Analysis: AMD's three-year reorganization

Even though its financial results have not reflected it, Advanced Micro Devices Inc. has changed in numerous and quite significant ways after several years of restructuring.

True. It can be difficult figuring out the extent of the changes that have occurred over the course of the last three years at the company because AMD's strategy of doling out details of its reorganization in bits—while keeping investors in suspense regarding plans for major operational areas such as manufacturing—have kept the rumor mills busy.

However, while AMD's failure to turn a profit in the last several quarters have raised doubts about the overall effectiveness of its reorganization plan, a closer look at the company's more recent announcements indicates the IC vendor is conducting the corporate version of an extreme makeover upon which executives pin all their hopes for the company's future.

The company's reorganization appears to have been structured along the following operational line:

First, reorganize the upper management—a process that is continuing; second, jettison non-core product lines; third, sell other fixed assets, including fabs, if necessary, but maintain some control over manufacturing through strategic partnerships.

Fourth, reduce workforce through direct layoffs and sale of businesses; fifth, improve liquidity position by raising funds through the sale of shares/equity stake; sixth, tidy up balance sheet by writing down or writing off the value of previous acquisitions to bring them in line with current market valuation and; seventh, cut capital expenditure.

The management's goal is to get AMD to operational profitability by the end of the December 2008 quarter.

Nip-and-tuck
While AMD's goals and strategic initiatives have received support from the investment community, the company has also been widely criticized for its nip-and-tuck approach.

Many of the initiatives proposed and implemented over the last couple of years have been executed in incremental stages, which have created the impression that the company is forever reorganizing and restructuring its operations.

As an industry observer noted, AMD appears locked into a process of "reorganization by a thousand stitches." The company will eventually achieve its goal, industry sources said, but its equity value is taking a major hit due to the perception that the company is in perpetual turmoil.

AMD itself provides enough reasons to doubt the reorganization plan is sufficiently comprehensive to achieve the desired goals.

Consider the following: a new president and CEO is in place yet the old boss Hector de Ruiz continues to hang around in an executive chairman capacity because the "company values his experience," according to a spokesman for AMD.

By retaining the role of executive chairman, however, Ruiz creates the impression in the investment community that CEO Dirk Meyer needs a little more handholding before he can fully assume complete management control of the company.

Also, the company's promised asset-light manufacturing strategy is yet to be unveiled more than one year after it was initially announced although the AMD spokesman confirmed implementation of the plan had already begun.

'Trust us, we are on track and it's going to be revolutionary for the industry,' AMD seemed to be saying, even though only a select few within the company and its likely external manufacturing partners can confirm this.

Asset-light plan on track
While the AMD spokesman insists the asset-light plan is already being introduced, some analysts believe the strategy is still under development although it is now at an advanced stage "with implementation over the next several quarters," according to Doug Freedman of American Technology Research.

One area of concern in the analyst community is how ambiguous AMD's competitive position remains in the microprocessor market and increasingly in the graphics IC sector where the company has seen the value of its ATI Technologies acquisition drop precipitously as competition increased from Nvidia Corp. and Intel.

In the struggle for market share with Intel in the microprocessor market, AMD's position has improved, claims the company and a few analysts, including American Technology's Freedman who said AMD's Q3 "is likely tracking better than consensus due to strength from numerous segments."

Some other analysts believe any improvement in AMD's position in the MPU industry is being seriously eroded by the overwhelming edge Intel maintains in resources and process technology.

The graphics IC market where AMD had some advantages over Nvidia is also still a problem area for the company due to the limited resources available to the company to fund needed research, according to Freedman.

"Although ATI has regained performance leadership in GPUs at 55nm, we remain somewhat concerned that ongoing restructuring introduces several risks specific to AMD," Freedman said in a report. "AMD's resource allocation (marketing, R&D), changing wafer fab strategy, and focus could potentially fall short of Nvidia's and add risk to the ATI GPU architecture roadmap."

AMD reborn
AMD by the end of the year is certain to emerge a fundamentally different though smaller company involved in only a handful of businesses. It has sold off some product lines considered non-core, including the DTV operation snapped up Aug. 25 by Broadcom Corp.

Through strategic funding, the company has shored up its balance sheet and jacked up cash and short-term investments to the highest level in years even as it worked on improving its operating metrics.

Gross profit margin, for instance, rose to 52 percent at the end of Q2 from 42 percent in the preceding quarter and 34 percent in the comparable three-month period in 2007.

The improvement in Q2 08 results was a direct result of the assets sale exercise undertaken by the company. The Q2 margin received a significant boost from the sale of the company's 200mm manufacturing equipment.

Stripped of the contribution from the equipment sales, Q2 gross profit margin would have been 37 percent, a sharp decline from the year-ago comparable period.

The workforce reduction promised by AMD—up to 10 percent—is reportedly on track and steps are being taken to improve the competitiveness of its microprocessors and graphics IC offerings.

The sale of the DTV unit was itself a fulfillment of a promise made earlier this year when Ruiz said the company would "exit those businesses" that were not leaders in their sectors.

So what will AMD look like once it completes the ongoing reorganization?

The company's workforce is expected to decrease to about 15,000 or less—more than 500 employees will join Broadcom upon completing the DTV transaction—and the breakeven revenue goal is also likely to decrease as costs fall.

The company's business divisions will most likely be pared down to two, namely, the computing business, which makes up the bulk of its sales and represented 78 percent of the 2007 revenue of $6 billion and the graphics IC business, which accounted for 15 percent of total revenue last year.

The consumer electronics division, which contributed sales of $408 million or 7 percent of 2007 revenue, will probably disappear into Broadcom.

AMD had previously exited the memory market and will emerge with two businesses executives consider viable by the end of this year.

It is obvious that AMD has taken serious steps to overhaul its operation but the challenge for the company is that the market remains fluid and rivals are constantly reviewing and adjusting their own positions to improve competitiveness.

AMD's management might find themselves wrapping up the ongoing restructuring process only to discover they must immediately embark upon another round in an unending series of reorganization and market repositioning.

- Bolaji Ojo
EE Times