ATI Technologies Inc.
TSX : ATY
NASDAQ : ATYT

ATI Technologies Inc.

March 30, 2006 06:00 ET

ATI Reports Results for Second Quarter of Fiscal 2006

MARKHAM, ONTARIO--(CCNMatthews - March 30, 2006) - ATI Technologies Inc. (TSX:ATY)(NASDAQ:ATYT) -

Record revenues of $672 million

To view the Supplementary Financial Information please click on the following link: http://www.ccnmatthews.com/docs/atisup.pdf

ATI Technologies Inc. (TSX:ATY)(NASDAQ:ATYT) today announced financial results for the second quarter of fiscal 2006 ended February 28, 2006.

Revenues(1) for the second quarter were $672 million, a new company record and a 14% increase relative to the first quarter of fiscal 2006. Gross margin percentage was 28.2%. Net income according to GAAP for the quarter was $34.1 million ($0.13 per diluted share). Non-GAAP adjusted net income(2) for the quarter was $44.8 million ($0.17 per diluted share).

(1) All dollar amounts are in U.S. dollars unless otherwise noted. All per share amounts are stated on a diluted basis unless otherwise noted. ATI Technologies Inc. reports under Canadian generally accepted accounting principles (GAAP).

(2) Adjusted net income excludes the after-tax impact of stock-option expense, as well as certain charges, recoveries, gains and other items. Adjusted net income does not have any standardized meaning prescribed by GAAP and therefore is unlikely to be comparable to similar measures presented by other issuers. For an explanation of the items excluded and a reconciliation of adjusted net income to net income determined in accordance with GAAP, please see "Non-GAAP Financial Measurements and Reconciliation" included in this release.

"In the second quarter, ATI delivered compelling products that continue to redefine the leading edge of our markets," said David Orton, President and CEO, ATI Technologies Inc. "Our Crossfire chipsets, Radeon graphic processors (GPUs), Imageon handheld media processors and state-of-the-art Xilleon™ high-definition television chips all delivered top-to-bottom solutions for ATI's customers. With strong customer momentum and product leadership, we are well positioned for continued growth in the PC and digital consumer markets."

Recent Highlights

- Launched the Radeon™ X1900 XTX and CrossFire™ Xpress 3200, reinforcing ATI's performance leadership in GPUs and chipsets.

- Announced and shipped the Mobility™ Radeon® X1600, X1400 and X1300, leadership 90 nanometer mobile graphics solutions that offer the best visual quality to notebooks at every price point.

- Shipped nearly 25 million Imageon® processors for the handheld market, and introduced the Imageon 2380 and 2388 processors and a complete DVB-H solution for the emerging mobile TV market.

- Acquired certain assets and employees from Shanghai-based Macrosynergy Technology Co., Ltd., an alliance company of XGI Technology Inc., further positioning ATI for international growth opportunities in key markets.

- Renewed normal course issuer bid (share buyback program) to commence on March 30, 2006.

Q3 Outlook

Revenues for the third quarter of fiscal 2006 are expected to be between $640 million and $680 million. Gross margin percentage is expected to improve to approximately 30.0%. Operating expenses, excluding stock option expense, amortization of intangible assets and other charges, are expected to be between $155 million and $160 million. The foregoing outlook contains forward-looking statements about ATI's financial condition and results. Reference should be made to the "Important Information Regarding Forward-looking Statements" set out in the MD&A section of this release.

Non-GAAP Financial Measurements and Reconciliation

In addition to the GAAP results provided in this release, we have provided certain non-GAAP adjusted net income financial measurements that present net income and diluted net income per share on a basis excluding the after-tax impact of stock-option expense, as well as certain charges, recoveries, gains and other items. Details of these excluded items are presented in the table below, which reconciles the GAAP results to non-GAAP financial measurements described in this release. These non-GAAP financial measurements do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measurements presented by other issuers. These non-GAAP measures are provided as a supplement, and should not be considered an alternative to measurements required by accounting principles generally accepted in Canada. Management believes that the presentation of adjusted net income financial measurements provides useful additional information to management and investors regarding the financial and operating performance of our core business operations. These non-GAAP financial measurements are part of the financial and other metrics used by management for purposes of our operating plans and employee incentive programs.



