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 release (in particular, the section entitled "Q4 Outlook") contain forward-looking statements about ATI's objectives, strategies, financial condition and results, as well as statements with respect to our beliefs, expectations, anticipations, estimates and intentions. These forward-looking statements are based on current expectations and various factors and assumptions. Accordingly, these statements entail various risks and uncertainties. The material factors and assumptions that were applied in making the forward-looking statements in this release include, but are not limited to: the expected rate of growth of the PC and Consumer markets; the expected mix of discrete and integrated chipsets that will be sold in the PC market; our expected market share across various customers and product segments; our expected future design wins both in the PC and Consumer markets; our expected product and production costs; the timely introduction of our new products and our competitors' new products for the PC and Consumer markets; the expected product specific average selling price of our products and our competitors' products; our overall competitive position and competitiveness of our current and future products; the relative mix of desktop and notebook chipsets; changes in the rate of exchange of Canadian currency to U.S. dollars; changes to our overall product mix; potential supply constraints and disruptions for components incorporated into our products and those of our customers; and unexpected variances in the cost or availability of materials, especially silicon wafer, memory, printed circuit boards and packaging costs.
It is important to note that:
- Unless otherwise indicated, forward-looking statements in this release describe our expectations as of June 29, 2006.
- We caution readers not to place undue reliance on these statements as our actual results may differ materially 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.
Material factors that could cause our actual results to differ materially from the forward-looking statements in this release include, but are not limited to: unexpected variations in market growth and demand for new GPU products and technologies; potential constraints on our ability to develop, launch and ramp new products on a timely basis; manufacturing considerations, competition, industry cycles and seasonality; dependence on third-parties for manufacturing; critical industry transitions; and other risks detailed in our regulatory filings. 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. Please see Item 3.12 "Narrative Description of the Business - Risks and Uncertainties" in our 2005 Annual Information Form and the Risks and Uncertainties section of our annual MD&A on page 30 of our 2005 Annual Report filed on SEDAR at www.sedar.com. Our Form 40-F and other filings we make with the U.S. Securities and Exchange Commission are available on EDGAR at www.sec.gov.
RESULTS OF OPERATIONS
Revenues for the Third Quarter of Fiscal 2006
Consolidated revenues for the third quarter of fiscal 2006 increased 23.0% to $652.3 million as compared to the third quarter last year. The PC and Consumer segments accounted for 77% and 23%, respectively, of consolidated revenues in the third quarter. A new quarterly record was achieved for total units shipped.
PC revenues increased 8.5% year-over-year to $499.7 million. Sales of desktop and notebook integrated products increased more than 200% year-over-year with the continued success of the Radeon Xpress 200 product line. The increase in sales of integrated products was partially offset by an approximate 15% decline in sales of desktop discrete products due to lower average selling prices resulting from a mix shift towards mainstream and value products in the add-in-board (AIB) channel. On a sequential basis, desktop discrete sales declined approximately 10% reflecting a seasonal decline in the market for discrete GPUs. Sales of notebook discrete solutions were also lower year-over-year as a result of the increased use of integrated graphics in notebook platforms.
Consumer revenue grew nearly 120% year-over-year to $152.6 million in the third quarter of fiscal 2006. Handheld revenue and unit shipments each increased more than 150% on growing sales of Imageon multimedia processors to major manufacturers of handheld devices. Digital television (DTV) revenues more than doubled on a greater than 150% increase in unit shipments to DTV manufacturers, with notable strength on LCD and integrated platforms. Royalties and non-recurring engineering revenue related to our game console business represented approximately 2% of consolidated revenues.
Revenues for the First Nine Months of Fiscal 2006
Revenues for the first nine months of fiscal 2006 grew 9.3% to $1.92 billion from $1.75 billion in the same period last year. The PC segment accounted for $1.50 billion or 79% of consolidated revenues while Consumer represented $409.9 million or 21% of consolidated revenues. The increase in consolidated revenues was driven by strong sales growth in the Consumer segment.
Gross margin percentage was 30.1% for the third quarter of fiscal 2006 as compared with 29.1% in the same period last year, reflecting improvement in mobile discrete and integrated chipset gross margins, as well as growth in the Consumer business, which has margins that are typically higher than our corporate average. This was partially offset by a decline in desktop discrete gross margins. On a sequential basis, gross margin improved from 28.2% in the second quarter of fiscal 2006 due primarily to an improvement in desktop discrete gross margins.
Year-to-date gross margin percentage was 29.0% as compared with 32.6% for the first nine months of fiscal 2005 reflecting lower margins in the desktop discrete business, as well as the impact of strong sales growth of lower-margin integrated chipsets. These chipsets comprised about one-quarter of consolidated revenues in the third quarter and the first nine months of fiscal 2006 as compared with 10% or less for the same periods last year. A larger proportion of higher-margin Consumer revenue helped to offset some of the overall gross margin decline.
Total operating expenses, excluding the amortization of intangible assets, stock-based compensation and other charges, increased 7.5% year-over-year and 10.7% on a year-to-date basis.
As we report and measure our financial results in U.S. dollars, the appreciation of the Canadian dollar relative to the U.S. dollar increased operating expenses by $4.1 million in the third quarter of fiscal 2006 as compared with the same period last year ($7.1 million for the first nine months of fiscal 2006 as compared with the same period in the prior year).
Selling and marketing expenses were up 4.1% year-over-year and 5.7% on a year-to-date basis, reflecting the addition of sales and marketing personnel and increases in advertising and marketing-related activities to drive brand and product awareness, particularly among AIB channel and retail customers.
Research and development (R&D) expenses of $91.5 million in the third quarter were 3.4% higher than the comparable period in fiscal 2005. For the first nine months of fiscal 2006, R&D expenses rose 8.4% relative to the same period a year ago. The increase was the result of continued investments across both the PC and Consumer segments to support product and technology development, and was primarily driven by increases in technical staff, including the acquisition of approximately 150 professionals from Macrosynergy Technology Co., an XGI Technology alliance company ("XGI") and Bitboys Oy ("Bitboys") in the quarter.
Administrative expenses were up $6.1 million or 38.3% to $22.1 million in the quarter and rose 35.0% for the first nine months of fiscal 2006 compared to the same period in fiscal 2005. The increases were related to investments in the supply chain organization, additional headcount related expenses and increased professional and consulting fees related to regulatory compliance and litigation.
In accordance with 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. Stock option expense for the third quarter was $8.2 million compared to $8.4 million for the same period last year. Total stock-based compensation includes the costs associated with stock options, restricted share units and deferred share units. Stock-based compensation costs were $12.9 million in the quarter as compared with $11.3 million in the previous quarter and $10.4 million in the third quarter of fiscal 2005.