ATI 4QF05 Conference Call

[Geo]

ATI 4th Quarter Conference Call 2005



Idiosyncratically selected as always, with no warranty for accuracy offered, express or implied.



Orton:



“Less than 24 hours ago we launched our new line of desktops to the world. Innovation that fuels product and technology leadership is first and foremost the operating imperative for ATIâ€.



“With this launch, you can hear the momentum shift in the graphics market, and the critics have agreed with that.â€



Various “gee whiz†quotes from reviews. His favorite was a quote from Guru3D on Toy Shop.



“The X1800 has arrived, with unparalled performance and unprecedented visual quality.â€



“Strongest lineup in our history.†“Top-to-bottom leadership in every segment of the market.â€



“Full-performance, full-precision, all the timeâ€.



CFO



4th Quarter sucked.



No royalties from Xbox in 4Q, nor were any expected. [Huh?]



“Made large strides in desktop chipset margins this quarter†[tho they are still below where they want them].



“Initial yields on our X1000 series are looking good, and we are confident that these products will have good margins right out of the chute.†[Crafty formulation as it avoids separating out XT yields]



OpEx in range.



1Q06 –We expect revenues to grow 15%. Gross margins above 29%. Expecting initial Xbox royalty revenues to hit this quarter.



“All we need to do is simply execute†[Yeah, well. . –insert mini-rant here--]



New ops guy is putting ATI personnel “on the ground†at suppliers. Reducing “cycle times†and “better forecasting†a priority.





Orton



Yadda-yadda happy talk on their commitment to improve.



X1000 family is vehicle for introducing new platform technologies. Market clearly moving towards convergence of graphics with video. Avivo paean.



Vista is coming and is the next major inflection point for the pc. Impacts both gpus and chipsets as its just around the corner. “Today, ATI offers the only full line of GPUs and chipsets that protect the customer’s investment and desire to get the most from Vista and its new 3D user interface.â€



Still da man in notebooks.

“With introduction of X1000 family, notebook customers now have some insights into what is coming over the next couple months for them.â€



“We have made huge strides in the chipset market over the last six months.†“We are the fastest growing supplier with proven momentum . . .†Shipped on ½ AMD world-wide in Q4. Expect to ship 25M chipsets in F06. Have moved from 5 to 15 OEM wins, including HP. Shipping 30 mobo designs.



Boring handset stuff [sorry, my eyes glaze]



Can’t wait for Xbox in November.



Really, really gonna get better on expense containment and margins. Pinky swear.



“We are now at the next stage of ATI, and at the cusp of a new phase of growth.â€



Q&A



Future of X700 and X800? Launch of GTO is repositioning of X800 into mainstream for Q1 and Q2. Q3 and Q4 is where it ramps down. X700 strong in notebooks. X700 will disappear from channel relatively quickly with X1300 and X1600 in place.



Big on second sourcing, particularly substrates. Sometimes second source within a company, like TSMC, multiple lines and locations.



For Q1, expecting less than 10% of total company revenues from new X1000 products. Margins for X1000 minimum of 32-35%.



X1600 in Q2? Will ship in Q1 (i.e. mid-November), in channel early Q2.



We think there’s a lot of momentum in our IGP business and expect it to keep growing. Unit and revenue growth expected.



Handsets 20m in 1Q. $5 ASP [what is ASP?]



Aiming for 25-30% margins in chipsets blended, with CrossFire above the range and integrated below the range. Need cost reductions, yield, packaging, etc in integrated. Today blended margins are in low teens. Multi-quarter effort.



