In “Future Trade: Web 5.0″ what Un-”sexy” stock did Jeff Macke recommend?
I’d play Intel (INTC - Annual Report) says Jeff Macke. It’s not sexy but Intel seems to survive.
Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.
My latest column is up at RealMoney. In it, I explain why I think the recent rally in semiconductor stocks should continue.
First, as I have mentioned before, the supply/demand balance remains favorable.
Second, pricing power appears to be improving, based on the most recent PPI report.
I think the names that will perform best are those whose gross margins are currently depressed, as improving margins would result in accelerating earnings power.
Disclosure: At time of publication, William Trent holds shares of SMH and MXIM, as well as put options against the shares of LRCX.
Disclosure: William Trent has a long position in SMH.
The following is a reprint of my January 23, 2008 RealMoney column.
In October, I wrote a bullish article suggesting that Intel (INTC - Annual Report) had all its ducks in a row. Up until the earnings report this week, the stock was performing more or less in line with the S&P 500. Now, however, it is looking like a bad call.
In hopes of figuring out what went wrong with my thesis, I took a fresh look. I still think Intel is worth buying at these prices, but I would probably wait for a signal that momentum was returning to the name before starting a new position.
One mistake was in accepting what I realized were somewhat aggressive estimates. “According to the Semiconductor Industry Association, the year-over-year sales growth for the industry has ranged from 1.7% to 4.8% over the last six months. For the largest manufacturer to be growing at more than twice the overall industry rate seems somewhat aggressive at first glance,” I noted.
I thought that “since Intel and rival Advanced Micro Devices (AMD - Annual Report) were the first companies to over-order, the first to see the damage it did to their margins, and the first to announce cuts to planned expenditures, it should surprise nobody if they are the first to recover as well.” Compared to most semiconductor makers that was true, but not enough to justify a double-the-industry growth rate.
I also thought the worst would soon be over in semiconductor pricing trends, but things have managed to get worse in the meantime. That said, the industry’s capital spending discipline remains intact – data released yesterday showed that orders for semiconductor equipment were down more than originally reported in November and down 18% year/year in December. As demand gradually catches up to supply, pricing power will improve.
To my credit, I was correct about Intel and AMD seeing a recovery sooner than the overall industry. I noted that “margins for both AMD and Intel are lower than they have been at any time since the depths of the technology bust. A modest improvement from current levels would still leave them well below the normal range, if there is such a thing.” Intel’s margins improved from 52% in September to 58% in the December quarter.
I was also correct to point out improving inventory trends at Intel. Inventory levels declined $132 million sequentially and nearly $1 billion from the December 2006 quarter. Inventory reductions tend to put a damper on margins, so once the excesses are depleted margins should improve further. The inventory reductions also provide a significant (though temporary) boost to cash flow.
You didn’t think I’d write a whole article without coming around to cash flow, did you? But why not? Cash flow is probably the single best reason to consider owning Intel right now. Over the last 12 months, Intel’s free cash flow (cash from operations less capital expenditures) was $7.2 billion, for an effective free cash flow yield of more than 7% on the current enterprise value.
Intel has been letting this cash pile up on its balance sheet in cash and marketable securities that are probably yielding just three or four percent. To me it would be a no-brainer to buy the company’s stock and increase that yield to 7%. I suspect a $7 billion buyback announcement, to be executed promptly, would put some mojo back into the shares.
In the meantime, no matter how much of a value Intel seems to be, the momentum is clearly gone. I would probably want to wait for investors to start recognizing some of the value before jumping in here. Though I am not a technical analyst, measures such as the MACD signal or a close above the 50-day moving average would probably qualify. Alternatively, fundamental momentum in the form of positive earnings revisions could also count.
Another option would be to get paid for waiting by selling out-of-the-money put options. The July 17.50’s were selling for $1.25 at the time of writing. That would provide a 7% six-month return on the money at risk and an effective entry point of $16.25 if the option is exercised.
Disclosure: William Trent has a long position in SMH.
This article is a reprint of my January 7, 2008 RealMoney column.
I have said in other articles that I think the semiconductor industry supply and demand fundamentals argue for positive stock performance out of the group. My general belief is that the semiconductor manufacturers like Intel (INTC - Annual Report) should do better than the semiconductor equipment manufacturers like Applied Materials (AMAT - Annual Report).
