ATI Technologies Inc.

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ATI Technologies Inc.

1 Commerce Valley Drive East
Markham, Ontario L3T 7X6
Canada
Telephone: (905) 882-2600
Fax: (905) 882-2620
Web site: http://www.ati.com

Public Company
Incorporated: 1985 as Array Technology Inc.
Employees: 2,700
Sales: $2.22 billion (2005)
Stock Exchanges: NASDAQ Toronto
Ticker Symbol: ATYT; ATY
NAIC: 334112 Computer Storage Device Manufacturing

Based near Toronto, Canada, ATI Technologies, Inc. is one of the world's largest makers of computer graphic chips and boards. The company divides its business into two units: PC Business and Consumer Business. Serving the PC market with graphics processors has been ATI's focus since the start. The Radeon line of processors are used in desktop computers and workstations, while the Mobility Radeon line offers integrated graphics for notebooks. ATI's Imageon line of graphics processors serves the consumer market, which includes cell phones, set-top boxes for television, and the Nintendo GameCube video game console. ATI maintains research and development facilities in Canada and the United States, manufacturing is done in Taiwan as well as Canada, and sales offices are located throughout the Americas, Europe, and Asia. ATI is a public company listed on the Toronto Stock Exchange and the NASDAQ.

FOUNDER IMMIGRATES TO CANADA

The man most responsible for ATI's rise to prominence is cofounder and longtime CEO Kwok Yuan Ho. He was born in China in 1950, the son of a teacher, and grew up in a family where money was tight. Nevertheless, he was able to attend the National Cheng Kung University in Taiwan, where in 1974 he received a degree in electrical engineering. For the next decade he worked in Hong Kong for electronics companies, including National Semiconductor Corp., Philips Electronics, and Control Data Systems. Ho was involved in a wide range of areas—engineering, quality assurance, manufacturing, purchasing, and general management—providing him with a thorough knowledge of the industry. In October 1983, while on vacation, he paid a visit to Canada and fell in love with Toronto as well as his future wife. A year later he applied for immigrant status, but despite his experience in the technology sector he had a difficult time finding work. As a result, he joined forces with two other recent Hong Kong immigrants, Lee Lau and Benny Lau. They pooled their resources, raised CAD 300,000 in a bank loan, and in August 1985 launched their own company to produce graphics cards, and the graphics chips that powered them, for personal computers. At the time, personal computers used monochrome monitors, but Ho recognized early on that color would soon be coming and that computer graphics would stimulate the sale of PCs to the general public. Ho and his partners initially called the company Array Technology Inc., which soon became Array Technologies Inc. Before the year was out, however, they settled on an abbreviation, ATI Technologies Inc. Ho served as chief executive officer, while Lee Lau would become vice-president of strategic planning and Benny Lau vice-president of product planning.

In October 1985, Ho and his partners used application specific integrated circuit (ASIC) technology to develop a graphic controller, and unveiled the company's first graphics board product. In the first year of operation the company sold about CAD 10 million of these cards. ATI's first major success came in July 1987 with the release of the EGA WONDER and VGA WONDER cards, which were compatible with every computer monitor, graphics interface, and software on the market at the time. The company was soon doing about CAD 60 million in annual sales and billing itself as the largest graphics-board maker in the world. To keep up with its growth, ATI opened a new 35,000-square-foot facility in September 1988. Befitting its status as a major player in the graphics industry, ATI was one of nine video display adapter manufacturers who in 1989 founded the Video Electronics Standards Association (VESA), an international body that initially established a standard for 800×600 resolution video displays and went on to establish many other standards related to computer monitors and graphics.

ATI's next major product, released in May 1991, was the ATI Mach8. Available as a chip or a board, it was able to process graphics independent of the computer's CPU (central processing unit). The new product pushed sales to the CAD 100 million level and employment approached 300. More products followed in 1992, including the Mach 32, which combined an integrated graphics controller and graphics accelerator in a single chip; and graphics cards for the VESA Local Bus (VLB) and peripheral component interconnect (PCI) slots of a personal computer, which had more of a direct connection to the CPU and therefore sent and received information faster. Also of note in 1992, ATI established a subsidiary in Munich Germany, ATI GmbH.

