Round Two: Intel's Fortunes Rise, and AMD's Fall

Published: April 25, 2007

by Timothy Prickett Morgan

The two engines of the X64 server and desktop market, Intel and Advanced Micro Devices, reported within the past few days their financial results for the first quarter of 2007, and a reinvigorated and reorganized Intel is hammering on AMD pretty hard in a price and technology war that began in 2003 when the Opteron processors were first announced. In the latest round of fighting, Intel is clearly winning back some lost ground, and that is pushing AMD into posting a loss.

Intel reported its numbers first last week, and with a certain amount of glee, even if revenues fell by 1 percent to $8.85 billion and operating income fell by 3 percent to $1.68 billion in the first quarter. The reason was that net income rose by 19 percent, to $1.61 billion, and earnings per share increased by 17 percent to 27 cents per share. After making cost cuts last year, Intel was able to bring more dough to the bottom line, and the reinvigorated dual-core and now quad-core Core architecture chips for laptops, desktops, and servers are, on average, holding their average selling prices after years of declines because Intel's prior Pentium and Xeon products were simply not competitive with AMD's Athlon and Opteron equivalents. Intel has nearly closed the performance and thermal gaps it's had against AMD's products with the Core family of chips; AMD will argue that it still has some advantages on these fronts, in terms of thermals, price per unit of performance, and price per performance per watt.

"The first quarter marked another solid period for our microprocessor business," said Paul Otellini, Intel's chief executive officer, in a conference call with Wall Street analysts. "Units were inline with seasonal patterns and ASPs held up well despite competitive pricing in the low price segments of the market. In general, we saw a flat quarter-to-quarter pricing in mobile and desktop segments, and a decline in server ASPs driven by a shift to dual and uniprocessor servers."

More than half of the company's sales in the quarter came from its Digital Enterprise Group, which makes processors and chipsets for computers. On the server front, Otellini said that Woodcrest shipments were growing (he didn't say by how much), and added that the quad-core "Clovertown" Xeon 5300 processors sales nearly doubled compared to the prior quarter. Overall, Intel's sales were inline with expectations that were revised downward in January, and processor shipments were down and "approximately seasonal," according to Andy Bryant, Intel's chief financial officer.

Intel warned Wall Street that the second quarter would be another "transitional" one, with sales expected to be in the range of $8.2 billion to $8.8 billion, according to Bryant. If Intel hits the midpoint of that range, sales will be off 4 percent from the first quarter of 2007, but up 6 percent compared to the second quarter of last year. Bryant said that lower sales, lower sell-through and higher startup costs for the "Penryn" generation of Core chips, which will start shipping later this year, will push down margins in the coming quarter.

Looking out further into the second half of 2007, Intel clearly thinks that it will be able to compete on the technology front, and thus bolster average selling prices for chips--particularly if AMD is not making money and can't chop prices further.

"We certainly think we continue to see a competitive price environment," Otellini explained. "But if you think back, over the last year, starting mid last year as the new products were introduced into the desktop server and mobile segments, we started to see our products differentiate themselves from the competition. As time passes, as we extend those products into the product stack, we think we have more than just price to compete on. So we find ourselves in a better position than we were a year ago. We think it held up pretty well in the first quarter and we raised margin percentage for the year."

A few days later, AMD hosted its conference call for its first quarter 2007 financial results, and it was just not as much fun. AMD said that it sold $1.23 billion in chips in the quarter, a drop of 7 percent from a year ago. The company posted an operating loss of $504 million and a net loss of $611 million, or $1.11 per share. While that loss includes $113 million, or 21 cents per share, in costs associated with the acquisition and integration of graphics chip maker ATI Technologies, the bulk of the loss was due to the price war with Intel, which AMD cannot be said to be winning.

"After more than three years of successfully executing our customer expansion strategy and significantly growing our unit and revenue base, our first quarter performance is disappointing and unacceptable," admitted Robert Rivet, AMD's chief financial officer, in a statement accompanying the results. "We are aggressively addressing the issues that led to our significant revenue decline. We are aligning our business model, capital expenditures and cost structure with the goal of accelerating our return to profitability. Lastly, our customer relationships remain solid, reflecting their confidence in our strategic direction, current and new products, and technology roadmaps."

AMD's Computing Solutions unit, which makes chips for computers and other embedded devices, posted sales of $918 million, down 38 percent, because both chip prices and chip volumes were down. AMD said that mobile chip shipments and revenues "increased significantly," server and desktop unit shipments and sales "declined significantly." AMD sold $197 million in graphics products, up 19 percent, and its consumer electronics business came in at $118 million.

Looking ahead, AMD is expecting sales to be flat or slightly up in the second quarter, and tried to explain to Wall Street that this was the worst of it.

"Believe me, we are not happy," said Hector Ruiz, AMD's chairman and chief executive officer. "Let me make it clear that we are doing all we can to make sure that, on one hand, we are not ridiculously conservative, but on the other hand, although we are pleased to see, to have confidence that we are going to do better in the second quarter, frankly it is increasing share off a really lousy quarter, so I would not put a big flag on top of that and wave it." (If you can diagram that sentence, I will offer you a job.) After that sentence failed, Ruiz took another stab at the idea he was trying to express. "What I would like to point out--because again we have to be careful to put one quarter in perspective, is that a gain in unit share for 14 consecutive quarters, and last quarter, yes, there was a meltdown, we collapsed--we are very upset about it, we understand it. We know exactly the things that led to the perfect storm. We are going to fix them and we are making progress as we speak. Therefore, from such a lousy beginning, we expect to improve and throughout the year, we expect to improve quarter by quarter."

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