Q3 2007 Earnings, AMD & Intel

With AMD's Q3 Earnings information added to Intel's we can see that Intel is doing quite well while AMD is still struggling. Nevertheless the announcements have dispelled many rumors that have followed the two over the course of this year.

Intel's revenues and margins are up this quarter and it is obviously doing well. In contrast AMD lost $400 Million and has much lower margins. One could be forgiven for confusing today with early 2003 when Intel was doing well and AMD was struggling to turn a profit as K8 was released. However, today is quite different from 2003 since AMD is now firmly established in servers, mobile, and graphics. In early 2003 AMD had barely touched the server market with Athlon MP, had only a single chipset for Opteron and had yet to create mobile Turion. It is interesting though to review the common rumors that have surrounded Intel and AMD this year to see where perception differs from reality.

A commonly repeated rumor was that AMD was teetering on the edge of bankruptcy and would likely have to file after another bad quarter or two. However, it is clear from the reduction in stock holder equity this quarter that AMD could survive at least another year with similar losses each quarter. If AMD improves in Q4 then bankruptcy seems unlikely. Also along these lines was the persistent rumor that AMD would sell FAB 30. AMD's announcement of pilot conversion to 300mm/45nm (as I indicated months ago) shows that AMD will not be forced back to a single FAB.

A similar myth was that AMD would need to be purchased by another company to be bailed out. The biggest problem with this idea is that there really isn't anyone to buy AMD. Companies like Samsung and IBM would be competing with their own customers with such a purchase and companies like Texas Instruments and Motorola have been out of the frontline microprocessor business for many years.

It has often been suggested that Intel could simply flood the market with bargain priced chips to deprive AMD of revenue. However it is clear from Intel's statements that they were unable to meet demand during the third quarter without drawing down inventories. Since the fourth quarter is typically the highest volume of the year it is unlikely that Intel will be able to cover all of the demand. Leaving Q4 with lower inventories would further prevent Intel from capturing additional demand in Q1. This means that Intel will likely be unable to really squeeze AMD until the second quarter of 2008 when 45nm production is up to speed and demand falls off from Q1 08.

Lately, it has been fashionable to suggest that AMD was abandoning the channel yet AMD posted record sales to the channel in Q3. It was also common to see bashing of ATI's offerings versus nVidia. Yet the increased sales from chipsets and graphics indicate that ATI is gaining ground after its loss of direct business with Intel. The ATI assets should continue to add to profits in Q4. Secondly, as AMD and nVidia strive to gain advantage there is no doubt that Intel is being left behind. With new chipset offerings from AMD in Q4 and Q1, Intel's chipsets will once again be second rate in terms of graphics. The company most likely to be hurt is VIA as the move by Intel and AMD into the small form factor mini-ITX size commoditizes the market and removes most of the previous profits. One has to wonder how much longer VIA can stay in this market as it gets squeezed both in terms of chipsets and low end cpu's. One has to wonder as well if Transmeta might soon become an AMD acquisition as it similarly struggles at the low end.

Intel was often described as moving its 45nm timetable forward one quarter while AMD was often described as falling further and further behind. However, the demand shortages would be consistent with rumors that Intel was having trouble moving 45nm production beyond D1D before Q1 08. Presumably the Penryn chips that will be available in Q4 07 will be from D1D. AMD's statement countered rumors of a slipping 45nm schedule by repeating its timetable of first half of 2008. Intel's supposed one quarter pull in for 45nm was clearly ficticious since Intel's own Tick Tock schedule would be Q4 2007 or exactly two years since 65nm in Q4 2005. So, Intel is on schedule rather than moving the schedule forward. AMD's statement was a bit of a surprise since the previous timeline had been "midyear" for 45nm. This could easily have been Q3 but AMD's wording of first half of 2008 means late Q2 is more likely. If AMD really is on this track then half of Intel's previous process lead will be gone in another two quarters. This would also mean that AMD will have moved to 45nm in just 18 months rather than 24 months as Intel has done.

A current area of confusion is whether demoed chips are at all representative of actual production. It has become apparent that Intel's initial production from D1D is of very high quality. However, quality seems to fall somewhat as production is moved to additional FABs. In the overclocking community, it has been suggested that Intel's bulk production did not catch up to the quality of the early D1D chips until the recent release of the G0 stepping. This suggests that Intel's bulk production quality lags its initial production quality by a full year. This would seem to explain both having to destroy the initial 45nm chips. Clearly, Intel's demos are not indicative of actual production as seen by the lack of chips clocked above 3.0Ghz. This leaves the question of whether AMD's demo of a 3.0Ghz K10 was similarly cherry picked. A late Q1 or early Q2 08 release of a 3.0Ghz FX Phenom would be consistent however a late Q2 release would mean that AMD was equally guilty.

