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AMD reports wider-than-expected loss

update The chipmaker's third-quarter earnings miss analysts' expectations, as a move to reduce inventory crimped revenue from processor sales.

update Advanced Micro Devices on Wednesday reported third-quarter earnings that missed analysts' expectations, as a move to reduce inventory crimped revenue from processor sales.

For the period ended Sept. 29, the chipmaker recorded a loss of $254 million, or 74 cents per share, on revenue of $508 million--a loss that's 36 percent greater than in the same period a year ago. The company reported a loss of $187 million, or 54 cents per share, on revenue of $766 million during the third quarter of 2001.

Analysts expected AMD to lose 67 cents per share on revenue of $499.7 million, according to a survey by First Call.

Earlier, the Sunnyvale, Calif.-based chipmaker predicted that its third-quarter revenue would increase modestly from the second quarter, which was a hair over $600 million. But the company warned on Oct. 2 that it would report lower-than-expected revenue of about $500 million.

AMD attributed Wednesday's higher-than-expected loss to its efforts to reduce inventory of PC processors held by PC makers and also by resellers.

"The sequential decline in third-quarter sales was primarily due to the aggressive actions we took in the PC supply chain to align our product mix with current customer and end-user demand, which has been less than we forecasted," Robert Rivet, AMD's chief financial officer, said in a statement. "We took more aggressive action in the third quarter than in the second quarter, which masked the progress that AMD is achieving in the marketplace. The sell-through, that is, actual consumption of AMD microprocessors, was higher in the third quarter than in the second quarter."

On a positive note, AMD saw sales of flash memory--used to store data in cellular phones and networking equipment--increase to $189 million during the third quarter. That's an 8 percent increase over the second quarter's $175 million in flash revenue.

AMD executives hope that, despite the short-term financial pain caused by the inventory reduction, the third quarter will become the fulcrum that swings the company back toward earnings growth in 2003.

To start, AMD executives expect to narrow the company's losses by posting a double-digit sequential increase in revenue during the fourth quarter on better sales of PC processors and flash memory.

"We believe that our revenue in the fourth quarter will be around 20 percent higher...than in the third quarter," AMD CEO Hector Ruiz said in a conference call with analysts.

AMD hopes to combine higher revenue with lower costs, Ruiz said.

A new strategic plan, discussed publicly for the first time in the earnings conference call, includes introducing new cost-saving measures that will eliminate between $50 million and $100 million in costs per quarter. As part of the plan, AMD will also increase its cash flow by securing asset-based loans. AMD is seeking a total of $155 million and will use assets like its Fab 25 chip-fabrication plant as collateral.

The result of the measures, AMD hopes, will be its attainment of the breakeven point by the second quarter and the realization of $350 million in cost savings by the end of 2003.

AMD will offer more details about this plan, including an undisclosed restructuring charge associated with it, at a meeting with analysts scheduled for Nov. 7.

Hammer time
While the company works on cost savings, it'll be hoping for good things from its forthcoming Hammer family of 64-bit processors.

Although no product roadmap changes have yet been announced, AMD now plans to lead with Opteron, its next-generation server chip, said Rob Herb, AMD's chief sales and marketing officer, during the conference call.

A Hammer-based Athlon chip for desktops, dubbed Clawhammer, is scheduled to hit the market first. But Herb indicated it will now take a backseat to the Opteron server chip.

Opteron, AMD hopes, will give it a better foothold with business customers.

"We are focused right now on the server space. We think the server space gives us the ability to break in to the enterprise area," a market AMD has been eyeing for quite a while, Herb said.

AMD made the decision to move Opteron to the forefront in part because its current Athlon chip has enough horsepower to hold the desktop, competing with rival Intel's Pentium 4, Herb said.

"As we enter into Q4, we have the ability to manufacture more than 2 million units at (performance levels of) 2400+ and above, really more than the market can absorb," Herb said. "The question is: What is the market demand for those high-end desktop PCs? That's not really clear."

The 2400+ is one of several new Athlon XP models AMD has introduced recently. The model number refers to the chip's relative performance capabilities.

AMD will look to Barton, an update for the current Athlon XP chip, to hold the line against the Pentium 4.

"We are going to be able to have a competitive product through most of 2003 with that chip," Herb said. "As we go through the year, we'll get into the high-performance desktop space. But (Hammer Athlon) doesn't get into the high-performance desktop space until the second half of the year."

"It's a little bit of a change," Herb said. "It is a change in strategy in that we've put a lot more focus on servers."