AMD Pinches Pennies on Road to Comeback
SAN FRANCISCO --
Advanced Micro Devices
(AMD) - Get Report
has made it clear it will cut costs.
The problem may be it's the only thing AMD can really do.
As the struggling chipmaker reassured investors that its turnaround remains on track Thursday, there were signs that the company still has a long way to go in its quest to revive its fortunes.
AMD's stock was off 2 cents at $6.17 in midday trading Friday, amid a broad market rally, that lifted the
Dow Jones Industrial Average
more than 250 points.
Now that AMD has gotten its much-delayed quad-core processors out the door, the stage should be set for sales to accelerate. After competing with a stale product lineup for months, and allowing
Intel
(INTC) - Get Report
to grab market share, AMD's sales team finally has something new to offer customers.
And the easy revenue comparisons from prior quarters give AMD plenty of headroom to outgrow the market.
Yet the company's
sales forecast for the second quarter calls for only seasonal growth
.
AMD's credibility with the Street is in tatters, so it's understandable that management would set a conservative target rather than risk another big miss.
But the implications of the guidance, should AMD's cautious outlook ultimately prove correct, are not encouraging.
With only a couple quarters to go until both AMD and Intel release their next-generation microprocessors, the window of opportunity is closing for AMD's quad-core chips to provide any kind of significant sales boost.
"To get more excited about the story longer term, it's really about bringing products to the marketplace that add value," says Michael McConnel, an analyst at Pacific Crest Securities who has a neutral rating on AMD. "Right now they're not bringing much value, they're purely competing on price."
What's more, AMD appears to be poorly positioned to capitalize on broader market trends.
Avian Securities analyst Avi Cohen believes one problem facing AMD is that the company is stronger in desktop PC processors than it is in chips for notebook PCs. The latter, of course, is where the fast growth is these days. In fact, on Tuesday, Intel CEO Paul Otellini said his company expected notebook shipments to outpace desktop shipments by year's end -- one year ahead of schedule.
"Because of AMD's disproportionate exposure on the desktop side, we think their business is going to look worse, even if they hold the line on market share," says Cohen.
And while
Intel appears to be holding up amid adverse macro-economic conditions
, AMD said Thursday that that the challenging economic environment for consumers hurt its first-quarter sales.
AMD may be able to mitigate some of these problems with its forthcoming notebook chips, dubbed Puma, which the company believes will give it an entrée into the small business segment when they are released this quarter.
Stifel Nicolaus analyst Cody Acree reckons AMD has decent prospects of regaining lost market share in the lucrative server segment now that the Barcelona processor is shipping.
"They are not going to take dramatic market share, but they're going to regain some stabilization," says Acree, who rates AMD a buy.
Dell
(DELL) - Get Report
and
Hewlett-Packard
(HPQ) - Get Report
have already announced Barcelona-based servers. And Acree expects
IBM
(IBM) - Get Report
to announce machines running Barcelona in the current quarter.
AMD also lowered the bar for achieving profitability on Thursday, bringing the company closer to its goal. Instead of requiring $2 billion in revenue to break even, AMD says it will now be able to achieve the feat with only $1.5 billion.
Of course, another way to look at it is that AMD has effectively lowered its sales outlook and now views $1.5 billion as its realistic quarterly revenue run rate for the foreseeable future.
To make its numbers at the lower level of sales, AMD will continue finding new ways to cut costs, whittling away various parts of the company, from capital expenditures to headcount to extraneous businesses like consumer electronics chips.
"We're turning over every rock to find every penny," AMD finance chief Bob Rivet said Thursday.
Whether AMD's future holds anything beyond penny-pinching remains unclear.