Although I think investors can profit from an ETF play like the Semiconductor HOLDRS (SMH) or the ProShares Ultra Semiconductors (USD - Annual Report), I figured it was about time for me to get more specific and try to pick some stocks I think are poised to do even better than the industry as a whole.
The clear winner, in my opinion, is MEMC Electronic Materials (WFR). MEMC is a leading manufacturer of silicon wafers for semiconductor devices and solar cells. Its customers include virtually all of the major semiconductor device manufacturers in the world.
MEMC is benefiting from a shortage of wafers, which has boosted its pricing power and profitability. According to DigiTimes, insufficient supply of polysilicon has spurred the price of silicon wafers so high that solar industry players are considering using scrap wafers that have been already been buried for years.
The tight supply has caused MEMC to drain most of its inventory. Days sales in Inventory (DSI) have plummeted from nearly 70 two years ago to less than 30 in the latest quarter.
Source: Zacks Research Wizard, William A. Trent
What’s more, the short supply is allowing MEMC to enter into highly favorable long-term supply contracts, with pre-determined pricing, on a take or pay basis, customer-advanced funds in the form of a capacity reservation deposit and equity participation in the customer’s business.
On the latest conference call, management said that not only their current capacity, but their planned capacity increases were largely spoken for.
Margins dipped slightly in the September quarter due in part to an incident that caused the company to lose well over a week’s worth of polysilicon production at its
Source: Zacks Research Wizard, William A. Trent
The increasing sales and margins, of course, are causing a steady increase in earnings estimates. Over the last 90 days 2008 EPS estimates have risen from $4.06 per share to $4.19 per share. The Zacks Rank, a measure of earnings revision momentum, is 2. This places MEMC among the top 20% of companies for earnings revision performance.
Of course, even the strongest fundamentals will do investors no good if the stock is overvalued. Fortunately, I don’t think this is the case for WFR.
Over the last 12 months, MEMC generated more than $600 million in free cash flow, giving it a 3.2% free cash flow yield based on the current $18.8 billion enterprise value. This just happens to be right in line with the current yield on 5-year Treasuries.
So why buy a risky investment like MEMC when risk-free Treasuries offer the same yield? Because Treasuries don’t offer growth, and MEMC offers tons of it. The consensus 5-year growth rate is 30%, but based on its return on equity MEMC has a sustainable growth rate of nearly 55% (which happens to be its growth rate over the past five years.)
Heck, even the lowest growth estimate is 13%. I’d take that in today’s market environment.
It’s true that by some measures the stock looks overvalued. For example, it has a price/book ratio of nearly 12x – well above the semiconductor industry average of 2x. A reduction in the valuation multiple would offset some portion of that growth benefit.
Since total return must equal growth plus the change in valuation, let’s assume that over the next five years MEMC grows at the 30% consensus rate but has its price/book shrink to the industry average of 2x. No problem. The growth still overwhelms the change in valuation, and the indicated annual return is 25%.
In my opinion, no other semiconductor player even offers close to that opportunity.
Disclosure: William Trent has a long position in SMH.
The following is a reprint of my December 27, 2007 RealMoney column
Recently I expressed concern that there may be more pain ahead for semiconductor manufacturers. The concern was based on recent sales reports from the semiconductor equipment industry and from the semiconductor equipment industry.
I have noticed that semiconductor stocks tend to perform best when the growth for chips exceeds the order growth for chip equipment. This is simple supply and demand stuff - when the chip sales are growing faster than equipment sales, it indicates demand is growing faster than supply. That means tighter capacity and less pricing pressure over the coming months, which is generally good for profits and by extension the stock prices. The reverse is true when orders for equipment are growing faster than chip sales.
Based on the October data, the equipment orders declined 24.7% year/year in September but only 16% in October. My fear was that the orders were not being cut as much as they had been in recent cycles, and therefore that the up-cycle I have been expecting would be cut short.
I did, however, note some cause for cautious optimism - in particular that the semiconductor industry data are sometimes subject to large revisions. And, lo and behold, the October equipment orders were revised down sharply.
Based on the updated report, equipment orders declined 19.9% in October and 19.4% in November. These data are much more supportive of my original thesis that the next year was likely to be a good one for semiconductor stocks.
