NVIDIA Rising; Infineon Improving; AMD Precarious

Chipmakers AMD (NYSE:AMD) and Infineon Technologies AG (OTC:IFNNY.PK) made it on EEtimes.com’s list of “10 companies in trouble”: they haven’t reported profits in almost three years. On the other hand, NVIDIA (NASDAQ:NVDA), AMD’s GPU rival, took a $119 million charge for shipping defective chips but returned to non-GAAP profitability. Let’s take a closer look.

On July 21, AMD reported second quarter results. Q2 revenue was down 13% to $1.18 billion, beating analyst estimates of $1.13 billion. Net loss was $330 million or $0.49 per share, compared to net loss of $1.2 billion last year and $416 million last quarter. Excluding the gain of $86 million or $0.13 per share from the sale of inventories, net loss was $416 million or $0.62 per share, missing analyst estimates of a loss of $0.53 per share.

Due to AMD’s capacity underutilization, lower industry-wide ASPs, and sell down of the company’s 65 nanometer inventory, gross margin declined to a disappointing 37%, from 43% last quarter. It reduced operating expenses by $29 million from the first quarter and is $28 million away from its $500 million operating expense target. AMD ended the quarter with $1.6 billion in cash after using $15 million in the quarter to repurchase debt. AMD transferred about $1 billion of its debt to its chipmaking JV with the Abu Dhabi government, Global Foundries, which was launched last quarter.

By segment, Computing Solutions revenue was $910 million, down 3% q-o-q with strong sequential growth in Asia, while sales were flat in the Americas and declined across Europe. Through low-cost solutions, AMD has gained share in the Greater China region. Operating loss was $72 million and ASPs were down q-o-q, driven by notebooks. In the Graphics segment, revenue was $251 million, flat y-o-y and up 13% q-o-q driven by growth in the Asia-Pacific and Greater China regions. ASPs were down across the board and operating loss was $12 million.

AMD’s graphics business, which includes Dell, HP and Lenovo as clients, is doing well, and it introduced the first 1GHz graphics processor during the quarter. AMD also announced new servers based on the six-core AMD Opteron processor with Dell, HP, IBM, and Sun.

For the third quarter, AMD expects revenue to increase slightly. Intel, on the other hand, expects a 5% increase in revenue.

According to a recent IDC report, PC microprocessor market shipments increased in the second quarter driven by Intel’s and OEMs’ inventory refreshes. Intel’s shipments increased 12.5% q-o-q and AMD’s 1.8%. However, Intel gained 1.6% and has 78.9% market share while AMD lost 1.6% and has 20.6% market share.

AMD is losing out in the processor market, largely because of Intel’s strong brand positioning and marketing. Further, AMD is not capitalizing on the growing popularity of netbooks. And, it has yet to make a profit from its $5.4 billion acquisition of graphics chipmaker ATI, a move which many feel was its biggest mistake. The stock is currently trading around $4 with market cap of about $2.5 billion. It hit a 52-week high of $4.80 on May 27.

We now look at AMD’s graphics business rival, NVIDIA, with annual revenue of $3.4 billion. On August 6, NVIDIA reported a strong second quarter. Q2 revenue was down 13% y-o-y but up 17% q-o-q to $776.5 million. Net loss was $105.3 million, or $0.19 per share versus $120.9 million, or $0.22 per share last year. Excluding the $119.1 million charge for the defective chips, the company recorded net income of $37.7 million or $0.07 per share, beating analyst estimates of $0.02 per share on revenue of $713.6 million.

In July 2008, NVIDIA set aside a $196 million reserve to support affected customers. The weak die/packaging material set affected laptops from vendors such as Dell, HP, Apple, Toshiba and Sony.

Gross margin was 20.2%, down from 28.6% last quarter but up from 16.8% last year. Operating expenses were $267 million, down $25 million over the quarter. The company ended the quarter with $1.47 billion in cash, up by $128 million over Q1.

By segment, revenue from the GPU business grew 5% q-o-q, marking an end to last quarter’s momentum as the commercial Montevino refresh platform ramped. Within GPU, desktop revenue was up 5% q-o-q while notebooks were down 5% q-o-q. The Professional Services business was up 10% q-o-q and the MCP business up 27% q-o-q.

Nvidia expects the launch of Microsoft’s Windows 7 and Apple’s Snow Leopard this fall to increase demand for GPU computing. It expects its GPU for high-performance computing, TESLA, to address a $5 billion market opportunity over the next three years.

Its mobile and embedded processor, TEGRA, which is at the heart of Microsoft’s new Zune HD, will address what is expected to be a $4.5 billion market by 2010.

For the third quarter, NVIDIA expects revenue to be up 5% to 7% q-o-q and gross margin to increase in the range of 36% to 38% driven by lower overall costs, 40 nanometer volumes, and higher gross margin products like TESLA and TEGRA as they continue to ramp. The stock is currently trading around $14 with market cap of about $7.5 billion. It hit a 52-week high of $14.23 on August 7.

On July 29, Infineon reported its tenth straight quarter of loss but showed signs of recovering as sales improved sequentially across all segments. Q3 revenue was down 18% y-o-y but up 13% q-o-q to €845 million. The group’s net loss was down to €23 million or loss of €0.03 per share, versus loss of €379 million last year.

Infineon, which faces debt of more than a billion dollars, finally sees a way out. It raised €725 million ($1.04 billion) from the sale of 337 million shares. New York-based financial investor Apollo Global Management LLC ended up with a stake of 1.3% in the company. Infineon raised another €250 million from the sale of its wireline operations to US private-equity firm Golden Gate Capital LLC.

Infoneon improved its operational performance due to higher sales, higher factory loading and the cost savings from its IFX10+ cost-reduction program. It has finally managed to handle its expenses and the Qimonda challenge. It ended the quarter with a net debt position of €151 million, down €170 million.

For the fourth quarter, Infineon expects revenue excluding its wireline business to grow, driven by its automotive and industrial segments. For the 2009 fiscal year, the company now expects depreciation and amortization to exceed the previous forecast level of €500 million. The stock is currently trading around $4 after hitting a 52-week high of $4.60 on July 17.