Wednesday, April 9, 2008

The Road to Barcelona

AMD announced today that it is finally shipping its quad-core Phenom (3/G Opteron) chips, formerly known as Barcelona. Having spent the past year shipping triple-core versions with a crippled fourth core that it took them that long to fix, AMD is reportedly “aggressively pricing” the new chips. In other words, they’re sacrificing margin in an effort to claw back market share from Intel, who have meanwhile been executing flawlessly on their 45-nm quad-core designs.

AMD’s new chip only beats Intel’s on a few benchmarks, so they’re short on options other than competing on price—unpalatable as a tactic and disastrous as a strategy. This is a particularly painful choice for AMD, since they’ve been hemorrhaging money for the past few years and their cost structure is seriously out of whack. The latter means that even with big design wins from H-P, which they also just announced, the spike in revenue probably won’t get them back into the black, and certainly not for long.

AMD’s total operating expenses in 2007, excluding the $5B expense of acquiring ATI, amounted to 121% of sales compared to 79% for Intel. Part of that stems from high SG&A expenses—23% of sales revenues vs. 14% for Intel. When you aren’t selling a winner, it’s a lot more expensive to create demand than to satisfy it.

Meanwhile AMD’s 2007 R&D expenses amounted to 31% of total revenue vs. Intel’s 15%, pretty much the industry standard. Much of the excess had to go into frantically trying to fix Barcelona’s cache flaw; the rest probably went into trying to improve yields at 65 nm and solving new problems at 45 nm—both very costly undertakings.

AMD has promised to look into going fabless, something I’ve long advocated. TSMC is at least one generation ahead of AMD and always will be. Set up a team of designers in Hsinchu and transfer your process design costs—not to mention huge CAPEX—on to the fab. And sell your costly German fab, whatever the political costs. You can’t manufacture in Europe and make money. Just ask Infineon, Qimonda and ST (well, they’ll deny it; look at their balance sheets instead).

Going private is an attractive option, especially now that AMD has a competitive product again. But that option may be dead for now thanks to the turmoil in the financial markets. The Blackstone Group, who took Freescale private, is reportedly in dire straits, as are many if not most private equity investment and hedge funds. This would be a good road for AMD to take when it opens up again.

Meanwhile, Hector should have lunch with NVIDIA’s Jen-Hsun Huang to talk about a buyout. The alternative, if he waits too long, will likely be a major buy-in from Carl Icahn, who’s always looking for underperforming assets. And you know where that leads.

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