ATI Technologies Inc.

ATI Technologies Inc.

March 24, 2005 06:00 ET

ATI Reports Second Quarter Results


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: ATI TECHNOLOGIES INC.

TSX SYMBOL: ATY
NASDAQ SYMBOL: ATYT

MARCH 24, 2005 - 06:00 ET

ATI Reports Second Quarter Results

MARKHAM, ONTARIO--(CCNMatthews - March 24, 2005) - ATI Technologies Inc.
(TSX:ATY)(NASDAQ:ATYT)

Revenues increase 31% to $608 million

ATI Technologies Inc. (TSX:ATY)(NASDAQ:ATYT) today announced a 31%
increase in revenues and a 20% improvement in net income for the second
quarter of fiscal 2005 as compared to the same quarter last year.

Quarterly revenues(1) grew $145 million to $608 million relative to the
second quarter of fiscal 2004 as a result of strong sales in both the
personal computer (PC) and digital consumer segments. Gross margin
percentage was 34.2%. For the second quarter, net income and net income
per share were $57 million and $0.22, respectively. Stock-based
compensation costs(2) in the second quarter of fiscal 2005 totaled $10.3
million. Net income and net income per share excluding these costs and
related taxes would have been $66 million and $0.25, respectively, as
compared with $50 million or $0.20 in the second quarter of fiscal 2004.

"In addition to posting solid year-over-year results, ATI performed well
in a seasonally down quarter," said David Orton, ATI's Chief Executive
Officer. "Strong sales of discrete PC products helped to offset the
anticipated seasonal weakness in our digital consumer business, which we
expect will rebound nicely in the second half. With the best solutions
for visual applications in the PC and digital consumer markets, we're
excited about our prospects for the rest of 2005 and beyond. The share
repurchase plan announced separately today reflects the confidence of
the board and management team in ATI's long-term growth potential."

(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) 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. Total
stock-based compensation includes the costs associated with stock
options, restricted share units and deferred share units.



---------------------------------------------------------------------
Three months ended Feb. 28, 2005
---------------------------------------------------------------------
Excluding Stock-Based Including Stock-based
Compensation Costs Compensation Costs (GAAP)
---------------------------------------------------------------------
Net income $66.2 million $57.2 million
---------------------------------------------------------------------
Net income per share $0.25 $0.22
---------------------------------------------------------------------


Outlook

For the third quarter, we anticipate a slight increase in our consumer
business and a seasonal decline in our PC business, which is expected to
result in revenues of $560 to $600 million. Gross margin percentage is
expected to remain approximately the same as the second quarter.
Operating expenses, excluding stock-based compensation costs, are
expected to increase by about 5% sequentially as we continue to invest
in research and development to create a foundation for long-term growth.

Looking into the fourth quarter, we expect our consumer business to
nearly double revenues from third quarter levels, and expect the PC
business to be better than seasonal due to growth in integrated and new
products.

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, 2005 compared to the three and six months ended February
29, 2004. This MD&A should be read in conjunction with the attached
unaudited interim consolidated financial statements for the period ended
February 28, 2005, the annual MD&A contained in the 2004 Annual Report
and the audited consolidated financial statements for the year ended
August 31, 2004.

In this MD&A, ATI, we, us and our mean 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 news release contain
forward-looking statements about ATI's objectives, strategies, financial
condition and results. These "forward-looking" statements are based on
current expectations and entail various risks and uncertainties. Our
actual results may materially differ 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.
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, including our 2004 Annual Information Form and
2004 Annual Report filed on SEDAR at www.sedar.com.

Unless indicated otherwise, this MD&A reflects our expectations as of
March 24, 2005.

Any reference to "year-over-year" in this MD&A refers to a comparison of
this year's second quarter results versus the second quarter of the
prior year unless otherwise noted.

RESULTS OF OPERATIONS

Revenues

Second quarter revenues grew $145 million to $608 million relative to
the same period a year ago. The PC segment accounted for $550 million or
90% of revenues while the Consumer segment accounted for $58 million or
10% of revenues in the quarter.

Effective the first quarter of fiscal 2005, we operate in two reportable
segments: PC and Consumer. The PC segment includes all 3D graphics,
video and multimedia products developed for use in desktop and notebook
computers. The Consumer segment includes products used in cell phones,
digital televisions (DTVs) and other consumer electronics. The Consumer
segment also includes royalties and contract engineering services under
development and licence agreements with cell phone and game console
product manufacturers.

