Lower Revenue Signals Trouble for AMD-ATI

Although the proposed merger of CPU manufacturer AMD and graphics chip producer ATI has cleared regulatory hurdles in the US and ATI's native Canada, an ominous warning issued by ATI after the close of business yesterday is starting to cast doubt upon whether the merger partners can achieve their stated principal objective: to seize the integrated graphics platform market.

Yesterday, ATI said it now projects revenue for its fiscal fourth quarter 2006 to be below the low end of previous estimates, specifically down to $520 million. This despite a stellar third quarter for the company, in which it posted $652.3 million in revenue, with declining cost of revenues that increased margins and bucked the industry trend.

The problem, ATI admits, is a rapid decline in its integrated chipset business for Intel platforms - more rapid than the merger partners anticipated. By merging with Intel's arch-rival, ATI knew it would be losing Intel's business, it just didn't anticipate how soon that would happen.

At the time the merger was announced late last July, both sides were willing to write off that part of the business, saying it produced low margins anyway. Meanwhile, the companies revealed their mutual interest in developing an integrated graphics platform for AMD-based systems that would eventually compete with Intel's popular Centrino platform.

"While we anticipated a decline in future Intel-based chipset business following the announcement of the acquisition agreement with AMD," ATI CEO Dave Orton stated late yesterday, "the decrease occurred much sooner than we expected."

To become a leader in integrated platforms, the two companies are discovering today, you must already have a stake in the market, even if this means supporting your competitor. This may make it more difficult, though not impossible, for the combined company to carve out a new position for itself in integrated platforms.

ATI also cited a supply chain problem among one of its major customers for handheld-based graphics as one reason for the anticipated revenue shortfall. The company stated it expected neither factor to have a long-term impact on revenue, although it abstained from mentioning that AMD is likely to be more affected. At mid-morning, AMD's stock price was down nearly 1.5 percent.