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Technology Stocks : 3DFX -- Ignore unavailable to you. Want to Upgrade?

To: Michael G. Potter who wrote (8302)	10/15/1998 10:29:00 PM
From: Joe C.	Read Replies (1) \| Respond to of 16960

Michael, I'm somewhat surprised at the 38% gross margin rate. I have a question for you on the destinction between cost of goods sold and R&D. TDFX has stated that R&D was significantly higher for two reasons: establishing their Texas site (I believe it was for servicing but now I'm not sure) and introducing new production processes. Anyway, I would imagine that both of these items would have associated costs that would fall under the cost of goods sold column. For example, buying the equipment would be a capital asset but then would be depreciated. However, wouldn't their be startup expenses that could not be accrued that would hit the cost of goods sold line? Same thing for the Texas site. Maybe I'm reaching but I can't explain the lower margins. I believe they're margins have been in the high 45-48 range and I can't understand how these margins could drop so much. Patrick is write in pointing this out as a concern but I'm wondering if some of this is not due to these items or possible Banshee ramp up charges. Of course this is just speculation, but can you offer any insights as to the fine points of these numbers. Joe C.

To: Michael G. Potter who wrote (8302)	10/16/1998 1:51:00 AM
From: Patrick Grinsell	Respond to of 16960

Explanation of the write down... Here is my understanding of what's going on. Voodoo2 consists of a 3 chip set, 2 texelfx units and 1 pixelfx. Since 3dfx stated plainly that they are using the same die cast it must mean that Voodoo1.5 is 1 pixelfx and 1 texelfx. So here is the main issue. Imagine they have about 500K chips with an equal numbers of texelfx and pixelfx. Say 250K for each. The problem is that you can only make 125K Voodoo2 chipsets from this. You are left with 125K of lonely pixelfx chips. You can't make a video card from only pixelfx chips so you're screwed and so 3dfx wrote them off. Here's the good part. If 3dfx finds demand is extra high then they have 125K FREE pixelfx chips ready to go. ie. that 4.5 million may give us a boost of 25-30 cents per share gross if they actually get used. Not too shabby. Pat

To: Michael G. Potter who wrote (8302)	10/16/1998 3:52:00 AM
From: Simon Cardinale	Respond to of 16960

Thanks Michael, I appreciate the accounting info. It confirms my suspicions. I see a few possible interpretations. 1) The v1.5 inventory cannot be recycled into V2 chipsets as we think. They said it probably could be recycled in the CC, but maybe it would be too difficult or expensive to be worth it. 2) They are going to turn the inventory into inflated sales for 4Q (it's okay with me, so long as it doesn't become a practice.) 3) They could recycle it as V2, but don't think demand will ever allow them to. Remember they're not having any more V2 chipsets fabricated as it stands. Analysis of the above: 1) Their statements lead me to believe that V1.5 was a V2 missing a second TMU, but otherwise identical at the chipset level. They can (without having any chips fabricated) turn "X" V1.5 chipsets into "X/2" V2 chipsets be tossing half the pixel processors and distributing the freed-up texel processors among the remaining chipsets. They implied they'd have to fabricate more chips in the CC, but maybe they were being evasive because of ... 2) This is sneaky, but I don't mind. 3) They've said they expect a V1 repeat, where V2 becomes really cheap and they keep selling chipsets into the future (probably at a huge discount after 1Q99, more as a marketing thing than for the immediate profit.) All in all, they're written off and can only do us good from here on. Simon