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HP quietly adopts AMD's Athlon chip

Hewlett-Packard is shipping consumer PCs containing the processor to select retail outlets and will likely begin to sell them via the Web soon.

True to its button-down culture, Hewlett-Packard has been quietly shipping consumer PCs using AMD's Athlon processor to some retail outlets and will likely begin to sell them on the Web by early March.

Since the beginning of the month, Hewlett-Packard has been selling Athlon-based Pavilion models in Sam's Clubs and Costco stores, an HP spokesman confirmed. The PC maker is expected to start selling them on its Web site by late February or early March, sources have said. Although wider distribution is likely, the decision to sell the Athlon systems online may not yet be final, the spokesman said.

With HP adopting the chip, AMD has persuaded four out of the top five PC makers to manufacture Athlon consumer systems. Dell remains the holdout. Gateway said it would start using Athlon chips earlier this month, after deciding to not release an Athlon PC last year. AMD could not be reached for comment.

HP's use of the chip is the latest victory for AMD, which will announce earnings for the fourth quarter today after the market closes. AMD is expected to report earnings of 1 cent a share for the quarter, according to a consensus of analysts compiled by First Call. Although this will amount to a profit of around $1.5 million, AMD hasn't posted a profit since the fourth quarter of 1998. The company is expected to report losses for 1999 in the range of $350 million.

While AMD will likely report strong growth in flash memory, a significant portion of the comeback can be attributed to Athlon, a performance PC processor that competes with Intel's Pentium III. Approximately 900,000 of the processors were shipped in the fourth quarter, up from 200,000 in the previous quarter, according to Dan Niles, semiconductor analyst at Robertson Stephens.

Because of the relatively high price these chips carry, AMD's average selling price, or ASP, for microprocessors likely rose to $87, he added ASPs are a heavily followed metric in the processor business. Last quarter, the company's ASP plunged to $65.

Despite the design win, however, many remain skeptical on the long-term outlook for AMD. In the past, Intel has stumped AMD's growth by rapidly cutting prices. Around the same time last year, in fact, price cuts from Intel--intended to dry up sales of AMD's K6-2 processor--turned AMD's profit picture around. The company went from two consecutive profitable quarters to three quarters of losses.

The depth of HP's commitment is also unknown. The HP spokesman said that the current Athlon PCs are targeted to "value" customers. In other words, HP is using Athlon in its lower-margin boxes. HP currently uses K6-2 chips in some of its less-expensive desktops and notebooks. Gateway has adopted Athlon in its Select line of computers where the chip will not overlap with Intel-based PCs.

Where an Athlon and Intel computer will be similarly priced, Gateway will only offer one processor, a spokesman said. In the past, Gateway mostly used AMD for its low-end boxes and later dropped the company's chips in favor of Intel's.

"Long term, (AMD's) execution record or lack thereof and an inability to maintain a competitive road map against Intel should limit the price excursions beyond the stated levels," wrote Ashok Kumar, an analyst with US Bancorp, in a recent note.

The company is also in the midst of manufacturing changes, noted Mark Edelstone of Morgan Stanley Dean Witter. AMD continues to move toward the more advanced 0.18-micron manufacturing process and continues ramping up a fabrication facility in Dresden, Germany.

These sort of changes have brought problems to other companies. The shortage of Intel chips in the fourth quarter, for instance, came partially from that company's leap to 0.18-micron manufacturing.