Advanced Micro Devices is facing a bleak outlook and at least one analyst is arguing that the company's business model is 'fundamentally broken." There may be some validity to that since AMD CEO Hector Ruiz is also talking about some business model "tweaks."
AMD reported a fourth quarter net loss of $574 million, or $1.08 a share, due to charges related to the acquisition of ATI Technologies. Revenue was $1.77 billion in the quarter. Those results include the acquisition of ATI. For non-ATI results see AMD's earnings statement.
Hans Mosesmann, an analyst with Nollenberger Capital Partners, called AMD's financial results "surreal." Indeed, the results were so off that Mosesmann concluded that "AMD's business model is fundamentally broken, in our opinion. The Street in our view does not realize this problem given AMD's recent historical success in terms of market share."
Not all analysts were as pessimistic as Mosesmann although downgrades were flying on Wednesday. Most sounded like Thomas Weisel analyst Eric Gomberg, who noted AMD's fourth quarter results were a major disappointment, but its upcoming Barcelona chip should improve matters in the second half of 2007. "Despite our optimism, we recognize that significant risk exists, particularly if Intel makes another aggressive price move," said Gomberg.
At issue is AMD's collapse in gross margin to 40 percent in the fourth quarter from 52 percent in the third largely because of server chip prices. Meanwhile, shipments rose 26 percent. Do the math and those results indicate that AMD is giving chips away to hold market share. Mosesmann said AMD had a few surreal moments.
AMD: “We believe we once again gained microprocessor unit share in the quarter, as we did in the year, by continuing to execute against our customer acquisition strategy and our product, technology and manufacturing plans,” said Robert J. Rivet, AMD’s chief financial officer.
Reality: Does market share at the expense of profits really make sense?
AMD: "Fourth quarter microprocessor unit shipments grew 26 percent year-over-year and 19 percent sequentially as customers continued leveraging AMD solutions to provide greater choice to the market."
Reality: Sure AMD has fine chips. But they get even finer the cheaper they get.
AMD: Management, however, is projecting margin of 50 percent or more and computational product sales growth of 20 percent. In other words, AMD is betting the farm on Barcelona.
Reality: Mosesmann says AMD's server average selling prices fell 20 percent as shipments went up 19 percent.
"We are puzzled by what we consider management's apparent naiveté regarding its goals. AMD is getting hit with problems on a multitude of fronts exacerbated by management's apparent naiveté, stubbornness, and/or hubris. 4Q06 in our view was merely an early flavor of what awaits AMD in 2007: poor product positioning, over-exposure to legacy 90nm manufacturing, large die-sizes, over-capacity, a highly leveraged balance sheet, and significantly higher execution risk with the addition of ATI to the equation."
AMD chief operating officer Dirk Meyer noted that the company was not "satisfied with our financial performance in Q4, and we need to improve our results in the future." But then proceeded to emphasize AMD's 2006 gains. That approach is what has analysts steamed. There's a disconnect between AMD's results and its outlook to 2007.
It's very telling when a CEO tosses the earnings call script and wings it. That's what Ruiz did last night.
"I’m going to talk to you from the gut. What I want to tell you is a little bit of history and put it in the context that I believe will show you why I am incredibly optimistic and excited by the future of this company, more than I have been in the seven years that I have been with this company."
From there Ruiz talks about how the company is focused on customers, who are demanding AMD fight for market share.
"We will carefully manage costs, but we also believe that we’re going to have to tweak our business model because we believe we have to achieve prosperity in an environment where pricing competition is going to be tougher than perhaps we had originally planned. We will do whatever it takes to continue on our path to deliver customer-centric innovation this year and beyond."
Add it up and AMD is clearly circling the wagons for now. This year should be interesting.