DIFFICULTIES AFTER GOING PUBLIC

With annual sales in the CAD 230 million range, ATI became a public company in November 1993 and its stock was listed on the Toronto Stock Exchange. But the company soon stumbled. When the fiscal year ended August 31, 1994, the company posted its first loss, CAD 2.7 million on sales of CAD 232.3 million. ATI's stock, which had traded around CAD 20, now slipped below CAD 5. To make matters worse, the company had not kept up with changes in chip design, which was now moving from 32-bit to 64-bit technology, allowing the processing of even greater amounts of information and resulting in better and faster graphics, including motion video. It was not until August 1994 that ATI introduced its Mach64 chip along with new graphics boards. To better keep pace with changes in the industry, ATI in 1995 established a 3-D engineering group, which would pay dividends throughout the decade.

ATI returned to profitability in 1995, when it also unveiled an Apple Macintosh-compatible graphics board, the first company in the industry able to serve both PC and Mac platforms. Later in 1995 ATI forged an agreement with United Microelectronics and other partners to build a semiconductor plant in Taiwan.

Innovations continued in 1996. ATI offered the graphics industry's first 3D chip for desktop computers, and later in the year unveiled a 3D chip for the notebook market. In addition, ATI became the first company to release a chip that could display computer graphics on a television, and also developed a video capture card, combining a graphics card with a TV tuner card to permit users to save analog TV signals. In another first, ATI now offered Macintosh PCI-based boards, something that only Apple had produced previously. Also of note, ATI established a European distribution headquarters in Ireland in 1996.

COMPANY PERSPECTIVES

From desktops to laptops, workstations to handheld devices, video game consoles to integrated solutions, ATI has established itself as a world leader in the design and manufacture of innovative 3D graphics solutions.

The efforts of the 3-D engineering group resulted in the 1997 release of the Rage Pro line of graphics accelerators. The 3D Rage II + DVD chip was the first graphic accelerator to offer motion compensation DVD software, and ATI became the first to offer hardware support for DVD acceleration and display. Moreover, ATI became the first graphics company that fully supported the Accelerated Graphics Port (AGP 2×), a high-speed channel connecting a graphics card to a computer's motherboard to accelerate 3D graphics. As a result of these advances, the company's graphic cards were now standard components in the top ten selling personal computers in the world. In 1997, ATI generated sales of more than CAD 600 million and recorded a net profit of CAD 47.7 million, but 1998 would be even better. Sales almost doubled to CAD 1.15 billion, while net income increased almost fourfold to CAD 168.4 million, as ATI became the top graphics supplier in the world, according to International Data Corporation. ATI released a number of new products in 1998, including the All-in-Wonder Pro, an all-in-one television, video, and graphics upgrade card that could be installed in any Pentium computer with an open PCI slot. But to make sure it maintained its engineering edge ATI acquired the graphics design assets of Tseng Labs, Inc., picking up a 40-person engineering team. Then, in November 1998, it acquired Chromatic Research, Inc., which produced multimedia chips for use in low-end computers, set-top boxes, and other consumer electronics devices. Ho was also recognized in 1998, when he was named Canada's Entrepreneur of the Year.

ATI enjoyed another outstanding year in 1999. Now listed on the NASDAQ in addition to the Toronto Stock Exchange, the company began reporting its results in U.S. dollars. For the year, sales increased by 67 percent over 1998, totaling more than $1.2 billion. Net income improved by 50 percent to nearly $160 million. ATI would not be able to maintain this pace, however. Competition was stiff in the graphics industry, as chip makers spent a great deal of money developing ever more powerful chips. Moreover, Intel and other semiconductor makers were building in graphic capabilities, taking away sales from the low-end of the market. The end result was low prices and thin margins, and an end to the days of geometric increases in sales and profits. In 2000 ATI improved sales to $1.3 billion. ATI also faced increasing pressure from rival Nvidia Corp., now the fastest growing graphics chipmaker in the world. Investors, in typical what-have-you-done-for-me-lately fashion, punished ATI's stock, which lost about half its value.

