AMD’s Profit Margin Hurt by Price War With Intel
Advanced Micro Devices Inc. on Thursday posted a higher third-quarter profit, helped by a tax gain, but a price war drove down profit margins.
AMD, the second-largest maker of computer processors, said its gross margin fell to 51.4% from 56.8% in the prior quarter. It said prices of chips for desktop computers had fallen faster than the company’s costs had.
Shares of Sunnyvale, Calif.-based AMD dropped 8.8% in after-hours trading Wednesday. The stock slipped 25 cents to $24.23 during the regular stock market session.
AMD has been embroiled in a price war with larger rival Intel Corp., which has been trying to clear unsold chips to make way for new processors aimed at taking back market share lost to its smaller rival over the last few quarters.
“Both of them saw pretty massive average selling price declines,” said Eric Ross, an analyst with ThinkEquity Partners.
AMD said its profit for the third quarter was $134.5 million, or 27 cents a share, compared with $76 million, or 18 cents, a year earlier. The latest results included a tax benefit of $21 million, or 4 cents a share.
Excluding that credit, Wall Street analysts said AMD’s earnings had missed their forecasts.
“Clearly, people are upset by this and rightly so,” said JoAnne Feeney, an analyst with FTN Midwest Securities. “I don’t think people expected quite the drop-off in average selling price that AMD saw here.”
AMD said revenue rose 9% from the previous quarter while unit shipments were up 18%, implying that average selling prices fell about 9%. Since it said average prices for laptop and server chips rose, that meant price drops were accounted for entirely by desktop chips.
AMD said it expected fourth-quarter demand to be seasonally strong and sales to rise from the prior quarter, but it did not elaborate. Wall Street had forecast fourth-quarter sales of $1.44 billion, according to Reuters Estimates.
Revenue was $1.33 billion in the third quarter, down nearly 13% from a year earlier, before the company spun off its Spansion Inc. memory chip unit. Analysts had expected third-quarter revenue of $1.31 billion.
Some analysts said a build-up of chip inventory for Dell Inc., which AMD landed as a customer earlier this year, also could have contributed to the fall in margin. AMD shipped 18% more processors in the quarter than the prior three months.
The company has steadily gained market share from Intel. It held more than 27% of the total PC market at the end of June, up from 18% a year earlier, according to market tracking firm Mercury Research.
Intel has fought back by overhauling its entire product line and slashing prices on older products.
