AMD’s Last Options

What can be more useless than a stock downgrade after the significant drop? The rating of "Speculative Risk” from Citigroup’s Glen Young is the last of a series of downgrade given to AMD. And the reasons this time around are:

“… reflects recent product delays, the continued challenging landscape for microprocessor and graphics processor pricing and the increased volatility of AMD’s shares versus its peers [Intel, NVIDIA]… we see little prospect for [market] share momentum in coming quarters, and expect poor financial performance as a result,” he wrote in a research note this morning. “We look for management to provide a viable restructuring solution as a means to revisit our rating on the shares...”

We’ve discussed AMD’s need to restructure several times since the beginning of the year and the pressure only builds up as AMD continues to delay any announcements. But to be fair, restructuring is easier said than done which is probably why AMD hasn’t fully come forward with any plans. Invariably this is due to the lengthy discussions with legal and creditors about which course of action to take. While some companies restructure voluntarily like IBM or HP others go for bankruptcy which allows protection from creditors and gives the new administration more power to make drastic changes. For AMD and just about any semiconductor company with short product lifecycle, bankruptcy is not a favourable option.

Normally I would say that AMD doesn’t have a lot of options but if I was forced to give a few examples, this is what they would be:

1. Keep the status quo, ride out the bad weather and hope for a miracle that the business picks up at least until they break even. Microprocessor volume demand grows ~15% YoY so AMD can sit around with two Fabs and wait for demand to outstrip supply. The only problem with this strategy is that it may take forever all the while being at the mercy of Intel's ability to manipulate pricing.
2. Shut down Fab30 at the end of 90nm. If AMD wishes to return to profitability, this is a quick and effective move. Running 2 Fabs was made on an assumption that margins would be at least >45%. Clearly the environment has changed and AMD needs to face this reality. While this also helps AMD avoid the cost of upgrading the Fab to become cost competitive, this reduces AMD’s fixed cost, limiting the day to day cash haemorrhage. The challenge with this option and any other plan to sell or reduce headcount is the covenant they have with the German/EU government.
3. Sell ATI. They already have the technology they need. They don’t need the additional quarterly loses. ATI will only continue to wither away if it continues to be under AMD. Not being able to deal and cooperate with Intel with equal footing as NVIDIA is a major disadvantage ATI doesn’t need right now. Separating the two companies can only be good for both.
4. Go 100% Fabless. AMD’s margins are now close to ATI’s that this may only be the only viable solution. They can only blame themselves for rapidly commoditizing the industry. Of course we’re not talking about something immediate but rather in steps similar to #2 – shutting down the Fab once the process node becomes obsolete. We’re talking at the end of 65nm.
5. Aggressive outsourcing. This is the mostly likely option AMD could take with a massive production offload to Chartered or TSMC, mostly for low ASP volume runners. Capital avoidance at 45nm makes this extremely attractive next year.
6. Focus on niche. This requires a massive u-turn in its philosophy of “breaking the monopoly”. AMD definitely has the technology and roadmap to exit commoditized segments while delivering only on key markets. This will require a massive reduction in production capacity and headcount but if executed perfectly will protect AMD from Intel’s pricing pressure.
7. Any combination with varying degrees of items 1-6 above.

AMD can still find a way out of bankruptcy. It’s just a matter of leadership adopting a different mantra and understanding that they don’t need to continue to knock heads with Intel in order to survive. In fact it is when they started deviating from Intel’s design approach and went ahead with their own ideas that they created their best product. Maybe it’s time for AMD to do the same with their business strategy.

Walked The Plank Or Rat Jumping Ship?

Henri Richards departs from AMD:
"...AMD said Richard is resigning on "his own accord and on completely amicable terms."..."

Of course those are typical nice words use whenever a top level executive leaves a company. Whether he truly decided to leave or was pressured to do so, there's a slim chance that we'll ever find out what really happened. (Unless of course an AMD executive later on decides to write a book entitled "Barcelonagate"). But one thing's for sure and for whatever reason Henri left, it doesn't bode very well for AMD.

