ATI Reports Third Quarter Results

ATI Technologies Inc. (TSX:ATY - News; NASDAQ:ATYT - News) today announced financial results for the third quarter and nine months ended May 31, 2005.

Revenues(1) grew $39 million or nearly 8% to $530 million relative to the third quarter of fiscal 2004. Gross margin percentage was 29.1%. For the third quarter, net loss was $0.4 million ($0.00 per share), as compared with net income of $49 million ($0.19 per share) in the third quarter last year. Stock-based compensation costs(2) in the third quarter of fiscal 2005 totaled $10.4 million. Net income and net income per share excluding these costs and related taxes would have been $8.5 million and $0.03, respectively, as compared with $50.5 million or $0.20 in the third quarter of fiscal 2004. These results are consistent with the preliminary results announced on June 6, 2005.

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Three months ended May 31, 2005
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Excluding Stock-Based Including Stock-Based
Compensation Costs Compensation Costs (GAAP)
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Net income (loss) $8.5 million $(0.4 million)
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Net income per share $0.03 $0.00
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"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 David Orton, ATI's Chief Executive Officer. "Yet, during the quarter, we also achieved important milestones in our core GPU business. In addition, we have a renewed focus on improving our operational consistency in ramping new technologies. Looking forward, we expect continued growth in our core markets as well as the new markets of chipsets and consumer."

Outlook

For the fourth quarter, we anticipate revenues in the range of $550-580 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. Gross margin percentage is expected to be in the range of 29-30%, but 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% from the third quarter.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL RESULTS

This is management's discussion and analysis of financial condition and the results of operations (MD&A) that comments on ATI's operations, financial condition and cash flows for the three and nine months ended May 31, 2005 compared to the three and nine months ended May 31, 2004. This MD&A should be read in conjunction with the attached unaudited interim consolidated financial statements for the period ended May 31, 2005, the annual MD&A contained in the 2004 Annual Report and the audited consolidated financial statements for the year ended August 31, 2004.

In this MD&A, ATI, we, us and our mean ATI Technologies Inc. and its subsidiaries.

Important Information Regarding 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 other sections of 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. Additional information concerning risks and uncertainties affecting our business and other factors that could cause our financial results to fluctuate is contained in our filings with Canadian and U.S. securities regulatory authorities, including our 2004 Annual Information Form and 2004 Annual Report filed on SEDAR at www.sedar.com.

Unless indicated otherwise, this MD&A reflects our expectations as of June 23, 2005.

Any reference to "year-over-year" in this MD&A refers to a comparison of this year's third quarter results versus the third quarter of the prior year unless otherwise noted.

RESULTS OF OPERATIONS

Revenues

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Revenues ($000) Three Months Ended Nine Months Ended
May 31 May 31
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2005 2004 Change 2005 2004 Change
(%) (%)
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PC 460,673 433,611 6% 1,528,851 1,281,501 19%
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Consumer 69,562 57,846 20% 223,431 142,998 56%
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Total 530,235 491,457 8% 1,752,282 1,424,499 23%
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Third quarter revenues grew $39 million or about 8% to $530 million relative to the same period a year ago. The PC segment accounted for $461 million or 87% of revenues while the Consumer segment accounted for approximately $70 million or 13% of revenues in the quarter.

Since the first quarter of fiscal 2005, we have operated in two reportable segments: PC and Consumer. The PC segment includes all 3D graphics, video and multimedia products developed for use in desktop and notebook computers. The Consumer segment includes products used in cell phones, digital televisions (DTVs) and other consumer electronics. The Consumer segment also includes royalties and contract engineering services under development and license agreements with cell phone and game console product manufacturers.

