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.

Apple Profit Soars 88% - Thanks to Intel based Macs

April 25 (Bloomberg) -- Apple Inc. said second-quarter profit rose 88 percent because of soaring consumer demand for its iPod media players and Macintosh computers. The company's shares surged 6.3 percent in extended trading.
Apple sold 10.5 million iPods and 1.52 million Macs in the quarter ended March 31, boosted by demand for notebook computers and the low-cost iPod Shuffle. Lower prices for memory chips and screens increased profit. Chief Executive Officer Steve Jobs is counting on the new iPhone, a product due in late June, to help spur results this quarter.

It pays to partner with someone that can deliver superior products. This $2 Billion dollar a year business between Apple and intel is proving to be very fruitful to both companies. Bear in mind that the 6 million units Apple ships every year is outside the 81-19% market share fought by Intel and AMD. This is an unchallenged business that guarantees revenue but AMD doesn't have access to.

Recent dealings between AMD and Dell proved to be inconsequential to one and disastrous to the other. I'll let you guess which one paid a heavy price. ATI is another company seemed to have been infected by inefficiency after the AMD takeover. I'll point out the trend, you make the conclusions.

Meanwhile SUN Microsystems is suggesting that there is a significant declining trend in growth of its Opteron based Sunfire Galaxy servers. Sun hints that Clovertown's advantage in performance and performance per watt is causing customers to look elsewhere. Luckily SUN plans to transition the product line to Intel by June - before it gets too late.

Again, the trend, you make the conclusions.

AMD Takes More Dept to Pay for Debt

Forbes:
"Chip maker Advanced Micro Devices Inc., said Monday it plans to offer $1.8 billion in convertible senior notes in a private offering."

I find this hilarious. AMD is offering convertible notes to private investors willing to 1) pay recent debt, 2) purchase cap call transactions 3) pay for capital expenditures to a money losing business. The prospects may not be at all that bad considering we're hearing that the conversion to common stocks is up to 3 times the current stock. Although the conversion and interest rates are variable per individual, AMD is putting a cap. The good news is, you get preference to assets just in case AMD goes BANKRUPT. I just can just imagine what sort of group of investors queing up for this offer. It's either private investors with a stake in AMD's business continuing (i.e., suppliers, partners) or investors who is waiting for AMD to close shop.

Assuming that there is enough people interested in this offer, this should allow AMD to continue for an additional few quarters. While this may be a temporary relief for AMD, one thing that bears emphasis is the fact that NOBODY was willing to lend AMD any more money. AMD was forced to dilute its shares. This is significant in business. The moment that nobody is willing to loan you money and you have stacks of debt, chapter11 is next.

BARCELONA NOT FAST ENOUGH - AMD is DOOMED!

AMD today disclosed performance projections for it upcoming Barcelona Quad Core. The "projections" shows the new 65nm monolithic QC to have up to 50% FPU advantage and 20% advantage in Integer over Intel's highest performing QC's at the same frequency.

This raises a lot of suspicion. AMD used to be clear cut when it comes to boasting performance numbers. What you see today is some vague-lawsuit-evading announcement with qualifiers: "intel's highest performing QC's" and "at the same frequency". Either AMD extrapolated the Barcelona performance numbers to 3GHz or they extrapolated down intel's highest performing QC to whatever god-awful speed they manage to get Barcelona running. in any case, AMD can't seem to claim absolute performance. And if by chance of a miracle that AMD is telling the complete truth, their advantage will be short lived as Penryn has proven to be offering almost the same performance advantage over current QC's.

Given that we already know what speeds Barcelona will be offered, a 20% in INT will not be enough. Not with the clock advantage and overclockability of C2D and the upcoming 45nm speed demons from intel. At an indistinguishable performance advantage with over 3X cost per CPU, this is most certainly a lost cause for AMD.

In 2005 AMD said they have the performance advantage. In 2006 they said they had the performance-per-watt advantage. Today, in 2007, they're claiming to have the performance-per-watt-per-square-silicon advantage. I would like you to think about what that means. If you are smart enough to be able to understand and visualize his new metric from AMD, I'm sure you would come to the same conclusion as I have.

AMD is DOOMED.

Massive Q1 Loses Makes AMD Throw in the Towel

Here’s the link directly from AMD’s press release.
http://www.amd.com/us-en/Corporate/VirtualPressRoom/0,,51_104_543~116842,00.html

Since AMD pretty much made an announcement a couple of weeks ago, I’m not going to attempt to repeat what was announced back then. Instead I will try and focus on some of the key items that caught my attention during the conference call.
After reporting a net loss of a staggering $611M, poor sales and low ASP’s AMD seemed to be in a generally humble mood. AMD Executives headed by Hector apologized for a “perfect storm” of a quarter and congratulated Intel, although with a slight remark of sarcasm, for a job well done. What I found amazing was the fact that for an hour’s session, the word “monopoly” was only uttered once.

