AMD Finds Itself in Financial Peril
The high-flying Advanced Micro Devices Inc. of 2006 has given way to a company
in financial peril, saddled with debt and bleeding from a brutal price battle
with its larger and suddenly resurgent Silicon Valley archrival, Intel Corp.
AMD finds itself the subject of rumors of a possible takeover or private-equity
cash infusion. While it wasn't long ago that AMD was stealing a big slice of
the microprocessor market and emerging as a long-term threat to Intel, those
very gains may have left AMD's well running dry.
Though the price competition has cut into both chip makers' profits, Wall Street
has punished AMD's stock particularly hard. Its shares have plunged more than
60 percent over the past year on fears about the company's ability to continue
gaining share without hurting profit margins. Meanwhile, Intel's stock is down
just 4 percent.
Investors are concerned AMD is spending too heavily to keep up with Intel's
aggressive transition to next-generation manufacturing technology.
AMD's fall has wiped out about $10 billion in shareholder wealth. Analysts
say the exodus will likely continue until the company rolls out its new chips
this year and resolves fears about its dwindling cash reserves and high capital
The shifting fortunes highlight the challenges facing AMD as it squares off
against a company with seven times its annual revenue and a history of spending
heavily on breakthrough technologies.
"AMD, as a company, has enough strong parts that it will survive, but
I think it's going to be a rough couple of years for this organization,"
said Stephen Kleynhans, a research vice president at Gartner Inc. "They've
got some very solid technology, but technology can be very fleeting. A technology
lead today can just disappear in just a matter of quarters."
Both Intel and AMD are adept at weathering the boom-and-bust cycles of the
volatile semiconductor industry. But they are still adjusting to AMD's newfound
competitiveness across a range of products, from desktops to laptops to servers.
AMD stole about 4 percent of the overall processor market from Intel in 2006,
according to Mercury Research. AMD scored a particularly big victory by partnering
with Dell Inc., once an exclusive Intel client.
But Intel, which still controls about three-quarters of the total market, has
roared back with a lineup of powerful and energy-efficient processors that appears
to be slowing AMD's offensive.
While AMD continues to gain market share in desktops and laptops, its growth
in the lucrative server market has stalled. In 2006, AMD siphoned about 5 percent
of the server market from Intel, but leveled out at 22 percent share during
the second half, according to Mercury Research.
Last month, Intel scored a high-profile victory of its own, announcing an alliance
with server and software maker Sun Microsystems Inc. The partnership will put
Intel chips back in Sun servers and workstations after several years of AMD
AMD is banking on regaining momentum with the mid-2007 launch of its new server
chip, code-named Barcelona, which has four computing engines and an updated
design. The company acknowledges that Intel beat it to market with four-core
chips that launched in November. But AMD insists its design for getting the
cores to communicate with each other will serve as a key advantage.
"Five years ago no one knew who we were in the server space, now we're
a player," said Mario Rivas, AMD's executive vice president for the computing
products group. "This will allow us to be a serious contender in the server
space and regain the performance crown. There is a halo effect that goes with
But analysts are not optimistic about a quick turnaround for AMD.
The company swung to a $166 million loss for fiscal 2006 and disappointed investors
by offering little clarity on how it intended to differentiate its products
from Intel's and improve profitability.
This week, AMD warned it was unlikely to meet its first-quarter revenue guidance
of $1.6 billion to $1.7 billion.
"Our view is that this will get worse before it gets better," said
Christopher Caso, a senior analyst with Friedman Billings Ramsey. "This
quarter's performance is evidence that it did get worse."
Wall Street is worried that AMD is in dire need of cash after its $5.6 billion
acquisition of graphics chip maker ATI Technologies Inc. and heavy spending
on factory upgrades. AMD bought ATI last year under the philosophy that combining
traditional processing chores with graphics capabilities in one chip would give
AMD a long-term advantage over Intel.
But the deal reverberated through AMD's finances. At the end of 2006, AMD was
sitting on $1.5 billion in cash but had $3.8 billion in debt, including $2.2
billion associated with the ATI acquisition. In 2005, AMD had $1.8 billion in
cash and a total debt load of $1.4 billion.
AMD said in its annual report that the big debt may crimp its ability to borrow
more money and pay for $2.5 billion in capital expenditures planned in 2007.
"It's a dilemma -- we believe AMD needs to spend the money to build the
fabs (chip factories), but they may have to find some additional financing to
achieve those goals," said analyst John Lau of investment bank Jefferies
& Co. "We believe investors need to see some resolution of these issues
before they start to get back into the stock again."
Intel ended 2006 in a healthier financial position: $10 billion in cash and
$2 billion in total debt. Intel's net income dropped 42 percent last year --
hurt by price-cutting and extensive factory upgrades -- but analysts are bullish
the company is quickly recouping its investments and improving profitability.
Intel is known for its heavy research-and-development spending even during
lean times. In 2006, the company said it was eliminating 10,500 positions in
a massive restructuring. But it still spent $5.9 billion on R&D -- about
17 percent of overall revenue -- up from $5.1 billion in fiscal 2005.
By comparison, AMD plowed $1.2 billion -- more than 21 percent of its revenue
-- into R&D last year.
The expenditures have helped Intel pull ahead of AMD by at least a year in
producing chips based on 65-nanometer and 45-nanometer technology, which shrinks
chip circuitry to 65- and 45-billionths of a meter. The smaller scale allows
more transistors to be crammed onto the same piece of silicon.
AMD said it is closing the gap with Intel and believes its partnership with
IBM Corp. makes rolling out the technology more cost-efficient.
"We believe we're putting the right capacity in at the right time, and
we're immediately getting the benefits," said Tom Sonderman, AMD's director
of manufacturing technology.
Industry analysts said both companies are suffering from the need to balance
the near-term goals of shareholders and the huge expenditures required to stay
"What this comes down to is the companies are playing a long-term game,"
said Dean McCarron, principal analyst at Mercury Research. "The financial
people would be delighted to hear AMD would not be investing in any factories.
They would be delighted if Intel would not compete on price to gain market share
and would focus on margins. That's great for the next three quarters, but a
train wreck for both companies."
Perhaps one lifeline for AMD will come from none other than Intel itself.
AMD is suing Intel for antitrust violations, claiming that Intel undercut AMD
by forcing customers into exclusive deals and offering secret rebates. Trial
isn't due to begin for two more years, but there's precedent for a settlement.
In the mid-1990s, AMD and Intel agreed to resolve several legal claims against
each other, and one result was that AMD won the right to keep producing chips
on the x86 design architecture -- which both companies still use today.