Advanced Micro Devices Inc. Pulls the Plug on SeaMicro

By Markets Fool.com

Back in February 2012, Advanced Micro Devices announced that it would acquire microserver vendor SeaMicro to "accelerate" its "disruptive server strategy." The company paid a whopping $334 million for the company, with $281 million of that paid in cash.

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Just three years later, AMD announced during its first quarter 2015 report that it would be pulling the proverbial plug on this venture and taking a $75 million writedown in the process. On the most recent earnings call, AMD CEO Lisa Su said that the micro-server market "[has] not developed at the pace we might have thought a couple of years ago."

Su also pointed out that AMD's "core competency is really in processors and being able to service that business through either standard or semicustom products." In other words, AMD -- a chip vendor -- thinks that it should just stick to selling chips.

What a terrible waste
Perhaps the most frustrating part of this for AMD shareholders must be the fact that AMD paid $281 million in cold hard cash for this acquisition. It would be one thing if AMD were generating robust levels of cash year-in and year-out, but as you can see from the table below, AMD's cash flow situation since early 2012 has been pretty bad:

Source: YCharts

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The worst part of this is that AMD has over $2 billion in debt to service, but only a little over $900 million in cash on hand. The company would have been better served plowing that $281 million in cash into paying off some of its relatively high interest debt.

Speaking of servers ...
AMD's server processor share has plunged so much in recent years that it's a stretch to say that the company is even "competing" in this market right now. Aside from a few rebranded PC processors, as well as an ARM based server chip that has perpetually been stuck in the "sampling" phase (to be fair, Su says that this chip -- known as Seattle -- should generate revenue in the second half of this year), AMD hasn't released new chips aimed at the server market in years.

AMD CEO Lisa Su talked about how the company is investing in developing new server chips in a bid to regain share, but I'm very skeptical that the company can even succeed at this point. AMD's larger rival, Intel , has said that it spends $2 billion per year in data center related research and development.

That's more than twice AMD's yearly research and development budget.

In addition, Intel has a strong base of products, architectures, and customer relationships from which to build off of; AMD not only needs to use its much smaller research and development budget to make up for lost time, but it then needs to be able to consistently invest so that its products remain competitive year in, year out.

This doesn't seem realistic to me.

It'll be interesting to see what AMD has to say in May
AMD made sure to let investors know that it will be hosting a financial analyst day on May 6. I am very interested to see what AMD's long-term strategy with respect to the server market. In particular, I'm interested in seeing what particular segments of the overall server market AMD will focus on, and what sort of financials the company expects in the medium and long term.

The article Advanced Micro Devices Inc. Pulls the Plug on SeaMicro originally appeared on Fool.com.

Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.