The key talking point for the evening was “Asset lite”. AMD’s new restructuring strategy going forward. It appears to be a clamp on Fab/Capital expenditures as they look for alternative ways to increase needed capacity without the associated start up and running costs. What isn’t said is equally important. It appears that AMD has thrown in the towel with regards to its previous strategy of ‘breaking the monopoly’ by acquiring 30% market share. They never said this directly but it doesn’t require much common sense that they’re mainly focusing on surviving at the moment. All capacity plans are capped while it plans to clear its backlog. It is quite obvious that Intel has driven AMD into a corner where their current business model no longer work. AMD is backing off. I'm not so sure about Intel.

Other key highlights:
Fab38 300mm transition slowed down.
31% Gross Margins!
Headcount reductions and selling of Fab planned for 2007
Barcelona sampling in Q1, Q2 start production/shipping and should be out by Q3’07.
Desktop Barcelona Q3’07
$900M worth inventory (equal to intel) with 40% 65nm!
45nm starts 2H08

“We are at the inflection point of our business” – Hector Ruiz at Q1’07 CC
It appears that Hector has finally started reading Andy Grove’s book “Only the Paranoid Survive”. It appears there is hope after all for AMD.

Scientia's Flawed Analysis

Since most of you seem to have read Scientia's recent blog "Core 2 Duo - the embarrassing secrets" let me then respond to them here.

Scientia said: "The two things that Intel would rather you not know about Core 2 Duo are that it has been (1) tweaked for benchmarks rather than for real code, and that at 2.93 Ghz it is (2)exceeding its thermal limits on the 65nm process."

(1)”Tweaked for benchmark" - Is he suggesting that the Intel engineers at the early stage of designing a new architecture which was about 5 years ago imagined what the benchmark tests will be like today and made sure that "high benchmark scores" was on the top of the design priority list? I don't think so.

He makes a case as to why the benchmarks do not represent the ‘real code’ of the real world application. Of course it isn’t. Not because you don’t wish it to be unrepresentative of real world apps but because there is no practical way to quantify what a ‘real world application’ is. Just like the American constitution for example, it's not perfect but its the best of what we have.

By definition a benchmark is a standard which you can use to measure one against another. A 3D mark score doesn’t mean anything unless you use that score to compare another score. That is what a benchmark is and for the sake of practicality you can only sample a few real world scenarios to make comparisons. The bottomline is that Intel never defined what the benchmarks are and both AMD and Intel are measured with the same stick.

Complaining about how the benchmarks doesn’t represent the real world is analogous to saying that the 100 meter dash Olympic race doesn’t represent how fast the runner is in real world situations like for example running across the Siberian Thundra. Of course it isn’t. The whole point of benchmarking is not to show performance against the real world but to show how one is better than the other.


(2) “exceeding thermal limits” – Scientia made his case by using Intel’s temperature guides which suggests that TAT should be at 55°C and the extreme editions are running above the limits.

Absolutely incorrect. The thermal dissipation rating of the CPU packaging is a function of the design of heat spreader (IHS), thermal interface material (TIM) and the hot zoning design of the chip. Obviously the temperature limits defined by intel were derived from the capability of the IHS and TIM to dissipate heat at 55°C. This limit has nothing to do with the silicon thermal limit. Nothing is stopping Intel from slapping a thicker IHS and a more expensive TIM just to increase heat transfer (along with clock speed) while maintaining that 55°C thermal requirement.

The GHz Race is Back..

...and Intel has leaped ahead with 3.33Ghz pre-production silicon. Not such a small feat considering that this is a working 45nm silicon. If you're asking how significant this is you don't have to look very far and compare AMD's old K8 architecture transition into an 'old' 65nm process technology. Not only were there no performance increase, the clock speed was even slower. If that doesn't sum up the gargantum gap between Intel and AMD in process know how, then I don't know what does.

Yorkfield Performance Advantage vs 2.93Ghz C2D
3DMark '06 V1.1.0 Pro CPU (score) : 21.8%
3DMark '06 V1.1.0 Pro Overall (score) : 7.6%
Mainconcept H.264 Encoder (seconds) : 18.0%
Cinebench R9.5 (CPU test): 24.9%
Cinebench R10 Beta (CPU test): 25.5%
HL2 Lost Coast Build 2707 (fps) : 37.3%
DivX 6.6 Alpha w/ VirtualDub 1.7.1 (seconds): 111%

Queries on Penryn's IPC becomes really insignificant at this point when clearly Intel has a speed demon with a slightly better IPC over Conroe. And with architectural improvements apparently leveling out, raw clock is once again King and by the looks of it Barcelona is just too slow and too late.

From Anandtech:
Obviously we'll reserve final judgments on Penryn for our official review of the CPU, but these initial results look very promising. We would expect to see clock for clock Penryn vs. Conroe improvements to be in the 5 - 10% range at minimum depending on the application. Factor in higher clock speeds and you can expect our CPU performance charts to shift up by about 20% by the end of this year.