Friday, April 20, 2007


Yeah, you get the tone for what is coming.

In summary, AMD didn't present a plan to solve the problems that ail the company. The losses are every bit as spectacular as potentially fatal. Barcelona is the only light in this tunnel but we don't know for sure if it will be introduced in numbers this year, although we can believe that production samples are circulating. R600 seems to finally be launched in numbers soon. A cash crunch may happen. Management didn't bother to discredit a Private Equity infusion, despite many numerous problems with that.

When I was bullish on AMD I saw these things:

  • Technology superiority
  • Revenue and specially profits growth above the industry
  • Very credible management
The rest of the positive qualities were derived by these three. A brief explanation: When I say technology superiority I mean that even though Intel had Core Duos, a good design and superiority of silicon process at 65nm; AMD had a much better package due to a superior design for dual cores, 64 bits, and power efficiency.

Now, I see:
  • Technology inferiority
  • Losses of unit and especially revenue market shares
  • In-credible management
I won't bore you with a reiteration of the factors, I will focus on this highlights:

(Read "seekingalpha"'s transcript):

The Perfect Storm

Opening words by Mr. Meyer, President:
In the first quarter, our challenges were caused by a few key things. First, we suffered some major growing pains. Starting roughly the middle of last year, we suffered occasional mix and delivery issues in the course of serving new and expanding relationships with global OEMs. This led to challenges in our properly serving the component distribution channel.

Second, the pricing pressure that started in Q2 last year continued in the mainstream of our CPU business as our competitor did everything in their power to protect their monopoly.

Third, we saw an increasingly competitive product environment in both CPUs and GPUs, and finally, weakening demand in the consumer electronics businesses added to our pain.

While any one of these problems might have put a damper on our performance in the quarter, the sum total of all four was something of a perfect storm for us.

The first thing to notice is that the "perfect storm" is very much still raging.

I can not accept the argument of "growing pains" to explain these three disastrous quarters, Q3, Q4 and Q1 when Management has been repeating the same line of channel disrruption and OEMs complexities. It is like saying that the company swung from high profitability to amazing losses because it now has more customers to attend to... My second reading of this line is that Dell is definitively hurting AMD a lot, the volume and pricing conditions AMD gave Dell allienated everybody from the white channel to Sun

The argument of Intel underpricing their products is very naïve. What is AMD expecting? that Intel won't try to push AMD back to its "normal" 15% market share and irrelevancy status?; more to the point, there is no indication whatsoever that Intel will dessist at hurting AMD, especially now that plain old price war is so successful.

"We saw an increasingly competitive product environment": Come on, guys! we all knew this was going to happen, why didn't you acknowledge the problem, for the sake of your own credibility when this was all too clear at Q4's conference call and you instead reiterated the fantasy of the 50% Gross Margins forecast for this year?


Mr. Meyer isn't saying anything new, or perhaps, the news are that Management is in such state of denial that the realities of AMD's uncompetitiveness are taking them by "surprise".
Our plan to fix these problems is fairly straightforward. We need to grow the top line, change our cost structure in line with the competitive environment, and execute flawlessly on our product and technology roadmaps.
So, the "plan" is to do things right?

Unfortunately, the rest of the Conference Call had the same tone: Denial, optimism, and empty promises.

Meyer: "we need to deliver on our product and technology roadmaps -- on time and on budget. Specifically, we need to deliver on the promise of Barcelona later this year"

Mr. Meyer, why did you find it necessary to say this?

Dr. Ruiz "bla-bla-bla":
Today, what you have heard Dirk and Bob describe is immediate and somewhat tactical in nature, but make no mistake -- it is also the beginning of a major restructuring of how we intend to run our company going forward, one that would reflect the natural growth and stratification of the processing solutions customer base, accommodate the business model distinctions between good enough entry level markets and performance-hungry mature market solutions, and reduce our capital intensity by exploring deeply more asset light business models in order to fully execute our plan.
Is it necessary to say so many obvious things to state that the crisis is so ugly that a restructuring is necessary?

What Management spoke about has a name: Incompetence. This is no perfect storm, this was a crisis that even the wittyless analysts predicted several quarters ago but Management did everything wrong like destroying an excellent cash position and opportunities like the New York fab with its billionaire bonuses to acquire a nest of liece, ATI; being irresponsible about the lack of competitiveness of K8 against C2D to have pharaonic market share gains plans that made the company crash and to annoy loyal customers; gambling everything on single die quadcores when the situation required intermediate steps to fill the gap; apparently gave Dell such a preferential treatment that it has only caused harm; instead of leveraging great competitive advantages like AMD64, DCA, cache coherent hypertransport with coprocessors and "sexy" innovative products, it made the ridicule with QuadFX.


