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AMD Reached for the Moon -- and Delivered

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Somebody alert the authorities! Flying pigs are throwing snowballs at Beelzebub under a blue moon!

Okay, not really. But Advanced Micro Devices (NYSE: AMD  ) just turned a quarterly profit, which might shock a lot of people just as much.

AMD reported a profit from continuing operations of $0.07 per share on sales of $1.78 billion. Gross margin expanded from 41% during last year’s third quarter to 51% in the current quarter. That's still nowhere near Intel (Nasdaq: INTC  ) and its 59% gross take, but it's a huge step in the right direction and a sure sign that the price war is indeed over. And just like Intel, AMD saw rising unit volumes alongside flat average selling prices. Paul Otellini made me think that Intel was stealing sales from its main rival, but these numbers tell a different story. Between reports from AMD, Intel, and IBM (NYSE: IBM  ) , we have a solid collection of evidence that rumors of the computer industry's death were greatly exaggerated.

But if you thought this report was impressive compared to a two-year string of losses and financial woes, just hold your horses. The "asset smart" manufacturing strategy hasn't actually happened yet -- it's still just an agreement on paper, and AMD stands to improve its operating model something fierce. Texas Instruments (NYSE: TXN  ) has improved its gross margins by nine full percentage points in the last four years by relying less on in-house production lines and more on third-party chip foundries like United Microelectronics (NYSE: UMC  ) . AMD's shift will be bigger because TI kept some of its plants, and AMD is unlikely to do that.

And that's not all. That expensive ATI deal is starting to pay dividends as the graphics segment produced $47 million of operating income, which made the difference between red and black ink on the operating line. Sales in this division exploded with a 55% gain over last quarter and an avalanche of high-performance graphics chips. NVIDIA (Nasdaq: NVDA  ) must have lost some market share this time.

CEO Dirk Meyer and his team are delivering on their promises at long last. Do this a couple more times -- in a row! -- and you'll convince the doubters that the worst is over, guys. After teetering on the brink of financial disaster for far too long, AMD could be the next turnaround story of Apple's caliber. And we won't be reminded of winged pigs the next time you make some money.

Further Foolishness:

Intel is a Motley Fool Inside Value selection. NVIDIA and Apple are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund owns shares in AMD, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.

Read/Post Comments (1) | Recommend This Article (3)

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  • Report this Comment On October 17, 2008, at 12:53 PM, TEBuddy wrote:

    Wow, someone was brave enough to give credit where credit is due, reporting the positive side of the story. THANK YOU. I don't understand how people can complain that AMD loses too much operating income maintain foundries, and needs to focus on designing cpus, and then when they spin it off they say AMD will still lose.

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