AMD Looks to Trinity for Growth in 2012

AMD reported a mix of signals from its fourth quarter 2011 at its analyst call yesterday.

AMD makes CPUs and graphics chips, including combined chips called APUs, for PCs, servers, and notebook computers. AMD has long struggled to make a profit in the shadow of its main competitor, Intel, which typically shows earnings that are more that AMD's revenues. For instance for Q4, AMD had $1.7 billion in revenues, while Intel had $13.9 billion in revenues of and $3.4 billion in non-GAAP net income.

Typically AMD has been the more innovative company, for instance introducing 32/64 bit chips, on-chip memory controllers, and on-chip graphics. In every case, however, Intel has used its cash to catch up with R&D, and then for marketing AMD back down to size. In Q4 Intel spent $2.3 billion on R&D, more than AMD received in total revenue.

So is AMD hopeless? Judging from the stock price, and its frequent quarters devoid of earnings the past few years, that is the easy bet. On a non-GAAP basis, excluding mainly a charge for a non-cash write down on AMD's investment in GlobalFoundries and a restructuring charge, AMD reported Q4 net income of $138 million or $0.19 per share. Whether that supports a stock price ending today at $6.73 per share depends on how you see the future.

According to some pundits, this was the year AMD was supposed to be wiped out. Clearly that worst-case scenario is wrong so far. The wipe out was supposed to come largely from a decline of PCs and x86-based chips in favor or smartphones and ARM-processors, combined with the usual pressures from Intel and graphics chip rival NVIDIA. Then there were the Thailand floods, which created a hard disk drive shortage which was supposed to kill what little demand there would be for PCs from old-fashioned worker bees who need something bigger (and faster, and with more storage) than an iPad to actually get work done.

There were some glitches, but on the whole AMD's Fusion strategy, putting a CPU and a high-end graphics processor on the same chip, worked out fairly well this year. AMD is now fabless, and fab partners were not able to produce good yields of the new chips (which cuts into margins) or even sufficient chips to meet demand.

The best news from yesterday's analyst call was that in Q1 the normal seasonal drop-off of demand combined with improved yields put in place in Q4 means AMD will have no supply constraints in the quarter. They should be able to meet demand for Fusion chips for the first time since the chips were introduced.

The new server chips, the 6200 Opteron series, are also selling well, but AMD was reduced to a tiny fraction of the market before the new product introduction. Intel is introducing new server chips in 2012, so it will be interesting to see how end markets respond.

The main opportunity for growth in 2012 with be Trinity chips, the newest design in AMD's Fusion series. Both the CPU component and the graphics component will be upgraded from current A-series chips, while power requirements will be reduced.

According to AMD, its OEM partners really like Trinity, which is already sampling. Trinity can power thin and light notebook designs, Windows 8 tablets, mainstream notebooks and PCs.

Most consumers may not recognize how much better AMD graphics are than Intel graphics, but OEMs have realized that Intel CPUs require expensive add-in graphic cards (from AMD or NVIDIA) to bring them up to snuff, while also increasing power draw. For very high end graphics, for games and for design work or intense computation, graphics cards are still required regardless of CPU. Intel has been working hard to make their graphics competitive, and could conceivably catch up by 2013. At the high end Intel CPUs are considerably faster than AMD CPUs, but they also cost a lot more.

I like to keep diversified and would recommend against anyone taking an outsized position in AMD at this point. Trinity may appeal to OEMs, but the real question is will it appeal to consumers (including business consumers), especially in China and India. If it does, there is still the margin question. AMD margins have historically been lower than Intel's and NVIDIA's, largely because AMD has been forced to compete on price even when its products have been technically superior to its competitors'.

If AMD can differentiate itself from Intel and get a good price point for Trinity chips, then it can make a profit and live to fight the next round. An entire year of strong positive cash flow would make AMD into a different sort of competitor. Intel would still be king, but AMD would have the money to work with and the scale to make it a real competitor rather than a second source.

Disclaimer: I am long AMD. I have no plans to sell my shares until I see how Trinity works out later in 2012. I won't trade AMD for at least a week after this article is published.

See also my AMD Q4 2011 analyst call summary;

http://www.amd.com/

TTM Technologies (TTMI) Sees E-Reader PCB demand

TTM Technologies (TTMI) makes PCBs (printed circuit boards) for the communications, industrial, medical, and consumer electronics industries. It owns plants in the U.S. and in China. The U.S. facilities generally do small runs of PCBs for prototypes and specialized, low volume products. Chinese facilities do larger PCB runs for computer and communications equipment, cell phones including smartphones, and more recently tablet computers and e-readers.

Q3 2011 was a no-growth quarter. Revenues were $358.3 million, down 2% sequentially from $366.1 million, and about flat against $356.8 million in the year-earlier quarter. GAAP net income was $24.5 million, up sequentially from negative $20.3 million, but down 16% from $29.1 million year-earlier. Q2 profits were hit by a one-time non-cash accounting charge for writing off some obsolete factory equipment. So, switching to a non-GAAP view of net income, we have: Q3 2011 $31.0 million, Q2 2011 $32.9 million, Q3 2010 $35.0 million.

While growth has been stagnant this year, profits have remained healthy. Annualizing Q3 non-GAAP EPS gives a P/E ratio is about 7.2 at today's closing price of $11.01 per share.

Because TTM has a broad array of end customers and a global presense, to a large extent its fortunes reflect those of the electronics industry as a whole. For that industry Q3 was a slow quarter in a slow year. Everyone is worried about end demand because of the economy. I believe TTM's ability to make a profit in this environment means it is a reliable cash generator. If the electronics industry picks up again in 2012, there is upside potential.

In the Q3 conference call on November 2nd management noted that some orders were pushed out past the end of the quarter. Cash flow from operations was $42.6 million. The cash and equivalents balance ended at $207.7 million. Long term debt ended at $366.7 million. TTM made capital expenditures of $28.3 million, mostly for new high-end manufacturing equipment in China.

It is notable that debt still exceeds cash. The debt was used to build and expand plants in Asia. So far it has been a good use of debt, but it does create some risk if there is an extreme economic slowdown. Paying down debt has been a priority use for cash.

TTM tracks end markets into 5 segments. For the quarter aerospace and defense was below trend. Cell phones were strong, particularly smartphones. Computers and related were weak and are expected to continue to be weak in Q4. The medical and industrial segment was flat. Networking and communciations, which accounted for 38% of revenue, is expected to be soft in Q4. There is also an "other" category, which saw growth because they are producing the PCBs for a new e-reader for an unspecified customer.

The top five customers were: Apple, Cisco, Ericsson, Huawei and ZTE. Only one of them accounted for more than 10% of revenue.

I believe that as the global electronics industry recovers TTM will continue to pay off debt and eventually be better positioned to use cash for buy-backs and dividends.

Disclaimer: I am long TTMI. I have no plan to change my position this quarter.

Keep diversified!

AMD Fusion Upside

AMD (Advanced Micro Devices) recently revealed that it has been unable to meet the demand for its first Fusion processors. They call these APUs, for Advanced Processing Units, to indicate that each chip includes both a CPU and a GPU (graphics processing unit). Introduced in late 2010, the first APU variety was designed to bring low cost, high quality graphic capabilities to inexpensive notebook computers. Computer makers (HP, Lenovo, Sony, etc.) embraced these first Fusion chips as a big improvement on the Atom chip from Intel, famous for underwhelming netbooks (sub-standard but very portable notebooks).

Does that mean the sun is finally rising on AMD investors (that includes me)? Intel remains not only holding most market share, but dominating the most profitable segments of the market, including chips for server computers. On the other hand Intel has its own problems, pressed from below by ARM architecture based chips in smartphones and tablets, while failing to be able to deliver the graphic quality consumers now expect. To make a workable business or consumer computer manufacturers need to add an AMD Radeon or NVIDIA GPU to the system.

Intel itself is not exactly the darling of Wall Street anymore. Today Intel is trading at 10 times last year's non-GAAP earnings per share. No tech bubble there. AMD is trading at 8.5 times last year's EPS. Intel is wading in cash; AMD has a substantial amount of debt. If you wanted to buy a computer processor manufacturing company, Intel would be the more obvious choice.

