AMD Maintains Lead

AMD released its second quarter earnings and maintained its lead over Intel…

as the worst performing CPU chip maker in the world. With negative profits of $330 million for the quarter ending June, AMD extended its losing streak to 11 straight quarters of negative profits, fortunately aided by a worldwide recession which has severely impacted demand for AMD’s products.

AMD Management, not to let its fortunes depend on external events, added to its negative profitability by studiously avoiding producing any products for the exploding netbook market. In addition it out-sourced its manufacturing operations to an independent company which has successfully managed not to book any orders from any company other than AMD, adding to AMD’s negative profitability. As AMD has no management control over this entity, results which are consolidated into AMD’s financials will successfully add another unknown to AMD’s financial outlook.

Dirk Meyer, AMD president and CEO commenting on results, said that while “we increased cash, exceeded our revenue plan and reduced operating expenses in the second quarter, gross margin was disappointing…”

While gross margins were essentially flat for the last two quarters, according to AMD’s press release:

“Second quarter 2009 AMD gross margin was 37 percent, including a positive impact of 8 percentage points due to a $98 million benefit from the sale of inventory written down in the fourth quarter of 2008″

This means that AMD’s margins were flat for the June quarter due to a one-time fire-sale of obsolete inventory; unfortunately, these one-time events mask the underlying margin erosion which is so fundamental to keeping AMD’s leadership role in the PC market.

Looking forward AMD stated:

“Considering current macroeconomic conditions, limited visibility and historical seasonal patterns, AMD expects its Product Company revenue to be up slightly for the third quarter of 2009.”

With arch-rival Intel reporting good results and expressing optimism for the balance of 2009, AMD should continue to lose money and market share for the rest of 2009, tenaciously hanging onto its lead over Intel. Market analysts following AMD support this view – J.P. Morgan analyst Christopher Danely stated:

“We believe AMD is losing share to Intel due to inferior products and is being hurt by lack of a netbook processor, which limits revenue growth and hurts pricing. We would note Intel processor sales outgrew AMD by 13% during 2Q09 and are expected to outgrow AMD by another 3% during 3Q09.”

According to Goldman Sachs analyst James Covello:

“While fundamentals for both PCs and MPUs continue to improve as evidenced most recently by Intel’s solid report and guidance, AMD’s tepid top-line results/guidance and weak margins suggest continued execution issues and potential share loss.”

We are confident that AMD is on track to continue its leadership role with the probability very high that its negative profits streak will extend for the balance of 2009, leading to 13 straight quarters of negative profits. With luck and the current management team, AMD should extend its streak well into 2010, successfully maintaining its eroding market position while avoiding bankruptcy with clever accounting manipulations, one-time fire-sale events and asset spinoffs.