Gateway expected back in AMD camp next week

Investors abandoned Murray Hill, N.J.-based Lucent's stock yesterday after the company announced its first quarter will miss earnings by 15 cents to 18 cents per share and sales will fall $1 billion below Wall Street analysts' estimates.

The earnings shortfall is the most significant problem Lucent has faced in its young history since spinning off from AT&T in 1996. Lucent executives blamed its first revenue shortfall on the company's inability to meet customer demand for optical networking equipment, lower software sales, and flat growth in wireless equipment.

Rival phone equipment makers took immediate advantage of Lucent's misery. Executives from Nortel, Alcatel, Newbridge Networks and Ericsson all announced that their companies will meet analyst's estimates for their fall quarters--and investors today flocked to their stocks.

"The message people are taking away is that Lucent screwed up," said analyst Martin Pyykkonen of CIBC World Markets. "Their conclusion is that Lucent must be losing something to (its competitors), that they might be good at beating Lucent to some degree--such as Ericsson in the wireless market, Cisco with the (Internet data) infrastructure, and Nortel and Ciena with optical equipment."

Lucent's stock stabilized today, inching up 1 point--but its competitors soared. At 1 p.m. PT, the close of regular market trading, Nortel shares were up 20.25, or 27 percent, to 97.25, while Ciena's shares gained 11.88, or 26 percent, to 57.75.

Shares of Ericsson increased 8 percent, Cisco and Newbridge Networks rose 6 percent, and Alcatel increased 5 percent.

While Lucent is considered a bellwether for the telecommunications equipment industry, analysts say rival companies didn't take hits in their stocks today because Lucent's troubles is not indicative of the market, where Cisco's sales jumped 49 percent last quarter and Nortel's revenue increased 30 percent.

"The basic message is that this is an issue specific to Lucent, and not telecom-market related," said analyst Joseph Bellace, of Jefferies & Co.

Analyst Paul Sagawa, of Sanford C. Bernstein, said Nortel is in the best position to capitalize on Lucent's woes in the optical market. Cisco, which recently made acquisitions in the optical arena, won't release products until later this year, he said.

Earlier this year, Nortel also had trouble meeting customer demand for optical equipment, he said. As a result, the company recently invested $400 million to build more manufacturing plants to increase production.

"It's good for Nortel, but I don't know if they can add a lot (more) capacity," he said.

Lucent believes it will back on track by the second half of 2000. Some analysts agree, but others remain skeptical as they downgraded the company's stock today.

"Lucent's stock is on sale and it's cheap merchandise, but I wouldn't buy it today," said Pyykkonen, who downgraded the stock from "buy" to "hold."

"The company has put a lot of burden on growth on the second half of the year," he added. "It's like a football game: You're down 21-0 midway through the first quarter. You say you've got potential to win, but I want to see that it's 21-14 by half-time." TOKYO--General Motors, the world's largest automaker, will work with electronics and entertainment giant Sony to develop "e- vehicles" with Internet access, the two companies said.

GM will use Sony's "memory stick," an integrated circuit storage device featuring flash memory technology to develop such vehicles, the companies said in a statement. Tokyo-based Sony first introduced the memory stick in 1998.

The device, shaped like a stick of chewing gum, is able to store various amounts of data, ranging from four to 64 megabytes. It has already been incorporated into Sony's digital video cameras, Walkman, the Vaio notebook and desktop computers and other products.

Sony and GM envision the memory stick being used to exchange data among communications products in the home, office and car. Drivers will be able to use the memory stick to store music or videos for later playback in their vehicles. As well, GM's "e- vehicles'' will have the capability of accessing the Internet.

"Our working agreement with Sony is the next evolution in our e-vehicle initiative,'' said Mark Hogan, president of e-GM, a new business group launched by GM in August. "We are looking forward to working with Sony to further these applications for the home, office and vehicle.''

For Sony, maker of the Vaio PC notebook and Wega flat-screen television, the agreement is a further boost to its vision of future networks of electronics appliances linking up with the Internet. Gateway will resume using processors from Advanced Micro Devices, according to people familiar with the PC maker's plans, opening up another chapter in one of the long-running soap operas of the computer world.

On Monday, or soon after that, Gateway is expected to announce that it will once again incorporate AMD's chips in its consumer PCs, including AMD's touted Athlon processor. The AMD-based systems may not be available the same day as the announcement, however, these people indicated.

The move comes days after a Gateway conference call in which chief executive Jeff Weitzen blamed lower-than-expected earnings on a shortage of Intel chips and promised that the company would reveal a plan to use alternative processors in the near future.

"We're all intensely frustrated by the supply situation we were put in. We're not about to stand by and let the actions of other companies dictate what Gateway products our customers can buy," he said then, adding: "In the next week or so, you're going to hear about some definitive and aggressive steps we are going to take to make sure this will never occur again."

Although Weitzen declined to identify AMD by name, analysts and others saw the statement as a sure sign that the companies were back together. Gateway, after all, used AMD processors until recently and only scuttled plans to adopt the high-speed Athlon right before that chip was announced, sources said. Both companies have declined to comment on the issue.

Only two other companies--Via Technologies and Transmeta--are in the business of designing Intel-compatible processors. Both companies, however, are only slated to release their first chips later this month and are seen as far less likely candidates. Transmeta, for one thing, is expected to target the mobile market, not a problem area for Gateway at the moment.

"It's real clear they have made up their mind" to go with AMD again, said Nathan Brookwood, an analyst at Insight 64.

AMD's stock has risen above 30, rare territory for the chipmaker, since Weitzen's comments.

With Athlon, Gateway will ensure it can play in every consumer market segment, Brookwood said. In addition, because AMD and Intel appear to continually be one-upping each other in terms of speeds with Athlon and Pentium III, Gateway will be able to stay at the cutting edge by having relationships with both.

"This is the way our free market system is supposed to work," Brookwood said.

Despite the optimism, observers wonder how big an impact the deal will make. Gateway and AMD have typically shared a tumultuous relationship. For years, Gateway came quite close to using AMD processors, only to back away late in the process.

Gateway finally started incorporating K6-2 processors from AMD about a year ago in its PCs. The deal kicked off with great fanfare. AMD even supplied chips for Gateway's first all-in-one PCs.

By midyear, the relationship was unraveling. AMD executives admitted they had difficulty supplying processors to Gateway. Intel has been caught in a chip shortage recently. AMD, however, had some difficulty in meeting early demand for Athlon. The company also has existing commitments with IBM and Compaq.

"Gateway kind of used AMD to get better pricing from Intel," said Ashok Kumar, an analyst with U.S. Bancorp Piper Jaffray, adding in a note: "We believe that the December quarter results and the Gateway design win will be adequate catalysts to take the stock to the overhead supply level of $36. However, long term the companies' execution record or lack thereof and an inability to maintain a competitive roadmap against Intel should limit the price excursions beyond the stated levels."

Still, the consensus opinion is that things are looking up for AMD. The company has been able to keep up and even at times surpass Intel in terms of performance with the Athlon chip and keep its customers generally happy. The company also may turn its first profit in a while when it comes out with its earnings later this month.

"They are more marketing limited than production limited," said A.A. "Tad" LaFountain, an analyst with Needham & Co., meaning that AMD's problem now lies in distribution.