Chicago (IL) – Despite another staggering loss in the third quarter, AMD’s financial health appears to be improving. Not only company executives believe that it may have a “shot” at posting a profit for the current quarter. AMD is regaining trust again and there’s  hope that the company is sailing out of what we called a “perfect storm” in April of this year.

AMD’s stated revenue goal for Q4 is $2 billion accompanied by a gross margin of 40%. Chief financial officer Bob Rivet noted during the Q3 conference call that this combination would enable to about break even in the Christmas quarter. Considering AMD’s current competitive position and the fact that the firm just posted a hefty $394 million loss for Q3, some could argue that this goal will require a small miracle to come true.

There is no denying that Q3 was another painful stab into AMD’s already bleeding bank account. But, on a closer look, any investor sifting through AMD’s Q3 report can also notice that the company is slowly recovering from a financial catastrophe that has begun with a $5.4 billion acquisition and has cost the company an additional $2.2 billion in losses in Q4 2006, Q1 2007, Q2 2007 and Q3 2007.

A quick look at AMD’s recent earnings reports reveals that the Q3 2007 revenue was the highest since Q4 2006 and the net loss was the lowest since Q3 2006 (in which the company posted a pre-ATI profit of $134 million). Clearly, Q3 2007 shows that AMD has made some progress this year. But, the recovery process becomes more apparent, if we separate the “Computing Solutions group” from the rest of AMD’s business units.

The simple reasoning behind this thought: AMD will rely almost completely on its Computing Solutions group (responsible for microprocessor products) to reach profitability in the fourth quarter. According to Rivet, AMD does not expect the graphics business to improve in Q4: Graphics cards apparently just don’t sell very well in the fourth quarter. So, let’s have a look at AMD’s Computing Solutions group.

In AMD’s last profitable quarter (Q3 2006), the company posted microprocessor revenues of $1.29 billion and a profit from these operations of $133 million. By Q1 2007, which AMD described as its “meltdown” quarter, the group suffered a decline in revenue down to $918 million and got smacked with a loss of $321 million. Fast forward, Q3 2007 revenue of the Computing Solutions group was almost on par ($1.28 billion) with the year-ago quarter and the net loss was reduced to $112 million, indicating an improving price environment in the microprocessor industry.

If we assume that the graphics business remains stable at a Q3 revenue of $252 million and the CE group will be able to take in around $100 million again, then AMD’s microprocessor revenue will have to increase by about 29% to about $1.65 billion to elevate the company into the $2 billion revenue range.

Turning in a profit, of course, will require the company to keep its gross margin in the 40% range. Gross margin for Q3 was 41% and 33% in Q2.

AMD can influence that margin only partially by itself, but will largely depend on the industry environment to achieve its goal. However, in contrast to the brutal price war earlier this year, there are signs that the battle between AMD and Intel has calmed down somewhat and each company has claimed its territory for now. AMD said that the average selling prices (ASPs) for its processors actually went up by 3% overall during Q3: Both desktop and notebook ASPs were up while server CPU ASPs were “slightly” down.

Earlier this week, Current Analysis West analyst Toni Duboise told TG Daily that Intel apparently has moved its marketing dollars from the lower end of the market to higher-margin products. If accurate, this could explain why AMD was able to improve its ASPs, since most of its processor are positioned in entry-level and lower-end mainstream segments in the consumer market – and out of Intel’s focus area.

Barcelona and Phenom quad-core processors will take AMD up the ladder again: If the company can ship enough quad-core processors during the quarter, the company may be able to improve its ASP further and will not have to post a 29% shipment increase to achieve its revenue goal.

There was no detailed information on the presence of AMD quad-core processors besides a remark of president Dirk Meyer, who said that AMD shipped “tens of thousands” of quad-core Opterons in Q3 and aims to ship “hundreds of thousands” in Q4. That may sound much, but AMD is already under tremendous pressure here as Intel is currently shipping 20 different quad-core CPUs for desktop and server systems. In Q3 alone, more than 2 million quad-core processors left Intel’s factories. Quad-core supply will be ample in Q4 and AMD will have to fight for its margins. The introduction of quad-core processors is likely to have a positive impact on AMD’s product mix and ASPs, but there is some uncertainty among analysts just how available these processors will be in Q4 and how this will play out for the company.

