AMD's CPU business to go more fabless

AMD co-founder Jerry Sanders once said that only real men have fabs and soon the chip maker will stray from that path in an attempt to improve its financial health. AMD has more than $5 billion in debt and hasn't made a profit in seven quarters, their financial situation is pretty bad and the company now confirmed they're planning to sell their most costly assets and move to a more fabless model.

Fortune heard from AMD CEO Dirk Meyer that his firm will go away from a captive fab model to venture into a more of a fabless model for the CPU part of the business, to relieve them of the heavy burden of building and maintaining state-of-the-art fabs.

Since it can’t afford to do this anymore, AMD plans to spin off its chip manufacturing operations by year’s end, probably by hawking them outright or by inking a partnership with a larger chipmaker – a maneuver akin to selling a house and leasing it back. Meyer is vague on the exact timing of a deal, but he knows it’s probably the best thing the company can do quickly to improve its financial position, and its reputation with investors. A successful transaction would see AMD pocket a good chunk of cash, while handing manufacturing to a company that can better keep pace with Intel’s world-class operations.

“We’re going to go away from a captive fab model to more of a fables model for the CPU part of the business,” Meyer says. “Longer-term, it relieves us of the burden of having to shell out cash for these gigantic factories. So it will be more of a pay-as-you-go model like a traditional fables semiconductor company.”

Until that happens, many on Wall Street will stay tentative about AMD. “We remain on the sidelines with regard to shares of AMD,” Patrick Wang at Wedbush Morgan Securities wrote in a recent research note to investors. He has a hold rating on the stock, but said he could get more optimistic when a turnaround seems more imminent. Glen Yeung of Citi Investment Research acknowledges the strategic importance of AMD’s efforts to slim down, but says he remains neutral on the company because it’s hard to see how it can successfully gain ground on Intel.

When I sat down with Meyer in a wood-paneled conference room at AMD headquarters in Sunnyvale last week, he didn’t sugarcoat the company’s challenges. Dressed in a collared shirt and no tie, the 46-year-old CEO looks and sounds more like an engineer than the typical chief executive with a ready sales pitch. Other AMD executives I’ve talked to have hemmed and hawed when I asked them exactly how AMD got into this bind; Meyer puts it plainly. “Unfortunately we bought a company some of whose businesses went downhill at the same time ours did,” he says, referring to ATI. “We’re in the midst of really lousy financial performance, and it’s that piece that we’ve really got to turn around.”