AMD drastically cuts Q4 earnings forecast

[qcmadness]

Sunnyvale (CA) - AMD cautioned investors that its Q4 2006 earnings will come in "substantially lower than in the third quarter." Fourth quarter revenues are expected to increase about 3% from the $1.33 billion the company reported in Q3 2006.

AMD said that the fourth quarter margin and operating income were impacted by "significantly lower microprocessor average selling prices, which largely offset a significant increase in unit sales." While more details about the quarter are not expected to surface until the firm releases its Q4 result on January 23, it appears that the processor price-war that was initiated by Intel in the first and second quarter of this year is taking its toll on AMD.

In our weekly price/performance analysis of microprocessors, we noticed a considerable decline in retail prices of AMD processors, which was especially apparent in the weeks before Christmas (see, for example, our analysis from December 22). While Intel was able to use its phasing out Pentium D 800 and D 900 series to increase the pressure on AMD, the Core 2 Duo series showed a very stable pricing trend over the course of the past few weeks (see the pricing trend in our December 29 analysis).

AMD expects fourth quarter operating income, excluding ATI-related segments and acquisition-related charges, to be "positive."

What I can extract from the news:
1. Intel's pricings is now hurting AMD's profit margin serverely.
2. AMD's contract with Dell came with a "significant increase in processor sales".
3. AMD can still earn money, excluding the money for ATi acquisition.

 

[qcmadness]

One thing is certain, it is going to be a long time before AMD recovers GPM above 50% like they promised the analysts at their last meeting.

If the GPM comes in significantly low, say 45% for CPU only, they will be in free fall after the announcement --- and will lose some faith with the analyst community as they have essential been fed a line, that's my guess.

15 bucks per share by summer is not unlikely if this scenario plays out and they fail to recover GPM above 50%.

Also, are we seeing a trend --- AMD warned in Q3 as well did they not?

jack

So 65nm transition is very critical for AMD, both for cost-reducing and higher production-capacity.

 

[qcmadness]

I have posted many times my opinion that 65 nm is more critical to AMD than building a 300 mm fab, no quesiton. Without 65 nm they cannot increase output, lower costs, nor can they build a quad core. This is beside any performance gain or loss 65 nm brings --- my personal take is that 65 nm is not really at the point AMD would have liked it to be, but they really have no choice --- they need it now so they are willing to put it out now with slighly less than stellar capability and work on improving it in the near term.

AMD's architectural platform requires a monolithic die, they could not do what Intel does and slap two die into the same package.

jack

I think AMD should increase the capital for the transiton of Fab 38 (30) and initiate it now and improve it later. I think it should get Fab 38 as soon as possible and leave Fab 4x (NY state) later.

 

[qcmadness]

And I think this is exactly what they are going to do.

In the worst scenario, the Fab 30 will be renamed Fab 39 (finished in 2008) which may seal AMD's fate.

 

[xpresso]

Actually Jack I had predicted they would hit $7 in July they really have no answer till they make Fusion work cost effectively. Technically, AMD has no real R&D just development. AMD buys true R&D from IBM, AMD cannot compete with Intel alone. They were very arrogant last year at IDF when they sent "muti core for Dummies to Intel". See this type of behavior is bound to get your ass kicked, and I would not want to be the one kicked by Chipzilla.

 

[gr8mikey]

15 bucks per share by summer is not unlikely if this scenario plays out and they fail to recover GPM above 50%.

jack

As fickle as the street is, I wouldn't be surprised if it went to $15 tomorrow morning. I am very interested in what the good doctor makes out of this news.

 

[bixplus]

15 bucks per share by summer is not unlikely if this scenario plays out and they fail to recover GPM above 50%.

jack

As fickle as the street is, I wouldn't be surprised if it went to $15 tomorrow morning. I am very interested in what the good doctor makes out of this news.

Well, it won't be pretty.... neither with their report, I wasn't sure how the accounting would workon the acquisition, it looks like they will take a $500 million one time charge against the merger, considering they will post profits lower than Q3, you are looking at 300 to 400 million in the red.

http://www.eetimes.com/news/semi/showArticle.jhtml;jsessionid=RSKXUB5W1GX2OQSNDLPCKHSCJUNN2JVN?articleID=196900362

The street will of course put this into perspective as a strategic investment so while it looks horrid to many --- investors will focus on the 'exluding acquisition related charges' part of the report.

Jack

Yeah, I agree that there will be a number of investors that will look past the merger fodder and directly at true performance. That being said, there are also a large number of investors/brokers out there who are basically "order takers" and don't spend the proper amount of time delving into the nitty-gritty data. So, I also think it's higly likely that AMD's stock will plummet at least $2+ dollars tomorrow. But, that's just a guess...I've been wrong before, many times actually.

