Dell's Decision to Use Advanced Micro Is Intel Blow (Update2)
2006-05-19 16:56 (New York)
(Updates with closing share prices)
By Ian King
May 19 (Bloomberg) -- Dell Inc.'s decision to end its 22-
year exclusive use of Intel Corp. computer chips marks the
biggest victory for Advanced Micro Devices Inc. in its battle to
take market share from the world's largest chipmaker.
Shares of Advanced Micro posted their biggest gain in 18
months after Dell, the world's largest personal-computer maker,
yesterday said it will use Sunnyvale, California-based Advanced
Micro's Opteron processor in some server machines. Intel dropped
1.6 percent.
For Advanced Micro, which topped 20 percent of the market
for chips that run servers for the first time ever last quarter,
the agreement is a foothold in the only major PC maker that
wasn't using its microprocessors. The switch is a setback for
Intel Chief Executive Officer Paul Otellini, who is already under
pressure to stem a slide in profit and market share.
``Advanced Micro looks like a better-run company right
now,'' said Jim Benham, a fund manager at Benham & Green Capital
Management in La Jolla, California. His firm oversees $100
million and recently sold its Intel shares. ``Intel has dropped
the ball.''
Advanced Micro shares rose $3.60, or 11 percent, to $34.95 at
4:15 p.m. in New York Stock Exchange composite trading, the
biggest rise since a 13 percent gain on Nov. 12, 2004, when chip
stocks advanced on higher demand for PCs. Santa Clara, California-
based Intel, the worst performer in the Dow Jones Industrial
Average this year, fell 29 cents to $18.36 in Nasdaq Stock Market
composite trading and have dropped 26 percent this year.
Dell and Advanced Micro had been talking for years, Advanced
Micro Chief Executive Officer Hector Ruiz said today in an
interview. ``We didn't do anything special'' to win the order
Ruiz said. ``They've always expressed a strong desire to have AMD
inside Dell boxes and it just finally happened.''
High End
The stock rose in part on optimism that Dell would expand
its use of Advanced Micro chips to PCs and other servers, the
larger computers that run Web sites and corporate networks.
``People are obviously extrapolating, thinking this will
lead to more,'' said Eric Ross, an analyst at ThinkEquity
Partners in New York. He has a ``sell'' rating on shares of both
Advanced Micro and Intel.
Ruiz said he is optimistic that the order will open the door
for Advanced Micro to win orders from Dell for chips for PCs,
Dell's largest unit.
``We have been anticipating, and we have the manufacturing
strategy in place to meet that demand,'' Ruiz said.
Advanced Micro's Ruiz has transformed the company from an
also-ran that offered low prices on desktop computer makers, to
one that leapfrogged Intel in technology to gain share in server
computers, which run corporate networks and Web sites, along with
desktop and notebook machines.
`Clear Acceptance'
As Intel's only major competitor, Advanced Micro won 22
percent of shipments for the most common type of server chips in
the first quarter, up from 16 percent in the fourth period, Mercury
Research analyst Dean McCarron said on April 25. Dell will use
Opteron chips in server machines that need more than one processor.
``There was clear acceptance'' for AMD in high-end markets,
Michael Dell, chairman and founder of the Round Rock, Texas-based
company, said on a conference call with analysts. ``AMD was very
successful.''
Dell's acceptance could help Advanced Micro break Intel's
stranglehold on sales of desktop computers used in company
offices.
``If Dell starts using AMD processors in some of the PCs and
lets AMD break into the enterprise PC market in a bigger way,
it's very significant,'' said Jim McGregor, an analyst at
Scottsdale, Arizona-based In-Stat.
Corporate Market
Advanced Micro's Ruiz wooed customers by adding to Opteron
the ability to process data in 64-bit chunks in addition to 32
bits, ahead of Intel. That has improved the performance of
corporate networks and gave Advanced Micro chips an edge since
its introduction in April 2003. Intel's Xeon didn't add 64-bit
capability until more than a year later.
``Dell is a customer-focused company and we're pleased to
see that they are listening to their customers,'' said Marty
Seyer, the head of Advanced Micro's commercial business division.
Both Dell and Intel missed their sales forecasts last
quarter. Dell yesterday said first-quarter sales rose 6.2
percent, the slowest growth rate in four years. The company said
it will cut $3 billion in costs this year, in part changing the
way it uses components.
Intel Struggles
Intel's Otellini told shareholders earlier this week that
the company's stock will struggle to regain losses that have
knocked it down the ranks of the world's largest technology
companies until new products he has planned for the third quarter
begin to win back orders.
``We appreciate Dell showing strong support for the bulk of
our product offering and the strength of our road map,'' said Scott
McLaughlin, a spokesman for Intel. ``This is a very competitive
industry. We work hard to win every piece of the business.''
The Dell order will help propel Advanced Micro, Ruiz said.
``Now we have the No. 1 PC maker as a customer so we expect
the sustainability of the business to continue,'' Ruiz said.
--With reporting by Rebecca Barr, Mike Schneider and Fred Fishkin
in New York and Connie Guglielmo and Jonathan Thaw in San
Francisco. Editor: Palazzo (ekm)
Story illustration: For a breakdown of Advanced Micro Device's
sales by region, see {AMD US <Equity> DES 7 <GO>}. For Dell's
sales by region, see {DELL US <Equity> DES 7 <GO>}.
To contact the reporter on this story:
Ian King in San Francisco at (1) (415) 743-3548 or
ianking@bloomberg.net;
To contact the editor responsible for this story:
Emma Moody at (1) (212) 617-3504 or emoody@bloomberg.net.
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