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Intel earnings expected up, AMD down

It will be a black and red week for the semiconductor industry.

It will be a black and red week for the semiconductor industry.

Both Intel and AMD will provide their first quarter financial results this week, and the differences are expected to be stark, the net effects of a gouging processor price war, according to most analysts.

Intel is expected to report $1.10 in earnings per share at 2 p.m. today, according to a consensus of analysts on First Call, a 26-percent jump in profits over the same period a year before. Profits, however, are down from the quarter before because of seasonal weakness in PC demand, and some analysts have begun to express concerns about earnings in future quarters because of declining PC prices.

Intel has dropped $1.125 to $60.25 today. Various Analysts have generally reiterated their ratings on Intel in the past few days, although Dan Niles of BancBoston Robertson Stephens downgraded the company from Strong Buy to Long Term Attractive because of declining PC prices.

"In our view, PC revenue growth will be difficult through the fall of this year due to the move to sub $500/free PCs in consumer, Celeron penetration in corporate, Y2K lockdowns by large corporations near mid-year, and the usual summer seasonality, which seems to be an issue each year," said Niles.

AMD, by contrast, is expected to report a loss of around 52 cents a share the following day and $630 million in revenue, and many expect the losses to be larger. Mark Edelstone, of Morgan Stanley Dean Witter, has predicted a loss of 65 cents per share for AMD and a profit of $1.14 per share for Intel.

Last week, Sunnyvale, California-based AMD said that it shipped approximately 4.3 million processors during the quarter, well below company predictions that it would sell close to 5.5 million and below the 5 million-plus processors it sold in the final quarter of 1998.

To compound matters, AMD said that the average selling price for its processors dipped to $78. Earlier in the quarter, the company warned investors that it would suffer significant financial losses and lay off 300 employees--at a time when it was predicting it would report an average selling price of $89. AMD has often said that it needs to achieve an average price of $100 to turn a profit.

The divergent results in many ways symbolize the effects the cheap PC phenomenon is having on the industry. AMD actually gained market share in January and February, leading Intel for the first time in the U.S. retail market in January and February, according to PC Data The company even managed to land high profile design wins with Toshiba and Gateway.

Nonetheless, AMD lost money because of relentless price pressure in the consumer PC segment.

Intel cut prices a number of times in the quarter and accelerated the release of Celeron processors. A 433-MHz Celeron that was originally due in the second quarter came out in March. Intel in fact cut substantially prices across their desktop and notebook product line yesterday, a move that AMD followed within hours.

AMD was forced to counter with its own price cuts and speed up its own product road map. Unfortunately for AMD, the pressure caused it to spring leaks. During the quarter, the company admitted to experiencing manufacturing difficulties with the 350-MHz and faster versions of the K6-2 and the new K6-III. Three separate times AMD warned analysts that it was going to report significant losses.

"The balance sheet is in a pretty disastrous condition," said Ashok Kumar, semiconductor analyst with Piper Jaffray. "They need CPR."

Intel is not immune to price pressures, but it is insulated from them by its Pentium II and III and Xeon processors. While the company has lost share in the retail segment, Intel continues to hold a virtual monopoly in the market for Windows-based desktops used by businesses.

AMD has also yet to challenge Intel in the market for workstations and servers. Not only do these processors sell for more money than K6 or Celeron processors, but also they provide Intel with a higher profit margin.

AMD price cuts
Processor Old Price New Price PCT.
500-MHz K6-III $476 $397 17%
450-MHz K6-III $284 $237 17%
475-MHz K6-2 $213 $213 0%
450-MHz K6-2 $203 $158 22%
400-MHz K6-2 $134 $103 23%
380-MHz K6-2 $118 $87 26%
350-MHz $87 $68 21%
Source: AMD
Some Xeon processors cost as much as 30 times a Celeron processor, according to Kumar.

Despite the expected profit, analysts will likely be intently listening to comments from Intel regarding the overall health of the PC industry. Last week, Compaq admitted that its earnings for the quarter would be close to half of expectations. The surprise announcements have caused a tizzy of excitement and sparked debate on the health of the PC industry.

So far, most observers say that the current weakness in demand is a normal, seasonal event.

"We believe PC demand is seasonally weak, and we view this as a normal and anticipated event," Edelstone wrote in a recent report. The Y2K bug, in fact, could become a spark plug for the semiconductor industry in the second half as PC makers begin to build buffer inventories. Annual growth could go as high as 15 to 18 percent for chipmakers.

Still, potential problems lay in pricing. Even if PC demand continues to grow at 14 percent a year, the industry has to cope with lower prices.

"The units are, roughly speaking, normal," said Roger Kay, PC analyst at International Data Corporation. "The declining ASPs [average selling prices] are real--the ASP decline could be a long-term bad news story for the industry."