AMD Enters The ShowMe Era . . .

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AMD held its analyst conference today, and it confirmed the existence of a new era for AMD: the ShowMe Era.

The Barcelona/Phenom debacle has changed the public environment. This is not because they in-and-of-themselves were great disasters, but piled on top of all the failures and underachievements of the past year, they were the straws that broke the camel’s back for the money and mainstream media people.

AMD is now going to live in a skeptical public environment. Not all the financial types, not all the media, and the new skeptics aren’t quite snarling wolverines yet, but the new attitude is “Show me.”

What does that mean? It means AMD isn’t going to get a break; it isn’t going to get the benefit of the doubt from the money and the media until they actually walk the walk.

Yesterday, AMD put on a dog-and-pony show, and it didn’t fly. The questions from the analysts were far more skeptical and less accepting than in the past, even sarcastic at a point or two.

How To Make A Half-Billion Dollar Loss Sound Like A Profit

The good news from yesterday’s conference is that if all goes well, AMD will lose a lot less money in 2008 than it did in 2007. The bad news is that they’ll still lose a lot of money even if all goes well.

As you might guess, the key issue at the financial conference was financial, as in “When are you going to start making some money?”

AMD tried to be slick and announced with great fanfare that they would have an operating income profit in 3Q 2008.

That’s the kind of statement I call “technically accurate.” What does that mean? A technically accurate statement is a statement that is true, but one that leaves false impressions in the mind of the audience.

To give a down-to-earth example, technical accuracy is going on a blind date because your friend told you the date was well-endowed. You find out the date is indeed well-endowed, all over, four hundred pounds’ worth of endowment. Your friend didn’t lie, but . . . .

To make future financial results seem good-looking, AMD said that they would show an operational profit, leaving the unwary with the idea that that’s the same as the company actually making money.

But operational income is not the same thing as net income. For our purposes, it’s enough to know that net income includes all expenses, while operating income does not.

What expenses does AMD “operating income” leave out? Is it a four hundred pounder? Well, it doesn’t include the interest on the five billion dollar plus of debt AMD has. That’s roughly $400 million just by itself.

Add in other excluded items, plusses and minuses, and the net additional expenses that aren’t included in “operating income” add up to about $175 million a quarter, or $700 million for the year. This is more than enough to put AMD’s net income for 2008 well into the loss column, let’s say about a half-billion dollars for all of 2008.

Mind you, that’s a lot better than the two billion dollars AMD will end up losing for 2007, but it’s hardly profit party time.

In the past, none of the analysts present would have mentioned this little embarrassing fact, but in the ShowMe Era, someone sure did ask when AMD planned to earn some net income. The AMD execs just sputtered and refused to answer that.

“Asset Lite” Explained (I Think)

Here’s something the analysts haven’t picked up on publicly, at least not yet.

When the big losses started at AMD, the execs said they were planning “an asset lite” strategy to attempt to cut down big time on fabbing expenses.

That kept the sharks away for a while. but after a while, they started asking, “When are we going to hear more?” and Hector pretty much said, “It’s a secret. If I told you, I’d have to kill you.”

Think I’m exaggerating? Well, yeah, but not all that much. Here’s what Hector said yesterday about it:

“I don’t think it’s prudent, and I think it would be absolutely silly for us to talk about something that could potentially be harmful to our plan. I don’t want to do that. And I will not do that.”

Up to now, the general consensus has been that Asset Lite (now rebranded Asset Smart) is Hector’s Biggest BS. After yesterday, though, I think I see the dim glimmers of what this actually is. And yes, it would be dangerous for AMD to explain it.

AMD is cutting way back on capital expenditures in 2008, from $1.7 to $1.1 billion. A very sizable chunk of that (let’s say roughly between a third and a half) will go to converting Fab36 to 45nm). That doesn’t leave much to redo Fab30, and AMD said yesterday that they would redo Fab30 a little at a time.

So AMD will pretty much be left with one fab whose production will be almost entirely (certainly over 90%) 65nm in 2008. That one fab will be making at least a decent proportion of quads, further reducing overall capacity.

Yet AMD expects to make slightly more CPUs in 2008 with one fab than they did in 2007 with two.

What I think AMD is going to do is the following:

1) Do the minimum amount of work on Fab30 consistent with spending as little of AMD’s money and as much European subsidy cash as possible, while:

2) Outsourcing more of the lower-end CPU work to Asian foundries, perhaps enticing them with the promise of more, better work later on.

3) Play the two off against each other, while keeping the New York State fab plans alive as a bargaining chip, and finally.

4) Wait for better times, so they can get back to building fabs by the regular hook or by crook.

I could be wrong, I definitely don’t have all the details and only the future will reveal all the twists and turns as this situation plays out, but I think I’m in the right neighborhood.

Bottom Line: I Can Shut Up About This For A While

I know the audience for this website isn’t exactly dominated by MBAs and financiers, and I’m sorry we’ve had to talk about AMD’s finances so much in 2007 (though probably not as sorry as many of you :)).

The reason why we did was that you can’t overclock or even clock a CPU not made by a defunct company, and there was some real doubt as to whether AMD was going to run out of money.

After yesterday, barring something completely unexpected, it’s probably safe to say that we won’t have to worry about AMD running out of money for at least the next six months, so we can shut up for a while about that.

Please, we are not saying AMD is out of the woods or a good stock investment or anything like that. We’re just saying they won’t go bankrupt for at least a while.

However, the financial crisis appears to have significantly damaged AMD’s future development plans, and that will affect those in this audience only interested in techie stuff. We’ll talk about that tomorrow.

Ed


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