AMD falls short in Q3

Despite two earlier warnings in a month that it would miss analysts' estimates, Advanced Micro Devices reported a larger loss than expected for its third quarter.

Despite two earlier warnings in a month that it would miss analysts' estimates, Advanced Micro Devices (AMD) today reported a larger loss than expected for its third quarter.

AMD said that, while sales of its multimedia chip increased, price cuts and AMD at a glance slower sales from older chips offset the gains, causing the chip maker to report a larger loss than anticipated.

AMD reported a net loss of $31.7 million, or 22 cents a share, narrower than its loss of $38.4 million, or 28 cents a share, last year.

Analysts, however, expected the company to report a loss of 12 cents a share, according to First Call. Earlier in the month, the company said it expected a small operating loss, but recently upped that to a "substantial" loss.

Revenue, meanwhile, increased to $596.6 million, compared with $456.9 million a year ago.

Marvin Burkett, AMD's chief financial officer, said in a conference call that sales from the K6 were up about $50 million, while sales from the K5 were down about $50 million. Everything else, he pointed out, was just about flat.

"We put the cost into the K6, but we didn't get the units or sales we expected, so we paid the price in margins," he said.

Poor yields on the K6 processor were a big factor in AMD's losses. The company had planned to produce between 1.2 million and 1.5 million K6 chips, but produced only a million. Much of the shortfall, moreover, came on the 233-MHz K6, the company's high-end chip that was intended to compete against Intel's main processor line.

The company's goal for the fourth quarter is to produce 2 million units that offer 233 megahertz or better. For 1998, the goal is 15 million units.

"The issue is our execution, and the challenge is to return to profitability in Q4," W.J. Sanders III, AMD chairman and chief executive, said in a conference call. "Previously, the most difficult thing for AMD was to persuade top-tier makers to use AMD chips. The challenge today is to just make more parts."

Sanders added that, by the end of the third quarter, AMD?s yields began to improve modestly.

For the year-end results, the company is expecting a tax credit of $20 million to $25 million. That should bring break-even results at the net profit level, said Sanders, with sales north of $700 million during the fourth quarter.

He also noted that AMD has a number of notebook design wins for the K6 that will be announced at Comdex.

But the shortfall is having repercussions beyond the current revenue picture for the quarter, said observers. AMD is not producing a large enough amount of chips to make switching to the platform attractive to computer vendors, and the chips the company is producing are performing at lower speeds than Intel's high-grade chips.

Charles Boucher, a semiconductor analyst with UBS Securities, told CNET last week. "If you pre-announce twice in a short period of time, it usually means that your business is melting down in real time. Either that or they just aren't in control."

"They are not able to capitalize on their opportunity to take market share." he added.

Michael Kanellos contributed to this report.

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