AMD stock up on smaller-than-expected ATI-related loss
Sunnyvale, Calif.-based microprocessor maker Advanced Micro Devices Inc (AMD) saw its stock rise approximately 11% in this morning’s trading following the release of its Q4 2007 financial results Thursday afternoon after the market closed. The results reflected a non-GAAP operating loss lowered to $9 million and a gross margin improved by 3 points sequentially to 44% and by 8 points from Q4 2006.
AMD’s Q4 revenue was $1.8 billion, 8% sequentially higher than $1.6 billion in Q3 2007, and flat compared to $1.8 billion in Q4 2006. GAAP net loss was $1.8 billion, or $3.06 per share, and AMD’s operating loss was $1.7 billion. The net loss included charges of $1.7 billion, or $2.89 per share, of which $1.7 billion were operating charges for the acquisition of ATI. Q3’s net loss was $396 million, and operating loss was $226 million, while net loss and operating loss in Q4 2006 was $576 million, and $529 million, respectively.
For the full year ended December 29, 2007, AMD reported revenue of $6 billion, 6% above $5.6 billion recorded in 2006, with net loss of $3.4 billion, including non-cash charges of $2 billion. AMD reported a net loss of $166 million for 2006.
Robert J. Rivet, AMD’s CFO, noted the company was close to break-even operationally for Q4 , reduced non-GAAP operating loss to $9 million, improved gross margin by three points sequentially driven by increased shipments of new products, higher average selling prices (ASP) and cost containment actions. Rivet asserted that the company shipped a record number of microprocessor units in Q4, including nearly 400,000 quad-core processors.
On a conference call with financial analysts, Rivet reminded, “In December, we disclosed that we would be taking a material charge for the write down of good will and intangible assets associated with the acquisition of ATI. This charge amounted to $2.89 per share or $1.675 billion, of which $1.6 billion was non-cash. The components of this charge are as follows: a non-cash goodwill and intangible write down of $1.545 billion, or $2.67 per share, associated with the ATI acquisition net of taxes; a non-cash charge for other ATI acquisition related costs of $61 million, or $0.11 per share; and a cash investment impairment of $69 or $0.12 per share associated with our remaining Spansion holdings.”
Further, he said: “Fourth quarter gross margin increased sequentially 3 percentage points to 44% driven by increased new product shipments, higher ASPs and cost containment. Manufacturing performance in Fab 36 remained strong, exceeding targets for output, yield and cycle time. Total operating expenses, R&D, and SG&A were down $25 million from the prior quarter, lower than we projected as a result of continued strong operational discipline.”
In terms of business segments, AMD’s computing solutions segment revenue was $1.4 billion, 9% higher sequentially, with server, mobile and desktop processor revenue each posting an increase quarter over quarter, driving an 11% sequential increase in microprocessor revenue. AMD said record desktop and mobile processor unit shipments drove a 7% sequential increase in overall microprocessor unit shipments, resulting in record microprocessor unit shipments. Server processor unit shipments increased 22% sequentially, driven by a significant increase in quad-core AMD Opteron processor shipments.
AMD’s graphics segment – previously ATI – brought in revenue of $259 million, a 3% sequential increase driven by demand for AMD’s new ATI Radeon HD 3800 series and continued adoption of the ATI Radeon HD 2000 series of graphics processors, AMD noted.
Q4 revenue for the consumer electronics segment was $109 million, a 12% increase compared with $97 million in Q3, driven largely by increased game console royalties and sales of products for the handheld market.
Looking ahead to Q1, Rivet said AMD expects revenue to decrease in line with seasonality. “Operating expenses are expected to be up approximately 5% compared with the fourth quarter. Acquisition related charges are expected to be approximately $55 million. We expect to have a tax expense of approximately $15 million. Depreciation and amortization is expected to be approximately $315 million and capital expenditures are expected to be approximately $425 million in the quarter.”
Hector Ruiz, chairman of the board and CEO of AMD, reiterated the data and expectations given during the company’s analyst meeting. “Everything that we told you at that analyst meeting is on plan and there has been no change in any of the information that we gave you and the projections that we gave you into next year.
“One of the things that we talked about is the fact that we were determined to fix our Barcelona quad-core issues as soon as we could. I’m very pleased to report that silicone has been out of the factor with the fixes that we’ve put in place and we’re really thrilled with all of the work that’s being done and expect that within 2 to 3 weeks we will begin providing our customers the samples that they will then put in server platforms beginning the end of the quarter and well into the second quarter and beyond,” Ruiz explained.
He also said AMD would ramp 45-nm manufacturing “aggressively” in the second half of this year.
In the manufacturing space, Ruiz said Fab 36 has been achieving great productivity, and is working on its addendum in Fab 38.
In response, Lehman Brothers semiconductors research analyst Tim Luke was encouraged. “Post close, MPU challenger AMD delivered Q4 2007 results that showed progress on several fronts versus modest expectations,” he said in a report this morning. “In particular, we highlight solid execution on gross margin expansion (driven by higher mix of higher-margin HPC server design wins and more rational pricing in emerging markets where AMD has an advantage driven by its lower ASPs across desktops, notebooks, and servers) and operating expense management (spurred by significantly lower SG&A resulting from what management described as operational discipline). We also note solid growth in both desktops and, surprisingly, servers with 22% quarter-over-quarter unit growth. With regard to the notebook segment, we highlight somewhat more moderate unit growth of just 2-to-6% quarter-over-quarter, after strong shipments in Q3 2007, notably into HP.
“Interestingly, we believe AMD’s progress in the server segment resulted form emerging demand in select high performance computing (HPC) clusters such as university research where floating point data types are preferred and where customers using Linux deployed the initial B2 version of the Barcelona offering; importantly, we highlight that given AMD’s direct connect (monolithic) architecture versus Intel’s front-side bus (multi-chip) approach, in floating point operations AMD enjoys an operational lead, even with its initial glitches,” he continued.
AMD experienced flattish trends in notebook ASPs, while desktops were up slightly, and servers were up in the low single digits, driving the company’s blended ASP higher by approximately 4%.
“Importantly, given the significance of low-end emerging market demand and its impact on what was above seasonal Q4 PC market growth, and, notwithstanding Intel’s solid product execution and process lead, we believe AMD is solidly positioned given its nearly 50% discount when observing blended ASPs,” Luke said.
He believes this is helping fuel unit share gains, where he believes AMD gained share in both desktops and, surprisingly, servers, while sustaining ASPs – Intel has stated that it is walking away from “non-economical” low-end business, providing AMD an opportunity to come in and sell its discounted processors across servers, notebooks, and desktops.
Further, in general, Luke said he was encouraged by AMD’s solid progress in microprocessors this quarter where it wrested revenue share from rival Intel in spite of delays in the ramp of Barcelona and Intel’s strong product portfolio.
Also, while the balance sheet continued to be pressured by high debt, Lehman is encouraged by the decline in inventory levels and expects that inventories may actually increase sequentially in Q1 as new products launches including Barcelona and its derivative products like Phenom for desktops ramp.
Luke maintained his 2-EW rating on AMD stock, meaning that AMD’s stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon in a sector coverage universe where fundamentals are improving.
Likewise, American Technology Research analyst Doug Freedman upgraded AMD, in this case, to “BUY” from “NEUTRAL,” as he believes the risk-reward at current levels, with a full year’s worth of bad news digested and discounted, presents a compelling entry point.
In related news, Intel announced earnings this week, which encouraged its stock to slide.