Canadian graphics chip giant ATI returned to profitability in its fiscal first quarter after losses in the two previous quarters due in part to its ability to cash in on demand for graphics chips in handsets and a global shortage of computer chipsets. But the company's revenue and net income showed a steep decline from the same quarter a year ago.

ATI's revenue dropped to $590.7 million during the three months ended November 30, from $613.9 million during the same period a year ago. It's net income declined to $7.6 million compared to $63.7 million.

The company has stumbled this year on an inability to get new technology into the market fast enough to compete with its main rival, Nvidia. ATI has been way behind in one high profit margin product in particular, technology to allow PCs to use two graphics cards for better performance. The company launched its first dual graphics processor product, dubbed CrossFire, nearly a year after Nvidia put out its SLI dual-graphics-card technology, which has already won over many enthusiasts.

But the current quarter marks a turnaround for ATI. Its revenue grew 26 per cent from the $470.2 million it posted during its fiscal fourth quarter, and its net income reverses a hefty $103.5 million loss from the fourth quarter. It was the company's worst quarter in terms of revenue since the second quarter of 2004.

The company's revenue in the first quarter improved mainly due to improved sales of chips for handsets and chipsets, according to Randy Abrams, a chip analyst at Credit Suisse First Boston, in a report. He said ATI should continue to gain chipset sales in the first few months of 2006, but that those sales could slack off later in the year as Intel ramps up chipset production at an advanced semiconductor factory.

ATI forecast its revenue for its second quarter are expected to increase by around 8 per cent to 12 per cent over the first quarter as the company continues to increase sales of its latest line of Radeon X1000 graphics processors and chipsets.