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S3 bounces back in graphics chip market

Graphics chipmaker S3 announces new customers for its upcoming chips and offers a peek at future products.

S3 today announced new customers for its upcoming graphics chips and offered a peek at future products as it continues to fight its way back in the market.

One of the pioneers in graphics chips, S3 is trying to bounce back after missing critical product cycles and, as a result, reporting a string of losses. In the fourth quarter, for example, it posted a wider-than-expected loss of $70.3 million.

S3 said today that it had signed up 36 new customers for its new Savage4 chip and stated that initial designs are estimated at more than $150 million in revenue for 1999.

The rise, fall, and possible redemption of S3 illustrate the topsy-turvy nature of the graphics market and the tremendous competitive pressures.

Over 40 companies produce 3D Terror in the graphics world graphics chip, an excessive amount of competitors that serves mostly to drive down price and increase the importance of landing alliances with reputable PC manufacturers and graphics circuit board companies.

S3 lost out on design wins in 1997 and was close to becoming an also-ran. S3's fortunes appear to be turning now because companies are once again looking at S3 products.

The users of the new S3 chips include three of the top five PC makers, according to the release. But S3 said it will not reveal specific company names until these PC companies launch their new systems in mid-1999.

S3 also cited data from Jon Peddie & Associates which shows S3 securing its Savage4 design with five of the top ten add-in circuit board suppliers, including Diamond Multimedia, Creative Technology, and Number Nine.

A graphics circuit board, which upgrades a computer to better graphics, is a popular after-market item for PC buyers. Twenty-five motherboard suppliers in Asia are also cited such as AsusTek, Samsung, and Acer.

"We've had such wild success with Savage4, that it's not a question of who is designing in our new part--it's a question of who isn't designing it in," S3 chief executive Ken Potashner said in a statement.

The Savage4 is targeted at the commercial and consumer PC markets and is designed to deliver 3D graphics "equivalent to high-end, niche gaming [machines], as well as leading 2D graphics and [full-motion] video acceleration," according to S3. It is built around a new 128-bit 3D engine and taps into the upcoming AGP 4X technology from Intel.

Sources close to the company are also tipping their hand about future products. A chip dubbed the GX4 is due by mid-year. This is a brand new architecture for the high-end of the graphics market. Also, Savage/MX, a version of Savage for the portable PC market is slated for mid-year using Intel's AGP technology.

Maybe most significantly S3 is planning a product called Savage/NB, an architecture which integrates a graphics chip with the PC's chipset for the lower end of the PC market, slated for second half of 1999. This will be an important trend in the burgeoning sub-$1,000 PC market.

A chipset that integrates a graphics chip would constitute a component which rivals the microprocessor in importance. To date, the chipset and graphics chips have been discrete components.

Despite all these potentially positive developments, S3 is still struggling to regain lost ground and prove to the market and industry that it is going to regain a semblance of its technology and market share leadership of before.

"I hope S3 is very sure about its projection of $150 million in revenue from Savage4 in 1999. Its investors will surely be upset if S3 fails to fulfill this promise. Even if the goal is reached, there's no guarantee S3 will be profitable," said Peter Glaskowsky, an analyst at the Microprocessor Report.

"The company sells its older pre-Savage products for less than they cost to manufacture, and must stop that practice as soon as possible," he added.

S3's biggest nemesis is ATI Technologies. ATI hit its stride just as S3 began to fade in 1997 and quickly rose to become the leading supplier of graphics chips to the PC industry. In the third quarter of 1998, ATI's cumulative market share for the desktop PC market was 26 percent vs. 15 percent a year earlier, according to Mercury Research. S3 was ranked second.

S3 must also compete against equally aggressive companies such as NeoMagic, 3DFX, Matrox, Trident Microsystems, Nvidia, Intel, and Intel subsidiary Chips and Technologies.

Another setback for S3 as well as other graphics chipmakers is that Intel's newest version of its AGP technology, dubbed AGP 4X, is delayed until the fall time frame. S3 is taking it in stride. "We'll launch Savage with 2X (the current generation of technology) and then PC manufacturers will go back and refresh products with Savage 4X," said Michelle Belufar, a marketing executive at S3.

But it is going to have to work hard and fast. In addition to S3's fourth-quarter loss of $70.3 million reported in January, the company reported losses of $113.2 million, or $2.22 per share, for the year, including write-offs for impaired assets and inventory write-offs.

Revenue for the year came to $224.6 million for 1998, compared to $436.34 million in 1997. Revenue for the fourth quarter came to $41.6 million, less than half of the $101.9 million in sales reported for the same quarter the year before.

The turn in the company's fortunes began when S3 missed two consecutive design cycles in the graphics chip industry. S3 executives have admitted in the past that they didn't implement designs around Intel's AGP architecture with the speed required in the hyper-competitive graphics chip market and thereby quickly lost ground.

But the company could be on the rebound with these announcements today and because it signed a licensing deal with Intel last year that will give it access to Intel's graphics and chipset technologies.

The licensing agreement will give S3 an opportunity participate in the integrated chipset market as its plans for future products show.