AMD 1996 Annual Report Download - page 215

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RISK FACTORS
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The Company's business, results of operations and financial condition are
subject to the following risk factors:
MICROPROCESSOR PRODUCTS
Intel Dominance. Intel has long held a dominant position in the market for
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microprocessors used in personal computers (PCs). Intel Corporation's dominant
market position has to date allowed it to set and control x86 microprocessor
standards and thus dictate the type of product the market requires of Intel
Corporation's competitors. In addition, Intel Corporation's financial strength
has enabled it to reduce prices on its microprocessor products within a short
period of time following their introduction, which reduces the margins and
profitability of its competitors, and to exert substantial influence and control
over PC manufacturers through the Intel Inside advertising rebate program. The
Company expects Intel to continue to invest heavily in research and development
and new manufacturing facilities and to maintain its dominant position through
advertising campaigns designed to engender brand loyalty to Intel among PC
purchasers. As an extension of its dominant microprocessor market share, Intel
also increasingly dominates the PC platform. The Company does not have the
financial resources to compete with Intel on such a large scale. As long as
Intel remains in this dominant position, its product introduction schedule,
product pricing strategy and customer brand loyalty may continue to have a
material adverse effect on the Company.
As Intel has expanded its dominance in designing and setting standards for PC
systems, many PC original equipment manufacturers (OEMs) have reduced their
system development expenditures and have begun to purchase microprocessors in
conjunction with chip sets or in assembled motherboards. In marketing its
microprocessors to these OEMs and dealers, AMD is dependent upon companies other
than Intel for the design and manufacture of core-logic chip sets, motherboards,
basic input/output system (BIOS) software and other components. In recent years,
these third-party designers and manufacturers have lost significant market share
to Intel. In addition, these companies are able to produce chip sets,
motherboards, BIOS software and other components to support each new generation
of Intel Corporation's microprocessors only to the extent that Intel makes its
related proprietary technology available. Any delay in the availability of such
technologies would make it increasingly difficult for them to retain or regain
market share. To compete with Intel in this market in the future, the Company
intends to continue to form closer relationships with third-party designers and
manufacturers of core-logic chip sets, motherboards, BIOS software and other
components. The Company similarly intends to expand its chip set and system
design capabilities, and offer to OEMs a portion of the Company's processors
together with chip sets and licensed system designs incorporating the Company's
processors and companion products. There can be no assurance, however, that such
efforts by the Company will be successful. The Company expects that as Intel
introduces future generations of microprocessors, chip sets and motherboards,
the design of chip sets and higher level board products which support Intel
microprocessors will become increasingly dependent on the Intel microprocessor
design and may become incompatible with non-Intel processor-based PC systems. If
the infrastructure of third-party designers and manufacturers which supports
non-Intel PC platforms were to fail to continue to support the Company's
products or to offer products competitive with Intel Corporation's, the Company
could experience difficulties marketing its microprocessors, which could have a
material adverse effect on the Company.
Dependence on New AMD Microprocessor Products. Am486 microprocessor products
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contributed a significant portion of the Company's revenues, profits and margins
in 1994 and 1995. Am486 microprocessor revenues in 1996 were significantly below
those of 1995. As the product life cycle of fourth-generation x86 products has
declined, the Company's ability to maintain or expand its current levels of
revenues from microprocessor products, and its ability to benefit fully from the
substantial financial commitments it has made to process technologies and
integrated circuit manufacturing facilities dedicated to the production of
microprocessors, has depended upon its success in developing and marketing in a
timely manner its future generations of microprocessor products, the K86 RISC
SUPERSCALAR/(TM)/products. The Company is currently shipping its
fifth-generation K86 products including the PR 133/1/, PR 150 and
PR 166 AMD-K5 processors which are designed to be competitive with the Pentium,
Intel Corporation's fifth-generation microprocessor. The Company anticipates
that the AMD-K5 microprocessor, which was introduced relatively late in the life
cycle of fifth-generation microprocessor products, will be a
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/1/ "PR" refers to the performance rating assigned to the microprocessors by AMD
based upon tests conducted employing the Ziff-Davis Winstone 96 benchmark, which
compares the systems performance provided by a microprocessor to the systems
performance provided by Pentium processors of various clock speeds. A
performance rating of 166, for example, indicates that the microprocessor has
been determined to deliver systems performance equal to or greater than that
provided by a 166 Megahertz Pentium.
Source: ADVANCED MICRO DEVIC, 10-K, March 20, 1997