AMD On Track To Report A Profit For Q3

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.