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AMD reports loss as operating chief quits

Advanced Micro Devices suffers dual setbacks, announcing a second-quarter operating loss of $172 million and the departure of Atiq Raza.

Advanced Micro Devices today suffered dual setbacks when it announced a second-quarter net loss of $162 million and the resignation of its chief operating officer and heir apparent to CEO Jerry Sanders.

While the financial loss was expected, the departure of president and COO Atiq Raza was not. His resignation will likely be viewed negatively, as he maintained a relatively strong reputation in a management team that has seen its share of criticism.

A number of investors have complained over the years about management at the chip manufacturer, which tends to lose money on a fairly regular basis. Investors have also periodically called for the resignation of Sanders, who collects a minimum of $1 million in annual compensation.

By contrast, Raza was viewed positively by processor analysts as an executive who kept an eye toward efficient manufacturing and operations. After his departure, Sanders said during a conference call with analysts that he will act as chief operating officer.

Some credited Raza with fixing the manufacturing difficulties AMD experienced with the K6 and K6-2 in 1997 and 1998. In 1998, Sanders put Raza on the fast track, laying out a career path for him at the company. In addition to serving as COO, Raza acts as the chief technical officer, president, and as a board member.

"[Raza's departure] was totally unexpected, even by people who knew him," one analyst said.

Ashok Kumar, an analyst with Piper Jaffray, added that Raza's departure follows mounting tensions between Sanders and Raza. Kumar said the move could have a big impact at AMD.

"With Atiq gone, they are giving Intel a license to print money," he said.

AMD's financial dive is largely a product of a punishing price war with archrival Intel. For the second quarter, AMD reported revenue of $595 million, which was down 6 percent from last quarter but up 13 percent from the year before.

"Intel's introduction of the Celeron processor has allowed them to collapse the price umbrella within the basic PC segment," Sanders said. As a result of the price war, the average cost of AMD processors dropped from $78 last quarter to $67 this quarter. The company's goal is to boost that price to $100.

AMD actually turned a profit during the quarter because it sold its Vantis division to Lattice Semiconductor, a sale that netted the company $432 million. However, excluding the Vantis sale and restructuring costs, AMD reported a net loss of $162 million, or $1.10 per share, and an operating loss of $172 million.

The company had warned analysts that it could have had an operating loss as high as $200 million for the quarter. As a result of that warning, analysts lowered their estimates even further, to a loss of $1.26 per share.

Raza, whose resignation is effective Friday, said he is leaving for personal reasons. Speculation began swirling this afternoon that he could be a CEO candidate at Compaq Computer or, to a lesser degree, Hewlett-Packard.

All eyes on Athlon
The company's fate now sits with the Athlon, or K7, processor announced late last month. Athlon chips, which sell for several hundred dollars more than K6 processors, will appear in computers by August, Sanders said. AMD will attempt to produce 1 million of the chips in the fourth quarter.

In terms of performance, the K7 beats the Pentium III, Sanders said. This will give AMD a chance to break into the high-end computer segments where Intel commands a de facto monopoly. Most AMD chips have been used in less-expensive computers.

"We should do better because we offer superior performance. The question is how much of a discount do we have to give to break into these new markets," Sanders said. "We expect to have several top-tier guys with Athlon computers this quarter."

Nonetheless, the company faces significant hurdles. AMD must solidify the commitment of PC makers and motherboard manufacturers to the chip. While strong interest exists, AMD is suffering through the problems any company encounters in establishing a new project.

AMD also plans to move to the more advanced 0.18 micron manufacturing process to later this year and then shift from aluminum to copper wires on its chips in 2000.

Analysts have touted the chip but question whether AMD will be able to meet manufacturing projections.

Raza's reputation
Raza came to the company when it acquired NextGen. At the time, AMD was reeling from the K5, a Pentium clone that found few customers. NextGen's chip became the basis for the K6 processor.

Although AMD struggled with manufacturing issues with the K6 in 1997, the chip has been at the heart of AMD's growing market share.

Although Raza enjoys a good reputation, some question whether he's ready for a such a high-profile job as the head of Compaq.

"Even though Atiq is known within the industry, and he's a pretty dynamic guy, I wonder if he's got sufficient star power to carry that mantle," International Data Corporation analyst Roger Kay said. "He might be very good operationally. He might actually be able to run the company. The issue is how much persona he has dealing with the outside."

"The more I think about it, the less likely it seems," Kay said.

Others, however, said a spot at Compaq seems to be a logical choice. Raza is leaving AMD at a time when one of his key projects--the Athlon processor--is coming to market. A move to Compaq could even benefit AMD, because the PC maker is one of its biggest customers.