ATI Technologies Inc.
ADJUSTED (NON-GAAP) VS. GAAP RESULTS
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(in thousands, except Three Months Ended Six Months Ended
per share data) Feb. 28 Feb. 28
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2006 2005 2006 2005
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Net income as reported
under GAAP $34,143 $57,193 $41,769 $120,896
Per share, diluted 0.13 0.22 0.16 0.47

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Adjustments:

Add: Stock option
expense(3) 8,713 8,603 17,521 16,652
Add: Amortization of
intangible assets(4) 2,251 1,389 5,449 2,633
Add: Other charges(5) 895 278 9,773 660

Deduct: Tax recovery
for stock option
expense (1,181) (997) (2,275) (1,397)
Deduct: Tax recovery
for intangibles - (131) - (263)
Deduct: Tax recovery
for other charges (62) (25) (692) (58)
Deduct: Gain on
investment - (880) - (880)

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Adjusted net income $44,759 $65,430 $71,545 $138,243

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Diluted weighted
average shares
outstanding 258,158 259,743 257,363 258,830

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Adjusted net income
per share, diluted $0.17 $0.25 $0.28 $0.53

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(3) In accordance with Canadian GAAP, beginning with the first quarter of fiscal 2005, ATI began expensing compensation costs associated with stock options granted to employees after September 1, 2002. See Note 13(i) to the unaudited interim consolidated financial statements.

(4) See Note 3 to the unaudited interim consolidated financial statements.

(5) Includes charges related to regulatory and litigation matters. See Note 8 to the unaudited interim consolidated financial statements.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL RESULTS

This is management's discussion and analysis of financial condition and the results of operations (MD&A) that comments on ATI's operations, financial condition and cash flows for the three and six months ended February 28, 2006 compared to the three and six months ended February 28, 2005. This MD&A should be read in conjunction with the attached unaudited interim consolidated financial statements for the period ended February 28, 2006, the annual MD&A contained in the 2005 Annual Report and the audited consolidated financial statements for the year ended August 31, 2005.

In this MD&A, ATI, we, us and our refer to ATI Technologies Inc. and its subsidiaries.

Important Information Regarding Forward-looking Statements

Forward-looking statements look into the future and provide an opinion as to the effect of certain events and trends on the business. Forward-looking statements may include words such as "plans," "intends," "anticipates," "should," "estimates," "expects," "believes," "indicates," "targeting," "suggests" and similar expressions.

This MD&A and other sections of this release (in particular, the section entitled "Outlook") contain forward-looking statements about ATI's objectives, strategies, financial condition and results, as well as statements with respect to our beliefs, expectations, anticipations, estimates and intentions. These forward-looking statements are based on current expectations and various factors and assumptions. Accordingly, these statements entail various risks and uncertainties. The material factors and assumptions that were applied in making the forward-looking statements in this release include, but are not limited to: the expected rate of growth of the PC and Consumer markets; the expected mix of discrete and integrated chipsets that will be sold in the PC market; our expected market share across various customers and product segments; our expected future design wins both in the PC and Consumer markets; our expected product and production costs; the timely introduction of our new products and our competitors' new products for the PC and Consumer markets; the expected product specific average selling price of our products and our competitors' products; our overall competitive position and competitiveness of our current and future products; the relative mix of desktop and notebook chipsets; changes in the rate of exchange of Canadian currency to U.S. dollars, changes to our overall product mix, potential supply constraints and disruptions for components incorporated into our products and those of our customers; and unexpected variances in the cost or availability of materials, especially silicon wafer, memory, printed circuit boards and packaging costs.

It is important to note that:

- Unless otherwise indicated, forward-looking statements in this release describe our expectations as of March 30, 2006.

