UPDATE 4-AMD eyes stronger PC demand, holds off on tablets

Thu Oct 14, 2010 8:21pm EDT

* PC manufacturers still seen with inventory

* AMD says fourth-quarter sales to be flat sequentially

* Company holds off on designing chips for tablets (Recasts, adds detail and quotes)

By Noel Randewich

SAN FRANCISCO, Oct 14 (Reuters) - Consumers will likely buy more PCs in the fourth quarter but manufacturers will continue to use up components they had over-accumulated in recent months, chipmaker Advanced Micro Devices Inc (AMD.N) said on Thursday.

Two days after Intel's (INTC.O) better-than-expected earnings lifted hopes for technology companies, which have been hurt by weak consumer demand and high inventories, AMD said its overall sales would be about flat in the December quarter.

"I think we saw a reaction across the supply chain aimed at bringing down or preventing an inventory build," said AMD Chief Executive Dirk Meyer. "We don't think that process is complete as of the end of Q3 and in fact will continue going into Q4."

Meyer said that even though tablets like Apple's (AAPL.O) iPad are eating into demand for laptops, AMD will hold off on investing to develop microprocessors for that market until it grows more.

"Frankly we're still so small in the notebook market that given all of the opportunities in front of us it doesn't make sense for us to start turning R&D dollar spending towards the tablet market yet," he said.

Sunnyvale, California-based AMD's third-quarter non-GAAP net profit was $108 million, or 15 cents a share, much higher than the 6 cents per share that analysts on average expected, according to Thomson Reuters I/B/E/S.

Shares of AMD, which last year hived off its chip manufacturing plants, or fabs, to focus on chip design, rose 4.8 percent in after-hours trade after closing 1.11 percent lower at $7.14. (For a graphic on AMD's earnings, click: link.reuters.com/kyr58p)

FABLESS

"People are missing the fact that this is a fabless company now. It's going to have fabless margins. They're not as impacted as they used to be by changes in top line," said Gleacher & Company analyst Doug Freedman.

Computer chip heavyweight Intel said on Tuesday its fourth-quarter sales should rise 3 percent in the December quarter, better than some analysts expected, but less than in healthy years.

Spending on microprocessors and other components that go into computers usually rises toward the end of the year, in part because of holiday shopping.

Since Intel warned in August about shaky consumer demand for PCs, lowering investors' expectations, semiconductor stocks surged through September in part on the belief that the worst might be over for the tech sector.

AMD warned in late September that its sales were also being hurt by weak demand from consumers, who are its main customers.

BET ON FUSION

A debt charge during the quarter boosted profit by the equivalent of 3 cents per share.

AMD's sales in the third quarter were $1.62 billion, in line with $1.615 billion that analysts expected, but they fell from $1.4 billion in the second quarter.

AMD's sales forecast for the December quarter was slightly below expectations.

"They need to gain some market share, especially in the higher margin businesses, and unfortunately for them Intel has too strong a product portfolio," said Srini Pajjuri, an analyst at CLSA.

AMD is betting its new lineup of "Fusion" silicon due for release in coming months will re-energize sales but it's unclear how they will compare to Intel's upcoming new offerings in price and performance. (Reporting by Noel Randewich; Editing by Robert MacMillan, Phil Berlowitz and Bernard Orr)

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