Lately there has been an uptick in the price of AMD stock following news that the European Union will fine rival Intel some $1.44 billion for illegal anti-competitive practices earlier this decade. This lends credence to the AMD v. Intel lawsuit in the U.S., which could result in billions of dollars of damages being awarded to AMD. AMD's market capitalization even after the recent run up stands at less than $3 billion, largely because it has been years now since it has shown a profit.
We probably are not at a the start of a new era, for reasons I will give shortly, but consider the possibility that AMD is going to emerge as a financially strong competitor to Intel in 2010. Intel would have to be prevented from using its substantial cash reserves to force AMD into another price war that would keep AMD from making significant profits. AMD would then be free to continue to introduce superior technology as it did earlier in this decade, only going forward it would be competing in a free market where computer manufacturers could incorporate AMD products into their designs without being threatened by Intel.
What happened earlier in the decade with AMD's technological innovations is instructive. AMD, which had mainly made Intel CPU clones until 2000, made three major design changes that rocked the computer world.
First, Intel had decided that the switch from 32 bit to 64 bit computing would be made by segmenting those two markets. If you wanted to do 64 bit computing the Intel way, you would have to switch to Itanium processors, and your old software would not work on those new processors. At the low end you would stay on the 32 bit road map. Intel ignored feedback from its customers that they wanted chips to run 64 bits on the old 32 bit instruction set, making them capable of easily running older software, and allowing for software makers to easily design 64 bit software. AMD listened to customers and introduced chips that could run both 64 bit and 32 bit software. A lot of people liked that.
Second, AMD introduced HyperTransport, which fixed a major bottleneck in Intel chips that prevented data from being moved from the CPU to memory, other CPUs, or other devices. Only this year, in 2009, did Intel introduce a similar feature in its processors.
Third, AMD's design took into account the problem of energy consumption and overheating of chips. Intel's plan was to make chips run ever faster, with no major changes in architecture, but fast meant hot. AMD changed the architecture to get just as much performance from its chips, but using less energy and running cooler.
The Opteron chip for servers incorporated all of these features, and for a couple of years steadily gained market share. Of course, AMD had almost no server market share before Opeteron. The same features were introduced in AMD Athlon chips for personal computers.
In 2004 I thought AMD was going to blow Intel out of the water. I thought the natural conservatism of the IT community would be overcome by the clear demonstrations of AMD's better technology. But in addition to AMD's need to build credibility and overcome the close relationships Intel had with manufacturers, it ran up against Intel's war strategy.
Internally, we now know, Intel admitted the AMD processors were better designed. Externally, Intel used three classic tactics: it used its massive ad budget to create the perception that its products were still superior; it lowered its prices so that AMD could not generate the profits necessary to maintain its process development efforts; and it used well-documented illegal and unethical tactics to keep manufacturing partners from using AMD chips in their designs.
Then, gradually, Intel followed the AMD roadmap. They started making greener chips that had the 32/64 architecture. Finally, they licensed AMD's hypertransport technology and built their own take on that into their chips. Given all that, with Intel's admittedly superior manufacturing capabilities (they can make smaller transistors than AMD, and so get more into similarly-sized chips), today it cannot be said that AMD has any kind of clear technology lead.
In retrospect, Intel used its market dominance to punish AMD for innovating. Prior to the described era of competition, Intel was quite happy to set extraordinarilly high prices for processors. AMD's clones were cheaper (and a year or two behind in design and process technology), but still profitable. If AMD had been content with 10% of the market, Intel would have kept it prices high, in turn guaranteeing AMD profits. It is almost universally acknowledged that Intel wanted to keep AMD alive and profitable, if not really competitive, simply to have plausable deniability to charges of running a monopoly.
Consumers were helped by AMD's technology innovations, but AMD stockholders lost out.
Hopefully the AMD v. Intel lawsuit will sort all that out. Billions of ill-got Intel profits should be rewarded to AMD.
Given the two corporate cultures, I suspect AMD has a roadmap that is in many ways superior to Intel's. To execute on the roadmap, however, they need money, and they need to know that Intel is not going to engage in ongoing anti-competitive practices.
AMD has at least one trick up its sleeve that should be played soon. It has a graphics division that is vastly superior to Intel's. Intel is pouring money into its graphics design division, hoping to catch up before it loses the lawsuit and AMD has the money it needs to pursue its vision of CPUs that do what clients want, rather than what Intel dishes out.
Disclaimer: I own some AMD stock.
See also my main AMD investor page at OpenIcon.com
Showing posts with label process technology. Show all posts
Showing posts with label process technology. Show all posts
Tuesday, May 19, 2009
Wednesday, May 13, 2009
Applied Materials Segment Performance Varies
Applied Materials (AMAT) is on the ropes. Fortunately it has large cash reserves. It is still paying a dividend (about 2% at this stock price). And it should bounce back when (or if) the global economy starts to recover.
The main take away for me from the AMAT analyst conference on May 12, 2009 was that there is a great deal of variance between the four major segments that make up the company. Let's take a look.
Traditionally Applied Materials makes the machines that make semiconductor chips. Broadly, the chips can be further divided into memory chips and logic IC's, although of course many systems now integrate both on a single chip. AMAT calls this it Silicon Segment. It had $260 million in revenue in the quarter. A year ago, the Silicon Segment had $1.27 billion in orders.
There is the cyclical problem with being a capital equipment manufacturer for you in a nutshell. Demand for end products like cell phones and computers is down. So demand for the chips that make them work is down. The chip manufacturing companies have plenty of capacity right now. Even as demand ramps up (if it does), they can go a bit before adding new capacity.
