Compaq is interested in adopting the 233-MHz K6, currently AMD's high-end chip, and also its upcoming 266-MHz chip for low-cost consumer PCs, according to Ashok Kumar, an analyst at Austin, Texas-based Southcoast Capital, an investment firm. Other sources in the financial community have said negotiations have been going on for a few weeks.
A Compaq spokesman said, as a matter of course, that the company is always evaluating different processors, but would not comment any further. AMD would not comment.
To fit within the Compaq's cost structure, the K6 would have to sell for between $80 and $90 per chip, less than what the chip sells for now, said analysts. AMD's cost comes to approximately $50 to $60 per chip. Low-cost Compaq desktops sell for between $799 and $999.
But the big problem is supply. Compaq wants a commitment from AMD to deliver at least 250,000 chips per quarter, a potentially difficult goal, according to Kumar. This past quarter, AMD experienced low yields with the K6 and especially low yields on the 233-MHz version. Only 15 percent of the K6 chips sold last quarter ran at 233 MHz, said sources.
While AMD has repeatedly maintained that most of its manufacturing problems are in the past, analysts remain skeptical about the company's ability to perform. AMD started sampling 266-MHz versions of the K6 only recently.
"AMD is worried about committing to those [manufacturing] numbers," said Kumar.
Even if a deal were to take place on those terms, the purported agreement would be difficult to meet, commented David Wu, technology analyst with Chicago Co. By ordering 250,000 chips in the quarter, Compaq would essentially be taking one-eighth of AMD's output, a large percentage, and this assumes that AMD could hit its goal of producing 2 million chips.
The past looms heavily as well. Compaq was slated to use the K5, AMD's previous-generation chip, but dropped plans after it was determined that the chip was not stable and did not offer adequate performance.
Another challenge AMD faces is getting to the next generation of production technology. The company is just starting to produce chips made on the .25 micron process on a limited basis. Currently, AMD is using a .35 micron production process. The newer .25 manufacturing process will result in smaller, faster chips and allow AMD to produce a larger volume of processors. This will also permit AMD to manufacture chips for notebook PCs.
Yet another hurdle for AMD is that Compaq is already using the MediaGX from Cyrix in its economy computers. "We expect a long relationship with Compaq," said Steve Tobak, vice president of corporate marketing at Cyrix. "We do not expect infringement from Intel or AMD."
The MediaGX, he added, uses a proprietary pin design. As a result, Compaq could not simply swap one processor for another, although the K6 fits into other standard computer designs.
Still, most agree that the K6 is a good, cost-effective alternative to Intel microprocessors. "There is probably a good chance they [Compaq] are going to do something with it [the K6]," commented Dan Niles, semiconductor analyst at Robertson, Stephens and Co. of San Francisco.
"They need big customers to give them credibility and they need to show they have an ability to produce," said Wu.
Elsewhere on the competitive front, AMD will kick off a reseller program later this quarter, said sources in the distribution industry and sources close to AMD. Under the program, resellers will be able to buy K6 chips through distribution, along with motherboards and chip sets, so that they can use the processor in "house brand" computers. Both Intel and Cyrix have similar programs that are fairly successful.
Jerry Saunders, chief executive officer of AMD, said during the company's quarterly conference call that he could not confirm any new design, but asserted that customers were warming to the chip.
"I cannot acknowledge any design wins that haven't been announced by customers," said Saunders. "I used to think that the most difficult part would be to persuade top-tier manufacturers to take an alternative processor. I no longer feel that it is our most important challenge. Our big challenge today is to make more parts."
Saunders acknowledged that the company still faces manufacturing problems, especially if it wants to meet is goal. The company will try to produce 2 million K6 chips with a substantial portion running at 233 MHz and above, he said. "This is going to be a very tough number. We have to do everything right to produce 2 million units," he said. "The challenge is heightened by the fact that the quarter ends December 28, which means it includes the holiday."
AMD made 1 million K6 processors in the past quarter, short of a goal of 1.2 to 1.5 million. The company produced a total of 1.9 million microprocessors; the remainder came from K5 production and production of other chips.
David Frink, an AMD spokesman, acknowledged that the two companies often speak together as a matter of business, but denied that any out-of-the-ordinary negotiations are taking place.