PC

PC revenues were up just over 30% during the quarter compared to the
same quarter last year primarily due to strong sales of discrete desktop
products to the add-in board (AIB) channel and from PCI Express design
wins with PC Original Equipment Manufacturers (OEMs). We continued to
successfully penetrate the AIB channel, with record quarterly sales up
nearly 50% from the second quarter last year. Product demand was
particularly strong for mainstream AGP and high-end PCI Express products
among OEM and AIB customers. Workstation product revenues more than
doubled from the second quarter last year as we began to ramp a number
of PCI Express-based OEM design wins.

Notebook discrete revenues in the quarter rose about 35% compared to the
same quarter last year. These were somewhat offset by lower sales of
integrated products.

Consumer

Handheld revenues in the second quarter rose almost 50% compared to the
same quarter last year due to a growing number of design wins and strong
product acceptance of the IMAGEON family of media processors,
particularly the IMAGEON 2250. Revenues from digital television products
grew dramatically due to the success of our XILLEON and NxtWave products
with television manufacturers and the accelerating market transition
from analog television to DTV in the U.S.

Revenues for the first six months of fiscal 2005

Revenues for the first six months of fiscal 2005 grew 31% to $1.2
billion from $933 million in the same period last year. The PC segment
accounted for $1.1 billion or 87% of total revenues while Consumer
represented $154 million or 13% of total revenue. Revenue growth
resulted from strong market share and sales in desktop discrete,
continued strength in the notebook market and strong sales improvement
in our handheld and DTV consumer businesses.

Gross Margin

Gross margin percentage for the second quarter of fiscal 2005 was 34.2%,
down 0.4% from 34.6% for the same period a year ago. Gross margin
percentage for the first six months of fiscal 2005 was 34.1%, down from
35.2% for the same period last year.

The decline in gross margin percentage in both the quarter and
year-to-date was primarily due to production costs associated with the
introduction and ramp of our new PCI Express products - particularly in
the desktop market. The overall gross margin percentage decline was
partially offset by the strong sales growth in our consumer business,
which has margins that are typically higher than our corporate average.

Operating Expenses

In total, our operating expenses, excluding stock-based compensation,
increased 31% in the quarter and 22% on a year-to-date basis compared to
the same periods last year, respectively. This was driven by the need to
make the necessary investments to maintain technology leadership and
create a platform for continued growth.

The foreign exchange impact of a stronger Canadian dollar increased
operating expenses in the second quarter by $4 million or 4% compared to
the same quarter last year.

Selling and marketing expenses were up 34% in the quarter compared to
the second quarter last year. The increase was primarily related to
higher levels of personnel, as well as increased advertising and
promotion to support our revenue growth. On a year-to-date basis,
selling and marketing expenses increased 22% compared to the six months
last year mainly due to additional personnel, as well as higher sample
costs and travel expenses largely related to sales and marketing
programs.

Research and development (R&D) expenses rose 28% in the quarter compared
to the second quarter of 2004. The increase was the result of continued
investment across both the PC and Consumer segments to support continued
product and technology leadership. The investment was largely the result
of an increase in technical staff to support new product lines, but was
also due to higher facility and prototyping costs. For the first half of
fiscal 2005, R&D expenses rose 22% compared to the same period in 2004,
for the same reasons cited above.

Administrative expenses were up 37% in the quarter and 24% for the first
six months of fiscal 2005 compared to the same periods in 2004. The
increases are primarily attributable to headcount related expenses.

Stock-based Compensation

In accordance with Canadian GAAP, in the first quarter of fiscal 2005,
ATI began to expense compensation costs associated with stock options
granted to employees after September 1, 2002. This expense item, along
with the expense associated with restricted share units and deferred
share units, is reflected in the expense for stock-based compensation
included in the attached unaudited interim consolidated statements of
operations and retained earnings.

Stock-options, restricted share units and deferred share units comprise
all stock-based compensation currently awarded by ATI to our employees
and directors. Stock-based compensation costs were $10.3 million pre-tax
in the quarter as compared with $2.8 million in the same period last
year. The increase in stock-based compensation was primarily related to
ATI commencing the expensing of stock options in compliance with
Canadian GAAP during the first quarter of fiscal 2005.

The $10.3 million expense in the second quarter of fiscal 2005 included
$8.6 million for compensation costs associated with stock options and
$1.7 million for compensation costs associated with restricted share
units and deferred share units.

Interest and Other Income

Interest and other income was $4 million in the second quarter of 2005,
compared with $2 million for the comparable period in fiscal 2004. The
difference primarily reflects increased investment income derived from
interest on our higher cash balances.

In the second quarter of fiscal 2005, we recorded an investment gain of
approximately $1 million as compared with nil in the comparable period.

For the first six months of fiscal 2005, interest and other income was
$6 million, as compared with $0.1 million for the same period in 2004.
The difference is attributable to interest on our higher cash balances.
Interest and other income in the first half of last year was also
impacted by the write off of capital assets in the first quarter of the
year, which was partially offset by an insurance recovery in the second
quarter.

