PROJECT HUNT, ATI Technologies (NASDAQ:ATYT & TSE:ATY)
Disclaimer: The information contained in this report was gleaned from online resources, ATI Technologies' Annual Report and website, The National Post and the Globe and Mail. I assume it all to be correct but it is also subject to possible misinterpretation. I welcome all feedback. Also note, much of what is written in this report is quoted verbatim from ATI's annual report. I haven't quoted within, but just be aware that if you read through the company's annual report, you'll likely experience some deja-vu.
ATI Technologies Inc.
33 Commerce Valley Drive East
Thornhill, Ontario
L3T 7N6 CANADA
(905) 882-2600 - Sales & Marketing
(905) 882-2620 - Fax
atitech.com
Recent Share Price:
NAS:ATYT $17.25
TSE:ATY $25.20
Recent P/E: 31
1999 P/S: 9.0
1998 P/S: 5.6
Current Market Share: 31% of worldwide graphics market (twice that of its closest competitor)
Financial Highlights:
-1999 revenues up 67% over 1998
-53% annual compound revenue growth over last 5 years
-Annual compound growth in adjusted net income of over 99%
-Sales up 300% over 2 years
-Adjusted net income per share up 46%
Noteable
-ATI's RAGE MOBILITY chip, launched in November 1998 was embraced by 9 of the top 10 notebook manufacturers
-75% of U.S. computer resellers choose ATI for their graphics and multimedia solutions (International Data Corporation Mulitclient Study, "Understanding the Whitebox World", AU 99)
-ATI won the largest digital set-top design contract in North America with General Instruments
-On February 16th, ATI announced the $400M acquisition of Palo Alto's ArtX Inc., giving them key technologies in the e-appliance market. Analysts have praised the deal as positioning them at the head of the pack in E-appliances.
-In 1998, ATI completed the acquisition of Chromatic Research, Inc., a developer of System-On-a-Chip technology for approximately $71M.
-In a conference call to analysts ATI's is reported to have indicated that the company would make another announcement in the e-appliance area within the next few weeks.
Company Overview
ATI Technologies Inc., the world's largest supplier of 3D graphics and multimedia technology, designs, manufactures and markets innovative and award-winning multimedia solutions and graphics components for PCs and electronics.
Development efforts are geared towards converging mass-market devices, whether they be personal computers, set-top boxes or consumer electronics appliances. From the next generation of mobile phones to home theatres, ATI's prospective engineering efforts intends to bring vivid graphics and dynamic multimedia into every room in the home.
An ISO 9002 company, ATI is the world's leading supplier of video and 2D/3D graphics accelerators to OEM and retail customers.
Founded in 1985, ATI employs more than 1,800 people at headquarters in Thornhill, Ontario, and in offices in the United States, Germany, France, the United Kingdom, Ireland, Barbados, Malaysia, Hong Kong and Japan.
ATI is a public company whose shares trade on the NASDAQ and Toronto Stock Exchange.
Products
All-in-Wonder: The All-in-Wonder features ATIs latest 3D graphics chip and the RAGE THEATRE chip which provides both TV output from the TV as well as TV input to the PC for Video cameras and tuners. It is backed by the ATI Multimedia Centre which is convergence software featuring smart TV features like closed-captioning, still frame-grab, on-demand instant replay and channel surfing; Digital Versatile Disc DVD player and digital video recording; video capture and editing; and CD audio. And it will soon allow TV programming.
Set-top-Wonder II: Will enable cable customers to enjoy an array of advanced services including: video-on-demand; always connected, web-enhanced television; email; interactive game services; etc.
RAGE 128: This family of graphics chips matches the best 3d chips on the market today and boasts unmatched support for Digital Video and HDTV.
RAGE MOBILITY: This set of chips enables a ONE-COMPONENT graphics subsystem solution that offers efficient levels of power usage and lowers the overall system cost for the value in the mainstream and highend mobile computing segment.
SOC Technology: This could be the big one. System on a chip, which ATI acquired through the purchase of Chromatic Research, Inc. ($71M), focuses on the generation of products that encompass graphics, system logic and processor blocks on a single chip. This would essentially be the brain behind E-appliances.
