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AMD walking microprocessor tightrope

Sales of processors are way up at Advanced Micro Devices, but that's just part of the problem.

Sales of processors are way up at Advanced Micro Devices, but that's just part of the problem.

AMD, which announced larger-than-anticipated losses of 45 cents a share for the second quarter, is riding a wave of demand for its K6 and K6-2 microprocessors now used in low-cost PCs from vendors such as Compaq, IBM, and Hewlett-Packard. The K6 family sales jumped from 1.6 million units last quarter to 2.7 million this quarter, while between 500,000 to 1 million chips will be added in both the third and fourth quarters, according to CEO Jerry Sanders.

New processors hitting top speeds of 350-MHz and 400-MHz will come out over the next two quarters and copper chips will follow late next year, he added. Currently, AMD's fastest processors run at 333 MHz.

Unfortunately, all of this heady shipment activity comes at a time when weakening demand, cheaper computers, and excess factory capacity are driving microprocessor prices into the basement. The average price for AMD processors came to $86 dollars in the quarter and the company needs a minimum average price of $100, Sanders said.

AMD reported a loss of $64.6 million--double the consensus estimate--on reduced sales of $527 million for the second quarter. AMD stock has dived 13.45 percent to $15.6875 following the annoucement.

Demand for its communications and flash memory products are down too.

AMD in fact will stop production at its plants on all products, except for K6 chips, for two weeks during the present quarter to stem costs.

"The issue is the marketplace and the market conditions. We are looking very good internally," Sanders told analysts on the quarterly conference call, alluding to the fact that the company has solved many of its most glaring manufacturing problems but now must face a depressed market just as it is getting into high gear.

To resolve this, AMD will try to increase both the volume of its processors and the average selling price of its K6 chips, said Sanders. That combination, however, is a tall order as increased volume of chips typically mean lower prices. Sanders further added that the company will try to wedge itself into the business market, where it has not sold well before.

"There is still some inventory to burn off," said Brian Matas, vice president of market research at IC Insights. "Manufacturers will pull back to help stabilize prices for the second half of the year." Intel will also continue to cut prices, which will put more pressure on AMD. (Intel is an investor in CNET: The Computer Network).

But prospects are not all that bleak, according to others. "There is room for AMD to grow the average selling price. I could also see them getting into more products," said Charles Boucher, semiconductor analyst at Donaldson, Lufkin and Jenerette, who noted that prices were depressed by the sell-off of older products. "They should be able to maintain prices on newer products unless Intel really trashes prices."

Nonetheless, he added that AMD is unlikely to hit its $100 goal this next quarter.

In order to do so, AMD would have to come out with faster chips in a short time frame, critical for reaping higher profit margins.

Sanders himself made it clear that higher volumes and higher prices are two goals AMD will have to achieve. "We're assuming no better than flat revenue for non-K-6 business. We expect revenue growth on K6. Profitability will depend upon volume and average selling price?The $100 average selling price is a minimum for our business model."

Ironically, the future warnings come at a time when AMD should be prospering. Last year, manufacturing problems with the K6 delayed adoption of the chip by major manufacturers. That changed earlier when top-tier vendors selected K6 family chips for certain consumer desktop and notebook models. Hewlett-Packard became a customer last month.

Capitalizing on this demand, AMD has set out an ambitious roadmap for the K6 family. This quarter, AMD will release a 350-MHz version of the K6-2, which will be followed by a 400-MHz version in the last quarter of the year. Hundreds of thousands of these chips will be available in the quarters they are released, he said. A version of the K6 with integrated high-speed memory--referred to as "cache"--will come out later this year. This chip has been referred to as either "Sharptooth" or the K6-3.

AMD's next-generation K7 will appear in the first half of 1999, Sanders said. Earlier, the company said the K7, which uses a new architecture, would come out in the first quarter. AMD will then top off this spate of activity in late 1999 with the opening of a new fabrication facility in Dresden, Germany. By 2000, this factory will be producing chips using copper interconnect technology in volume, Sanders said.