DECLINING MARKET SHARE

While 2000 was clearly a challenging year, ATI did enjoy some advances. It acquired ArtX, Inc., a major developer of high-performance graphics for computers and appliances. The deal brought with it CEO Dave Orton, who would become ATI's president and chief operating officer. ATI also unveiled its Radeon graphics processor, which gave it entry into the high-end gaming and 3D workstation markets. But 2001 would see ATI surpassed in market share by Nvidia, which proved more nimble at launching new products and winning business from PC manufacturers and game console makers. In addition, Intel chopped away at ATI's share of the graphics market. By the third quarter of 2001, ATI's marketshare was 17 percent, a far cry from the 32 percent share it enjoyed in the halcyon days of 1999, while Nvidia now commanded 31 percent of the market and Intel 26 percent. At the end of 2001, ATI reported a drop in income to $1.04 billion and a net loss of $54.2 million. In a bid to rebound, ATI brought in new executives, and rather than make the add-in boards for its chips, it now licensed its technology to Taiwan board suppliers and returned the focus to chip design. In addition to increasing the budget, ATI established two chip-development teams, whose efforts were staggered to shorten the gap between products. The second team was, in essence, the ArtX R&D group. As a result, a process that once took 14 months now took about nine months.

The balance sheet continued to suffer in 2002, when ATI posted revenues of $1.02 billion and lost another $47.5 million, but its commitment to chips continued and began to bear fruit. In June 2002 the company acquired NxtWave Communications Inc. to expand its set-top chip business. A month later ATI released its Radeon 9700 Pro, the first major product to come from the ArtX design group. The new chip was twice as fast as any other graphic chip on the market, unseating Nvidia, and now became the gold standard for video game consoles. The technology was too costly, however, for most PC buyers, who opted for computers that relied on cheaper chips that integrated graphics with memory control and other functions.

KEY DATES

1985:: Company is founded.
1993:: Company goes public and is listed on the Toronto Stock Exchange.
1999:: ATI becomes largest chip maker in world.
2000:: ATI is listed on the NASDAQ.
2004:: Founder retires.

ATI enjoyed greater success in 2003, bouyed by contracts with Microsoft's Xbox and Nintendo GameCubes video game consoles. For the year, ATI increased revenues to nearly $1.4 billion and returned to profitability, recording net income of $35.2 million. But ATI's comeback story was marred by accusations by the Ontario Securities Commission (OSC) that seven people connected to the company engaged in insider stock trading, including Ho and his wife along with two other ATI executives and their spouses. The charges stemmed from sales of ATI stock in early 2000, at a time when sales were beginning to sag and the company was on the verge of issuing an earnings warning to investors. On the day of that warning, ATI stock lost 42 percent of its value. Ho was under a great deal of pressure to step down, and he even had to use a back door to enter the Toronto hotel for the company's annual shareholder meeting in order to dodge photographers and reporters. But he refused to relinquish his post, expressing confidence that his conduct had been proper and would be judged so by the OSC. He would turn over the CEO role to Orton in June 2004, part of a succession plan that was already in place, but he would retain the chairmanship.

The insider trading case cast a shadow over ATI for years. Finally, in April 2005 a former ATI investor-relations director, Jo-Anne Chang, and her husband agreed to pay a CAD 1.5 million fine and accept a 20-year ban on trading in securities, and a ten-year prohibition on serving as a director or officer at a public company. Several months later, in October 2005, the OSC dismissed the charges against Ho and his wife. With the matter finally behind him, Ho now resigned as ATI's chairman and retired, something he said he had been planning to do since 1999. "I wanted to retire by the time I was 50. I failed," Ho told Canadian Business. "In the last 20 years I owe my family too much. I spent 99% of my time on ATI, ATI and ATI, and the other 1% on my kids and life. Right now, I should spend some time with my family, take care of them, but also take care of a lot of other interests."

Ho left ATI as it continued to battle Nvidia for supremacy in the graphics industry. In 2004 ATI continued to surge, as sales approached $2 billion and net income totaled $204.8 million. Nvidia staged a comback in 2005 by launching a popular dual graphics card, while ATI had nothing comparable to offer for several months. Although sales increased to more than $2.2 billion in 2005, net income plummeted to $16.9 million. ATI enjoyed strong business the first quarter of 2006, but the future would remain competitive and uncertain. Not only would it have to continue to slug it out with Nvidia at the high-end of computer-graphics chips, they both faced increasing competition from giant Intel, which was gaining market share by making performance improvements to its mainstream graphics chips.

PRINCIPAL SUBSIDIARIES

ATI Technologies (Europe) GmbH; ATI Research, Inc.; ATI Technologies Systems Corp.; ATI Research Silicon Valley Inc.; ATI Technologies Distribution Inc.