AMD warning shows processor momentum shifting
SAN FRANCISCO - AMD's pain may be Intel's gain. Thursday's profit warning from Advanced Micro Devices Inc. (NYSE:AMD - news) shows the No. 2 computer processor maker is smarting from a price war with Intel Corp. (Nasdaq:INTC - news) , whose all-new chips have given it the upper hand."The read AMD would like the world to have is that there's a price war and it hurt AMD and so it's also hurting Intel. But in truth, it's a little different," said Cody Acree, an analyst with Stifel Nicolaus. "I don't think it's apples to apples."
After more than a year of dramatic share gains driven by a processor design more efficient than Intel's, AMD is finding itself on the defensive.
It appears especially vulnerable in the market for server chips, where Intel is applying pressure with a line of revamped products headed by a chip with four processing cores.
AMD may have slashed server processor prices 40 percent, given that its quarterly processor revenue grew only 3 percent, despite "significant" growth in unit shipments, said JoAnne Feeney, managing director with FTN Midwest Securities.
"I think it came from Intel having very successfully come up with new processors and ramping production up much more quickly than anyone expected," Feeney said.
But while analysts say evidence is mounting that Intel is winning this round of the processor wars, they also point out there are plenty of other risks to its financial performance.
The PC industry is grappling with swollen inventories and lackluster sales as consumers wait for the broad release of Microsoft Corp.'s (Nasdaq:MSFT - news) Windows Vista operating system, due out this month.
"While Intel appears to be regaining market share from AMD and in our view has relatively lower risk, it is not immune to these industry factors," said Daniel Berenbaum, an analyst with Susquehanna Financial Group.
When Intel reports fourth-quarter earnings on Tuesday, Wall Street will be looking for it to show a profit before special items of $1.43 billion, or 25 cents per share.
That is a drop of 40 percent compared with a year earlier. Since then, Intel has sold off several unprofitable business units, pledged to cut 10,000 jobs and refocused on its core PC processor operations.
Revenue is expected to be $9.43 billion, down 7.5 percent from a year earlier.
For AMD, there appears to be no quick fix.
AMD is toiling away on its next-generation chips and plans to launch its first server chip with four processing cores in the middle of the year, which will take on Intel in the high end part of the market.
AMD also has a new notebook chip in the works that should help it challenge Intel's long-standing dominance in that fast- growing segment.
Even then, it may take several months before the new chips translate into fresh share gains. That is because AMD must increase output of those chips, while customers need time to evaluate them against Intel's offerings.
"If the Vista deployments begin to build some momentum and PC sales overall improve dramatically, then everyone will benefit and it could lift AMD," Acree said.
"Unfortunately, a lot of things don't change for AMD until they get new products, just like how things didn't change for Intel until they had new products."
In light of AMD's warning, Wall Street now expects it to show a profit, before special items, of $51 million, or 8 cents per share. Including the company's acquisition of graphics chip maker ATI, which closed in the quarter, AMD is expected to show a loss of nearly $500 million, or 91 cents per share.
AMD reports quarterly earnings on January 23.
Scott Hillis
www.reuters.com
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