But despite this uncertainty, it is interesting to note that analysts are apparently regaining some confidence in AMD. “Would it be correct to say that there is now a better chance that you are returning to profitability in the fourth quarter than there was one quarter ago?” asked one analyst during the conference call. Before answering “yes”, Rivet replied with a “thank you”, which was preceded by a short pause. There was no visual contact on this conference call between analysts, journalists and AMD executives, but one could just feel Rivet’s relief over a positive comment from an analyst. It was that sort of a positive comment AMD hasn’t heard in a year.

It’s anyone’s best guess whether AMD will be able to achieve its $2 billion revenue goal. And even if there is reasonable doubt that the company can actually hit that mark, the financial improvement is obvious and a full recovery now appears much more likely than three months ago.  No matter how you look at it, it’s a continuation of the story we have seen over the past year. There’s fierce competition between Intel and AMD, which should guarantee consumers a wave of new, greatly improved products on both sides.   

Hope this is it

Oct 19, 2007 02:08     

Im hoping AMD pulls it out in Q4. Im also hoping that the GPU sales are brisk as well, with the new games flooding in for fall/winter and ATI delivering some nice product, filling the void between 8800/2900 and the rest of the so called mids
John report abuse vote down vote up Votes: +0

cutting down sponsorships... that's the way to go

Oct 19, 2007 02:21     

I heard AMD is removing their sponsorships on sport events like NASCAR, not sure about F1. If they go like that.. hope they can recover. However.. don't forget that Intel also lost one billion in one of the quarters last years, forcing them to give up staff. Its a small world with full of sine waves. One time.. you are at peak, which followed by a valley.
Alien report abuse vote down vote up Votes: +0

yeah, not too surprised...

Oct 19, 2007 03:41     

it was only a matter of time for AMD to pick itself back up and continue the fight, something i've been expecting already. Go AMD! =P
Jon report abuse vote down vote up Votes: +0

I'd be one to argue

Oct 19, 2007 05:00     

that you'd be right in suggesting a small miracle is what they need. if this was the q1 goal of 2008, sure, if their 45nm process runs hard and is to expectations. to expect their current lineup for mainstream to give them that profit? How? Even if their 65nm processors are more mainstream, they cant expect them to survive. Dont get me wrong, i love amd, but the amd of two years ago isnt the one of today. Their entire structure has changed, and hopefully its for the good. If its a strong change for the good, id expect to see benefits this last quater, but not significant ones till the ones after.

skythra report abuse vote down vote up Votes: +0

bleeding to death

Oct 19, 2007 08:55     

AMD needs to find a private owner, maybe Microsoft can just buy them and call it a day... never mind how monopolistic and highly illegal that would be of course :)
Niva report abuse vote down vote up Votes: +0

More likely 2008

Oct 19, 2007 10:09     

I think it is too soon to see any traction from any quad offerings. But trimming unnecessary expenses is the way to go. AMD should also try to concentrate on moving all their offerings to 65nm process. Doing this will result in more chips at less cost thereby improving margins (with good yields). I think we can expect a continuation of the sell off of 90nm products for this quarter. The other sectors should hold or gain some what. The first half of 2008 will give us all a better picture.

tobago report abuse vote down vote up Votes: +0

me sensored

Oct 19, 2007 22:42     

what me do bad Rick?
coldmast report abuse vote down vote up Votes: +0

Quad core connundrums

Oct 20, 2007 07:42     

What do you think of this? http://www.crn.com/hardware/202404792 They can't even deliver Barcelona in quantity! So where will the profits come from?
Sockets report abuse vote down vote up Votes: +0

What loss?

Oct 20, 2007 21:43     

Intel did not have any loss last year, or the previous 10. AMD will still try and find a way to sue its way to profitability. Talk about AMD sitting back and relaxing, while Intel started producing.
robert report abuse vote down vote up Votes: +0

get it together down there AMD.

Oct 22, 2007 04:47     

I hope they pull it off in '08, or we're all in trouble.
Kevin LS report abuse vote down vote up Votes: +0

This guy talks up AMD all the time

Oct 25, 2007 08:57     

Consider the source. Revenue the highest its been since Q3 of 2006. Q3 every year is good for PC / Processor sales. This is the yearly cycle. They didn't "do" anything. Nothing like a fanboy writing editorials.
BSMonitor report abuse vote down vote up Votes: +0

go big green!

Oct 25, 2007 11:25     

I will not buy Intel no matter what, I am an unabashed AMD fan and that will never change. While I never believed AMD was going to fold and die, I was disheartened for a number of quarters now and this is welcome news for me and mine...now if only Serenity 2 would be greenlit then my world would be complete! CAN'T STOP THE SIGNAL!
ryan report abuse vote down vote up Votes: +0