How Intel Ruined AMD's Happy New Year

For chipmaker Advanced Micro Devices and CEO Hector Ruiz, 2004 was something
of a coming-out year. Long a perennial also-ran to Intel Corp. in the
semiconductor market, AMD knocked its mighty rival back on its heels last year
with an innovative microprocessor for servers and personal computers. The
company swiped market share from Intel, raked in cash, and saw its stock soar.
BusinessWeek even named Ruiz one of the best managers of the year.

In the tech industry, though, you're only as good as your last earnings
announcement. On Jan. 10, AMD warned that fierce competition in the memory-chip
market would push fourth-quarter earnings well below Wall Street expectations.
In a tersely worded release the Sunnyvale (Calif.) company said it expects
fourth-quarter operating income to be "down significantly" from the
third quarter. The stock plunged 26% the next day, to $14.86. The misstep fanned
fears that AMD, for all of its success in 2004, remains the same inconsistent
performer it has been in the past, with solid results followed by spectacular
washouts.

What happened? Intel lowered the boom. The chip giant got much more
aggressive in the market for flash-memory chips, which store data in cell phones
and other electronic devices. That contributed to a 30% decline in flash prices
in the second half of the year. Such a drop hurts AMD much more than Intel
because the smaller chipmaker gets nearly 50% of its revenues from flash-memory
chips, while Intel gets only 7%. As if to underscore the giant's advantage,
the day after AMD's warning, Intel announced strong results for its fourth
quarter. "AMD's head has got to be spinning. Intel just clocked them
good," says analyst Richard L. Whittington at researcher Caris & Co.,
one of the six firms that downgraded AMD's stock on the news.

Ruiz may have a tough time clearing his head right away. Even as growth in
the flash market slows this year, Intel vows to keep competing aggressively.
That's likely to put a crimp in prices and limit AMD's ability to take back
market share. In the third quarter, Intel grabbed the lead in the flash market,
with 22.9% share, compared with 22% for AMD, according to researcher iSuppli
Corp. "In six months' time I would be very disappointed if we didn't
show continued momentum," says Sean M. Maloney, the Intel executive
vice-president who oversees the business.

There's no question that Ruiz has AMD on much more stable footing than in
the past. Unlike in the aftermath of previous setbacks, analysts believe the
chipmaker will continue to turn a profit. Consensus estimates call for 2005 net
income of $217 mn on sales of $5.24 bn. Ruiz also is racing to wean AMD away
from its reliance on the cyclical memory-chip business. He's expanding into
the sale of chips for consumer electronics and plans to roll out a new processor
for the notebook market, which is dominated by Intel now. And he hopes to bring
a huge new manufacturing plant online next year to relieve the manufacturing
constraints that have stymied the company's growth. Still, AMD is likely to
have to depend on the volatile flash market for at least a third of its revenues
for the next two years.

In the end, Ruiz knows it will be customers who decide AMD's fate. At the
Consumer Electronics Show in early January, he greeted them by the dozens as
waiters plied them with drinks and hors d'oeuvres at a posh restaurant. One
thing is clear: This battle is just beginning.

By Cliff Edwards in San Mateo, Calif., with Spencer Ante in New
York in BusinessWeek. Copyright 2005 by The McGrraw-Hill Companies,
Inc