Pricing War Blamed For AMD's 4Q SlumpPricing War Blamed For AMD's 4Q Slump

AMD saw its shares downgraded after announcing late Thursday that processor sales for the fourth quarter will miss Wall Street's expectations.

The company's pricing war with chip rival Intel, combined with too much inventory, has affected its fourth-quarter revenue, according to analysts. AMD and Intel have been fighting a price war for about six months now, while market- and mind-share swing back and forth between them.

"Intel got very, very aggressive because AMD had taken so much business away from them," says Jon Peddie, president of Jon Peddie Research. "Intel cut some prices and then, to Intel's credit, they came out with the Core 2 Duo, which is, in fact, better than most people thought it would be. It's taken some business back from AMD, and that's why AMD has ended up with some extra inventory."

Late on Thursday, AMD released a short statement saying revenue, excluding ATI-related segments, for the fourth quarter (which ended Dec. 31, 2006) is expected to increase approximately 3% from the $1.33 billion reported in the third quarter of 2006. Analysts had expected, on average, revenue of $1.85 billion. AMD and financial analysts had expected strong numbers for AMD in the final quarter of the year because of holiday purchases.

"The fourth-quarter gross margin and operating income were impacted by significantly lower microprocessor average selling prices, which largely offset a significant increase in unit sales," AMD stated in the release.

Some news and financial outlets are saying these numbers put AMD 25 % below what Wall Street had predicted. David Kroll, a spokesman for AMD, says that's not an accurate number.

Kroll explains that Wall Street expectations were based on a combination of AMD's regular processor sales combined with revenue from ATI's chipsets, graphics, and consumer electronics businesses. The statement AMD released on Thursday doesn't take ATI's numbers into account. He said those numbers won't be made available until Jan. 23, when AMD will officially report its fourth-quarter consolidated results.

AMD acquired ATI last year and this will be the first quarter that the company consolidates its earnings.

He also notes that at this point AMD's processor revenue for the fourth quarter looks to be coming in at $1.33 billion. Wall Street had expected the company's processor revenue to come in at $1.44 billion. That would put AMD's processor revenue at 9.5% below expectation.

After AMD issued its release late Thursday, Glen Yeung, an analyst with Citigroup, downgraded AMD's shares from buy to hold. He said in a statement that the downgrade reflects "concerns that gross margin may face more persistent pressure than anticipated." He added, "Our previous buy rating had anticipated a recovery in gross margin from weak 3Q 06 levels. With pricing pressure in high-margin server processors more acute, this recovery is delayed by at least one quarter and risk to this assumption exists."

Peddie, however, says AMD's fourth-quarter numbers aren't an indication of real trouble for the company, or of Intel getting in anything but the latest blow in their ongoing battle.

"This shifts back and forth every quarter," he says. "It's not an indication of one company killing another company. They just rock back and forth quarter to quarter. It all has to do with aggressive pricing. It's a constant battle, but neither one is going to kill the other one."