PB - Some comments on AMD's "Cash Drain Problem".
On AMD's balance sheet, things still look messy. The company was forced to dip into its cash reserves to keep operations going, and cash, equivalents, and short-term investments dropped 42% to $377 million during the period. The large drop is discouraging, especially considering the $432 million gain from the sale of its Vantis unit last quarter has already been wiped out through plant and equipment purchases. Inventories rose as a consequence of the Taiwan earthquake, which helped explain the sequential decline in the company's working capital and the erosion of working capital management measures such as the current and quick ratios.
Paul
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fool.com
AMD Chipping Away Its Losses
By Brian Graney (TMF Panic)
October 7, 1999
x86 microprocessor maker Advanced Micro Devices (NYSE: AMD) turned in its third quarter results last night, posting a loss of $0.72 per share. Revenues of $662.2 million were an 11% improvement from the previous quarter, but were down 3% from a year ago and up only 11% from two years ago. The First Call mean estimate had called for a loss of $0.97 per share in the period, so at the very least the company deserves a Bronx cheer for not bleeding as much red ink as analysts had expected.
There's no getting around the fact that a loss is still a loss, of course. The struggling company still has quite a bit of work to do to get its financial house in order, but there are a few signs that it is heading in the right direction.
Without question, the introduction of the Athlon chip has been a big plus. On a conference call last night, AMD said it was able to produce about 350,000 of the new chips, selling about 200,000 units at an average selling price (ASP) of a little less than $300. The pricing situation is a quantum leap from what AMD was seeing last year, when ASPs for its older K6 chips were hovering around $100. This quarter, ASPs for the 4.3 million K6-2 and K6-III chips sold during the period were reportedly $65.
If recent ASP level holds up and the company can ship the 800,000 Athlons it is promising in Q4, then there is a chance that AMD could break even in the current quarter. Since the company said Q4 gross margins should exceed the 28.4% reported in Q3, at appears that ASPs are expected to remain firm, if not improve, in the short-term. However, management is staying on the cautious side of the fence and a return to profitability appears to be at least another quarter away.
The balance sheet remains the most intriguing window into the future of the company. It is at this point that many semiconductor investors lose their analytical way, since it is all too easy to place greater weight on technological advances and how they will impact the income statement in future periods and ignore what is happening on the balance sheet.
For long-term investors aiming to achieve a market-beating return, this mistake is akin to stockpicking suicide. AMD's ability to stay alive in the declining-price environment of microprocessors and make a serious run at entrenched gorilla Intel (Nasdaq: INTC) in the high-end of the market will ultimately boil down to expert capital allocation and asset management.
On AMD's balance sheet, things still look messy. The company was forced to dip into its cash reserves to keep operations going, and cash, equivalents, and short-term investments dropped 42% to $377 million during the period. The large drop is discouraging, especially considering the $432 million gain from the sale of its Vantis unit last quarter has already been wiped out through plant and equipment purchases. Inventories rose as a consequence of the Taiwan earthquake, which helped explain the sequential decline in the company's working capital and the erosion of working capital management measures such as the current and quick ratios.
AMD is reining in its capital spending plans for the year to about $650 million, but that still suggests a huge cash outflow compared to the cash inflow investors can expect from operating activities. More asset sales from non-microprocessor activities, such as the sale of the company's data communications chip business that was announced last night, will help. However, judging by the rate at which AMD blew through the money from the Vantis sale, operating cash flows are going to have to pick up the business funding slack at some point.
With AMD announcing this week that it will challenge Intel in the high-end market with its own 64-bit chip -- codenamed SledgeHammer -- based on its mainstay x86 architecture and set to debut in 2001, investors are left to wonder where the money for Athlon's "Sista' Sledge" is going to come from. A small die size and the conversion to a 0.18 micron geometry fabrication process should help make the SledgeHammer cheaper to produce than chips based on Intel's all-new 64-bit "Itanium" architecture. But the efficiencies of the design likely won't be enough to fully offset the costs associated with making a full-out run at Itanium, which will have the added advantage of hitting the market a year earlier.
AMD has already used $1.5 billion to get Athlon to where it is today; coming up with even more money to fund the development and roll-out of SledgeHammer will be an enormous challenge. At some point, shareholders are going to demand a return on all of this investment. With the profitability horizon being stretched to the limit and an entrenched rival with a whopping $10 billion war chest laying in waiting, the clock is ticking for AMD.
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