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AMD On Track To Report A Profit For Q3

By - Source: Tom's Hardware | B 9 comments

Zelenograd (Russia) - Remember AMD’s promise to return to profitability in the third quarter of this year? You may be wondering how this will be possible considering the fact that the company has lost money over the past seven quarters, including $269 million in Q2 2008, and no big bucks advances against Intel are in sight. But we are certain that AMD in fact will report a huge profit for the third quarter that may not originate from hugely increased product sales, but will create the foundation for the much anticipated announcement of AMD’s "Asset Smart".

There has been much talk about AMD’s return into the black over the past seven quarters, which, in aggregate, brought AMD losses of $5.14 billion (including charges). AMD’s numbers became somewhat predictable, if we followed analyst CPU sales forecasts and the company’s claims that it would need at least $2.0 billion in revenue per quarter to return a profit. Cost reductions including layoffs recently took that number down into the $1.6 - $1.7 billion range and AMD plans to cut the requirement to close to $1.5 billion in order to be able to break even.

And even that may be a bit optimistic at the time, as the company brought in only $1.3 billion in Q2, but $1.5 billion in Q1. But a breakeven is a generally believed requirement for the company to announce "Assert Smart", a move that is expected to split AMD into a manufacturing company and a fabless chip development firm. While production numbers of the quad-core Opteron are improving and the ATI has delivered a fantastic graphics chip, there is at least some doubt that regular sales would allow AMD to become profitable again in Q3, especially if we consider the aggressive pricing of Phenom processors and our own impression that the company’s latest Puma platform is showing up in far less Back-to-school notebooks than we would have expected.

And still, there is little doubt that AMD in fact will announce a profit for Q3.

Why? Simple: AMD has just sold its 200 mm wafer equipment to JSC Angstrem, a Russian semiconductor manufacturer. Earlier this year, JSC Angstrem bought 130 nm CMOS equipment from Fab 30 in Dresden for about $190 million. With this part of the deal, JSC has all of the components to start manufacturing computer chips.

There is some doubt about how much money changed hands during the deal and AMD Europe declined to release any numbers. But JSC Angstrem did. CEO Anatoly Soukhaparov told German newspaper SZ-Online that the company recently received a 815 million Euro loan, the "majority" of which is spent on the AMD manufacturing equipment as well as AMD CMOS technology that was developed in Dresden, Germany. We leave it up to you to guess what "majority" really means, but 815 million Euro translates into $1.2 billion at the current exchange rate. This would mean that AMD will get at least $600 million, $190 million of which have been accounted for in AMD’s Q2 result. That leaves potentially more than $400 million for Q3.

We generally would expect AMD’s revenue to seasonally improve from Q3 and the loss from continuing operations to decline, which leaves AMD with lots of room to return into the black for Q3.

According to Soukhaparov, Angstrem plans to start manufacturing chips in late 2009. It seems that the idea is to create a Russian version of Silicon Valley. Zelenograd, by the way, translates to "Green city".

Angstrem is expected to produce Bluetooth, USB, Wi-Fi and similar controller chips, which is seen as way to collect experience and knowledge in modern chip manufacturing. However, the deal between AMD and JSC Angstrem is not done. Soukhaparov also stated that the company is negotiating with the U.S. and EU governments to win approvals to import 90 nm processing technology as well. The executive expects that the 90nm deal could close in couple of years and AMD will continue to supply JSC Angstrem with 90nm equipment from Fab 36, resulting in additional revenues for AMD.

It appears that AMD will be spending the windfall on its Fab30-to-38 conversion, which will turn AMD’s Fab30 into a 45 nm 300 mm Fab from the current 90nm 200mm facility.

Some may call this sale of manufacturing equipment to achieve profitability cheating and it is certainly not the type of profitability we would have expected when CEO Hector Ruiz promised that the company would return a profit in Q3. But if it is necessary for the company to stand up again and follow through with its "Asset Smart" plan, that that is fine with us.

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  • 1 Hide
    JeanLuc , August 19, 2008 12:43 PM
    Wolfgang, AMD will report it's sales of it's Dresden asset in its results but it won't effect it trading profit. When AMD releases it's full accounts for the year the sale of the plant will be in it's balance sheet not it's Profit and Loss statement.

    A more accurate phrase would be to say 'AMD to receive massive cash injection from the sale of its fabrication plant.' However cash and profit are two completely separate things.
  • 0 Hide
    JeanLuc , August 19, 2008 12:45 PM
    I should point out the sale could effect AMD's profits in as much as if the plant was pure overhead and wasn't profitable, profit will be increased by the value of it's overhead (if any).

    Why can't you edit your own comments?
  • 0 Hide
    jevon , August 19, 2008 1:24 PM
    I was going to say basically the same thing JeanLuc, that the only way I believe this will be impacting 'profitability' is by reducing company overhead created at the fab - assuming a loss/profitability there. Otherwise, this is a cash increase.
  • 0 Hide
    Anonymous , August 19, 2008 4:55 PM
    The cash injection from divesting the chip plant won't increase profitability..but it will surely help to cut fixed costs which will eventually help AMD to breakeven early and increase profits...also layoffs will help AMD to cut costs which will increase its profitability...the only way AMD can increase profits through cutting costs and managing gearing.prices can never be increased in this highly competitive market....must put great emphasis on Lean management and Six Sigma
  • 0 Hide
    Anonymous , August 19, 2008 6:33 PM
    Almost looked like AMD was going to do some KAMIKAZE for a while!

    It did some great moves against NVIDIA; but it's basically taking on 2 monster firms namely Intel and Nvidia.
    If it's not careful it might get liquidated very soon...
  • 0 Hide
    Anonymous , August 19, 2008 7:28 PM
    Jeanluc - while your comment on profitability is theoretically correct, AMD already used 200Mil in equipment sales in Q2 and recorded it in a way that bumped up their net income and operating margin (which you wouldn't typically do with a one time asset sale). While technically legal, it is obviously very misleading, especially on the gross margin piece - however most analysts recognized this and stripped out the impact of the sales when evaluating the company.

    If AMD's 'goal' is SUSTAINED profitability and not just making the numbers work out, one would think they wouldn't play these rather obvious games, but frankly it will work on most of the media in pulling the wool over there eyes.
  • 0 Hide
    ravenware , August 19, 2008 8:14 PM
    What was being manufactured on the 200 mm wafer equipment?
  • 0 Hide
    V3NOM , August 22, 2008 8:54 AM
    cpu's i would assume...
  • 0 Hide
    V3NOM , August 22, 2008 8:55 AM
    what fab are AMD making GPU's? is it some seperate company actually producing them or...