AMD looks for fix during rough year

The next several weeks could dictate whether significant changes are required to get the company back on track and well positioned against Intel.

It doesn't take long to fall from grace in Silicon Valley.

Advanced Micro Devices is hurtling toward what could be another disappointing period as the second quarter draws to a close next week. Wall Street expects the company to have lost 84 cents per share for the June quarter on $1.26 billion, up 4 percent from the same quarter a year ago. That compares with a loss of $611 million or $1.11 per share in the first quarter and a net profit of $88 million or 18 cents per share in the second quarter of 2006.

AMD needs a fix, and fast. A $2.2 billion debt offering will help keep the lights on in Sunnyvale, Calif., and Austin, Texas--the chipmaker's primary U.S. locations--as some financial analysts had been worried about AMD's cash-flow situation. The company is pinning its near-term hopes on Barcelona, a quad-core server chip that AMD hopes will allow it to shore up the eroding prices of its server chips, the source of most of its pain this year.

But is Barcelona, which is expected sometime in the third quarter, a Band-Aid or a tourniquet? The company's problems could be broader in scope and more than one good product launch can fix.

"AMD really needs to round out their product portfolio," said Jim McGregor, an analyst with In-Stat. "If not, a lot of the market share gains they made they are going to give back. They've got a critical 12 months ahead of them."

Intel is expected to keep the pressure on with server price cuts around the time of Barcelona's arrival. The new realities of chip pricing could force AMD to re-examine its manufacturing strategy. And its ambitious project to integrate the PC processor and the graphics processor is years away from fruition.

An AMD representative said the company will have more to share about its future road map and its near-term plans for becoming profitable once again. The company will report its second-quarter results in July and hold an analyst day shortly thereafter, he said.

Intel offensive
AMD's current mess starts with tough competition from chip king Intel. A price war initiated by Intel last year, ostensibly to clear out older products ahead of the Intel Core launch, has persisted into 2007, as AMD has grappled with the market's response to Intel's quad-core server chips launched in late 2006.

But Intel chose a quicker route to four cores by building server chips with two dual-core chips together in the same package. AMD, on the other hand, chose a more complicated design in which all four cores live on the same piece of silicon. The company believes this will deliver a performance advantage over Intel's approach because all the cores can communicate directly with their neighbors.

And supply-chain problems made it even harder for AMD to compete as the calendar turned from 2006 to 2007. The company was already in the process of aggressively discounting its processors when it was forced into even steeper discounts when one of its customers, believed to be Dell, left it stranded with a bunch of unsold chips.

Analysts believe that Barcelona will likely outperform Intel's Clovertown generation of quad-core chips from 2006. The problem for AMD is that Intel is preparing to launch a second generation of quad-core server chips in the fourth quarter of this year. While it's too early to ascertain the performance of those processors, they will likely be extremely competitive with Barcelona, and expected price cuts on the older Clovertown processors will give Intel's customers two options for quad-core technology.

Plus, Intel's plan for 2008 is to mimic the design characteristics that made AMD's Opteron chip a winner. The Nehalem generation of processors will come with integrated memory controllers and point-to-point interconnects, design characteristics that allowed AMD to enjoy a significant performance advantage from 2003 until last year.

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