Ahead of its financial powwow, AMD takes ATI writedown

Ahead of its financial powwow, AMD takes ATI writedown

Summary: Advanced Micro Devices said in an SEC filing Wednesday that it will take a goodwill impairment charge due to its October 2006 acquisition of ATI Technologies.These goodwill impairment charges are taken when a company doesn't expect to get its expected returns on an acquisition.

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Advanced Micro Devices said in an SEC filing Wednesday that it will take a goodwill impairment charge due to its October 2006 acquisition of ATI Technologies.

These goodwill impairment charges are taken when a company doesn't expect to get its expected returns on an acquisition. AMD is basically punting on the idea that ATI will generate the value predicted at the time of the acquisition. It's unclear how big the write-off will be, but the goodwill on AMD's books is about $3.2 billion.

The ATI write-off, which isn't entirely unexpected, comes a day before AMD hosts its annual analyst powwow at the New York Stock Exchange. Expectations couldn't be lower among the Wall Street types. Here's what AMD is expected to talk about:

The fallout from the Barcelona launch. AMD has had a rough time getting Barcelona chips into OEM hands due to manufacturing issues and chip flaws. As a result, AMD is shipping far fewer units than it initially expected. Citigroup analyst Glen Yeung said in a research note that Barcelona and delays in the Phenom desktop processor will be front and center. Yeung said the implications for the "unsuccessful Barcelona launch" will include weaker than expected gross margins.

AMD's balance sheet. Analysts indicate that cash flow is a major concern for AMD since it is expected to post operating losses throughout much of 2008. Yeung predicted that AMD will have about $720 million in cash at the end of the fourth quarter. Analysts will be listening closely to figure out how AMD will pare expenses and help its balance sheet. Last month, AMD secured a $622 million cash infusion from Dubai's Mubadala Development Co., which now owns 8.1 percent of AMD. The investment diluted existing shareholders by 49 million shares, but gave AMD some wiggle room.

AMD's asset light strategy. For a year, AMD has talked about an "asset light" strategy that would outsource production of chips. This model would obviously save capital expenses and perhaps boost AMD's profit potential. Yeung said that TSMC will begin production of low-end AMD chips in the first half of 2008. AMD could confirm the TSMC relationship and sell some assets. Longer term it is unclear whether an asset light strategy can keep up in the semiconductor arms race. Intel sees its manufacturing prowess as a competitive advantage. Can AMD leapfrog Intel when it relies on others for manufacturing?

Topics: Networking, Banking, CXO, Enterprise Software, Hardware, Intel, Processors

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12 comments
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  • In other words, "Blue Sky" is turning gray.

    I wonder if they are trying to cover their loss in value due to junk processors by blaming it on ATI. I can't believe they overestimated goodwill by so much. If they did, Hector needs to go. I can't help but think a better CEO would never have let AMD lose the momentum they were carrying such a short time ago.
    bjbrock
    • Big goodwill charges

      aren't uncommon and they happen fairly often--which is usually an indictment of the ROI you get from big pie in the sky mergers.
      Larry Dignan
      • Blue Sky is the difference...

        between the FMV of the net assets and FMV of the company as a whole. Did AMD over value ATI or have they sucked the value out of ATI as some other posters have suggested?
        bjbrock
  • AMD is killing ATI and them selves

    Since buying ATI, AMD has done little but milk it as a short term cash cow. They have done nothing that wasn't already "in the pipe" when they bought ATI.

    The Quad core has proven to be a major flop in both performance and stability/reliability and AMD is saying NOT to use it for work stations or desktop machines (and only in very limited server roles) due to errata that is yet to be solved. This issue has all the OEMs telling customers to go with Intel, even in servers. (They don't want the hassles either.)

    Farming out the chip production? I guess for the low end (cheap) CPUs this *may* make sense, but it also means a slimmer profit than ever on chips that weren't bringing many real dollars to the bottom line to begin with.

    From everything I see, AMD is in deep trouble and current management seems to not have answers other than to say things will improve *someday*. I don' believe that is going to impress wall street or stockholders. It certainly is not impressing OEMs or the end customer...
    No_Ax_to_Grind
    • All Eyes on Fusion

      As everything in the short term pipe is as smart as building a hospital in New Orleans with a backup power generator in the basement for when you get flooded, AMD does have a long term vision for ATI/AMD. The problem is that we won't see this for some time and they are banking quite a bit on technology to get to that point, hoping that their dedicated gaming fan base won't abandon them. Too late for many. Even I want to build a Core 2 Quad over a Phenom now.
      nucrash
    • Oh so true. At the risk of...

      sounding like a broken record, Hector's job at the helm needs to be re-evaluated. No decent CEO could let his company lose the momentum they had going.
      bjbrock
  • AMD and ATI

    Does anyone recall what the justification was for the purchase of ATi?
    dls2
    • Besides a unified gaming platform...

      the GP-GPU in connection with hypertransport. But this will only serve a niche market - high performance computing for one. The average PC user won't need it.
      bjbrock
  • Their own fault...

    ATI came out swinging against Vista and complained all over about all of the cost to write drivers for Vista. So high level CIOs like myself chose to go with nVidia. My rep and I waged a stealth campaign at the local Geek Squad counter by puchasing some ATI cards and then returning them en-masse, causing a DoS attack at the counter and pursuading people to buy nVidia based cards for the ultimate Vista WOW.
    Mike Cox
    • Good one!

      (NT)
      bjbrock
  • Fickle user base?

    Notice the lack of posts by the AMD fans? Point being that AMD *thought* they had a dedicated user base. As the problems mount, the dedicated user base got out of dodge...
    No_Ax_to_Grind
    • wrong as usual :o)

      maybe their (former) customers just want the best value for their processing dollar, which AMD's currently not providing.

      :o)
      Jack-Booted EULA