Advanced Micro Devices
will report financial results Wednesday, and one key to the company's report will be its flash memory unit, which helped plunge the company into red ink in its fourth quarter as sales unexpectedly fell.
AMD's flash memory unit generated $74 million in profit for the first three quarters of the year but then lost half of that in the fourth quarter, a period during which sales and profits should have been strong.
The disappointing performance of the flash unit closed out an otherwise positive 2004 for AMD. Nonetheless, CEO Hector Ruiz was
publicly contrite regarding the unit and vowed to "take bold actions" to render the business profitable to shareholders.
Because AMD has been able to
improve its computer processors, thus gaining ground on chief rival
, many investors are increasingly pressing AMD to dump its flash unit if it can't generate sustainable profits.
Intel was also seen
as part of AMD's fourth-quarter problem, with Intel aggressively trying to regain lost share. Intel's memory unit grew sales but still posted a large loss. However, Intel's investors can forgive this from a company that operates substantially in the black. Flash memory constitutes only 10% of Intel's sales, compared with close to 50% for AMD.
Flash memory chips, which retain data when power is turned off, are used in handheld electronic devices such as cell phones, digital cameras and digital music players. The two types of flash -- dubbed "NAND" and "NOR" after the mathematical actions they perform -- do the same thing in different ways. AMD and Intel are the two largest makers of NOR chips.
NAND is less expensive and writes data more quickly, so it's popular in devices such as digital cameras and music players. The NOR variety is more expensive, but it can read data more quickly and therefore is used often in cell phones and to boot up personal computers. The capabilities of the two flash types increasingly overlap, though, creating new markets for each.
AMD's flash sales are expected to decline sequentially in the current quarter because of oversupply and pressure on selling prices, as well as a typical drop-off in demand. AMD didn't make a prediction about the unit's profitability, but Ruiz has promised that overall, the company would be profitable.
Analysts are expecting the chipmaker to post a profit of 2 cents a share in the first quarter, according to Thomson First Call.
Ruiz said he planned on accelerating technology transitions, better utilizing capacity and becoming more competitive and aggressive about sales to better bolster the flash unit. The impact of these pledges remains to be seen, but consistent profitability is a tall order in the memory market.
"This is a memory business, and memory businesses don't enjoy sustainable profits," says Jim Handy, flash memory analyst at Semico Research, which has no banking relationship with Intel or AMD.
Still, AMD has a lot invested in its flash unit, which is formally called Spansion. The unit is owned 60% by AMD and 40% by
, but its financial results appear solely on AMD's books. Spansion was formed after being spun out of a 10-year-old joint venture by AMD and Fujitsu in 2003.
"I've always viewed AMD as looking at Spansion as a very long-term thing, and I don't expect any knee-jerk reactions," says Handy, adding that he'd been hearing the sale rumor even before Spansion was formed.
Though he didn't place much credence in such talk, Handy admitted that there are precedents for selling a memory unit, such as
waiting for a market uptick and then spinning off
. In addition,
sold its DRAM (dynamic random access memory) unit to
during a downturn, taking stock as payment.
That second option might be more akin to what AMD could be forced to do if it really wanted to unload its flash operation. With Intel again a strong contender in the flash market, pricing looks negative, and supply appears abundant for the immediate future. For its part, Intel says that it wants its memory unit to be profitable but said that profitability might not happen until 2006.
Analyst Eric Ross with ThinkEquity Partners, which doesn't do banking with either company, says the profitable opportunities in the flash market appear to be tightening. "It looks worse than DRAM," he says, referring to the much larger and highly commoditized memory sector.
Without the prospect of profits, Ross says finding a buyer for Spansion will be very tough. "I'm having trouble understanding why someone wants to buy it, particularly at a price attractive to investors and AMD," Ross says.
But AMD demonstrated that the unit could generate profits through nine months last year, before it stumbled to close out the year. AMD can go a long way in increasing the attractiveness of its flash unit to both prospective owners and its own shareholders if it could get the unit back into the black. Proving that the company has a plan to do just that would be a start. And Wednesday would be a good day to do it.