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AMD Touts Mobile Success, Questions Tablet Opportunity

On the surface, AMD had a decent Q3 with $1.69 billion in revenue, up 4 percent from last year, as well as $97 million in net income. Nothing to write home about, given Intel's recent blockbuster quarter result, but it's better than the $118 million loss AMD reported for Q3 2010. But there is more to the numbers, of course, and I don't think that I was the only one coming out of the conference call scratching my head and trying to make sense of what AMD is telling us.

Much of the confusion may result of the statements made by AMD's new CEO, Rory Read. There was this persistent note that AMD is making progress, but isn't doing good enough just yet and there is more that has to be done. Read describes that situation as not being "out of the woods yet." By now, we also know that Read is constantly traveling and is quite obviously spending significant time with AMD customers. The new CEO has been in this new position for just 60 days, so we will cut him some slack, but it is obvious that in future earnings calls he will have to answer questions with direct answers and not with scripted phrases. You can read the entire transcript of the call over at Seeking Alpha.

The good news in AMD's Q3 result was success in mobile, where AMD saw its revenues climb by 35 percent sequentially and 20 percent year over year. 90 percent of all shipped mobile processors were Fusion APUs. The company said and it believes that it has a 28 percent global share in the $200 to $600 notebook segment, Read said. Server revenue climbed 27 percent sequentially. So, what about desktops? Read and CFO Thomas Seifert simply ignored this part of the business and it was obvious that something was up with that.

Citigroup analyst Glen Yeung picked the omission up and asked "it sounds like what fell short must have been desktop. And I wonder as I think about the execution issue: One, do you sense that there is a longer term impact from that? Did you just turn some customers off forever because you screwed up on the execution side?"

Read somewhat evaded the question, but eventually noted: "In the desktop space, there's a little less pressure, but we had to choose where we did our manufacturing capacity in order to support our notebook growth and to make sure that we try to deliver on the commitment that we made to our customers. And they felt some of that pain in the third quarter because we weren't able to execute as cleanly as we would like. In the notebook space, we're making progress. In the desktop space, I think we know how to manufacture in that space. We just need to be able to move more of the wafers in that direction."

After a lengthy answer that did not answer the analyst's question and left us speculating, Read apologized and said that he "got fired up on that one." In aggregate, it appears that the ongoing manufacturing and yield issues at Globalfoundries have especially hit AMD's desktop products. AMD is waiting to get access to higher margin 32 nm products, but yields aren't where AMD is expecting them to be. Additionally, the transition to 32 nm forced the company to compromise on 45 nm production capacity as well.

CFO Seifert noted that the AMD clearly has some headwinds in the current quarter as well: "45 nm supply is still going to be not where we want it to be because we continue to trade off capacity towards 32 nm. We also will see some ramp-up costs from a 28-nanometer technology perspective."

While carefully describing the 32 production as a challenge and a scenario in which AMD makes improvements step-by-step, Read at one point said that he was "disappointed" by the production yields in this space. "And that occurred over a sustained period of time," he said, which was a clear shot in the direction of its manufacturing subsidiary Globalfoundries. AMD can be much more aggressive toward Globalfoundries, by the way, as its share in the company has dropped to 9.6 percent. Furthermore, AMD just lost its final member on the Globalfoundries board. As a customer, your language can be different from the language you use as an owner.

The one statement from Read that left me wondering was a response to a question on how AMD will participate in the tablet market. After a long introduction on what customers have told him, Read replied that "I'm not sure the tablet just in the form factor itself is the real game in hand. I think the impact in terms of proprietary control points and chips in the marketplace that's going to occur both in client server over the coming months and years are going to be exciting opportunities."

So, is that a note that AMD will not be building tablet chips after all - a reason believed to be a part of Dirk Meyer's downfall. That was, by the way, the only note about tablets in the entire conference call, indicating that there is no immediate concern at AMD for this segment (even if there was a hint that AMD might be talking about this segment at its 2011 Analyst Day event, which, ironically, has been moved to February 2012). There was not much information that would enable us to see a change in direction at AMD under Read. As far as we can tell, it's still the same as the new CEO indicated that AMD's core opportunities will be in the core trends of "thin and light, convergence, [and] consumerization."