Advanced Micro’s Big Restructuring

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“Our restructuring efforts are decisive actions that position AMD to compete more effectively and improve our financial results.”

-Rory P. Read, CEO & President of AMD

Advanced Micro Devices (NYSE: AMD) designs and manufactures semiconductors, as well as differentiated products like Accelerated Processing Units. A semiconductor is an essential piece of equipment that powers a wide range of computing devices.

Advanced Micro’s Q3 2012 revenue was $1.27 billion, a decrease of 10% from Q2 2012. It adjusted operating loss was $0.12 billion, which was substantially lower than compared to Q2 2012. AMD’s reported adjusted net loss is $0.15 billion, again a substantial decrease from Q2 ‘12.The decrease in the revenue and profitability is caused primarily by decreased consumer  buying and reduced average selling price.

AMD expects Q4 2013 revenue of $1.2 billion, a decrease of 9% from Q3 2013. A decrease in revenue expectations of the company is based on the fact that the demand from the customers will fall due to the on-going global economic environment, consumer softness in the mature market, and a slowing enterprise market segment. All this will ultimately reduce the demand for AMD products.

 AMD recently launched a large restructuring program. I believe that this program will substantially reduce the company's profitability in the short run. The company itself estimates that the restructuring will cost $20 million alone in Q4 2012 and $190 million for FY 2013. However, in the long run this will help the company to increase its competitiveness and will enhance shareholder return. AMD is planning to reduce its global workforce by 15%; I see this as an opportunity for the company to weed out inefficient workers.

I believe that AMD will use the advanced technology to further reduce the cost per unit of its product. This action will be along the lines of Intel’s introduction of 3-D 22nm technology, which has substantially reduced the cost of Intel products. Recently, AMD introduced II generation A-series APU, one step in this direction.

Intel (NASDAQ: INTC) is the largest global supplier of microprocessors. AMD is the only significant rival to Intel in the CPU market for personal computers. Together, both Intel and AMD hold 99.1% of the market, with Intel occupying about 80% and AMD occupying 19% in FY 2011. In comparison to Intel, sales of AMD are still very small. However, the recent restructuring steps and more emphasis from AMD on research & development will surely help AMD to perform better in the future and help it to withstand the competition, especially Intel.

Nvidia (NASDAQ: NVDA) is another competitor of AMD. Its total revenue for Q3 2012 stands at $1.2 billion. Out of the company's total revenue, the GPU segment comprises 62.3%. Licensing fees from Intel are one of the primary sources for Nvidia's GPU segment revenue. If Nvidia aggressively competes with Intel, it is always possible that Intel will forcefully acquire Nvidia. This is more probable, as the major component of the Nvidia’s revenue comes from Intel. Hence, acquisition of Nvidia may bring lots of synergies, which make Nvidia vulnerable to acquisition from Intel.

The recent economic slowdown has forced companies to reduce costs while maintaining their operational efficiency and quality. As such, I see this as an opportunity for AMD to weed out operational inefficiencies, instead of a weakness.

In Q3 2012 AMD witnessed substantially lower sales and  profitability. All this is the result of economic slowdown and consumer softness. I believe that the company will break down this trend in coming periods. Hence, the stock can be bought for a medium and long term investment.

akgupta88 has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend Intel and NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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