AMD Sees Continued Gains Despite Revenue Drop

The chip maker still expects to grow even as it faces disappointing second-quarter revenue and product and pricing moves by its larger rival Intel.

Advanced Micro Devices said it continued to gain market share versus its larger rival Intel during the second quarter of 2006, despite challenges.

AMD, of Sunnyvale, Calif., on July 20 reported second-quarter revenue of $1.22 billion and earnings per share of 18 cents for the period. Company executives expressed disappointment in the revenue figures, which did not meet their original projection.

AMD originally predicted second-quarter revenue that would be slightly below or equal to its first quarter take of $1.33 billion, but later warned that it would hit closer to the $1.22 billion mark.

"The second quarter leaves us unsatisfied as we did not meet our sales objective," Dirk Meyer, AMDs president, said in a conference call with analysts.

AMD saw its processor shipments slip 4 percent from the first quarter. But it was unable to meet its revenue goal primarily because of processor pricing.

/zimages/1/28571.gifClick here to read about how AMD dropped its second-quarter sales forecast.

Lower desktop processor prices—an area of intense competition with rival Intel during the quarter—led to a lower average selling price for the companys processors, thus hitting revenue, company executives explained on the conference call.

In some cases, AMD left business on the table in the desktop market, given that it aims to grow market share profitably, executives said.

AMD still gained market share in server processors during the quarter—revenue from its Opteron chip jumped a record 144 percent year over year—and may also have gained share in PC processors as well, despite the tight competition with desktops.

Looking ahead, AMD expects to increase third quarter revenue over and above seasonal trends, which usually see increases of about 4 to 7 percent from the second quarter to the third quarter, company executives said.

If seasonality increases by x-amount, "we expect to do better than that," said Hector Ruiz, AMDs CEO, in a call with analysts.

Increases could come from expanding its business with PC and server makers, some of which might not already use AMDs chips, Ruiz said.

"We believe that our opportunity to continue to be very competitive even with this very competitive environment is only going to improve," he said.

AMD has been working to use its Opteron business—the chip is used by several brand name companies, including Hewlett-Packard, IBM and Sun—as a stepping stone in the broader business PC market.

The chip maker was able to sign on Dell—a company that for years said it was sticking with its Intel-only portfolio—as a customer for Opteron in the quarter, while also adding business from existing customers.

New business also often comes from existing clients. For example, AMD said Lenovo Group had announced plans to add AMD chips to its ThinkCentre business desktops.

Also, Dell, which has only one publicly announced product, could present lager opportunities in the future.

Still, AMD will face a more competitive Intel. Since May, Intel has released two new dual-core Xeon processors—including the highly-touted "Woodcrest" 5100 series—and on July 27 will begin rolling out its Core 2 Duo chips for desktops.

The chips offer a better mix of performance and energy efficiency, Intel has said.

Intel has also signaled a plan to offer its Pentium chips at more aggressive prices, allowing dual-core processors into lower price points.

AMD has signaled that it will respond to price cuts by Intel. But its executives said it will hold steady with its product plans, adding new processors and building out a plan to add extra enabling technologies around the chips as well.

AMD plans to show off its forthcoming quad-core processor before the end of 2006. It has announced Torrenza, a program which invites third parties to build co-processors for use with its chips.

Its also gearing up for the August launch of its next-generation Opteron server processor, an updated dual-core chip that will offer greater memory and virtualization features.

The Sunnyvale, Calif., company will roll out the processor later in August, according to spokesman Phil Hughes. He declined to be more specific on the date, but said reports that the launch is set for Aug. 1 were unfounded.

/zimages/1/28571.gifAMD is set to launch new Opteron. Click here to read more.

The new Opteron, referred to internally as "Rev F," will offer support for faster DDR2 (double data rate 2) memory, an updated on-board memory controller and AMDs on-chip virtualization technology, formerly known as "Pacifica."

Like that of rival Intels virtualization feature, the AMD technology will take some of the work now done by software from vendors like VMware, which will make the virtualized environment more secure.

CEO Paul Otellini said on July 19 that "Tulsa," the next generation of its Xeon MP chip for servers running four or more processors, will come out in the third quarter, though Intel already has begun shipping the chip for revenue.

However, Intel still has its own share of challenges. The company reported disappointing second-quarter earnings on July 19, and then announced to employees that it was shaking up its upper management tier.

That came a week after Intel announced on July 13 that it was eliminating about 1,000 management jobs.

The changes were part of an aggressive internal operations review overseen by Otellini.

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