AMD warns of operating loss

AMD has been falling this week because of worries that stiff competition from Intel is forcing the company to sell at prices that leave it with too little profit margin.

AMD's stock dropped $2 to 18.9375, a decline of almost 10 percent as 12,720,100 shares traded hands today. The Sunnyvale, California, company's shares have dropped 24 percent since Monday.

Meanwhile, Intel fell $8.56 to 133.125, a decline of over 6 percent. The Santa Clara, California, giant has been slashing prices on its low-cost Celeron processor, which it introduced last April to contend with AMD's gains in the market for chips that power low-cost personal computers.

"In the light of Intel's recent pull-in of its February 28 price reductions to February 8, and pending product announcements, we are re-assessing our competitive response," AMD CEO Jerry Sanders said in a prepared statement. "The likely outcome is that in spite of the planned richer mix [of AMD processors], we will be unable to increase our microprocessor average selling prices in the current quarter.

"This will put additional pressure on our gross margins. In the face of planned R&D spending on technology development through the Motorola alliance and at our new Dresden megafab, the company could incur an operating loss in the current quarter," Sanders concluded.

Concern about AMD intensified yesterday after it canceled appearances at two technology conferences, fueling speculation that it may be shopping its Vantis division. Despite this week's deal with Gateway for a consumer computer in Japan, AMD seems to be faced with several problems.

First, the company's prices are in "free fall," according to Ashok Kumar, an analyst at Piper Jaffray, due to aggressive price cutting by Intel. AMD has said its goal is to maintain a $100 average selling price (ASP) for chips, but price pressure is pushing that number toward $60 for the current quarter, Kumar said.

But Tad La Fountain, semiconductor analyst for Needham & Company, disputed that such severe price erosion has occurred.

"AMD's CFO told me this evening that the ASPs for the quarter were likely to come in at about the same level as the fourth quarter--$89," he said.

Second, Intel is advancing its technology road map rapidly, said Charles Boucher, semiconductor analyst with Donaldson, Lufkin and Jeanrette.

Intel will start shipping chips based around the more advanced 0.18-micron process in the second quarter, he said, earlier than expected. A 433-MHz Celeron chip is due in March, said sources, while a 466-MHz version will come out in May with a 500-MHz chip to follow.

AMD will have to match these performance advances. But the company has previously stumbled in trying to implement new technology. Recently, AMD struggled to produce enough 350-MHz K6-2 chips.

"AMD has been prone to make mistakes," Boucher said.

AMD's next chip is the K6-3, which is expected to run at 450 MHz and 500 MHz. It comes out toward the end of the quarter. AMD will then follow with the K7 in the second half of the year. Both chips are said to outperform Intel processors in certain aspects.

The question is whether the company can produce enough of these chips and then obtain high-enough prices to boost its average selling price.

Kumar predicted that the price of K6-2s sold to PC makers in March will be: $40 for 333-MHz chip, $50 for 366 MHz, $55 for 380 MHz, and $60 for 400 MHz.

"We expect blended average selling prices exiting the March quarter to drop to $60, a 30 percent sequential decline," Kumar said.

Tom Kurlak, an influential analyst with Merrill Lynch, cut his estimates for both companies.