AMD Disappoints On Earnings Front

Advanced Micro Devices (AMD) missed earnings expectations by 14 cents.Revenues were better than consensus, however, totaling $1.18 billion. Sales were flat sequentially and down 12.2% year over year, but better than management’s expectations of a sequential decline.

Computing Solutions generated $910 million, a 3% decline from the first quarter. Microprocessor units were flat sequentially, while the ASP declined. A stronger Asia was offset by a flattish North America and weak Europe. The lower ASP was attributable to continued customer shift in the notebook market toward lower-cost models, and sale of old stock at lower prices. Graphics revenue was $251 million, an increase of 13.1% sequentially. Units grew significantly, partially offset by a lower ASP. Foundry segment sales declined 10.6% to $253 million.

The pro forma gross margin was 28.3%, down 977 basis points (bps) from the previous quarter’s 38.1%. The company sold a higher mix of 65nm product at lower prices, the impact of which was compounded by significantly lower utilization rates. The changing nature of the notebook business also contributed to the lower gross margin.

Operating expenses of $655 million were down 8.8% sequentially. The operating loss margin declined 4.9 bps to -27.0%. This was entirely on account of higher COGS, and offset by lower R&D and SG&A expenses as a percentage of sales. The computing solutions, graphics and foundry margins were -7.9%, -4.8% and -39.9%, respectively.

On a pro forma basis, AMD had a net loss of $406 million, or a -34.3% net loss margin, compared to losses of $371 million (-31.5%) in the previous quarter and $378 million (-28.0%) in the prior-year quarter. Special items, including gain from inventory previously reserved, restructuring charges, stock compensation charges and amortization of intangibles had a $0.11 net positive impact on the EPS. Excluding these items, the income attributable to the Foundry Company and providing for payments on class B preference shares, the fully diluted GAAP loss per share (LPS) was 49 cents per share, compared to 66 cents per share in the prior quarter and $1.96 in the year-ago quarter.

Balance sheet metrics improved. Inventories were down -8.5% sequentially to $493 million, with annualized inventory turns increasing from 5.4x to 6.9x. Days sales outstanding (DSOs) decreased from 32 to 28 days. The company ended with a cash and short-term investments balance of $2.5 billion, down $205 million from the March quarter. AMD has around $5.2 billion in long term debt and $798 million in long term liabilities, yielding a net debt balance of $3.53 billion.

Management is optimistic about the company’s performance going forward. In June, Dell (DELL), Hewlett-Packard (HPQ), International Business Machines (IBM), Cray (CRAY) and Sun announced new servers based on its six-core Opteron processors. The company also showcased several products including drivers for Microsoft’s (MSFT) DX11 technology included in Windows 7 to be released later this year. While significant revenue from the DX11 products is not expected until 2010, the new Opteron processors should ramp in the second half.

Revenue is expected to increase slightly next quarter. Gross margins will pick up as the utilization rate increases and the percentage of 45nm processors and 40nm GPUs grow in the mix. AMD lowered the capex guidance for the year. Spending for the product company is expected to be $100 million ($150 million previously guided), and spending for the foundry company is now expected to be $690 million, ($760 million previously guided). The diluted share count will go up to 705 million.

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