AMD earnings: More fear, uncertainty, and doubt?

Don't expect the chipmaker's outlook to be uplifting when it reports earnings on Thursday. Company already has said it plans to trim workforce by 9 percent and cut pay.

Brooke Crothers Former CNET contributor
Brooke Crothers writes about mobile computer systems, including laptops, tablets, smartphones: how they define the computing experience and the hardware that makes them tick. He has served as an editor at large at CNET News and a contributing reporter to The New York Times' Bits and Technology sections. His interest in things small began when living in Tokyo in a very small apartment for a very long time.
Brooke Crothers
3 min read

Updated at 11 a.m. PST with additional information from analysts.

These are not ordinary times. Not for Advanced Micro Devices, which reports earnings on Thursday. Nor for Intel.

For starters, AMD said last week that it would slash its workforce by 9 percent and institute temporary salary cuts.

This comes as the company enters the final stages of bifurcating into AMD the product company, which designs chips, and The Foundry Company, which manufactures them. A measure taken to stave off collapse. (There are still a few more steps that have to be taken before the split is sanctioned by all entities involved.)

The Sunnyvale, Calif.-based chipmaker also faces the Herculean task of returning to breaking even in operating income, according to Ashok Kumar, an analyst at investment bank Collins Stewart.

The world economy isn't cooperating, however. AMD, like Intel, has to face a difficult first quarter and possibly troubled second quarter. These two quarters are historically weak to begin with. Add the unusually negative macroeconomic factors on top of that and "recovery isn't looking like a first half kind of thing" for AMD, according to an industry source who follows the company and expects AMD to paint a less than rosy picture.

"This doesn't look like one of your normal semiconductor cycles, where you pop out of it very quickly and very aggressively, and overtake any dips," said the source.

And speaking of dips, Taiwan Semiconductor Manufacturing Co., the largest contract chip manufacturer and major industry bellwether, said on January 9 that December net sales on a consolidated basis were off 30.1 percent from November 2008 and off a whopping 51.9 percent (54.8 percent on an unconsolidated basis) from December 2007. TSMC reports fourth-quarter results on Thursday too.

The situation for Intel--which reported a 90 percent dive in year-to-year fourth-quarter profits last week--isn't that different. Bloomberg is reporting that Chief Executive officer Paul Otellini told employees last week in an internal memo that a first-quarter loss is possible after 87 quarters of profit.

But Intel said as much publicly in its earnings conference call last week, refusing to give official guidance for the first quarter due to heightened uncertainty and then bringing up a possible scenario in which things don't improve as expected.

Chief Financial Officer Stacy Smith put it this way during the conference call: because of the dramatic drop-off in demand from customers (what Intel calls "the supply chain") in the fourth quarter, the chipmaker is "aggressively" reducing factory utilization in the first quarter. "The expectation is that we can start to reload the factories a bit in Q2 from where they are in Q1," he said. But he then addressed a "hypothetical" situation where conditions don't improve as expected.

In this case, Smith said Intel would slow the introduction of next-generation 32-nanometer manufacturing process technology. (Currently Intel chips are based on 45-nanometer technology.) "Over time if our view of demand is wrong and this is much worse than we expect...we'd slow the ramp rate of 32-nanometer," he said.

The question is what measures AMD will take if its already precarious situation gets worse. Doug Freedman of Broadpoint AmTech estimates that AMD's two-quarter sales decline is about 30 percent, though AMD may be faster at correcting excess inventory than Intel.

"We expect the operating income break-even level to be imminently lowered through more permanent cost controls given near-term challenges in the PC-related food chain," Freedman said in a research note Wednesday.

Collins Stewart's Kumar said he thinks AMD may have to further "cost-reduce" itself back to profitability.