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Advanced Micro makes hay on Intel production delays

Advanced Micro Devices top executive Jerry Sanders says the average price of its computer chips rose more than 20 percent during the fourth quarter, thanks to robust sales of its new Athlon XP chips.

"I don't think we've ever seen such a dramatic turnaround," Sanders told The Chronicle this week.

AMD's average price for chips slid to US$60 in the third quarter, after a first quarter average of US$91 and a second quarter average of US$76. Sanders said he expects the average price of AMD chips during the fourth quarter, which ends Dec. 30, to rebound to at least US$72.

Some analysts said they were surprised at the rise in prices, but noted that AMD is also benefiting from rival Intel Corp's inability to meet demand for its Pentium4 chips.

The price increases will likely help AMD beat its records on quarterly microprocessor revenue (US$661million set in the second quarter of this year) and unit sales (7.8 million set in the third quarter), Sanders said.

"We expect to have record revenues in processors, and I would be very disappointed if our unit shipments don't start with an `8,'" he said, indicating that 8 million units sold could be attainable.

While this year will be remembered as one of the worst slumps for the chip industry, the fourth quarter has been a pleasant surprise for at least AMD and its archrival, Intel.

Both companies, while in the middle of a fierce price battle, last week said sales of their leading computer chips were doing better than earlier estimates.

"Who is making money in the semiconductor industry right now? Maybe Intel, but that's about it. Companies are facing widening losses in shrinking sales, but we're having widening sales and shrinking losses," Sanders said, maintaining his firm is still on track to return to profitability during the second quarter of next year, earlier than what some analysts are predicting.

By then, the company should begin seeing the financial benefits from cutbacks, such as the shutdown of two chip plants in Austin, Texas, and the laying off of 2,300 employees in September, Sanders said.

"I don't need to grow revenues [to get back to profitability]," he said. "We expect to do quite well."

Douglas Lee, an analyst at Banc of America Securities, called AMD's gains on average selling price amazing.

"My thoughts are AMD has done very well this quarter, aided by Intel's inability to [meet] Pentium4 demand," he said.

"But I'm not trying to take anything away from AMD. They've done a nice job."

If Sanders' estimates are correct, the chipmaker will be increasing its fourth-quarter revenue by about 15 percent from the previous three months, Lee said.

Last week, AMD said it expects sales to grow by at least 10 percent from third quarter's US$766 million.

But in the long run, the current successes won't be anything to write home about, said Hans Mosesmann, analyst at Prudential Securities.

"When your competition has a shortage on products, you can do a lot of things," he said. "I'm a big fan of AMD ... [but] the margin after this quarter ... it's going to get tougher and tougher."

And much of that has to do with Intel ramping up production of its Pentium4 chips, said Mosesmann, who recommended on Thursday that his clients sell AMD shares.

"AMD is going to blow away the numbers [this quarter] ... My sense is that [revenue is] going to be up 15 percent or 16 percent. But that doesn't mean that that's sustainable," he said.

While AMD share prices have been on the upswing in recent weeks, Mosesmann says he believes they will stumble during the next couple of quarters.

The fourth quarter has been "great and it's wonderful. They're going to make money, but I think the stock will be down to the low teens ... and it'll be a long summer for AMD," Mosesmann said.
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