One last chance for beleaguered AMD?

Chip maker beset by manufacturing problems and sliding revenues as PC makers await the K7 processor.
Written by Robert Lemos, Contributor

PC chip maker Advanced Micro Devices Inc. is expected to announce grim news today -- manufacturing problems have driven down the company's yields of its most lucrative processors, leaving AMD selling far too few, and far too unprofitable, processors.

The result: Revenues are expected to slide to $630m (£384m) on an average selling price per chip of $78, said the company last week in its third earnings warning this quarter. Previously, company chairman and CEO W. J. Sanders III said that AMD needed to earn $100 per chip on average to be profitable.

It seems odd then, that despite the news, AMD's PC-making partners are standing by the company, betting that AMD will be able to get its manufacturing under control. "They've had problems all along, but look at them -- they're still around," said John Schneider, spokesman for US firm CyberMax Computers Inc. -- one of AMD's initial partners. Schneider described delays in receiving shipments from AMD, but added, "We have always got everything we ordered. On occasion, it's just been late."

CyberMax would not comment on how backed up AMD has become. Another major PC maker said it had suffered no delays due to AMD's chip shortages, though it admitted that the punctuality may be due to preferential treatment. "In all honesty, things are going quite well," said a spokesman for the major brand, speaking on condition of anonymity. "Our expectations were set realistically and they were met." That's surprising, considering that AMD had a 1.2 million processor shortfall this quarter. The Californian chip maker initially expected to sell more than 5.5 million processors this quarter. Due to its manufacturing problems, only about 4.3 million got out the door.

Many of the processors that never made the cut included AMD's most profitable high-end processors, according to an AMD spokesman. That inability to ship large quantities of its fast -- and more lucrative -- processors has added up to snowballing losses. "It doesn't cost any more to make a fast processor than a slow one -- but you can sure charge a lot more for the fast ones," explained Nathan Brookwood, principal analyst with chip and networking watcher Insite 64.

In describing the AMD's manufacturing problems, Brookwood frequently refers to the company as a chip maker that ably "snatches defeat from the jaws of victory." That unfortunate ability is wreaking havoc on the balance sheet. Last week, AMD estimated it will only have made $630 million from January to March -- amounting to a loss of about $0.50 a share. While that's up from $541 million for the same quarter last year, it fell well short of the previous quarter's revenue of $789 million. In early March, AMD announced it would cut about 300 jobs in the next two years.

But the industry still likes AMD's K6-2, K6-III and coming K7 products. AMD's K6-2 has repeatedly dominated the sub-$1,000 marketplace. In addition, AMD's foray into the Intel-dominated corporate and high-end mainstream markets -- the K7 processor -- has its partners excited. "The K-7 and the K6-III have promise to be great products," said Insite 64's Brookwood. "Assuming that the design is solid, it will be more advanced than anything Intel will have for a year."

For CyberMax, having dibs on the next-generation chip makes weathering the other "minor" problems well worth it. "By all measurements, it's going to take the market by storm," said CyberMax's Schneider. Yet, even his faith is limited. "[At this point,] we are just hoping that they get the K7 out," said Schneider.

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