AMD is on the verge of layoffs, despite silly AMD PR “denials”.

This isn’t surprising at all, though the reasons for doing this now might be:

1) So long as the current crisis in the financial markets continue, AMD is cut off from conventional financing. This is not news nor revelation, AMD’s financial officer implied that at the conference call in January. Less conventional financing is also likely to be on hold under current jittery market conditions; the Abu Dhabi investors are still down 50% on their investment.

2) The plunge of the dollar has added another anchor to AMD’s boat. A big chunk of AMD’s expenses are incurred in Dresden, denominated in euros. A large chunk of AMD’s revenues come in dollars, not just from the United States (which only accounts for around 20% of world CPUs these days), but also from those countries who more-or-less tie their currencies to the U.S. dollar (which includes China, which is about 28% of AMD’s market).

What that means is AMD processors become relatively more expensive to make in dollar terms. Let’s say an AMD processor costs 20 euros to make. If the dollar and the euro are worth the same, that means the processor costs 20 USD to make. If, however, the euro is worth 1.5 USD, that means the processor costs $30 in dollar terms.

A cheaper dollar is no big deal if you can increase the dollar price (i.e. oil), but AMD doesn’t have the luxury of doing that. In contrast, Intel has multiple fabs in both dollar and euro-zones, so it can sell CPUs in either zone from fabs with expenses based on that same zone.

That means AMD makes less gross profits on CPU sales to dollar regions, and cannot cut prices as readily as Intel in those regions.

I don’t want to leave an exaggerated impression of the impact of the dollar’s drop. A lot of AMD’s expenses are denominated in dollars, and there are counterbenefits (AMD euro revenues are worth more when denominated in dollars.)

Overall, though, it’s a net negative. Keep in mind that even a slight worsening of the terms of trade has a sizable impact on AMD’s bottom line: just a net 3% deterioration means about $50 million more in losses for AMD.

An extra $50 million in losses would probably make a mockery of any AMD promises to reach “operational profit” by June (and certainly drains the small AMD piggy bank faster with no prospect of new money coming in) without any reduction in expenses, so I guess the pink slips need to go out now to keep Hector and Company from getting them a little later at the annual shareholders meeting. :),


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