AMD Faces Looming Cash Crunch Amid Quest for New Markets
Advanced Micro Devices Inc. (AMD), the long-struggling competitor of giant rival Intel Corp., is facing yet another crisis amid a shifting technology landscape and declining demand for personal computers.
Chief Executive Officer Rory Read is firing workers to pare expenses as the chipmaker’s sales slide. Still, he can’t cut costs fast enough to head off his next looming challenge: shrinking cash reserves. Cash declined to $1.5 billion in the third quarter, shedding $279 million from the previous period.
If the trend continues, cash levels may drop to $600 million by this time next year, according to an estimate by Sanford C. Bernstein & Co. That compares with the $1.1 billion in reserves the company said it requires, and a quarterly operating expense target of $450 million. AMD has $2.04 billion of debt.
“I’d never been worried about cash flow; I am now worried,” said Stacy Rasgon, an analyst at Bernstein.
Read said the decline of the PC market -- which provides 85 percent of AMD’s sales -- happened faster than he expected and left him with less time to remake the company. As AMD concentrates on developing products for new markets, Rasgon, Chris Caso at Susquehanna International Group and Craig Berger at FBR Capital Markets are among analysts who say they’re concerned AMD might run out of money before any transformation can happen.
Rasgon, who cut his rating on the stock to market perform earlier this month, said a lack of compelling new products from AMD could leave the Sunnyvale, California-based company with as little as $300 million by the end of next year, he said.
Amid a squeeze by the weak economy and changing consumer tastes, the global PC market will contract by 1.2 percent to 348.7 million units this year, according to IHS ISuppli. That would be the first annual decline since 2001.
As the market shrinks, AMD’s spot as the alternative to Intel (INTC) in PC processors is also being threatened by the entrance of companies such as Qualcomm Inc. (QCOM) and Nvidia Corp. (NVDA) At the same time, computer makers looking to move into tablets -- responding to the success of Apple Inc.’s iPad -- may turn away from AMD, according to Pat Becker Jr., a fund manager at Becker Capital Management in Portland, Oregon.
“You have to wonder if this is it for AMD,” Becker said. “Are they done?”
The company’s cash flow became a focus for analysts during its third-quarter earnings call on Oct. 18, provoking analysts such as Longbow Research LLC’s Joanne Feeney to ask how AMD would simultaneously reduce expenses and speed up the introduction of new products.
Read said he plans to get more sales from markets such as industrial equipment, computer games and communications by adapting existing computer designs to fit in new devices with a minimum of research and design effort.
A failure to deliver that new revenue might leave AMD needing to make further cuts, which in turn would damage its ability to produce competitive designs, Susquehanna’s Caso said.
AMD interim Chief Financial Officer Devinder Kumar, who stepped in last month after the resignation of Thomas Seifert, said that once AMD completes its operating-expense cuts, cash reserves of $700 million to $800 million will be sufficient. In addition, AMD is negotiating with a chip supplier, Globalfoundries Inc., to reduce purchase commitments and therefore expenses, he said.
“Those negotiations are going well,” Kumar said in an interview. Much of the spending required to develop chips capable of competing in new markets has already been done, he said.
AMD stock, the worst performer on the Philadelphia Semiconductor Index (SOX) this year with a decline of 61 percent, advanced 1.9 percent to $2.12 at the close in New York.
The second-largest maker of PC processors, behind Intel, last week forecast sales that will again miss analysts’ estimates and said it will cut 15 percent of its staff, or about 1,770 jobs. It’s reported a loss in three of the past four quarters.
“The fourth quarter will continue to be challenging and we do not expect PC market conditions to improve for several quarters,” Read, who took over in August 2011, told analysts on the conference call.
The company had already disclosed on Oct. 11 that third- quarter sales fell short of its earlier predictions, leading Standard & Poor’s to place the company’s BB- credit rating on watch for a possible downgrade.
Credit default swaps on AMD debt, which rise as investor confidence deteriorates, are trading at their highest level since Nov. 11, 2009. Derivatives traders are now pricing in a 62.5 percent chance of AMD defaulting within five years, up from 51 percent on Oct. 17, according to a standard pricing model maintained by data provider CMA. Contracts protecting the company’s debt climbed to 18.5 percentage points upfront today, up from 9.3 percentage points on Oct. 17.
The company’s $500 million of 7.75 percent notes due in August 2020 fell to 82.09 cents on the dollar, to yield 11.27 percent, on Oct. 22, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s the lowest level for the debt since it started trading in January 2011.
AMD is facing an even greater challenge than the one it has fought against Intel since they were both founded in the late 1960s. PCs are under threat from tablets and smartphones that are built on different chip technology.
“Unfortunately for AMD, the PC market moved away from it faster than the new management moved to remake the company,” Caso wrote in a research report.
Yet unlike Intel, which has more than $10 billion of cash and tens of thousands of engineers to recast its products and explore new markets, AMD has struggled to stockpile cash. Since 2001, the company has reported five annual losses that have dwarfed the profit accrued over that period by more than $6 billion in aggregate.
In the past, PC makers such as Hewlett-Packard Co. and Dell Inc. have built at least some machines with AMD’s chips, using it to limit Intel’s ability to dictate prices. While AMD and Intel chips were the only ones able to run Microsoft Corp.’s dominant desktop Windows operating system, that is set to change later this week, when Microsoft begins selling two new versions of Windows, including one that will work on ARM Holding Plc’s alternative technology.
Dell, Lenovo Group Ltd. and Asustek Computer Inc. are among PC makers that have said they will use phone-chip technology to build devices running Windows aimed at trying to pare the lead of Apple in tablet computers -- and have committed to using new low-power chips from Intel for that market.
AMD announced one product win on Oct. 22, saying Japan’s Fujitsu Ltd. chose a new chip it calls Z-60 -- a combination of a microprocessor and graphics unit -- for a new tablet.
Still, the company hasn’t yet produced a chip targeting the tablet market that’s good enough to win significant business, according to C.J. Muse, an analyst at Barclays Plc.
“It comes down to the inability to provide a viable product,” said Daniel Berenbaum, an analyst at MKM Partners LLC. Computer makers are “less concerned about keeping AMD alive and more concerned with keeping themselves alive.”
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