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AMD's profit slides
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July 12, 2001: 6:43 p.m. ET
Chipmaker's earnings decline; warns of potential loss in third quarter
By Staff Writer Richard Richtmyer
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NEW YORK (CNNfn) - A protracted slump in demand for flash memory chips and intense price competition in the PC processor market took a big bite out of Advanced Micro Devices' bottom line in the second quarter and could cause the company to post a third-quarter loss, executives said.
"If current business conditions prevail, our revenues could decline by more than $100 million in the current quarter, and we would report an operating loss," AMD Chairman and Chief Executive Jerry Sanders told analysts during a teleconference Thursday evening.
He made those remarks after the company reported a second-quarter profit that declined more than 86 percent from the same period last year.
After the close of trading, the company said it earned $17.4 million, or 5 cents per share, during the quarter ended July 1. That compares with a profit of $124.8 million, or 37 cents per share, during the same quarter a year ago.
At $985.3 million, AMD's second-quarter sales were down more than 17 percent from the $1.2 billion it reported during the same period last year.
The results were in line with the company's sharply lowered expectations.
Last week AMD warned investors that its results will fall far short of recent expectations, forecasting a profit ranging between 3 cents and 5 cents per share on sales of $985 million. Prior to that, Wall Street had expected AMD's second-quarter profit to be nearer 27 cents per share on revenue of $1.08 billion.
Executives at AMD in Sunnyvale, Calif., blamed the shortfall on increased price pressure in the PC processor market and weaker-than-expected demand for flash memory chips, which are used largely in mobile phones and other portable electronic devices.
AMD runs a distant second to Intel in the PC processor market, garnering roughly 20 percent of the market. Still, the company's Athlon and Duron brand processors have been steadily pecking away at Intel's market share. In response to the growing competitive threat, Intel has been aggressively pricing its newest Pentium 4 processors in an effort to thwart AMD's advances.
To put the magnitude of the price cuts into perspective: Intel earlier this month rolled out its fastest Pentium processors, operating at 1.8 gigahertz, priced at $562 in thousand-unit quantities. When the company introduced the Pentium 4 nine months ago, the 1.5 GHz version was priced at $819.
AMD's fastest Athlon processors, operating at 1.4 GHz, are currently priced at $253 in thousand-unit quantities.
Sanders, who noted that the average selling price, or ASP, of an AMD processor in the second quarter had dropped to just more than $75 from about $90 in the prior quarter, said his company's larger, deep-pocketed rival recently has become even more aggressive on pricing.
"An unprecedented number of price moves by Intel in an attempt to stall our market share progress were successfully countered, but impacted ASPs severely," he said.
Despite the profit and revenue shortfall, AMD said it had record unit sales of more than 7.7 million PC processors during the quarter. "On 7.7 million units, a $15 drop in ASPs compared to the prior quarter cost us $115 million in revenues, most of which would have dropped to our bottom line," Sander said.
At the same time, the company said sales of its memory products declined by 13 percent from the second quarter of 2000 and by 23 percent sequentially.
Looking ahead, Sanders said AMD expects continued weakness in demand for flash memory products, driven primarily by the continued severe weakness in the communications and networking sectors. He expects a sequential decline in sales for the third quarter.
At the same time, the company lowered its PC unit growth forecast for 2001, now anticipating industry unit shipments will be approximately flat for the year. And in that weaker environment, Sanders vowed to continue to aggressively seek to increase its PC processor market share and counter whatever further pricing moves Intel might make.
"We're not going to be pushed out of the ring by a sumo wrestler," he said.
Based on a normal seasonal pattern, which would show a pick-up in market demand for PCs in the third quarter, Sanders said he expects unit sales of its processors to again be at record levels, while ASPs will continue to be under pressure.
AMD will intensifying its cost-containment efforts during the quarter and reduce or eliminate those costs that will impact our near-term outlook without affecting its strategy, Sanders said.
He said the company's internal goal is to break even in the third quarter and return to "solid profitability" in the fourth quarter.
Prior to Thursday's earnings news and market outlook from AMD, analysts generally had expected AMD to log a third-quarter profit of 11 cents per share, according to a survey conducted by earnings tracker First Call. 
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