AMD 2Q: Good news and bad

Friday 20th July 2007, 09:09:00 AM, written by Geo

AMD reported their 2Q results yesterday evening at the close of business. They include elements in which both optimists and cynics will find support for their views.

First, the good news. Against most expectations in the midst of a price war with Intel, gross margins increased in 2Q from 31% to 34%. A $30M write-off of old inventory cost them an additional 2%, suggesting the go-forward baseline for margins is 36%. This is a nice improvement over 1Q, particularly given that some observers were concerned that margins might decrease rather than increase. Additionally, after a near melt-down on units shipped in 1Q, CPU shipments increased by 38% in 2Q. Presumably we will see this dramatic increase have an impact on market-share when various analysts report on the matter.

Unfortunately, the above positive elements made barely a ripple on the bottom line results. After loudly proclaiming that "a perfect storm" in 1Q had been the cause of a $611M loss, the results for 2Q improved by less than 2%, with a bottom-line loss of $600M. This means in 6 months AMD has lost more than 1.2 billion dollars, and thus it should be clear to even the most casual observer that this state of affairs cannot continue much longer without serious consequences of some sort. AMD executives claim that they see a nearly break even structure exiting 2007, but at this point serious progress will have to be made to get within even shouting distance of that goal.

From the results posted, it does not appear that any part of the business is currently profitable. Even ATI's consumer business, while relatively small, was nearly always a nice addition to the gross margins pictures pre-AMD. Currently it appears that doldrums at Motorola have that business running in the red as well, with revenue declining from 1Q's $118M to only $85M in Q2.

Lastly, AMD continues to book "acquistion and integration related" charges as a result of the acquistion of ATI. For 2Q, they've booked another $78M of such charges, following 1Q's $113M and an original charge of $551M in 4Q of 2006. This means in the three quarters since the deal closed, AMD has booked $742M in such charges. This is an eye-popping number for a $5.5B deal that at the time of announcement the participants advertised for it's marvelous synergies, aligned corporate culture, and remarkable lack of overlap. More disturbingly, while the charge continues to be as high as $78M in 2Q, there is no guarantee that more of the same might not be in store for 3Q.

So, on balance, while there was improvement in the top line in 2Q the bottom line is every bit as dreary as 1Q's "perfect storm", and signficant challenges lay ahead for AMD to right their ship.

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