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AMD struggles with chip production

Advanced Micro Devices says that its K6 processor yield problems have not gone away, and will continue to affect profitability and production goals.

During a meeting with analysts, Advanced Micro Devices (AMD) said today that its K6 processor production problems have not gone away, and that those troublesome issues are going to affect profitability and production goals.

The company said it would not meet its goal of producing 2 million processors this quarter, the second time in a row the company has missed its production target. During the third quarter, AMD had planned to produce between 1.2 million and 1.5 million K6 chips, but produced only a million. At the time, AMD also said that it expected to produce 15 million units in 1998.

Low processor yield--specifically yields on the high-end 233-MHz K6--caused AMD to report a financial loss last quarter, and has been one of the chief reasons why major computer vendors have shied away from adopting the K6. Ironically, AMD's bad news came on the same day that IBM agreed to incorporate a lower-end K6 into a new consumer computer.

At AMD's headquarters in Sunnyvale, California, analysts met with executives to hear presentations regarding the status of the company's various businesses. But discussion of progress on the company's production of K6 processors was the main attraction for analysts, said Scott Allen, an AMD spokesman.

Allen said the company's progress on yield issues from last quarter have continued to impact production this quarter. Yield refers to the percentage of usable processors that emerge from a silicon wafer. AMD's yields have been well below the 50 percent mark for its high-level chips recently, according to analysts.

While the chip maker is still producing both the .35 and .25 processor, its current focus is on the .25, Allen said, adding, "Our future depends on our ability to get .25 in full production in the Austin, Texas, Fab 25 plant.

Fixing the yield problems isn't as easy as flicking a switch, Allen pointed out. "The 2 million processor goal was not met because we have not completely solved the yield problems, which include getting good dye per wafer and high frequency or speed of the microprocessor," he said.

Allen said AMD has been addressing the production problems by creating task forces and by shuffling people and projects around. For example, research and development in the Sunnyvale sub-micron development center was suspended in order to make more room for chip production.

The problems continue to push back profitability, however. Allen said that, for the fourth quarter, the company's break-even point is between $670 million and $700 million. In its third quarter, AMD reported revenue of $596.6 million.

"It's pretty significant. The stock price has been stable on the promises that management has been making," said Richard Belgard, a consultant with MicroDesign Resources. "Expect it to drop tomorrow morning."

"This is potentially a bigger problem in the next few quarters," said David Thor, an analyst with Boston Equity Research Group. "No [computer manufacturer or investor] is going to trust them to make production goals."

While AMD missed production goals last quarter, Thor said this marks the first time it has missed when it faces such a huge opportunity with low-priced PCs.

"Their problem now is forward-looking," Thor said. "They won't be able to put together contractual deals?No one is going to trust them."