How AMD plans to bring back growth
Q1 was catastrophic for AMD. The firm had to swallow a net loss of $611 million, with a $300 million hit on its cash reserves. The company has $1.2 billion left in the bank and considers a level of $600 million as "acceptable minimal level." There is no doubt that AMD cannot sustain many of these quarters without having to look for external cash. During the Q1 conference call, the company acknowledged the disappointing period and referred to the quarter as "lousy", "unacceptable", "a strong setback", "more than a miss", "a terrible start into the year", "a meltdown" and "a collapse".
CEO Ruiz and Meyer told analysts that the company will go through a restructuring phase that will be overseen by an "executive taskforce", chaired by Ruiz, and that will be "bigger and more dramatic than the one [AMD] undertook in 2002." The company "understands the problems" and will "fix the issues" to "put the company back on track," Meyer said. AMD announced a range of cost cutting programs, including capital expenditures in the amount of $500 million, which include a slow-down of the conversion of Fab 30 from 200 mm to 300 mm wafers. AMD is also considering the sale of real estate and will put a freeze on hiring. The company did not mention layoffs per se, but confirmed that it expects to end Q4 2007 with a lower headcount compared to Q1.
Despite all its problems, the company does not intend to change its overall product strategy. "We are half way there," said Ruiz. "We are now accelerating our efforts to complete our work and finish the other half." AMD was hit at the worst possible moment, in a situation where it is most vulnerable from a product and finance perspective. Many of its products are on their weigh out and have a hard time sustaining competitive pressure. On the CPU side, Intel pulls AMD down with its aging Pentium D series, while it leverages the superior Core series to rake in the big bucks. On the GPU side, Nvidia currently has a big lead and cashes in on the fact that the R600 GPU is late. According to Rivet, the AMD's graphics division lost $35 million in Q1.
On a positive note, AMD believes that Q1 was just about as bad as it can get. Henri Richard, in charge of AMD's sales and marketing, said that the firm has scored several design wins in Q1, all of which will materialize in Q2 and the second half of the year. Average selling prices of microprocessors apparently are stabilizing and the Opteron replacement "Barcelona" is on its way. AMD said it has shipped pre-production units in Q1, it is shipping production units in Q2 and it expects customers to ship servers with the quad-core processor in Q3. The firm's mobile business is growing, but Turion has to wait for a succeeding product that can compete with Intel's upcoming Santa Rosa Core 2 Duos and the 45 nm Penryn chip. A (65 nm) Turion replacement is not expected to arrive until 2008. The transition to 45 nm is also on track, even if AMD is still working on getting its 65 nm processors in volume out into the market: 45 nm AMD processors are promised for the second half of 2008.
For the second quarter of 2007, which typically shows weaker results than Q1, AMD expects its revenues to be about flat with Q1. This forecast raised some eyebrows with analysts, who questioned whether this confidence is really justified, given the firm's downswing over the past six months. Ruiz answered that AMD should not be "ridiculously conservative." In fact, the firm believes that it will regain some market share, which, however, should not be so difficult if we realize that the firm has just experienced one of the worst quarters in the its history.
While AMD's current situation looks serious, it is unlikely that there will be any major changes in the firm's strategic direction. Turning the ship around is too late and would not make a whole lot of sense anyway. With the ATI team on board, AMD in fact looks much better than without it: There are resources that allow the company to design unique and competitive products against an Intel that rarely has been as strong as it is today. Without ATI, AMD would still be a hopelessly out-resourced processor company with a few products that would limit its maneuverability even more.
Despite the critical developments in Q4 and Q1, AMD is far from giving up. At least for now, AMD has still cards to play and Captain Ruiz turns the ship into the wind: "We are not going to change our strategy because of one lousy quarter."
