3Dfx, Iomega Results
Plus, Lucent screamin' and SBUX pleasin'
by Jeff Fischer

ALEXANDRIA, VA (July 16, 1998) -- Like a stealth bomber (complete with disintegrating parts), 3Dfx flew low last night and bombed the public with its earnings report a day early, according to our war plans. Luckily the surprise attack didn't faze our Five-Star General, Monsieur Fool Port (he's French), due to his long-term strategy. Missing the news by a day didn't alter anything in the Fool's bunker.

3Dfx (Nasdaq: TDFX) reported earnings of $0.54 per share, topping estimates by six cents, on revenue of $58.6 million, up from $50 million last quarter. The business economics improved again, with operating margins rising from 18% last quarter to 20%. Strong margins can partially be attributed to the fact that Voodoo2 accounted for 90% of revenues.

The beautiful thing about a technology business that has a market lead (and Intel has enjoyed this position for years) is this: Sales of new, higher margin technology provides the fuel for the company's research and development fire. It's with dollars earned through leadership that a company is able to keep building on that leadership, and continue to distance itself from second-tier companies. 3Dfx spent over $8 million on research and development this quarter, nearly four times the $2.3 million that it spent in the second quarter of last year.

In the conference call, 3Dfx shared that it's positioning itself for a strong 1999, during which it should further capitalize on its lead in the 3D graphics accelerator market and introduce exciting new products, while continuing to brand itself and build partnerships with industry component manufacturers and game makers.

Enough with the business mumbo jumbo right now -- what's with the stock price? The shares fell 18% in the face of all this good news. Granted, 3Dfx is a semiconductor chip maker and will trade at a discount because of it, but its gross margins are as strong as Intel's, its growth rate is too high to mention (three figures across the board, four on earnings growth), and its market leadership is unquestionable. (Plus, it has leadership with entrenchment. Hundreds of games are being made under the 3Dfx banner.) The question remains, then, what kind of valuation does the stock deserve?

At $17, 3Dfx now trades at 14.5 times the trailing earnings of $1.17 per share and at 8 times 1999 earnings estimates. And this is before we consider cash. As of June 30, the company had $85 million in cash and equivalents, or just over $5 per share in cash. If you knock this from the share price, you have a $12 equity trading at 10 times trailing earnings and 6 times next year's estimates. Even beleaguered chip stocks are granted these kind of disrespectful earnings multiples. (In fact, even Innovex (Nasdaq: INVX), with its declining sales and earnings of late, has multiples above this.) You'd think that a company doing as well as 3Dfx would be given a premium valuation over second-tier chip companies. And these days, it's difficult to even tell who is number two behind our guy, because 3Dfx has done so well.

The bulletpoint details of the conference call are available on our 3Dfx web message board, primarily in two posts (post one, and post two). One area that the company has been unsatisfactory is in its investor relations department. The person in charge of the department recently resigned, so perhaps it'll improve. We've called 3Dfx three times and left three messages the past few days with no results. If we get access to a conference call replay (for transcribing purposes), we'll provide a summary. Until then, the message board does provide the scoop from a few angles.

Despite the decline in 3Dfx, Le Fool Port was able to rise 1% and top the S&P. America Online (NYSE: AOL) and Lucent Technologies (NYSE: LU) both stormed to new highs. Old Lou has been screaming for attention the past weeks -- attention we've denied it. Lucent has continuously gained ground, rising from $80 to $92. The company reports earnings on July 22, and $0.27 per share is expected.

We will be able to provide a summary of Iomega's (NYSE: IOM) conference call tomorrow (as well as Intel's, by the way). This afternoon Iomega reported a second quarter in line with expectations. Revenues declined 2% from last year, to $394 million, and the company lost $33 million before charges, or $0.13 per share. Zip drive sales to computer manufacturers totaled more than 50% of total Zip sales and, being lower margin sales, the company admits that it needs to lower its expenses in order to make this side of business more profitable. That initiative and ending the unsuccessful but expensive ad campaign should help Iomega reach profitability again by the fourth quarter.

Sales in North America climbed 4%, while Asia and the Pacific Rim declined 4%. But Europe was the true weak link, trailing off 13%. Sales in Europe declined more significantly the past two summers, too. Europeans are smart; they tend to take long vacations over the summer.

