AMD's Third Quarter Results Excellent, Company Is Bullish On Q4

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News Posted: Mon, Oct 19 2009 9:16 PM
Last week, we predicted that Intel's strong product mix and fabulous Q3 results could have negatively impacted AMD's own numbers at a time when the company is struggling to return to profitability. While AMD has yet to return to the black, the company's third quarter results are very good. Company executives weren't willing to flatly predict a strong Q4—the market is still uncertain—but the company may well hit its original Q4 target. The conference call packed a lot of information into 60 minutes, so let's start unpacking it—numbers first.

AMD's total revenue in Q3 was $1.396 billion, up 18 percent over the second quarter, but down 22 percent year-on-year. That last isn't surprising—Intel's own revenue was down eight percent year-on-year—and AMD hopes the gap will narrow further in Q4 as the market returns to what CEO Dirk Meyer referred to as normal seasonal trends. The company reported a net loss of $128 million, after factoring in a favorable impact of $54 million, which Sunnyvale attributed to its retirement of debt. The company's operating loss in Q3 2009 was $77 million. Both of these numbers are huge improvements over Q2, when AMD's net loss was $330 million, with an operating loss of $249 million.

"Strong demand for our product and platform offerings combined with disciplined execution resulted in AMD Product Company achieving profitability in the third quarter," said Dirk Meyer, AMD president and CEO. "Growth in microprocessor and graphics unit shipments drove an 18 percent sequential revenue increase, while improved factory utilization rates, higher microprocessor average selling price [ASPs] and an increase in 45nm product shipments resulted in a gross margin improvement from the prior quarter." Officially, AMD's gross margin improved to 42 percent compared to 37 percent in Q2, but the latter number is misleading. AMD's gross margin in Q2 was boosted eight percent by a one-time inventory sale—remove that boost, and AMD's gross margin may have jumped as much as 13 percent.

Now let's switch gears and talk products.

Processors:

AMD grew all three of its market segments in the third quarter—revenue was up 17 percent overall. Mobile revenue growth substantially outpaced the average at 28 percent, a somewhat surprising number given Intel's historical dominance of this arena. AMD didn't offer detailed color on exactly which mobile chipsets or price points accounted for the upswing, but did indicate that its thin-and-light/netbook competitive product series accounted for less than fifty percent (but more than 10 percent) of the total gain in mobile. In servers, the company's hexa-core Istanbul accounted for about a third of all shipments, and the company's mixture of 45nm and 65nm products is now running at approximately 50/50.

When asked why it took the company as long as it did to ramp 45nm, Meyer indicated that the switchover was delayed significantly by the reality of market conditions in 2009. The precipitous sales drop early in the year left AMD with a substantial number of 65nm processors, and delayed demand for the company's newer 45nm offerings. With GlobalFoundries fabs currently running under capacity, AMD expects no problem ramping 45nm production as consumer demand improves. By the end of the fourth quarter, the majority of the company's processors will be on 45nm, a fact that suggests the company's average cost-per-processor (already markedly lower in Q3 than Q2) will continue to fall through at least Q4. 32nm parts, unfortunately, are still at least a year away. AMD will sample both "Fusion" processors and 32nm standard chips in the first half of 2010, but doesn't expect to ramp production until the tail end of 2010. The company had no specific response to when it might be able to close the manufacturing gap between itself and Intel, but the answer, one assumes, is directly proportional to AMD/GlobalFoundries net income. The company's 32nm parts will continue to use SOI technology, and AMD has no immediate plans to transition its processors to bulk silicon production.

AMD expects CPU revenue to grow nominally in Q4, partly thanks to stronger mobile positioning and the launch of its Congo platform for the thin-and-light segment. Server revenue could also be up, thanks partly to Istanbul's drop-in compatibility with existing two socket and four socket server architectures. As for the desktop/consumer market, Sunnyvale believes it's currently underrepresented in higher-end systems, and intends to address that gap with 45nm Phenom II / Athlon II processors.

Graphics Cards:

The Radeon HD 5870, AMD's current top-end DX11 solution

AMD's graphics division reported net revenue of $306 million, up 22 percent from Q2, and an operating income of eight million dollars. GPU ASP's actually dropped slightly, but the company is downright bullish on ATI's prospects through Q4 and into next year. The new Radeon 5000 series did not have a significant impact on the company's revenue; the increase was driven by the 4000 series. AMD is quite pleased with its current competitive position vis-à-vis NVIDIA, and believes the 5000 series will drive further revenue gains in this segment, although GPU revenue is expected to increase more slowly than CPU revenue.

One interesting fact that emerged from the conference call relates to GPU gross margins. The ideal/target gross margin for these products is between 35-45 percent. AMD's not currently playing in that range, and while the company didn't provide its exact gross margin, it did note that the 5000 series is expected to eventually raise it into the lower end of that range. This isn't expected to happen in Q4, but will be a gradual transition over the course of 2010.

In addition to consumer discrete cards, AMD plans to expand its presence in the lucrative workstation graphics segment. Again, don't look for quick leaps here—it takes time to forge the proper linkages to effectively grow in that space—but its a potential source of revenue Sunnyvale has more than an eye on.

