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Advanced Micro Devices (AMD) saw its stock fall more than 10 percent today after posting a wider-than-expected first-quarter loss that it blamed on production problems and an industry slowdown.

AMD's shares were off 3-3/16 today, closing at 27-5/16. Also affecting the stock were reports that IBM may buy a stake in AMD and that CEO Jerry Sanders could step down during the next 12 months.

Since last Monday, AMD's stock had been climbing every day, jumping to a recent high of around 31 on analysts' comments that the company had solved its manufacturing problems. Yesterday, however, the chipmaker reported a $55.8 million loss, compared with a profit of $12.9 million for the like quarter a year ago.

The quarterly loss of 39 cents per share was below the mean estimate of a 29-cents-per-share loss predicted by Wall Street analysts, according to First Call.

For the first quarter ended March 29, AMD recorded sales of $540.9 million, down from $552 million for the like quarter a year earlier. On March 4, AMD warned that its first-quarter results would "decline significantly" compared to the fourth quarter of 1997. The company reported revenues of $613 million and a net loss of $12.3 million, or 9 cents a share, during the fourth quarter.

"Everybody knew they were going to lose money but no one knew how much," said Hans Mosesmann, an analyst with Prudential Securities. "I upgraded [AMD's stock rating] on momentum on yield [improvements]" to "buy" from "hold" last week.

"Yields were on track as we had expected," he added. "Everyone knew it was going to be a bad quarter. They could have lost 50 cents [a share]...The company is on track to return to profitability in the third quarter."

Sanders has a signed a contract that will keep him with the company through 2003, said company spokesman Scott Allen. In 2001, he will give up the CEO title. At the end of 2002, Sanders will give up the chairman title but will remain with the company's executive team through 2003. Allen said it is unclear what role he will play or what title he will hold in 2003.

For the time being, a financial investment would improve AMD's situation, said Mosesmann. "They are strapped for cash and do need some funding."

The company has been very open about its need for funds. AMD recently filed for a shelf registration with the SEC to sell up to $1 billion in common and preferred stock as part of a debt offering. "We need to acquire external financing this quarter," said Allen. The shelf registration allows the company to either do a debt or equity offering.

"To compete with Intel, they need more resources," Mosesmann said. "Someone with deep pockets would be beneficial."

At this point, an IBM investment is nothing more than a rumor, added Allen, noting that AMD's management will consider opportunities that are in the best interest of shareholders.

IBM does have an extensive, two-fold relationship with the chipmaker. AMD has an agreement with Big Blue, announced in February, in which the PC giant manufactures its Intel-compatible microprocessors. The second half of the relationship is that IBM is a customer. It buys AMD chips for PC hardware.

"Our year-to-year performance troughed for AMD in the first quarter and we look for important improvements quarter by quarter throughout the year," Sanders said during a conference call.

"We have a good chance of returning to profitability in the third quarter. That would mean that revenues would have to be over $700 million," he added. "We believe we are now back on the steepest microprocessor ramp in our history." Sanders noted that he expects AMD to ship at least 2 million K6 units in the second quarter.

In a statement, he also cited "weak demand in certain Asian economies--notably Korea and Japan." He said the outlook was brighter for AMD's computation products group.

"We have resolved the yield problems on the 0.35-micron process," he added, noting that during the just-completed quarter, AMD-K6 unit production increased "nominally" over the 1.5 million units shipped during the prior quarter.

AMD had a well-publicized challenge, and "we had to overcome it or it was going to overcome us," said Allen. "The K6 represents the future of the company and to date, AMD's problem has been that demand has far exceeded supply."

The company produced 1.5 million K6 chips in the fourth quarter and "nominally more than that" this quarter, according to Allen. AMD set a goal of producing 12 million units internally during calendar 1998. IBM will start producing wafers in the third quarter and expects to have final products in the fourth quarter.

In addition, AMD shares have been on the rise. Since the holidays, the chipmaker's stock appreciated about 70 percent from trading in the high teens as of late December.

Looking beyond the current quarter's woes and warnings, a handful of analysts, who were looking for improvements in yields, upgraded the company to "buy" late last month, something that will have a direct impact on earnings.

Reuters contributed to this report.

 

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