Novice Investing - AMD Quarter Doesn't Advance Well

Date: Thursday 07th 2008f August 2008 01:43:54 PM

AMD Quarter Doesn't Advance Well - 04/03/2008

By: Novice Investing Staff

Advance Micro Devices Inc. (AMD) slowed by product delay and lower sales, announced that it will cut up to 10% of its workforce or a total of 1800 workers. Furthermore, sales for the 1st Quarter ending on March 2008 will fell short at $ 1.5 Billion versus $ 1.61 Billion, a 7% miss on the top line.

Sensing that graphics will be key to battleground with Intel, AMD acquired chip maker ATI Technologies, which was at the time was the number two competitor of nVidia, the dominant graphic chip maker. Bundling its processor with graphic capabilities of ATI was AMD's strategy of attacking Intel's dominant. Unfortunately, ATI's acquisition hasn't gone as planned and it drains AMD's financial resource which is still needed in the microprocessor business. Since that time, AMD has admitted that the value of its ATI's acquisition has fallen 30%. It had written off $ 2 Billion from that acquisition.

Looking at AMD's expected revenue, what does a $ 110 Million revenue miss translate into the bottom line? Assuming a gross margin of 40% which is not out of line with its historical average, AMD would have $ 44 Million profit cut or $ 0.07 per share. That doesn't look much. However, with its leveraged balance sheet ( $ 3.23 Billion of negative net cash), AMD can't afford to incur considerable period of earning losses. Interest expense alone will cost the company $ 226 Million annually assuming a 7.0% interest rate. Meanwhile, analysts still expect AMD to incur a loss of $ 1.07 and $ 0.37 for fiscal year 2008 and 2009 respectively. Let's hope so. Suppose that AMD report a higher losses of say $ 1.50 per share for its 2009 fiscal year, we doubt that AMD can survive on its own without endangering its common stock holder. Its shares can be easily trade to $ 0 in that case.

What would prevent further losses at AMD? Many analysts have pointed out to the release of AMD's Barcelona chips (finally?!?!). It has been delayed from its initial release of June 2007 and hurt AMD's result along the way. While Barcelona has been released quite some time after archrival Intel released its own version of Quadcore processors, we should expect at least a break even for AMD if Barcelona is to have a huge success. Thus, don't expect AMD to turn profitable anytime soon. With the cyclical nature of a semiconductor business, investors are better off to not be overly optimistic.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Advance Micro Devices Inc. (AMD) or any other securities.

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