AMD's A-OK Quarter Eases Fears After Previously Poor Performance

SAN FRANCISCO -- The funny thing about Advanced Micro Devices (AMD Quote) is that the company doesn't just surprise the Street -- it shocks it silly.

That's what happened today when the semiconductor maker reported fourth-quarter profits of $65 million, or 43 cents per share. That's a ridiculous 42 cents above the average per-share profits analysts expected, according to First Call, and up from a loss of 72 cents per share in the third quarter.

"They just blew away the quarter," said SG Cowen analyst Drew Peck, who had expected AMD to report fourth-quarter profits of 10 cents per share. "The company made enormous strides in market share and in acceptance of the [Athlon]," AMD's high-end microprocessor that competes directly with Intel's (INTC Quote) Pentium III processor. Peck has a neutral rating on the company, and his firm is not an underwriter of AMD.

Not only did Intel's pesky rival make 1 million of its high-end Athlon chips, as CEO Jerry Sanders had promised, it sold more than 800,000 of the chips, an acceptable ratio for AMD's first-ever high-end product. That helped produce record revenue of $969 million, up 46% from the third quarter and 23% year over year, and more than $100 million over the break-even level it predicted when it previewed fourth-quarter performance in November. The company now claims a 17% share of the PC-chip market, the highest share it has ever enjoyed, and more than halfway to its goal of 30% by 2001.

That's a relief for investors who have piled back into this volatile stock. Since Oct. 21, AMD's shares have risen 141% to close at 41 today. The stock now is within sight of the all time-high of 48 1/2 last seen almost three years ago. For most of 1999, AMD investors seemed to follow a pattern: buy at 15 and sell at 25. When the stock broke past 30 on Dec. 2, it was a milestone.

'Buy at 15, Sell at 25' AMD has broken its traditional pattern

Just last July, AMD was in dire straits. Intel had stolen back so many customers and so much market share by dropping chip prices that Sanders practically abandoned the low end of the PC market. In the third quarter, AMD lost a whopping $105.5 million, or 72 cents a diluted share, and had just $377 million in cash left on its books.

Still, even as analysts on the company's conference call Wednesday congratulated Sanders, it was clear they were haunted by the fear that a retaliation by Intel or a manufacturing blunder on AMD's part will send the stock crashing in future quarters. "We've been on the AMD roller coaster four times now," said a fund manager with San Francisco-based Parnassus Investments on the call.

Sanders said that Intel would only hurt itself by dropping prices this time around. "Demand is very strong," he said. "We have excellent cost structures. In a rational market we will do quite fine."

He predicted that sales in the first quarter will be flat compared with the seasonally strong fourth quarter. But he expects unit sales of Athlon processors to grow. In the fourth quarter, the Athlon chips sold at an average price of $250. And for the next year, he said, the company expects to match or exceed Intel's chip speeds, megahertz for megahertz. He expects to take market share from Intel in the corporate computer market for the first time, beginning the second half of next year.

AMD historically has competed against industry leader Intel only on budget computers and by selling chips at a 25% discount to Intel's prices. Today its chips supply every major PC maker but Dell (DELL Quote), and Sanders says AMD is competing with Intel at Intel's prices.

Sanders said he is actively searching for a replacement for Atiq Raza, the former AMD chief operating officer and Sanders' heir apparent, who left in July. Sanders said the person selected will likely be groomed to take over as CEO when Sanders steps down at the end of 2001.

In a major change of tone from past AMD conference calls, there was little sense that investors are eager for Sanders to leave. A fund manager reminded Sanders that at the company's annual shareholder meeting in New York nine months ago, one shareholder had proposed that he resign. "I wish he were here now to hear this," the fund manager said on Wednesday's call. "He didn't have any faith in you, and I think we did."

Still, not everyone believes that the new millennium will treat AMD better than the old one. "Sanders wants you to believe that Intel has changed its stripes and will be too scared to drop prices," Peck says. "I'm not convinced of that. AMD continues to compete against one of the biggest and meanest companies in the world."