own level. Analysts look forward not backwards. Farouda IPO and Foundry IPO both early 98 will boost SIII both of which they own chunks of. New concentration of business market with desktop video capiabilities. This gets them away from the cutthtroat 3d market depths where competition is nutty. marketshare marketshare marketshare!!! More analysts comments Given this scenario, S3 has chosen to focus its efforts on introducing in a timely fashion its next-generation desktop products, in order to recapture some of the mid-range and high-end volume in 2H:98. As part of this renewed focus, S3 has abandoned its Plato (integrated core logic cum graphics accelerator) product and reallocated resources to its new efforts. The Plato product has reportedly been cannibalized by entry level ViRGE products in the segment zero or $1000 PC market. The company took a charge to the cost of goods sold line, to finalize its exit from its Plato product efforts. Non desktop graphics revenues accounted for 5% of sales in the quarter. While the Sonic Vibes audio product secured some design wins at add-in card manufacturers, the pricing on this high-end product was also pressured as it faced a difficult market. The ViRGE/MX 3D notebook accelerator gained a design win at Toshiba. Importantly, S3 introduced its Virge/MXi embedded DRAM notebook 3D accelerator for initial revenue in 1998. These products represent the first serious efforts by S3 in the notebook market. While earnings in the quarter were cushioned to the tune of $0.10 by the positive influence of UMC' s contribution to the gross margin line, they were also negatively affected by about $0.02 for the charge taken to write-down the Plato product line. Net of these factors, we anticipate that gross margin could have come-in around 30%, leading to break-even EPS for the quarter.