Cray Dumps AMD

As promised from a previous blog entry , it was only a matter of time when Cray makes a deal with Intel and leave AMD out in the cold. Cray's 2007 earnings was drastically affected solely by AMD's product delays and poor performance: "... The decrease in product revenue (16%!!!) was principally due to delays in completing new products in time to recognize revenue in 2007 because of delays in product development and component availability" - Cray 2007 annual report.

WSJ : "Intel Corp. and supercomputer maker Cray Inc. announced an alliance that could add to pressures on Advanced Micro Devices Inc., and aid Cray's battles with much larger hardware vendors".

While the immediate implications are obvious, such as the decline in 4P market share for AMD and the associated drop in healthy margins, there are other far reaching but less obvious things to consider. For one, AMD's foothold on the server spare would completely evaporated once Nehalem ships with the likes of Cray on board. Design wins in HPC space are always critical due to the significantly longer product life cycle (sales and after-sales support). It is never easy to get back in this segment unless there are very compelling reasons to do so because price which seems to be AMD's only forte, plays a lesser role.

The news about the collaboration in R&D could only mean more bad news for AMD. Intel will be willing to pay for a significant portion (read: almost all) of the R&D as long as it involves their CPUs and a bit of pressure to forget about competing platforms. A clever and legal way of locking in your supplier for future products. Cray may be only one HPC vendor making such an announcement, but the shift between the big players have been going on for quite sometime now.

Expect Opteron based systems to disappear one by one from the supercomputer list in 2010.

AMD's Q1 2008 Earnings (or lack of) Report

"AMD today reported first quarter 2008 revenue of $1.505 billion, a net loss of $358 million, or $0.59 per share, and an operating loss of $264 million. These results include an impact of $50 million, or $0.08 per share, from ATI acquisition-related charges. First quarter revenue decreased 15 percent compared to the fourth quarter of 2007 and increased 22 percent compared to the (abysmal) first quarter of 2007".

“A seasonally weak first quarter (natural trend therefore beyond AMD's control) was amplified by a challenging economic environment for consumers (people don't have money to buy PCs) and lower than expected (meaning awful) revenues of previous generation products (meaning obsolete), resulting in lower than expected revenues in all business segments. However, we are encouraged (interesting choice of words, why not speak in volumes like "overwhelmed") by the market acceptance of our Quad-Core AMD Opteron™ server processors as well as our new chipset and graphics offerings,” said Robert J. Rivet, AMD’s Chief Financial officer. “We remain committed to achieve operating profitability in the second half of the year, driven by our portfolio of new products and platforms (which NEW product?) and aggressive restructuring programs (meaning layoffs).

It appears as if AMD is back to square one. Not surprisingly, a product line-up of buggy, handicapped and obsolete products guarantees nothing else but massive losses. AMD may pretend all they want that they're giving what the customers want, the latest financial statement says otherwise. It is shocking that they can claim to be having a difficult market environment when their direct competition is thriving. I would like to think that they're lying and know what the hell is going because it sounds as if they're not living in reality.

What is surprising is that AMD admitted to the server share loses and the massive decline in overall unit shipment. Other alarming trends in their numbers include margins going south from 44% last quarter to 42% in Q1'08. While revenue declined $265M compared to last quarter together with unit sales, MG&A increased by $20M! The graphics division which was supposed to have a strong product lineup (at least relative to Computing) also made a loss.

To fix all their problems Hector once again pulled out the old (one year old to be exact) black rocket called "asset-smart". While I could have sworn hearing laughter through the muted telephones, at least one analyst was too pissed to mention that he's getting tired of waiting for the "wait-and-see-if-we-make-it-to-break-even-asset-smart" strategy. Of course, like always Hector said he will make an announcement "soon". With the way AMD puts emphasis on asset-smart whenever they're in trouble and less when they're doing better, it is beginning to look like asset-smart really is filing chapter 11. People who think Hector isn't smart don't know what they're talking about.

INTEL's Q1 2008 Earning's Report

• Record Server Microprocessor Revenue
• Revenue up 9 Percent Year-over-Year
• Gross Margin up 4 Points Year-over-Year
• Operating Income up 23 Percent Year-over-Year
• Net Income $1.4 Billion; EPS 25 Cents

SANTA CLARA, Calif., April 15, 2008 - Intel Corporation today announced record first-quarter revenue of $9.7 billion, operating income of $2.1 billion, net income of $1.4 billion and earnings per share (EPS) of 25 cents.
"Our first quarter results demonstrate a strengthening core business and a solid global market environment," said Paul Otellini, Intel president and CEO. "We saw healthy demand for our leading-edge processors and chipsets across all segments. Looking forward, we remain optimistic about our growth opportunities as we continue to reap the benefits of our 45nm technology leadership."

It appears like business as usual for Intel despite the macro-economic turmoil affecting the financial industry. Strong server sales dominate the earning's call with frequent mention of grabbing market share from AMD (estimate ~$100M lost to Intel). AMD's situation is so awful that one analyst asks if Intel takes into consideration their competitor's "too dire" situation and how any of their actions could adversely affect the competition. However which way you read into that statement, it is like saying, "are you making sure you're not hurting AMD too much to kill it and just apply enough pressure to keep it half-dead on life support?"

Outlook for the second quarter and the rest of the year remains strong with plenty of optimism for Atom and a brief mention that Nehalem is on track. Business as usual for Intel with a strong product line-up means a lot of red ink on Thursday as AMD reports.

AMD's Annual Layoff Exercise

"Advanced Micro Devices, reporting a slump in sales, said Monday it will cut 1,680 employees, or about 10 percent of its worldwide workforce, between now and September. An AMD spokesman said the move was part of a cost-cutting plan to help return the company to profitability. He said the company doesn't know how many will be affected at its two Silicon Valley campuses. AMD said that the revenue drop was caused by lower than expected sales across all business segments, which it attributed to an anticipated seasonal decline". -siliconvalley.com

Expect every horrible announcement to be beautifully written and without fail stated in a positive manner. It is amusing that AMD calls a sudden announcement of workforce reduction as a cost-cutting "plan". Intel announced a 10% workforce reduction over the course of several quarters to save $2B annually. Now that is what you call a plan.

It's not surprising that AMD's sales are off by around $100M. AMD's customers are left to choose between an aging Athlon or a Phenom that does not have guaranteed delivery dates. Large OEM planners are having problems booking production plans for Phenom based systems - or so I heard. To most companies with tiny margins, on-time delivery is key:

Citigroup wrote about the issues with Dell this morning, saying: "Our analysis suggests that a source of AMD's shortfall is Dell's decision to reduce their AMD exposure. Consistent with speculation throughout the quarter, AMD's shortcomings in two flagship products (Barcelona and Phenom) was the likely sore spot for Dell. - cnbc