February 20, 2007
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For the quarter ending March 31, chip manufacturer AMD (Advanced Micro Devices) says it expects to
report revenue of about US $1.225 billion. AMD says its revenues dropped rapidly, primarily due to lower
overall selling prices, and because of significantly lower unit sales.
Overall, the company plans to restructure its whole business model to significantly boost operational
efficiencies and to greatly reduce its operating cost structure.
American Micro Devices will lower this year's capital expenditures by approximately $500 million, which
the company believes will not significantly impact its overall production plans for 2007.
The company said it would also significantly reduce discretionary expenses and limit hiring to critical positions.
No other details were provided. The company issued a statement adding it would provide more details during its
conference call to report its first quarter financial results on April 19.
AMD is feeling tremendous pressure from Intel, said Warren Shiau, senior analyst at the Strategic Counsel.
Intel currently has a superior product line-up and superior manufacturing efficiency, he said. "When Intel had the
chance last time, it didn't take it to AMD as hard as it could have. It doesn't seem like Intel is going to make
that mistake again," he said.
Shiau added "and because of its manufacturing edge, Intel can handle relatively lower overall production costs
than AMD can. Since Intel has product superiority, it can set price levels, so what we're probably going to see is
Intel edging price levels lower and lower until AMD simply can't cover its fixed costs anymore."
What's happening now is going to get a lot worse for AMD, Shiau added. "AMD is still a sitting duck for at least
another quarter and maybe more if it can't ramp-up production of its new Barcelona-based designs quickly enough,"
he said. "Q2 to Q3 could see a really bad cash flow situation at AMD."
On the bright side, Shiau noted, AMD needs to last through another couple of quarters of adversity before it
should get some relief from Barcelona. And Intel is highly unlikely to drive AMD out of business, he said.
"However, Intel is in such a good position right now even when Barcelona comes on stream, Intel is opening up
such a large process manufacturing advantage that AMD is always going to be behind," he said. "That it can decide
to do enough damage to peg AMD at a certain portion of the market for years to come, by hitting AMD so bad that it
has to compromise R&D, product development and manufacturing investment.
"If the AMD announcements changes from reducing discretionary expenditures and freezing hiring to cutting
back on capital investment to cutting R&D and product development teams, then you'll know this is happening," he
added.
"The market in general is under a great deal of margin pressure at the moment. Not only is this a traditionally
slow time of year but the Microsoft Windows Vista operating system has simply not had as big an impact on sales
as many thought it would," said Rob Enderle, principal analyst for The Enderle Group.
He added "in addition, there is very little driving volume. There are only three memorable new machines in the market,
two from HP (TouchSmart) and one from Toshiba (R-400)."
"Almost everyone else is focused on competing on price alone and that is driving down prices and not anything
for sales volume."
Finally, corporate buying is a lot lower in 2007, and that further puts pressure on margins, he said.
Enderle added "this is one of the reasons Hewlett-Packard is trying to launch a premium mid-of-the-line later
in 2007."
At the same time, Shane Rau, program manager for IDC Corp. said with regards to AMD's comments that the nature
of the industry being indirect, sales through intermediaries like distributors, means there is delayed feedback to à
a supplier like AMD when rapid changes occur in demand or the competitive environment.
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Source: Daily Channel News
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