To break out of its trading range AMD, at the very least, would have to start generating substantially more earnings than it has lately. What are the chances of that, when the sector itself appears to be in trouble, and Intel has a tradition of crushing AMD whenever Intel's market share starts to slip?

It really does come down to Fusion. Intel is scared of Fusion, so it is using considerable resources to catch up in graphics technology. Intel is now paying NVIDIA to use its intellectual property, which probably includes graphics designs. That should start to show up in Intel chips in 2012. My guesstimate is that by 2013 Intel will have closed the graphics gap. So AMD's future profits, and the value of its stock, highly depends on how much market share it can pick up in 2011 and 2012, and at what kind of profit margins.

It came as a surprise to me, and probably to everyone, that AMD became supply-constrained in Q1. I think the problem is that the first Fusion chips were on the 40 nm process, which is where most graphics chips are at this year. Both NVIDIA and AMD reported supply constraints at 40 nm in early 2010. AMD failed to anticipate demand for its new chips, and so did not book enough capacity in advance. AMD now contracts for fabrication of its chips, whereas Intel has its own fabs. On the April 21 AMD analyst call for Q1 2011, AMD executives talked about insuring future fabrication capacity, so that must be about the Fusion shortfall.

Right now AMD is about to launch its second round of Fusion processors, which will be more powerful, but also will require more power. So they will be for higher-end notebooks and for desktop CPUs. The will be on the more-advanced 33 nm process. That may have its own issues, but it won't run into the 40 nm roadblock. Later this year AMD will also introduce its Bulldozer CPUs, which are not part of Fusion (they don't have graphics processing on the die).

The upside for AMD investors depends on continued support from manufacturers (HP, Dell, Lenovo, etc.) and from retailers like Best Buy. The near-universal sentiment now is that consumers get more for their money with AMD based computer systems, particularly when it comes to graphics capabilities. Thus AMD should pick up market share this year in the sub-$1000 categories of notebook and desktop computers.

One commonly told story is that consumers are moving to tablets, so sales of PCs and notebook computers are about to come to a grinding halt. The actual evidence for that is scant. In the U.S., prior to the introduction of tablet computers (they've been around for nearly a decade, but did not become popular until Apple marketed a more attractive, if less powerful, version), everyone pretty much had at least one computer, either a desktop or a notebook, maybe a netbook. Most moderate to heavy users had a PC at work and a desktop and either a notebook or netbook for personal use. As the new thing, tablets are going to sell, and with budgets tight, they are going to cause purchases of notebooks and desktops to be delayed. But most tablet computer users have found they are not really a replacement for their more powerful cousins. So, the question becomes: what do they upgrade next? Are they going to get an even newer tablet, or are they going to refresh the old desktop or notebook computer?

You know what the gadget guys will have. A good, reliable, high-performance desktop, a good notebook computer for working away from home, a tablet to be cool and consume video, and a smartphone.

AMD is not going to compete in the smartphone space, but their Fusion chips are beginning to appear in Windows-based tablets. Their stand-alone graphics chips are now used by Apple for its desktop computers.

Also, this is a global market. The same low-cost high-graphics capability that appeals to U.S. consumers will appeal even more to first-time PC buyers in India, China, Brazil, and developing countries.

A recovery of market share in the server GPU market would also benefit AMD, but I'll leave that topic to a later story.

Any reasonable investor not already holding AMD should probably take a show-me the market share and EPS gains attitude. On the other hand, there is a good chance that 2011 will be a year when those of us who already hold AMD will see the upside of Fusion. Maybe as early as the report on Q2, if production was ramped for the new Fusion products.

See also:
AMD home page

AMD Ships First APUs on Analyst Day

Computer chip maker AMD announced it began shipping its new APUs (Advanced Processing Units) to computer makers this morning from its Singapore plant. At its analyst day presentation AMD executives described and demonstrated the APUs, which combine an advanced CPU (general purpose computer processing unit) with an advanced GPU (graphics processing unit) on a single chip.

Emphasizing what a groundbreaking point has been reached, CEO Dirk Meyer held up a typical sized CPU and then a mid-range GPU card, which was about the size of a small paperback book. Then he held up the APU that will have the equivalent CPU and GPU computing power. It was smaller than the CPU chip, about the size of a postage stamp. I know that the GPU card contains not only a GPU chip but memory, a fan, and connections for video output, so the comparison was a bit of an exageration. But it is a sort of computing grail achievement that goes beyond mere size comparisons.

Of course, knowing AMD has been working for years to achieve this feat, much larger rival Intel has announced that it will also have an integrated cpu/gpu product release for 2011. AMD executives mocked it, as well they might. We know it is an inferior product. It supports a graphics standard called DX10, which is now four years old. AMD supports DX11. It is true that most older software and games can't take advantage of DX11.

But many games already can, and most graphics software updates are moving to DX11. So Intel will be making an offering that can't cope with new games or software. When you buy a new computer, it is often because you want to take advantage of new software. Intel will be leaving consumers in the lurch.

Nevertheless, Intel is the Goliath, and AMD's previous attempts to take on the giant have had mixed results. Intel's profits are usually higher than AMD's revenues, and Intel spends way more on R&D than AMD. A few years ago Intel was so far behind in graphics, it is remarkable that they are maybe only 2 years behind now.

Intel will heavily outspend AMD in marketing, and will omit to tell consumers that its chips can't run DX11. So for AMD to take a lot of market share in 2011, it has to get its story out. In my experience retailers are more interested in Intel advertising subsidies than in making sure consumers make an informed choice between computers based on AMD and Intel. I would hope that tech "geniuses" would tell show off their stuff by telling the public to choose AMD if they want good graphics and video capabilities. But it seems that a lot of technology mavens are employed by Intel and Apple.

If the word does get out that Intel cpu/gpu combination chips are not good enough, AMD's ability to take market share could become capacity constrained. Intel has a huge production capability to match its market share; AMD's capacity can only be expanded so much in the short run.

Still, even a 10% increase in revenues for AMD in 2011, with maybe a 1% increase in market share, would be a boon for AMD.

Watch this space closely. The actual computers will start being available to the public in January, traditionally a slow period for computer sales. Public acceptance of the new AMD products, or resistance to Intel advertising, should be knowable by March or so, and act as a predictor for the remainder of the year.

For investors a key element will be margins. AMD believes that with the new processors (and server chips introduced in 2010) it can improve its non-GAAP gross margin from about 40% for 2010 to about 44% to 48% in 2011. If that turns out to be true (if Intel does not start a price war), then earnings will rise nicely and AMD will be in an even better position to compete with Intel in 2012.

Dirk Meyer showed an HP thin light notebook running gaming level graphics using the new APU chips. He claimed it could run 8 to 10 hours on one battery charge, and would cost less than $600. I want one, and it would work a lot better for me than a smaller form factor tablet computer. This ability to reduce power consumption is being introduced across the range of new AMD products in 2011: for netbooks, notebooks, desktops, and servers. That is good news.

AMD Earnings At Bat

Another earnings season got underway today when Alcoa reported. Of the companies I follow closely the first to report on its second quarter (Q2) will be the computer chip maker AMD.

Q1 2010 was the best first quarter in AMD's history, with revenue of $1.57 billion and GAAP net income fo $257 million. Guidance for Q2 (given at the AMD Q1 2010 analyst conference) was that it would be down seasonally from Q1. That is a typical seasonal pattern. In Q3 and Q4 each year the computer makers who are AMD's customers start ramping up for back-to-school and Christmas holiday sales.

I suspect that, within that context, Q2 has been a pretty good quarter, largely based on watching advertisements for consumer and enterprise computer equipment. In graphics chips NVIDIA did not come out with its new, competitive chips until well into the quarter, and even then supplies seem minimal, with AMD dominating key price points. I saw a number of adds for AMD graphics in machines that use Intel CPUs, which is a positive surprise.

In the CPU department I think the results may be mixed. Intel seems to continue to dominate in notebooks, while AMD has made some gains in the desktop department. Desktops are going a bit out of style as consumer items, and margins are low, but they are still critical for people who are doing non-mobile work where having computational power and large screens is still a big plus.

Finally, there is the server CPU market. I am seeing mixed signals here. AMD and Intel are more differentiated in servers than they were a few years ago. AMD has gone for more cores per CPU and more processing power per dollar, but Intel leads in pure performance. I doubt AMD made much headway against Intel in server market share this quarter, but it should still be a rising tide situation.

