AMD: Advanced Micro Devices Expenses Look Out of Control
AMD (AMD - Annual Report) reported financial results for the quarter ended June 30, 2007. AMD reported second quarter 2007 revenue of $1.378 billion, an operating loss of $457 million, and a net loss of $600 million, or $1.09 per share. This compared with analyst expectations of a loss of $0.85 on $1.26 billion in sales.
When I previewed earnings, I said its hard to see how it could get any worse, but if anyone can pull it off…. So let’s take a look at how they managed to do it.
The Good News
- Revenue was up 13% from last year
- Gross margins of 33% were up sequentially from 28%
- $130 million of their expenses were what they consider to be exclusion-worthy (although I wouldn’t give them credit for the $31 million in stock-based compensation.)
The Bad News
The bad news starts with gross margins. Although they were up sequentially, they were down from the near-record 57% the company reported in the year-ago quarter. One would expect the opposite when revenues rise in a capital-intensive industry. But looking back longer-term, it is last year that looks like the anomaly, not this one.
Moving on to operating expenses, AMD reported $461 million in gross profit, from which was deducted $475 million for research and development (uh-oh!), $365 million for marketing, general and administrative expenses and $78 million of acquisition related charges that were included in the $130 million non-recurring charges ($99 million by my accounting) noted above.
That leaves us with an operating loss of $457 million, or $358 million if you exclude the expenses management and I agree are non-recurring. That leads me to a couple of observations about AMD’s prospects:
- Even if AMD were to recover to last year’s near-record gross margin level they would have lost more than $33 million. How can their expenses be set at a level that is unprofitable in the best of times?
- If the chart above is correct and 33% is a more normal gross margin, at the current level of operating expenses they will need to increase revenue by nearly 80% just to break even.
The stock is in a relief rally because investors expected AMD’s margins to be creamed after Intel’s (INTC - Annual Report) results. I think if investors took a closer look the last thing they would feel is relief.
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That peak in R&D expenses for AMD in the 2nd half of 2006… That’s not an abnormality.
Maybe you overlooked the little fact that that was the exact time they MERGED WITH ATI.
They acquired ATI and all their expenses in the 2nd half of 2006.
Do some research man before you post such junk.
Geesh.
Actually, the research is there if you take the time to read it.
That had nothing to do with the second half of 2006. It was the second quarter of 2007. While it would be worthwhile to analyze any in-process R&D charges separately, there were none in that quarter and at any rate would be included in the $99 million added back.
The only thing that peaked in the second half of 2006 was profitability, which is what I show on the chart. Profits now look normal, which in AMD’s case means low.