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conference date: June 29, 2006
for quarter ending: May 31, 2006 (3rd quarter 2006)
Overview: Return to profitability and improved gross margins, but seasonal weakness and weakness in PC graphics business lead to non-bullish guidance for 4th quarter. More bullish on 1st quarter fiscal 2007 due to new products for PCs and rapid growth of consumer (TV and cell phone) segments.
Basic data:
Revenues were $652.3 million (23% growth year-over-year, but 3% sequential decline, more than usual), within guidance range. Net GAAP income 31.9 million or .12 per share; non-GAAP $42.5 or .16 per share compared to a net loss year-earlier. Gross margin was 30.1%. Stock-based compensation costs were $12.9 million.
Guidance:
Revenues of $620 to $660 million with slightly improved gross margins
Conference Highlights:
Priorities are PC business growth, margin expansion, and operational efficiency. Reduced inventories by $50 million.
Reiterated quarter's developments such as Nokia partnership. PC division launched Crossfire Express 3200; Fire GL 1GB graphic card; gaming physics system. Many design wins.
$500 million 77% was PC division, and increase of 8.5% year-to-year. Discrete product revenues were soft, down 10% sequentially, but chip-set demand was good, up 200% over year-earlier and margins improved to nearly 20%. Consumer products accounted for 23% of revenue and had 120% year-over-year growth and $152.6 million quarterly income. Consumer business has better than average margins, contributing to margin improvement.
Operating expenses $153 million higher than expected due to one-timetax issues and increase in Canadian dollar relative to US$.
$366 million inventory at end of quarter. $518 million in cash and equivalents, which is a decline due to acquisitions and share purchases.
Tough quarter for industry; growth to be weak in this (4th) quarter before strength in last quarter of calendar year. Consumer business going stong with LCD TV demand especially strong in Europe. OEM's want ATI logo to show image quality. Design wins on video phones.
New Radion products will launch, aiming for regaining PC video card leadership. Intel's Conroe launch will drive higher video chip/card sales.
Q&A:
PC Market is weak and near-term uncertain, so why predict rebound in 2nd half? Because of platform transitions and back-to-school and holiday cycle; OEM and retailer feedback.
Notebook market looks softer than they had projected, but desktop relatively strong, so blend should drive up margin improvement.
Inventory composition? Cut back on raw materials. Now in reasonably good shape, but not yet to target.
Orders from OEM's did pull back slightly in May, but improved in June. June is usually softest of three months, then build in July and August.
ASPs (average sales price): ASPs tend to be consistent because business is largely with OEMs.
Consumer segment to be slightly improved in Q4 over Q3; PC chipset to go down in Q4, GPUs probably flat, "could be more bullish."
NVDA stanglehold on multi-GPU market, can you break it? Crossfire is accepted by OEM because of Conroe introduction (will be this summer). Marketing effectively. Crossfire will enable physics. More SI's will bring Crossfire solutions to market with summer; monitor game sites.
Small amount of low-margin inventory to sell off. But good yields on 80 nm. So will approach margin model in fall. OEM and notebook discrete tend to have lower gross margins. AGP product needs to be moved because of tech changes, so ASPs tend to be low; selling more than expected, which lowers margins.
DTV grew 50% sequentially.
Conroe rollout strategy? Mainly addressing new levels of performance with GPU/gamer market. As to motherboard chipsets, they tend to be at lower end of market.
Mix shifts will occur as AMD and Intel introduce new products.
If demand is high in August do to AMD/Intel price reductions, can you fill orders? Will be ready, challenge is predicting the mix.
Cell phone coprocessor business? Change was on the expense side, making investments there, otherwise mix was steady.
OEM pricing is stable; only some shift from notebook to desktop; some shift in chipsets sold more likely to effect margins than change in ASPs.
Partners very excited about the program, looking forward to back-to-school and holiday sales.
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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. Before making or terminating an investment you should always verify any factual basis of your decision from multiple independent sources.
Copyright 2006 William P. Meyers