We'll get AMD's numbers on Thursday, July 15th. I'll be taking notes on the analyst conference and post them at AMD Q2 2010 analyst conference. You can also listen to the conference yourself live on the Internet, starting at AMD Q2 live conference. That will be at 2:00 PM Pacific Time (5:00 PM Eastern Time). If you miss it you can also listen to an archived recording later.

Can AMD Ignite Fusion?

AMD is the perpetual also-ran in the CPU and GPU (graphics processing unit) sweepstakes. According to AMD, their next big thing is Fusion, in which a CPU and a GPU are combined on a single chip, or APU (Accelerated Processing Unit). Is it possible that in 2011 AMD will make serious profits from this innovation? Or is this more like the power from nuclear fusion program, which after decades of work and billions of dollars of investment has yet to make commercially available electricity?

In my April 17, 2010 story, Paint AMD Black?, I discussed AMD's latest financial results. The second quarter ends with June, and that readout will tell us how well demand is holding up. But the real value in AMD stock, or lack thereof, is in whether it has made the right choices in its roadmap, given its difficult position versus rivals Intel and NVIDIA. While there are other aspects to that roadmap, Fusion is probably the most important in the 2011 time frame.

There are two major forks in the computer processor road in the 2009-2011 time frame. One is about graphics processing, including using processors designed for graphics to compute other types of problems. The other fork is between traditional PC processors and mobile processors, where low power requirements are as important as computing and graphics capabilities.

Intel is the largest of the three rivals, so I will describe its known roadmap first, then contrast that with the roadmaps of AMD and NVIDIA. Intel dominated the market for PC computer chips almost from its inception, but it has traditionally supplied only minimal graphics capabilities. Keep in mind that a regular CPU can do graphics calculations. A GPU speeds up graphics calculations. GPUs can do this because graphics calculations use a relatively small number of well-known algorithms to accomplish their tasks, and these algorithms can run in parallel, all at the same time. In addition to letting the CPU do graphics, as that became unsatisfactory even on low-end computers, graphics were added to motherboard chip sets. This is called integrated graphics, and Intel (as well as NVIDIA and AMD) developed low end-graphics for motherboard chip sets.

Intel also tried to develop what are called discrete graphics chips. These are not on a motherboard, but on a separate card, called a video or graphics card. Intel recently abandoned its Larabee (see Anand's Thoughts on Intel Canceling Larrabee) project for a high-end discrete graphic chip, but will be putting its expertise to work by adding the failed Larrabee circuitry to its own CPUs, some time in the future. So right now Intel has no clear strategy for dealing with GPU computing on desktop or server computers. If you want that, you need to add an NVIDIA or AMD ATI GPU card to an Intel-based machine, and we are already seeing a lot of that.

In the mobile space Intel sold its floundering mobile application processor unit to Marvell, which in retrospect was a mistake, as Marvell is quickly becoming a big player in mobile devices. Instead Intel concentrated on Atom, which was originally used in the netbook space. Intel's strategy is to make Atom more powerful, yet less energy needy, to move more into the smartphone and tablet computer space.

AMD has decided to focus on the PC (desktop and notebook) and server market with graphics capabilities being a major weapon to win market share from Intel. The last time AMD won a lot of market share from Intel was also due to a roadmap decision, when Intel tried to bifurcate customers into 32 bit and 64 bit users. AMD instead integrated 32 bit and 64 bit capabilities on its Athlon and Opteron chips, which was so popular that Intel had to change it roadmap.

Will it work this time? One problem is that AMD is typically a half-step behind AMD in the process technology it uses to manufacture its chips, so it either needs a larger chip to accommodate the same number of logic gates, or must make due with fewer gates on a similar sized chip. GPU chips for high-end discrete graphics are big, and so are the CPUs for PCs. Combining both on a single chip could lead to a lot of defects, low productivity, and negative margins. The first Fusion chips will probably have the equivalent of mid-range GPUs mixed with mid-range CPUs. Yet if defect rates are low enough, these could be formidable chips. There would be no need to run to an external motherboard graphics chip or discrete graphics chip in order to do the processing. For many applications that lack of communications lag will make up for the lower processing power of each unit.

AMD has simply decided not to compete in the mobile space except to the extent that its notebook processors are able to pick up some of the netbook or tablet market. Given the importance of the mobile market, that may not seem smart. But the mobile market is fiercely competitive; even Intel has floundered there, against the likes of Qualcomm, Broadcom, Marvell, and many others. AMD has limited resources compared to Intel. It can't afford to enter markets where it has no competitive edge.

NVIDIA has an interesting strategy too, and it involves a different take on each of the forks. It is going heavily into mobile with its Tegra processor. It is ahead of AMD in high-end graphics, and graphical computing, with its Fermi and CUDA technologies. Clearly NVIDIA would like to allow their GPUs to also do the work of CPUs and thereby crash the PC motherboard party. They could do that by adding ARM based processors to Fermi. But it would be a whole new marketing world for them. They might simply wait and watch the ARM/mobile space eat up the old PC space the way PCs once cut into the minicomputer space.

I own AMD stock and think it is currently undervalued, but there is no denying that Intel is much larger that AMD and has lots of profitability, while AMD has just squeaked by for years. Until AMD shows several successive quarters of profits and market share gains, and it is clear that it chose the best roadmap, I don't expect much short-term upward movement of the stock. On the other hand, waiting until all the good news is in means missing out on almost all of the stock appreciation, if it happens.

See also:
AMD Q1 2010 Analyst Conference Summary
AMD 4/15/2010 earnings release
AMD at Wikipedia
my main AMD page

Paint AMD Black: Profits at Last!

AMD, contrary to expectations, posted a profit in the first quarter of 2010. This is remarkable. The maker of computer processing unit (CPU) and graphics processing unit (GPU) chips was not expected to show a profit until well into 2010, if ever.

In Q4 2009 AMD's rival Intel paid it $1.25 billion to settle (probably true) allegations that Intel had engaged in illegal, monopolistic practices that lowered AMD's sales earlier in the decade. Whether or not AMD was profitable in Q4 is problematic. GAAP (Generally Accepted Accounting Principle) net income (profit) was $1.18 billion. But take away the $1.25 million from Intel, and you have a $70 million loss. On the other hand AMD claimed in had non-GAAP net income of $80 million. But to get that number they had to exclude GlobalFoundries, which is the new company holding the fabrication facilities AMD had formerly owned 100% of. Still, Q4 revenue of $1.65 billion was up an astonishing 42% from Q4 2008.

Q1 2010 had positive net income any way you look at it. Revenue was up 33% from $1.18 billion in the year-earlier quarter. But there were a number of one-time charges and benefits related to spinning off GlobalFoundries that need to be examined by investors. GAAP net income was $257 million. Most of the time companies give non-GAAP numbers because they are higher that GAAP numbers, but in this case AMD owned up that on a comparable non-GAAP basis net income was only $63 million (then again, prior guidance was for negative that figure). See my AMD Q1 2010 Analyst Conference Summary for a more detailed explanation, or the AMD 4/15/2010 earnings release for a number of reconciliation tables between GAAP and non-GAAP numbers.

Because of the cyclical buying patterns of both consumers and enterprise buyers, the first half of the year is typically slower for AMD and Intel than the second half. Even with the global semiconductor industry climbing rapidly out of the recession (or, as I prefer, the Panic of 2008), AMD was expecting to show a loss this quarter. What made the difference?

AMD has introduced some very competitive products lately. In servers, it offers chips with more cores than Intel (although Intel cores allow more threads per core, which helps in some multi-threaded software applications). In notebook computer chips it has been coming from behind, which makes it relatively easy to gain market share. In graphics chips AMD picked up a lot of market share from competitor NVIDIA these last two quarters, and with very good profit margins (there's a manufacturing capacity shortage, so no price war at present).

As we move into 2010 the most probable trajectory is fairly sweet for AMD, but of course competition with NVIDIA and Intel will remain fierce. One way to categorize servers is by number of processors; most low end servers are 1P, while 2P servers are very popular. There has been a historic price premium for 4P and up servers because of the difficulty making that many chips communicate effectively with each other. Now, at least for 4P, AMD has solved that problem. The new 6000 series 2P chips are ready for 4P. At first they will be used mostly for 2P boxes, but the incentive to move to 4P boxes, especially in virtualized server farms, will be significant. A 4P box would have 4 AMD processors with as many as 12 cores per processor, or 48 cores. Each core can easily run as a virtual machine, so for instance for Web server farms, each box would be the equivalent of 48 Web servers. The economies of scale will be quite attractive.

