Amid Losses, AMD Looks to Restructure

CEO Hector Ruiz says the company will focus on its core x86 processor and graphics business while other parts of the business will come under scrutiny.

By year's end, Advanced Micro Devices might look like a different company.

During the company's first-quarter 2008 earnings call April 18, CEO Hector Ruiz told analysts that the heavy losses the company has endured during the last six quarters will likely lead to a restructuring of the Sunnyvale, Calif., company.

For the first quarter, AMD posted a net loss of $538 million, or 59 cents a share, which was down from the $611 million, or $1.11 a share, loss the company posted a year ago. The company announced revenues of $1.51 billion, compared with $1.23 billion it posted a year ago and the $1.77 billion in revenues it had in the fourth-quarter 2007.

AMD posted a $50 million charge, or 8 cents a share, due to its 2006 acquisition of ATI.

The mounting losses have forced the company to take a hard look at its business. By the third quarter, it plans to lay off 10 percent of its 16,500-person work force, and Ruiz still believes the company will return to profitability by the second half of 2008. Intel, AMD's main rival in the chip business, posted better than expected quarterly numbers earlier this week.

While AMD will continue to focus on its core business of designing and manufacturing x86 microprocessors and graphics technology, Ruiz said the company plans to "scrutinize" other parts of the company that are not turning a profit or not central to its new goals.

"It is clear that our business environment has changed from just the second half of last year when we saw some of our non-core businesses on a path to growth and profitability. That is now questionable," said Ruiz.

"As a result, we are embarking on a significant restructuring of our company to address the following: We need to intensely scrutinize all of our businesses in order to ensure that our core x86 and graphics products are on a healthy path to leadership and profitability," Ruiz added. "We also need to scrutinize our non-core business and see how they fit into our plans toward growth and profitability."

If those "non-core" businesses are not profitable, Ruiz said the company will likely jettison those parts of the company. While executives did not point to a specific part of the company, it seems they will begin to examine the company's consumer electronics business, which has underperformed.

John Spooner, an analyst with Technology Business Research, said that the consumer electronics division makes products for televisions, cell phone handsets and other devices, and has pulled in about $100 million in revenue during the last few quarters. He added that the company has wanted the division to make more money and now might be a good time for AMD to look for a buyer for the business.

"It makes sense because it's not a core part of their business, and they can't really afford to focus on consumer electronics at this point," said Spooner. "They need to focus on processors for PCs and servers as well as graphics."

In addition to looking at non-essential businesses, Ruiz said the company is still working on its "asset-lite" or "asset-smart" strategy, which appears will help the company when it comes to manufacturing. For more than six months, Ruiz and his executives have talked about the asset-smart strategy, but have provided few details.

Spooner and other industry observers believe AMD is working toward some sort of manufacturing partnership with another company to take some of financial burden off of its bottom line. This will allow AMD to focus on processor design and marketing.

It's not clear what partners AMD would use, but it does have a relationship with IBM to develop new chip technology. The two companies are working on creating AMD's 45- nanometer manufacturing technology, which the chip company plans to ramp by summer to deliver products in the fourth quarter.

AMD is looking to bounce back in the second half of 2008 with a mix of new products for desktops, notebooks and servers. After a design flaw delayed the release of its much anticipated quad-core Opteron processors in the second half of 2007, the company is now shipping the chips in volume, and both Hewlett-Packard and Dell are offering the processor in a number of systems.