Better yet, Gartner Group expects all major segments of capital spending to decline in 2008. Worldwide semiconductor equipment spending is now expected to total $40.3 billion in 2008, a 9.9 percent decrease from 2007 spending of $44.8 billion. (Source: Fabtech).
I don’t always believe reports from the industry analysts, because they are often wrong. I like to use the supply/demand model as a gut-check, allowing me to reconcile the unknown (analyst estimates) with what is known (current leading indicators.) In this particular case, I think Gartner is going to be close to the mark.
So what is the upside for investors? I have charted the performance of the SOX index over the last five “excess demand” cycles - with each one beginning the month after semiconductor sales begin to grow at a faster rate than semiconductor equipment orders. I use a one-month delay because the Semiconductor Industry Association reports monthly sales on a one-month lag, so the chart shows the performance starting at the time the data become available.
From the start of the excess demand cycle to the first month of excess supply, semiconductor stocks did very well in three out of four instances - and the bad time was likely a by-product of the Internet bust. (That explanation is also supported by the fact that the periods of excess supply were bad times for the SOX in three out of the last four instances, with the Internet boom being the one exception.)
Sources: Semiconductor Industry Association, Semiconductor Equipment and Materials International, Yahoo!Finance, compiled by William A. Trent
The current period is much more “normal” than boom/bust for tech. Therefore, I think the normal outcomes are likely to prevail.
But perhaps more enticing is that so far in this cycle the SOX is down nearly 16%. Similar (though slightly worse) interim declines happened in two of the previous cycles, and in both cases were followed by rallies of more than 50% over the following six months.
In general, I favor the semiconductor makers such as Intel (INTC - Annual Report) over the equipment makers such as Applied Materials (AMAT - Annual Report) or KLA-Tencor (KLAC) , because more capex cuts will be needed to restore the supply/demand balance.
Disclosure: William Trent owns shares in the SMH and in Maxim Integrated Circuits (MXIM) and put options on LAM Research (LRCX)
Disclosure: William Trent has a long position in SMH.
My December 4, 2007 RealMoney article:
Recent data points are shaking my confidence in the near-term outlook for semiconductor stocks.
After being bearish for more than a year I had turned cautiously bullish earlier this year because it looked like potential supply (which I measure as orders for new semiconductor equipment) was coming back in line with demand (which I measure as the year/year change in semiconductor revenues. Unfortunately, the latest data show this trend weakening faster than I thought it would.
On Monday, the Semiconductor Industry Association (SIA) released their sales report for October, saying worldwide semiconductor sales rose to $23.1 billion, an increase of 5 percent over the $22 billion reported in October 2006 and 2 percent higher than the $22.6 billion reported in September of this year.
That 5.0% sales increase year/year was a slight decline from the 5.8% year/year growth reported a month ago but was still the second-best growth reported since January. Taken alone, I wouldn’t consider this report troubling in terms of the supply/demand balance as it shows stable if not slightly improving demand trends.
However, on November 15 Semiconductor Equipment and Materials International (SEMI) released their October book/bill report for semiconductor equipment orders and sales. The bookings figure was flat with the final September 2007 level of $1.24 billion and 16 percent less than the $1.47 billion in orders posted in October 2006.
The fact that demand growth (up 5%) was greater than supply growth (down 16%) is generally supportive of positive performance for semiconductor stocks. The performance of the SOX index during the last five periods in which such conditions prevailed is presented below.
Sources: SIA, SEMI, William A. Trent
In each of the periods other than 2001/2002 the excess demand growth relative to supply resulted in positive returns for the SOX. Unfortunately, the current period to date most resembles 2001/2002. That similarity is also noticeable when looking at the size of the relative peaks and troughs in supply/demand balance.
Sources: SIA, SEMI, William A. Trent
As the chart illustrates, there is typically a fair degree of symmetry between subsequent peaks and troughs, which is only natural because over time one would expect balanced supply and demand.
That 2001 peak in excess demand, however, occurred quickly and was shallow relative to the long, drawn-out period of excess supply that preceded it. So far in 2007, the chart is looking very similar. If the relationship continues to hold, it could be some time before semiconductor stocks again experience the normal cyclical upswing.
