The outcome of the fourth quarter is not exactly a secret. Advanced Micro Devices ( AMD) bled, while Intel ( INTC) fared better than expected. When AMD reports its earnings after Tuesday's market close, investors will get all the gory details, including a more complete accounting of the severity of the price erosion, as well as the latest market share moves in the continuing slugfest between the two chipmakers. "The worst of the news is out
for AMD. And hopefully the details will help us get a clear picture of the depth of their problems for Q4 and their prospects over the next six months," says FTN Midwest analyst JoAnne Feeney. While AMD acknowledged in its warning earlier this month that its chip prices and its profitability took a thrashing in the fourth quarter, the company also said that unit shipments were up during the quarter. "What we're looking for is detailed information on unit sales in desktops and notebooks so that we might glean a better picture over the market share shift in Q4," says Feeney, who rates AMD a buy. Like many analysts, Feeney believes that AMD lost market share in servers in the fourth quarter, as Intel's new generation of Xeon processors continues to win fans in the market. Indeed, Intel's server momentum continued on Monday, when it announced that Sun Microsystems ( SUNW) will use the Xeon in certain servers, supplementing its existing lineup of AMD-based machines.
Desktops and notebook chips are the big wild card, though, and any signs that AMD gained share in these two categories -- despite fielding a chip lineup that has become long in the tooth compared with that of Intel -- will be an encouraging sign for AMD bulls. The price of any market share gains will be reflected in AMD's gross margin, which is expected to show signs of stress and remain short of the company's goal of reverting to the 55% to 60% level. In its preannouncement earlier this month, AMD said its gross margins were hurt by significantly lower prices. In the third quarter, AMD's gross margin declined to 51.4% because of price competition as well as growing pains it attributed to working with a new set of larger customers, such as Dell ( DELL). John Lau, an analyst at Jefferies & Co., which has received noninvestment banking compensation from AMD in the past 12 months, expects "substantial margin erosion as the company attempts to remain competitive." Indeed, Lau's EPS estimate of 2 cents is significantly lower than the average expectation on Wall Street of 10 cents. Analysts polled by Thomson Financial expect AMD's fourth-quarter sales to total $1.73 billion, including contributions from the recently acquired graphics-chip maker ATI.
Excluding the ATI results, AMD has warned that its fourth-quarter operating income will be positive but substantially lower than the third quarter's $119 million. AMD also said that sales in the fourth quarter increased 3% from the $1.33 billion revenue in the third quarter. That's a good deal lower than AMD's initial expectation for a seasonally strong fourth quarter, which the company defined as ranging from 6% to 13% sequential growth by historical standards. Of course, AMD's outlook will be of utmost importance for investors. Analysts are expecting EPS to remain flat and revenue to move up moderately in the first quarter, as little is expected to change near term in the existing competitive dynamics between AMD and Intel. But with AMD expected to become more competitive by about midyear, when it introduces a new generation of processors, any details AMD provides for the full-year 2007 financial expectations, in addition to updates on its technology rollout, will be key.