Investors Reading Too Much Into AMD's 'Plea' To Private Equity

| About: Advanced Micro (AMD)

Our preview of earnings for Advanced Micro Devices (NASDAQ:AMD):

Expected to lose $0.46 on $1.34 billion in sales this quarter and $0.36 on $1.35 billion next.

Given how disastrous the current outlook is, we may be getting near the bottom for estimates. Valuation, however, remains questionable. We hate negative P/E multiples.

Like many prognostications, we didn’t call things exactly right.

AMD Reports First Quarter Results:

AMD (AMD) today reported financial results for the quarter ended March 31, 2007. AMD reported first quarter 2007 revenue of $1.233 billion, an operating loss of $504 million, and a net loss of $611 million, or $1.11 per share. These results include ATI acquisition-related and integration charges of $113 million, or $0.21 per share, and employee stock-based compensation expense of $28 million, or $0.05 per share.

Maybe now we’re closer to a bottom.

First quarter 2007 gross margin was 31 percent, excluding stock-based compensation expense and acquisition-related charges, compared to 40 percent in the fourth quarter of 2006 and 59 percent in the first quarter of 2006. The decrease from the prior quarter was largely due to significantly lower microprocessor unit shipments, lower microprocessor average selling prices [ASPs], and the inclusion of the former ATI operations, which generally have lower-margin products, for the entire quarter.

Selling fewer items at lower prices is seldom a recipe for success. Guidance, meanwhile, was cryptic:

In the seasonally down second quarter, AMD expects revenue to be flat to slightly up.

Well, consensus was correct about the “flat to slightly up” part. The only thing is, it is off the $1.233 billion base rather than the $1.34 that had been expected.

As to the questionable valuation, AMD took a page from Linear Technology’s (NASDAQ:LLTC) book and dangled the prospect of huge share purchases in front of investors, according to

Executives said the company was evaluating various “asset-light” options, which involve outsourcing portions of chip fabrication to third parties instead of building multibillion-dollar facilities, and noted that the company was not averse to seeking shelter from the rigors of the public markets through a private-equity deal.

We think investors are reading too much into this in the wake of the Linear-inspired giddiness. Linear actually had the cash to do half its buyback and tons of cash flow with which to finance the remainder. AMD, by contrast, is running out of cash - which is why it needs capital in the first place, public or private.

Turning to the more mundane task of sifting through the mess that is AMD’s financial statements, inventories managed to grow 15% sequentially and have now nearly tripled on a year/year basis. They can cover 106 days worth of sales with what they now have on hand, but remember - the value of the inventory on hand declines almost daily. “Deferred income on shipments to distributors,” also known as “channel inventory,” would cover another 20 days. Forget “asset light” - AMD shouldn’t need to spend another dime on capacity for some time.

AMD shed nearly $400 million of cash during the quarter, to end with less than $1.2 billion. A couple more quarters like this and they’ll be looking for subprime lenders rather than private equity buyers.

AMD 1-yr chart:

AMD 1-yr chart

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Tagged: , Semiconductor - Broad Line, Earnings
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