AMD Q2 - what the...

Ok - I did not see it coming the way it did finally. I did mention earlier that AMD might start giving stuff away at close to cost to fill their factories and win share - every unit they sell is a unit Intel doesn't sell. However, this is the weirdest result I've every seen.

Significant revenue and gross margin growth in spite of which losses that were similar to Q1. Get the details here:

Q2 Results
Q2 Earnings Call Transcript

So here's what I think really happened.

1. AMD sold as much as they could at the low end to maximize their factory utilization to improve GM's.
2. Their transition to 65 nm coupled with the fact that they are not incurring 45nm start up costs improved margins.
3. I had mentioned mobile earlier - this did help somewhat. More importantly, they were able to ride the overall growth in mobile through Toshiba.
4. They also seem to have made some recovery in servers.

So what went wrong - how did they lose almost the same amount of money as Q1:

1. The ATI acquisition. Graphics revenues down YoY. Losses continue. And...the acquisition costs hit their profits.
2. They are selling at the low end. So even though they seem to have improved margins QoQ, the reality is those are not due to improving ASPs but more a function of higher units to fill the factories and some mobile/server uplift.
3. The had 30 million additional MGA expenses. Now how much of that do you think are sales/marketing kickbacks to some of their customers to off load the additional volume.

This was a weird quarter for AMD. If they have stuffed inventory into their customers again, then Q3 might be a tough quarter for them again.

Intel Q207 actuals - and impact to AMD

I haven't had much time to listen to the Intel announcement. However, the gross margin was disappointing and as I said below, if Intel misses then the stock is heading down about 5 points which it did after hours. However, I think this will stabilize and possibly go back up 1-2 points as folks look at the results with a cooler head. What was really disappointing was Intel's Q3 revenue forecast and even though they did pop the margin number back up, what it says to me is they are unable to capitalize on the technology lead they have and proportionately converting it into revenue. Unless AMD is doing what I said they might earlier and almost give away their low end at cost. In which case Intel would have had to decide to stem the bleeding at some point and not fight AMD all the way down to the mud.

The impact to AMD is that their GM's are going to be awful. Further down from the 29% they had in Q1. It feels like Intel took more share in server and desktop and potentially lost some more in mobile. The impact of a further hit on servers along with unit pressure on desktop is not going to be completely offset by mobile upside considering the small base of mobile AMD is coming off. Otellini did say they felt pricing pressure on the low end of desktop and mobile. Which was AMD trying to salvage unit share and hence hit their revenue number. So expect the revenue to be at risk. More importantly, with the margin hit their EPS numbers will be worse than forecast so I think they will lose more money than the 85 cents per share Wall Street is predicting. My earlier call was around half of their Q1 loss and I think that's now back in play. Expect somewhere in the region of a 200-250 million $ loss. The other thing to consider is the start up costs of Barcelona. If the product is pushed to Q4 effectively then some of those ramp costs will hit them in Q3 thereby suppressing margins further.

Right now - I have nothing positive to say about AMD. But Intel's execution while good, is not as good as it could have been. I think they have made the critical mistake of allowing AMD to get established - both with the OEM customer base and to some extent their brand. Which is allowing the OEMs to move their parts even if they're inferior which allows the OEMs in turn to take a tougher stance at the negotiating table with Intel.

On the market share, we won't see the results this week but I think we're on track to see some minor upside for Intel. I'm still comfortable with a point as I called it below.

Q2 - for Intel and AMD

In a short while Intel will announce their Q2...followed by AMD a couple of days later. I've been busy to really do any analysis but I'm going to put some thoughts down anyways with an eye on what would happen to the stock.

Intel

I see two possible scenarios for Intel.

1. They hit the numbers (revenue/gross margin) they gave Wall Street at the end of Q1. In addition, EPS comes in as forecasted by the Street. This is a no win situation for them. The stock has grown significantly in the last few months. They will not be rewarded for this and expect a close to 5% drop almost instantly. If AMD pulls off a relatively "not so bad" quarter, then the Intel stock will get hammered.

2. They exceed their revenue numbers. They also beat Street forecast on EPS. If they can blow this away, they're heading north to the tune of 2-3% and the stock may even flirt with 27$. I think this is a high possibility because I think they were ultra conservative with their numbers. Since Intel always reports before AMD, they had no way of knowing how much AMD was bleeding in Q1. As a result of which I think they were conservative.

AMD

I think AMD has an easier quarter. After the abysmal Q1, there's no way but up. The question is how much up?

What AMD needs to do is meet or beat Q1 revenue Considering they had stuffed the channel in Q4 and the inventory should have worked itself out in Q1, they can expect some upside. However, balance this with seasonality where Q2 is usually the lowest quarter and this might balance things out. The key things to watch for are how Intel calls their server and desktop shares. If they call a big increase in servers, then AMD's revenue share is at risk. If they call a big desktop share increase then AMD's unit share is at risk. If both then AMD's entire quarter is at risk.

Either ways, I think AMD's price has not dropped sufficiently since the Q1 debacle with an uptick in the last couple of days. I think the stock will be static unless they really surprise pleasantly...which I think is unlikely.

One last thing, I'm also expecting Intel to win back another point or so of market share over the 5 points they won in Q1. Reason - it takes time to win back the channel so that market share momentum should carry them at least this quarter.

We'll see shortly.

AMD cuts prices again

AMD cuts prices again at the same time trimming their product line of single core at the bottom.

This is pre-empting Intel's July 22 price cut. It will reduce their Q3 margins so they will need to re-gain share to balance this out. However, the key issue here is once again they are shafting their channel by dropping prices at short notice. All the guys who bought inventory in the last couple of weeks are going to be ticked off that they are going to be stuck with parts that are about 15-20% more expensive and thus hard to move.

AMD is making it harder for themselves to re-take the DIY channel. I'm also surprised that they are dropping prices across the desktop stack when Intel's cut is only on Quad Core. The only thing I would think they'd have to be worried about is the Q6600 at $266 which was a little too close to their 6000+ part originally at $229. Which leads me to believe AMD has not been as successful as they would like in re-taking share in the channel in Q2 and they're using this opportunity to try and do so.

More losses for AMD is all I can say...!

Why AMD invested in Transmeta

Good article at the Motley Fool.

Barcelona and AMD continue to get slammed

George Ou from ZDNet posted a scathing review of not just the Barcelona benchmarks but also AMD's ethics.

He outright calls them dishonest. I've been saying for some time now that AMD is spending too much time trying to PRtheir way out of the mess they're in instead of focusing on execution.

Once again Hector and his boys - stop focusing on bringing Intel down. Focus on building and bringing to market innovative and reliable technology. Forget the 30% market share. Focus on doing the right thing for your shareholders.

With the sad results emerging for Barcelona until AMD can scale the MHz, it looks like this year is going to be a total wash out for them. And if Penryn can ensure Intel maintains the performance lead then I don't see any hope for AMD even in 2008 unless they can bring Fusion to market successfully. It's time for them to get back their focus - kill the peripheral projects and have laser focus on their bread and butter.

UPDATE

AMD has removed the benchmarks and replaced it with some marketing pooh pah.

Hat's off to George - and to the power the Internet gives individuals.