Q2 2006 ATI Technologies Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning, ladies and gentlemen. Welcome to the ATI Technologies 2006 second-quarter results conference call. Please be advised this call is being recorded. I would now like to turn the meeting over to Ms. Janet Craig, Director of Investor Relations.

JANET CRAIG, DIRECTOR OF IR, ATI TECHNOLOGIES: Thanks and good morning. Before I turn the call over to Dave and Patrick, let me remind you that the discussion to follow contains forward-looking statements about ATI's objectives, strategies and operating 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 estimates or assumptions prove inaccurate. Therefore, we cannot provide any assurance that forward-looking statements will materialize.

Material assumptions that were applied in making these forward-looking statements and material factors that could cause our actual results to differ materially from these forward-looking statements are disclosed in today's press release. Additional information concerning risks and uncertainties is contained in our filings with Canadian and U.S. security regulatory authorities, in particular in the Risks and Uncertainties section of our annual information form and our annual MD&A.

We assume no obligation to update or revise any forward-looking statements whether as a result of new information, future events or any other reason. Also let me remind you that we report in U.S. dollars under Canadian GAAP. In order to ensure that everyone on the call that wishes to ask a question has the opportunity to do so, we are restricting the number of questions each caller may ask to one. At this time, I will turn the call over to Dave Orton.

DAVE ORTON, PRESIDENT & CEO, ATI TECHNOLOGIES: Good morning and welcome to ATI's Q2 fiscal 2006 conference call. In fiscal Q2, ATI exceeded our revenue guidance, delivering $672 million in sales, a 14% gain quarter-over-quarter and 11% year-over-year. This is almost 10% higher than our previous record revenue.

We saw growth in all four major product areas; CPUs, chipsets, our digital TV business and handsets. Our chipset, handheld, and DTV businesses have now delivered four consecutive quarters of growth. Our desktop GP business was up almost 10% sequentially and our Mobility Radeon GPUs grew in a seasonally slow quarter. Chipsets are now about 25% of our total sales and desktop IGPs saw a greater than a 50% increase quarter-over-quarter.

Overall demand for our Imageon media processors was quite strong with a record revenue quarter and shipping almost 25 million units during the quarter. Our DTV businesses set a new record in units and revenues and we continue to capture numerous design wins in the ITTV space for late '06 and '07.

At the center of ATI's growth and momentum is an unrelenting pursuit to innovate and our ability to drive these technology advances into a top to bottom product stack that delivers real customer value. Just look at the X1000 family to see ATI at our best. Innovative technologies like Avivo and full featured high dynamic range and our ability to translate this innovation into a product that has an incredible customer demand.

The X1900 has been a smash success with over 50,000 units shipped in just the first five weeks. When matched with the new CrossFire chipset, the X1900 captures both a single and dual card performance crown.

On January 24, we launched the X1900 with the volume in the channel and many OEMs like Acer, Alienware, Gateway and Voodoo shipped immediately, as did our add-in partners from ASUS, Diamond Multimedia and Sapphire. The response was and continues to be tremendous, as demonstrated by the following quote. "There is little doubt that the X1900 is the most powerful graphics card available on the market today" and that was an (indiscernible). The performance and technical superiority of the X1900 are so great that I honestly believe that it actually shocked our competition with both our performance and visual quality.

At the heart of the X1900 is the most advanced share model 3.0 pixel processing in the industry. In addition, we have designed this product to support up to 1 GHz in memories and this combination delivers the fastest GPU on the market and it has quite a bit of headroom to spare. If you don't believe me, just go out and ask the thousands of over (indiscernible) enthusiasts who are now flocking to the X1900 for the ultimate visual experience.

With both OEM and SI design wins for our top-of-the-line X1900, we continue to paint the graphics world ruby red. Before I go into details on the rest of our product line, I want to turn over to Patrick and give you the highlights from Q2.

PATRICK CROWLEY, CFO, ATI TECHNOLOGIES: Thank you, David. Good morning, everyone. Our revenues, as Dave mentioned, for the second quarter of fiscal 2006 was $672 million. That represents a 14% sequential increase and a new Company record in a seasonally down quarter for the industry. So we are very pleased with top-line performance.

Revenue growth was driven by all product lines. In terms of revenue split, the PC segment represented $540 million or 80% of total revenue in the quarter. Desktop Discrete amounted to less than 40% of Company revenues. Chipsets, almost one-quarter of Company revenues and notebook discrete, a little less than 20% of Company revenues.

Revenue in our core Desktop Discrete business grew 10% sequentially on strong ASP improvement despite lower seasonal volumes. Our chipset business on Intel and AMD platforms once again posted record sales, strong growth and continued margin improvement. Sequential revenue growth was north of 35% for the combined desktop and notebook chipset business and the desktop to notebook revenue mix was roughly 60/40.

The consumer segment, which included handheld, DTV, NRE and royalty revenues, accounted for $132 million or 20% of Company revenues in quarter two. Consumer revenues were up by more than 5% sequentially, again in what would normally be considered a seasonally down quarter. Handheld accounted for more than 10% and DTV about 5% of consolidated revenues.

Royalties from our game console business, which includes royalties from both Microsoft and Nintendo, totaled approximately $10 million in the quarter and NRE was less than $10 million in the quarter.

It was another record year for handheld with shipments totaling or approaching 25 million units and revenues up nearly 15% sequentially on continued penetration of the mainstream feature phone market. DTV revenue was up slightly despite seasonality.

Moving on to gross margins. Gross margin percentage was 28.2% for the second quarter as compared with 28.7% last quarter. Within the Discrete business, we have essentially cleared out the written down legacy product, but as a result, Discrete margins continued to be impacted in the quarter. Chipset gross margins also continued to improve in the quarter, but as we indicated, the growth in relative mix of chipsets contributed to the sequential margin decline. Consumer margins remained steady.

Operating expenses at $139 million came in well below guidance due to the timing of R&D programs, as well as reduced advertising and marketing costs and professional fees. When we guided on OpEx last quarter, it looked as though some Q3 programs might be accelerated and possibly land late in Q2. We wanted to be conservative and build this into our guidance for Q2. However, as it turned out, this was not the case and these expenses landed in Q3, as originally expected.

Net income for the quarter was $34.1 million or $0.13 per share diluted. Adjusted net income, which excludes stock option expense, amortization of intangibles and other charges, was $44.8 million or $0.17 a share diluted.

Moving now to the balance sheet. We ended the quarter with inventory at $428 million or about 72 days based on Q2 sales. That is higher …