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ATI on top of graphics world

The 3D graphics chip leader reports a huge surge in earnings, thanks to key design wins with major computer makers.

Graphics chip leader ATI Technologies is on a roll in the 3D arena, and it seems that very little can knock the company out off its perch in the near future.

The Toronto-based graphics chip manufacturer announced today that revenue jumped 92 percent to $1.2 billion for fiscal 1998, which ended in August, while earnings shot up 253 percent to $168 million, a surge largely attributable to key design wins with major hardware manufacturers such as Dell Computer, Compaq Computer, and Hewlett-Packard, as well as strong ties to Intel.

The company's business plan looks solid for the coming year too. ATI's next-generation graphics chip, the Rage 128 series, will likely appear on shelves before Christmas. The line is one of the most widely used in the PC industry.

ATI earnings skyrocket
  Fiscal 1997 Fiscal 1998 % Increase
Sales $602.8 million $1.2 billion 92 %
       
Earnings $47.7 million $168.4 million 253 %
       
Source: ATI

In addition, the company disclosed this week that it is buying graphics chip designer Chromatic and is gearing up to move into the "system-on-a-chip" business of providing integrated processors for set-top boxes and digital TVs. (See related story)

Industry analysts attribute ATI's success to its talent for cutting deals rather than cutting-edge technology.

"Their chips aren't magically delicious or anything," said Peter Glaskowsky, senior analyst at MicroDesign Resources. "There's not a performance thing you can point to. They aren't great from a 3D perspective. They are great from a 2D perspective."

The only area where ATI seems to be on the cutting edge is with the video technology that comes on the Rage 128 chip, he said, and that delayed product won't even emerge until next month.

Instead, ATI excels at pleasing the customer--namely, large computer and motherboard makers that remain the largest buyers of 3D parts. Although ATI's Rage chips may not provide the maximum performance, the company's developer support is superior to what the competition offers.

Moreover, ATI manufactures both graphics chips and add-on boards. This results in more tightly integrated and easier-to-adopt parts, Glaskowsky said.

Intel in many ways was largely responsible for putting the company toward the front of the pack, according to Jon Peddie, principal analyst at Jon Peddie & Associates, a Tiburon, California-based consultancy.

Intel purchased large numbers of ATI Rage processors in 1997 as a way to jump-start interest in its Accelerated Graphics Port (AGP) technology, an architecture introduced last year. ATI had one of the better AGP chips, Peddie said.

Intel purchased ATI's chips, inserted them on boards, and then gave them away to software developers. As a result, the Rage chip became the default choice for hardware companies, which started releasing AGP-enabled systems in the fall of 1997.

"Intel has been one of ATI's biggest motherboard customers," Glaskowsky added. (Intel is an investor in CNET: The Computer Network, publisher of News.com.)

ATI then got a boost when rivals S3 and Cirrus missed two design cycles. "ATI came in like a rocket and scooped up all the design wins," Peddie said. "It was good timing and good execution on their part."

The emphasis on execution has allowed the company to continue to expand. Recently, Gateway replaced a higher-performance Nvidia processor with an ATI chip because Nvidia could not meet supply requirements, according to Ashok Kumar, analyst at Piper Jaffray.

Despite the fact that the 128-bit Rage solution is late, it will likely not affect the company's outlook significantly, Glaskowsky said. Most major computer manufacturers have not moved to available 128-bit chips from competitors and instead are still using the 64-bit Rage chip that came out last year.

ATI has also started to lay the groundwork for moving into the TV set-top arena in a deal with General Instrument and its acquisition of Chromatic. "They've got their foot in the door," he said.