AMD Reduces Sales Forecast, Citing Chip Manufacturing Glitch

Advanced Micro Devices Inc. (AMD), the second-largest maker of processors for personal computers, cut its forecasts for third-quarter sales and profitability, citing manufacturing glitches. Shares dropped as much as 11 percent.

Sales in the period ending Oct. 1 will rise 4 percent to 6 percent from the previous quarter, the Sunnyvale, California- based company said in a statement today. That compares with an earlier prediction for growth of about 10 percent.

Globalfoundries Inc., a spinoff of AMD’s manufacturing operations that now supplies the company with chips, is having difficulties with production at its plant in Dresden, Germany. That has caused a shortfall of AMD’s latest processors, the company said. The glitches are a setback as AMD rolls out its new Llano chip for laptops, which has drawn steady demand, said Hans Mosesmann, an analyst at Raymond James & Associates.

“They’re not cutting because of demand, but are cutting because of execution problems,” said Mosesmann, who is based in St. Petersburg, Florida. “The big question is how far along are they at fixing this problem.”

AMD shares dropped to as low as $5.50 in late trading after the announcement. They declined 34 cents to $6.15 at 4 p.m. on the New York Stock Exchange. The stock has fallen 25 percent so far this year.

Gross margin, or the percentage of sales remaining after deducting the costs of production, will be 44 percent to 45 percent for the quarter, AMD said. The company had previously projected gross margin of 47 percent.

Globalfoundries’ Resources

Globalfoundries is “throwing substantial resources at improving yields,” said Drew Prairie, an AMD spokesman. “We’re seeing progress.”

In the second quarter, AMD had sales of $1.57 billion. A revenue increase of 4 percent to 6 percent from that period would equal sales of about $1.64 billion to $1.67 billion. Analysts on average estimated AMD’s third-quarter sales would rise to $1.72 billion, according to Bloomberg data. Revenue in the year-earlier third quarter was $1.62 billion.

Other chipmakers have slashed forecasts in recent weeks, citing weak demand. Unlike those companies, AMD can’t supply enough of the new Llano chips, according to Raymond James’ Mosesmann.

Earlier this week, Freescale Semiconductor Holdings said its third-quarter sales won’t meet earlier projections. Freescale followed rivals Texas Instruments Inc. and Intersil Corp. in saying that orders for their products are slowing.

Llano, Interlagos

In addition to being unable to supply enough Llano chips -- a combination processor and graphics chip for PCs -- AMD said it wasn’t able to ship its new server chip, called Interlagos, as early as planned.

In April, AMD said it changed its supply agreement with Globalfoundries to protect it against production delays. Under the revised agreement, AMD only pays for functioning chips delivered, rather than total production.

The government of Abu Dhabi is AMD’s largest shareholder, with about a 16 percent stake. AMD is also the biggest customer of Globalfoundries, which Abu Dhabi created out of manufacturing operations it bought from AMD and Singapore’s Chartered Semiconductor Manufacturing Ltd. in 2009. AMD is now primarily a chip designer.

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles@bloomberg.net.

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