Fool Plate Special: AMD Loses Steam, Ground
By Paul Larson
Things are pretty ugly in the market for personal computers right now as several of the industry's major players have fallen on hard times. Yesterday we reported on the
ongoing pain Gateway (NYSE: GTW - news) is feeling, and now leading PC component maker AMD (NYSE: AMD - news) has come out and warned that its
third-quarter earnings will be worse than previously expected.
When AMD released Q2 results, the company said it expected to see a 10-15% sequential revenue decline in the
third quarter. Now AMD is saying sales will be at the bottom of that range, a near 15% decline.
Second-quarter sales for AMD were $985 million, which implies revenue should be near $837 million in the current
quarter. Not only are sales expected to be down 15% sequentially, but the picture is even uglier when looking at
what AMD achieved last year. In 2000's Q3, AMD achieved $1.2 billion in sales, meaning year-over-year
revenues will be down over 30%.
AMD reiterated that if sales declined in the range it previously expected, the company would report an operating
loss in the current quarter. The magnitude of the loss remains to be seen, but the red ink will no doubt compare
quite negatively to the over $400 million in bottom-line profits AMD was able to garner in last year's third quarter.
AMD also said it was seeing continued weakness in its flash memory business, sales for which are forecast to
decline roughly 30% sequentially in the current quarter. The company's PC microprocessor business was expected
to ship roughly the same number of units (7.8 million) as in the second quarter, but lower average selling prices are
also taking a bite out of AMD's revenues.
AMD losing ground?
It's interesting to contrast how AMD is doing against its archrival Intel (Nasdaq: INTC - news) in the ongoing battle over the PC microprocessor market. While AMD
is expecting unit sales to be roughly flat with the second quarter, Intel yesterday said it still expected demand for its microprocessors to increase in the second half of the
year versus the first half of the year. This seems to indicate Intel is gaining back some of the ground it has lost to AMD over the last two years.
Looking at the speeds of the processors each company is now shipping, AMD appears to be falling behind Intel yet again. AMD's fastest microprocessor runs at "only"
1.4 Gigahertz, while Intel has just broken the 2.0 Gigahertz barrier. Though processor speed is not the only metric used to measure performance, for computer buyers
who want the fastest microprocessors available Intel is the clear choice at the moment. (For more on this sector, visit our InDepth: Computer Hardware page.)
Things may not get better for AMD any time soon. While AMD is expected to be in the red for the third quarter, Intel is still projecting a profit, albeit lower than last
year's. The fact that Intel remains in the black while AMD is in the red gives Intel much greater flexibility to improve its competitive positioning, either by increasing
research spending or by cutting prices, both actions that will be increasingly difficult for AMD to take.
The bottom line is that AMD is in a sub-prime position at the moment. The company is getting whacked by a two-punch combination: an anemic economy that is
squelching demand and a rival that has revived its competitive advantages. Though the release of Microsoft's (Nasdaq: MSFT - news) Windows XP may enliven
demand for new PCs in the fourth quarter, it will be an uphill battle for AMD to regain ground and benefit from that unless it can ramp up production of its
next-generation processors in a hurry. |