How long for 50/75% of discrete is X1000? AGP will live longer than anyone expected, at least another 6 months, as low end. On PCX will be significant in six months. Lot of demand for X550 and X300 in OEM. High percentage of OEM business limits margin upside. [i.e. easier to stick it to Joe User than Dell]



Yields on X1800? Lessons learned on R520 for R580 by engineering team? [subtext, “not gonna f’ it up this time, guys?â€] A: Design approach on R520 and RV530 didn’t work with fab. Simple fix when identified. Overall 90nm very good yields. Not just in X1800, all four chips. Expect to see further improvements. Aggressively looking at 80nm and 65nm as well. Lesson learned in “advancing the simulation environments on advanced technology nodes so that the simulation environments can truly pick up the characterization of what’s really going on in the real silicon. And we’re working both with our semiconductor and CAD partners to attack that problem.â€



Notebook chips from X1000 family? Dance, dance, dance. Our track record shows that once we do desktop what happens on notebook.



ATI & Intel on chipsets? We respect customers and don’t preannounce on their behalf.



XB royalties for 1Q. Nintendo was $6-8M? Launch is late in the quarter, so that’s not unreasonable. [which seems to suggest a full quarter would be much higher. [Also seems to suggest, combined with earlier answer re no royalties so far, that royalties are based on MS actually selling XBs, rather than fab’ing chips containing IP purchased from ATI.]



How’s CrossFire going with X1000? Just rolling out volume solutions on CrossFire. Every X1000 shipping is CrossFire ready. We’ve learned a lot the last 3-6 months. You’ll see CrossFire solutions this fall, for both AMD and Intel.



Delay impacted notebook markets for spring ’06? Not really, because X1800 won’t go into notebooks so that design cycle has been ongoing.



Workstation? Almost 50% of unit shipments in that market, but mostly in low and midrange. Goal is to leverage X1800 and an advancement in OGL drivers [sigh –Sasquatch sighting!] to significant growth in the higher-end.



UMC for X1000? Why? Low-end 90nm lots of demand, so capacity is the main driver. Dual-sourcing also desirable. Validating pricing for 90nm too.



Why $200 gap in desktop launch pricing? Two things. Announcement was MSRP not SRP prices. Enthusiast pricing (XL and XT) typicalling is lower at SRP. X1600 and X1300 MSRP as well, but typically those prices are closer to SRP than the enthusiast segment. So the real gap in pricing isn’t as big as it looks with MSRP.



Main criticism in reviews was timing. What can you do to turn that around? CrossFire criticism as well. Tech looks good, what can you do to improve public perception? “We would agree†[peals of laughter around ATI table –glad they aren’t as blind as we sometimes like to think they are!] We picked a point to lauch. . .we have three products coming out. . .complicated matters. . .X1300 and X1800XL are ready to go in volume. And we felt for a clear picture of performance and pricing we needed to do all three. XT late this month or early November they will be available on the shelf. . . we’re confident with that.

 

[wireframe]

[No royalties from Xbox in 4Q, nor were any expected. [Huh?]

I believe the royalities for Xenos are based on sales and Microsoft would be lumping these payments. No Xboxes sold, no royalties.

 

[AlphaWolf]

Handsets 20m in 1Q. $5 ASP [what is ASP?]

ASP is average selling price.

 

[Geo]

ASP is average selling price.

Thanks. . .damn, that's cheap.

 

[Bruce]

Thanks for the infos, seems like the stock markets liked it..... at least for today

 

[Slides]

What handsets does ATI sell?

 

[AlphaWolf]

What handsets does ATI sell?

None, they sell graphics chipsets (imageon) for phones. I think motorola is their biggest customer.

 

[overclocked_enthusiasm]

Nice recap GEO and I can't find anything major to correct you on. I will just add a few tidbits from memory:

1. Orton seemed to laugh at the xbox revenue being in the $6-8 million range this quarter because "sales don't even begin until there is only 8 days left in our quarter". I would anticipate a muted xbox revenue stream for this quarter but next quarter will be huge.

2. The Intel IGP chipset deal seems to perhaps evolved into a long term contract. While Orton was unwilling to clarify the relationship, he certainly implied that the business would NOT be taken away from ATI anytime soon. He discounted the premise that Intel would simply pull the plug on ATI once capacity freed up for Intel.

3. Orton claimed that Gross margins at ATI are very unlikely to reach the lofty levels at Nvidia simply because of the higher OEM mix that ATI has compared to retail/AIB.

