Maverick
sure, here is the 1st - Dan Niles
Regards
-Albert
12:28pm EDT 12-Oct-00 Lehman Brothers (Niles, Daniel 415-274-5252) AMD INTC
Advanced Micro Devices: Lower Revs & GMs but lower expenses; Reducing EPS P1 of
Today`s Date: 10/12/00
Ticker: AMD Fiscal Year: 12/31
Price: 22.75 52wk Range: 49 - 8
Rank(New): 2 - Outperform Target(New): 40
Rank(Old): 2 - Outperform Target(Old): 40
-----------------------------------------------------------------------------
EPS 1999 2000 2001 %Change
Act. Old New St.Est Old New St.Est 2000/2001
1Q -0.41 0.57A 0.57A 0.58A 0.59E 0.54E 0.57E - - -5
2Q -0.55 0.60A 0.60A 0.61A 0.59E 0.55E 0.58E - - -8
3Q -0.36 0.60E 0.64A 0.62E 0.64E 0.64E 0.63E - - 0
4Q 0.22 0.74E 0.68E 0.76E 0.68E 0.71E 0.70E 209 4
-----------------------------------------------------------------------------
Yr. -1.11 2.53E 2.50E 2.56E 2.50E 2.45E 2.50E - - -2
P/E 9.1 9.3
-----------------------------------------------------------------------------
MARKET DATA FINANCIAL SUMMARY
Shares OutStanding (MM) 352.9 Revenue (B) 4.8
Mkt Capitalization (B) 8.0 Five-Year EPS CAGR 20.0 %
Dividend Yield - - Return On Equity (2000) - -
Convertible Yes Current Book Value 5.60
Float - - Debt To Capital 42.9 %
Disclosure(s) None
-----------------------------------------------------------------------------
INVESTMENT CONCLUSION
* Q/Q revenue growth of 3% versus our 5% and GMs of 47.0% versus our 47.5%
was balanced by lower expenses and taxes leading to operating EPS of $0.64
versus our $0.60. Going forward we are lowering our Q4 EPS from $0.74 to
$0.68 and FY01 from $2.50 to $2.45.
SUMMARY
* Q4 Athlon units sold are expected to be below the 7.2M prior forecast with
total processors in a range of 8-9M versus 9M formerly. Processor ASPs fell
$2 q/q to $90 and should decline again putting the $100 target on hold.
* Memory revenue growth is expected to slow from 16% q/q to the mid-single
digits in Q4.
* We maintain a cautious view on the stock given the potential for a more
aggressive pricing environment in both flash and processors. Current
estimates do not contemplate that. The low P/E of 9x, however, limits the
downside.
-----------------------------------------------------------------------------
Q3:00 Results LEH Est. Actual Difference
Revenues $1,229 $1,207 -2%
Gross Profit $584 $568 -3%
Gross Margin 47.5% 47.0% -46 bp
Operating Expenses $325 $305 -6%
Operating Income $259 $263 2%
Operating Margin 21.1% 21.8% 72 bp
Tax Rate 20.0% 19.0% -100 bp
Net Income $209 $219 5%
EPS - Operations $0.60 $0.64 6%
Fully Diluted Shares 358 353 -1%
AMD reported operating Q3 EPS of $0.64 above our $0.60 estimate and consensus
of $0.62. Revenues of $1.207B (up 3% q/q and 82% y/y) were less than our
$1.229B estimate as a result of lower than expected ASPs. Processor ASPs of
$90 was lower than the $96 we had been modeling and down $2 q/q but still up
38% y/y. Total processor units shipments were nearly 6.9M with about 2.1M
Athlons and over 1.5M Durons compared to last quarter when the company shipped
6.5M total, with 1.8M Athlons. Durons were introduced in the quarter to target
the value segment of the PC market. The company shipped 3.2M K6 units in the
quarter at ASPs that were flat q/q and under $50. More aggressive pricing of
Durons caused the overall processor ASPs to decline q/q for the first time
since Q2:99.
