AMD Outperforms

AMD's sales in PC processors met ambitious estimates for the third quarter and its flash memory unit strengthened. With Intel in turmoil, AMD looks like the company to beat.

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By Brian Lund (TMF Tardior)
October 11, 2000

The earnings-warning blues have taken hold of Wall Street lately, dragging down a lot of solid companies together with the ones that are struggling. Advanced Micro Devices (NYSE: AMD) has suffered together with its nemesis, Intel (Nasdaq: INTC). AMD has dropped more than 50% from its high in late June, despite issuing nothing but good news.

AMD's price rose after the bell today, however, after it issued strong third-quarter results. Net income, excluding one-time gains and charges, rang in at $219 million, or $0.64 per share, way better than the $0.36 loss in the year-ago quarter and two cents ahead of estimates.

Sales and margins
Sales came in slightly below expectations at $1.206 billion, as did operating income of $263 million, because AMD sold off its voice communications unit. Total sales rose 3% sequentially, but PC processor sales rose 7% and flash memory sales rose 16% sequentially. Demand for flash memory and the Athlon processor -- AMD's top-shelf offering -- exceeded supply.

Though gross margins diminished somewhat, operating margins remained strong at 21.8% -- a 40 basis point improvement sequentially and infinitely better than last year's loss -- as a result of small increases in R&D and SG&A spending. AMD expects to continue to produce operating margins in excess of 20%.

PC processors strong
AMD managed to meet its ambitious sales target of 3.6 million Athlon and Duron processors in the quarter. It also sold 3.2 million K6 processors. Management insists that it can meet its Q4 target of 7.2 million Athlon/Duron units, including a 1.2 gigahertz version. It anticipates selling 28 million units this year, way ahead of last year's 18 million. Average sale prices fell for Duron, but management asserts that this is temporary.

AMD took PC-processor market share away from Intel in the quarter. It now sells to nine of the top ten PC makers -- all but Dell (Nasdaq: DELL). High-flying start-up Transmeta wants to license technology from AMD for use in its own products. In spite of problems in the PC industry, which both Intel and Dell have felt, AMD continues to perform in line with ambitious expectations.

Flash memory strong
AMD's flash memory unit continues to perform. It now accounts for 35% of total revenue, up from 31% last quarter. In the third quarter, AMD did a deal with Texas Instruments (NYSE: TXN) to develop an advanced architecture for AMD's flash memory devices for wireless appliances. That follows a three-year deal to supply Hewlett Packard (NYSE: HWP) with flash memory products for printers. In spite of weakness in the handset market, which Motorola (NYSE: MOT) has felt, AMD continues to improve its flash memory sales.

There is one noteworthy element on the downside. AMD's accounts receivable rose 29% over the previous quarter, well above the 3% sequential increase in revenue. Inventories also rose 14%. That pushed its Foolish Flow up from 1.05 to 1.1. That's not terrible, but it is worth keeping an eye on. It's unusual for a company that is having trouble meeting demand.

Otherwise, AMD has turned the tables on Intel this year. AMD has traditionally been the company that has failed to meet demand or to maintain a performance advantage in its products. This year, however, Intel has been the one stumbling over its own feet. Now it's playing catch-up. If Intel doesn't look sharp, it may fall way behind its competitor.

Your Turn:
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