AMD Takes Big Hit in Servers in Q4 2006
Last week, Intel announced that dual-core processors constituted 90% of its “mix” – the assortment of CPUs it sold to its customers in 2006. Today, AMD announced that dual-core processors constituted 30% of its mix.
Making dual-core and quad-core sell better for AMD may be key to moving the needle back in the positive direction. The company announced today its gross margins fell to 40% in Q4 2006, from a high of 52%. The decrease, CFO Bob Rivet explained, was due not just to costs from the absorption of ATI but also significantly lower ASPs (average selling prices) in the server space. That’s where Intel hit AMD hardest.
Even though AMD expects its revenue for Q1 2007 to be lower still, Rivet told one analyst, “with the improvement of 65 nm, more of that output can continue to come on board, servicing the channel...we believe gross margins will actually improve quarter-on-quarter, in particular in the microprocessor business.”
Earlier, Ruiz projected AMD should be able to close its conversion to 65 nm lithography by this summer, and plans to accelerate its 45 nm ramp-up “to close the gap with our competitor.” That 65 nm roadmap includes far more dual-core than single-core production, so the two projects go hand-in-hand.
“We’ve got an opportunity to accelerate [the dual-core mix] as a percentage of our overall product line going forward,” Meyer stated, “probably more rapidly as the product gets pushed down the price stack, as we go to an increasing fraction of 300 mm manufacturing and 65 nm technology. So I actually think an increased dual-core mix for us means an ASP and margin upside in the near term.”
Seasonally, first quarter sales are typically down over fourth quarter sales, so some downturn is to be expected. AMD’s group vice president of worldwide sales, Henri Richard, noted that seasonality should be expected to take a 4% toll on revenue. That figure could be up or down some in Q1 2007, due perhaps, Richard said, to one factor in particular.
Guess which one. “I think that one of the factors I want to underline...is that there’s a certain amount of added uncertainty with regard to Vista...How will it affect inventories? That’s another factor that makes the first quarter a little more complex than the average first quarter, because Microsoft doesn’t launch a new operating system every other year.”
If Vista triggers an unseasonable rise in demand in the first quarter, it could lead to declining inventories, which is not good. If Vista doesn’t move the needle, then revenue in desktops and mobile don’t compensate for the server revenue problem...which is also not good.
“I acknowledge there are a number of reasons why the first quarter looks a little wonky,” Ruiz remarked, “but 2007 to us looks very healthy. We truly believe—and we have had our own experiences ourselves—that Vista will provide impetus to unit demand in 2007 and beyond. We think it’s going to be a great innovation that will bring a lot of value to the marketplace.”
Last year, AMD was crediting its continued success on its rocketing approval in the server market. But no comment today typified the spotlight shift more clearly than that of CFO Bob Rivet. When confronted by one analyst who said AMD was successful in competing against “a monopolist” before, but now it’s not, is there any thought about AMD going back to its previous successful strategy – its Opteron push?
“Well, we’ve thought long and hard about this, and concluded that there is no model that’s stable over the long term that allows us to be profitable in a niche. The level of investment required is too large, and the only way for us to maintain profits on a sustained basis is to be large, and engage in a material way with strategic OEM customers. That’s what they want to see from us, that’s what they demand from us, and that’s what we’re going to do.”
It is not a new AMD, but with one round of the “Dual-core Duel” having been fought, it’s clearly walking into 2007 with a new pace: determined, decisive, but with a hint of a limp.