Wednesday, January 25, 2012

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;

Wednesday, January 18, 2012

Marvell Technology Group Hones Edge

Marvell Technology Group (MRVL) was started by a young man, Sehat Sutardja, with a belief that he could make a better chip for controlling disk drives. 16 years later, Marvell dominates the market for hard disk drive controller chips, but now receives about half of its revenue from other market segments.

At the CES this year Marvell showed off some products that again put Marvell on the bleeding edge. I'll come back to those after providing some background for those of you not so familiar with the Marvell story.

For investors the last few year with Marvell have been tough. The stock pays no dividend. After splitting in 2004 and again in 2006, the stock price entered 2007 at well over $20 per share. At the 2008 bottom it hit a low around $4.48. Today it ended sharply up at $15.12 and representing a market capitalization of $8.8 billion.

These stock price gyrations exaggerated Marvell's changes in revenues and net income. Total 2006 (fiscal 2007) revenue was $2.24 billion, with slightly negative net income. Revenues for 2010 (fiscal year 2011, ending January 29) were up to $3.6 billion, with net income hitting $904 million. This fiscal year 2012 revenues are trending towards $3.45 billion, but with just $690 million net income.

A series of problems and even a catastrophe hid Marvell's growing profit potential in 2011. Aside from general global economic turmoil, one major problem was RIM's failure to recapture lost market share with its newer Blackberry smartphone models. This may or may not be temporary. Marvell makes the processors for some Blackberry models. Marvell did not get a slot in the new RIM PlayBook tablet, which sold poorly. It appears that the failures are largely RIM's, and often software related. The Marvell processors, when used, seem to work well.

The catastrophe was flooding in Thailand, which knocked HDD (hard disk drive) factories out of commission, and so the revenue for HDD controller chips will be low for the current quarter. Factories should be mostly back online by February 1 when Marvell's new fiscal year begins.

Meanwhile the main good news has been the rapid ramping of sales of Marvell-processor based smartphones in China. Marvell's chips not only include the processor, but most of the functions needed to run a smartphone (graphics, cellular modem, wi-fi, bluetooth). Thus while brand-happy Chinese are dying (almost literally) to get iPhones, the middle-class masses are buying Android based smartphones that run on a new high-speed, invented-in-China protocol, TD. The ramp in revenue from this in calendar 2012 will be substantial, and the baseline should be noted in the Q4 report due in early March.

Which brings us back to CES (and leaves out Marvell's leading enterprise-grade Wi-Fi and wired internet switch chips). I can only hit highlights, so many products were introduced.

Foremost, Google chose Marvell's ARMADA 1500 HD Media System-on-Chip (SoC) for the next generation of Google TV. While there is no guarantee that Google TV will become a mass market product, it does much to validate the hundreds of millions of dollars Marvell has invested in research and development for ARMADA and related technologies. ARMADA is ARM-based and contains many of the same technologies used with smartphones and tablets. Google has worked closely with NVIDIA, Qualcomm and other ARM-based chip designers; this is a clear sign Marvell is also in the inner circle. The ARMADA chip series has been adopted by OEMs for a wide range of consumer and business appliance applications. See also ARMADA and PXA application processors.

Plug computers are a Marvell invention: inexpensive, small but powerful computers that plug directly into electric sockets and can act as local servers. SMILE plugs are designed to connect a classroom of up to 60 students and complement the One Laptop per Child program and Marvell ARMADA based low cost, low power tablet computers. This is mainly for developing nations, but given funding shortages should be considered by U.S. schools as well.

In storage, much has been said about replacing hard drives with SSDs, and PCs with Flash-based tablets. Change has come slowly. Marvell already leads in SSD controller chips. Now it introduced a chip that attached through PCIe, an existing, faster port than the standard SATA disk port. Everyone agrees this will be popular. Alternately another chip allows for an SSD and hard drive to function together better to lower response times while keeping bulk storage costs low.

Consumer home connectivity and automation were addressed by several products. New models of Avastar wireless chips make it easier for all sorts of devices to connect, including Internet phones and video surveillance. Lighting with LEDs was specifically addressed with new, automation-ready chips. The Smart Energy Platform, a combination of a wireless microcontroller and management software, is aimed at lowering price points for energy-conscious appliances in the home.

Except for Google, OEMs will make their own announcements as branded products become available this year.

I will wait on management's Q4 fiscal 2012 in early March before trying to estimate directionality for the new year. Technology is rapidly evolving. More individual devices mean more information needs to be stored in the cloud, requiring in turn more HDD storage and connectivity. All these trends favor Marvell, but competitors will be gunning for the same revenue and profits.

What do I think would most enhance shareholder value? A dividend. As of last quarter Marvell had 2.4 billion in cash, no debt, and cash flow of $262 million. Marvell has used its cash mainly for stock buy backs, and is likely to continue to do so.

Disclaimer: I am long Marvell. I seldom trade the stock and won't for a week after this article is published.

Keep diversified!