Sunday, October 18, 2009


AMD announced its third quarter 2009 results and fourth quarter guidance at its analyst conference on Thursday, October 15, 2009. On a GAAP basis, AMD lost $128 million in the third quarter. While that improves on a $330 million loss in Q2, and on $134 million loss in the year-earlier quarter when revenues were higher, no one could claim it is a good number for stockholders.

On the other hand AMD announced $214 million adjusted EBITDA. That is Earnings before Interest, Taxes, Depreciation, and Amortization.

I know investors who keep a very close eye on EBITDA and prefer it as a measure to GAAP or even non-GAAP net income. A better way to look at it is it is a real number, and it has meaning if you understand it and its relation to the current stock price and future expectations.

In AMD's case, they announced that all non-GAAP measures (EBITDA is not a GAAP measure) reported are for the AMD Product Company. This is the main part of AMD that designs and sells microprocessors, graphics processors, and other semiconductor parts. The other part of the company own the fabs, the factories that make those parts, which has been largely spun off. AMD still owns part of that, which is now called GLOBALFOUNDRIES. At present GLOBALFOUNDRIES has only one customer, AMD, but it is talks to expand its client list.

The AMD Product Company, if it were a separate entity, would have been profitable, barely, on a non-GAAP basis, with net income of $2 million. GAAP, they showed a loss, because non-GAAP net income excludes certain one-time or non-cash expenses (and sometimes income).

The biggest single difference between EBITDA and non-GAAP earnings is interest, in this case costing $110 million. The rest is depreciation and amortization of $96 million, and a mixture of smaller items.

Depreciation and amortization refer to cash that was already spent in the past, usually on capital equipment or acquisitions, that is written off gradually as an expense due to IRS rules.

Interest, however, is a real expense, and in AMD's case is caused by over $5 billion it owes from acquiring ATI. The ATI purchase is beginning to pay off with traction in graphics and the planned introduction in 2010 of combined microprocessor-graphics chips, but the money owed and the interest is quite real. The interest payments won't go away until the principle is paid down, and it can't be paid down without cash profits.

Knock $110 in interest off the $214 EBITDA, and you have $104 million in what you could argue was some kind of profits for the quarter.

Q3 is usually a strong season for AMD, compared to Q1s and Q2s. But the economy should recover in 2010. If Intel does not start another price war — not likely given that they are under a great deal of scrutiny for their illegal and unethical past behavior — it is not unreasonable to project $104 million out another three quarters.

With a big rounding that is $400 million a year in earnings of a sort. A moderately bullish analyst might argue that a market capitalization of $8 billion is justified by those earnings. To get to an $8 billion market cap, the price of AMD's stock would need to hit $11.50 per share.

That sounds very bullish, and given the competition, it might be. But it might also be the case that in 2010 AMD is going to take a lot of market share from both Intel and NVIDIA, and it might even be market share with good margins. In which case this little calculation exercise will seem conservative in retrospect.

In conclusion, both the risks and opportunities for AMD investors are great. It is not a stock for the faint of heart.

So keep diversified!

See also AMD: The Dream Renewed [May 18, 2009] in which I describe the situation based on the AMD v. Intel lawsuit. And of course my AMD analyst conference summary for October 15, 2009

Disclaimer: I own some AMD stock.

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