There are still some reasons for cautious optimism. For one thing, the semiconductor industry data are sometimes subject to large revisions. With that in mind, I’m not going to get too hung up on the data released in a given month.
Furthermore, recent forecasts have continued to show a cautious approach to adding capacity. Gartner Dataquest forecast that 2008 capital investments by the four largest foundries will decline 9.6% year-on-year. The largest foundries are Taiwan Semiconductor (TSM), United Microelectronics (UMC), Chartered Semiconductor (CHRT) and Semiconductor Manufacturing International (SMI).
Also, according to a Friedman Billings Ramsey analyst, capital spending in the DRAM sector is expected to fall by more than 30 percent in 2008. Leading players in this market include Samsung (SSNLF), Qimonda (QI), Hynix (HXSCF), and Micron (MU - Annual Report).
Together foundries and DRAM have been responsible for a good deal of the total capex and their caution ahead increases the chances of supply and demand returning to balance.
However, given the current state of the economy and the seasonal factors that should have helped demand in October and November, I’m glad I have my long position in the Semiconductor HOLDRS (SMH) offset by a put option on equipment maker LAM Research (LRCX).
In general, I favor the semiconductor makers like Intel (INTC - Annual Report) over the equipment makers like Applied Materials (AMAT - Annual Report) or KLA-Tencor, due to the fact that more capex cuts will be needed to restore the supply/demand balance.
Disclosure: William Trent is long SMH and holds put options against LAM Research (LRCX)
Disclosure: William Trent has a long position in SMH.
This article was originally published at RealMoney on October 10, 2007.
Intel Corp. (INTC - Annual Report) is scheduled to report earnings today, October 16. The consensus among sell side analysts is that the company will report sales of $9.6 billion (up 10% year/year) and earnings per share of $0.30. This puts the average analyst daringly close to the precise midpoint of the guidance Intel provided as its mid-quarter update.
According to the Semiconductor Industry Association (SIA), over the last six months the year/year sales growth for the overall semiconductor industry has ranged from 1.7% to 4.8%. For the largest manufacturer to be growing at more than twice the overall industry rate seems at first glance to be somewhat aggressive.
However, the nadir in industry sales was in June, and the growth rate has been picking up steadily since then. Furthermore, the industry as a whole has been more disciplined about adding capacity. After more than a year of ordering more chip producing equipment than was needed to satisfy demand from customers, the last six months have seen orders for new equipment being placed at a far slower rate. In fact, sales of semiconductors in August grew 4.8%, while orders for new equipment saw a 19.4% decline year on year.
Since pricing is determined by supply and demand, when demand is growing at a faster rate than supply it should be good for pricing, margins and the stocks – subject to a lag between the time equipment is ordered and when it is installed. Last month, when the PPI data showed a poor pricing environment for semiconductors (see the chart of year/year price changes below) I said “I happen to believe the worst will soon be over for semiconductors.” The reason for my belief is that this year’s poor pricing environment stemmed from last year’s over-ordering of equipment, so this year’s thriftiness should start to improve pricing sometime soon.
Source: Bureau of Labor Statistics
Furthermore, since Intel and rival Advanced Micro Devices (AMD - Annual Report) were the first companies to over-order, the first to see the damage it did to their margins, and the first to announce cuts to planned expenditures, it should surprise nobody if they are the first to recover as well.
Finally, addressing the issue of whether the guidance is too aggressive, a look at the historical data suggests otherwise. Margins for both AMD and Intel are lower than they have been at any time since the depths of the technology bust. A modest improvement from current levels would still leave them well below the normal range, if there is such a thing.
Source: Zacks Research Wizard
Finally, I looked at inventory levels to see how supply and demand were trending at the company level. For Intel, at least, the inventory levels appear to be drifting back toward normal.
Source: Zacks Research Wizard
Stock performance following the report may come down to the December quarter guidance relative to expectations. There, too, however, the consensus appears beatable. Current estimates call for $10.4 billion in sales, which is just a 7.5% year/year rise. Given the acceleration in industry growth, that rate may well be in line with the overall industry rate despite the aforementioned justification for Intel to lead the group up.
With company inventory levels having peaked, margins potentially having troughed and overall industry health looking likely to improve, I believe Intel’s guidance is not aggressive, and may even be conservative.
