Advanced Micro Devices Battles for Its Life

Wielding its Athlon chip for high-end computers, AMD struggles with big-time competition, production problems and a recent earthquake.
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SAN JOSE, Calif. -- In the headquarters of

Advanced Micro Devices

(AMD) - Get Report

, there is a poster of its CEO Jerry Sanders dressed like

Indiana Jones

and wielding a whip. These days, the portrayal is fitting: AMD's story is the action-packed, against-all-odds thriller of the semiconductor industry.

Here's the underdog hero in a sinking boat about to be run down by a giant steamship that is

Intel

(INTC) - Get Report

. To stay afloat, it's jettisoning all unnecessary goods even as it tries to shoot Intel with its one supercharged weapon called the

Athlon

. Just then, a massive earthquake hits, causing waves that almost knock the boat over.

Can AMD survive? Will the Athlon work? Investors didn't seem to think so last month, when the stock dropped 20% to 17 3/16 on Sept. 30 from 21 11/16 on Sept. 8. But since then, it's been rallying, getting back 13% to close at 19 7/16 Wednesday. After the market closed, AMD reported third-quarter revenue of $662 million and losses of $106 million. That's a per-share loss of 72 cents, but far less than the

First Call/Thomson Financial

consensus, which estimated the company would lose 97 cents per share.

The company needs to generate sales of $850 million a quarter just to break even. It hasn't been able to do either for a year. AMD now has cash on its balance sheet of just $377 million, plus an untapped $200 million line of credit. Compare that with Intel, which is

spending $300 million just on its

Pentium III

marketing campaign.

Meanwhile, AMD is trying to stay afloat by selling off all unnecessary assets. In the second quarter it sold its

Vantis

programmable logic division for $500 million. On a

conference call with analysts Wednesday, Sanders said AMD would try to sell its profitable communications product division, which generates $70 million in revenues a quarter.

How much AMD can get for it remains to be seen. "There is a high level of interest in it," Sanders said. "We will see what it is worth." Without the communications division, AMD is left with its microprocessors and flash memory products.

What a year for this company. It started out with

rave reviews for its

K6-3

chip that was supposed to rival Intel's P3, but then the chip design

crashed when the company tried to crank it out in high volume. Then, it geared up to sell its Athlon chip, its best shot at undermining arch rival Intel's P3 and

Xeon

chips for high-end computers. Just then, earthquakes rocked Taiwan, threatening to severely limit the number of computers than can be produced in time for the busy holiday season.

Sanders said the company has the potential to produce 1 million Athlon chips in the fourth quarter and hopes to sell some 800,000 of them, but warned that earthquake damage to Taiwanese plants could make the actual sales figure lower. Nor does he think the company will break even next quarter. "This is a very tough goal," Sanders said. "It remains just that, a goal."

And there you have AMD's latest cliffhanger. The company refuses to die, but it can't catch a break either. The damage in Taiwan comes just when AMD is finally presenting the computer industry with something it has never had before, a choice of processors for high-performance desktops.

Few doubt customers will welcome that choice. The question, says Michael Slater, principal analyst of research firm

MicroDesign Resources

, is whether or not AMD can manufacture and sell Athlons in high volume. (MicroDesign doesn't have a consulting relationship with AMD or Intel.)

If AMD can stay afloat two more years, it is looking at even higher revenues and profits from its

K8

line. Dubbed the "SledgeHammer," the chip is designed to rival Intel at the highly lucrative market for low-end servers. Whereas the Athlon's average sales price of $300 gets Sanders excited, server chips can sell for $3,000 each.

Within AMD, executives say they aren't too worried about Taiwan. Stephen Lapinski, who directs product marketing for the Athlon, told

TheStreet.com

that AMD's top customer,

Compaq

(CPQ)

, makes its own motherboards outside of Taiwan and won't have production problems.

IBM

(IBM) - Get Report

, another Athlon buyer, also makes its own motherboards outside Taiwan.

AMD is keenly aware that it will need to attack Intel in marketing just as it has tried to attack it in chip performance. Lapinski said that AMD will launch an ad campaign this quarter targeted for the first time at the 10 or so publications devoted to computer-aided design and high-level computing. "This will be a new experience for us," he said.

Financial analysts are beginning to see signs that AMD can return to financial health. "They are scratching their way back to profitability," says

Salomon Smith Barney

analyst Jon Joseph, who has a neutral rating on AMD. "We just have to watch as things unfold next year. It will depend on their execution and the popularity of the Athlon. It is coming along a little bit better than I had anticipated. It's a real chip with real customers."

Assuming no more disasters, natural or manmade.