Updated from 10:29 a.m. ESTGraphics chipmaker ATI ( ATYT) today reported revenues well above expectations, but earnings fell just short of the Wall Street consensus, and margins slid almost 3 points in just one quarter. Also, ATI said earnings will stay flat for the quarter that's under way, though analysts had been expecting profits to grow. That means there'll likely be no improvement from this quarter's lower-than-expected EPS. For the first quarter of fiscal year 2003, the company posted net income of a scant $5 million or 2 cents a share according to generally accepted accounting principles, reversing last year's $32 million loss. On a pro forma basis, the profit of 3 cents a share was a penny short of expectations. In recent trading, shares dropped a painful $1.32 or 21%, to $5.10. Revenue totaled $322 million, up 35% sequentially and 29% above last year's levels. Sales ran well above expectations for $265 million. In a statement, president David Orton said, "We were pleased with the strength of our PC business in our first quarter. We obtained key design wins in every product category, and our product strength helped ATI to gain share in all major channels and geographies." Share gains were no doubt helped by the fact that rival Nvidia's ( NVDA) launch of its NV30 chip was delayed, missing the holiday season. In any case, ATI managed to rack up an impressive list of customers for its new Radeon 9700 family of products, including Dell, H-P, Gateway, NEC, E-Machines and Fujitsu. On the down side, its gross margins slipped to 27.3% from 30.1% in the most recent quarter, primarily because of a writedown in inventory. Part of the decline was also chalked up to what the company called "a slower transition in the implementation of cost reductions." In a statement, ATI said that while gross margins should improve somewhat in the quarter now under way, they're not likely to reach the company's target range of 32% to 35% until the final quarter of the current fiscal year, which will end next August. "There's no question that margin is our No. 1 concern and focus," said CFO Terry Nickerson on the conference call. Special charges included the following: a $32,000 loss on investments; a $3.2 million benefit for amortization of goodwill and intangible assets; a $6,000 benefit for the net tax on sale of investments; and a charge of $1.1 million for the deferred tax recovery of future tax liability on intangible assets. As for guidance, ATI predicted revenue will slide 10% in the quarter under way because of seasonal weakness. Gross margins should improve slightly, but expenses will rise because of higher R&D spending. Net income should be flat. The Street had been expecting a penny rise in earnings. Yesterday Canadian regulators said they'll investigate the timing of an ATI earnings warning in spring 2000, citing concerns about insider trading that took place before the announcement. On the conference call, Horton noted the investigation only in passing, saying, "The events were two and a half years ago," and requesting that analysts focus on current business in the Q&A session.