Disclosure: William Trent has a long position in SMH.
I warned most of last year that building oversupply would harm pricing for semiconductors, and the latest PPI data bear that out.
Pricing is the worst it has been since late 2003, which in turn was the worst it has ever been. But I think the fundamental outlook is improving, and my updated supply and demand model shows that late 2003 was actually quite a good time to own semiconductor stocks. You can never be too sure, though, so I decided to review the recent conference calls from a broad range of semiconductor manufacturers to get their sense of market conditions.
Intel (INTC - Annual Report) is seeing a shift in where the pricing pressure is coming.
Now, as far as the pricing environment. It was a more competitive pricing environment than we thought in Q2, and we expect it to continue to be somewhat competitive which is what you’re seeing in our margin outlook for the year. We believe the best defense against the competitive price environment is better product.
If you look at what’s happening with us the last year, you’ve seen better products quarter by quarter by quarter. You’ve seen improved product differentiation, 45 nanometer coming out; the Penryn product family, as Paul talked about. So what you’re seeing is Intel’s commitment and focus to making our products better and better and better which is the best defense we have in a competitive pricing situation.
Glen Yeung - Citigroup
Andy, is the pricing pressure the same now as it has been all year? Is it getting worse or getting better?
Paul Otellini
I would say it is different, Glen. It is much more targeted now at the low end of the desktop and even a little bit of the notebook marketplace, and a year ago it was higher in the stacks in many areas.
(Excerpt from full INTC conference call transcript)
Altera (ALTR) is deciding that in some cases they just won’t take it anymore.
There are pieces of business that we do look at, that we do turn down, because we don’t think that they are profitable today or will ever be profitable pieces of business for us to entertain. As an example in Q1 we looked at two pieces of consumer business, where the pricing expectation and requirement for the customer was not something that we could support. And so, we told the customer, we were not interested in participating in the business going forward.
(Excerpt from full ALTR conference call transcript)
Texas Instruments (TXN - Annual Report) wants to avoid competition where possible.
Jim Covello - Goldman Sachs
Okay. And then maybe my final question. Just on the analog side, you guys are obviously doing a terrific job picking up share. You talked at the Analyst Meeting in very clear terms about the strategy for doing that and a lot of the share gain is kind of coming from that third bucket you described at the Analyst Meeting, the smaller customers where you have the scale and mask to you need to go after customers that maybe your competitors don’t have the same scale and mask to go after. What kind of competitive response are you expecting from the rest of the analog industry, as they try and stop you guys on your continued share gain impact? Thanks a lot.
Kevin March
Jim I guess, I would comment on that, we have already been seeing competitive response but I think the difficulty for our competitors again has to do with scale, that is we have a sales force that is such that we can just simply touch a lot more customers than any of our competitors can touch at a one point in time. We added to that the breath of our total product offering that we have and we can literally solve almost any problem that a customer may have on a particular Board that they’re may be designing, which allows them to really solve their problem fairly quickly with solutions that we have as opposed to having multiple vendors in. Those are probably two elements of the position that we enjoy today and we’ll enjoy in the future that we would expect to be quite difficult for our competitors to really be able to overcome, so we remained confident that our objectives to growing our positions in analog are really pretty solid and within our reach.
(Excerpt from full TXN conference call transcript)
All in all, it seems that management teams are seeing the competitive pressures that are reflected in the PPI, and are responding to them. Their response, I believe, will improve the industry’s fundamental balance and result in better pricing and better stock prices.
Disclosure: William Trent holds put options on the shares of Lam Research (LRCX) and has a short position in put options related to the Semiconductor HOLDRs ETF (SMH).
William Trent currently owns put options against the shares of Lam Research (LRCX).
Last year the companies in the memory segment of the semiconductor industry were working flat out in anticipation of rising demand on the heels of Microsoft’s Windows Vista release. At one point last year they accounted for a significant portion of the investments in new semiconductor equipment as well. With the memory situation now more generally recognized as a glut and more rational investment plans being put into place, some memory prices are actually rising. I decided to take a look at the recent conference calls for some of the most exposed companies to see if there is anything noteworthy to report.
