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IBM rattles AMD shareholders

IBM's decision to drop Advanced Micro Devices from PCs sold in the U.S. and Europe presents the chipmaker with an image problem, not a financial one.

Advanced Micro Devices shareholders shuddered because of an image problem, not a financial one.

Shares of AMD fell more than 4 percent Tuesday on news that IBM dropped AMD processors from PCs sold in the United States and Europe. After all, the loss of a high-profile customer never looks good.

On the other hand, AMD's processor revenue didn't depend heavily on IBM.

"Perceptually, obviously, it stings," said Michael Feibus, principal analyst with Mercury Research. "But for the near-term bottom line, there's not much of an impact. It's really not hitting the coffers right now."

AMD won't say how much of its sales came from IBM, but company observers believe it wasn't significant. Banc of America Securities analyst Douglas Lee estimates that IBM produced, at most, 2.5 percent of AMD's overall revenue, which is expected to be about $3.97 billion this year, according to First Call's consensus prediction.

"IBM itself is not going to torpedo AMD's earnings," Lee said.

Although IBM was one of the first major vendors of PCs to adopt AMD chips, Big Blue stopped selling retail PCs in October 1999, when AMD commanded 16 percent of the PC processor market, according to Mercury. Yet Mercury's figures indicate that, by the second quarter of this year, AMD's slice of that market had risen to 22 percent.

"We continue to hear from sources that at existing configurations, AMD is still holding (market) share in the channel," Thomas Weisel Partners analyst Eric Ross wrote last week.

Low-end and mid-priced PCs--AMD's strong point--will outsell high-end machines in retail channels, analysts believe. Yet that might not be enough to keep AMD profitable in the short term.

The Intel factor
If First Call's projection is correct, the Sunnyvale, Calif.-based company will lose money in the current quarter as it deals with a price war launched by its larger rival, Intel. AMD's policy is to sell chips cheaper than Intel, so the current downward spiral in the cost of Intel's Pentium and Celeron chips has squeezed AMD's margins on its Athlon and Duron processors.

Intel's price cuts are making it harder for AMD to reach its goal of 30 percent market share by the end of the year, analysts said. And it will get even harder as the clock-speed gap increases between Pentium and Athlon chips. Athlons are faster than Pentiums at the same clock speeds, but Intel has been raising clock speeds more frequently than AMD. Intel expects to have 2GHz Pentiums by year's end; AMD's next publicly announced target is 1.7GHz.

"AMD really has to step up their rollout of newer products," Lee said.

Increasing


Gartner analyst Mark Margevicius says IBM's decision to stop using AMD processors is driven entirely by concerns about cost--the only thing that really matters to most buyers.

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revenue is especially important for AMD because it doesn't have much room left to cut costs, other than shifting production to outside foundries such as Taiwan Semiconductor or United Microelectronics Corp., Lee said.

But between the weak economy and Intel's aggressiveness on prices, boosting revenue from its current consumer base has become difficult for AMD. So the corporate market becomes more important than ever.

That's the most damaging part of IBM's decision to pull back from AMD, Lee said. Corporate sales are considered the main driver of PC demand, but they've always been AMD's weak point. Losing business-oriented IBM reinforces the belief that AMD machines will never be popular among corporations.

PC manufacturers' corporate sales divisions didn't promote AMD machines as aggressively as Intel's because AMD didn't have chips for all segments of enterprise computing for a long time, AMD spokesman Drew Prairie said. AMD hopes that will change soon, given the introduction this year of new Athlon chips for mobile PCs, workstations and low-end servers.

But Feibus argues that if corporations were going to clamor for AMD machines, it would have happened already, because Athlon has had a price and performance edge over Pentium for several quarters.

"Unfortunately, that's not how decisions are made in the corporate market," Feibus said, adding that Intel's brand has simply been too powerful to overcome. "The old saying 'no one ever got fired for buying IBM' really mutated into 'no one ever got fired for buying Intel' in the '90s. That's a tough mantra to break."

And a tough image to battle, not only for corporate sellers, but apparently shareholders too.