On the other hand, a lot of tech guys just wait for Intel, no matter how slow Intel is. So how much actual market share AMD will pick up while those guys are waiting for Intel is not predictable.

There are other new products being introduced this year, but the next big thing is Fusion, in which chips can act as both CPUs and GPUs. Look to hear more about that this coming fall.

Adobe (ADBE) Illustrates Tech Spending Revival

Adobe (ADBE) held its first quarter fiscal 2010 analyst conference yesterday and reported generally good numbers. Revenue was $858.7 million, up 13% sequentially from $757.3 million and up 9% from $786.4 million in the year-earlier quarter. Earnings per share (EPS) were $0.24, up sequentially from negative $0.06, but down 20% from $0.30 year-earlier. (See my Adobe Q1 2010 conference summary)

Note that the quarter reported ended March 5, 2010. So the period mostly overlaps with what most companies would call their first quarter ending March 31, 2010. So it is an early indicator for software, and probably hardware, trends in the quarter.

I don't own Adobe stock, nor do I think it is undervalued compared to other tech stocks. But I do think that revenues and profits will accelerate this year.

Creative Suite 5 (CS5), the upgrade from CS4, will be released later this year. CS4 has been a disappointment, and that is mainly due to the recession and the Windows operating system cycle. CS4 corresponded to Windows Vista; CS5 will take advantage of Windows 7.

Can we admit now that much of the depth of the recession in the last quarter of 2008 and first quarter of 2009 was a business panick? Businesses cut their purchasing to the bone, some times well into the bone, because of economic uncertainty from the banking/financial sector failures, which in turn had been triggered by the housing downturn. But except for housing and finance, by and large the technology businesses were healthy. Many had large pools of cash to draw on, and were never in any danger of going under. By firing employees and cutting their own spending they made the economy worse, in particular within the tech sector, where they do a lot of buying each other's products.

In Adobe's case lots of people, freelancers and corporate drones alike, decided they could make do with CS3 rather than upgrading to CS4. Also, CS4 did not run so great on Windows XP. Remember when XP was introduced and their was the usual anti-Microsoft campaign and people were slow to adopt it? Then, once they learned XP and got used to it, they could not live without it and did not want to learn a new operating system. The same might have been true of Vista. I use Vista and it was a major improvement on XP. But between the usual timidity and the recession, a lot of people, including large enterprises, skipped Vista. Delaying taking advantage of its higher productivity over XP. Of course, Vista consumed more resources (faster processors, more memory), so by sticking with XP people were also able to avoid hardware upgrades.

2010 looks like it is shaping up to be one big refresh cycle. Old desktops can be replaced by supercomputers or even notebooks at $500 per pop. Windows 7 has gained people's confidence and really shines on newer hardware. And CS5 is going to have many new features that will increase productivity among creative professionals. As the guys at Adobe said, Create Suite lets you create once, then easily export the content to print, large screen Web format, mobile format, or even high-definition video. And it won't work well with a pokey old single-core computer running XP.

I am predicting a great year for AMD, Intel, NVIDIA, Adobe, and Microsoft. Most other innovative tech companies, both hardware and software, should do well to the extent they are competitive within their specialties. Right now the tech companies I actually own are Marvell, AMD, Dot Hill, Microchip, TTMI, SGI, and Applied Materials. Typically the first quarter of a year is seasonally down for tech companies, but I expect it to be less seasonally down than usual, followed by ramping through the year.

Later today Linux specialist Red Hat will report results for its quarter ending February 28. At openicon.com I'll be posting my Red Hat (RHT) analyst conference summary soon after the conference ends. And probably my column hear tomorrow will give some additional insight into Red Hat.

AMD Q4 2009

AMD reported on its fourth quarter of 2009 this Thursday. It was a quarter of impressive improvements, with sales up 18% sequentially and 42% from the year-earlier quarter. That is excluding the almost $1.25 billion payment from Intel, which was entered in the operating expense accounts, and so did not appear in revenues. AMD also excluded the payment from non-GAAP numbers.

The hot money bailed out Friday, sending the stock price down over 12% to below $8. That is the way of hot money. Looking at the charts, my guess is a lot of hot money bought in above $8 during December and January, which makes this another example of hot money being stupid money.

Investors, the people who actually reap profits from business activity, need to look at the moving parts within AMD to see whether staying long is justified. The main reason to suspect it is not is that AMD is competing against Intel and NVIDIA, two very tough competitors. In addition, ARM-based processors are coming on strong against the x86 brethren, so in the next few years companies like Marvell (MRVL) may be nibbling even at mighty Intel's heels.

First, look at measures of profit. I'll use three: GAAP net income, non-GAAP net income, and EBITDA. Again, I exclude the $1.242 billion Intel settlement. GAAP net income was negative $64 million. Non-GAAP net income was positive $80 million. EBITDA ((Earnings Before Interest, Taxes, Depreciation and Amortization) was $282 million, impressive except that AMD has a lot of debt and so interest, and has invested a lot of capital and so depreciation does represent cash spending in the past. Still, I think it is fair to say that by some investor standards the quarter was profitable. The non-GAAP and EBITDA numbers exclude the former fabrication business. This makes sense to use since that business has been spun off (to GlobalFoundries). Starting in Q1 2010, AMD will be fabless.

As to the future, we want to know whether revenues will continue to ramp, and whether profit margins on revenues will continue to improve. Which means we have to look more closely at product trends.

AMD is now in the graphics processor business, and after years of struggle is showing some success. NVIDIA is the company to beat, and while that is still a distant goal as far as chip revenues, AMD almost certainly gained market share in Q4. AMD has the only GPUs (graphics processing units) that work with DirectX 11, the newest graphics standard. This attracts forward looking purchasers, and resulted in graphics revenues of $427 million, up sequentially 39.5% from $306 million, and up 58% from $270 million year-earlier. The worry would be that NVIDIA will have a better DirectX 11 capable processor some time in 2010. It is not a for sure thing, given how NVIDIA has been stumbling the last couple of years. While I don't expect AMD to have another year of 58% GPU revenue growth, I suspect whatever NVIDIA does, AMD will see healthy growth this year. We are going into a computer refresh cycle, and NVIDIA's slowness to market means it lost opportunities to be built in to systems.

In the CPU business revenue growth was robust, if not as eye-popping as with GPUs. Revenue was $1.214 billion, up 13.5% sequentially from $1.069 billion, and up 39% from $873 million year-earlier. Growth was described as broadly based, but Opteron 6-core server processors were described as having been a source of strength.

If profit margins expand along with revenues in 2010, today's AMD market capitalization of $5.3 billion is going to seem ridiculously pessimistic. On the other hand, since AMD still has almost $5 billion in long term debt and liabilities, any further stumbles of the kind we saw this last decade could have very serious consequences.

Q1 is typically seasonally down for CPU and GPU manufacturers. Given that AMD was not able to ship enough of its new GPUs to meet demand, there is at least a possibility that Q1 revenues could be closer to flat for AMD. That would be a very good sign for the full year 2010.

On the whole I would say I think AMD stock looks undervalued at $8 per share, but then I am a long-term AMD investor, so maybe I am being overly optimistic.

For more details, see my AMD Q4 2009 analyst conference summary.

See also amd.com

Shortages for Electronics, Semiconductor and Computer Makers

Listening to a variety analyst conferences this last couple of weeks I heard a variety of executives mention shortages of the components they needed to manufacture their own products. Some simply had to scurry to get parts, others lost sales because they were unable to deliver product.

Extreme Networks, EXTR, for instance, was unable to manufacture its latest and greatest network switching devices in sufficient quantity. They had let their inventories get too low.

Integrated Silicon Solutions, ISSI, reported that there was a shortage of wafers (the starting point for making their memory devices), but that they actually sold more than expected because their rivals in the SRAM and specialty DRAM market were not able to make deliveries.

