(AMD) Advanced Micro Devices to Cut 10% of Their Workforce

Advanced Micro Devices Inc. (AMD) plans to eliminate 10% of its workforce or about 1,400 jobs in order to reduce operational costs. This layoff is an attempt by AMD to optimize its cost structure and thereby improve its competitiveness.

The workforce reduction is expected to be over by the first quarter of 2012 and will be conducted globally across all its divisions. Along with other unspecified operational changes, the layoffs are expected to save $200 million in 2012.

Management is looking to reinvest some of the savings into newer business areas, including chips for devices such as tablet-style computers in emerging markets and Internet-related opportunities (mainly cloud computing).

Advanced Micro has been suffering from the slowdown in the global PC market plus the delay in important new chips due to manufacturing hiccups this year. The company’s third-quarter sales of $1.69 billion missed its guidance of a 10% sequential increase after Globalfoundries Inc. couldn’t supply enough of Advanced Micro’s new laptop chips to meet demand.

Most of Advanced Micro’s business is in chips for PCs that don’t have a meaningful presence in smartphones and tablets. We believe that the weak computer market and the company’s failure to penetrate the new mobile device market have forced it to refine its cost structure.

The rise of mobile devices, meanwhile, is benefiting chip makers such as Qualcomm Inc. (QCOM) and Texas Instruments Inc. (TXN), processors of which are designed to consume less power.

After a weak second quarter, Advanced Micro made a modest comeback in the third quarter, with earnings of 13 cents a share beating the Zacks Consensus Estimate by 3 cents. Worldwide PC sales have been stagnant, while smartphones, tablets, and other mobile devices experienced strong growth. In order to stay ahead of its rivals like Intel Corp. (INTC) and NVIDIA Corp. (NVDA), we believe Advanced Micro would need to enter these emerging markets.

Advanced Micro shares currently carry a Zacks Rank of #3, implying a Hold recommendation in the short term (1–3 months).

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