4. The overall tone was one of "we know our execution has been poor, and we have truly addressed the issues that will make it better. We are comitted to yada yada yada...". While it was nice to hear, I have heard it for 2 quarters in a row now and I am not sure that Orton deserves the benefit of the doubt, but Wall Street gave him a pass today.

5. The magnitude of the miss was HUGE. Revenues missed by $130 million ($470 vs $600) or 22%, EPS was a loss of (.41) vs a consensus gain of .07, and gross margins tanked another 500+ basis points sequentially and have now fallen 500+ basis points 2 quarters in a row. These #s are from the June guidance at the last reported CC BTW.

6. The perception that "ATI beat estimates" with a loss of (.12) BEFORE the writedown etc. vs the consensus (.30) is just plain wrong from what I can tell. The estimates that I have seen all showed a loss of about $100 million and they all included the writedown. ATI came in with just over that estimated loss of $100 million so I am confused. The actual loss of (.41) should have been used in relationship to the consensus (.30) and for whatever reason that mistake was repeated all day. In my view, ATI missed the already revised estimate on EPS by (.11) cents.

Overall I thought that the ATI CC was as good as they could have expected. I thought the analyst Q/A was going to be much more harsh than it was. The chipset business with Intel, Xbox 360 and the well timed launch (*cough paper) yesterday bought ATI a pass for another 30 days. In this case, Orton stepped up for shareholders and Wall Street was in a good mood. I will believe his words when I see boxes of x1800 XT and others cards on the shelves in major US retailers.

 

[Geo]

3. Orton claimed that Gross margins at ATI are very unlikely to reach the lofty levels at Nvidia simply because of the higher OEM mix that ATI has compared to retail/AIB.

Actually, I think I captured that one, tho not the comparison to NV, which I agree was the context of the original question. Which to some degree is a bit funny, if you think about it, and how ATI used to moon over not having NV's OEM business in the high-end.

Overall I thought that the ATI CC was as good as they could have expected. I thought the analyst Q/A was going to be much more harsh than it was. The chipset business with Intel, Xbox 360 and the well timed launch (*cough paper) yesterday bought ATI a pass for another 30 days. In this case, Orton stepped up for shareholders and Wall Street was in a good mood. I will believe his words when I see boxes of x1800 XT and others cards on the shelves in major US retailers.

Personally, I've never had a moment of doubt that the launch was timed as it was so as to make this call as least painful as possible. I think Orton dissembled a bit in that answer in that regard. In my view, if this call had previously been scheduled a week later, the launch would have been a week later.

I did like his confidence at the end tho about XT availability on store shelves late this month or early November. That was the kind of strong statement people remember and mock you for later if it doesn't happen. Certainly they've earned a lack of confidence for their assurances tho at this point. That kind of answer will either start rebuilding trust if it is delivered, or make it slide ever further if it is not.

 

[Geo]

Future of X700 and X800? Launch of GTO is repositioning of X800 into mainstream for Q1 and Q2. Q3 and Q4 is where it ramps down. X700 strong in notebooks. X700 will disappear from channel relatively quickly with X1300 and X1600 in place.

The more I think about this part, the more I think it might give us a little visibility on R580 that supports what Wavey has been saying.

When you consider both sides of that answer together, the conclusion you'd come to is that the reason X800 ramps down in Q3 is the same reason that X700 disappears quickly in the channel --i.e. it is being replaced. With what? With R5xx derivatives, I'd say, as it moves down to make room for R580.

ATI's Q2 2006 ends Feb 28. If my analysis is correct, I'd expect R580 to launch in late February or March.

 

[Geo]

2. The Intel IGP chipset deal seems to perhaps evolved into a long term contract. While Orton was unwilling to clarify the relationship, he certainly implied that the business would NOT be taken away from ATI anytime soon. He discounted the premise that Intel would simply pull the plug on ATI once capacity freed up for Intel.

