When I previewed earnings, I said its hard to see how it could get any worse, but if anyone can pull it off…. So let’s take a look at how they managed to do it.
The Good News
• Revenue was up 13% from last year
• Gross margins of 33% were up sequentially from 28%
• $130 million of their expenses were what they consider to be exclusion-worthy (although I wouldn’t give them credit for the $31 million in stock-based compensation.)
The Bad News
The bad news starts with gross margins. Although they were up sequentially, they were down from the near-record 57% the company reported in the year-ago quarter. One would expect the opposite when revenues rise in a capital-intensive industry. But looking back longer-term, it is last year that looks like the anomaly, not this one.
Moving on to operating expenses, AMD reported $461 million in gross profit, from which was deducted $475 million for research and development (uh-oh!), $365 million for marketing, general and administrative expenses and $78 million of acquisition related charges that were included in the $130 million non-recurring charges ($99 million by my accounting) noted above.
That leaves us with an operating loss of $457 million, or $358 million if you exclude the expenses management and I agree are non-recurring. That leads me to a couple of observations about AMD’s prospects:
• Even if AMD were to recover to last year’s near-record gross margin level they would have lost more than $33 million. How can their expenses be set at a level that is unprofitable in the best of times?
• If the chart above is correct and 33% is a more normal gross margin, at the current level of operating expenses they will need to increase revenue by nearly 80% just to break even.
The stock is in a relief rally because investors expected AMD’s margins to be creamed after Intel’s (NASDAQ:INTC) results. I think if investors took a closer look the last thing they would feel is relief.
AMD 1-yr chart: