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conference date: January 23, 2007
for quarter ending: December 31, 2006 (4th quarter)
Overview: As anticipated, not a good quarter. Okay, I would consider it a disaster, excepting that it sets them up to do well in 2007. Revenues increased only because of acquisition of ATI. Costs from that acquisition and stock-based compensation more than ate up profits.
Basic data:
Former ATI revenues and expenses are included starting October 25, 2006. Comparisons to year-earlier also do not include results from former memory products division.
Revenues of $1.77 billion, but excluding $398 million from former ATI, were only $1,374, up slightly 3% sequentially and up 2% from Q4 2005.
Operating income of $63 million from organic AMD and ($13 million) from former ATI led to a non-GAAP operating income of $50 million. Acquisition charges were $550 million. Stock-based compensation was $27 million. Resulting in a GAAP operating loss of $527 million.
GAAP gross margin ws 36%, down sequentially from 51% and from Q4 2005 57%. Non-gaap gross margin was 40% compared to 52% in Q3 2006.
GAAP loss per share was $1.08. Includes $1.04 per share ATI acquisition expense (ARC charges).
Cash ended at $1.5 billion. Debt totals $3.8 billion, including $2.2 billion associated with ATI acquisition.
Guidance:
Q1 revenues are expected to be seasonally down, between $1.6 billion and $1.7 billion. Operating expenses expected $710 to $760 million. Stock compensation $32 million. ARC charges $120 million, including $30 million in costs of sales.
Conference Highlights:
Not satisfied with financial performance. But 2006 as a whole was a strategic success, ending with record quarterly unit shipments: 135% increase in servers; 78% mobile; 35% overall.
Computation product revenue was $1.34 billion, up 3% sequentially. Microprocessor unit shipments were up 19% sequentially and 25% year-over-year. Demand for mobile processors was strong, up 41% sequentially. Desktop processor revenue was characterized as strong, up 14% in units and 8% in revenue. Desktop ASPs driven by shift in customer mix. Server processor units were flat sequentially and prices were down significantly. Operating income for computational products was $73 million.
65 nm process based chips started shipping in December.
Graphics, chipsets and consumer electronics segment (essentially, old ATI) was $398 million (began October 25, so partial quarter). That split into $278 million for graphics and chip sets (but operating loss of $33 million) and $120 million for consumer electronics (operating income of $20 million).
Many OEMs announced new AMD based products. Wii from Nintendo includes ATI graphics and is selling well. Imageon media processors for wireless handsets did well.
Revenue included approximately $50 million in royalty and patent license revenue.
Gross margin decline was due to lower server ASPs and lower ATI margins.
Inventory is $814 million includes $314 million from ATI. Inventory for traditional AMD grew as 65nm ramped up. $668 million in capital expenditures.
Segments now included computation products; embedded products; graphics and chip sets; and consumer electronics. Starting next quarter will report 3 business segments: computing solutions; graphics solutions; and consumer electronics solutions.
ATI integration already largely behind them. Priorities now are to find new customers and provide long-term value to shareholders. 65nm conversion will be completed in 2007. Transition to 45 nm will be in the first half of 2008. Plans to continue to grow market share and cut costs. Grew market share 3 years in a row, from the mid-teens to the mid-twenties.
Pricing competition is the toughest difficulty going forward. Will continue to offer best value proposition to customers.
No backing off from December analyst day guidance.
Q&A:
Gross margin going forward? Goal for 2007 is 50% operating margin; may take a while to get there. Will require improved mix of products plus cost reductions. Still plan to spend $2.5 billion in capital expenditures in 2007. "That will generate a negative cash flow, but as you can see from the balance sheet, we are prepared for that."
Q1 revenue color? ATI is heavily consumer, so very seasonal, with Q1 weakest. Market visibility is not good. Pricing is expected to be challenging all year, but especially first half.
ASPs down for 2007? Product space changes mix. Conversion to mobile will continue. So believes slightly up in ASPs in 2007.
Customers telling to spend cap ex? They want to increase share of business they do with AMD, not excess capacity. Several major customers around the world have not yet switched to AMD.
Intel gains in server space? AMDs ASP in servers is still higher than Intel's, but Intel made gains. Some AMD customers did not execute on introductions as well as expected. Very little footprint in 1 processor space, so could grow there.
Desktop ASPs? No major shift, slightly down. All pricing issues were related to server segment. New architecture introduction in summer should give some competitive advantage again.
Inventories and demand? Unit wise bullish about 2007, but first quarter less certain. Vista will provide demand. Inventory was lower than they would like in Q3 and Q4. Channel inventory in graphics segment needs improvement.
Q1 gross margins? Lower revenues won't lead to lower gross margins, largely because of 65nm introduction and room for improvement in ATI products.
Q1 seasonality? Historically has been down about 4%. Vista may effect that, especially if there are problems introducing it.
Mix improvement? Dual core in Q4 was about one-third. As product gets pushed down price stack will increase ASPs as percent becomes higher.
Pricing v. market share? Not backing away from gaining market share.
Quad core servers will appear before quad core desktops.
Performance lead? Based on what we know about our product and their product, bullish will capture both performance and performance-per what crown with quad core introduction.
Cash flow implications of cap ex spending plan? Monetizing Dresden 200 mm tools and other measures will provide enough funds to execute our strategies.
Depreciation for 2007? $1.3 billion.
Op ex guidance and restructuring? Op ex guidance excludes restructuring charges and stock option expense.
Fighting for market share, isn't that bad for shareholders? We are looking out for long term shareholders. The best thing we can do is break up Intel's monopoly.
Commercial v. consumer? Commercial segment is growing faster than consumer segment. Workstation marketplace provides an opportunity.
Interest payments? Q4 was partial quarter, future quarters will be a bit higher.
Profitability of Barcellona quad core given Intel introduced at dual-core prices? Will be introduced at same level as dual cores.
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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.
Copyright 2007 William P. Meyers
