Monday, October 22, 2007

AMD Q3 07 and some related thoughts on Intel

AMD had an improved quarter too:
Press release

Let's look at the same numbers as the Intel report below to see whether there are some market trends emerging.

- Revenues of 1.632 billion up from 1.378 billion in Q2.
- EPS loss of 71 cents which beat the street forecast.In dollars this was 396 million.
- Gross margin 41% up 8% from 33% in Q2. However, 2 points of the improvement came from an inventory write off in Q2 so the real gain is 6%.
- Inventories down 53 millon.
- Headcount down 221 to 16,498.

And some other interesting facts and figures...

- Graphics revenue up 57 million and the losses of 50 million in Q2 are now down to just 3 million.
- ASPs up in desktop and mobile but down in server.
- AMD sees no evidence of over booking too and Rivet too was concerned that inventories were lower than he'd like.

I had said earlier, AMD will lose around 300 million and they did not disappoint. It will be very difficult for them to go into the black in Q4. Rivet says he needs around 2 billion of revenue at 40% + gross margin. However, that will be extremely difficult as it means every incremental $ of revenue needs to drop straight into the bottom-line in Q4.

What seems to be happening is both Intel and AMD have been surprised by some spectacular demand and both of them are tight on capacity. Hence, with almost full factories, their gross margins are naturally shooting up. In addition, at times like this they can afford to ignore lower end less profitable business when supply is constrained. The key in Q4 will be managing their product builds. If they call the right product mix their customers want and have it built, they will be laughing to the bank. However, any screw up on forecasting and it will mean leaving revenue on the table that could have been had.

The couple of other things I wanted to comment on:

1. Intel's static ASP vs AMD's improvement. Intel did say desktop ASPs improved while AMD said desktop/mobile improved but server was down. Here's what I think is going on. AMD is slugging it out with a lot of discounting in the server space as they are disadvantaged against Intel's newer products. Hence, they are pulling server pricing down. In mobile, even though AMD is using price to gain entry/share, they are still seeing an uplift as a mobile CPU improves their ASP compared to a desktop part. And some of their new customers like Toshiba tend to sell higher end SKUs. However, Intel is being forced to lower their pricing on mobile as AMD becomes more competitive. However, as Santa Rosa ramps and Penryn comes through, they may be able to create some uplift in mobile ASPs too.

2. It's now obvious that over booking is not a concern and end user demand is robust. Which is a good sign for not only AMD/Intel but also the global economy. Usually tech products and PCs are the first to see demand drop during a recession. It will be interesting to see Apple/Microsoft/Motorola's results this week too.

3. Expect both AMD and Intel to have blow out quarters. Specially Intel. While they are forecasting a mid-point of 10.8 billion for Q4, I think they can hit 11 billion. And get their Q4 profits very close to 2.5 billion which should drive their EPS close to 40 cents. I also think Intel will be aggressive with their share buy back as this is a golden opportunity to have a blow out quarter and drive their EPS and hence share price up.

This is going to be a good quarter for both the players. The guys who should be worried are the OEMs and specially channel as they fight to get supply. HP and Dell have a natural advantage due to their scale. But in the notebook business folks like Acer are becoming big players rapidly so it's going to be interesting. Expect the entire PC industry to have a great Christmas if demand remains strong.

Wednesday, October 17, 2007

Intel Q3 07

Intel announced a bang up quarter today:

- Revenues of 10.1 billion. Well above the updated forecast of 9.6.
- EPS 31 cents. Beating the Street by 1 cent.
- Gross margin 52.4%. At the high end of their forecast and up 5.5% QoQ.
- Inventories down ~550 million.
- Headcount down to 88k

The story is demand is robust. ASPs are flat. The re-structuring is helping drive down costs and make Intel a trimmer company.

Q407 outlook:
- Revenue 10.5 - 11.1 billion. Mid-point of 10.8 billion.
- Gross margin 57 points +/- a couple of points.
- Headcount down another 2k to 86k.

It mostly sounds like good news. Demand is wonderful. Mobile continues to show strong growth. Costs continue to decrease. We have a leaner stronger Intel.

But there are a few areas of concern:

- Accounts receivables is up by 400 million. Which almost accounts for the entire inventory reduction. The Street is concerned there's been over-booking in Q3 and this will impact Q4 sell through. While it's not unusual to load inventory in Q3 anticipating Q4 is the biggest qtr of the year. But there could be some truth in Wall Street's concerns.

- In spite of a renewed product line and competitive pricing - ASPs remain flat! What's going on...? It's simple. AMD is competing hard and the OEMs are extremely happy to counter-balance Intel's influence with a reasonable mix of AMD product. The real problem here is in Intel's marketing. What's going on is end users either don't care about what CPU they are buying or are so price conscious that they are willing to trade off on the brand. This is highly likely a problem for them in emerging markets. But the bottom line is the OEMs are able to negate Intel's strong brand to a good extent.

I think Intel is being conservative in their guidance ever since their fiasco in early 2006. So I do expect them to meet their Q4 guidance. And if everything clicks - to even beat that guidance. However, AMD is competing hard and probably using pricing to try and win back share. Which I think they will have gained some since they should have cleaned out their channel issues by now. While they're still losing money, their focus is to fill their factories in order to drive up gross margin and share. Even if it means lower ASPs.

As for Penryn and Barcelona. These will not have much impact in Q4. Intel will see some benefit to gross margins probably factored into their Q4 guidance already. Going into 2008 these will take on greater significance and the heat will be turned up by both with new products having real availability. Who will win. The end user. Because AMD will probably start to drop prices if they find they're not gaining traction fast enough. Which will create another mini price war. The bottom-line problem is there's too much capacity between the two players and neither of them seems to be slowing down in their drive to keep building capacity.

I'm back...

I've been away from the blog for a few weeks and I apologize. I've been pre-occupied with some other stuff and essentially there's been a whole lot of nothing going on between AMD and Intel as both try and stabilize business, share and most importantly margins.

However, Intel's announcement this morning is a good segue to get back to the blog.