By John Rogers
The best thing that can be said about the first quarter is that it’s over, said Jerry Sanders, chairman and chief executive officer of Advanced Micro Devices Inc. The Sunnyvale, California- based chip maker reported a net loss for the quarter of $128.4m on revenue of $631.6m, compared to a loss of $62.7m on revenue of $540.9m in the year-ago period. The loss amounted to $0.88 per share but, excluding a restructuring charge of $15m, would have been $0.81. Analysts surveyed by First Call were expecting a slightly wider loss of $0.92 after AMD had warned last week that the quarter would be a particularly rough one.
AMD was hit by high fixed costs, declining average selling prices and continuing yield problems for its K6 family of processors. The yield problems, which had hampered the fourth-quarter and were believed to have been solved in January, when the company predicted that margins for the first quarter would be in the low- to-mid 40s. Instead, gross margin for the quarter stood at 29% of sales, down 10 points from the prior quarter. Average selling prices, meanwhile, slipped to $78. The company has said before that it needs ASPs to hold firm at about $100 if it expects to be profitable. Record spending on research and development of $160m in the quarter only added to pressure.
On a conference call with analysts following the announcement, Sanders said, Our horrific financial performance in the first quarter can be attributed to three factors: yield, yield, yield. The lingering problem was a design flaw that mostly affected production of K6-2 chips running at 400-MHz or faster. The shortfall in these higher-margin chips compounded the company’s already poor pricing situation.
Sanders explained that the limitation was discovered late in the fourth quarter and said correction work was carried out immediately but the fixes didn’t work their way through the production process until the end of February. Thus only the last five weeks of the quarter saw the company producing at maximum volume. Production of K6-2s in March actually outstripped that of January and February combined, leading Sanders to assert that the problem was a one quarter phenomenon. He predicted that margins will climb back to the mid-to-upper 30% range for the second quarter.
Despite the disastrous production problems, AMD claims to have held a 45% market share in the desktop PC market in March and a 60% share in the sub-$1,000 market. Its share of the portable market has also risen to 39%, according to Sanders, double what it was seven months ago. The company said it lost a significant amount of business due to the yield problems, but claims that its customer relationships are strong and should lead to increased sales going forward. The company’s stated goal of shipping 20 to 25 million chips for the full year is still very much attainable, Sanders added. AMD said it is also seeing improving order patterns in its non-processor product lines, with flash memories leading the way. Sales of non-processor products are expected to rise 10% in the second quarter.
