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Computerworld - With Advanced Micro Devices back on its financial feet after 13 grueling quarters in the red, industry watchers are looking for the chip maker to dust itself off and plot a course for the next few years.

Advanced Micro Devices late yesterday reported a profit for the first time in three years during the fourth quarter of 2009. Executives credited a hefty legal settlement with rival Intel and a change in AMD's business model for the improved results.

Fourth quarter revenue totaled $1.65 billion, up 42% from the year-earlier period and $150 million more than analyst estimates.

Over the last several years, the chip maker has been rocked by product delays, a lack of profits and slips in market and mind share. And adding salt to the wound, archrival Intel has been mostly firing on all cylinders during that time, constantly releasing new chips with more cores. Intel's developers have helped keep it on top by sliding from 65-nanometer chips to 45nm and more recently to 32nm.

AMD has continued to lag behind those development efforts through the years.

However, AMD's latest results indicate that it may be righting its ship, analysts said.

"This is huge," said Rob Enderle, an analyst with the Enderle Group. "This removes a significant cloud from AMD's future, making vendors more willing to depend on them for products and investors more willing to invest in the company. Success breeds success and this should, if sustained, help AMD attract talented employees" and generate more funds to invest in its own R&D efforts.

Analysts point to a number of factors that have helped to pull AMD from the financial mire. The chip maker has lately been executing on chip release plans and has been able to take advantage of its decision to spin off its manufacturing operations into a separate company, called Global Foundries, as part of an effort to cut costs and get an infusion of capital.

"AMD took a number of steps that will help them do a better job over the coming year," said Dan Olds, an analyst at Gabriel Consulting Group. "First, the spinoff of their foundry operations helped them get rid of a lot of debt and capital spending load. The settlement with Intel also was used to pay down debt and that gives them much more flexibility to spend money developing and marketing products. On the technology side, their ATI operation is spinning out some great chips and is highly competitive with Nvidia again."

Jim McGregor, an analyst with In-Stat, cautioned that one solid quarter doesn't change the fact that AMD still has to work hard to stay out of the weeds.

"AMD is still facing increased competition from Intel and a new graphics architecture from Nvidia that will be out this year," noted McGregor. "AMD has gotten much better about execution, but we have not and will not see a new architecture from AMD for some time."

McGregor and Enderle agreed that AMD needs to chart its own path and get out from underneath Intel's technical shadow.

"[AMD] needs to step out from Intel's shadow and find their own way," said Enderle. "Currently the market is moving away from PCs and towards something else, like smart phones and tablets. This may provide AMD an opportunity, before that market is set or the ideal form factor identified, to create a market where it can thrive. They need to imagine a future where they can be very successful and build a market bridge to that future."

Olds added that if AMD can maintain its profitability, the whole technology industry would benefit. "We need a strong AMD to keep Intel and Nvidia honest and working hard," he said.

Sharon Gaudin covers the Internet and Web 2.0, emerging technologies, and desktop and laptop chips for Computerworld. Follow Sharon on Twitter at @sgaudin, send e-mail to sgaudin@computerworld.com or subscribe to Sharon's RSS feed .

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