PC

PC revenues were up about 6% compared to the same quarter last year primarily on stronger sales of discrete desktop products to the add-in board (AIB) channel and from PCI Express design wins with PC Original Equipment Manufacturers (OEMs). Broad-based demand for our products led to year-over-year unit growth of approximately 22% due to substantial growth in PCI Express-based OEM design wins. A large number of these design wins were concentrated at the lower end of the market, however, leading to the more modest increase in revenue. On a sequential quarter basis, overall PC unit volumes increased despite the typical seasonal weakness usually seen in the third quarter relative to the second quarter. However, a product mix shift led to a higher concentration of sales in the mainstream and value segments, which generally carry lower average selling prices than products in the performance segment. The percentage of revenue derived from the enthusiast segment of the market remained unchanged from the second quarter of fiscal 2005.

Our desktop integrated business revenues more than quadrupled year-over-year largely due to the successful launch of new products, such as the Radeon® Xpress 200 series for the AMD and Intel platforms, which resulted in significant OEM design wins. Workstation product revenues also grew significantly year-over-year reflecting product success and increased market penetration, particularly within entry level programs at OEMs. Desktop products accounted for approximately 60% of total PC revenues with notebook accounting for the remainder.

In the Notebook business, revenues from discrete products were down slightly while sales of integrated products fell more sharply year-over-year. While overall growth in the notebook market has remained strong, as has our discrete market share, our overall market share in notebook graphics has been impacted by the growing use of integrated chipsets. However, our revenues from notebook integrated products showed strength in the third quarter, rising 45% relative to the second quarter of fiscal 2005.

Consumer

Consumer revenues grew 20% relative to the same quarter in fiscal 2004. Handheld unit volumes rose 45% year-over-year and revenues grew 12% as our Imageon(TM) product line for handheld devices successfully penetrated the mainstream mobile phone market. Revenues from digital television products grew by 83% over the same period last year due to the continued success of our Xilleon and NxtWave products with television manufacturers and the accelerating market transition from analog television to DTV in the U.S.

Revenues for the first nine months of fiscal 2005

Revenues for the first nine months of fiscal 2005 grew 23% to $1.75 billion from $1.42 billion in the same period last year. Revenues in our PC segment rose 19% year-to-date and accounted for $1.53 billion or 87% of total revenues while Consumer rose 56% and represented $223 million or 13% of total revenue. Revenue growth was driven by strong market share and higher sales in our desktop and notebook discrete businesses, as well as sales growth in our handheld and DTV consumer businesses. These gains were partially offset by a decline in sales of notebook integrated chipsets.

Gross Margin

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Q3 2005 Q3 2004 Change (%)
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Gross Margin ($000) 154,429 172,539 (10%)
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Percentage of Revenues 29.1% 35.1% (6%)
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Gross margin percentage for the third quarter of fiscal 2005 was 29.1%, down from 35.1% for the same period a year ago and 34.2% in the second quarter of fiscal 2005. Gross margin percentage for the first nine months of fiscal 2005 was 32.6%, down from 35.1% for the same period last year.

During the third quarter, we experienced an overall mix shift in our company product lines as well as some operational issues in the packaging and test area of the manufacturing process, both of which caused our gross margins to decline relative to the same period last year and to the previous quarter. Gross margins in our core desktop discrete business remained strong while notebook discrete margins were somewhat weaker due to the transition from higher-margin AGP products to PCI Express products. Gross margin was also negatively impacted by the increased sales and accelerated ramp of desktop integrated chipsets which currently have margins that are well below the corporate average. Lower than anticipated yields on certain products due to an accelerated production schedule also negatively impacted gross margin.

Year-to-date gross margin percentage declined for the reasons above, as well as production costs associated with the introduction and ramp of PCI Express products earlier in the year. The overall gross margin percentage decline for the quarter and year-to-date was partially offset by a growing contribution from our Consumer segment and from our workstation business, both of which carry margins that are higher than the company average.

Operating Expenses

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Select Operating Q3 2005 As % of Q3 2004 As % of Change
Expenses ($000) Revenues Revenues Y-o-Y
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Research and
development 88,508 16.7% 65,539 13.3% 35%
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Selling and marketing 37,744 7.1% 31,243 6.4% 21%
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Administrative 16,013 3.0% 12,166 2.5% 32%
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Total operating expenses, excluding stock-based compensation, increased 31% in the quarter and 25% on a year-to-date basis compared to the same periods last year, respectively. The majority of the increase was related to research and development and was driven by the need to make the necessary investments to maintain technology leadership and create a platform for continued growth.

