AMD Slashing 10% of Its Work Force

The chip maker is reporting lower than expected sales this quarter.

After denying earlier reports of layoffs, Advanced Micro Devices announced April 7 that it would eliminate 10 percent of its work force by the third quarter of 2008 in order to cut costs after disappointing sales in the first quarter.

The cuts were deeper than the original 5 percent reduction that had been reported in March. The company has about 16,000 employees worldwide, but it did not specify where the 1,600 layoffs would come from later this year.

The announcement from AMD comes as the company is preparing to release its first quarter financial results on April 17. In a statement, the chip maker announced that its revenue for the quarter, which closed March 29, would hit $1.5 billion, a 22 percent increase from a year ago, but a 15 percent drop from the $1.77 billion in revenues it recorded in the fourth quarter of 2007.

During the fourth quarter of 2007, AMD reported that it had recorded a $1.6 billion loss related to its acquisition of ATI. In January, CEO Hector Ruiz promised to bring the company back to financial stability by the second half of the year and indicated at the time that he would not cut jobs in order to trim costs.

In the statement AMD released Monday, executives wrote that the company had "low than expected sales across all business segments" during the first quarter of 2008.

While the first quarter of any year is typically slow for chip makers, John Spooner, an analyst with Technology Business Research, said the revenue drop is typically five to 10 percent. AMD's 15 percent revenue loss was unusually large and could indicate several problems.

It could mean that AMD did not ship a lot of processors during the quarter or it did ship a fair amount of product but that the ASP (average selling price) of its chips was far lower than expected. Spooner suspects a combination of lower shipments and lower ASPs resulted in AMD's revenue decline.

Part of the reason for AMD's troubles dates back to 2007, when the company pushed back the release of its quad-core Opteron processor-Barcelona-and its Phenom desktop chips due to erratum within the silicon. That meant that AMD had to push back the release of other products, such as its triple-core chips, which were released in March.

"The demand for processors drops off in the first quarter and if you don't have your latest and greatest chips at your disposal at this time, it puts you in a really bad position," said Spooner. "Intel has had their latest and greatest out in the market and even though there are reports of shortages, it seems they were able to wrap up the sales."

The reduction in its work force should help AMD return to profitability by reducing costs. Spooner added that AMD also needs to quickly ramp up its production of 45-nanometer processors in order to stay competitive with Intel.

AMD also needs to show that its chips, especially its quad-core processors, offer a better price performance compared to Intel's offerings.