AMD Swings to First-Quarter Loss

Advanced Micro Devices Inc. reported a greater-than-expected loss in the first quarter as the chip maker continued to struggle amid a fierce price competition with larger rival Intel Corp. Despite the miss, AMD's already-depressed stock price surged on signs the price battle is easing and the company is willing to outsource some of its chip-making duties to outside factories to cut costs.

AMD said Thursday it lost $611 million, or $1.11 per share, in the first three months of the year. That compares with a profit of $185 million, or 38 cents per share, in the same quarter a year ago.

Sunnyvale-based AMD reported $1.23 billion in sales, a 7 percent decline from the $1.33 billion it rang up a year ago.

Analysts, on average, were expecting AMD to record a loss of 48 cents per share on $1.26 billion in revenue, according to a survey by Thomson Financial. Expectations varied wildly, with some analysts predicting a loss as steep as 82 cents a share.

AMD took roughly 4 percent of the processor market from Intel last year, but relentless price cuts by both companies have cut deeply into their profit margins. Intel has been better able to weather the fight -- its cash horde is almost seven times the size of AMD's, and its market value is nearly 16 times larger.

"The first quarter of 2007 was a terrible start to the year," Robert Rivet, AMD's chief financial officer, said on a conference call with analysts. "But we are confident we have a plan to put us back on the right track."

Rivet said the company is aggressively addressing the issues that led to the quarter's significant revenue decline and said customers remain confident in AMD's strategy, products and technology roadmap.

Before the results were released, AMD shares rose 37 cents, or 2.7 percent, to close at $14.28 on the New York Stock Exchange. In after-hours trading, investors shrugged off the bad news and the stock gained 22 cents on optimistic commentary by AMD management.

Analysts said the company pleased investors by offering a more conciliatory tone on pricing and market share than its bellicose posturing in recent quarters.

JoAnne Feeney, senior research analyst with FTN Midwest Securities Corp., said AMD has toned down its rhetoric about gaining market share at all costs, indicating the company will focus more on improving its overall profitability.

AMD management also said the company will consider offloading some of its manufacturing duties to third-party factories, which would reduce its capital expenditures and put more profits back into the company coffers, she said.

"Everybody expected AMD to have a terrible quarter -- and if it's terrible, what's two times terrible?" Feeney said. "That's water under the bridge. At this point everybody wants to know if this company can become more profitable. And at this point, it seems like the company is saying all the right things."

AMD was optimistic for the second quarter -- sales are expected to be flat or slightly higher in a seasonally sluggish period when Intel is forecasting lower revenues and profit margins. AMD management said the company expects market-share gains at Intel's expense in the current quarter but would not elaborate.

AMD also said its closely watched gross margin percentage would improve as it transitions to a more advanced chip-making process, and that its new server chip, code-named Barcelona, was on track to ship in products in the third quarter.

In addition, AMD said it would cut 500 jobs, or about by 3 percent of its work force, the end of the year through attrition and performance evaluations. AMD finished the quarter with 16,700 employees. By comparison, Intel currently has 92,000 workers after completing a massive restructuring that eliminated about 10 percent of the Santa Clara-based company's worldwide work force.

Intel reported Tuesday that its first-quarter profits surged 19 percent as the company benefited from a big tax windfall and lower production costs because of its speedier transition than AMD to a new chip-making process.

AMD recorded $113 million in charges during the recent quarter related to its acquisition of graphics chips maker ATI Technologies Inc. The charges brought down net income by 21 cents per share. The company also took $28 million in charges for employee stock-based compensation expenses, which further reduced net income by 5 cents per share.

Dragged down by sharply lower unit sales and average selling prices, AMD warned twice in the past two months it would not meet its own forecasts. Last week the company shaved about $400 million from its revenue guidance for the quarter, said it would cut 20 percent of its capital expenditures budget for the year, and announced it was imposing a partial hiring freeze to clamp down on costs.

Still, the first-quarter loss was greater than expected.

The company's gross margin percentage plunged from 58 percent last year to just 28 percent in the recent quarter. AMD blamed the decline on significantly lower microprocessor unit shipments, selling prices and the inclusion of ATI's operations, which generally have had lower margins. Excluding one-time charges, the story wasn't much better, as the gross margin comparison was 59 percent versus 31 percent.

A high-flier just a year ago, AMD's stock has plummeted amid signs a resurgent Intel is stealing back market share and forcing AMD to cut deeply into its own profit margins with equally severe price cuts to try and sustain its hard-won gains.

Investors are also concerned about AMD's ability to pay for the $5.6 billion ATI acquisition while still spending heavily to add manufacturing capacity and transition to a new chip-making process.

AMD's stock, which was trading above $30 the same time last year, has lost more than half its value since then, wiping out more than $7 billion in shareholder wealth.


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