AMD to face tough questions at analyst meeting

AMD preempted the analyst meeting with the announcement Wednesday that it plans to take a material charge for impaired goodwill from its US$5.4 billion acquisition of graphics chip maker ATI. But AMD didn't say how big that charge will be, promising to announce the amount within four days -- a span of time that implies details of the charge will be revealed after the analyst meeting.

Goodwill is a financial term that describes the difference between the price that one company paid to acquire another and the net value of the assets that it acquires. This difference, or goodwill, reflects the intangibles that a company acquires, such as the reputation and intellectual property of the acquired company.

AMD initially recorded goodwill of $3.22 billion from the acquisition of ATI. That was reduced to $3.17 billion at the end of September, primarily due to changes in income-tax liabilities recorded by the company. AMD's decision to write off a significant portion of this goodwill is a recognition that ATI is no longer worth the price it paid last year.

The expected charge further dims AMD's gloomy financial outlook. The company has so far lost $1.6 billion this year on sales of $4.2 billion. By comparison, AMD recorded a $410 million profit on sales of $3.9 billion during the first nine months of 2006. At the same time, AMD borrowed heavily this year to keep its operations moving, issuing $3.7 billion in notes that are convertible into company shares.

AMD received a further boost last month with a $608 million investment from a company owned by the Abu Dhabi government, but the company still faces significant challenges.

Those challenges are reflected in the decline of AMD's gross margin since last year, partly as a result of the ATI acquisition, which brought lower-margin products into AMD's lineup, but also because server chips represented a lower percentage of the company's microprocessor sales. Server chips are generally more expensive and have higher margins than processors used in desktops and notebooks, and strong sales of server chips would give a badly needed boost to AMD's financial situation.

The problem is that AMD's latest server chip, the Quad-Core Opteron formerly known as Barcelona, has been repeatedly delayed, giving rival Intel an opening to expand sales of its own server chips at AMD's expense.

After recently discovering a bug in the Quad-Core Opteron that stopped shipments of the chip, AMD now expects the processor, launched in September, to finally ship in large volumes sometime during the first quarter of 2008. That means the Quad-Core Opteron might not be available to most customers until March, six months after its launch and more than one year after the first pre-production samples of the chip were made available to server makers.

While analysts will be looking for more detailed guidance on when AMD expects to ship Quad-Core Opteron chips in volume, they will also be looking for information on the next version of the Quad-Core Opteron, called Shanghai. AMD promised to ship Shanghai during the middle of 2008, but the company has yet to produce working samples of the chip.

"We will have initial samples also in January. I'm fairly confident that those puppies are going to boot, and then we can have a follow-up conference call and I'll tell you, 'The sucker is booting,'" said Mario Rivas, the executive vice president of AMD's Computing Products Group, responding to a question about Shanghai during a recent interview with CRN.

Whether that means AMD will release Shanghai in mid-2008 as promised remains to be seen.

Shanghai is a 45-nanometer "shrink" of the problematic Barcelona chip, which is produced using a 65-nanometer process. These numbers represent the average size of the smallest feature that can be created on a chip, and smaller is generally considered better.

Moving to a more advanced production process offers chip makers several benefits, such as reducing unit production costs by making the chip smaller or adding more features, such as additional on-chip cache. But the move to a more advanced process also carries risks, such as the possibility of lower production yields that can result in limited availability or chips that run at lower clock speeds than expected.

Along with these issues looming over AMD, there are questions about the future of Hector Ruiz, the company's CEO and chairman. As head of the company, Ruiz ultimately bears responsibility for the company's recent performance problems and the impending write down of goodwill from the ATI acquisition. For months, there has been speculation within the industry that Ruiz would be forced to step down from his current position.

However, that's unlikely to happen, according to a Reuters report citing comments made by Ruiz in a television interview to be aired by CNBC Europe later today. During that interview, Ruiz named AMD President and COO Dirk Meyer as his successor, but scotched speculation he plans to step down next year, the report said.