AMD Turns In Surprise Profit

Advanced Micro Devices shares dipped Wednesday morning following a week of speculative gains in the run-up to its third-quarter report, which came out better than expected.

In its first profit since last year's second quarter, AMD (AMD) said it made $1 million, or 1 cent a share, far surpassing analysts' consensus expectation of a loss of 13 cents a share. That estimate was considered conservative as some analysts predicted AMD would earn as much as 15 cents a share by its fourth quarter.

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AMD (AMD)
Shares fell 15/16 to 18 15/16 in recent trading on volume of 2.1 million.

Sales increased to $685.9 million from $526.5 million in the year-ago period, when the Sunnyvale, Calif.-based semiconductor manufacturer lost $31.7 million, or 22 cents a share.

The company's earnings reflected strength in its core K6 microprocessors business, which analysts expected would hold up earnings. K6 shipments were up 1 million units from the second quarter to 3.8 million units, the company reported. But, the company said, its non-PC-processor businesses, including memory chips, were flat or down from year-ago levels.

K6 processors accounted for 31 percent of retail desktop processors and grabbed 54 percent of market share in the increasingly important sub-$1,000 PC market, the company reported.

The trend of K6 processors leading the way for the company will likely continue into the fourth quarter, AMD executives said in a conference call.

Looking ahead, the company also said it expects to post a profit in its fourth quarter due to higher K6 sales. AMD said fourth-quarter research-and-development costs will rise $20 million to $25 million.

AMD also said it would have a "major announcement" about a K6-2 mobile processor during its fourth quarter and will unveil a version of a K7 product during the Comdex trade show scheduled for mid-November in Las Vegas. A K7 processor will be introduced in the first half of 1999.

While K6 sales are expected to power AMD's fourth quarter, the company's chairman and chief executive, W.J. Sanders, said his bias on the rest of the companys products "is more up than down." Sanders said AMD doesn't see a general upturn, but "the worst is behind us," he said.

"We see the PC market as pretty strong" in the United States, Europe and Asia, Sanders said.

Analysts were expecting strength in K6 performance. Dan Scovel of Fahnestock & Co. foresaw K6 unit shipments of 3 million to 3.5 million for the quarter, compared with 2.7 million in the second quarter.

However, his estimate of a loss of 17 cents fell below the consensus outlook because he saw weakness in AMD's other semiconductor lines.

"Their flash memory, network communications and [programmable logic] chips have been the ones paying the bills, and we're seeing some deterioration there," Scovel said.

Brown Brothers Harriman analyst William Milton said he expected AMD's other businesses to show signs of cracking under global industry pressure. "We estimate K6 revenue, which represented 42 percent of the product mix in the second quarter to increase 51 percent sequentially. ... However, we expect the company's other businesses to be sequentially down."

Along with AMD's report, strong earnings from Motorola (MOT) aided the growing sentiment that a recovery is under way in the battered sector.

"We believe that many companies saw at least a slight improvement in bookings and shipments, with the year-to-year growth rate bottoming sometime during the August-September window," Donaldson Lufkin & Jenrette analyst Charles Boucher wrote in a research note.

Another factor in analysts' rosier outlooks: The inventory correction that virtually halted new orders in the first half ended in the third quarter, marking renewed demand for microprocessors.

But the rebuilding of PC inventory alone may not solve the chip industry's problems, some analysts say. "We believe that the positive momentum in the PC component area, driven almost entirely by inventory snapback, can be maintained into the fourth quarter but not much further," said Goldman Sachs analyst Joe Moore.

Moore said he expects most other semiconductor markets to exhibit results in line with lackluster outlooks, as several analog and logic chip makers warned of disappointments in the third quarter. He also said he expects slow demand for consumer and industrial electronics chips as well as telecommunications components to cause weakness into the fourth quarter.

But AMD can pull earnings higher by the fourth quarter if the conditions are right, Fahnestock's Scovel said.

"We think," he said, "if they keep carving out additional market share, delivering unit volumes on the K6 and executing in their other businesses they can do 15 cents in the fourth quarter."

Written By Binti Harvey & Tiare Rath