Tuesday, April 10, 2007

The Disaster

Ok, AMD warned (again!), the financial evolution of the company is much worse than anticipated.

This time, it seems that AMD overproduced and then had to firesale products because it fell into the trap of believing OEMs' (and I suspect particularly Dell's) demand promises; and because Management didn't want to accept the fact that the market is not enthusiastic about its products.

Allow me to compare what our friend Ron (Cove3) praises about AMD's Management:

AMD is the only company to have survived the Intel jauggernaut. For such a small company to have totally revolutionized the computing industry, turning all notions of computing architecture upside down in a mere 8 years, is nothing short of miraculous. Prestigous partners, parallelism, common platform, multi-core, energy focus, memory/bus innovation, graphics integration, SOI, etc

Think back to 2000 and tell me you could have forseen how the server, desktop, and mobile market would look in 2007
To my list of mistakes(1), what AMD's management has done since February last year:
  • Allowed Core to arrive without any counter punch
  • Disappointed with AM2 and S1 (no performance improvement)
  • Failed with Quad FX
  • Gambled the company in an acquisition of a company with severe problems, which destroyed the (successful) notion of the Virtual Gorilla or Partner Ecosystem that compensated for the huge defficiency in economies of scale to Intel
  • Allienated the channel and very important customers like Sun and HP to get Dell onboard, which apparently didn't bring any benefit and the harm of further channel disruption. AMD must not allienate the channel, their natural customers are there
  • Promised to return to 50% Gross Margins in October due to the improving percentages of 65nm "almost by the day"
  • For all the great importance of the 65nm process, they should have known that it wasn't going to bring faster speeds initially but energy consumption economies, thus, rather than beginning its marketing with Desktop products, they should have gone for Laptops. Thanks to AustinRocks about his explanation: They anticipated so much demand for Desktops due to Vista that they feared being caught off-guard, but "anyone with half a brain knew [that Vista] was going to be a flop"... except AMD's management...
  • Having so many MCM options like the double-duals, or my preferred four cores in a die and L3 shared cache in another, Management put all the eggs in the single die quadcore (Barcelona) basket.
  • Disappointed again with 65nm (no performance gains)
  • Lied in December about growing at 20% this year, double the expected market rate; 50% Gross Margins
  • Kept producing what the market wasn't buying
  • Warned a miss before Q2, promised better margins in Q3, missed again before Q4 almost "days" after a very rosy analysts day, and twice before Q1...
  • Once acquired ATI, insisting on Vista
What's going on? My take is that AMD's management is naïve enough to be persuaded of the gigantic blunder of acquiring ATI by the pirañas in Wall Street that want to further their Investment Banking businesses and leverage the media to guarantee the concretion of bad mergers; and naïve enough to believe the OEMs' demand promises to distract from the channel and overproduce products that then they have to firesale for the great short term benefit of OEMs.

Chronically, Management has been underperforming, to be kindly put. I would like to quote "Amddog":
No, management is not good, never was. Same goes for marketing, but management is ultimately responsible for that too. AMD had better product 2 years ago,and the profit and market gains were driven by better technology, not by management performance. Actually they did poor job of just slowly gaining market share while having much better technology. Now that Intel has better mouse trap AMD position collapsed like a house of cards.
The first big bold move AMD management made was the ATI purchase. We all know how smart that was. Hector also openly announced the intention to break Intel monopoly and a goal of 30% or more market share causing price war which ultimately collapsed AMD financial situation. It is stupid to openly pick a fight with a stronger oponent. The smart thing to do would be to keep the mouth shut and go after maximum profit.
He further criticizes the bad planning on silicon transitions from 90nm to 65nm and then 45nm, since AMD is equipping Fab36 for 65nm, "AMD 65nm new dry litho tools are good only for 65nm generation, and have to be replaced now [for the "wet" lithography of 45nm process]. Big waste of money and terrible planning".

I reiterate the criticism about the chronical "underdog" mentality of not challenging the status quo and going full speed ahead with coprocessors and embracing Free and Open Source software rather than waiting for Microsoft or VMWare to do something about key advantages like AMD64 or AMD-V like I have detailed in many of my posts.

The lost market and revenue shares in these two quarters blow the efforts of many years. Even if Barcelona is as good as it is claimed, only a slow repositioning may take place in 2008. With the severe blows AMD is receiving from July '06 to October '07 like going to the capital markets for $1 billion for operative cash and losing more than one giga dollars this year (12.5% of market cap) I see as a definitive defeat to capitulate about capital expenditures. If the strategy of closing the huge gap of the economies of scale to Intel doesn't work, then AMD is sliding back from duopoly status to profitless long term unviability.

(1)Originally published here.