Do or Die: AMD Moves Away From PCs Amid Steep Losses
Historically, AMD has surprised analysts and investors with a better than expected quarter result in 20 of the past 48 earnings calls. Today's was not one of those calls, but there was still a surprise.
The plain numbers of AMD's Q3 result look dramatic. Revenue of $1.27 billion was down 10 percent sequentially and 25 percent year over year. The net loss was $157 million compared to a net profit of $97 million in Q3 2011. Rory Read, who has been CEO of AMD since August 2011, released the following statement as comment:
"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 advantage 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."
Lowering the cost of the business model has, of course, to do with layoffs. Subjectively, AMD has been in restructuring since the time Read joined the company. About 1,400 people were laid off beginning in November of last year and there has been an ongoing replacement program for people who left AMD over the past year, shaking up AMD's on-hand talent in virtually all business fields. About a year ago, AMD employed a head count of 11,737 at the end of June. This restructuring round will bring the head count down 15 percent to just under 10,000 people. AMD expects to save about $190 million per year as a result.
Read explained during the earnings call that the entire cost reduction approach is targeted to help AMD achieve a lower breakeven point at $1.3 billion revenue per quarter. He expects the company to achieve this revenue base by Q3 2013, which means that there will be four more quarters of expected losses for AMD - which is not necessarily a safe game, given AMD's deteriorating cash. The company has $1.3 billion available, down from $1.58 billion three months ago. If the decline gets even worse, AMD could be in serious trouble.
However, Read said that he understands what the problem is and there is a strategy in place to fix it. While the company was able to gain some market share in mainstream notebooks, according to the executive, lower end PC sales are very weak at this time, while tablet sales are growing quickly. He also echoed Intel's note that vendors are taking a cautious approach toward the launch of Windows 8. Both AMD and Intel are not exactly enthusiastic about the Windows 8 launch opportunity, which will most certainly increase the concerns over Windows 8's ability to relight the fire of the PC market.
Reads idea is to be less vulnerable to those problems, especially because he does not believe that the PC market will return to normal growth for "several quarters". As a result, he is not only reducing AMD's cost, he is also moving away from the PC market as a whole. "40 to 50 percent" of AMD's future business will not be focused on PCs. Instead, he will aim half of AMD's business three areas: At servers, which will leverage AMD's own CPUs, "third-party" CPUs, and will count on SeaMicro's server fabric to provide custom solutions. Another area will be "semi-custom" APUs for the gaming, industrial and communications market and AMD will be aiming its APUs at ultramobile devices. Despite the reduced headcount, Read believes this is possible by reusing its technology across more platforms and by simplifying product development cycles.
Will it work? Your guess is as good as any, but Read says that his recipe will work by Q3 2013. So, he has given himself and the new AMD about a year. If it does not work, AMD will have run out of money and confidence - and potentially beyond repair.