Wachovia analysts see AMD credit continuing to deteriorate near-term

By Ronda Fears

Nashville, Tenn., Oct. 3 - With a hefty cash burn rate anticipated and Advanced Micro Devices Inc.'s recent warning, the credit will continue to crumble and convertible investors might look elsewhere for chip exposure, according to a report Thursday by convertible analysts at Wachovia Securities, Inc.

"We believe AMD's credit will continue to deteriorate in the short term. The only major catalyst, besides a major restructuring, for this company is the introduction of its Hammer family of microprocessors," said analysts Henry Voskoboynik and Dmitry Melnick in the report.

"Because this product family will only be introduced early next year (best-case scenario) and will not meaningfully contribute to revenue until the December 2003 quarter, convertible investors might find more compelling investment ideas elsewhere in the semiconductor industry."

AMD's stock bottomed at 0.6x book value in the two previous cyclical downturns in 1992 and 1996, the analysts said. Using this trough valuation on estimated book value of $7.70 at the end of 2003 suggests downside to $4.62.

However, the analysts expect AMD to post an aggregate loss in excess of $1 billion in 2002 and 2003, including a 40% tax credit, substantially surpassing losses in the previous downturns.

Earlier this week, AMD pre-announced yet another disappointing quarter, lowering guidance for fiscal third quarter revenue to $500 million from $600 million-plus. The consensus estimate called for revenue of $614 million.

In addition, the company said it expects to post a "substantial operating loss" for the quarter.

All of the shortfall is coming from the microprocessor side of the business. The flash memory business improved sequentially in the third quarter and accounted for about 39% of sales, up from 29% in the June quarter.

Wachovia analysts believe AMD's microprocessor unit shipments declined to 5.5 million in the September quarter, down from 6 million in the June quarter and 8 million in the March quarter.

They also forecast a 20% sequential average selling price decline from $62 in June to $50 in September, resulting in a 26.3% sequential revenue decline in the microprocessor business.

In addition, the analysts currently believe AMD had to take product back from distributors in the quarter and as a result will likely post a substantial inventory write-down charge to mark product to market.

The Wachovia analysts expect AMD to finish the September quarter with cash and equivalents of $735 million, down from $1.1 billion at the end of June and short- and long-term debt of $1.43 billion. Their estimates call for negative $74 million in cash flow from operations and negative $289 million in free cash flow.

"Despite substantial revenue declines over the past three quarters, the company refuses to take any meaningful permanent measures to reduce its cost structure," the analysts said.

"Unless the company announces a major restructuring program, including substantial headcount reduction, it will likely burn through more than $600 million over the next five quarters."

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