What's Wrong With Advanced Micro?
By Robert Ristelhueber and Carol Haber
From Electronic News--April 12, 1999
Sunnyvale, Calif.--Advanced Micro Devices' first quarter continued to resemble a slow-motion train wreck, with the company last week warning that microprocessor shipments would fall below already-depressed expectations.
The third red flag flown by AMD in the past two months flabbergasted observers. "It's almost like shareholders are getting a weekly update," said Ashok Kumar, a financial analyst with Piper Jaffray, Minneapolis. "If you have to pre-announce three times in one quarter it implies a lack of control and visibility into the operation," added Charles Boucher, a financial analyst with Donaldson Lufkin Jenrette, San Francisco. "I was surprised that AMD didn't realize what the shipments were going to look like earlier than now."
Last week's announcement didn't touch on the company's non-microprocessor results, which won't be addressed until earnings are formally disclosed this Wednesday. But analysts are bracing for bad news there, too, since the company lost market share in both programmable logic and flash memory in 1998.
AMD's programmable logic sales, represented by its Vantis unit, slipped 19 percent last year, while the PLD market as a whole grew 6 percent, according to Semico Research, Phoenix. Its flash memory sales dropped 21 percent last year, over twice as much as Intel's and the market's as a whole.
"I don't know why they have repeatedly dropped the ball on Vantis," said William Milton, a financial analyst with Brown Brothers Harriman, New York. "Going back to 1987 when they bought Monolithic Memories, AMD was the number one player in PLDs and then lost ground over the years. Now Vantis is a secondary player." Vantis president Richard Forte resigned earlier this year (EN, Feb. 8).
"I haven't heard a whole lot of good news from its programmable logic or flash divisions lately," said Chris Chaney, a financial analyst with A.G. Edwards, St. Louis. "AMD even downplays those businesses on conference calls. It is possible they are taking R&D dollars and giving it to microprocessors, which are the sizzle behind the company. (AMD chairman Jerry) Sanders likes to talk about the sizzle."
"The non-microprocessor business in aggregate is losing money," added Kumar of Piper Jaffray. "There is no way AMD can turn it around and have that sustain the overall company. It's way too small."
That would leave microprocessors as the company's savior, but there wasn't much good news coming from that sector. Shipments of the K6-2 processors were 4.3 million units in the first quarter, "substantially below plan," the company said. Severe price competition, particularly in processors running slower than 400MHz, caused average selling prices (ASPs) to decline to $78.
Yield problems "continued to take a heavy toll on production volume and mix through the first eight weeks of 1999," the company said. Based on a preliminary analysis, AMD expects first quarter revenues to be about $630 million, compared to $541 million for the same quarter a year ago, and $789 million for the immediate-prior quarter.
Those yield problems were fixed by March, AMD said, with K6-2 shipments last month exceeding those in January and February combined. The company still expects to meet its goal of shipping 20 to 25 million unit in 1999.
"Demand for K6 family processors remains strong, and customer relationships remain intact. Based on March production results and the planned production mix of K6-2 and K6-III processors, and initial shipments of K7 processors scheduled for June, the company believes that ASPs will improve this quarter," the company said.
Yet, observers have been burned by AMD's promises before. "Everybody who comments on the company these days always has to add, 'if they don't run into manufacturing problems,'" said Nathan Brookwood, principal at Insight 64, a market research firm in Saratoga, Calif. "The question is not do they have a good design, but can they build it?" said Tony Massimini, chief of technology for Semico Research.
AMD must also weather another round of price cuts this week, with Intel expected to announce sweeping reductions in the prices of its Celeron, Pentium II and Pentium III chips, moves which AMD will have to respond to.
Yet at least one analyst remains hopeful. "If there has to be a problem, let it be manufacturing. That can be fixed," said Milton of Brown Brother Harriman. "AMD has the customers. It has the technology. Now it has the brand. Don't write them off."
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