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AMD Profitable Again By Q3 2008

New York (NY) - AMD faced critical analysts once again at its December analyst meeting, but chief executive officer Hector Ruiz sees the company on a road of continued recovery, which he believes will result in a return to profitability in the third quarter of 2008. However, the company appeared to be unsure whether it can deliver on a previous statement that it may be able break even in the current quarter.

No matter where you look at, AMD appears to be walking on thin ice. Despite a consistent message given at today’s analyst day that the worst is behind the company, analysts grilled AMD executives with questions that were looking for some guidance when the manufacturer will be able to post a profit again.

AMD executives came into this meeting with a great disadvantage - four quarters with a combined $2.2 billion loss as well as a bug in the Barcelona quad-core processor, which dropped the company’s market capitalization by more than 40% within a few weeks. At the time of this writing, AMD stock traded at $8.54, translating into a market cap of $4.74 billion, which is substantially below the purchase price of ATI, which AMD had acquired in 2006 for $5.4 billion. As a result, AMD recently said that that it will take an "impairment charge" for ATI assets in Q4 of this year.

But CEO Hector Ruiz and other AMD executives asked analysts not to look back, but to the road ahead. He complained about the criticism from analysts and noted that the company has a track record of "four years of flawless execution." Commenting on the Barcelona bug, Ruiz said that AMD "blew [the launch] and [AMD] is very humbled by it."

"Shame on us," he told analysts. "But we learned from it and it will never happen again," Ruiz said.

Company executives believe that 2008 will remain a challenge, but Ruiz is sure that AMD "will be profitable again in Q3 2008." A break even is now expected for Q2 2008. Ruiz declined to provide further detail on this promise to analysts and did not say if profitability will be achieved on a basis of operating income or net income. However, chief financial officer Bob Rivet noted that profitability will be achieved not just for one quarter, but for all of 2008.

The first half of next year is expected to begin with a "seasonal down" first quarter, in which AMD plans to tackle Intel high products on the higher-end and higher-margin products as well as the goal to steal market share from its rival. A key strategic product appears to be the tri-core Phenom processor, which AMD believes cannot be replicated by Intel: "They do not have a true quad-core product, but only two dual-cores on a die," executive vice president Mario Rivas said.

While Q3 2008 is still somewhat in the future, several analysts were interested in AMD’s Q4 2007 performance, for which AMD showed some uncertainty and appeared to somewhat contradict itself. Back in the Q3 2007 conference call, the company said that it may have "a shot at a breakeven" in the fourth quarter and even during today’s analyst conference CFO Rivet echoed that statement at one time. During the Q&A session, however, Rivet and Ruiz said that AMD "never said that [the company] would break even. We said that we would like to, but that was not a forecast," Rivet said.

To break even, AMD would have to increase its microprocessor revenues by about 29% from Q3 levels, if revenues from its graphics and consumer electronics business remain stable. This calculation, however, does not take in consideration the impairment charge for ATI assets.

Similar to the 2006 year-end analyst conference, analysts were left with a vision of AMD, rather than with real products that are in the market at this time. Barcelona is still ramping (and shipping with the errata plus patch), with a 2x shipment increase for Q1 2007 over Q4 2007, and Fusion is still in the distant future. For now, analysts will have to write their reports based on demonstrations: "Imagine all the platforms you will see [in the future]," said Ruiz.