AMD needs a trip to Barcelona

AMD's fourth quarter earnings demonstrate its need for a quad-core processor

AMD reported a mixed set of results for its fourth quarter 2006 on Tuesday. Measured by double-digit its PC processor unit shipment increases during the fourth quarter and for all of 2006 it’s doing well and demand for its chips is strong. AMD's overall unit shipments were up 35 percent for 2006, the company said, and it believes its market share increased to between 20 percent and 25 percent for calendar 2006. That's the good news.

The bad news involves where things appear to be headed for AMD. The chipmaker reported a hefty $574 million loss for the fourth quarter, due in part to its acquistion of ATI, which closed in October. But even after subtracting a $550 million charge related to the ATI acquisition, it's clear AMD faces a problem that may only be solvable by the introduction of new processors. That problem is the affect of price competiton. Sparring with Intel ate up most of the additional profit AMD would have seen from its higher fourth quarter unit shipments. AMD’s non-ATI operating income of $63 million—a figure that reflects what AMD would have looked like without ATI in order to compare its fourth quarter earnings to its third quarter earnings—was less than half the $142 million it repored in the third quarter of 2006. Put simply, the figure shows that despite shipping more processors in the fourth quarter, AMD made far less money per chip than the third quarter. Ouch.

AMD appeared to be protecting its market share gains by competing on price with Intel. Intel, too, suffered from this price competition. But, given the performance of its Core Microarchitecture products versus their predecessors and AMD's current line of processors, Intel appears to have gained more leverage with customers. Intel can also use its new quad-core Xeon chips to tout a lower price per-core than AMD’s dual-core Opteron chips in the two-socket server space. AMD looks to have responded to this by making pricing concessions to keep its customers happy while it continues to work on its quad-core “Barcelona” Opteron chip. But those concessions put a big dent in its profits.

The second issue is that AMD’s ATI business wasn’t profitable, either. ATI's operatins brought in revenue of $398 million, but also delivered an operating loss of $13 million for the nine weeks after they were merged with AMD in the fourth quarter. Clearly, AMD needs to turn that loss around as quickly as possible. ATI’s discrete graphics processor business appears to be primary source of the trouble. AMD has plans to reduce its inventories, streamline its manufacturing and roll out new products all while working to better penetrate certain areas, such as corporate workstations. The sooner it puts them into place, the better.

AMD's pricing problem can be also be solved. Given that AMD indicated it will continue battling Intel on price--and it can use cost reductions from its new 65nm manufacturing process to offset some price drops--it the fast introduction of its quad-core chips will be vital. If Barcelona is as good as AMD says it will be, it allow the chipmaker to increase its server pricing and thus turn around its profits. (AMD will also offer a quad-core desktop processor this year.) But even if AMD rolls out Barcelona in June as a Wednesday report by the Inquirer suggested it will, it’s still going to be a long wait for AMD.

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