Saturday, July 21, 2007

AMD Ambitions Still Burn

A humbler but unbowed AMD management reported Q2 2007 results to analysts on July 19 and answered questions. There is no doubt that AMD is on the ropes and Intel, just 3 years ago a complacent, fat, slumbering giant, is wide, awake, mad, and pounding the hell out of them. But that does not mean that AMD investors are out of the money in the long run. At least there is a referee now; Intel's mafia-goon tactics from the 1990's are being watched by courts and regulatory agencies around the world.

Despite Intel's bluster at its own analyst conference on Tuesday (see my detailed summary), it appears that AMD actually gained overall market share again in Q2. We'll have to wait until independent results are released to be sure.

But there was a lot of bad news at the AMD conference (see my detailed summary). Earnings were highly negative at a $600 million loss or $1.09 per share. Even if you pull out $130 million in one-time charges, they lost $470 million in the quarter on revenues of $1,380 million.

They also wrote off $30 million in obsolete processor inventory. What I believe happened is that they sold a lot more obsolete stock that went into low-end desktop and notebook computers. Given the price war between AMD and Intel, even up-to-date stock may have been sold at less than the cost of production.

So are the folk at AMD committing suicide? Maybe not, but they are taking a gamble. Intel has immense depth in resources; they are far more able to play the price war game than AMD. In 2005 that was okay, because AMD processors were acknowledged as superior in the industry. But in 2006 Intel brought out a new generation of processors that are roughly on par with AMD, so pricing became a serious issue. Intel in Q2 2007 had almost as much net income as AMD have revenue, making it seem like back in 1997 when AMD was allowed to live only so that Intel could not be accused of being a monopoly.

Now the good news for consumers and maybe even AMD investors: blood still flows in AMD veins. Management still plans to beat Intel in the long run, and it is still a credible story. You see this in three areas: the release of Barcelona processors due this quarter; the minimization of layoffs; and the coming push at the graphics market.

Intel now has a long history of spending a lot of money to convince people that its processors are wonderful, but doing inelegant engineering that does not really serve the end customers well. AMD continues to take a different approach: they are relatively quiet about their upcoming processors. Because, I believe, secrecy serves them well: if they announce what they are doing, the engineers at Intel will start copying them. Like they did with the transition to 32/64, with dual core, with energy efficient chips, and with on-chip memory controllers.

Lots of IT departments and consumers still have not bought anything with an AMD chip in it. Some people are just conservative, or own Intel stock. They did not by Opteron server processors or Athlon desktop chips when they had a clear lead on performance, performance per price, and performance per energy use. Some people are just going to stick with Intel.

But Toshiba, one of the last holdouts, is now offering computers based on AMD processors. AMD would not say exactly how much impact this had on Q2 revenues; I suspect almost none. Most Toshiba notebook and desktop pcs will still run on Intel chips, but it is still a gain for AMD and a loss for Intel.

In fact the PC makers like having two sources to play off against each other.

Intel laid off 12,000 employees in the last year; AMD has laid off some 500. Intel cut fat, which is good for everyone except the fired employees; AMD can only cut lean, so it is trying to do no cutting at all.

AMD is also in a tough fight with NVIDIA. AMD bought NVIDIA's traditional rival, ATI, which was doing poorly in many ways, and which has been a major factor contributing to AMDs recent string of losses. But again, there is reason behind this short-term madness.

AMD only made computer chips (and memory, but it divested that) in the past. There can be benefits to specialization, but we are in an era of consolidating more function into less silicon. ATI makes "chip sets" as well as graphics chips. Chips sets are the glue on computer motherboards. Intel was already making processors, chipsets, motherboards, and low end-graphic chips. Now AMD has a full set of solutions for computer assemblers. At the same time AMD has made it clear that it will keep its solutions "open" so that they will work with chips from NVIDIA and other makers. Computer manufacturers can make the best design for their customers.

If you don't own any AMD stock I would not advise buying any at this point unless you like a very high risk factor. I own AMD stock. But take a good look at Barcelona when it comes out; that is the real key to the short-term value of AMD stock.

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