Foad, All - not all news is bad
Foad, thank for the article. The feeling on the street is mixed mainly due to the risk factors involved.
Below is part of a pru review
Regards
-Albert
3:37pm EDT 8-Apr-98 Prudential Securities.....
AMD: K6 YIELDS UP, AMD IS BACK........
AMD reported first-quarter 1998 results yesterday after the market close, posting an EPS loss of $0.39, which was slightly more than our recently revised loss estimate of $0.37. The Consensus loss estimate was $0.29. As expected, first-quarter losses were driven by manufacturing ramp-up problems related to K6 processor yields (good die per wafer). The dismal operational performance in the quarter was offset by significant improvements in K6 yields at 0.35 and 0.25 micron geometries, which we believe now positions AMD solidly in the mid-to-low end of the PC market going forward. AMD is back. We reiterate our recent Buy recommendation (3/31/98) on AMD. Furthermore, we are raising our 12-month target price for the stock to $38 from $35.
First-Quarter Review First-quarter revenues of $540.9 million declined 12% sequentially from 613.2 million in the fourth-quarter, and declined 2% year over year. Earnings per share were a loss of $0.39 and missed the consensus loss estimate of $0.29 by 10 cents. Gross margins declined significantly to 21.7% in the first-quarter from 30.1% sequentially as AMD struggled with manufacturing-related problems in ramping its K6 processor in fab 25.
The product line breakdown for the first-quarter was as follows: CPG (microprocessors including K6) revenues were $169 million, or 31% of total revenues, versus $203 million, or 33% of total revenues in the fourth-quarter; Memory Group (Flash/EPROMs) were $167 million, or 31%, versus $181 million, or 30%; Communications Group revenues were $149 million, or 28%, versus $174 million, or 28%; and the Vantis subsidiary (PLD) revenues were $56 million, or 10%, versus $55 million, or 9%. The corporate book to bill was below parity.
AMD Is Back In A Big Way The real story for AMD is its remarkable come back. AMD went from essentially not having a clue as to the nature of its K6 yield problems to nearly overnight yield improvements in both 0.35 and 0.25 micron geometries. Speed distributions also improved significantly by the end of the first-quarter. We estimate K6 speed distribution at 0.25 micron is 80% 266 MHz and 20% 300 MHz, which places the K6 squarely in the mainstream of the PC market from a performance perspective. The company plans to introduce K6s at 350 MHz in Q3 and 400 MHz in Q4, which should ensure that AMD keeps up with speed enhancements by Intel.
AMD Expects To Ship 12 million K6s In 1998 - We Think They Can Beat This Goal Twelve million K6 processors from fab 25 in 1998 is impressive, however we believe the company could actually build around 15 million, which makes for good upsides. The question here is how rapid will the decline of the Socket 7 motherboard (used by Pentium and K6 processors) be relative to the newer Slot1 used by Pentium II in 1998. Given 1) the momentum of the sub$1K segment, 2) Intel's transition issues migrating to the low-end of the market with its Celeron family, 3) good support from IBM and Compaq, 4)a consistent pricing strategy, and 5) a good K6 roadmap, it is our view that AMD has a good chance at beating its publicly articulated goal of 12 million K6 unit shipments in 1998. In 1999 the K7 processor, which will use SlotA (Slot1-compatible), will be in volume and should offset the inevitable decline of Socket 7.
No Comments On Equity Investment Company management indicated that it would not comment on rumors, good or bad, related to equity investments in the company. We continue to believe that an agreement with a major electronics OEM has been finalized or is being finalized for much needed cash. AMD did say it intends to raise some cash in the second-quarter through an offering as indicated by the recent $1 billion shelf registration. However, with a capital expenditure goal of $1.4 billion in 1998, the $1 billion shelf registration alone may not be enough. Additionally, from a longer term perspective, we view an equity investment with the right partner as a strategic necessity to compete with the deep pockets of Intel.
AMD's Non-Processor Business - Flat At Best In Q2. AMD indicated that the general semiconductor market in the first-quarter was characterized by excess memory capacity, pricing pressures, inventory reduction programs by customers, and demand weakness in Asia. The communications segment declined 14% sequentially for AMD and was characterized by product transitions in networking and softness in infrastructure. In memories, sales declined 8% mainly as a result of weakness in EPROMS, however Flash sales also declined. The Vantis subsidiary was up 2% sequentially and actually enjoyed stable average selling prices (ASPs). The guidance for the second-quarter is expected to be at best flat sequentially for the non-processor segments of AMD.
AMD's capital expenditures in the first-quarter were $193 million versus $155 million in the fourth-quarter. For 1998, capital expenditures are expected to be $1.4 billion, $490 million of which is targeted for the new Dresden, Germany processor fab. Depreciation was $117 million versus $108 million in the fourth-quarter. Cash at the end of the quarter was $307 million, down from $467 million in the first-quarter.
We are maintaining our 1998 revenue and EPS estimates at $2.8 billion and $0.02 respectively. We are revising slightly upward our 1999 revenue and EPS estimates to $3.5 billion and $1.60, from $3.4 billion and $1.50 respectively.
AMD now has momentum which should benefit the company throughout 1998, as both K6 yields and design wins are no longer obstacles. Last night's announcement by IBM to use the K6 300 MHz in an Aptiva model is an excellent example of such momentum. In our judgment, there are good upsides to our earnings estimates going forward, thus we are raising our 12-month target price for the stock to $38 from $35. We reiterate our Buy recommendation for AMD.
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