An End to Red Ink at AMD?

With another quarter of losses behind it, AMD has reason for hope with a slew of new products.

Is there a light at the end of AMD's long dark tunnel? Or is that just the headlight of an oncoming train with a big blue "I" on it?

The chipmaker reported its sixth consecutive loss in a row on Thursday. The one bright spot was the loss wasn't that bad, only $358 million, or a $0.59 loss per share. This wasn't a surprise, as the company had warned of greater than average seasonal weakness.

However, there may be some relief in store. AMD (NYSE: AMD) has a lot of new products out that put it back in competition with arch-rival Intel (NASDAQ: INTC) and the company is engaging in always-unpleasant cost cutting. So there may be hope.

One of AMD's problems was an aging product line. As Technology Business Research (TBR) analyst John Spooner noted, the company had too many older chips with newer ones in the pipeline. The result was a higher-than-normal sequential revenue decline of 15 percent. A typical decline would have been between five and 10 percent.

"We believe that the lack of availability of quad-core Opteron servers from brand name servers, in particularly, dealt the chipmaker a blow in the first," Spooner wrote in a research report. "However, due to seasonality and slowing consumer demand in the U.S., AMD was unable to offset slowing server shipments with higher sales of notebook chips as was the case in the fourth quarter of 2007."

But now AMD is finally shipping Quad Core Opteron in volume. Dell (NASDAQ: DELL), HP (NYSE: HPQ) and Sun (NASDAQ: JAVA) are already offering product and in the case of Dell, broadening their Opteron offerings. The desktop Phenom processors are available in triple and quad-core designs and AMD has more on the way.

Dean McCarron, president of Mercury Research, said AMD now has a competitive product lineup. "Do they have a top to bottom stack that can compete with Intel at the top end? Probably not," he said. But McCarron thinks the segment with the greatest volume is in the midrange of performance, an area he said AMD can compete very well with Intel.

Both Spooner and McCarron think that it will take some time before profits from these new chips show up on the bottom line. Both said it won't be until at least the third quarter before AMD can return to profitability. "We expect the products to have the greater impact on its third quarter results as businesses will take time to evaluate new servers from HP and Dell," Spooner wrote.

In addition to the already announced 10 percent reduction in workforce, Spooner believes AMD will have to trim costs by exiting non-essential businesses and restructuring its manufacturing operations. He also said AMD might enter into additional manufacturing partnerships to help offset its own fabrication expenses.

Given that the company said on the conference call that it won't be profitable in Q2 of this year, McCarron said don't expect it, but Q3 and beyond could turn around. "The second half of the year is the most likely time to have revenue growth take place," he said. "Their seasonality is very consumer-oriented, so that would drive some volume there.

McCarron said there are positive signs that the major OEMs are still in AMD's corner. "If they were losing patience, AMD wouldn't be getting design wins for the server products," he said. "OEMs think the competition has helped them. It's given them the best technology to choose from and kept prices competitive. There's a reason for the largest OEMs to be supportive of AMD."

TAGS: chips,Intel,Dell,HP,AMD

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