AMD Reduces Chip Orders

Zacks

In yet another attempt to cut costs, Advanced Micro Devices Inc. (AMD) announced that it would reduce its fourth quarter and 2013 wafer purchase commitment with GlobalFoundries.

GlobalFoundries, which manufactures integrated circuits (ICs) for semiconductor companies such as Broadcom (BRCM), Qualcomm (QCOM), and STMicroelectronics (STM) was formed in 2009 by divesting AMD’s manufacturing unit. In 2010, it merged with Singapore-based Chartered Semiconductor Manufacturing Co. Ltd. to become the third largest foundry in the world.

AMD will reduce its expenditure on wafer purchases to $115.0 million for the fourth quarter and $1.15 billion for fiscal 2013. However, AMD will have to fork out a termination payment of $320.0 million, which will be spread over the next four quarters.

The global PC market is showing no sign of recovery as the rising popularity of Apple's (AAPL) iPads and Google’s (GOOG) Android devices continue to cannibalize sales. Handheld devices are the preferred choice now, since most routine work can be done with them. On the macro front, the Chinese and European economies have slowed down and the U.S. is fighting its own Fiscal Cliff dilemma. Hence, global PC demand may decline further in 2013.

Previously, AMD had cut roughly 400 jobs from its Austin workforce in order to reduce operational costs. It is also planning to sell its 58-acre Austin, Texas site and lease back the same from the buyer in an attempt to generate funds to pay some portion of its debt and diversify its business. It is expecting to raise $150.0 million to $200.0 million from the transaction.

The company had a debt of $2.035 billion at the end of the third quarter. It also includes a due of $225.0 million to Globalfoundries in the first quarter of 2013. Hence, AMD is taking all sorts of measures to generate more cash and pay off its surging debt.

AMD’s revenues in the third quarter came in at $1.27 billion, down 10.2% sequentially and 24.9% year over year, more or less in line with its revised guidance of a 10% sequential decline (at the mid-point). Revenues were also in line with consensus expectations of $1.28 billion. The Graphics business generated 27% of its sales and was down 6.8% sequentially and 15.1% from the year-ago quarter.

The weak third quarter performance and fourth quarter guidance sent estimates plunging, which had the Zacks Consensus Estimate for the fourth quarter and fiscal years 2012 and 2013 dropping significantly lower. As a result, AMD shares carry a Zacks Rank #5 (Strong Sell).

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