ATI Reports Results for Third Quarter of Fiscal 2006

Post by **Apoptosis** » Thu Jun 29, 2006 9:25 am

MARKHAM, ONTARIO, Jun 29, 2006 \-- ATI Technologies Inc. -

Revenues up 23% year-over-year; record quarter for chipsets, handheld and DTV

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

ATI Technologies Inc. today announced financial results for the third quarter of fiscal 2006 ended May 31, 2006.

Revenues(1) for the third quarter were $652.3 million. Gross margin percentage was 30.1%. Net income determined in accordance with Canadian generally accepted accounting principles (GAAP) for the quarter was $31.9 million ($0.12 per diluted share). Non-GAAP adjusted net income(2) for the quarter was $42.5 million ($0.16 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.

(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.

For the first nine months of fiscal 2006, revenues were $1.92 billion. Gross margin percentage was 29.0%. Net income according to GAAP for the year-to-date was $73.7 million ($0.29 per diluted share). Non-GAAP adjusted net income for the period was $114.0 million ($0.44 per diluted share).

"In the third quarter, we continued to assert our technology leadership," said David Orton, president and CEO, ATI Technologies Inc. "In a challenging quarter for the PC industry, we delivered on our key operational objectives of gross margin expansion and improved inventory management. With several important PC and graphics processor advances on the way, we see a number of catalysts that will drive continued excitement and growth for ATI and the industry."

Recent Highlights:

- Acquired Bitboys Oy, a leading developer of mobile graphics technology based in Helsinki, Finland.

- Announced a strategic partnership with Nokia aimed at delivering a new era of multimedia experiences and solutions for the consumer. This includes ATI working closely with Nokia and key developers to help drive content through a support network of ATI dedicated tools and software development kits.

- Introduced the CrossFire(TM) Xpress 3200 - the first chipset with true, unrestricted dual x16 PCI Express(R) performance delivering the enthusiast gaming platform of the future.

- Introduced the Radeon(R) Xpress(TM) 1100 chipset series supporting AMD's Turion(TM) 64 X2 mobile technology.

- Introduced the FireGL(TM) V7350, the world's first 1GB graphics accelerator for the professional workstation market.

- Repurchased 1,523,900 shares for an aggregate $24.7 million under a normal course issuer bid.

Q4 Outlook

Given anticipated near-term PC market conditions, revenues for the fourth quarter of fiscal 2006 are expected to be between $620 million and $660 million. Gross margin percentage is expected to improve to between 31.0% and 31.5%. 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
---------------------------------------------------------------------
(in thousands, except Three Months Ended Nine Months Ended
per share data) May 31 May 31
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2006 2005 2006 2005
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Net income as reported
under GAAP $31,898 $(445) $73,667 $120,451
Per share, diluted 0.12 (0.00) 0.29 0.47
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Adjustments:
Add: Stock option expense(3) 8,216 8,391 25,737 25,043
Add: Amortization of
intangible assets(4) 3,228 3,046 8,677 5,679
Add: Other charges(5) 579 1,351 10,352 2,011
Deduct: Tax recovery for
stock option expense (1,114) (1,065) (3,389) (2,462)
Deduct: Tax recovery for
intangibles (207) (49) (207) (312)
Deduct: Tax recovery for
other charges (39) (118) (731) (176)
Deduct: Gain on investment (75) - (75) (880)
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Adjusted net income $42,486 $11,111 $114,031 $149,354
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Diluted weighted average
shares outstanding 258,263 259,100 257,663 258,920
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Adjusted net income per
share, diluted $0.16 $0.04 $0.44 $0.58
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(3) In accordance with 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
14 to the unaudited interim consolidated financial statements.
(4) See Note 4 to the unaudited interim consolidated financial
statements.
(5) Includes charges related to regulatory and litigation matters.
See Note 9 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 nine months ended May 31, 2006 compared to the three and nine months ended May 31, 2005. This MD&A should be read in conjunction with the attached unaudited interim consolidated financial statements for the period ended May 31, 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.