The Bottom Line:

AMD's Q3 results are quite encouraging. The company continues to move towards profitability, and its product mix across both CPUs and GPUs is strong enough that it may very well hit its fourth-quarter profitability goal (barring a major economic upset). With that said, there's nothing new on the horizon that fundamently changes the company's competitive position vis-à-vis Intel. The Core i7 product line continues to whomp on Phenom II whether we're talking about Lynnfield or Bloomfield, and AMD can't effectively counter Nehalem's HyperThreading with a quad-core processor.

AMD will pull hexa-core Istanbul (codenamed Thuban) to the desktop , which will definitely improve the company's position, but there's no magic way for AMD to jump a process generation and magically be head-to-head with Intel's current lineup. To the company's credit, it's not espousing any such strategy, and is choosing to carefully trim costs and improve margins to put itself back in the black. That's not as exciting a story as head-to-head competition in all product segments, but it's a fundamental part of remaining in business, and an absolute necessity for AMD.

It may take another product generation (and a move to 32nm) before AMD can move decisively to enter additional markets, but profitable quarters between now and then are critical. With GlobalFoundries picking up steam, the upcoming 45nm dual-core Congo platform launching, and the Radeon 5000 series in the field, there's still a lot of action to be had.

One other thing. It's become a bit fashionable to bemoan AMD's lack of a true Atom-competitor. We maintain that this is, in fact, untrue. It'd be nice if AMD just happened to have its own Atom-like architecture sitting on the shelf, but attempting to go down that road right now would be a real mistake. Additional details here.
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Thanks for the detailed report!

I'm surprised that ATI 5000 series didn't have as much as impact on revenue as I would have thought, but maybe because the card is too competitively priced at this point.

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Marco C replied on Mon, Oct 19 2009 9:51 PM

It's too new to be factored into the numbers, gibbersome.

Marco Chiappetta
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Joel H replied on Mon, Oct 19 2009 10:15 PM

Gibbersome,

AMD reported that the 5000 series made no meaningful contribution to revenue this quarter. Next quarter that'll be a different story, and it'll shift again once various mobile parts begin making their way out of the gate.

It can take a long time for GPUs to hit full revenue potential, particularly given product cycle lead times. That's part of why we still see a fair number of notebooks equipped with Radeon HD 3000 GPUs, even though the 4000 series has been available for quite some time.

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gibbersome replied on Mon, Oct 19 2009 10:40 PM

Ahh, yes. Of course, thanks for the clarification Marco & Joel.

Joel, I'm actually going through your previous article now (why an Atom replica is not the answer to AMD's problems). Thanks for the great articles!

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realneil replied on Tue, Oct 20 2009 8:58 AM

I hope to see them do well. In the past I've cleaved to the AMD line of products because of their affordability. The performance delivered was always acceptable to me too.

I understand that Intel and NVIDIA usually end up with the best performers, the fastest whatever it is. (my new rig proves this beyond any doubt)

But I also think that the competition that AMD and ATI provide have kept prices from skyrocketing beyond all reasonable levels. Their consistently lower prices put the skids on the market and I appreciate that.

If I build a system for someone, I try to work AMD and ATI parts into it because I feel that their survival does us all good.

Dogs are great judges of character, and if your dog doesn't like somebody being around, you shouldn't trust them.

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Joel H replied on Tue, Oct 20 2009 1:52 PM

Realneil,

I'd say ATI has the next few months effectively locked up as far as being top dog is concerned. The only card NVIDIA has left that retains top dog positioning is the GTX 295--and ATI has yet to roll out their own dual-GPU HD 5000 card.

It goes without saying that everything could change when NVIDIA ships Fermi, but that's not likely to happen until the end of Q1 2010.

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gibbersome replied on Wed, Oct 21 2009 12:37 AM

Joel, do you reckon that Nvidia is that far away with releasing the 300 series?

By that time, AMD will have a 5870x2, a 5890, a 5830, and mobile versions of the 5650, 5850 on the market!

Meanwhile the new 300 series will have just been released with $500+ price tags.

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Joel H replied on Wed, Oct 21 2009 2:05 AM

Gibbersome,

You've overestimated on ATI a bit. I agree that we'll probably see a 5870X2, but any 5890 is still some time away--ATI launched the original 9 months after the 4870, early March would be just 5.5 months from the 5870's launch date. Granted, AMD's own 5890 launch date could shift depending on how Fermi performs, but NVIDIA has its own ASPs and gross margins to protect--a full-fledged 300-series product isn't going to swoop in at an insanely low price point.

(Also keep in mind what I noted above re: gross margins. ATI's are quite a bit lower than NVIDIA's, hence Dirk's remark about hitting the lower end of the 35% margin area with the 5000 series.)

I don't think we'll see Fermi before the March timeframe. Of course, I also don't think I'll be asked out tomorrow by a gorgeous supermodel.

But I *have* been wrong before...

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gibbersome replied on Thu, Oct 22 2009 12:06 PM

Lol, I guess I was exaggerating a bit. With no Fermi in sight, ATI has little need to release a 5890 right now.

I think Nvidia's main problem will be trying to stay competitive. ATI 5800 series not only did matched GTX 200 series performance, but also lowered the prices.

Either way, exciting time for gamers!

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