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ATI Between The Fires

ATI Technologies was founded in 1985 and is currently the oldest and most experienced graphics chip designer on the planet. But the company is no longer a designer/producer of graphics cards or graphics chips only: it develops a very broad portfolio of multimedia products. Unlike AMD, the company has always said that it is tailored for product portfolio expansion and currently its GPU business accounts for about 50% of the revenue. Still, the company is greatly focused on the PC segment: 77% of revenues come from chipset and GPU businesses, while about 23% are the earnings of consumer electronics division.

While generally the business of ATI grows stably, there are a lot of risks associated with it. The main one today is definitely Intel’s possible entry into the market of discrete graphics processors as well as Intel’s ability to increase its production capacities extremely, which will allow the company not only to supply enough CPUs and chipsets for everyone, but may also guarantee that the firm may enter an additional market with significant volumes of products.

Already now Intel dominates the market of chipsets and graphics devices (with its chipsets containing built-in graphics cores, which are sometimes referred as IGPs, or integrated graphics processors) and if the company presents competitive lineup of standalone GPUs, significant part of ATI’s discrete GPU business will be affected, which will mean that ATI’s and Nvidia’s revenues will go down.

On the other hand, ATI faces competition from Nvidia Corp. and tremendously needs any advantage it could have over the rival. The main advantage ATI does already have is that a huge chunk of its business has no relation to the PC market performance and, given that it is not obvious that Intel will be able to offer competitive GPU lineup, the company does not need to be acquired by anybody. Yet, ATI feels tremendous pressure on its margins now: the company’s gross margin in the most recent quarter was 30.1%, while Nvidia’s exceeded 42%, primarily because ATI’s margins in the desktop discrete segments deserve to be better: they were “not in the PC gross margin model in Q3,” said Patrick Crawley, ATI’s chief financial officer during the most recent conference call.

“Despite missing the streets revenue target in Q1 2006, ATI’s long-term outlook is positive. As a result, there is a risk that the purchase could command substantial goodwill. This would dilute the profitability of the deal or force AMD to incur a significant write-down at some later point,” said Martin Kariithi of TBR.

 
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