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AMD warns of 1Q loss
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February 4, 1999: 5:33 p.m. ET
Heightened competition, price pressure from Intel to hurt chip maker
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NEW YORK (CNNfn) - Advanced Micro Devices Inc. Thursday warned it may incur an operating loss in the first quarter due to stiff competition from rival chip maker Intel Corp.
Analysts said the warning stems from the fact that the Sunnyvale, Calif.-based firm is currently engaged in a price war it cannot win unless it's able to make a dent in the high-end PC business.
AMD (AMD) shares were halted on the New York Stock Exchange after falling 2, almost 10 percent, to 18-15/16.
Wednesday, AMD announced it had canceled scheduled appearances at a pair of technology conferences. Analysts had speculated that heightened competition from Intel (INTC) was the root of the company's last-minute withdrawal.
ADM shares have been retreating...
Analysts polled by First Call expected AMD to log a profit of 13 cents a share in the first quarter. The company said it is re-assessing its competitive position in light of recent price reductions from Intel.
The two companies have been locked in a fierce battle to control the chip market for low-cost PCs. Intel recently began shipping 366- and 400-MHz versions of its Celeron chip, which competes with AMD's K6 line. Intel also plans to unveil a 466-MHz Celeron chip next month.
AMD has been planning to offer a broader mix of products to respond to Intel's pressure, but the company said those efforts won't be completed in time to increase the average selling price of its chips in the first quarter.
While Intel shares have been on the rise.
AMD is scheduled to ship the K7 processor by June. That chip is designed to go head-to-head with Intel's upcoming Pentium III processor and will mark AMD's initial entry into the higher-end - and higher profit margin - business-PC market.
Charles Boucher, semiconductor analyst at Donaldson, Lufkin & Jenrette, said Intel has had the luxury of aggressively pricing its Celeron chip because it can make up for the lower profit margins with its high-end Pentium offerings.
Currently, AMD doesn't have that luxury.
"If they get the K7 out in a timely manner, they may have the opportunity to boost its average selling price," Boucher said.
Tim Mahon, an analyst at S&P Equity Group, said June may be a little late for AMD to receive a boost in its average selling price.
"Clearly, the average selling price is significantly lower than the company's target price of $100," he said. "The K7 will help, but they'll have to make it up until then with K6s."
AMD may be out in the cold
Boucher added that AMD will be left out in the cold in a price war with Intel unless the company is able to take on the world's largest chipmaker in the business-PC market.
"They can't win a price war with the current products," Boucher said. "The next opportunity is with the K7. That will either be their salvation or AMD's final chapter in the microprocessor business."
Scott Allen, an AMD spokesman, said the company remains on target to ship the K7 chip by June, as well as the K6-3 processor -- an upgrade of the company's low-cost PC chip - later this quarter.
"We're confident that we can make design enhancements that will result in a richer product mix," Allen said. "We hope this will be a one-quarter event."
But analysts weren't terribly optimistic that AMD would be able to stave off further losses until the K7 ships.
"In the past AMD has talked about new products and has had execution problems," Mahon said. "And they will have a difficult time getting corporate users to use their products. Corporate users like to stick with one supplier and use their products."
Last month, AMD disappointed analysts and investors by posting fourth-quarter earnings 4 cents short of Wall Street estimates.
Intel shares tumbled 8-9/16 to close at 130-1/8. 
-- by staff writer John Frederick Moore
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