Amid further delays of AMD's quad-core server chip and plans to write off goodwill from the acquisition of ATI, AMD executives are going to face tough questions when they meet financial analysts in New York today.
AMD pre-empted the analyst meeting with the announcement on Wednesday that it plans to take a material charge for impaired goodwill from its $5.4bn acquisition of graphics chip maker ATI. But AMD didn't say how big that charge will be, promising to announce the amount within four days - a span of time that implies details of the charge will be revealed after the analyst meeting.
Goodwill is a financial term that describes the difference between the price that one company paid to acquire another and the net value of the assets that it acquires. This difference, or goodwill, reflects the intangibles that a company acquires, such as the reputation and intellectual property of the acquired company.
AMD initially recorded goodwill of $3.22bn from the acquisition of ATI. That was reduced to $3.17bn at the end of September, primarily due to changes in income-tax liabilities recorded by the company. AMD's decision to write off a significant portion of this goodwill is a recognition that ATI is no longer worth the price it paid last year.
The expected charge further dims AMD's gloomy financial outlook. The company has so far lost $1.6bn this year on sales of $4.2bn. By comparison, AMD recorded a $410m profit on sales of $3.9bn during the first nine months of 2006. At the same time, AMD borrowed heavily this year to keep its operations moving, issuing $3.7bn in notes that are convertible into company shares.
AMD received a further boost last month with a $608m investment from a company owned by the Abu Dhabi government, but the company still faces significant challenges.
Those challenges are reflected in the decline of AMD's gross margin since last year, partly as a result of the ATI acquisition, which brought lower-margin products into AMD's lineup, but also because server chips represented a lower percentage of the company's microprocessor sales. Server chips are generally more expensive and have higher margins than processors used in desktops and notebooks, and strong sales of server chips would give a badly needed boost to AMD's financial situation.
The problem is that AMD's latest server chip, the quad-core Opteron formerly known as Barcelona, has been repeatedly delayed, giving rival Intel an opening to expand sales of its own server chips at AMD's expense.
After recently discovering a bug in the quad-core Opteron that stopped shipments of the chip, AMD now expects the processor, launched in September, to finally ship in large volumes sometime during the first quarter of 2008. That means the quad-core Opteron might not be available to most customers until March, six months after its launch and more than one year after the first pre-production samples of the chip were made available to server makers.