Q3:00 Processor Details LEH Est. Actual Difference
ASP $96 $90 -6%
Units (MM) 6.7 6.9 3%
Processor Revenues (MM) $642 $625 -3%
Gross margins declined 70bp sequentially to 47.0% which was below our
estimate for 47.5% for the quarter. Dresden is now fully ramped and we
believe that Dresden is producing better yields than AMDs Austin fab. At the
end of last quarter the company stated that it expects to be able to sustain
gross margins in the 47% range. This still could be possible but we are now
modeling closer to 46% for next year given the gross margin decline q/q and
lower expected ASPs.
Operating margin of 21.8% was 70bp higher than our estimate as a result of
lower than expected MG&A. Operating income for Q3 was $263M compared to our
$259M estimate and $250M last quarter. MG&A declined by about $10M q/q from
$152M in Q2 to $142M this quarter as the company pushed out some advertising
programs from this quarter into Q4. This is expected to increase back to
$154M next quarter.
Q3:00 Revs by Segment LEH Est. Actual Difference
PC Processors $642 $625 -3%
Memory $398 $420 6%
Other $189 $162 -15%
Total Revenues $1,229 $1,207 -2%
Flash revenues increased 17% q/q and more than 100% y/y. This compares to
last quarter when flash revenues increased 10% q/q and 118% y/y. Flash unit
shipments were up 11% q/q while flash bit growth was up 19% q/q and 80% y/y.
Clearly, the average package density of flash devices shipped continues to
increase. Clearly, flash is a very favorable business for AMD currently as the
company continues to be able to decrease price per bit at the same time it
increases bits per package. Average density per package that AMD ships has
increased to 9.5Mbit per package from 7.2Mbit a year ago. We believe that
market will continue to shift towards 16Mb, 32Mb, and in some cases 64Mbit by
next year. The company says that about 80-85% of the flash sales are derived
from long-term contracts compared to the 70% level reported last quarter.
Though we believe this is important, from our prior experience we believe it
is hard to maintain those contract terms if pricing changes dramatically. AMD
also reports than only 35% of flash production is consumed by the wireless
handset end market.
We note that current flash spot market pricing is about $12 for 8Mbit and down
about 20% in the past three months while 16Mbit pricing is between $23 and $30
depending on the package and down approximately 30-40% in the past three
months. We expect that flash memory revenue growth will decelerate to the
mid-single digits in Q4. AMD currently manufactures flash on 0.22u and
remains on track to qualify 0.18u by the end of the year and start converting
production to 0.18u by mid-2001.
The company expects the Other IC segment to be $100M per quarter and Foundry
to be $50M per quarter for the forseeable future. The dramatic decrease in
the other category is related to chipset production dropping from $23M in Q2
to $0 in Q3 as production was transferred to VIA. The company has also changed
its reporting structure now that the PLD (Vantis) and voice communications
businesses (Letegrity) have been divested. AMD is now reporting embedded
processors and chipsets as Other IC and foundry business to support Vantis and
Legerity as Foundry.
We are reducing our total processor unit forecast for Q4 from 8.5M to 8.3M.
AMD said it will be able to produce 7.2M Athlons and Durons in Q4 but will not
be able to sell or ship them all in the quarter. We are assuming in our
model for Q4 that they are able to ship 6.5M units of Athlon and Duron and
1.8M units of K6, which is now at end of life status. Significantly, in Q3
more Athlons were sold than Durons. For Q4, we expect that the company will
ship more Durons than Athlons. We believe this could lead to further ASP
pressure. Now that Intel is no longer capacity constrained and the PC market
has been weaker than we expected earlier in the year, we believe that the
competitive dynamics of the PC microprocessor market have changed. AMD even
remarked on the call that it does not expect to penetrate the corporate
market until mid-2001, a result that is pushed out from prior comments from
that company that evidence of corporate penetration would be visible by year
end.
Our Estimate Changes Old New Difference
Q4:00
Revenues $1,408 $1,321 -6%
Operating Income $327 $291 -11%
EPS $0.74 $0.68 -8%
CY2001
Revenues $5,900 $5,775 -2%
Operating Income $1,288 $1,253 -3%
EPS $2.50 $2.45 -2%
We are reducing our Q4 EPS estimate from $0.74 to $0.68 and our 2001 EPS
estimate from $2.50 to $2.45. We continue to maintain a cautious view on the
stock given the potential for a more aggressive pricing environment in both
flash and processors, which we believe the current estimates do not
contemplate. The low P/E of 10x, however, limits the downside.
------------------------------------------------------------------------------ |
