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AMD posts profit, but below estimates

Advanced Micro Devices posts its second quarterly profit in a row, but the numbers fall below analysts' expectations.

A design problem with the fastest versions of the K6-2 processor drove revenues and profits for Advanced Micro Devices below expectations, and more difficulties loom.

The chipmaker today reported net income of $22.3 million today for the fourth quarter, or 15 cents per share, on record revenues of $788.8 million.

The earnings are even worse when tax consequences are assumed. If a nominal tax rate of 30 percent is addded, AMD's earnings drop to 10 cents a share, said analysts. Intel's earnings assumed a tax rate.

While earnings bested the results from last quarter, and certainly beat a 9 cent per share loss for the same quarter the year before, analysts were expecting profits of around 18 cents a share and higher revenues. Yesterday, archrival Intel surprised analysts with a better-than-expected earnings of $1.19 per share.

Along with the standard pricing pressures, the culprit behind AMD's shortfall turned out to be a design problem in the mask, or circuit layout, of the 350-MHz version of the K6-2, CEO Jerry Sanders said. AMD had a goal of selling more than half of its chips at 350 MHz or higher, but only 34 percent hit that mark. Many of the chips AMD wanted to sell as 350-MHz chips turned out only to run at speeds closer to 333 MHz or 300 MHz. The slower speeds depressed AMD's average selling prices, margins, and profits.

"It had at least a $20 million impact on our revenue line in our last quarter," he said, adding that the average selling price for AMD chips came to $89, well below the $100 target.

But the real problems begin this year. Intel told analysts yesterday that the company will do whatever it takes to gain back market share lost to AMD in 1998, which means AMD will struggle even to repeat the lower-than-expected revenues reported today in the first quarter. AMD's earnings, in fact, were impacted by a quiet December price cut on Intel's Celeron chips.

And, while the mask problem with the K6-2 is fixed, the current chip architecture may be running out of steam. Sanders said that the upcoming K6-3 chip will hit 500 MHz, but wouldn't predict beyond that. The K6-2 core, which is at the heart of the K6-3, was not anticipated to go this fast in the first place. The Pentium III, by contrast, will be running at over 500 MHz by the middle of the year.

"Normally they shoot themselves in the face, but this time around they shot themselves in the foot," said Ashok Kumar, an analyst with Piper Jaffray. Looking ahead, Kumar added, "Intel has marching orders to get back market share. They will sacrifice prices and margins to do it?.It only goes south from here."

Sanders confident
Despite the chip shortfall and looming price pressures, Sanders predicted that AMD has fixed the design issue and will get back on track for the first quarter. K6-3 chips will emerge in this quarter, with volume shipments following in the second quarter. The K-7, meanwhile, will come out at the middle of the year. AMD will also start to produce chips out of its Dresden, Germany, factory by the end of the year.

"We have a high level of confidence that we will be able to improve the speed mix," he said.

Nonetheless, pricing will be a major issue for the quarter. AMD will only produce about the same number of chips this quarter as it did in the last quarter of Q4. To achieve their goals, therefore, AMD is going to have to raise its average selling price.

The K6-3 should help raise the average price when it comes out toward the end of this quarter and appear in volume in the second quarter, he said. "We definitely will be able to extract a premium for this product. We would like to get a $100 premium for this product [over the average] . We might get half that."

Otherwise, AMD will tout the technical advantages of the K6-3 and K6-2 over the comparably priced Celeron chips. The speeds will be close to the same, but the AMD chips will have faster system buses and additional multimedia instructions.

While this may be formidable, Intel doesn't seem to care. Paul Otellini, general manager of the Intel architecture business group, said earlier this month that Intel would not add faster buses and multimedia instructions to Celeron. Intel tried to push performance issues in 1998 and lost ground. Instead, Intel will concentrate solely on megahertz in the consumer market, he said, pretty much what AMD did last year.

Price war to heat up
Intel will also be cutting prices drastically. By March, the 366-MHz Celeron chips released last week will be selling for $80. The current price is $123. AMD prices its chips against the Celeron, which means that a number of its chips will also be below the $100 mark.

AMD revenues increased by 15 percent over the third quarter, and by 29 percent from the fourth quarter of 1997. The company also reported earnings of 1 cent per share last quarter and a loss of 9 cents a share for the same quarter a year before. Last year, a manufacturing flaw drove AMD into the red.

All of AMD's growth came from the K6 line. The non-microprocessor businesses for the company were flat and won't likely improve until the second quarter, Sanders said.

The problems were resolved, and the company went on to snag a number of high-profile design wins with major PC makers, including IBM. Still, the majority of AMD's sales were in the low-budget sector of the consumer market.

In 1997, AMD reported revenues of $2.4 billion and a net loss of 15 cents a share.

AMD's stock dropped 11.9 percent, or $3.75, to $27.75 at the close of the day.