AMD Asset Smart Caught In A Catch 22

Mountain House (CA) - AMD’s Q1 presentation was different from what we had heard in the past five quarters. The bleeding is still substantial and there is little doubt about it stopping during Q2. But AMD executives have changed their tone. They were less apologetic about their misses and took a firm stance against analysts, like there was an ace up their sleeve. That ace appeared to be the company’s Asset Light, or “Asset Smart” strategy, which the CEO declined to talk about. In fact, he can’t talk about it: According to industry sources, Asset Smart is caught in a Catch 22: It can only be brought forward if AMD has a profitable quarter with which to free up the cash to invest.

Analysts played a cat-and-mouse-game with AMD’s executives during the conference call, trying to chase down some sign for good news in AMD’s future. The company confirmed that it is going ahead with its restructuring plan and indicated they may sell non-core businesses (for example, possibly their consumer electronics business) soon. But they remained tight-lipped about what analysts were interested most and what is generally believed will bring a dramatic change in the way AMD operates and creates new products: Asset Light (or Asset Smart, depending on the executive or analyst you ask). Here are some examples:

Krishna Shankar (analyst, JMP Securities): "(...) you talked about the asset light strategy and having details on that soon. (...) can you give us a little more clarity on what asset light might look like, either in terms of share ownership of a fab or AMD becoming to some extent fab-less? I just want a little more color on your asset light strategy.
Hector Ruiz (AMD: chairman, CEO): "I know you would like it and I feel terrible that I can’t provide you details that I would love to and I hope to do it soon, but the obvious thing is that what gives us an opportunity to do things creative is the fact that we have incredibly strong world-class benchmark manufacturing assets and at this point in time, and I hope to tell you more soon."

Tim Luke (analyst, Lehman Brothers): "(...) in framing your expectations that you thought you might be able to provide some incremental color on asset light in the near future, should we think about that being so by the time you get to the call in July being the next sort of near future, near-term event, that will be when you might be looking to have news to share or do you think there is potential for it to move out beyond into the second half of the calendar year?"
Ruiz: "Good try, Tim, good try. You know, I am not really trying to be evasive but I think we are truly tremendous progress in this area and I - I do not want to be flippant but to me, near future is any time in the next 90 days to the rest of the year. I can’t call you any closer than that."

Ross Seymore (analyst, Deutsche Bank): "(...) I believe we’ve just hit the one-year anniversary of hearing about the asset smart or fab light strategy and really haven’t seen much to do with it. I know it’s a difficult and complex strategy. Is there any reason to believe that that scrutiny of your core and non-core businesses would happen any sooner than that sort of one-year anniversary we’ve already run into on the fab light side?"
Ruiz: "I can assure you that it will happen a lot sooner."

Chief financial officer Bob rivet mentioned during the conference call that the company calls its current business model "pre-Asset Smart".

Yesterday, we published an in-depth article on the background of Asset Smart-Asset Light and taking the implications of this program into consideration, you may be wondering why AMD is holding back? Well, there may be a very good reason.

The company has launched a serious cost-cutting initiative with the goal to drop their breakeven point from the currently (unconfirmed) $2 billion to a confirmed $1.5 billion in quarterly revenue. Achieving this goal is a requirement for Asset Smart-Asset Light to go ahead and so we should not expect an announcement before breakeven happens. Plain and simple: AMD has to bring in a profit in order to have a strong position in any negotiations with investors, such as Mubadala Abu Dhabi (MAD).

According to our sources, AMD’s "Asset Lite-Asset Smart" strategy will not be executed unless the company is in a much stronger position for any investment negotiations - as was the case with Fab25/FASL LLC/Spansion LLC/Spansion Inc. AMD and MAD AMD are in the future, but Ruiz won’t use the red phone until AMD can prove that it can stand on its own.

In short: With no profit, AMD is stuck in pre-Asset Smart. Cost reductions and greater availability of the B3 Barcelonas will improve AMD’s margins and the company to stand by its goal to return into the black in the second half of this year.

Asset Lite-Asset Smart is enables investors to acquire at least a portion of AMD’s own crown jewels, something that might be considered AMD’s core-core business. AMD’s facilities have a great reputation. Remember: This small company had a 20-percent market share with Fab 30, a single 200mm wafer foundry, versus Intel’s long list of fabs. However, AMD is now making preparations for a sale: During the conference call, AMD confirmed that it is continuing with its policy of buying shares of AMD Saxony from its partners. The reason is very simple: If AMD controls 100-percent of the Fab36/38 complex (government and state subsidies excluded), more money will remain with AMD, instead of flying to financial institutions in Europe. AMD did not disclose how much of AMD Saxony LLC is in the hands of foreign investors, but AMD has to earn a lot of money to buy them out entirely.

There was a positive note in the call as well: AMD shipped half a million quad-core processors in Q1 2008, about 100.000 units more than in Q4 2007. B3 processors have been produced in the final 13 weeks during the quarter - which means that the manufacturing of revision processors began in January.