Advanced Micro Devices Inc. will have to more than shrink its workforce to fundamentally change its operating structure.
A 10 percent job cut sounds drastic, but Advanced Micro Devices Inc. will have to do better than that to fundamentally change its operating structure, including possibly embracing a fabless manufacturing model, if it wants to return to profitability anytime soon.
That's because AMD has one of the highest cost structures in the semiconductor industry, according to a EE Times analysis that shows the company trailing rival Intel Corp. and most other major IC suppliers in such metrics as gross profit, R&D along with selling, general and administrative (SG&A) expenses as measured as a percentage of sales.
Erasing the gap between AMD and Intel won't be achieved simply through layoffs announced by the on Monday (April 7) when it projected a revenue shortfall for the first quarter of 2008. It also will require a thorough overhaul of the company's operating model and probably a swift move to an outsourced manufacturing or adoption of a fabless system long promised by AMD (Sunnyvale, Calif.).
AMD's financial health has steadily deteriorated over the last five years as the company struggles to keep pace with rival Intel on technology and products. A key move was the addition of graphics chips through the acquisition of ATI Technologies Inc. The deal helped boost AMD's revenue to a record $6 billion in 2007, from approximately $5.7 billion in 2006 and as low as $3.5 billion in 2003. However, the revenue gains have come at a huge price in the form of higher operating costs.
The numbers don't look good
AMD's SG&A costs rose as a percentage of sales to 23 percent in 2007 from 20 percent one year earlier and a low of 16 percent in 2004. The company's R&D costs soared to 31 percent of total revenue in 2007 from just under 19 percent in 2004.
It gets worse. Total operating expenses as a percentage of revenues have ballooned as the company struggled with the costs of its $5 billion-plus acquisition of ATI.
In 2007, total operating expenses as a share of revenue hit 148 percent, including the $1.61 billion special charge recorded by the company during the year.
Even excluding that "unusual expense," AMD's total operating expense as a percentage of sales was 121 percent for 2007, versus 101 percent in 2006 and 96 percent in 2005. The surge in 2007 was attributable to AMD's higher expenses for R&D, SG&A as well as depreciation/amortization charge related to the ATI transaction.
Intel, on the other hand, managed to reduce SG&A as a percentage of sales to 14 percent in 2007 after it engineered a similar 10 percent workforce reduction in 2006, two years ahead of AMD's move. In 2006, Intel's SG&A expenses as a share of sales were 17 percent, up from 15 percent in 2005.
Intel's R&D costs as a share of sales have also remained relatively flat at about 15 percent, and the company has recently tamped down on total operating costs, dropping these as a percentage of sales to 79 percent in 2007 from 84 percent in 2006.
A review of financial data at other leading semiconductor companies also indicates costs are rising across the board within the industry.
Aside from AMD and Intel, other companies reviewed include STMicroelectronics N.V., Infineon Technologies A.G. and Nvidia Corp., the discrete graphics semiconductor supplier that a few analysts have suggested as a potential acquirer of AMD.
While all these companies have recorded mixed results in their overall cost reduction efforts, they have been mostly successful in bringing down SG&A expenses as a percentage of sales.