Selling and marketing expenses were up 21% compared to the third quarter last year. The increase was primarily related to higher levels of personnel, as well as increased advertising and promotion to support our revenue growth. On a year-to-date basis, selling and marketing expenses increased 21% compared to the same nine months last year mainly due to additional personnel, as well as higher sample costs and travel expenses largely related to sales and marketing programs.

Research and development (R&D) expenses rose 35% in the quarter compared to the third quarter of 2004. The increase was the result of continued investment across both the PC and Consumer segments to support continued product and technology leadership. This investment included higher prototyping costs incurred in the design and development of future products on 90 nanometer process technology, as well as an increase in technical staff to support new product lines. The recent acquisition of certain professionals from Terayon Communication Systems, Inc. (Terayon) and CuTe Solutions Private Limited (now, ATI Technologies India Private Limited) contributed to the increase in technical staff. For the first nine months of fiscal 2005, R&D expenses rose 26% compared to the same period in 2004, for reasons similar to those above.

Administrative expenses were up 32% in the quarter and 26% for the first nine months of fiscal 2005 compared to the same periods in 2004. The increases are primarily attributable to headcount related expenses as well as professional and consulting fees.

Stock-based Compensation

In accordance with Canadian GAAP, in the first quarter of fiscal 2005, ATI began to expense compensation costs associated with stock options granted to employees after September 1, 2002. This expense item, along with the expense associated with restricted share units and deferred share units, is reflected in the expense for stock-based compensation included in the attached unaudited interim consolidated statements of operations and retained earnings.

Stock-options, restricted share units and deferred share units comprise all stock-based compensation currently awarded by ATI to our employees and directors. Stock-based compensation costs were $10.4 million in the quarter as compared with $2.3 million in the same period last year. The increase in stock-based compensation was primarily related to ATI commencing the expensing of stock options in compliance with Canadian GAAP during the first quarter of fiscal 2005.

The $10.4 million expense in the third quarter of fiscal 2005 included $8.4 million for compensation costs associated with stock options and $2.0 million for compensation costs associated with restricted share units and deferred share units.

Interest and Other Income

Interest and other income was $3.9 million in the third quarter of fiscal 2005, compared with $1.3 million for the comparable period in fiscal 2004. The difference primarily reflects increased investment income derived from interest on our higher cash balances.

No investment gain or loss was recorded in the third quarter of fiscal 2005, as compared with an investment loss of approximately $1.3 million in the same period last year.

For the first nine months of fiscal 2005, interest and other income was $9.7 million, as compared with $1.4 million for the same period in 2004. The difference is attributable to interest on our higher cash balances.

Net Income (Loss)

We incurred a net loss of $0.4 million in the third quarter of fiscal 2005 as compared to net income of $49 million in the same quarter last year. The decline in net income is due to the lower gross margins and higher operating expenses outlined in previous sections. Net income per share fell to $0.00 from $0.19 in the same period in 2004. Net income and net income per share excluding stock-based compensation costs described above were $8.5 million and $0.03, respectively, for the third quarter of fiscal 2005, compared to $50.5 million and $0.20 in the prior year.

Year-to-date, net income declined 16% to $120 million or $0.47 per share from $144 million or $0.56 per share for the first nine months of fiscal 2004. The decrease was largely the result of the sharp decline in net income in the third quarter of fiscal 2005.

Liquidity and Financial Resources

Inventory levels of $456 million at the end of the third quarter increased from $255 million at fiscal 2004 year-end. Approximately two-thirds of inventory in the PC segment consisted of PCI Express goods versus one-third AGP. Inventory in terms of days sales outstanding was above our internal target of 60 days. We expect inventory levels in dollar terms to decline in the fourth quarter but to remain above our 60-day target.

