7.23.2007

Did AMD Really Improve Last Quarter?

I may have given the wrong impression in my last post. The mixed reception of AMD’s last conference points to a well crafted report from the company’s top dogs with stories of small gains and promises yet come. It if wasn’t for AMD’s analyst meeting just around the corner, I’m quite sure the “asset-lite” teaser wouldn’t go down well for the investors who are anxious for to hear about that major shake up.

AMD’s Qtr-Qtr gain also played a big role in creating a sense of recover. Nobody (except for a few anonymous posters here) seems to be realising that Q1’07 numbers were irregular. Q1’06 numbers were so artificially deflated that any kind of performance from AMD, however poor it may be, is guaranteed to show some kind of improvement. AMD's earnings report from Q4’06 until Q1’07 cannot be used as a meaningful comparison for assessing trends in revenue growth or market share. The numbers from the two quarters are completely muddled up that it is impossible to determine the true run-rate on a quarterly basis. How AMD truly performed is anybody’s guess. And since I’m anybody, I would like to make a first guess.

I think AMD had a very strong motive to make Q4’06 pretty along with the rest of 2006. AMD was applying for a loan around the same time they were feeling the heat from Intel’s Core2. Seeing sharp decline in customer demand is the quite easy to hide within a quarter. It’s possible to imagine that AMD stuffed its customers with around $200M worth of sales with a loose return policy just to hide the ugly truth from potential creditors. Now if we try an normalise the true decline of AMD’s revenue and move the $200M revenue over to Q1’07, here's how AMD’s numbers would look like:



If you look at the alternative numbers, it shows how AMD's Q2'07 gains turn into another decline by moving revenue to where it should be. The point is not whether the alternative numbers are correct, but to illustrate how AMD’s small improvement last quarter is completely meaningless by comparing it to an excessively deflated Q1'07.

5 comments:

yomamafor2 said...

I agree with your analysis. Due to AMD's channel stuffing back in Q406, as well as pushing any processor shipments to Q207, AMD has artificially created a "hole" in their chart, as illustrated by you. However, if you actually take out the artificiality, you'll see a steady decline, if not increasing decline, in their financial status.

AMD's debt has increased from 3 billion to almost 5 billion in just a quarter, and they continue to invest resources in Fusion, it wouldn't be surprising if they actually file a Chap 11 in Q208, or even earlier.

I guess there will only be one person who would be surprised to find this reality.

Anonymous said...

While the analysis is interesting on the "alternative" #'s does it also factor in the typical seasonal decline from Q4 --> Q1? AMD was also dropping prices throughout Q1 which may have contributed...

While clearly (at least to most) the Q4 #'s were artificially high and the Q1's were artificially low... Q1 should see some decrease even in normal biz conditions.

I'm also curious about the 38% unit increase with a much lower gain in revenue - were ASP's really that much lower? Or did the product mix shift? Usually a business likes to see revenue (or at least profit) go up at a similar pace to unit sales.

What happens next quarter if AMD doesn't see another 38% unit increase? Are their production costs going down that fast or do they expect ASP's to go up?

Axel said...

Roborat I completely agree with your commentary, in fact I voiced it earlier in my comment to your Intel Q2 07 analysis.

I don't see how AMD's revenue could truly have increased from Q1. Their price cuts were in response to flagging demand. The Toshiba win in budget laptops would be miniscule from a revenue standpoint; even AMD refused to quantify the contribution during the CC. Besides, Intel cut their prices greatly in March as well, which would have offset demand spurred by AMD's price cuts.

With lower demand for K8 chips AND lower ASPs, how can revenue increase from Q1? Answer: Due to an artificially low Q1 as a result of stuffing the channel in Q4 06. AMD apparently did this expressly for the purpose of securing additional financing in December:
http://www.theinquirer.net/default.aspx?article=36914

It's pretty clear, reading between the lines, that there has been a steep downward trend in AMD's revenue. Demand for AMD products has taken a nosedive over the last three or four quarters and now with Intel quadcores at under $300, Q3 will be even worse for AMD unless they drastically cut back on CAPEX. In the latest CC they did not announce any such major cuts in CAPEX but it's obvious that something has to be done VERY SOON to save the ship. Selling off some 200-mm equipment and Spansion interests isn't enough. "Asset lite" is all about a fundamental shift away from in-house CPU fabrication and getting someone else to do it instead.

I think you're right that they'll probably announce something big during their Analyst Day. Either then or soon after.

Anonymous said...

Well one area AMD improved:

http://www.theinquirer.net/default.aspx?article=41193

'AMD has "sustained commitment to environmental stewardship"'

Apparently in H1'07 AMD has decided to burn cash instead of fossil fuels?

Anonymous said...

"In the latest CC they did not announce any such major cuts in CAPEX"

Actually they pushed out ~200Mil of capex in H2'07, while this doesn't seem like a lot, it is actually a fair amount of their overall capex (I think this is ~10% of the yearly spends, ~20% if you are just looking at H2'07). Not that this will really do much though...except slow down the F38 conversion ramp.