It is important to note that:

- Unless otherwise indicated, forward-looking statements in this release describe our expectations as of June 29, 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 http://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 http://www.sec.gov

RESULTS OF OPERATIONS

Revenues for the Third Quarter of Fiscal 2006

Consolidated revenues for the third quarter of fiscal 2006 increased 23.0% to $652.3 million as compared to the third quarter last year. The PC and Consumer segments accounted for 77% and 23%, respectively, of consolidated revenues in the third quarter. A new quarterly record was achieved for total units shipped.

PC Segment

PC revenues increased 8.5% year-over-year to $499.7 million. Sales of desktop and notebook integrated products increased more than 200% year-over-year with the continued success of the Radeon Xpress 200 product line. The increase in sales of integrated products was partially offset by an approximate 15% decline in sales of desktop discrete products due to lower average selling prices resulting from a mix shift towards mainstream and value products in the add-in-board (AIB) channel. On a sequential basis, desktop discrete sales declined approximately 10% reflecting a seasonal decline in the market for discrete GPUs. Sales of notebook discrete solutions were also lower year-over-year as a result of the increased use of integrated graphics in notebook platforms.

Consumer Segment

Consumer revenue grew nearly 120% year-over-year to $152.6 million in the third quarter of fiscal 2006. Handheld revenue and unit shipments each increased more than 150% on growing sales of Imageon multimedia processors to major manufacturers of handheld devices. Digital television (DTV) revenues more than doubled on a greater than 150% increase in unit shipments to DTV manufacturers, with notable strength on LCD and integrated platforms. Royalties and non-recurring engineering revenue related to our game console business represented approximately 2% of consolidated revenues.

Revenues for the First Nine Months of Fiscal 2006

Revenues for the first nine months of fiscal 2006 grew 9.3% to $1.92 billion from $1.75 billion in the same period last year. The PC segment accounted for $1.50 billion or 79% of consolidated revenues while Consumer represented $409.9 million or 21% of consolidated revenues. The increase in consolidated revenues was driven by strong sales growth in the Consumer segment.

Gross Margin

Gross margin percentage was 30.1% for the third quarter of fiscal 2006 as compared with 29.1% in the same period last year, reflecting improvement in mobile discrete and integrated chipset gross margins, as well as growth in the Consumer business, which has margins that are typically higher than our corporate average. This was partially offset by a decline in desktop discrete gross margins. On a sequential basis, gross margin improved from 28.2% in the second quarter of fiscal 2006 due primarily to an improvement in desktop discrete gross margins.

Year-to-date gross margin percentage was 29.0% as compared with 32.6% for the first nine months of fiscal 2005 reflecting lower margins in the desktop discrete business, as well as the impact of strong sales growth of lower-margin integrated chipsets. These chipsets comprised about one-quarter of consolidated revenues in the third quarter and the first nine months of fiscal 2006 as compared with 10% or less 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 7.5% year-over-year and 10.7% on a year-to-date basis.

As we report and measure our financial results in U.S. dollars, the appreciation of the Canadian dollar relative to the U.S. dollar increased operating expenses by $4.1 million in the third quarter of fiscal 2006 as compared with the same period last year ($7.1 million for the first nine months of fiscal 2006 as compared with the same period in the prior year).

Selling and marketing expenses were up 4.1% year-over-year and 5.7% on a year-to-date basis, reflecting the addition of sales and marketing personnel and increases in advertising and marketing-related activities to drive brand and product awareness, particularly among AIB channel and retail customers.

Research and development (R&D) expenses of $91.5 million in the third quarter were 3.4% higher than the comparable period in fiscal 2005. For the first nine months of fiscal 2006, R&D expenses rose 8.4% 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 approximately 150 professionals from Macrosynergy Technology Co., an XGI Technology alliance company ("XGI") and Bitboys Oy ("Bitboys") in the quarter.

Administrative expenses were up $6.1 million or 38.3% to $22.1 million in the quarter and rose 35.0% for the first nine months of fiscal 2006 compared to the same period in fiscal 2005. The increases were related to investments in the supply chain organization, additional headcount related expenses and increased professional and consulting fees related to regulatory compliance and litigation.

