Today AMD pre-announced their Q406 would miss Wall Street's expectations quite significantly:
1. They are projecting a 3% growth in revenue on signficant unit growth as a result of declining ASPs.
2. Profits on their CPU biz are positive but substantially lower that Q306. This is excluding acquisition related charges.
3. Gross margins are severely impacted.
http://biz.yahoo.com/ap/070112/amd_outlook.html?.v=3
http://www.marketwatch.com/news/story/amd-sees-lower-prices-cutting/story.aspx?guid=%7BA87F4DB6%2D90B4%2D4725%2D97E9%2D5D5D80329C70%7D
My analysis of why I thought they would be flat to down is in the article two stories below. What I did mis-call a few weeks ago was that I thought they would focus on margins and high profit products because they were capacity constrained. However, I think in spite of selling a lot more, they are selling it for a lot less. I reiterate that Dell is sucking them dry and they are feeling the heat on the server business from Intel. They have been using the server business profits to feed the other parts but that ride is coming to an end for now.
So why is it Bob Rivet provided such a positive outlook at the analyst call on Dec 14th barely a month ago. I agree with Charlie for once. They were borrowing money and it's easier to secure the kind of loans you need if your business is looking good. They also tried to keep the bad news under wraps as per Charlie's article:
http://www.theinquirer.net/default.aspx?article=36914
So now, they've ticked off a bunch of people - their creditors, the analysts and probably the press. I've said this before, if you are going to walk around shouting to anyone who will listen how Intel is a mean and underhanded company and you are the anti-thesis saving the world...then you must hold yourself to a higher standard. Or else your own underhanded tactics will bite you in the @$$ much harder.
Back to the topic of this article. The reversal of fortunes has begun. Intel will have a better quarter than AMD. At the least they will hit their commitment to Wall Street...if not exceed the mid point of their forecast. They may not gain share this quarter (but I do have till Q107 to hit that) but they will definitely see more than a 3% increase in revenue over Q306 and a sweet improvement in EPS. I think there's even a reasonable chance they will see an improvement in gross margins.
16 comments:
when your high-end products can only sell a half the price that it used to...
when dell is demanding unprecedented volume from you for budget PC's...
when your competitor clearly has the better product, this is what happens.
i don't think AMD had any choice between high margins or market share.
I'll wait until the actual numbers are available to write a comparison article.
Let me see - Intel...still 75% + of the market. Margins at 50% including flash, mobo's, etc. I think you need to learn to walk before you run. I.e. go to first grade before you graduate to 2nd grade.
Did you read my post. It's about how the momentum is reversing. If you're going to build an argument, put some analysis behind it and give us a conclusion. I too enjoy cheaper products. What does that have to do with the post?
180, AMD is at the point where, if momentum reversed, they'd be totally and completely screwed to the naked eye. As such, this seems like a slight fluctuation, and not reversed momentum, simply them hitting the limit of their abilities of production and demand generation. If K8L weren't only a few months away to entice vendors, if AMD hadn't just released a new platform to a high margin market that they could easily shift focus to, if Intel had rushed lower cost mid-range quad core cpus to market with lower priced dual-core cpus to fill in the gaps, and if the market weren't so slow to react to all of this (at least, relatively speaking), then maybe momentum would already be "reversing".
If anything, AMD's momentum is stagnating as well as Intel's chance to gain any. Let's just wait for the actual numbers to see exactly what we have here.
If AMD's shipments are up significantly it should be very interesting to see whether Intel's market share has gone down or if they were referring to a regular Q4 Xmas sales surge. Now that VIA's basically out of the running it's a pure zero-sum game. I'm surprised about the slow ramp of the Core-based CPU's though. It's possible Intel is unloading Netburst CPU's given their small 100m inventory writeoff. Maybe they're using these to bring some extra pain to AMD while keeping their Netburst writeoffs low. I guess we'll see when desktop marketshare numbers come out
Most AMD fans underestimated the financial impact Dell would have (at least short term) on AMD. If they can increase capacity fast enough and not lose the channel then it will payoff, unfortunately when Intel slashes prices, Dell will alway be expecting a better deal from AMD than the rest of the OEM's and AMD channel customers by virtue of the volume they buy.
Thus Intel can now turn the screw further as AMD's pricing with Dell will need to beat (not match) the Intel prices - had AMD just been selling to channel, merely matching Intel would be enough.
