AMD issues Q3 warning, analysts warn on burn rate

Advanced Micro Devices Inc. (AMD) lowered its estimates for its third-quarter revenue Wednesday, as analysts warned the company will have to secure additional financing to survive beyond the expected launch of its Hammer processors in mid-2003 if the current weakness in the PC market continues.

The company said its third-quarter sales will be about US$500 million, down from estimates of slight growth from AMD’s second-quarter revenue of US$600 million. Significant reductions in AMD’s inventory of processors due to oversupply reduced third-quarter sales, it said in a release.

AMD is struggling to manage its debt and cash flow amid a slowdown in sales of PCs. Assuming the company posts US$500 million in revenue for the third quarter, and assuming the PC market grows slowly into 2003, AMD will burn through its remaining cash in five quarters through its efforts to pay off its long-term debt without dipping into its credit line, said Eric Ross, director of electronics research at market research company Investec in New York.

“We doubt the company can survive without a substantial financing event,” said Ross in a research note distributed Thursday. AMD is burning through US$200 million in cash each quarter, he said.

The company’s options include restructuring its debt, or borrowing against assets, including its Dresden, Germany, fab, Ross said. “For safety’s sake, they would want to raise around US$500 million,” he said.

Ross believes AMD’s technology is competitive with rival Intel Corp., but the larger chip maker is in a far better financial position. The financial situation at AMD, based in Sunnyvale, Calif., handicaps it in the battle against Intel for the processor market, Ross said.

“I think they’ve done a great job in staying competitive, but can they keep it up? If the PC market continues to be weak, and the flash market continues to be weak, that’s a big problem for them. They’re not going to lose much market share, and their technology is competitive, but they won’t be able to make huge investments in new designs or process technologies,” he said.

The company will release its third-quarter financial results on Oct. 16.

AMD launched its fastest desktop processors yet on Tuesday, the Athlon XP 2800+ and 2700+, although the chips won’t be available until late November. It is scheduled to release the next two major steps on its road map, its higher-cache Barton core and its 64-bit Hammer chips, in the first half of 2003.