Existing/Future Markets:
Desktop Computing-
This is the existing market that ATI dominates. They are expanding this area to include bringing TV to the computer as well as multimedia solutions for the PC (DVD, MPEG, Gaming, etc)
Mobile Computing-
Another of their mainstay markets, mobile computing is primarily lap-tops right now, however we can anticipate more movement into handheld device displays, wireless product displays, cellular phone displays, etc.
Set-Top Boxes-
A big push for ATI currently. Set-top boxes will allow users to watch TV, surf the Web, and use a computer in the comfort of their familyroom. ATI has secured design wins for set-top boxes with Sony and General Instruments and more are soon to be announced (last part is hearsay).
Consumer Electronics/E-Appliances-
ATI is developing a wide range of options to allow PC and consumer electronics manufacturers to exploit the insatiable demand for low-cost PCs and computing appliances. The strategy includes existing low-cost graphics accelerators, Shared Memory Architecture (SMA) and System-On-a-Chip (SOC) products. The SMA products integrate graphics and core logic and are designed for the low-end and ultra low-end PC market. SOC is designed for future-generation products that encompass graphics, system logic and processor blocks on a single chip which include sub-$500 computers and consumer electronic devices.
Digital Flat Panel Displays-
ATI offers a range of products at the chip and board level that support all-digital flat-panel displays for desktop PCs requiring much less space and power. They have already secured a number of design wins and market research indicates that ATI has a market share more than twice that of its nearest competitor.
Customers
ATI's customers are OEMs (Original Equipment Manufacturers), system builders, and retailers (and therefore end-users) designing computing devices which require graphics and video support. Current customers in these areas include IBM, DELL, Gateway, Sony, Nintendo*, Matsushita*, Acer*, Apple, General Instruments, etc.
* Business acquired through the acquisition of ArtX Inc.
Key Competitors:
Existing Competitors in the PC industry are:
Traditional Discrete Component Suppliers
Nvidia Corporation
3Dlabs
Trident Microsystems Inc.
Traditional Add-in Board Suppliers
Creative Technology Ltd.
Number Nine Visual Technology Corporation
Fully Integrated Graphics Suppliers
Matrox Graphics Inc.
3Dfx Interactive Inc.
S3 Incorporated
Suppliers of Mobile Graphics
Neomagic Corporation
Intel Corporation
Graphics Processor with Integrated Graphics and Core Logic Components Suppliers
Intel Corporation
Silicon Integrated Systems Corp.
Via Technologies, Inc.
Intel is by far the largest threat in the traditional PC market. Due to ITS gorilla status, it can control technological innovations by modifying the CPU standard or incorporating graphics capabilities on the main system. ATI is keenly aware of this competition and makes reference to it in the annual report.
Intel could also be a competitor in the processor arena for E-appliances. They have great financial resources and the fact that they haven't managed to secure the market for processors in appliances yet, doesn't mean that they should be discounted. On February 16th, ATI announced the $400M acquisition of ArtX Inc., giving them key technologies in the set-top market. Analysts have praised the deal as positioning them at the head of the pack in E-appliances.
The competitors in the set-top category are few, but some traditional graphics companies have indicated their intention to compete in this category, however ATI has a headstart with its design wins with Sony and General Instruments. Nvidia is mounting a good fight with their GeForce chip and rumours have surfaced that ATI and Nvidia are vying for the spot in Microsoft's Xbox.
G/K Characteristics:
The most promising Gorilla-type technology that I can see, is ATI's SOC products. SOC combines the CPU, logic, multimedia, graphics and input/output for peripherals on a single chip that is about one square centimeter, ideal for low-cost, high-volume PCs and information appliances. Due to the size and nature of handheld and appliance-type products, an integrated processing, graphics solution makes a lot of sense and may very-well bring the price of such offerings into the consumer range. I believe that set-top boxes and E-Appliances could progress without ATI's technology, although the features being built into ATIs chips make these products much more useable and much more marketable to consumers. It will be a while before the other competitors catch-up at which point, I would expect ATI to have a commanding market-share lead.