The other part of the margin story people have ignored is Dell is no longer getting as favorable pricing from Intel - and as Intel is now selling a greater percentage of their chips in the channel (due to the vacuum AMD created when they got the Dell account), Intel is getting better pricing...(hence better margin).
While hindsight is 20/20, I think AMD should have continued to crank out Opterons and not attempted to win the Dell account until after they had the capacity not to lose other business - meaning instead of Q3'06 they would have been better off doing this Q2/Q3'07 after the bulk of F36 capacity was online. What is odd is they were selling everything out when they announced the Dell win, so it's not like they needed the additional business at the time (especially as it was a lower margin business than their other customers).
In my view the Dell business could have been had at anytime as Dell clearly needed a bargaining stick with Intel (and were perhaps upset over the Apple deal).
In my view the real winner of the AMD-Dell deal was Intel - fewer low price parts to Dell (not to mention an increase in prices of the chips they are selling to Dell) and more channel demand due to less AMD channel product. One could also argue it diminishes AMD's lawsuit as they have not dramatically picked up market share since new markets were "opened" (i.e. they were capacity constrained, not market constrained).
From strategic point of view I think it still may be good for AMD in the long term as it does get them access to the busines PC environment and more "market" cred.
I would take the Unit volume "significanly up" statement from AMD with a pinch of salt.
Unit volumes significantly increase between Q3 & Q4 any way. Question would be whether significant increase was seasonal or market share gains.
Even if they had gain in market share, that would be at the very low end - where Dell is selling their stuff. Thus the fall in margins & shortfall in revenue.
yup, i talked about the momentum stuff N months ago in sharikou's blog ... and it seems like it match i was thinking
Put that aside, i think it is quite obvious AMD 'cheated' in order to get the loan (or better rate), as what pointed out by Charlie. I guess AMD think that they will not get into legal trouble even if they did that willfully, as the banker first priority now is to be able to get back the loan money + interest, instead of distracting AMD with the legal trouble which will definitely bring risk to AMD financial performance.
Anyway, even if they can get away with the legal issue, I guess AMD will not able to get another loan easily next round. They really have to pray that their financial performance won't go red in any time soon
Anonymous - nice post. I don't think AMD had a choice when to begin serving Dell. I'm sure Dell would have called the shots...and AMD would not be in any position to say no or else risk not gaining entry into the world's largest account.
It will indeed be interesting to see what AMD calls a significant rise in units and what the overall market Q3 to Q4 jump was. I think a lot of it it will boil down to how Dell has done this quarter. But the one thing we may all be overlooking is that in spite of selling AMD as well, it doesn't mean their Intel business isn't growing quarter on quarter. Specially in mobile and 2P servers.
We shall see in a few hours...
cheers,
180 - thanks,
I think AMD had more power than they realized with Dell, Dell was losing the incentive deals with Intel thanks to the lawsuit thus Dell was going to be in a less competitive position wrt to their competitors (i.e. margins would be further squeezed).
So they shined up the market share apple and AMD bit it and realized the apple was a bit sour. AMD could have waited, I don't think Dell could have without further erosion of business to HP, et al. The mistake was guaranteeing capacity though Dell likely gave AMD no choice on this.
Anonymous - here's how I think the conversation w/ Dell would have gone. Hector, Henri and Dirk would have gone to see Kevin.
Kevin - are you guys ready w/ the capacity I need or not?
AMD team: well...
Kevin - let me lay this out for you. Intel has a kick @$$ new line up. I still get huge volume discounts by consolidating my biz with them. I am still the largest PC company on the planet and Intel gives me a ton of marketing and other support. Now, the public reason I'm coming to you is my sales guys are getting their butts kicked and are copping out using no AMD line up as an excuse. The real reason I'm coming to you is that I want super low pricing so that I can increase my margins because I have squeezed out every ounce of cost efficiency in my supply chain I can find. But first I need to know - are you ready to play with the big boys? In case you weren't sure - there's only one good answer to this question.
AMD team - yes, we're ready.
Kevin - that was the right answer. Let's go have lunch.
