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AMD caught in PC slowdown tide

Following in the footsteps of rival Intel, Advanced Micro Devices warns fourth-quarter revenue and profit will be lower than expected.

Following in the footsteps of rival Intel, Advanced Micro Devices warned Monday that fourth-quarter revenue and profit will be lower than expected.

The Sunnyvale, Calif.-based chipmaker, which sells processors for consumer PCs, said net income will be 50 cents to 60 cents a share, lower than the 68 cents a share forecast by analysts polled by First Call/Thomson Financial.

Revenue will be flat or nominally higher than the third quarter's $1.2 billion.

The company will ship 6.8 million chips this quarter, slightly more than last quarter, AMD said, but lower than the 8 million to 9 million projected.

The expectations could change depending on sales in the last two weeks of the year, the company added. Still, even with the deflated expectations, AMD will likely post a profit this year, the first time the company has managed to accomplish that since 1995.

Like Intel and many PC companies, AMD has been stung by a drop in consumer computer buying. While unusually high in the first part of the year, consumer PC sales began to peak in July.

Since then, a weakening economy, PC saturation and excess inventory have effectively cut down the sales flow of new chips and PCs. Consumer PC sales in October were lower than the same month the year before.

Burning off the inventory bulge could take some time. For PC stocks, "a sustainable rally is unlikely until" the second quarter of 2001, Mark Edelstone, an analyst with Morgan Stanley Dean Witter, wrote in a report today.

"It's no big surprise," said Joe Osha, an analyst at Merrill Lynch, who added that it is difficult to predict when the inventory situation for the PC market, and the companies that sell chips to it, may normalize. As a whole, the semiconductor market will likely bounce back in a quarter or so, he said. The current downturn "is a respite, not an end," to the ongoing upswing in the semiconductor market, he added.

"While the slowdown in demand for PCs has been attributed variously to excess channel inventory, a slowing economy, or buyer apathy, we believe it is temporary," said AMD CEO Jerry Sanders. "The PC in wired and wireless forms will continue to be the hub of the digital universe."

Last quarter, Sanders warned that some economic factors could affect AMD during this quarter. A slowdown in corporate buying, he noted then, would likely mean AMD would not be able to get its processors into a corporate computer from one of the top four PC makers until the middle of next year, longer than earlier anticipated

Events in the last few weeks have taken some of the steam out of the AMD juggernaut. Since it came out with the Athlon processor in August 1999, AMD has been riding a wave of record sales and customer acceptance. The company has traded the bragging rights for having the world's fastest desktop processor with Intel several times in the past 15 months. AMD also managed to scoop market share away from Intel in the performance PC category, where machines cost $1,200 to $2,000. Historically, most of AMD's processors sold in budget machines.

In November, however, the company admitted that it was cancelling "Mustang," a chip for multiprocessor servers. AMD also delayed versions of Athlon and Duron, a low budget version of Athlon, for notebooks from the current quarter to the first and second quarters, respectively, a situation that has effectively given Intel a temporary near-monopoly in notebooks.

Additionally, the acceptance of Duron has been hampered by the lack of chipsets with integrated graphics chips. Duron came out in June but was not picked up by many major PC makers in the U.S. until last month. The continuing lack of cheap integrated chipsets continues to curtail Duron sales, the company said.