A Weaker David to Intel's Goliath

AMD's chip delays and cash woes pile up

When Advanced Micro Devices Inc. (AMD ) announced on Oct. 1 that revenue for the third quarter will be at least $100 million lower than expected, few were surprised. After all, apart from Dell Computer Corp. (DELL ), tech continues to languish. Indeed, the Sunnyvale (Calif.) company blamed lousy market conditions for its fifth loss in as many quarters. "Weakness in the personal-computer market continues to impact AMD," lamented Chief Financial Officer Robert J. Rivet Sr.

But if the economy is hardly helping, many of AMD's travails appear self-inflicted. Its current chips are too slow for the higher-margin desktops PC makers are now concentrating on to boost profits, while production glitches have delayed its next-generation PC chips. Worse, AMD is falling behind in its bid to crack the lucrative server market. With the company burning through cash and its market share crumbling, CEO Hector de Jesus Ruiz will have to pull out all the stops to get AMD back on track.

That's quite a reversal for a company that only 2 1/2 years ago boasted the fastest microprocessors in the world. Now, with Intel Corp. (INTC ) preparing to roll out a souped-up 3 gigahertz Pentium 4 processor in November, AMD is still struggling to make chips that pass the 2-gigahertz mark. Moreover, the widely anticipated launch of its next-generation Hammer family of chips, has been delayed until February or March--more than a year later than originally planned. As a result, AMD's market share may dwindle from a high of 22% in 2001 to 15% by yearend, says Merrill Lynch & Co. analyst Joseph Osha. "AMD is losing an enormous amount of ground in the microprocessor business," he adds.

How did AMD lose the lead in speed it once enjoyed over its much bigger rival? Intel has put in place new production techniques that enable it to make ever faster chips at a drastically cheaper cost. The combination is letting Intel beat AMD on both speed and price. In contrast, AMD's Athlon chip was never designed to run as fast as the current Pentium 4. Although AMD has managed to pump up the speed, it has yet to duplicate Intel's ability to spit the chips out more cheaply.

Despite these problems, Ruiz, who took the helm in April, insists AMD's woes are temporary. He's pinning his hopes on next-generation processors for PCs and servers, which can run desktop applications much faster than current chips. The big question is whether there is sufficient demand for such sophisticated chips. There aren't many applications yet that need such processing power. But Ruiz plans to compete on price and figures with the likes of Dell and Apple Computer Inc. will buy the high-performance chip at a cheaper price than that of rivals.

Ruiz is also seeking to tap new markets. In February, AMD acquired Alchemy Semiconductor Inc. It makes low-power chips used in handheld and tablet PCs, car navigation, and networking gear. Two months ago, AMD also unveiled low-power flash-memory chips for cell phones and handhelds. And it recently rolled out chips that significantly boost the amount of data that can be stored on a single chip. "We're way farther ahead of the game [than] people think we are," says Ruiz.

Maybe, but first, he must shore up AMD's perilous finances. The move to more sophisticated production processes is depleting AMD's cash stockpile. At current rates, it could go through its $1.1 billion cash reserves by the end of May. To stem the flow, AMD is expected to renegotiate millions in debt coming due over the next four years. More restructuring is also possible after the decision early this year to shut two plants in Texas and fire 2,240 workers.

For 33 years, AMD has managed to survive many scrapes in its David vs. Goliath battle with Intel. And no one in the industry wants a monopoly to emerge. That's why AMD is likely to keep nipping at Intel's heels--though it will need to strike a major blow with Hammer to win back market share.

By Cliff Edwards in San Mateo, Calif.

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