AMD beats targets but sees slowdown

Intel rival is OK for the moment, but sees hard times on the horizon
Written by John G.Spooner, Contributor

Advanced Micro Devices reported first-quarter earnings Wednesday that topped analyst expectations but warned of a sales drop in the current quarter.

The company reported income of $124.8m, or 37 cents a share, on revenue of $1.19bn, excluding charges. Income was down 34 percent from the same quarter last year, when the company reported income of $189.3m, or 55 cents a share.

Analyst polled by First Call had been expecting a profit of 33 cents a share on revenue of about $1.13bn.

AMD's sales were up 9 percent from the fourth quarter of 2000, thanks in part to strong sales of its Athlon and Duron chips. However, the company warned that sales for the second quarter could be down as much as 10 percent.

"The second quarter is always the worst quarter," chief executive Jerry Sanders said in a conference call after the announcement. "We didn't stuff the channel so much in the fourth quarter, but the industry did."

That means that as the industry as a whole works through excess inventory, "this is going to be the toughest quarter," Sanders said.

AMD's year-to-year sales decline is the result of softening markets for products, such as flash memory, overpowering gains in PC processors, AMD executives explained.

AMD rival Intel, for its part, also pointed to declines as high 7.5 percent in its earnings call Tuesday. Intel pointed to price cuts and economic uncertainty as the cause for its declines.

Sanders saw some opportunity in the PC market. "We feel if we hold flat, we'll actually gain a little" marker share there, he said.

"I certainly think that the second half is going to be better as a whole, but the computer industry is going to lead us out," Sanders said.

AMD's processor shipments, totaling 7.3 million units, were up 27 percent from the fourth quarter and 126 percent from the first quarter of 2000, the company said. AMD shipped 6.5 million Athlon and Duron chips and 800,000 K6-2 chips for an average selling price of just over $90.

The company intends to introduce chips based on its new design, called Palomino, in May. AMD will allocate all of its initial Palomino production to mobile versions of the chip.

"We plan to launch the desktop version of Palomino at 1.5GHz" in the third quarter, Sanders said. AMD last month announced delays for desktop versions of chips based on Palomino and the low-cost Morgan design.

AMD finished its first quarter with a good position in the PC market, analysts said.

The chipmaker was able to keep inventories from ballooning and at the same time improve its market share. AMD's share of the PC processor market rose from 17 percent in the fourth quarter of 2000 to 21 percent in the first quarter of 2001, according to preliminary numbers released by Mercury Research.

Intel's share, on the other hand, fell from 81 percent in the fourth quarter to 77 percent in the first quarter, according to the preliminary numbers.

While only four points, it was the largest jump in market share AMD has seen since it launched its Athlon processor in 1999. At that time, AMD jumped from 12 percent to 16 percent between the third and fourth quarters of 1999. It took the company five more quarters to move from 16 percent to 17 percent, according to Mercury.

"AMD, we don't think, suffered any decline in unit shipments," said Dean McCarron, principal researcher at Mercury. Meanwhile, Intel reported a decline in chip sales for the first quarter.

The problem stems mostly from excess inventory in the PC market, one of the chief markets served by AMD, McCarron said. PC makers had "component and also finished product inventories up the wazoo" in the fourth quarter, he said. But sales could rebound in the second quarter.

"A lot of the inventory has burned off, so sales are coming back," McCarron said. However, sales are lower overall compared with last year, so "it's not coming back to the same level."

"Basically the ones that got hammered [in the first quarter] are the ones that will see" an upswing in the second quarter, he said.

While AMD fared well in the first quarter, the company faces pricing pressure from rival Intel going into the second quarter. Intel may well take back some of its market share by cutting prices on the Pentium 4 chip by up to 50 percent.

The price cuts are expected at the end of this month, as Intel attempts to push the Pentium 4 into PCs priced between $1,000 and $1,500, the mainstream of the PC market.

"We believe they [Intel] are going to get much more aggressive on the pricing," Sanders said.

But he doesn't intend on getting into a price war. Quoting George Bernard Shaw, he said, "Don't fight with pigs. You get dirty, and the pigs like it."

"We're not going to get into a price war with Intel," Sanders said. "We will match their pricing for a given clock speed...and we'll offer more delivered performance."

Meanwhile, AMD has its work cut out for it in the corporate market. The company will look to parlay Athlon's success in consumer PCs into the business market with new mobile and workstation-server versions of the chip. Adding corporate sales will help AMD weather current economic woes and meet its goals for the end of the year. But the company faces an Intel-only mindset among corporate IT decision makers and product managers at large PC manufacturers, analysts have said.

AMD will spend $1bn on capital expenditures for 2001, up $200m from 2000. Most of the money will go to finish a new plant and move to a new 0.13-micron process for smaller, faster chips.

The company's processors should reach 2GHz at the beginning of next year, Sanders said.

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