Graphics Chips (NVDA, ATYT, etc) (fka GPHX)

[dhellman]

=DJ UPDATE (2): ATI Says 4Q Margins May Not Be Sustainable

(Adds analysts comments in paragraphs 7-10 and updates share price.)

By Stuart Weinberg Of DOW JONES NEWSWIRES TORONTO (DOW JONES)--ATI Technologies Inc.'s (ATYT) fourth-quarter revenue and earnings exceeded expectations, but the graphics chip maker forecast a decline in first-quarter gross margins, citing increasing competitive pressures.

The Markham, Ont. company's gross margins climbed sharply in the fourth quarter, up three percentage points from the previous quarter, to 35.6%. However, on a conference call early Friday, ATI chief financial officer Terry Nickerson said margins were at the high end of ATI's targeted range.

"While we are pleased with the increase in gross margin, it is just about the high end of our target range and our forecast anticipates that we will be back in our 32-35% range in response to competitive pressures going forward," he said.

Asked to provide more detail about the "competitive pressure," Nickerson said the company's integrated graphics processors begin shipping in the first quarter, which could pressure margins. In addition, the company may be taking an overly cautious view, he added, given the strength in fourth-quarter margins. "We just recognize that we have pretty strong margins...and it's just a question of how sustainable is that and for how long. So we may in fact be a little bit cautious in terms of the guidance on that, but right now that's how we're seeing it," he said.

On Nasdaq Friday, ATI is down 85 cents, or 5.2%, to $15.45 on about 8.1 million shares. The stock has traded as low as $15.33.

CIBC World Markets analyst Daniel Gelbtuch said he believes the decline in the share price may reflect profit-taking, noting that the stock is up sharply this year. Investors may also be concerned about the lower gross-margin forecast, he added. Gelbtuch said Nickerson's comments suggest ATI is being extremely cautious. Hence, the analyst said his forecasts are "going up."

National Bank Financial analyst Deepak Chopra was less sanguine about ATI's forecasted margins. In a research note Friday, he said the lower forecast highlights two major concerns: pricing pressure and the lower margins that will be generated from the integrated products.

During the call, ATI president David Orton acknowledged that margins from the integrated business will be at the low end of the company's range, as ATI attempts to gain credibility and market share in this new area of its business.

Harris Partners analyst Jon Hykawy lauded the company's fourth-quarter results, calling the 71% year-on-year revenue growth "remarkable." However, he added, there are clearly risks for any ATI investor at this point. "Aside from market and economic risk, which we don't believe we are any more qualified to judge than many others, we note that we are approaching yet another product cycle from both Nvidia Corp. (NVDA) and ATI," he said. "Should Nvidia manage to produce fantastic products for both the enthusiast and mainstream, and ATI misstep, then ATI will be hurt."

Hykawy said he didn't believe this scenario was likely to occur, given what is known at this point regarding coming products. ATI is also diversifying well into a variety of consumer products and hedging against continued pressure on discrete praphics processors by entering the market for integrated chipsets, he added. "This is a very strong company," he said.

Hykawy owns ATI shares but Harris Partners doesn't have an investment-banking relationship with the company. National Bank's Chopra and CIBC's Gelbtuch don't own ATI shares and neither firm has an investment-banking relationship with the company.

For the period ended Aug. 31, ATI reported net of 9 cents a share, compared with a loss of 15 cents a year earlier. Adjusted net came in at 12 cents, up from breakeven. Adjusted net excludes the effects of investment gains, other charges, amortization of goodwill and other items.

Revenue rose to $380.6 million from $223 million.

The Thomson First Call mean estimate was for adjusted net of 10 cents a share on revenue of $364.46 million.

"We had an excellent quarter," Nickerson said.

For the first quarter, the company sees revenue of $400-$430 million with adjusted net even with or slightly higher than the fourth-quarter level. The First Call mean estimate is for adjusted net of 13 cents and $399.65 million, respectively.

Company Web Site: http://www.ati -Stuart Weinberg, Dow Jones Newswires; 416-306-2026; [e-mail] (END) Dow Jones Newswires

October 03, 2003 13:25 ET (17:25 GMT)