At the end of last week ATI Technologies announced its financial results for the second quarter of its 2003 fiscal year, which ended February 28, 2003. The company continues to gain momentum thanks to its technology and performance leadership, though, it is not enough to make the company profitable.

Revenues for the second quarter were $318.5 million compared to $322.0 million in the first quarter of the fiscal 2003. Gross margin was 28.9 percent, rising 1.6% from 27.3% in the first quarter. On a year-over-year basis, revenues in the second quarter and the first six months were up 19.7% and 24.1% respectively.

Throughout the quarter ATI saw the shipments of high-end R300-based products as well as mobile graphics products grew sequentially, whereas sales of Nintendo GameCube consoles declined, which caused slight downturn in revenues for the quarter. ATI’s products are now installed in 25% of white-box PCs in comparison to only 15% in the first quarter, according to ATI’s officials.

Operating expenses, excluding the amortization of intangibles and other charges, were $80.3 million in the second quarter, up slightly from the first quarter levels of $79.6 million. The increase came primarily from continued investment in R&D. On a year-over-year basis, total operating expenses, excluding the amortization of intangibles and other charges, for the second quarter and the first six months of the year increased 15.0 and 15.1% to $80.3 million and $159.9 million respectively. Higher operating expense levels were primarily a result of increasing investments in R&D, both headcount and the cost of technology required to support the increasingly more complex chips; as well as to a smaller extent, volume related selling expenses.

Adjusted net income for the second quarter was $9.7 million or $0.04 per share compared to $7.0 million or $0.03 per share for the previous quarter, and $17.6 million or $0.07 per share for the same period a year ago.

The net loss for the second quarter was $8.3 million or $0.04 per share compared to net income of $5.0 million or $0.02 per share for the first quarter of 2003 and a net loss of $3.0 million or $0.01 per share for the same period a year ago. The losses were primary caused by special charges that include $8.0 million to settle the U.S. class action law suit, a portion of which is expected to be paid by ATI's insurer; $2.8 million related to costs incurred in connection with the work of the independent Special Committee of the Board relating to the Ontario Securities Commission investigation and Notice of Hearing; $2.8 million resulting from the closure of the European manufacturing operations (ATEL); and $2.4 million in lease termination charges related to surplus space in leased buildings.

Take a look at the statements from the top ATI executives made during the conference call:

Product mix in the second quarter:

• RADEON 9500, 9700 and 9000-series of products contributed 40-50% of the whole revenue. Keeping in mind that only one million of R300 graphics chips used on the RADEON 9500 and 9700 were sold by early March, we can assume that the RADEON 9000-series of products is extremely successful and allocated the a very substantial part of ATI’s sales.
• Mobile products (both discrete and integrated) allocated roughly 33% of ATI’s business for the quarter.
• 90% of the units shipped were chips, only 10% were actual graphics cards (Editor: I wonder, how does ATI Technologies consider its Remote Wonder, as a graphics card or a chip?).
• ASPs improved by segment in the second quarter amid flat unit growth.

Inventory levels declined significantly to $131.3 million at the end of the second quarter compared to both the first quarter of 2003, where inventory was $172.4 million and at year-end where inventory levels were $175.3 million. Inventories were higher in those previous periods due to a major product transition and are now at an appropriate level to support current sales. ATI’s representative said that all legacy products are now “virtually” gone. Analysts believe that current inventory level represents 53 days of sales.

Business and financial expectations for the third and fourth quarters in ATI’s Fiscal 2003:

• Sales will remain flat at about $300 million level.
• Gross margins will improve in the Q3 and will go towards 35% level, though, ATI’s Terry Nickerson declined to comment when he expected to see such margins.
• Nintendo is likely to rebound with strong sales of the GameCube console in the third quarter of fiscal 2003.
• Higher margins are expected to be caused by overall improvement of gross margins within desktop and notebook segments as well as rising fees from Nintendo.
• As we already told you above, operating costs are likely to increase next quarter.
• ATI’s products for consumer electronics will make more significant contribution to the company’s sales in the fourth quarter (up to 10%). No actual figures were set because the company now only has numerous design wins and orders, though, everything depends on the shipments of the actual products.
• ATI forecasted uptick on the corporate notebook market and hopes to benefit from it.
• As one of the largest supplier of graphics solutions for mobile computers, ATI sees quite a lot of business opportunities with Centrino platform for its discrete and integrated graphics products.
• The company said that there are more charges from Ontario Securities Commission during the Q3, though, the sums depend on the situation.

Product mix in the third quarter and beyond:

• RADEON 9600-series of products will eventually substitute the RADEON 9000-series of products.
• RADEON 9700 PRO will remain afloat within the next quarter.
• RADEON 9800 PRO will be the top graphics card offered by ATI Technologies in its third quarter.
• ATI expects its core-logic products that are to be unveiled in the second half of the calendar year to be successful. The company also expects mainboard makers to be interested in such solutions.

The majority of the questions asked were about ATI’s business, not the upcoming products. I can easily explain this: at the moment ATI Technologies is the leader of the market in terms of technologies, right now analysts try to guess if ATI is able to gather momentum and benefit from its current position. Time will tell.