AMD: Do Or Die . . .

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AMD issued its financial results, and they weren’t too good.

They showed a loss of about a half-billion dollars, but just about all of that was derived from buying ATI, so it’s probably best to set that aside and instead looking at where the company stands as a going business.

On the CPU side, what is essentially happening is that AMD is making more and more processors (which costs more and more money), but isn’t getting paid any more in toto for them. For instance, AMD made 26% more CPUs in Q4 2006 than in Q4 2005, but only got 3% more money for them. Not surprisingly, their operating income dropped more than 75%, from $305 to $72 million.

Last quarter, AMD made 19% more chips in Q4 than they did in Q3, but only got paid 3% more for them. That means a drop in average selling price of about 14%.

What was surprising, shocking was where the drop occurred. Last quarter, the average price for a desktop chip went down, but only about 5%. Mobile chips actually went up a bit. It was the server chips that went to hell. AMD didn’t increase sales there, and average sales price “declined significantly.”

Well, AMD makes a lot more desktop/mobile chips than server chips, and if the average price on the first declined by less than 5%, while the overall selling price dropped 14%, server CPU prices must have gone to hell.

Given all this, it’s probably safe to say that for at least the next couple quarters, making AMD will roughly be a breakeven proposition. Prices will weaken somewhat and costs will increase due to an increasing percentage of dual core chips, offset by lower costs as the percentage of 65nm chips increases.

ATI? Well, officially, they lost $13 million for the two months they were part of AMD, and while they’ll probably do better in 2007, ATI has never made a ton of money anyway (see page 9), so it’s not like the ATI section can carry the company profitwise.

So what you have is a recent merged company where neither section is likely to make decent money anytime soon, and could well lose a bit. This is not so good when you’ve emptied your piggy bank to buy ATI, and will need to spend billions on fabs the next couple years just to keep from trailing Intel by even more.

Unhappy Campers

Between the earnings warning and the earnings result, Wall St. is not too happy with this company. The loss didn’t bother them as much as not seeing the light at the end of the tunnel.

After the earnings results, AMD had its usual conference call, and you can see a transcript of the Wall Streeters starting to snarl here.

(BTW, thanks to Seeking Alpha for providing this service and having such a clear and reasonable policy on quoting from it.)

The analysts were essentially saying, “Uhhh, when do you plan to start making real money?” and the AMD execs were essentially saying, “Don’t worry, be happy.” This did not go over too well, and finally somebody got as blunt as anybody gets in these things:

(Bolded print indicate our emphasis)

Jim Covello – Goldman Sachs
. . . It seems like your goals as a company are at a little bit odds here. Getting new customers and creating value for shareholders hasn’t been something that have worked well with one another for the last few quarters. And it’s not going to turn around, as long as both you and Intel continue to add so much capacity and fight one another.

What is it going to take for you to change the strategy? How bad does it have to get before the strategy can change? I understand that you guys aren’t changing the strategy today, but for shareholders, they are looking for the answer of how it’s going to turn around. Other than you guys gaining a lot of share, which Intel is going to try to fight, how does it turn around? And if it doesn’t turn around soon, what would cause you to change the spending strategy?

Dirk R. Meyer
Well, we’ve been pretty clear for quarters and years, and that is that we compete against a monopolist who has a dominant share, and long-term, the best returns we can generate for our shareholders involve breaking that monopoly.

Covello
Can I ask a question about that? You guys were doing incredibly well before you really decided to ramp the spending and gain share . . . and now the spending is such that you’re losing a bunch of money.
You’ve been very profitable competing against the monopoly before, and now you’re not. Is there any thought of going back to the model that allowed you to be so profitable . . . .

Meyer

[W]e’ve . . . concluded that there is no model that’s stable over the long-term that allows us to be profitable in a niche. The level of investment required is too large, and the only way for us to maintain profits on a sustained basis is to be large and engage in a material way with strategic OEM customers. . . . That’s what they demand from us, and that’s what we’re going to do.

Covello

[I]s there a point at which you say well, I can’t afford to do this, even if it’s what the customers want?

Rivet

(in a nutshell, no)

For the first time, AMD flat out said, “We can’t survive long-term unless we get big and become at least Pepsi to Intel’s Coke.” We’ve said that was AMD’s strategy the last few years, but now they’ve said it.

In other words, do or die.

Who is right? In the long run, the AMDers are, fab costs are just getting too high to stay alive as a 15-20% player. If AMD doesn’t break out of that, permanently, they face a slow, lingering death. That’s what the AMDers are focused on.

However, if AMD fails to break out permanently after racking up big debts to get big, well, eventually you run out of both your and other people’s money and then nobody wants to lend you anymore and that’s called bankruptcy. You go a lot faster that way, and that’s what the Wall Streeters are focused on.

So AMD is saying, “If we don’t get big in the next few years, we’ll die.” The Wall Streeters are saying, “If you don’t start making serious money in the next few years, you’ll die.”

Both are right.

Ed


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