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ATI shares plummet

Globe and Mail Update

Shares of ATI Technologies Inc. fell more than 10 per cent Thursday after the computer-graphics chip maker unexpectedly swung to a loss in its fiscal third quarter and cut a fourth-quarter sales forecast it made less than two weeks ago.

It is the third sales warning this year from the Markham, Ontario, graphics-chip maker, which analysts fear is losing ground in a battle with rivals Nvidia Corp. and Intel Corp.

Shares of ATI fell to a low of $13.91 (Canadian) in Toronto, their lowest level in nearly two years. They closed down $1.26 or 8 per cent at $14.45. The stock has shed a third of its value since the start of 2005.

For the third quarter ended May 31, ATI reported a loss of $445,000 (U.S.) or break even on a per-share basis, compared with a year-earlier profit of $49-million or 19 cents a share. Analysts polled by Thomson First Call had expected a profit of 4 cents for the quarter.

Sales rose 7.8 per cent to $530-million, in line with analyst expectations. Gross margin, or the percentage of sales left after subtracting manufacturing costs, narrowed to 29 per cent from 35 per cent.

“It was a challenging quarter for ATI, particularly within our PC business where we came in well below our expectations for both revenue and gross margin,” said chief executive David Orton.

The company said it lost money despite higher sales on chips for personal computers, which includes those used in 3D graphics, video and multimedia products for desktop and notebook computers. These tend to have a lower profit margin than chips for televisions and cell phones, a division where sales were higher in the third quarter.

ATI warned on June 6 — for the second time — that its fiscal third-quarter sales would miss targets. At the time, the company said it shipped too many low-end products and not enough high-value goods during the quarter, which would pressure gross margins.

Most analysts expected that the bad news was done, but on Thursday, the company lowered its sales forecast for the fourth quarter to between $550-million and $580-million.

“This range has been adjusted down from the preliminary guidance announced on June 6, 2005, due to a more conservative expectation on the ramp of new products in the fourth quarter,” ATI said. The company said on a conference call that its new graphics chip, the R520, is delayed.

Gross margin is expected to be in the range of 29 to 30 per cent, ATI said, although that “is largely dependent on the final product mix for the quarter.” Operating expenses, excluding stock-based compensation costs, are expected to remain flat to up 3 per cent from the third quarter.

Analysts, who had lowered their estimates after ATI's sales and gross margin outlook on June 6, are calling for earnings of 4 cents a share.

UBS Securities analyst Martin Cecchetto noted that ATI's inventory levels of $456-million at the end of the third quarter are a recent “historical high” of 111 days, well above the company's target of 60 days.

“When inventory last reached 96 days, a writedown occurred the next quarter which caused a one-time, 3 per cent impact to gross margins,” he said in a note released Thursday.

Analysts say that ATI is losing sales to competitors Nvidia, a U.S. graphics chip maker that has released new technology, and Intel, which has been making inroads into the laptop market.

© The Globe and Mail

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