Is there a discontinuous innovation?
I think so. The evolution of the set-top box and e-appliances in general is part of a greater discontinuous innovation in the wiring of homes to the Internet and appliances to each other. All of the e-appliances will be quite continuous for the end-user while adding enhanced digital features and customization features not otherwise possible with traditional appliances.
Is there proprietary open architecture?
I think so. Again, SOC seems like it could very-well develop into a standard for E-appliances. It's still too early to tell whether or not E-appliance processors will become platforms in the same way that Intel's processors did. ATI hold numerous patents for their technology, many of which fit into an open architecture themselves which makes them less exclusive. SOC is not this way however and it remains to be seen if the set-top graphics enablers become standardized
or not.
Mass-market appeal?
Yes. It's almost certain that e-appliances will become mass-market consumer products in the relatively near future. So many companies now have vested interest in it, that I don't think that's much of an issue.
Standardization?
ATI is heavily involved in the formation of standards that will guide the key industries, such as Open Cable Initiative and the Home Phoneline Network Alliance. They are also concentrating on getting design wins with strategic customers as early as possible to create a defacto standard.
Are there high barriers to entry?
The highest barrier that I can see is the fact that they can produce such a high quality product and keep production costs low (they use a modular production system). It would be very difficult for a new competitor to achieve ATI's quality at a competitive price. Existing competitors would have an easier time competing due to their existing infrastructures.
High Switching Costs?
It seems that once an OEM has chosen a supplier for graphics, they tend to stick with it. Sony and General Instruments have committed to ATI for the lifetime of their respective products. If ATI's SOC were to become a standard, I think the switching costs would be a given.
Have Value Chains Developed?
Yes. Although they are still developing. We have the component suppliers, product developers (which are growing daily in both the set-top and e-appliance markets), broadband and wireless access providers, HDTV and the content/service providers (these are just starting to crop up). Once e-appliances become commonplace they will take off in the form of DTV programming, home-automation applications, home/business management applications etc. Most of these will require graphics capabilities.
Have they crossed the chasm?
I think that the underlying markets have crossed the chasm. Set-top boxes and e-appliances seem to be popping up with greater regularity. What's up for grabs now is the processing and graphics standards that will power them. I think that will necessarily play out in a tornado.
Conclusion
It appears as though ATI is headed into various tornados. In many of these, they will service markets that won't produce a Gorilla. Their expert execution to date leads me to believe that they have a good chance of becoming (or staying) ruling monarch. There are a couple of areas that I truly believe that ATI could make a running for Gorilladom. These are in the areas of enabling graphics on the set-tops and giving the processing and graphics power to e-appliances.
Due to the cost of HDTVs, set-top HDTV decoders will become the dominant method of HDTV reception for the next 10 years. For ATI to become a gorilla here, the graphics components of the set-top must become standardized. I cannot yet tell if this will happen, but to date, ATI is powering the main boxes. Once Microsoft releases the Xbox (hibrid HDTV decoder/Game console), it will be interesting to see what's powering the graphics. If its ATI, I think they've got a HUGE advantage. If it's a competitor (Nvidia has been batted around), we may have a battle royal brewing.
If ATI is to dominate in the area of E-appliances, they've got a big battle on their hands. There are lots of companies with big pockets who would LOVE to have this one. Whoever wins, gets the mother-load though. ATI has a leg up in the graphics aspect of this, and many of the future appliances will require graphics support (think videophones, wallmount displays, information pads, electronic paper, as well as user-interfaces for innumerable other products) I truly believe that once all the cards are played, the E-appliance market will be MUCH bigger than the PC market ever was. I'm almost sure that it will develop with some sort of SOC solution, and whoever provides it will be a damn-huge gorilla.
Recommendation?
Throw ATYT/ATY on the watchlist but don't bet the farm yet. If they play their cards right, they've got a good shot. Regardless of whether they become a gorilla, I think they're moving up. |
