ATI reports revenues of $463 million for the second quarter
MARKHAM, ON/ Munich, Germany - March 31, 2004 - ATI Technologies Inc. (TSX: ATY, NASDAQ: ATYT) today announced its financial results for the second quarter of fiscal 2004, ended February 29, 2004. ATI reported revenues of $463.3 million, a 47.8% increase relative to the second quarter of fiscal 2003. Gross margin rose to 34.8% - almost six percentage points higher than the same quarter a year ago. Net income per share was $0.19 for the quarter compared to a loss of $0.04 per share last year. ATI's cash position increased $88.5 million during the quarter to $468.5 million as of February 29, 2004.
Technology leadership across all product categories enabled ATI to deliver a strong second quarter performance. We continued to make broad-based unit gains in the desktop mainstream markets and saw growth in our DTV business relative to the first quarter.
"We continue to deliver strong financial performance driven by the strength and breadth of our product lines," said K.Y. Ho, Chairman and Chief Executive Officer, ATI Technologies Inc. "Product and technology leadership continues to be the foundation of our success and we see tremendous opportunities in the future to expand our market share and accelerate our momentum in the consumer electronics market."
Recently, we announced a strategic collaboration with Qualcomm Inc., a major supplier of cell phone technology. This, together with the partnership with SK Telecom announced in March of this year and current design wins with Motorola, cement ATI's leadership position in cell phone graphics.
We believe we are well-positioned for the back half of fiscal 2004 based on the strength of our product roadmap, including new products that are to be announced shortly; the expected transition of the PC industry to the PCI Express interconnect in the second calendar quarter, where we have significant opportunity to gain market share in the desktop discrete market; continued relative strength of the PC market; as well as continued momentum in the Consumer business.
As a result of these factors, ATI expects strong revenues for the third quarter, despite it being traditionally the industry's weakest, and to be in the range of $440 - $480 million. Gross margin, as a percentage of revenues, is expected to be in the upper half of its target range of 32 - 35%, and about the same level as the second quarter. Operating expenses, excluding amortization of intangible assets and other charges, are expected to increase 5 - 10% relative to the second quarter due to increased prototyping expense as well as staffing to support new customer programs - particularly in the Consumer business.
Management's Discussion and Analysis of Interim Financial Results
In this Management's Discussion and Analysis (MD&A), ATI, we, us and our, mean ATI Technologies Inc. and its subsidiaries.
About 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 elsewhere in 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.
Any reference to "quarter-over-quarter" in this MD&A refers to a discussion of this year's second quarter results versus the prior year unless otherwise noted.
Financial Results Analysis
In the second quarter of fiscal 2004, our revenues grew by 47.8% compared with the same period a year ago.
Revenues were $463.3 million in the second quarter compared to $313.5 million for the same quarter last year. For the first six months, revenues were up 43.8% to $933.0 million compared to $648.9 million for the same period last year.
Our PC revenues increased by about 35% for the second quarter of fiscal 2004 relative to the same period a year ago. All product categories, including desktop and notebook discrete, as well as integrated graphics processors (IGPs) contributed to this increase. Our consumer product revenues increased eight-fold with our Imageon(tm) products being the key driver of growth in this period.
PC revenues increased over 35% and consumer product revenues increased ten-fold in the first six months of fiscal 2004 compared with the same period a year ago.
Increasing shipments to add-in-board (AIB) manufacturers were a major driver of PC revenue growth. AIB channel revenue approximately doubled for the second quarter and year-to-date relative to the same periods a year ago.
Gross margin in the second quarter was 34.8%.
Our gross margin improved by almost six percentage points compared to the second quarter of fiscal 2003. Year-to-date our gross margin was 35.4% compared with 28.0% for the same period a year ago - a gain of 7.4 percentage points.
Desktop discrete product margins were the main contributor to the increase of gross margin on a quarter-over-quarter and year-to-date basis. The increase in our gross margin in desktop discrete was a result of strength across all our desktop products, and particularly in the mainstream to enthusiast segments. Cost reduction programs and inventory management improvements are also contributing to the strength in our gross margin.
Our reported gross margin is comprised of product gross margin as well as royalty income associated with our Nintendo business and "non-recurring engineering" (NRE) payments associated with our development contracts. Both our royalty income from Nintendo as well as NRE are reported in our segmented reporting under "Other". While royalty income from Nintendo is recorded as 100% gross margin, NRE payments for console products are matched against the related cost of development. Please see Note 10 to the consolidated financial statements for further information on our segmented reporting.
Our operating expenses, excluding the amortization of intangibles and other charges, were $103.2 million, an increase of 28.6% over the second quarter in fiscal 2003. Year-to-date operating expenses, excluding the amortization of intangibles and other charges, were $209.8 million, up 31.0%, from $160.1 million for the same period a year ago.
