AMD posts down Q1, future cloudy
As revenue falls and profitability is still out of reach, the MPU maker continues to withhold plans for its asset-lite strategy.
By Suzanne Deffree, Managing Editor, News -- EDN, April 18, 2008
Advanced Micro Devices has announced Q1 results in line with its recently lowered forecast and hinted that changes will soon come to the struggling microprocessor maker.
“We are embarking on a significant restructuring of our company," CEO Hector Ruiz said during a conference call Thursday after market close. "We need to intensely scrutinize our non-core businesses and revisit their strategic fit into our plans and their path to growth and profitability. Absent these, we will exit those businesses."
Overall, AMD’s revenues were down 15% sequentially at $1.5 billion but up 22% year over year.
Broken out by business group, AMD’s computing solutions unit, the company’s top performing operation, reported Q1 sales of $1.19 billion, down 15% quarter over quarter and up 30% year over year. The computing solutions unit recently released its Barcelona server chips (officially known as quad-core Opteron processors) to the broad channel and noted a significant deal with Hewlett-Packard. Barcelona, which is considered key to the company’s near-term future, has been a trouble spot for the company; several design-glitch delays kept AMD's technology availability behind that of competitor Intel. AMD’s CTO Phil Hester resigned last week after the Barcelona botch.
Meanwhile, AMD’s graphics unit saw revenue of $230 million, down 11% from Q4 and up 17% from Q1 2007. This unit includes ATI, which AMD purchased in October 2006 for approximately $5.4 billion. The deal has come under heavy scrutiny since then, with analysts suggesting AMD may have overpaid for the GPU maker.
Lastly, AMD’s consumer electronics group, the company’s weakest performing segment, saw sales of $81 million in Q1, down 26% from Q4 and down 31% from Q1 2007. AMD blamed the sales slide on seasonality and the weakening US economy. While Ruiz did not disclose details on what businesses the company would possibly exit, consumer electronics is the most likely choice, according to analysts.
“We expect consumer to be down seasonally in Q2,” Tim Luke, a semiconductor analyst at Wall Street watching firm Lehman Brothers, said in a research note this morning. “Management is looking to divest the consumer-electronics business as it has a disproportionately higher R&D expense; higher revenue and margin volatility; and is not core to AMD’s business.”
Total AMD sales were accompanied by a net loss of $358 million, a significant improvement on Q4 2007’s net loss of nearly $1.8 billion and also an improvement compared to Q1 2007’s net loss of $611 million.
“We remain committed to achieve operating profitability in the second half of the year, driven by our portfolio of new products and platforms and aggressive restructuring programs,” Robert J. Rivet, AMD’s CFO, said. Rivet in December 2007 promised profitability for the Sunnyvale, Calif-based company by Q3 2008. In a step toward that, AMD earlier this month announced it would lay off 10% of its workforce, cutting some 1,650 jobs.
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One possible path to profitability would be for AMD to further leverage its fab-lite, or what it calls “asset-smart,” strategy or to move to a full fabless model. The company has been committed to its asset-smart strategy for some time, yet has not detailed its plans. On Thursday’s conference call, Ruiz said that AMD has made “significant progress” in its asset-smart strategy and that he is “very hopeful that we will be able to communicate details of this rather complex effort in the near future.”
“Despite a high level of market interest, AMD has, as yet, provided few details around the approach it will take to restructure its manufacturing,” Luke noted. “Management, however, noted that the asset-lite deal was expected to be announced in the ‘near future,’ and we expect the deal may be announced before the summer of 2008.
“We believe one approach the company could consider may include selling its fabs to a third party such as the Mubadala Development Company, which has already invested $608 million for 8% stake in AMD,” Luke said, noting that Mubadala is a corporation of the government of Abu Dhabi and serves as a vehicle for the capital of the United Arab Emirates to invest directly in publicly traded companies.
“As part of such a deal, we believe AMD could consider dividing its activities into a design and foundry company. A separate foundry function might enable it to compete with Intel without the capital required to keep up from a manufacturing standpoint (this would be funded by investments from the asset smart partner under the foundry company). Another approach may be that AMD partner with foundries such as existing partners TSMC (for ATI) and Chartered as part of asset lite,” Luke said.
Looking ahead to Q2 numbers, AMD said it expects its revenue to decrease in line with seasonality.
AMD’s stock was trading at $6.15 at noon eastern today, down slightly from its Thursday close of $6.19. The stock price falls near the bottom of AMD’s 52-week range of $5.31 to $16.19.
