Server Sales Drive Profits at AMD

By Mark Hachman  |  Posted 2004-10-07

Server Sales Drive Profits at AMD

Advanced Micro Devices Inc. on Thursday reported lower revenues than in the previous quarter, although profits climbed on increased 64-bit sales into the server market. The company also said it would phase out its 32-bit AthlonXP processor earlier than some analysts expected.

AMD, based in Sunnyvale, Calif., reported net income of $44 million on sales of $1.2 billion for the companys third quarter, ended Sept. 26. A year ago, AMD reported a net loss of $31 million; income increased 38 percent from the second quarter.

Meanwhile, revenue climbed 30 percent from the same period a year ago, but dropped just less than 2 percent from the second quarter of 2004.

"The third quarter was another solid quarter, despite challenging dynamics in the memory business," said Hector Ruiz, the companys chief executive, president and chairman.

Makers of cellular handsets trimmed production during the third quarter, apparently worried about economic conditions. As a result, flash memory sales into the wireless handset market declined significantly, resulting in lower ASPs (average selling prices) for flash memory, the company said.

By contrast, AMD executives said the companys AMD64 products—the Opteron server processor and the AMD64 desktop chip—experienced double-digit gains in both units and ASPs. All told, AMD64 products represented a third of AMDs total sales.

That percentage of sales will likely increase, however, as AMD moves to phase out the AthlonXP, the 32-bit chip that was the instrument of AMDs resurgence in the early years of the new millennium. AMD executives said its fabs have now shifted the next-generation AMD64 chips to the new 90-nm process, which augurs well for faster speeds and lower power, analysts have said.

Read more here about Athlon64 chips being put to use in thin-and-light notebooks.

AMD is officially "end-of-lifing" the AthlonXP chip and will curtail its shipments by the end of the first quarter of 2005, said Henri Richard, executive vice president of sales and marketing at AMD. The AthlonXP will be replaced by the Sempron, a low-cost value processor similar to the AthlonXPs design.

"Im kind of surprised, actually," said Dean McCarron, principal at Mercury Research Inc., based in Cave Creek, Ariz. "They were going to an end-of-life schedule, obviously, but its a bit more aggressive than I otherwise expected. I would think that would mean that the other [AMD64] products are doing well; they wouldnt be able to do that if they werent able to deliver volume."

Likewise, the increased ASPs mean that AMD is succeeding in the higher-margin server market.

Barry Crume, director of the companys workstation and server segment, said in an interview that the increase in net income was directly tied to server sales. "Higher server sales translate into higher ASPs," Crume said.

During the third quarter, AMD signed up America Online Inc., Merrill Lynch, Bell Helicopter, Sabre Holdings, BNP Paribas, E! Networks, Fox Sports and Agere Systems to use Opteron-based systems, the company said. A quarter of the Fortune 100 customer list uses AMD-based machines, AMDs Ruiz said during the conference call.

Next Page: Wilting sales in flash memory.

Wilting Flash

Sales from AMDs Computation Products Group increased by 21 percent, improving gross margins within AMDs memory division, AMD chief financial officer Robert Rivet said in a statement.

AMDs 64-bit processor sales represented more than one-third of the companys total CPG sales, and sales growth was driven by both higher average selling prices and increased unit volumes, he said.

In previous quarters, AMD revenues had been driven by sales of memory devices, especially flash. During the third quarter, AMDs processor division found its footing.

Read more here about AMDs earnings in the second quarter.

Sales at AMDs CPG increased to $673 million from $503 million in the third quarter of 2003 and $554 million in the second quarter of 2004, an increase of 34 percent and 21 percent, respectively. AMDs Memory Group recorded $538 million in the third quarter, an increase of 27 percent from $424 million in the third quarter of 2003 and a decline of 20 percent from $673 million in the second quarter of 2004.

Balanced against the AMD64 products will be the new Sempron, which was launched this past quarter. Although the Sempron was not designed to replace the AthlonXP, the chip will serve some of the same markets.

Designed for "everyday computing," the Sempron is seen as AMDs processor of choice for the emerging Chinese market. There, the chip will go up against a non-Intel MIPS RISC processor, which will power an "Open Sourced Network Computer" initiative announced Wednesday by a Chinas Tsinghua University, MIPS Technologies Inc. and ATI Technologies Inc.

The PMC Xiao Hu will be based on PMC-Sierras MIPS-based core, said Bob Bailey, chief executive of Santa Clara, Calif.-based PMC-Sierra, who argued that the oft-maligned NC (network computer) could survive under the right conditions.

"The reason the NC initiative will likely succeed now when it has failed in the past is because of a confluence of events and trends, such as Linux open source, open-source hardware from the MIPS community, and Moores Law catching up to the idea, so that the cost of a thin client will be dramatically cheaper than a PC as well as draw less than a tenth of the power," Bailey wrote in an e-mail to Wednesday night. In addition, the emerging economies in Asia and Eastern Europe are screaming for the low-cost thin-client/server model, Bailey said.

Although memory sales decreased, AMD executives said they werent worried. Ruiz said he visited many of the Asian handset OEMs during the last weeks of the quarter, and they reported that an unsettled Chinese market caused them to be cautious. Meanwhile, AMD is shifting its own fab and the one it shares with joint-venture FASL LLC to 110-nm lines, the most advanced in the industry.

"Well see some pickup [in the second half of 2004] for these reason s," Ruiz said. "If the market is there and the supply-chain logistics are fixed, well do well."

Click here to read about Hewlett-Packards supply-chain woes.

AMD expects third-quarter revenues to be in line with seasonal norms, which typically show revenue increases of about 10 percent to 12 percent, Ruiz said. The flash memory market will continue to be "challenging," but the company will be helped by a continued shift toward its AMD64 line and away from the 32-bit generation, executives said.

Editors Note: This story was updated to include information and comments from a conference call with AMD officials and analysts.

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