Accounts receivable at May 31, 2005 was up 6% to $389 million from $366 million at August 31, 2004. Relative to the second quarter of fiscal 2005, accounts receivable decreased approximately $21 million due to seasonally lower sales. Accounts payable and accruals rose 40% to $663 million from $474 million at August 31, 2004. Accounts payable and accruals were up about $80 million on a sequential quarter basis, an increase that is consistent with the increase in inventories.

Cash flow from operations was $15 million in the third quarter. Our cash position, which is defined as cash and cash equivalents and short-term investments, at May 31, 2005 was $644 million, up from $549 million at fiscal 2004 year-end and down from $653 million at February 28, 2005. The change from February 28, 2005 reflects increased capital expenditures and the cash consideration for the Terayon acquisition during the third quarter. As of May 31, 2005 we had working capital of $834 million compared to $695 million at fiscal 2004 year-end.

Outstanding Share Data

At May 31, 2005 there were 252,844,998 common shares outstanding or 258,919,924 shares on a year-to-date weighted average diluted basis.

Other Corporate Developments

On March 29, 2005, a panel of the Ontario Securities Commission (OSC) approved a settlement agreement reached between Staff of the OSC and ATI. As part of the settlement, ATI agreed to pay a total of CDN $900,000 as a contribution to costs, and a voluntary payment in connection with a Notice of Hearing and Statement of Allegations filed by the OSC. Further details on the settlement are contained in Note 8 to the unaudited interim consolidated financial statements.

Normal Course Issuer Bid

Under the terms of a Normal Course Issuer Bid announced on March 24, 2005, ATI may purchase up to 24,700,000 of its common shares, representing approximately 10% of its "public float" as of March 17, 2005, as calculated in accordance with TSX rules and policies. ATI will cancel any common shares purchased under this Bid. No shares were repurchased for cancellation in the third quarter.

ACCOUNTING POLICIES

Our unaudited interim consolidated financial statements are prepared according to Canadian GAAP. The key estimates and assumptions that management has made and their impact on the amounts reported in the unaudited interim consolidated financial statements and notes remain substantially unchanged from those described in our 2004 Annual MD&A, with the exception of the adoption in the first quarter of fiscal 2005 of the revised CICA Handbook Section 3870, "Stock-based Compensation and Other Stock-based Payments". See Note 1 to the unaudited interim consolidated financial statements for more information about the accounting policies used to prepare our financial statements.

SUPPLEMENTARY FINANCIAL INFORMATION

The table below shows selected financial information for the eight most recently completed quarters.

ATI TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR EIGHT QUARTERS
(Thousands of US dollars, except per share amounts)

Q3 2005 Q2 2005 Q1 2005
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Revenues $ 530,235 $ 608,188 $ 613,859
Cost of goods sold 375,806 399,885 405,009
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Gross margin 154,429 208,303 208,850

Expenses
Selling and marketing 37,744 36,352 33,125
Research and development 88,508 77,726 73,114
Administrative 16,013 15,793 12,676
Amortization of
intangible assets 3,046 1,389 1,244
Stock-based compensation 10,395 10,329 10,558
Other charges (recoveries) 1,351 278 382
----------------------------------------
157,057 141,867 131,099
Income (loss) from
operations (2,628) 66,436 77,751

Interest and other
income (loss) 3,914 3,624 2,176
Gain (loss) on investments 0 880 0
Interest expense (525) (537) (519)
----------------------------------------
Income before income taxes 761 70,403 79,408
Income taxes 1,206 13,210 15,705
----------------------------------------
Net income (loss) $ (445) $ 57,193 $ 63,703
----------------------------------------
----------------------------------------

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Net income per share
Basic $ 0.00 $ 0.23 $ 0.26
Diluted $ 0.00 $ 0.22 $ 0.25

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Weighted average number
of shares (000's)

Basic 251,602 251,046 249,027
Diluted 251,602 259,743 257,917

Outstanding number of
shares at the end
of the period (000's) 252,845 252,258 251,324

