From Bloomberg:
Advanced Micro's X-Box Loss Is Soon Forgotten: David Wilson
Princeton, New Jersey, April 7 (Bloomberg) -- X-Box? What's an X-Box?
Advanced Micro Devices Inc.'s shareholders have every reason to ask that question these days, even if they know full well that it's the video-game system in development at Microsoft Corp.
Just four weeks ago, Microsoft said it selected Intel Corp. to supply the microprocessors that will run the X-Box, scheduled for release in the second half of 2001. Advanced Micro's failure to get the contract triggered a three-day, 17 percent decline in its share price.
The shares recouped the entire loss by the end of the first quarter, and surged another 20 percent in the first four days of this week even as the stock market faltered.
As a result, the Sunnyvale, California-based company briefly became the best performer in the Standard & Poor's 500 Index this year. It ended yesterday as No. 2, with a gain of 146 percent.
Three events this week helped to lift the shares: Advanced Micro's disclosure that it had more than $1 billion in quarterly sales for the first time, an analyst's report that Dell Computer Corp. may soon become a customer for its microprocessors, and a contract to sell a different type of chip to Alcatel, Europe's second-largest maker of phone equipment.
Past Problems
Although the good news outweighs the bad these days, it wasn't all that long ago that the opposite was true.
Advanced Micro reported its last full-year profit in 1995. During the past four years, it's had losses totaling $282.9 million as it struggled to challenge Intel's dominance of the processor market. More than four-fifths of all PCs use Intel's chips as their ``brains.'
At the end of 1998, the company found itself unable to produce enough of its most powerful -- and most profitable -- processors to meet demand because of a design flaw that slowed the manufacturing process.
The shortage led some customers to take their business to competing chipmakers, especially Intel. The lost sales, combined with price-cutting, led to losses in the first three quarters of last year.
Advanced Micro also lost Atiq Raza, its president and chief operating officer and the heir apparent to Chief Executive Jerry Sanders. Raza resigned last July for personal reasons.
Taking the Lead
The company's fortunes started to turn around the next month, when its Athlon microprocessors went on the market. The chips operated at speeds as high at 650 megahertz, faster than any of Intel's Pentium III processors.
At that speed, the chips could process 650 million instructions in just one second -- and the company could compete with Intel in supplying processors for every type of PC, ranging from machines selling for less than $1,000 to the most expensive models for business.
Advanced Micro maintained its lead by introducing faster versions of the Athlon four times during the next seven months. The company reached the 1-gigahertz milestone last month, just two days before Intel.
By the time it got there, Advanced Micro's customers included Gateway Inc., second only to Dell among direct sellers of PCs. The San Diego-based company began buying the processors in January, after seeing its earnings fall short of estimates because it couldn't get enough chips from Intel.
Keeping a Unit
Not long after signing up Gateway, the company reported that fourth-quarter earnings more than doubled to $65.1 million, or 43 cents a share, as it sold more than 800,000 Athlon chips. It also named Hector Ruiz, credited with turning around Motorola Inc.'s computer-chip business, as Raza's successor.
While Advanced Micro said in February that first-quarter sales may exceed the fourth quarter's $968.7 million, its stock didn't take off until it started selling the 1-gigahertz Athlon. In the next two days, its shares soared by almost a third to 55.
The stock's retreat after the X-Box decision left most of that gain intact. It rallied 9.6 percent to 60 last Thursday, just before the company decided against selling a unit that produces chips for networking equipment.
Advanced Micro had hired two investment banks, Donaldson, Lufkin & Jenrette and Salomon Smith Barney, to find a buyer for the unit and its telecommunications-chip division last October. The company said it would keep the networking-chip business because of increasing demand for its products.
Getting a Look
Then came this week's events, starting with the Alcatel order. The two-year agreement calls for Advanced Micro to supply the French company with about $300 million of flash-memory chips for use in modems, cellular phones and telecommunications gear. The devices can store information even after power is turned off.
The $1 billion-plus sales figure followed on Wednesday, when Advanced Micro said first-quarter revenue totaled more than $1.06 billion. Growing demand, especially for the flash-memory devices, fueled a sales increase of 10 percent from the fourth quarter, the company said.
Yesterday brought the prospect that Dell would follow the lead of Gateway and other major rivals by buying the company's processors. Discussions between the PC maker and Advanced Micro are ``heating up,' according to a report from Jonathan Joseph, an analyst at Salomon with a ``buy' rating on the stock.
``We're still continuing to look at the products,' said Kevin Rollins, Dell's vice chairman. Both companies acknowledged they were having talks. Advanced Micro rose 2 5/8 to 71 and traded as high as 74 1/4, a record.
Against that background, it isn't surprising that investors would forget about the X-Box -- not to mention all of that other bad news in years past.
Apr/07/2000 6:35
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