- We caution readers not to place undue reliance on these statements as our actual results may differ materially from our expectations if known and unknown risks or uncertainties affect our business, or if our estimates or assumptions prove inaccurate. Therefore, we cannot provide any assurance that forward-looking statements will materialize.

- We assume no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or any other reason.

Material factors that could cause our actual results to differ materially from the forward-looking statements in this release include, but are not limited to: unexpected variations in market growth and demand for new GPU products and technologies; potential constraints on our ability to develop, launch and ramp new products on a timely basis; manufacturing considerations, competition, industry cycles and seasonality; dependence on third-parties for manufacturing; critical industry transitions; and other risks detailed in our regulatory filings. Additional information concerning risks and uncertainties affecting our business and other factors that could cause our financial results to fluctuate is contained in our filings with Canadian and U.S. securities regulatory authorities. Please see Item 3.12 "Narrative Description of the Business - Risks and Uncertainties" in our 2005 Annual Information Form and the Risks and Uncertainties section of our annual MD&A on page 30 of our 2005 Annual Report filed on SEDAR at www.sedar.com. Our Form 40-F and other filings we make with the U.S. Securities and Exchange Commission are available on EDGAR at www.sec.gov.

RESULTS OF OPERATIONS

Revenues

Consolidated revenues for the second quarter of fiscal 2006 increased $64 million or 11% to a record $672 million as compared to the second quarter last year. The PC and Consumer segments accounted for 80% and 20%, respectively, of consolidated revenues in the second quarter.

PC Segment

PC revenues declined 2% year-over-year to $539.9 million, resulting primarily from reduced volumes of desktop discrete products to add-in-board (AIB) and retail customers. Sales of desktop discrete products increased 10% on a sequential basis following the recent introduction of a new family of desktop discrete products which has significantly improved our competitive position in this segment. Sales of notebook discrete solutions were also lower year-over-year as a result of the increased use of integrated graphics in notebook platforms.

The decline in revenues from discrete PC products was partially offset by strong sales growth in desktop and notebook integrated products, which collectively increased by more than 450% from the second quarter of fiscal 2005. Continued market penetration and significant OEM design wins for the Radeon Xpress 200 series for Intel and AMD platforms led to the increase.

Consumer Segment

Consumer revenue grew 127% year-over-year to $132.5 million in the second quarter of fiscal 2006. Handheld unit shipments increased more than 250% while revenue increased approximately 200% on increased sales of Imageon processors to major manufacturers of handheld devices. Digital television (DTV) unit shipments more than doubled while revenues increased approximately 75% on higher product sales to DTV manufacturers and strong design win momentum on integrated and LCD platforms. Royalties and non-recurring engineering revenue related to our game console business increased nearly 50% and continued to represent less than 3% of consolidated revenues.

Revenues for the first six months of fiscal 2006

Revenues for the first six months of fiscal 2006 grew 3% to $1.26 billion from $1.22 billion in the same period last year. The PC segment accounted for $1.01 billion or 80% of consolidated revenues while Consumer represented $257 million or 20% of consolidated revenues. The increase in consolidated revenues was driven by strong sales growth in chipsets and consumer digital products, offset by a decline in PC discrete products.

Gross Margin

Gross margin percentage was 28.2% for the second quarter of fiscal 2006 as compared with 34.2% in the same period last year and 28.7% in the first quarter of fiscal 2006. Year-to-date gross margin percentage was 28.4% as compared with 34.1% for the first half of fiscal 2005. Gross margin percentage for the quarter and year-to-date reflect a decline in desktop discrete margins resulting from a repositioning and write-down of certain products in the fourth quarter of fiscal 2005. As a result, certain products continued to be sold in the first half of fiscal 2006 at significantly reduced margins. In addition, gross margin was also impacted by strong sales of lower-margin integrated chipsets, which comprised approximately one-quarter of consolidated revenues in the second quarter and first half of fiscal 2006, as compared with about 5% for the same periods last year. A larger proportion of higher-margin Consumer revenue helped to offset some of the overall gross margin decline.

