For Thursday, May 25, 2000 Chipmaker rocks market with warning ATI Technologies: About $3-billion wiped off the market value By MICHAEL LEWIS The Financial Post Investors wiped $2.5-billion in market value off the stock of ATI Technologies Inc. (ATY-T) after the world's largest computer graphics chipmaker warned it will lose US$20-million in its current quarter, a sharp reversal from its earlier forecast of a US$36-million profit.

ATI blamed the bad news on a "growing worldwide computer component shortage" and aggressive pricing by newly consolidated competitors in the United States, leading analysts effectively to tear up their financial model for the Thornhill, Ont.-based company through 2000.

ATI did shoulder some of the blame for the direction it gives to the market.

"Probably, our radar needs to be improved," said newly appointed president and chief operating officer David Orton. "We missed a beat," he said, adding that the company is taking steps to improve accountability, and to make sure that its future guidance is closer to reality.

ATI stock fell $10.70, or 42%, to close in Toronto at $14.75 on exceptionally heavy volume. The company said it is selling fewer video and graphics parts to computer assemblers, mainly in Europe, where shortages of other components are forcing production cutbacks. It said shortages, and losses, will likely continue through the third and fourth quarters.

In its previous quarter, ATI posted a 45% jump in operating profit to US$35-million, with K.Y. Ho, chairman and chief executive, saying he expected 50% sales growth this year and profit margins in the 30% range.

The company conceded Tuesday that its margins have been reduced to 21%, but said profitability will return in early 2001. Including one-time charges, ATI expects to report a loss of approximately US35" a share when it reports its third quarter results for the period ended May 31 on July 6, but said it can meet 2001 revenue targets of US$1.8-billion to US$2-billion.

Analysts asked the company, which delayed guidance on 2001 profit and gross margins,why it should be believed now?

"There's something that doesn't jibe here," said one analyst, who asked that his name not be used.

"Maybe the issue is really that [products] are not shipping well and you've had to cut prices."

ATI, however, cited several companies that have been hurt by shortages, including computer network equipment supplier Cisco Systems Inc., which said earlier this month that it could fail to meet sales and profit targets thanks to scarce computer parts.

As well, Palm Inc. said yesterday it's fighting with cellphone makers for a limited supply of memory chips and liquid-crystal-display screens, meaning it won't keep up with demand for its best-selling Palm handheld organizers.

Motorola Inc., Nortel Networks Corp. and Qualcomm Inc. also have cited similar shortages in recent quarters.

Still, ATI has prompted considerable skepticism over its ability to track market trends.

Mr. Orton said ATI was caught off guard this quarter by a "confluence of events" in a fast-changing sector, with some sharp price cuts by competitors and parts shortages becoming apparent only in recent weeks.

He said those cuts were initiated by rivals leaving the sector, and said fewer players will ultimately trigger price hikes for its products.

He also said that the company expects to announce significant new contracts starting in July, and sees a revenue surge once it begins to ship its new high-speed Radeon graphics chip this summer. Mr. Orton said ATI is seeking to diversify into growth markets and is already looking at ways of paring operating costs.

In the interim, he said, ATI's margins are being squeezed by rising prices of memory components used in its products, while competition means it can charge less for some of its offerings.

ATI said its loss, excluding acquisition-related costs and a US$56-million writedown of raw-materials inventory, will be US6" to US8" per share in the quarter. That compares with the US14"-a-share average profit estimate of six analysts polled by First Call/Thomson Financial.

The company expects third-quarter revenue to fall 1% from the year-earlier period to US$300-million, while gross margins will fall to 21% in the third quarter from 33.2% in the previous three months..

Dennis dos Santos, an analyst at RBC Dominion Securities Inc. in Toronto, cut his rating of ATI to "neutral" from "outperform" and his 12-month target price to $17 from $25, saying ATI's warning makes it vulnerable to rivals such as Nvidia Corp. which is forecasting strong growth through the year.

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-- meg davis (meg9999@aol.com), May 25, 2000