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AMD falls after disappointing earnings

The stock drops after a host of downgrades from analysts and skepticism that the company may end up on the losing end of a processor price war.

Advanced Micro Devices, the Sisyphus of the microprocessor world, reported its largest profit in more than a year yesterday, only to get rewarded with a sinking stock price, a host of downgrades from Wall Street analysts, and skepticism that the company may end up on the losing end of a looming processor price war.

The turn in AMD's fortunes comes as a result of disappointing fourth quarter earnings yesterday.

Although the company sold a record number of microprocessors and achieved record revenues, earnings came only to 15 cents a share, below consensus estimates of 18 cents a share. A manufacturing glitch with the faster versions of the K6-2 prevented AMD from making enough of the chips.

The earnings also included a one-time quarterly tax benefit. If an income tax rate of 30 percent is applied to the numbers, AMD's earnings drop to 10 cents a share, reported some analysts. After taxes, Intel reported $1.19 in earnings per share.

AMD's stock dropped 18 percent, or $5, to $22.50 in morning trading while six analysts have downgraded the stock a notch. One has issued an upgrade.

"There was no indication that the were having a speed distribution problem. Unit demand was very strong and it didn't seem like there was a shortage of product," said Charles Boucher, an analyst with Donaldson, Lufkin, & Jeanrette. "This is another example of AMD surprising people at the last minute." Boucher discounted the effect of the tax benefit, but downgraded AMD from "top buy" to "buy."

AMD, it turns out, discovered a design problem in the mask, or circuit template, of the 350-MHz version of the K6-2. Many of the chips AMD wanted to sell as 350-MHz chips turned out only to run at speeds closer to 333 MHz or 300 MHz and thus were sold as 300-MHz and 333-MHz chips. AMD fixed the problem, which increased the number the company could manufacture. Despite that, because it could not sell as many of the fast chips as it wanted, the company experienced lower average selling prices, margins, and profits.

"It had at least a $20 million impact on our revenue line in our last quarter," said AMD chairman Jerry Sanders, adding that the average selling price for AMD chips came to $89, well below the company's $100 target.

But a bigger problem may loom in the future with pricing. Intel has launched a scorched earth policy in the consumer market, where AMD sells most of its chips. Most Celeron processor will be selling at below $100 by March, predict some, which may keep K6-2 chips below the magical $100 mark. AMD's prices and earnings, in fact, were likely impacted by a quiet December price cut on Intel's Celeron chips.

"Intel launched a jihad against AMD," said Ashok Kumar, an analyst with Piper Jaffray. "Intel has marching orders to get back market share. It only goes south from here."

The upcoming K6-3 and K-7 chips can help AMD boost their prices and margins up. In fact, the chips could even beat Intel's upcoming Pentium IIIs in performance, according to a variety of observers. But, can they do it?

"They will have a fairly tall order to fill. They have to keep pace with Intel in terms of performance and price." said Boucher. Laboratory benchmarks indicate that both the K6-3 and K-7 will come out a comparable performance benchmarks. The question, however, is if the company can produce enough of them.

"It all comes down to execution. What they did in the previous quarter is not going to give people a lot of confidence."