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AMD on a Roll

AMD has had a great run this year, driving up production and sales. The result has been big improvements in gross and operating margins. The company will ramp up production in the second half of the year to meet the current excess demand, but this industry has a way of turning on suppliers.

By Brian Lund (TMF Tardior)
July 20, 2000

It's not your father's Advanced Micro Devices (NYSE: AMD) anymore. The company, which hasn't seen positive annual operating income since Clinton's first term, is gearing up to pull that trick off in 2000.

Great second quarter results
AMD reported stunning second-quarter earnings last night. Revenue soared to $1.17 billion, 97% above the year-ago quarter, yielding operating income of $250 million, compared with a $173 million operating loss a year ago. Untaxed earnings per share rang in at $259 million, or $1.51 per share, up 31% sequentially and 37 cents ahead of First Call estimates.

The company also announced a two-for-one stock split for August 22. That's almost exactly 17 years to the day since AMD's last split. In fact, if you had bought AMD stock on the day of that split in 1983 and sold it at the start of 2000, you wouldn't have had to pay a dime in capital gains. Your return on investment would have been zero. It's been a different story since then. AMD is up 200% year-to-date.

Improvements in production and demand
The difference is that AMD has finally begun to execute, just in time to meet a jump in demand. The company has maintained an advantage over Intel (Nasdaq: INTC) this year, gaining market share in high-end microprocessors. This quarter, AMD introduced two seventh-generation processors, a new Athlon for the high end and the Duron on the low end. AMD, like Intel, couldn't meet demand this quarter, selling 1.8 million processors. AMD believes it will achieve production increases in the next quarter to 3.6 million units and 7.2 million in the fourth quarter.

Flash memory sales also exceeded supply. AMD had sold out for the quarter by the beginning of May. The company's market share in flash memory has jumped recently and should reach 27% this year, just behind Intel's projected 28% market share.

AMD's ramped-up production and sales have resulted in a huge shift in the company's financials. In the first quarter, gross margins improved 4.5 percentage points sequentially. This quarter, gross margins were up another 3.2 percentage points, hitting 47.7%, well above its historic 31% average, because of higher volumes and higher average selling prices in its microprocessor business. Operating expenses have remained level year-over-year, which has caused operating margins to soar almost 30 percentage points to 21%. That's about as good as Intel's in the latest quarter.

Enjoy the ride
AMD is firing on all cylinders now and looks to continue to do so for the rest of the year. With Intel's recent missteps and supply problems, AMD should be able to take advantage of the huge demand for microprocessors and flash memory. Remember, though, that the semiconductor business is very cyclical. AMD's share price tripled in 1997 too, only to fall back in the depressed market of 1998. As both Intel and AMD ramp up production, we may see a drop in average selling price. If the increased production is coupled with a big drop in demand, woe is AMD.

Until then, AMD shareholders are finally smelling some roses.

Your Turn:
Ever want to express your distaste for the Wintel monopoly? Looking to argue that the Willamette will beat the pants off the Thunderbird? There's always a lively conversation going on at the AMD Discussion Board!

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