Gateway expected back in AMD camp next week

On Monday, or soon after that, Gateway is expected to announce that it will once again incorporate AMD's chips in its consumer PCs, including AMD's touted Athlon processor. The AMD-based systems may not be available the same day as the announcement, however, these people indicated.

The move comes days after a Gateway conference call in which chief executive Jeff Weitzen blamed lower-than-expected earnings on a shortage of Intel chips and promised that the company would reveal a plan to use alternative processors in the near future.

"We're all intensely frustrated by the supply situation we were put in. We're not about to stand by and let the actions of other companies dictate what Gateway products our customers can buy," he said then, adding: "In the next week or so, you're going to hear about some definitive and aggressive steps we are going to take to make sure this will never occur again."

Although Weitzen declined to identify AMD by name, analysts and others saw the statement as a sure sign that the companies were back together. Gateway, after all, used AMD processors until recently and only scuttled plans to adopt the high-speed Athlon right before that chip was announced, sources said. Both companies have declined to comment on the issue.

Only two other companies--Via Technologies and Transmeta--are in the business of designing Intel-compatible processors. Both companies, however, are only slated to release their first chips later this month and are seen as far less likely candidates. Transmeta, for one thing, is expected to target the mobile market, not a problem area for Gateway at the moment.

"It's real clear they have made up their mind" to go with AMD again, said Nathan Brookwood, an analyst at Insight 64.

AMD's stock has risen above 30, rare territory for the chipmaker, since Weitzen's comments.

With Athlon, Gateway will ensure it can play in every consumer market segment, Brookwood said. In addition, because AMD and Intel appear to continually be one-upping each other in terms of speeds with Athlon and Pentium III, Gateway will be able to stay at the cutting edge by having relationships with both.

"This is the way our free market system is supposed to work," Brookwood said.

Despite the optimism, observers wonder how big an impact the deal will make. Gateway and AMD have typically shared a tumultuous relationship. For years, Gateway came quite close to using AMD processors, only to back away late in the process.

Gateway finally started incorporating K6-2 processors from AMD about a year ago in its PCs. The deal kicked off with great fanfare. AMD even supplied chips for Gateway's first all-in-one PCs.

By midyear, the relationship was unraveling. AMD executives admitted they had difficulty supplying processors to Gateway. Intel has been caught in a chip shortage recently. AMD, however, had some difficulty in meeting early demand for Athlon. The company also has existing commitments with IBM and Compaq.

"Gateway kind of used AMD to get better pricing from Intel," said Ashok Kumar, an analyst with U.S. Bancorp Piper Jaffray, adding in a note: "We believe that the December quarter results and the Gateway design win will be adequate catalysts to take the stock to the overhead supply level of $36. However, long term the companies' execution record or lack thereof and an inability to maintain a competitive roadmap against Intel should limit the price excursions beyond the stated levels."

Still, the consensus opinion is that things are looking up for AMD. The company has been able to keep up and even at times surpass Intel in terms of performance with the Athlon chip and keep its customers generally happy. The company also may turn its first profit in a while when it comes out with its earnings later this month.

"They are more marketing limited than production limited," said A.A. "Tad" LaFountain, an analyst with Needham & Co., meaning that AMD's problem now lies in distribution.