I wanna know if you're blind Jo'Anna
If you wanna hear the sound of drums
Can't you see that the tide is turning
Oh don't make me wait till the morning come
-- Eddy Grant, "Give Me Hope Jo'Anna"
I'll let the off-rhymed nod to National Poetry Month above speak for itself. I think its context will become clear as you read my thoughts on the earnings report we'll hear from chip maker Advanced Micro Devices (NYSE: AMD ) this Thursday night.
What analysts say:
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Buy, sell, or waffle? Thirty-three analysts keep an eye on AMD today. Five of them advocate a buy, 10 say "sell," and the other 18 are holding. In our Motley Fool CAPS investor community, it's a tad-below-average two-star stock, based on input from more than 1,600 users.
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Revenue. AMD has preannounced its revenue already, to the tune of about $1.23 billion, and the Reuters estimate polls show analysts aligning with that figure. The original guidance called for $1.6 billion to $1.7 billion. A year ago, net sales amounted to $1.33 billion.
-
Earnings. The average estimate predicts $0.47 per share of red ink, compared to last year's $0.38 in profit per share.
What management says:
That lowered guidance announcement was certainly saying something last week. Revenues are coming in soft as AMD gets hit with a double whammy -- lower average selling prices and lower unit volumes. The announcement also mentioned restructuring plans, intended to improve operational efficiencies and lower the costs of doing business. More detail on that to come in the earnings release.
It sounds like bad news, but the market seems to have focused on the "efficiency" part of the pre-release, and the stock price has gone up about 5% since that day.
What management does:
The margin trend is a thing of beauty, until you reach the most recent quarter. At which point: Ka-blooey! The acquisition of graphics chip designer ATI in the midst of a protracted price war with Intel (Nasdaq: INTC ) is putting a hurting on anything you care to measure in AMD's finances these days. The lowered expectations and restructuring action both stem from this background.
|
Margin
|
9/2005
|
12/2005
|
3/2006
|
7/2006
|
10/2006
|
12/2006
|
|
Gross
|
39.1%
|
40.9%
|
46.2%
|
49.9%
|
52.7%
|
50.1%
|
|
Operating
|
0.9%
|
2.4%
|
9.3%
|
11.3%
|
12.5%
|
8.2%
|
|
Net
|
0.8%
|
2.8%
|
6.2%
|
7.5%
|
8.8%
|
(2.9%)
|
|
Efficiency Ratios
|
9/2005
|
12/2005
|
3/2006
|
7/2006
|
10/2006
|
12/2006
|
|
|
0.4%
|
1.2%
|
4.3%
|
5.3%
|
5.4%
|
2.8%
|
|
|
1.4%
|
5.2%
|
9.6%
|
11.6%
|
12.6%
|
(3.6%)
|
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.
One Fool says:
Oh dear. As an AMD shareholder, I'm OK with some of the shortcomings here, such as 13% share dilution as part of the ATI acquisition, heavy pressure on the margins, and the rumors about necessary refinancing or additional dilution to keep the business going. After all, there's light at the end of the tunnel; the native quad-core Barcelona processor is due out in a couple of months, along with new graphics chips that could steal the other performance crown from NVIDIA (Nasdaq: NVDA ) . In the longer term, the price war will eventually end, and selling prices will then firm up, and AMD has some possibly game-changing designs in the pipeline, powered by ATI's platform and integration expertise.
But is that light just an oncoming train? Until now, AMD has been doing the only sensible thing: investing in R&D and increased manufacturing capacity like there's no tomorrow. But now management says that capital expenditures will be reduced by $500 million this year, running the risk that development talent could feel the pain from those operational cuts.
And Barcelona will certainly take the performance lead again, but Intel is a generation ahead in process technologies. The 45nm chip currently known as Penryn could level the performance delta again in short order, with the added bonus of cheaper production. Such is the power of smaller chip traces. AMD is still ramping up its 65nm production lines and working with IBM (NYSE: IBM ) to come up with a usable next-generation process. But it's playing catch-up to a rival with much greater resources -- and like I just said, it looks like the underdog is backing off of crucial reinvestments into its future at a very inopportune time.
Give me hope, AMD.
Fool on:
Intel is a Motley Fool Inside Value pick, and NVIDIA a Stock Advisor selection. You can check out any of the Fool's newsletters with a 30-day free trial.
Fool contributor Anders Bylund is an AMD shareholder but holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure will never back down from a challenge.
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