AMD Faces The Music, Scales Back Expenses

It was not a happy crew on AMD’s quarterly financial conference call, as CEO Hector Ruiz and his top lieutenants had to explain a net loss of $611 million for the first quarter of 2007.

AMD  reported first quarter 2007 revenue of $1.233 billion, but thanks to expenses from its ATI acquisition, a price brawl with Intel, its inability to meet demand and weakening demand in the consumer channel, the company was hit with the huge loss.

“The sum total of all four was a perfect storm for us,” said Dirk Meyer, president and COO of AMD. For the first quarter of 2006, AMD posted a profit of $184.5 million, or 38 cents per share.

AMD had warned investors last month it would fall short of sales. Analysts had been expecting a loss of around 48 cents per share, according to Reuters.

There’s no question the price battle Intel  has launched is hurting AMD. AMD’s adjusted gross margin was 31 percent, compared to 40 percent in the previous quarter and 59 percent for the first quarter of 2006. Intel’s margin this quarter was 50%.

There were also some big bills to pay this quarter, including those to the acquisition of ATI and integration charges of $113 million, employee stock-based compensation expenses of $28 million, and a tax-related expense of $23 million.

To get things under control, Meyer said the company will begin a round of cost reductions. “We know we can’t cut our way to prosperity but there are some steps we can take,” he said. He said AMD plans to reduce expenses by $500 million. It will slow conversions of some of its fabrication plant to larger manufacturing wafers and slow down on hiring. AMD expects to end the year with a lower headcount than it had when it started the year, but did not specifically say layoffs were planned.

Chief financial officer Robert Rivet said that restructuring costs will begin to show more in the second half of the year. He expects revenues to be flat to slightly higher in the coming quarter. “We had a terrible start to the year but we’re confident we have a plan to put ourselves back on track,” he said.

Getting on track means shipping the new R600 GPU line for video cards and the Barcelona family of Opteron chips. The R600 cards should begin to ship next month, while Barcelona samples will go to OEM partners in the second quarter and OEMs will be shipping Barcelona-based systems in the third quarter.

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