AMD Cuts Down Safety Net

On first blush, investors warmed to Advanced Micro Devices'(AMD Quote) plan to sell its flash memory unit in an initial offering.

But will they feel the same way in the morning?

The company will be letting go of a third of its revenue base in return for ending its exposure to violent fluctuations in supply and prices that characterize this commodity memory. Without flash memory, AMD will now be solely a maker of computer microprocessors.

AMD says this was the plan all along with Spansion, the flash unit that it owns along with Fujitsu: "We are executing on a strategy which we embarked on two years ago to make Spansion financially independent," said AMD CFO Bob Rivet during a conference call late Wednesday.

Still, the company didn't float the IPO idea until its flash business caused it to miss Wall Street earnings targets for two straight quarters. AMD's stock has fallen 23% this year.

Now, AMD is left with one front on which to battle Intel(INTC Quote), the world's largest computer chipmaker and AMD's primary rival. Intel gets its chips in four of every five computers sold around the world, but AMD has been fighting back the last few years.

AMD has bolstered its technology and manufacturing capabilities, expanding its production, working harder to be more reliable, and becoming more of an innovator instead of a copier.

The main beneficiaries of these improvements have been AMD's microprocessors. AMD now participates in the server market and designed a chip exclusively for mobile computers. AMD also created a new design for placing more than one processing core on a single piece of silicon.

The net of these improvements has been that AMD's computer chip unit has generated operating profits for AMD during each of the previous seven quarters.

Still, the computing market is maturing -- and that will be glaringly obvious without another product line to shoulder some of the burden.