Here's a statement from W.J. Sanders you might find encouraging/discouraging depending on how you look at it. Basically don't expect much from AMD stock for the rest of the year. Expect 1997 to be much better.
To my fellow employees:
As pre-announced on June 20, AMD today reported a loss for the just-completed second quarter of 1996 on a sales decline of more than 15 percent
compared to the immediate-prior quarter. The loss is substantial.
The widening operating loss resulted from insufficient profits generated by our other divisions to offset the large losses we are currently experiencing
in our Microsoft® Windows®-compatible microprocessor divisions (i.e., TMD/CMD, formerly PCD). A significant drop in flash memory sales, in
the face of soft demand and sharply lower prices, was the main cause of our revenue shortfall, but all product lines were adversely affected by poor
market conditions.
It now appears that the unprecedented dollar growth in worldwide IC revenues in 1995 was inflated by inventory accumulation. End-user demand
appears healthy, but a wrenching period of inventory de-accumulation is underway at our customers. After worldwide IC growth of 43 percent in 1995
and 35.5 percent in 1994, I believe the industry will be flat this year. I expect the largest single sector -- DRAMs, which grew by more than 70
percent in dollar terms in both 1994 and 1995 -- will actually decline as prices plummet.
Therein, however, lie some seeds of recovery. Lower costs per bit for memory historically have opened new applications and stimulated overall
demand. In the non-DRAM sectors, I expect inventory de-accumulation to have run its course by the end of the summer quarter and growth in
demand to resume concurrently.
I believe AMD¹s sales troughed in the just-completed quarter, and the opportunity for recovery is at hand. We must seize that opportunity.
Nevertheless, growth adequate to return us to profitability is unlikely before the fourth quarter. The fixed -- or essentially fixed -- cost of creating
growth-producing assets (i.e., Fab 25, process technology development imperatives, and pivotal product development) preclude profitability at
current sales levels.
We are in for a few tough-to-very-tough quarters. The cyclical nature of our industry and the speed at which things change is neither new nor
frightening to me. If you either have a short memory or have only been at AMD during the last five years of extraordinary growth for AMD and the
industry, you may find the current situation alarming. That's good. This is no time for complacency. This is a time for action. Actions designed to
increase current revenue (i.e., grow sales) while simultaneously managing cash flow to ensure funding those programs critical to achieving our 1998
revenue goal of $5 billion are our top priorities.
It's all about growth, and our Computation Products Group (CPG) isn't growing. The lack of a competitive offering to challenge Intel's Pentium in the
marketplace has been the largest single factor in a decline approaching $200 million in quarterly sales year-to-year for CPG. The swing from profits
to losses has been similarly dramatic. While I don't want to discount the significant impact of current industry conditions on AMD's operating results
-- nor am I suggesting that there is no room for improvement elsewhere at AMD -- the simple fact is when we fix our microprocessor problem, we
fix our problem. It's a problem worth fixing!
The Microsoft Windows-compatible microprocessor market was a $12-billion-business in 1995 and should reach $25 billion within five years. Only
AMD has the intellectual property rights, the process technology, the deep submicron logic manufacturing capacity, and the customer relationships to
mount a significant challenge to Intel's dominance (greater than 85 percent share of market). There is no other single opportunity that rivals this one
for AMD. By comparison, the much-ballyhooed chip market for next-generation consumer electronics (e.g., HDTV, DVD, satellite and set-top
boxes, and 32-64 bit video game controllers, etc.) is only projected to reach $7-8 billion by the year 2000. That market, with few barriers to entry,
offers less profit potential. We are in business to make profits.
Over the last five years our Microsoft Windows-compatible microprocessor business has generated the preponderance of AMD¹s economic
value-added (EVA). EVA is net profit after a charge for the capital utilized. In our capital-intensive industry, this is a critical metric which we must
apply to every product line. Indeed, even with the large losses we are currently experiencing, our operating cash flow is near break-even. The large
outflow of cash is for capital expenditures, largely for Fab 25, to ensure capacity and capability to build the forthcoming AMD-K6 microprocessor.
This cash demand and its impact on our current assets in light of weak sales created a possibility, as previously reported, that we might not meet a
standard provision of our short-term loan agreements -- the so-called "quick ratio" covenant -- at the end of the quarter. (The quick ratio is the
ratio of cash, cash equivalents, and accounts receivable to current liabilities.) We negotiated a short-term change in the ratio with no concessions on
our part. We are in full compliance with all aspects of our credit arrangements. As appropriate, we will explore alternatives for additional credit
facilities to ensure that we can implement our strategic plans.
In the just-completed quarter, we shipped more than 200,000 AMD-K5-PR75 and AMD-K5-PR90 microprocessors as direct plug-in
replacements for Pentium 75s and Pentium 90s, thereby demonstrating compatibility of AMD's independently developed, fifth-generation
processors. This is a tremendous achievement. We also made initial shipments of our AMD-K5-PR100 devices, and expect AMD-K5-PR100s to
be the largest revenue producer in the K5 family this quarter. AMD-K5 processors equivalent to higher-speed Pentiums should be shipping in
volume in Q4. We also plan to sample the AMD-K6 in Q4. The AMD-K6 should generate the revenue per wafer necessary to earn the desired
return on the investment in Fab 25!
1996 is proving to be a tough year for AMD. With a successful K6 program, 1997 should be our best year ever. Our execution in microprocessors has
been the subject of heavy criticism. I would remind you of Teddy Roosevelt's well-known assertion that:
"It is not the critic who counts, not the one who points out how the strong man stumbled or how the doer of deeds might have done
them better. The credit belongs to the one who is actually in the arena."
We are in the arena. Each and every one of us can contribute to AMD¹s resurgence by extending ourselves.
The values that have guided us through nearly three decades will serve us well in these tough times. In the final analysis, our success is in our
hands: people are the ultimate source of our competitive advantage. We must once again call upon our indomitable will to survive and prosper in the
world¹s most competitive industry. We must respond to today's competitive challenges with better ideas that create advantages for our customers.
Our customers’ success is our success. Each of us must take the initiative to identify obstacles to success and create solutions.
Business is tough. We must be tougher.
God bless. |
