January 23, 2007 1:51 PM PST

AMD shows loss on merger costs

Advanced Micro Devices posted a quarterly loss on Tuesday as the supplier of microprocessors felt pressure from a price war with Intel and booked costs from its $5.4 billion purchase of graphics chipmaker ATI.

AMD's net loss for the fourth quarter, ended December 31, was $574 million, or $1.08 per share, compared with a profit of $96 million, or 21 cents a share, a year earlier. Revenue was $1.77 billion, compared with $1.84 billion a year earlier.

The results included special items such as a $550 million charge related to its purchase of ATI. AMD finalized the acquisition of the graphics and chipset maker in October.

"We are not satisfied with our financial performance in Q4, and we need to improve our results in the future," Dirk Meyer, president and chief operating officer of AMD, said on a conference call following AMD's earnings announcement. Nonetheless, he noted that AMD continue to gain market share against Intel all year, and recorded a 26 percent gain in unit shipments in the fourth quarter compared with last year.

The problem, however, is that the 26 percent gain in unit shipments translated into only a 2 percent gain in revenue. AMD said earlier this month that quarterly revenue would fall short of Wall Street expectations and that operating profit would fall from the third quarter, citing lower prices for its chips.

The pricing erosion was felt mostly by AMD's server group, where unit shipments were flat, said CEO Hector Ruiz. Desktop processor prices dipped a little, and mobile-processor prices actually rose, he said.

One definite bright spot for AMD was the performance of the company's mobile division, which enjoyed a 76 percent increase in unit shipments and an 85 percent increase in revenue. Although the company faces an uncertain pricing environment during the upcoming year, the ongoing shift in the PC market toward notebooks will help stabilize AMD's pricing, Ruiz said.

Shares in AMD have fallen more than 50 percent over the past year as investors grow concerned that its market share gains against Intel have stalled. The stock trades at 13 times expected 2008 profit, compared with 15.6 times for Intel.

After years spent trying to catch up to AMD's Opteron processor, Intel fired back this year with new processors based on its Core microarchitecture. The chips have received favorable reviews to date, and analysts think Intel has regained some market share in servers.

Analysts are also worried about AMD's ability to compete with Intel's manufacturing heft, although that's always been a concern when it comes to AMD. The company is in the midst of the transition to its 65-nanometer manufacturing technology and expects to complete it this year, setting the stage for a quicker-than-usual transition to 45-nanometer manufacturing technology in 2008, Meyer said.

Intel has laid out aggressive plans for using its capacity to build chips with dozens of cores on each silicon die, but it doesn't appear that Ruiz will be standing in line to buy one.

"I think those products and technologies are going to find their rightful place in the pantheon where the Pentium 4 at 10GHz lies," he said, referring to Intel's plans earlier in the decade to extend the clock speed of its Pentium 4 processor to those extreme speeds. Heat considerations forced Intel to scrap that project and adopt multicore designs based around the power-efficient Core microarchitecture.

This year, AMD is betting on a quad-core product known as "Barcelona" to change its fortunes in the server market. The company said earlier Tuesday that it expects Barcelona to outperform Intel's quad-core chips by 40 percent when it arrives in the middle of this year as AMD's first quad-core processor.

However, it's looking like an uncertain first half of the year for the PC market, Ruiz said. The pending debut of Microsoft's Windows Vista operating system will have a positive long-term effect on PC sales, but it's not clear that the industry will see a bump from Vista in the first quarter, he said.

Accordingly, AMD provided conservative guidance for the first quarter. The company said it expects the quarter to be "seasonally down," and predicted that revenue will fall between $1.6 billion and $1.7 billion. Analysts surveyed by Thomson First Call had been expecting an average of $1.8 billion.

Reuters contributed to this report.

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