STMicroelectronics (STM) is the third-largest supplier of NOR flash memory and is combining its memory business with that of Intel (INTC - Annual Report) into a joint venture to be known as Numonyx. Flash was not their strongest segment, partly due to temporary customer issues.
Carlo Ferro
Good afternoon, everybody. This is not frankly a particular quarter for pricing pressure on flash when including both NOR and NAND. We’re used to this kind of pressure, which is in the mid-single-digit range. What maybe is somehow peculiar, has been somehow peculiar is that the price pressure on NOR has been somehow higher than price pressure on NAND.
Carlo Bozotti
Yes, but the major issue in Q2 on flash was volume and specifically in the wireless and of course a specific customer where our presence is very important and I think that the major issue that we had was the lack of volume at this customer, or at that customer.
(Excerpt from full STM conference call transcript)
Nokia (NOK) is the largest customer for STMicroelectronics, accounting for about 20% of sales. Last week Nokia announced they would be sending even more business to STM, and STM shares rose on the announcement. I think STM has generally been making the right moves.
SanDisk (SNDK - Annual Report) is one of the world’s largest suppliers of flash-based data storage products for the consumer, mobile communications, and industrial markets. SanDisk is hopeful the industry has hit bottom for this cycle.
The second quarter started under very difficult market conditions but improved markedly as the quarter progressed. April and May were characterized by excess supply, but July is coming to balance and during the distinct possibility the demand for high capacity flash products may outstrip industry wide supply in the second half of this year.
(Excerpt from full SNDK conference call transcript)
Micron (MU - Annual Report) did not sound quite as confident - call it cautious optimism. Micron is a leading manufacturer of both DRAM and flash memory.
The major factors affecting this quarter’s results were, one: significant growth in industry memory supply, which caused average selling price erosion across DRAM and NAND memory; two: noteworthy cost per megabit reductions achieved by the company for its DRAM and NAND devices, which could not keep pace with ASP declines, and three: progress made on reductions and overhead expenditures….
Despite the demand strength and encouraging signs pointing to stronger demand in the second half of the calendar year, the memory business in particular has been under profitability pressure due to persistent oversupply. Moving forward, I am optimistic about a more favorable supply/demand balance as we see the impacts of memory content expansion, new end product introductions, seasonal demand upticks, and a slowing industry-wide output growth rate.
(Excerpt from full MU conference call transcript)
Finally, I turn to one of the companies most at risk should capital spending subside - Lam Research (LRCX). They sound optimistic, but I’m not so sure.
We expect that foundry shipments for Lam will be weak in the September quarter as a function of the pull-ins to June and we expect that shipments in foundry will strengthen in the December quarter. Shipments for Logic, Flash other and MPU are expected to be flat in the second half compared with the first half.
Turning to 2008, as we discussed at our Analyst Meeting last week, we believe that 50% CapEx intensity and memory is not sustainable existing 2007, and in fact the rated capacity additions has already begun to slow. The depth and duration of this reduction in capacity additions will be dictated by the actual demand environment as we go forward in the next 6 to 12 months.
Demand trends to watch here included adoption rates of major products such Vista and the iPhone, as well as, the overall demand for the broad range of other semiconductor intensive consumer digital electronic products.
As we move into 2008 it will also be important to watch the conversion of 200 millimeter memory production to 300 millimeter as memory manufactures ability to generate acceptable profits of 200 millimeter will force additional production to move to 300 millimeter.
Based on current industry dynamics, our very early assessment for calendar year 2008 is that overall wafer side equipment spending is likely to be flattish with memory spending to be down potentially 10% to 15%, and an expectation that foundry logic/other and MPU spending will increase sufficiently to offset the decline in memory spending.
(Excerpt from full LRCX conference call transcript)
Lam got 73% of its revenue from the sale of equipment to memory chip makers in the last quarter. If three quarters of the business declines 10% to 15%, for the overall business to remain flat the remainder would have to grow from 27% to 39%. Semiconductor sales growth has averaged high single-digit, and most forecasts I have seen for semi equipment over the next two years are in that range as well. I think the guidance is too optimistic.
Disclosure: William Trent owns put options against shares of Lam Research (LRCX) and has a short position in put options related to the Semiconductor HOLDRS (SMH) ETF.
William Trent currently owns put options against the shares of Lam Research (LRCX).
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
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:
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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