Amid mounting loses, AMD considers equity and asset-lite strategy

April 20, 2007 – With profits gone and cash drying up, AMD is starting to reevaluate its business model to push back into profitability, including slowing the 200mm-300mm transition at its Fab 30 in Germany, moving toward an asset-lite model, and investigating a range of financing options, according to details provided by company execs during their 1Q financial results conference call.

AMD swung to heavy losses of $611 million in 1Q07 on 7% fewer sales of $1.23 billion vs. a year ago. Losses were attributed mainly to the punishing price war with Intel, with about $113 million in charges related to its acquisition of graphics chipmaker ATI Technologies Inc. Gross margins evaporated to just 28.1% vs. 58.5%, attributed to lower microprocessor unit shipments, horrible ASPs, and influence of ATI’s lower-margin business.

AMD’s 2Q outlook looks a bit brighter, with revenue projections flat to slightly up — meaning AMD expects to regain share — though the company didn’t provide more details. Gross margins should improve progressing into 3Q, around the time of the release of its Barcelona chip.

Already having said it would increase operational efficiencies by a number of new initiatives including chopping about $500 million off its planned $2.0 billion 2007 capex, AMD execs on the analyst call discussed more specific plans to push back into profitability. The company’s 200mm Fab 30 had been slated to start its 300mm conversion later this year and begin full 300mm production in early 2008, but now AMD will slow the 300mm infusion into that shell, noted Dirk Meyer, AMD president/COO, adding that AMD’s ramp schedule for Fab 36 remains unchanged.

One of the big strategic maneuvers will be more serious exploration of a shift toward an asset-lite model, at least for some areas of the business. These strategies have gained traction partly due to AMD’s partnership with IBM and Chartered in the Common Platform Alliance, and partly due to influence from recently acquired ATI, noted CEO Hector Ruiz, pointing out that AMD already considers its joint development agreement with IBM as an asset-lite strategy since it doesn’t have to build an R&D facility. Ruiz and Henri Richard, EVP of sales and marketing, deflected an analyst’s question about restrictions within AMD’s current partnership contracts about how much work it can shift to foundries, saying that the company has “a lot of flexibility in those agreements.”

An asset-lite strategy may not be that easy, though. “AMD has very little leverage to bargain with creditors/partners right now and will likely be on the short end of any proposed partnership,” noted Doug Freedman, American Technology Research analyst, in a research note. FBR Research analyst Chris Caso more specifically pointed to AMD’s cross-licensing agreement with Intel over the x86 instruction set, a deal which the analysts believe requires AMD to produce most of the products in-house.

The other notable strategy shift involves seeking a cash infusion, something analysts have been projecting for weeks, and Ruiz welcomed that possibility which could come from any number of sources. “We have absolutely no prejudice or bias towards the source of capital as long as it makes sense for us, and we are very open to any of those ideas,” including a private equity deal, he said during the analyst call.

Other plans to generate working capital include selling land and collecting grants/subsidies, which CFO Robert Rivet suggested could each generate “north of $200 million” and start to be seen in 2Q07.

The need to raise funds will be something to closely watch over the coming weeks. FBR’s Caso pointed out that AMD lost ~$883 million in free cash flow during 1Q07, and both he and ATR’s Freedman think AMD will be desperate for cash by September. “While we know this is a management team that knows how to grow spending, we now need to see if it knows how to cut spending,” Freedman wrote. Caso concurs: “We think the issue is not whether AMD can lose less cash (we think there are ways in which that can be done), but whether the company can find a way to operate profitably again now that INTC has a product line that is competitive,” he said.


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