AMD comes to grips with the ATI merger fallout

Investors and consumers were warned the bad news would come, and it came as predicted. AMD took a stunning charge of $1.6 billion in one quarter, to account for value from the ATI merger it now realizes may not materialize.

The term is "goodwill," and it's used in evaluating the potential value that a merged entity brings to the acquiring company, over and above its tangible assets and the present value of its current contracts. At the time AMD and ATI merged in July 2006, AMD's financial team estimated the total value of the merger at $5.4 billion. $3.2 million of that was projected to be goodwill, how much more valuable AMD is as a company just for having ATI as a division.

While investors were warned well in advance, the news from AMD yesterday was still pretty bad: $1.6 billion of that goodwill had to be written off in the last quarter, as not really being an asset of the company. As a result, what would have been a quarter with a minor loss, and less of a loss than the previous quarter, ended up hitting hard: $1.77 billion of reported loss for the quarter on revenue that was 0.2% higher than in the fourth quarter of 2006.

For the year, AMD posted a loss of $2.865 billion -- a reflection of the fact that it was not really a good year for the company, even with the ATI matter put aside. With research costs higher for the year by 53%, and gross margins down from 49% to 38%, the full effect of Intel's replacement of NetBurst microarchitecture with Core looked like the aftermath of a hurricane.

But without the goodwill impairment, one might get the impression that a turnaround really was under way at AMD. The portion of its loss for the quarter not related to ATI only totaled a meager $9 million. And for the quarter unto itself, gross margin rose 3% over the third quarter, to 44%.

The company shipped more processors in both the desktop and mobile segments than at any other quarter of its history, up a combined 7% over the third quarter. And as executives including CFO Bob Rivet and CEO Hector Ruiz repeated yesterday during the regular analysts' call, "we believe we gained market share in the fourth quarter."

"The Computing Solutions segment was profitable in the fourth quarter," Rivet reported, "and we believe we gained share in microprocessors on the basis of its 11 percent growth in revenue."

How much does ATI contribute to AMD as a company, now that both the merger and the write-down are complete? In the last quarter, the Computing Solutions segment (where all the CPUs come from) was responsible for $1.4 billion of AMD's revenue, while the Graphics division produced $259 million in revenue -- about 18.4% of what CPUs generate.

What AMD had been counting on to get back into the game with Intel was high demand for its new quad-core processors with Barcelona architecture. Usually, high demand translates into high sales, but when you have a problem at the logic level, that translation doesn't typically take place as planned.

"Demand for quad-core AMD processors is strong," CFO Rivet made sure everyone heard, pausing for full effect, knowing full well that analysts would know about the sales translation problem. "We continue to execute our volume ramp, and in the first quarter, we will more than double our shipments over the fourth quarter," he added. That, of course, is assuming AMD resumes its quad-core "ramp" plan where it left off.

Quad-core shipments stand at about 400,000 to date, which is not where they could be.

"We were determined to fix our Barcelona quad-core issues as soon as we could," CEO Ruiz reassured analysts yesterday. "I'm very pleased to report that silicon has been out of the factory with the fixes that we put in place, and we're really thrilled with all of the work that's being done, and expect that in two to three weeks, we will begin providing our customers the samples that they will then put in server platforms beginning at the end of the quarter, and well into the second quarter and beyond."

Translation: Some select server customers will receive test samples of Barcelona with the permanent logic fixes in place. These will be fixes that don't turn off certain caching features, as the temporary fix presently does through the BIOS. Call this a kind of "beta test" for hardware, which will take place in early February. Assuming all is well, AMD can begin shipping quad-core in volume, likely in March.

But very likely, those server testers will represent consumers as well, whose quad-core Phenom processors using the same Barcelona architecture are being reworked right along with the Opteron processors that servers use. In the meantime, AMD has been asking customers to take a hard look at its triple-core Phenoms, though many enthusiasts are comparing triple-core to the kind of stopgap measure Intel took three years ago in its marketing push for hyperthreading, back before the dawn of the dual-core era.

AMD's hope -- at least insofar as its guidance is concerned -- is that Q1 2008 will be mild and uneventful. Just the fact that the write-off period for ATI's goodwill appears to finally be over, has helped restore some investors' confidence in the stock. At mid-day, its shares on the New York Stock Exchange were trading up about 10%, to just below $7. The actual value of the ATI goodwill write-down, when translated to a per-share value, is the equivalent of about $1.55 per share.