AMD Projects Impairment Charge Due to Weak Graphics, Multimedia Business Performance.

Just one day ahead of its meeting with financial analysts Advanced Micro Devices said that the value it paid for graphics and multimedia chip designer ATI Technologies last year was too high and the actual revenues the company gets and will be able to obtain from its graphics and multimedia businesses are below expectations.

AMD: ATI Is Guilty of Everything

According to a statement with the U.S. Security and Exchange Commission (SEC), AMD concluded that the current carrying value of its goodwill which it had recorded as a result of its October 2006 acquisition of ATI Technologies was impaired. The write down will allow AMD to easily explain financial analysts why its current market capitalization ($4.97 billion at press time) is below the price of ATI it paid last year as well as poor financial results and losses with problems that allegedly existed at ATI before the merge.

“The acquisition took place at the moment, when ATI was not really leading in terms of technology… It is not like we acquired ATI and we lost market share. It was just a consequence of [ATI’s execution]: Nvidia had better graphics than ATI back then and that is why AMD lost market share. We also should consider [hardware] cycles of OEMs: if you are missing their cycles, you are out for a while. You have to be [ready] with the right [product] part at the right moment to get a cycle. When you are in, you are going to stay in for a long time. So, the main reason behind the share loss is missing OEM cycles. But we are regaining them now,” recently said Vincenzo Pistillo, director of consumer business development in EMEA region for AMD.

“This conclusion was reached based on the results of an updated long-term financial outlook for the businesses of the former ATI Technologies as part of AMD’s strategic planning cycle conducted annually during the company’s fourth quarter and based on the preliminary findings of the company’s annual goodwill impairment testing that commenced in the beginning of October 2007,” a statement concerning the write-down reads.

AMD’s Graphics Product Group Performs Below Expectations

Formally speaking, ATI Radeon X1900-series graphics cards were considerably more advanced than Nvidia’s GeForce 7900-series offerings at the time when AMD acquired the Canada-based graphics chip developer. But ATI, which at the time was already AMD’s graphics product group, could not launch its DirectX 10-supporting high-end offering last November and then was also late with mainstream DX10 graphics products.

But market share declines emerged not because ATI could not offer a competitor to Nvidia’s GeForce 8800 GTX, which still retails for $549 and higher. Just after AMD and ATI announced the transaction, partners of Intel and ATI annuled orders onto ATI Radeon Xpress-branded chipsets for Intel processors, which dramatically lowered ATI’s market share from 27.6% to 20.3%, according to Jon Peddie Research (JPR) data. However, already in Q4 2006 the market share of AMD’s graphics product group rebound to 23%, only to gradually decline to 19.1% in Q3 2007.

Clearly, the loss of Intel-compatible chipset sales as well as overall graphics adapter market share rather negatively affected sales of graphics products at AMD. If back in Q3 FY2006* ATI earned $325 million on its desktop and mobile discrete graphics products, then in Q3 FY2007* graphics product group of AMD only reported $252 million in revenue (only a bit higher than $228.3 million that ATI used to earn on desktop standalone products only).

It should be noted that the third calendar quarter is usually the strongest quarter in terms of volume during the year and AMD publicly stated that despite of the new product launch it does not expect graphics revenue increase in Q4 FY2007. If similar calendar periods are compared, then the picture would be even worse for AMD, as in Q2 FY2007 (which ends on June 30) its graphics product group earned $195 million, down 40% from ATI’s discrete graphics revenue in Q3 FY2006.

Consumer Electronics Sales of Former ATI Dip FurtherGraphics product group of AMD evidently experienced a number of issues with transitioning to DirectX 10 architecture and its relatively weak business performance, perhaps, could be explained with technology-related issues. But is it only the division of former ATI, which performance leaves much to be desired? It seems that not really.

AMD's third quarter consumer electronics (CE) segment revenue was $97 million. Under consumer electronics AMD understands sales of chips for handhelds, TV-sets, royalties from video game console manufacturers and, quite possibly, nonrecurring engineering (NRE) works that the company’s specialists may do in one of those segments.

ATI earned $150 million ($145 million without NRE) back in its Q3 FY2006 on handheld/DTV processors, NRE and royalties. It should be noted that back in Spring ’06 there was no massively successful Nintendo Wii game console on the market. Microsoft Xbox 360 also hardly brought a lot to ATI due to weak seasonality for game consoles as manufacturers start to ramp up production of game systems for holiday season in Summer.

Even if AMD got $20 million in royalties for Wii and Xbox 360 (which is a huge underestimation) in a seasonally strong quarter that ends on the 30th of September, it means that actual sales of CE products declined nearly two times since ATI’s days, from $135 million in seasonally weak quarter to $77 million in seasonally strong quarter.

Microprocessor Sales Down, Chipset Revenues ShadyDue to the fact that central processing units (CPUs) from Intel Corp. have performance advantage over CPUs by AMD, sales of microprocessors seem to be considerably down compared to the previous year.

Back in Q3 FY2006 the world’s second largest maker of x86 chips earned $1.33 billion on its computing products (CPUs only at the time), whereas in Q3 FY2007 it reported computing solutions group revenue of $1.283 billion (which now includes sales of both CPUs and chipsets).
ATI earned nearly $170 million on mobile and desktop core-logic sets for AMD and Intel processors in Q3 FY2006, but since the lion’s share of those earnings most likely came from Intel-compatible chipsets, this number can hardly be compared to anything now. Unlike CPUs, chipsets cost about $25 - $30 in average in the best-case scenario and given the current position of AMD processors on the market, AMD probably had to concentrate on lower-end solutions.
Anyway, after the acquisition by AMD the former ATI cannot sell any significant amount of chipsets compatible with Intel processors. Therefore, its maximum chipset market share will be equal to AMD’s processors, whereas its realistic market share may be even lower, as there are still Nvidia, SiS and Via on the market.

AMD to Write Down ATI Acquisition

While it is evident that business of former ATI has been harmed considerably in the most recent seventeen months, AMD insists that the explanation of dramatic revenue decline is ATI’s issues with execution that were left unnoticed by AMD during the acquisition process going on for nearly a year: starting from December ’05 and closing in October ‘06. It is interesting to note that without former ATI earnings of AMD in the most recent quarter could be as low as $1.2 billion (thanks to later-than-expected quad-core chip launch in September), instead of $1.632 billion.

Currently the chipmaker has no idea how much they overpaid for ATI Technologies. But the acknowledgement of the fact that ATI’s business may bring less revenue than expected a while ago may pursue a number of different goals, including the one to focus analysts' and investors' attention on certain aspects of AMD’s business instead of attracting it to AMD’s business in general.

“The company expects that the impairment charge will be material, but the company has determined that, as of the time of this filing, it is unable in good faith to make a determination of an estimate of the amount or range of amounts of the impairment charge. […] In any event within 4 business days after it makes a determination of such an estimate or range of estimates,” the statement by AMD reads.

*In this news-story we compare data between AMD’s Q3 of fiscal 2007 (which ended on September 30, 2007) and ATI’s Q3 of fiscal 2007 (which ended May 31, 2006).