AMD Warns of a Revenue Shortfall

Advanced Micro Devices is hardly in the chips. It predicts fourth-quarter sales will drop 25%, as customers dial back tech outlays

Chipmaker Advanced Micro Devices (AMD) is among the most recent casualties of the slowdown in technology spending. On Dec. 4 the chipmaker drastically cut its sales outlook, saying fourth-quarter revenue will drop about 25% from the third quarter's $1.59 billion.

AMD blamed a cratering in demand for chips used in personal computers and servers, the machines that run corporate networks. The company cited "weaker-than-expected demand across all geographies and businesses, particularly in the consumer market." The company is scheduled to report quarterly earnings on Jan. 22. Its warning comes three weeks after a similarly dire outlook from rival Intel (INTC), which cut the low end of its revenue forecast by $1.4 billion on Nov. 12 (, 11/12/08).

The announcements reflect a steep drop in tech spending by corporations and consumers that's taking a toll on the broader technology industry, forcing layoffs just this week at telecom stalwart AT&T (T) and software maker Adobe (ADBE). AMD's announcement also underscores the company's particular woes amid competition with Intel.

Losing Out on Netbooks

AMD shares dropped 2.7%, to 2.14, in early afternoon trading. On Oct. 16, AMD reported a third-quarter loss of $67 million on sales just shy of $1.6 billion, not including licensing revenue. The decline outlined on Dec. 4 would put this quarter's revenue at less than $1.2 billion, or about $300 million below Wall Street analysts' expectations.

AMD is hurting in part because of the new and growing product class of consumer netbooks (, 11/18/08), small and light notebook PCs that sell for less than conventional PCs. "AMD has a proportionally higher exposure to the consumer market than Intel, and the only part of the consumer market that's growing right now is netbooks, where it doesn't participate," says Ashok Kumar, an analyst at Collins Stewart.

At least one analyst was quick to revise his forecast. Craig Berger of FBR Capital Markets cut his estimate on AMD's 2009 revenues to $4.9 billion from $5.4 billion, and said he expects AMD to lose $1.45 a share, vs. his prior estimate of a $1.15-per-share loss. "We think AMD's relatively stale product offering of desktop and mobile chips…means its business is faring worse than Intel's," he wrote, adding that Intel is taking market share from AMD. He suggested that more bad news may be yet to come from Intel. "The magnitude of AMD's miss obviously raises the risk that Intel will also preannounce revenues worse than its already revised range."

A Manufacturing Spin-Off

On Oct. 8, AMD announced a wide-ranging restructuring plan under which it will spin off its manufacturing operations into an outfit called Foundry Co., which will focus on making chips for AMD and other customers while AMD focuses on chip design. The new company will be jointly owned by AMD and investors from the oil-rich Middle Eastern emirate of Abu Dhabi ( 10/08/08). The new structure will take the enormous expense of manufacturing chips off AMD's back and allow the company to focus on lower-cost chip design operations. But the restructuring will take time and isn't expected to be complete until well into next year.

AMD has been struggling in recent years to keep up with Intel in the PC and server microprocessor business. Last month it launched a new server chip under its Opteron brand, which is widely known by its code name Shanghai (, 11/13/08).

By some performance measures, the chip is expected to get AMD back in the game against Intel in the server space, and it could help rehabilitate AMD's reputation after a prior product known as Barcelona appeared late and failed to meet performance expectations. On Nov. 17, Intel brought out a new chip, code-named Nehalem and sold under the Core i7 name, that is being aimed at desktop PCs, while chips for two- and four-chip servers are expected in the coming months.

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