About 40% of the increase in operating expenses quarter-over-quarter and half of the increase on a year-to-date basis was a result of incentive-based compensation and the foreign exchange impact of a higher Canadian dollar relative to the U.S. dollar.
Increased advertising as well as increased staffing to support higher sales levels were the key factors in the higher sales and marketing expense on both a quarter-over-quarter and a year-to-date basis. Higher operating expenses were also due to an increase in administration costs resulting from the higher Canadian dollar and incentive-based compensation and a changed methodology for board compensation. Please see Note 11 to the consolidated financial statements for further information on the board compensation change.
Research and development costs were also higher at 25.5% quarter-over-quarter and 28.5% on a year-to-date basis. In addition to the higher Canadian dollar and incentive-based compensation costs, R&D expenses have risen in both comparable periods due to increased staffing and technology costs required to promote advances in our growing product line. These increases were largely attributable to increased staffing in software and our handheld business, as well as prototyping costs and CAD-related licensing fees.
We recorded a recovery of other charges totaling $0.2 million in the second quarter. This compares to other charges of $16.0 million for the second quarter last year. Other charges in fiscal 2003 were related to the settlement of a U.S. class action law suit, costs incurred in connection with a regulatory matter, restructuring charges related to the closure of the European manufacturing operations and a lease termination charge related to surplus space in leased buildings, which were not a factor this year. Please see Note 7 to the consolidated financial statements for further information.
Total Operating Expenses
Our total operating expenses reflect the operating expenses detailed earlier, as well as amortization of intangible assets and other charges. For further information on the treatment of the amortization of intangible assets, please see Note 3 to the consolidated financial statements.
Interest and Other Income
Our interest and other income was $1.9 million in the second quarter of 2004 compared with $0.6 million in the second quarter last year. The increase in interest and other income for the second quarter compared to the same period a year ago is primarily due to an insurance recovery related to the earthquake in Taiwan in September 1999, as well as an increase in interest income due to a substantially higher cash position.
For the first six months of 2004, interest and other income was $0.1 million compared with $1.1 million in the same period in 2003. The lower income for the first six months of 2004 was mainly due to the write off of capital assets in the first quarter of this year. This was partially offset by the insurance recovery and increased interest income noted above.
Net Income (Loss)
Net income increased to $47.6 million in the second quarter of 2004 from a loss of $9.4 million in same quarter last year. We generated net income of $95.0 million for the first six months of the current fiscal year compared with a loss of $2.1 million in 2003.
The increase in net income in both comparable periods was largely the result of increasing revenues, higher margins and improving operating expense leverage, as well as the decrease in other charges described above.
Liquidity and Financial Resources
Inventory levels increased to $228.7 million at the end of the second quarter up from $176.5 million at August 31, 2003, but were about flat relative to the first quarter of this year. In general terms, this inventory level reflects the higher volume of sales generated in the quarter, and in line with our goal of keeping inventory in the 60-day range.
Accounts receivable were down by $13.0 million from the year ended August 31, 2003 to $221.6 million at the end of the second quarter. Days sales of accounts receivable were down to 48 days in the second quarter compared to 50 days in the first quarter of 2004 due to the timing of product sales during the quarter.
As of February 29, 2004 we had working capital of $549.0 million compared to $430.3 million at August 31, 2003. Cash flow from operations was $75.2 million in the second quarter. We had cash and short-term investments of $468.5 million at the end of the second quarter, up from $350.7 million of cash recorded at end of fiscal 2003. Our cash position increased mainly as a result of increasing earnings in the first two quarters of the fiscal year.
Intangible assets other than goodwill declined slightly to $8.6 million at the end of the second quarter, from $8.8 million at year-end.
Conference Call Information
ATI Technologies Inc. will host a conference call to discuss its financial results for the second quarter results today, Wednesday, March 31, 2004 at 8:30 AM (EST) (5:30 AM Pacific, 6:30 AM Mountain, 7:30 AM Central). 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 web cast of the conference call will be available at http://www.ati.com/companyinfo/ir/quarterlyresults.html under the Financial Information section, 2004 Conference Calls - Q2 2004. Replays of the conference call will be available through April 7, 2004. Replay information is as follows: Replay: 416-695-5800 Passcode: 3012073. 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 and digital media silicon solutions. An industry pioneer since 1985, ATI is the world's foremost visual processor unit (VPU) 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 markets. With 2003 revenues in excess of $1.3 billion, ATI has more than 2,500 employees in the Americas, Europe and Asia. ATI common shares trade on NASDAQ (ATYT) and the Toronto Stock Exchange (ATY).
Copyright 2004 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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