Spansion IPO to free AMD from lackluster memory group

AMD's decision to put its Spansion LLC flash memory unit up for an initial public offering will merely formalize the split between the company's two major operating divisions, but the removal of an unprofitable business could accelerate future development of AMD processors, analysts said Thursday.

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AMD announced plans Wednesday to sell shares of Spansion, its joint venture with Fujitsu Ltd., to the public. Spansion hopes to raise $600 million through the initial public offering (IPO), it said in its S-1 registration statement filed with the U.S. Securities and Exchange Commission.

Spansion was a drain on AMD's overall performance in the last two quarters, most recently dragging the company to a net loss of $17 million on revenue of $1.23 billion despite the solid performance of its processor business. AMD will look much better to the investment community as a processor company, with revenue growth of 31 percent in the first quarter compared to last year's first quarter, and operating income growth of 37 percent compared to last year, analysts said.

AMD intends to remain the largest shareholder in Spansion, but if it owns less than 50 percent of the company it does not have to include its results in its financial reports, said Ben Lynch, an analyst with Deutsche Bank Securities in New York, in a research note published Thursday. AMD certainly would have liked to hide those results in its last two quarterly earnings reports, when Spansion lost $39 million and $110 million, respectively.

AMD's Opteron or Athlon 64 customers won't see a profound difference in the day-to-day operations of the new processor-oriented company, said Kevin Krewell, editor in chief of the Microprocessor Report in San Jose, California.

Spansion and AMD's Computation Products Group, which makes and sells its microprocessors, already operated as two very separate units, Krewell said. They didn't share development resources and the manufacturing of the processors and flash memory were done in different locations, he said.

However, the processor business will now be able to take the profits it generates and plow some of it back into research and development, said Dean McCarron, principal analyst with Mercury Research Inc. in Cave Creek, Arizona. AMD's chip business made about $92 million in the first quarter, and it takes about $100 million in resources to develop a new chip architecture, he said.

With AMD's future chances in the processor market largely tied to its ability to claw ahead of rival Intel Corp., any increase in research and development will ultimately help end users, McCarron said.

One of the reasons for Spansion's poor performance in the last few quarters was aggressive pricing by Intel, AMD's main competitor in the NOR flash memory market, Lynch said. NOR is a type of flash memory used in mobile phones that is under attack by another type of flash memory called NAND that is made by companies like Samsung Electronics. NAND is used in removable memory cards and USB (universal serial bus) flash drives and is faster and cheaper than NOR, which is considered more reliable.

Flash memory is an extremely volatile business, and AMD's overall financial picture is much more exposed to swings in the market than Intel's. Even in the first quarter, a terrible quarter for Spansion, the memory group accounted for 36 percent of AMD's overall revenue, or $447 million. As recently as the first quarter of 2004, AMD earned more revenue from flash memory than from processors.

By contrast, flash memory accounts for less than one percent of Intel's quarterly revenue, based on flash memory revenue figures published by iSuppli Corp. Intel does not break out the results of its flash memory business separately from the results of its Communications Group, which also includes processors for personal digital assistants and networking chips.

AMD will be free to focus on the performance of its processor business without having to worry about the flash memory market, Lynch said in the research note. With that business growing steadily ahead of the launch of AMD's dual-core processors next week, the company looks to be on solid ground for the remainder of the year, he said. AMD and Spansion have not said when they expect the IPO to be completed, but the process usually takes several months.

Some analysts are concerned about Spansion's chances of attracting investors, given its recent financial performance and the difficulty of competing in the flash memory market. But that's the nature of this particular industry, in which several companies are able to compete and generate profits, Lynch said.

"We do not believe that the outlook for NOR flash, or Spansion's competitiveness in it, is any worse than the average semiconductor memory company," Lynch wrote in the research note. Deutsche Bank own shares in AMD and has done investment banking work for the company within the past year, but individual analysts are not allowed to hold stock in the companies they cover, according to a disclosure statement accompanying the research note.