NVIDIA, NVDA, had the most serious problem I heard. They make graphics processors for computers and mobile devices. NVIDIA's third quarter revenues grew 16% sequentially, but they believe they could have shipped $50 million to $100 million more in product if they had product to ship. The problem was mainly in the newest, high-end graphics chips. TSMC, the foundry that makes them for NVIDIA [and makes much of the world's semiconductors], could not make the chips fast enough. Partly this was due to low process yields on the latest, most miniaturized technology.

AMD's graphics processor segment probably picked up some of the slack, but they are also using TSMC and can't get enough of their newest product either. However, they apparently did a better job anticipating demand than NVIDIA did.

Dot Hill, HILL, was able to get enough disks to ship their storage units to HP, NetApp, and other customers, but reported that they had to work hard to get enough disks and could not guarantee they could get as many disks as they will need in the fourth quarter if demand continues to ramp.

There are probably many more examples, and of course there are always companies products aren't competitive and so are not worried about shortages. But the general pattern is clear. From bottom to top, inventories were taken too low earlier this year, and manufacturing capacity was cut back too much.

Much of the increase in end-user demand is coming from China, but there is a buildup in demand in the United States off the lows of late 2008 to early 2009.

I am expecting robust growth in most segments of the global semiconductor, networking, and computer equipment industry during 2010.

Even capital equipment makers like Applied Materials, AMAT, are looking at a return of demand. It might seem that since on the whole demand is still lower than in 2008, foundries would not need to be buying new semiconductor manufacturing equipment yet. But just as new, better, higher capacity products are always being designed, the machinery for making them has to be upgraded. If someone wants 33nm parts, you can't make them with 90 nm tools. So it now makes sense to buy newer, higher-technology equipment rather than simply restarting production lines that make parts that are no longer in demand.

Disclaimer: I own shares of AMD, HILL, and AMAT. I do not own shares of the other companies mentioned (as of today). - William P. Meyers

Rackable Systems Eats Silicon Graphics

When I moved to San Francisco in the early 1990's and started meeting the computer graphics crowd, the place everyone said they wanted to work was Silicon Graphics. Not only was that where the cutting edge lay, it was also seen as a smart career move. Surely, in a few years, Silicon Graphics would surpass HP and then Intel and IBM.

It did not work out that way. Today Rackable Systems (RACK) announced it would buy Silicon Graphics (SGIC) for about $25 million. While that is certainly a bargain basement price for a treasure chest of intellectual property, I cannot assume that Rackable will do well with the acquisition.

Silicon Graphics' (aka SGI) traditional problem is running a business that actually makes money. That is exactly the problem Rackable Systems has had these last few years. Rackable has a substantial amount of cash in hand, but it was mostly generated from its initial IPO, not from profits. Rackable grew rapidly and had some profitable quarters a few years back, but then they got shoved around by bigger competitors, notably Sun, HP, Dell, and IBM. I think Rackable on its own could be profitable again if IT spending picks up some time this year, but this acquisition will create distractions and a lot of new variables to manage. So we have the dilemma of a company with a tremendous opportunity that could turn into a serious downside.

What are Rackable shareholders (that includes me) getting for their $25 million in cash? The latest results for SGI showed revenues of $82.8 million and a GAAP net loss of $49.2 million and an EBITDA of negative $17.3 million. That is no way to run a business. And it is not just from the recession. Once upon a time SGIC's market capitalization was over $1 billion.

So the first thing Rackable management should do is can as much of SGI's management as is necessary. Cut costs to the bone. Assuming an $80 million per quarter run rate, if you can't generate $8 million of profit on that, you should get out of the business. If there is revenue that can't be made to generate a profit, jetison it.

Having watched variously poorly managed technology companies for years, I will ball park what I would expect to see if I were a Rackable manager reviewing SGI. Sure, if you spend $1 million on a product, and it is a good product, and offer it for sale at $800,000, someone is going to buy it. What you need to do is price the product at $1.1 million. If your customer will not pay $1.1 million for the product that cost you $1 million, you don't need that customer. So first you try to raise the price, and if that does not work, you close that product line down. Let the managers and workers find jobs elsewhere (good luck). Or if they want to keep their jobs, and sell their product for $800,000, they need to find ways to reduce product cost, and if necessary give back enough of their compensation package to make that work. There a business people lacking high school diplomas who could tell you this; MBAs could tell you this; but technology guys often are mesmerized by their toys and forget they are in business.

SGI has some pretty nice products. Supercomputers. Those should be priced to generate a profit. Graphics software. Why should that not make a profit? Servers - lots of companies make profits selling servers. Professional services - how can you not make profits on professional services? (Technology geniuses have found a way to do that: pay your staff more than you charge the clients! Fail to take overhead into account!)

Rackable's last acquisition did not go well. Management said that RapidScale storage technology would be the Next Big Thing (back in 2006) but it was a failure that apparently could not be sold once Rackable no longer wanted it.

On the bright side, Rackable does have some pretty amazing talent, so maybe management can turn the company around and make hay with the SGI assets too. Rackable got big quickly because it took the need to lower power consumption at data centers seriously. It is still very, very good at that. It has clients like Amazon, Microsoft, Facebook, and Yahoo, and it has been making advances internationally and in new specialties like Defense and Oil exploration.

SGI looked like it should be valuable in the 1990's because it put technology first, before profits. Some times that works, but usually it does not. The best business model wins when the technology is good enough. The best business technology solves enterprise problems at a price that beats the alternatives. Profits have to be part of the model, or else you can't keep up research and development efforts. The leading edge wanders off to ATI or NVIDIA.

Because SGI is selling itself off through a bankruptcy, rather that directly with a merger, it is possible that debts will disappear. This, in itself, might help it move towards profitability, but even if it is the case, can't change the need for better management.

I'm not selling my Rackable stock, but I'm not buying more right now either. I'd like to see what Rackable does with the SGI assets over the next six months or so. If Rackable runs SGI like SGI ran SGI, this merger will sink it.

See also my Rackable Systems page, with links to Rackable analyst conference summaries.

Marvell Technology In Recession Mode

Marvell Technology Group (MRVL) reported revenue of $513 million for their quarter that ended January 31, 2009 (4th quarter fiscal 2009). That was not a good number for Marvell; it was down 35% from the October 2008 quarter, and down 39% from the year-earlier quarter.

I own Marvell stock. I had hoped for better, but not expected it. Since a lot of Marvell's revenue comes from the data storage sector, I hoped people's need to store ever-increasing amounts of data might partially offset the recession. As we have seen, for instance, at Dot Hill. On the other hand, I have a backup drive that once seemed capacious and now is getting pretty full, but I am delaying buying a bigger capacity drive right now; I have more pressing needs for cash. Multiply by 100 million.

Marvell is a relatively new company that grew big quickly and seems to aim at dominating the entire mixed digital analog sector. In addition to making chips for Western Digital drives, it makes processors that RIM uses in some of its Blackberry products, chips for printers, chips that combine Bluetooth and WiFi, and video processing chips. It seems to be able to move its engineering expertise from one technology arena to another, taking on the likes of TI, Motorola, Intel and Broadcom. Sometimes it takes Marvell a while to get traction in a new area, but when Sehat Sutardja says "In a year or two, " it is a good idea to take him seriously.

In a year or two, Sehat believes there will be architectural convergence for many devices, including netbook computers, smartphones, and next generation data and communication appliances. He believes Marvell has all the expertise necessary to get there with the best products at prices that enable the magic of mass consumption with good profit margins for Marvell. That looks right to me. Marvell has shown it can do ARM processors as good as anyone, and it is unrivaled at putting analog circuitry on chips.

But I would not discount, quite yet, the ability of rivals to out market, and perhaps even out engineer, Marvell. Motorolla, TI and Intel all have deep pockets and large research establishments.

Of its $513 million in revenue in the quarter, Marvell spent $208 million for research and development. Obviously they could have sent a lot of engineers home in 2008 and pleased short term investors. That is not the Marvell way.

Whether Marvell was profitable in the quarter depends on how you want to do your accounting. On a GAAP basis they lost $65 million. They claim non-GAAP net income of $32 million. On a cash basis, they had free cash flow of $95 million. They ended with $952 million in cash and equivalents, so they are well positioned to keep up their drive for industry dominance.

They have cut costs, and are reducing the work force by 15%. If I know Marvell's corporate culture, that means those lucky enough to be employed are going to work even harder and smarter, if that is possible.

