StockTalk:
TMF Interview With 3Dfx Interactive CEO Greg Ballard
With Yi-Hsin Chang (TMF Puck)

September 17, 1998

Part 3 of 3

TMF: What would you tell investors who are afraid to invest in 3Dfx because of its turbulent history, and how would you convince an individual to buy stock in 3Dfx right now?

Ballard: Well, that's a very good question, isn't it? Its turbulent history has been almost entirely in the stock trading and not in the performance of the company with the exception of this last quarter -- I'm really sorry that that happened because I would have loved to have said that it was entirely the function of the stock market. I guess what I would say is there has been a lot of suspicion about the staying power of any graphics company. To some extent we live in the shadow of these other companies that have come and gone. We have no intention of coming and going.

If you look at our road map, even what we have talked about publicly -- to follow on Banshee being an example of that, we have alluded to a next-generation part -- you will see that we're in no danger of slipping into second, third or fourth or fifth place in this business. We are number one right now in terms of performance, we're number one in terms of retail, and we're soon to be, we believe, number one in terms of the performance segment of the OEM market. So watch our performance. We have not messed up in terms of positioning yet. I guess that's the first answer.

The second answer is -- and this is one that really pains me -- just to look at the valuation of this company. Maybe you take out our cash and look at just what is referred to as the enterprise value of this company. We've got a valuation right now that's roughly the same as many second-round venture companies here in [Silicon] Valley, and yet we're a company that by even the most conservative estimates of the analysts is going to do a better than $175 million profit this year.

Take that same revenue rate and profitability rate and look at Broadcom, a company that's also a service provider that just happens to be in the set-top box business, and they've got a multibillion dollar market cap. So it's a matter of time we believe before the market sort of turns its gaze and sees that we've executed well for a number of quarters and that we've grown this business, that it may have some occasional ups and downs, but so does General Motors -- every company has occasional ups and downs. The question is, do you think that the trend line overall is up?

You look at our company, we closed 1996 at somewhere around $4 to $5 million in revenue. We closed 1997 at $44 million in revenue. We will close 1998 at somewhere in the nearly $200 million range. The analysts sort of differ on that. With that sort of growth rate, it is absolutely baffling to me that our valuation could be so low. On a personal level, I consider this to be a wonderful opportunity to buy into a company that I believe is going to be the leader in this very exciting area.

"On a personal level, I consider this to be a wonderful opportunity to buy into a company that I believe is going to be the leader in this very exciting area."

TMF: Do you plan to try boosting the share price, such as with a buyback any time soon?

Ballard: Well, you know it's certainly something that the board talks about from time to time. I will tell you that the biggest problem with that is that the stock market does not typically in most recent times respond to that. You end up spending cash that you could use for other purposes to buy back your stock, and a lot of times it doesn't boost your stock price at all. And the board would rather we save our cash right now and use it for other growth opportunities whether it's acquisitions or investing in the future of this company. That could change and it's certainly something that we look at but there's currently no plans to do a buyback.

TMF: Are you doing anything to attract institutional investors and portfolio managers to buy the stock, and are you talking more with analysts than you have in the past?

Ballard: Yes, we have, but we've always done that. I mean, we have a very good relationship with a number of institutions. They've been following us, and they've had a fairly consistent message to us, which is that they really like the retail business. They respect it. They respect what we've done in terms of branding and content, but what they're waiting for in order to verify our credibility is for us to prove that we can be a significant player in the OEM market because they believe, right or wrong, that that's where the big dollars are.

So we believe that no matter how many doors we bang on, no matter how many presentations we make, that in the end we're going to be rewarded on our performance, and our performance is going to be typically measured in the OEM market. So our belief is that when we are able to start announcing the specifics of some of these OEM design wins, that you'll start to see the institutions perking up their interest. Having said that, there are obviously some institutions that see the opportunity even now, and I suspect that that's the reason why you saw an increase in our share price even the last couple of days after its lows. Some people just recognize that at some point this becomes a really good buy no matter what.

"Our belief is that when we are able to start announcing the specifics of some of these OEM design wins, that you'll start to see the institutions perking up their interest."

TMF: What do you think are your biggest challenges going forward?

Ballard: Well, one big challenge is to keep everybody in the company from focusing too much on the report card of our stock price and to focus on the great prospects of the business. That's a challenge that a lot of people in the Silicon Valley have right now with no exception. We have a particularly acute challenge because we were at one point trading as high as $35, so one of the things that I'm spending more time on is just talking to employees about our vision and reassuring them that we're on track.

The other challenge is to make sure that we -- this is going to sound self-serving -- make sure that we don't do too much too fast in the OEM world. We've had some inquiries from very large companies to buy a lot of Voodoo Banshees, and one of the things that we talk about internally is how much business can we do in the fourth quarter. Now by the time the first quarter rolls around and the second quarter of next year and we're introducing our next version of Banshee into the OEM world, we want to be able to do as much business as possible with these OEMs. So the question or the challenge is what can we do in the fourth quarter to make sure that we maintain high levels of service when we're just starting out in the OEM world and yet create the relationships with these guys to go forward and really blow through the numbers in the first or second quarter with the OEM. And that's a delicate balance, one that we're grappling with on a daily basis.

TMF: Do you want to add anything else?

Ballard: We've focused so much on third quarter and what's going on in the OEMs lately that we have sort of overlooked some of our big wins in the content side. People talk about Glide having faded a little bit in glory, and I don't quite understand that. Glide has also allowed us to have a few titles that have come out that are exclusive to 3Dfx. As a matter of fact, our most recent count is that somewhere between 50 and 60 titles in the third and fourth quarter will run only on 3Dfx. An example of that is the one that we announced last week, Diablo2. The Diablo was a huge title, and we're selling millions a year. Diablo2 looks to be a worthy successor to it.

If you want to play that game in 3D, you're going to have to have a 3Dfx chip set. And that was true with Unreal, which for all intents and purposes was exclusive for 3Dfx for the first two or three months it was on the market. So if you were an avid gamer or a semi-avid gamer like me, and you want to play the leading games in the marketplace, the only safe choice is to have 3Dfx, and we're going to continue to push that advantage. That is an advantage we have that nobody else has.

Final Fantasy 7, which was last month, I guess, the number three seller -- it's gone down a little bit -- was played on 3Dfx . It was a D3D title so it played on 3Dfx and it played on a number of other accelerators. It did not play at all on any of the nVidia chip sets, including TNT so that if you wanted to play one of the great role-playing games of this decade, you had to have something other than an nVidia chip set.

So the point here is, 3Dfx is the only chip set that is compatible with all major APIs and because of that, we are the safe bet, ironically, for someone who wants to play games because they know that when they buy a game and bring it home and put it in their computer, it's going to play if they have a 3Dfx accelerator.

TMF: Thank you so much for your time.

Ballard: I appreciate the opportunity to talk to you. We're big fans of yours, so we appreciate it.

Related links:
3Dfx website
3Dfx message board
Fool on the Hill: 3Dfx and Market Efficiency (9/17/98)
StockTalk interview with 3Dfx (6/3/98)
Dueling Fools on 3Dfx (3/4/98)

Got an idea for StockTalk? Who would you want us to interview and what should we ask? Drop us a note at [email protected].

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