AMD Gets Back in Black

The company's early return to profit blows away earnings expectations.
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Updated from 4:51 p.m. EDT

Advanced Micro Devices

(AMD) - Get Report

exceeded Wall Street's financial targets for the second quarter as it posted a profit for the first time in nine months.

AMD cited record gross margins for its computer microchips, specifically its chips used in servers and laptops, as drivers of its results. AMD's memory group posted a steep loss, but the top and bottom lines for the unit both improved from the previous quarter.

The results pushed AMD shares up 2.8% to $19.78 on Instinet in the late session. A jump above $20 would be a first since early January.

For the quarter ended June 26, AMD earned $11 million, or 3 cents a share, on sales of $1.26 billion. During the same quarter last year, AMD earned $32.2 million, or 9 cents a share, on sales of $1.26 billion.

Analysts had expected a loss of 5 cents a share on sales of $1.22 billion, on average, according to Thomson First Call. The bottom line range was wide, however, with expectations spanning a loss of 17 cents to earnings of 5 cents.

At the quarter's start, AMD only said microprocessor sales would be flat to slightly down; it didn't disclose expectations for its memory unit, which AMD has said it would like to spin off via an IPO.

For the third quarter, AMD said its computer chip sales should "exceed normal seasonal patterns" and the company again declined to project results for its memory unit.

Analyst Eric Ross with ThinkEquity Partners said AMD's microprocessor business is doing well, but memory remains stuck. Ross doesn't own the stock and his firm doesn't have an investment banking relationship with AMD.

He said the run-up in the stock has been overdone considering the overhang that the flash unit creates, but investors continue to find reasons to buy in. During the past three months, shares are up almost 40%. Ross said that's too much for what essentially is a break-even quarter.

"Until someone buys or they spin off the flash unit, it will continue to be a drag on earnings," Ross says. "They will never get the results Intel has while they have such a big flash business."

Flash memory made up 37% of AMD's sales while

Intel

(INTC) - Get Report

, AMD's primary rival, generates less than 10% of its sales from flash.

AMD's gross margin was 39%, up from 34% in the previous quarter and above the 38% in the second quarter last year. The company has long-term targets of 60% margins, but that takes into consideration the memory group's spinoff.

AMD recorded an operating profit of $110 million and sales of $767 million within its computation products group, which includes PC, server and laptop chips and chipsets. In the previous quarter, this unit posted a $92 million operating profit on sales of $750 million.

Selling prices rose 6% for its computer processors, likely stemming from AMD's server and laptop chips, which command premium prices. Geographically, sales were strong in China, North America and developing markets, the company said.

Its memory group lost $90 million on sales of $462 million in the second quarter vs. an operating loss of $110 million on sales of $447 million in the first quarter and an operating profit of $45 million on sales of $673 million in the second quarter last year.

Unit shipments rose 12% sequentially in the memory group and AMD said sales of its MirrorBit flash memory, an advanced technology that AMD says carries a cost advantage over competing technologies, grew to 20% of total memory sales with increased wireless demand.