Net Income

Net income increased 20% to $57 million in the second quarter of fiscal
2005 from $48 million in the same quarter last year largely due to
substantial growth in revenue. Net income per share increased to $0.22
from $0.19 over the same period. Net income and net income per share
excluding the stock-based compensation costs described above were $66
million and $0.25, respectively, for the second quarter of fiscal 2005.

Year-to-date, net income increased 27% to $121 million or $0.47 per
share from $95 million or $0.37 per share for the first half of fiscal
2004. The increase was largely the result of strong sales growth.

Liquidity and Financial Resources

Inventory turnover was above our target of 60 days to better support our
customers during the AGP to PCI Express and lead-free transitions. Also,
we have recently undertaken a strategic initiative to improve our
manufacturing and product delivery processes and as a result, increased
our inventory levels to ensure seamless order fulfillment as we
transition through this process change. Inventory levels of $367 million
at the end of the second quarter increased from $255 million at fiscal
2004 year-end. Inventory is expected to return within our target range
by the end of the fiscal year.

Accounts receivable was up 12% to $410 million from $366 million at
August 31, 2004. Accounts payable and accruals rose 23% to $583 million
from $474 million at August 31, 2004. Accounts receivable, accounts
payable and accruals are at levels consistent with our business volumes.

As of February 28, 2005 we had working capital of $852 million compared
to $695 million at fiscal 2004 year-end. Cash flows from operations were
$41 million in the second quarter. Our cash position, which is defined
as cash and cash equivalents and short-term investments, at February 28,
2005 was $653 million, up from $549 million at fiscal 2004 year-end and
$621 million at November 30, 2004.

Outstanding Share Data

At February 28, 2005 there were 252,258,221 common shares outstanding or
259,742,630 shares on a weighted average diluted basis.

Other Corporate Developments

During the quarter, we entered into a definitive agreement to acquire
certain cable modem silicon intellectual property and to hire
approximately twenty-five employees from Terayon Communication Systems,
Inc. The transaction closed on March 9, 2005, subsequent to quarter-end.
The purchase price allocation has not been finalized. An independent
valuator is being employed to determine the allocation of the fair
values of the assets acquired. The acquisition is expected to enhance
our strategic position in the DTV market, particularly in the area of
interactive digital cable ready (iDCR) television.

Also during the second quarter, we completed our acquisition of CuTe
Solutions Private Limited ("CuTe") of Hyderabad, India. CuTe possesses
expertise in audio and digital media solutions and will broaden our
product offering for consumer electronics devices and personal
computers. CuTe's offices in Hyderabad will also form the basis of ATI's
new research and development centre in India, ATI Technologies India
Private Limited.

Normal Course Issuer Bid

ATI also announced on March 24, 2005 that a Notice of Intention to make
a Normal Course Issuer Bid has been filed with, and accepted by, the
Toronto Stock Exchange. Under our Normal Course Issuer Bid, ATI may
purchase up to 24,700,000 of its common shares, representing
approximately 10% of its "public float" as of March 17, 2005, as
calculated in accordance with TSX rules and policies. ATI will cancel
any common shares purchased under this Bid. The purchase may commence on
March 30, 2005 and will terminate on March 29, 2006 or on such earlier
date as ATI may complete its purchases under the terms of the Bid.

ATI believes that its common shares are an attractive investment and
that normal course purchases represent an excellent opportunity to
enhance value for shareholders. ATI's strong cash position allows for
the implementation of the normal course issuer bid without adversely
affecting ATI's other growth opportunities.

ACCOUNTING POLICIES

Our unaudited interim consolidated financial statements are prepared
according to 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 remain
substantially unchanged from those described in our 2004 Annual MD&A,
with the exception of the adoption in the first quarter of fiscal 2005
of the revised CICA Handbook Section 3870, "Stock-based Compensation and
Other Stock-based Payments". See Note 1 to the unaudited interim
consolidated financial statements for more information about the
accounting policies used to prepare our financial statements.

SUPPLEMENTARY FINANCIAL INFORMATION

The table below shows selected financial information for the eight most
recently completed quarters.



