AMD's perfect storm

Advanced Micro Devices appears to have sailed straight into a perfect storm. The chipmaker today updated its outlook for the first quarter. It’s an outlook that’s not good. AMD expects to post revenue of about $1.2 billion, according to the Wall Street Journal. That's a year-to-year decline of more than $100 million from AMD’s first quarter 2006 sales. When combining AMD and ATI Technologies’ revenue, the chipmaker is facing a nearly $800 million year-to-year revenue decline, when considering AMD and ATI's combined first quarter 2006 revenue. For what it's worth, AMD is facing a tough compare. The first quarter of 2006 represents the high water mark for AMD and ATI’s combined revenue for the last eight quarters, coming in at just over $2 billion.

So what is happening to AMD, which was flying high until it ran into trouble in the fourth quarter of 2006? I believe it comes down to these factors: Price competition with Intel is the most obvious factor. Intel is on the upswing with an improved product line that has increased its ability to compete and win business from AMD. This has clearly been putting pressure on AMD. The chipmaker has responded with price cuts, which have reduced its revenue and profit potential for the first quarter. I also believe that AMD’s purchase of ATI has created some uncertainty around its graphics processors and chipsets product line. Nvidia has swooped in to take advantage and has gained in graphics processor and chipsets, particularly on the notebook side. I also think that AMD is being affected by an overall slowdown in brand-name desktop PC sales. Even Hewlett-Packard, which had a huge fourth quarter, was only able to increase its desktop sales by three percent year-to-year. I think this was worsened by AMD’s admittedly slow shift in redirecting its processor shipments away from its OEM business to reseller partners. I still believe that it expected Dell to take more processors than it has.

For AMD, 2007 isn’t going to be a particularly fun year, especially the first half. However, I think that many of the factors that have caused AMD to lower its first quarter expectation are short-lived. The company is actively working to deliver processors to its channel partners, for example. However, I think it’s pretty obvious that competition between Intel and AMD will remain intense throughout 2007. AMD will continue to be under considerable pricing pressure until it delivers its quad-core “Barcelona” Opteron server processor, slated for a mid-year launch, and subsequent multi-core desktop and notebook chips.

And despite the fact that they have helped AMD’s stock price to move upward today, the company’s belt-tightening maneuvers don’t thrill me. I would caution AMD against allowing any part of its planned $500 million reduction in capital expenditures, one of several cost-cutting measures it will undertake in 2007, to affect its ability to begin an on-time transition to 45-nanometer production. AMD said the reductions would not affect its 2007 capacity plans. So it appears to be pragmatic about cost cuts. That’s a good thing as I think that any delay in its transition to 45nm, which is scheduled to begin at mid-2008, will hurt AMD’s long-term capability to compete with Intel.