Advanced Micro Devices CEO Faces Test After Coming Up Short
Sunnyvale, California, Feb. 3 (Bloomberg) -- Advanced Micro Devices Inc. Chief Executive Jerry Sanders felt so good about talking to semiconductor-industry analysts in November that he wore his special suit: the one with his name sewn over and over in faint pinstripes in the blue wool.
Sanders had reason to feel flashy. He told his audience that AMD, with a tenth of Intel Corp.'s $26.3 billion in revenue last year, was taking sales from its arch-rival in the burgeoning market for chips that power low-cost personal computers.
On a conference call with those same analysts last month, Sanders struck a different note. He had to explain how a production glitch kept AMD from capitalizing on strong demand for its highest-powered processors during the holiday sales season, resulting in disappointing fourth-quarter results. The company's shares fell almost 20 percent the next day.
Even worse, Intel, the No. 1 chipmaker now run by the hard- charging Craig Barrett, is gunning for the bargain-priced PC market with new processors that are powerful, fast and cheap.
''AMD is going to feel the brunt of Intel's attack, and it isn't going to be pretty,'' said Ashok Kumar, a Piper Jaffray Inc. analyst who rates AMD shares ''hold.''
After 30 years of battling Intel and outlasting three of its leaders, Sanders may face his toughest test yet in Barrett, who took over as chief executive from Andrew Grove in May.
World's Apart
The two men couldn't be more different. Sanders, 62, is a salesman who delights in tailored suits, Rolls Royce automobiles and Dom Perignon champagne. Barrett, 59, is a former Stanford University professor of materials-science engineering who eschews ties and likes to drive his Hummer off-road vehicle through the mountains of Arizona.
More important, Barrett is considered by analysts and industry insiders to be one of the world's great manufacturing executives. He made his mark at Santa Clara, California-based Intel in the 1980s by slashing to two weeks from four the time it took to attach casings and wires to semiconductors.
AMD, on the other hand, has long struggled to make enough working chips. It was a year late with the K5 processor, its answer to Intel's Pentium. Problems making the next model, the K6, left AMD with losses totaling $125 million in 1997 and 1998.
Gaining on Intel
In recent months, it looked like Sanders had put the snafus behind him. AMD started churning out its top-of-the-line K6-2s and selling them at a discount to Intel's flagship Pentium. Makers of PCs costing less than $1,000, the fastest-growing part of the market, bought millions and put AMD -- not Intel -- inside.
The result: Sunnyvale, California-based AMD's share of the microprocessor market rose to 15.5 percent in the fourth quarter from 6.6 percent a year earlier, while Intel's fell to 75.7 percent from 87.1 percent, according to market-research firm International Data Corp. in Framingham, Massachusetts.
AMD turned a profit of $23 million in the second half of last year after losing money in the prior four quarters.
Trouble is, many investors were counting on AMD to do better because the market for inexpensive PCs was booming. AMD missed Wall Street forecasts as it struggled to make enough speedy processors.
The culprit was a design problem and many chips that were supposed to run at 400 megahertz came off the assembly line running at 300 megahertz, AMD said, though it refused to specify what went wrong. Faster chips can handle more instructions per second.
AMD's slower chips sold for less than half the $158 price of the faster ones.
Drying Up
Now, the easy money in the low-end PC market is drying up. In April, Intel introduced Celeron, a chip aimed at the bargain- PC market. It costs about the same as AMD's comparable K6-2.
''We're concerned about Intel's aggressive pricing,'' Sanders said on a conference call with analysts this month. ''But we think the market is growing and we'll do fine.''
Sanders says the K6-2 is superior to Celeron because enhancements make it better for audio and video. His challenge, as demonstrated by the fourth-quarter production problems, is delivering enough.
''AMD had a window of opportunity and they failed to capitalize on it,'' said Randy Yuen, a technology analyst at Salomon Brothers Asset Management, which owns Intel shares. ''If you go against Intel, you can't make any mistakes.''
Meanwhile, at the high end, Intel has a lead with Xeon, a powerful microprocessor for servers, the computers that run Internet sites, control PC networks and handle databases. Xeons sell for as much as $3,692 each, giving Intel a high-margin cash producer to finance its war at the low end with AMD.
Sanders and his team are hard at work on their own high- powered chip called K7, though analysts worry whether it will come out on time, given AMD's record with new products.
''Intel always seems to be a little ahead,'' said Larry Borgman, an analyst at Josephthal & Co. who rates Intel ''hold.''
Street Fighting
That doesn't mean Sanders is likely to give up the fight with Intel. He grew up poor on Chicago's South Side and wanted to become a movie star. That dream died when he was beaten up by thugs, leaving his face scarred. He ended up getting a bachelor's degree in electrical engineering from the University of Illinois.
Like Intel founders Robert Noyce and Gordon Moore, Sanders got his start at Fairchild Semiconductor, where many of the top chip executives trace their roots.
Sanders was Fairchild's head of marketing before getting fired. He started AMD in 1969 with the aim of going head-to-head with Moore and Noyce, who had moved on to start Intel. Grove, who joined a little later, also came from Fairchild.
AMD built its microprocessor business by licensing Intel designs and making compatible chips. The cooperative agreement broke down in the 1980s and the companies fought in court until 1995, when they settled their differences and paid each other damages. As part of the settlement, AMD got the right to use the core technology in Intel's 386 and 486 chips forever.
Market Losses
Whatever AMD won in court, it quickly lost in the market as Intel rolled out faster versions of its new Pentium processor. That forced AMD to respond with its first home-grown design -- the K5 chip.
The K5 was supposed to perform better than the Pentium, but it was more than a year late reaching the market. By the time it came out, the Pentium was more powerful than AMD's chip.
Sanders has spent most of the past three years trying to prove that AMD can make new chips that match Intel's for speed, performance and cost. He vows that the foul-ups of the fourth quarter won't happen again.
''We've got the problem behind us now,'' Sanders said on the conference call when analysts grilled him about it.
Investors aren't so sure. While Intel shares touched a record 143 11/16 on Jan. 20, AMD recently traded at about 23 1/2, down from a 16-month high of 33 on Jan. 12.
For AMD shares to recover, Sanders may have to prove he's a better match for Barrett.
12:00:31 02/03/1999 |