If Henri was pressured to leave, then the problem only points to AMD's abysmal marketing record which can only get worst with severely handicapped next-gen products. Or if Henri did decide to leave, it only suggests a bitter and irreconcilable disagreement. A product launch is the busiest time for marketing and leaving before such an event means a withdrawal of support or unwillingness to be responsible for its outcome. Changing heads before a war suggest there's internal confusion and conflict. Or maybe it's a simple case of integrity on the part of Henri against AMD's increasingly shady claims of leadership.

Meanwhile on the Intel front, the Centrino advertising blitz has begun (Intel Ads). Intel plans to halt AMD's gains in the mobile segment with an estimated $50M advertising budget. This is in contrast to AMD's overall budget of $20 for making this YouTube video. (And no, there isn't a missing 'M' in the $20 figure).

AMD CEO Confirms Barcelona is DOA

This should remove any doubt about what to expect when Barcelona launches. When asked whether Barcelona will change the competitive landscape, Hector replied: "I expect us to regain position in the server market because Barcelona is a very strong product. It won't have the huge impact Opteron had. If you remember at the time Intel had no new product (to compete against it). So it will be more challenging.

If you want to know what he just said, it means "NO" in corporate double speak. If you try and turn his answer around, you'll find the true message: Intel currently has a product that we cannot beat and we expect Barcelona to regain the unspecified position in the server market - that same awful position we are at the moment.

When asked what was (is) the problem with Barcelona, Hector replies by saying that "the problem with Barcelona is that it is late". Trying to control themselves from uttering the word "DUH!", Mercury News continued and asked what specifically caused the delay. Hector responds by saying that they keep running into "gotchas". That's "technical glitches" according to Mercury News just in case you got lost in the technical jargon. Personally, companies that keeps bumping into 'gotchas' while calling them 'gotchas' doesn't last very long in my portfolio.

Of course Hector bragged about how they were the first to try the complicated native quad core approach. Not even with Intel's vast resources did they consider doing such a monumental task, according to Hector. I'm surprised he never thought that it was probably the same reason why jet packs or that solar powered flashlight never really took off. Maybe because it's a stupid idea. After clearly demonstrating such a failed strategy, I'm not sure it's pretty clever to criticize your competition who'd already shipped 1.2 million quad-cores and completely destroyed your business.

Surprisingly, Hector also claimed how Intel continued its illegal practices in Japan even after the JFTC settlement. He went on and said "When a customer tells you they have this plan with you and says, "I like it, I love it, we're going to do it," and 90 days later they change their minds...". I find AMD's claim to be very odd not only because they are assuming that people don't change their minds for a better deal but also because I do the same thing to annoying sales people just to get them off my back while trying to sell me something useless. Is AMD arrogant enough to think that their competition doesn't have anything better to offer and can actually change peoples minds?

You can read more here: Mercury News

The AMD Yard Sale

From the INQ.

By now, everyone is aware how deep AMD’s financial troubles are. I don't think anybody with a sane mind is willing to contest this important fact. However, the debate continues on the idea of an AMD comeback. History is peppered with examples of how AMD survived through obscurity and difficulty and managed to come out of the red every once in a while. Some repeatedly use the argument that AMD have been in this situation before and are used to operating in such environment. Well, not really.

Never has AMD in its entire history come to an embarrassing situation where they’re forced to put up a yard sale just to keep the business going. This itself is unique and draws no parallel to what AMD experienced in the past. To add to that, the game of leap frogging is over while AMD is losing half a billion dollars on a supposedly very healthy market. Barcelona is broken and AMD normally makes a profit when demand picks up. Things are very different this time around. Once a company starts selling one-off, non-operating assets it's just a matter of time.


Zoomed photo of the sign:

OEMs Ignoring Barcelona

OEMs have finally validated Barcelona and they don't like it. The rumours have been spreading and now it seems like the cat is out of the bag.

Advanced Micro Devices Inc. (nyse: AMD - news - people ), meanwhile, lost more than 5 percent to hit a 52-week low. Credit Suisse analyst John W. Pitzer, who took over coverage of AMD from another analyst, kept an "Underweight" rating on the stock.