What silicon semiconductor equipment that was sold did not really go to increase unit capacity. A few companies are continuing to forge ahead on their technology roadmaps during the downturn. This means, in this industry, smaller process technologies. Applied Materials is selling the next generation of machines that can produce chips with smaller gates.
New orders in the Silicon Segment were $259 million. You can't tell exactly what the next quarter's revenues will be from new orders. The lag for this type of equipment is typically more than a quarter. Applied Materials had a backlog of $3.16 billion in orders at the end of the quarter (including all segments), so it could run for some time just filling older orders.
The global services segment is more steady. It had $319 million in revenue and $236 million in new orders, compared to $599 million in revenues year-earlier. That is still quite a drop off. Equipment needs to be maintained, but with utilization low the need for services drops off too.
The best news was in the environmental technology segment, which I prefer to refer to as Solar. Again, AMAT does not make solar cells, it makes the equipment to make solar cells. These are of two major types, crystalline silicon and thin-film. A year ago this quarter, revenues in solar were only $85 million. This quarter the revenue came in at $357 million, though new orders were only $141 million. Demand was very high a year ago - you remember the energy price bubble? - and now while there is plenty of long-term demand, new factories of any kind are considered a risky business.
The fourth segment is Display, which you can think of as equipment to make flat LCD screens for TVs. Results here were dismal: $84 million in sales and $13 million in new orders. Year-earlier revenues were $198 million. Again, a lot of capacity was built in 2007 and 2008, then demand slumped in the fall of 2008. Applied Materials management believes that flat-screen tvs continue to win market share, so some time in late 2009 manufacturers will have to start increasing capacity again for the presumed sunnier days of 2010.
The silicon segment is expected to recover gradually as demand re-ramps and older process technologies are scrapped for newer ones. Solar will ramp again as soon as energy prices go back up and financing becomes more generally available. Services will ramp as utilization of current equipment increases.
Of course, all of these trends assume that the economy will improve in the second half of 2009 and show something like sustained growth in 2010. In the meantime, if you own some AMAT stock (I do), sit back and enjoy your dividends. Applied Materials has $3.1 billion in cash and equivalents in the bank, and even in this dismal quarter was better than break even on cash flow (but non-GAAP net loss was $136 million, and GAAP net loss was $255 million). Some day demand for semiconductor equipment will return, and with its new solar business on top of that, Applied Materials will be even more impressive than it was back in 2007.
The main take away for me from the AMAT analyst conference on May 12, 2009 was that there is a great deal of variance between the four major segments that make up the company. Let's take a look.
Traditionally Applied Materials makes the machines that make semiconductor chips. Broadly, the chips can be further divided into memory chips and logic IC's, although of course many systems now integrate both on a single chip. AMAT calls this it Silicon Segment. It had $260 million in revenue in the quarter. A year ago, the Silicon Segment had $1.27 billion in orders.
There is the cyclical problem with being a capital equipment manufacturer for you in a nutshell. Demand for end products like cell phones and computers is down. So demand for the chips that make them work is down. The chip manufacturing companies have plenty of capacity right now. Even as demand ramps up (if it does), they can go a bit before adding new capacity.
What silicon semiconductor equipment that was sold did not really go to increase unit capacity. A few companies are continuing to forge ahead on their technology roadmaps during the downturn. This means, in this industry, smaller process technologies. Applied Materials is selling the next generation of machines that can produce chips with smaller gates.
New orders in the Silicon Segment were $259 million. You can't tell exactly what the next quarter's revenues will be from new orders. The lag for this type of equipment is typically more than a quarter. Applied Materials had a backlog of $3.16 billion in orders at the end of the quarter (including all segments), so it could run for some time just filling older orders.
The global services segment is more steady. It had $319 million in revenue and $236 million in new orders, compared to $599 million in revenues year-earlier. That is still quite a drop off. Equipment needs to be maintained, but with utilization low the need for services drops off too.
The best news was in the environmental technology segment, which I prefer to refer to as Solar. Again, AMAT does not make solar cells, it makes the equipment to make solar cells. These are of two major types, crystalline silicon and thin-film. A year ago this quarter, revenues in solar were only $85 million. This quarter the revenue came in at $357 million, though new orders were only $141 million. Demand was very high a year ago - you remember the energy price bubble? - and now while there is plenty of long-term demand, new factories of any kind are considered a risky business.
The fourth segment is Display, which you can think of as equipment to make flat LCD screens for TVs. Results here were dismal: $84 million in sales and $13 million in new orders. Year-earlier revenues were $198 million. Again, a lot of capacity was built in 2007 and 2008, then demand slumped in the fall of 2008. Applied Materials management believes that flat-screen tvs continue to win market share, so some time in late 2009 manufacturers will have to start increasing capacity again for the presumed sunnier days of 2010.
The silicon segment is expected to recover gradually as demand re-ramps and older process technologies are scrapped for newer ones. Solar will ramp again as soon as energy prices go back up and financing becomes more generally available. Services will ramp as utilization of current equipment increases.
Of course, all of these trends assume that the economy will improve in the second half of 2009 and show something like sustained growth in 2010. In the meantime, if you own some AMAT stock (I do), sit back and enjoy your dividends. Applied Materials has $3.1 billion in cash and equivalents in the bank, and even in this dismal quarter was better than break even on cash flow (but non-GAAP net loss was $136 million, and GAAP net loss was $255 million). Some day demand for semiconductor equipment will return, and with its new solar business on top of that, Applied Materials will be even more impressive than it was back in 2007.
Friday, January 23, 2009
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
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
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