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AMD warns of revenue shortfall

Intel-rivaling chipmaker blames first-quarter sales slump on problems with switching its distribution strategy.

Advanced Micro Devices warned on Monday that its quarterly revenue is expected to fall short of its previous guidance to Wall Street.

The chipmaker said it is unlikely to achieve its previous revenue guidance of $1.6 billion to $1.7 billion for the first quarter, which ends later this month.

In comments at Morgan Stanley's Technology Conference on Monday, CEO Hector Ruiz blamed the shortfall on problems AMD encountered when it switched its distribution strategy to accommodate new large customers such as Dell.

Hector Ruiz Hector Ruiz

"We need to fix the challenge that we created in the fourth and first quarters, with our channel partners, and get our distribution systems back on track," Ruiz said.

In past years, AMD chips were largely distributed through resellers and channel partners around the world. But with the success of its Opteron server processor, AMD now works with some of the largest computer companies in the world, including Hewlett-Packard, Dell, IBM and Sun Microsystems.

Those companies generally require AMD to guarantee supply for certain periods and for certain products, forcing AMD to allocate its chips toward those customers and away from channel partners, Ruiz said.

And when some of those companies didn't meet their demand targets, AMD was unable to switch its shipments back to channel partners fast enough to prevent Intel from winning those deals, Ruiz said. The company believes that these are short-term problems that will be alleviated as more manufacturing capacity comes online and as AMD launches its Barcelona processor, Ruiz said.

Dell was likely the company that disappointed AMD given its own problems over the second half of the year, said Hans Mosesmann, a financial analyst with Nollenberger Capital Partners, in a research note distributed after Ruiz's comments. But he questioned whether AMD's issues are really short-term problems, citing yield issues with AMD's new manufacturing technology and the time needed to make Barcelona into a product for desktops and notebooks.

"Management's view that the current dynamic is a near-term execution issue is misguided and puzzling, in our opinion," Mosesmann wrote. An AMD representative said that yields on its latest manufacturing technology are in line with previous rollouts of new technologies, and the company has seen "no challenges" related to yields, or the number of working processors that can be cut from a silicon wafer.

The warning did not address any potential effect to the company's first-quarter earnings. AMD is expected to post a net loss of 25 cents per share for the first quarter, according to a consensus of analysts estimates compiled by Thomson Financial.

Ruiz declined to specifically address AMD's profitability in the first quarter but noted that "we are definitely challenged when our revenue drops to maintain profitability."

AMD has seen its revenue and gross margins squeezed over the past 12 months, as it has engaged in a price war with archrival Intel. Last month, AMD cut prices on its desktop processors by as much as 35 percent.

The pricing environment remains "competitive," Ruiz said. Still, AMD thinks that it can improve its gross margins as the year moves on, he said.

Intel, meanwhile, is expected to post a profit of 22 cents for the first quarter, according to Thomson. It expects to generate revenue of $8.7 billion to $9.3 billion in the first quarter.

Shares of AMD fell 24 cents to $13.94 in morning trading, while Intel was up 17 cents to $19.40.