SSB:tgt $100,raises est
AMD: Good Q2 Report, Raising Estimates 2S (Outperform, Speculative)
Mkt
July 20, 2000 SUMMARY
* AMD reported Q2 EPS of $1.51 ($1.21 taxed at a 20%
SEMICONDUCTORS rate) on revenues of $1.17 billion (up 7%
Jonathan Joseph quarter-over-quarter and up 97% year-over-year), which
was well above our $1.12 estimate on in-line revenues of
$1.15 billion.
Edward Sun * The big upside in the quarter came from impressive
gross margins of 47.7%, well above our 44% estimate, due
largely to better manufacturing margins and improved
Flash pricing.
* Given the better profit outlook, we are raising our
fully-taxed EPS from $3.88 to $4.23; reported EPS (with
the last 3 quarters at 20% tax rate) are reduced from
$5.50 to $5.29, while 2001 goes from $5.00 to $5.50.
* We retain our 2S (Outperform) rating on AMD and retain
our $100 price target.
P/E (12/00E) 16.6x
P/E (12/01E) 16.0x
GOOD SOLID Q2 REPORT; ONLY SURPRISE WAS GROSS MARGINS
There was nothing out of the ordinary in AMD's report. The company hit about
1.8 Athlon shipments, which was our estimate. The ramp at Dresden for the
Thunderbird (now called the Athlon) appears to be going smoothly enough for
the company to declare that output "production" and move the costs from R&D
to COGS. Duron also appears to be ramping well, while chipset and motherboard
support appears to be coming in on schedule. And Flash, of course, remains
extremely strong. As mentioned, the one surprise were gross margins, which
were boosted by larger volumes and higher ASPs, both in microprocessors and
in Flash memory.
OUTLOOK FOR PROCESSORS PRETTY POSITIVE
The analyst conference call was very bullish on the prospects for both AMD
and the microprocessor market in 2H. Management suggested microprocessor
supply would remain tight through the whole second half, echoing Intel's
(INTC---138 1/8, 1M) comments yesterday. In addition, the company expressed
great confidence it would virtually double Athlon output per quarter for the
next couple of quarters, growing to 3.6 million in Q3, 7.0 million in Q4, and
to 28.25 million for the year. AMD thinks the number could be 30 million. In
addition, the mix would likely have a positive impact on prices, as it did
last quarter. We raised our Q4 Athlon forecast from 6.0 million to 6.5
million. Speed grades are also moving up to 1.1GHz this quarter and likely
1.4GHz by yearend, which is always a good sign. The only cloud on the horizon
could be rapidly growing supply at both Intel and AMD, but does not look like
it will be a problem over the next couple of quarters.
FLASH MARKET ALSO A BARN BURNER
AMD management was adamant they have seen no loosing up of Flash supply in
recent months. In fact, they believe they are more capacity constrained today
than they were in Q1, despite the fact that bit growth shipments fell from
about 100% growth in Q1 to 70% growth in Q2. The company is anticipating
about 70% growth in bits for the year as a whole. In fact, management
believes it will not be able to get close to meeting demand until mid-2001.
For that reason, AMD is putting plenty of new capacity on line. In addition
to facilities at FASL JV1, JV2, and Fujitsu Iwate, the company is ramping
capacity at FASL JV2B and Gresham, Oregon. In addition, the company just
announced it would build a JV3 "megafab" on a fast-track basis. We retain our
somewhat cautious outlook for the Flash market over the medium-term, mostly
because we believe a very large amount of capacity is coming on line just as
marginal demand in cell phones appears to be softening some. Management does
not agree with our assessment.
FINANCIAL REVIEW: AS ALWAYS, A VERY TIGHT SHIP
As is usually the case, AMD ran a very tight financial ship this quarter.
Gross margins rose despite the fact that an incremental $15 million in
production transfer costs were shifted from R&D to COGs, as mentioned. We
anticipate that GM will remain at about the 47% range for the next couple of
quarters. An additional $30 million ($45 million on a quarterly basis) of
depreciation will hit the P&L this quarter as the company assumes the full
burden of production at Dresden. For that reason, we are not raising our Q3
EPS estimate significantly above the Q2 actual. Operating expenses are in
line with our outlook, though the company is now generating more interest
income as a result of greater cash, and will significantly reduce its $44
million annual interest burden from tender of $400 million in senior secured
notes. There will be a one-time charge of about $24 million after-tax ($0.15
per share) from the recall. In addition, the company will likely record a
one-time gain of about $205 million ($1.16 per share) from the sale of its
networking business. |
