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ATI sees growth in Taiwan struggle

The graphics chipmaker posts fourth-quarter earnings that come close to expectations and the chief executive says demand is up thanks to the earthquake in Taiwan.

ATI Technologies, the world's largest graphics chipmaker, posted fourth-quarter earnings which were close to expectations while the chief executive said that demand is stronger than expected because of last month's earthquake in Taiwan.

ATI Technologies said net income (adjusted) rose 10 percent to $32.3 million, or 15 cents a share, excluding one-time charges. Consensus estimates had been about 16 cents. This compares to $29.4 million, or 14 cents per share, in the same period last year.

Actual earnings were reduced because of one-time charges related to the acquisition of system-on-a-chip developer Chromatic Research. Including the Chromatic charges, ATI's net income for the fourth quarter came to $16.8 million, or 8 cents a share.

The company said sales for the fourth quarter were $304.7 million, an increase of 49 percent from the $204.7 million recorded last year.

The company attributed the increase in sales to a rise in revenues from graphics chips for mobile computers and its Rage 128 components and circuit boards.

Sales for the year ended August 31 increased 67 percent to $1.23 billion, up from $737.3 million for fiscal 1998. Adjusted net income for the fiscal year rose 48 percent to $159.3 million, or 73 cents per share, compared with $107.3 million or 50 cents per share for the 1998 fiscal year.

The company's high-end "Rage Fury Maxx" product did well, said K.Y. Ho, ATI's chief executive. He also cited increasing sales to TV set-top box and consumer appliance makers.

"We were shipping small quantities last quarter but now volumes are quite high," he said about this new market segment for ATI.

But the company also said that

Fluctuating memory
Market prices for 64-megabit chips, the most common kind of computer memory. Prices were already climbing before the earthquake in Taiwan.
Date Price (spot) Price (contract)
Feb. $9-$10 $9-$10
July $4.90-$5.30 $5.20
Sept. 16 $13.95-$15.20 $6
Sept. 21 Taiwan earthquake
Sept. 30 $16.90-$19.10 $6-$9.30
Oct. 19 $15.38-$18.50 $7.25
*Spot market applies to single transactions. Contract prices apply to longer term agreements.
Source: Dataquest
because its most popular chip, the ATI Rage Pro, is a mature product and because pricing is "commensurate with lower pricing structure, fiscal fourth-quarter sales of the Rage Pro had the effect of moderating overall sales growth," according to a statement.

Though ATI reiterated that it had significant inventory to compensate for supply shortfalls because of the Taiwan earthquake, Ho stated that demand was higher because of the disaster. He concluded that PC makers are turning to ATI for a stable supply of chips because it is the leading graphics chip supplier.

"Supply is tight but we keep inventory," he said. "Everybody lost two weeks of supply," Ho added.

He also confirmed that ATI has been forced to raise prices of memory used in its products. He said memory cost increases must be "passed on," but memory prices in the last few days have leveled off to pre-earthquake levels. Compaq Computer is also raising prices for upgrade memory products for notebook PCs, a source close to Compaq said yesterday.

The price surge for memory, however, may have already peaked, postulated Mark Giudici, director and principal semiconductor pricing analyst at Dataquest. Memory prices started to rise prior to the earthquake, a hike which corresponded to greater-than-expected PC demand. On September 30, panic buying was at its crest, but has tapered off a bit since then, he said. Companies such as Dell and ATI have suffered because of price hikes, in other words, but relief could be on the way.

"The dust is settling on the earthquake. It is not a worst-case scenario," he said.

In other financial highlights, the company said that gross margins were off one point to 36 percent from the third quarter of this year as a result of the introduction of new products "with their higher initial material costs, and more expensive memory and silicon." This trend is expected to continue through fiscal 2000.

Operating costs (excluding acquisition amortization costs of $52.1 million) for fiscal 1999 increased 91 percent to $240.8 million, up from $126.3 million for fiscal 1998. "This was attributable to an increase in R&D expenses relating to the acquisition of the Chromatic Research development team and incremental sales, marketing and R&D expenses to support an increased number of product programs including desktop, mobile and set-top components and boards," the company's statement said.

ATI said operating expenses for the fourth quarter "rose to reflect a historical pattern that is indicative of the required ramp up of production to ensure a quantity of products for the Fall and Christmas selling season."