AMD's Sanders Spins Another Good Yarn

Analysts greeted the company's optimistic forecast with caution.
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SAN FRANCISCO -- You have to give W.J. "Jerry" Sanders credit. Even when the Advanced Micro Devices (AMD) - Get Report CEO was forced to report first-quarter numbers that he himself described as "horrific," -- revenues down 20% from the previous quarter, an 88-cents-a-share loss including one-time charges -- he came out with a rosy outlook for the future.

What follows is the take from Sanders himself, from today's conference call with analysts:

1.

Production problems

: "We believe the

production limitations of Q1 were a one-quarter phenomenon." The problems were caused by what Sanders vaguely described as unforeseen design "limitations." Translation: bad designs. They weren't discovered until late in the product testing, and couldn't be fixed until the end of February.

But not to worry, Sanders said, the last five weeks were fabulous. March shipments exceeded January and February shipments combined, and output of high speed 400 MHz chips tripled in March. During the second quarter, Sanders fully expects the company to produce the targeted 5 million sellable chips.

"Our last seven weeks of production indicate we will have competitive products and our customer relationships remain intact," he said. "More than half will be at 400 MHz or higher. A 500 MHz product is possible."

2.

Average sales prices

: In the first quarter ASP dropped to $78, a 12.5% drop from the already ugly ASP of $88 in the fourth quarter of last year and 22% below the target of $100 per chip. This quarter, he expects to hold ASPs at $78.

3.

The next generation K-7 chip

: "We are on track for production shipments of K-7 in June," Sanders said. You will see K-7 based desktop computers from top-tier computer makers on store shelves in July.

4.

First-quarter unit volumes

: "A paltry" 4.3 million units. That compares to the "robust" 5.5 million units that Sanders was able to produce in the third quarter of last year.

5.

Profitability

: "We are not in this for charity although it might look like it from time to time." To break even this quarter, AMD will need to hit revenues of $850 million.

6.

On credibility

: "We have not changed our story, we have just continued to refine our story."

Not all of this washed with analysts. "It seems to me that their plans have changed," said Joseph Osha, an analyst at

Merrill Lynch

. Osha, whose firm has no underwriting relationship with AMD, has a neutral rating on the stock.

Osha listened in on the conference call and said he hung up a bit confused. AMD had previously said it would start phasing out its last generation K6-2 chip to concentrate on selling the higher margin K6-3. But on the call, Sanders implied that it was still focusing heavily on the K6-2 and that the new generation K6-3 would not be produced in heavy volume until the third quarter.

It would be a long shot for AMD to break even this quarter. To hit $850 million, AMD would need to sell more than 6 milllion chips at a $78 average sales price, or get ASPs higher, according to Osha. All the while, it would need to grow non-microprocessor revenues 10% from the last quarter.

And that, Osha said, is unlikely this quarter.