 

[xpresso]

Do you fault Paul for making a good point? Intel spends a lot of money to be the leader in process technology, I did not see it as arrogant. He is under a lot of pressure for inheriting a mess IMO. 65 nm is no cakewalk, which I am sure AMD is finding out right now.

 

[piesquared]

I think this article has a very accurate view of AMD's situation currently. Their focus right now is different and AMD is putting alot of resources into the design of the next two gen's, and somewhat less on the current 65nm generation.

http://www.penstarsys.com/editor/company/amd/65nm/amd_65_2.htm

 

[gOJDO]

AMD's architectural platform requires a monolithic die, they could not do what Intel does and slap two die into the same package. 65 nm is critical for them to keep up in the core race.

Actually they can. Two LV dies connected via HTT bus on one package. It will require at least 2 RAM modules to work.

 

[Wombat2]

"AMD said that the fourth quarter margin and operating income were impacted by "significantly lower microprocessor average selling prices, which largely offset a significant increase in unit sales.""

haha :lol:

AMD = pwned

 

[gr8mikey]

"AMD said that the fourth quarter margin and operating income were impacted by "significantly lower microprocessor average selling prices, which largely offset a significant increase in unit sales.""

haha :lol:

AMD = pwned

I sure would like to know what Dell is paying them per CPU on average. I bet it ain't much. While Dell is good for volume, it is killing AMD's ASPs.

 

[Wombat2]

"AMD said that the fourth quarter margin and operating income were impacted by "significantly lower microprocessor average selling prices, which largely offset a significant increase in unit sales.""

haha :lol:

AMD = pwned

I sure would like to know what Dell is paying them per CPU on average. I bet it ain't much. While Dell is good for volume, it is killing AMD's ASPs.

Dell always goes for the cheapest crap which is why they only sold P4s before C2D.

 

[Major_Spittle]

One thing is certain, it is going to be a long time before AMD recovers GPM above 50% like they promised the analysts at their last meeting.

If the GPM comes in significantly low, say 45% for CPU only, they will be in free fall after the announcement --- and will lose some faith with the analyst community as they have essential been fed a line, that's my guess.

15 bucks per share by summer is not unlikely if this scenario plays out and they fail to recover GPM above 50%.

Also, are we seeing a trend --- AMD warned in Q3 as well did they not?

jack

Intel's GPM is <50% right now. The price war is hurting everyone, even the innocent children. OH, the Humanity. I think I'll go buy myself an undervalued CPU now to make myself feel better. :lol:

 

[qcmadness]

Yeah, I agree that there will be a number of investors that will look past the merger fodder and directly at true performance. That being said, there are also a large number of investors/brokers out there who are basically "order takers" and don't spend the proper amount of time delving into the nitty-gritty data. So, I also think it's higly likely that AMD's stock will plummet at least $2+ dollars tomorrow. But, that's just a guess...I've been wrong before, many times actually.

Now nearly 10% ($2)

 

[Julian33]

Out of curiousity, can anyone remember the last time that AMD's stock was this low, or dropped by such a significant margin?

 

[qcmadness]

Out of curiousity, can anyone remember the last time that AMD's stock was this low, or dropped by such a significant margin?

The P4C attack on Athlon XP with a possible monopoly act.

 

[bfellow]

You're right their stock has plummetted by at least 11%. Well it says 52 week low is at 16.90 which I don't think it would reach. Unfortuately, its causing entire DOW to plummet

 

[bixplus]

Yeah, I agree that there will be a number of investors that will look past the merger fodder and directly at true performance. That being said, there are also a large number of investors/brokers out there who are basically "order takers" and don't spend the proper amount of time delving into the nitty-gritty data. So, I also think it's higly likely that AMD's stock will plummet at least $2+ dollars tomorrow. But, that's just a guess...I've been wrong before, many times actually.

Now nearly 10% ($2)

lol...yes, looks like Jack's prediction may come true as well:

If the GPM comes in significantly low, say 45% for CPU only, they will be in free fall after the announcement --- and will lose some faith with the analyst community as they have essential been fed a line, that's my guess.

http://news.moneycentral.msn.com/ticker/article.aspx?Symbol=US:AMD&Feed=AP&Date=20070112&ID=6337921

Yeung downgraded AMD to "Hold" from "Buy," saying he now forecasts gross profit margin of 45.5 percent, compared with his previous estimate of 49.7 percent.

Heck even Charlie agrees with Jack's sentiment: http://www.theinquirer.net/default.aspx?article=36914

Jack, sorry to put you and Charlie in the same post...no offense buddy.

