ATI Reports Results for First Quarter of Fiscal 2006

[Apoptosis]

ATI Reports Results for First Quarter of Fiscal 2006

MARKHAM, Ontario, Dec 21, 2005 (BUSINESS WIRE) -- ATI Technologies Inc. :

All product lines contribute to 26% sequential increase in revenue

Please click below to access financial statements and notes

http://www.ccnmatthews.com/docs/ati1221.pdf

ATI Technologies Inc. today announced financial results for the first quarter of fiscal 2006 ended November 30, 2005.

Revenues(1) for the first quarter were $591 million, a 26% increase relative to the fourth quarter of fiscal 2005. Gross margin percentage was 28.7%. Net income according to GAAP for the quarter was $7.6 million ($0.03 per diluted share). Non-GAAP adjusted net income(2) for the quarter was $26.8 million ($0.10 per diluted share).

"We are pleased with our overall progress in the quarter and remain intensely focused on technology leadership and operational execution," said David Orton, ATI's Chief Executive Officer. "Our PC business is benefiting from strong demand for the new X1000 series GPUs as well as significant growth in integrated chipsets. Our Consumer segment continued to record solid growth with handheld shipments up nearly 60% sequentially and surpassing 21 million units in the quarter."

Recent Highlights

-- In October 2005, ATI introduced the Radeon X1000(TM) family of 90 nanometer products, delivering price/performance and image quality leadership in all segments of the desktop PC market.

-- ATI recently introduced the Mobility Radeon X1600 - the industry's first 90 nanometer notebook discrete GPU.

-- In the first quarter, ATI shipped more than 21 million visual processors for the handheld market - equal to about half its handheld volumes for all of fiscal 2005.

-- ATI recently shipped its 10 millionth chip for high-definition integrated digital televisions (HD IDTVs)

-- The Xbox 360(TM) game console featuring ATI's custom-designed GPU with the world's first unified shader architecture launched in November 2005, ushering in the era of high-definition gaming.

-- During the quarter, ATI repurchased 408,100 shares for $5.7 million under its share buyback program.

(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 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.

Outlook

Revenues for the second quarter of fiscal 2006 are expected to increase by approximately 8 - 12% relative to the first quarter due to continued growth in our Radeon X1000 family and in our Radeon Xpress line of chipsets for AMD and Intel based platforms. Due to the anticipated increase in chipsets as a proportion of our business in the second quarter, we expect gross margin to decline approximately one percentage point. Operating expenses, excluding stock option expense, are expected to increase just over 5% relative to the first quarter. 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 news 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 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 press 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.

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 months ended November 30, 2005 compared to the three months ended November 30, 2004. This MD&A should be read in conjunction with the attached unaudited interim consolidated financial statements for the period ended November 30, 2005, 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.

RESULTS OF OPERATIONS

Revenues

Consolidated revenues for the first quarter of fiscal 2006 declined $23.2 million or 4% to $591 million as compared to the first quarter last year, due to lower revenue in the PC segment. The PC segment accounted for 79% of consolidated revenues and the Consumer segment accounted for 21% of consolidated revenues.

PC

PC revenue fell 10% year-over-year to $466 million in the first quarter of fiscal 2006. The primary factors behind the decline were reduced volumes and average selling prices (ASPs) on performance and enthusiast discrete graphics products to add-in-board (AIB) and retail customers. In early October 2005, we introduced a new family of desktop discrete products which have significantly improved our competitive position. As expected, sales of these new products accounted for less than 10% of consolidated revenues in the quarter and are anticipated to grow as a proportion of revenues in future quarters. Sales of notebook discrete solutions were also lower year-over-year as a result of increased use of integrated graphics.

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 200% from the first quarter of fiscal 2005. Continued market penetration and significant OEM design wins for the Radeon Xpress 200 series for the Intel and AMD platforms accounted for the increase.

Consumer

Consumer revenue grew 31% to $125 million from $96 million in the first quarter of fiscal 2005. Handheld unit shipments almost doubled while revenue increased approximately 55% on increased sales of Imageon processors. Digital television unit shipments rose almost 50% while revenues increased more than 25% on higher sales of Xilleon and Theater DTV products to tier-one digital television manufacturers.

