FOOL CONFERENCE CALL
SYNOPSIS*
By Jeff Fischer (TMF Jeff)
3Dfx Interactive
(Nasdaq: TDFX)
4435 Fortran Dr.
San Jose, CA 95134
Ph: 408-935-4400
3dfx.com
ALEXANDRIA, VA, (April 16,
1998)/FOOLWIRE/ -- 3D media technology
leader, 3Dfx, reported record first quarter 1998
revenue of $50.0 million, a sequential increase of
127% from the $22.2 million achieved in the fourth
quarter of 1997, and nearly ten times greater than
the $5.2 million achieved in the same quarter of
last year.
Net income climbed to $7.4 million, or $0.50 per diluted share, on diluted
shares outstanding of 15 million. This compares to earnings of $0.15 per
share achieved in the prior quarter and a loss in the same quarter of last
year.
Conference Call Intro: This was the third consecutive quarter of earnings
per share at least doubling (when excluding engineering earnings from the
prior year), and though growth has been so rampant that it's been hard to
predict, visibility is improving and the company expects revenue growth of
15% to 20% each of the next two quarters and earnings per share growth
slightly below that as ASPs (average selling prices) retract modestly.
New Product, Voodoo II, Helps Deliver Record Quarter: 3Dfx's
latest 3D technology, Voodoo II, shipped slightly earlier than expected and
helped propel the company to a record quarter. The product shipped in
decent volume as early as February and throughout March because the
Voodoo II chipset qualified for shipment earlier than expected. The product
is an "unqualified hit," according to the company. It achieved the highest
performance numbers for any 3D product available and it sets standards
well above the closest competition, while it alone utilizes Glide technology.
The product won five stars from C/NETs Game Center, the first gaming
product to ever do so.
Diamond Multimedia and Creative Labs, two of 3Dfx's largest customers,
are shipping Voodoo II product and additional customers will launch Voodoo
products in the current second quarter, giving 3Dfx a more diversified client
base. The decrease in demand for Voodoo Rush following the launch of
Voodoo II is as expected.
Branding, Mindshare, and Product Development. Branding, consumer
mindshare, and relationships with programmers have been and will continue
to be very important. 3Dfx recently initiated a world tour with its products,
teaching some 500 programmers about its technology with great success.
Over 400 new gaming titles are expected this holiday season and over half
should use 3Dfx's proprietary Glide technology. 3Dfx is the only 3D
graphics company with product that operates optimally with all games being
made.
The trend is now for software that actually requires faster technology like
3Dfx's -- gamers are demanding that the software lives up to the hardware,
whereas in the past it was the other way around. The 3D market is large
enough for several companies, according to 3Dfx, but only two or three top
hardware companies will receive support from all 3D software developers,
and 3Dfx is importantly the number one company in the industry.
Roughly 2/3rds of all gaming software boxes with 3D logos carry only the
3Dfx logo, while the company is continuing its aggressive marketing
campaign in gaming magazines and at retail outlets. Voodoo II launched
with fanfare and visibility, unlike most all other semiconductor products --
only Intel (Nasdaq: INTC) comes to mind as similar in style and as having
the ability to brand a chip. Also, the new magazine devoted to 3Dfx
products is doing well with advertisers and consumers, 3Dfx is told.
The company will escalate its marketing in the second half of the year as
Banshee is launched.
Financials from the 3Dfx CFO. As stated, Voodoo II shipped as early as
February and throughout March, causing the larger than expected revenue
increase. Gross margins of 51% in this quarter could see pressure and
decline modestly in the future as the company enters the "value" market,
selling older technology at lower prices.
SG&A expenses were higher due to the growth in the quarter, with 50% of
the expenses related to sales and marketing and 50% general and
administrative (increased commissions and marketing programs added to the
expense).
Accounts receivable increased and the company is taking on some reserves
to better fit the model of a business with $50 million in quarterly revenue.
Receivables mainly increased because of the volume of Voodoo II product
shipped in March. The receivable balance is up to 67 days sales outstanding,
above the company's target of 55 days. This number should decline
however and isn't a concern now. Cash on hand will probably go up by a
factor with earnings in the forthcoming quarters, and inventory increased
this quarter in preparation for Voodoo II's launch.
Earnings per share were figured on 15 million shares because the company
uses a weighted average share count for its shares outstanding. Reflecting
the secondary offering completed in the past quarter, the share count will
increase to 17.5 million shares in the second quarter.
