Could 2007 be a Repeat of 2002 for AMD? Part II.

In part I we looked at the overall events of AMD's revenue drop in 2002. In part II we'll look at the current financial outlook of both companies.

We saw that AMD's very large revenue drop to 5.5% was only a temporary event and that the actual shift was from about 9.3% to 8.2%. However, during this time, AMD was much less profitable than Intel. There are many reasons for this. Intel had been well established in servers since the Pentium Pro while AMD did not begin to make server chips until the Athlon MP in late 2001. Intel also was more involved with mobile, manufactured its own chipsets, and obtained lower costs from its 300mm FAB. Today, AMD has a good track record and established base of server chips, is more diversified into mobile, has an operating 300mm FAB (FAB 36), and with ATI's purchase is moving into chipsets. AMD is much more diversified than it was in 2002 and this tends to make AMD more profitable.

Intel was also ahead in the shift to smaller manufacturing processes. Intel did have some difficulty in following AMD to copper interconnects which led to some of problems in 2001 however they were arguably ahead on process technology at the 130nm level. AMD had had a process partnership with Motorola and then one with UMC but it found a true partner in IBM. IBM's process experience finally enabled AMD to begin manufacturing the K8. Although Intel is still moving to smaller processes more quickly it no longer has more advanced process technology. However, even if AMD's process is slightly more complex the two processes are still very much alike. The first real test of process leadership won't occur until Intel begins using high K materials for gates while AMD stays with silicon dioxide. AMD has a small lead in process control software with APM. It takes Intel two months to move a chip from test to production with its Copy Exact method whereas AMD can go to production the same day with APM. This shows a fundamental difference in design style as Intel has dedicated FABs (D1D and D1C) specifically for design while AMD runs tests in its production FABs. We saw in the graphs that when one company had production difficulty the other company temporarily benefited however there is currently no indication of problems from either company.

There is no doubt that Conroe is faster on the desktop than X2. Even the fastest FX-62 processor is only a bit faster than the E6600. If AMD were to release a 3.0Ghz FX-64 its speed would be just slightly less than an E6700 but at a much greater price tag. Assuming that the 4X4 plan covers X6800, AMD would need to price match:

E6700 - no current match, would require 3.0Ghz clock, 5800+
E6600 - no current match, would require 2.8Ghz clock, 5400+, similar to FX-62
***** - 5000+ AMD's current fastest common chip, slower than E6600 but priced higher
E6400 - 4600+, currently matches in price
E6300 - 4200+, currently matches in price
***** - 3800+ should be comparable to a proposed lower model by Intel

AMD might skip E6700 since it would need a 3.0Ghz chip but it should probably address E6600. This would still require producing a 2.8Ghz 5400+. AMD will either have to address this or leave this upper segment entirely to Intel along with its higher margins.

Overall, things are not as bad for AMD as it would appear. In servers, the Woodcrest version of Core 2 Duo doesn't share the same advantages that the desktop chip has. This is true for several reasons. Opterons are capable of up to 8-way configurations but 4-way is currently the point of maximum benefit. Woodcrest is only capable of 2-way which leaves the 4-way market very open to AMD. Intel's older Prescott based Xeon 4-way chips are much less competitive with both lower performance and higher power draw. Further, Intel's newest 5000 chipset is designed for FBDIMM which has three disadvantages. FBDIMMs draw more power than regular RDIMMs which nullifies Woodcrest's lower power draw. FBDIMM also slows down substantially when the memory slots are fully populated as they normally are with servers. This tends to nullify Woodcrest's higher speed. Finally, Intel announced a very large scale back to its expected use of FBDIMM in 2008 while AMD canceled its plans for FBDIMM entirely. This could make Intel's 5000 series chipsets much less desirable. Intel could solve all of the problems except the 2-way limitation by releasing a new chipset for Woodcrest but this will take time. These factors tend to remove any immediate advantages that Woodcrest may have had. In the mobile area Merom has much less of a lead because the fastest Conroe chips draw more power. However, the 65nm Merom chips are ahead AMD's 90nm Turion chips. AMD should be reasonably competitive again once Turion is moved down to the 65nm process.

