4.26.2007

An Impartial Assessment of the Likelihood of an AMD Bankruptcy

The road to bankruptcy is a downward spiral. Both camps from the AMD-Intel debate wonders about the same question: Is AMD on that road?
The only way to find out is to study other cases of business failures in the past, analyse the negative signs which led to bankruptcy and try and see if the same signs and symptoms applies to AMD. It is important to realise that each company is unique in its circumstance. What appears to be exceptional in AMD’s case is that the company is accustomed to financial difficulty. Anyone wishing to understand if AMD is indeed on the road to Chapter11 needs to be able to separate what is unique in AMD’s troubles today from its troubles in the past.

There are 3 stages in the life of a business/corporation where the risk of failure is elevated. By order of risks, the 3 stages are 1) the Start-up, 2) Aggressive Expansion and 3)Business Inflexibility. Start-up bankruptcies are quite common especially during the internet bubble. Business Inflexibility usually happens when a company has had too much success in the past that it fails to adjust to current market changes. Automotive and Airlines companies tend to fall into these categories. Interestingly AMD falls into the Aggressive Expansion stage. This is the stage where the company has an innovative product, sees great demand for the product and therefore has no choice but to expand to meet the demand. It is at this stage that a company borrows money to meet capital expenditures. This is common practice and there is nothing wrong with such a strategy. The result is simply a higher debt/equity ratio which exposes AMD to greater environmental risks.

In 2006 AMD further increases its debt/equity ratio with the purchase of ATI. One needs to remember that the terms of the loan agreement is always a good indicator of perceived business risks and investor confidence. Least to say, the strict loan terms stipulated in the ATI loan shows a decline in confidence and perceived higher risks. The key note to remember is that in every “post-expansion” bankruptcy case, it is not the debt that is the fundamental cause of the collapse but rather the complete lack of confidence from the investing community. For AMD, at the moment the general feeling is a “wait and see” attitude as AMD is in the midst of restructuring. While the stock seems to be in the upside, one has to wonder if lack of direct creditors the real reason for AMD’s decision to issue 1.8B worth of private notes. Investor capitulation is one of the negative signs of impeding bankruptcy.

The second factor that compounds the problems of financially distressed companies is that suppliers and customers become reluctant to do business. It is natural for the other businesses in the eco-system (supply chain) to shield themselves from the risks in case the failing company collapses. We’ve heard AMD losing the channel by becoming unreliable in shipping products. Today, AMD not only needs to convince its channel partners that the deliveries will arrive; they have to convince them that they are not going away anytime soon. The decline of the eco-system will inevitably result to poorer sales which is a key ingredient of the downward spiral. Although we’ve seen alarming reports about AMD’s poor channel sales, it is too early to say that the changes are irreversible.

The 3rd sign for a post-expansion bankruptcy is the inability of management to restructure after the post-expansion sales collapse. A failed aggressive expansion is normally a result of overestimation of future sales, overlooked environmental changes, and underestimated expenses. I don’t suppose anyone can argue that AMD’s decline in sales and underestimation of Intel’s product line contributed to its poor earnings. But the key requirement for a company to go south is not so much about financial metrics as it is the response to its market contraction. AMD badly needs to reduce its size to its current and smaller market for it stop the bleeding. A lot of investors are waiting to see if AMD’s restructuring plans are adequate enough for its size against its contracted market. It is hard to say at this point if AMD will respond correctly.


In summary, the signs of an impeding AMD bankruptcy aren’t clear cut. While we’ve seen some signs of decline in investor confidence and business support like (Sun, Google, channel suppliers), there is no evidence that the changes are absolute or permanent. We have to wait and see what changes AMD brings to the table. Like any post-expansion problems, AMD is faced with severe cash-flow problems, crippling debt and a significantly smaller market.
If there is anything significantly different between AMD’s old problems from today, this time around AMD is coming from an aggressive expansion. Remember the bigger the company's size is, the bigger the loses, the quicker the collapse. AMD needs to act quick this time.

10 comments:

Anonymous said...

whoa, too deep bro! - keanu

Anonymous said...

Great job Dr. Roborat. You are a true beacon of light in this fud filled darkness.