Stock-based Compensation

In accordance with 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 third quarter was $8.2 million compared to $8.4 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 $12.9 million in the quarter as compared with $11.3 million in the previous quarter and $10.4 million in the third quarter of fiscal 2005.

Interest and Other Income

Interest and other income was $8.3 million in the third quarter of fiscal 2006 as compared with $3.9 million in the third quarter of fiscal 2005. For the first nine months of fiscal 2006, interest and other income was $21.4 million, as compared with $10.6 million for the same period in 2005. The increases are attributable to higher rates of return on investments, as well as a favorable impact on foreign exchange resulting from translation gains primarily on Canadian dollar net assets.

Net Income

Net income determined in accordance with GAAP was $31.9 million or $0.12 per diluted share in the third quarter of fiscal 2006, as compared with a net loss of $0.4 million (nil per diluted share) in the same period last year. The improvement in net income relative to last year is primarily due to the higher revenues and improved gross margins described previously in this MD&A. Included in net income was a one-time tax benefit in the quarter resulting in a third quarter effective tax rate of approximately 8% as compared to a longer-term average tax rate of approximately 18%.

Year-to-date, net income in accordance with GAAP decreased to $73.7 million or $0.29 per diluted share from $120.5 million or $0.47 per share for the first nine months of fiscal 2005. The decrease is due to lower overall gross margins and higher expenses in the current period relative to last year.

Liquidity and Financial Resources

On a sequential basis, inventory of $366 million in the third quarter declined 14% from the second quarter of fiscal 2006 reflecting a continued focus on inventory management. Inventory was up from $348 million at August 31, 2005. Days of inventory at quarter end were approximately 79 days based on the previous quarter's sales.

Accounts receivable at quarter end were $436 million as compared with $386 million at August 31, 2005 and reflect higher sales and the timing of payments. Accounts payable and accrued liabilities of $641 million were down from $665 million at August 31, 2005. Both accounts receivable, and accounts payable and accrued liabilities are in line with current revenue levels.

Cash deficit from operations was $26.6 million in the quarter as compared with cash generated of $15.2 million in the third quarter of fiscal 2005 and a cash deficit of $8.6 million in the second quarter of fiscal 2006. The decrease in cash flow from operations from 2005 to 2006 was primarily due to changes in working capital accounts and the timing of payments.

Cash position (cash, cash equivalents and short-term investments) at quarter end was $518 million, down from $587 million at August 31, 2005 and $607 million at February 28, 2006. The sequential decrease reflects the reduction in cash from operations, as well as $24.7 million in share repurchases and $37.2 million on the acquisitions of XGI and Bitboys. At May 31, 2006, we had working capital of $702 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. In the third quarter, 1,523,900 shares were repurchased for cancellation for $24.7 million.

Corporate Developments

On April 27, 2006, we acquired 96.2% of the shares of Bitboys Oy ("Bitboys"), a privately held company based in Helsinki, Finland, for cash consideration of $32.3 million. Bitboys has 15 years of experience in the graphics industry and specializes in handheld platforms. See Note 3(i) to the unaudited interim consolidated financial statements.

On March 3, 2006, ATI completed the acquisition of certain assets of Shanghai-based Macrosynergy, an XGI Technology alliance company, as well as related personnel working out of XGI Technology's Santa Clara, California location, for cash consideration of $6.2 million. Macrosynergy specializes in multimedia add-in boards for personal computers. See Note 3(ii) to the unaudited interim consolidated financial statements.

Outstanding Share Data

At May 31, 2006, there were 253,609,452 common shares of ATI outstanding. There were 258,262,863 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 16 to the attached unaudited interim consolidated financial statements.

ACCOUNTING POLICIES

Our unaudited interim consolidated financial statements are prepared in accordance with 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 third quarter ended May 31, 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 http://ir.ati.com/phoenix.zhtml?c=10542 ... rlyresults under the Quarterly Results section, Q3 2006. Replays of the conference call will be available through July 6, 2006 by calling 416-695-5800. The passcode is 3189000. 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 3,700 employees in the Americas, Europe and Asia. ATI common shares trade on NASDAQ (ATYT) and the Toronto Stock Exchange (ATY).