Is AMD Returning to Profitability?

&otThe old saying, essentially, is, "From here, things can only get better." From where AMD was last April, that's indeed what happened - and perhaps that's no surprise. Yesterday, the company reported rising chip shipments that led to increased revenues and recovering profit margins, though still not yet near the point of being considered "healthy."

A deal announced just two months ago between AMD and one-time Intel-exclusive producer Toshiba is being credited by analysts for an 82% increase in mobile processor shipments over AMD's second fiscal quarter of last year, even though in the real world, AMD could not possibly have shipped that many Turions in a 45-day period.

More likely, the surge was brought on by long-time AMD partner Acer, whose resurgence to most likely the world's #3 notebook computer manufacturer now has another AMD partner, HP, combating it in the courtroom. The Toshiba bounty will most likely be recorded during the third quarter, which will only bring more good news for AMD.

It could really use the good news, after a solid year of being hammered by Intel in all the departments where AMD had demanded that it play fair, including price and performance. While it managed to report a loss for the June quarter of $457 million on $1.37 billion of revenue, that loss was indeed narrower than for the first quarter - as predicted - and revenue was up 11.3% over the previous quarter.

Now, if you put two and two together (as many analysts neglect to do), you conclude that the 82% mobile CPU shipment increase - part of a 38% overall shipment increase over the prior quarter - wasn't reflected in revenues that were only marginally higher, on gross margin up only 5% on the quarter to 33%.

So the quarter you'd expect AMD to cash in on is the third quarter - the current one. And so you'd expect AMD's guidance for this quarter to be more rosy.

Thus the surprise is that there are no roses here. The company's published outlook for the third quarter reads, in its entirety, as follows: "In the seasonally up third quarter, AMD expects revenue to increase in line with seasonality." That's two "seasons" in one sentence.

So there are still problems to contend with, some evidence of which came two weeks ago with the resignation of executive vice president Dave Orton, the former ATI CEO who joined its executive suite during its acquisition. In announcing Orton's resignation ten days ago, AMD even neglected to mention his own position with the company - a sign that he's not exactly being recommended to his next position.

Orton's departure comes as AMD continues exploring the option of creating more while manufacturing less. Last April, CEO Hector Ruiz announced publicly for the first time that his company was considering adopting an "asset-light" production model, where it does more outsourcing of its own designs to contracted manufacturers rather than rely upon its own factories. Such a model helps reduce a company's capital expenditures ("capex"), which analysts typically welcome.

Speculation in that direction increased two weeks ago, after AMD announced a small investment in Transmeta, the low-power processor creator that once competed head-on with Intel.

Also improving AMD's chances for the remainder of the year is that it has apparently halted its bleeding of market share. In the last quarter, according to preliminary estimates released yesterday by independent hardware analyst iSuppli, AMD took back half a point of global microprocessor market share from Intel, moving from 10.9% to 11.4%.

Whether it can continue that upward trend during the upcoming "Barcelona" quad-core era - whenever it finally does begin - may depend on whether its processors actually perform as indicated by benchmarks that the company apparently redacted, after ZDNet blogger George Ou pointed out the performance numbers for future 2.6 GHz quad-core CPUs were simulated rather than observed.

While customers had been hoping for 3.0 GHz frequencies for Barcelona-based server CPUs, AMD tells BetaNews they'll have to wait until later months, and that only the 2.6 GHz models will be available during the third quarter.