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AMD AT A GLANCE

P/E ► -1.23   EV/EBITDA ► -9.28   ROA ► -20.8% AVG ROE ► -596.4% VERY LOW Debt to Equity ► -16.4   Current Ratio ► 1.89 AVG Interest Coverage Ratio ► -5.12 AVG

 

 

 

 

 

 

This article refers to the semiconductor manufacturer. For the Armenian dram, see Armenian Dram (AMD)

Advanced Micro Devices (NYSE: AMD) is a leading semiconductor producer that makes microprocessors for a variety of computing products, including personal desktop and notebook computers, servers, gaming consoles, and other consumer electronics. Along with market leader Intel, AMD dominates the semiconductor space.^[1]

Intel has been in the industry longer than AMD and, with 76.7% market share and 79.7% of the revenue share for micoprocessors, maintains a significant lead over its smaller rival.^[2] AMD announced a loss of $3.09 billion for FY 2008, while Intel's net income was $5.2 billion giving AMD a huge disadvantage when trying to allot money towards R&D ($5.722B by Intel compared to AMD's $1.84B).^[3][4] Intel has strengthened its lead with the release of a new line of processing technology (45nm), known as the Core i7. Chips using this technology are faster and consume less power.^[5] AMD rolled out its own 45nm release during the 4Q of 2008.^[6]

On October 7, 2008 AMD closed a deal for a joint venture with Advanced Technology Investment Company (ATIC), a venture capital firm from Abu Dhabi. The new company assumes all manufacturing debt, operates AMD's two fabs, and will construct another fab in upstate New York. The joint venture gives AMD much needed cash and allows it to focus on chip design so it can most effectively compete with rival Intel.^[7]

Company Overview

Business Metrics

AMD has split from being a chip designer and semiconductor foundry into just a chip designer with the spinning out of the manufacturing business. This business model is still developing and the company has announced a net loss of $330 million, in the latest period. AMD has had a negative income since 2006, and less revenue in 2008 compared to 2005, largely due to excessively high costs and write downs on the ATI acquisition (there was a $684M write down in the 4Q on it). AMD spends a large portion of its money on R&D ($1.85 billion, about 31% of revenue in 2007.) Still, this is far less than Intel's spending in the same area--the industry giant is very aggressive about innovation. The graph below shows the net income and the revenues generated by the firm over the last 3 financial cycles.

AMD Annual Report 2008^[3]

On July 21, 2009 AMD announced that it suffered a loss of $ 330 million for the second quarter of 2009. This makes it the 11th straight quarter in which the company has not managed to post a profit. However this loss was in light of increased revenues of $1.184 billion which were slightly higher than those recorded for the 1st quarter of 2009, $1.177 billion.Poor margins, that have decreased from 43% in Q1 to 37% in Q2 were blamed as the major reason for the losses in the quarter. The outlook for the next quarter predicts slightly higher profits but analysts are skeptical on when the company will be able to post an actual profit for a quarter. The company's fate is in sharp contrast to its major rival, Intel that has reported record revenues for the second quarter.^[8] AMD reported a 22 percent revenue decrease in the 3rd quarter 2009 compared to a year ago, totaling at $1.396 billion. It also reported a net loss of $135 million, a 6 percent decrease from the $127 million net loss a year ago. ^[9]

Business Segments

AMD Annual Report 2008^[10]

Products

• Computation Products
  • Microprocessors: Essentially the brain of a computer, these products are found in all personal computers. AMD produces both single- and dual-core processors, which run both 32- and 64-bit computing.^[11]
  • Servers and Workstations: The single- and dual-core Opteron processors are AMD's server and workstation microprocessing units, similar to their standard microprocessor cousins but made for larger computing projects including business processing (supply chain management, for instance), engineering and web servers. In August 2007, AMD introduced their quad-core AMD Opteron processors.^[12]
• Embedded Products: These are processors that are designed for devices in non-PC/computer markets. These products are made to meet particular consumer needs that may be outside the scope of PC processor units, like significantly smaller size, higher mobility, or tolerance of harsh environments.^[13]
• Graphic & Chipset Products: These enhance a computer's graphics capabilities, and can be either stand-alone graphic cards or chipsets that are integrated into motherboards. These products are used in systems designed for gaming or high-level graphic display.^[14]
• Memory Products: Until its IPO in October 2006, Spansion was a subsidiary of AMD that produced and sold flash memory products. Since its sale, AMD has discontinued its production and sale of flash memory products.^[15]
• Consumer Electronics: This segment includes processors for gaming consoles, digital televisions and handheld devices. These processors are specialized to fit the needs of a given product line. AMD's processors can be found in Microsoft's Xbox 360, the Nintendo Wii and Nintendo GameCube gaming consoles. (Related: Game Consoles Wars: Xbox 360 vs. PS3 vs. Wii.)^[16]
• Computers: AMD has announced their first computer brand named AMD Business Class. The company would develop and design these machines in collaboration with partners like Dell. These desktops would be followed by a range of new laptop products likely to be sold by companies like Acer, Dell, Fujitsu-Siemens, Hewlett-Packard and Lenovo. They will be targeted at the small- and medium-size business market, but would also meet the demands of the biggest corporate clients as well.^[17]

