While a solid quarterly report is expected today from Advanced Micro Devices, Lehman Brothers today reported that the company’s share appreciation may feel the weight of Spansion’s coming IPO.

Spansion, a flash company AMD jointly founded with Fujitsu, announced its plans to break off on its own in April as AMD announced a loss in its Q1. Now with Q2’s announcement waiting in the wings, Lehman predicts the parent company will still feel the effects of its soon-to-be independent startup.

“While we believe product momentum continues, particularly in the microprocessor business, we recognize that the impending IPO of the Spansion flash business may be an overhang on further near-term share appreciation,” Tim Luke, managing director of equity research, at the firm said in a report.

“At present we retain our 2-Equal Weight rating with a constructive bias ahead of the seasonally strong [second half] and ongoing solid execution in the microprocessor business,” he said, noting that MPUs make up about 60 percent of AMD’s total sales.

Indeed, Lehman expects AMD’s June quarter MPU revenue to show a sequential gain of 8 percent and a year-over-year decline of 1 percent. The Opteron microprocessor for servers will continue to be the marquee product for AMD going forward, Lehman reported.

Further, Lehman said AMD’s flash is seeing some progress but faces strict pricing challenges in the market. “With respect to the flash spin and Spansion IPO, we believe that while the market dynamics remain competitive, units may show growth in Q2 and second half (units were up 10 percent quarter-over-quarter in Q1),” Luke said. “We believe the pricing environment remains challenging and therefore model flash sales down 3 percent quarter-over-quarter and down 36 percent year-over-year to approximately $434 million.

In terms of profitability, Lehman estimate AMD's operating loss at approximately $86 million in Q2 from a loss of approximately $110 million in Q1. Going forward, the firm expects an improvement toward a loss of $60 million in Q3.

“While we do not model breakeven profitability in 2005 for the flash business, we consider that an environment of improving unit growth as well as ongoing higher margin MirrorBit traction could allow some upside to these estimates,” the analyst continued. “At present we retain a more conservative profile for this volatile business.” 

Overall, Lehman anticipates AMD Q2 revenue of $1.2 billion, down 1.6 percent sequentially, and gross margins of 36.4 percent. Within that, the firm expects MPU sales to be 62 percent of revenue; flash memory to be 36 percent of sales, down 3 percent sequentially.

By: DocMemory
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