AMD beats estimates and nears break-even
Friday 18th January 2008, 10:10:00 AM, written by Arun
Revenue was up 8.5% quarter-over-quarter, which contributed to higher factory utilisation. The latter, along with the introduction of new products, resulted in gross margins improving from 41% to 44%. The combination of these two factors increased gross profits by 17%, or $116M. Operating expenses were down by $25M despite R&D being slightly up.
The following points, from both the earnings data and the conference transcript at seekingalpha.com, are also noteworthy:
- 45nm is now expected to ramp in 2H08, while management previously indicated 1H08. However, Barcelona B3 is said to be back and working as expected, with sampling going to customers in a few weeks.
- Hector Ruiz also mentioned that "we’ve had silicon on a quad-core 45 nanometer product that equally we’re as pleased with the results". This seems to imply Shangai is booting, which is good news, but obviously isn't very precise.
- The Abu Dhabi-related cash infusion netted $608M. Cash is at $1.89B, so that's a $361M increase over Q3; excluding the cash infusion, that would be a negative cash flow of $247M, which is better than previous quarters but obviously not ideal yet.
- At the end of Q2, AMD's ownership of Spansion was worth $326M. Since then, there have been impairment charges of $57M and $69M in Q3 and Q4 respectively.
- However, Spansion's share price was down by more than 50% in Q4, and it doesn't seem like AMD sold many (if any) of their shares in that period. This implies that future significant write-downs are to be expected there, potentially affecting AMD's cash & equivalents position by up to $100M.
These results, which were excellent overall, position the company nicely to achieve operational income break-even in Q3 (as guided by management) and, if that does happen, net income break-even in Q4. The first half of 2008, however, is obviously going to be less encouraging due to negative seasonality factors.
On the other hand, if I have to be perfectly honest, I still have no idea how AMD could maintain current CPU market share in the 2008 back-to-school cycle. Their roadmap up to that point is incredibly unexciting (things only start spicing up again with Shangai), and Intel has a huge cost advantage. Furthermore, Intel's gross margins guidance for 2008 is lower than expected, which might imply they want to be more aggressive on pricing than the latest roadmaps suggest.
However, other factors in AMD's favor are also to be considered. First of all, OEMs obviously don't want to see them go the way of the dodo, so they'll be very cautious about giving more business to Intel. Secondly, AMD's positioning in notebooks and servers looks fairly strong in 2008, and those are high-margins businesses. And finally, former-ATI operations should do fairly well this year compared to 2007, so that'll also help the bottom-line.
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