AMD can pull earnings higher by the fourth quarter if the conditions
are right
By Binti Harvey & Tiare Rath, CBS MarketWatch
Last Update: 10:49 AM ET Oct 7, 1998
Tech Report
SUNNYVALE, Calif. (CBS.MW) -- Advanced Micro Devices shares
dipped Wednesday morning following a week of speculative gains in the
run-up to its third-quarter report, which came out better than expected.
In its first profit since last year's second quarter, AMD (AMD) said it
made $1 million, or 1 cent a share, far surpassing analysts' consensus
expectation of a loss of 13 cents a share. That estimate was considered
conservative as some analysts predicted AMD would earn as much as 15
cents a share by its fourth quarter.
Shares fell 15/16 to 18 15/16 in recent trading on volume of 2.1 million.
Beating its target
Sales increased to $685.9 million from $526.5 million in the year-ago
period, when the Sunnyvale, Calif.-based semiconductor manufacturer
lost $31.7 million, or 22 cents a share.
The company's earnings reflected strength in its core K6 microprocessors
business, which analysts expected would hold up earnings. K6 shipments
were up 1 million units from the second quarter to 3.8 million units, the
company reported. But, the company said, its non-PC-processor
businesses, including memory chips, were flat or down from year-ago
levels.
K6 processors accounted for 31 percent of retail desktop processors and
grabbed 54 percent of market share in the increasingly important
sub-$1,000 PC market, the company reported.
The trend of K6 processors leading the way for the company will likely
continue into the fourth quarter, AMD executives said in a conference call.
Looking ahead, the company also said it expects to post a profit in its
fourth quarter due to higher K6 sales. AMD said fourth-quarter
research-and-development costs will rise $20 million to $25 million.
In the pipeline
AMD also said it would have a "major announcement" about a K6-2
mobile processor during its fourth quarter and will unveil a version of a K7
product during the Comdex trade show scheduled for mid-November in
Las Vegas. A K7 processor will be introduced in the first half of 1999.
While K6 sales are expected to power AMD's
fourth quarter, the company's chairman and chief
executive, W.J. Sanders, said his bias on the rest of
the company's products "is more up than down."
Sanders said AMD doesn't see a general upturn,
but "the worst is behind us," he said.
"We see the PC market as pretty strong" in the
United States, Europe and Asia, Sanders said.
Analysts were expecting strength in K6
performance. Dan Scovel of Fahnestock & Co.
foresaw K6 unit shipments of 3 million to 3.5
million for the quarter, compared with 2.7 million in
the second quarter.
However, his estimate of a loss of 17 cents fell
below the consensus outlook because he saw
weakness in AMD's other semiconductor lines.
Flash-memory 'deterioration'
"Their flash memory, network communications and [programmable logic]
chips have been the ones paying the bills, and we're seeing some
deterioration there," Scovel said.
Brown Brothers Harriman analyst William Milton said he expected
AMD's other businesses to show signs of cracking under global industry
pressure. "We estimate K6 revenue, which represented 42 percent of the
product mix in the second quarter to increase 51 percent sequentially. ...
However, we expect the company's other businesses to be sequentially
down."
Semiconductor comeback?
Along with AMD's report, strong earnings from Motorola (MOT) aided
the growing sentiment that a recovery is under way in the battered sector.
"We believe that many companies saw at least a
slight improvement in bookings and shipments, with
the year-to-year growth rate bottoming sometime
during the August-September window," Donaldson
Lufkin & Jenrette analyst Charles Boucher wrote in
a research note.
Another factor in analysts' rosier outlooks: The
inventory correction that virtually halted new orders
in the first half ended in the third quarter, marking
renewed demand for microprocessors.
But the rebuilding of PC inventory alone may not
solve the chip industry's problems, some analysts say. "We believe that
the positive momentum in the PC component area, driven almost entirely
by inventory snapback, can be maintained into the fourth quarter but not
much further," said Goldman Sachs analyst Joe Moore.
Lackluster outlooks
Moore said he expects most other semiconductor markets to exhibit
results in line with lackluster outlooks, as several analog and logic chip
makers warned of disappointments in the third quarter. He also said he
expects slow demand for consumer and industrial electronics chips as well
as telecommunications components to cause weakness into the fourth
quarter.
But AMD can pull earnings higher by the fourth quarter if the conditions
are right, Fahnestock's Scovel said.
"We think," he said, "if they keep carving out additional market share,
delivering unit volumes on the K6 and executing in their other businesses
they can do 15 cents in the fourth quarter." |
