Dell to Use AMD Chips
In Some Servers
By DON CLARK and CHRISTOPHER LAWTON
May 19, 2006; Page A3
Dell Inc., in a break from one of its best-known strategies, is ending an exclusive relationship with Intel Corp. to buy chips for some server systems from Advanced Micro Devices Inc.
The move, disclosed along with lower earnings for Dell's fiscal first quarter, comes as the long-dominant computer maker faces nagging questions about whether its business model needs adjustments to meet tough competition. Rivals such as Hewlett-Packard Co., International Business Machines Corp. and Sun Microsystems Inc. offer machines with AMD chips, a factor that analysts believe has contributed to recent market-share losses for Dell, particularly in servers.
Dell's decision is a coup for AMD, whose stock rose sharply in after-hours trading following the announcement. It is likewise a blow to Intel, whose exclusive relationship with Dell has been a symbol for the chip giant's influence over technology standards in the computer industry.
Analysts said the move, a topic of years of speculation, is the latest in a series of signs that AMD has evolved from an erratic upstart to a reliable supplier of chips that have recently had technology advantages over Intel's. Though the announcement only focuses on high-end servers that don't sell in massive volumes, those systems sell to a demanding audience of corporate computer buyers that AMD is now successfully courting with a chip called Opteron.
"What it shows is that AMD has finally arrived in the big leagues," said Samir Bhavnani, an analyst at Current Analysis, a market-research firm. Those high-end systems, which use at least four chips each, have been an area where Dell has been losing the most market share by relying on Intel. "It's clear that this is where Dell has been hurting the worst and by extension where Intel has been hurting the worst," said Roger Kay, an analyst at Endpoint Technologies Associates.
AMD's shares were at $31.35, up 58 cents, in 4 p.m. New York Stock Exchange composite trading and rose to $35.46 following the announcement in after-hours trading. Intel's shares were off one cent at $18.65 at 4 p.m. on Nasdaq and subsequently slid to $17.73. Dell's stock traded at $23.95, up 32 cents, at 4 p.m. on the Nasdaq and rose following its announcements to $24.77.
Dell, which had warned on March 8 that it would miss its sales and earnings forecasts, yesterday reported net income for the fiscal period ended May 5 of $762 million, or 33 cents a share, down 18.4% from $934 million, or 37 cents a share, for the year-earlier period.
Revenue totaled $14.2 billion, up 6% from $13.39 billion a year earlier. The results matched the company's lowered guidance and analysts' expectations.
Dell, of Round Rock, Texas, enjoyed years of relentless growth, partly because of a strategy of selling directly to consumers through the Internet and telephone sales. It is still the No. 1 PC maker, dominating sales of desktop machines to corporations. But the company has lately struggled to cope with changing forces in the market. Much of the growth for PCs is coming from consumers and emerging countries, two areas where Dell has a smaller presence. The company is also facing particularly strong competition from H-P.
Intel offers marketing incentives to companies that use its products, and Dell was widely believed to receive substantial financial benefits from using Intel exclusively. Dell executives at times appeared close to adopting AMD chips, only to reverse themselves and say they were sticking with Intel.
Kevin Rollins, Dell's chief executive, said yesterday that the company finally concluded that it made sense to offer AMD-based machines in high-end servers. Mr. Rollins called Intel a "great partner" and said Intel will continue to supply the vast majority of Dell's chips.
Chuck Mulloy, an Intel spokesman, noted that Intel expects to improve its competitive position with new server chips due out in the second half of 2006.
Write to Don Clark at don.clark@wsj.com and Christopher Lawton at christopher.lawton@wsj.com
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