The "R" Word

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Intel ducked a bullet last night, but the fear of recession will plague all tech companies for the foreseeable future, some more than others.

Last weekend, we spoke about some of the accounting games AMD is likely to play when it releases its numbers tomorrow night.

Since then, Intel has released its numbers, which gives us a slightly better idea as to what to expect from AMD.

Intel had an OK quarter, slightly better than expected and a good deal better than was feared. It probably gained a tiny, insignificant amount of market share from AMD, but that will remain essentially the same as Q1.

Intel made more money, but that was mostly due to 45nm production being cheaper than 65nm production. Otherwise, Intel is expecting a fairly normal, ho-hum rest of the year.

Normal and ho-hum sounds boring, but boring is pretty excellent compared to all the excitement surrounding financial companies going down the tubes and the growing expectation the world economy is going to follow. Companies like Intel will of course survive any economic bad times, but the same can’t be said for weaker companies.

This brings us to AMD’s prospects. Once you strip out all the one-time adjustments, good and bad, the numbers should end up a little worse than in Q1, maybe a trifle more than the typical seasonality drop, but again, nothing significant.

One might say, “But what about the 4800-series? What about Puma? What about Phenoms?” The answer to that is “What about the 4800-series and Pumas being introduced at the end of the quarter and thus having little if any impact on sales for the second quarter?”

Phenoms have been popping up more often in OEM boxes, which seems to indicate AMD can actually make a decent number of them. That should have a positive impact, but any Phenom improvement last quarter will be tampered down by X2 prices continuing their slow drift downwards. You can now buy a Brisbane 2.3GHz X2 in the US for less than $50. Imagine what the OEMs are paying.

So no, despite some good news lately, AMD’s numbers aren’t going to legitimately improve to any real extent tomorrow night.

However, optimism isn’t misplaced, it’s just premature. All these items ought to have a significant positive effect in the third quarter.

Provided we have a normal, ho-hum market, that is.

AMD stock has dropped to new five-year lows the last few weeks, but that hasn’t really been due to anything the company has done lately. Intel has dropped about 15% in the last few weeks, too.

The reality is tech companies are going to be blown around, up and down by the “R” word for the foreseeable future. That will be more the case with the smaller ones than the big ones, but if Intel had missed its earnings statement by a penny a share rather than beating it by two-three cents, the stock would have gone down 25% today.

But they beat expectations, and expectations for AMD this quarter are so low anyway that it would be tough not to meet them.

No, unless some unexpected disaster is revealed tomorrow night, this quarter’s results won’t matter much. It’s going to be next quarter’s results that will matter.

AMD’s objectives the next year are simple: Do better enough so they won’t run out of money and somehow manage to beg, borrow or steal enough to start building the next-generation fab.

To have a fighting chance to do so, they have to do considerably better next quarter. What’s “considerably better?” Come close to breaking even, real breakeven, not “operational breakeven.” This is really essential because they ought to be able to do that under normal circumstances, given the good news mentioned earlier. Combine that with a negative ruling on Intel from the European Commission (even if Intel appeals it) and AMD will have a fighting chance to get that money to build that new fab.

Mind you, even if everything goes right, AMD’s financial manuevers will seem like Perils of Pauline remakes, and the results will still look like a house of cards, but that’s nothing new. Finances won’t get permanently better unless/until Intel gets fined and throttled, but better a cardboard house than no house at all.

But if the “R” word stops being a fear and starts being a reality in the tech industry, if the AMD execs start off talking about “perfect storms” next October, this company is in deep, deep trouble, and life will get a lot more complicated for both them and us.

Ed


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