AMD hits a roadblock in road to recovery

IDG News Service - Advanced Micro Devices hit a roadblock on its path to profitability during the second fiscal quarter, with an aging inventory of old chips and falling PC prices holding the company hostage, analysts said on Wednesday.

AMD on Tuesday narrowed its net loss during the second fiscal quarter of 2009 compared to last year, but the company's revenue was flat over the first quarter--a relevant comparison since last year AMD owned a manufacturing unit that was spun off into a separate company. Analysts said that AMD underperformed, especially when compared to archrival Intel, which a few days earlier reported a sequential revenue increase of US$879 million.

Pricing pressure, factory underutilization and an inventory of aging chips partly affected profit margins, said Dirk Meyer, AMD's CEO, during a conference call on Tuesday to discuss the results. The company exceeded revenue expectations, but the gross margin "was disappointing," Meyer said.

Gross margins are an important measure for chip makers as they show a company's profitability after absorbing business costs. Weak gross margins reflect poor profit margins on products, and that could delay AMD's efforts to become profitable, analysts said.

"Advanced Micro Devices reported disappointing second quarter results yesterday due to unusually weak gross margins," said Craig Berger and Robert Pikover, financial analysts at FBR Capital Markets, in a research note issued on Wednesday.

The recession has forced many consumers to trade down to inexpensive laptops, which has affected the pricing of microprocessors, said David Wu, an analyst with Global Crown Capital. That has materially affected the margins of chip companies like AMD and Intel, but Intel has deeper pockets to bear the brunt of such an impact, he said.

AMD is also feeling the pressure of reduced laptop shipments, said John Spooner, senior analyst at Technology Business Research. Because the demand for laptops has slowed, chip makers like AMD have dropped chip prices to attract more buyers.

"Even more difficult for [chip] companies is end-users are purchasing less notebooks in general. It reflects on the margins," Spooner said. But the good news is AMD could see shipments increase as it is getting more chip orders from PC makers, he said.

Margins also took a hit because of sales of aging chips, which dominated AMD's shipments, analysts said. The company unloaded old chips manufactured using the 65-nanometer process, causing a drop in margins, analysts said. The company is still moving operations to the upgraded 45-nanometer process, which should lead to faster and more power-efficient chips at a lower cost.

Intel on the other hand has already moved to the 45-nanometer process, and is on track for the 32-nm process by the end of this year. Intel's lead in manufacturing technology could continue to pressure AMD's pricing in CPUs and graphics processing units (GPUs), wrote Doug Freedman, an analyst with Broadpoint AmTech, in a research report issued on Wednesday.