Flash dims AMD's revenue outlook

However, the chipmaker said it will report a better-than-expected profit, thanks to strong sales of its PC processors. AMD projects that its net income will increase from the $32 million--or 9 cents per share--mark, which it hit during the second quarter.

Previously, AMD forecast that its third-quarter revenue would increase slightly from the company record of $1.26 billion, achieved during the second quarter, on rising sales of PC processors and flash. Thus, 21 financial analysts on average had been expecting AMD to report revenue of $1.34 billion for the quarter, according to Thomson First Call.

Despite better sales of its PC processors--and at higher prices on average--its flash memory sales were disappointing during the quarter. Flash memory is an important product for AMD, often representing more than 50 percent of its revenue in a given quarter. The chips are used to store data in a range of devices, including cell phones and handhelds.

"Our gross margin and net income are expected to improve sequentially from the second quarter of 2004, largely due to significantly higher sales and stronger (average selling prices) in our processor business," Robert Rivet, AMD's chief financial officer, said in a statement. "Although third-quarter sales are anticipated to be lower than projected, due to softness in our profitable flash memory business, sales in our microprocessor business remained strong, driven by increased demand for AMD64 processors," which include the Athlon 64 PC and Opteron server chips.

While AMD's PC processor business appears to be gaining steam, the warning raises concerns about the flash memory business, one financial analyst said in a report.

Christopher Danely, an analyst at JPMorgan Chase, wrote that Intel has been cutting prices of NOR flash, one type of flash memory chip, and has started a "price war in an effort to regain flash market share."

Thus, "we remain concerned with AMD's flash business, as it appears the flash industry is about to enter a downturn, and flash is a significant portion of the company's revenue," Danely wrote in his report, noting that flash represented 53 percent of the company's second-quarter sales. "As a result, we believe AMD has the most risk to revenue and (earnings per share) estimates of any semiconductor stock in our universe."

In early September, Intel also lowered its third-quarter guidance, citing a mix of factors, including an overly bullish forecast. The company also said surplus PC processor inventory among its customers had resulted in slower-than-expected sales in that area, and it cited continued weakness in its flash memory sales.

AMD will report its earnings after market close on Thursday.