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Advanced Micro Devices, the world’s second largest maker of processors, rolled to a loss in the fourth quarter as the $5.4 billion acquisition of ATI Technologies and sluggish sales of server chips took their toll on the company’s bottom line.

For the financial quarter that ended Dec. 31, AMD, which is based in Sunnyvale, Calif., reported a net loss of $1.08 per share or $574 million. That was in sharp contrast to a net income of $96 million, or 21 cents per share, which the company posted last year at this time.

For the financial quarter, sales were $1.77 billion compared to $1.84 billion a year ago. Wall Street estimates had called for revenues of $1.73 billion.

The purchase of ATI, which was completed in October, led to a charge of $550 million or $1.04 per share. A $27 million charge for employee stock-based compensation also cut into profits. Excluding the acquisition, the company’s operating income was $63 million, a loss of 77 percent from a year ago and down 56 percent compared to the third quarter.

Minus those charges, AMD still posted a loss of four cents a share. Wall Street estimates had called for a profit of 10 cents a share. For the coming first financial quarter, AMD executives are calling for revenue of anywhere between $1.6 and $1.7 billion, while Wall Street analysts said they were expecting revenue of $1.8 billion.

Click here to read more about AMD’s soon-to-be released quad-core chip.

AMD also watched as its gross margins hit 40 percent. During the same time last year, its gross margins were 57 percent.

As for its server business, AMD explained that revenues were flat compared to the third quarter of 2006 and the average sale price of its chips was also down. Since November, AMD has been feeling pressure from its rival Intel, which introduced several new Xeon quad-core processors.

“Pricing is incredibly challenging,” CEO Hector Ruiz told analysts in a call, following the release of the quarterly results.

Henri Richard, AMD’s chief sales and marketing officer, explained that the price war with Intel had become “very severe” during the last few months of 2006 and that caused some of the losses on the server side.

In addition, the company was hurt when some new product introductions did not execute as expected and some customers decided to hold off buying products until later this year, when AMD plans to introduce its own quad-core chip, called “Barcelona.”

In a research paper released just after AMD posted its results, Technology Business Research, of Hampton, N.H., wrote that Intel was able to take advantage of its first-to-market quad-core Xeon processors. This move by Intel affected the price of AMD’s Opteron processors and led to the slow sales in the server market.

“We believe that, given the pricing situation, AMD was not able to match Intel’s price-per-core without making concessions on Opteron pricing,” TBR analysts wrote in the paper.

“With AMD not expecting to deliver its first quad-core server chip until mid-2007, TBR expects Intel to continue to press what advantages it can in the server space as well as in the desktop PC arena during the first half of 2007 in an effort to regain market share it lost to AMD in 2005 and 2006,” the report said.

The day after AMD released its number, several companies, including American Technology Research, downgraded the company’s stock.

As for the ATI acquisition, Ruiz said the purchase fit into the company’s overall plans and AMD was willing to shoulder the financial burden as part of its long-term strategy.

Click here to read more about AMD developing its 65-nanometer manufacturing process.

Although the price war with Intel hurt the company—AMD a few weeks ago reported that its quarterly earnings would fall short of Wall Street expectations—the company said its overall processor shipments compared to the fourth quarter last year increased 26 percent and shipments grew 19 percent sequentially.

AMD saw better success in its shipments of processors for notebooks. Shipments and revenue were up 41 percent compared to the third financial quarter. Overall, mobile processor shipments were up 76 percent and revenue was up 85 percent for the year.

On the desktop side, AMD’s Athlon 64 dual-core processor performed well.

AMD said it had started shipping its chips that use a 65-nanometer manufacturing process in December and it was moving ahead with its plans to develop 45-nanometer chips. Intel has also said it is preparing chips that use 45-nanometer manufacturing.

For the coming year, Ruiz said he felt “bullish” about the company’s ability to increase its shipments of processors.

Specifically, he felt that Microsoft’s Windows Vista operating system, which was introduced for the enterprise market in November and will debut for consumers on Jan. 30, will lead the way.

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