For more details, see my Marvell analyst conference summary for March 5, 2009.

The current economic and stock market troubles provide for a unique opportunity to buy into Marvell, but there is risk in investing in the highly competitive semiconductor industry, so ...

Keep diversified.

AMD on the Ropes

When you go up against Goliath, you had better not make mistakes. The biggest David and Goliath story in the semiconductor chip industry in this decade has been AMD and Intel. Right now AMD is badly battered by the giant Intel, partly because AMD stumbled in introducing quad core microprocessors.

AMD reported fourth quarter 2008 results at its analyst conference yesterday, and they were a disaster. Even when you strip out special or non-cash items, AMD lost a lot of money on its basic operations producing microprocessors and graphics processors.

For details on what happened in the quarter and what management thinks of the first quarter of 2009, see my AMD analyst conference summary for q4 2008.

AMD made its biggest mistake, or double mistake, when it and Intel were transitioning from dual core to quad core chips. Much of today's problems stem from that era. Intel, which had been rapidly losing market share in the high-margin server chip market, decided to kluge together two dual core chips, each a separate piece of silicon. AMD insisted on the more elegant solution of actually putting all four cores for the Opteron on the same silicon chip. Then it ran into design and production problems, delaying its quad core introduction. Intel, with its dominant market share and huge cash flow, had no competition in quad-core chips for about a year. That was enough to regain most of the market share it had lost and to using pricing to keep AMD at bay even after quad core Opterons were finally introduced.

AMD also acquired graphic chip maker ATI, which was a smart move in itself, but they paid way too high of a premium for the acquisition and were saddled with debt that was unsupportable given ATI's marginal profitability.

AMD has always been behind Intel in what is called process technology. AMD's superior chip designs are typically made using larger silicon features than Intel's, which means Intel can put more transistors on any given size of chip.

The fourth quarter of 2008 should have been a magic moment for AMD. The new version of its quad core Opteron processor is at the same process technology, 45 nm, as Intel's current competitors. It is a very competitive chip. AMD also has very competitive desktop Phenom processors and notebook Turion processors. Some people even admit that it is ahead of NVIDIA in graphic chip technology for the first time since ATI was acquired.

But demand for computers fell across the board in the last quarter of 2008 due to the banking crisis. Instead of making a profit, gaining market share, and preparing for the next round of competition, AMD was badly hurt. Intel has a huge inventory of unsold processors, so they will probably be dumping them on the market. And Intel has huge cash reserves, so they can better develop new technology while making little profit during the downturn.

So is AMD finished? By no means. The spin off of their manufacturing operations to The Foundry Company has been well publicized and should be completed in February. At that point the core of AMD will be a design and sales company. AMD's much smaller team of engineers has consistently out-designed Intel for a decade now; maybe they can keep up the heat.

AMD will emerge from its spin off with a substantial amount of cash and somewhat decreased debt. That leaves it vulnerable, of course, to Intel's "aggressive" sales tactics (illegal, according to some nations) and ability to flood the market with cheap processors.

So visibility is practically non-existent here. If the economy turns around before Intel is able to introduce 32 nm based chips, AMD might be able to gain crucial high-margin market share in servers. But once Intel starts selling 32 nm chips, AMD will be at a disadvantage again, for a while, no matter how good their chip designs are.

I still own some AMD stock. It has been the worst performing stock in my portfolio. It is a reminder that even geniuses can lose money for you.

So keep diversified.

More data:

www.amd.com

Rackable Systems Has Ice Cube Orders

Rackable Systems (RACK) has been talking about its ICE Cube containerized datacenter systems for over a year now. At their analyst conference on November 3, 2008, they announced that an indefinite amount of ICE Cubes will ship in Q4. My take is that if the orders are not cancelled, and if they ship early enough in Q4, Rackable may report revenues from the orders in Q4. This is great news for Rackable investors (which includes me).


We knew from the pre-announcement that Q3 results would be bad, and they were. Revenues were $65.3 million, down 14% sequentially from $76.0 million and down 25% from $87.2 million year-earlier.


On the other hand, even though net income was negative, it improved significantly due to tighter cost controls. Net income was a loss of $6.0 million, a sequential improvement on Q2 loss of $27.9 million, but worse than essentially $0 results year-earlier. EPS was negative $0.20, compared to negative $0.95 in Q2, and $0.00 year-earlier.


Rackable still has a lot of cash and equivalents, ended at $184.6 million, down sequentially from $198.1 million. Most of the reduction, according to management, was to produce the ICE Cube units that will ship this quarter.


Rackable was not able to sell its RapidScale storage division, so that will be written off as a loss. Instead it is partnering with NetApp for storage. You may recall how RapidScale was once lauded as a division that was going to give Rackable a competitive edge and good profit margins once it ramped up. Well, that does not mean closing it down now is not the right thing to do.


The NetApp partnership might work out to be more than it appears. Management says the NetApp people are introducing them to potential new clients. Since NetApp is probably confronted with occasional losses against vendors like HP and Dell that can provide both servers and storage, working with Rackable could prevent them from losing from sales. It is conceivable that the partnership could be quite beneficial for both parties, but I would not bet on it until I saw some actual revenues coming in. Rackable expects the NetApp partnership to start generating revenue in 2009.


They continue to lead with their high-quality, computationally intense, energy efficient technology. Their newest technology is called CloudRack. Obviously they are targeting the cloud computing market.


Rackable's stock is in the dumps, but then again they have not turned in a profitable quarter in some time. They have enough cash to survive a downturn, but so do their principal competitors. So Rackable, while promising, has to be rated as a risky tech stock.


For details on what management said on November 3, see my Summary of the Rackable Systems analyst conference for Q3 2008.


Keep Diversified!

More:

Rackable Systems

AMD Shanghai Opterons Could Restore Profitability

Microprocessor and graphics processor chip maker AMD let slip that its new Shanghai version of the Opteron processor is actually ahead of schedule for production. Samples are available now for testing and it may begin appearing on servers as early as Q4 of this year.

AMD was doing well in its efforts to become a true rival to Intel until the Barcelona version of Opteron ran into problems. It came out over a year late. It had some merits: the four core version had all four cores on a single chip. Intel's four-core Xeon server processor actually was two two-core chips packaged together, which resulted in a variety of performance issues.

The Shanghai Opterons will also have four cores, but they will be on a 45nm process enabling them to have larger internal memories (caches) and other acclerators that were not present in the Barcelona versions, which were done with a 65nm process.

In looking at Q3 2008 results, which will be released October 16, we will be seeing the results of revenues from the current generation of Opteron processors. This generation has its merits, and may have sold well into energy conscious server customers. But if there is a surpise bump it will be from the recently reinvigorated ATI graphics unit, which came out with highly acclaimed products that may have sold very well in Q3. Notebook CPU and graphics chips, which were once a weakness for AMD, also should be showing a strengthening trend.

So if Q3 was better than expected, and Shanghai starts shipping in Q4, and the economy does not melt down, AMD investors will have something to cheer about for the first time since 2005. Given the almost vanishingly low current market capitalization for AMD, that might generate quite a pop.

Then again, I am a long-term investor in AMD, so this analysis could just be wishful thinking.

For more data see my AMD page and www.amd.com

For the technical news article on Shanghai see AMD says new 'Shanghai' chip is ready to go by Brooke Crothers at CNET.

Its always best to ...

Keep diversified!

Shaking Up Tech: NVIDIA, AMD, and Intel

Technologies may come and go, but technology powerhouses can be much more durable. IBM, the champion of mainframe computing, is still around today and generating lots of profits for its investors. The mainframe also rans mostly did not make successful transitions to new technologies and business models.

The last three years have been rough for investors in the dominant computing technology, the PC. The funny thing is that PCs are more powerful than the mainframes of the 1980's, and many of them are not really personal; they are the servers of datacenters, internet web farms, and local networks.

Companies that dominate the end PC market like Dell and HP are dependent on the makers of the semiconductor chips that are the building blocks of the PC. Some components have multiple sources, but when it comes to the core, the Central Processing Unit (CPU, or just "processor"), there are only two AMD and Intel (symbol: INTC). In the graphics department at the high end we have only AMD (symbol: AMD) and NVIDIA (symbol: NVDA), but Intel competes in the low end of the market where graphics are integrated into motherboards.