Customers

• Original Equipment Manufacturers (OEMs) and Original Design Manufacturers (ODMs) are companies that produce computers, handheld devices, and telecommunications and network communications products, and who are among ADM's chief customers. The products that these manufacturers produce rely on the processors that AMD makes.^[18]
• Third Party Distributors:AMD also sells its products to companies that distribute to smaller OEMs and ODMs.^[19]

Industry Metrics

Process Technology and Architecture

• Process Technology: this is the technology used in creating microprocessors. AMD's 65nm process technology is considered to be superior to Intel's, but Intel went one step further than AMD when it announced its new 45nm process technology. These numbers (65nm, 45nm) refer to the thickness of the insulation on the transistors inside the microprocessors--with thinner insulation, the density of circuits on a processor can be increased, so processors can be made both smaller and more powerful. Intel's 45nm processor was introduced in early November, while AMD is introducing its own around six months after.

• Architecture: architecture refers to the chip design--how many individual processors can be crammed into one single chip. How the chip functions depends on its architecture, and changes in architectural design usually stem from attempts to create more efficient or more powerful processors. Currently, AMD uses both single-core and multi-core architecture for its processors.

Performance Metrics

Microprocessors are typically rated on a number of characteristics that measure their performance. These measurements are the most important factors for determining the success of a specific line of products, and as such they are the focusing points for creators of these chips. Some lines of chips will focus more on one factor than another in an attempt to predict what the market prefers (i.e. faster chips vs. more energy efficient chips, etc.)

• Number of cores: Modern CPUs are multicores which means it has two or more processing units operating in parallel. The number of cores, clock speed, the number of threads each core can process in paralell, the cache and memory architecture deterimine the speed of the processor.
• Clock Speed: Microprocessor speed is an indicator of how powerful the product is. In this ultra-competitive industry, Intel and AMD compete to produce the faster processor, even if the difference is very minimal. While clock speed is not the only performance factor that determines how good a processor is, it certainly plays a significant role.
• Power Usage: processors that can provide the same computing power while using less energy are more efficient and more valuable. Here too, AMD and Intel race to create the most power-desirable chips.
• Performance Per Watt: This measures the computing power of a microprocessor per single watt of energy consumed. In 2005, this metric proved to be very important for server processors: AMD's performance-per-watt focused processor was more appealing to the server market than Intel's clock-speed-focused processor because of the significant difference in power usage. AMD's was much more energy-efficient, lowering energy bills for products using its chips. As a result, AMD saw an 18.5% jump in its share of the server market between 2005 and 2006.

Trends and Forces

Semiconductor Cyclicality

The semiconductor industry is deeply cyclical. Demand in up cycles is so high that chip manufacturers have trouble keeping up. Similarly, if electronic sales, particularly PC sales, are slow, demand for chips can plummet. The fact that the semiconductor industry is more subject to the whim of consumer demand more than corporate demand, also adds to the overall volatility. Semiconductor sales have shown about an 80% correlation with GDP growth trends, meaning a downturn in GDP growth could very likely be accompanied by a downturn in semiconductor sales.

Declining PC Sales Decrease Product Demand

The demand for products that use AMD's processors is a significant factor in the success of AMD. Demand for computers has been decreasing growth since the mid 1990s, and as a result, microprocessing companies have seen decreasing growth in profits. IDC expects PC sales to be down 5.3 pct in 2009 as consumers search for cheaper units in a bad economy.^[20] In addition the slumping of the world economy, AMD's substantial amount of indebtedness is concerning. For the FY08, the company recorded a debt of $5.1 billion. This amount is large and with no means to repay this debt (loss of $3.1 billion for FY08), the company has to look at ways of cutting debt while increasing profitability. They have announced restructuring measures and headcount reduction methods as ways of achieving cost cutting.^[21][22] As of FY09Q1, the company again faced a net loss of $414 million compared to $351 million in FY08Q1.^[23]

New Platform Technology Business

With the acquisition of ATI Technologies in October 2006, AMD was able to begin supplying 3D graphics, video and multimedia products for all types of computers, as well as products for consumer electronics. Before this acquisition AMD was unable to compete with Intel in platform technologies. AMD has developed a notebook platform, called Puma. This platform is designed to be compatible with consumer, business, and high end notebooks, making it a very attractive platform for OEM's. The high end graphics provided by ATI gives AMD's platform a significant advantage over Intel's competing platforms.^[24] However, this advantage comes partly from the fact that Intel has had problems with the graphics aspect of its platform, known as Montevina. If Intel can get this chip working then the competition for AMD would increase.

