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AMD sees upside despite warning

Despite warning that its first-quarter results would "decline significantly," Advanced Micro Devices' stock has been on a roll.

Despite warning earlier this month that its first-quarter results would "decline significantly," Advanced Micro Devices' (AMD) stock has been on a roll as analysts and investors look beyond the current quarter and toward the revenue potential of improved yields announced by the company today.

AMD's stock gained more than 9 percent on the news, AMD stock chart to 29-1/16, up 2-1/2 from yesterday's close of 26-9/16. Since the holidays, the chipmaker has seen its stock appreciate about 70 percent from trading in the high teens as of late December.

The company has forged deals with a handful of computer companies to use their K6 chips over chips manufactured by competitor Intel (INTC), but AMD has not been able to produce enough chips to keep up with demand. K6 processor production problems have plagued the company, and those issues have affected profitability and production goals, deflating the stock from its highs in the mid-40s early last year. Analysts' ears have perked up as AMD says its yields have improved, producing a flurry of Wall Street reaction.

BancAmerica Robertson Stephens analyst Dan Niles, for example, upped his rating on the stock today to "buy" from "market performer," while Prudential Securities raised its rating to "buy" from "hold." The rating changes followed similar moves yesterday by Volpe Brown Whelan, which raised its rating to "buy" from "hold."

AMD warned earlier this month in a filing with the Securities and Exchange Commission that revenues in the first quarter of 1998 were expected "to decline significantly, and the net loss to increase significantly, as compared to the fourth quarter of 1997."

The company reported revenues of $613 million and a net loss of $12.3 million, or 9 cents a share, during the fourth quarter.

But analysts are looking beyond the negative in the current quarter, and instead are looking for improvements in fundamentals.

"Yields are improving and they can crank out more chips faster," said one analyst. "They had design wins at IBM (IBM) and Compaq (CPQ), but they didn't have the volume to ship."

AMD has signed deals with IBM, Compaq, and others, by which those companies would use its chips. The company also entered a deal with IBM to have IBM manufacture its Intel-compatible microprocessors, in an effort to solve lingering manufacturing problems.

"We believe the production situation at AMD is improving drastically vs. last quarters," Niles said in a research report released today. "We believe the company has made a production breakthrough?. The addition of IBM as an outside foundry source, as well as improved K6 internal production yields, provides some potential upside to our 1998 unit estimates."

AMD should be able to produce 13 million to 15 million units in 1998, vs. a previous forecast of 11 million chips, Niles said in a research report released today. He noted also that the company has improved yields on both its older .35 micron chips and its newer .25 micron processors.

AMD was rumored to be looking to sell up to a 25 percent stake of its business, but today company spokesman Scott Allen said the rumor "is absolutely not true."

"We have been very candid about the fact that we were going to have to go out sometime during the second quarter and raise some cash," but not by selling any stake in the company, Allen said, noting that the company recently filed for a shelf registration with the SEC to sell up to $1 billion in common and preferred stock as part of a debt offering. AMD said it would use the proceeds for general corporate purposes, which may include the reduction of outstanding debt, or for working capital, acquisitions, and capital expenditures.

Other processor makers trying to nudge into the Intel-dominated market include Cyrix, which also has been haunted by manufacturing and marketing problems, which have hurt its efforts to increase microprocessor sales. It has not been able to make enough high-speed 200- and 233-MHz MediaGX chips to satisfy the demands of PC giant Compaq.

AMD today introduced what it called the highest performing member of its family of Am186 microcontrollers, the 50-MHz Am186ER microprocessor. Microprocessors are low-cost processors, typically integrating a number of computer chip functions and designed to consume small amounts of power.