Updated from 5:00 p.m. ESTAdvanced Micro Devices ( AMD) shares sank to a new 52-week low in extended trading after the chipmaker revealed ravaged profit margins that reflect a brutal price war and hefty acquisition-related charges. Though AMD said it gained market share in the quarter, the average selling price of its lucrative server processors declined significantly, pushing the company into the red. AMD CEO Hector Ruiz acknowledged that the impact of a price rivalry with Intel ( INTC) is turning out to be greater than the company initially planned. "Pricing is incredibly challenging -- we expect it to be for all of the year, but in particular the first half of the year," Ruiz said in a postearnings conference call. But despite the stress that the price reductions are exerting on its financial performance, AMD's top brass said the company would press on with its plan to take market share from Intel, the dominant player in the PC microprocessor market. AMD management said the transition to a new generation of chip-manufacturing technology as well as a "maniacal" focus on cost control will lift gross margins back to the roughly 50% target level in 2007. That would mark a significant improvement from the 40% gross margin that AMD posted in the fourth quarter. Investors bid down AMD's stock 4.1%, or 72 cents, to $16.79 in extended trading.
AMD said it had a net loss of $574 million, or $1.08 a share, in the fourth quarter. AMD attributed $1.04 of the loss to its recent acquisition of graphics chipmaker ATI, meaning that AMD's EPS excluding the charges was -0.4 cents. That's well below the average analyst expectation, which called for AMD to earn 10 cents a share. AMD's sales in the fourth quarter were more or less in line with
analysts' dampened expectations after a warning earlier this month. The company said sales in the fourth quarter were $1.77 billion, compared with the average analyst expectation of $1.73 billion. But AMD's outlook for the current quarter was soft, with the company projecting sales between $1.6 billion and $1.7 billion, vs. analyst expectations of $1.81 billion. AMD said margins would improve slightly in the current quarter but didn't provide a specific range. Last week Intel reported better-than-expected, fourth-quarter financial results and said its unit shipments and its average selling prices increased. But Intel projected stagnant gross margins for 2007, raising fears that the price war between Intel and AMD was not about to let up. Backed by a new lineup of microprocessors, Intel has erased the technological advantage that allowed AMD to encroach on its turf over the past couple of years. Intel seems to be having the most success fighting back with its new Xeon server processors. On Monday, Intel announced that Sun Microsystems ( SUNW) would begin using Xeon chips in certain of its servers, supplementing its existing lineup of AMD-based machines.
In its earnings report Tuesday, AMD said shipments of its server processors were sequentially flat in the fourth quarter, while average selling prices declined "significantly." Part of the problem is that AMD is fielding a stale lineup of chips and is not planning to introduce its new quad-core Barcelona processor until the summer of 2007. But AMD is still managing to hold its own with its current portfolio of desktop and notebook chips. The company said it believed it gained unit market share in both categories in the fourth quarter. ASPs for mobile chips increased slightly, while desktop prices decreased slightly during the quarter. Overall unit shipments in the fourth quarter were up 19% sequentially, while mobile shipments surged 41%. "We've been on a customer acquisition strategy for some time, but we're not through," said Ruiz. Customers around the world want to increase their share of business with AMD, he said. To meet that demand, AMD plans to invest $2.5 billion in capital expenditures in 2007, upgrading some of its manufacturing facilities to handle larger 300-millimeter silicon wafers and churn out chips with 65-nanometer circuitry. Smaller circuitry allows a company to pack more transistors per chip, reducing costs. Intel has been producing the bulk of its chip output at 65 nanometers since June and is already racing to move to the next generation of 45-nanometer chips. And with Microsoft's ( MSFT) new Vista operating system slated to begin shipping this month, AMD management said the overall PC market looked encouraging in 2007. "We truly believe that Vista will provide an impetus to unit demand in 2007 and beyond," said Ruiz.