PAUL - SOMETHING YOU MIGHT ENJOY -AMD: Production Problems Continue To Plague K6 Output
08:08am EST 11-Nov-97
At AMD's analyst meeting, it disclosed that it is making slow progress in solving the production problems associated with ramping the K6 microprocessor on its .35 CMOS process. That is manifested in a continuation of low die and sort yields, and thus lower than expected output of K6 microprocessors. Adding further pressure to the company's profitability is its drive to introduce higher performance versions of the K6 (K6-3D) on a more advanced .25 manufacturing process along with stalled sales of the non-microprocessor products. While many of the problems that AMD is having is the result of a lack of internal execution on an aggressive plan, the company really has no choice but to pull out all the stops in trying to compete head-to-head with Intel - a daunting task that requires flawless execution. Analysts are lowering their estimates once again to account for these issues until there is evidence that the company is back on track.
Solving K6 production problems continue to limit output. - The K6 yield problems that caused last quarter's shortfall are still with the company. So far, it has released few details concerning the exact nature of the problem(s), other than to say that so far they have been unable to resolve them satisfactorily and that yields are not improving as expected. As a consequence, the expectation of K6 shipments in the 2M unit range for the December quarter will be unachievable. The new assumption for K6 shipments is slightly above 1.5M units for this quarter -- although that target could prove to be too aggressive as well. Going forward, analysts didn't get the feeling that a breakthrough in these yield issues was imminent, bringing into question the company's ability to execute effectively in bringing its Windows CPU to market. Moreover, without flawless execution, AMD will continue to have a tough time competing head-to-head against INTC -- a strategy AMD insists on following.
Newer K6 variations and a shift to .25 process is an even higher hurdle. -- In trying to sustain a narrow performance gap with INTC's Pentium II with AGP (enhanced graphics capabilities), AMD plans to offer two new K6 variants that have additional MMX instructions to improve floating point calculations which are important in improving graphics processing. The first version, named the AMD K6-3D, will begin shipping in 1H98 followed by the K6+3D later in the year that has an additional 1Mbits of secondary cache SRAM. Both of these new products will have much larger die sizes than the 68 mm2 of the current K6. Additionally, AMD is aggressively trying to shift manufacturing to a finer .25 process, even before working out the issues with the .35 process. The combination of trying to ramp more complex K6 variants on a newer process technology will be a daunting task at best. As that shift takes place, less than perfect execution could prolong the manufacturing ramp to higher volumes.
analysts' are taking another healthy cut to estimates because of the K6 issues.-- The company's non-microprocessor business which made up three quarters of revenue last quarter, is stuck in a flattish pattern. While demand is way up in some areas like FLASH memory (25% of overall revenues), aggressive price cutting is limiting any upside. That in combination with lower unit expectations for the K6 this quarter will likely lead to a larger loss than analysts had earlier thought. Looking into next year, analysts are taking another healthy cut to the estimates to reflect the company's inability to pull all the pieces of its K6 business together. As a consequence, analysts are lowering the K6 unit assumption and gross margin expectations for 1998. In addition, analysts are increasing the R&D expense rather sharply to account for the aggressive launch of newer K6 variants on a new process technology, both of which will require stepped up engineering. In all, analysts now expect the company to be unprofitable through the first quarter of 1998, whereas before they were looking for a modest profit in 1Q98. Farther out, analysts are cutting the 1998 revenue estimate by $165M, on lower K6 unit assumptions of about 12M, down by a little more than 1m units, versus company guidanceof between 10-15M units.
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