Operating Expenses

Total operating expenses, excluding the amortization of intangible assets, stock-based compensation and other charges, increased 7% year-over-year and 13% on a year-to-date basis.

Selling and marketing expenses were approximately flat year-over-year at $37 million in the second quarter of fiscal 2006. On a year-to-date basis, selling and marketing expenses rose 7% due to increases in sales and marketing personnel, as well as advertising and marketing-related activities to drive brand and product awareness.

Research and development (R&D) expenses of $81.8 million were 5% higher than the comparable period in fiscal 2005. For the first six months of fiscal 2006, R&D expenses rose 11% relative to the same period a year ago. The increase was the result of continued investments across both the PC and Consumer segments to support product and technology development, and was primarily driven by increases in technical staff, including the acquisition of professionals from Terayon Communication Systems, Inc. and CuTe Solutions Private Limited in 2005.

Administrative expenses were up $4.5 million or 29% to $20.3 million in the quarter and rose 33% for the first six months of fiscal 2006. The increases were related to investment in the supply chain organization, headcount related expenses and increased professional and consulting fees related to regulatory compliance and litigation.

On a combined basis, selling and marketing, R&D and administrative expenses declined nearly 2% relative to the first quarter of fiscal 2006 due to a focus on cost controls and generally lower prototyping costs, license fees, travel and advertising and promotional expenses.

Stock-based Compensation

In accordance with Canadian GAAP, beginning with the first quarter of fiscal 2005, ATI began expensing compensation costs associated with stock options granted to employees after September 1, 2002. Stock option expense for the second quarter was $8.7 million compared to $8.6 million for the same period last year. Total stock-based compensation includes the costs associated with stock options, restricted share units and deferred share units. Stock-based compensation costs were $11.3 million in the quarter as compared with $12.3 million in the previous quarter and $10.3 million in the second quarter of fiscal 2005.

Interest and Other Income

Interest and other income was $6.8 million in the second quarter of fiscal 2006 as compared with $4.5 million in the second quarter of fiscal 2005. For the first six months of fiscal 2006, interest and other income was $13.0 million, as compared with $6.7 million for the same period in 2005. The increases are attributable to higher rates of return on cash, cash equivalents and short-term investments, an increase in investments in short term investments, as well as a favorable impact on foreign exchange.

Net Income

Net income calculated in accordance with Canadian GAAP was $34.1 million ($0.13 per diluted share), as compared with net income of $57.2 million ($0.22 per diluted share) in the same period last year. The decline relative to last year is primarily due to lower gross margins and higher expenses year-over-year, described previously in this MD&A.

Year-to-date, net income in accordance with Canadian GAAP decreased to $41.8 million or $0.16 per share from $120.9 million or $0.47 per share for the first half of fiscal 2005. The decrease was largely the result of the factors listed above.

Liquidity and Financial Resources

Inventory of $428 million at the end of the quarter increased from $348 million at August 31, 2005. The increase partially reflects a change in our procurement model. In order to minimize the impact of industry supply constraints, we have begun to directly purchase and take inventory of certain components known as substrates. Inventory also grew as a result of chipsets which could not be shipped prior to quarter-end due to a temporary supply shortage of southbridges, as well as the ramping of new desktop and notebook discrete programs to meet anticipated demand. Days of inventory at quarter end were approximately 72 days based on the previous quarter's sales.

Accounts receivable at quarter end was $419 million as compared with $386 million at August 31, 2005. Accounts payable of $403 million was up from $363 million at August 31, 2005. Both accounts receivable and accounts payable are in line with current revenue levels.

Cash flow from operations was negative $8.6 million in the quarter as compared with $28.1 million in the first quarter of fiscal 2006 and $41.3 million in the second quarter of fiscal 2005. Cash position (cash, cash equivalents and short-term investments) at quarter end was $607 million, up from $587 million at August 31, 2005. At February 28, 2006, we had working capital of $723 million as compared to $660 million at August 31, 2005.

