Saturday, January 24, 2009

AMD reports $1.4B loss, 35% revenue decline

As expected, AMD Inc's Q4 2008 showed significant declines in revenue and an increase in loss for the struggling MPU maker.

December quarter revenue of $1.162 billion was down 35% sequentially and 33% year over year. Net loss of $1.424 billion compared to a $127 million loss in Q3 and a $1.772 billion loss in Q4 2007.

"The fourth quarter of 2008 is going to be remembered for the severe stresses placed on the global economy and on our industry," AMD CEO Dirk Meyer (pictured) said on the company's earning call Thursday afternoon. "The global economic environment led to a softening in end-user demand for PCs and servers and what is usually the year's strongest quarter.

"In addition, we saw the beginning of a severe inventory correction across the IP supply chain, particularly acute in notebooks and one that is continuing into this quarter. The effect on the economy is going to continue to dampen end-user demand, the degree to which is uncertain. This combination makes the future particularly murky."

Q4 capped off a difficult year for AMD, marked by several cost-cutting actions. A 10% layoff in April 2008  was followed by a 600 headcount reduction in November of the year. After failing to hit profitability and on multiple quarters of revenue decline, the company also announced it would spin off its manufacturing assets   into a separate company in October. Further, AMD announced it would sell off non-core businesses, including its DTV and handset units, as it looked to focus on its strengths and to cut costs. AMD concluded the sale of its DTV group to Broadcom for $141.5 million in October and earlier this week announced the sale of certian handset and multimedia technologies to Qualcomm for $65 million.

On such actions, AMD announced in its earnings report that it has lowered its breakeven from $1.5 billion to $1.3 billion.

For the year ended December 27, 2008, AMD recorded revenue of $5.808 billion, down compared to 2007 revenue of $5.858 billion, and a net loss of $3.098 billion, lower than its 2007 net loss of $3.379 billion.

"In light of current macroeconomic conditions, very limited visibility and continued inventory corrections in the supply chain, AMD expects first quarter 2009 revenue to decrease from the fourth quarter of 2008," CFO Bob Rivet said on the call, noting that he expects AMD to meet the new breakeven in Q2.

Rivet estimated 2009 R&D will be about $300 million a quarter, down from the $325 million AMD estimated at its November analyst day. "This reduction does not compromise our roadmap," he insisted. "Capital expenditures have been reduced to about $45 million per quarter, roughly half of what we discussed at the analyst day. Now, that's the foundation of AMD, the product company, based on the expected February close of the asset-smart transaction."

AMD fielded questions on the call regarding Intel Corp's expressed concerns on the manufacturing asset spin off. The two chip making rivals have a long-standing x86 licensing agreements that allow them to use certain technologies without legal ramifications. Intel has questioned how AMD will act in accord with those agreements once its manufacturing assets are spun off into a separate company.

Rivet said on the call that Intel's concerns are not a condition of AMD closing its Foundry Company deal, which is expected to conclude within 48 hours of AMD's February 10 shareholders meeting. He also said that the spin out will be "consistent with the terms of all our IP licensing agreements."

Adding to that Meyer said, "The term, our license to Intel patents are perpetual, meaning the patents to which we're licensed and they're licensed are licensed forever. The agreement does expire and we expect we'll renegotiate it as we did earlier in this decade. But the licenses persist."

Meyer expects AMD and Intel to renegotiate over the next few quarters.

Although AMD management expects the foundry spin out to reduce operating expense by $1 billion a year compared to its current run rates, industry watchers are still on the fence as to whether the move will give AMD the hand up it needs in terms of its finances.

"We still do not know the financial impact of AMD spinning out its manufacturing assets to [form the] Foundry Co," Craig Berger, a semiconductor market analyst at FBR Capital Markets, said in a report this morning. "Management says quarterly operating expenses will be $525 million, a positive, though gross margins remain undetermined. Depending on the financial impact of its manufacturing spin out, AMD could still have cash and liquidity problems in 2010."

In terms of Q1 outlook, AMD, like Intel, did not give a specific Q1 revenue estimate in its earnings report. FBR estimated that AMD's revenues will decline 12% sequentially to $1.02 billion and operating expenses declining 11% sequentially.

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