AMD: The Recovery Continues

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AMD continued on the road to recovery. Actually, they recovered a lot this quarter. 🙂

This was due to a pretty big upturn in sales. For the first time since the Thunderbird era in 2001, AMD sold considerably more CPUs than they did back then.

They said they sold 27% more CPUs than they did last quarter, and 41% than they did a year ago. Plug those numbers into the number of PCs sold, and AMD’s marketshare, and you get a figure of a bit over 9.5 million CPUs sold, rather more than the 8 million plus sold back in 2001 and 8.5 million sold 4Q 2005.

Alas for AMD, unit sales alone are not the best competitive measurement against Intel. Back then, worldwide sales of CPUs were roughly 150 million annually. Now it’s more like 200 million.

PC sales in the third quarter should be a bit over 50 million machines, so AMD’s marketshare should be around 19% when those figures get report. That’s about 2.5%-3% better than they’ve done the last few quarters, which is a considerable improvement, but it’s still not the 21-22% levels of 2001.

To put it another way, the PC market needs 50 million more CPUs than it did in 2001. Last quarter, AMD provided about 1.5 million more than they did back then, Intel provided the other 48.5.

So AMD is still catching up.

It must be said that this recovery has a much firmer foundation than sales records back in 2001. AMD is now getting about $100 a processor. Back in 2001, AMD was lucky to get $75-80 a CPU, and often got only about $60. That $100 figure stayed firm in the face of the sales spurt.

Good, But

The AMD conference call included some questioning about AMD’s future capacities, and Hector Ruiz was talking about have yearly CPU capacity of 75 million by the end of 2006 and 100 million by the end of 2007.

This would mean almost doubling sales in the next fifteen months. To do this, AMD would have to average about 15% growth per quarter for the next five quarters in a row.

Actually, most of that growth would have to come towards the back end of that period, since Fab 36 won’t be making CPUs for a few more quarters. AMD is curiously projecting only modest growth of 7-13% for next quarter. That is less than the usual increase in PC sales for fourth quarter over third, which suggests they don’t have much spare capacity left.

Even if you cut the figure down to 60 million (i.e. selling 15 million Christmas quarter 2006), that would still be quite a challenge.

It’s hard to see how AMD can expand the way they want to without provoking a price war at some point in time.

“One For You, One For Me”

For the first time, the AMD financials this quarter showed four units. The first three are the Computation Products; the Memory Products; and the Personal Connectivity segments. The first made $209 million, the other two lost $50 and $14 million units.

Then we have “All Other.” All Other had a terrible quarter. They lost $66 million on just $2 million in revenue.

Needless to say, somebody asked about this new unit.

Well, it turns out that this appears to be the Santa Claus segment, aka “pay bonuses to AMD employees” unit. It’s not yet clear if this is essentially all this “segment” does, but if it is, this could be highly, highly disturbing.

If this is the case, and you take this unit. AMD wouldn’t have made $76 million, they would have made $142 million, or almost double the profit.

Put another way, this quarter, the AMD execs essentially put the money they made into two big piles, one for them, one for the shareholders, and counted it out saying, “One for me, one for you.”

If that’s accurate, that seems a bit greedy. It’s about four times the amount shown for (adjusted) previous quarters.

It may well not be (and we’re going to look deeper into this, and compare whatever we find to what Intel does, and yes, Intel puts its bonuses into an “All Other” category, too, though it also contains working units). It might be a one quarter fluke representing a payoff after a few years of slim pickings, but the conference call seemed to suggest that this was a figure that would remain substantial so long as the good times kept rolling.

For the moment, though, it looks pretty bad. It was noticed by the media, and it probably didn’t help the 10%+ drop in AMD’s stock price yesterday (though it probably didn’t cause it).

More on this probably next week.

Conclusion

There’s no denying that last quarter was AMD’s first truly successful quarter in a long time.

There’s also no denying that with its ambition plans, AMD is going to have to keep doing this again and again in the face of increased Intel competition for the next few years.

Ed

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