AMD Issues Sales Warning

A negative financial update from Advanced Micro Devices Inc. (AMD) late on Monday raised a potentially ominous sign for semiconductor stocks ahead of Tuesday's bellwether earnings report from Intel Corp. (INTC).

Analysts expect Intel, the world's largest chip maker, to report an 11 percent increase in sales from the third quarter to the fourth, driven by strong demand for microprocessors used in notebook and server computers. The update will be the first quarterly report this year from a major U.S. technology company.

But a long-running price war between Intel and AMD in a separate business — flash memory chips (search) used predominantly in cellular phones — has limited both companies' profits, and appears to be intensifying. Like other kinds of memory chips, flash tends to trade like a commodity, so price cuts by one supplier can be felt industrywide.

In an unscheduled financial update after the market close, AMD pointed to a "competitive and challenging" environment for flash memory, a business that has AMD and Intel jockeyeing for leadership. AMD said sales in that business would fall, reversing an earlier forecast for flat-to-higher sales.

After the news, JMP Securities cut its investment rating on AMD and said the company should consider divesting the flash business, which is run along with Japan's Fujitsu Ltd. (search) as a joint venture called Spansion.

Flash remains a relatively small business for Intel, accounting for an estimated 7 percent of its more than $8 billion in sales last quarter, but it has nevertheless been a thorn in the side of the company.

Memory chips form the core of the company's money-losing communications business, and have put Intel in a seemingly no-win situation: when it ignored pressures to cut flash memory prices, the company suffered painful market share losses. Yet when it has cut flash prices to stay competitive, it lowered its overall profit margins.

At the same time, the business is not expected to grow, according to a recent report by ThinkEquity Research.

"We believe the total flash market will remain basically flat over the next several years," analyst Eric Ross wrote in a research note on Monday.

Flash memory problems are nothing new for either Intel or AMD. Both companies blamed the business for spoiling their third-quarter financial forecasts.

A prescient research report from iSuppli Corp. (search) at the time warned of continuing price declines over the next four quarters as suppliers increased production, and the effects spread from Intel's re-entry into the non-cellular phone segment of flash memory.