Also i would like you to comment on this bit of news where according to dailytech the 2900XTX gets spanked by the 8800 GTX in most of the gaming benchmarks it seems just like intel Nvidia need not release any better than their current offering to beat AMD:

http://www.dailytech.com/article.aspx?newsid=7052

Chalk this one up to AMD's long list of recent failures and Barcelona is next.

AMD BK Q2 08

Anonymous said...

I really think you should start talking out of your ass like sharikou and scientia and maybe you will start getting more traffic because apparently facts does not generate much interest.

Roborat, Ph. D. said...

I really think you should start talking out of your ass..

i tried in the past. Maybe i'm not very good at it. Anyway this way when nobody comments, i'd like to think people agrees with me.

Anonymous said...

I agree with you man.

Anonymous said...

You are the devil

Not Penix said...

Good read, and your not partial one way or another (Unlike others bloggers...)

I'm hoping AMD doesn't go under, I can't wait to see if R600 and Barcelona will be competitive,

And whats with never being able to log into my blogger account, its getting quite anoyying, well i can log in but I can't post.

Heat said...

http://www.fudzilla.com/index.php?option=com_content&task=view&id=703&Itemid=1

AMD/ATI has officially stated that they are not releasing the 2900XTX and their latest line which is 6 months late will only manage to compete with the 8800GTS.

AMD BK Q2 08

Scientia from AMDZone said...

Actually, I think that was a fairly decent analysis. It is true that theoretically AMD could be in big trouble.

Now, I notice that you didn't take into consideration that sales for AMD may bump up in Q3 and Q4. But, I understand that. There really is no way to be certain just how competitive K10 will be, how many will actually be produced, and if there is any current pent up demand. For example, it is also possible that some of Intel's current sales were due to pent up demand because of Prescott. However, there isn't any good to know without waiting to year's end and see what actually happens.

I think about the only other thing I could add would be that AMD does have a fall back position of sorts. For example, let's say that the Chartered contract is more wafers than AMD actually needs because of unexpected low demand. It is possible that AMD could shift some ATI production to Chartered or to its own FABs to help minimize the loss and more fully utilize capacity. Beyond that, I'm not sure what AMD could do.

Anonymous said...

"it is possible that AMD could shift some ATI production to Chartered or to its own FABs to help minimize the loss and more fully utilize capacity."

AMD is doing the ATI work at TSMC, no? Chartered runs a totally different 65nm process than TSMC and simply "shifting" production to Chartered (or for that matter AMD) is not a simple task. This requires new lot files as transistor performance between the two processes will not be the same - this could mean anything from tweaking various process steps (litho, implant, gate loop, etc...) to needing to re-layout many of the process layers or even tweaking design. This would not be a trivial task and would not likely be cost beneficial unless it was a permanent shift. It would also take some time to do this.

Also I would find it unlikely that the contract with Chartered does not specify CPU's (speculation on my end).

Scientia - your K10 volume predictions on your blog are flat out wrong. You give an example of a 1/2 year K10 ramp to ~30% by end of year which you translate to ~7.5% total year. Unfortunately you neglect to factor in that this is SERVER ONLY and thus the 7.5% estimate is the production % of server volume which is likely about ~2-2.5% of total CPU production if you estimate server as ~1/3 of AMD's CPU output.

This will not DENT revenue #'s in 2007 - even Hector has acknowledged this, but for some reason you continue to cross your fingers and say "maybe" it will. Do you really think when Hector said that he was focusing on design wins in H2'07 he was holding out hope that they could see significant revenue from K10 this year?

If AMD gets a bump in Q3/Q4 it will be from seasonal demand increasing and unit costs coming down due to fuller conversion to 65nm, not K10 sales. The real question will be what impact Intel's Q3 server chip price cuts will have. If AMD is forced to lower prices on the 90nm Opterons they will really be bleeding in server space as there is no way there will be volume K10 in Q3 which will allow AMD to maintain server ASP's.

My best guess - AMD will pair their operating losses in each sucessive quarter but Q2 and Q3 will be red, and there is small chance Q4 may be in the black (<25%). If AMD continues to see the growth in mobile that they have been there is an outside shot Q3 will be positive (from operating income perspective). At some point, AMD may be forced to choose between volume share and profitability - at some point it would seem they need to give up on this 30% share target, get ASP's up and restore some financial health/sanity.