AMD says good times can last

Wall Street was expecting good things from AMD, but certainly didn't see a fourth quarter upside surprise of 42 cents a share coming
Written by Larry Dignan, Contributor

The quarter could convince even the most jaded skeptics to hop on board the AMD bandwagon. After the bell Wednesday, AMD turned in earnings of 43 cents a share on record sales of $969m. For context, First Call consensus called for a profit of 1 cent a share. The profit also reversed a loss of $105m (£65.1m) in the third quarter. Wow.

Analysts were expecting good things from AMD and upgraded the stock accordingly ahead of the results. Even long-time critic and USB Piper Jaffray analyst Ashok Kumar recently wondered if "Jerry got his groove back."

Jerry Sanders, AMD's CEO, indicated his groove was back and even gloated a bit. "The Athlon makes it a whole new ball game," said Sanders. "We can provide customers with competitive solutions going forward."

Sanders shows that if you stick around long enough, good things happen. The AMD chief has had institutional investors calling into question the company's corporate governance and retail investors calling for his head. Meanwhile, the whole future of the company hinged on whether AMD could deliver its Athlon chip. AMD delivered and regained some market share from Intel.

Nevertheless, Sanders had to convince analysts that AMD's recent turnaround was for real. AMD's biggest risk going forward is execution. And the track record is spotty. AMD has had strong quarters only to miss the next three because of execution issues.

"We are well aware of your execution concerns," said Sanders, replying to one analyst who questioned whether the good times will last. "We did have execution issues, but the real issue is we didn't have the offering to compete."

Now AMD has the full line of products, according to Sanders. AMD has also learned from previous mistakes, he said.

The chief said the high-end Athlon processor chip gives AMD a performance product, a high-margin offering that can alleviate pricing pressure. In addition, AMD had strong performances from its flash memory business, which is fueled by cellular phone demand, and its communications group.

"We have the wind at our back," said Sanders, who pointed out the chip sector is in a cyclical upswing and the company is more diversified.

Analysts still weren't totally convinced. "We've been on this roller coaster before," said one analyst. "How do we know we're not heading down?"

Sanders pointed out that the company "will be fine in a rational market." AMD suffered over its own fumbles, but also because Intel was able to cut prices on the low-end and hurt AMD's momentum with the Celeron chip.

However, AMD's Athlon chip, which should now top 800-MHz, allows the chipmaker to compete with Intel on all fronts. The Athlon provides protection against low-end price-cutting. "It wouldn't be in Intel's best interest to collapse pricing," said Sanders, who noted average selling prices were solid.

Sanders' argument is convincing. Flash memory sales jumped 33 percent sequentially and communications chip sales were up 34 percent. Both units will show double-digit revenue growth in the first quarter. On the PC chip side, AMD has high-end and low-end products.

And the outlook isn't too shabby. First quarter sales will be down to flat in the first quarter, but that's coming off a record quarter. Sales will still be up "dramatically" year over year.

"Unit shipments of AMD Athlon processors are expected to increase, resulting in a richer mix and higher blended average selling price for PC processors," the company said.

According to Zack's Investment Research, 10 analysts rate AMD a "buy" and 12 analysts rate the stock a "hold" or worse. Just a few months ago only one analyst rated AMD a "buy." The holdouts can be forgiven because of AMD's history, but look for them to change their ratings.

By the end of the analysts conference call, analysts seemed to be buying Sanders' story. One analyst noted how one rude shareholder was calling for Sanders' head at AMD's annual meeting. "He lost faith in you, but we didn't," the analyst gushed.

That's a little dramatic, but we know where this is heading. The AMD bandwagon is going to get crowded.

Apple delivered yet another big upside surprise and decided to award CEO Steve Jobs with the option to buy 10 million shares of Apple stock and a Gulfstream V jet.

Like clockwork, some folks will say Jobs' compensation is excessive. We say Jobs may deserve a little more. Jobs brought Apple back from the dead and turned a $2bn market cap into a $16bn market cap in two and a half years. And the guy didn't get paid for turning the company around.

Jobs is like a superstar athlete -- there's only so many of them. No one saw this Apple rebound coming and Jobs salesmanship is the big reason the company is thriving again. He deserves the cash. Hope he enjoys his jet.

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