Advanced Micro Devices (AMD) Inc. officials say they are encouraged by the company's improvements in the third quarter of 2007, but maintain that there are still some hurdles to overcome before the chip maker can become profitable.
Sunnyvale, Calif.-based AMD reported Q3 revenue of $1.632 billion, an 18-per-cent increase compared to its Q207 revenue of $1.378 billion, and a 23-per-cent improvement over Q306's revenue of $1.328 billion. In an analyst conference call, Dirk Meyer, the company's president and CEO, said the increase in revenue was "fueled by a steady flow of new products and robust demand for our offerings," such as mobile processors, which saw a record revenue increase of 43 per cent.
AMD's desktop processor business also saw strong performance, particularly in the channel, "where we sold record unit volume in the quarter," Meyer said. He also noted that this was the quarter when AMD began shipping its new Barcelona quad-core Opteron processor, a move that was met with customer excitement and high demand.
"Based on the input we're getting from our customers and end users, there is a lot of demand for Barcelona," Meyer said. "We're just seeing people licking their chops and ready to get their hands on the product. Clearly, going from two cores to four cores is a big incremental increase in capability in the Opteron line that we think is going to provide some benefit to the business here."
Graphics segment revenues also grew 29 per cent sequentially, due to customer adoption of the ATI Radeon HD 2000 family. "We're encouraged by the widespread and growing customer response to AMD-based platforms," said Meyer, adding that AMD is particularly pleased with Toshiba's recent announcement that it will introduce commercial notebooks based on AMD's Turion 64 processors and 690 chipset.
Third-quarter gross margin was 41 per cent, compared to 33 percent in Q207 and 51 per cent in Q306. The increase from the prior quarter was "largely driven by record microprocessor shipments, improved manufacturing efficiencies, inventory management, and a richer microprocessor and graphic product mix," said AMD's CFO Bob Rivet.
Despite revenue and margin increases, AMD still suffered an operating loss of $226 million, and a net loss of $396 million, or 71 cents per share. Third quarter results included a negative impact of $120 million, or 22 cents per share, due to ATI acquisition-related, integration and severance charges and impairment of assets. Still, Q3's operating loss was an improvement over the company's $457-million operating loss in Q2.
According to Hector Ruiz, AMD's CEO, the company has "made solid progress on (its) plan toward a profitable model" and plans to continue exercising operating cost control and improving efficiencies across the board. "We are very encouraged by our progress, but are dissatisfied with our financial results," he said. "We're working diligently to bring this company back to profitability as soon as possible."
In order to reach profitability, AMD will have to approach the $2-billion revenue mark and keep margins north of 40 per cent, said Rivet. "We're on a path. We made good progress in the third quarter" with gross margin passing the 40-per-cent mark, he said. "(We're) clearly not there in the sales level. We'll see in fourth quarter. Our goal is to break even, and maybe we have a shot at it" if revenue reaches $2 billion, he said.
The one thing AMD will not do is cut its way to prosperity, Rivet noted. Rather, reaching profitability is about "growing the top line and getting the appropriate margin from the manufacturing organization and making appropriate investments in R&D to pull us into even higher growth rates."
AMD expects revenue to increase in line with seasonality in Q4. Analysts at Thomas Weisel Partners LLC estimated that seasonal growth is based on a historical average increase of seven to 10 per cent quarter-over quarter. In a research note, the analysts wrote that while they expect Q407 mobile processor units to grow nine to 10 per cent, "blended (average selling prices) will likely trend slightly lower, due to price concessions to customers, resulting in about seven to eight per cent quarter-over-quarter revenue growth." The analysts predicted eight-per-cent revenue growth in Q4, combining mobile processor predictions with the expectation that graphics processor growth will be relatively flat quarter-over-quarter, since AMD's new Spider platform is not expected to be launched until mid-November.
Thomas Weisel also predicted gross margin of 42.5 per cent in Q4 and 43.9 per cent in 2008, as well as a six-per-cent increase in operating expenses quarter-over-quarter in Q4. Despite AMD's revenue and margin growth predictions, "under the current operating model, break-even by year-end is unlikely," the analysts wrote.