A lot of faith was put into Intel's mobile Centrino position. However, this quarter it is clear that Intel lost some mobile ground. Intel faces a much greater challenge as Griffin is released with an all new mobile chipset in Q1 08. All early indications are that mobile Penryn is unable to match Griffin's power draw. This will likely mean continued erosion of Intel's mobile position.

The server market is another area that tends to run counter to rumors. After Intel's very strong showing with Woodcrest and Clovertown it has taken about as much 2-way share from AMD as it can. The suggestion has been that Intel could hold its 2-way share while taking 4-way share from AMD with Tigerton. This scenario is almost certainly incorrect. Barcelona should provide strong competition in 2-way servers from Q4 07 forward so Intel is likely to lose some of its server share. And, Tigerton is only a slightly modified 65nm Clovertown which will have great difficulty overcoming the high power draw of its quad FSB, FBDIMM chipset. This makes it unlikely for Tigerton to do more than hold the line as a replacement for Tulsa. It appears that Intel's true 4-way champion, Nehalem, won't arrive until Q4 (the normal Tick Tock schedule) by which time AMD's 45nm Shanghai will already be out. I have no doubt that Nehalem could show very well against Shanghai since Nehalem will have more memory bandwidth. However, a big question is whether this will move down to the desktop. There still seems to be some confusion too as to whether or not Intel is really willing to discard its lucrative chipset sales and FSB licensing. The strength of Nehalem is also a two edged sword as Intel will simultaneously lose its die size (and cost) advantages since Nehalem is a true monolithic quad core die. Power draw is also unclear until it is known whether Nehalem has a direct IMC or some type of intermediate bus like AMD's G3MX. For example if Nehalem relies on FBDIMM as the current C2D generation does then Nehalem may have a tough time being competitive in performance/watt.

It now appears that AMD has indeed moved up its own timetable for delivering 2.6Ghz chips. These seem scheduled for release in Q4 whereas the previous roadmap had them appearing in Q2 08. This would likely mean 2.8Ghz chips in Q1 from AMD however Intel could maintain a comfortable lead with 3.1Ghz or faster chips of its own. The number of partners added to IBM/AMD research consortium also vanquished persistent rumors that AMD would toss SOI on 32nm.

However, the most surprising thing that has come up is AMD's view of the market. The popular wisdom was that AMD would be forced to back down and give up share to Intel. Yet in spite of Intel's good showing in profits, AMD is determined to increase revenues to $2 Billion a quarter. This would mean not only holding onto current share but taking more share from Intel. The $2 Billion mark is unlikely soon but it does seem that a near term loss of, say, $100-200 Million would be considerably better than the current $400 Million loss. The $2 Billion goal also seems to fit with AMD's previously stated goal of 30% share by end of 2008. I don't have AMD's volume share numbers yet for Q3 but I recall 23% from Q2. If AMD is at, say, 24% now then a 25% increase would be 30% and a similar 25% increase with the $1.6 Billion gross revenue would be $2 Billion. Assuming that AMD can hit its 45nm Shanghai target, I can't see any reason why this wouldn't be possible. It would mean ramping FAB 36 by the normal schedule and then partially ramping FAB 38 in Q1 and Q2. This would allow production to increase in Q2 and Q3 which would keep delivered chip volume increasing in Q3 and Q4 when FAB36 will already be topped out. Since Intel's 45nm ramp is slower than AMD's it is possible for AMD to blunt Intel's price advantage as long as Shanghai stays on track.

In spite of the rumors that have been dispelled we are left with a number of unanswered questions. Is there a bug that is holding back K10's performance? What speeds will Intel and AMD have in Q1? Is Intel really willing to toss its chipset revenue with Nehalem while losing its current cost advantages? Will the additional partners that have joined IBM and AMD in SOI research allow AMD to match or even exceed Intel's process tech? Can AMD really increase its share by 25%? Is AMD's faster adoption of Immersion a technical advantage or a technical curse? Will Shanghai be able to catch Penryn or hold AMD's position against Nehalem? The sad part is that it will take another year to know all of the answers for certain.