AMD's latest woe: too many chips
Biggest quarterly loss will sour K-7 debut
AMD to post record loss
It's producing more chips than it can sell
BY DEBORAH CLAYMON, Mercury News Staff Writer
Advanced Micro Devices Inc. -- which has stumbled in recent quarters because of production problems and price competition -- said Wednesday it expects to post its worst operating loss ever because of a new dilemma.
This time, AMD made too many chips.
W.J. Sanders III, AMD's longtime chairman and chief executive, said in a statement that AMD expects to manufacture more than 6 million of its flagship K6 microprocessors during the quarter ending June 30. But it is unlikely to sell more than 3.7 million of them.
For that reason, Sunnyvale-based AMD expects less than $600 million in operating revenues and more than $200 million in losses in its second quarter. Yet these results -- which Sanders termed ''a bitter disappointment'' -- are more than just the latest evidence of AMD's failure to capitalize on the K6, its strongest potential competitor in years to chip giant Intel Corp.'s product line.
The numbers also leave AMD in a weak position as it introduces its newest chip, previously called the K7 but now dubbed the Athlon microprocessor. AMD simply cannot afford to incur such enormous losses at a time it needs to invest research and development funds to push its technology ahead, said Keith Diefendorff, editor-in-chief of Microprocessor Report.
''It is a self-fulfilling prophecy,'' he said. Once the company starts losing huge sums of money, the research squeeze ''only gets worse.''
Wednesday's release from AMD contained another ominous sign for the Athlon, the centerpiece of AMD's push into the market for more powerful and higher profit-margin chips.
AMD said its quarterly sales suffered because frustrated potential customers didn't return to the fold once AMD solved the manufacturing problems that plagued the K6 last year. The company chose to supply only its ''first-tier'' PC manufacturer customers when chip yields lagged.
Customer confidence is an even larger concern with the Athlon, because it is the first AMD chip in years whose design differs significantly from Intel's chips. Computer manufacturers and component makers will have to design their products specifically to support AMD's new processors.
The continuing bad news is also likely to put more pressure on company founder Sanders, recently singled out by national business magazines as one of the nation's worst performing CEOs.
An AMD spokesman, however, defended the company's performance. ''Clearly these kinds of losses are not good news,'' said Scott Allen. He called the company's execution ''pretty good'' but said to successfully compete against Intel, the company's actions must be flawless.
AMD and Intel have been battling at the low end of the PC market, where the K6 contends with Intel's Celeron for a place in sub-$1,000 PCs. Intel has driven the average selling price of these microprocessors well below $80, squeezing AMD's profits and helping to drive a third competitor, National Semiconductor's Cyrix Corp., out of the market altogether.
AMD believes the Athlon will allow it to escape its low-end woes. Industry analysts believe this strategy may work, but said it's a risky one for a company that has had such trouble with execution.
''AMD is living on the edge, there's no question about it,'' said Charles Boucher, a semiconductor analyst with Credit Suisse First Boston in San Francisco. Still, Boucher said, the release of the Athlon is a silver lining.
''If AMD executes the Althon well, it could start to build an R&D war chest to keep the fight going,'' said Boucher. ''But if the company stumbles again, they will be really challenged to produce any next generation technology.''
To avoid that fate, AMD is experimenting with ways to make chips with less capital expenditure than Intel. It recently forged a partnership with Motorola to combine production efforts and reduce overall costs.
Even though quarterly sales fell way short, computer manufacturers have not abandoned AMD, said George Iwanyc, an analyst with Santa Clara-based Dataquest. He believes PC makers want AMD to remain a viable competitor to Intel. ''AMD provides the best negotiating argument to Intel,'' he said.
AMD's ailing stock -- which closed down $1.06 at $18.19 Wednesday -- is likely to dip further today on the announcement, which came after the close of market. Analysts had expected AMD's quarterly loss to be about one-third what Sanders projected.
In its first quarter, AMD had a loss of $118.8 million, or 81 cents a share.
''Athlon is AMD's one hope,'' said Diefendorff. ''If they can't pull it off then it looks like nobody is going to be able to compete with Intel.''
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