Recent Intel and AMD Financials Disappoint Wall Street

Published: July 27, 2006

by Timothy Prickett Morgan

It has not been an easy couple of weeks for the two competitors behind the X64 server platform. Both Intel and AMD are suffering from the competitive pressures that each is inflicting on the other, and those pressures have hurt their respective financial results in their most recently closed quarters.

In its second quarter of fiscal 2006 ended July 1, Intel had sales of just over $8 billion, a decline of 13 percent, and ballooning research and development costs, which rose by 27 percent, and marketing and other costs, which rose by 19 percent, put the squeeze on profits. In fact, net income fell by 57 percent to $885 million in the quarter, putting a douse of cold water on any theory (as far as I am concerned) that Intel and AMD are not engaged in a price war. To be fair, they are at war--price is only one weapon that are using. But they most certainly are using price to try to win business. Intel said that processor unit sales were lower, and average selling prices were also lower, and that sales of chipsets were flat but motherboard sales were lower, too.

Intel's new chief executive officer, Paul Otellini, has been reviewing all aspects of the company's operations for months, and earlier this year laid off 1,000 employees. Last week after we went to press, Otellini moved some top executives around, naming Sean Maloney head of Intel's sales and marketing group, ousting Eric Kim and Anand Chandrasekher, who used to run it together. David Perlmutter, who used to run Intel's Mobility Group with Maloney, now has the unit to himself. Chandrasekher now reports to Perlmutter and is focused on creating low-power chips and platforms. Kim will now run the Digital Home Group all by his lonesome. Thus ends the "two-in-a-box" executive strategy at Intel. Richard Wirt, who was co-head of the Software and Solutions Group, and Bill Siu, who was in charge of the Channel Platform Group, both retired and both had over 25 years with the company. Renee James will run the Software and Solutions Group, and Intel is looking for someone now to run its channel efforts. Intel has just under 100,000 employees worldwide, and the speculation out there is that anywhere from 10,000 to 15,000 positions will ultimately be eliminated from the company.

Over at AMD, with Opteron getting traction, you would think it would be Party Central. But it is as tough down in Texas as it is in the heart of Silicon Valley. For the first quarter (ended July 2) of its fiscal 2006 year, AMD reported sales of $1.2 billion, down 3 percent. But with R&D expenses up 2 percent and marketing and general costs up 35 percent, AMD booked net income of only $88.8 million. While this was a factor of eight higher than the year ago quarter, that profit level was half that of the prior quarter, which was essentially the first calendar quarter with a few days shifted. That was a big drop in profits, and Wall Street did not react well.

That drop in stock price is one reason AMD spent so much of its own cash--and borrowed $2.5 billion more--to do its $5.4 billion acquisition of video chip and chipset maker ATI Technologies. (See the related story in this issue for more on that development.) With its stock price hammered in recent weeks, AMD did not want to use bigger piles of stock to make the deal, and thereby dilute how much of the merged entity it would control.