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Advanced Micro Devices


delivered a solid first-quarter report Wednesday, but for investors fretting about the chipmaker's future prospects, the big profit upside wasn't enough.

With competition from



expected to grow more fierce in coming quarters, AMD's lackluster guidance stoked fears that the chipmaker's salad days are coming to an end.

AMD's shares tumbled more than 8.5%, or $3, to $32.40 in midday trading Thursday.

"We knew at some point Intel would come back. It's just a question of how much longer AMD has and it looks like maybe their easiest quarters are behind them," says Romeo Dator, co-manager of U.S. Global Investor's All-American Equity Fund, which holds AMD shares.

Intel shares meanwhile, which closed at a 52-week low on Wednesday, were recently up nearly 2%, or 37 cents, to $19.49.

AMD's $1.33 billion in first-quarter revenue was in line with its guidance, which called for flat to slightly down sequentially, in keeping with the seasonally slow start the year.

But that guidance was set before Intel

delivered its midquarter revenue warning in March, saying sales in the first quarter could be short by as much as $500 million.

In other words, AMD didn't get any extra pop from Intel's shortfall.

"Is that a sign of slowing PC market or just pricing pressure? It's hard to say. I think maybe a combination of the two," says Dator.

Neither scenario, of course, is good news for AMD.

AMD increased its server sales by more than 100% year over year in the first quarter, while notebook and desktop sales were down sequentially. Overall, AMD continued to make strides in increasing its mix of higher-end products -- the average selling price across AMD's product line-up increased 7% from the fourth quarter.

"AMD clearly gained revenue share in the MPU segment in the quarter, but may not have gained unit share," Deutsche Bank analyst Ben Lynch wrote in a note to investors, maintaining his sell rating on AMD. Deutsche Bank makes a market in AMD securities and has provided non-investment banking services to AMD in the past 12 months.

AMD set a new margin record in the first quarter, logging 58.5% gross margins, up from 57.3% in the fourth quarter.

AMD credited its product mix improvements, higher prices and manufacturing efficiencies for the increased margins, which contributed to its healthy first-quarter earnings upside.

In fact, AMD lifted its long-term gross-margin targets from the previous 51% to 57% range to a new level of 55% to 60%.

But some investors viewed the margin goals with skepticism, given the reports of Intel's aggressive price cutting.

"What they

AMD think they're going to do and what actually happens are two different things," says Bob Bacarella, chief financial officer of Monetta Financial Services.

"I think the bloom is off the rose for AMD right now," says Bacarella, pronouncing AMD shares "dead money" for the next three to six months; he liquidated his shares following the earnings report.

AMD executives played down the significance of price cuts from Intel, without exactly denying that they were occurring, during the conference call with analysts following the earnings announcement. Management was circumspect about the second-quarter margin outlook, saying only that AMD would try to live within its newly set range.

"I believe it is prudent at this point in time, despite our highly confident scenario relative to products and customers, that we should be cautious in the second quarter," said CEO Hector Ruiz.

And AMD's acknowledgement that its processor's forthcoming DDR2 memory support would not provide a significant performance boost didn't help matters. Intel is slated to release a trio of new microprocessors in the second half of the year, featuring a new microarchitecture, which some analysts believe could allow Intel to reclaim the performance crown.

AMD projected that second-quarter sales would be flat to down slightly from the first quarter. That would represent a 65% year-over-year increase, but it's below the Street's expectations, which called for revenue to increase by 1.5% sequentially.

Several Wall Street analysts lowered their 2006 revenue expectations, while moving up their EPS estimates. CIBC World Markets added 21 cents to AMD's 2006 EPS estimate, while trimming revenue from $5.8 billion to $5.66 billion.

"Guidance was conservative, in our view, perhaps reflecting caution now that AMD has caught the attention of the slowly awakening giant," wrote CIBC analysts Rick Schafer and Allan Mishan. "We believe INTC has already implemented pricing cuts at the low-end and we anticipate pricing pressure will only intensify as the year progresses." (CIBC makes a market in Intel securities.)