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AMD to miss estimates
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December 11, 2000: 6:52 p.m. ET
Chip maker blames inventory buildup, weaker economy for shortfall
By Staff Writer Richard Richtmyer
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NEW YORK (CNNfn) - Semiconductor maker Advanced Micro Devices warned investors Monday that its fourth-quarter sales and profit will come in short of previous expectations.
AMD, the world's No. 2 supplier of PC microprocessors, said it expects to report fourth-quarter sales flat to nominally higher than the $1.2 billion it logged in the third quarter.
The company, whose warning came just days after a similar revelation from market leader Intel, also said its earnings per share for the fourth quarter will be between 50 cents and 60 cents per share, depending on the relative strength of PC processor sales in the closing weeks of the quarter.
Most recently, the company had told analysts to expect fourth-quarter revenue to rise in the high single-digit range.
The most recent forecast of analysts polled by earnings tracker First Call had called for AMD to earn 68 cents per share on fourth-quarter revenue of roughly $1.3 billion.
Executives at AMD in Sunnyvale, Calif., blamed the shortfall primarily on a buildup of inventory among its customers and a generally slowing economy.
 AMD (AMD: Research, Estimates) shares rose $1.25 to $17.31 ahead of the announcement, which was made after the markets closed. They fell 6 cents to $17.25 in after-hours trade.
When AMD reported its third-quarter results in October, executives said they expected to sell out production of its high-end "Athlon" and low-end "Duron" processors.
On Monday, the company said demand for Athlon processors continues to be strong and it still expects to sell out its fourth-quarter production of those chips. However, AMD said demand for the lower-end Duron processors has been below previous expectations, although it expects demand for those products to increase in the first quarter as new features are added to them.
AMD also said Monday that demand for its flash-memory chips, which are used largely in wireless handsets, set-top boxes and other consumer electronics, remains strong and that it expects sales growth for them will exceed previous guidance for the quarter.
Sudeep Balain, an analyst at Chase H&Q who on Friday downgraded his rating on AMD to "market perform" from "buy," said the company also has experienced weakness in demand for its K7 family of processors.
"They already had been falling behind in meeting their shipment forecasts," Balain said in an interview with CNNfn.com on Monday.
The current weakness in the demand for consumer PCs is likely weigh heavily on AMD as well as other PC-related companies in the first half of 2001 considering the general slowdown in the economy, Balain said.
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If Intel starts to have some trouble, they're going to have a lot of excess inventory that's going to get pushed out into the channel, and people like AMD are going to have trouble.
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Sudeep Balain
Chase H&Q |
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The first quarter is typically the worst for the PC sector as sales slow after the back-to-school and holiday seasons. This year, with the typically strong fourth quarter falling below some expectations, AMD and other PC-related stocks could fall under tremendous pressure in the first half of 2001, according to Balain.
"It's going to be a while before PC demand picks up because of the economic slowdown," he said. "But more importantly, the market is pretty saturated. We know that. If Intel starts to have some trouble, they're going to have a lot of excess inventory that's going to get pushed out into the channel, and people like AMD are going to have trouble."
With its warning, AMD added its name to a growing list of PC-related companies to warn of a weaker-than-expected fourth quarter. In addition to Intel (INTC: Research, Estimates), Micron Technology (MU: Research, Estimates), Apple Computer (AAPL: Research, Estimates), Gateway (GTW: Research, Estimates), Compaq (CPQ: Research, Estimates), Hewlett-Packard (HWP: Research, Estimates) and Gateway (GTW: Research, Estimates) all also have said their results will come in below previous expectations.
And Ulric Weil, technology analyst at Friedman Billings Ramsey & Co., said he expects to see even more names added to that list before year's end.
"If you really drill down and look at what's going on, you will find, particularly when it comes to the consumer part of the sector, that there's an inventory buildup in the channel," Weil said. "So sooner or later, the channel stops ordering. There are no miracles here. The market is maturing, the product is becoming 'commoditized,' and these are very difficult times for these vendors."
For the time being, Weil is recommending that investors stick to the sidelines when it comes to PC-related stocks. If they want to keep their money working in that segment, he says a safer place now might be in the stocks of electronic manufacturing services, or EMS, companies.
EMS companies such as Solectron (SLR: Research, Estimates), Flextronics (FLEX: Research, Estimates), Celestica (CLS: Research, Estimates), SCI Systems (SCI: Research, Estimates) and Sanmina (SANM: Research, Estimates), specialize in assembling, repairing and servicing electronics on a contract basis for big-name tech companies. By farming out their manufacturing to contract manufacturers, they save money by taking advantage of the EMS companies' economies of scale.
In the current economic environment, it is likely that more companies will seek to outsource their manufacturing and service operations in the coming months, according to Weil.
"Everybody now is trying to save money, and they can do that by outsourcing their 'commoditized' assembly, repair and service business to these companies, who do that much more efficiently," Weil said. 
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