Gross Margin

Gross margin percentage was 28.7% for the first quarter of fiscal 2006 as compared with 34.0% in the same period last year and 9.0% in the fourth quarter of fiscal 2005 (23.3% excluding a special inventory write-down). The repositioning of older products late in the fourth quarter of fiscal 2005 continued to negatively impact desktop discrete gross margins in the first quarter and will, to a lesser degree, impact gross margins in the second quarter of fiscal 2006. However, we saw overall gross margin improvement in our desktop discrete business due to the introduction of new products and a generally improved competitive position. Year-over-year gross margin was also impacted by sales of integrated chipsets, which currently have considerably lower margins than our other products and comprised approximately 20% of consolidated revenues in the quarter as compared with about 6% in the same period last year. Strong gross margins in the Consumer segment helped to offset some of the gross margin decline.

Operating Expenses

Selling and marketing expenses were up $4 million or 13% to $38 million as compared to the first quarter of fiscal 2005. The increase was primarily related to increases in sales and marketing personnel as well as advertising activities to drive brand and product awareness and revenues.

Research and development (R&D) expenses of $86 million were $13 million or 18% higher than the comparable period in fiscal 2005. The increase was the result of continued investment across both the PC and Consumer segments to support product and technology development, and was primarily driven by increases in technical staff as well as higher prototyping costs incurred in the design and development of new products. The acquisition of certain professionals from Terayon Communication Systems, Inc. (Terayon) and CuTe Solutions Private Limited (now, ATI Technologies India Private Limited) earlier in 2005 contributed to the increase in technical staff.

Administrative expenses were up $5 million or 39% to $18 million relative to the first quarter of fiscal 2005, reflecting investment in the supply chain organization, additional headcount related expenses as well as increased professional and consulting fees, including external legal fees related to litigation.

On a combined basis, selling and marketing, R&D and administrative expenses declined 2% relative to the fourth quarter of fiscal 2005 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 first quarter was $8.8 million compared to $8.0 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 $12.3 million in the quarter as compared with $11.2 million in the previous quarter and $10.6 million in the first quarter of fiscal 2005.

Other Charges - Litigation Settlement

In August 2004, American Video Graphics, LP ("AVG") filed a series of lawsuits alleging patent infringement in the US District Court for the Eastern District of Texas in which ATI intervened along with two other suppliers of graphics processors. While an agreement in principle has been achieved and it is reasonably expected that a final, definitive settlement agreement between AVG, the defendants and intervenors can be negotiated and executed, there remains the possibility that such negotiations may break down. Nevertheless, ATI reasonably expects such a final, definitive settlement agreement to be negotiated, executed and approved by the court prior to the end of January 2006. As a result of this, ATI has accrued $8.6 million for the anticipated settlement in this quarter. Further details are contained in Notes 8 and 15 to the unaudited interim consolidated financial statements.

Interest and Other Income

Interest and other income was $6.3 million in the first quarter of fiscal 2006 as compared with $2.2 million in the first quarter of fiscal 2005. The increase was driven by a higher rate of return on cash invested and a favourable impact on foreign exchange.

Net Income

Net income calculated in accordance with Canadian GAAP was $7.6 million ($0.03 per diluted share) for the first quarter, as compared with net income of $63.7 million ($0.25 per diluted share) in the same period last year. The decline relative to last year is primarily due to the lower revenue and gross margin discussed in earlier sections of this MD&A.

Liquidity and Financial Resources

Inventory levels of $331 million at the end of the quarter decreased from $348 million at August 31, 2005. Days of inventory at quarter end were approximately 71 days based on the previous quarter's sales.

Accounts receivable at quarter end was $368 million as compared with $386 million at August 31, 2005. Accounts payable of $302 million was down 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 $28 million in the quarter as compared with negative $21 million in the fourth quarter of fiscal 2005 and $66.9 million in the first quarter of fiscal 2005. Cash position (cash, cash equivalents and short-term investments) at quarter end was $608 million, up from $587 million at August 31, 2005. At November 30, 2005 we had working capital of $668 million as compared to $660 million at August 31, 2005. Our current ratio improved to 2.01 in the current quarter from 1.95 at the end of fiscal 2005.

Normal Course Issuer Bid

Under the normal course issuer bid, we repurchased for cancellation 408,100 common shares in the first quarter of fiscal 2006 for a total consideration of $5.7 million.

Outstanding Share Data

At November 30, 2005 there were 251,700,419 common shares outstanding. There were 256,568,416 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 first quarter ended November 30, 2005. 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 http://www.ati.com/companyinfo/ir/quarterlyresults.html under the Quarterly Results section, Q1 2006. Replays of the conference call will be available through December 28, 2005 by calling 416-695-5800. The passcode is 3158131. 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 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 2005 revenues of U.S. $2.2 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 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.

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