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ATI's shares fell 16 per cent on the Canadian stock exchange yesterday on investor fears that the 3D graphics market leader is going to see a significant shortfall in earnings.

ATI's shares closed at C$13 ($8.80) after hitting a low of C$12 ($8.16), just 20 cents above its year-low of C$11.80. ATI stock also trades on Nasdaq, and ended the day at 8.875.

During the day, UBS Warburg Dillon Read downgraded ATI's stock from 'buy' to 'hold'. UBS cut its 12-month shareprice target by $1 to $11, fiscal 2000 earnings four cents to 31 cents a share and 2001 earnings from 55 cents a share to 36 cents, according to Reuters.

Revenue estimates were reduced for fiscal 2000 to $1.35 billion from $1.38 billion. For 2001, the new estimate is $1.6 billion, down from $1.75 billion.

ATI itself is aware of the problem, having predicted it will lose 6-7 cents a share for Q3 2000 - a marked change on the 13-14 cents a share profit it had originally been anticipating. The reason: a price war and rising component costs, both conspiring to nuke ATI's margins.

Meanwhile, Nvidia has been pulling in some significant OEM deals - the kind of business ATI thrived upon - through its aggressive six-monthly new product roll-out schedule. Nvidia is pretty much the only 3D company that's been able to ship new, more advanced graphics chips on a regular basis. 3dfx has only just begun shipping the Voodoo 4 and 5 - the best part of a year late, and ATI's successor to the popular Rage 128, the Radeon, isn't due to ship until the summer - the 128 has been around since late 1998, apart from the Pro upgrade.

By contrast, Nvidia has shipped two 256-bit GeForce parts - the GeForce 256 and, in April, the GeForce 2 - in the last 12 months alone. That has allowed it to keep its older TNT and TNT 2 chips moving smoothly downmarket to enable it to pitch at various OEM price points.

And, as a company dedicated to chip production, Nvidia isn't as strongly affected by component costs as its board-producing rivals are.

ATI does have strong OEM relationships, but it does need to accelerate its product development cycle. Getting Radeon out of door will allow it to push Rage 128 and Rage 128 Pro further down. Will that be enough to get ATI out of its present difficulty? Probably not. Intel's graphics-integrated Timna CPU and similar SoC products from Via (thanks to its purchase of S3's graphics chip operation) threaten to limit the room for manoeuvre lower end of the OEM market, increasing competition at the higher end.

And ATI just doesn't have the reputation of 3dfx or Nvidia for coming out with cutting edge kit for serious gamers - good though its products are - to make a big play for that end of the market. Though it's going to have a damn good try with Radeon.

The upside is that 3D acceleration seems now pretty much de rigueur on mid-range PCs, and that expands the scope ATI and its rivals have to sell to OEMs. ®

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