Some support for your analysis: http://www.theinquirer.net/?article=26780

 

[Cartoon Corpse]

Vista is coming and is the next major inflection point for the pc. Impacts both gpus and chipsets as its just around the corner. “Today, ATI offers the only full line of GPUs and chipsets that protect the customer’s investment and desire to get the most from Vista and its new 3D user interface.â€￾

so uhm, that sounds (again) like they're pretending they're already dx10 compliant? isn't that a lie?

 

[BRiT]

so uhm, that sounds (again) like they're pretending they're already dx10 compliant? isn't that a lie?

Uhm... Vista's lowest requirements are basicly DX9. Sounds like they're marketting that their lineup meets Vista's requirements.

 

[PurplePigeon]

so uhm, that sounds (again) like they're pretending they're already dx10 compliant? isn't that a lie?

And anyways, nVidia claims something very similiar (http://www.nvidia.com/page/technology_vista_home.html):

NVIDIA offers a complete top-to-bottom line up of NVIDIA® GeForce™ graphics processing units (GPUs) that will take full advantage of the new Windows Vista features and functionality when the final OS is released.

 

[Geo]

Uhm... Vista's lowest requirements are basicly DX9. Sounds like they're marketting that their lineup meets Vista's requirements.

What I found interesting is they seemed to be making a distinction between them and NV re "whole lineup". The only way I can take that is that DX 9.0l (I think that's the Vista min, isn't it?) actually does have a substantive difference to it than DX 9.0c. Because ATI seems to be suggesting here that NV 6xxx-class parts will not meet the minimum Vista requirement.

Am I missing that? If I'm correct, what is this difference --what is that NV 6xxx-class needs and doesn't have to meet the minimum Vista requirement?

 

[BRiT]

Am I missing that? If I'm correct, what is this difference --what is that NV 6xxx-class needs and doesn't have to meet the minimum Vista requirement?

Hrm... Maybe ATI was including some non-graphic lineup, perhaps something to do with integrated video chipset line? *shrug* Though for the life of me, I can't picture either side not having a SM3-based integrated shipset lineup available.

Or maybe they're refering to their wonderful multimedia functions provided by AVIVO?

 

[Dave Baumann]

ATI's drivers are already certified for Vista and are shipping a release in the Beta of Vista, I think its something like only NVIDIA's AGP boards are packaged at the moment, MS also recommended to me using an ATI board for this release (or until they provide updated vista drivers for download). ATI are obviously using this to drive sales and, IIRC, a recent IBM laptop that was released with ATI graphics is actively being sold on it being "Vista ready".

 

[Cartoon Corpse]

this is exactly the point of info that makes me decide one way or another to buy latest greatest now (hotrod rig), or middle of the road upgrade (not so hot) with an eye towards post vista repurchase.

so as not to get left with a $4000 dinosaur turd in just 1 year.

and im still wondering...

can anyone clarify for the man in the street consumer of pc hardware what they mean?

 

[Geo]

ATI's drivers are already certified for Vista and are shipping a release in the Beta of Vista, I think its something like only NVIDIA's AGP boards are packaged at the moment, MS also recommended to me using an ATI board for this release (or until they provide updated vista drivers for download). ATI are obviously using this to drive sales and, IIRC, a recent IBM laptop that was released with ATI graphics is actively being sold on it being "Vista ready".

So it's a driver thing? Do we have any reason to suspect at this point that NV 6xxx won't eventually catch up pre-Vista public availability?

I'm assuming 7xxx is a slam-dunk for that (mebbee I shouldn't, but I recall NV pimping it at release that way).

 

[Dave Baumann]

Logically there shouldn't be any reason why NVIDIA wouldn't be on par sooner or later. I would suggest this is a resource element at the moment - with ATI having DX9 integrated graphics for sometime they obviously felt this would be worthwhile for them now as integrated cycle times at the OEM's are often much longer, so getting good support for Vista now is an active selling point because solutions may SKU's sold now may still be sold when Vista is actually released; now that 6100 is here I expect NVIDIA will be paying more attention to it, especially so when their Intel integrated graphics comes around.