It is clear that for dual core Intel will be fastest no matter what in 2006. However, this is not so clear when we move up from dual core. Intel will release the Kentsfield quad core equivalent of Conroe later this year and probably the Clovertown quad core version of Woodcrest in 2007. These chips however are far less ambitious and leading edge than Conroe. In fact, they are essentially the same strategy as Intel used to lackluster effect with Smithfield. If Smithfield is any indication, Kentsfield is destined to be the quad core version of Celeron by end of 2007. Smithfield was an MCM which means just putting two dies in the same package rather than a truly integrated design like Core 2, Core 2 Duo, and K8. Further, Smithfield was manufactured on the same process which led to high power draw. Kentsfield seems to have all of the same disadvantages. Kentsfield's power draw basically doubles compared to Conroe while using two dies in the same package means that two FSB controllers share the same bus. Although a desktop unit can tolerate a higher power draw for a performance chip this factor tends to make Clovertown much worse than Woodcrest. It remains to be seen if anyone will elect to upgrade from Woodcrest to Clovertown on large scale servers at the cost of doubling the cpu power draw. This is important as was shown by the upgrade of an older, Opteron based supercomputer at Oakridge National Labs. It could do this because AMD managed to stay within its TDP when moving to dual core and has stated that it will again with quad core. This could be why Opteron now has contracts for two TeraFlops supercomputers. Intel seems to be similarly capable of doing this with integrated designs (like Yonah (Core 2) and Woodcrest) but not with MCM designs. In this light, Kentsfield and Clovertown have to be seen as stopgap until Intel creates an integrated quad core design.

So, if Intel's quad core offerings are stopgap then what is AMD's 4X4? To find out if 4X4 is a clever new idea or just a stopgap reaction to Conroe and Kentsfield we have to see how it compares to current dual socket systems. You can pick up a pair of 1.8Ghz Opteron dual cores for $560. Since only the lowest of the 4X4 processors was stated to be under $1,000 this indicates that 4X4 is a more upscale offering. It would appear that AMD is trying to span two markets with 4X4. Essentially, we have two chips replacing what was one FX chip at the same price range. In this light, it would be an enthusiast offering and match up with companies like Alienware and Voodoo PC. This seems consistent as Alienware has already stated support. So, dual core FX replaced single core and now dual chip is replacing single chip. However, making use of all four cores means either having a game that has that much threading (which none currently do) or running things in the background while playing a game. Perhaps in view of this trend, multithreading will accelerate. The other area that may be spanned by 4X4 would be workstations. However, this is mostly a question of what memory is supported as RDIMMs are required to create workstation or server class systems. If 4X4 can successfully span both enthusiast and workstation markets it could be clever idea.

C2D is definitely a boost for Intel but the volume in 2006 is not high enough to drive the overall market. By year's end, C2D will only be at 30% of Intel's capacity which is what AMD's 65nm production will be. Simply shrinking the die to 65nm and reducing power consumption should be sufficient in 2006 for the server and notebook markets. It has been suggested that Intel will take back share by lowering prices. If 4X4 will replace one chip with two then it appears that AMD is at least somewhat prepared to match Intel in terms of price. However, Intel currently has a large overstock of Prescott and Presler based P4 chips. Releasing Conroe at low prices does put pressure on AMD but it puts even more pressure on Intel's P4 line which will still make up around 80% of the total chip volume in the last two quarters. Since this will dominate Intel's revenues in 2006 I would expect Intel to see around a 12% drop versus 2005 while I would expect AMD's revenues to increase around 10% versus 2005. To put this another way, Conroe simply will not be produced in large enough volumes to turn the market around for Intel. It will bring new revenues but these will not be enough to offset the P4 declines.

