AMD Q3 financials improve, but losses still a concern

Looking to Q4 and noting the macroeconomic environment, CEO Dirk Meyer said he does not expect the quarter to have its usual strength, but "it does not seem like a disaster."

By Suzanne Deffree, Managing Editor, News -- Electronic News, 10/17/2008

Although financials are improving at Advanced Micro Devices Inc and the MPU maker's GPU revenue increased by 55% in the September quarter, analysts are still concerned on the company's continuing losses.

Q3 marked AMD's eight straight quarter of loss at $67 million. The loss is a significant improvement, however, when compared to AMD's Q3 2007 loss of $396 million and Q2's loss of nearly $1.19 billion.

To combat the losses, AMD earlier this month announced it would spin out its manufacturing operations into a separate company, thereby allowing it to refocus its financial and development resources and lower its debt. With outside investment, AMD created "The Foundry Company" and received much praise from the financial community in doing so. That praise carried over to the company's Q3, but also came with lingering questions.

"We think AMD did a good job of negotiating its 'asset-smart' agreement," FBR Research said in a statement this morning. "That said, we still expect continuing operating losses, as AMD will consolidate all financial statements together--a rebucketing of costs between entities."

Maintaining a cautious tone, FBR Research said it awaits additional clarity as to what AMD's stand-alone margins will look like, what the total effects of financial statement consolidation will be on AMD's earnings power, and whether AMD will look to reduce its stake in the Foundry Company in order to get its ownership percentage below 20%.

Dirk Meyer, AMD's president and CEO, did not give much further detail on the company's manufacturing plans when speaking to financial analysts on AMD's Q3 call Thursday afternoon.

"We are on a path to becoming the company we aspire to be and we will be. We are satisfied with our asset smart announcement, in fact, we are thrilled," he said. "As many of you indicated in our meetings last week the 'asset smart' transaction is nothing short of transformational for AMD and for the whole semiconductor industry.

"It assures this company of a long-term source of world-class manufacturing capacity while unlocking the untapped potential and value of our phenomenal Dresden team to the rest of the industry. It is good for us, good for our customers, good for the great people of Dresden and in upstate New York, and it's good for competition, which means it will be good for consumers around the world," he continued.

AMD's revenue also showed improvements in the quarter. Q3 revenue from continuing operations was just less than $1.8 billion, a 14% increase year on year and a 32% increase on Q2. Much of the gain came from AMD's ATI GPU business.

"In the graphics segment, revenue for the quarter was $385 million, up 55% sequentially and up 40% year-over-year," Bob Rivet, AMD's CFO, said on the call.

The company in Q3 refreshed its graphics product line, introducing 10 new Radeon 4000 series products that span from the value end of the GPU market to the high, enthusiast to the high, enthusiast end.

"These timely introduced leadership products return the graphics segment to profitability resulting in operating income from the graphics segment of $47 million," Rivet said.

AMD further reported gross margin of 51%, which compared favorably to Q3 2007 gross margin of 41% and Q2 gross margin of 37%.

Looking to Q4 and noting the overall macroeconomic environment, the company projected revenue in the $1.58 billion range.

"I would not say that the couple of weeks into Q4 we are seeing substantially different market conditions than what we saw in Q3. I would just say that the quarter does not have its usual strength. It does not seem like a disaster," Meyer said.

"We are not forecasting a shrink in business Q3 to Q4, but it is pretty murky. The one good news I will say is average across customers and channels, we are not seeing inventories being terribly out of line. So, to the extent the end user demand picks up, there is a little stronger than we think. We got an opportunity to ship more," he concluded.