Six years ago the picture looked remarkably like it does today, at least superficially. Intel dominated the CPU market. AMD made CPU's, but not profits, largely using technology licensed from Intel and allowed just enough market share by Intel to keep Intel from be accused of monopolizing the market. NVIDIA led the discrete graphics chip market, with ATI sometimes having substantial market share, but basically always in the number 2 position.

AMD is responsible for shaking up that picture two times in the past 6 years. Realizing that Intel's roadmap for future processors was not what PC makers really wanted, AMD came out with its Opteron server chip design, and with the Athlon equivalent for PCs. The Opteron and Athlon introduced 64-bit (as opposed the the prior standard 32 bit) computing to mass markets, integrated the memory controller on the chips, and were designed to save energy (Intel's roadmap was basically use the old design, keep running it faster and hotter). Despite a great deal of resistance for a complacent PC industry, and some hardball tactics Intel used to minimize the erosion of its market share, suddenly AMD looked like it might actually eventually overtake Intel. But Intel had a lot of money, lowered its prices, and even changed its chip design, then used its marketing power to push back at AMD.

AMD also bought ATI. They paid about $5 billion for ATI, more than the value of AMD today. NVIDIA and Intel both executed well at the same time, and AMD looked to be in risk of bankruptcy.

NVIDIA is also shaking things up with its CUDA technology. Let's just say it uses the graphics chip for general computing, and that endangers both CPU makers, Intel and AMD.

The second quarter of 2008 was one of the most interesting of this decade, and Q3 and Q4 are looking to be just as interesting. Both NVIDIA and Intel screwed up, and AMD's plan to sell better designed CPUs, graphics chips, and chip sets (the "glue" chips that go on the computer motherboard) seems to be getting some traction.

You can get a very good idea of the financial states of NVIDIA, AMD, and Intel, as well as hearing what their respective managements have to say about their current and upcoming technologies, by reading my summaries of their Q2 analyst conferences [See NVIDIA Q2 2008 analyst conference summary; AMD Q2 2008 analyst conference summary; Intel Q2 2008 analyst conference summary]. Note that NVIDIA's quarter ended July 27, 2008, and is their fiscal Q2 2009.

NVIDIA's disaster month was July. It was revealed that NVIDIA chips were melting down, particularly in certain Dell and Apple notebooks (Apple, as usual, denies that its products have any problems). NVIDIA took a $196 million charge to deal with the expected costs of replacing or fixing the notebooks. That is bad, but it is the kind of thing that happens from time to time, and should not affect NVIDIA very much unless the problem gets repeated.

Worse for NVIDIA, they had to drastically lower their prices in July. After about 3 years of offering no competitive threat to NVIDIA, ATI (now a division of AMD) had brought out some great graphics chips and prices them very nicely.

Which does not mean AMD is back in the money. Intel's primary weapon against Intel in 2006 was lowering prices to the point that AMD could not match. It is a monopoly tactic that is tried and true. Force out the competition with ruinous pricing, then jack prices back up to highly profitable levels when the competition is done in. The only difference with Intel is that if they had actually forced AMD out of business, they would then clearly be a monopoly. So they just pushed AMD to the brink, gained back some lost market share, and then raised prices again when they introduced their Core Duo technology.

NVIDIA is also far more profitable than AMD, but they have nowhere near the muscle of Intel. They have not yet tried to chase ATI/AMD out of the market with pricing muscle. Instead they have a long tradition of competing (and winning) with better technology. So the price cuts were necessary to their own survival, and will hurt their financial position in the short run more than they hurt AMD.

AMD stock is practially free these days. While AMD has a respite, it is going to have to struggle just to stay alive. It has not made a profit, even on a non-GAAP basis, in years. Its new notebook technology (a combination of CPUs and graphics chips) is very competitive and has had some good design wins, but Intel's (which suffered a delay in introductions) is certainly competitive. AMD is finally producing quad-core Opterons that are being lauded by end users, but they came out over a year late, giving Intel time to up the ante.

I own AMD stock, and it has been the worst-performing stock in my portfolio. Hope springs eternal, so I bought more AMD recently. NVIDIA stock is also dirt cheap; I am keeping an eyeball on it. Intel is a safe bet, but I don't feel it is a great bargain at the current price.

More data:

http://www.intel.com/
http://www.amd.com/
http://www.nvidia.com/

Intel Beats; AMD Thursday

Intel (INTC) reported revenues and earnings that beat Street estimates on Tuesday. See my summary of the Q2 2008 Intel analyst conference. AMD will report after the market closes on Thursday, July 17, 2008.

AMD investors are doubtless wondering whether Intel did well because the overall microprocessor end market was strong, or because it took substantial market share from AMD.

AMD preannounced three unusual items, but did not contradict its prior guidance that revenues would be seasonally down in Q2. The big scary item was a $880 million write down from its ATI acquisition, which is actually almost meaningless because it is a non-cash item. It will have a $32 million restructuring charge, which is real. It also sold some old equipment for $190 million, which strengthens its cash position. [See the AMD July 9, 2008 SEC filing]

The most important data to look at Thursday is Q2 revenues. Intel's revenues dropped 2% from Q1 to Q2 (Q2 is typically seasonally slow for microprocessor revenues, with Q3 and Q4 stronger due to back-to-school and holiday sales). If AMD revenues dropped 2 to 4%, I would characterize that as okay. Worse than 4% I would start to worry, even though excessive worry is already built into the stock price. Anything from a 1% drop to positive territory will be cause for celebration.

If you look at past AMD year-over-year and sequential comparisons, or AMD to Intel comparisons, you get a very broad spectrum of possibilities.

AMD Q1 2008 revenues were $1.505 billion, down 15% sequentially from $1.77 billion, but up 22% from $1.23 billion the year-earlier quarter

INTC (Intel) Q1 2008 revenue was $9.7 billion, down 10% sequentially from $10.7 billion in Q4 2007, but up 9% from year-earlier $8.85 billion (Q1 2007). Q2 revenue was $9.47 billion, down 2% sequentially from $9.7 billion, but up 9% from $8.68 billion year-earlier.

Suppose AMD Q2 revenue is up 22% from year-earlier Q2 of $1.38 billion, as it was in Q1. Then Q2 2008 revenue would be $1.68 billion, up 11.6% sequentially. That seems unlikely.

Suppose AMD is down 2% sequentially like Intel. Revenues would be $1.47 billion.

Guidance was seasonally down Q2 revenues. Q2 2007 revenue, however, was up 12% sequentially from Q1 2007.

So it is possible AMD is just being conservative, given that the main factor in their sales is Intel pricing schemes, which are not in AMD's control. However, Intel reported healthy profit margins the first half of this year, so they are not putting as much pricing pressure on AMD as they were in 2006 or 2007.

AMD seems to finally have its quad-core Opteron production ramped up. It may be doing better in its graphics division, and it actually managed to beat Intel to the punch introducing a new line of notebook computer system chips. Computers built around Phenom processors seem to be available from most major retailers.

So a good Q2 would not be a complete surprise. If it is a good Q2, I would like to see an updated roadmap for 2009-2010. Intel is already out selling pitching microprocessors that it is only dreaming of; AMD paused in its wild, rosy roadmap announcements during the Barcelona delays.

I would also want to hear that AMD's 45 nm chips are starting to come off production lines. AMD has done a terrific job closing the gap with Intel on chip manufacturing, but there is still a gap and it does help Intel keep its chips more competitive than they would be otherwise.

I am a long-term investor in AMD.

Keep diversified!

More data:

You can read my summary of the AMD Q2 analyst conference when it is ready on Thursday, or listen yourself from a link on the AMD investor relations page.

AMD Revival?

Are AMD's troubles mainly behind it? If they are, the stock price is way to low. But after watching Intel (INTC) swat down AMD with aggressively priced but inferior products, and the subsequent AMD fumbling of the transition to Barcelona quad-core Opteron processors, I can understand why confidence in AMD is not high and could take some time to rebuild. I kept the AMD stock I accumulated, but I have not yet added more to my position despite recent tempting prices.

There are three big variables to look at. One is the competitiveness of AMD's technology. This has many moving parts, including many moving parts at rivals Intel and NVIDIA [NVDA]. The second is financial: what does the hard, historic data look like and tell us about future potential. The third is about markets. A number of nations have accused Intel of using illegal tactics to keep AMD out of the market. And many well-place decision makers own Intel stock. And Intel advertises heavily in the trade journals that help technology purchasers make decisions. As in other businesses, having a better product is no good unless you can develop channels for selling that product.

