AMD treads water in Q1, promises a path to profitability

Net revenue for AMD's first quarter ending last March was actually substantially higher: a good 22% higher than Q1 2007, to $1.5 billion. And gross margin -- although not where it should be -- was tolerable, at 42%. But R&D and administrative costs ate up all of that margin and then some, leaving the company with an operating income loss of $264 million, and a net loss of $358 million or 59 cents per share.

It was not anywhere near the $1.772 billion loss the company had suffered during the holiday quarter. But also during that quarter, it had $1.77 in revenue, meaning that AMD's 17.6% revenue decline over Q4 could not be chalked up entirely to seasonality.

At first, CFO Rivet did try to lump Intel's performance in with its own as a way of sharing the seasonality burden, but it was obvious after just a few seconds that this ploy would not be very effective.

"'Seasonal,' from our perspective and to me, is a combination of what our competitor's is and us, because we are the industry," began Rivet's valiant effort. The best seasonality he's experienced in recent years is about zero percent, he added, again lumping AMD and Intel together. Ten percent is the extreme, and four to five percent is the average. "Right now, we don't see any reason, even though we do have a good product lineup, to push that any harder than what the math says, also based on what our competitor says."

Later, Rivet had to concede that this 9% average was driven down by AMD's nearly 18% dip. It's not that sales is the problem, necessarily, because sales weren't all that bad this last quarter -- it's that the segments where AMD has had to concentrate its efforts, aren't always the most profitable ones.

"Clearly we did poorly in that performance, which we believe is due to our exposure in the consumer space," he remarked. "Though total PC units -- an interesting phenomenon -- appear to be okay [in terms of] how PC units are selling, but clearly there's a lot of people very cautious.

"So our position for second quarter is, we're cautious, we clearly still see...the 'consumer pressures, but we don't need to forecast stronger or worse than [the industry average] at this point in time. We'll just try to hit it in the middle of the fairway," Rivet continued, probably alluding to someplace he would rather have been at the time.

"It is clear that our business environment has changed from just the second half of last year," stated AMD CEO Hector Ruiz. "But we saw some of our non-core businesses on a path to growth and profitability that is now questionable. As a result, we are embarking on a significant restructuring of our company to address the following: We need to intensely scrutinize all of our businesses in order to ensure that our core x86 and graphics products are on a healthy path to leadership and profitability."

Notice there how Ruiz aligned the entire graphics business under the "core" segment which would be excluded from possible spinoffs; later, he said so more explicitly.

"We also need to intensely scrutinize our non-core businesses, and revisit their strategic fit into our plans, and their path to growth and profitability," Ruiz continued. "Absent these, we will exit those businesses."

The 10 percent workforce reduction announced earlier this month will be one element of a very extensive cost reduction program, which CFO Rivet said would reduce the company's "break-even point" -- the mark on the scale where profitability begins" -- by at least $200 million to $1.5 billion, probably by the end of this year.

But profitability will mean gaining back market share, and AMD's strategy now is to get a grip on consumer share but forge way ahead in server share.

"Our quad-core server shipments in Q1 represented about 25% of the mix, roughly," said CFO Rivet, where the "mix" is the breakdown of the company's different types of customers. "That ought to grow quickly to 50% in the current quarter, and go beyond 50% after that point in time."

In other words, where server CPU sales represented just one quarter of AMD's shipments in the last quarter, it expects that segment to represent half of shipments in this quarter, and exceed the halfway point in successive quarters, in order for its business overall to achieve profitability.

So going forward this year, AMD will be concentrating on more product lines in both CPUs and GPUs, and will make room, time, and resources for these new efforts by shedding more of its workforce, and disposing of businesses whose profitability models no longer seem feasible. It's a sound approach, the measure of whose future success may be whether Ruiz and others continue to want to modify their trend numbers by averaging them in with Intel's.