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Chip price war leads to more AMD losses

Despite a year of new deals with major vendors, increased sales, and improved manufacturing, AMD is expected to report its fourth consecutive loss.

Despite a year featuring new deals with major computer vendors, increased sales, and improved manufacturing, chipmaker Advanced Micro Devices is expected to report its fourth consecutive quarterly loss today, and hopes of recovery do not seem to be on the horizon.

The loss is expected to be 20 cents a share, according to a consensus of 24 analysts on First Call. Estimates range from a loss of 38 cents to a loss of two cents. A loss of 29 cents per share is expected for the year.

Unlike 1997, when AMD's losses came as a result of manufacturing problems with its K6 processor, AMD's woes now stem from an ongoing decline in processor and computer prices. The rise of the sub-$1,000 and the sub-$800 computer, financial strain in Asia, and a decline in domestic computer demand have squeezed profits out of the hardware industry.

Though AMD microprocessor unit sales are surging, prices are simultaneously plummeting. The company is estimated to have shipped 2.7 million microprocessors during the quarter, a 69 percent jump over shipments of 1.6 million in the first quarter, said Ashok Kumar, semiconductor analyst for Piper Jaffray.

However, the price of AMD's processors dropped. The average selling price of AMD's microprocessors went from $105 in the first quarter to $85 in the quarter just ended. Manufacturing costs come to around $50 a chip, according to Kumar.

Additionally, rival Intel stepped up its cost-cutting efforts and will come out with a faster version of its inexpensive Celeron chip in the fourth quarter.

Microprocessor prices have been descending across the board for all manufacturers, added Brian Matas, vice president of market research at IC Insights. The average selling price of all microprocessors was $92 in April. It dropped to $75 by May.

In the end, AMD probably broke even on microprocessors for the quarter, but losses in its memory and communication units combined to make a loss, according to Kumar.

Compaq, IBM, and Hewlett-Packard (HP) all began, or agreed to begin, using AMD chips. Good design wins to be sure, but these companies are adopting AMD mostly for the low-end part of their lineup.

"The floor is nowhere in sight," Kumar said. "There is an opportunity to increase units, but in the third and fourth quarter they will hit the wall."

The difficulty AMD has had in maintaining its profit margins is exemplified by the pricing on the K6-2, AMD's cutting-edge consumer chip. The 300-MHz and 266-MHz versions of the chip arrived on May 28 and came with posted wholesale prices of $281 and $185, respectively, in volume. The day after the release, retailers were offering the chip in single units to consumers for $172 and $127; prices have further dropped to $164 and $112. Computer vendors are likely paying much less, added Kumar.

AMD's K6 chips, of course, sell for even less.

Ironically, the company enjoyed a series of victories in the quarter. Besides the design wins, the company started to make its volume transition to the advanced 0.25-micron manufacturing process and released the first K6-2 chips. HP agreed to adopt these for consumer machines.

AMD is not the only semiconductor company to have hit a glitch. Last weekend, Intel temporarily shut down two plants to clear out inventory, and the industry leader is expected to report flat revenues for the quarter. Intel will make its financial report on July 14. (Intel is an investor in CNET: The Computer Network).