An End to Red Ink at AMD?

Is there a light at the end of AMD’s long dark tunnel? Or is that just
the headlight of an oncoming train with a big blue “I” on it?

The chipmaker reported its sixth consecutive loss in a row on Thursday. The
one bright spot was the loss wasn’t that bad, only $358 million, or a $0.59
loss per share. This wasn’t a surprise, as the company had warned of greater
than average seasonal weakness.

However, there may be some relief in store. AMD (NYSE: AMD) has a lot of
new products out that put it back in competition with arch-rival Intel
(NASDAQ: INTC) and the company is engaging in always-unpleasant cost
cutting
. So there may be hope.

One of AMD’s problems was an aging product line. As Technology Business
Research (TBR) analyst John Spooner noted, the company had too many older chips with newer ones in the pipeline. The result was a higher-than-normal sequential revenue decline of 15 percent. A typical decline would have been between five and 10 percent.

“We believe that the lack of availability of quad-core Opteron servers
from brand name servers, in particularly, dealt the chipmaker a blow in the
first,” Spooner wrote in a research report. “However, due to seasonality and
slowing consumer demand in the U.S., AMD was unable to offset slowing server
shipments with higher sales of notebook chips as was the case in the fourth
quarter of 2007.”

But now AMD is finally shipping Quad Core Opteron in
volume
. Dell (NASDAQ: DELL), HP
(NYSE: HPQ) and Sun (NASDAQ: JAVA) are already offering product and in the
case of Dell, broadening their Opteron offerings. The desktop Phenom processors are available in triple and quad-core designs and AMD has more on the way.

Dean McCarron, president of Mercury Research, said AMD now has a
competitive product lineup. “Do they have a top to bottom stack that can compete with Intel at the top end? Probably not,” he said. But McCarron thinks the segment with the greatest volume is in the midrange of performance, an area he said AMD can compete very well with Intel.

Both Spooner and McCarron think that it will take some time before profits from these new chips show up on the bottom line. Both said it won’t be until at least the third quarter before AMD can return to profitability. “We expect the products to have the greater impact on its
third quarter results as businesses will take time to evaluate new servers
from HP and Dell,” Spooner wrote.

In addition to the already announced 10 percent reduction in workforce,
Spooner believes AMD will have to trim costs by exiting non-essential
businesses and restructuring its manufacturing operations. He also said AMD
might enter into additional manufacturing partnerships to help offset its own fabrication expenses.

Given that the company said on the conference call that it won’t be
profitable in Q2 of this year, McCarron said don’t expect it, but Q3 and
beyond could turn around. “The second half of the year is the most likely
time to have revenue growth take place,” he said. “Their seasonality is very
consumer-oriented, so that would drive some volume there.

McCarron said there are positive signs that the major OEMs are still in
AMD’s corner. “If they were losing patience, AMD wouldn’t be getting design
wins for the server products,” he said. “OEMs think the competition has
helped them. It’s given them the best technology to choose from and kept
prices competitive. There’s a reason for the largest OEMs to be supportive of
AMD.”

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