S3 reports huge loss

The graphics chipmaker posts an earnings slide as competition in the market heats up.

Tech Industry

Graphics chipmaker S3 today reported a substantial slide in earnings during the third quarter, the fallout from a year of turmoil in the graphics market.

S3 reported a net loss of $35.4 million for the quarter, or $0.69 a share, compared to net income for the same period quarter last year of $4.4 million, or $0.08 per share.

S3's revenues for the third quarter were $47.3 million compared to $119.6 million for the third quarter of 1997.

"All I can assume is that their customers have stopped buying them because there's so much better products out there," said Peter Glaskowsky, senior analyst at MicroDesign Resources. Glaskowsky called S3's performance a "failure of execution."

S3's problems began last year when its then new line of chips, the Virge series of graphics microprocessors, "aimed to low" in graphics performance. Other chipmakers such as ATI passed S3 in performance. ATI subsequently passed S3 for leadership in the market.

The company's latest chip, the Savage 3D, is indeed a better offering, Glaskowsky said, but they did not ship enough of the chip to make a difference on the balance sheet.

"S3 missed all of 1997," Glaskowsky said. "They had stuff they could sell, but the margins were relatively poor."

After the main microprocessor, graphics chips are the most critical piece of silicon in personal computers today. These chips handle the manipulation of images users see on their computer screens and are increasingly important as computer interfaces and 3D games become more sophisticated and demanding.

Included in the net loss are charges for restructuring, write-offs of older 2D and 3D inventory and write-offs of certain excess and obsolete capital equipment. These charges amounted to approximately $18.0 million or $0.35 per share.

"During the third quarter, we continued to be severely impacted by softening of the Asia market. While we commenced shipments of our Savage 3D product, its ramp was offset by the lower than expected demand of our older 2D and 3D products," said Terry Hold, president and chief executive officer of S3, in a statement. "Moving forward, we maintain a strong balance sheet that will enable us to continue investing in new desktop and mobile products."

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