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Mixed bag for 3Dlabs

The company's stock drops, opening up an opportunity for bargain-hunting investors.

It turned out to be a case of good news and bad news for 3Dlabs (TDDDF).

The company yesterday warned that its third-quarter earnings would fall far below expectations. That caused the stock to drop over 20 percent today, but it also opened up an opportunity for bargain-hunting investors, analysts say.

After losing 2 points yesterday, the stock continued to slide today, falling as much as 24 percent from yesterday's close of 30-1/4. The company had said its earnings would be as much as 75 percent below analysts' expectations because of product delays.

Robertson Stephens, however, upped its rating on the company to a "buy" from a long-term "attractive" recommendation.

And another analyst, who had downgraded the company earlier this month to "buy" from "strong buy" based on valuation, said he would hold steady with his current rating even though the stock is now trading below his target price of $45.

But today's pull back in price, however, leaves this issue to be a "very attractive stock," said Charles Boucher, an analyst at UBS Securities. "I don't think they will get back everything they lost, but we should see a steep recovery in 1998."

"I am going to leave things the way they are for now. Price was the principal reason, but there were some product-side issues as well," Boucher said. "The announcement yesterday was a verification of the issues we suspected, but the shortfall in earnings was much larger than we expected."

Net income for the third quarter of 1997 is expected to be in the range of $1.7 million to $1.9 million, or 9 cents to 11cents per share. Analysts were expecting profits of 38 cents a share, flat compared with second-quarter results, according to First Call.

Revenues are expected to be about $13.6 million, compared with revenues of $5.92 million during the third quarter of 1996. During the previous quarter, the company posted revenues of $17.34 million.

The company attributes the shortfall to product transition, as well as to delays in getting products to market, but maintained that the problems are only temporary.

Analysts agreed. Boucher explained that the difficulties are a supply issue not a demand issue. Therefore, while it is an unpleasant temporary situation, the operational problems are fixed or being fixed, and there is not a fundamental weakening of the market. "That end is very strong," he said.

"They had a difficult supply relationship, and the cost of chips was higher than they planned in their model. Demand, however, was very strong. I think both issues are being addressed and the delinquency issue should be fixed during the fourth quarter to put the manufacturing difficulties behind."

3Dlabs found itself hit with a late production ramp-up of its Permedia 2 parts by the company's semiconductor partners, higher-than-anticipated per-unit costs for those parts, and delays in the introduction of Glint MX-based products by 3Dlabs customers. This resulted in Glint revenues falling below recent historical levels, the company said.

Permedia 2 is the second generation of 3Dlabs' low-cost graphics processor family targeted at the commercial desktop and entry-level professional markets. Certain consumer markets have been targeted as well.

Glint MX is a member of 3Dlabs' high-end 3D graphics processor family. It ships in personal workstations and on professional-class graphics boards for the PC. The company said both Compaq (CPQ) and Dell (DELL) introduced new PC-based workstations that use the product during the third quarter.

"We do not plan to let this temporary situation distract us from the potential market opportunities which we believe we have in front of us," said Osman Kent, president and CEO of 3Dlabs, in a statement. "We expect to enter 1998 with a strong product and customer lineup and with most of the recent transition difficulties behind us."

The company will report earnings after the markets close on October 21.