AMD may earn 15 cents in Q4 98 if they keep carving out additional market share, delivering unit volumes on the K6 and executing in their other businesses
By Binti Harvey & Tiare Rath, CBS MarketWatch
Last Update: 5:41 PM ET Oct 6, 1998
Tech Report
SUNNYVALE, Calif. (CBS.MW) -- Advanced Micro Devices fueled
hope for a rebounding semiconductor industry Tuesday after the company
squeaked by with an unexpected third-quarter profit.
AMD (AMD) posted a quarterly profit of $1 million, or 1 cent a share,
far surpassing analysts' expectations for a loss of 13 cents a share. Sales
rose $685.9 million from $526.5 million in the year-ago period.
Beating its target
AMD's third-quarter profit beat its own target. Previous to the report,
AMD wasn't expected to record earnings until the fourth quarter. The
semiconductor manufacturer hasn't posted a profit since last year's second
quarter.
AMD's earnings were also far better than last year's performance, when
the semiconductor manufacturer lost $31.7 million, or 22 cents a share.
The company's strong earnings came from strength in its K6 processors
business, which analysts expected would be strong. K6 shipments were
up 1 million units from its second quarter to 3.8 million units, the company
reported. Most other business segments were flat or down from year-ago
levels, AMD said.
Dan Scovel of Fahnestock & Co. expected the company to report a
pickup in demand for its K6 microprocessor core product. Scovel
expected K6 unit shipments of 3 million to 3.5 million for the quarter,
compared to 2.7 million in the second quarter.
However, his estimate of a loss of 17 cents fell
below the consensus outlook because he sees weakness in AMD's other
semiconductor businesses.
Flash-memory 'deterioration'
"Their flash memory, network communications and [programmable logic]
chips have been the ones paying the bills, and we're seeing some
deterioration there," Scovel said.
Brown Brothers Harriman analyst William Milton also expected AMD's
other businesses to show signs of cracking under global industry pressure.
"We estimate K6 revenue, which represented 42 percent of the product
mix in the second quarter to increase 51 percent sequentially ... however,
we expect the company's other businesses to be sequentially down."
The earnings weren't a total surprise, however. AMD helped push
semiconductor stocks higher Tuesday as most other tech sectors were in
the red. AMD's shares closed up 1 1/2 to 19 7/8 ahead of the report.
Along with AMD's anticipated report was also strong earnings from
Motorola (MOT) and a growing sentiment that a recovery is underway
for the battered sector.
"We believe that many companies saw at least a
slight improvement in bookings and shipments, with
the year-to-year growth rate bottoming sometime
during the August-September window," Donaldson
Lufkin & Jenrette analyst Charles Boucher said in a
research note.
Another factor in analysts' rosier outlooks: The
inventory correction that virtually halted new orders
in the first half ended in the third quarter, marking
renewed demand for microprocessors.
However, the rebuilding of PC inventory alone may
not solve the chip industry's problems, some analysts say. "We believe
that the positive momentum in the PC component area, driven almost
entirely by inventory snapback, can be maintained into the fourth quarter
but not much further," said Goldman Sachs analyst Joe Moore.
Lackluster outlooks
Moore expects most other semiconductor markets to exhibit results in line
with lackluster outlooks. Moore believes other semiconductor markets
continue to flounder, as several analog and logic chipmakers warned of
disappointments in the third quarter.
He also expects slow demand for consumer and industrial electronics
chips as well as telecommunications components to cause weakness into
the fourth quarter.
But AMD can pull higher earnings by the fourth quarter if the conditions
are right, Scovel said.
"We think if they keep carving out additional market share, delivering unit
volumes on the K6 and executing in their other businesses they can do 15
cents in the fourth quarter," he said.
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