AMD's Pain, Investors' Gain

The chipmaker's revenues will come in well short of expectations, so it's aggressively cutting costs

What's going on with AMD? On Apr. 9, chipmaker Advanced Micro Devices said it would come in far short of Wall Street's expectations for revenues in the first quarter. Yet its stock surged on the news.

Huh? Chalk investors' positive reaction up to aggressive cost cutting. With sales slower than analysts expected, AMD (AMD) is imposing a partial hiring freeze and curtailing its spending to weather a fierce onslaught from giant Intel Corp.

The cost-cutting measures came as AMD issued a warning about its first-quarter results. The Sunnyvale-based company said its revenue for the three months ending in March totaled $1.23 billion, well below the company's initial estimates of $1.6 billion to $1.7 billion. (For a video clip of BusinessWeek.com reporter Arik Hesseldahl discussing AMD, click here.)

Management had previously acknowledged that the company would miss that revenue target, but the magnitude of the shortfall was more severe than Wall Street had anticipated. Analysts, on average, had projected first-quarter revenue of $1.55 billion, according to Thomson Financial.

AMD blamed the disappointing results primarily on lower prices for its chips—a byproduct of an intensifying battle with Intel, the world's largest maker of the microprocessors that power personal computers and scores of other high-tech devices.

With the ruthless competition driving down prices, AMD is expected to sustain substantial losses this year. The company's didn't specify its first-quarter losses in Monday's announcement.

Analysts, on average, had been projecting a loss of $155 million, or 30 cents per share, before AMD disclosed its first-quarter revenue dropped by about 8 percent from the same time last year. One of the more bearish, Joseph Osha of Merrill Lynch (MER), put out a report on Apr. 3 predicting a rough first half for both AMD and Intel. (see BusinessWeek.com, 4/4/07, "Stale Chips, Sliding Revenues").

With less money coming into the company, AMD said it will revise its business model. The overhaul will include a $500 million, or roughly 20 percent, reduction in its capital expenditures for this year coupled with a mandate to only fill "critical" job openings.

Investors applauded the cost-cutting commitment as AMD shares climbed 64 cents, or 5%, to $13.50 during Monday afternoon trading on the New York Stock Exchange. AMD's stock price has plummeted by about 60% during the past year, a $9 billion drop in market value that has underscored concerns about the company's ability to withstand the pricing pressure from the much-larger Intel.

"I keep waiting for one of these companies to cry, 'Uncle!'" said American Technology Research analyst Doug Freedman. "Until that happens, it's hard to recommend these stocks."

There was plenty of pessimism to go around. Blogger Om Malik called the AMD announcement a "tech reality check" and warned that soft demand "could chill the technology industry for at least first half of the year." Over at ZDNet, the ChipLand blog said AMD had sailed into the "perfect storm."

Freedman said he doubts AMD's restructuring will be enough to get the company through its current adversity. He believes the company will also need to raise more money, possibly by selling more of its stock.

AMD indicated it would provide more details about its cost-cutting initiative when management reviews its first-quarter results in an Apr. 19 conference call.

By the Associated Press, with BusinessWeek staff