AMD benefits from improved pricing structure

Advanced Micro Devices captured the attention of the industry last year with the introduction of two processor families that can...

Advanced Micro Devices captured the attention of the industry last year with the introduction of two processor families that can run both 32-bit and 64-bit applications.

However, analysts have said that the factors leading to its first quarterly profit in two years have more to do with better management of AMD's existing businesses than with the new processors.

Earlier this week, AMD reported a fourth-quarterly net income of $43m on revenue of $1.2bn. Revenue increased by 76% over last year's fourth quarter, and the $43m in income represents AMD's first quarterly profit since the second quarter of 2001.

AMD is doing a much better job of managing its processor pricing and channel sales than in the past, said Dean McCarron, principal analyst with Mercury Research. The company used to discount its processors steeply to sell more of them, but it is now holding firm on its prices.

"The parts are being priced appropriately rather than being priced to move," McCarron said.

One of the reasons AMD can hold the line on prices is because the performance of its Athlon XP chips is more competitive with Intel's chips than it has been in past years, said Nathan Brookwood, principal analyst with Insight 64.

"A year ago, AMD was being scrunched down into the low end of Intel's pricing matrix, around the Celerons, as opposed to the higher end Pentium 4s," Brookwood said.

AMD has since improved the yields, or the number of working processors cut from a silicon wafer, of its highest-performing Athlon XPs, allowing it to sell more of those chips, which command higher prices, as a result.

The Athlon XP 3200+ and 3000+ sell for $213 and $203 in volume quantities respectively, and perform about as well as Intel's 3.06GHz and 2.8GHz Pentium 4 processors, according to analysts and hardware reviewers. The Intel processors are priced at $401 and $278 in volume quantities respectively.

Another factor behind AMD's fourth-quarter turnaround was the improved performance of its flash memory business, said Ben Lynch, an analyst with Deutsche Bank Securities in New York.

AMD's flash memory group reported revenue of $566m for the quarter, up 161% from the previous year and only slightly behind the $581m generated by AMD's microprocessor group. The flash business reported an operating loss of $3m, much better than its loss of $59m reported the previous year.

Lynch said the increase in sales can be explained partly by strategic missteps on Intel's part. Intel raised prices for its flash memory products early last year and customers were unwilling to pay the higher rates. This caused a number of customers to look to AMD for their flash memory parts, damaging Intel's market share.

AMD now has a product line that can compete with Intel's mainstream processors, Brookwood said. The company hopes to create a premium brand by emphasising the 64-bit benefits of the Athlon 64 product line down the road, when more operating systems and applications are available to take advantage of the chip's abilities.

Brookwood added that AMD will get a boost when Microsoft releases both a desktop and server version of Windows for its 64-bit chips. Those versions had been expected last year, but their release was pushed out to the second half of this year.

AMD should also benefit from an increase in sales of Opteron, the server version of the Athlon 64, McCarron said, adding that momentum generated by the support of server vendors IBM and Sun Microsystems will start to take effect this year.

Opteron was important for AMD in 2003, not so much from a financial perspective, but because it helped cement the idea that AMD is a legitimate supplier of chips to corporate customers. "A lot of that groundwork has been laid, and they could see some pretty significant expansions of their corporate business," McCarron said.

If AMD continues to build momentum with Opteron servers, Intel will have to consider releasing a chip that also adds 64-bit extensions to the x86 instruction set, Brookwood said. Intel sells the vast majority of desktop, notebook and low-end server processors in the world, and will not hesitate to pursue that business if AMD demonstrates a market, he added.

With the forthcoming launch of Intel's next-generation desktop processor, Prescott, AMD will find it hard to gain market share in the second half of the year, Lynch said. Prescott's delay has given AMD time to grow its business, but Intel can be expected to compete heavily on the desktop side, he added.

Tom Krazit writes for IDG News Service

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