AMD Q4 2007 Analysis, Page One

We take apart AMD’s Q4 financial results and see what the company has in store for 2008. Not only do we look at how AMD almost broke even this quarter but also how their future product plans will affect the company.
    Today AMD announced their results for the 4th quarter of 2007.  It is truly a bittersweet announcement for AMD, as they came very close to breaking even operationally, but the overall value of the company has dropped by a significant amount.

    AMD announced that they had revenue of $1.77 billion, and an overall loss of $1.77 billion.  At first glance this seems amazing, considering that AMD lost “only” around $300 million last quarter, and some $600 million the quarter before.  When we really break down the numbers, that $1.77 billion loss does not look nearly as bad at first, but it still does not mean good news for AMD.

    When AMD broke down the numbers their operational expenses for the company for Q4 really only resulted in a net loss of around $9 million.  This is far lower than the expected $32 to $37 million most analysts were predicting.  This means that operationally AMD has done a pretty good job in tightening the belt, as well as gaining marketshare and improving ASPs.  So where exactly does the $1.77 billion loss come from?

    Last year when AMD bought ATI, they paid around $6 billion in cash and shares.  Now that AMD has had time to digest ATI, it has become unpleasantly obvious that the $6 billion dollar deal (insert Bionic man sound) was overpriced for what AMD received.  Everyone now realizes that ATI was overvalued, and AMD paid far too much for it.  One has to wonder why much of the top management of the old ATI is now missing.  So while AMD only lost $9 million when considering company operations, the amount of value lost to “goodwill” is around $1.68 billion.  Once other acquisition charges are assessed (again), as well as other intangibles, then we come up with the loss of $1.77 billion.  So basically AMD only lost $9 million “real” dollars, but the value of the company has dropped by $1.77 billion.

    One of the more positive items from this announcement is that AMD has around $1.9 billion of cash on hand.  This is up over $334 million from last quarter, but this also includes the $622 million investment from the Abu Dhabi firm.  Still, they have increased their cash position, and this should allow them to help weather the next quarter, which is seasonably slower and will likely make for another loss for the company.  AMD has stated that it expects sales to drop, but that most expenses will remain the same.  It is very positive that they have increased their cash position over the past quarter.

    Even though AMD has been roundly criticized for their Lake Tahoe/Warsaw launches, those types of events are not a huge drain on the company.  Otherwise, AMD has exhibited a lot of operational discipline.  This has lead to the small(ish) $9 million operational loss.

Where the Gains Came From

    First and foremost AMD had record processor shipments in the past quarter.  Not only that, but ASPs have stabilized, and in fact rose on average.  AMD is claiming that they likely have gained marketshare from Intel, but they are not sure how much.

    AMD shipped around 400,000 quad core parts to servers and desktops, and expect to more than double that amount this next quarter.  AMD would not speculate exactly how much, but it will definitely be in excess of 800,000 to 900,000.  AMD stated that the demand for their quad core processors was very strong, even in the midst of the TLB errata situation.  The processor group had a net $21 million operating income.  AMD continues to be strong in the mobile sector, and the Turion brand is gaining much more acceptance.  Even Toshiba shipped its first AMD based notebooks to the market.

    Graphics shipments increased by a respectable 3%, but the GPU branch is still operating at a loss.  The demand for the RV670 based boards is very strong, and the older HD 2×00 series of boards and chips are selling briskly.  The graphics division is looking a lot better, and there is a lot of optimism about upcoming products for the next several quarters.

    The multimedia and handheld group also showed some good revenue gains, mainly due to greatly increased handheld sales and royalties from game consoles (Xbox 360 and Wii).

    Margins reached 44% overall, which is a significant increase from the previous quarters.  In Q1 of last year margins reached a low of around 32%, and it increased again from Q3 levels of around 41%.  While still not in the mid-50s that AMD would like to be, it is a significant improvement that comes from managing expenses, adjusting products to market demand, introducing new products to good demand, and increasing the efficiency of their production facilities (namely Fab 36).

    When all of this is put together, it seems that AMD is really starting to come out of its slump operationally.  They were dangerously close to having a break-even quarter.  AMD still assures us that they expect to break-even in Q3 of this year, and post a profit in Q4.  Q1 and Q2 of this year will still be tough on AMD, as again they do not see expenses shrinking by any great amount but revenue will be seasonally down.

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