Normal Course Issuer Bid

On March 23, 2006, the Board of Directors authorized the renewal of the Company's Normal Course Issuer Bid (NCIB). Under the NCIB, we may purchase up to 25,100,000 ATI common shares, representing approximately 10% of ATI's "public float" as of March 15, 2006, as calculated in accordance with TSX rules and policies. ATI will cancel any shares purchased under this NCIB. Within the past 12 months, 2,408,100 shares were repurchased for cancellation pursuant to a normal course issuer bid commenced on March 30, 2005.

Corporate Developments

On March 6, 2006, we announced the acquisition of certain assets and employees from Shanghai-based Macrosynergy Technology Co., Ltd., an alliance company of XGI Technology Inc. ("XGI"), a developer of multimedia graphics products. We also acquired certain employees from XGI's Santa Clara, California location. The acquisition has increased ATI's presence in China, an important technology and manufacturing market. As a result of the transaction, ATI has added approximately 100 new employees in Shanghai and Santa Clara.

Outstanding Share Data

At February 28, 2006, there were 253,473,516 common shares of ATI outstanding. There were 258,158,100 shares outstanding on a weighted average diluted basis.

Claims and Proceedings

For a description of legal claims and proceedings affecting our business and operations, please see Note 15 to the attached unaudited interim consolidated financial statements.

ACCOUNTING POLICIES

Our unaudited interim consolidated financial statements are prepared in accordance with Canadian GAAP. The key estimates and assumptions that management has made and their impact on the amounts reported in the unaudited interim consolidated financial statements and notes thereto remain substantially unchanged from those described in our 2005 Annual MD&A. See Note 1 to the unaudited interim consolidated financial statements for more information about the accounting policies used to prepare our financial statements.

Conference Call Information

ATI Technologies Inc. will host a conference call today at 8:30 AM (EST) to discuss its financial results for its fiscal 2006 second quarter ended February 28, 2006. To participate in the conference call, please dial 416-641-6105 ten minutes before the scheduled start of the call. No password is required. A live webcast of the call will be available at ir.ati.com/phoenix.zhtml?c=105421&p=irol-quarterlyresults under the Quarterly Results section, Q2 2006. Replays of the conference call will be available through April 6, 2006 by calling 416-695-5800. The passcode is 3176779. A web cast replay will be available at the web site noted above.

About ATI Technologies

ATI Technologies Inc. is a world leader in the design and manufacture of innovative 3D graphics, PC platform technologies and digital media silicon solutions. An industry pioneer since 1985, ATI is the world's foremost graphics processor unit (GPU) provider and is dedicated to deliver leading-edge performance solutions for the full range of PC and Mac desktop and notebook platforms, workstation, set-top and digital television, game console and handheld device markets. With fiscal 2005 revenues of US $2.22 billion, ATI has more than 3,400 employees in the Americas, Europe and Asia. ATI common shares trade on NASDAQ (ATYT) and the Toronto Stock Exchange (ATY).

Copyright 2006 ATI Technologies Inc. All rights reserved. ATI and ATI product and product feature names are trademarks and/or registered trademarks of ATI Technologies Inc. All other company and product names are trademarks and/or registered trademarks of their respective owners. Features, pricing, availability and specifications are subject to change without notice.

For media or industry analyst support, visit our Web site at http://www.ati.com

Contact Information

  • ATI Technologies Inc.
    Dave Erskine
    Corporate PR
    (905) 882-2600 ext. 8477
    derskine@ati.com
    or
    Other ATI Contacts:
    Porter Novelli Canada
    Derek Baker, Manager
    (416) 422-7158
    derek.baker@porternovelli.com
    or
    For investor relations support, please contact:
    ATI Technologies Inc.
    Zev Korman, Investor Relations
    (905) 882-2600, Ext. 3670
    zev@ati.com
    www.ati.com