Things do look different in 2007. As C2D continues to ramp up this will move things in Intel's favor and at some point C2D will begin to dominate Intel's sales. This is where it gets more interesting. Intel's ramp of C2D would be very favorable by the end of the first quarter. The only other thing in AMD's pocket to counter would be K8L, AMD's fully integrated quad core design. This chip includes a shared L3 cache, double the prefetch size, double the L1 cache bus width, and double the FP pipelines. It boosts its FP performance similar to the way C2D was boosted over Yonah. This chip has advanced power management and additional AMD64 instructions. And, because it is manufactured on 65nm it draws no more power than AMD's current dual core 90nm chips. The interesting part is that AMD officially says mid year 2007 for release. However, this estimate is similar to the current end of year estimate for 65nm chips. In both cases, AMD allows itself some padding so that if problems occur it can still meet its estimated delivery. If things go well, it can always move its release forward. This is why it seems likely that 65nm will appear in October rather than in December. Likewise, K8L could arrive in the 2nd quarter of 2007. K8L is likely to surpass Conroe in FP/SSE performance at the same clock and probably cut the current integer performance gap in half. With higher SSE performance but lower Integer performance I would say that the dual core version of K8L (without shared L3) will be about equal to Conroe. And, Intel will need a better chipset to prevent Woodcrest from being left behind. This won't actually have much effect on notebooks since K8L won't be used for mobile but it will outclass Intel's stopgap quad core offerings just as X2 did with Smithfield and the Presler die shrink. Overall, K8L should deliver more performance and lower power draw than Kentsfield/Clovertown. However, Intel is likely to respond with an integrated quad core design in 2008 as it did with C2D.

It isn't just K8L though that would make AMD competitive in 2007. Whereas Intel will be almost entirely converted to 65nm by end of 2006, AMD will only be at 30% conversion on one FAB. This means that AMD will continue to gain from lower cost as it ramps 65nm production toward mid year in 2007. Similarly, Intel will be at full 300mm production whereas FAB36 will only be at 50%. AMD again gains from lower costs as FAB36 reaches 100% capacity by end of 2007 and 125% (with a cleanroom addition currently under construction) by mid 2008. Intel's biggest benefit in 2007 will be conversion to the Conroe die. Conroe's die is only about half the size of the Presler die which will lower costs for Intel. However, the die size for K8 is actually smaller than Conroe which means that AMD will get a little more benefit. AMD's falling costs due to 300mm and 65nm ramping in 2007 puts it into a very good position to resist pricing pressures from Intel in 2007. This means that the argument for gaining share by reducing prices will essentially be gone by year's end as AMD's costs will drop faster than Intel's during 2007.

There are some incidental areas like Intel is currently taking losses in non-computing areas and is spending down its cash reserves. AMD's cash reserves are depleted and it incurs some debt with the ATI purchase. The interest on the debt is mostly offset by the cost savings of merging AMD and ATI so the debt itself is the biggest factor. However, Intel's unprofitable sections and its current large inventories are likely to hit its stock harder than AMD's. This would particularly be true if Intel has to reduce stock buyback to save money. With Dell's increased AMD offerings combined with the increased server offerings from IBM, Sun, Dell, and HP it does seem unlikely that AMD will see any large reversals soon. AMD seems to have mostly short term problems while Intel's appear to be longer term. AMD needs to address E6400 and E6600. However, AMD seems to have power management and performance under control with K8L and its 4X4 plan appears to create a new price structure in the former FX/EE range. Although Intel looks very good at the moment it will need to create an integrated quad core solution and address 4X4, HTX, and HT 3.0 in 2008 to stay competitive. Short of either Intel or AMD's having production problems that reduce volume there are unlikely to be any large changes in share. However, AMD's current 18% revenue share may just be temporary and it could fall back to 15% where it was two quarters ago. Overall, I would expect Intel to do worse this year than 2005 and AMD to do better than 2005.