What AMD is doing right
AMD is scheduled to report on its Q4 and full-year 2008 Thursday after market close and I, like many of you, will be listening to what the company has to say very closely.
If you read this blog often, you may be puzzled by this post’s headline. Usually when discussing AMD this blog questions the company’s viability and longevity. For months, this blog called out for AMD to release its business recovery plan to the public while watching the company’s stock sink and revenue declines grow, and with each post grew less and less sure that AMD could recovery from a business standpoint. I’m still not 100% convinced that it can — especially given the current economic environment which has driven AMD’s stock down to the $2 range — but the company did finally release a plan and has been acting on that plan ever since.
Foremost, the company spun out its manufacturing in early October. While many readers have commented in previous blog posts that such a move was foolish and will eventually leave AMD unable to compete, I continue to disagree. Spinning out "The Foundry Company" should supply AMD with much needed cash and will ease its financing concerns considerably. AMD also has considerable partnerships that it can rely on for manufacturing.
As illustrated by its aggressive Shanghai pricing, AMD has additionally kept its chip prices relatively low compared to similar solutions from competitors, a plus for the burgeoning low-cost laptop/netbook category and an even bigger plus as electronics supply chain rumors suggest PC OEMs will be looking more at cost and less at speed/core counts as 2009’s economic battering continues. (See "With Dirk Meyer and Phenom II, AMD keeps on trying" for more.) AMD competitor Intel has reportedly cut prices by nearly half on some of its chips to help buoy sinking demand.
AMD also shuffled its management in July 2008. Hector Ruiz — whose head most stockholders were calling for on a stick by last summer — shifted to executive chairman and Dirk Meyer moved to president and CEO. Meyer, an ex-AMD designer, has a tough road ahead of him, but general semiconductor industry and financial industry sentiment is a lot more friendly — and somewhat more patient — toward his leadership so far than it had been toward Ruiz. These two execs, by the way, just took 20% pay cuts in an effort to reduce company costs.
That executive shift came after AMD announced a whopping $1.2 billion charge for its Q2 2008 and said that as part of a review of its non-core businesses it had decided to divest its handheld and DTV product businesses. The company has done so and in ways that could benefit the overall electronics industry as both companies acquired the businesses with the intention of growing further innovation (and profits) off of established technologies. Truth be told, that’s not always the goal of an acquisition.
AMD sold the DTV group to Broadcom for $141.5 million, gaining cash and allowing it to better focus on its core technologies. Broadcom, in turn, said it plans to build its DTV focus around the AMD technology, which CEO Scott McGregor related confidence in during an EDN interview.
Then, just this week, AMD announced it had sold certain handset and multimedia assets to Qualcomm for about $65 million, again, gaining some cash and allowing better focus on x86. Qualcomm has been licensing much of the just-purchased technology for years and should be able to build off it easily, advancing its own multimedia capabilities and potentially keeping end costs down as it’s no longer paying licensing fees.
Both of these sales also helped AMD trim headcount, and that brings this post to a gray area in AMD’s recovery: its recent swarm of layoffs. Yes, headcount reductions stink, there’s no question about that, especially when we are seeing good EEs shown the doors at companies like AMD by the thousands each week. But such action does lower costs, and that’s a primary focus for AMD management right now. It’s a double-edged sword that many semiconductor industry companies will face once business recovers: Lay off to lower costs and stay afloat, but once afloat, how do you focus on innovation and regaining profits without the designers you let go?
All in all, I’ve been encouraged by AMD’s business moves in recent months. While I expect Q4 sales to be down substantially, somewhere around 30% sequentially according to Street estimates, tomorrow’s call is the first AMD earnings report I’ve looked forward to in a while.
I’ll be listening for management comments on inventory in the PC supply chain and what products AMD believes have longer supply chains and what still needs inventory work down; how much pressure AMD’s GPUs are facing on crunched consumer spending (Nvidia recently projected sales down 50%); how the Foundry Company is doing and what benefits have come from that spinout thus far; how AMD’s prices are impacting revenues; and if its break-even level, previously set at $1.5 billion, has been lowered given AMD’s cost-cutting actions.
What do you think? Is AMD recovering? Can it recover in this economic environment? Share your thoughts on the company below.
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