35% of the quarter's $50 million in revenue came from Voodoo II, 55%
from Voodoo Graphics, and the remainder from Voodoo Rush.
The company is now paying taxes and the 20% tax rate that it paid last
quarter will increase to 28% in the second quarter and be as high as 31% at
the end of the year, with an average rate of about 28% expected for the
year.
Question and Answer Period.
Question: In regards to Voodoo II, is the company at all supply constrained
or demand constrained?
Answer: 3Dfx is not constrained in chipset supply. It can increase its
chipsets with any increase in demand. The company did see temporary
constraints in the memory component market which held back some
Voodoo II retail rollout because the board companies couldn't ship the
boards without the component. But this has been remedied and even board
producers should not have any constraints by mid-quarter. It's "not even
worth considering" in relation to 3Dfx. It didn't touch revenues.
Question: With Voodoo I moving into the lower-end "value" market, what
kind of price decline do you foresee when supplying the product to OEMs?
Answer: 3Dfx is still working on an appropriate price with OEMs, but it will
likely sell for $20 to $30, closer to $20.
Question: We saw the product mix for this quarter, what about next
quarter?
Answer: Voodoo II will be the bulk of sales in the current quarter, at around
75% to 80%, projected.
Question: What is the penetration rate with OEMs?
Answer: 3Dfx feels that it just started. It's now looking for the best way to
deploy 3D with other OEMs, and OEMs are learning that this is a good way
for them to sell to groups of people that weren't being targeted with other
products. The technology is now 10X better than Nintendo 64 with
capabilities never before possible. OEMs can target users from the high-end
to the low-end and make all gamers happy.
Question: Then why in light of this should revenues grow only 15% to 20%
in the next quarter?
Answer: This is still a substantial quarterly growth rate in the off-season
summer months on the consumer side, while on the OEM side growth won't
really begin to expand until Banshee (2D/3D product) ships (in the third
quarter).
Question: As the company blends the average selling prices (asp) for its
products, will the overall ASPs be flat or drop?
Answer: ASPs will be flat to slightly down in Q2 and beyond. The main
reason is that pricing Voodoo Graphics in the value range puts pressure on
ASPs, though it does increase volume. So unit sales will probably grow a
little faster than revenue. That's a safe assumption.
3Dfx believes that Graphics will show life throughout the year, though. It's
just now moving to value pricing. Some OEMs won't deploy it, but others
will use it to reach new markets at the $99 price level. It won't appeal to
hardcore gamers, but it will appeal to the lower-end customer who wants
compatibility with 3Dfx but doesn't need best of the best. Of course, again,
the bulk of revenue will be in Voodoo II, and Voodoo II pricing will be flat
to slightly up over Q3 and Q4, though it's too early to predict an ASP for the
coming quarters. Demand has been very high on the board level and
consumer level and there's no need to reduce the price. As for Banshee,
3Dfx is very excited about it but is being modest about its revenue impact in
Q3 and Q4. The revenue run rate should grow about 15% to 20% linear.
Question: What will happen with marketing and administrative expenses
going forward?
Answer: These expenses should be similar each of the next two quarters,
and perhaps increase in Q4... though dropping as a percentage of sales over
the coming quarters.
Question: On the competitive landscape -- how do you plan to sell Banshee
against competition in the OEM space? Particularly in relation to Intel's
i740?
Answer: The company's strategy against Intel is that it aims to occupy a
different space and focus than does Intel. Intel is much more focused on a
lower cost, lower performance market. 3Dfx focuses on the high-end user.
And 3Dfx is the only company that matches its marketing program with
OEMs' marketing. It's the only gaming company with a product that runs
with everyone else's product. Perhaps more importantly, all games run with
3Dfx's product while many won't run without its product.
Every month a competitor announces a product that is going to be a
"Voodoo killer." But it never gets produced -- not yet anyway. The
announcements come far before the products ever reach the marketplace.
3Dfx differentiates itself because it doesn't release a future roadmap for its
products. So other companies are comparing their future products with
3Dfx's current products. 3Dfx aims to always be the technology leader as
it is now, and it also wants to "own" the content in the industry.
Sony is crushing Nintendo because it has the content to support its
technology. The total package that is delivered to the consumer is what
matters. 3Dfx offers the total package where the others don't -- from
performance to compatibility with all of the best and new games. And "All
of our products are compatible between and among each other... and of
course Banshee will be as well."
END.
Hey, Fool on!
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provides a daily column.)
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