ATI TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR EIGHT QUARTERS
(Thousands of U.S. dollars, except per share amounts)

Q2 2005 Q1 2005 Q4 2004 Q3 2004
---------------------------------------------------------------------

Revenues $608,188 $613,859 $572,218 $491,457
Cost of goods sold 399,885 405,009 379,836 318,918
---------------------------------------------------------------------
Gross margin 208,303 208,850 192,382 172,539

Expenses
Selling and marketing 36,352 33,125 29,244 31,243
Research and development 77,726 73,114 75,865 65,539
Administrative 15,793 12,676 11,517 12,166
Amortization of
intangible assets 1,389 1,244 1,486 1,546
Stock-based compensation 10,329 10,558 1,691 2,315
Other charges
(recoveries) 278 382 155 (454)
---------------------------------------------------------------------
141,867 131,099 119,958 112,355
---------------------------------------------------------------------
Income from operations 66,436 77,751 72,424 60,184

Interest and other
income (loss) 3,624 2,176 2,815 1,340
Gain (loss) on investments 880 0 0 (1,307)
Interest expense (537) (519) (499) (513)
---------------------------------------------------------------------
Income before income taxes 70,403 79,408 74,740 59,704
Income taxes 13,210 15,705 13,584 11,085
---------------------------------------------------------------------
Net income $57,193 $63,703 $61,156 $48,619
---------------------------------------------------------------------
---------------------------------------------------------------------


---------------------------------------------------------------------

Net income per share
Basic $0.23 $0.26 $0.25 $0.20
Diluted $0.22 $0.25 $0.24 $0.19

---------------------------------------------------------------------

Weighted average number
of shares (000's)

Basic 251,046 249,027 247,699 245,960
Diluted 259,743 257,917 258,198 256,650

Outstanding number of
shares at the end of the
period (000's) 252,258 251,324 249,287 247,886

---------------------------------------------------------------------


Q2 2004 Q1 2004 Q4 2003 Q3 2003
---------------------------------------------------------------------

Revenues $463,337 $469,705 $380,674 $355,691
Cost of goods sold 302,914 302,134 246,643 240,700
---------------------------------------------------------------------
Gross margin 160,423 167,571 134,031 114,991

Expenses
Selling and marketing 27,031 30,079 26,176 24,586
Research and development 60,809 63,278 61,285 53,713
Administrative 11,532 11,487 10,557 10,326
Amortization of
intangible assets 1,541 1,542 1,271 3,169
Stock-based compensation 2,826 751 0 0
Other charges
(recoveries) (178) 173 10,440 2,288
---------------------------------------------------------------------
103,561 107,310 109,729 94,082
---------------------------------------------------------------------
Income from operations 56,862 60,261 24,302 20,909

Interest and other
income (loss) 1,856 (1,754) 714 (1,350)
Gain (loss) on investments 0 0 3,844 0
Interest expense (531) (515) (516) (488)
---------------------------------------------------------------------
Income before income taxes 58,187 57,992 28,344 19,071
Income taxes 10,602 10,553 6,050 4,063
---------------------------------------------------------------------
Net income $47,585 $47,439 $22,294 $15,008
---------------------------------------------------------------------
---------------------------------------------------------------------


---------------------------------------------------------------------

Net income per share
Basic $0.19 $0.20 $0.09 $0.06
Diluted $0.19 $0.19 $0.09 $0.06

---------------------------------------------------------------------

Weighted average number
of shares (000's)

Basic 244,373 242,998 240,647 238,183
Diluted 255,876 254,109 249,525 242,539

Outstanding number of
shares at the end of the
period (000's) 246,604 244,239 241,742 239,267

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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 2005 second quarter
ended February 28, 2005. To participate in the conference call, please
dial 416-405-9328 ten minutes before the scheduled start of the call. No
password is required. A live webcast of the call will be available at
http://www.ati.com/companyinfo/ir/quarterlyresults.html under the
Quarterly Results section, Q2 2005. Replays of the conference call will
be available through March 31, 2005 by calling 416-695-5800. The
passcode is 3125451. A web cast replay will be available at the web site
noted above.

About ATI Technologies

ATI Technologies Inc. is the world leader in the design and manufacture
of innovative 3D graphics and digital media silicon solutions. An
industry pioneer since 1985, ATI is the world's foremost graphics
processing unit (GPU) provider and is dedicated to delivering
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 2004
revenues of US $2 billion, ATI has more than 2,700 employees in the
Americas, Europe and Asia. ATI common shares trade on NASDAQ (ATYT) and
the Toronto Stock Exchange (ATY).

Copyright 2005 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

Please click on the following link to access the Financials Statements
and
Notes to the Financial Statements -
http://www2.ccnmatthews.com/database/fax/2000/ati0324.pdf

-30-

Contact Information

  • FOR FURTHER INFORMATION PLEASE CONTACT:
    ATI Technologies Inc.
    Chris Evenden
    Director, Public Relations
    905-882-2629
    cevenden@ati.com
    or
    Other ATI Contacts:
    Porter Novelli Canada
    Trevor Campbell, Director
    (416) 422-7202
    trevor.campbell@porternovelli.com
    or
    For investor relations support, please contact:
    ATI Technologies Inc.
    Janet Craig, Director, Investor Relations
    (905) 882-2631
    janet@ati.com