Today we planned to review the Fool's thoughts on Iomega, but of course we'll do that after hearing and summarizing the conference call tonight. Suffice it to say for now that Zip disk sales just achieved a record quarter and Zip drives are being offered in more PCs than ever before. The company is going to find a way to become profitable on these sales and the coinciding disk sales. The battle cry since 1995 has been that Zip could become a new standard. Arguably, Iomega has never been closer to realizing this. The more PCs that ship with Zip drives installed, the more likely critical mass becomes -- no matter what other solutions are out there, because none of those are offered on all of the major computer boxes.

Finally, Starbucks (Nasdaq: SBUX) apparently declined on a random report that some insiders at the company are selling shares. Most sales are options related, though, and as long-time Fools know, AOL insiders, for example, have sold shares every year for as long as we've owned the stock. Insiders sell shares for many reasons, none of which usually mean that the stock is going down. Over the past years AOL insiders -- and recently Amazon insiders -- are surely kicking themselves for selling shares.

Anyway, we have good news on Starbucks. We wrote in the SBUX buy report that the company should open its conference call to shareholders, something that it had never done. Today the company shared that, beginning with its quarterly report on July 23rd, it will provide a conference call replay number for all investors.

This is great news. Its genesis might have something to do with the fact that Starbucks was the topic of discussion on a recent Fool Radio Show, during which Tom and David suggested that all listeners e-mail the company about its conference call policy. However it came about, though, the company is to be commended for improving its relations with shareholders and providing this service.

Now, if we can just get 3Dfx and Amazon.com to offer the same.

Fool on!

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07/16/98 Close

Stock Change Bid ---------------- AMZN + 7/8 113.25 AOL +4 1/8 122.63 T --- 59.56 DJT + 1/4 7.88 DD + 1/16 68.19 XON - 1/16 71.44 INVX - 7/16 15.00 IP +1 7/8 44.81 IOM + 3/8 6.06 KLAC + 7/16 27.44 LU +2 1/8 92.63 SBUX -1 3/16 55.13 COMS + 3/16 29.69 TDFX -3 7/8 17.38
Day Month Year History Annualized FOOL +1.01% 8.61% 54.99% 420.13% 51.88% S&P: +0.78% 4.42% 22.01% 158.29% 27.19% NASDAQ: +0.30% 5.58% 27.40% 177.79% 29.56% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 122.63 3272.12% 9/9/97 580 Amazon.com 19.11 113.25 492.60% 5/17/95 1960 Iomega Cor 1.28 6.06 373.48% 10/1/96 84 LucentTech 23.81 92.63 289.05% 8/12/96 130 AT&T 39.58 59.56 50.49% 2/20/98 215 DuPont 59.83 68.19 13.96% 2/20/98 200 Exxon 64.09 71.44 11.46% 4/30/97 -1170*Trump* 8.47 7.88 7.01% 7/2/98 235 Starbucks 55.91 55.13 -1.40% 2/20/98 270 Int'l Pape 47.69 44.81 -6.04% 1/8/98 425 3Dfx 25.67 17.38 -32.31% 8/13/96 250 3Com Corp. 46.86 29.69 -36.65% 8/24/95 130 KLA-Tencor 44.71 27.44 -38.63% 6/26/97 325 Innovex 27.71 15.00 -45.87% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 87063.75 $84481.88 9/9/97 580 Amazon.com 11084.24 65685.00 $54600.76 5/17/95 1960 Iomega Cor 2509.60 11882.50 $9372.90 10/1/96 84 LucentTech 1999.88 7780.50 $5780.62 8/12/96 130 AT&T 5145.11 7743.13 $2598.02 2/20/98 215 DuPont 12864.25 14660.31 $1796.06 2/20/98 200 Exxon 12818.00 14287.50 $1469.50 4/30/97 -1170*Trump* -9908.50 -9213.75 $694.75 7/2/98 235 Starbucks 13138.63 12954.38 -$184.25 2/20/98 270 Int'l Pape 12876.75 12099.38 -$777.38 8/24/95 130 KLA-Tencor 5812.49 3566.88 -$2245.62 1/8/98 425 3Dfx 10908.63 7384.38 -$3524.25 6/26/97 325 Innovex 9005.62 4875.00 -$4130.62 8/13/96 250 3Com Corp. 11715.99 7421.88 -$4294.12 CASH $11876.47 TOTAL $260067.28

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