AMD - Near Term Revenue Outlook Is Terrible, Yet Investors Should Applaud Aggressive Restructuring Efforts

| About: Advanced Micro (AMD)

Shares of AMD fell a whopping 16.8% in Friday's trading session. The global semiconductor firm had a tough period. Shares have fallen 40% over the past month ahead of its third quarter earnings release on Friday.

Third Quarter Results

AMD reported third quarter revenues of $1.27 billion, down 25% on the year. Revenues came in line with analysts expectations of $1.28 billion, after the company lowered its revenue outlook last week.

AMD reported a net loss of $157 million, or $0.21 per share. Non-GAAP net losses came in at $150 million, or $0.20 per share, which missed analysts expectations by $0.04 per share.

Gross margins fell to 31% after the company took a $100 million write-down on A-Series Accelerated Processor Units, amidst weaker demand and lower than average selling prices.

CEO Rory Read commented on the results, "The PC industry is going through a period of very significant change that is impacting both the ecosystem and AMD. It is clear that the trends we knew would re-shape the industry are happening at a much faster pace than we anticipated. As a result, we must accelerate our strategic initiatives to position AMD to take advantages of these shifts and put in place a lower cost business model. Our restructuring efforts are designed to simplify our product development cycles, reduce our breakeven point and enable us to fund differentiated product roadmaps and strategic breakaway opportunities."

Restructuring Efforts

AMD outlined a restructuring plan to combat the challenging conditions. AMD will cut its global workforce by roughly 15% which will be completed as soon as the final quarter of 2012. As such, operating expenses are expected to fall another $20 million in the fourth quarter, and $190 million in the full year of 2013. The company will take a restructuring charge of approximately $80 million in the fourth quarter as a result of the measures.

By the end of the third quarter in 2013, AMD expects lo lower its break-even point to $1.3 billion in quarterly revenues.

CEO Read comments, "Our restructuring efforts are decisive actions that positions AMD to compete more effectively and improve our financial results. Reducing our workforce is a difficult, but necessary, step to take advantage of the eventual market recovery and capitalize on growth opportunities for our products outside of the traditional PC market."

Outlook

For the fourth quarter of 2012, AMD expects to see its revenues fall by 9% sequentially. This implies fourth quarter revenues of $1.16 billion, plus or minus 4%. The outlook for the current quarter, falls short of analysts expectations of $1.31 billion.

The guidance implies that AMD expects fourth quarter revenues to fall 31% compared to fourth quarter revenues of $1.69 billion in the fourth quarter of 2011. The guidance implies that AMD is expected to generate full year revenues of $5.4 billion.

Valuation

AMD ended its third quarter with $1.5 billion in cash, equivalents, and short and long term investments. The company operates with $2.0 billion in long term debt, for a net debt position of roughly $500 million.

For the first nine months of 2012, AMD generated revenues of $4.27 billion. The company reported a loss of $710 million, or $0.96 per diluted share. At this rate, the company is expected to generate revenues of $5.4 billion. Full year losses, including the $80 million restructuring charge could reach close to $1 billion.

The market currently values AMD at just $1.5 billion. This values AMD at roughly 0.3 times annual revenues.

Investment Thesis

Year to date, shares of AMD have lost 60% of their value. Shares started the year at $5.50, and have risen some 50% to highs around $8 in March. From that point in time, shares kept falling to levels around $2.20 on Friday.

Shares have lost over 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 writedowns in the final quarter.

The firm's capital position has improved between 2008 and today. AMD cut its net debt position from almost $4 billion in 2008, to $500 million at the moment. The short term prospects remain very dark. Third quarter revenues fell 25% on the year, and for the final quarter AMD guides for a 31% fall in revenues on the year. Consequently, AMD aims to cut 15% of its workforce, equivalent to some 1,750 employees.

Demand for personal computers is falling as users are switching to smartphones and tablets. Research firm Gartner said that global PC shipments fell 8.3% for the third quarter, to 87.5 million units. The PC market is expected to show the first annual decline in shipments since 2001. Earlier this week, Intel (INTC) reported a disappointing set of third quarter results.

As a potential investor, I am quite pleased with the announced job cuts. The one-time restructuring costs seem relatively favorable to the estimated annual synergies. Still it requires a market recovery to make the firm profitable as fourth quarter revenues are guided far below the $1.3 billion future break-even point.

Fortunately AMD has liquidity available, to bridge the transition period. While the near term outlook looks bad, I am impressed with the speed and size of the cuts, making shares worth a gamble around $2 per share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.