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Q1 2007 performance is "disappointing and unacceptable" says AMD's chief financial officer

Ten days ago, AMD announced that it was planning to restructure its business due to a significant drop in quarterly revenue. At the time, the company was projecting its Q1 revenue to come in at $1.225 billion USD.

The official numbers are in and AMD has reported Q1 revenue of $1.233 billion USD and an net loss of $611 million USD. The numbers include a charge of $113 million USD due to the acquisition of ATI and $28 million USD for employee stock-based compensation expenses. AMD had revenue of $1.773 billion USD in Q4 2006.

The ongoing price war between AMD and Intel is partially to blame for the reduced earnings. Intel has been aggressively cutting prices on its current processors and AMD has been quick to respond. AMD as a result has witnessed lower average selling prices (ASPs) in addition to lower unit sales.

"After more than three years of successfully executing our customer expansion strategy and significantly growing our unit and revenue base, our first quarter performance is disappointing and unacceptable," said AMD CFO Robert J. Rivet. "We are aggressively addressing the issues that led to our significant revenue decline. We are aligning our business model, capital expenditures and cost structure with the goal of accelerating our return to profitability. Lastly, our customer relationships remain solid, reflecting their confidence in our strategic direction, current and new products, and technology roadmaps."

On a positive note, AMD reported $197 million USD in revenue from its graphics division in Q1 2007. This represented a 19 percent gain from Q4 2006. AMD's next generation DirectX 10-based R600 graphics processor is expected to launch within the next few weeks. The top of the line AMD ATI Radeon HD 2900 XT will feature 320 stream processors, 512-bit memory interface with eight channels, native CrossFire support, 128-bit HDR rendering, 24x anti-aliasing and HDMI output with 5.1 surround sound.

Looking to the near future, AMD plans to get its 65nm native quad-core Barcelona processors out the door during Q3. AMD has high hopes for the processors which will incorporate 2MB of L3 cache and AMD Virtualization (AMD-V) technology. "We expect across a wide variety of workloads for Barcelona to outperform Clovertown by 40 percent," said AMD's corporate vice president for server and workstation products, Randy Allen in January.

The company will not, however, begin production of 45nm processors until the first half of 2008. 45nm processors won’t actually ship until the second half of 2008.

Intel is well aware of AMD's plans and many have suggested that the company released early performance numbers for its quad-core Penryn processors to divert attention away from AMD's upcoming Barcelona. Intel's 45nm Penryn taped-out in January and will begin shipping in the latter half of 2007 -- roughly a year ahead of AMD's first 45nm processor.


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By ybee on 4/20/2007 2:01:15 AM , Rating: 2
Considering R600 delay and loss of Intel chipset business, it could be worse.

You should keep in mind also that AMD could go for a much more agressive cost cutting (back in 2003 AMD could break even on $500M CPU sales), but it apparently decided to keep up R&D and marketing expenses. So lets just say that it is not so much a loss as a strategic investement.


By defter on 4/20/2007 2:52:08 AM , Rating: 2
The more costs AMD will cut, the further they will fall behind Intel/NVidia. Thus, cost cutting will not help in the long term, it will just prolong the agony.

AMD has already announced that they are cutting costs by delaying FAB30 conversion that was previously scheduled to begin in mid-2007. Thus in 2008 Intel will have several 45nm FABs online while AMD will keep producing CPUs using ancient 90nm process on 200mm wafers. This doesn't look like a very sustainable solution.

quote:
back in 2003 AMD could break even on $500M CPU sales


They also had profitable flash division then. Currently, execluding one time charges and other costs, AMD needs $1.6B revenue to just break even. Their gross margin was $347M while R&D+marketing costs were $767M, thus they would need to reduce their R&D+marketing spending less to a half in order to break even. Then, they have a large debt for which they have to pay interest. And they would still need to find few billions for future fab conversion and construction...


By ybee on 4/20/2007 3:27:54 AM , Rating: 3
A few figures for 3Q 2003

CPU sales $503M, operating income $19M
Flash sales $424M, operating loss $50M (so in 2003 flash was not profitable)

R&D expenses $214M, MG&A expenes $151M

In 1Q 2006 R&D expenses were $432M, MG&A expenes $335M.

Interest in 1Q is just $80M - not a major cost item.

So if you compare 2003 and 2007, there is a lot of room for maneuver for AMD. It could break even at a much lower level of sales, it can do it it now. And it has always been behind intel in terms of manufacturing so nothing new here either. I dont think though it will be 90nm CPUs vs 45nm CPUs. AMD will most likely use its 90nm capacity to manufacture chipsets.


By defter on 4/20/2007 3:48:31 AM , Rating: 1
Sorry, I forgot about flash losses.

quote:
It could break even at a much lower level of sales, it can do it it now.


You need to take into account that chips have become much more complex in these 3.5 years, requiring more development money. The same applies to process, developing 45nm process will cost much more money than developing 90nm one.

quote:
Interest in 1Q is just $80M - not a major cost item.


$80M is 6.5% of revenue, which is a significant amount. If one takes interest into account then in order to make it even, AMD must cut their R&D+marketing costs by about 2/3. That's not really feasible (unless AMD sells some divisions, but then again, that would decrease revenue).


By ybee on 4/20/2007 4:19:25 AM , Rating: 3
quote:
You need to take into account that chips have become much more complex in these 3.5 years, requiring more development money. The same applies to process, developing 45nm process will cost much more money than developing 90nm one.


These are valid points. But what's even more important is that R&D and marketing expenses are subject to the law of diminishinh returns - much of the money spent is marginally profitable or just wasted. As long as your company remains profitable it is OK because cutting budgets would hurt morale, and decent managers care more about employees than shareholders.

But there is nothing like a quarter like this to focus you mind on what you really need to do and what is optional.

My point about interest is that it is well below the variation of quarterly operating cashflow. No big deal. You also should keep in mind that debt is generally good, because it inreases rate of return for shareholders. If you need money you should borrow as much as you can (at least until you are in the deep junk territory)


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