AMD's K6 chips puts chip maker in the black

"The K6-2 is a winner," said W.J. Sanders III, AMD's chairman and CEO.

On Tuesday, AMD (NYSE:AMD) became the second major chipmaker in as many days to shatter analysts' estimates. The company posted a profit of $1 million, or 1 cent a share, for its third quarter on sales of $685 million, beating the First Call consensus of an 11-cent loss per share. AMD shares closed up 1 1/2, to 19 7/8, ahead of the earnings report.

On the same day, Motorola Inc. (NYSE:MOT) easily hurdled analysts' estimates in its third quarter.

K6-2 spells success
The K6-2 processor has become the AMD's savior.

"Other segments of our business have been flat," said Sanders, adding that sales of the K6-2 processor fueled the companies growth single-handedly and boosted gross margins 12 points, to 39 percent.

Company officials said AMD had shipped more than 3.8 million K6 units in the quarter, a 70 percent improvement vs. the second quarter. Over 73 percent of those processors -- and 80 percent of the revenue -- was due to the K6-2 processor.

Limited growth in the future?

Piper Jaffray semiconductor analyst Ashok Kumar correctly predicted both the number of units shipped and AMD's quarterly revenue total ahead of the earnings report. But he and other analysts said the company's growth targets for the next year are unrealistic.

"What's being left on the table are essentially crumbs," Kumar said. "That's why revenue growth will be fairly muted."

Despite economic unrest abroad, particularly in Asia, AMD has managed to grab between 8 percent to 10 percent of the world's chip market. Of course, that means that Intel Corp. (Nasdaq:INTC) still holds about 85 percent of that market.

Counting on K7

Next week, AMD will announce its K7 chip, which isn't pin-compatible with any of Intel's products and depends on a completely new infrastructure.

"Intel has been the only company to successfully establish a new PC architecture," Kumar said. "AMD's strategy will relegate it to a niche status."

AMD's Sanders, of course, disagreed. "We will be showing the K7 and its infrastructure at Comdex," he said. "We have some 30 motherboard manufactures making Socket 7 motherboards, many of those same guys will be supporting us for the K7."

The K7 chip is expected to hit the market in early 1999.

Into the void
Michael Lins, an analyst with Cowen & Co., has a neutral rating on the stock, but said AMD is filling a void left by Intel.

"Intel is being forced to make changes in its product road map for its a lack of offering for the very low end," Lins said. "In the interim, AMD has been left with the $1,000 PC market all to itself."

Last month, Lins had raised his estimates for AMD's third quarter to a loss of 5 cents a share. "During July and August, AMD couldn't keep up with demand," Lins said. "And there's extremely robust demand there. I don't know if I would want to call that crumbs, but that's certainly the lower end of the microprocessor PC market."

Overall, the company had a 30 percent improvement in sales versus the second quarter and a 15 percent jump compared to the year-ago quarter when it lost $31.6 million, or 22 cents a share, on sales of $596 million.

Last quarter, AMD lost a whopping $64.5 million, or 45 cents a share, on sales of $526 million.

AMD shares were trading at a 52-week high of 31 5/8 last October before falling to a low of 12 3/4 in late August. Eighteen of the 22 institutional investment firms following the stock maintain a "hold" recommendation.

Analysts expect it to lose about $1 a share for the fiscal year.

Strong sales of Advanced Micro Devices Inc. flagship processor, the K6-2, helped the struggling chip maker surprise Wall Street by returning to the black in the third quarter.

"The K6-2 is a winner," said W.J. Sanders III, AMD's chairman and CEO.

On Tuesday, AMD (NYSE:AMD) became the second major chipmaker in as many days to shatter analysts' estimates. The company posted a profit of $1 million, or 1 cent a share, for its third quarter on sales of $685 million, beating the First Call consensus of an 11-cent loss per share. AMD shares closed up 1 1/2, to 19 7/8, ahead of the earnings report.

On the same day, Motorola Inc. (NYSE:MOT) easily hurdled analysts' estimates in its third quarter.

K6-2 spells success
The K6-2 processor has become the AMD's savior.

"Other segments of our business have been flat," said Sanders, adding that sales of the K6-2 processor fueled the companies growth single-handedly and boosted gross margins 12 points, to 39 percent.

Company officials said AMD had shipped more than 3.8 million K6 units in the quarter, a 70 percent improvement vs. the second quarter. Over 73 percent of those processors -- and 80 percent of the revenue -- was due to the K6-2 processor.

Limited growth in the future?

Piper Jaffray semiconductor analyst Ashok Kumar correctly predicted both the number of units shipped and AMD's quarterly revenue total ahead of the earnings report. But he and other analysts said the company's growth targets for the next year are unrealistic.

"What's being left on the table are essentially crumbs," Kumar said. "That's why revenue growth will be fairly muted."

Despite economic unrest abroad, particularly in Asia, AMD has managed to grab between 8 percent to 10 percent of the world's chip market. Of course, that means that Intel Corp. (Nasdaq:INTC) still holds about 85 percent of that market.

Counting on K7

Next week, AMD will announce its K7 chip, which isn't pin-compatible with any of Intel's products and depends on a completely new infrastructure.

"Intel has been the only company to successfully establish a new PC architecture," Kumar said. "AMD's strategy will relegate it to a niche status."

AMD's Sanders, of course, disagreed. "We will be showing the K7 and its infrastructure at Comdex," he said. "We have some 30 motherboard manufactures making Socket 7 motherboards, many of those same guys will be supporting us for the K7."

The K7 chip is expected to hit the market in early 1999.

Into the void
Michael Lins, an analyst with Cowen & Co., has a neutral rating on the stock, but said AMD is filling a void left by Intel.

"Intel is being forced to make changes in its product road map for its a lack of offering for the very low end," Lins said. "In the interim, AMD has been left with the $1,000 PC market all to itself."

Last month, Lins had raised his estimates for AMD's third quarter to a loss of 5 cents a share. "During July and August, AMD couldn't keep up with demand," Lins said. "And there's extremely robust demand there. I don't know if I would want to call that crumbs, but that's certainly the lower end of the microprocessor PC market."

Overall, the company had a 30 percent improvement in sales versus the second quarter and a 15 percent jump compared to the year-ago quarter when it lost $31.6 million, or 22 cents a share, on sales of $596 million.

Last quarter, AMD lost a whopping $64.5 million, or 45 cents a share, on sales of $526 million.

AMD shares were trading at a 52-week high of 31 5/8 last October before falling to a low of 12 3/4 in late August. Eighteen of the 22 institutional investment firms following the stock maintain a "hold" recommendation.

Analysts expect it to lose about $1 a share for the fiscal year.