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

To: Joe C. who wrote (8306)	10/15/1998 11:16:00 PM
From: Michael G. Potter	Read Replies (2) \| Respond to of 16960

There was a recent clarification/change in accounting policies that cover start-up costs (AICPA sponsored - not 3dfx specific). Companies used to have some discretion in capitalizing and amortizing production start-up expenses but now they have to expense them as incurred. I'm sure that there were some "extra" Banshee start-up costs this quarter that were not R&D and belong in COGS. However, 3dfx gave an explanation during the CC that focussed on the write-off, more Banshee (lower margin) as a percentage than expected, and less sales in total than expected. COGS is not just the cost of the chipsets, the whole execution arm of TDFX also falls into this area and represent fixed costs. There is a breakpoint in the revenue/cost line where fixed costs are surpassed. Once you pass that line more profit drops to the bottom line. If you're very close to that point, you'll have a fairly big distortion of the gross margin percentage. Since 3dfx had much less sales than expected, they probably were much closer to the fixed cost breakpoint in the slope of their profit. That's probably the most significant reason why their margins were as low as they were. The easiest way to see the above explanation is to constract a graph. At zero sales, there is a certain fixed expense. As sales increase, that fixed cost doesn't change. At a certain point, the variable profit equals the fixed costs. The more sales past that point, the more leverage you get in your gross profit. Did that make sense? The level of fixed vs. variable and the amount of Banshee ramp-up costs are two questions I have for 3dfx. Don't hold your breath for an answer, that type of information probably is competively sensative and they are not required by the SEC to reveal it. Michael