intel feels margin pinch/amd production problems persist:
Intel, AMD Feel Bottom-Line Pressure
(01/11/98; 10:50 a.m. EST)
By Kelly Spang, Computer Reseller News
As Intel and Advanced Micro Devices close their books for 1997, steep price drops, the growing strength of the sub-$1,000 PC, and the economic crisis in Asia will affect the chip makers' financial results.
For Sunnyvale, Calif.-based AMD, Wall Street analysts are expecting manufacturing problems to drag down the company's bottom line, as well.
"AMD is going to be tough. Their earnings are going to be low," said Jonathan Joseph, senior semiconductor analyst for Montgomery Securities of San Francisco. "They have manufacturing problems -- those don't just go away."
As both chip makers prepare to announce their fourth quarter and year-end financial results after the market closes on Tuesday, Intel is expected to earn 90 cents per share while AMD is expected to take another loss for the quarter -- amounting to roughly 13 cents per share -- according to the First Call consensus.
Digital Equipment will announce its second quarter earnings on Thursday. The First Call consensus for earnings of 43 cents per share, compared with 15 cents per share a year ago.
Compared with the similar quarter a year ago, the First Call consensus for Intel is down by 17 cents, while AMD is up by 2 cents. Intel reported $1.07 per share for the same quarter last year and AMD reported a loss of 15 cents per share.
"Right now, most investors are cautious given the economic crisis in Asia and the pricing pressures of the sub-$1,000 PC," both contributing factors weighing on Intel's earnings, said Dave Powers, senior technology analyst with Edward Jones of St. Louis.
Additional factors working against Intel may be deep price cuts on processors in December and a weak flash market, Joseph said.
A positive trend for Intel moving into 1998, according to Powers, is the "negative effect of the OEM transition to a build-to-order model is mostly behind them now." At its annual financial analyst meeting in the fall, Intel executives said the channel assembly trend would cost Intel between $500 and $750 in revenue in 1997.
This year, Intel plans to continue to aggressively drop its processor prices in an effort to push the Pentium II into all market segments. As a result, VARs will see Pentium II prices to come down on average of 25 percent at the end of the month and again in May.
For the 200-MHz and 233-MHz Pentium with MMX, VARs can expect price cuts upwards of 35 percent at the end of the month. In May, those prices will be slashed again by more than 20 percent, according to industry sources.
While AMD officials said the company will maintain its pledge into 1998 to undersell Intel by 25 percent for processor speed grades comparable to the K6, analysts are skeptical if that is possible.
"When they first brought out [the K6] products it was possible [to undersell Intel by 25 percent]," said Brian Matas, vice president of market research for IC Insights, a market research company in Scottsdale, Ariz. "When AMD started suffering from yield problems, I don't think they can keep prices that low. They have to make some money."
To date, the K6 has gone head to head with the Pentium with MMX, which Intel will phase out over the next year. But with the introduction of its 266-MHz K6, based on its .25-micron process technology, AMD will be forced to compete with the Pentium II on pricing. At the end of the month, the 266-MHz Pentium II will drop by 29 percent in price, and the processor will be priced at $289 by May.
The boxed version of the 266-MHz K6 will be available in the channel toward the end of the second quarter into the third quarter, said Thomas Toles, AMD field marketing manager. Pricing has not been announced yet, he said.
AMD is aiming to convert its process technology to .25 micron by the second half of 1998.
"The good news for resellers is we have an aggressive plan [to convert to] .25 micron, which will provide greater availability of parts this year," Toles said.
Analysts, however, question if AMD tackled its manufacturing issues, which are keeping overall yields somewhere between 50 percent and 60 percent. A more acceptable level would be between 75 percent to 85 percent, Matas said.
AMD officials said the company does not comment on yield rates.
AMD's ability to deliver products "lingers in the background, but I don't worry about it," said Scott Paddock, store manager for PC Brokers, a Denver-based VAR. "They have a good product."
In 1997, Paddock said availability of the 200-MHz and 233-MHz K6 was tight, but "not a serious issue." Now Paddock is waiting for a steady supply of the 266 MHz, which IBM has used up to this point for its Aptiva consumer PC. AMD is ramping volumes of the 266-MHz chip and will launch the product officially into the channel in the second quarter. |
