Chipmaker Advanced Micro Devices (AMD) joined the growing chorus of semiconductor companies with bad news to report, saying on Apr. 7 that its sales for the quarter just ended will come in below expectations. AMD said it will cut its workforce by about 10%, or more than 1,600 jobs, by the end of the third quarter.
AMD has struggled to integrate graphics chipmaker ATI, which it acquired in 2006. It faces a weakening market for the PC microprocessors that make up its core business and a resurgent rival in chip giant Intel (INTC). AMD said revenue for its fiscal first quarter will be about $1.5 billion—down 15% from the fourth quarter of 2007, but up 22% over the year-ago quarter. AMD reports quarterly earnings Apr. 17.
Previously AMD had expected sales for the quarter to fall in line with the usual seasonal pattern, which would be a 7% drop in first-quarter sales over the typically busier fourth quarter. "This warning is not entirely a surprise," says analyst Ashok Kumar of CRT Capital Holdings. "It was broadly anticipated, but the magnitude was worse than expected."
AMD said it will also record a restructuring charge related to the layoffs during its second fiscal quarter, but it doesn't yet know how much that will be. AMD's stock closed the day up 11¢, or more than 1%, to close at 6.34. But it dropped back down 28¢ in after-hours trading.
Lost Ground to Intel
Analyst Doug Freedman of American Technology Research welcomed AMD's cost-cutting news. "AMD hasn't been efficient with the workforce it has," he says. "I don't think this cut will be material to its ability to be effective. It will emerge leaner and meaner. We saw what this did at Intel after it started cutting jobs that amounted to 20% of head count." Freedman rates AMD stock a buy with a price target of $10.
Earlier in the day, before AMD's announcement, Lehman Brothers (LEH) analyst Tim Luke said in a research note he expects AMD's share in the PC and server microprocessor market to fall by 1.5%, worse than the previously expected drop of 1%. Luke said that Intel has been increasingly competitive in both servers and "value" desktop PCs—that is, those in the lower price ranges—market segments where AMD had made gains against Intel during the prior two or three years.
A weaker outlook for U.S. consumer spending has only hurt AMD's results further, Luke wrote. While it is not uncommon for AMD to give up a few percentage points of share to Intel during the first and second calendar quarters, Luke wrote, "We are concerned that Intel's superior product offering and [the] pending U.S.-led consumer spending down drift combined may exacerbate this trend. As such we are somewhat more cautious on AMD's growth prospects over the next three to six months."
Chip Demand Down
The company may also be hurt by a glut of unsold chips. Inventory corrections are not uncommon for chip companies during the first three months of the year, as PC manufacturers often order more chips than they actually need during the fall runup to the holiday season.
AMD's warning followed a Mar. 3 warning from Intel about its exposure to the dismal market environment for NAND-type flash memory chips (BusinessWeek.com, 3/5/08). Those chips are used in consumer-electronics devices such as music players from Apple (AAPL) and digital camera memory cards from SanDisk (SNDK). On Apr. 7, market research firm iSuppli cut its market outlook for NAND flash, saying that sales growth of the chips will drop by two-thirds and will rise to $15.2 billion in 2008, up only slightly from the $13.9 billion reported in 2007.