OT this will also hurt the other cheapo box makers
Advanced Micro Devices is predicting a loss of about $200 million for its second fiscal quarter ending June 27, a disappointment even the launch of its K7 processor could not abate.
Despite significantly improved microprocessor yields and theintroduction of its long-awaited K7 chip, which is officially known as the Athlon, AMD continues to run in the red. "Gray-market activity plus three official price moves by Intel dashed our hopes of an orderly pricing environment," said W. J. Sanders III, chairman and CEO of the Sunnyvale, Calif., company.
"Today, Intel can pretty much give the damn Celerons away and not have an effect on their margins," Sanders told analysts and reporters during a conference call this afternoon. Average microprocessor selling prices (ASPs) dipped to about $60, down from $78 in the first quarter, he said.
Second quarter revenues for AMD from the sale of microprocessors are expected to be about $250 million, which Sanders called "extremely disappointing." Sales of non-microprocessor products, however, are expected to increase, indicating a general upswing in the chip industry. Flash memory, for example, is on allocation, a company spokesman said. AMD will officially report earnings July 14.
AMD estimates that 50 percent of the 3.7 million microprocessors it expects to ship this quarter will run at 400 MHz or above. However, the company will actually manufacture about 6 million processors, leaving it with a potential inventory overhang, the company said.
Analysts had a day to prepare for the earnings warning, but the scope still caught some by surprise. "It was everything I expected, and then some," said Drew Peck, analyst with SG Cowen & Co., in Boston, who said the microprocessor ASP drop was greater than he had anticipated.
A flood of 333- and 366-MHz microprocessors which entered the market following a decision by National Semiconductor Corp. to pull its Cyrix subsidiary out of the PC processor arena contributed to pricing declines, producing an environment during April and May that Sanders called "just awful." AMD executives added that Intel sold a package of Celerons, older chip sets, and motherboards to lower-tier customers, a low-cost bundle that AMD and its partners couldn't match.
The news that AMD's K7 had officially launched, under the brand name Athlon, was somewhat overshadowed by the earnings preannouncement. The company said Athlons are now shipping, but did not specify at what speed grade. In 1,000-unit lots, the 600-MHz Athlon will carry a price of $699, the 550-MHz device will be priced at $479, and the 500-MHz chip will be $324 in 1,000-unit quantities-a significantly higher price than AMD has charged for prior microprocessors, Sanders said.
K7 production should be in the tens of thousands of units during the second quarter, increasing to hundreds of thousands in the third quarter, all using the 0.25-micron process of AMD's Fab 25 in Austin, Texas, Sanders said. He said 0.18-micron chip production is on track for the fourth quarter, adding that Athlons using copper interconnects to increase their speed will arrive by the end of 2000. AMD tentatively expects 1 million K7s to ship during the 1999 calendar year.
End-user Athlon-based PC systems priced at least $1,200-and probably $1,500-are planned for August, the company said. A 500-MHz K6-2 also will be produced in time for sub-$1,500 PCs sold this Christmas.
"The K7 is not targeted for any sub-$1,000 space, but will instead expand the served available market," Sanders said. "We clearly need the higher ASPs of the Athlon to finally achieve profitability." When asked if AMD expects to sell the Athlon at its rated price rather than at a deep discount, Sanders said "with the K7 we can compete with Intel ... we can all price parts in a blood bath, but at least not all the blood will be ours."
For AMD, the challenge now is a familiar one: ramping the Athlon and balancing its existing customer relationships. Keith Diefendorff, analyst with MicroDesign Resources, in Sunnyvale, Calif., called the Athlon the company's most technically competitive part ever, "clearly with the potential to outperform [Intel's] Pentium III on most things." But Cowen's Peck downplayed the K7's performance advantage, instead calling the chip "a bet-your-company proposition."
Indeed, AMD is facing a task perhaps even more daunting than its yield problems; it must overcome corporate America's bias towards Intel microprocessors.
To accomplish this, the company must be prepared to shell out additional market development funds to convince corporate end-users and their PC OEM suppliers that the Athlon is a viable corporate microprocessor, Peck said. In the meantime, AMD will favor top-tier OEMs first, leaving the lower-rung companies to fend for themselves, according to analyst Charles Boucher of Donaldson Lufkin & Jenrette in San Francisco.
Boucher added that AMD has been granted a slightly wider market window given Intel's recent confirmation that it will delay the launch of its high-end Coppermine processor until November. "The slipout on Coppermine gave them a golden opportunity," he said.
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