TO ALL
AMD: Poor K6 Yields
08:00am EDT 1-Oct-97
Due to lower-than-expected yields for its K6 microprocessor (MPU), Advanced Micro Devices (AMD) preannounced a negative earnings surprise on September 3. At that time, management suggested the company would report a nominal operating loss. Although AMD met its objective of shipping 1 million K6s in the third quarter versus 370,000 units in the second quarter, the company announced yesterday that lower-than- expected K6 yields led to lower revenues and a third-quarter loss that will be substantially larger than previously anticipated.
Since AMD met analysts' unit estimate, analysts have to conclude that the additional revenue pressure and concomitant loss is due to average selling price (ASP) pressure caused by the inability to generate enough high-speed, higher-priced MPUs during the quarter. AMD's unit production costs are the same for all three of its current K6 MPU speed grades (166, 200, and 233 MHz), and since its higher-speed MPUs enjoy significantly higher ASPs and profits, the company's overall revenue and earnings results are highly sensitive to changes in mix.
While analysts did not believe AMD had completely solved its yield problem, many believed the problem had been identified and was steadily improving. Based on a significant increase in the number of wafer starts at Fab 25 in Austin, Texas and analysts' belief that the working MPUs were offering bin splits that generated a large percentage of 200 and 233 MHz devices, analysts expected AMD to nearly double its K6 revenues in the third quarter.
However, it appears that the distribution (bin split) of the company's yield produced fewer high-speed MPUs than analysts previously expected, and analysts believe this development pressured ASPs and constrained AMD's K6 revenue growth in the third quarter. Based on analysts' belief that AMD's yield problem may continue to pressure overall ASPs for another couple of quarters, analysts have reduced their 1997 and 1998 earnings estimates.
AMD's inability to correctly understand the magnitude and quickly fix its yield problems has caused many analysts to downgrade their rating on the stock. AMD will report its actual earnings results on October 7, and the company will unveil its K6 roadmap on October 14 at the Microprocessor Forum. Based on AMD's most recent negative earnings surprise and the apparent severity of its ongoing yield problems, many analysts believe the stock will quickly decline to the mid to high 20s.
REGARDS BILL
LONG INTEL |