What is AMD's greatest problem?: Intel's economies of scale. That's why the single most important strategy has been to increase production muscle; that is a sound goal even having at most acceptable products because it spreads thinly the fixed costs of silicon research and development. This strategy was handsomely effective, especially combined with the "Virtual Gorilla" of the ecosystem of partners that had Marvell, Broadcom, ATI, nVidia, IBM, Sun, HP, etc., competing each other but also cooperating to increase AMD adoption, because every bit of market share lost by Intel-Dell was gains for the ecosystem.

Being constrained to up to 20% of foundry outsourcing by the x86 license, AMD does not have another option but to assume the costs of R&D to fab their processors. AMD apparently was so successful at its R&D that it was able to transfer technology to Chartered, a big foundry. The greatest challenge to keep succeeding at silicon manufacturing is to increase the scale of operations, again, a version of the economies of scale problem. Spansion was a good shot in that direction, although the market for flash wasn't good, but AMD also explored other options, it made something sensible, to share the costs of silicon development upstream with IBM and downstream with Chartered.

Now Dr. Ruiz says AMD is giving up at being "Asset FAT" and the company gave up 500 million dollars planned for capacity expansion.

I don't know how to make sense of this, 'cos AMD must fab 80% of its microprocessors anyway and the greatest the in-house production, the better the economies of scale; but then again, this same Management team killed the ecosystem of partners by acquiring ATI and also committed the money for capacity expansion there, lost the opportunity to get the New York fab bonuses...

I suppose they want to go the route of other microprocessor fabless companies, to the same ultimate destination: The grave. I don't know much about silicon manufacturing, but I understand that even the most basic capabilities of microprocessors are bounded by the silicon process parameters, thus, this may explain why fabless µproc manufacturers didn't survive, especially if Intel is so determined to push the envelope and stay over one node ahead of the pack; being dependent on IBM for Research and Development and to hope that IBM's silicon process may be transferred to foundries quick enough doesn't seem to work.

I don't lose my sleep trying to understand AMD's management. After I got to the irrefutable conclusion that they were inept by acquiring ATI, I know that they are capable of truly nonsensical things; I thus believe in the simple explanation that now that they don't have money to close the economies of scale gap, they don't know what to do, they don't have a plan and suggest ideas that don't resist analysis.


About the nature of the losses themselves, everything stinks: From 504 million dollars in net losses, merely 113 are related to acquisition related charges... that means that this is no one-time pain but recurrent, the business loses $1 for every $3 in revenues; to have kept market share, or even gained a percentage is my archetypical definition of a pyrrhic victory. Consumer Electronics went to 4 million in losses from 20 million in gains in a short quarter, Graphics lost more, from 27 million to 35 million. Inventories grew...

The guidance? flat to slightly up, meaning that the company expects to lose another dollar per share... if a tech. company should be valued around 20x EPS, AMD's $14 stock price would require yearly EPS of $0.70, but the company is losing about $2.5 dollars per share this year. I think AMD never had a string of profitable quarters that adding all up made more than $2.5 per share, and its historical profitless existence is to write legends. AMD may face a cash crunch very soon that it can only solve through dillution due to the restrictions on the loans it took to acquire ATI; the yields of single die quadcores may be much less than the yields of dual cores (yields decrease exponentially with the number of cores), and since Barcelona is the only product to peg hopes on, there are substantial risks there. Intel is really coming with a new generation of silicon.

Private Equity? how? the x86 license is tremendous poison pill. Having net losses equivalent to 10% of market cap per quarter? requiring financing? without assured production and market for competitive products?

This is a catastrophe without mitigation.


Anonymous said...


You make the comment that AMD can only outsource 20% of it's capacity to Foundries due to the x86 license with Intel? Do I read that correctly? So, currently, only 20% of it's needed supply could come from Chartered Semiconductor?

Eddie said...

That is correct.

In the Investor Village AMD message board where I have been participating there have been numerous debates about this topic.

While the exact terms are not known, there are limitations on the quantities that AMD may outsource and they are 20%.

I am not a lawyer, but I am sure that any contractual obligation may be evaded by stretching the terms, furthermore, too many years have passed since the original agreement and it is not clear to me whether these limitations are definitive.

The license limitations also constitute a poison pill regarding AMD acquisitions, basically only someone with an x86 license (IBM) may acquire AMD