AMD Financial Warning . . .

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AMD said and didn’t say some things the other day.

It did say that it made quite a few more processors, but got less money for each, so they did a lot more work without getting paid any extra.

When you make more processors, that costs you more. If you make more, but don’t get paid any more for it, you make less profit, and AMD said that they made a lot less profit this quarter than last.

What AMD didn’t talk about the other day was what the acquisition of ATI was going to do to their financial numbers. This will be the first quarter where ATI’s numbers will be included in AMD’s (about two month’s worth). ATI lost money in Q3, and it’s likely they lost some in Q4, too.

Buying ATI ended up costing AMD hundreds of millions of dollars, and some of that will show up on the bottom line this time around, too.

So AMD will probably show an overall loss for the quarter when they post their results in about a week.

Marketshare? They almost certainly didn’t gain anything significant (if they obviously had, they would mentioned it in the press release), probably lost a bit. Yes, they said they made more units, but it’s 4Q, everyone does. You can easily make more units for Christmas, yet still lose marketshare. Probably not much, though.

Did AMD Lie?

Some investors (and apparently some analysts) felt that AMD lied to them during their analyst conference.

I reviewed the extensive slide show for the conference, and I saw no evidence of a literal lie, just the usual AMD slickness. They talked about about how well they did in 1Q-3Q 2006, and said they’d do well in 2007, and if you assumed from that they’d do well in 4Q, well, you shouldn’t assume. 🙂

But this is nothing new. I remember AMD telling analysts at a conference that Palomino was imminent, then announcing a six month delay less than two weeks later.

If that wakes some analysts up, good, but they shouldn’t have been asleep in the first place.

What To Think

AMD is going to have a rough 2007, and this earnings warning is the first sign of it. The price war is doing increasing damage to the bottom line, and AMD has nothing in the hopper for at least the next six months to counter that. Even in the second half of the year, anything they have might catch up to Conroe, but not the 45nm chips.

It’s hard to see how they’re going to make much money with lower-speed chips, especially when Intel plans nice little things like $113 Core2Duos. I wouldn’t be surprised to see $70-80 X2 3800s within the next four-five months. Yes, 65nm fabbing will save some dollars, but if a CPU costs ten dollars less to make, but you get thirty dollars less for it . . . .

More importantly, this earnings warning is going to do much to destroy the perception that AMD is on a roll (red ink in the computing unit next quarter would finish the job). The media’s been a big AMD cheerleader the last few years, mostly due to that perception of momentum. The tone was already changing, even before this warning, but facts like these will greatly accelerate the media’s shift from kiss to kick mode. It’s hard to see how the likely events of the next year will reverse that.

Yes, AMD could continue to gain marketshare, but only by practically giving their product away, and Wall St. doesn’t like that approach at all. They want AMD to make more and more money, not necessarily more and more processors.

It wouldn’t be that big a deal if AMD had a piggy bank to tide it over, but they spent that and then some to buy ATI.

Yes, there’s that antitrust suit, and don’t be surprised to hear AMD talk more about that being a savior, but counting on a huge settlement from a lawsuit isn’t the best way to run a company.

AMD will muddle through, but it’s not going to be a pretty sight.

Ed


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