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AMD Still Cowers in Intel's Shadow

Despite the release of new chips, it continues to lag.


Advanced Micro Devices

(AMD) - Get Report

will have a tough act to follow after


(INTC) - Get Report

blistering third-quarter results that blew away Wall Street estimates.

Intel boosted its sales 16% thanks to strong demand for PC microprocessors -- market conditions that could benefit AMD as well.

But expectations for AMD, which will report its results after Thursday's market close, are not encouraging.

The average analyst estimate calls for AMD to post a loss of 62 cents per share, according to Thomson Financial.

Revenue is expected to be $1.52 billion vs. $1.33 billion at this time a year ago. Last year's results did not include contributions from


, the Canadian graphics chip company that AMD

acquired for $5.4 billion in October 2006. Once the ATI results are backed out, AMD's revenue growth appears to be flat year over year.

American Technology Research analyst Doug Freedman predicts another quarter of "sub-optimal revenue growth" as AMD battled Intel with an uncompetitive product portfolio in most market segments.

Despite AMD's release of its most significant chip in years during the third quarter, investors may not see an immediate turnaround in the company's fortunes.

In September, the company

unveiled its long-awaited Barcelona microprocessor, filling a gaping hole in its product lineup.

While Barcelona gives AMD a much-needed quad-core chip -- nearly a year after rival Intel released its first quad-core processors -- the product's impact on AMD's income statement is likely to be muted.

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Because the initial versions of Barcelona feature low clock speeds, the chip's immediate appeal may be limited. Barcelona was also only commercially available in the final weeks of the quarter, further limiting its impact on AMD's financial results.

Nollenberger Capital Partners analyst Patrick Wang said AMD's third-quarter results are likely to get a bigger boost from the R600 graphics processor it introduced earlier this summer than from the Barcelona microprocessor.

Wang expects the graphics division to be near break-even this quarter, thanks to a full quarter of revenue from the R600 chip. By contrast, AMD's graphics business posted operating margins of negative 25% in the second quarter.

Although the R600 is generally viewed as lagging


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competing G8 chip in performance, it is proving to be a popular component for modestly priced PCs targeted at mainstream consumers.

Sales of graphics chips could account for up to 20% of AMD's total sales in the current quarter, compared with 14% in the second quarter, says Wang.

Still, graphics alone can't save AMD, which lost more than $1.2 billion in the first six months of the year and is saddled with $5.3 billion in debt. In August, AMD's chief sales and marketing officer

Henri Richard jumped ship and joined

Freescale Semiconductor


Many investors have also lost faith. AMD's shares, which closed at $14.11, up 15 cents, or 1.07%, on Wednesday, are off roughly 45% from the 52-week high of $25.69 (although shares have rallied 24% from August's 52-week low of $11.27).

AMD said in July that it hoped to return to break-even status by the fourth quarter, but later backed away from the claim, calling it an "aspirational" target.

In any case, stanching the red ink will require a significant lift in AMD's top line, which analysts don't see happening by year's end. The average analyst's expectation calls for AMD to lose 33 cents a share in the fourth quarter.

Changes in the chipmaker's manufacturing are expected to play an important role in the quest for profitability.

Investors are anxiously awaiting details on AMD's plans to switch to an "asset-light" model, in which a greater portion of its chip production is outsourced to third-party contractors. The move will allow AMD to cut costs by scaling back investments in its own fabs.

So far, management at AMD has been cagey about the strategy, citing competitive reasons for keeping mum.

At some point, though, AMD will have to show its cards. With The Street looking for signs of a comeback, AMD's chip manufacturing plans could move the stock as much as its chip shipments.