AMD: Tech Turnaround
11/19/2004 12:00 am EST
"Once or twice a year an exceptional opportunity comes down the pike and it often lies in the volatile semiconductor sector," says Gregory Spear, editor of The Spear Report. "We believe we have identified what may prove to be one of the great tech turnaround stories of all time."
"The economics of the semiconductor business are scary. In the highly capital-intensive business, volume is everything. The first million or so chips of a particular design pay for the tooling and amortization--that's it. Because of Intel's aggressive competitiveness Advanced Micro Devices (AMD NYSE) frequently found it hard to get to break even before margin pressure crushed profits as Intel lowered prices. To make matters worse, Intel had 100% of the high-ticket, high-margin server market, which it used as a cash cow to support undercutting AMD in the desktop space. Then, as luck or fate would have it, in a stroke of competitive technical genius, AMD's engineers found a way to exploit an Achilles' heel on Intel's part in regard to new 64-bit chips for the server market. Intel's Itanium chips would not run standard 32-bit software applications very well, and that was intentional on Intel's part. They did not think this would be a problem. They were wrong, and it was a huge strategic mistake. While Intel struggled with the sluggish adoption of the Itanium, AMD was already developing a 64-bit processor that, surprisingly, would run 32-bit software blisteringly fast due to a variety of elegant proprietary design features.
"In April 2003, AMD launched the Opteron, followed in September 2003 with the desktop version, the Athlon 64. These chips began to garner glowing reviews for both performance and cost effectiveness, even though they were not being used for 64-bit applications; they ran many 32-bit programs significantly better than Intel's 32-bit Xeon server chips, while generating less heat. Meanwhile AMD has made considerable progress in the flash memory and embedded processor business, which is the type of memory that now serves as the brain in more and more consumer products, from cellphones to cameras to cars. The question now arises: Is this just another one of those short-lived technological synchronicities that have characterized AMD's checkered past for as long as one cares to remember? We think not.
"The story of AMD is a story of personalities as much as technology. Jerry Sanders, former CEO, stepped down in 2002, which amounts to a sea change at the very core of the company. Sanders was known for his competitive bravado and autocratic management style, and the company was a direct reflection of his personality. Sanders' successor, Hector Ruiz, is the polar opposite, and therein, we believe, lies the key to AMD's future. Ruiz, 58, is transforming virtually everything about the company culture. Unlike his predecessor, who was known for his impulsive shoot-from-the-hip style of management, Hector is a process-oriented leader with an integrated vision of the chip business from manufacturing to inventory control to supply chain management. He has shifted the company's lone-wolf image to a new focus on building alliances with key players in the industry. This strategy is paying off handsomely.
"After three years of losses, AMD has scored four consecutive profitable quarters. In early October, the company reported sales of $1.2 billion, a 30% year-over-year increase, and net income of $44 million or $0.12 per diluted share for the quarter ended September 2004 vs. a net loss of $0.09 a share one year ago. Third quarter gross margin increased 200 basis points to 40% percent from the second quarter of 2004. Nice! Total 2004 revenues should exceed $5 billion (a little less than the company's market cap), up more than 40% year-over-year. And miracle of miracles, as margins have expanded, earnings are expected to exceed $150 million vs. a loss of almost twice that amount last year. And while its market share is still minute, AMD cornered almost 7% of the 32-bit server market in the third quarter, more than double its year-ago level. That figure is expected to reach 20% by the end of 2005. Through marketing alliances with HP, Sun, and IBM, AMD has now become a major supplier to the backend data center operations of 25% of Fortune Global 100 companies. In tough times, these tech leaders view AMD as a means to help customers lower IT costs. AMD is also making inroads in the world's fastest-growing PC market, China.
"Ruiz, however, is a man who thinks globally and acts globally, in more ways than one. Ruiz has a personal goal to see 50% of the world's population get Internet access by 2015, up from 10% now. To further his dream, this week AMD unveiled a low-cost Internet access device aimed at first-time technology users in the developing world. The ‘PIC’ includes a browser, e-mail, productivity tools such as word processing and spreadsheet software, and the ability to view images and multimedia files. The suggested price for the sealed device is $185 with a keyboard, mouse, and pre-installed software, or $249 with a monitor. If it breaks, it is simply replaced, not repaired. AMD has an alliance with the Tata group, India's second-largest conglomerate, which will finance the devices over a three-year period. AMD also has a distribution partner in Mexico and will be working with Cable & Wireless in the Caribbean. We like the vision, the company, the leadership, the execution, and the chart. We believe AMD will far outperform its peers over the next 12-24 months and may prove to be one of the great tech turnaround stories of all time."