AMD Sees Silver Lining Despite All The Red Ink

Intel may have had a fantastic third quarter, but AMD didn’t—at least not in terms of profitability.

The company on Thursday reported third-quarter revenue of $1.63 billion, a 23 percent increase from the same quarter in 2006 and an 18 percent improvement from the second quarter.

But expenses due to manufacturing transitions and the ongoing cost of its ATI acquisition ate into the bottom line, resulting in an operating loss of $226 million, and a net loss of $396 million, or 71 cents a share.

In the year-ago quarter, it returned a profit of $136 million, or 27 cents a share.

Almost $120 million, or 22 cents per share, of that loss can be attributed to costs associated with integrating graphics and chipset player ATI, which AMD acquired a year ago, as well as various severance and impairment charges.

Chairman and CEO Hector Ruiz didn’t speak much on the conference call discussing the numbers, but he made his feelings plain. “We’re dissatisfied with our financial results, and working diligently toward bringing the company back to profitability,” he said.

On the other hand, President and COO Dirk Meyer sounded more upbeat on the call.

“We are encouraged by the progress we made in the third quarter,” he said. “We cut operating losses by more than half, improved margin and improved our cash flow.”

Demand was quite high for its new Quad-Core Opteron, a.k.a. “Barcelona,” which shipped in August. Meyer admitted the production ramp has been slower than anticipated, but expects it to be widely available by the middle of the fourth quarter, adding that AMD will be ready to ship “hundreds of thousands of processors.”

Gross margin came in at 41 percent, up from 33 percent in the second quarter, but not quite as good as the 51 percent margin it recorded in the year-ago quarter. The sequential uptick was the product of microprocessor unit shipments, manufacturing efficiencies, improved inventory management and a richer product mix.

Because it shipped so late in the quarter, Meyer said the Quad-Core Opteron had almost no impact on sales for the quarter.

Microprocessor sales were up 19 percent in the quarter, with mobile processors up 41 percent from the prior quarter and 68 percent year-over-year. The company’s graphics business grew by 29 percent from the launch of ATI’s new Radeon HD 2000 series of processors.

With product development relatively healthy, AMD’s biggest challenge continues to be its infrastructure.

It is on track to shutter Fab 30, one of its large manufacturing lines at the Dresden, Germany facility, to assist in its transition from a 200mm to a 300mm wafer manufacturing process, which will increase processor yield. The company also plans to move to more advanced 45nm semiconductor designs in the first half of next year, a potentially expensive move that will serve to help it compete with rival Intel’s upcoming 45nm processors.

AMD CFO Robert Rivet said the company expects the fourth quarter to be in line with seasonable trends, but played his cards close to his chest in terms of fourth quarter projections.

He said the company expects a 6 percent increase in operating expenses related to investment in fabrication. The company also anticipates additional expenses, including a $75 million charge for the ATI acquisition, $25 million in tax expenses and $290 million in charges for depreciation and amortization.

Mike Feibus, president of TechKnowledge Strategies, said AMD has to get its financial house in order because it’s adversely affecting AMD’s generally good products.

“They have a lot of things they need to fix from a cash-flow position,” he told “When they restructured debt, they didn’t eliminate their debt, they just gave it a longer lease. They need to bring costs more in line. They have a lot of debt-to-equity.”

He added that the otherwise-solid product side of AMD’s business suffered somewhat as a result of three problems with the company’s Barcelona release: It was six months late, has a low clock speed, and AMD did a lousy job of communicating with their OEMs.

Of the three, the communication issue was the real sin, Feibus said. AMD apparently didn’t adequately warn its customers that it would not have a large, ready supply of Quad-Core Opteron processors.

“My sense from OEMs is they were more upset with communication on the issues than they were with the actual clock rate or schedule,” Feibus said. “It may be a two-player environment, but AMD doesn’t get a pass. You gotta stay in touch with your partner, and Intel is running on all cylinders right now. Saying, ‘We’ll get back to you next week’ doesn’t work.”

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