AMD The Rest of the Year

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AMD provided a reasonably satisfactory technical answer to its problems yesterday.

Will that be enough?

While it certainly helps, the Sony Betamax provides mute testimony that being technically better isn’t always good enough.

Here are some of the challenges AMD will face for the rest of the year:

The Backlog

AMD stated during their conference call that they had made too many Palominos and needed to work the excess inventory off.

With the release of their quarterly financial statement, we now have a notion of how big it was.

A company’s balance sheet shows many items that are regarded as assets. These include items that are in the process of being
made (called work-in-progress), and finished products the company hasn’t sold yet.

Take a look at the value of AMD’s finished products (all amount come from AMD’s 10-Q reports to the SEC)

Fiscal Periods Ending
Q3 ’01
Q4 ’01
Q1 ’02
Q2 ’02
Finished Products
125
117
90
225

>

Please note the dramatic jump from Q1 to Q2. That was equivalent to about three weeks’ worth of sales in the fourth quarter, or about the drop in number of processor sold between Q1 and Q2.

Here are the figures for work-in-progress

Fiscal Periods Ending
Q3 ’01
Q4 ’01
Q1 ’02
Q2 ’02
Work-In-Progress
292
237
266
116

AMD clearly slammed on the production brakes, with work-in-progress dropping almost 60%.

If you look at Pricewatch, you can see that there’s still plenty of Palominos around despite the near-giveaway prices, even though production on them ended last quarter, and as you can see, the pipeline was pretty thin as of June 30.

So if you were sitting with 1.5-2 million processors two months ago, and they’re still around, it’s not too likely sales have been booming.

Pricing

The average price AMD got for a CPU last quarter was about $60, and those figures have probably declined for the first two months of this quarter. They may get a bit of a boost with the 2400 and 2600, but Intel’s upcoming price cuts of the 2.53GHz and below will make it difficult to improve the picture much in the last few weeks of the quarter.

Intel is using its advantage in perceived speed to full advantage by depressing prices where AMD has a matching product, and charging a lot where it doesn’t.

So AMD introducing new products merely means that they’re doing little more than paddling water and not being able to significantly increase their average CPU price.

Intel has been more aggressive than usual in its pricing and planned product introductions, and the most likely reason for this is:

Underdemand Answered With Oversupply

If you look at any of AMD’s financial problems, lack of demand is always lurking at least somewhere in the background.

The computer industry was hoping for recovery going into the third quarter, but signs aren’t good. Intel’s actions are meant to stir up some interest and grab as much of a lukewarm market as possible.

But even if matters pick up a bit, both Intel and AMD, one way or the other, are increasing capacity much more than even the most optimistic forecast could justify. This will become very evident in 2003.

This means either a lot of unused fab capacity or a lot of pricecutting, which is not what AMD needs right now.

Under normal circumstances, AMD could expect at least some recovery the fourth quarter. If there’s any quarter when you should make money, it’s that one.

If Intel stick to the prices they’ve already announced, AMD will likely have an unprofitable but not awful Christmas quarter. However, if Intel reaches for the price weapon yet again, it could be very rough for both of them, but it will be inevitably rougher for the little guy.

In the end, money talks.

Ed

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