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ATI Technologies announced its financial results for the first quarter of fiscal 2004, ended November 30, 2003. Continuing the success, the company reported astonishing revenue, income and gross-margins, in line with the high-end of expectations released early December.

Markham, Ontario-based ATI Technologies reported record revenues of $469.7 million, a 23% increase over the fourth quarter of fiscal 2003 and a 40% increase over the first quarter a year ago. Gross margin showed continued strength at 35.9%. Net income in the first quarter of fiscal 2004 was $47.4 million or $0.19 per share compared to net income of $22.3 million or $0.09 per share for the fourth quarter of fiscal 2003 and net income of $7.3 million or $0.03 per share for the first quarter last year. Adjusted net income for the first quarter was $49.0 million or $0.19 per share compared to $29.0 million or $0.12 per share for the previous quarter and $9.3 million or $0.04 per share recorded in the same period last year.

As always, below we present the highlights of the quarter and future expectations obtained both from ATI’s press statements as well as from conference call.

Highlights of the Q1 FY2004, product, design wins, announcements:

  • The increase in revenues compared to the first quarter a year ago was the result of increased sales of ATI’s desktop discrete products; greater penetration of AIB and ODM channels; improved sales of notebook discrete and integrated processors due to continued growth of the notebook market and a growing contribution from the consumer business.
  • According to ATI Technologies management, all desktop products, such as RADEON 9800, RADEON 9600 and RADEON 9200, lines did well during the quarter.
  • Consumer products grew 30% quarter-over-quarter.
  • The firm initiated volume shipments of desktop chipsets with integrated graphics.
  • ATI is sampling the world’s first PCI Express graphics processor(s).
  • In the Q1 FY2004 the company inked deals with a number of AIB companies, including ASUS, Creative Europe, etc.
  • The company also experienced some positive changes in the market share during the calendar Q3 2003. 

Highlights of the Q1 FY2004, financials:

  • Higher than expected gross margins were conditioned by rebounded GAMECUBE royalties.
  • The strong gross margin was also driven up by higher margins of desktop products and the absence of serious price pressure from the competition.
  • Operating expenses, excluding the amortization of intangibles and other charges, were $106.7 million in the first quarter, up from $99.5 million in the fourth quarter of fiscal 2003, and up from $79.9 million in the first quarter a year ago.
  • Expenses during the first quarter of fiscal 2004 also reflected higher CAD-related licensing fees, and $3 million higher advertising and marketing expenditures as well as incentive-based compensation expenses.
  • Operating expenses also included one time charge of $6 million spread through “three [expense, editor] lines”.
  • Inventory levels increased to $224.6 million at the end of the first quarter of 2004 from $176.5 million at the end of the fourth quarter of fiscal 2003. Higher inventory levels generally reflect the higher current level of sales. Present inventory level is “10% higher than 60 days of sales”.
  • ATI Technologies’ cash position, including short-term investments, was $380 million as of the first quarter-end, compared to $350.7 million at the end of fiscal 2003.

Product mix notes for the Q1 FY2004 quarter:

  • Consumer products grew 30% quarter-over-quarter (not including GAMECUBE).
  • Margins for consumer products are generally higher than that of “core-business”, e.g. graphics chips, and above 35% range.
  • ATI is continuing to gain momentum with its processors for mobile phones. A major customer of ATI in this field is Motorola.
  • HDTV business was also strong during the quarter; the company signed contracts with Sony and Samsung.
  • Handset logic accounted for roughly 75% or ATI’s consumer business.
  • The company is strong in the high-end of desktop discrete segments. The growth in market share as well as shipments should be attributed primarily to mainstream and low-end products. The 9200 did “extremely well both in terms or revenue and volume,” the management says.
  • The company sees some “white-box” growth in Eastern Europe and China. Europe in general is also strong for the company. ATI is continuing to penetrate North American market. OEM growth appears to be robust.
  • As the company moves from “cards business” to “chip business”, geographies of the company’s revenue sources are changing. Asia is the general market for the company’s products.

Expectations for the future (Q2 FY2004), financials:

  • Q2 outlook reflects relative strength the company saw in the first quarter. Revenue are expected to be in the range of $430 million and $470 million, gross margin is anticipated to be approximately 32% to 35%, but in the “higher range”.
  • Revenue is projected to increase in FY2004.
  • Operating expenses are expected to be roughly flat in Q2 to Q1 FY2004 (the figure includes one-time charge in Q1; so if we exclude the charge, there will be some moderate increase in the operating expenses, management, editor).
  • There will be some pressure on expenses because of prototyping some new products (R420 and derivatives? editor) in the company’s Q2 and Q3 of FY2004.
  • Operating expenses should account for 2/3 of revenue. But the company does see them declining at this very point, however expects them to uptick throughout the year.

Expectations for the future, products:

  • On SoundView Technology Group’s Hans Mosesmann question on R4xx product sampling, ATI’s officials commented “You are jumping a little too far on that… We have an entire line of PCI Express and one of [such products] currently sampling.”
  • The company will be able to supply top-to-bottom PCI Express x16 discrete products for desktops, workstations, mobile PCs, media centre PCs and other applications in calendar 2004. The company will also launch its IGP products for desktop Intel and AMD platforms supporting PCI Express bus. Besides, there will be PEG x16 AIW products in 2004 as well.
  • There will be some pressure on expenses because of prototyping some new products (R420 and derivatives? editor) in the company’s Q2 and Q3 of FY2004.
  • ATI is working with TSMC on both 0.11 micron and 90nm semiconductor technologies.
  • ATI is “very pleased” with ramp, yields and transistor performance of low-k 0.13 micron process this Fall.
  • Mobile is expected to be a major driver for growth in the company’s Q2 of FY2004.
  • No MSI AIB products for white-box channel (probably, no for retail as well, editor).
  • The company is, according to the management, on track to be the No.1 HDTV chipset supplier in North America.
  • More HDTV and handheld leading products to come in 2004.
  • Consumer business is still ranged to account for 10 to 20% of revenue.
  • Expect ATI to decrease “cost-structure” by optimising product yields and expenses.
  • ATI is generally focused on the higher-end IGP products.

Interesting statements:

  • Desktop discrete in both white-box and OEMs is “stable” (obviously in terms of share, editor). But it is anticipated to raise once the desktop overall market grows. If there is double digit growth in overall desktop PCs, the company sees the same trend for its desktop products as well.
  • ATI sees XGI “as a press”, but does not think there would be some breakthroughs from XGI. Nevertheless, ATI still takes the competition seriously. Double-processor graphics cards are not really cost-effective because of not impressive performance scalability, ATI believes.

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