Graphics chip boosts Videologic

VIDEOLOGIC, the computer chip designer, is confident that it will be able to license its new graphics chip to several personal computer manufacturers early next year.

The company is in talks with about 15 PC manufacturers about its PowerVR2 Series2 chip, which can deliver two-dimensional and three-dimensional graphics, making it especially useful for playing computer games.

No agreements have been signed yet, but analysts expect Videologic to clinch several deals early next year. NEC, the Japanese group that manufactures the chips for Videologic, is preparing volume production in the first quarter of next year.

A deal with a large PC manufacturer would mark another step in the rehabilitation of Videologic, which has consistently disappointed investors in recent years despite being one of the UK's few truly high-tech companies.

Earlier this year Sega, the Japanese electronics giant, selected Videologic's chip for its new Dreamcast games console.

The device, which is set to replace Sony's Playstation in the affections of computer game freaks, is currently selling at a rate of 150,000 a week - even though it has yet to launch in Europe and the United States.

Revenues from the contract helped Videologic reduce its pre-tax loss to pounds 378,000 in the six months to September, compared to a pounds 2.9m loss in the same period of last year. Brokers now forecast a profit of more than pounds 3m for the full year.

"We have got our ducks much better lined up than we have in the past," said Geoff Shingles, Videologic's chairman, adding that the company had also dramatically reduced its cost base.

Although the company is keen to attract PC manufacturers, it points out that the revenue stream is essentially short term because suppliers have to compete every time a new model is introduced - usually two or three- times a year.

Videologic is therefore also hoping to have its chips included in television set-top boxes.

"In the future all home entertainment is going to be centralised on that one box in your living room," said Patrick Yau, an analyst at Nomura, the Japanese bank.

A reliable profits stream would allow institutional investors to take Videologic seriously again. However, analysts warned that the shares, which rose 2p to 52.5p yesterday, are still not particularly cheap.

"For the current year the shares are pretty fully valued, although you can make a longer-term case for them," said Mr Yau.

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