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By Siraj Sarwar

Advanced Micro Devices (NYSE:AMD) designs and produces microprocessors and low-power processor solutions for the communications, computer, and consumer electronics industries. The majority of the firm's sales are in the computer market. AMD acquired graphics processor and chipset maker ATI in 2006 in an effort to improve its positioning in the PC food chain. In 2009, the firm spun out its manufacturing operations to form a foundry joint venture, Global Foundries.

AMD is losing market share due to intense competition in the business. In the battle for microchip markets, Intel (NASDAQ:INTC) emerged as the winner. Intel's win was an unfortunate lost for AMD and its shareholders. AMD lost about half of its market value in this year alone. The stock looks like a bargain at the current prices, but there are several risks involved. In this article, I dig deeper into company's recent financials and restructuring efforts to prove my point.

Financials

AMD has 85 percent of its core business in the traditional PC market, reported its Q3 2012 earnings. The company experienced a 10 percent sequential decline in revenues and placed a net loss of $157 million. The macro headwinds have directed to a challenging environment, which is influencing the entire semiconductor industry. Other microchip makers such as Nvidia (NASDAQ:NVDA), Intel, and Texas Instruments (NASDAQ:TXN) are being hurt by the slowdown. However, AMD has been the toughest hit so far.

As a result of lean inventory managed by its OEM partners, AMD registered 11 percent fall in its computing solution segment. Moreover, the company documented 7 percent drop in the graphics section revenue. The gross margins dropped to 31 percent, a 15 percent sequential drop, due to the $100 million inventory write off. Poor demand together with the low factory utilization rates resulted in the significant decrease in the profit margins. EPS has dropped consistently in the previous couple of years, which has been among the significant factors behind weak valuations.

AMD's Effort to Restructuring the Business

AMD overlooked the pace of change in the computing industry. However, the company understands the urgency of a much required restructuring. The restructuring plan announced in an effort to strengthen AMD's competitiveness and reduce its expense base by 25 percent. In an effort to control its rising costs, the corporation plans to decrease its current headcount by 15 percent.

AMD seeks to diversify itself over the PC market. Therefore, the company is focusing on other adjacent markets, including new embedded markets and dense serving. The corporation intends to drive 40 percent to 50 percent of its portfolio from more quickly growing markets in the future.

Together with the change in its operating model, the company seeks to deliver breakeven results with $1.3 billion in revenue by the Q3 of 2013. In light of the sluggish PC growth, I think a switching focus to other markets is an encouraging move for the company.

Cash Burn

AMD released an operating loss in the latest quarter and saw its cash balance lower to $1.48 billion from $1.76 billion in the past year quarter. The company's debt load ticked up slightly from $2.02 billion to $2.04 billion in the quarter. However, the cash situation will force AMD to become much thriftier. It indicates the company cannot necessarily get the best equipment and engineers, providing it a material disadvantage versus better-capitalized peers.

Therefore, AMD declared a number of strategic moves in an effort to become cash-flow positive in the long-term. The new strategy is simple: stop attempting to battle Intel on its own turf. In addition, the company has now established a long-term goal to have only 40 percent to 50 percent of its revenues from the traditional PC space. AMD hopes to have the rest of its revenues come from alternate sources like micro-servers, semi-custom embedded design, and ultra-low power APUs. In addition, the company needs to turn cash flow break-even at a lower revenue rate. So I think it is a wise decision to cut workforce by 15 percent.

Valuations

(click to enlarge)

Source: Finviz.com

Striking a peak of $8.40 in March this current year, the stock has dropped significantly since then and is presently hanging around the $2-$3 range. Aside from undesirable macro conditions, the company's stock has also been impacted by internal factors such as a change in leadership. Moreover, stock has dragged down by a manufacturing glitch previous year and the firm's slow response to quickly changing consumer needs.

Shares have lost 85% of their value over the past five years. AMD traded around $2 during the financial crisis and recovered to $10 in 2010. From that point in time, shares have fallen back to $2 again. Revenues fell slightly between 2008 and 2012, from $5.8 billion to $5.4 billion. Net losses for 2012 could approach $1 billion if the company is forced to take additional write-down in the final quarter.

Advanced Microchip vs. Competitors

Intel Corp is the leader in the processors market. The company continues to lead the PC market, although the PC market is presently hurting. Intel has a 4.2 percent dividend yield. That is huge in the tech industry. The strike Intel has taken is because of macroeconomic conditions beyond its control. The corporation itself seems to be doing very effectively.

NVIDIA Corporation is another big competitor of AMD in the tech industry. Nvidia makes some of the leading graphics cards in the market, but the company also makes the processors for tablets and phones. It is great to see that Nvidia almost have half of the market capitalization in cash. It highlights how much cash the company has on hand.

Summary

I believe Advanced Microchip does have the potential to turn itself around, and it has just announced a restructuring plan. The company is not in the most effective position; the company's debt is too high. AMD needs a big win to bring in cash regularly and in large quantities.

The company obviously encounters a long-term competitive challenge from Intel in the microprocessor market. The current weakness in the global PC market has also set pressure on demand for the company's processors. Thus, I estimate the gloomy performance to continue for the following few quarters. Nevertheless, I feel that there could be a number of upcoming developments which can steer the corporation from these difficult times and help it come back to profitability in the future.

Source: Is There A Turnaround For AMD Ahead?