AMD earnings: More fear, uncertainty, and doubt?

Updated at 11 a.m. PST with additional information from analysts.

These are not ordinary times. Not for Advanced Micro Devices, which reports earnings on Thursday. Nor for Intel.

For starters, AMD said last week that it would slash its workforce by 9 percent and institute temporary salary cuts.

This comes as the company enters the final stages of bifurcating into AMD the product company, which designs chips, and The Foundry Company, which manufactures them. A measure taken to stave off collapse. (There are still a few more steps that have to be taken before the split is sanctioned by all entities involved.)

The Sunnyvale, Calif.-based chipmaker also faces the Herculean task of returning to breaking even in operating income, according to Ashok Kumar, an analyst at investment bank Collins Stewart.

The world economy isn't cooperating, however. AMD, like Intel, has to face a difficult first quarter and possibly troubled second quarter. These two quarters are historically weak to begin with. Add the unusually negative macroeconomic factors on top of that and "recovery isn't looking like a first half kind of thing" for AMD, according to an industry source who follows the company and expects AMD to paint a less than rosy picture.

"This doesn't look like one of your normal semiconductor cycles, where you pop out of it very quickly and very aggressively, and overtake any dips," said the source.

And speaking of dips, Taiwan Semiconductor Manufacturing Co., the largest contract chip manufacturer and major industry bellwether, said on January 9 that December net sales on a consolidated basis were off 30.1 percent from November 2008 and off a whopping 51.9 percent (54.8 percent on an unconsolidated basis) from December 2007. TSMC reports fourth-quarter results on Thursday too.

The situation for Intel--which reported a 90 percent dive in year-to-year fourth-quarter profits last week--isn't that different. Bloomberg is reporting that Chief Executive officer Paul Otellini told employees last week in an internal memo that a first-quarter loss is possible after 87 quarters of profit.

But Intel said as much publicly in its earnings conference call last week, refusing to give official guidance for the first quarter due to heightened uncertainty and then bringing up a possible scenario in which things don't improve as expected.

Chief Financial Officer Stacy Smith put it this way during the conference call: because of the dramatic drop-off in demand from customers (what Intel calls "the supply chain") in the fourth quarter, the chipmaker is "aggressively" reducing factory utilization in the first quarter. "The expectation is that we can start to reload the factories a bit in Q2 from where they are in Q1," he said. But he then addressed a "hypothetical" situation where conditions don't improve as expected.

In this case, Smith said Intel would slow the introduction of next-generation 32-nanometer manufacturing process technology. (Currently Intel chips are based on 45-nanometer technology.) "Over time if our view of demand is wrong and this is much worse than we expect...we'd slow the ramp rate of 32-nanometer," he said.

The question is what measures AMD will take if its already precarious situation gets worse. Doug Freedman of Broadpoint AmTech estimates that AMD's two-quarter sales decline is about 30 percent, though AMD may be faster at correcting excess inventory than Intel.

"We expect the operating income break-even level to be imminently lowered through more permanent cost controls given near-term challenges in the PC-related food chain," Freedman said in a research note Wednesday.

Collins Stewart's Kumar said he thinks AMD may have to further "cost-reduce" itself back to profitability.

[atici]

Face it: AMD is toast. It has bad management and its products can no longer compete.

Intel has been on a roll with manufacturing and is strong in many areas (Atom, memory,...)

[tipoo_]

did you read the article? Intel's profits have fallen tremendously. yes, their products seem to be kicking chip butt right now, but things are tough for both chip makers.

[atici]

Yes, I read it. It's true Intel's profits fell, but that's because demand for computers fell. AMD has a more fundamental problem -- it can no longer produce competitive products cost effectively. Economic crisis will end at some point yet I don't see AMD ever becoming competitive. Therefore it's headed for bankruptcy...

[pithenumber]

@atici
Phenom II is competitive with Core 2 and Intel needs Core 2, i7 isn't cheap enough for mainstream yet, prolly won't be for a while due to DDR3+expensive board required

[tipoo_]

The way i see it...they are still in second place, that aint so bad :)


look how they did last (not this) quarter, for all intents and purposes they pretty much were profitable. and at that time (and still now) EVERYBODY was in the red. so AMD isnt doing as bad as some might think, if it wasn't for this whole recession thing i think they would be doing well.

[Mister Winky]

Tipoo,

Your optimism is charming, but it's wasted on AMD. They made two huge blunders in the last 3 years that have cost them dearly:

1) They let Intel take the lead in quad core CPUs, betting that customers would wait for AMD's supposedly better interconnect bus that allowed all 4 cores to communicate at high speed. Meanwhile, Intel flooded the market with highly profitable quad core CPUs which were really 2 dual cores joined at the hip. AMD made a huge error thinking a minor technical advantage would keep customers waiting. They were wrong.

2) The Barcelona and Phenom bug and resultant product delays really hurt AMD's credibility. Again, how many customers could afford to delay critical IT projects because they want to be loyal to AMD's CPUs? Not many. Intel offered competitive products when AMD was struggling to get their chip to market.

AMD is in a really tight spot. Because they don't have the reputation and distribution network that INtel enjoys, they are always playing from a 2nd place position, but they can't afford to fall this far behind and stay in business. To succeed, AMD has to either sell products that are technically competitive with Intel at a lower cost, or technically superior to Intel at the same cost. Right now, they aren't winning either battle. Combine this with their lack of diversification (as Atici mentioned) and you have a losing mix.

AMD's competition earlier this decade proved to be very important to Intel's turnaround, so I hope Intel doesn't get complacent when AMD is gone.

-Mister Winky

[pithenumber]

Now that they have something good, no one will buy it. Phenom II had very little hype, its launch went barely noticed. Phenom II is awesome, beats Intel at the price range, 775 is dying, paying $6 for a slightly faster processor and upgrades until 2011 sounds like a good reason to prefer Phenom2 940 over C2Q 9400. AMD is still strong in the server and graphics market.