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ATI Tech Slashes Outlook

Desktop chip sales fall short of expectations.

Updated from 4:53 p.m. EDT

ATI Technologies


warned Monday that fiscal fourth-quarter revenue -- and potentially profits -- will fall far short of its previous prediction as a result of slower-than-expected sales of its chips for desktop computers and a huge inventory writedown.

In reaction, investors hammered the stock. In after-hours trading, shares of ATI were off $1.62, or 14%, to $9.72.

The move marked the second time in three months that ATI has slashed its fourth-quarter outlook.

"This has clearly been a challenging and disappointing quarter for ATI, and we are committed to resolving our operational issues," company CEO David Orton said in a statement.

The graphics-chip maker now expects to post sales of $465 million to $480 million in the current quarter, down from a previous range of $550 million to $580 million.

Meanwhile, the company expect to post gross margins in the single digits as a percentage of sales, due to the write-off of $60 million to $70 million in inventory. Previously, the company had predicted that its gross margins would come in at about 29% to 30% of sales.

ATI didn't give the impact of the lowered guidance on its bottom line. However, the company said operating expenses should come in as expected at about $143 million to $148 million, excluding stock-based compensation costs, implying that it will post an operating loss of about $100 million or more for the quarter.

In contrast, analysts polled by Thomson First Call were predicting the company would earn 7 cents a share on sales of $560.2 million in the quarter.

Shares of ATI were halted immediately after the bell pending the company's announcement. They resumed trading at 4:55 p.m. EDT. The stock closed regular trading off 12 cents, or 1%, to $11.34.

ATI blamed the revenue shortfall on its chips for desktop computers, both those sold through retailers and those sold to computer manufacturers. Not only did the company sell fewer numbers of chips than expected, but the average selling price of its chips was lower than the company projected.

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Sales of ATI's other products -- which include chips for notebook computers and others for consumer electronics products -- should come in as expected, the company said.

The problems are short-term, the company said.

"We are also confident that our upcoming desktop product launch will allow us to reclaim top-to-bottom technology leadership in discrete graphics," Orton said in the statement.

Still, ATI has clearly been struggling of late. The announcement marked the second straight quarter that the company has issued a pre-earnings warning. The company

warned in early June that it wouldn't meet third-quarter estimates.

The move also marked the third time the company has sought to bring down expectations for the fourth quarter. The company predicted in June that it would post $600 million in revenue in the fourth quarter, which was below analysts' estimates at the time. With its third-quarter earnings report later that month, the company

warned that fourth-quarter sales wouldn't meet its initial outlook.

ATI has been struggling to compete in recent quarters with offerings from rival graphics chipmakers, most notably


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