Graphics-chip maker ATI Technologies ( ATYT) is struggling with its core business. But investors decided Thursday that it didn't matter all that much. ATI
reported earlier in the day that net income fell 40% in its second quarter as sales of its flagship PC products stagnated and gross margins plunged. Despite the crummy results compared with the year-ago period, investors bid up ATI's stock as much as 12% following the company's report. In recent trading, the company's stock was up $1.32, or 8.4%, to $17.05. So what's going on? Well, as bad as they were, ATI's results weren't as bad as the Street expected. And the company did offer somewhat better than expected results for its coming quarter. But, perhaps most importantly, the company indicated that even if the core business wasn't doing great, its newer ventures into providing graphics chips for products such as cell phones and televisions are growing great guns. Indeed, ATI's revenue from these "consumer" businesses -- the segment into which it lumps sales of everything but its PC graphics chip -- more than doubled in the just-completed quarter from the year-ago period. With the PC market slowing -- and especially with Intel ( INTC) taking increasing share of the graphics market with chipsets integrated into its CPUs -- both ATI and chief rival Nvidia ( NVDA) have been trying to diversify their businesses. Both companies are players in the next generation of video game consoles, for instance with Nvidia partnering with Sony ( SNE) and ATI teaming up with both Microsoft ( MSFT) and Nintendo. Also, Nvidia has focused on mobile phones, signing deals with the likes of Motorola ( MOT) and Sony Ericsson. In addition to mobile-phone makers, ATI has signed deals with digital television manufacturers such as Sony and Matsushita to incorporate its chips into their products.
At least for ATI, those efforts paid off noticeably in the second quarter, helping to lift an otherwise dour quarter. Sales for the consumer segment jumped 127% to $132.5 million. Some of that uptick came from ATI's business with Microsoft. The software giant's Xbox 360 game console began shipping in November. Since ATI gets a royalty from sales of the device, revenue from its Microsoft business would have been expected to increase, considering the machine wasn't on store shelves a year earlier. Without giving specific numbers, ATI reported that its game-console business revenue jumped 50% year over year. But the company is clearly having success in its consumer businesses beyond video games. ATI's consumer business provided 20% of its overall sales in the quarter, while the game console segment alone comprised less than 3%, meaning that the lion's share of consumer sales were for graphics chips for phones and televisions. Again, without breaking out specific numbers, ATI reported that sales of mobile phone chips tripled in the quarter, while television chips rose 75%. But even more impressive than the sales was the impact of the consumer businesses on ATI's bottom line. In the quarter, the consumer business provided nearly three-fifths of the company's operating income -- despite accounting for just one-fifth of the company's sales. ATI's best hope could be that its consumer momentum continues, because news on the PC front was ugly again. ATI has struggled in that business since the middle of last year, when Nvidia beat it to the punch in releasing an updated line of high-end chips. Struggling to sell its high-end chips, the company wrote off inventory last year and slashed prices. Those troubles are still weighing on the company's results. In the second quarter, ATI's PC-related sales fell 2% to $539.9 million. More damaging, though, the company's overall gross margin fell 6 percentage points as a portion of sales to 28.2%, due largely to the PC chip price cuts. Things may be starting to turn around on the PC front, but challenges remain: While ATI saw far greater success selling integrated chips than discrete ones -- second-quarter sales of integrated chips jumped 450% -- prices and profit margins are typically lower on integrated chips. Some analysts worry that the integrated market is gradually eating away at the discrete market, which has been the graphics-chip makers' cash cow.