Advanced Micro Devices
Thoughts on AMD's 4th Quarter

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By mjuarez
October 27, 2003

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I was curious on a number of fronts regarding AMD's 4th quarter. A lot of parallels have been drawn between 1999's 4Q, and the current one: AMD is entering 4Q, typically a strong quarter, with a solid product lineup, and with Intel stumbling on a number of fronts. As people on this board have said, the situation looks even better than in 1999. Back then, motherboard support for AMD's Athlon was pitiful at best, and they didn't have a differentiating feature (such as 64-bits), besides being faster.

So, we enter 4Q2003. Motherboard support for AMD can be seen everywhere. Opteron and Athlon64 are widely available at ASPs much higher than the $200 mark. IBM is committed and onboard with Opteron. Flash demand is finally picking up. And AMD definitely has the fastest processors out there, usually at a slight discount to Intel's offerings. In the meantime, Intel has delayed a couple of critical products (Prescott, Dothan) and Itanium has failed to take off.

With this in mind, and borrowing Q's accounting hat, I took a look at AMD's current financials vs. 1999. Back then, revenue jumped from $662M in 3Q99 to $969M in 4Q99, a 46% increase. And, gross margins jumped from 28% in 3Q to 40% in 4Q. Since 1999 (excluding 2000 as an aberration, since the whole market was in the dumps then) AMD has, for the last 4 years, managed to always increase both revenue and margins in 4Q when compared to 3Q, often substantially. So, it should not be unreasonable to expect AMD to do that again this year. See the following table.

                          4Q2002     4Q2001     4Q2000    4Q1999
% Revenue Increase           35%        24%        -3%       46%
% Gross Margins              26%        32%        44%       40%
% Change in Gross Margins   145%        38%        -6%       41%

In this light, it seems almost ridiculous for Ruiz to expect a 10% to 15% increase in revenues for 4Q2003. Considering that the market as a whole seems to be finally recovering, it looks to me like Ruiz is playing it safe on financial performance, just to be on the conservative side. That way, any surprise can only be a positive one.

Let's play a little bit with numbers here. Assuming that gross margins go to 40% again, like in 1999 (they're at 34% for 3Q2003, flash demand is picking up and ASPs are rising, so it's not a huge stretch), that float stays at approximately 350M, and that "Expenses" include R&D, SG&A and interest expenses, all flat from 3Q, we get the following scenarios for 4Q2003.

Revenue increase
   from 3Q               0%      10%      15%      25%      46%

Total revenue         $954M   $1049M   $1097M   $1192M   $1392M

Cost of Goods Sold    $572M   $ 629M   $ 658M   $ 715M   $ 836M
Expenses              $391M   $ 391M   $ 391M   $ 391M   $ 391M

Net Income            ($10M)  $  27M   $  47M   $  85M   $ 165M
EPS                 (-$0.03)  $ 0.08   $ 0.13   $ 0.24   $ 0.47

By looking at the table, you can see that, even if revenue was flat compared to 3Q, by only increasing the gross margin to 40%, AMD would be very near to getting a breakeven. If you look at the estimates given by Ruiz, of revenue increasing between 10% and 15%, we get a decent profit of approximately $0.10 EPS. Would not be bad, considering analysts are expecting $0.02 EPS, but I believe AMD can do much better. I'm betting on somewhere between a 15% and 25% revenue increase, along with the increase in gross margins to 40%, which would put the EPS in solid $0.20s territory.

Finally, the last column is just for reference. As in "what would happen now if AMD performed as well as in 4Q1999?". Well, revenue would increase 46% and we would get $0.47 EPS. Wouldn't be bad for a deferred Christmas gift, don't you think?


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