Fool.com: NeoMagic's Act Improving (News) November 18, 1999

NeoMagic's Act Improving

By Dave Marino-Nachison (TMF Braden)
November 18, 1999

Shares of notebook computer multimedia accelerator device maker NeoMagic (Nasdaq: NMGC) reversed a short-lived rally today, despite the company's turning in fiscal third-quarter (ended Oct. 31) earnings of $0.16 per share, missing last year's $0.33 mark though a nickel better than First Call's three-analyst consensus estimate.

Margins were disappointing, with production problems continuing to plague the company as they have all year. Though operating expenses decreased year-over-year, cost of sales jumped nearly 28%, badly outpacing revenue growth -- 4.4% for the quarter -- and severely hurting profits.

It's been capacity constraints, production costs, and product delays that have hurt NeoMagic in 1999 and the once high-flying, if erratic, stock has sunk to all-time lows for much of the calendar year. Many market watchers, though, believe the company has done well to get its fabrication issues -- NeoMagic doesn't do any of its production in house, which can be a mixed blessing -- in order, possibly setting the stage for a return to the impressive valuations of years past.

For much of the year, and Q2 in particular, NeoMagic couldn't keep up with demand for its key product, the MagicMedia256AV graphics and DVD video accelerator, losing sales as a result. This time around, the company was able to pry incremental capacity from its suppliers to keep pace.

"We worked closely with our vendors on bringing more production on line near-term," said CEO Prakash Agarwal. "The MagicMedia256AV provided the majority of our revenues during the third quarter and we expect it to continue doing so for several quarters." Initial shipments of the newest version have begun and are expected to take off in Q1, though delays in getting the product to market mean they won't be in some of the notebooks to come out early next year.

And now a new fab, Germany's Infineon Technologies, has begun producing NeoMagic's accelerator's full-time with shipments to pick up in fiscal Q4. That's key since current manufacturing partners Toshiba and Mitsubishi have had trouble meeting demand for NeoMagic's products.

Also worth following is the company's gradual expansion into new product lines; NeoMagic is looking into making accelerators for other devices, such as digital cameras, which would seem a natural fit for the company since, like notebook computers, they require space conservation and the ability to work with battery power.

If NeoMagic is now able to keep up with the demand for its notebook accelerators, it stands to grow revenues not just because of the expected expansion of the portable PC market but from new market share growth as manufacturers become increasingly assured that they'll get what they order. And if NeoMagic can complement that with expansion into new product lines, better days for the company would appear to be in order. With the stock currently trading at around 16 times projected full fiscal year earnings, it certainly seems worth a closer look.

Related Links:
NeoMagic Web Page
NeoMagic Message Board
Fool Plate Special, 11/13/97: NeoMagic's Earnings Enchant

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