I think the best way to see the financials is to look at past quarterly reports and analyst conferences. Of course you can look at SEC filings, but for a comprehensible overview I rely on my own analyst conference summaries. Follow this link for a summary of AMD's April 17, 2008 report on the quarter ending March 1. AMD's investor relation page is also useful.

The biggest change over the last year is the decrease in the write-down of ATI acquisition charges. Graphic chip maker ATI was barely holding on against an NVIDIA onslaught when AMD purchased ATI for about $5 billion. Today the combined AMD/ATI operation has a market capitalization of about $4.5 billion. Hence the write-downs. AMD's Q1 cash flow from operations was $16 million, and they generated $50 million more by selling obsolete (to them) tools. More interesting, revenues were $1.505 billion, down 15% sequentially from $1.77 billion, but up 22% from $1.23 billion the year-earlier quarter. The seasonal drop was a bit worse than expected, but the 22% pop from year-earlier seems to show the worst of the revenue slump is behind.

I don't expect anything beyond the normal seasonality for the June quarter. Quad-core Opteron sales should be ramping up, and quad-core Phenom too, but neither have enough technological advantage over Intel's quad-core products to cut much into Intel's market share. The same is true on the discrete graphics processor side, where NVIDIA's domination seems solid in the short run.

Looking down the road 6 months to a year, however, I think AMD is going to be able to leverage its technological leadership over Intel in some key areas. AMD will continue to be the low-energy leader, which is especially important in servers and notebook computers. While Intel has increased the efficiency of its chips (largely by copying AMD) and has a 6-month to a year lead in process technology (the constant shrinking of transistor size on chips), its designs still seem to ignore the needs of end-customers.

The single biggest differentiator, however, is in graphics. AMD's Puma [Turion X2 Ultra] technology for notebooks is the best example. Intel cannot make high-end graphics chips and its low end chips are garbage (and the main reason people complain about Microsoft Vista). AMD Puma builds in a high degree of graphics functionality at a low cost, ideal for low-end notebooks. But for more expensive notebooks, manufacturers can simply add a discrete, high-end, graphics chip. The graphics processing power of the two chips is additive.

Everyone is the industry is afraid of Intel. If Intel cuts off your supply of chips, you are screwed. If Intel raises its prices to you (or gives your competitors better discounts for not using so many AMD chips), you are screwed. There are many large corporate end-users that still have Intel-only policies. Consumers usually do not know what to think about AMD v. Intel, although that is an improvement over 10 years ago, when AMD was assumed to be the inferior brand.

On the other hand, if someone else is selling notebooks that are AMD based (AMD makes the processor, graphics processor, and "glue" chips) that are noticeably better (better graphics, faster processing, longer battery life) than more expensive Intel-based notebooks, that could cause some people to rethink their relationships with the bully boys at Intel.

Of course, the Intel camp is promising wonderful, better than AMD notebook chips real soon. And they will buy enough advertising (and reviewers) to make their propaganda seem true, whether it is or not.

So AMD remains a risky stock. It has a lot of potential. But so far betting on the PC industry showing some backbone against Intel bullying has not paid off, and it may not in the future.

I think Intel is going to have to pony up some money to settle the AMD v. Intel lawsuit. There has just been too much evidence accumulating around the world of Intel wrongdoing. Whether it will be for a half-billion dollars or for $50 billion or any point in between is anyone's guess right now.

AMD Valuation

Last year AMD bought ATI for $5.4 billion. Today AMD is valued by the market at $5.9 billion. What gives? What sort of valuation should be put on AMD stock?

AMD, of course, makes microprocessors, or CPU's, the cores of computers. It traditionally competed only in the PC space until it introduced its Opteron processor for servers in 2003, and usually had less than 10% of the market, with Intel having about 90%. From 2003 until 2005 AMD had a good run, gaining market share and hitting a stock price over $40 in January 2006. Then Intel struck back. By slashing its prices and promising a new generation of chips for later in 2006, Intel first cut into AMD's profit margins and then began to regain market share. The new chips introduced in 2006 had their faults but were overall on par with AMDs. Then came the ATI acquisition, which saddled AMD with a lot of debt. To add to this toxic brew, AMD's quad-core chips, code named Barcelona, were delayed in 2007. For more AMD background and history check out my AMD page.

Because of the necessity of competing on price and the poor sales of ATI chips after the acquisition (competitor NVIDIA introduced new graphics chips that put ATI behind), AMD has had a very bad year. The good news is that the stock is now astonishingly cheap, if you are willing to pick up on the risk. Last week a wealthy shiek bought some $600 million's worth, so you would not be alone in your gamble. [I own AMD stock and also owned ATI stock before the merger. I also once owned NVIDIA stock but foolishly sold it.]

Lets use the numbers from AMD's latest quarter, Q3 2007, as a proxy for its current condition [See also my AMD October 18, 2007 Analyst Conference Summary]. Revenues were $1.63 billion, up 18% from Q2 2007 and up 22% from year-earlier.

Which would seem to say that AMD is accelerating out of its 2006 slump, at least on the revenue side.

Q3 2007 net loss was $226 million, which tells you the core story of AMD's low stock price. While it was better than the net loss of $457 million in Q2, it was a reversal of a net income of $121 million in Q3 2006. Q3 2006 in itself was not a good quarter for profits.

The main reason I think AMD is underpriced is because in Q3 2007 it reached positive cash flow. That is, much of the net loss was for non-cash expenses, including ATI acquisition costs. AMD spent the money on ATI last year, but under generally accepted accounting principles (GAAP) some of that expense is written off over time.

Also, AMD shipped a record number of processors in Q3. Despite predictions by Intel fans that AMD would sink back into the obscurity from whence it came, and claims that AMD notebook chips sales would be down, AMD's processors for notebook computers had 68% better unit shipments than the year-earlier quarter.

After some real problems marketing graphics chips after the ATI acquisition, that segment seems to be getting on track with a 29% sequential increase in graphics revenue.

Intel has always led AMD in process technology (the ability to put more logic gates in the same area of a chip). Just a few years ago AMD was typically two years behind Intel. This month Intel introduced chips using 45nm technology, though they don't seem to be actually available in any quantity yet. AMD said it 45nm chips will ramp in Q2 2008. My guess is that means a May release, so AMD has closed that gap down to 7 months. But AMD has a lead in putting 4 processor cores on a single semiconductor chip, and in design architecture.

If AMD were a recent startup investors would probably consider it a tiger, given all these trends. Intel is a heavy competitor, of course, so heavy that many nations are looking into Intel's reputation for illegal anti-competitive practices and AMD had to file a lawsuit to force Intel to allow computer makers to by AMD chips without retribution.

While Intel is AMD's main danger, a secondary risk would be the possibility of a slowing of the expansion of the computer market. Given the booms in India, China, Russia and elsewhere, I'd prefer to bet on a strong global market even if the U.S. market weakens.

One place AMD shines is giving its customers (the computer makers) what they want, in contrast to Intel's take-it-or-leave-it approach.

Another downside concern is the slow pace of introduction of quad-core Opterons. If AMD does not get its act together on this soon, it could lose all the gains it made since 2002 in the relatively high profit margin AMD market.

On balance, I see AMD growing in 2008, with positive cash flow and progress probably positive GAAP net income by the second half. AMD's stock price probably won't move above $15 per share until this current run of market turmoil ends and AMD shows 2 consecutive quarters of profitability.

But with a current revenue annual run rate of $6.5 billion, and apparently accelerating, I think a rational market would put the market cap at no lower than $7 billion. Which works out to $12.65 per share.

And if indeed AMD continues to gain revenues as quickly as it has lately (possible with its new Phenom processor, quad-core Opteron, and Spider graphics system), it could go a lot higher a lot sooner than most analysts and investors think.

AMD believed it would have a long-term competitive advantage if it became the only company with high-end graphics and general microprocessor capability. It might still be proven right.

Strangely, while I've been writing this its AMD's stock price has risen to $11.05, from $10.55 or so when I started writing.

More data:

www.amd.com
competitors:
www.intel.com
www.nvidia.com