From tomorrow's WSJ,
March 9, 1999
AMD to Post Substantial Loss
On Shortfall in K6 Chip Sales
By DAVID P. HAMILTON
Staff Reporter of THE WALL STREET JOURNAL
Advanced Micro Devices Inc. said that design problems with its flagship
microprocessor will result in a production shortfall and a "significant" loss in
the chip maker's first quarter.
The Sunnyvale, Calif., company, which said last month that a loss was
possible, also said it will cut 300 jobs in the next two quarters as part of a
restructuring program aimed at boosting the company's focus on
microprocessors.
Stock Falls Almost $2
The bad news further battered AMD shares, which have now fallen nearly
40% since the beginning of the year. AMD made the announcement after
stock markets closed Monday, with its shares up 50 cents to $18.9375 in
New York Stock Exchange composite trading. But the shares plunged to
$17 in after-hours trading, according to Instinet Inc.
AMD's co-chief operating officer, Atiq Raza, said the company will ship
no more than five million units of its flagship K6 personal-computer
microprocessor in the current quarter, a half-million unit shortfall from
AMD's previous plans and fewer than the company built in the fourth
period. The company said the problem stems from a serious design flaw
that forced AMD to retool its manufacturing line late last year.
Because of the flaw, AMD wound up producing fewer of it fast 400
megahertz chips. The shortage of chips in that class will cost AMD a big
chunk of its expected revenue, which in turn will likely lead to a larger
operating loss at the beleaguered chip maker, analysts said.
AMD didn't quantify the expected first-quarter loss. But Charles Boucher,
an analyst at Donaldson, Lufkin & Jenrette Inc., had already expected
AMD to post a loss of 20 cents a share in the first quarter, and now
expects that loss to be even worse. "It's a very disappointing
announcement, just when you thought things couldn't get worse," Mr.
Boucher said.
Market-Share Gains
For AMD, the manufacturing miscues are a sharp counterpoint to its
marketing success. The feisty upstart has been making its first serious
market-share gains in years against perennial rival Intel Corp., benefiting
from a major consumer shift toward sub-$1,000 PCs.
Partly because of AMD's competition, Intel's share of the microprocessor
market sank to 76% in the fourth quarter of 1998, down from about 85%
a year earlier, according to Mercury Research, a Scottsdale, Ariz.,
research firm. AMD, which held 16% of the market that quarter, actually
edged out Intel in desktop PC microprocessors sold in the U.S. retail
market in January, according to market-research firm PC Data Inc. of
Reston, Va.
At the same time, however, AMD has been battered by that same
competition. A month ago, AMD warned of a possible first-quarter
operating loss because of severe price competition from Intel's new line of
low-end microprocessors. In 1998's first quarter, AMD posted a loss of
$55.8 million, or 39 cents a diluted share, on revenue of $540.9 million.
The manufacturing woes add to the pressure. AMD said the problem will
cause total shipments of K6 chips to fall in the first quarter from the 5.5
million chips it shipped in the fourth quarter of 1998.
Output Estimate for Year
While it was able to pinpoint the problem last year, AMD's average
microprocessor takes about three months to manufacture. So, its problems
in producing the fastest K6 chips continued through the end of February.
Mr. Raza said AMD now plans to ship at least five million K6 chips in the
second quarter, about the same as in the first period, and is still on track to
meet its goal of shipping 20 million to 25 million microprocessors in 1999.
Mr. Boucher said he had expected AMD to ship 24 million chips in the
current year, but plans to trim that estimate.
AMD said its job cutbacks, representing 2.2% of its workers, are
intended to shift its work force to its core business of microprocessor and
PC-communications products. The company declined to say which
positions are being eliminated, and said the reductions would consist both
of layoffs and the shifting of employees to new jobs.
Some analysts think that AMD has now missed its opportunity to score
further points with the current version of its chip, formally called the K6-2.
But it just announced an updated model, dubbed the K6-III, that has some
design advantages over Intel. An even bigger chance will come with the
K7 chip, which is scheduled for introduction in June.
Mr. Raza said that AMD has just started production of the K7. "Nirvana
for AMD would be to execute well on the K7," which stands a chance of
being faster than any comparable Intel chip, said Ashok Kumar, an analyst
with Piper Jaffray Inc. "If it can execute, [the competition] is theirs to lose."
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