Competition

AMD competes directly with Intel (INTC). Intel has been in the microprocessor industry longer than AMD and has a significant lead in market share, but AMD has been able to gain some of this market share.

With the acquisition of ATI Technologies, AMD hoped to increase its ability to compete with Intel on all levels. However, with the loss of Spansion, AMD's flash memory subsidiary, there are even more areas in which Intel has the outright advantage.

Intel has an enormous amount of power in the microprocessing industry and as a result is able to leverage its market share to gain more customers. This has been a difficult obstacle for AMD to overcome in the past. However, AMD does boast a reputation for better service, making it popular among certain groups of consumers. Lower price points also make certain AMD products preferable to Intel's equivalents. But these recent price wars between the two competing firms have proven to be costly for AMD. Because Intel is so much larger than AMD, it is able to cut costs more effectively and as a result the losses in profit margins (from price cuts) does not affect Intel as severely.

There is another market where AMD has yet to develop a processor. Greater demand for mobility drove the increase in notebook popularity, and now that trend has sparked the rise of netbooks (aka Mobile Internet Devices, or MID's). Intel has released its Atom processors for this market and NVIDIA has released a competing processor called the Tegra. AMD has yet to develop a processor for this up and coming market, and if netbook demand really starts to take off then AMD could be left trying to make up ground once again.

In the graphics chips world, the major competitors are Intel and Nvidia. AMD's Radeon line of graphics processors have turned out to be better than expected and are delivering stiff competition to Nvidia in the high end market. AMD executed a differentiating strategy for its high end graphics cards by developing mid range chips but then bundling those chips into its high end graphics cards.^[25] Nvidia and Intel, on the other hand, generally develop a high end chip and then move that chip down the value chain over time. AMD's strategy poses possible execution problems over time because it requires advanced inter processor communications, but the design is able to dramatically decrease power consumption.^[26] AMD released a dual processor graphics card, named the HD 4870 X2, in August 2008. The is aimed at gaming and is capable of 2.4 trillion operations per second. ^[27] This card marks an important step in gaining market share from leading graphics producer Nvidia. In 2Q 2008, Nvidia's market share for laptop graphics dropped 3% to 24% while AMD increased its market share 1% to 18%.^[28]

References

1. ↑ AMD 2008 10-K pg. 2  
2. ↑ AMD narrows market share gap with Intel, revenue gap grows (07-02-2008). Retrieved on 2009-06-03.
3. ↑ ^{3.0 3.1 3.2} AMD 2008 10-K pg. 45  
4. ↑ ^{4.0 4.1} INTC 2008 10-K pg. 26  
5. ↑ Giz Explains: Why Intel's Core i7 Processor Is a Beautiful Monster (11-26-2008). Retrieved on 2009-06-03.
6. ↑ AMD completes 45-nm processor, but quad-core Opterons still delayed (03-04-2008). Retrieved on 2009-06-03.
7. ↑ AMD and Advanced Technology Investment Company of Abu Dhabi to create new leading-edge semiconductor manufacturing company (10-07-2008). Retrieved on 06-03-2009.
8. ↑ Earnings round-up: Apple Good, AMD Bad. Hexus.channel (2009-07-22). Retrieved on 07-24-2009.
9. ↑ AMD Reports Third Quarter Results (October 15, 2009).
10. ↑ ^{10.0 10.1 10.2 10.3 10.4} AMD 2008 10-K pg. 60  
11. ↑ AMD Annual Report 2008 Part 1
12. ↑ AMD Annual Report 2008 Part 1
13. ↑ AMD Annual Report 2008 Part 1
14. ↑ AMD Annual Report 2008 Part 1
15. ↑ AMD Annual Report 2008 Part 1
16. ↑ AMD Annual Report 2008 Part 1
17. ↑ AMD Business Class desktop personal computers launched - April 28, 2008
18. ↑ AMD Annual Report 2008 Part 1
19. ↑ AMD Annual Report 2008 Part 1
20. ↑ PC sales seen down 5.3 pct in 2009. Forbes (2008-12-03). Retrieved on 07-10-2009.
21. ↑ AMD 2008 10-K pg. 22  
22. ↑ AMD 2008 10-K pg. 23  
23. ↑ AMD 2009 10Q1 pg. 13  
24. ↑ AMD shakes PC Notebook Status Quo
25. ↑ Nvidia: Intensifying Competition and Execution Challenges
26. ↑ Nvidia: Intensifying Competition and Execution Challenges
27. ↑ Informationweek.com, AMD Unveils Latest Dual-Chip Graphics Card
28. ↑ Bloomberg.com, Nvidia has first loss in 6 years, Buyback lifts stock