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Q4 2004 Q3 2004 Q2 2004 Q1 2004 Q4 2003
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Revenues $ 572,218 $ 491,457 $ 463,337 $ 469,705 $ 380,674
Cost of
goods sold 379,836 318,918 302,914 302,134 246,643
-----------------------------------------------------
Gross
margin 192,382 172,539 160,423 167,571 134,031

Expenses
Selling and
marketing 29,244 31,243 27,031 30,079 26,176
Research and
development 75,865 65,539 60,809 63,278 61,285
Administrative 11,517 12,166 11,532 11,487 10,557
Amortization of
intangible
assets 1,486 1,546 1,541 1,542 1,271
Stock-based
compensation 1,691 2,315 2,826 751 0
Other charges
(recoveries) 155 (454) (178) 173 10,440
-----------------------------------------------------
119,958 112,355 103,561 107,310 109,729
-----------------------------------------------------
Income (loss)
from operations 72,424 60,184 56,862 60,261 24,302

Interest and
other income
(loss) 2,815 1,340 1,856 (1,754) 714
Gain (loss)
on investments 0 (1,307) 0 0 3,844
Interest expense (499) (513) (531) (515) (516)
-----------------------------------------------------
Income before
income taxes 74,740 59,704 58,187 57,992 28,344
Income taxes 13,584 11,085 10,602 10,553 6,050
-----------------------------------------------------
Net income
(loss) $ 61,156 $ 48,619 $ 47,585 $ 47,439 $ 22,294
-----------------------------------------------------
-----------------------------------------------------

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Net income
per share
Basic $ 0.25 $ 0.20 $ 0.19 $ 0.20 $ 0.09
Diluted $ 0.24 $ 0.19 $ 0.19 $ 0.19 $ 0.09

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Weighted average
number of shares
(000's)

Basic 247,699 245,960 244,373 242,998 240,647
Diluted 258,198 256,650 255,876 254,109 249,525

Outstanding number
of shares at the
end of the period
(000's) 249,287 247,886 246,604 244,239 241,742

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Conference Call Information

ATI Technologies Inc. will host a conference call today at 8:30 AM (EDT) to discuss its financial results for its fiscal 2005 third quarter ended May 31, 2005. 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 webcast of the call will be available at http://www.ati.com/companyinfo/ir/quarterlyresults.html under the Quarterly Results section, Q3 2005. Replays of the conference call will be available through June 30, 2005 by calling 416-695-5800. The passcode is 3125452. A web cast replay will be available at the web site noted above.

About ATI Technologies

ATI Technologies Inc. is the 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 graphics processor unit (GPU) 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 device markets. With 2004 revenues of U.S. $2 billion, ATI has more than 3,000 employees in the Americas, Europe and Asia. ATI common shares trade on NASDAQ (ATYT) and the Toronto Stock Exchange (ATY).

Copyright 2005 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.

For media or industry analyst support, visit our Web site at http://www.ati.com

(1) All dollar amounts are in U.S. dollars unless otherwise noted. All per share amounts are stated on a diluted basis unless otherwise noted. ATI Technologies Inc. reports under Canadian generally accepted accounting principles (GAAP).

(2) In accordance with Canadian GAAP, beginning with the first quarter of fiscal 2005, ATI began expensing compensation costs associated with stock options granted to employees after September 1, 2002. Total stock-based compensation includes the costs associated with stock options, restricted share units and deferred share units.

Please click on the following link to access the Financial Statements and Notes to the Financial Statements - http://www2.ccnmatthews.com/database/fax/2000/ati623.pdf

ATI Technologies Inc. (TSX:ATY - News; NASDAQ:ATYT - News)



--------------------------------------------------------------------------------
Contact:
ATI Technologies Inc.
Chris Evenden
Director, Public Relations
(905) 882-2629
cevenden@ati.com
OR
Other ATI Contacts:
Porter Novelli Canada
Trevor Campbell, Director
(416) 422-7202
trevor.campbell@porternovelli.com
OR
For investor relations support, please contact:
ATI Technologies Inc.
Zev Korman, Manager
(905) 882-2600, ext. 3670
zev@ati.com
http://www.ati.com



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