AMD, Pitzer said, is receiving limited initial support for its new processors from large original equipment manufacturers, "due in part to lower than expected performance metrics and the delayed ramp of high-end chips."

If Barcelona's performance appears "lower than expected", it should be pointed out that half of the inflated expectations came from AMD's excessively exuberant Executives while the other half is due to unrealistic goals and poor execution.

The implications of having limited OEM support are massive and will be damaging to AMD in so many levels. The most critical of all is the scaling back of AMD offerings in the server space due to the impending decline of AMD-based server demand. OEMs aren't quite keen on introducing a new CPU with minute volume and sub par performance and yet is capable of "Osbourning" their existing K8-based SKUs.

Moore's law states that the number of transistors in a semiconductor doubles every 18 months. The economic equivalent means that the price of performance is also halved every 18 months. Barcelona's performance at 2.0Ghz severely lags behind Moore's law which is why it shouldn't really surprised anybody when OEMs are finding no value in it.

Intel Ticks Off Another AMD Advantage

Intel's usual ruthless efficiency in ensuring AMD's speedy demise is once again demonstrated with the release of their newest quad-core Xeon processors. As if being massively ahead in performance isn't enough, pulling in the release of 3.0Ghz X5365 and the power efficient L5335 will ensure that all the barn doors are closed before the Barcelona horse can even bolt. AMD's last remaining selling point was power efficiency and with this release, it is going to be difficult to position Barcelona at any meaningful price point.

The new Xeon's are made with the latest rev.G silicon stepping which allows very significant reduction in idle power - AMD's last remaining "value" proposition. With the conspicuous L5355 identically running at Barcelona's peak speeds of 2.0Ghz yet with a TDP of only 50W (24W at idle!), Intel is essentially spoiling Barcelona's launch party.

"Intel innovation continues to enable us to be the multi-core trailblazer providing a choice of quad-core products for those craving the highest performance, lowest power and all points in between," said Kirk Skaugen, vice president of Intel's Digital Enterprise Group.

The AMD Pyramid Scheme

According to Wikipedia, over 90% of the people who get involved in a pyramid scheme never recover their investment. Fitch, a leading credit rating agency have rated AMD’s latest offer of convertible senior notes as “Poor recovery prospects given default” with a chance of recovering investments below 10%. As an issuer, AMD is rated as a ‘B’, which we can only assume means ‘Bad’ if you look at the rate this company keeps recruiting unsuspecting creditors as the base of this hollow pyramid gets bigger and bigger.

Wikipedia lists the identifying features of a pyramid scheme:

• Products being sold having no intrinsic value or being sold out of line with its fair market value – QuadFX, R600
• Highly excited sales pitch (sometimes including props and/or promos). – PowerPoint slides, Best Premier of 2007
• Little to no information offered about the company unless an investor purchases the products and becomes a participant. AMD mum about company plans
• No product or a product being sold at a price ridiculously in excess of its real market value. As with the company, the product is vaguely described. – AMD ramps PPT slide manufacturing while real products gets pushed out.
• An income stream that chiefly depends on the commissions earned by enrolling new members (creditors, investors) or the purchase by members of products for their own use rather than sales to customers who are not participants in the scheme. – AMD borrows money, again, and again
• A tendency for only the early investors/joiners to make any real income. Hector Ruiz’ Ginormous Payslip in the midst of AMD’s massive losses.
• Assurances that it is perfectly legal to participate. – http://www.breakfree.amd.com/
  

Just like any pyramid scheme, the collapse of AMD's business is inevitable if it doesn't choose to re-adjust its strategy. Of course AMD isn't an illegal money making scam, but the parallels are astounding if not hilarious. It's very obvious AMD is approaching the limit of its ability to raise cash while everyone estimates the company to return to profitability sometime in 2009, which is really too long and without guarantee. After trying to borrow $3.7B within less than 6 months in order to survive, I'm beginning to doubt AMD will be around very long.

As a consolation for those that continue to follow this company, Fitch believes that in a case of bankruptcy, AMD will be re-organised rather than liquidated simply because it believes this company isn't worth much if sold piece by piece. Like I said in my previous article. If Ruiz and his posse doesn't restructure, someone else will do it for them.