AMD: Is the worst over?
AMD fumbled the Barcelona launch, lost $1.77 billion in its fourth quarter and has a bandwagon of doubters. But there are a bevy of reasons to be cautiously optimistic following AMD's latest checkup.
First let's get the bad stuff out of the way. AMD lost money by the truckload on a net basis in the December quarter. If you strip all of that away, AMD lost $9 million and was close to break even. And depending on what charges you choose to exclude or include AMD may have topped Wall Street estimates--there was some debate on that among analysts Friday over a tax benefit. The acquisition of graphics chip maker ATI--the reason for the massive quarterly net loss--hasn't turned out as AMD had planned. AMD has been yapping about this AssetSmart strategy to be more nimble on the manufacturing side, but management refuses to cough up any meaningful details. Meanwhile, AMD management, which is optimistic, is in the Wall Street penalty box for overpromising and underdelivering.
Given those moving parts it would be understandable if you wrote AMD off and predicted a future of being Intel's doormat. However, there is another side of the argument that merits further review. Here are a few reasons to be cautiously optimistic about AMD:
AMD will more than double its Barcelona shipments this quarter. On AMD's earnings conference call, CFO Robert Rivet said the company shipped "close to 400,000" quad core units. "We continue to execute our volume ramp and in the first quarter we will more than double our shipments over the fourth quarter," said Rivet. Executives were adamant that the errata problems with Barcelona were fixed. Now 800,000 to 1 million units isn't a massive jump it's a good start toward mass production.
CEO Hector Ruiz said:
We were determined to fix our Barcelona quad-core issues as soon as we could. I’m very pleased to report that silicone has been out of the factor with the fixes that we’ve put in place and we’re really thrilled with all of the work that’s being done and expect that within two to three weeks we will begin providing our customers the samples that they will then put in server platforms beginning the end of the quarter and well into the second quarter and beyond.
Derrick Meyer, chief operating officer at AMD, added:
We’ve got B3 material out of the Fab and we’re putting it through its paces internally and in a couple of weeks we’ll be providing engineering samples to our customers and follow that quickly with production samples later in the quarter. We’ll be working with our server customers very diligently to accelerate as best possible the availability of their systems and the marketplace, you’ll start to see that very late in Q1 and most of the systems early in Q2 and later into Q2.
From a speed perspective, we’re focused on getting the high volume mid band power products into the market where the top speed right there is the 2.3 gigahertz part. The higher performance band, 2.5 gig part will follow in Q2.
As an aside, for folks that want to go deeper about the chip ramp--including B2 and B3 stepping--read the earnings call transcript at SeekingAlpha. The company is serious about being profitable. Rivet said the magic revenue number for AMD to break even on a net basis is $2 billion or more--a sum that's possible. In the meantime, AMD is improving efficiency. Rivet noted:
In the fourth quarter, we achieved near breakeven at the operating line. We grew ASPs on the strength of new products. We believe we gained share in microprocessors. We managed costs well while growing the top line and we improved gross margin by three points, capping off an eight point gross margin improvement from a year ago. We are maniacally focused on our return to profitability. And as I said as last month’s analyst day, we plan to do so in the second half of 2008.
The rub: No analyst believes AMD. "We believe AMD's breakeven goal assumes continued share gains and margin improvement at the same time, which we believe is unrealistic," said Merrill Lynch analyst Srini Pajjuri.
The PC market remains healthy--for now. Intel didn't see any inventory buildup and said PC demand was chugging along led by notebooks. AMD reiterated the same thing. Derrick Meyer, AMD's chief operating officer, said:
We saw a pretty healthy environment in Q4. We’re not seeing anything substantially different than what Bob referenced, normal seasonality in Q1. Clearly with all the economic noise in the system, we’re looking very keenly and constantly at the environment, but then again we haven’t seen any substantial change from norm.
This point is critical. AMD's recovery depends on tech demand holding up. If the tech industry is healthy due to emerging markets AMD's recovery is likely. If things unravel AMD has a much tougher road ahead because it doesn't have the balance sheet or financials to skate through a recession.
Bottom line: AMD is a show me company. Frankly, no one wants to hear anymore talk from the company--it has to execute. Analysts across the board were encouraged by AMD's comments, but harbor doubts about the company's ability to deliver and the broader economy. Until AMD strings together a few solid quarters those doubters will remain.
Also see: