AMD Could Run Out of Cash by May

[johnnymk]

OCTOBER 21, 2002

BUSINESS WEEK NEWS: ANALYSIS & COMMENTARY

When Advanced Micro Devices Inc. (AMD ) announced on Oct. 1 that revenue for the third quarter will be at least $100 million lower than expected, few were surprised. After all, apart from Dell Computer Corp. (DELL ), tech continues to languish. Indeed, the Sunnyvale (Calif.) company blamed lousy market conditions for its fifth loss in as many quarters. "Weakness in the personal-computer market continues to impact AMD," lamented Chief Financial Officer Robert J. Rivet Sr.

But if the economy is hardly helping, many of AMD's travails appear self-inflicted. Its current chips are too slow for the higher-margin desktops PC makers are now concentrating on to boost profits, while production glitches have delayed its next-generation PC chips. Worse, AMD is falling behind in its bid to crack the lucrative server market. With the company burning through cash and its market share crumbling, CEO Hector de Jesus Ruiz will have to pull out all the stops to get AMD back on track.

That's quite a reversal for a company that only 2 1/2 years ago boasted the fastest microprocessors in the world. Now, with Intel Corp. (INTC ) preparing to roll out a souped-up 3 gigahertz Pentium 4 processor in November, AMD is still struggling to make chips that pass the 2-gigahertz mark. Moreover, the widely anticipated launch of its next-generation Hammer family of chips, has been delayed until February or March--more than a year later than originally planned. As a result, AMD's market share may dwindle from a high of 22% in 2001 to 15% by yearend, says Merrill Lynch & Co. analyst Joseph Osha. "AMD is losing an enormous amount of ground in the microprocessor business," he adds.

How did AMD lose the lead in speed it once enjoyed over its much bigger rival? Intel has put in place new production techniques that enable it to make ever faster chips at a drastically cheaper cost. The combination is letting Intel beat AMD on both speed and price. In contrast, AMD's Athlon chip was never designed to run as fast as the current Pentium 4. Although AMD has managed to pump up the speed, it has yet to duplicate Intel's ability to spit the chips out more cheaply.

Despite these problems, Ruiz, who took the helm in April, insists AMD's woes are temporary. He's pinning his hopes on next-generation processors for PCs and servers, which can run desktop applications much faster than current chips. The big question is whether there is sufficient demand for such sophisticated chips. There aren't many applications yet that need such processing power. But Ruiz plans to compete on price and figures with the likes of Dell and Apple Computer Inc. will buy the high-performance chip at a cheaper price than that of rivals.

Ruiz is also seeking to tap new markets. In February, AMD acquired Alchemy Semiconductor Inc. It makes low-power chips used in handheld and tablet PCs, car navigation, and networking gear. Two months ago, AMD also unveiled low-power flash-memory chips for cell phones and handhelds. And it recently rolled out chips that significantly boost the amount of data that can be stored on a single chip. "We're way farther ahead of the game [than] people think we are," says Ruiz.

Maybe, but first, he must shore up AMD's perilous finances. The move to more sophisticated production processes is depleting AMD's cash stockpile. At current rates, it could go through its $1.1 billion cash reserves by the end of May. To stem the flow, AMD is expected to renegotiate millions in debt coming due over the next four years. More restructuring is also possible after the decision early this year to shut two plants in Texas and fire 2,240 workers.

For 33 years, AMD has managed to survive many scrapes in its David vs. Goliath battle with Intel. And no one in the industry wants a monopoly to emerge. That's why AMD is likely to keep nipping at Intel's heels--though it will need to strike a major blow with Hammer to win back market share.


By Cliff Edwards in San Mateo, Calif.

[sbp]

johnnymk: linkage!

[johnnymk]

Whoa!! Typing in the dark just doesn't cut it. If you are looking for a direct link to Business Week, you have to be a member to read their pages.

[bachviet]

Damn that would be bad for us since less competition = more expensive products!

[kain9i6]

Boooo!!!.. anyone on these forums know how to make processors?? if AMD goes under.. we can just make our own.. =0)

[Ladogaboy]

Originally posted by bachviet
Damn that would be bad for us since less competition = more expensive products!

I'm probably going to wait atleast two or three years to upgrade after I buy my next system, so I'm not really worried.

Besides that, AMD isn't going anywhere. They might leave the CPU market for a while, but they'd be back.

Personally, I think that the reason they are waiting so long to release the Hammer line is because they want to address some of the current complaints about AMD processors, e.g. heat/noise.

[gear02]

damnit! IT'S NOT JUST ABOUT CLOCK SPEED!!!!

I really hate the fact that the public believes that a P4 2Ghz CPU is faster than a 1.8Ghz Athlon. It's not all about clock speed ya know you %(#*&. I mean, the PowerPC chips are hovering around 800Mhz but are supposedly faster than some P4 and Athlon chips. Geez. That's the only thing I hate about all of this. Intel just likes to ramp up their clock speed. AMD just tries to make the fastest chip, regardless of clock speed. That's why they had to make the stupid XP nomenclature.

But to be fair, I think AMD isn't doing too well in bringing out new chips like Intel. I could have sworn the 2100+ XP chip has been out for a long time and that's one of their higher end chips.

Btw I wasn't cursing at you G|A. You guys are too smart. It's Dell and those stupid people...

grrrrrr...

[kain9i6]

Having worked for Intel in the past, I will now recite this extremely thought out and neatly prepared speech I was to speak when they gave me my Employee of the Millenium award (that I so wrongly didn't win, or even get nominated for.. dicks) this with extreme prejudice!

ahem.. (clears throat)

Intel..
YOU SUCK!!!!!!

thank you!
:bows:

[p3rsian]

Originally posted by kain9i6
Having worked for Intel in the past, I will now recite this extremely thought out and neatly prepared speech I was to speak when they gave me my Employee of the Millenium award (that I so wrongly didn't win, or even get nominated for.. dicks) this with extreme prejudice!

ahem.. (clears throat)

Intel..
YOU SUCK!!!!!!

thank you!
:bows:

right on

[skynet]

<sarcasm>
Funny that Intel sucks so much that are manage to keep in business huh? Kind of like Microsoft, boy they bite the big one, that is why their stock is up around $40 per share I believe.
</sarcasm>

I really hate when people bash these companies, If it wasn't for Intel, AMD wouldn't be around. After all AMD's cpus are based off intel's architecture.

I think Dell has to be one of the best companies out there, while I personally think their marketing sucks, it hits the mainstream of idoits out there. But they offer great products at great prices and have great customer service. I know a good handful of people who buy dell and love them. I have also been to two colleges which purchase nothing but dells.

I dare you to program an OS. If you get anywhere close, I guarentee I can rape it a new @$$ hole with bugs. Programming on that level is extremly hard.

I think the main reason these companies get Bashed, is because of PEBKAC problems. I have knew a person who hated dell because he has a gateway, and in the computer lab they put there floppy into the zip drive.

[sbp]

similiar warning: http://www.infoworld.com/articles/hn...q3.xml?s=IDGNS

"We doubt the company can survive without a substantial financing event," said Ross in a research note distributed Thursday. AMD is burning through $200 million in cash each quarter, he said.

The company's options include restructuring its debt, or borrowing against assets, including its Dresden, Germany, fab, Ross said. "For safety's sake, they would want to raise around $500 million," he said.

http://www.extremetech.com/article2/...,637404,00.asp
"In June, AMD held $1.1 billion in cash assets; the company's cash holdings dropped to $891.0 million in the third quarter"

AMD doesn't help its case by doing paper launches. Now compare that to Intel. http://www.eweek.com/article2/0,3959...099TX1K0100487

"Intel Corp. has begun shipping 3GHz Pentium 4 processors, the first to feature performance-enhancing hyperthreading technology, to major PC makers in preparation for its formal launch Nov. 14, sources said."

And Intel continues to press forward. Intel's $10 Billion Gamble

Yeah the P4 was a dog at first but now look at it. Its longer pipeline will enable its speed to be eventually ~8Ghz before that architecture is done.

Perhaps AMD will be bought by another company.

We can thank AMD for lowering prices and driving up the speeds. AMD is needed, otherwise Intel would charge an arm and leg for cpus {still do for the newest ones}.

[LegendKiller]

If one does not look at the hype surrounding AMD and the reporters (who know jack and well...jack about things) and do a quick search on Yahoo for AMD's financials you can see they aren't burning 200m per quarter, as a matter of fact, they did the opposite this last quarter, increasing cash by 200m. Its actually a bad idea to keep 1.1b in cash laying around, its very excessive and provides almost no returns. Its a better idea to invest.

If one looks at their current assets you can see a general stability, with inventories slowly going down (good), accounts receivable going down (good). Looking at longer term assets, PPE investments are up (good), which means they are not liquidating assets to make up for short loses.

Moving onto Liabilities, accounts payable is decreasing (good), short term debt is doing ok, going up a bit but not that much (about 1%).

I could do a complete breakdown of the whole company, which would more or less showing they are doing quite well, considering the industry as a whole. Do NOT take these reports at face value, reporters love suckering people. Furthermore, people often mistake REVENUE losses for cash losses. The whole are totally different for various reasons. Just because a company is in the red does NOT mean its cash is leaving. AMD has been in and out of the red for more than 2 decades, this is nothing new.

Now, if you want to talk about messed up companies, look at IBM and others. IBM has spent over 40 billion in the last 7 years to buy back stock while only making 25 billion in revenues. You can look at their cash flows and see that they cannot afford to keep this up, but they keep doing it in order to make their Earnings Per Share look good. This is bad because they are not investing cash to further projects and innovation. It shows management is doing a VERY bad job of managing the company (despite what the maroons in the press say). Lastly, IBM has only kept its stock price this high because the investment holding companies own the majority of the stock, which they dont care whether it goes up or down since its a dividend company (as opposed to growth).

The point is, reporters do not care what a comapnies financials are. They are suckered by the big numbers like every other sucker who was taken for a ride during the bubble. When you see many of those numbers do NOT invest off of them, look at the financials and learn. And for crying out loud do NOT say a company is going to die because it has negative revenues.


Ohh, I just looked at their balance sheet. AMD NEVER held 1.1b in cash reserves, here are their actual numbers. Furthermore, it would be sheer idiocy for them to do so. The axiom is that "you never hold more cash than current activities demand", there are NO current activities that would EVER demand 1.1b. Maybe 1/4b or so, but not that much....idiot reporters.

Jun 30, 2002 Mar 31, 2002 Dec 30, 2001 Sep 30, 2001
$506,191,000 $298,387,000 $427,288,000 $397,423,000



LK

[faither]

Nice review of AMD's financials. Good to see you're branching out from Hardware reviews. In all honesty, analysts are generally not all that much brighter than the general populous and are almost always in someone's hip pocket. They should be obligated to disclose their holdings and any subsequent transactions once they publish such a story. I think people would be surprised with what they saw.

[LegendKiller]

I am a b-school grad student on the side .


Yeah, people would be utterly amazed by the "work" done by most analysts. Usually they take a quick look at the company (sometimes shorter than my look) and make a report on it, then they spend the other 7.5 hours of their day playing golf (yes, I am cynical).

Furthermore, they will never tell the truth, even if a company is toast. Its pretty impressive that "sell" recommendations moved from .01% of all recommendations to .03% in the last 9mo. VERY impressive!

Then, you have all of the b-week articles, dont even get me started on some of those.


Never fear, competition is alive and kicking.


LK

[johnnymk]

In a nutshell, could you tell me about Business Week and their articles? I am curious, because I have subscribed to them for years and years. That magazine and Business 2.0 are my favorite business magazines.
Generally, both of those magazines appear to be on the leading edge of what's happening. I know that many of the readers write in and tell Business Week what grave mistakes that they have made in their reporting, but on a large scale, I am generally impressed.

[LegendKiller]

In my humble, and partially educated opinion (mind you, I am only 23 and have not entered the b-world on a total scale). Thier shortfalls are much the same as any other magazine/newpaper, although they aren't as bad as some. I like Financial times, less bias and it gets a nice world view of what the US is doing (which can be good or bad, depending on the topic).

I have liked how BW reports some good articles, like their 99 (or was it 98) article on irrational exhuberance, but then they jump out in front and still lead the pack in reporting the latest and greatest companies while not bothering to look at what is actually happening. Furthermore, the perpetuate the "revenue" and "EPS" centric point of view, where those two are the only thing that matters. Besides, they are quite liberal (especially one of their writers, forgot his name), and their tech writer isn't the greatest.


LK

[adowding]

Originally posted by skynet
[B]<sarcasm>

I really hate when people bash these companies, If it wasn't for Intel, AMD wouldn't be around. After all AMD's cpus are based off intel's architecture.

AMD was around before intel. Maybe thats Vice Versa