AMD reports $457M loss, sales up 13% y/y

By Ann Steffora Mutschler, Senior Editor -- Electronic News, 7/20/2007

Despite a weak Q1, Sunnyvale, Calif.-based microprocessor and graphics chipmaker Advanced Micro Devices (AMD) yesterday afternoon reported revenue for its Q2 ended June 30 of $1.4 billion, 12 percent higher sequentially from $1.2 billion in Q1 and 13 percent higher year-over-year from $1.2 billion in Q2 2006.

As a result of the acquisition of ATI, 2006 financial results only include the results of the former ATI operations from October 25 through December 31, 2006. Therefore, financial results for Q2 do not correlate directly to those for Q2 2006.

The Intel rival also posted an operating loss of $457 million, compared to an operating loss of $504 million in Q1 and operating income of $102 million in Q2 2006. AMD also reported a Q2 net loss of $600 million or $1.09 per share.

The company noted that the results include an impact of $130 million, or 24 cents per share, from ATI acquisition-related and integration charges of $78 million, employee stock-based compensation expense of $31 million, severance charges of $16 million and debt issuance charges of $5 million.

AMD’s CFO Robert J. Rivet pointed out in a statement, “While we made solid progress in the second quarter across a number of fronts, we must improve our financial results. We achieved a 12 percent sequential revenue increase, improved the gross margin and won back microprocessor unit and revenue market share.”

“Strong distribution channel demand, initial sales to Toshiba, and a broader adoption of AMD platforms led to a 38 percent sequential increase in microprocessor unit shipments. In addition, our Graphics business gained momentum at the end of the quarter as we began shipping the new ATI Radeon HD 2000 family of graphics processors,” he continued

“We continue to focus on realigning our business model and reducing our capital expenditures and cost structure in the second half of the year,” Rivet added.

Q2 gross margin was 34 percent, excluding stock-based compensation expense, acquisition-related and severance charges compared to 31 percent in Q1; the increase from the prior quarter was largely due to increased microprocessor unit shipments, AMD said. Gross margin for the same quarter last year was 57 percent. Comparatively, Q2 gross margin was impacted by a write-off of older microprocessor inventory of approximately $30 million.

For AMD’s Q2 computing solutions segment, revenue was $1.1 billion, compared with $918 million in Q1. The 20 percent sequential increase was primarily due to a 38 percent increase in microprocessor unit shipments, offset partially by lower average selling prices (ASPs) for desktop microprocessors. Q2 server, mobile, and desktop microprocessor revenue increased sequentially, while mobile processor unit shipments increased 21 percent sequentially and 82 percent year-over-year. 

In the graphics segment, in the seasonally down Q2, revenue was $195 million - flat from Q1. Initial sales of the ATI Radeon HD 2000 family of graphics processors were strong in the channel, and design win momentum with key mobile and desktop OEMs continues to grow, AMD pointed out.

In the consumer electronics segment, revenue was $85 million, compared with $118 million in Q1. The sequential revenue decline of 28 percent was largely the result of lower handheld unit sales and revenue, partially offset by increased digital TV processor revenue.

Last month, AMD announced that initial revenue shipments of the company’s native x86 quad-core processor, “Barcelona,” will begin in Q3 in both standard and low-power versions.

In late May, AMD gave details of its next-generation platform for notebook computing, codenamed “Puma,” which pairs AMD’s notebook processor, “Griffin,” with the “RS780” mobile chipset.

Looking ahead to Q3, AMD said, “In the seasonally up third quarter, AMD expects revenue to increase in line with seasonality.”

Tim Luke, semiconductor equity research analyst with financial services firm Lehman Brothers noted in a report this morning that as a result of the results, he is maintaining his “Equal Weight” rating on AMD’s stock, meaning the he expects the stock to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

Luke also noted that the Q2 results showed progress on several fronts following a very weak Q1, with loss levels remaining elevated but with new products emerging, inventory lower and capex cut suggesting more focus on cash/margins over market share. With an outsourcing deal looming, Lehman said it expects shares to trade upwards into next week’s analyst day.

AMD Q2 revenue came out ahead of Lehman estimates, with the new products noted above to support the company’s outlook. The firm believes the lowering of capex from $2 billion to $1.8 billion is positive for both Intel and AMD. Lehman noted that AMD management had initially guided 2007 capex of $2.5 billion in December 2006, and cut it in April. Intel has also reduced its capital expenditure guidance to $4.9 billion from $5.5 billion.

Lehman believes the lower capital expenditure by both MPU players is encouraging as it reduces the risk of overcapacity in a market that is already facing severe pricing pressure. “With Intel targeting 5 to 8 percent gross margin expansion in the second half and AMD focusing more on margins and cash, we feel the focus may shift away from predatory pricing. The reduction in capex with a strong demand background bodes well for pricing and margins for both companies,” Luke said.

“We believe analyst day [will] focus on new products ( Barcelona ) with little on FabLite as negotiations continue with several players,” Luke wrote in his report.

Lehman said it is encouraged by stabilizing ASPs, particularly in its server and notebook segments.

“With inventory down, market share up, a pending product cycle refresh on the horizon, and an ‘enviable’ pricing position in the fastest growing MPU segment currently (low-end notebooks), and we are incrementally more positive on the near-term outlook for AMD. We would expect the shares to edge higher into next week’s analyst day (July 26),” Luke said.

Finally, the firm said it expects few details on July 26 with regard to AMD’s outsourcing deal/Asset Light strategy as negotiations continue with several players.

AMD is evaluating a roster of Asset Light strategies where it would partner with foundries such as existing partners TSMC (for ATI) and Chartered.

“Asset Light could bring some significant flexibility to the CY08 CAPEX and to the plans for Fab 38. One of the clear opportunities for AMD with Asset Light would be to lower its balance sheet requirements while operating with lower gross margins. One of the issues would be whether to manufacture using AMD’s SOI technology or ATI and TSMC’s bulk technology for the Fusion product which in 2009 should targeted integrating graphics and MPUs,” Luke noted.

“We recognize, depending on how AMD proceeds with FabLite strategy, that the company could potentially need more cash to fund growth,” he added.

Also this week, the European Commission authorized $361 million (262 million Euros) in aid to AMD, which the German authorities intend to grant to the company for the conversion and extension of its existing micro-processor wafer plants in Dresden, Germany. It remains to be seen whether this will help pull the MPU maker out of its cash problems.