Basically - if AMD didn't move when Dell wanted them to, they may have lost the chance to enter the business for the time being. This is every sales guy;s nightmare. Not closing the sale when the customer has said yes is the worst thing you can do. Imagine if they were ready 1-2 quarters later but by then Dell had staged a recovery through the new Core line up. AMD would have been kicking themselves in the head. So it isn't just about who is better positioned at that point of time. AMD needs Dell more for long term growth than Dell needs AMD. There is no way they can get to 50% of the market w/o Dell.
Finally - Dell knows they're the 800 pound gorilla still...and this probably shows in their behavior w/ their suppliers.
Well - perhaps you are correct but I still don't think Dell had as much leverage as you think and AMD moved too quickly...yes they wanted an in on the corporate business but they really have no need for the extra sales in the next 1-2 quarters.
Not to mention the fact that most of Dell's volume stuff is the lower margin parts across mobile, desktop, server. Being capacity constrained AMD should be focused on their high end products until they can get the extra capacity online, which would keep margins up and perhaps allow them to bring more capacity online more quickly (or start paying off some of their newly acquire debts)
I'm still not sure why AMD doesn't outsource more to Chartered until they get the fab capacity. I guess either Chartered doesn't have the capacity or the markup Chartered is charging is just not worth it? (especially for the Dell biz)
No disagreement with that. I said it in an earlier post. I defies the laws of economics when demand exceeds supply and prices are still dropping. At that point, I attributed it to Dell so I'm with you on this.
cheers...
Here is a twisted opinion!
I think AMD really needed to maximize the cash it could get. That is why they went with Dell and I really think Dell got more that many people think from AMD.
Here is the scheme: AMD gets Dell, Dell gets big committment and bigger discounts, AMD/Dell win will make the AMD investors happy, AMD stock goes up ($40), banks give AMD loans, AMD buys ATI, AMD gets what Intel has: A PLATFORM. Once investors discover this manipulation, they will get very upset.
So, what would the future look like for AMD. Well, based on what I just said, not as rosy as AMD has painted it. NO, AMD will not go bankrupt.. But will hurt really bad in 2007. Why? Capacity issues, outdated architecture, performance, performance per watt, and another delayed K8L! Yes, I expect the K8L not to make it on time or in quantity to validate AMD promises.
2007 will be slow for Intel and AMD! But Dell will suck the wind out of AMD margins and Hector can do nothing about it since he signed the dotted line.
If anything, AMD is trying to brute force their way into a respectable share of the market. What they have right now would in no other duopoly be something that people could legally be complacent with. To do this they have to increase spending, while decreasing margins, which may seem like a really bad idea long term, as it probably is, but over a section of 2-3 quarters, is not yet long term. If AMD can create an ability to bloat the market, it's only good for AMD, as Intel has the majority share, and will have to let more of its factory floors sit unused.
I see this quarter as something AMD chose instead of just sitting in their niche as Intel mowed them over with more capacity, better processors, and platforms AMD couldn't address. They really had no other choice, as rushing R&D on a new processor and new process is never cost effective, and R&D is very rarely able to be accelerated, so AMD would simply be stuck with the prospect of being exactly where they are, technology-wise, with no loyal customer, and a very performance conscious channel as their only refuge (which I would consider far worse at this point, than Dell). AMD would be ramping a fab without demand, and they'd be changing to a smaller process without need, both very bad things.
Greg - I don't think AMD chose this quarter. I think it crept up and bit them on the ass in the last couple of weeks. Here's how it works and what I think happened:
1. OEM customers will always order more than they need and then cancel at the last possible moment. This way they have the supply if they need it.
2. When Rivet said the quarter was on track Dec 14th, he probably thought it was. What could have happened (there could be several scenarios) is all the low end inventory they had stuffed in the channel did not get sold jacking up their inventories while increasing their outstandings from distributors dramatically. In addition all the heavily discounted client CPUs Dell probably ordered did not get canceled and they had to ship it in the quarter. This dramatically increased their volumes but hit their ASPs and margins like nobody's business.
The other possible factor is they did not gauge their product mix again very well this quarter and hence ended up with inventory and stuff not sold in the channel.
Whatever happend, when your demand is going up dramatically and you are unable to hold ASPs...let alone increase them, you have a big problem that is outside your control. We've been seeing this with AMD ever since they signed Dell. In the comments on one of my earlier posts I had said that Dell is a difficult customer and they will suck every drop of blood they can from AMD...as they do Intel. I believe this is a large part of AMD's declining ASPs which they are unable to balance with their server ASPs because they are losing share in that segment.
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