 

[gr8mikey]

It is now also being reported that AMD inventory is piling up in the channel. They are gonna cut prices again after intel later this month. So AMD is no longer capacity constrained and cannot sell everything even at these firesale prices. NOT GOOD for AMD.

More here at Digitimes

Talk about intel putting the hammer down. It almost looks like they are trying to force AMD out with every price cut.

 

[atp777]

Yeah, and with pockets as deep as intel, they can afford to lose some just to bring market share back to their direction. I want to see AMD bounce back. An Intel only market would be horrible.

 

[wolverinero79]

Ya, I didn't so much like the poke in the eye from Paul. I can understand him getting fed up with some of AMD's really crappy tactics (the sign in Times Square, the billboard in Santa Clara, the dummies book, the gross miscalculations of MSS AMD expects to capture), but Intel's usually kept itself away from "below the belt" marketing. His statement was in fact true, but that doesn't make it any less arrogant. Hard as it may be, when you're on top, you have to take the criticism in stride. The more the little guy whines, the more pressure you're probably putting on him and the more desperate he's becoming.

The lowest profit expectation I've seen so far has been 43%, which would be pretty scary. We'll just have to sit and wait.

Also, I know the laws are pretty loose around warnings, but it seems really shady to do a warning 2 weeks after quarter close at the end of CES. I'll have to go looking for AMD manager stock sales records, but it wouldn't surprise me to see a whole bunch of share sales from AMD execs right after this announcement. Maybe not, but I still am wondering what they're doing. Even if it's far worse than what people expect, wouldn't it be better to just come out with the earnings and let things fall then? If they're not that bad, then this seems like stock manipulation - cause a huge dive, then watch it go back up on earnings day. I'm really confused by this.

 

[bixplus]

It is now also being reported that AMD inventory is piling up in the channel. They are gonna cut prices again after intel later this month. So AMD is no longer capacity constrained and cannot sell everything even at these firesale prices. NOT GOOD for AMD.

More here at Digitimes

Talk about intel putting the hammer down. It almost looks like they are trying to force AMD out with every price cut.

Great point, gr8Mikey! That really does fly in the face of all those reports saying that AMD was selling everything they were making.

On the flip side, now that they have inventory building up, maybe they can begin focusing less on churning product and more on getting the fab(s) finished. Then again, I guess that all depends on their product mix that is building up in the channel. If it's product that garners little consumer interest, then they're in a real pickle because the pressure is still on to produce more desireable chips. As you've mentioned, cutting prices even deeper may be their only option...but that'll kill ASP even more. AMD is really between a rock a hard place right now!

 

[Major_Spittle]

It is now also being reported that AMD inventory is piling up in the channel. They are gonna cut prices again after intel later this month. So AMD is no longer capacity constrained and cannot sell everything even at these firesale prices. NOT GOOD for AMD.

More here at Digitimes

Talk about intel putting the hammer down. It almost looks like they are trying to force AMD out with every price cut.

This is not good for Intel either, I just sold 1/2 the stock I have in Intel because of this as protection. I was hoping to sell Intel at around $27 by late spring, but the reports of built up inventory scared me. I figured the p4 inventory would be gone by early Q107, vista would release, Intel would gain market share, and cpu prices would be stable/rising.

Intel should sell a lot of CPU's through mid 2007, but the price hit could make it tough to put their GDP>50%.

This could show that Intel controls pricing in the CPU market and can Make/Break themselves, I guess it depends on how threatened they feel by AMD expanding production and the K8L release. If they feel threatened they will keep prices down I imagine.

The real winners will be NVIDIA/ASUS/HP/Dell/Micron because they will keep their profit margins as sales rise.

Warning: this is purely speculation, please do not take this as investment advise because I know very little about the market and I am purely speculating.

 

[rodney_ws]

I have posted many times my opinion that 65 nm is more critical to AMD than building a 300 mm fab, no quesiton. Without 65 nm they cannot increase output, lower costs, nor can they build a quad core. This is beside any performance gain or loss 65 nm brings --- my personal take is that 65 nm is not really at the point AMD would have liked it to be, but they really have no choice --- they need it now so they are willing to put it out now with slighly less than stellar capability and work on improving it in the near term.

AMD's architectural platform requires a monolithic die, they could not do what Intel does and slap two die into the same package.

jack

I think AMD should increase the capital for the transiton of Fab 38 (30) and initiate it now and improve it later. I think it should get Fab 38 as soon as possible and leave Fab 4x (NY state) later.

Man, we got a bunch of arm chair generals here!