AMD to Restructure, May Outsource More to IBM, Chartered

By Scott M. Fulton, III, BetaNews

April 19, 2007, 10:23 PM

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The need for drastic change comes amid some of the worst news the company ever faced all in one quarter. As Meyer explained, four problems conspired to make the first quarter's performance unacceptable. "We suffered some major growing pains," including some sticking points in relationships with new OEM customers. Second, Intel applied serious price pressures on AMD - giving it some of its own medicine from prior years - "as our competitor did everything in their power to protect their monopoly."

Third, both CPU and GPU markets became more competitive - a tip of the hat to both Intel and nVidia for producing high-performing parts. Fourth, "weakening demand in the consumer electronics businesses added to our pain."

There was, to coin a phrase, a fifth element that Meyer neglected to list: a loss of market share. As analyst firm iSuppli confirmed earlier this afternoon, AMD lost 4.6 points of global market share in the first quarter alone, nearly all of it to Intel, giving it a 75.7% share of the overall CPU market. AMD's share is now 11.1%.

"While any one of these problems might have put a damper on our performance in the quarter," Meyer said, "the sum total of all four was something of a perfect storm for us." Coming out of the storm, he projected, means AMD must "grow the top line, change our cost structure and align with the competitive environment, and execute flawlessly on our product and technology roadmaps."

What does this mean? As Intel intimated a few days ago during its own not-so-bad quarterly report, it's not against developing more premium products with premium prices. With AMD's customer mix including more OEMs, its premium product line - specifically, Athlon FX-64 - could be expanded. To "align the cost structure," it could produce CPUs whose price/performance curve is more tightly fitted to Intel's. As it stands now, Intel's curve is positioned more competitively below that of AMD, for the first time in several years.

At the same time, the company is not against the notion of developing an entirely new, low-end computer or consumer electronics product design whose entire development, management, and sales could be handled overseas, perhaps for emerging markets. As CEO Ruiz explained, this could be a way for AMD to earn more value from what he called "n-minus-one" or "n-minus-two" technologies - older product lines.

But Ruiz is also apparently considering options that just months ago would have been unthinkable for AMD. Would he be willing to consider private equity investment, in whole or in part, taking the company out of the constant spotlight of public investor scrutiny?

"We have absolutely no prejudice or bias towards the sorts of capital, so long as it makes sense for us," he responded, "and we're very open to any of those ideas. Bob [Rivet, the CFO] is continuously looking and alert as to any opportunity that might come up to take advantage of...Like everything else, if we think it's something that makes sense for our shareholders, we will certainly consider and look at it."

Would AMD be willing, for instance, to extend a patent covenant of sorts to Intel? "We have a number of broad IP licensing agreements with many companies, including Intel," Ruiz responded, "and every one of the models we're looking at to implement takes all of that into account. We have an awful lot of flexibility."

While he declined to discuss the specifics of IP licensing arrangements, Ruiz clearly left the door wide open with comfortably fuzzy language, saying, "The asset-light model we're talking about is well within all of the guidelines that we have."

If AMD is really willing to go that far, it would need to be ready to make peace with its competitor. To that end, Hector Ruiz offered a few olive branches, but stopped short of issuing the traditional signal of surrender.

"Our hats off to our competitor," he said. "They've done a good job in closing the gap in their product line. It took them four years to do it, and I think they've done a good job. I think we're into some difficult challenges...In our case, we had four years of continuously, every quarter, outperforming our competition. And then, to use the analogy of football, we had an undefeated season and lost the first game of the playoffs. Well, we are not going to change dramatically what we were thinking of doing as a result of one lousy quarter. We do have to make adjustments."

Those adjustments will include the attitude kind and the payroll kind, he added, hinting first of some lessons learned in the company's initial experiences with managing ATI. He then immediately said the company will lose at least 500 employees between now and the end of the second quarter.

"Although we're pleased and have confidence that we're going to do better in the second quarter," Ruiz stated toward the close, referring to his company's prospects for regaining market share from Intel, "frankly, it's [easy to increase market] share from a really lousy quarter. So I wouldn't put a big flag on top of that and wave it...We had gained unit share for 14 consecutive quarters, and last quarter, it was a meltdown, we collapsed, we're very upset about it, and we understand it. As Dirk pointed out, we know exactly the things that led to the perfect storm. We're going to fix them, and we are making progress as we speak. Therefore, from such a lousy beginning, we expect to improve, and throughout the year, we expect to improve quarter to quarter."