For AMD, Less Is More
Dec 7th 2012 8:01PM
Updated Dec 7th 2012 8:04PM
The problems Advanced Micro Devices have faced lately are well-documented. Inventory writedowns, delivery problems, and macroeconomic pressures have all negatively affected AMD's share price. Down 53% year to date, AMD shareholders are ready for something to hold onto.
Strange as it sounds, the recent announcement from AMD that it has renegotiated its wafer contract with longtime partner GlobalFoundaries, agreeing to only one-quarter of the original contract, is a good thing. Under most circumstances, ordering such a small amount of inventory is viewed as an indication of a depressed marketplace, and a company that isn't meeting its revenue objectives. But for AMD, less turns out to be more.
Rather than the $500 million in wafers AMD had agreed to purchase, the new arrangement with GlobalFoundries calls for $125 million worth of product delivered in Q4. Here's where it gets kind of strange, however. The two companies agreed to the deal, with one large caveat -- AMD is required to pay GlobalFoundries a $320 million "termination fee."
There are a couple of downsides to the deal: No. 1, AMD ends up paying almost as much for not fulfilling its entire order than if it had done so. No. 2, AMD will incur a $165 million charge in the current quarter to account for the fee.
One upside to the fee, if it can be called an upside, is AMD is able to spread the payments out over the course of the next year. Considering AMD's declining cash balance -- down nearly $300 million compared to the prior quarter's $1.58 billion -- and $2 billion debt load, ready cash is at a premium.
AMD's decision to sell and lease back its Austin, Texas headquarters, pocketing an estimated $150 to $200 million , is an example of the need to bolster its financial standing. Plans are to complete the transaction, and have the proceeds available to help pay operating costs, by Q2 of 2013.
The new lower volume of wafers means AMD should be in a better position to manage its inventory. So, the write-offs AMD's been forced to take in the past for unused product shouldn't be an issue, at least for the immediate future.
To its credit, AMD is taking steps to broaden its markets beyond PCs. But its efforts to grow the mobile business means AMD is running headlong into the likes of Qualcomm , Ericsson , and NVIDIA , all of whom have been there, done that.
According to research firm IHS, both Qualcomm and NVIDIA will grow processor revenues in 2012. Qualcomm is expected to make the biggest jump, generating an additional 27.2% compared to last year, and NVIDIA will show an 8.7% improvement. The IHS study suggests AMD will see a decline in 2012 processor sales of 17.7%, thanks to the disintegrating PC market.
And then there's Ericsson and its smartphone patent portfolio. Its patents alone make Ericsson a key mobile chip player -- and another roadblock for AMD to overcome. Samsung, already paying Apple for infringing on its patents, is also the target of a recent patent infringement lawsuit filed by Ericsson.
Like AMD, Intel is another big hitter that was late to the mobile computing wars, but even it's ahead of AMD. For investors looking for value in the mobile chip space, Intel's financials, along with its impressive 4.5% dividend, make it an attractive alternative.
With all that, based on readers' comments from my Dec. 5 article, AMD has a number of fans, both for its products and its chances of getting things turned around. Though not at its 52-week low, AMD's share price is meandering in that neighborhood, which equates to a decent risk/reward scenario for the more aggressive investor.
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The article For AMD, Less Is More originally appeared on Fool.com.Fool contributor Tim Brugger has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel and Qualcomm. Motley Fool newsletter services recommend Intel and NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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