AMD Expects Rebound After Weak Second Quarter

MANHASSET, N.Y. — Declining average selling prices for high-volume desktop processors sent AMD Inc.'s sales and earnings tumbling for the second quarter of 2006.

AMD (Sunnyvale, Calif.) reported sales of $1.22 billion, operating income of $102 million, and net income of $89 million, or 18 cents per share for the quarter ended July 2, 2006. These results include $18 million of employee stock-based compensation expense and a net gain of $10 million associated with Spansion LLC's repurchase of its 12.75 percent senior subordinated notes.

The company had reduced second-quarter guidance earlier this month, calling for sales of $1.215 billion, after warning of a flat second quarter following a strong first one. In the first quarter, AMD posted sales of $1.332 billion, net income of $184.5 million, and operating income of $259 million.

During a conference call with analysts, AMD chief executive Hector Ruiz and other company officials said they expected demand to be "seasonally strong" in the second half of 2006, and projected third quarter sales to increase sequentially. However, Ruiz was vague about giving specific figures.

"Our customers tell us they expect demand for our products is healthy, and some customer acquisition strategies makes us optimistic we're going to gain market share," Ruiz said.Ruiz added pricing would continue to be a challenge, particularly in desktop processors, as would channel inventories in this sector.

For AMD, the second quarter pricing decline was in part likely prompted by a price war with archrival Intel Corp., which cut its second half forecast after posting dismal second-quarter results Wednesday.

Gross margin fell sequentially to 56.8 percent from 58.5 percent the first quarter, and total microprocessor unit shipments fell 4 percent sequentially.

"While we achieved 53 percent year-over-year sales growth and recorded our twelfth consecutive quarter of greater than 20 percent year-over-year microprocessor sales growth, we are dissatisfied by not reaching our second quarter sales target," said Robert J. Rivet, AMD's chief financial officer, in a statement.

On the positive side, AMD reported a double-digit sequential increase in sales of its Opteron processors, and said it would supply its dual-core Opteron processor to Dell Corp. for use in servers by the year's end.AMD also announced plans to expand its manufacturing operations, including converting Fab 30 from 200mm to 300mm production, expanding capacity at Fab 36, and accelerating the transition to 45nm production within 18 months of initial 65nm production. AMD also received a non-binding $900 million cash incentive package consisting of grants and tax credits from the State of New York to build its next fab in Luther Forest, N.Y..