AMD Takes Big Hit in Servers in Q4 2006

In the first two years of its business in the server CPU space, AMD was able to capture about 20% market share. But in the wake of tremendous competition from Intel, AMD's executives Tuesday afternoon were forced to admit that revenues from servers fell and unit shipments remained flat in the prior quarter over the end of 2005.

With Intel having answered the challenge, the company whose language at this time last year evoked images of a high-noon duel on a main street in old Texas, sounded a lot more cautious, measured, quiet. Even CEO Hector Ruiz, who said he opted this time to speak to shareholders "from the gut" with a speech ostensibly reaffirming his enthusiasm for his company's coming year, ended up mocking his competitor, promising to focus only on innovations that are "truly relevant," to follow Moore's Law "in an intelligent fashion," and taking credit for forcing Intel "to become more efficient."

At one point late in today's analysts' briefing, AMD President and COO Dirk Meyer invoked dark and menacing language in reference to Intel, reminiscent of Pres. Reagan's language in reference to the menace of communism. "We compete against a monopolist who has a dominant share, and in the long term, the best returns we can generate for our shareholders involve breaking that monopoly."

Not counting the newly acquired ATI part of the business, fourth quarter revenue last year only increased by $36 million – far less than the seasonable amount – to $1.37 billion, gaining only 2% over the year ago quarter. With ATI revenues of $398 million factored in, AMD revenue for Q4 was $1.77 billion. But with acquisition charges of $550 million to contend with – as anticipated – AMD posted a net loss for the quarter of $527 million. For the year, without ATI factored in, AMD posted gross revenue of $5.25 billion, but ended up losing $47 million for the year after acquisition and integration charges.

The biggest problem AMD faced last quarter was a huge decline in margins, down to the 40% level, while Intel is staring at breaking the 50% mark. More on today's AMD news to come in the next update.

Typically, a company giving a quarterly earnings report tends to shed the spotlight on the good points to avert attention from the bad ones. Today’s AMD earnings report was an overt exercise in spotlight shifting. Executives refused to break down the bad news into discrete numbers, though financial analysts on the call eventually acquired the bits and pieces of variables they needed to do the math themselves.

Overall, microprocessor unit shipments grew 26% over the fourth quarter of last year, and 19% over Q3 2006. The breakdown spotlighted mobile processor unit shipments increasing 76% annually, and desktop processor shipments rising “strongly.” That’s where the spotlight trails off, as server unit shipments were declared “flat.”

When CEO Hector Ruiz chose to speak “from the gut,” it was obvious he wanted to change the message to downplay Intel’s recent strengths, by casting them as responses to AMD’s successes in 2005. “We recognize that the industry’s addiction to single-core clock frequency was something that was past due,” Ruiz remarked. “We had to introduce the industry and our customers to a new way of looking at how to innovate by looking at workflow and application-specific performance, and therefore we introduced the first ever dual-core server product into the marketplace on x86 instruction [set]. I’ve decided that was such a major change in the industry that the competition has followed suit, and created also their own extensions to x86 and multicore technology roadmaps.

“But it’s more than just about cores,” Ruiz continued, shifting the spotlight even further. “Really, it’s about mapping technology to specific usages...We see the opportunity to exploit Moore’s Law in a very intelligent fashion, by focusing on what’s relevant to our customers...It is true that Moore’s Law is allowing some people to claim that putting 64 cores or even 128 cores on one piece of silicon can be the future of this industry. I beg to differ. As a matter of fact, I think those products and technologies are going to find their rightful place [alongside] the Pentium 4 at 10 GHz.”

Later, Ruiz and the other executives were asked, with Intel steering its strategy toward more silicon and more cores at the same price as prior generations, doesn’t AMD have to make an obvious change that strategy to come back to profitability, or does it have some other plans? “I don’t know what you mean by ‘gotta change,’” responded Dirk Meyer. “But if you look at what’s happening in the marketplace, it’s similar to what’s always happened in our business: new features, new capabilities get introduced at the top of the price stack, and slowly over time get rolled down the price stack. And that’s in fact what you see with dual-core. That’s what we’ve been doing and the competition’s doing, so from our perspective, nothing new.”

Next: How changing the mix could improve AMD’s margins