Sunday, January 20, 2008

AMD Beats Expectations

Wall Street's gleeful expectations of the demise of AMD, and return of monopoly profits at Intel, were shattered when AMD delivered its Q4 results on Thursday, January 17, 2008. While AMD is far from being out of the woods, its situation is much better than most analysts thought.

The headline numbers offered an excellent demonstration to paying attention to the difference between GAAP and non-GAAP numbers. Revenues under both systems were the same, $1,77 billion. That was up 8.5% from the previous quarter but flat from Q4 2006, so it mainly represents the seasonal nature of the personal computer business.

GAAP net income was negative $1.77 billion. That would normally mean a company spent twice as much money producing and selling its goods as it was able to sell the goods for.

But non-GAAP net income was negative $9 million. Losing $9 million in a quarter is not good, but it is a far cry from a $1.77 billion loss.

The difference has to do with AMD's acquisition of ATI in 2006 for over $5 billion. At the time that seemed more than ATI was really worth, but AMD thought it was worth it to obtain ATI's graphics chip and motherboard chipset (the chips that make the microprocessor of a computer work with other chips on the board that holds them all) capabilities. Unfortunately ATI's competitor NVIDIA came out with new product that kicked ATI's behind in 2007.

So for Q4 2007, under GAAP rules, AMD admitted they paid to much for ATI, writing off $1.6 for lost "goodwill." You can still look at it two ways. AMD admitted they lost $1.6 billion. Or they had already paid for ATI back in 2006, so this is what is called a non-cash charge.

It's not like the ATI acquisition was all folly. AMD actually has, at least for the present, a strategic advantage over rival Intel because of it. Intel makes processors and chipsets, but only low-end graphics chips. NVIDIA makes high-end (and low-end) graphics chips and chipsets. Only AMD can deliver all three to computer makers: advanced microprocessors, chipsets, and high-end graphics chips.

The other part of AMD's report that was a surprise to most of us was the "Barcelona" quad-core Opteron processor situation. Bacelona chips had been delayed in Q1, and an error was found in the chips, so AMD announced it would not be making general shipments until Q1 2008. Actually the error was easily fixed in the Linux operating system, so large data centers that had been waiting for the chips decided to buy them despite the bug. Nearly 400,000 were shipped. Of course the revenues from most of those won't show up until Q1 2008.

Because of the quad-core shipments ASPs (average sales prices) were up for processors, and number of units shipped were up as well. Graphics revenues were up, but not so much.

Intel, of course, has fairly decent chips out now, in many ways playing catch-up to AMD designs, but having an advantage of introducing 45nm (higher transistor density) technology before AMD. But AMD is sampling 45nm chips, so the race is hardly over. On the Intel side they are working to catch up with AMD and NVidia in graphics capabilities.

With demand for personal computers (mostly for business use) exploding in India, Russia, China, Saudi Arabia and other rapidly developing nations, there is room for both AMD and Intel to grow. Behind in technology, and having been forced to cease, or appear to cease, illegal marketing practices due to an AMD law suit, in 2006 Intel started a brutal pricing war to keep its market share. In 2007 Intel introduced better chips and relented on pricing issues, which allowed it to start raking in money again. AMD has benefitted from the easing of pricing pressures, but must regain a clear technology lead if it is to be free from that danger in the future.

AMD's stock price received a nice pop on Friday after the Q4 results announcement, but the stock price is way down from its 2005 price. AMD is a risky investment, but management believes AMD will turn profitable in Q3 2008. If that is true, the stock is significantly undervalued at today's price.

I own AMD stock.

See my notes on Thursday's AMD analyst conference
See my main AMD page, with links to more articles
My Intel main page

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