The X64 Chip Makers Show Financial Improvement in Q4

Published: January 24, 2008

by Timothy Prickett Morgan

The X64 processor duopoly, which is comprised mostly of Intel and Advanced Micro Devices, is humming along despite the displeasure Wall Street has for both companies and the issues facing AMD as it tries to get its quad-core "Barcelona" processors into the field. Both companies reported their most recent financial results, for the fourth quarter of 2007, last week, and Intel clearly is firing on all cylinders again. AMD is still tinkering with the engine after a pretty good run from 2003 through 2005.

But there was no winning for most of the public companies that make up the stock indexes of the world, and Intel, which is a component of the Dow Jones Industrial Average in the United States, took its lumps as part of the Dow because of uncertainty in the economy. And to make matters worse, Intel helped spur on that uncertainty when the company's top brass said they were cautious about sales in the first quarter of 2008 and throughout this year.

In the fourth quarter of 2007, Intel's overall revenues rose by 10.5 percent to $10.7 billion, and because of the expanded sales and cost cutting, operating income more than doubled to $3 billion. Net income rose by 51 percent to $2.3 billion, and earnings per share rose by 46 percent to 38 cents per share. This puts Intel in the kind of performance window that Wall Street expects. So you’d think investors would be happy. Not so. Intel's stock was hammered last week, dropping from the $23 or so a share it was trading at before the financial results for Q4 were announced down to around $19 as we got to press on Monday afternoon.

One of the reasons why Wall Street was so upset is that sales were off expectations--$88 million lower than the midpoint of consensus estimates, even though Intel set new record highs for processor and chipset shipments in Q4; Intel broke records for the full year, too. In the Digital Enterprise Group, which makes chips and chipsets for servers, PCs, and workstations, processor sales came to $4.33 billion, up 12.3 percent, with chipset and motherboard sales up 8 percent to $1.41 billion. The Mobility Group, which makes processors and chipsets for laptops, notebooks, and other portable computers, had processor sales of $2.99 billion, up 12 percent, with chipset sales of $1.12 billion, up 20.9 percent. Intel's other product lines posted sales of $866 million, and had an operating loss of $771 million.

Intel is doing very well in servers, particularly because AMD is struggling. "Our server business had a great fourth quarter as we shipped a record number of processors," explained Paul Otellini, Intel's chief executive officer. "We experienced strong double-digit revenue growth in the fourth quarter, both on a sequential basis as well as year over year reflecting the strength of our quad core Xeon processor family. Our new core MicroArchitecture MP platform called Caneland exceeded our ramp and conversion targets for the quarter."

This is all good news, if you are Intel. What seemed to upset Wall Street is that Stacy Smith, Intel's chief financial officer, said that Intel's plan for sales in the first quarter of 2008 would be somewhere between $9.4 billion and $10 billion, which represents a 10 percent sequential decrease if you do the math against the midpoint of those two numbers and the quarter just finished. The trouble is that, historically, Intel usually only sees a 7 percent sag in sales moving from Q4 of one year to Q1 of the next. Moreover, Intel's gross profits are still below the 60 percent-plus level it enjoyed in days gone by, and there is no indication those days are coming back.

Not with AMD still in the game, which it most assuredly is despite a bug in the Barcelona Opterons and some pretty big buckets of red ink thanks to write-offs associated with its acquisition of graphics chip maker ATI Technologies. AMD's sales in the fourth quarter were $1.77 billion, essentially the same as in the final quarter of 2006. However, the company had a loss of $1.77 billion, but $1.68 billion of that was caused by the ATI write downs. For the full 2007 year, AMD's sales were up 6 percent to just over $6 billion, and it had a net loss of $3.38 billion. Not a great year, and showing just how hard it is to compete with Intel while suffering product delays and absorbing a large acquisition.

"We were close to break-even operationally for the quarter, reducing our fourth quarter non-GAAP operating loss to $9 million," explained Robert Rivet, AMD's chief financial officer. "We improved gross margin by three points sequentially, driven by increased shipments of new products, higher average selling prices and cost containment actions. We shipped a record number of microprocessor units in the quarter, including nearly 400,000." (About two-third of those were desktop Phenom chips, one third are Barcelonas for servers and workstations.) The Barcelonas might have a cache memory bug that requires a patch workaround, but someone is buying them.

AMD's Computing Solutions group had $1.4 billion in sales, up 9 percent sequentially from the third quarter of 2007. Microprocessor sales were up 11 percent sequentially, and desktop and mobile processor unit shipments were up 7 percent compared to Q3 2007, to record highs. Server processor shipments rose by 22 percent sequentially. Rivet said in a conference call with Wall Street analysts last Thursday that the Computing Solutions unit was profitable and gained share in the quarter.

AMD's Graphics group had $259 million in sales in the quarter, driven by the new ATI Radeon HD 3800 series of cards and the continuing use of ATI Radeon HD 2000 cards by computer makers.

As 2007 was coming to a close, AMD said it was expecting to get a tweaked Barcelona chip into customer hands in the first quarter of 2008, but over the holidays and in early January, there was some whispering that this might happen in the second quarter. And so it will. Dirk Meyer is president and chief operating officer of AMD, said in the conference call last week that AMD has got the B3 stepping of Barcelona chips out of its chip factories and is putting them through the testing paces now; in a few weeks, he said that engineering samples will be sent to customers and AMND will get production samples into their hands later in the quarter. "We'll be working with our server customers very diligently to accelerate as best possible the availability of their systems and the marketplace," Meyer said. "You'll start to see that very late in Q1 and most of the systems early in Q2 and later into Q2." He added that AMD was trying to get 2.3 GHz Barcelona B3 parts out to customers first, followed by 2.5 GHz parts in the early part of the second quarter. No word yet when AMD will get the clocks up to 3 GHz or so, which is where customers want them.

AMD did not provide much guidance for the first quarter of 2008, except that it would be down along normal seasonal trends.

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