AMD 3Q Financials - Lessons Learned

After AMD’s 2nd quarter fiscal results, SemiWiki published an article entitled, “The Good, The Bad, and The Ugly”, with some (muted) optimism for improved results in the future. Unfortunately, the most recent AMD quarterly results is just plain ugly.

Further, the conference call with financial analysts was rather poorly conducted. As a result, multiple analysts quickly downgraded AMD’s financial outlook, with one referring to the company as “un-investable”. Ouch.



First, the results…

Revenue fell 10% quarter-over-quarter, and 25% year-over-year. Operating expense reductions were put in place, with comments from management that OpEx will continue to decrease into 2013, due in large part to a reduction in staffing. The new product announcement in the quarter was the Trinity APU (CPU + GPU), targeted at the $600-$799 retail price “UltraThin” notebook (comparable to Intel’s Ultrabook strategy). Alas, that segment has not been strong. (AMD told analysis to expect a further revenue decline in the 4^th quarter, even with the Win8 introduction.)

AMD wrote down $100M of unsold inventory as unmarketable, resulting in a gross margin of an anemic 31%, down from 45% in the previous quarter.

Last quarter, AMD management indicated an inventory buildup had started, but that they were not going to adopt pricing discounts. At that time, one analyst questioned whether the “take or pay” wafer supply agreement AMD had recently signed with GlobalFoundries was inconsistent with the revenue outlook. AMD did not concur, and was optimistic that sales volume would improve, especially in the lower-price point global market segments that were the focus of AMD’s APU strategy. Well, sales did not improve in the PC market (including the low-price points), forcing the inventory writedown.

An interesting balance sheet entry was that inventory in the 3rd quarter inventory was down $89M from the 2nd quarter, after the $100M write-off. So, inventory effectively increased in the quarter, a sign that conditions have continued to deteriorate.

Lesson learned: Wafer supply agreements are crucial to a fabless company to ensure sourcing capacity – however, they need to be carefully negotiated to establish both cost and inventory levels that match the sales outlook. Clearly, the WSA that AMD signed with GF for 2012 will be an ongoing issue.

AMD announced a significant reduction in staffing, to be implemented in the 4^th quarter. Alas, lots of good engineers will be let go, always a sad event in our industry.

Now, for the really ugly news…

AMD management provided poor and confusing information to the financial analysts during the call. Here are some examples…

AMD indicated they are aggressively moving to reduce the dependency upon the PC market (currently, 85% of revenue), and will be pursuing other markets. AMD commented, “We will develop semi-custom APU’s with high IP re-use for gaming, communications, and industrial automation markets In one year, these will be 20% of revenue”. One analyst asked, “How are you going to both cut engineering staffing and aggressively pursue new markets?” The AMD answer was not clear.

Another analyst inquired, “The communications and industrial markets are difficult to enter, with long design-in product development cycles – how are you going to capture significant market share in less than 12 months?” AMD management referred to some design wins in the development pipeline, but with insufficient detail to satisfy the analyst.

Lesson learned: When indicating a new corporate strategy to an analyst, be prepared to describe how you will implement that strategy. Vague answers will not be highly regarded.

The most egregious case of dodging an analyst’s question arose when discussing gross margin forecasts, gross margins being an excellent indicator of cost controls and pricing stability.

During the conf call, AMD had indicated two financial targets for mid-2013 – a reduction in OpEx to $450M quarterly (aided by the reduction in headcount), and a “break-even” revenue of $1.3B quarterly.

Now, Wall St. analysts may not fully understand the technology, but they can crunch numbers. One analyst asked, “If I divide $1.3B break-even revenue into the $450M quarterly OpEx target, the result suggests a 36% gross margin, substantially lower than normal. Are you anticipating significant pricing discounts, given the fixed wafer costs?”

The AMD CFO evaded the question altogether, saying “We’re not projecting a $1.3B quarterly revenue in 2013, that’s just the break-even revenue target.” Despite repeated requests from the analyst, no clearer answer was forthcoming – the analyst was clearly getting frustrated.

Lesson learned: When discussing financial targets, be prepared to address questions related to those forecasts. Evading questions will inevitably lead to negative comments and downgrades.

All in all, AMD faces a growing credibility gap in the financial markets. A new CEO was hired in 2011, with the promise to aggressively pursue growing markets in mobile and handheld computing, improve financial execution, and clarify the product strategy. Alas, the recent quarterly results, and in particular, the discussion of those results with the financial analysts did little to restore that credibility. The next scheduled presentation to the analysts will be at the end of November – hopefully, AMD will have a more lucid presentation then.

And, best of luck to the soon-to-be-displaced AMD engineers in finding new opportunities!

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