Advanced Micro Devices Lays Out Silver Lining - TheStreet

Advanced Micro Devices Lays Out Silver Lining

Shares get a late lift after the company says it would consider a private-equity deal.
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Updated from April 19

It's rare when a company losing more than a half-billion dollars in a quarter can offer shareholders a ray of hope, but

Advanced Micro Devices

(AMD) - Get Report

may have come closer than most.

Following the release of first-quarter results on Thursday that the company itself called "unacceptable," AMD's senior management said it was aggressively addressing the issues that led to the company's deteriorating performance.

Executives said the company was evaluating various "asset-light" options, which involve outsourcing portions of chip fabrication to third parties instead of building multibillion-dollar facilities, and noted that the company was not averse to seeking shelter from the rigors of the public markets through a

private-equity deal.

Asked about the possibility of such a transaction, Ruiz said the company was keeping an open mind.

"We have absolutely no prejudice or bias towards the source of capital as long as it makes sense to us," said CEO Hector Ruiz. "As for the difference between being a public company vs. being a private company, it's like everything else: If its something we think makes sense for our shareholders we will consider and look at it."

That openness, combined with hints of a turnaround plan -- on which AMD promised to provide further details during its analyst meeting in July -- reversed an after-hours selloff that started immediately after the stock resumed trading in the extended session.

Shares of AMD were off 16 cents, or 1.1%, to $14.12 in early Friday trading.

"We are aligning our business model, capital expenditures and cost structure with the goal of accelerating our return to profitability," said AMD CFO Robert Rivet.

AMD also provided bullish guidance for the seasonally slow second quarter, projecting flat-to-slightly increasing sequential revenue. That would imply that AMD expects to take market share from rival

Intel

(INTC) - Get Report

, which projected that its second-quarter sales will be flat to down 7% sequentially.

Of course, AMD has not been the most reliable source when it comes to forecasting its own business.

For the recently ended first quarter, AMD initially projected sales in the range of $1.6 billion to $1.7 billion. The chipmaker trimmed its guidance twice as the quarter progressed, and it ultimately reported $1.23 billion in sales -- $470 million short of the top-end of its initial expectation and down 7% year over year.

AMD said it lost $611 million, or $1.11 a share, in the first quarter, including acquisition-related charges of 21 cents a share and stock-compensation expenses of 5 cents a share.

Backing out the acquisition-related charges, AMD lost 90 cents a share, well below the estimate of analysts polled by Thomson Financial, who were looking for a loss of 48 cents a share.

A year ago, the company earned $185 million, or 38 cents a share.

The company reported operating losses in all of its major business units, including graphics and consumer electronics chips. And AMD's microprocessor and chipset business saw sales tumble 38% from the fourth quarter, as unit shipments and average selling prices declined significantly.

AMD also said its cash position fell 24% over the quarter to $1.17 billion.

AMD's stock has dropped nearly 58% in the past 12 months, as the chipmaker has fallen on hard times. For a couple of years, AMD's microprocessors had a technological edge over Intel's, allowing AMD to make inroads with new customers such as

Dell

(DELL) - Get Report

and grab a 25% share of the microprocessor market.

Intel has mounted a sharp counteroffensive, however,

releasing a torrent of improved dual and quad-core processors and using its manufacturing muscle to wage a price war with AMD. The price cuts have taken a toll on both companies'

profit margins, although AMD seems to be suffering more.

AMD's gross margin fell to 28.1% in the first quarter. A year ago, AMD had a 58.5%

gross margin.

President Dirk Meyer attributed the disastrous quarter to a "perfect storm" of problems, including price pressure, competition and growing pains from serving new customers.

"We know the only way to get healthy is to fully understand our problems and fix them," said Meyer.

One fix will come in the third quarter, when AMD releases its long-awaited quad-core microprocessor, dubbed Barcelona. That chip will provide AMD's first fundamental processor upgrade in nearly two years and, the company hopes, will put it on a more equal footing with Intel.

AMD also said it was on track to begin producing chips with 45-nanometer circuits, a generation smaller than its current 65-nanometer technology, in the first half of 2008. Intel plans to ship 45-nanometer chips, which allow the company to save costs and increase performance, later this year.

AMD CEO Hector Ruiz said he will head up an executive task force to oversee the company's turnaround plan, which includes rejiggering its sales and marketing operations, cutting back on expenses and eliminating $500 million in capital expenditures for 2007.